Resource Allocation In Strategic Factors

Resource Allocation in Strategic Factors 1

RESOURCE ALLOCATION IN STRATEGIC FACTORS

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Resource Allocation in Strategic Factors 2

Resource Allocation in Strategic Factors

Backgrounds of “Real Options Theory”

The “Real Options Theory” (ROT) starts via developing a comparison amid the financial

alternatives and the real choices. By definition, financial alternative connote the derivative

security that has its value retrieved from the characteristics and the worth of a second or

alternative financial security, or asset. Financial option offers its investors with the right, and

does not give an obligation, to sell or buy the said asset as at a directive price (for instance, an

exercise price) before/on a stated date (for instance, the date of expiration). Scholes & Black

(1973) as well as Merton (1973), the then great financial economists, created the financial option

valuation formula, and their respective methodologies have led to the subsequent studies

regarding the financial asset pricing, which the resulted in the creation and advancement of the

ROT (Smit & Trigeorgis, 2004).

The perception that the real options were created from Meyer’s seminal concept which can be

perceived as company’s optional investment chances as calls on the real assets, in similar ways

as financial options call gives the decisions rights on the financial assets (1997). Through

analogy, the real options have their own unique underlying assets of the value of the gross

project of the anticipated operating/working cash flows; the real options exercise prices are the

investment needed to get this mentioned asset; the maturity time is the time taken when the

maker of the decision can have the investment deferred before the expiry of the investment

decision (Trigeorgis, 1996). Earlier identified, the “real options” describe the reserves in the

“real assets”, not as in “financial assets” case that confers the company freedom, as opposed to

the duty, to pursue particular steps in the near period (like in Trigeorgis, 1996; Amram &

Kulatilaka, 1999). The “real options” and “financial options” comparisons can be found in a

general textbook (Brealey et al., 2006).

The research on real options in economics and finance fields has advanced a categorization of

similar “real options” which are most of the time attached in an investment, and this include

stage investment options, differed options, options to change the operating scale, options to

position investment, switching options, growth options, and abandonment options (Trigeorgis,

1993). Additionally, an investment frequently entails a mixture of a selected number of the

common “real options” mentioned earlier, and their summed-up worth usually fluctuates from

total of the value of every option on its own. Investments like venture capital and development of

a new technology may also constitute sequential steps, and such investments involving multiple

stages constitutes multiple choices, whose intentioned asset is not basically “real asset”, but

instead a different type of alternative (Trigeorgis, 1996). To the level which some financiers has

the ability to simultaneously hold options, company undertaking several investments at option

time may also undergo interactions of the option portfolio, in the embedded options in a single

investment may help in shaping the other options value which are held by the company and as a

result the option portfolio anticipated value (Luehrman, 1998).

The literature regarding real options in the fields of finance and economics do seem to feature

analytic direction, involving analysis of real options to evaluate a company’s investment under

some improbability as well as to create the optimum situations and settings for pursuing the

investment (Roberts & Weitzman, 1981). For instance, earlier research studies have evaluated

investments in flexible manufacturing and natural resource (Triantis & Hodder, 1990; Brennan &

Resource Allocation in Strategic Factors 3

Schwartz, 1985), studied the optimal timing and estimation of investment in the land

development portfolio, and looked into the relationship and association between the value of the

company and the option to change operating scale (Titman, 1985, Majd & Pindyck, 1989

McDonald & Siegel, 1985; Pindyck, 1988). Dixit (1992) and Pindyck (1991) looked into the

literature about investing 8nder uncertainty, while Dixit and Pindyck (1994) explored massive

literature on theoretical advances. Earlier studies have paid more attention to the competitive

environment that surrounds the company’s investing and their strategic concept of real options,

which bears critical effect for competitive strategy (Grenadier, 2000; Smit & Trigeorgis, 2004;

Kulatilaka & Perotti, 1998). Earlier researchers have also concentrated on “real options theory”

to study investments in the creating and developing strategic resources like R&D, together with

other corporate innovations like diversification and acquisitions, in the broader angle of

corporate strategy (Pacheco-de-Almeida & Zemsky, 2003; Matsusaka, 2001; Bernardo &

Chowdhry, 2002; Childs & Triantis, 1999; Matsusaka, 2001).

There are relatively very few empirical studies that have considered theoretical work in literature

in the field in large scale. This has been indicated by Schwartz and Trigeorgis (2001) in their

study. The existing scientific studies that have delved in real options in the economics and

finance sector have largely focused on the analytical area of natural investment and development

in real estate (Moel & Tufano, 2002; Quigg, 1993; Paddock, Siegel, & Smith, 1988). The studies

have also investigated the impact and insinuations of specific possibilities for the worth of the

company (Berger, Ofek, & Swary, 1996). Scientific studies regarding the corporate development

and strategic resources are not sufficient, however, and implementation matters of options

associated to the company, incentives, etc. are yet to be done in depth.

Development of ROT in Strategic Management

The original attentiveness and focus on “real option” in strategic management areas started to

surface around the 1980s (Hayes & Garvin, 1982; Trigeorgis, 1996). This occurred when the

scholars in the field of management first expressed lack of satisfaction with the conventional

financial methods like NPV (net present value) to strategic decision-making processes and in the

resource allocation. These methods make it a little more difficult and challenging to account for

follow-up on the rare opportunities in investment which re always embedded in the corporate

investment cases, or to attract the flexibility of the managers in adapting or implementing their

decisions to technological uncertainties and the evolving market, a view also supported by Kester

(1984) and Myers (1984).

Kogut, an economist expert was amongst the first scholars to take time and conceptualize and to

scientifically test the “real options” accordingly in strategic management arena. Kogut’s seminal

works began in regards to the MNCs as well as the synchronization/cooperation of their tasks

and maneuvers in different republics across the world. Kogut, in a number of scientific articles,

maintained that the MNC (the multinational corporations) operations confer them a series of

“real options” to dominate on the greater heights of heterogeneous in addition to uncertain

occasions that are present in different nations. For example, Kogut fronted the suggestion that

investment in the international platform confers MNCs valuable and very profitable options for

growth and the very first outlay in an overseas state provides an outsized option worth because

the investment can unravel raft of prospects for impending growth. The author likewise

expounded that the multinationals hold a selection of substituting the available preferences that

provide suppleness in operations via permitting the company to change value chain undertakings

Resource Allocation in Strategic Factors 4

over different geographical detached affiliates of the main company since uncertain

environmental events and conditions improve and evolve.

Figure: Strategic Management Real Options Research Framework

There are several studies that have done further studies on Kogut’s initial contributions to the

sector in a number of significant ways. For example, Kogut & Kulatilaka (1994a) created a

framework that monitors and measures the value of option of production changing between tow

country geographical areas in the existence of highly volatile exchange rates. In another study,

Kogut and Chang (1996) scientifically conducted scientific tests of the concept that the very first

investment (initial) may serve as the base for the concurrent enlargement, and they revealed that

the direct investment by Japanese companies in the United States were originated or prompted by

an increase of the Japanese currency. In their research, Miller and Reuer (1998a, b) looked at the

multinationals in their US economic exposure to the movements of the foreign exchange rate.

They proved that companies having greater FDIs featured lower exposures and that these kinds

of exposures were basically asymmetric that is in tandem with the existence of “real options”. In

their part, Allen & Pantzalis (1996) and Tang and Tikoo (1999) proved the appreciation and

valuation of the depth of multinational corporations’ international operations by the stock

market, giving support to the perception that switching options is viable to the companies. Reuer

et al., in recent study embedded the importance of functioning with ease and flexibility in regards

to the downside risk minimization from the MNC reserves (Tong & Reuer, 2007; Reuer &

Leiblein, 2000). The scientists suggested that the level to which the multinationals can benefit

from the operations in different geographical boundaries interferes with some organizational

factors that increase switching costs and coordination.

The pioneering contributions by Kogut also constituted the areas of organizational and

governance options in corporate strategy area (Kogut, 1991). The scholar issued the very first

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theoretical foundations and arguments and the scientific evidence that the joint ventures gives

companies real options to grow sequentially into uncertain and totally new markets. Through

investing in a joint venture, a company is in position to expand, but only on the condition that the

future turns out to be favourable. Congruent to the theory, the author discovered that the

companies undertake expansion by practising the option through purchasing of its partner when

the combined endeavor undergoes a constructive demand stock, but the organization go on to

hold onto the cooperative undertaking investment when undesirable demand indicators shows.

A good number of empirical and theoretical studies that later emerged has looked to go further

length by studying the organizations’ choice in a specific governance mode and related

governance design matters (Chi & McGuire, 1996). First, adopting the formal frameworks, Chi

et al., looked into the situations and conditions under which to sell or acquiring a joint venture

gives positive financial value for the trading partners. They looked into the circumstances under

which an organization might hold the options privileges, and the scrutinized governance

configuration concerns, for instance, the equity market allocations amid the associates (Chi,

2000). Reuer et al. examined the real options attached to the different types of joint ventures and

their findings showed that joint ventures improve an organizations progression option values,

and under certain special identified situations.

Secondly, Folta (1998) investigated the companies’ decisions to pursue joint ventures versus

acquisitions through viewing the joint ventures as giving the sequential commitments and

deferral option. The scientist discovered that the corporations have a high probability of

investing in the joint ventures as compared to acquisition when experiencing high levels of

uncertainty in its operations. In their research, the scholars Folta and Miller (2002) furthered

study based on Kogut’s (1991) study putting their emphasis on the decisions regarding option

exercise. The scientists also went further to examine the minority investments. Folta et al went

further to continue on his earlier study (Folta, 1998) and to further on Dixit and Pindyck’s (1994)

research. They focus on the deferral options, looking at company’s market entry choices in their

study, and gave consistent results with the “real options theory” (Folta, Johnson, & O’Brien,

2006; Folta & O’Brien, 2004; Miller and Folta, 2002). Collectively, the entire group of research

studies has started to gear towards real options theory of organizational governance and market

entry option that have the ability to effectively complement the currently prevailing principles:

the market entry frameworks, vary in their qualities and the attached options as they take a

diverse way of responding to uncertainty, thereby making companies to use them in a

discriminate manner to build and structure their respective investments.

During the same period that Kogut did his experiments, Bowman and Hurry (in the years 1987

and 1993) were also tirelessly doing their best to create option theory based on strategic

management angle. The two authors proposed option to be a strategy heuristic that is important

for a clear understanding of the sequential or series resource commitments when there is

uncertainty in the operating environment. Key to the duo’s theory creation is the perception that

the selections lens “provide an economic sense for the behavioural stages of incremental

resource investment.” The scientists Hurry et al., (1992) discovered that the Japanese venture

capitalists seemed not to make smaller separate or sole investments, but a bigger portion of

investments, with an intention of capturing a wider array of future opportunities, that they

thought were a sustainable and consistent options strategy, basically a new technology. In his

part, McGrath (1997) supported a perception logic of options technology by fronting the concept

Resource Allocation in Strategic Factors 6

that companies can create amplifying pre-investments to influence the uncertainty to their own

benefit. In another paper, McGrath advanced the perception that entrepreneurial ingenuities and

projects can be perceived to be “real options” and further recommended that these are managed

through “real options” school of thought (1999). In congruent to many of these studies, Kogut

and Kulatilaka (for the years1994b, 2001 and the year 2003) targeted at integrating the real

options literature and the capabilities through proposing a concept that re lotions gives a heuristic

outlining of perceiving the competences as creating a framework to react to the impending

undefined openings.

Provided the interest of the strategy segment in studying and comprehending the true behaviours

of the companies, it is not unique that when paralleled to the research in the “real options” in the

economics as well as finance fields, the strategy studies have paid considerably more attention to

matters about the implementation of options (Rumelt et al., 1994). While the “real options

theory” can be plied in principle to appraise the strategic investment plus resources that are not

openly transacted, the strategy scientists have long proposed different challenges that can frame

both implementation and assessment. For example, repairs challenges, creation, and exercise. It

is true that the primary concept discovers its heritages in the original assistances in the area and

has run through the entire line of real options study in the investment strategy.

For instance, Kogut (1985) discussed the challenges faced by the company managers when

identifying the valuable alternatives attached in the company’s investments, a fact that is

likewise supported by Bowman & Hurry (in the year 1993 article). Additionally, just because a

company identifies with entrenched possibilities does not imply its availability of the

organizational and management structures to back up the enactment (Kogut, 1989). Additionally,

the executives may not utilize the appropriate data in assessing the “real options”, or may

evaluate them in a wrong way as for result of lack of suitable proxies (Miller & Shapira, 2004

Bowman & Moskowitz, 2001). Lastly, the organizational and managerial factors may further

change the exercise decision and option maintenance: the supervisors might be liable to

intensification of obligation, they might not adhere to the complex cues for exercise due to

bounded rationality (Coff and Laverty, 2001; Kogut, 1991; Adner and Levinthal, 2004; Garud,

Kumaraswamy, & Nayyar, 1998; McGrath, 1999;).

Significance of the ROT to Strategic Management

The “real options theory” avails a group of logical techniques as well as heuristics with the

intention of helping deal with and evaluate the uncertainties that pervade the strategic choices

(Kogut & Kulatilaka, 1994). Rumelt et al., in his research study recognized uncertainty as one of

the great 5 monkey ditches that motivated research deviating from the original “neoclassical

theory” of the company, and that has led to the emergence of the strategic management area.

(1994, p. 26). Given the important responsibility of uncertainty in regards to strategic choices

and decisions, it is more appropriate that the amplified significance of the “real options theory”

for strategic management can be justified by a minimum of three important influences, which

likewise explains why the “real options” are unique:

a) ROT calls for intensive investigation to relook into the received knowledge, and provides

special predictions on company’s decision for several categories of strategic decision

under conditions that are uncertain. Take a look at the following illustrations; as earlier

discussed, the real options angle challenges the conventional perspective of JVs (joint

Resource Allocation in Strategic Factors 7

ventures) like marriages, where stability and longevity were the primary success

indicators. According to real options theory, companies can open value at the JV

termination stage, and there is very important role played by the conventional

investments joint ventures by design angle. As a second example, the FDIs (foreign direct

investments) has for a long time been considered to be the answer to the transaction costs

that accompany the assets and market exchange technology. The real options theory, by

contrast, focuses more on the dynamic efficiency gains, the company’s capability to seize

the upside opportunities and downside risk reduction over time by changing the value

chain activities across different borders in response to the diverse uncertainties. Lastly, at

a more general degree, the real options issue new regulations for resource investment

through indicating that real options change a company’s investment threshold away from

the criteria of the NPV. While the thresholds details impact on the different real options

has been shown somewhere else, the provided insight by the real options analysis can be

summarized briefly in the following manner: a company may use a minimized investment

threshold & make a decision to invest even in a situation where the NPV is not positive.

Where the embedded growth option is sufficiently valuable; on the contrary, a company

may use an elevated investment threshold and make a decision not to put investment even

when the NPV is in good standing (positive NPV). Where the embedded or attached

deferral options are sufficient and the related opportunities costs of investing in the

present time are important.

b) The ROT suggests that an unbalanced payoff system for entrenched options investments

that real options allow companies to minimize the downside risks while evaluating the

upside opportunities Bowman & Hurry, 1993. The performance outcomes asymmetry is

as a result of the discretionary decisions right that options generate, for example, the right

to choose the results in the future only when it is favourable. When the real options are

compared to other theories, it gives the suggestion that the higher the level of the

uncertainty, the greater the potential payoffs to the holder of the option, given that the

very first investment is very limited (few options) and the downside losses are

constrained (Hull, 2003). Another important factor of the theory focuses on the flexibility

where there is uncertainty features the option value, and the said value can be responsible

for a significant part of the several investments value. Empirical findings and theory also

suggest that the value of such options significantly differs across companies and

industries. An important issue to consider in the case of the strategic management area is

that the heterogeneity sources may be (Tong & Reuer, 2006 and Kester, 1984).

c) Lastly, the real options theory provides the proof regarding the companies’ resource

allocation processes through informing strategic decision making. For a long time now,

strategic planning has embraced such issues as a follow-up opportunity, sequential

management of uncertainty and information, and incremental resource commitment,

which are all important for a company’s strategy. However, by their very nature, planning

frameworks lacked the type of strong decisions criteria as described and defined by the

investment models in the conventional finance theory. The real options theory can assist

in enhancing the strategic decision making for an organization by introducing the

discipline of the financial markets into the scientific planning tools, and also by

integrating the strategic realities into the conventional budgeting models that do not

account for their flexibility value explicitly and managed discretions (Amram &

Resource Allocation in Strategic Factors 8

Kulatilaka, 1999; Trigeorgis, 1996). While good implementation of the real options

analysis for resource allocation calls for overcoming the organization challenges, the real

options theory promises to integrate financial and strategic analyses for the corporate

strategy (Myers, 1984; Bettis, 1983).

Competitive Advantage of Firms as Seen in Realistic Real Theory

As will be observed in this segment, when it comes to implementation of these options, it is

argued that organizations may have differences in their implementation of the prior stated

factors. According to Myers in 1977, the current values of options account for the value an

organization, as an attempt to increase investments in the case of terms becoming more

favourable.

As stated by Kulatilaka and Kogut in 2001, the argument raised in past research is that these

favourable terms are accumulated in different processes that are imbued with a set of proprietary

“real options” on useful assets, which are readily available in factor markets, which identifies

how these terms are accumulated. The diversity of a firm may result from proprietary options, is

an assumption born of previous work. In 1996, Trigeorgis that in a situation whereby a myriad

of firms has equal portions of shared options, the theory developed will respond to this situation.

Accessibility to the feedback that comes in the form of novel information on the assets value and

contingent nature is brought about by a real option.

Table 1: Existing approaches to generating heterogeneity in factor markets that are compatible

with “real options theory”

How performance heterogeneity emerges

Differential endowments in real

options

Differential access to options allows a focal firm to

acquire assets in factor markets that other firms cannot

acquire.

Endowments in options (Barney,

1991; Kogut and Kulatilaka, 2001;

Myers, 1977).

Unique complementarities allow the firm to acquire

assets in factor markets because those assets are more

valuable to the focal firm than to other firms.

Productive complementarities

(Adegbesan, 2009; Lee, Folta, &

Lieberman, 2011; Lippman and

Rumelt, 2003).

Superior information allows the firm to more

accurately price an option on an asset and to generate

advantage in an otherwise complete market through

bidding or exercise.

Information (Barney, 1986;

Makadok and Barney, 2001;

Maritan & Florence, 2008).

Learning abilities such as integration of new information and practice of unforeseen claims on an

asset in a factor market differ from one firm to the next. These learning abilities are categorized

as updating of beliefs and processing of information. The imperativeness of implementing a real

option is emphasized by the idea of information processing. The raw data acquired from the

feedback received by the firm, as a result of implementing a real option, has to be converted into

usable information. Extant work in feedback learning is very similar to the ideology of belief

updating as suggested by both Levinthal and Posen in 2012.

Resource Allocation in Strategic Factors 9

Transaction Cost Theory

The 2009 Oliver Williamson’s Economics Nobel prize recognizes the importance of TCT Theory

(Transaction Costs Economics) for analysis of economic governance, specifically in the

company boundaries. TCT reinforced the effect of the awards in economics discipline in 1991

for Ronald Coarse’s work on the nature of the company that is considered seminal work for the

transaction cost economics. Transaction cost economics/ theory is essential in the analysis of a

number of organizational and strategic matters important to the company. Specifically, TCT has

been used in conducting studies on companies’ boundaries, the rationale for undertaking an

acquisition, vertical integration decisions, networks and other dynamic governance forms. TCT

has grown to cover international business and strategic management in making efforts to explain

how companies internationalize and the required structural management in enhancing the odds of

success.

Figure: Transaction Cost Theory

TCT attempts to justify why firms exist, and why firms expand or reasons why they source

activities to the external environment. The theory suggests that companies try to reduce the costs

of switching resources with the environment and that they try to reduce the bureaucratic costs of

the exchanges within the firm. Firms are as a result weighting the costs of switching resources with

the environment, against the bureaucratic costs of in-house performance activities.

The theory perceives market and institutions as different possible forms of coordinating and

organizing economic transactions. When the external transactional costs are higher compared to

the firm’s internal bureaucratic costs, the firm will experience growth, because the firm is in a

position to conduct its activities in a cheaper way, compared to when the activity redone in the

market. However, where the bureaucratic costs are higher compared to the external transaction

costs, then the company have to be downsized.

Core Competency by Kotler

Resource Allocation in Strategic Factors 10

A core competency is an idea in management theory created by Gary Hamel and C Kotler

Prahalad. The core competency theory is a harmonized mixture of several skills and resources

that distinguish company in a marketplace and therefore forms the foundation of the firm’s

competitiveness.

Core competencies meet three main criteria including:

a) Core competencies provide access to several markets

b) Core competencies should make a substantial contribution to the perceived consumer

benefits for the complete product

c) Core competencies are difficult to copy or imitate by competition

A company’s core competencies may include fine optics, precision electronics and

microelectronics. These help the company to build high-tech cameras better than the

competition, and at the same time can be used in manufacturing other products that require the

competencies. A core competency originates from a specific set of skills or methods of

production that deliver extra value to the consumer. The core competencies allow the company

to access a range of markets.

As part of TCT, core competency ensures organization success through strategic identification of

the market, ensuring production of a complete product and creation of a totally unique product in

the market.

VRIN /VRIO Analysis

Birger Wernerfelt in 1984 developed the resource-based view, abbreviated as RBV, as a

foundation for competitive advantage for a company that mainly relies on the use of a set of

valuable intangible or tangible resource at disposal of the company. The RBV theory has been

very influential and has gone further to form the basis for VRIO frameworks and other similar

models.

In Wernerfelt’s theory, the company is a set of resources. A business differs according to what

such resources are and how the resources are combined together. Examples of resources include

knowledge, information, assets, processes, attributes and capabilities.

Figure: VRIO Illustration

Resource Allocation in Strategic Factors 11

Not all business resources are strategically and equally relevant. Some resources, however,

provide the business with a competitive advantage. Such resources possess the VRIN

characteristics which can be identified by focusing on the following essential attributes;

i) Value: identifying resources that can bring the company value can be an invaluable

source of competitive advantage. However, some resources are easy to obtain, while

others are very costly and difficult to obtain.

ii) Rareness: resources that are t the disposal of every competitor does not add much

value, but highly scarce resources are a source of competitive advantage.

iii) Imitability; an ideal resource must not, and cannot be obtained by the competitors

iv) Non-substitutability; an ideal resource cannot be substituted by other resources

Asset Specificity

Asset specificity is a core component of TCT. Asset specificity is a major factor impacting on

the Transaction Cost in an organization. Asset specificity refers to the level at which an asset can

be used across multiple purposes and scenarios. A high-level specificity asset only has used in a

single situation or one purpose. On the other asset, a low specificity asset has multiple purposes

or uses. Asset specificity concept applies to the designed capital to feature one function or

trained labour targeted at performing a single task, and has its limited applications and uses due

to some inherent restrictions on other possible applications and uses. The more an asset is

specific in its functionality, the lower its redeployability or potential resale value. The

personalized computer applications are a perfect example of a highly specific asset. Generally,

the service sectors can be categorized as being of low asset specificity, on the other hand, the

airline industry can be categorized as being high asset specificity. It is high risk to invest in high

specificity assets when the economic conditions are uncertain or poor.

Resource Allocation in Strategic Factors 12

Table 1: Literature summary on determinants

There is also a concern when a specific asset is immobile. This is referred to as site specificity.

For instance, a given asset may be located in a specific place and it is prohibitively or impossibly

expensive to move. An example of a high site-specific company is where a manufacturing

company has its plants located in a given area and it is very expensive, impossible or very

difficult to relate it to another highly strategic location.

Asset specificity challenge: opportunistic pricing can be a serious challenge with the highly

specific asset. When a firm depends too much on a single supplier for a given parts supply, the

supplier may make efforts and tricks to charge unnecessarily high for the parts. The supplier may

also try to underpay the supplier on their part knowing too well that the supplier has another

market to supply their products. This problem can be effectively solved and prevented through a

properly written and nicely negotiated contracts prior tossup-ply.

Emotional Intelligence

There are stiull difficulty in measuring emotional intelligence. MacCann & Roberts, (2008) and

Dulewicz & Higgs, (2000) have engaged in comprehensive studies that helped outline theories of

measuring emotional intelligence, especially at place of work. However, the concept of

emotional intelligence (EI) is not a new one in workplace, since studies in the field began far

back as in the 1920s. Edward Thorndike first introduced the social intelligence concept in the

1920s, while making efforts to determine the factors that determine the predictability of IQ.

Edward’s theory suggests the social intelligence causes fluctuations in the outcome measures

which are not explanations for IQ. This implies that social intelligence does not depend on IQ.

Resource Allocation in Strategic Factors 13

Several theories about emotions in a company presents emotional status at work and important

determining factors of satisfaction and performance; and hence is adherence to Affective Events

Theory which depends on the emotional intelligence demand for a specific job where different

behaviors are created, leading to both negative and positive events (like autonomy, emotional

labor, tasks, hassles, demands etc.). these experiences then lead to different kinds of emotions at

place of work which impacts on the worker’s attitude., for instance, spontaneous help or

impulsive action. Such experiences are caused by individual tendencies like positive moods,

negative moods and emotional intelligence. This means that the emotions regulate and influences

a persons’ attitudes which are concerned with satisfaction and motivation, commitment and

loyalty, and also decisions regarding staying or quitting the job.

The link between realistic real options and competitive advantage

The first basis of starting the argument is over the delineation of a “real option” in the event of

both contemporaneous and prospective uncertainty, in giving meaning to this type of option. The

ratio of perspective and contemporaneous uncertainty and magnitude of the total uncertainty, are

the differences that may arise in the realistic real options.

Managerial flexibility is put at the top of a firm’s priority list as observed in the occurrence of

prospective uncertainty and the existence of contemporaneous uncertainty presents managerial

decision-making within a genuine “real option” as quintessential. The efficacy of firms when it

comes to implementing realistic “real options” differs in factor markets. These differences are

based on either the magnitude of the mistakes they make and the number of these mistakes,

implementation of alternatives that ought to have been put on hold or terminating possibilities

that ought to have been implemented. The three steps mentioned below will guide the direction

of our argument.

During the process of choosing an option exercise, differences in the articulation of a firm’s

subjective philosophies about the worth of the asset at the period in which the process of

choosing an option exercise was being conceived. Companies gifted with replicated selections

and acquiring identical data have different subjective beliefs as observed in our grafted feedback

learning discussion to real options.

These differences in firms may include:

a) Transformation of data into useable information- the ability of firms to transform data

into information differs in regulating and controlling the activity of processing

information as per the conditions set by the realistic real options.

b) Updating the belief process- the occurrence of a definite level of contemporaneous

uncertainty, due to the noisy new information, differences may arise in the capacity to

manage the conviction modernising procedure in various firms. A combination of these

mechanisms promotes the incorporation of new information, so as to lace a contingent

assertion on an asset.

c) The correctness of subjective beliefs- these alterations of the accurateness of individual

opinions bring about contrasting of the option implementation decisions, which in turn

causes errors in the option implementation. This also leads to the deviation of option

exercise decisions as an outcome of alterations in the latent value of an asset. Take for

Resource Allocation in Strategic Factors 14

example the occurrence of implementing an option that should have been eliminated in

exercising a realistic “real option” in asset acquisition in a factor market. This is as a

result of the exercise price exceeding the asset and the subjective belief being higher than

the exercise price. Or even in the case of a firm not indulging in acquisitions of assets as

an outcome of terminating the option in the factor market though it was required in

option execution.

d) The occurrence of competitive heterogeneity- this will happen due to option execution

errors made in the resource allocation practice and may even result to a competitive

advantage for the firm. Take for instance two organisations A and B, which have equal

shared realistic “real options” in the acquisition of industrious assets in factor markets.

Executives are the main people that are engaged in the option-exercising decision-making

procedure. Minimization of costs incurred by a firm is brought about by assets by a

significant fixed margin.

The right moment for a firm to exercise its identified option is when the cost reduced is higher

than the exercise price, in assets acquisition. And resulting errors from option exercising, lead to

an increase in competitive advantage e.g. due to the differences in beliefs on asset value amid

institutions A and B causes A to exercise its realistic options in asset procurement in the factor

market even if it should have been terminated as soon as firm B had terminated its realistic real

option, which offers company B a competitive advantage over A.

Table 2: Extant theories that are grafted onto our behavioral real option theory

Real Options

Strategic Factor

Markets

Feedback

Learning

Real Options

Valuation

Real Options

Reasoning

Prim

ary

Cont

ribut

ion:

Quantifies the

value of

managerial

flexibility.

Highlights the

value of

managerial

flexibility.

Information

imperfections can lead

to competitive

heterogeneity.

A behaviorally

realistic model of

decision-making.

Cent

ral

Mec

hani

sm:

Newly arrived

information

resolves

prospective

uncertainty that

existed in the

past.

Newly arrived

information

resolves

prospective

uncertainty that

existed in the past

Imperfect nature of

information regarding

the current value of

assets.

The ability to learn

(resolve

uncertainty) as

information arrives

that updates asset

value.

Exis

ting

Limi

tatio

Assumption of

perfect

information on

the

contemporaneous

value of an asset.

Inability to

compare or

ordinally rank the

payoffs to

alternative

projects.

Does not explicitly

recognize the arrival of

new information over

time and learning is

assumed to be trivial.

Does not

(formally) model

changes in asset

value.

Resource Allocation in Strategic Factors 15

Conclusively, the differences in option implementation decisions in factor markets are as a result

of a diversified information process and belief updates, and may also bring about competitive

advantage.

These ideas emanate from our theory of realistic real options theory.

Contemporaneous uncertainty also influences the realistic real options as prospective

uncertainties do. This is due to the data provided by a realistic real option about the asset rather

than provide distinct information. Engagement of a firm in transforming the data acquired from

the realistic real option into useable information is paramount in information processing

activities.

The level of contemporaneous uncertainty reduces as the efficacy of processing information

increases in any particular body of data. Which simply means, that the information acquired from

the decision-making process of the option to be executed by a firm, will bear less noise and will

be useable. As a result of various differences in the traits of top management personnel, problem-

solving schedules, and the firm’s organizational structure, there will be the presence of

differences in the information processing capability of firms relative to realistic real option.

The firms with high information processing capacity will definitely have a lower

contemporaneous uncertainty as compared to those with lower processing capacities.

First proposition: contemporaneous uncertainty reduces the superior level of information

processing rise, competitive advantage created by a firm through increasing efficacy of executing

real options in factor markets. From an adaptive angle, their rationality is intentional. This is due

to the efforts put by a firm to transform raw data into usable information and implementing this

information as an attempt to exercise their decision. As mentioned in the earlier sections,

Bayesian learning is embedded with the notion that most firms proportionally update its beliefs

on asset value. Depending on the amount of noise emanating from the contemporaneous

uncertainty of the new information, the extent to which a firm updates its beliefs varies.

Second proposition: the ability of a firm to competitive advantage by “real options” in factor

markets is brought about by maintaining a belief-updating rate that equals that the level of

contemporaneous uncertainty.

Conclusively, we propose that challenges facing belief updating should interact with the

problems of information processing. As the financial option, which lacks contemporaneous

uncertainty, the asset value is easily determined due to the dearth of noise in information

processing.

On the other hand, high contemporaneous uncertainty, the signal will lack information and will

have a lot of noise, which will render any information acquired null and void. When firms are

processing information with an average efficacy, means that the contemporaneous uncertainty

will be at a moderate level which in turn will lead to the belief updating becoming difficult.

Third proposition: The relationship between a company’s capacity to create competitive

advantage through efficiently terminating “real options” in the factor market and the firm’s

ability to equalize the belief-updating frequency to the levels of contemporaneous uncertainty.

Resource Allocation in Strategic Factors 16

Other Realistic Real Options Consequences

Contemporary research on organization structure, cognition, and challenge solution has linked to

our theory, in this segment. As suggested by both Burgelman and Bower in 1983 and 1970

respectively, managerial and organizational processes facilitate the generation of competitive

advantage.

According to Mason and Hambrick in 1984, the top management team (TMT) is directly

responsible for the amount of attention accorded to the perception of processing data. From

previous research on this topic, education, organizational tenure, and age are characteristics of

TMT that are associated with TMT demographics for underlying cognitive processes, as

supported by Tihanyi, Ellstrand, Dalton, and Daily in 2000. These TMT characteristics were

found to have measures of variations, by other works that were associated with decision-making,

as proposed by Wiersema and Bantel in 1992. As contemporaneous uncertainty levels rise, TMT

members who learn in noisy areas are not prone to make option execution errors.

The older lot of TMT members will take a longer time to update their beliefs than their younger

counterparts, which makes the younger lot more prone to making option execution errors in

noisy areas, which slow down the updating rate. For instance, Bingham, Davis, and Eisenhardt in

2009, stated that it is vital to recognize and inspect the various differences between the cognitive

capability of TMT in decision-making and how they affect an organization’s decision-making

process, which was further supported by Gavetti in 2012, who also gave the meaning of

behavioral failures as the factors that hinder a firm’s ability to acquire resources as other firms

can, and TMT members are to blame for these type of failures due to their mental plasticity,

rationality and discerning ability. After examining these cognitive and behaviour-based

approaches and integrating them with the propositions of this research paper, facilitates the

deduction of links between a myriad of option execution errors, mind assessments and the

generation of an advantage.

According to Fredrick in 2005, calculative skills are connected to the cognitive reflection test,

through the work in behavioural economics. The TMT members who pass the cognitive

reflection assessment will be in a better position to make appropriate decisions, make minor

option execution errors and create a competitive advantage over other firms led by TMT

members who failed the test.

In 2008, Mackey suggested that through linking both the circumstances surrounding option

execution in a factor market and contingency for noticed variations in TMT members and

organization value. More generally, our work provides a circumstance-contingent explanation for

observed differences between individual TMT members and firm value (e.g., Mackey, 2008).

Entrepreneurial confidence literature by Lowe and Ziedonis in 2006, is an example of a research

source in which biases are conspicuous. This literature also suggests that decisions such as entry

and delayed exit are positively influenced by confidence, after controlling for context and ability.

According to this research, resource allocation and generation of competitive advantage depend

on the ability of managers to overcome cognitive biases such as hubris.

The propositions in this research advocate for the creation of various ways of executing options

by managers, after dealing with being either over confident or under confident, which will also

Resource Allocation in Strategic Factors 17

improve the belief updating rate. Dunkelberg, Woo, and Cooper in 1988 suggested that linking

of responses from several surveys pertaining individual bias would provide a chance for

experimental research. Examination of victims of individual bias has a probability of making or

not making errors when deciding on the exercise options in factor markets.

The difference in the ability of organizational structures to consolidate and process information

has been noticed for a long time. According to Rivkin and Siggelkow in 2005, information

processing is interactively affected by decision rights and tasks allocation, alignment of

incentives, and interactions. And this research aims at emphasizing on how these factors affect

information processing. Nadler and Tushman in 1978 stated that the task environment influences

the efficacy of a particular firm. And the nature and efficacy of decisions are impacted by a

firm’s hierarchical breadth, size, and depth, as supported by Stiglitz and Sah in 1986. Similarly,

belief updating may be affected by the structured processes that minimize unfairness (Chugh,

Milkman, and Bazerman, 2009).

According to Lovallo and Kahneman in 1993, attempted emancipation from certain situations

that a firm’s current problem emanates from, is a way of promoting organizational success. Our

research has also sourced information on several plausible channels, from insights acquired from

organization structure work. Dividing the top management authority in an attempt to delegate

decision-making will negatively affect the processing of information since this increases the odds

of making errors when deciding to execute options in factor markets. This also prohibits the

creation of competitive advantage through exercising real options. Number of levels that a

portion of data must cover before the decision-making process is over, influences the efficiency

of processing information by a firm.

Another factor that affects the efficacy of processing information is the span of control of a firm,

those that use a vertical span of control will experience a reduced rate of belief updates. Our

solution to this challenge according to our research, is to increase the interaction of the number

of vertical levels in management and the contemporaneous uncertainty level, which in turn will

better explain its relationship with the likelihood of making errors when executing options in

factor markets.

Conclusively, the rapidly growing challenge creation and challenge solving literature are

impacted by our research.

According to Zenger and Nickerson in 2004, the manner in which a firm formulate and attempt

to come up with a solution, is influenced by the level of challenge solving skills. Firms are

encouraged to take note of their differences in incentive magnitude, conflict resolution programs,

so as to enable them to offer a solution to these challenges.

The optimal form of search is compromised by these organizational problems that influence the

appropriation of knowledge and accumulation of strategic information, also stated by Zenger and

Nickerson in 2004.

Balancing of these ideas through assessment of the relationship between the utilization of various

processes of formulating problems, constituents of the organization structure, and execution

mistakes in real options are made possible through our theory.

Resource Allocation in Strategic Factors 18

For example, knowledge accumulation and appropriation may be affected by the use of open and

Concord-based challenge frames, which leads to complications with the execution of options.

In the same light, the manner in which personnel communicates with each other greatly affects

the process of transforming raw data into information and also extends to the execution of real

options.

Conclusions

The main focus of this paper is to delve into the theory of realistic real options and its

effectiveness in making decisions on resource allocation in factor markets considered to be

strategic. We also identify and evaluate both the prospective and contemporaneous uncertainties,

which covers the value of assets currently and upcoming values.

The decisions made on resource allocation, which through contemporaneous uncertainties,

managers within the firm and as a whole can acquire a competitive heterogeneity, are related to

the exercise of options in factor markets. The premise of our theory is based on the studies done

by Bromiley, Maritan, Burgelman, and Bower in 1986, 2001, 1983, and 1970 respectively, that

asserted that structural, behavioural, and organizational differences, result from competitive

heterogeneity, in the resource allocation process.

Specifically argued out by Burgelman, Bower and other various management professionals, was

that differences in the allocation of decision rights, knowledge, and power, birthed the

differences in the firms’ ability to control the uncertainty experienced in the surrounding

investments.

Our contribution to the research suggested that competitive advantage can be better understood

by expounding on the extent to which values of real options have on the processing of

information by a firm. The alterations in asset values over a period, evolution and emergence of

heterogeneity are better explained by drafting a factor market and feedback learnt from

previously stated theories. The significance of variations in the internal structure of a firm in

updating of beliefs or processing information is evident, especially when compared to previous

research expounding on the differences in options, information or even productive

complementarities. Just as most research papers have limitations, so does ours, but does not fall

short of providing a commencement point for discussion.

The first thing observed is the noticing of real options lens as an undeveloped tool to observe

resource allocation decisions. Real options are risked at becoming inappropriate in the event of

limitations in prospective uncertainty which makes it harder to invest in a series of sequences.

Other valuation approaches can be implemented in a setting whereby a certain firm is

undertaking a myriad of projects, such as the portfolio theory.

The second thing observed is the assumption made, that most of the resource constraints facing

actual firms are not factored in. Planned acquisitions, willingness to alter debt levels, liquidity

and the desire for investment are the constraints that undermine investments made in relation to

behavioural approach (Bromiley, 1986). These constraints inhibit the exploration of lucrative

investment opportunities, and exact force on top management when deciding on a potentially

promising venture of uncertain value by firms.

Resource Allocation in Strategic Factors 19

Our research paper has achieved realism through evaluating the role and consequences of

informational fallibilities and the limitations undermining productive opportunities for future

study. Also suggested in this research paper is that when the contemporaneous uncertainty levels

are high, not much thought is given to the prospective uncertainty levels, since they are irrelevant

at this point. According to Teach in 2003, the low number of firms adopting real options in

exercise is caused by the neglect of prospective uncertainty.

This unwillingness may also be attributed to managers’ avoiding real option tools that they

consider to be usable in the finance facet options, which lacks contemporaneous uncertainty and

functionality is minimal in the real world. According to Van Putten and MacMillan in 2004,

projects that have high levels of uncertainty should be avoided by managers, as a bid to follow

the advice derived from proponents of real options. It is important to note that it is

contemporaneous uncertainty that causes a manager not to invest in a project, rather than the

prospective uncertainty.

When drafting this research paper, we sought to expound on the resource allocation process and

how it brings about competitive advantage and heterogeneity, as an attempt to provide this

theory in a simple and comprehensible way. We recommend that it would be beneficial to

implement belief updating, information processing and finally, resource allocation decisions into

firms so as to develop plausible behavioural and organizational activities.

We believe that we couldn’t have come up with a better channel through which current and

future organization scholars can infer from this approach.

Resource Allocation in Strategic Factors 20

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