The Value of Real Options Theory and Analysis in Strategic Management: The Case of Apple Inc.: Project Titan

Andrei Radu Buse

Student thesis: Master thesis

Abstract

Through this thesis, the objective is to determine the merits of a real options framework as managerial tool to be used with respect to making investment decisions. To do so, this line of thinking is put into context, by comparison to other relevant theories in the field of strategic management, as well as the existing techniques for project valuation. Often times, capital investment decisions are made based on managerial intuition, given the recognized difficulties to accurately assess project value using mainstream tools such as discounted cash flow analysis, particularly in situations characterized by high uncertainty. Real options are conceptually positioned at a point of convergence between disciplines, resulting in a challenge to integrate disparate views which may appear irreconcilable. Proponents of the real options approach have long argued for the opportunities to gain a more unified understanding of strategic decision making under uncertainty, and bridge the gap between strategic considerations and valuation models. The case study applies an integrated real options approach to assess an autonomous electric vehicle project, currently in development by Apple Inc. The valuation technique which is elaborated upon is based on the binomial approximation method, using project NPV as base case value. By doing so, it has been possible to exemplify the complexities which hinder the applicability of this model, thus making it possible to understand why the approach has not gained traction among practitioners, as has been claimed it would. Although there are many conceptual similarities to financial options, and the association can lead to gaining unique insight, differences in clarity regarding the definition of the underlying variables that determine option value render tools used to accurately assess the value of financial options far less convincing with respect to their “real” counterparts.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages92