IDEAS home Printed from https://ideas.repec.org/a/inm/orinte/v29y1999i6p42-56.html
   My bibliography  Save this article

Strategic Valuation of Investment Under Competition

Author

Listed:
  • Patricio Del Sol

    (Pontificia Universidad Católica de Chile, Vicuña Mackenna 4860, Santiago, Chile)

  • Pankaj Ghemawat

    (Harvard Graduate School of Business Administration, Soldiers Field, Boston, Massachusetts 02163)

Abstract

The most serious problem with the widely used discounted-cash-flow (DCF) methods of investment valuation is that they are commonly applied without explicit regard to competition. As a result, the prescriptions they afford are often inconsistent with those given by competitive strategy frameworks. To remedy this, we show how such frameworks can be integrated with DCF methods to value investments (and disinvestments) in competitive and uncertain contexts. We recommend that the DCF analysis be carried out within a framework that includes the following three analytical steps: positioning, which focuses on competitive advantages; sustainability, which focuses on competitive dynamics; and flexibility, which focuses on options to revise the initial investment plan in the face of uncertainty. Valuators using this framework will reduce the likelihood that the DCF analysis misses relevant competitive-strategy considerations. Firms that have used this framework for positioning, sustainability, and flexibility have shaped and clarified their choices, solving apparent inconsistencies between DCF results and the competitive-strategy argument.

Suggested Citation

  • Patricio Del Sol & Pankaj Ghemawat, 1999. "Strategic Valuation of Investment Under Competition," Interfaces, INFORMS, vol. 29(6), pages 42-56, December.
    • Handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:42-56
    DOI: 10.1287/inte.29.6.42
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/inte.29.6.42
    Download Restriction: no
    File URL: https://libkey.io/10.1287/inte.29.6.42?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Baldwin, Carliss Y. & Clark, Kim B., 1994. "Capital-Budgeting Systems and Capabilities Investments in U.S. Companies after the Second World War," Business History Review, Cambridge University Press, vol. 68(1), pages 73-109, April.
    2. Kaplan, Steven N & Ruback, Richard S, 1995. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-1093, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shigufta Hena Uzma & J.P. Singh & Naveen Kumar, 2010. "Discounted Cash Flow and Its Implication on Intangible Valuation," Global Business Review, International Management Institute, vol. 11(3), pages 365-377, October.
    2. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Eva Regnier & Craig Tovey, 2007. "Time horizons of environmental versus non‐environmental costs: evidence from US tort lawsuits," Business Strategy and the Environment, Wiley Blackwell, vol. 16(4), pages 249-265, May.
    4. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    5. Kobari, L. & Jaimungal, S. & Lawryshyn, Y., 2014. "A real options model to evaluate the effect of environmental policies on the oil sands rate of expansion," Energy Economics, Elsevier, vol. 45(C), pages 155-165.
    6. Emili Grifell-Tatjé & P. Marquès-Gou, 2002. "Measuring Sustained Superior Performance at the Firm Level," Working Papers 0208, Departament Empresa, Universitat Autònoma de Barcelona, revised Jul 2002.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wen-Shiung Lee, 2013. "Merger and acquisition evaluation and decision making model," The Service Industries Journal, Taylor & Francis Journals, vol. 33(15-16), pages 1473-1494, December.
    2. Lian, Qin & Wang, Qiming, 2012. "Acquisition valuations of withdrawn IPOs: When IPO plans turn into mergers," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1424-1436.
    3. Eberhart, Allan C., 2005. "A comparison of Merton's option pricing model of corporate debt valuation to the use of book values," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 401-426, March.
    4. Ivanovski Zoran & Narasanov Zoran & Ivanovska Nadica, 2018. "Performance Evaluation of Stocks’ Valuation Models at MSE," Economic and Regional Studies / Studia Ekonomiczne i Regionalne, Sciendo, vol. 11(2), pages 7-23, June.
    5. Jani Saastamoinen & Hanna Savolainen, 2021. "Does a leopard change its spots? Auditors and lawyers as valuation experts for minority shareholders in the judicial appraisal of private firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 613-636, March.
    6. Groh, Alexander P. & Gottschalg, Oliver, 2009. "The opportunity cost of capital of US buyouts," IESE Research Papers D/780, IESE Business School.
    7. Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
    8. Cornell, Bradford, 2000. "Valuing Intel: A Strange Tale of Analysts and Announcements," University of California at Los Angeles, Anderson Graduate School of Management qt4dm1h6qh, Anderson Graduate School of Management, UCLA.
    9. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Paper Series 496, University of Wisconsin, Agricultural and Applied Economics.
    10. Eberhart, Allan C., 2001. "Comparable firms and the precision of equity valuations," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1367-1400, July.
    11. Segelod, Esbjorn, 2000. "Investments and investment processes in professional service groups," International Journal of Production Economics, Elsevier, vol. 67(2), pages 135-154, September.
    12. Gentry, James A. & Whitford, David T. & Sougiannis, Theodore & Aoki, Shigeo, 2002. "Do Accounting Earnings or Free Cash Flows Provide a Better Estimate of Capital Gain Rates of Return on Stocks?," Working Papers 02-0111, University of Illinois at Urbana-Champaign, College of Business.
    13. Pengguo Wang, 2018. "Future Realized Return, Firm‐specific Risk and the Implied Expected Return," Abacus, Accounting Foundation, University of Sydney, vol. 54(1), pages 105-132, March.
    14. Fernandez, Pablo, 2003. "Levered and unlevered Beta," IESE Research Papers D/488, IESE Business School.
    15. Segelod, Esbjorn, 2000. "A comparison of managers perceptions of short-termism in Sweden and the U.S," International Journal of Production Economics, Elsevier, vol. 63(3), pages 243-254, January.
    16. Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, August.
    17. Mishra, Dev R. & O'Brien, Thomas J., 2005. "Risk and ex ante cost of equity estimates of emerging market firms," Emerging Markets Review, Elsevier, vol. 6(2), pages 107-120, June.
    18. Frank Asche & Bård Misund, 2016. "Who’s a major? A novel approach to peer group selection: Empirical evidence from oil and gas companies," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1264538-126, December.
    19. Dittmann, Ingolf & Weiner, Christian, 2005. "Selecting comparables for the valuation of European firms," SFB 649 Discussion Papers 2005-002, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    20. Bauke Visser, 1999. "Endogenous local interaction and multi-product firms," Journal of Evolutionary Economics, Springer, vol. 9(2), pages 243-263.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:42-56. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.