Question 1

Corporate ventures that use real options logic in decision making tend to keep total investment low in order to minimize the downside risk of a project.

Accepted Answer

The real options logic process of evaluating ideas separates winning ideas from losing ones in a way that keeps investments low. Using real options logic to advance the development process is a key way that firms reduce uncertainty and minimize innovation-related failures.

Question 2

Fostering creativity and experimentation is the only innovativeness technique that company managers should consider when identifying and launching corporate ventures.

Accepted Answer

Many corporations owe their success to an active program of innovation-based corporate venturing. Exhibit 12.5 highlights two of the methods companies can use to enhance their competitive position through innovativeness. One is to foster creativity and experimentation. Another is to invest in new technology, research and development, and continuous improvement.

Question 3

First movers in an industry often capture above-average profits, but usually find it difficult to maintain early market share gains.

Accepted Answer

First movers have several advantages. They often capture unusually high profits, because there are no competitors to drive prices down. First movers that establish brand recognition are usually able to retain their image and hold on to the market share gained by being first. Generally, first movers have an advantage that can be sustained until the maturity phase of the industry life cycle.

Question 4

Financial risk taking involves the risk an executive assumes in taking a stand in favor of a strategic course of action.

Accepted Answer

Personal risk taking refers to the risks that an executive assumes in taking a stand in favor of a strategic course of action. Executives who take such risks stand to influence the course of their whole company, and their decisions also can have significant implications for their careers.

Question 5

Escalation of commitment is the tendency for managers to irrationally stick with an investment, even one that is broken down into a sequential series of decisions, when investment criteria are not being met.

Accepted Answer

Both real options and decisions involving escalation of commitment require specific environments with sequential decisions. As the escalation-of-commitment literature indicates, simply separating a decision into multiple parts does not guarantee that decisions made will turn out well. This condition is potentially present whenever the exercise decision retains some uncertainty, which most still do. The decision to abandon also has strong psychological factors associated with it that affect the ability of managers to make correct exercise decisions.

Question 6

According to Peter Drucker, successful entrepreneurs typically are risk takers.

Accepted Answer

In his book Innovation and Entrepreneurship, Peter Drucker argued that successful entrepreneurs are typically not risk takers. Instead, they take steps to minimize risks by carefully understanding them. This is how they avoid focusing on risk and remain focused on opportunity.

Question 7

The term skunkworks is used to refer to a type of in-house facility that corporations use to develop entrepreneurial ideas.

Accepted Answer

Skunkworks are independent work units, often physically separate from corporate headquarters. They allow employees to get out from under the pressures of their daily routines to engage in creative problem solving.

Question 8

Managerial conceit occurs when decision makers who have made successful choices in the past come to believe that they possess superior expertise for managing uncertainty.

Accepted Answer

Often, poor decisions are the result of such traps as biases, blind spots, and other human frailties. Much of this literature falls under the concept of managerial conceit. Managerial conceit occurs when decision makers who have made successful choices in the past come to believe that they possess superior expertise for managing uncertainty.

Question 9

Real options logic is useful when corporations consider stock options as a way to finance entrepreneurial ventures.

Accepted Answer

Real options logic is applied in situations where decisions are made to invest in new ventures or other business activities. Many strategic decisions have the characteristic of containing a series of options. The phenomenon is called embedded options, a series of investments in which at each stage of the investment there is a go or no-go decision.

Question 10

Intel uses option contracts for the right to purchase key pieces of equipment at a specific future date. They simulate the likelihood that they will need to purchase a specific piece of equipment and then create the options contracts to reduce risk and potentially save money.

Accepted Answer

Intel has figured out a way to limit the risk it faces by using option contracts. Intel pays an up-front fee for the right to purchase key pieces of equipment at a specific future date. At that point, Intel either purchases the equipment or releases the supplier from the contract. In these cases, the supplier is then free to sell the equipment to someone else. Where there is significant uncertainty about the need for equipment, they use the simulation results to identify the specific equipment for which they need option contracts and the value of those options to Intel. This helps with the pricing.

Question 11

Options exist when the owner of the option has the obligation to engage in certain types of transactions. The most common are stock options.

Accepted Answer

Options exist when the owner of the option has the right but not the obligation to engage in certain types of transactions. The most common are stock options. A stock option grants the holder the right to buy (call option) or sell (put option) shares of the stock at a fixed price (strike price) at some time in the future.

Question 12

Risk taking can lead to competitive advantage, but it needs to be managed carefully.

Accepted Answer

Risk taking, by its nature, involves potential dangers and pitfalls. Only carefully managed risk is likely to lead to competitive advantages. Actions that are taken without sufficient forethought, research, and planning may prove to be very costly. Therefore, strategic managers must always remain mindful of potential risks.

Question 13

One of the potential pitfalls of real options analysis is that managers may have the incentive and know-how to game the system.

Accepted Answer

Managers using ROA may have an incentive and the know-how to game the system. If managers know that a certain option value must be met in order for the proposal to get approved, they can back-solve the model to find a variance estimate needed to arrive at the answer that upper management desires.

Question 14

Firms can act proactively by introducing new products or technological capabilities after the competition has entered the market. Amazon and its online bookselling market is a good example of this.

Accepted Answer

Proactiveness techniques include introducing new products or technological capabilities ahead of the competition. Amazon was able to define the online bookselling market by entering the market early and defining the user experience. It further leveraged its position as an early mover when moving into other retailing ventures and later into cloud computing.

Question 15

Stock options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

Accepted Answer

A stock option grants the holder the right to buy (call option) or sell (put option) shares of the stock at a fixed price (strike price) at some time in the future. The investment to be made immediately is small, whereas the investment to be made in the future is generally larger. An option to buy a rapidly rising stock currently priced at 50 USD might cost as little as 0.50 USD. Owners of such a stock option have limited their losses to 0.50 USD per share, while the upside potential is unlimited. This aspect of options is attractive, because options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

Question 16

Real options analysis helps managers make investment decisions involving large irreversible commitments of financial resources.

Accepted Answer

ROA is appropriate to use when investments can be staged whereby a smaller investment up front can be followed by subsequent investments. Real options can be applied to an investment decision that gives the company the right, but not the obligation, to make follow-on investments.

Question 17

A real estate option grants the holder the obligation to buy or sell a piece of property at an established price sometime in the future.

Accepted Answer

A real estate option grants the holder the right to buy or sell a piece of property at an established price sometime in the future. The actual market price of the property may rise above the established (or strike) price or the market value may sink below the strike price. If the price of the property goes up, the owner of the option is likely to buy it. If the market value of the property drops below the strike price, the option holder is unlikely to execute the purchase. In the latter circumstance, the option holder has limited his or her loss to the cost of the option but during the life of the option retains the right to participate in whatever the upside potential might be.

Question 18

Competitive aggressiveness is a response to threats whereas proactiveness is a response to opportunities.

Accepted Answer

Proactiveness is a response to opportunities, the O in SWOT. Competitive aggressiveness, by contrast, is a response to threats, the T in SWOT. A competitively aggressive posture is important for firms that seek to enter new markets in the face of intense rivalry.

Question 19

Business risk taking refers to the risk associated with entering untested markets or committing to unproven technologies.

Accepted Answer

Business risk taking involves venturing into the unknown without knowing the probability of success. This is the risk associated with entering untested markets or committing to unproven technologies.

Question 20

The more specific the human capital of the manager becomes, the easier it is to transfer it to other organizations.

Accepted Answer

The more specific the human capital of the manager becomes, the harder it is to transfer it to other organizations. Hence, there is a greater likelihood that managers will stick around and try to make an existing decision work. They are more likely to continue an existing project even if it should perhaps be ended.

Quiz 12: Managing Innovation and Fostering Corporate Entrepreneurship