Socio-technical transition processes: A real option based reasoning.

Using a real option reasoning perspective we study the uncertainties and irreversibilities that impact the investment decisions of firms during the different phases of technological transitions. The analysis of transition dynamics via real options reasoning allows the provision of an alternative and more qualified explanation of investment decisions according to the sequentiality of pathways considered. In our framework, flexibility management through option investments concerns both the incumbent and the future technological regime. In the first case it refers to ex-post flexibility management and in the second case to ex-ante flexibility management.

Decision support for firm performance by real options analytics

This paper develops a real options decision support tool for raising the performance of the firm. It shows how entrepreneurs can use our intuitive tool quickly to assess the nature and type of action required for improved performance. This exploits our estimated econometric relationship between precipitators of entrepreneurial opportunities, time until exercise, and firm performance. Our 3D chromaticity plots show how staging investments, investment time, and firm performance support entrepreneurial decisions to embed, or to expedite, investments. Speedy entrepreneurial action is securely supported with this tool, without expertise in econometric estimation or in formulae for real options valuation

Evaluation Of Retrofitting Options In Urban Drainage Systems Based On Flexibility: A Case Study For Nhieu Loc - Thi Nghe Basin In Ho Chi Minh City

Inherent uncertainties are the primary constraints and concerns for any robust urban flood management programme. Selection of better retrofitting options to tackle uncertainties involves the process of evaluating the technical and financial feasibility of a wide range of options. In this paper, we present a case study of a catchment in Ho Chi Minh City, Vietnam, where we apply evolutionary methods to search for optimal retrofitting opportunities to cope with uncertainties. Flexible options such as detention storage at nodes and provision of sustainable drainage systems have been identified. The optimal storage volumes for detention storage at the nodes and optimal coverage areas for sustainable drainage options to prevent flooding in Nhieu Loc – Thi Nghe basin, have been arrived at by integrating optimization techniques and a storm water management model. This case study demonstrates and paves the way for considering combined hydraulic modelling along with an optimization approach as the first step towards incorporating flexibility into urban drainage systems. A Real in Option framework to assess the flexibility is also presente

Evolving Strategy: Risk Management and the Shaping of Large Engineering Projects

Large engineering projects (LEPs) are high-stakes games characterized by substantial irreversible commitments, skewed reward structures when they are successful, and high probabilities of failure. Their dynamics also change over time. The journey from initial conception to ramp-up and revenue generation takes 10 years on average. While the “front end” of a project – project definition, concept selection, and planning – typically involves less than one third of the total elapsed time and expense, it has a disproportionate impact on outcomes, as most shaping actions occur during this phase. During the rampup period, the reality of market estimates and the true worth of the project are revealed. Sponsors may find that actual conditions are very different from expectations, but only a few adaptations are possible. Once built, most projects have little flexibility in use beyond the original intended purpose. Managing risks is thus a real issue. The purpose of this chapter is to sketch out the various components of risk and outline ranges of strategies for coping with risks and turbulence based on an assessment of 60 projects as part of the IMEC study. Further more, we propose the elements of a governance system to master their evolutionary dynamics. The main finding is that successful projects are not selected but shaped. Rather than choosing a specific project concept from a number of alternatives at the outset based on projections of the full sets of benefits, costs and risks over the project’s lifetime, successful sponsors start with project ideas that have the potential to become viable. These sponsors then embark on shaping efforts to influence risk drivers ranging from project-related issues to broader governance. The seeds of success or failure of individual projects are thus planted early and nurtured over the course of the shaping period as choices are made. Successful sponsors, however, do not escalate commitments, and they abandon quickly when they recognize that projects have little possibility of becoming viable

Exploring flexible strategies in engineering systems using screening models : applications to offshore petroleum projects

Thesis (Ph. D.)--Massachusetts Institute of Technology, Engineering Systems Division, February 2009."December 2008." Cataloged from PDF version of thesis.Includes bibliographical references (p. 290-297).Engineering Systems, such as offshore petroleum exploration and production systems, generally require a significant amount of capital investment under various technical and market uncertainties. Choosing appropriate designs and field development strategies is a very challenging task for decision makers because they need to integrate information from multiple disciplines to make decisions while the various uncertainties are still evolving. Traditional engineering practice often focuses on finding "the optimal" solution under deterministic assumptions very early in the conceptual study phase, which leaves a large amount of opportunity unexploited, particularly the value of flexible strategies. This thesis proposes a new approach to tackle this issue - exploring flexible strategies using midfidelity screening models. The screening models interconnect and model physical systems, project development, and economics quantitatively at the mid-fidelity level, which allows decision-makers to explore different strategies with significantly less computational effort compared to high fidelity models. The screening models are at a level of detail that gives reliable rank orders of different strategies under realistic assumptions. Flexibilities are identified and classified at strategic, tactical, and operational levels over a system's lifecycle. Intelligent decision rules will then exercise flexible strategies as uncertainties unfold. This approach can be applied as a "front-end" strategic tool to conduct virtual experiments. This helps identify good strategies from a large number of possibilities and then discipline-based tools can be used for detailed engineering design and economics evaluation.(cont.) The present study implemented the use of such screening models for petroleum exploration and production projects. Through two simulation case studies, this thesis illustrates that flexible strategies can significantly improve a project's Expected Net Present Value (ENPV), mitigate downside risks, and capture upside opportunities. As shown in the flexible tieback oilfield development case study, the simulations predicted a 82% improvement of ENPV by enabling architectural and operational flexibility. The distributions of outcomes for different strategies are shown in terms of Value-at-Risk-Gain curves. This thesis develops and demonstrates a generic four-step process and a simulation framework for screening flexible strategies with multi-domain uncertainty for capital-intensive engineering systems.by Jijun Lin.Ph.D

Application of Real Options Theory to Software-intensive System Acquisitions

Proceedings Paper (for Acquisition Research Program)In the Department of Defense (DoD), the typical outcome of a software acquisition program has been massive cost escalation, slipping planned delivery dates and making major cuts in the planned software functionality to guarantee program success. To counter this dilemma, the DoD put forth a new weapons acquisition policy in 2003 based on an evolutionary acquisition approach to foster increased efficiency while building flexibility in the acquisition process. However, the evolutionary acquisition approach often relies on the spiral development process, which assumes end-state requirements are known at the inception of the development process, a misrepresentation of reality in the acquisition of DoD software-intensive weapons systems. This article presents a framework to address requirements uncertainty as it relates to software acquisition. The framework is based on Real Options theory and aims at mitigating risks associated with requirement volatility based on the technology objectives''constraints as put forth by the customer at the acquisition decision-making level.Naval Postgraduate School Acquisition Research ProgramApproved for public release; distribution is unlimited

Design Catalogs: A Systematic Approach to Design and Value Flexibility in Engineering Systems

This paper proposes design catalogs as an efficient systematic process for identifying and evaluating improved designs in engineering systems by exploiting ideas of flexibility. Standard design and evaluation approaches typically do not cope well with a range of possible operating conditions. They often simplify considerations of uncertainty, which may lead to designs that do not perform as well as those responding dynamically to changing conditions. The proposed process addresses the complexity of the design problem under uncertainty, recognizing that it is impossible to analyze all possible combinations of evolutions, and the flexible ways in which the system could adapt over time. The process creates a small subset of designs that collectively perform well over a range of scenarios. It bundles representative scenarios and their flexible responses to enable a more thorough analysis that accounts explicitly for uncertainty—and enable considerations of improved designs. Each element consists of combinations of design variables, parameters, and management decision rules carefully selected, and referred as operating plans. In the example analysis, the process improves economic performance by 37% as compared to standard methods in an infrastructure system case study, while exploring only 3% of the design space. It reaches 86% of the stochastically optimal solution while being 183 times faster computationally in the example numerical study. The systematic property aims for practical applications in industry. In each phase, it gives the freedom to rely on the designer's expertise with the system, or to consider analytical tools already in use at the design organization.National University of Singapore (MOE AcRF Tier 1 Grant WBS R-266-000-061-133)Massachusetts Institute of Technology. Engineering Systems DivisionMassachusetts Institute of Technology. Center for Real Estat

Linking Policy Research and Practice in 'STIG Systems': Many Obstacles, but Some Ways Forward

This paper reflects on the relevance of systems thinking about the interdependent policy issues bearing on the dynamics of science, technology and innovation in their relationship to economic growth. Considering the approach that characterizes much of the current economics literatures treatment of technology and growth policies, we pose the critical question: what kind of systems paradigm is likely to prove particularly fruitful in that particular problem-domain: Evolutionary, neo-Schumpeterian, and complex system dynamics approaches are conceptually attractive and we analyze their respective virtues while also acknowledging their more serious problematic features. Those become visible quickly when trying connect systems-relevant research with practical policy-making in this field. Not content to have simply identified some significant obstructions in the path toward that goal, the paper also suggests some potentially feasible ways forward.Techonological Change, systems paradigm, STIG systems,