2024

Kinnunen Jani; Georgescu Irina; Collan Mikael; Virkki Pekka

The recent paradigm shift in global politics from the era of free trade and globalization towards securing economic interests has brought geopolitical risk into the center of business decisions. Business leaders are pointing out geopolitics as the greatest business risk causing, e.g. disruptions in global supply chains. However, a very limited number of systematic models and tools to evaluate these risks and support risk-management exist. In this paper, we take a fuzzy approach to investments under geopolitical risk.While real options thinking has gained significant attention for its ability to assess the value of managerial flexibility, fuzzy modeling has strength in inherently ambiguous and imprecise investment environments. We extend the fuzzy root-mean-square (RMS) fuzzy pay-off method for real option valuation (FPOM) based on cashflow scenarios. RMS-FPOM incorporates trapezoidal fuzzy numbers as a representation of uncertainty. The results are compared to the center-of-gravity pay-off method, to highlight its advantages and suitability for practical applications. To illustrate the practical relevance of our approach, a numerical example of real options in supply chain in uncertain geopolitical environment is presented. The real options can be viewed as independent or interdependent sequential real options; they may be proprietary to the company doing analysis in-house or, for example, to a corporate acquirer screening possible supply chain networks to exercise the identified real options and building competitive advantage and possible synergies through M&A transactions. The presented approach provides a robust framework for evaluating real options in supply chain networks associated with demand or supply side disruptions.