Mark R. Manfredo and Clifford J. Shultz I
Tsunamis, hurricanes, earthquakes, mudslides, terrorist attacks, and war can be massively and incomprehensibly catastrophic events. The best initial efforts to restore some semblance of stability typically rest in humanitarian aid and other forms of donor assistance. However, over time, donor fatigue saps energy from well-intended projects, and the inevitable next catastrophe draws resources and attention from previously devastated regions. Unfortunately, conditions often deter private-sector investment, which is vital for enterprise creation, jobs, and socioeconomic development. Devastated areas that would most benefit are often viewed as being too risky by potential investors that are interested in important infrastructure projects and other forms of engagement, such as trade. This is especially true in war-ravaged and politically volatile areas, in which catastrophe can exacerbate tensions, often making them even less inviting. There is considerably more risk endemic to the process of marketing to, with, and in these markets and to managing value chains, from source to consumer, than in markets that are not recovering from war.
Although any export or business venture in a recovering economy is risky, there may actually be value in this uncertainty, especially if marketing managers have and maintain flexibility to respond to it. If the value of this strategic flexibility can be quantified at the time an investment decision is made (e.g., when evaluating the financial feasibility of an export venture), it may indicate that the venture is more valuable than first believed. Real options analysis is a framework that can be used to value managerial flexibility in the presence of uncertainty. Real options are similar to financial options (e.g., stock options), but they are options embedded in real investment projects. Indeed, a failure to consider the existence and value of real options embedded in any risky investment likely underestimates the true value of the investment. If managers considered the real options value of their strategic decisions to enter recovering economies, they may be more inclined to engage these countries, despite considerable uncertainty. In turn, Engagement could increase trade and additional investment to the region.
Given this understanding, the objective of this research is to evaluate the real options value of potential export ventures to recovering economies. The authors specifically examine the case of an enterprise evaluating the feasibility of entering the recovering countries of Bosnia–Herzegovina, Croatia, and Slovenia¾countries that emanated from the disintegrated Yugoslavia and are still experiencing the economic and social effects of wars that occurred in the 1990s. Market environments with high levels of risk contain considerable real options value. This is especially true if the investment is considered in terms of conditional responses to uncertainty, provided that management maintains the flexibility to respond to the uncertainty. In the context of an export marketing venture to the countries of Slovenia, Croatia, and Bosnia–Herzegovina, these conditional responses are assumed to be the combined option to abandon the project, expand marketing efforts, scale back marketing efforts, or remain with original plans. In examining this, the authors also develop a systematic way of considering and measuring risks associated with an export venture to countries in which scant data are actually available for quantifying the unique risks of such a project. Furthermore, valuing options that may be present in risky export ventures provides considerable insight into the design of marketing strategies and policies that could be used to enhance trade with these countries.
The findings suggest that the highest-risk projects inherently carry the highest real options value, which argues for marketing strategies that are flexible in the presence of risk and that ensure this flexibility. For example, the option to expand the export marketing venture, after it is initiated, contributes most to the overall value of the combined option to abandon, expand, contract, or stay the course. Therefore, “lean” marketing strategies that promote rapid market expansion and penetration at a reasonably low cost should be designed and implemented. The option to abandon the export venture completely is also found to be valuable; this is particularly true with higher cost savings or cost recovery realized from abandonment. This result suggests that there could be strong benefits from policies that focus on attracting initial investment relative to policies that encourage large-scale capital investments in the recovering region. Marketing ventures that rely more on leasing arrangements, strategic alliances with local partners, and other strategies that are variable cost intensive versus fixed cost intensive potentially provide greater value to the option to abandon. However, the impact of the option to scale back marketing efforts is the least valuable. Indeed, the option to scale back marketing efforts is valuable only if the cost savings from doing so is substantial. Given these contingencies and the inevitable impact on the marketing system (especially suffering humans), policies should be developed to reward companies for staying the course and being aggressive with their marketing efforts to abet recovery, even in the face of risk.
Indeed, considering the real options value of any venture in the wake of catastrophe may help convince policy makers to provide incentives for marketing companies to trade with and to conduct business in recovering economies. Increased commercial activity will create more uniform and effective systems, enhance efficiencies, and more broadly lead to “win–win” outcomes for investing firms, as well as the suffering consumers and marketing firms in the countries and areas that are recovering from catastrophe.
Mark R. Manfredo is Associate Professor in the Morrison School of Management and Agribusiness at Arizona State University. He has a PhD from the University of Illinois at Urbana-Champaign. His areas of expertise include futures and options markets, financial management, risk management, and forecasting, with particular emphasis on applications in the food and agribusiness industry.
Clifford J. Shultz II is Professor and Marley Foundation Chairin the Morrison School of Management and Agribusiness at Arizona State University. He holds a PhD from Columbia University. His expertise includes globalization, sustainability, and marketing and development in recovering economies, with particular emphasis on Indochina and the Balkans. He has published widely on these areas, including publications in Journal of Public Policy & Marketing. Dr. Shultz has received numerous awards for his scholarship (e.g., Fulbright grants, the Thomas Kinnear Award) and currently manages several funded projects designed to assist recovering markets and economies. He has been invited to lecture at and to work with governments, research institutes, universities, and companies on five continents.
Journal of Public Policy & Marketing, Vol. 26, No. 2, Fall 2007
View Table of Contents