9.1.3 Screening for Real Options “In” an Engineering System: A Step Towards Flexible System Development
Authors: Bartolomei Jason E. , de Neufville Richard , Hastings Daniel E. , Rhodes Donna H. 
Published: November 2014

The goal of this research is to develop an analytical framework for screening for real options “in” an engineering system. Real options is defined in the finance literature as the right, but not the obligation, to take an action (e.g. deferring, expanding, contracting, or abandoning) at a predetermined cost and for a predetermined time. These are called “real options” because they pertain to physical or tangible assets, such as equipment, rather than financial instruments. Real options improve a system's capability of undergoing classes of changes with relative ease. This property is often called “flexibility.” Recently, the DoD has emphasized the need to develop flexible system in order to improve operational, technical, and programmatic effectiveness. The aim of this research is to apply real options thinking to weapon acquisitions in order to promote the ability of weapon system programs to deftly avoid downside consequences or exploit upside opportunities.

The practice of real options in systems engineering is a nascent field of inquiry. One of the most significant challenges in applying real options to engineering systems is the problem of identifying the most efficacious points within the system to create options. In order to identify the points of interest, systems engineers require knowledge about the physical and non physical aspects of the system, insight into sources of change, and the ability to examine the dynamic behavior of the system. We propose a two‐phase process to perform this analysis. The first phase is a system representation phase that seeks to create an end‐to‐end representation of engineering system that includes endogenous interactions across system views and interactions with a systems environment. The next phase is an analysis phase that models the evolution of the engineering system in order to identify the real options in the system. This paper presents the system representation phase and proposes a methodology for creating an end‐to‐end representation of an engineering system.

The methodology for representing an engineering system extends existing systems engineering and architecting methods in two dimensions. First, the framework couples traditional architecting views to represent traceability and endogenous interactions within an engineering system. Second, the framework includes views of the system not represented in traditional engineering frameworks that includes social networks and environmental interactions. The framework uses coupled Design Structure Matrices (DSM) to represent the traditional and new architecting views. The coupled DSMs are organized into an Engineering System Matrix (ESM), which is a holistic representation of an engineering system that captures the critical variables and causal interactions across architectural elements. The result is an analytic framework that captures the qualitative understanding of the system into a single view that is conducive for deep quantitative inquiry.

This paper presents a discussion of pertinent literature, an overview of the ESM framework and underlying theory. In addition, this paper previews ongoing research using the ESM to identify options for a mini‐air vehicle (MAV) weapon development system.