IDENTIFYING REAL OPTIONS TO IMPROVE THE DESIGN OF ENGINEERING SYSTEMS

This chapter is part of the developing literature on the use of real options in the design and development of major projects – more generally, of engineering systems. The chapters by Kazakidis and Kalligeros in this book are part of the same stream. This work differs substantially from the bulk of the real option literature. It focuses on improving the overall performance of technological projects by incorporating flexibility into their design. The field is growing rapidly because engineering projects are expanding in scope and complexity while their environment is becoming increasingly uncertain in terms of stakeholder requirements, resource availability, market demand, and other aspects. Traditional engineering design methodology is deficient in dealing with such uncertainty. Practitioners in the field thus need new approaches. Research in real options is leading to significant practical results. Many applications demonstrate that flexible designs can greatly increase expected overall performance compared to traditional rigid designs optimized for specific conditions. Flexible designs can deliver these benefits because their underlying architecture enables managers to adapt projects to circumstances that develop. Owners can thus cut losses by avoiding undesirable outcomes, and increase gains by taking advantage of new opportunities. Part 1 describes the concept of this developing literature. It situates design flexibility in the spectrum between the standard use of real options and traditional engineering design. As indicated below, the focus on flexible design involves deep reframing of the way we think about both design and the