Strategic Management Journal Strat. Mgmt. J., 23: 655–665 (2002) Published online 28 March 2002 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.244 RESEARCH NOTES AND COMMENTARIES OPTION VALUE AND ENTRY TIMING KENT D. MILLER* and TIMOTHY B. FOLTA Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana, U.S.A. When facing uncertainty, firms entering new markets can make initial foothold investments rather than undertake large sunk investments. Such investments are real call option purchases. They offer management flexibility, but also raise questions about whether and when to increase commitments to new markets. We present an entry timing decision criterion and discuss its application to a variety of market entry situations. Optimal timing for exercising real options depends on current dividends, possibilities for preemption, and whether the option is simple or compound, proprietary or shared. Our analysis reveals critical assumptions and new theoretical insights regarding market entry timing. Copyright  2002 John Wiley & Sons, Ltd. The timing of market entry decisions is a central concern of business strategists. At the heart of these decisions are trade-offs between commit- ment and flexibility under uncertainty (Ghemawat, 1991). Entry commitments involve sacrificing flex- ibility and increasing exposure to the uncertain- ties of new markets. Research on real options has contributed to our understanding of the con- siderations surrounding entry timing by elabo- rating the value of waiting (e.g., Ingersoll and Ross, 1992; McDonald and Siegel, 1986; Trige- orgis, 1991). A fundamental conclusion from this research is that, under uncertainty, deferring sunk commitments can enhance the expected values Key words: real options; entry; timing; preemption; flex- ibility *Correspondence to: Kent D. Miller, Krannert Graduate School of Management, Purdue University, 1310 Krannert Building, West Lafayette, IN 47907-1310, U.S.A. of investments. If the value of waiting exceeds the benefits from moving quickly, delaying entry enhances firm value. Here we focus on the decisions of firms holding real options conferring opportunities to enter new product and geographic markets. Table 1 provides some examples of market entry call options. The underlying assets associated with real call options are nonfinancial resources. Throughout this paper, we maintain the conceptual distinction between real options, which are rights, and their underly- ing resources. By purchasing a real option, the firm defers resource acquisition until some future time. The subsequent decision to exercise an option involves striking the option by making the sunk investments necessary for resource deployment and full market entry. This paper has several important objectives. First, we clarify some key underlying assumptions Copyright  2002 John Wiley & Sons, Ltd. Received 19 May 1999 Final revision received 15 November 2001