Platforms and real options in large-scale engineering systems

Abstract

This thesis introduces a framework and two methodologies that enable engineering management teams to assess the value of real options in programs of large-scale, partially standardized systems implemented a few times over the medium term. This enables value creation through the balanced and complementary use of two seemingly competing design paradigms, i.e., standardization and design for flexibility. The flexibility of a platform program is modeled as the developer's ability to choose the optimal extent of standardization between multiple projects at the time later projects are designed, depending on how uncertainty unfolds. Along the lines of previous work, this thesis uses a two-step methodology for valuing this flexibility: screening of efficient standardization strategies for future developments in a program of projects; and valuing the flexibility to develop one of these alternatives. The criterion for screening alternative future standardization strategies is the maximization of measurable standardization effects that do not depend on future uncertainties.

(Cont.) A novel methodology and algorithm, called "Invariant Design Rules" (IDR), is developed for the exploration of alternative standardization opportunities, i.e., collections of components that can be standardized among systems with different functional requirements. A novel valuation process is introduced to value the developer's real options to choose among these strategies later. The methodology is designed to overcome some presumed contributors to the limited appeal of real options theory in engineering. Firstly, a graphical language is introduced to communicate and map engineering decisions to real option structures and equations. These equations are then solved using a generalized, simulation-based methodology that uses real-world probability dynamics and invokes equilibrium, rather than no-arbitrage arguments for options pricing. The intellectual and practical value of this thesis lies in operationalizing the identification and valuation of real options that can be created through standardization in programs of large-scale systems. This work extends the platform design literature with IDR, a semi-quantitative tool for identifying standardization opportunities and platforms among variants with different functional requirements.

(cont.) The real options literature is extended with a methodology for mapping design and development decisions to structures of real options, and a simulation-based valuation algorithm designed to be close to current engineering practice and correct from an economics perspective in certain cases. The application of these methodologies is illustrated in the preliminary design of a program of multi-billion dollar floating production, storage and offloading (FPSO) vessels.