Managing Uncertainty in Socio-Technical Enterprises using a Real Options Framework

Real options analysis has traditionally been applied to the valuation of capital investment decisions. More recently, real options have been applied to the valuation of flexibility in system design decisions. However, different applications of real options are often considered in isolation. This paper introduces an integrated real options framework that supports holistic decision making under uncertainty for enterprises. This is accomplished by first introducing a new characterization of a real option as a tuple consisting of a mechanism and type, which disambiguates among 1) patterns of mechanisms that enable flexibility and 2) the types of flexibility in an enterprise. A new classification of mechanisms and types of options based on “where” they are embedded within the enterprise architecture is then devised, in order to enable a more comprehensive consideration of real options opportunities. The enterprise architecture in this context is described in terms of eight enterprise views and their dependencies. Modeling of the enterprise dependencies using a coupled dependency structure matrix (C-DSM) may be leveraged to propagate the impact of uncertainties and identify feasible types and mechanisms of real options. Examples are presented from a mini air vehicle (MAV) project, where challenging decisions span technical and social dimensions.