In search of strategic flexibility in shifting toward electrification: A comparative analysis of Toyota and Nissan from a real options reasoning perspective

Type de publication:

Conference Paper


Gerpisa colloquium, Paris (2019)


Battery Electric Vehicles, electrification, hybrid electric vehicles, Nissan, powertrain, real options reasoning, toyota



Automotive makers face ongoing choices among alternative powertrain (PT) technologies, i.e., internal combustion engine vehicles (ICVs), hybrid electric vehicles (HEVs), plug-in HEVs (PHEVs), battery electric vehicles (BEVs), and fuel cell electric vehicles (FCEVs). Although the overall trends toward the electrification are clear, there remains a significant degree of uncertainties about types and timings of the PTs of the future and their market values. Some carmakers (e.g., Nissan, Tesla, and BYD) have committed to BEVs earlier than others (e.g., Toyota, Volkswagen, etc.). How can carmakers move ahead of their competitors in the face of emerging PT technologies while sustaining flexibility in strategic decision-making under uncertainty? This study compares Toyota and Nissan to address this question through a real options reasoning perspective.



A real option is defined as a right, but not an obligation, to defer, abandon, or expand a particular business project or a tangible asset at a specified cost (Trigeorgis and Reuer, 2017). Real options reasoning (ROR) is a heuristic for recognizing hidden (shadow) options in the investment and logically structuring possible decision-making courses (Driouchi and Bennett, 2012). In this study, after arguments about real options studies are reviewed, ROR is applied as a lens to analyze the Japanese carmakers’ electrification strategies. Their strategic intentions and logic behind the selection of PT technologies are examined by using event-trees to illustrate the trajectories of the divergences and mergences of PTs of released car models.



Toyota has heavily invested in HEVs and currently has no BEV models. The main elements of an HEV include an internal combustion engine, transmissions, an electric motor, rechargeable batteries, a power management unit, etc. The ROR analysis suggests that Toyota’s hybrid system has three option values. First, at a vehicle level, it has an option to switch driving modes between an internal combustion engine and an electric motor, depending on driving conditions. Second, it has an option to expand portfolios of HEV models by equipping existing models with the Toyota Hybrid System II. Third, the carmaker has compound options to develop PHEVs, BEVs, or FCEVs by adding or withdrawing relevant components to/from the THS-II.

     Nissan is one of the first movers of PT electrification; it released a BEV model (Nissan Leaf) to a mass market segment in 2010. Even though the cumulative sales have reached 400,000 units worldwide as of March 2019, however, the Leaf has been the only BEV model in Nissan’s product portfolio. Unlike Toyota, Nissan’s BEV is rather isolated from the trajectory of other PT models. This is partly because the electric PT is tightly coupled with the dedicated vehicle platform. This trait would restrain options to expand the portfolios of BEV models by flexibly installing the electric PT to other models with different platforms. Interestingly, Nissan announced the plan in 2017 to sell out its battery business unit, one of the core technologies of BEVs, to a Chinese investor. From ROR, this decision can be interpreted that the carmaker intends to gain options to switch suppliers through the vertical disintegration of its battery division.


Practical implications

ROR helps decision-makers identify not only strategic alternatives without relying on formal mathematical models but also understand the organizational challenges of actualizing the option values.

     First, the option holder’s perceptions of uncertainties will influence the exercise of the options in question. For example, the more Toyota considers the prospect of BEVs to be uncertain, the more likely it is that the carmaker will continue holding the options; Toyota will wait and see until the uncertainties are resolved. This is because the real option allows asymmetric decision-making and the potential gains will increase when the volatility of the uncertainty is higher. On the contrary, when one has confidence that BEVs will undoubtedly become the technology of the future, there is no reason to pay extra costs to hold the options. When perceived uncertainties are high, the options will not be exercised, which then reduces opportunities to learn from experiences in the marketplace and reinforces pessimistic perceptions about the uncertainties.

     Second, a firm’s behaviors taken against uncertainties will affect real options decision-making. For example, key factors in deciding whether to transition from HEVs to BEVs are improvements in performance and the pace of cost reductions for rechargeable batteries. If a carmaker recognizes an option to defer, the firm can wait until the technical and economic issues of the cells are solved. In addition, if self-reliant efforts can resolve the uncertainties regarding the batteries, the firm will make R&D investments to raise the possibility of commercializing BEVs. Under such circumstances, the firm may be captured by “option traps” (Adner and Levinthal, 2004). In essence, the flexibility of real options stems from the possibility of abandoning the options when the situation turns out to be unfavorable for exercising the options. As Toyota’s R&D policy is to commit to all areas of next-generation technologies, the carmaker has strong impetus to develop critical technologies internally. Such a tendency toward escalating commitment (Staw, 1981) may undermine the options value of Toyota’s hybrid systems to hedge the downside risks under uncertainty. Meanwhile, Nissan’s decision to divest its battery business will lower the risk of the escalation of commitment and increase the flexibility in its battery procurement.


Adner, R., and Levinthal, D. A. (2004). What is not a real option: Considering boundaries for the application of real options to business strategy. Academy of Management Review, 29(1), 74-85.

Driouchi, T., and Bennett, D. D. (2012). Real options in management and organizational strategy: A review of decision-making and performance implications. International Journal of Management Reviews, 14(1), 39-62.

Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of Management Review, 6(4), 577-587.

Trigeorgis, L., and Reuer, J. J. (2017). Real options theory in strategic management. Strategic Management Review, 38(1), 42-63.

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