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The primary objective of the given article is to advocate the role of Real Options (RO) as a
viable alternative to static investment analysis tools such as NPV, IRR which in an uncertain
operating environment have limited utility since they do not incorporate the crucial impact of
timing of a particular decision. The article seeks to promote the usage of RO by offering an
example of its successful usage in the telecommunication sector. Further a literature review
of RO as an interpretative lens and a key decision making tool has also been done along with
highlighting the key bottlenecks related with this approach. Finally in wake of all the above
research, agenda has been set for future research studies to be conducted so as to enhance the
usage of RO more extensively and accurately.

Theoretical base & Arguments

RO may be defined as the right of going ahead or not going ahead with a particular
investment project. Thus it represents a dynamic approach to capital budgeting decision
making where project may be pursued when the conditions become favourable and the
investment yields handsome returns for the investors (Arnold & Hatzopoulos, 2000).
Additionally the RO method can be extensively used as an interpretative lens primarily with
regards to deciding on the correct market entry time and additionally with regards to projects
involving high technology as the timing becomes crucial in such cases (Benaroch &
Kauffman, 1999). Further the RO method can be also used as a dynamic investment decision
framework in cases where the level of uncertainty is comparatively higher (Bowman &
Moskowitz, 2001). For the application of this technique, it is imperative that four conditions
need to be satisfied namely uncertainty in environment, flexibility in decision making,
irreversibility of the decision taken and revelation of the required information (Adner &
Levinthal, 2004). Further despite its benefits there are certain limitations of this approach
such as limited applicability provided the above conditions are met, grave implementation
issues which is the main reason why despite its popularity as an academic topic it has had
limited utility in actual real life situations and the biases on the part of the organisation and
decision makers are not accounted in this approach (Coff & Laverty, 2001).


The author has used primarily two methods for the article namely case study method and
literature review method. The case study method has been used to highlight a real life case
from the telecommunication industry where the RO approach was used to reap rich gains and
thereby makes a case for its usage on more extensive scale. Further a thorough literature
review has been conducted of the available literature on the RO technique with regards to its
usage and limitations.

Sources and credibility of evidence

The literature review that has been deployed by the author has been particularly extensive and
refers to empirical case studies cited by other credible researchers in the field which adds to
the credibility of the arguments made in the article (Kemna, 1993). Additionally the author
despite, advocating more widespread usage of RO is pragmatic and honest and thereby hints
on the various limitations of the RO framework and seeks to overcome these through further
research directed in the future. Besides the case study based on Mobitel stated in the article is
a real life success story which deployed the RO approach and thus provides more credibility
to the various arguments and observations.

Place in the literature

The current article occupies an important place in the RO literature since it does not only seek
to discuss the merits and limitations of the RO approach but rather based on the current
literature actually seeks to set research agenda for the future which would enhance the usage
of RO approach in real business scenarios. This research agenda needs to be taken ahead by
like minded researchers so as to offer practical answers to the various issues raised
particularly with regards to understanding and incorporating uncertainty, underlying
complexity due to intertwined choices and additionally defining the normative expectations
that the potential users have from the RO approach so that these can be focused (Lander &
Pinches, 1998).

Soundness of its conclusion(s)

The current article is able to successfully demonstrate the practical usage of RO while
demonstrating its limitations. As a result it recommends that the scholars doing research on
RO must focus on key research areas which have been identified above. Clearly the
conclusions drawn are sound and relevant since the article does not end at the conclusion of
the literature analysis and the existing gaps but goes beyond that and makes attempt at
closing the current gaps that are inhibiting the widespread use of RO as a decision making
tool (Kester, 1984).

Potential theoretical contribution

The theoretical contribution of the current article lies in the fact it provides the background
research to establish the underlying utility of the RO method in business scenarios and
additionally hint at the various issues that is inhibiting its usage. Further its lays the platform
for future research by indicating the potential areas of research and thus present critical
background material for any researcher who wants to enhance the usage of RO in the real

Ability to be applied by managers

The given research has tremendous implications for the managers involved in making crucial
capital budgeting decisions particularly in a volatile environment where timing of the
decision is a crucial variable where traditional parameters such as NPV, IRR may have
limited usage. Additionally it also enhances the level of communication amongst the relevant
stakeholders and thereby ensures inclusive decision making (Janney & Dess, 2004). Besides,
the RO approach also provides the requisite flexibility in decision making to managers so as
to implement the project in the event of favourable development and to stall the project in the
event of unfavourable developments. This results in better decision making and interpretation
of the key risks and rewards associated with the project (Folta & OBrien, 2004).


It can be concluded that RO approach can serve as a viable alternative to traditional capital
budgeting techniques especially in an uncertain environment since it provides an underlying
uncertainty in decision making. The success of this approach has been highlighted in a
plethora of business case studies. The RO model can be applied only if certain conditions are
fulfilled. However the underlying complexity associated with this process and its total neglect
of human biases tends to limit its usage in actuality. In wake of this it is imperative that more
research needs to be conducted on the subject so as to close this gap through fulfilment of
normative expectations. This is a powerful tool which needs to be applied by managers more
frequently especially in an environment which is plagued with uncertainty and thus both
timing and actual returns hold the key.

Adner, R., & Levinthal, D. A. (2004). What is not a real option: Considering boundaries for
the application of real options to business strategy. Academy of Management Review, 29(1),
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Arnold, G. C., & Hatzopoulos, P. D. (2000). The theory practice gap in capital budgeting:
Evidence from the United Kingdom. Journal of Business Finance & Accounting, 27(5/6), 603

Benaroch, M., & Kauffman, R. (1999). A case for using real options pricing analysis to
evaluate information technology project investments. Information Systems Research, 10(1),
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Bowman, E. H., & Moskowitz, G. T. (2001). Real options analysis and strategic decision
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Coff, R. W., & Laverty, K. J. (2001). Real options on knowledge assets: Panacea or
Pandoras box? Business Horizons, 44(6), 73

Folta, T. B., & OBrien, J. P. (2004). Entry in the presence of dueling options. Strategic
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Janney, J. J., & Dess, G. G. (2004). Can real-options analysis improve decision-making?
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Kemna, A. G. Z. (1993). Case studies on real options. Financial Management, 22(3), 259

Kester, W. (1984). Todays options for tomorrows growth. Harvard Business Review, 62(2),

Lander, D. M., & Pinches, G. E. (1998). Challenges to the practical implementation of

modeling and valuing real options. Quarterly Review of Economics & Finance, 38(4), 537.