V O L U ME 18 | NU M B E R 2 | SP R I NG 2 0 06

Journal of

APPLIED CORPORATE FINANCE

A MO RG A N S TA N L E Y P U B L I C AT I O N

In This Issue: Valuation, Capital Budgeting, and Value-Based Management

London Business School Roundtable on Shareholder Activism in the U.K.

Panelists: Victor Blank, GUS Plc and Trinity Mirror Plc; Alastair
Ross Goobey, Morgan Stanley International; Julian Franks,
London Business School; Marco Becht, Universit Libre
de Bruxelles; David Pitt-Watson, Hermes Focus Asset Management; Anita Skipper, Morley Fund Management; and
Brian Magnus, Morgan Stanley. Moderated by Laura Tyson,
London Business School, and Colin Mayer, Oxford University

The Role of Real Options in Capital Budgeting: Theory and Practice

28

Robert L. McDonald, Northwestern University

How Kimberly-Clark Uses Real Options

40

Martha Amram, Growth Option Insights, and Fanfu Li and

Cheryl A. Perkins, Kimberly-Clark Corporation

Handling Valuation Models

48

Stephen H. Penman, Columbia University

FMA Roundtable on Stock Market Pricing and Value-Based Management

56

Panelists: Tom Copeland, MIT; Bennett Stewart, Stern Stewart;

Trevor Harris, Morgan Stanley; Stephen OByrne,
Shareholder Value Advisors; Justin Pettit, UBS; David Wessels,
University of Pennsylvania; and Don Chew, Morgan Stanley.
Moderated by John Martin, Baylor University, and Sheridan
Titman, University of Texas at Austin

Expectations-Based Management

82

Incentives and Investor Expectations

98

Tom Copeland, MIT, and Aaron Dolgoff, CRAI

Stephen OByrne, Shareholder Value Advisors,
and S. David Young, INSEAD

The Effect of Private and Public Risks on Oileld Asset Pricing: Empirical
Insights into the Georgetown Real Option Debate

106

The Real Reasons Enron Failed

116

Bennett Stewart, Stern Stewart & Co.

Multinationals in the Middle Kingdom: Performance,

Opportunity, and Risk

120

David Glassman, Prince Management Consulting

Gavin L. Kretzschmar and Peter Moles,

University of Edinburgh

How Kimberly-Clark Uses Real Options

by Martha Amram, Growth Option Insights, and Fanfu Li and Cheryl A. Perkins, Kimberly-Clark Corporation*

uring the past ve years, Kimberly-Clark (KC) has faced a challenge that confronts many
companies as they accelerate organic growth:
How can senior managers bring the rigor and
discipline used to make daily operating decisions to the
uncertain and risky world of innovation? The challenge
was particularly acute at K-C because the company is well
known for its use of Return On Invested Capital (ROIC)
and Discounted Cash Flow (DCF) tools to ensure strong
and successful nancial management. Any new valuation
tools would need to pass stringent credibility tests before
management would use them to allocate additional capital
and to manage costly projects aimed at enhancing innovation and competitiveness.
This article is about how K-C adopted and now uses the
real options approach to project evaluation and management,
with the goal of building the same degree of condence in
planning, resource allocation, and outcomes in the uncertain world of innovation the company already experiences
in its operations. The purpose of the article is to share the
lessons learned from a successful adoption process, including how K-C adapted the real options framework to its own
circumstances and requirements. The article includes a case
study, a review of the management practices that have made
the real options approach effective, and a glimpse of whats
next in an ongoing process of improvement at K-C.
Kimberly-Clark: A Strong Financial Base
with Upside Potential
K-C is a leading consumer products manufacturer. In 2004
sales were $15 billion, with 77% of sales and 83% of prots
coming from the North American and European markets.
The company is focused on two key global businesses:
consumer products and business-to-business. K-C has identied four major opportunities to increase prots: increase
revenues from new innovations; increase sales to developing
and emerging markets; capture growth in the business* The authors gratefully acknowledge the contributions of William F. Bane and Greg R.
Benrud of Kimberly-Clark Corporation.
1. Source: A presentation by the CFO, Mark Buthman, at the CAGNY conference in
early 2005. See www.kimberly-clark.com/investorinfo
2. Data in this article are from authors calculations, K-Cs Form 10-K, and the CAGNY
presentation unless otherwise noted.

40

Journal of Applied Corporate Finance Volume 18 Number 2

to-business (B2B) market; and reduce infrastructure and

supply-chain costs.1
K-C produces a large stream of cash ow each year. In
2004, operating cash ow was $2.7 billion on $15 billion
in sales. The cash generated by operations was used for
investment, stock buybacks, and dividends.2 This operating cash ow is the result of corporate discipline. K-C
introduced ROIC as a key performance metric in 2003.
As a result, the company now regularly reports both its
actual and targeted ROIC to the nancial community.
Whats more, senior managements pay is now tied closely
to performance, and the companys 2005 goals included
increasing its ROIC by one-half of one percent and
maintaining tight control of capital spending. Wall Street
has praised the tight nancial management of K-C, using
comments that include excellent cost cutting and tax
management, dedicated to protable growth through
cost-cutting and careful spending on innovation, and
disciplined capital allocation.3
K-C has always prided itself on its ability to bring
innovative products to market. In the 1920s, the company
invented two product categories: Kleenex facial tissue
and Kotex sanitary pads. Many other category creators
followed, including the introduction of Kotex Lightdays
pantiliners in the 1970s, Huggies PullUps training pants in
the 1980s, and PullUps GoodNites youth pants and Huggies
Little Swimmers swim pants in the 1990s. Scott Paper, which
merged with K-C in 1995, introduced the rst paper towel
in the early 1900s, Soft-Weave two-ply bathroom tissue in
the 1940s, and a new dispenser system called Windows for
the delivery of paper towels in the 1990s.
K-C is also known for its strategic use of innovation.
A telling example is presented in Rising Tide, a book about
brand building at K-Cs rival Procter & Gamble (P&G).4
In a chapter titled The Diaper Wars, the authors describe
a race in diaper technology, pricing, and product positioning. In the early 1980s, P&G had high manufacturing
3. Comments from analyst reports by Morgan Stanley and Morningstar, rst quarter,
2005.
4. See Davis Dyer, Frederick Dalzell and Rowena Olegario, Rising Tide, Lessons
from 165 Years of Brand Building at Procter & Gamble (Harvard Business School Press,
2004).

A Morgan Stanley Publication Spring 2006

Figure 1

Cumulative Success Rate for New Products by Project Stage

100%

% of Initial Ideas

80%
60%
40%
20%
0%
Idea
Generation

Idea
Screen

Business
Analysis

Development

Test &
Validation

Commercialization

Success

Source: PDMA Foundation, Comparative Performance Assessment Study (CPAS), 2004. See www.padma.org.

costs for diapers; and when the rm attempted to maintain

a higher price, it was leapfrogged by K-C. With cheaper
manufacturing costs, K-C was able to introduce a new brand
(Huggies) with better features priced at only a few pennies
more. Supported by superior diaper manufacturing technology, K-C grew a strong brand and claimed nearly a third of
the diaper market by the late 1980s. P&G later recovered,
but this episode is now studied at P&G College (an internal management training center) for its strategic lessons on
innovation races and brand support.
Another example of successful innovation is K-Cs use of
its proprietary non-woven technology to make sterile wrap
and surgical gowns. In 2004, K-C entered into the toiletries
category by leveraging non-woven technology to produce
a disposable washcloth that is thicker and more absorbent,
and that also lathers better, than competing products.
K-C continues to pursue innovation through the introduction of new organizational structures and new tools.
One business unit is the K-C Enterprise Growth Incubator,
a center of innovation that is led by Chief Technical Ofcer
(CTO) Cheryl Perkins (a co-author of this article). The
mission of the Growth Incubator is to accelerate revenues
and prots from products, solutions, or businesses that are
new to the world or new to K-C, as well as to reduce by
half the development cycle time for all K-C products. To
support K-Cs strategy of redoubling innovation efforts, the
managers and nancial analysts in the Growth Incubator
had to squarely face the risks of new product development
and commercialization.
Figure 1 illustrates the extent of the challenge. The
graph, based on project data from over 400 companies,
plots the average success rate of new products by project
stage. Reecting the common experience, the graph shows
that there is considerable risk at every stage. Clearly, traditional nance metrics do not ensure better decisions along
the path to commercialization, nor do they help identify the
Journal of Applied Corporate Finance Volume 18 Number 2

most valuable product development projects. Faced with

not only valuable new product development opportunities,
but also the associated risks, K-C turned to the real options
approach to evaluating innovation.
Introducing Real Options
The Growth Incubator projects, which include new products as well as corporate venture capital and technology
licensing deals, are characterized by great uncertainty, long
time horizons (two to seven years), and many interim milestones. Thus, the projects are well suited to the real options
model. With sponsorship from the CTO, a pioneering team
created three or four real options examples from ongoing
projects. Each example had two key features: they showed
what was added by the real options approach, and they
demonstrated that real options relied on the same nancial
drivers as the well-understood DCF models. The examples
were especially effective in showing the effect of uncertainty
on the investment payoff. To make the examples helpful
and credible, the diverse pioneering teamwhich included
people from nance, strategy, and technologyaddressed a
number of tough questions early on. This approach differs
from the methods used at many other companies, where
core real options groups tend to be like-minded staff and
critics evaluate the approach only much later in the adoption process.
The sponsorship of the CTO was crucial to the adoption
of real options at K-C. She introduced real options to the
senior leadership team, the group that reviews project expenditures and progress, in a series of one-on-one conversations.
In addition to presenting examples, the CTO described real
options as a new way of thinking, as a change in both how
project analyses are framed and the order in which risks are
investigated and resolved. Live examplesprojects that
required immediate decisionswere used so that the senior
managers could see how the real options method added
A Morgan Stanley Publication Spring 2006

41

A Case Study in Project Valuation

imberly-Clark has formed a growing number of partnerships designed to leverage the companys core
competencies and provide access to external capabilities.
Partnerships include supply agreements for manufacturing services, licensing agreements that give K-C the right
to use technology or a brand name, joint development
agreements that spell out how K-C will work with another
company to bring a solution to market, and venture capital investments that give K-C external perspectives on
new technology development. The complex nature of
these partnerships challenges K-C business teams in terms
of both valuation and deal structure. The real options
approach has been used to address the problem of how to
value these complex deals and how best to structure the
many contingent terms.
Contingent Options in a Joint Development Agreement. In 2004, K-C began to evaluate a strategic-alliance

relationship with a start-up rm (ABC) to make new

products that combined ABCs unique technology with
K-Cs manufacturing and distribution expertise. The
legal framework was to be a Joint Development Agreement (JDA) that laid out the development of a specic
technology. The JDA would require K-C to make specic
technology development milestone payments to ABC.
In return, K-C would have the exclusive right to license
and use the technology in new K-C products. The project
team identied two major risks: the market demand for
the lead product was uncertain and the technology was
about four years away from full development. Given these
risks, was this project a good deal for K-C?
Figure 2

The prolonged development phase, and the difculty

in predicting future cash ows and market conditions,
made it difcult to employ a DCF analysis. The team
then examined the project carefully and found that the
JDA could be structured to give K-C the right but not the
obligation to exit the relationship at any time.
The analysis team also realized that K-C did not need
to commit the entire investment up front, but could
invest in stages as more information became available.
The project team then illustrated the key issues using the
milestone diagram as shown in Figure 2.
Based on this analysis, the JDA was structured to
retain managerial exibility and to delay spending until
sufcient information became available. The real option
methodology was selected for use in this valuation. K-C
routinely uses an internally developed real options calculator that is a modied binomial lattice.5 In the model,
the value of the project at each decision point is calculated, and this analysis is updated over time. At each stage,
K-C makes the decision to continue only if the project is
worth more than the investment required.
Figure 3 shows the inputs and outputs of the real
options model at the start of the project, before the rst
$1 million investment.
The left side of Figure 3 shows the inputs, with ve
option inputs (S, X, r, T and ) marked in bold. The
value of sigma reects K-Cs historical average stock price
volatility, approximately 26%. While the option inputs
shown address the value of the market opportunity, the
last input, the Cumulative Probability of Technical

Milestone Diagram

42

Journal of Applied Corporate Finance Volume 18 Number 2

A Morgan Stanley Publication Spring 2006

Figure 3

Real Options Example

Valuation of K-Cs Potential JDA ($ gures are in millions, not real numbers)

Inputs
PV of Value at Launch (S)
Upcoming Investment (X)
Volatility ()
Risk-free rate (r)
Years to Launch (T)
Initial Investment*
Cumulative
Probability of Technical Success

Outputs
$80
$40
30%
5.7%
4.5
$1

Option Value
Option Value, Net of Cost
Upside Potential

$11
$10
62%

Risk-Adjusted PV of Value at Launch

Risk-Adjusted PV of Upcoming Investment
Value Ratio

$22
$11
2

30%

Initial investment is the immediate payment due to begin the JDA.

The magnitude of uncertainty during the options life. Higher uncertainty creates
more option value.

The ratio of risk-adjusted benets per risk-adjusted dollar invested. See Timothy
Luehrman, Investment Opportunities as Real Options: Getting Started on the Numbers, Harvard Business Review, July-August, 1998.

Success, captures the technical risks of development. The

right side of Figure 3 shows the results of the real options
valuation before any expenditures have been made. These
are highlighted in bold.
The real options analysis shows that the option to
develop is worth $11 million. The rst payment of $1
million is due at the start of the JDA, making the net
value of the option $10 million. The Upside Potential
shows that the project outcome is highly uncertain, but
because option value increases with uncertainty, this is
actually a positive result. Whereas traditional frameworks
simply discount future outcomes, thereby penalizing
long-awaited payoffs, the Upside Potential helps management see the benet of waiting for the future.
K-C also prepares a second set of calculations in which
the risk-adjusted (expected PV) of benets are divided by
the risk-adjusted costs. The Value Ratio, equal to 2.0 in

this case, shows that the risk-adjusted payoff to the project

is greater than its cost.
This particular JDA would also be accepted using
traditional nancial tools. In fact, many projects at K-C are
similarly valuable. Thus the option method is also used to
rank projects by the value they are expected to create and
their position in the project pipeline. Project selection is
based on value and portfolio t. The real options approach
gave K-C the insights used in the design of the JDA, and
thus were an integral part of the entire project analysis.
K-C prepares similar analyses for all projects in the
Growth Incubator and uses the results in its portfolio
evaluation. Project selection and go-ahead decisions are
made in comparison to other attractive investment opportunities, not in isolation. The structured analysis allows
the inputs and outputs to be easily updated over time for
use in project reviews and decision updates.

5. K-C has modied the binomial lattice options calculator by including technical risks as a multiplicative factor for the chance of success at key points on the
timeline.

value while remaining consistent with and so reinforcing

business judgment. The CTO followed up with small informal training sessions and a more detailed pilot analysis.
One early example focused on an improvement-related
investment in K-Cs leading feminine hygiene product.
Industry partners had demanded innovations beyond the
annual product upgrade. Using traditional tools, the nancial analysts assigned to the issue had struggled to quantify
Journal of Applied Corporate Finance Volume 18 Number 2

the impact of a larger expenditure. To assist, the Growth

Incubator team used real options. While the original analysis showed that the expenditure had a large Net Present
Value (NPV), the real options analysis added a distribution
of outcomesbased on a range of potential market share
increasesthat helped management take a closer look at
risk reduction.
Despite these early successes, the pioneering team
A Morgan Stanley Publication Spring 2006

43

recognized that senior managers are time-pressured and

naturally hesitant to get sidetracked by new analytics. It was
understood that the adoption and diffusion of real options
would take time, both in working with layers of management and introducing the concept to a broader internal
audience. A process was established to obtain buy-in from
senior management (CEO, CFO, and Senior Business Unit
Leaders). The pioneering team also developed a practical
real option analysis toolkit and provided training to other
internal nance professionals.
From the beginning, K-C has owned the process,
its pace, methodology and scope. The pioneering team
prepared all the models and traveled throughout the
company to provide training for others. Outside consultants were used in a targeted fashionto validate the
analytical framework, to review the preparation of
certain inputs, and to provide advice on best practices.
Because outsiders did not drive the process, changes have
proceeded at a pace that has proven acceptable to the KC corporate culture. Consequently, these changes have
gained traction and are now being institutionalized. The
use of real options no longer depends on one key employee
or consultant. The real options perspective and associated
quantitative tools have moved into the mainstream of KCs business analysis process.
Successful Real Options Practices
K-Cs real options efforts have been underway for nearly
four years. This section describes some of the successful
practices in use. The section that follows it identies some
of the continuing challenges.
A well-developed process of facilitation. It is not
unusual at K-C for managers and experienced business
analysts to play a facilitating role for cross-functional project
teams, while using the real options model to frame the
discussion. The analyst helps to extract a range of possible
outcomes from the project and business leaders in specic
terms such as volume, pricing, cost, and chance of success.
The analyst also informally vets the rst-cut results against
corporate prot and growth expectations.
In one case, quick calculations showed that the prot
margin was below the minimum for corporate approval,
and the supply chain team responded with a new strategy
to lower costs. This facilitation process has two functions:
conveying top-down metrics to a diverse group and helping
the group shape their project for corporate approval.
Quantifying the upside potential. In a company with
a strong corporate culture of nancial controls, it is easy to
miss value because the upside potential of a project cannot
always be rigorously quantied within an ROIC and DCF
framework. Also, the strategic importance of the upside
potential can be neglected due to the static nature of traditional DCF analysis. Quantifying the upside potential has
44

Journal of Applied Corporate Finance Volume 18 Number 2

been critical to demonstrating the value of risky projects

to K-Cs senior management. The pioneering team put
together straightforward information packages for each
project, and walked senior management through the shift
in frameworks in a low-key manner. As a result, the top
leadership team has been able to digest the quantitative
results and use the insights strategically.
Screening and qualifying projects before a formal
analysis. As Figure 1 shows, there is typically a sharp fallout
rate for projects, from idea generation to business valuation
and beyond. The fallout rate can be improved, however,
with good screening. K-C screens projects before nancial and strategic analyses are begun, both informally on a
case-by-case basis, and in a more structured manner at the
business unit level. In fact, K-C has developed a comprehensive portfolio management process for each business unit.
In addition to reducing valuation workloads, the screens
reinforce the quantitative performance standards for new
projects. Screening eliminates the continued analysis and
planning for projects that are identied as exceptions,
allowing K-C to focus resources on those that can contribute
to company value. In terms of the overall process, screening
is as important as the detailed analysis in making the valuations useful to managers.
Adapting the real options approach to t the business
need. K-C has customized the tools it uses to value and
manage projects under uncertainty, which has increased
acceptance of the new approach. Customization has also
allowed K-C to avoid mathematical overkill, the forcetting of projects into a narrow paradigm, and the tendency
to ignore managerial intuition and experience. This type of
homegrown adaptation is not taught in business schools,
and carries with it a major risk of incorrect models and
unreliable results. On the other hand, reducing models to
just what is needed for the current application has strong
benets as well.
K-C managed its model risk by bringing in consultants
at several points to review and validate their models. KC also piloted the real option analysis tool in its Growth
Incubator to gain valuable experience before introducing
the tool to the mainstream of the corporations business
analysis team.
Pinpointing the learning from the next investment.
One of the most vivid examples of the benets of the real
options approach came from a project analysis that identied the value in early product testing. Taking the analysis
one step further, the team identied the consumer behaviors
that would have to change for the product to succeed in the
marketplace. Early testing focused on gathering this specic
behavioral information, leaving many of the typical test
market questions unanswered. The pinpoint focus was very
valuable because it quickly and cost-effectively answered the
key question underlying the projects value.
A Morgan Stanley Publication Spring 2006

Real OptionsAn Expanded Denition

he term real options was rst coined nearly 30

years ago by a prominent corporate nance professor,
Stewart Myers of MIT.6 True to its origins, when the real
options approach is taught in corporate nance classes
in MBA programs, the focus is on the application of
quantitative tools borrowed from the pricing of nancial
options. But in the corporate world, the term real options
has taken on a wider meaning.
In companies without a toolkit for addressing uncertainty, the term real options has been applied to simple
decision trees or stage-gate models. While academics
might use different labels for each of these tools, corporate practitioners and consultants lump all these valuation
tools together under the term real options.
K-C has introduced a range of tools that address
uncertainty and provide guidance on how to best match

tools to applications. For many projects at K-C, risk

analysis for technical development and valuation is done
using a stage-gate (expected NPV) model. This works well
when market dynamics are well understood. At the other
extreme are new-to-the-world projects, where almost every
variable is uncertain. Here the valuation toolkit includes
stage-gate models, decision analysis, Monte Carlo simulations, and a modied binomial lattice calculator. For the
most wide-ranging projects, K-C uses its experienced
pioneering real options team and the advanced toolkit.
These projects include the valuation of in-licensing or
out-licensing alternatives, co-development or investment
in early-stage technologies owned by others, equity investments in startup companies in exchange for technology
access, and the evaluation of contingent payment terms
in partnership contracts.

6. For more real options history see Martha Amram and Nalin Kulatilaka, Real Options (Oxford University Press, 1999).

The analysis stays with the project. Most large

projects require a long-term approach to tracking and
updates, and the real options method meets this requirement. K-C has found that one of the benets of the real
options approach is that the analysis can be updated,
assumptions tested, and data refreshed as the project moves
forward. Transformational projectswhich are often the
key projectstake many years, and with the real options
approach an experienced core group of business analysts
can provide decision-making continuity. Over a longer
period, the effect of economic drivers under K-Cs control
can be separated from those largely affected by chance, a
process that accumulates important insights for analysts
and management alike.
Using options thinking to open up strategic potential. K-C has found that the language of real options helps
the company articulate future opportunities. Using the real
options method, the merits of strategic alternatives can be
claried, often without crunching a number. K-C senior
management is now comfortable with the real options way
of thinking because, in their words, it doesnt circumvent
business judgment. Use of real options analysis helps K-C
make better-informed decisions earlier in the process and
helps to speed products to market. A conventional analysisone that heavily discounts the unknownmight
suggest abandoning or delaying a project (to wait for more
Journal of Applied Corporate Finance Volume 18 Number 2

information) while a real options analysis might suggest

investing to learn.
Continuing Challenges
K-C views the adoption of the real options approach as
a work in progress. The company continues to reect on
successes and challenges, and to invest resources in ongoing
improvements. Modications of the toolkit, and education
and training, are always underway. Other continuing challenges include the following:
Better project monitoring through effective
meetings. Modern corporate life is full of meetings.
And like many companies, K-C has worked to increase
the effectiveness of its meetings, a crucial step in managing option-laden projects and making good decisions.
To capture the value shown in the real options models,
decisions must be made on time. Decision-makers must
be at the right meetings, be fully briefed, and be prepared
to act.
Taking the portfolio view. One exciting result of the
adoption of real options at K-C has been the development
of a portfolio view of innovation projects. As managers in
the pharmaceutical and oil industries can attest, the assembly
and interpretation of portfolio results in an uncertain world
are no trivial matter. But, importantly, the portfolio view can
also demonstrate the infeasibility of a set of projects that have
A Morgan Stanley Publication Spring 2006

45

Key Success Factors

number of companies have adopted real options in

some form, but most have found it difcult to use.7
Why is K-Cs experience different? What happened at
K-C that has allowed real options to grow and ourish?
Ive worked with a number of Fortune 500 companies
on real options implementation, and from this experience I see the following key success factors at K-C:
1. Real options did not lead the way. K-C has a topdown mandate for increased organic growth. Careful
attention to implementation of this strategic imperative led to concern about how to value risky projects,
which led in turn to real options. In other companies,
the introduction to real options has been followed by a
quest for a useful applicationand this doesnt work.
Real options support K-Cs corporate objectives.
2. Setting the stage for senior level adoption. KC uses a unique process of socialization and decision
preparation. K-Cs CTO applied that process during
the introduction of real options to the most senior
levels of the company. Through one-on-one sessions,
live examples, and a relaxed pace, the top team became
comfortable with the real options approach before being
asked to use it. The CTOs actions conferred credibility
on K-Cs adoption of real options.
3. Taking the long-run view. In many companies,
a staff member will get real options fever, and push to
have the tool adopted quickly because from their newly

enlightened point of view, value is being lost through

incorrect valuations. In contrast, the rate of adoption at
K-C was at a pace that ts the corporate culture. In the
long run, the slower diffusion gave staff time to absorb
and digest the new material, which led in turn to a more
enduring value gain from the change to real options.
4. Clear metrics. The key audience for any new
valuation and decision-making tool is the top team. At
K-C, senior management understands options-based
metrics, and those metrics align with their concerns
about misvaluing growth projects. Here again, the CTO
played a key role in achieving this clarity and alignment.
In other companies, the form of the real options output
is often model-driven, not business-driven.
5. Removal of career risk. As an outsider, Im not
sure how this was accomplished, but I have seen that
K-C staff is better able to work towards the companys
long-term goals because they are not looking over their
shoulder to see if they might get red or laid off. In other
companies, I have witnessed a manager rapidly adopt
real options because he felt it would enhance his career
with the board, only to be red within the year. I have
also seen entire real options initiatives begin to make
progress and then be discarded because of changes in
senior management two layers above. The steadiness of
the management team at K-C supported the steadiness of
adoption and created greater and lasting value. MA

7. See for example articles on corporate real options adoption in CFO magazine,
September 2001 and July 2003.

been approved on a one-off basis. K-C expects to reap large

benets from its ongoing work on its innovation portfolio.
Project triage. K-C also faces perhaps the most
common problem for companies adopting tools for
managing uncertainty: project triage. Every project has a
champion, and it is far harder to confront the champion
and close the project down than it is to effectively push the
project to the bottom of the Corporate To-Do List by
reducing resources or adding new projects to the workload.
Without project triage, vital innovation resources are
spread too thin, and the most valuable projects are not
completed in a timely manner, slowing corporate growth
from innovation.
46

Journal of Applied Corporate Finance Volume 18 Number 2

Leveraging real options as a way of thinking. As a

company with strong cash ow in relatively slow-growth
markets, K-C is uniquely positioned to support and benet
from innovations with large upside potential. This type of
growth is driven by a certain mentality, a mentality free of
the constraints of traditional practices, capturing the potential of what could be. The real options method validates a
new way of thinking and is an approach that is expected to
pay valuable dividends.
Conclusion
Many companies have evaluated the real options approach,
but corporate adoption has not been as rapid as early advoA Morgan Stanley Publication Spring 2006

cates envisioned. In the K-C experience, a number of factors

that have nothing to do with the rigor or precision of quantitative models have led to the successful adoption of this
quantitative tool. The tool has been modied to t K-Cs
needs, and is thus fully owned by the business analysis
staff and accepted by senior decision-makers. The existing
academic and practitioner literature on real options typically does not address the practical side of the challenge. We
hope that this brief summary of one companys experience
and ongoing efforts will bring focus to these issues by real
options experts in both industry and academia.

Journal of Applied Corporate Finance Volume 18 Number 2

martha amram is a co-founder of Growth Option Insights and has

consulted widely on corporate adoption of the real options approach.
After the real options adoption process was well underway at KimberlyClark Corporation, Amram assisted the company by validating their
real options models and providing suggestions on how to obtain the
volatility input.
fanfu li is a Financial Manager at Kimberly-Clark Corporation.
cheryl perkins is Senior Vice-President and Chief Innovation Ofcer
at Kimberly-Clark Corporation.

A Morgan Stanley Publication Spring 2006

47

Journal of Applied Corporate Finance (ISSN 1078-1196 [print], ISSN

1745-6622 [online]) is published quarterly, on behalf of Morgan Stanley by
Blackwell Publishing, with ofces at 350 Main Street, Malden, MA 02148,
USA, and PO Box 1354, 9600 Garsington Road, Oxford OX4 2XG, UK. Call
US: (800) 835-6770, UK: +44 1865 778315; fax US: (781) 388-8232, UK:
+44 1865 471775.
Information for Subscribers For new orders, renewals, sample copy requests, claims, changes of address, and all other subscription correspondence, please contact the Customer Service Department at your nearest
Blackwell ofce (see above) or e-mail subscrip@bos.blackwellpublishing.com.
Subscription Rates for Volume 18 (four issues) Institutional Premium
Rate* The Americas $356, Rest of World 218; Commercial Company Premium Rate, The Americas $475, Rest of World 289; Individual Rate, The
Americas $95, Rest of World 53, 80; Students** The Americas $50, Rest
of World 28, 42.
*Includes print plus premium online access to the current and all available
backles. Print and online-only rates are also available (see below).

Customers in Canada should add 7% GST or provide evidence of entitlement

to exemption.

Customers in the UK should add VAT at 5%; customers in the EU should also
add VAT at 5%, or provide a VAT registration number or evidence of entitlement to exemption.
**Students must present a copy of their student ID card to receive this rate.
For more information about Blackwell Publishing journals, including online access information, terms and conditions, and other pricing options, please visit
www.blackwellpublishing.com or contact our Customer Service Department,
tel: (800) 835-6770 or +44 1865 778315 (UK ofce).
Back Issues Back issues are available from the publisher at the current singleissue rate.
Mailing Journal of Applied Corporate Finance is mailed Standard Rate. Mailing to rest of world by DHL Smart & Global Mail. Canadian mail is sent by
Canadian publications mail agreement number 40573520. Postmaster
Send all address changes to Journal of Applied Corporate Finance, Blackwell
Publishing Inc., Journals Subscription Department, 350 Main St., Malden, MA
02148-5020.

Journal of Applied Corporate Finance is available online through Synergy,

Blackwells online journal service, which allows you to:
Browse tables of contents and abstracts from over 290 professional,
science, social science, and medical journals
Create your own Personal Homepage from which you can access your
personal subscriptions, set up e-mail table of contents alerts, and run
saved searches
Perform detailed searches across our database of titles and save the
search criteria for future use
Link to and from bibliographic databases such as ISI.
Sign up for free today at http://www.blackwell-synergy.com.
Disclaimer The Publisher, Morgan Stanley, its afliates, and the Editor cannot
be held responsible for errors or any consequences arising from the use of
information contained in this journal. The views and opinions expressed in this
journal do not necessarily represent those of the Publisher, Morgan Stanley,
its afliates, and Editor, neither does the publication of advertisements constitute any endorsement by the Publisher, Morgan Stanley, its afliates, and
Editor of the products advertised. No person should purchase or sell any
security or asset in reliance on any information in this journal.
Morgan Stanley is a full service nancial services company active in the securities, investment management, and credit services businesses. Morgan Stanley may have and may seek to have business relationships with any person or
company named in this journal.
Copyright 2006 Morgan Stanley. All rights reserved. No part of this publication may be reproduced, stored, or transmitted in whole or part in any form
or by any means without the prior permission in writing from the copyright
holder. Authorization to photocopy items for internal or personal use or for the
internal or personal use of specic clients is granted by the copyright holder
for libraries and other users of the Copyright Clearance Center (CCC), 222
Rosewood Drive, Danvers, MA 01923, USA (www.copyright.com), provided
the appropriate fee is paid directly to the CCC. This consent does not extend
to other kinds of copying, such as copying for general distribution for advertising or promotional purposes, for creating new collective works, or for resale.
Institutions with a paid subscription to this journal may make photocopies for
teaching purposes and academic course-packs free of charge provided such
copies are not resold. For all other permissions inquiries, including requests
to republish material in another work, please contact the Journals Rights and
Permissions Coordinator, Blackwell Publishing, 9600 Garsington Road, Oxford
OX4 2DQ. E-mail: journalsrights@oxon.blackwellpublishing.com.