Appropriate timing for SMEs to introduce an Internet-based online channel under uncertain operating costs: a real options analysis

Abstract

This study analyzes the strategic decisions of small- and medium-sized enterprises (SMEs) to determine their optimal timing for introducing an Internet-based online channel when faced with uncertain operating costs. Introductory threshold, option value of waiting, and expected waiting time are derived by constructing value functions for SMEs who consider introducing an Internet-based online channel in addition to a traditional brick-and-mortar channel when faced with uncertain operating costs through traditional net present value method and real options approach. In order to facilitate the use of the proposed models in practice, we propose a parameter estimation method for the uncertain operating costs according to historical data of the actual operating costs, and explain the procedures involved in the whole process of how our models can be used in practical applications. Furthermore, we examine the effect of various parameters, such as awareness of consumer consumption on the Internet, irreversible sunk investment cost, cost efficiency coefficient, risk-free interest rate, mean drift rate and uncertainty rate of the uncertain operating costs, on the optimal timing for the introduction of an Internet-based online channel. In this study, the strategic decision-making of optimal timing for introducing an Internet-based online channel under uncertain operating costs is investigated from a new perspective by seeing the introduction of an Internet-based online channel under uncertain operating costs as a real option. This paper is part of a growing literature in the field of distribution channel management at the intersection of operations and finance. This study enriches the research stream of dual-channel sales mode and expands the scope of application of the real options approach. The models and findings presented in this study can provide theoretical support and practical guidance for SMEs to decide whether and when to introduce an Internet-based online channel when faced with uncertain operating costs in practice.