Evaluating strategic options using decision-theoretic planning

The purpose of this research is to examine whether decision-theoretic planning techniques can be used to help managers evaluate strategic options in complex and uncertain environments. Firms faced with choices such as whether to acquire a start-up, develop a new product, or invest in updated production technology continue to make decisions based on unreliable heuristics, ‘gut feel’ or misleading financial measures such as net present value (NPV). In this paper we show that decision-theoretic planning techniques originally developed for robot planning permit us to gain the insights provided by real options analysis without working within the restrictions of models designed to price financial options or incurring the overhead of constructing huge decision trees. A biotechnology licensing problem similar to those addressed elsewhere in the real options literature is used to illustrate the methodology and demonstrate its feasibility.