This paper intends to quantify the impact of anticipating a capacity expansion, treated as a risky investment in a strategic vertical integration.
This paper adapts the real option methodology to a time frame model. It uses a case study to investigate the vertical integration approach.
The integration value depends on the demand critical level under market volatility. The existence of demand positive jumps affects the demand critical value and the integration decision moment.
The numerical example is limited to a single organization, but the findings allow a generalization of the proposed framework.
The model helps managers to more accurately decide to change from outsourcing to an integration strategy and defer commitment until future uncertainties, related with market and lack of information, can be partially solved. Finally, the paper provides a time framework for a strategic decision support system.
The research in this paper differs from previous literature mainly in four aspects: it quantifies the integration decision under demand uncertainty; its model determines critical demand quantities as the trigger moment for a capacity investment; it examines the impact, on the trigger moment, of the uncertainties in demand for products; and its model incorporates positive shocks impacts in products' demand, making a closer approach to the reality.
