Portlandia
The Strategy and Value of a New Venture:
The Case of Portlandia Ale a supplement to
“Uncertainty: The New Rules for Strategy”
Journal of Business Strategy
May/June 1999
Glaze Creek Partners
Page 1
May, 1999
Note:
This example is taken from
Chapter 10 of
Real Options: Managing Strategic Investment in an Uncertain World (HBS Press, 1999) by Martha Amram and Nalin Kulatilaka
Glaze Creek Partners
Page 2
May, 1999
A Step-by-Step Example
PORTLANDIA ALE:
❒ Two brewmasters and a dream
❒ Their business plan is straight DCF
❒ The reality is that firm has options
❒ Let’s calculate the expanded value of the firm:
V = DCF + option value
Glaze Creek Partners
© HBS Press, 1999. From Chapter 10, Real Options: Managing Strategic Investment in an Uncertain World
Page 3
May, 1999
Portlandia Ale’s Business Plan
Fixed Cash Flow
Optional Cash Flow
Spend $0.5M per quarter on product development
Raise
$4M
If Launch,
Obtain Value of an
Established
Brewer
x
Spend $12M on
Market Launch
Year 1
Year 2
Year 3
Glaze Creek Partners
© HBS Press, 1999. From Chapter 10, Real Options: Managing Strategic Investment in an Uncertain World
Page 4
May, 1999
Even with optimism, spreadsheet calculations show that the DCF value is negative
Value of Portlandia Ale using discounted cashflow = ($0.23M)
Time
Y1-Q1
Revenues
Investment
(0.50)
Terminal Value
PV (Investment)
(0.50)
PV (Terminal Value)
DCF Value
($0.23)
Y1-Q2
Y1-Q3
Y1-Q4
Y2-Q1
Y2-Q2
Y2-Q3
(0.50)
(0.50)
(0.50)
(0.50)
(0.50)
(0.50)
(0.49)
(0.49)
(0.48)
(0.48)
(0.47)
(0.46)
Y2-Q4
Y3-Q1
1.5
(0.50) (12.00)
22.00
(0.46) (10.86)
14.46
Terminal Value =
$1.5M quarterly rev. x 4 x 3.66 (Market to sales ratio)
Glaze Creek Partners
© 1999, Amram and Kulatilaka. Downloadable file at www.real-options.com
Page 5
May, 1999
But there is no obligation to launch the product, only an option
❒ DCF has two parts
▲
“Hardwired” investment schedule
▲
Single roll of the dice on revenue
❒ Recognizing the option to launch
▲
The Case of Portlandia Ale a supplement to
“Uncertainty: The New Rules for Strategy”
Journal of Business Strategy
May/June 1999
Glaze Creek Partners
Page 1
May, 1999
Note:
This example is taken from
Chapter 10 of
Real Options: Managing Strategic Investment in an Uncertain World (HBS Press, 1999) by Martha Amram and Nalin Kulatilaka
Glaze Creek Partners
Page 2
May, 1999
A Step-by-Step Example
PORTLANDIA ALE:
❒ Two brewmasters and a dream
❒ Their business plan is straight DCF
❒ The reality is that firm has options
❒ Let’s calculate the expanded value of the firm:
V = DCF + option value
Glaze Creek Partners
© HBS Press, 1999. From Chapter 10, Real Options: Managing Strategic Investment in an Uncertain World
Page 3
May, 1999
Portlandia Ale’s Business Plan
Fixed Cash Flow
Optional Cash Flow
Spend $0.5M per quarter on product development
Raise
$4M
If Launch,
Obtain Value of an
Established
Brewer
x
Spend $12M on
Market Launch
Year 1
Year 2
Year 3
Glaze Creek Partners
© HBS Press, 1999. From Chapter 10, Real Options: Managing Strategic Investment in an Uncertain World
Page 4
May, 1999
Even with optimism, spreadsheet calculations show that the DCF value is negative
Value of Portlandia Ale using discounted cashflow = ($0.23M)
Time
Y1-Q1
Revenues
Investment
(0.50)
Terminal Value
PV (Investment)
(0.50)
PV (Terminal Value)
DCF Value
($0.23)
Y1-Q2
Y1-Q3
Y1-Q4
Y2-Q1
Y2-Q2
Y2-Q3
(0.50)
(0.50)
(0.50)
(0.50)
(0.50)
(0.50)
(0.49)
(0.49)
(0.48)
(0.48)
(0.47)
(0.46)
Y2-Q4
Y3-Q1
1.5
(0.50) (12.00)
22.00
(0.46) (10.86)
14.46
Terminal Value =
$1.5M quarterly rev. x 4 x 3.66 (Market to sales ratio)
Glaze Creek Partners
© 1999, Amram and Kulatilaka. Downloadable file at www.real-options.com
Page 5
May, 1999
But there is no obligation to launch the product, only an option
❒ DCF has two parts
▲
“Hardwired” investment schedule
▲
Single roll of the dice on revenue
❒ Recognizing the option to launch
▲