Screening for Real Options “In” an Engineering System: A Step Towards Flexible Weapon System Development PART I: The Use of Design Matrices to Create an End-to- End Representation of a Complex Socio-Technical System

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 develop weapons system programs able 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 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