Real Options in Military System Acquisition: The Case Study of Technology Development for the Javelin Anti-Tank Weapon System
NAVAL POSTGRADUATE SCHOOL MONTEREY CA GRADUATE SCHOOL OF BUSINESS AND PUBLIC POLICY
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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.
- Economics and Cost Analysis
- Logistics, Military Facilities and Supplies
- Surface-Launched Guided Missiles
- Navigation and Guidance