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RICHARD DE NEUFVILLE: So
the first portions of it,

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the title is the
"Drivers of Flexibility."

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That is, through our
exploration of the fact

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that the forecast
is always wrong,

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that there's uncertainty,
and the observation

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that we need to explore
what might happen,

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there are certain factors
that make it much more likely

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that we should have
flexibility to not.

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And on the other hand, there
are things that act against it.

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There are reasons why
flexibility is either not

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desirable or, the most important
thing I want to emphasize,

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why there are certain factors
in the practice of engineering,

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the paradigm of
engineering as we have it

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that act against the idea
that we should be flexible.

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And this is what
this topic is about.

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That is, what are
the issues that

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are for and against
flexibility and how

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we might deal with them?

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We can come back to some of
the implications later on.

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But for the moment, I want
to address these five issues.

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So a key aspect
of flexibility is

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to delay the design and
management decisions.

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That is say, all right, we're
prepared to do something.

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For example, in
the garage case, we

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are ready to add extra floors
if it seems appropriate.

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But we're not going to act on it
until we know what's happening.

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We're not going to,
quote, "pull the trigger,"

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is a expression often
used in practice on it

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until we know that the
circumstances are definitely

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right.

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So there are, however, a
way of thinking about it

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of saying, well,
why mess around?

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We're going to need this.

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Why don't we build it now?

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Why shouldn't we just make
up our minds, do it right,

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rather than dithering around and
not knowing what we're doing?

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Why don't we take action
and be real leaders?

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So this is the discussion
I'd like to address.

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So I got to call out
five factors, which

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are driving for and against the
desirability of flexibility.

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The basic one, of course,
is their uncertainty.

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If we didn't have
uncertainty, if we absolutely

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knew what was going
to happen, then we

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should optimize for that
one particular state.

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But the fact is we don't
know what's going to happen.

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Not only we don't
know what's going

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to happen next year
or the year after

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or the year after
that and so on,

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but we don't know
in what sequence.

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And next year may be good and
next year after that may be bad

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or vice versa, and those
have different implications

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for the profitability of the
value of the system as a whole.

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The second one is this notion
of economies of scale, which I

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want to go into in more detail.

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But it basically says,
if you build it larger,

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it is cheaper per
unit to build it.

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And therefore, don't mess around
with small, uneconomical units

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of capacity.

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Go for the big thing,
save yourself money,

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and don't delay.

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The third one, which is
directly opposite to that,

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is the discount
rate, which basically

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says, if you delay decisions,
if you build the capacity later

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on, you'll be doing it at
a discounted rate in terms

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of the present so that it's
cheaper to build something

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in the future than it is now
on a present value basis.

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Adding to that effect is
this notion of learning,

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that, if you are doing
something reasonably new

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that you haven't made
millions of already,

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you're building a power plant,
for example, of a new design

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and then you're going to build
another one or an oil platform

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that, when you use the same
design second time, third time,

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fourth time, you've
figured out or the team,

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the company has figured out
ways to organize things better,

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maybe some design improvements,
but the cost per unit

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typically decrease
often significantly when

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you repeat the same
design, the same module.

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So the practice
of having modules,

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there's an advantage to it.

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And then finally, there's this
notion of competitive gaming,

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which is quite
complex, which I'm not

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going to go into detail here
but to suggest what it is.

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But the basic idea is that
sometimes an organization

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or a group or an
individual wants

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to scare away its competitors
by saying, I'm doing it

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and I'm going to be the
leader in this area.

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And if you try to compete
with me, you'll lose.

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So at some point, it is an
acceptable and desirable

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strategy to act first
now, be number one,

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and get the benefits of that.

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On the other hand,
it also means you're

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more likely to make
the mistakes but still

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that notion of their
strategic reasons

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to play in the game of
competitive games to not delay.

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So these are four
elements I want to discuss

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in the next little while.

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So first of all, I want
to revoke the notion

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of uncertainty a bit.

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So a lot of people will
use uncertainty and risk

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as sort of equivalence, which
implies, since risk is saying,

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oh, this is a bad
thing, you don't

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talk about the risk of
winning the lottery.

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I mean, this is a good thing.

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But you talk about risk
in terms of bad things.

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I risk failing my exam.

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I risk losing my way.

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I risk losing some
money, whatever.

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So I think that the notion of
thinking of uncertainty as risk

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is not a good mental state.

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Because it leads to the
idea, if risk is bad,

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I'm going to try
to stamp it out.

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Stew Myers used to
use that expression.

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I'm going to stamp it out.

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It's not good.

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We're going to eliminate it.

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Well, first of all,
you can't eliminate.

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But then secondly,
the uncertainty

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can be good, that you are
developing a new product

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and maybe it will
be a winner, that

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the uncertainty of your gain,
it can be exactly what you want.

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If you're a startup,
you know from the data

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that most startups fail.

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If you're simply going on
the basis that startups fail,

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you should never
get involved in it.

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If you're risk-averse,
never get involved in it.

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But the attractiveness
of startups

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is that they may break through
and that upside uncertainty

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is what drives that
kind of activity.

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And I encourage you to talk
about uncertainties in general

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rather than risk and
recognize that we're

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talking about a range
of future possibilities.

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