Economic Systems Analysis and Assessment

Intensive Systems, Organizations,and Enterprises

Andrew P. Sage, William B. Rouse

• Publisher: Wiley-Interscience
• Year: 2011
• ISBN:
  9781118015483
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Electrical Engineering & Telecommunications
• Index: Technology & Engineering

An Authoritative Introduction to a Major Subject in Systems Engineering and Management

This important volume fills the need for a textbook on the fundamentals of economic systems analysis and assessment, illustrating their vital role in systems engineering and systems management. Providing extensive coverage on key topics, it assumes no prior background in mathematics or economics in order to comprehend the material.

The book is comprised of five major parts:

• Microeconomics: a concise overview that covers production and the theory of the firm; theory of the consumer; market equilibria and market imperfections; and normative or welfare economics, including imperfect competition effects and consumer and producer surplus
  
  

• Program Management Economics: discusses economic valuation of programs and projects, including investment rates of return; cost-benefit and cost-effectiveness analysis; earned value management; cost structures and estimation of program costs and schedules; strategic and tactical pricing issues; and capital investment and options
  
  

• Cost Estimation: reviews cost-estimation technologies involving precedented and unprecedented development, commercial-off-the-shelf (COTS) software, software reuse, application generators, and fourth-generation languages
  
  

• Strategic Investments in an Uncertain World: addresses alternative methods for valuation of firms including Stern Stewart's EVA, Holt's CFROI, and various competing methodologies
  
  

• Contemporary Perspectives: covers ongoing extensions to theory and practice that enable satisfactory treatment of the increasing returns to scale, network effects, and path-dependent issues generally associated with contemporary ultra-large-scale telecommunications and information networks
  
  

Also discussed in this comprehensive text are normative or welfare economics and behavioral economics; COCOMO I and II and COSYSMO as examples of a cost model; and options-based valuation models and valuation of information technology intensive enterprises.

Economic Systems Analysis and Assessment serves as an ideal textbook for senior undergraduate and first-year graduate courses in economic systems analysis and assessment, as well as a valuable reference for engineers and managers involved with information technology intensive systems, professional economists, cost analysts, investment evaluators, and systems engineers.

CHAPTER 1

INTRODUCTION TO ECONOMIC SYSTEMS ANALYSIS AND ASSESSMENT: COST, VALUE, AND COMPETITION IN INFORMATION AND KNOWLEDGE INTENSIVE SYSTEMS, ORGANIZATIONS, AND ENTERPRISES

1.1 INTRODUCTION

This book is about one of the fundamental concerns in the engineering and management of systems of all types, and especially those with a major telecommunications and information network focus: the economic behavior of these systems. We discuss the very important role of economics in shaping our lives and designing our activities and institutions to achieve economic (and other) objectives. The purpose of this book is to present those fundamentals of classic and modern microeconomic systems analysis and assessment that are most necessary in the engineering and management of systems of machines, humans, and organizations that are effective and efficient, and equitable as well. We desire to equip ourselves to answer three fundamental questions:

1. What should be produced and how much of it should be produced?

2. How should the goods be produced?

3. Who should get the goods and services that are produced?

The first of these questions relates to effectiveness, the second to efficiency, and the third to equity concerns. There are a number of related concerns. Many other questions, and their answers, are also important. We are generally concerned with why, where, and when artifacts as well as what, how, and who. For example, we surely wish to ensure sustainability, by preserving the natural resource basis to enable continued satisfaction of human needs in an equitable manner over time. There are also issues that affect marketing of our products, as well as with research and development to enable the production of innovative products (and services). Thus, we wish to examine a plethora of issues associated with the engineering of economic systems.

This chapter will provide an overview of our undertakings. We will first summarize a framework for systems engineering and illustrate the important role of the economics of a firm in maximizing profits and that of the economics of the consumer in maximizing satisfaction by allocating resources, all within the constraints of finite resources. Then we will provide an introductory discussion of the microeconomics of firms and consumers operating together in various markets. Our presentation will stress the information base and other conditions necessary to ensure what we will call a perfectly competitive economy.

These conditions will, as will be apparent, typically not prevail. Various distortions from perfect competition will then result. Our discussions will concern normative economics—how individuals and organizations should ideally behave from an axiomatic perspective to best achieve identified objectives. We will also discuss descriptive economics—how individuals and organizations actually behave. Finally, we will discuss prescriptive economics—how individuals and organizations should behave in realistic settings. This chapter provides a relatively detailed outline of this work and our objectives in writing it.

1.2 A FRAMEWORK FOR SYSTEMS ENGINEERING AND MANAGEMENT

A central purpose of systems engineering is to assist clients in organizing knowledge that contributes to the efficiency, effectiveness, equity, and explicability of decisions and associated resource allocations. Systems engineering methodology provides a framework for the formulation, analysis, and interpretation of issues and problems that lead to the resolution of issues of large scale and scope. Within this framework, content, concepts, and methods are selected. The systems process, in which client(s) and analyst(s) cooperate to establish useful policies, plans, or designs, involves three fundamental steps:

1. Formulation of the issue or problem,

2. Analysis of the (impacts of) alternatives, and

3. Interpretation of results for the value systems of relevant stakeholders, thereby leading to the evaluation and prioritization of alternatives as well as the selection and implementation of selected alternative(s).

The systems engineering process is typically characterized by

1. a systematic, rational, and purposeful course of action;

2. a holistic approach in which issues or problems are generally examined in relation to their environment, as well as to due attention to the causal or symptomatic, institutional, and value aspects of the issue under consideration; and

3. the eclectic use of methods and knowledge based on the normative theory of systems science and operations research, as well as the behavioral theory of systems and organizational management.

The typical product of a systems engineering study is a plan to implement a decision, or a plan to implement another phase of a systems study that will ultimately result in such a plan. Economic concerns are vital in developing appropriate plans. It is the study of engineering economic systems analysis that is of interest here. This study is all the more valuable if we first embed it within a discussion of the entire systems process.

A very important fundamental concept of systems engineering is that all systems are associated with life cycles. These are of several types: we have a life cycle for the engineering of the system, and another life cycle for the use of the system. Similar to all natural systems that exhibit a birth–growth–aging–death lifecycle, human-made systems also have a life cycle. Generally, this life cycle consists of three essential phases: definition of the requirements for a system, development of the system itself, and deployment of the system in an operating environment. Each of these may be described by a larger number of more fine-grained phases. These three phases are found in all intentional systems evolutionary efforts. Most realistic life-cycle processes comprise more than three phases. One of the major contributions of systems engineering is in adopting an appropriate perspective for the life cycles associated with engineering the system.

This life-cycle perspective should also be associated with a long-term view toward planning for systems evolution, research to bring about any new and emerging technologies needed for this evolution, and a number of activities associated with actual systems evolution, or acquisition. Thus, we see that the efforts involved in the life-cycle phases of definition, development, and deployment need to be implemented across three life cycles that comprise:

• systems planning and marketing;
• research, development, test, and evaluation (RDT&E); and
• systems acquisition or procurement.

We briefly examine these life-cycle phases here. Discussions of the methods for systems engineering are very important. Here we emphasize economic systems analysis and its application to telecommunications and information networks. We emphasize that these discussions would be incomplete if they are not associated with some discussion of systems engineering life cycles, processes, or methodology and the systems management efforts that lead to selection of appropriate processes.

Systems engineering is a management technology to assist and support policy making, planning, decision making, and associated resource allocation or action deployment. Systems engineers accomplish this by quantitative and qualitative formulation, analysis and assessment, and interpretation of the impacts of action alternatives on the needs perspectives, the institutional perspectives, and the value perspectives of their clients or customers.

The key words in this definition are formulation, analysis and assessment, and interpretation, which form an integral part of systems engineering. We may exercise these in a formal sense, or in an experientially based intuitive sense. These are the components comprising a structural framework for systems methodology and design. We need a guide to formulation, analysis and assessment, and interpretation efforts, and systems engineering provides this through embedding these three steps into life cycles, or processes, for systems evolution.

Systems management and integration issues are of major importance in determining the effectiveness, efficiency, and overall functionality of systems designs. To achieve a high measure of functionality, it must be possible for a systems design to be efficiently and effectively produced, used, maintained, retrofitted, and modified throughout all phases of a life cycle. This life cycle begins with need conceptualization and identification, through specification of systems requirements and architectures, to ultimate systems installation, operational implementation, evaluation, and maintenance throughout a productive lifetime.

For our purposes, we may also define systems engineering as the definition, design, development, production, and maintenance of functional, reliable, and trustworthy systems within cost and time constraints. It is generally accepted that we may define things according to

• structure,
• function, or
• purpose.

Often, definitions are incomplete if they do not address structure, function, and purpose. Our continued discussion of systems engineering will be assisted by the provision of a structural, functional, and purposeful definition of systems engineering as follows:

Structure. Systems engineering is an appropriate combination of methods and tools, made possible through a suitable methodology and systems management procedures, in a useful process-oriented setting that is appropriate for the resolution of real-world problems, often of large scale and scope.

Function. Systems engineering is a management technology to assist clients through the formulation, analysis and assessment, and interpretation of the impacts of proposed policies, controls, or complete systems on the need perspe...