Flexibility & Real Options Analysis

One way in which a firm can attempt to mitigate risk under conditions of uncertainty is to adopt a strategy of flexibility. A flexible strategy provides firms with the ability change course quickly and sharply, should the firm experience unanticipated changes in the competitive landscape. In his book "Gaining & Sustaining Competitive Advantage" Jay B. Barney outlines the following types of flexibility:

TYPE OF FLEXIBILITY	EXAMPLE
The option to defer	An oil company leases land for potential exploration instead of buying it.
The option to grow	A firm builds a plant with the ability to add capacity at low cost
The option to contract	A firm hires contract and temporary employees instead of full-time employees.
The option to shut down and restart	A firm outsources distribution to a firm that distributes the products of many firms instead of outsourcing distribution to a firm that distributes only its production.
The option to abandon	A firm builds a manufacturing plant that employs only general-purpose machinery.
The option to expand	A firm invests to create one product because that investment could lead to the development of other products in the future.

As a tech company with a high level of scalability, Salesforce already has a great deal of inherent flexibility just by the nature of the industry in which it operates. This economy of scale provides Salesforce the option to grow and expand quickly and at very low cost. Tech companies also have the ability to contract, shutdown and restart, and abandon certain aspects of its operations.

Unlike hardware manufacturers, Salesforce does not have to worry about investments in plant and equipment that makes flexibility options more costly to exercise. This position makes it easy for the company to expand and contract quickly when the competitive landscape faces unanticipated changes.