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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

will continue to

will continue to dominate in total aircraft sold and either surpass or rival the total valuesold of twin aisle aircraft (Airbus 2006, Boeing 2006).6.3.2 COMPETITIVE SITUATION IN LARGE COMMERCIAL AVIATION INDUSTRYBCA, as the incumbent in the industry, has seen a loss in market share from a high ofnearly 70% of orders after the acquisition of McDonnell-Douglas in 1997 to a near paritywith AI currently. Currently, both AI and BCA have a family of aircraft that have avariety of payloads and range capabilities. The AI family starts around 107 passengerswith the A318, an A320 derivative, and extends up to the forthcoming A380 with 555passengers. The BCA family starts around 110 passengers with the 737-600 and extendsup to around 467 passengers with the forthcoming 747-8. A summary of the families ispresented in Table 6-3. The shaded entries are planes sizes that a BWB type aircraftcould compete with effectively.Table 6-3 AI and BCA Product Offerings, matched by closest competing products. Datafrom (Airbus 2007, Boeing 2007).Airbus Product OfferingsBoeing Product OfferingsAircraftFamilyPassengers Range(km)AircraftFamilyPassengers Range(km)A320 107-185 5600-6800737 110-215 5648-10,200A310 220 8050 767 245 10,454A330 253-295 10,500-12,500757(discontinued)A350 253-300 13,900-16,300787 220-300 5650-15,750A340 239-380 13,350-16,100777 301-365 14,594-17,556A380 555 15,000 747 467 14,815From the mid-1970’s to the late 1980’s AI developed and marketed a family of planes,including all of those listed above with the exception of the A350 and A380, which arecurrently at some phase in development, and began to erode BCA market share. In the1990’s BCA was determined to maintain a 60% market share and priced its planesaccordingly to achieve this goal (Hartley 2004). As a result, BCA reduced prices over20% off list prices (Biddle and Helyar 1998), which created future problems, as BCA didnot have a lower cost production advantage over AI (Hartley 2004). In the competitiveaircraft sales market, the low prices that BCA was offering, matched by AI, combinedwith good economic conditions occurring before the Asian financial crisis in 1997 causeda large surge in orders for both AI and BCA. While BCA was a leading provider oftechnically advanced products, its internal processes for such activities as designcommonality, parts management and supplies created large inefficiencies in production.Because of these inefficiencies, as BCA attempted to ramp up its production capabilities240

to meet rising demand, the overall manufacturing system within BCA melted down,eventually resulting in a one month shut down of production to sort out the situation(Hartley 2004). The resulting delivery delay, combined with canceled and reduced ordersresulting from the Asian financial crisis and the 9/11 terrorist attacks resulted in areduced number of orders, making the remaining orders even more competitive betweenAI and BCA. To continue to win orders, AI offered deep discounts, but BCA refused tofollow AI into unprofitable territory, resulting in AI winning a greater percentage oforders for the first time (Hartley 2004).The competition between AI and BCA has also been driven by changes in the airlineindustry, especially deregulation of the US airline industry that has resulted in creatinggreater cost competition and increased sensitivity to costs, including aircraft purchase andoperating costs. The resulting increase in competition for orders has caused AI and BCAto reassess their own business models, with an increased focus on customer requirementsand focus on driving costs out of the supply chain (Harrigan 2006).AI has continued its reliance on derivative aircraft for blending continuity and innovation(Thorton 1995) to continue to sell high quality aircraft at competitive prices. This is doneby offering a range of aircraft that have multiple features in common, such as identicalcockpits or identical fuselages and wings, which allow airlines to reduce maintenance andtraining costs or allow AI to reduce tooling and design costs. AI has also continued itreliance on designing and manufacturing critical components internally, especially fornew models, reserving outsourcing for older models that are nearing the end of theirlifecycle, allowing AI to keep its leadership role in manufacturing (Harrigan 2006).BCA has chosen to take a different route, as demonstrated with the move towardsrecasting itself as a prime integrator with the new 787 Dreamliner, in a similar manner asthat embraced earlier by the auto industry (A.T. Kearney 2003). Traditionally in thedesign and manufacturing process, BCA would do most of the design work itself, retain ahigh share of manufacturing in house and do most assembly in house as well, using thesame manufacturing techniques that it had used for decades (Laudon 2000). Specializedsubassemblies, such as engines or avionics would be provided by specialists. Theremaining components would be designed by BCA and built to design by suppliers,without much real interaction between BCA and the supplier. Additionally, BCA wouldprovide all the investment needed for the program (Harrigan 2006). With the 777program in the mid-1990’s BCA relied more heavily on several Japanese suppliers totake a larger role in some design and manufacturing tasks, though BCA still provided thebulk of the capital investments.Focusing on systems integration, BCA is trying to reduce unit costs and potentially shiftsome of the non-recurring design and development costs and risks down the supply chainto suppliers (Pritchard and MacPherson 2004). The system integrator forms an integratednetwork of suppliers, in which each partner has a core competency in some area, with thesystem integrator ensuring that the entire system fits together in the end. Thisresponsibility includes technical responsibilities for the overall design and productionprocesses, program management responsibilities for costs, timings, and uncertainties, and241

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    ACKNOWLEDGEMENTSThis dissertation i

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    students. I am sure I am missing pe

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    6.7 Enterprise and Institutional Ch

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    Table 8-8 Summary of existing mode

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    Figure 3-17 System management loop

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    Figure 5-13 Historical world annual

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    Figure 7-19 Decision path for ITS m

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    Figure 10-3 Summary of differences

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    1. A large commercial aircraft maki

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    made to the system are often not on

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    From the MIT Engineering Systems Di

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    enterprise, the enterprise itself m

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    system capable of coping with uncer

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    Ch. 2Ch. 3Ch. 4Ch. 7Ch. 5Ch. 8Ch. 6

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    applicability of the framework. Fin

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    Myers, S. (1977) Determinants of Ca

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    FindingsFigure 2-1 Research process

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    • Difficult to predict future beh

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    As is apparent in the literature, t

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    of these. Ideally, either with the

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    do not appear to be mutually exclus

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    The ability for a system to activel

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    price (the option price) for the fl

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    and the results can be easier to ex

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    For some real options this appears

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    there is value to waiting to see wh

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    2.5 REAL OPTION PROCESSESExisting p

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    option is then evaluated with a “

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    • Option to engage in exploration

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    elatively straight-forward and are

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    OptionComplexityReal option in syst

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    2.8 REFERENCESAllen, T. et. al. (20

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    Hayes, R. and D. Garvin. (1982) Man

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    Ross, A. (2006) Managing Unarticula

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    3 LIFE-CYCLE FLEXIBILITY (LCF) FRAM

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    3.1 OVERVIEW OF NEED FOR LIFE-CYCLE

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    Figure 3-3 Condensed version of the

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    level, the appropriate enterprise n

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    3.1.2.1 Conceiving an OptionThe abi

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    3.1.2.2 Design and Evaluation of Op

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    option holder can not exercise the

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    system’s underlying structure and

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    3.2.2 DECISION TO USE LCF FRAMEWORK

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    Figure 3-11 Integration of decision

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    ounded rationality is not an issue,

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    quantitative analysis chapters, Sec

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    meantime, the land now would have d

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    3.2.5 DESIGN STRATEGY FOR OPTION EX

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    anticipated that external political

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    Figure 3-16 illustrates how the str

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    3.2.6 MANAGING THE SYSTEMManaging t

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    System Management LoopFigure 3-17 S

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    System Management LoopSystemImpleme

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    Long-term Management Loop ofUnknown

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    Long-term Management Loop of Unknow

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    Enterprise Readiness is included as

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    Figure 3-23 Condensed LCF Framework

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    3.4 REFERENCESAllen, T. et. al. (20

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    4 FLEXIBILITY IN BLENDED WING BODY

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    4.1.1 THE EARLY YEARSAfter the firs

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    Figure 4-2 Sikorsky S-42 Flying Boa

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    The 1950’s saw aircraft shift fro

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    to the government for doing so, wou

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    Figure 4-7 European supersonic civi

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    While airlines compete on a variety

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    Figure 4-11 Comparison of several l

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    Figure 4-12 Foreign and domestic so

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    Figure 4-14 Drawings from Leonardo

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    shifting their body weight) to the

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    Figure 4-19 Semi-monocoque construc

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    With a bi-wing (or tri-wing) constr

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    Figure 4-24 Loads and lifts generat

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    Figure 4-25 747-8, showing both loc

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    Additional benefits of the BWB arch

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    4.4.1 BWB OPTION DECISION PATHSFor

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    lower costs, higher scales of econo

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    Miller, B. (2005) A Generalized Rea

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    5 VALUE OF FLEXIBILITY IN BLENDED W

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    This chapter is composed of three m

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    this research were deemed necessary

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    For clarity of discussion, a high l

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    model, a better understanding of co

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    An overview of each of these subsys

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    important and may make inroads into

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    Figure 5-9 Airline finances and pro

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    Figure 5-10 Airline profitability,

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    Product design is based on a trade-

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    The airframe manufacturer productio

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    $70Inflation Adjusted Crude OilPric

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    5.2.5 MODEL VALIDATIONThe system dy

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  • Page 191 and 192: 5.3.1 INHERENT BENEFITSBWB technica
  • Page 193 and 194: minor differences between aircraft
  • Page 195 and 196: The remainder of this section looks
  • Page 197 and 198: derivative depends on corporate str
  • Page 199 and 200: Table 5-1 Number of derivatives lik
  • Page 201 and 202: LowFuelCosts35%30%HighFuelCostsProb
  • Page 203 and 204: The results presented can be interp
  • Page 205 and 206: Compared to the Boeing 787, the dev
  • Page 207 and 208: than a European option, because of
  • Page 209 and 210: In the opposite case where the BWB
  • Page 211 and 212: Because of the consequences of exer
  • Page 213 and 214: 35%30%Probability25%20%15%10%5%0%$-
  • Page 215 and 216: BWB does not seem to offer advantag
  • Page 217 and 218: type plane, relative to conventiona
  • Page 219 and 220: 5.4 REFERENCESAirbus. (2006) Annual
  • Page 221 and 222: 6 CHALLENGES OF FLEXIBILITY IN BLEN
  • Page 223 and 224: FindingsFigure 6-1 Case study analy
  • Page 225 and 226: Figure 6-2 Characteristics of case
  • Page 227 and 228: 6.1.3 INTERVIEWEE SELECTIONAs the i
  • Page 229 and 230: Table 6-2 ITS case study organizati
  • Page 231 and 232: about flexibility, i.e. is it a goo
  • Page 233 and 234: 2. If flexibility is used, can you
  • Page 235 and 236: case with BCA, which has embraced a
  • Page 237 and 238: primarily through military and NASA
  • Page 239: Figure 6-7 Delivery and market fore
  • Page 243 and 244: Another option widespread in the ai
  • Page 245 and 246: design, evaluate or manage flexibil
  • Page 247 and 248: Interviewee views on flexibility ce
  • Page 249 and 250: and evaluations are based around th
  • Page 251 and 252: operating and maintenance costs by
  • Page 253 and 254: when fuel costs increased substanti
  • Page 255 and 256: options, such as cross-program deri
  • Page 257 and 258: 6.9 REFERENCESAirbus. (2007) Produc
  • Page 259 and 260: 7 FLEXIBILITY IN HOUSTON GROUNDTRAN
  • Page 261 and 262: Figure 7-2 Characteristics of case
  • Page 263 and 264: cases can be added to existing or n
  • Page 265 and 266: 7.2.2 STANDARD ITS TECHNOLOGIES AND
  • Page 267 and 268: • increased opportunities for pri
  • Page 269 and 270: for Inherently Low Emitting Vehicle
  • Page 271 and 272: Marker 2005). This type of cross fu
  • Page 273 and 274: Figure 7-4 Plastic pylon separated
  • Page 275 and 276: ecause the network of sensors can t
  • Page 277 and 278: operating conditions. Additional ro
  • Page 279 and 280: DSRC based system would require a l
  • Page 281 and 282: Houston has already deployed one of
  • Page 283 and 284: Figure 7-13 Transit center location
  • Page 285 and 286: Figure 7-15 Houston’s managed lan
  • Page 287 and 288: as HOT or TOT lanes. This can be es
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    HOT / BRTlaneNon-flexibleTOT / BRTl

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    BuildtraditionalinfrastructureDelay

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    or improved safety functions could

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    Haning, C. and W. McFarland. (1963)

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    8 VALUE OF FLEXIBILITY IN HOUSTON G

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    attempt was made to completely repr

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    Figure 8-4 Quantitative analysis pr

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    8.2.1.1 Travel Demand ModelingThe t

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    ange of traffic analysis studies to

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    I-10 KatyFreewayI-610(innerloop)Bel

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    5 lanesFigure 8-10 Example of satel

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    Beltway 8(secondary loop)I-610 (inn

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    8.2.2.5 Major Modeling AssumptionsD

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    from a public agency that is intere

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    funding improvements that would pre

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    This is because of the low-cost of

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    From the analysis above, with the d

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    Figure 8-16 Addition of two general

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    capabilities are typically deployab

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    Table 8-5 Benefit-Cost Ratios for K

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    35%30%25%Probability20%15%10%5%0%$(

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    Figure 8-20 NPV density function, w

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    Table 8-6 Summary of flexibility to

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    Figure 8-23 Comparison of ITS/delay

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    vehicles would continue to gain fre

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    Figure 8-24 Value of time savings f

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    This illustrates the importance of

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    Table 8-10 Summary of ITS case stud

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    Similar to the above discussion of

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    9 CHALLENGES OF FLEXIBILITY IN HOUS

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    new challenges as well as increase

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    9.2 QUALITATIVE ANALYSIS PROCESSPre

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    The qualitative research methodolog

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    to be able to answer the research q

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    Table 9-1 Functional activities per

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    USDOT, Volpe Center, Officeof Syste

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    3. If flexibility is used, can you

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    • Increased data sources - The no

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    importance that Harris County plays

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    Figure 9-7 H-GAC area of responsibi

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    Figure 9-9 State level stakeholders

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    9.3.2.3 State Legislators and Gover

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    met with business interests before

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    The resulting plan forecasted more

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    Discussions with interviewees with

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    Currently, the cross section of the

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    Also of interest is another part of

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    y the Southern Pacific Railroad. In

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    9.6 PROCESSES FOR IDENTIFYING, DESI

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    The federal level interviewee conti

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    may not be tied to a physical proje

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    During the interview process, sever

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    Figure 9-15 Katy Freeway configurat

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    Monitor/ManageFigure 9-16 Summary o

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    company on a schedule to complete t

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    interviewees commented on the ongoi

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    facilities has created a lack of wi

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    eversible HOV lanes as a safety pre

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    the real option and the decision to

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    • Mechanism for creating pressure

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    9.9.2.2 Uncertainty as a Result of

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    option purchase price. This was bec

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    9.10 REFERENCESABC7. (2004) Chicago

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    Judd, D. and T. Swanstrom. (2004) C

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    10 FINDINGS AND CONCLUSIONSChapter

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    concerns the use of real options

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    Table 10-1 Summary of major researc

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    to a system. Rather, these options

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    future option exercise can prevent

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    Q1-2. The case studies provided a d

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    Currently, the Silver Line right-of

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    technical system as well as the soc

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    In the ITS case study, the transpor

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    system that the technical system is

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    option exercise unlikely (building

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    some future date. This type of wast

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    DesignPhaseEvaluationPhaseManagemen

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    ITS capabilities used to create the

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    technical and social components of

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    incorporated directly into the mode

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    As defined in Section 2.6, the diff

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    In the BWB case study, an enterpris

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    For “standard” real options it

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    “Standard” real options are des

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    From the research it was found that

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    d. Evaluating the option with quant

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    need for the system is, while simul

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    10.7 REFERENCESClemons, E. and B. G

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