Engineering has a deep root in physical science. Scientific knowledge forms the core of the technological invention. Engineering is often known as the application of the principles of science and mathematics to develop economical solutions out of technologies. It focuses on the optimization of design, fabrication, and operation of technological solutions. On the other hand, Economics is a social science. It describes the factors that determine the production, distribution, and consumption of goods and services. It happens to be that through technological innovations, we can influence both production, distribution, and consumption. In designing a technological solution, engineers take optimum design decisions, often through tradeoffs, to make the best usage of resources. The application of economic principles in the analysis of engineering decisions formed a new discipline called Engineering Economics. But is it different from Engineering Economics for Innovation Economy?
The objective of driving economic growth through technological innovation extends the scope of conventional Engineering Economics. The application of the principles of economics in making rational decisions for dealing with the challenge of trading innovative ideas in a competitive market economy forms a new set of knowledge—Engineering Economics for Innovation Economy.
From Tinkering to Engineering
Tinkering often stands for intuitive creativity-based trial and error approach of forming techniques to get jobs done. Of course, tinkerer invents technologies, and innovate products around them. It has been an innate capability of human beings. In the absence of scientific knowledge, often tinkerers fail to optimize and scale up the technique. Once underlying scientific knowledge is formed, the path of optimization and scalability opens up. Consequentially, techniques developed out of tinkering are upgraded to technologies and innovations. Engineering focuses on the optimum use of technologies for designing technological solutions products for getting jobs done cost-effectively. For example, the screen size of computer displays or radius of wheels is determined not only based on technology feasibilities, but also upon consideration of cost-benefit analysis.
Human beings have been practicing tinkering for millions of years. But the history of engineering is quite short. Engineering follows the formation of scientific knowledge. In contrary to it, advances in tinkering often demand the creation of scientific knowledge, followed by engineering.
The genesis of Engineering Economics
Engineering economics primarily originated from developing optimum, customized technical solutions. In the 18th and 19th centuries, often technological solutions used to be engineered as customized solutions. Either users requiring technological solutions like power plants or telecommunication networks used to have their in-house engineering department. Or, they used to contract them out to get purpose-built solutions. The design challenge was to have an optimal tradeoff in taking design decisions based on Economic principles. But this knowledge body is not sufficient to make engineering decisions for succeeding with technological innovations in a competitive market economy. As a result, this reality demands Engineering Economics for Innovation Economy.
Tinkering, Innovation, and Science
Often innovation emerges from tinkering. The formation of ideas for developing tools in getting jobs done is human beings’ innate capability. Knowledge is fed into the creative process to form ideas. Often such knowledge originates through experience, trial and error, intuition, and imagination. Tinkerer usages this knowledge to develop innovative means or tools. Such tinkering-based technique invention and product innovations belong to Praxis. It is Carl Max’s articulation of human beings’ creativity. But these inventions, as well as innovations, are not scalable. They do not keep growing in getting jobs done better at decreasing cost. In developing countries, people often call them grassroots innovation.
But once underlying knowledge, which originates in the form of art and tacit form, is codified, it creates scientific knowledge. The creation of scientific knowledge opens the path of advancing tools developed out of tinkering for making them better and less costly. For example, Wright Brothers came up with the flying machine based on their tinkering approach. In the absence of the formation of scientific knowledge about the underlying mechanics, Wright Brothers’ machine could not have found the scalable path of growth, consequentially of being a super jumbo jet.
Innovation Economy
In the 1940s, Prof. Schumpeter searched for finding the strength of the free-market economy to offer us increasingly better-living standards. In his quest, he found the role of entrepreneurs competing to profit from ideas by providing better products at decreasing costs. He argued that technological changes in driving innovations were at the heart of economic growth. In his book Capitalism, Socialism and Democracy, Joseph Schumpeter introduced the notion of an innovation economy. The continued growth leads to offering increasingly better products at decreasing costs to get our jobs done better. This is a core capacity for offering a growing quality of living. As a result, the space of uprising of living standards is determined by the scalability of the growth of the underlying technology core, consequentially innovations.
It has been explained that this scalability is determined by the progress of developing scientific knowledge, its conversion to the advancement of technology, and the application of Engineering for having an optimum solution. Theorization of economic growth distilled from entrepreneurship and innovation is the subject of Innovation economics.
Economics of Innovation and Consumer Preferences
Consumers extract value from the consumption or deployment of products. Neoclassical economics term it as a utility to measure pleasure or satisfaction. Consumers have a number of preferences to extract utility. They distribute scarce resources, whether money or time, to extract the varying amount of utility from each of the preferences. The objective has been to maximize the satisfaction from the consumption of a set of products. For example, we extract utility from watching TV. But that does not mean that we keep investing all our time to watch. Similarly, we often confront the choices of whether to watch TV or to have asleep. Human beings make decisions for the consumption of varying quantities of different products to maximize the total utility from the set of choices.
The amount of utility we extract through the consumption of products in a certain period of time often influences or determines our living standards. To improve our standard of living, we are looking for better quality products and also new products. Better quality products lead to increasing value extraction from each amount of resources, whether time, effort, or money. On the other hand, a growing number of products offer us more options to increase total utility extraction. Therefore, our challenge is to provide successive better versions of existing products, preferably at the same or lower price. On the other hand, we should offer new products to get emerging jobs done for opening new windows of utility extraction. But how can we succeed in making existing products better as well as cheaper, and offer new products?
To address this challenge, we keep adding new features and improving existing features of incumbent products and introducing new ones. Innovations of products (and also processes) lead to the expansion of consumption set. It also enhances the utility creation capacity of each option. As a result, consumers find the opportunity of extracting more utility by spending the same amount of resources than before.
Innovation faces the law of diminishing marginal utility
The law of diminishing marginal utility states that if all else remains the same, as product features increase as well as improves, the marginal utility derived from each additional feature or improvement of the existing feature declines. Marginal utility is the change in utility as an additional unit of new feature or improvement of existing features is consumed. For example, the utility of the usage of smartphones has been increasing. This improvement of utility extraction is increasing due to the addition of new features and also due to the improvement of existing features. But they face the law of diminishing marginal utility. The utility of smartphones neither keeps increasing linearly due to the additional features nor due to the advancement of existing features. For example, increasing screen size does not keep improving utility proportionately. Therefore, the effect of diminishing marginal utility influences design decisions.
Knowledge, Ideas, and Engineering of Features
Ideas are for either adding new features to incumbent products or improving existing features. We need the knowledge to feed the creative process of producing those ideas. Engineering plays a critical role in advancing the knowledge to feed the creative process, and most importantly, to make optimum design decisions for implementing ideas effectively and efficiently. In the absence of engineering, the journey of innovating saturates rapidly. Moreover, engineering also plays a vital role in designing and improving production processes to produce copies of innovation cost-effectively. For example, Electrical and Computer Engineering has been a source of knowledge for fueling the creative process of generating ideas. And its role has been vital for designing the optimum implementation of ideas, for both improving products and processes.
The tradeoff between ideas, consumer preferences, and competing offerings
The technical feasibility of adding new features or improving existing alone does not lead to innovation decisions. Consumer preferences play an important role. The ultimate objective is to contribute to marginal utility. The utility of a feature or its improvement depends on the individuals or users, the purposes to be served, and the situation in which they will be served. For example, the large screen size of smartphones contributes to the utility of watching movies. But the same large screen size is inconvenient to make quick phone calls while walking on the street. Such practicality demands us to optimize engineering design decisions upon considering consumer preferences of using target features in preferred situations. Moreover, competing offerings also influence engineering design decisions. Therefore, designing a cost-effective solution is not always preferred to succeed in the market.
Value creation, willingness to pay, and value extraction challenges Engineering Economics for Innovation Economy
There is a cost of creating additional value or utility through innovation, either through the addition of new features, improving existing ones, or introducing new products. Engineering plays a vital role in implementing an idea at a minimum cost. The perceived value often influences the willingness to pay. How to figure out the contribution of a feature to marginal utility or perceived value, consequential incremental growth of willingness to pay, is a challenge to profit from ideas. However, the value that producers can extract from consumers not only depends on the delivery of value. It also depends on the offerings from the competitors. Competing offerings significantly influence the number of units that could be sold at a price point.
Therefore, the success of innovation in a competitive market not only depends on ideas and engineering ability to implement them for advancing utility in a cost-effective manner but, most importantly, on the competition force. For this reason, conventional engineering economics is not sufficient to make design decisions for innovation. It should consider the response of competition affecting the value extraction callability from the engineered innovative ideas.
For example, the well-engineered Nokia phones failed to keep extracting value due to the emergence of the iPhone. Similarly, the price-setting or value extraction capability of Samsung for its smartphones depends on offerings from Apple, Oppo, or Vivo. On the other hand, the design decision of 3rd party plugins like apps made a significant contribution to Apple’s ability to extract value from the iPhone.
Engineering Economics for Innovation Economy is more than Cost-Effectiveness
Engineering economics for innovation economy is more than taking optimal decision decisions for cost-effective implementation of technologies. It should consider customer preferences and, most importantly, value extraction capability influenced by the competition. The dynamics of the market economy affecting the trade of ideas as product features should be taken into consideration in making design decisions. Otherwise, even well-engineered products run the risk of failing to extract the desired value from the market. In addition to maximizing value creation through optimum design decisions by considering economic principles, engineering economics for innovation economy must consider the dynamics of the market affecting the value extraction. Therefore, Engineering Economics for Innovation Economy is vital for succeeding in trading ideas in this globally competitive economy.
