This is a Darden case study.This note is designed to introduce the binomial option-pricing model. It covers the basic concepts using a one-period model and then provides an example of a two-period model. The note focuses on a conceptual approach to binomial option pricing rather than formulas.
Swot Analysis of "Binomial Option Pricing" written by Robert M. Conroy includes – strengths weakness that are internal strategic factors of the organization, and opportunities and threats that Binomial Option facing as an external strategic factors. Some of the topics covered in Binomial Option Pricing case study are - Strategic Management Strategies, Financial management, Financial markets and Finance & Accounting.
Some of the macro environment factors that can be used to understand the Binomial Option Pricing casestudy better are - – increasing transportation and logistics costs, geopolitical disruptions, challanges to central banks by blockchain based private currencies, increasing inequality as vast percentage of new income is going to the top 1%, increasing commodity prices, there is increasing trade war between United States & China, increasing government debt because of Covid-19 spendings,
central banks are concerned over increasing inflation, increasing household debt because of falling income levels, etc
Introduction to SWOT Analysis of Binomial Option Pricing
SWOT stands for an organization’s Strengths, Weaknesses, Opportunities and Threats . At Oak Spring University , we believe that protagonist in Binomial Option Pricing case study can use SWOT analysis as a strategic management tool to assess the current internal strengths and weaknesses of the Binomial Option, and to figure out the opportunities and threats in the macro environment – technological, environmental, political, economic, social, demographic, etc in which Binomial Option operates in.
According to Harvard Business Review, 75% of the managers use SWOT analysis for various purposes such as – evaluating current scenario, strategic planning, new venture feasibility, personal growth goals, new market entry, Go To market strategies, portfolio management and strategic trade-off assessment, organizational restructuring, etc.
SWOT Objectives / Importance of SWOT Analysis and SWOT Matrix
SWOT analysis of Binomial Option Pricing can be done for the following purposes –
1. Strategic planning using facts provided in Binomial Option Pricing case study
2. Improving business portfolio management of Binomial Option
3. Assessing feasibility of the new initiative in Finance & Accounting field.
4. Making a Finance & Accounting topic specific business decision
5. Set goals for the organization
6. Organizational restructuring of Binomial Option
Strengths Binomial Option Pricing | Internal Strategic Factors
What are Strengths in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The strengths of Binomial Option in Binomial Option Pricing Harvard Business Review case study are -
Innovation driven organization
– Binomial Option is one of the most innovative firm in sector. Manager in Binomial Option Pricing Harvard Business Review case study can use Clayton Christensen Disruptive Innovation strategies to further increase the scale of innovtions in the organization.
Successful track record of launching new products
– Binomial Option has launched numerous new products in last few years, keeping in mind evolving customer preferences and competitive pressures. Binomial Option has effective processes in place that helps in exploring new product needs, doing quick pilot testing, and then launching the products quickly using its extensive distribution network.
Digital Transformation in Finance & Accounting segment
- digital transformation varies from industry to industry. For Binomial Option digital transformation journey comprises differing goals based on market maturity, customer technology acceptance, and organizational culture. Binomial Option has successfully integrated the four key components of digital transformation – digital integration in processes, digital integration in marketing and customer relationship management, digital integration into the value chain, and using technology to explore new products and market opportunities.
Training and development
– Binomial Option has one of the best training and development program in the industry. The effectiveness of the training programs can be measured in Binomial Option Pricing Harvard Business Review case study by analyzing – employees retention, in-house promotion, loyalty, new venture initiation, lack of conflict, and high level of both employees and customer engagement.
High brand equity
– Binomial Option has strong brand awareness and brand recognition among both - the exiting customers and potential new customers. Strong brand equity has enabled Binomial Option to keep acquiring new customers and building profitable relationship with both the new and loyal customers.
Strong track record of project management
– Binomial Option is known for sticking to its project targets. This enables the firm to manage – time, project costs, and have sustainable margins on the projects.
Cross disciplinary teams
– Horizontal connected teams at the Binomial Option are driving operational speed, building greater agility, and keeping the organization nimble to compete with new competitors. It helps are organization to ideate new ideas, and execute them swiftly in the marketplace.
Operational resilience
– The operational resilience strategy in the Binomial Option Pricing Harvard Business Review case study comprises – understanding the underlying the factors in the industry, building diversified operations across different geographies so that disruption in one part of the world doesn’t impact the overall performance of the firm, and integrating the various business operations and processes through its digital transformation drive.
Sustainable margins compare to other players in Finance & Accounting industry
– Binomial Option Pricing firm has clearly differentiated products in the market place. This has enabled Binomial Option to fetch slight price premium compare to the competitors in the Finance & Accounting industry. The sustainable margins have also helped Binomial Option to invest into research and development (R&D) and innovation.
Analytics focus
– Binomial Option is putting a lot of focus on utilizing the power of analytics in business decision making. This has put it among the leading players in the industry. The technology infrastructure suggested by Robert M. Conroy can also help it to harness the power of analytics for – marketing optimization, demand forecasting, customer relationship management, inventory management, information sharing across the value chain etc.
Ability to recruit top talent
– Binomial Option is one of the leading recruiters in the industry. Managers in the Binomial Option Pricing are in a position to attract the best talent available. The firm has a robust talent identification program that helps in identifying the brightest.
Superior customer experience
– The customer experience strategy of Binomial Option in the segment is based on four key concepts – personalization, simplification of complex needs, prompt response, and continuous engagement.
Weaknesses Binomial Option Pricing | Internal Strategic Factors
What are Weaknesses in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The weaknesses of Binomial Option Pricing are -
Employees’ incomplete understanding of strategy
– From the instances in the HBR case study Binomial Option Pricing, it seems that the employees of Binomial Option don’t have comprehensive understanding of the firm’s strategy. This is reflected in number of promotional campaigns over the last few years that had mixed messaging and competing priorities. Some of the strategic activities and services promoted in the promotional campaigns were not consistent with the organization’s strategy.
Interest costs
– Compare to the competition, Binomial Option has borrowed money from the capital market at higher rates. It needs to restructure the interest payment and costs so that it can compete better and improve profitability.
Compensation and incentives
– The revenue per employee as mentioned in the HBR case study Binomial Option Pricing, is just above the industry average. Binomial Option needs to redesign the compensation structure and incentives to increase the revenue per employees. Some of the steps that it can take are – hiring more specialists on project basis, etc.
Lack of clear differentiation of Binomial Option products
– To increase the profitability and margins on the products, Binomial Option needs to provide more differentiated products than what it is currently offering in the marketplace.
Ability to respond to the competition
– As the decision making is very deliberative, highlighted in the case study Binomial Option Pricing, in the dynamic environment Binomial Option has struggled to respond to the nimble upstart competition. Binomial Option has reasonably good record with similar level competitors but it has struggled with new entrants taking away niches of its business.
Slow decision making process
– As mentioned earlier in the report, Binomial Option has a very deliberative decision making approach. This approach has resulted in prudent decisions, but it has also resulted in missing opportunities in the industry over the last five years. Binomial Option even though has strong showing on digital transformation primary two stages, it has struggled to capitalize the power of digital transformation in marketing efforts and new venture efforts.
Increasing silos among functional specialists
– The organizational structure of Binomial Option is dominated by functional specialists. It is not different from other players in the Finance & Accounting segment. Binomial Option needs to de-silo the office environment to harness the true potential of its workforce. Secondly the de-silo will also help Binomial Option to focus more on services rather than just following the product oriented approach.
High dependence on star products
– The top 2 products and services of the firm as mentioned in the Binomial Option Pricing HBR case study still accounts for major business revenue. This dependence on star products in has resulted into insufficient focus on developing new products, even though Binomial Option has relatively successful track record of launching new products.
High bargaining power of channel partners
– Because of the regulatory requirements, Robert M. Conroy suggests that, Binomial Option is facing high bargaining power of the channel partners. So far it has not able to streamline the operations to reduce the bargaining power of the value chain partners in the industry.
Slow to harness new channels of communication
– Even though competitors are using new communication channels such as Instagram, Tiktok, and Snap, Binomial Option is slow explore the new channels of communication. These new channels of communication mentioned in marketing section of case study Binomial Option Pricing can help to provide better information regarding products and services. It can also build an online community to further reach out to potential customers.
Low market penetration in new markets
– Outside its home market of Binomial Option, firm in the HBR case study Binomial Option Pricing needs to spend more promotional, marketing, and advertising efforts to penetrate international markets.
Opportunities Binomial Option Pricing | External Strategic Factors
What are Opportunities in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The opportunities highlighted in the Harvard Business Review case study Binomial Option Pricing are -
Use of Bitcoin and other crypto currencies for transactions
– The popularity of Bitcoin and other crypto currencies as asset class and medium of transaction has opened new opportunities for Binomial Option in the consumer business. Now Binomial Option can target international markets with far fewer capital restrictions requirements than the existing system.
Identify volunteer opportunities
– Covid-19 has impacted working population in two ways – it has led to people soul searching about their professional choices, resulting in mass resignation. Secondly it has encouraged people to do things that they are passionate about. This has opened opportunities for businesses to build volunteer oriented socially driven projects. Binomial Option can explore opportunities that can attract volunteers and are consistent with its mission and vision.
Harnessing reconfiguration of the global supply chains
– As the trade war between US and China heats up in the coming years, Binomial Option can build a diversified supply chain model across various countries in - South East Asia, India, and other parts of the world. This reconfiguration of global supply chain can help, as suggested in case study, Binomial Option Pricing, to buy more products closer to the markets, and it can leverage its size and influence to get better deal from the local markets.
Using analytics as competitive advantage
– Binomial Option has spent a significant amount of money and effort to integrate analytics and machine learning into its operations in the sector. This continuous investment in analytics has enabled, as illustrated in the Harvard case study Binomial Option Pricing - to build a competitive advantage using analytics. The analytics driven competitive advantage can help Binomial Option to build faster Go To Market strategies, better consumer insights, developing relevant product features, and building a highly efficient supply chain.
Leveraging digital technologies
– Binomial Option can leverage digital technologies such as artificial intelligence and machine learning to automate the production process, customer analytics to get better insights into consumer behavior, realtime digital dashboards to get better sales tracking, logistics and transportation, product tracking, etc.
Finding new ways to collaborate
– Covid-19 has not only transformed business models of companies in Finance & Accounting industry, but it has also influenced the consumer preferences. Binomial Option can tie-up with other value chain partners to explore new opportunities regarding meeting customer demands and building a rewarding and engaging relationship.
Manufacturing automation
– Binomial Option can use the latest technology developments to improve its manufacturing and designing process in Finance & Accounting segment. It can use CAD and 3D printing to build a quick prototype and pilot testing products. It can leverage automation using machine learning and artificial intelligence to do faster production at lowers costs, and it can leverage the growth in satellite and tracking technologies to improve inventory management, transportation, and shipping.
Better consumer reach
– The expansion of the 5G network will help Binomial Option to increase its market reach. Binomial Option will be able to reach out to new customers. Secondly 5G will also provide technology framework to build new tools and products that can help more immersive consumer experience and faster consumer journey.
Increase in government spending
– As the United States and other governments are increasing social spending and infrastructure spending to build economies post Covid-19, Binomial Option can use these opportunities to build new business models that can help the communities that Binomial Option operates in. Secondly it can use opportunities from government spending in Finance & Accounting sector.
Lowering marketing communication costs
– 5G expansion will open new opportunities for Binomial Option in the field of marketing communication. It will bring down the cost of doing business, provide technology platform to build new products in the Finance & Accounting segment, and it will provide faster access to the consumers.
Learning at scale
– Online learning technologies has now opened space for Binomial Option to conduct training and development for its employees across the world. This will result in not only reducing the cost of training but also help employees in different part of the world to integrate with the headquarter work culture, ethos, and standards.
Changes in consumer behavior post Covid-19
– Consumer behavior has changed in the Finance & Accounting industry because of Covid-19 restrictions. Some of this behavior will stay once things get back to normal. Binomial Option can take advantage of these changes in consumer behavior to build a far more efficient business model. For example consumer regular ordering of products can reduce both last mile delivery costs and market penetration costs. Binomial Option can further use this consumer data to build better customer loyalty, provide better products and service collection, and improve the value proposition in inflationary times.
Creating value in data economy
– The success of analytics program of Binomial Option has opened avenues for new revenue streams for the organization in the industry. This can help Binomial Option to build a more holistic ecosystem as suggested in the Binomial Option Pricing case study. Binomial Option can build new products and services such as - data insight services, data privacy related products, data based consulting services, etc.
Threats Binomial Option Pricing External Strategic Factors
What are Threats in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The threats mentioned in the HBR case study Binomial Option Pricing are -
Capital market disruption
– During the Covid-19, Dow Jones has touched record high. The valuations of a number of companies are way beyond their existing business model potential. This can lead to capital market correction which can put a number of suppliers, collaborators, value chain partners in great financial difficulty. It will directly impact the business of Binomial Option.
Backlash against dominant players
– US Congress and other legislative arms of the government are getting tough on big business especially technology companies. The digital arm of Binomial Option business can come under increasing regulations regarding data privacy, data security, etc.
Instability in the European markets
– European Union markets are facing three big challenges post Covid – expanded balance sheets, Brexit related business disruption, and aggressive Russia looking to distract the existing security mechanism. Binomial Option will face different problems in different parts of Europe. For example it will face inflationary pressures in UK, France, and Germany, balance sheet expansion and demand challenges in Southern European countries, and geopolitical instability in the Eastern Europe.
Increasing wage structure of Binomial Option
– Post Covid-19 there is a sharp increase in the wages especially in the jobs that require interaction with people. The increasing wages can put downward pressure on the margins of Binomial Option.
Stagnating economy with rate increase
– Binomial Option can face lack of demand in the market place because of Fed actions to reduce inflation. This can lead to sluggish growth in the economy, lower demands, lower investments, higher borrowing costs, and consolidation in the field.
Learning curve for new practices
– As the technology based on artificial intelligence and machine learning platform is getting complex, as highlighted in case study Binomial Option Pricing, Binomial Option may face longer learning curve for training and development of existing employees. This can open space for more nimble competitors in the field of Finance & Accounting .
High level of anxiety and lack of motivation
– the Great Resignation in United States is the sign of broader dissatisfaction among the workforce in United States. Binomial Option needs to understand the core reasons impacting the Finance & Accounting industry. This will help it in building a better workplace.
Trade war between China and United States
– The trade war between two of the biggest economies can hugely impact the opportunities for Binomial Option in the Finance & Accounting industry. The Finance & Accounting industry is already at various protected from local competition in China, with the rise of trade war the protection levels may go up. This presents a clear threat of current business model in Chinese market.
Environmental challenges
– Binomial Option needs to have a robust strategy against the disruptions arising from climate change and energy requirements. EU has identified it as key priority area and spending 30% of its 880 billion Euros European post Covid-19 recovery funds on green technology. Binomial Option can take advantage of this fund but it will also bring new competitors in the Finance & Accounting industry.
Shortening product life cycle
– it is one of the major threat that Binomial Option is facing in Finance & Accounting sector. It can lead to higher research and development costs, higher marketing expenses, lower customer loyalty, etc.
New competition
– After the dotcom bust of 2001, financial crisis of 2008-09, the business formation in US economy had declined. But in 2020 alone, there are more than 1.5 million new business applications in United States. This can lead to greater competition for Binomial Option in the Finance & Accounting sector and impact the bottomline of the organization.
Technology disruption because of hacks, piracy etc
– The colonial pipeline illustrated, how vulnerable modern organization are to international hackers, miscreants, and disruptors. The cyber security interruption, data leaks, etc can seriously jeopardize the future growth of the organization.
High dependence on third party suppliers
– Binomial Option high dependence on third party suppliers can disrupt its processes and delivery mechanism. For example -the current troubles of car makers because of chip shortage is because the chip companies started producing chips for electronic companies rather than car manufacturers.
Weighted SWOT Analysis of Binomial Option Pricing Template, Example
Not all factors mentioned under the Strengths, Weakness, Opportunities, and Threats quadrants in the SWOT Analysis are equal. Managers in the HBR case study Binomial Option Pricing needs to zero down on the relative importance of each factor mentioned in the Strengths, Weakness, Opportunities, and Threats quadrants.
We can provide the relative importance to each factor by assigning relative weights. Weighted SWOT analysis process is a three stage process –
First stage for doing weighted SWOT analysis of the case study Binomial Option Pricing is to rank the strengths and weaknesses of the organization. This will help you to assess the most important strengths and weaknesses of the firm and which one of the strengths and weaknesses mentioned in the initial lists are marginal and can be left out.
Second stage for conducting weighted SWOT analysis of the Harvard case study Binomial Option Pricing is to give probabilities to the external strategic factors thus better understanding the opportunities and threats arising out of macro environment changes and developments.
Third stage of constructing weighted SWOT analysis of Binomial Option Pricing is to provide strategic recommendations includes – joining likelihood of external strategic factors such as opportunities and threats to the internal strategic factors – strengths and weaknesses. You should start with external factors as they will provide the direction of the overall industry. Secondly by joining probabilities with internal strategic factors can help the company not only strategic fit but also the most probably strategic trade-off that Binomial Option needs to make to build a sustainable competitive advantage.