FLEXIBILITY IN DESIGN - Title Page - MIT

de Neufville + Scholtes D R A F T September 30, 2009CHAPTER 3FLEXIBILITY CAN INCREASE VALUE“Invincibility lies in the defense; the possibility of victory in the attack.”Attributed to Sun Tzu“Robust design is passive way to deal with uncertainty. Flexible design is active way to deal withuncertainty.”This chapter shows how flexibility in the design of projects can increase expected value,often dramatically. Flexibility in design routinely improves performance by 25% or more. Itachieves such results by configuring existing technology to perform better over the range ofpossible future circumstances. Flexible design enables the system to avoid future downside risksand take advantage of new opportunities. By cutting losses and increasing gains over the rangeof possible futures, flexible design can improve overall average returns, that is, the expectedvalue.Moreover, flexible design often also reduces initial capital expenditures (CAPEX). It canthus obtain greater expected value at less cost, leading to substantial increases on the return oninvestment. Indeed, flexible designs lead to smaller and inherently less expensive initial systems.This is because the flexibility to expand as needed means that it is not necessary to buildeverything that might be needed at the start. Thus even though the flexible design has extrafeatures that enable its ability to adapt to different situations, the extra cost of these features isfrequently much less than the savings achieved through a smaller initial design.The demonstration of the advantages of flexible design sets the stage for the second partof the book, the detailed presentation of the methods for identifying, choosing and implementingflexibility to maximize value to the system.The demonstration is by example, inspired by an actual development in SoutheastEngland. The case is transparently simple, to enable us to develop an intuitive understanding ofthe results. The case is however realistic. It represents in the small the same issues andopportunities as large, complex developments such as a major, $250 million project discussed atthe end of the chapter.We begin by showing that standard evaluations, using a cash flow analysis based on amost likely forecast, can give misleading, wrong results. This is because of the flaw of averages.Any analysis that does not account for the possible range of distributions of scenarios can bewidely wrong – not only in its estimation of value but also, perhaps more importantly, in itsidentification of the best project.The example then demonstrates that the right kind of flexibility in the design gives theproject leader three kinds of advantages. It can• Greatly increase the expected value of the project;Part 1: Chapters 1 to 3 Page 45 of 69