Real Options in Military System Acquisition: The Case Study of Technology Development for the Javelin Anti-Tank Weapon System
Abstract
Three different technologies were considered in the guidance technology development phase of the Javelin anti-tank missile system: a laser-beam riding system, a fiber-optic guidance system, and a forward-looking infrared guidance system. Rather than choosing a single technology, in August 1986, the Army decided to award three "Proof of Principle" contracts of $30 million each to three competing contractor teams to develop the technologies and conduct a "fly-off" missile competition. The Army paid $90 million for these three options, all with potential but none with a guarantee of success. By doing this, the Army acquired the right, but not the obligation, to purchase the most successful technology for the Javelin missile. This is the essence of a "real option." In this research, we applied the real option model to the three candidate Javelin guidance technologies. The study analyzed the three alternatives using measures of effectiveness (MOE) to combine performance across nine acquisition objectives. These MOEs were compared with development and procurement cost estimates. No alternative dominated. Marginal benefits analysis was then used to define the trade-off space among the alternatives. Differences in the likelihood of successful development of the alternatives were evaluated, resulting in one technology appearing to dominate. However, the acquisition approach created a real option for the best alternative that could differentially add value to the alternatives. A real options model was used to analyze the value provided by investing in this competitive option. Results indicate that the Army paid less than the total value of the three options, but could have increased net savings by paying different amounts to test each alternative. The analysis method provides a logical and defendable approach to the analysis of alternatives during technology development uncertainty.
Document Details
- Document Type
- Technical Report
- Publication Date
- Aug 22, 2013
- Accession Number
- ADA591730
Entities
People
- David N. Ford
- Diana Angelis
- John Dillard
Organizations
- Naval Postgraduate School