Analysis options

Much of the apparent complexity of current approaches to real-options analysis arises from the attempt to fit financial-option formulae to real-world problems. Usually this does not work since real-world options are often quite different from financial options. Option-pricing formulae are treated as a pro-crustean bed by academics Either the real world is simplified beyond recognition or unwarranted assumptions are added to make the facts fit the theory. Neither approach satisfies managers. 

Options analysis is a technique that can deal with such contingencies. It is a form of decision analysis that includes chance variables, initially hidden, representing states of nature that can be uncovered, in whole or in part, through a decision to carry out research. Such research creates options—the ability to progress, or abandon, one of several courses of action. This research might be technical or market research, in applications of option analysis to R D planning. 

In classic options analysis, one flrst creates an approximate version of the decisions and risks to be considered and then tries to exactly optimize the decision policies. 

In a tiny fraction of cases, a quick formula can be used. For most cases, the analysis uses an options tree, with one leaf per possible outcome. However, this falls prey to the curse of dimensionality —the number of leaves on the tree grows exponentially in the number of risk and decision dimensions considered. Thus only a limited, simple set of situations can be optimized in this way because one has to severely limit the decisions and risks that are considered. Tools available to help automate and simplify options analysis, widely used in pharmaceutical project evaluation, include Excel addons such as R1SK [11] and more graphically based solutions such as DPL [12]. Both of these support the creation and evaluation of decision trees and of influence diagrams Figure 11.2 shows a simple example of each of these. A primer in applied decision theory is Clemen s book Making Hard Decisions, other sources may be found in the website of James Vornov, Director of Clinical Research at Guildford Pharmaceuticals, a recent convert to decision theory for options analysis [13]. 

New combinations of simulation and optimization allow a much wider set of R D decision making processes to be optimized, at least approximately, than in the past. This exciting new approach has been developed to solve many problems thought to be impossible to solve with classic options analysis. The idea is to trade off the exactness of the optimization for the ability to look at more complex situations [21]. 

Massachusetts Toxics Use Reduction Institute Pollution Prevention Options Analysis Tool (p2oasys)... 

Chen, T.P. Hydrogen Delivery Infrastructure Option Analysis, FY 2006 Annual Progress Report, DOE Hydrogen Program, 2006. 

Another model, used in the USA, is the OASYS Pollution Prevention Optional Analysis System, developed by the Toxic Use Reduction Institute. Technologies are assessed on a variety of hazard criteria, including acute and chronic human toxicity, physical properties, aquatic impacts, persistence/bioaccumulation, atmospheric releases, disposal, chemical properties, energy/resource use, product hazard and exposure potential. Alternatives are rated to... 

Health Canada (2005) An Environmental Assessment Regime for New Substances in Products Regulated under the Food and Drugs Act. Health Canada-Options Analysis Paper. 

To better evaluate pollution prevention options, the project attempted to assess the risks posed to individuals and populations exposed to chemical contaminants released from the refinery. An initial risk assessment analysis was performed to identify chemicals requiring further study, and to establish a baseline by which to judge potential risk reduction opportunities. Since change in exposure to benzene was used as a proxy for evaluating relative risk reductions associated with alternative pollution prevention options, the usual uncertainty associated with risk assessments was not a factor in the option analysis. The uncertainty in absolute risk assessments can arise from multiple sources the use of animal study results, difficulties with human studies, variation in individual responses to chemical exposures, the impact of differing dose rates, multiple simultaneous exposure to chem-... 

Due to the uncertainty involved in the evaluation of new products, financial analysis tools that consider risks and opportunities are more appropriate and valuable than deterministic approaches. These new approaches to project financial evaluation that consider imcertainty include options analysis and Monte Carlo simulation. Due to their proactive handling of uncertainty, these tools can more accurately calculate the risks and opportunities of a new product concept. With the use of a financial analysis model, basic tradeoff statements can be developed by the project manager to assist in understanding the importance of each objective. In the pain management product example, a statement emphasizing the value of time would be a week delay in the project costs 1 million in today s money. ... 

An outline of the individual CRM activities including hazard identification, control option analysis, verification activities, etc. (note that the plan should focus on areas where there is an intention to vary the approach from what is documented in the SMS). 

Mun, J., 2006. Modeling Risk Applying Monte Carlo Simulation, Real Options Analysis, Forecasting and Optimization Techniques. Hoboken, NJ Wiley. 

Optional analysis of resin. Treat the resin (10 mg) with a large excess of hydroxylamine in pyridine for 6 h at 95°C. Wash resin and dry. FTIR analysis shows no carbonyl absorption at 1700 cm and microanalysis shows 0.82% nitrogen, indicating a loading of aldehyde of 0.59 mmol/g. 

This question is typically addressed through the creation of a business case that includes options analysis. Hopefully, the business case is meaningful and provides a firm foundation for a business commitment to either do nothing or push ahead with one of the options. If the choice is to go on, the typical delivery vehicle for a new product is a project with a defined Project Life Cycle (PjLC). 

These models can be used qualitatively, to capture and represent the scenario that gives a rise to a hazard and subsequently to its consequences, thus supporting options analysis and identification of new potential mitigations. 

In order to support risk profiling, integration of individual core hazard models into one, overall safety risk model and options analysis, the existing technique cause consequence modelling was developed fiirther as detailed in related sections below. 

An important part of options analysis is apportionment to the model elements. As already mentioned earher, it is possible to distinguish three apportionment categories ... 

In order to support the options analysis further, sensitivity analysis on the models should be performed in order to identify the model elements which contribute most to the risk. These are the model elements upon which to focus the analysis with the aim of improving the safety performance of the system. 

Within the project timescales, options analysis concentrated on hazards classified as (MAJOR, COMPARABLE) which account for the majority of the risk. Each (MAJOR, COMPARABLE) hazard remaining at the end of the project phase was subjected to an options analysis in order to underpin an argument that there are no reasonably practicable tactical options available to reduce risk further. 

The ALARP argument rests in part on the conclusion that there are no tactical or reasonably practicable strategic options, which would reduce risk further. As part of the options analysis, a Ust of performance metrics that would allow the project, to make a quantitative assessment of the risk associated with (MAJOR, COMPARABLE) hazards at a later stage was identified. 

Each hazard was subjected to an Options Analysis process as described above. 

Cat ory 1 and 2, novel change - Change Safely Analysis required (including options analysis)... 

A systematic study, of each hazard, regarding the causal and consequential effects of failures, shall be carried out. In order to identify all the applicable defence/protection options, the best available expertise shall be employed. The results of the apportionment, and the importance analysis, are used as guidance for the concentration of effort and the prioritisation of options analysis. 

Key business and engineering management tools. My personal favourites are tools that provide a holistic picture or analytical framework for the whole business or project, thus enabling consideration of all material aspects at an appropriate level of definition to assist with prioritisation and options analysis. 

Mun, J. Real options analysis tools and techniques for valuing strategic investments and decisions. Wiley finance series. New York John Wiley Sons, 2005,2nd edition. 

---