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Case
The Value of Flexibility at Global Airlines: Real Options for EDW and CRM
Author(s)
Technology projects are inherently risky; research shows that large IT projects succeed as planned only 28 percent of the time. Building flexibility, or real options, into a project can help manage this risk. The management flexibility of options has value, as the downside risk is reduced and the upside is increased. The case is based on real options analysis for an enterprise data warehouse (EDW) and analytic CRM program at a major U.S. firm (disguised as Global Airlines).
The data mart consolidation or the EDW marginally meets the firm's hurdle rate as analyzed using a traditional net present value (NPV) analysis. However, different tactical deployment strategies help mitigate the risk of the project, by building options into the project, and the traditional NPV is expanded by the real option value. Students analyze the different deployment strategies using a binomial model compound option Excel macro, and calculate the volatility using Monte Carlo analysis in Excel. A tutorial is provided to teach students how to accomplish the real options analysis for a simplified project, and this tutorial is easily generalized by students to the case scenario.
In addition to the tactical options, the case has a strategic growth option of analytic CRM. Students must analyze both the tactical and strategic growth options and make a management project funding recommendation and also recommend an optimal deployment strategy to manage the project risk. The case teaches real options for technology projects. Students learn how to calculate real option values, where the key input of volatility is obtained by Monte Carlo analysis in Excel. Students also learn that the real option value is "real," resulting from active management mitigating project risk and improving the upside. Most important, students understand the difference between tactical vs. strategic growth options and make a management recommendation on funding the project and also recommend an optimal deployment strategy to manage the project risk.
The data mart consolidation or the EDW marginally meets the firm's hurdle rate as analyzed using a traditional net present value (NPV) analysis. However, different tactical deployment strategies help mitigate the risk of the project, by building options into the project, and the traditional NPV is expanded by the real option value. Students analyze the different deployment strategies using a binomial model compound option Excel macro, and calculate the volatility using Monte Carlo analysis in Excel. A tutorial is provided to teach students how to accomplish the real options analysis for a simplified project, and this tutorial is easily generalized by students to the case scenario.
In addition to the tactical options, the case has a strategic growth option of analytic CRM. Students must analyze both the tactical and strategic growth options and make a management project funding recommendation and also recommend an optimal deployment strategy to manage the project risk. The case teaches real options for technology projects. Students learn how to calculate real option values, where the key input of volatility is obtained by Monte Carlo analysis in Excel. Students also learn that the real option value is "real," resulting from active management mitigating project risk and improving the upside. Most important, students understand the difference between tactical vs. strategic growth options and make a management recommendation on funding the project and also recommend an optimal deployment strategy to manage the project risk.
Date Published:
01/01/2006
Discipline:
Finance;Management;Marketing;Strategy;Technology
Key Concepts:
Real Options, Customer Relationship Management, Risk Management, CRM, Marketing, Enterprise Data Warehousing, EDW
Citations:
Jeffery, Mark, Robert Sweeney, Chris Rzymski, Sandeep Shah. The Value of Flexibility at Global Airlines: Real Options for EDW and CRM. 5-404-768 (KEL266).
