Switch Option: Managing Strategic Investment in an uncertain world

It is widely accepted in literature that an increase in uncertainty should have an inhibiting effect on investment results. This paper shows that the concept of a negative ‘uncertainty – investment’ relationship is not always correct. In fact, the uncertainty can actually have a positive impact on investment by means of the real options approach. In this context, this paper deals with a theory useful to increase the performance of a Supply Chain (SC) operating in today’s business environment full of uncertainty. Focusing the attention on a specific network two factors are assumed as the main sources of uncertainty: demand and technology change. A switch option is used to develop a new framework to quantify and maximise the expected Net Present Value (NPV). A numerical example and a sensitivity analysis of the option value are finally presented.