If management flexibility, represented by real options, is the key to value creation, logic would seem to tell us that losing flexibility can destroy value. This section will illustrate this point.

The first example occurs under command-and-control conditions. In a planned economy, a plant manager may be rewarded only for producing his quota, which he will attempt to produce whether it is needed or not. This condition alone guarantees that market economies will outperform centrally planned economies. Such “plans” destroy value, at least in comparison to plans that allow for flexibility.

Comrade Zhukov’s plan is to produce one million liters of black paint and to deliver it to the Lada factory. He is given one hundred thousand 10-liter cans, one-half million liters of solvent, and the required amount of polymer base and carbon black. He has no incentive, nor access to resources, to produce more. If Lada doesn’t want the paint, it’s not his problem. And if there is a fire in the carbon black factory, well, that would not be his fault. So in principle he has no options. His Western counterpart, Ms. Jones, with a similar business plan, might trim production and inventory to adjust to a current shortage of cans, prebuy to take advantage of low prices for polymers, and attempt to exploit a new market trend toward red sports cars. She may perceive options to recycle cans, inventory an emergency supply of polymer, and purchase red pigments. All of these options add value.