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ASNE Day 2016 - Technical Paper Session 5 : Thursday, March 3, 2016 1330-1500

Current Trends in Naval Applications


Author: Norbert Doerry

Title: Real Options Framework for analyzing Modular, Adaptable, and Flexible Surface Combatants


This paper will present a framework for determining how much of what type of modularity, adaptability, and flexibility features to incorporate into a surface combatant design to enable the warship to remain operationally relevant over its design service life. In making this determination, the manner in which questions are asked of analysis is very important. This paper posits that the determination depends on a number of uncertain parameters, and the vector of these uncertain parameters forms an “uncertainty space” that is a function of time. These uncertainty parameters may include elements such as a potential adversaries capability in a warfare area, potential technology breakthroughs, or whether the Nation is preparing for, or in major combat operations, in regional conflict, or operating in a peace time mode. For this paper the “uncertainty space” is evaluated at discrete time steps (typically annually) and is assumed to be representable by a Markov chain of “uncertainty spaces.” The configuration of the ship, tactics, force architecture, and the status of R&D projects are also viewed as a “configuration vector” that is also modeled as a time dependent vector represented by a Markov chain (time steps typically the same as that for the uncertainty space.) The modernization process and the initial design of the ship are described by a “design vector.” This document posits that two or more alternatives for the “design vector” are under consideration. Each alternative is evaluated to determine where the evolving “configuration vector” has unacceptable, acceptable, and superior performance with respect to operational relevance within the “uncertainty space” as a function of time. Total ownership cost incurred to date (with uncertainty estimates) is evaluated for each alternative across the “uncertainty space” as a function of time. By comparing the operational relevance and cost for different alternatives under different uncertainty space trajectories, senior leadership can make value based decisions.

In Real Options Analysis terms, the initial design within the “design vector” includes the purchase of options in the design (such as modularity features). The “configuration vector” represents the cumulative effect of options in the design that have been exercised to date, as well as options on the design (modifications for which features have not been explicitly provided. The modernization process within the “design vector” details the work necessary to evaluate the “uncertainty space” and decide how and when to exercise the options. The payoff of the option is represented by the evaluation of the “configuration vector” in terms of unacceptable, acceptable, and superior operational performance. Unacceptable operational performance is considered a capability gap.

Note that the concept in this paper can be extended to include the entire class of ships (or even the entire fleet) as part of the “design vector” and the “configuration vector.” The paper concludes with recommended future steps to implement the proposed framework.

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