Evolving Strategy: Risk Management and the Shaping of Mega-Projects

Abstract

The authors of this paper argue that the succession of shaping episodes that form the front-end process to cope with risks can be reinterpreted in terms of the real-options framework that is currently revolutionizing academic treatments of project evaluation. In fact, as is often the case with cutting-edge practice, managers have been successful at creating value through the development and exercise of sequential options without explicitly framing the process in options terms. Academics have simply codified this practice in the form of a new conceptual framework. The real-options framework is based on the same logic as that of financial options as previously developed. It recognizes that the decisions that determine project cash flows are made sequentially over many episodes. This paper illustrates the rich varieties of mechanisms through which these options are shaped and exercised over the life of the project – the real management that is integral to real options.

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