On conducting simultaneous versus sequential engineering activities in risky R&D

We consider development projects in which the activities can be classified in two types: uncertainty resolving R&D efforts that accumulate in the form of knowledge to eventually give rise to a discovery; and routine technical investments which aim at improving the profitability of the project once the discovery has been made. The advantage of initiating routine preparatory activities prior to the achievement of a technological break-through in such projects, sometimes termed as ‘concurrent engineering’, is analyzed within a suitable dynamic optimization framework. The optimal double expenditure policy is compared with the conservative delayed investment policy, under which all the routine engineering activities are delayed until the risky R&D efforts culminate in a breakthrough. A criterion for the optimality of the latter policy is developed on the basis of the probability distribution of the discovery date. The application of the criterion is illustrated for a variety of specifications regarding the uncertainty associated with the R&D process. We find that simultaneous investment is the optimal policy for a large class of probability distributions. However, if the conditional probability of immediate discovery is always below some critical value, it is optimal to delay the preparatory activities until the discovery.