Title: Switch option: managing strategic investment in an uncertain world

Authors: Federica Cucchiella, Massimo Gastaldi

Addresses: Department of Electrical and Information Engineering, University of L'Aquila, Monteluco di Roio, L'Aquila 67040, Italy. ' Department of Electrical and Information Engineering, University of L'Aquila, Monteluco di Roio, L'Aquila 67040, Italy

Abstract: It is widely accepted in literature that an increase in uncertainty should have an inhibiting effect on investment results. This paper shows that the concept of a negative |uncertainty–investment| relationship is not always correct. In fact, the uncertainty can actually have a positive impact on investment by means of the real options approach. In this context, this paper deals with a theory useful to increase the performance of a Supply Chain (SC) operating in today|s business environment full of uncertainty. Focusing the attention on a specific network two factors are assumed as the main sources of uncertainty: demand and technology change. A switch option is used to develop a new framework to quantify and maximise the expected Net Present Value (NPV). A numerical example and a sensitivity analysis of the option value are finally presented.

Keywords: supply chain management; SCM; flexibility; risk; real options; strategic investment; investment management; uncertainty; supply chain performance; demand; technological change; net present value; NPV.

DOI: 10.1504/IJENM.2008.016597

International Journal of Enterprise Network Management, 2008 Vol.2 No.2, pp.167 - 184

Published online: 11 Jan 2008 *

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