Try real options. The Edsel is here to stay. That's what Ford Motor chairman Henry Ford II told Ford dealers in 1957. Thus intoned Digital Equipment founder Kenneth Olsen in 1977. Even for business leaders with vision, the future is difficult to predict.
Huge sums are at risk, in a competitive climate that demands ever-faster decisions.
By quantifying the fuzzy realm of strategic judgment, where leaps of faith govern decisions, real options analysis fosters the union of finance and strategy. A real options analysis recently led the company to back away from an acquisition, says Unterman. Casting investment opportunities as real options increased both the top and bottom lines at Cadence Design Systems, a California-based provider of electronic design products and services. Most software licenses, for example, require a royalty payment on sales back to the vendor. In a recent transaction, Cadence was asked to pay a royalty plus a floor, a minimum payment in the case that sales were low.