Strategic Management Flexibility in Strategy

What is a risky decision-making setting?

A situation where all outcomes and their probabilities are known.

What is an uncertain decision-making setting?

A situation where neither outcomes nor their probabilities are known.

Why doesn’t classic NPV work under uncertainty?

Because you can’t reliably predict future cash flows or their risks.

How are decisions made under uncertainty?

In stages, over time, with flexibility to adapt to new information.

What is technical uncertainty?

Not knowing how to develop or build the product or solution.

What is market uncertainty?

Not knowing how customers will respond, or how much demand exists.

What is PESTEL analysis used for?

To identify external uncertainty factors: Political, Economic, Social, Technological, Environmental, Legal.

What is the "Core" category in real options?

Making small, safe improvements in areas where both the market and technology are stable and well-known. There’s little uncertainty, so flexibility isn’t very valuable.

Example:
Apple updating the iPhone camera each year — the market is steady, the tech is proven, and the change is low-risk.

What is "Platform Positioning"?

when a company builds a base in a market that is uncertain, but the technology is mostly known. It’s a strategic move to be ready if the market grows.

Example:
Tesla building electric car factories early — the tech was ready, but future demand was still uncertain.

What is Platform Scouting?

Making a small early investment to build a foundation despite high uncertainty, keeping options open for the future.

Example:
Google developing its cloud computing platform early when the market and technology were still uncertain.

What are "Positioning Options"?

Strategic investments made to prepare for future opportunities when the market is uncertain, but the technology is mostly known. The goal is to secure a foothold now and expand later if things go well.

Example:
Amazon entering the healthcare market by buying a small online pharmacy. The tech is proven, but customer demand and market direction are still unclear. They’re getting ready in case the market takes off.

What are "Scouting Options"?

Early investments to explore ideas where both the market and technology are uncertain. The goal is to learn, not commit — and decide later whether to continue, expand, or stop.

Example:
A biotech startup tests a new gene-editing method. It's unclear if it will work (technical risk) or be approved or accepted (market risk). They invest a little now just to explore.

What are "Stepping Stones"?

Small, early projects a company undertakes when both technical uncertainty and market uncertainty are high. These projects help the company learn and build capabilities, preparing for future opportunities.

A car company starts producing electric scooters.

• They’re unsure if the technology will work well (technical uncertainty).

• They’re also unsure if customers will want them (market uncertainty).

• By making scooters now, they learn about electric motors and batteries.

• This knowledge helps them prepare to build electric cars later.

What is a real option in strategic management?

A right but not a duty to invest, expand, contract, or exit in the future, depending on how things evolve.

What are the 6 main types of real options?

Defer, Grow, Contract, Shut Down & Restart, Abandon, Expand.

What is the "Defer" real option?

The ability to delay an investment until more information is available.

What is the "Grow" real option?

The ability to increase investment later if the project is successful.

What is the "Contract" real option?

The ability to reduce the size or scope of an investment.

What is the "Shut Down and Restart" real option?

The ability to temporarily pause and later restart operations.

What is the "Abandon" real option?

The right to exit a project entirely to avoid further losses.

What is the "Expand" real option?

The ability to grow beyond the original plan if the outcome is positive.

What real option does a pilot project represent?

A Defer option — it allows the firm to wait before full investment.

What real option does a flexible lease give a retailer?

Contract option (reduce space) and an Abandon option (exit lease).

What matrix cell involves high market and high technical uncertainty?

Stepping Stones.

What matrix cell has low market and low technical uncertainty?

Core.

What does a higher “σ” do to option value?

It increases the option’s value , more uncertainty means more potential upside.

What happens to option value if T (time) increases?

The value increases — longer decision time adds flexibility.

What does the risk-free rate (r) do in real options?

It discounts future investment cost (X) — higher r can raise option value.

What is NPVq in real options?

The ratio of cash flow value (S) to present value of investment cost (PV(X)).

What is σ√T used for?

It shows cumulative uncertainty over time — used in option value tables.

What is path dependence in strategy?

When early decisions determine whether future strategic options are even possible.

Why is vertical integration less flexible under uncertainty?

It locks the firm in and is expensive to reverse.

Why are alliances or contracts better under uncertainty?

They’re easier to change or exit if the situation evolves.

When is classic NPV enough without real options?

When both technical and market uncertainty are low.

What’s the danger of relying only on NPV?

Firms might ignore valuable future opportunities and stick to the core business.

What habits help firms identify real options early?

Running small tests and keeping decision-making agile.

Why are real options valuable in uncertain environments?

They help manage risk by allowing flexible, staged decisions.