STRATEGY FOR R&D: Studies in the Microeconomics of Development

STRATEGY FOR R&D: Studies in the Microeconomics of Development

Okonometrie und Unternehmensforschung Econometrics and Operations Research VIII Herausgegeben von I Edited by M. Beckmann, Bonn R. Henn, Gottingen A. Jaeger, Cincinnati W. Krelle, Bonn H. P. Kiinzi, Zurich K. Wenke, Ludwigshafen Ph. Wolfe, Santa Monica (Cal.) Geschiiftsfiihrende H erausgeber I Managing Editors W. Krelle H. P. Kiinzi

Strategy for R&D: Studies in the Microeconomics of Development by Thomas Marschak Thomas K. Glennan, Jr. Robert Summers With 44 illustrations A RAND Corporation Research Study - - Springer-Verlag Berlin Heidelberg GmbH 1967

THOMAS MARSCHAK University of California Berkeley THOMAS K. GLENNAN, jr. The RAND Corporation Santa Monica, California ROBERT SUMMERS University of Pennsylvania Philadelphia ISBN 978-3-662-39360-4 ISBN 978-3-662-40413-3 (ebook) DOI 10.1007/978-3-662-40413-3 AII rights reserved, especially that of translation into foreign languages. It is also forbidden to reproduce this book, either whole or in part, by photomechanical means (photostat, microfilm and/or microcard or any other means) without written permission from the Publisher. 1967 by Springer-Verlag Berlin Heidelberg Originally published by The RAND Corporation in 1967 Softcover reprint ofthe hardcover 1st edition 1967 Library of Congress Catalog Card Number 67-28248 The use of general descriptive names, trade names, trade marks, etc., in this publication, even if the former are not especially identified, is not to be taken as a sign that such names, as understood by the Trade Marks and Merchandise Marks Act, may accordingly be used freely by anyone. Title No. 6483

ACKNOWLEDGMENTS The basic questions studied in this book were originally raised at The RAND Corporation, in a group whose membership changed over a period of some years. We are indebted to all members of this group, which included at various times Leland Johnson, Burton Klein, Andrew Marshall, William Meckling, Emmanuel Mesthene, Richard Nelson, and Edward Sharkey. We should also like to express our gratitude for the trenchant observations of Professor Edwin Mansfield of the University of Pennsylvania and John McCall and Robert Perry of The RAND Corporation, all of whom commented on an earlier version. The work of the authors and the other members of the R&D policy group has been supported partly by the United States Air Force under the Project RAND research contract with The RAND Corporation, and partly by The RAND Corporation with its own research funds. Chapters 3 and 4 were supported by the Air Force and reported on earlier. For this support and for the contributions of numerous Air Force officers and civil servants we are deeply grateful. Finally, we express our debt to Burton Klein, who first conceived the idea of extending a study of current military development practices into a broader inquiry into the nature of development, who first posed the questions that guided all the RAND work in this field, and who has given this book steady and extremely patient encouragement.

CONTENTS Acknowledgments List of Figures. List of Tables... Vll Xll X Ill 1. THE MICROECONOMIC STUDY OF DEVELOPMENT by Thomas Marschak The Nature of the Studies.... The Microeconomic Study of Development and its Relation to Broader Economic Issues.............. 6 The Management of Government-financed R&D. 6 The Market Allocation of Resources to R&D... 9 R&D, Technical Change, and Economic Growth.. 11 2. ISSUES IN THE CHOICE OF DEVELOPMENT POLICIES. 13 by Thomas K. Glennan, Jr. A. What Is Development?..................... 14 B. The Structure of a Development: Uncertainty Reducing and Routine Tasks...................... 16 C. The Nature of Internal Uncertainties in Development. 21 D. The Resolution of Uncertainty....... 24 E. The Elements of Development Policy.... 29 F. The Component State of the Art Advance. 30 G. Component Interrelatedness........ 32 H. The Use of Parallel Developments..... 34 I. Distribution of Effort Among Uncertainty Reducing Tasks. 34 J. The Impact of Available Time and Resources upon Development Strategies..................... 35 K. External Uncertainties.................. 39 L. The Relation of Development Strategies to External Uncertainties 43 M. Conclusion......................... 45 3. THE ROLE OF PROJECT HISTORIES IN THE STUDY OF R&D 49 by Thomas Marschak A. Introduction...... 49 B. Airborne Radars... 51 "Side-looking" Radar. 51 World War II Radars. 55 Some Postwar Radars. 57 Interpretation..... 60 IX

X Contents C. Aircraft Engines.......................... 63 The Nature of Engine Development: An Illustrative Model. 65 Issues to Be Examined in the Engine Histories 72 Thej-79... 72 TheJ-57 andj-75................. 76 The J-40...................... 78 Some Shorter Histories: J-46, J-33,]-35, T-35. 81 Tabular Summaries of Uncertainties in the Engine Projects Studied.... 84 Summary.... 89 D. Fighter Aircraft. 90 The F-100. 90 The F-102.... 98 The F-104.... 110 E. Two Postwar Strategic Jet Bomber Programs. 118 The B-52......... 118 The B-47......... 126 F. The Sidewinder Missile. 129 Development History. 129 G. Conclusions....... 136 4. COST ESTIMATES AS PREDICTORS OF ACTUAL COSTS: A STATISTICAL STUDY OF MILITARY DEVELOPMENTS. 140 by Robert Summers A. Introduction and Summary... 140 Aims and Scope of the Study... 140 Outline of Methods and Results. 142 B. An Analysis of Cost-estimate Chronologies. 148 Errors in Non military Cost Estimating.... 148 Model of the Development Process (I)............... 149 Preliminary Description of the Data........ 150 Raw Measure of Accuracy of Estimates: Raw F.......... 150 Adjusted Measure of Accuracy of Estimates: F.......... 153 Model of the Development Process (II); First Variable: Timing Within the Development Program................ 154 Second Variable: Technological Advance.... 156 Bivariate Analysis oft and A............ 157 Third Variable: Length of Development Period. 160 Fourth Variable: Calendar Date. 161 Regression Results: Algebraic. 161 Hypothesis Testing........ 163 Regression Results: Graphic... 166 Fifth Variable: Missiles Versus Aircraft; Sixth Variable: Quantity Adjustment............... 168 Seventh Variable: Estimator and/or Contractor. 169 Eighth Variable: Benchmark Time... 170 Data Problem: Errors in Measurement...... 172 Data Problem: Randomness............ 172 Estimation of Independent Variables; Weighting Observations 173 Conclusions About Learning During Development........ 175

Contents x1 Cost Changes of Major Article Components. 176 The "Changing-configuration" Hypothesis. 176 Conscious Underbidding of Contractors?.. 177 C. The Consequences of Cost-estimate Inaccuracies. I 78 Cost Inaccuracies Versus Other Uncertainties... 178 System Choice and Inaccurate Cost Estimates: Bias. 179 System Choice and Inaccurate Cost Estimates: Variance. 180 Implications for Cost-effectiveness Studies.. 184 Implications for Force-structure Projections........ 188 5. TOWARD A NORMATIVE THEORY OF DEVELOPMENT. 190 by Thomas Marschak A. Introduction..................... 190 B. Normative Problems in Development Strategy. 192 1. The Framework............... 192 2. The Developer's Task Under Certainty... 193 3. The Developer's Task Under Uncertainty.. 195 4. The Pure Parallel Approach Problem with One or More Review Points........................ 200 5. The Parallel Approach Problem with Sequential Selection of Approaches at Each Review Point......... 248 6. The Pursuit of Approaches with Different Intensities. 253 7. Multi-component Problems.............. 278 8. Further Refinements for the Case of Two Valued Preferences...................... 286 9. Many Valued Preferences............... 291 10. Changes in the World Outside the Developer's Control. 295 11. Project Selection Problems................. 296 12. Previously Explored Sequential Decision Problems Related to the Parallel Approach Problem............. 297 13. Limitations of Problems Based on the Approach Concept. 303 C. Normative Problems in Development Organization. 304 l. General Normative Models of Organizations.. 304 2. Normative Models of the Development Project.. 307 Appendix: Proof of Theorem 4 of Chapter 5. 315 Index........................ 323

LIST OF FIGURES 1a. Subjective Probability Distribution of Strength before Test. 17 1 b. Subjective Probability Distribution of Strength after Test.. 17 2. Traditional View of Distribution of Effort in Development. 19 3. Overlapping of Tasks...................... 19 4. Distribution of Development Costs Through Time...... 20 5. Schematic of Amplifier/Power Supply Development Problem. 21 6. Probability Distribution of Outcomes of Applying Fixed Budget over a Given Time Towards Achieving A* and V*. 23 7a. Design Within the State of the Arts............. 37 7b. Design Beyond the State of the Arts............. 37 Sa. Time and Resources Plotted Within the State of the Arts. 38 Sb. Time and Resources Plotted Beyond the State of the Arts. 38 9. Key Events in Development..... 44 10. Cumulative Costs of Development.. 44 11. World War II Radar Development.. 56 12. Postwar Radar Development Times. 59 13. Bias and Variability of Adjusted Cost Estimates. 144 14. (F,t)ProfilesforT= 1948... 167 15. (F,t) Profiles fort= 1954... 167 16. (F,t) Profile for a Type I Program {A= 16, L = 96} fort= 1954 with the.68 Forecast Confidence Band............... 168 17. Comparison of True Costs and Estimated Costs of Two Articles Requiring Minor Technological Advances............. 182 18. Comparison of True Costs and Estimated Costs of Two Articles Requiring Major Technological Advances............. 183 19. Certain and Uncertain Costs in Past Air Force Strategic-Force Budget Projections.......................... 189 XII

LIST OF TABLES 1. Radar Development Costs........................ 62 2. Accuracy of Predictions as Compared With Actual Performance, J-79 Engine......................... 73 3. Early Predictions in the Development of 15 Engines......... 86 4. Successive Engines Planned for Use in Various Aircraft....... 88 5. Use or Planned Use of Major Engines in Air Force and Navy Aircraft....................... 89 6. Specifications for Two Versions of the F -102. 101 7. Performance of the F -104............ 114 8. B-52 Models-Design Data........... 120 9. Annual Development Costs, Sidewinder Missile, 1950-1957. 135 10. List of Cost Chronologies Studied............. 151 11. Cost-Factor Frequency Distribution............ 152 12. Adjusted Cost Factors Classified by Timing Within the Development Program.................. 156 13. Adjusted Cost Factors Classified by Magnitude of the Technological Advance Sought in the Development Program....... 157 14. Adjusted Cost Factors Classified by Both Time Elapsed and Magnitude of the Technological Advance Sought in the Development Program..................... 158 15. Means of Adjusted Cost Factors.................... 159 16. Standard Deviations of Adjusted Cost Factors............ 159 17. The Value of an Additional Approach in a Centralized and a Decentralized Project Organization................. 310 Xlll