Flexibility Strategy - Valuing Flexible Product Options

Flexibility is very critical in addressing changing customer needs in the highly competitive market scenario that we see around us nowadays. Flexibility can be understood as the innate ability of a system or product to support new functions and to perform these at some finite range of operating conditions and capacity levels during later stages of its lifecycle. Usually the range of expected behavior is fixed in a specification. This paper evaluates the conditions where a flexible architecture is no longer financially viable vis-à-vis fixed architectures. This paper will contribute to research in Systems Engineering by demonstrating how alternative valuation methods can yield an estimate of product option value, yielding information on the relative value of flexibility options during product design. The application of the flexible product option valuation framework is described using a case of a handset processor in a 2G/3G wireless network context. Black-Scholes model and the Binomial model are presented as methods for computing the economics of financial options.