A Real Options-Based Framework for Strategic Decision-Making in Hostile, Turbulent and Ultra-Volatile Environments

Abstract

The resources required by modern military action are essential in establishing a favorable force balance and thus become a critical landmark in strategic decision making. The imbalance in resources is of utmost importance and needs to be analyzed in full relation with the current dynamic and volatile environment. Decisions made based on such resource dynamics are rapid, intuitive and can be easily transferred into practical approaches provided that the complexity of the processes characteristic of combat environments is fully taken into account. Moreover, the dynamic management of portfolios needs to also include options. Additionally, strategic decisions must be harmonized with operational and tactical decisions while integrating all available means by which to employ resources and meeting the deadline set by the features of real time situations. Traditional approaches like discounted cash flow/ net present value (DCF/ NPV) cannot provide the flexibility required by the changes in combat environment. Unlike the financial options focused on bonds, stocks, financial rates, military real options (MRO) evaluate military resources and bonds and are thus advantageous under uncertain and ultra-volatile conditions. Thus, strategic decision makers need to not only deter against losses, but to also understand how to preserve the opportunity to act in turbulent times.