Real Options

Jürgen De Smet & Yves Hanoulle

Up-Front Decisions

You do not need to decide right now!

Only decide when to decide

Keep as many options open as possible

Actively gather information until you have to decide

You only commit when you must

When you have a good reason to

Why would you want to do that?

Later you are smarter

You can deal with risk

A real option has a value

A real option has expiration criteria

A real option has a purchase cost

Common sense?

Comon Sense

Real options decision making – Identify Options

A

B

C

Options

Real options decision making – Identify Conditions

A

B

C

X or Y

X and Y

Z

conditions

Real options decision making – Identify Conditions

A

B

C

X or Y

X and Y

Z

Real options decision making – Identify Conditions

A

C

X or Y

Z

B

X and Y

Real options decision making – Time to decide

A

B

C

X or Y

X and Y

Z

first decision point

Real options decision making – wait for first condition

A

B

C

X or Y

X and Y

Z

?

Real options decision making – Refine options

A2

B

C

X or Y

X and Y

Z

Real options decision making – Find new options

B

C

X and Y

Z

D

Y

A2

X or Y

Real options decision making – Push back decision

B

C

X and Y

Z‘

D

Y

A2

X or Y

C

Z

Real options decision making – Plan D?

B

C

X and Y

Z‘

D

Y

A2

X or Y

This is great

Set based design

Design options

Vehicle designs• 20 entered in a competition• 5 worked out in detail• 4 clay models made• 2 prototypes made and revised• 1 model chosen

Types of engines

• 80 types considered• narrowed down to 10 by testing• 4 types after more extensive testing• 1 selected after evalutation by computer

simulations

Agile user stories

Test Driven Development

Dimensional planning – Dirt road

Dimensional planning – Cobblestone road

Dimensional planning – Highway

Why is dimensional planning valuable?

Heusden

Amsterdam

Why is dimensional planning valuable?

Amsterdam

Heusden (Belgium)

Heusden (Netherlands)

Who is paying for this expensive mistake?

Lets create a tighter contract so the customer does!37

Why is dimensional planning valuable?

Amsterdam

Heusden (Belgium)

Heusden (Netherlands)

Why is dimensional planning valuable?

Amsterdam

Heusden (Belgium)

Heusden (Netherlands)

Why is dimensional planning valuable?

Amsterdam

Heusden (Belgium)

Heusden (Netherlands)

Why is dimensional planning valuable?

• Dimensional Planning vs Cost?

– Amsterdam – Heusden Belgium : Dirt Road– Amsterdam – Heusden Netherlands: Dirt Road– Amsterdam – Heusden Netherlands: Cobblestone

VS

– Amsterdam – Heusden Belgium Highway+

– Amsterdam – Heusden Netherlands ????

Why is dimensional planning valuable?

Real options vs Change Requests

Get “real”

• Generate as much options as possible• Identify the conditions and expiration timing• Decide when to decide• Actively go for more info• Go for multiple options if needed• Wait as long as possible• Decide fast

Resources

• http://www.agilecoach.net/html/Real%20Options%20handout.pdf • The Toyota Way-Jeffrey Liker, pp 239-240:

http://www.amazon.com/The-Toyota-Way-ebook/dp/B000SEGIVS • Koen van Exem: http://www.inxin.com/wiki/DimensionalPlanning • Software by Numbers:

http://www.amazon.com/Software-Numbers-Low-Risk-High-Return-Development/dp/0131407287/  

Jürgen De Smet & Yves Hanoulle