Mapping the Telecom Value Chain - A Roadmap for Communications Networks

Mapping the Telecom Value Chain: A Roadmap for Communications Networks Strategic Business System Design And Technology Roadmapping 1. Fruit Flies & Temporary Advantage 2. Supply Chain Design & 3-DCE 3. eBusiness Phenomena: Business Model Innovation 4. Technology Roadmapping: A telecom example Cisco’s End-to-End Integration for its Fulfillment Supply Chain • New product development on-line with supply base • Technology Supply Chain Design: Innovation through Acquisition Customers Order info flows direct to Cisco and suppliers Cisco Finished Product flows direct to customer via logistics supplier Contract Manufacturers • Single enterprise information system • Dynamic replenishment, direct fulfillment, merge in transit • Customer orders through Cisco Connection online Component Suppliers & Distributors Basic Design Principle: Arm’s length Relationship with Fulfillment Chain Partners Value Chain Design in a Fast-Clockspeed World: Study the Industry Fruitflies Evolution in the natural world: FRUITFLIES evolve faster than MAMMALS evolve faster than REPTILES THE KEY TOOL: Cross-SPECIES Benchmarking of Dynamic Forces Evolution in the industrial world: INFOTAINMENT is faster than MICROCHIPS is faster than AUTOS evolve faster than AIRCRAFT evolve faster than MINERAL EXTRACTION THE KEY TOOL: Cross-INDUSTRY Benchmarking of Dynamic Forces Cisco’s Strategy for Technology Supply Chain Design 1.Integrate technology around the router to be a communications network provider. 2. Leverage acquired technology with - sales muscle and reach - end-to-end IT - outsourced manufacturing - market growth 3. Leverage venture capital to supply R&D Basic Design Principle: Acquisition Relationship with Technology Chain Partners Volatility Amplification in the Supply Chain: “The Bullwhip Effect” Customer Retailer Distributor Information lags Delivery lags Over- and underordering Misperceptions of feedback Lumpiness in ordering Chain accumulations Factory Tier 1 Supplier Equipment SOLUTIONS: Countercyclical Markets Countercyclical Technologies Collaborative channel mgmt. (Cincinnati Milacron & Boeing) LESSONS FROM A FRUIT FLY: CISCO SYSTEMS 1. KNOW YOUR LOCATION IN THE VALUE CHAIN 2. UNDERSTAND THE DYNAMICS OF VALUE CHAIN FLUCTUATIONS 3. THINK CAREFULLY ABOUT THE ROLE OF VERTICAL COLLABORATIVE RELATIONSHIPS 4. INFORMATION AND LOGISTICS SPEED DO NOT REPEAL BUSINESS CYCLES OR THE BULLWHIP. INDUSTRY CLOCKSPEED IS A COMPOSITE: OF PRODUCT, PROCESS, AND ORGANIZATIONAL CLOCKSPEEDS Mobile Phone INDUSTRY CLOCKSPEED THE Mobile Phone product technology THE Mobile Phone PRODUCTION PROCESS process technology THE Mobile Phone MANUFACTURING COMPANY organization Mobile Phone System CLOCKSPEED is a mix of Transmission Standards, Software and Handsets Mobile Phone System TRANSMISSION STANDARD slow clockspeed SOFTWARE APPLICATIONS HAND SET medium clockspeed OPERATING SYSTEM slow clockspeed SERVICES fast clockspeed fast clockspeed ISSUE: THE FIRMS THAT ARE FORCED TO RUN AT THE FASTEST CLOCKSPEED ARE THE MOST LIKELY TO STAY AHEAD OF THE GAME. Clockspeed drives Business Strategy Cadence Dynamics between New Projects and Core Capability Development: PROJECTS MUST MAKE MONEY AND BUILD CAPABILITIES CORE CAPABILITIES NEW PROJECTS (New products, new processes, new suppliers) The Strategic Leverage of Value Chain Design: Who let Intel Inside? 1980: IBM designs a product, a process, & a value chain Customers Intel IBM Intel Inside Microsoft The Outcome: A phenomenonally successful product design A disastrous value chain design (for IBM) LESSONS FROM A FRUIT FLY: THE PERSONAL COMPUTER 1. BEWARE OF INTEL INSIDE (Regardless of your industry) 2. MAKE/BUY IS NOT ABOUT WHETHER IT IS TWO CENTS CHEAPER TO OUTSOURCE 3. VALUE CHAIN DESIGN CAN DETERMINE THE FATE OF COMPANIES AND INDUSTRIES, AND OF PROFIT AND POWER 4. THE LOCUS OF VALUE CHAIN CONTROL CAN SHIFT IN UNPREDICTABLE WAYS Vertical Industry Structure with Integral Product Architecture Computer Industry Structure, 1975-85 IBM DEC BUNCH All Products All Products All Products Microprocessors Operating Systems Peripherals Applications Software Network Services Assembled Hardware Horizontal Industry Structure with Modular Product Architecture Computer Industry Structure, 1985-95 Intel Intel Microprocessors Operating Systems Peripherals Applications Software Network Services Assembled Hardware Mac Moto Microsoft HP IntelEpson Microsoft Mac Mac Seagate Lotus Novell AOL/Netscape Microsoft HP Compaq IBM Dell TI etc etc AMD Unix TIetc etcetc etc EDS etc etc etc etc Double Helix Model Applied to the Optical Value Chain AT&T 1995 RBOCS 1980’s INTEGRAL PRODUCT VERTICAL INDUSTRY PRESSURE TO DIS-INTEGRATE Nortel 2001 MODULAR PRODUCT HORIZONTAL INDUSTRY Cisco 1990’s INCENTIVE TO INTEGRATE Corning 1999 THE DOUBLE HELIX IN OTHER INDUSTRIES • TELECOMMUNICATIONS-- – “MA BELL” was Vertical /Integral – BABY BELLS & LONG LINES & CELLULAR are Horizontal/Modular – Today’s Verizon is going back to Vertical /Integral • AUTOMOTIVE-- – Detroit in the 1890’s was Horizontal/Modular – Ford & GM in the mid 1900’s were Vertical /Integral – Today’s Auto Industry is going back to Horizontal/Modular • TELEVISION-- – RCA was Vertical /Integral – 1970’S THROUGH 1990’S were Horizontal/Modular – Today’s media giants are going back to Vertical /Integral • BICYCLES-- – Safety Bikes to 1890’s boom to Schwinn to Shimano Inside TELECOMS: IN THE BEGINNING, THERE WAS VERTICAL INTEGRATION AND MARKET POWER IN FR AS TR UC TU RE CO N E T N T VOICE COMMUNICATION T & AT TELEPHONE NETWORK VIDEO ENTERTAINMENT CORPORATE DATA & er s s st r to dca a r a e o p , O Br M e rk B l b o I a w C et N CABLE & BROADCAST NETWORKS D , C E DATA NETW0RKS E . C T IP BEGAT CONVERGENCE & LOSS OF MARKET POWER THE HOURGLASS N ephe CO ow (H FR E R ) U ? C T Co C U OI > R T ve R S A ie to N I ow (H SHOPPING, PORTALS, SEARCH, MUSIC, VIDEOS, JOKES, CHAT, EMAIL, PORNOGRAPHY, DATA, ETC., ETC. h ac IP IP A DE INF LLO VE RA W LO ST S PE RU CO N D IN CTU TEN DE RE T PE T AN ND O D EN BE TL Y T l?) N ra E e T m FIBER OPTIC NETWORKS, CABLE MODEMS, DSL CONNECTORS, SWITCHING SUBSTATIONS, ETC., ETC. Controlling the Chain Through Distribution: The End of P&G Inside ? • • Controlling the Channel Through Closeness to Customers: consumer research, pricing, promotion, product development Customers Retailer Retailer Retailer P&G Controlling the Chain Through Distribution: Beware of Walmart Outside Controlling the Channel Through Closeness to Customers: Chain Proximity Customers WalMart Retailer Retailer P&G Retailer WalMart Private Label Vertical Growth on the Double Helix Clockspeed Amplification in “The Speedup Effect” Appendix Phone & Internet Consumer Value Chain Analysis Service Provider (AOL, ATT) Equipment Maker Component Maker Hypothesis:Clockspeeds accelerate as you head downstream, closer to the final customer Volatility Amplification in “The Bullwhip Effect” and Clockspeed Amplification in “The Speedup Effect” Customer Retailer Distributor Factory Tier 1 Equipment Inventories & Orders fluctuate more as you look upstream, tough on suppliers, but New Phone Applications Handset Platforms Telecom Equipment Optical Components Clockspeeds accelerate as you head downstream, closer to the final customer Media Supply Chains: An Industry at Lightspeed Customers The box Wired Phone Wireless phone PC/laptop PDA Television VCR Pager r The Content The Pipe (Access, Metro, Backbone) Land-basedTelco: -copper POTS -fiber -DSL Cable Networks Wireless: -broadcast TV -CDMA, TDMA, GSM -satellite/microwave Retail Outlets -Borders: -Blockbuster -Seven-Eleven Delivery (e.g., Fedex) Video/Audio: Movies & Art & News & Sports News/articles/books (newspapers & magazines) Communication: voice & video & email Banking Education Shopping Internet, et al ALL COMPETITIVE ADVANTAGE IS TEMPORARY Autos: Ford in 1920, GM in 1955, Toyota in 1990 Computing: IBM in 1970, DEC in 1980, Wintel in 1990 World Dominion: Greece in 500 BC, Rome in 100AD, G.B. in 1800 Sports: Bruins in 1971, Celtics in 1986, Yankees no end The faster the clockspeed, the shorter the reign Strategic Business System Design And Technology Roadmapping 1. Fruit Flies & Temporary Advantage 2. Supply Chain Design & 3-DCE 3. eBusiness Phenomena: Business Model Innovation 4. Telecom Value Chains: A fruit fly example VALUE CHAIN DESIGN: Three Components 1. Insourcing/OutSourcing (The Make/Buy or Vertical Integration Decision) 2. Partner Selection (Choice of suppliers and partners for the chain) 3. The Contractual Relationship (Arm’s length, joint venture, long-term contract, strategic alliance, equity participation, etc.) IMPLEMENTATION OF VALUE CHAIN DESIGN: EMBED IT IN 3-D CONCURRENT ENGINEERING PRODUCT Performance Specifications Recipe, Unit Process PROCESS Technology, & Process Planning Details, Strategy Product Architecture, Make/Buy components Time, Space, Availability Manufacturing System, Make/Buy processes VALUE CHAIN ARCHITECTURES IN 3-D INTEGRALITY VS. MODULARITY Integral product architectures feature close coupling among the elements - Elements perform many functions - Elements are in close spacial proximity - Elements are tightly synchronized - Ex: jet engine, airplane wing, microprocessor Modular product architectures feature separation among the elements - Elements are interchangeable - Elements are individually upgradeable - Element interfaces are standardized - System failures can be localized Ex: stereo system, desktop PC, bicycle - VALUE CHAIN ARCHITECTURE Integral value-chain architecture features close proximity among its elements - Proximity metrics: Geographic, Organizational Cultural, Electronic - Example: Toyota city - Example: Ma Bell (AT&T in New Jersey) - Example: IBM mainframes & Hudson River Valley Modular value-chain architecture features multiple, interchangeable supplier and standard interfaces - Example: Garment industry - Example: PC industry - Example: General Motors’ global sourcing - Example: Telephones and telephone service DESIGNING ARCHITECTURES FOR PRODUCTS & VALUE CHAINS: THE NEED FOR ALIGNMENT VALUE CHAIN ARCHITECTURE (Geog., Organ., Cultural, Elec.) INTEGRAL PRODUCT Jet engines ARCHITECTURE Microprocessors INTEGRAL Mercedes vehicles Automotive Supplier Parks MODULAR MODULAR Polaroid Lucent, Nortel Personal Computers Bicycles Chrysler Vehicles Cisco DESIGNING ARCHITECTURES FOR PRODUCTS & VALUE CHAINS: MODULARITY VS. OPENNESS ARCHITECTURAL PROPRIETARINESS CLOSED ARCHITECTURAL STRUCTURE Pentium Chip INTEGRAL MODULAR Mercedes Vehicles SAP ERP IBM Mainframes Microsoft Windows Chrysler Vehicles OPEN Linux Palm Pilot software & accessories Phones & service Web-based ERP INFORMATION ARCHITECTURE MUST REFLECT BUSINESS MODEL In/Outsourcing: Sowing the Seeds of Competence Development to develop dependence for knowledge or dependence for capacity Independence Dependence + Amount of Work Outsourced knowledge +/or supply Supplier Capability + Amount of Supplier Learning + Amount of Work Done In-house + knowledge +/or supply Internal Capability + + Amount of Internal Learning Strategic Business System Design And Technology Roadmapping 1. Fruit Flies & Temporary Advantage 2. Supply Chain Design & 3-DCE 3. eBusiness Phenomena: Business Model Innovation 4. Telecom Value Chains: A fruit fly example Technology Dynamics in the Aircraft Industry: LEARNING FROM THE DINOSAURS + Japanese appeal as subcontractors U.S. firms’ appeal as subcontractors + + Boeing outsources Japanese Industry Autonomy to Japan (Mitsubishi Inside?) + Japanese industry size & capability + - U.S. industry size & capability SOURCEABLE ELEMENTS PROCESS ELEMENTS ENGINEERING CONTROLLER ASSY VALVETRAIN TEST BLOCK SUBSYSTEMS I4 V6 V8 PRODUCTS ITEM IS INTEGRAL ITEM IS MODULAR Strategic Make/Buy Decisions: Assess Critical Knowledge & Product Architecture DEPENDENT FOR KNOWLEDGE & CAPACITY A POTENTIAL OUTSOURCING TRAP WORST OUTSOURCING SITUATION INDEPENDENT FOR KNOWLEDGE & DEPENDENT FOR CAPACITY BEST OUTSOURCING OPPORTUNITY CAN LIVE WITH OUTSOURCING INDEPENDENT FOR KNOWLEDGE & CAPACITY OVERKILL IN VERTICAL INTEGRATION BEST INSOURCING SITUATION Strategic Make/Buy Decisions: Also consider Clockspeed & Supply Base Capability Clockspeed Clockspeed Fast Slow Clockspeed Fast Slow Few Many OK Fast Slow Few Many Clockspeed Suppliers or Few Many W Suppliers INTEGRAL st Watch it! Fast Slow Suppliers OK Be s Few Many Ou t t Fast Slow Clockspeed Suppliers Tr ap Few Many Suppliers DECOMPOSABLE (Modular) Clockspeed INDEPENDENT FOR KNOWLEDGE & CAPACITY Be Suppliers Ove st Few Many k rIn ill DEPENDENT FOR CAPACITY ONLY DEPENDENT FOR KNOWLEDGE & CAPACITY Fast Slow Qualitative analysis of strategic importance uses five key criteria Value chain elements with high customer importance and fast clockspeed are generally strategic (unless there are many capable suppliers) ‹ Competitive position is seldom the primary consideration for strategic importance, rather it serves as a “tie-breaker” when other criteria are in conflict Competitive ‹ Customer Importance: • High • Medium • Low Technology Clockspeed: • Fast • Medium • Slow ‹ ‹ When many capable suppliers exist, knowledge may be considered commodity and development should be outsourced Position: • Advantage • Parity • Disadvantage Architecture is considered a constraint for the sourcing decision model, controls the level of engineering that must be kept in house for integration purposes Capable Suppliers: • None • Few • Many Architecture: • Integral • Modular Possible Decisions (Knowledge & Supply): • Insource • Outsource • Partner/Acquire • Partial Insource • Partial Outsource • Invest • Spin Off • Develop Suppliers Every decision requires qualitative and quantitative analysis to reach a conclusion High Knowledge Supply Qualitative Value Strategic Importance Qualitative Model Improve Economics Divest/ Outsource Customer Importance: • Hig h • Med ium • Low Competitive Position: • Ad vantage • Parity • Disa dva nta ge Low Quantitative Value Capable Suppliers: • No ne • Few • Many Possible Decisions: High Insource Outsource Partner/Acquire Partial Insource Partial Outsource Invest Spin Off Develop Suppliers Engine A EVA Engines EVA PBIT EVA AS-IS BIC AS-IS BIC AS-IS Capital Charge Net Assets BMK Working Capital +. WACC BMK BIC X AS-IS −. AS-IS AS-IS COGS BMK Taxes . . . Transmissions EVA AS-IS BIC BIC AS-IS Engine B EVA GMPT EVA Revenue −. NOPAT BIC • • • • • • • • AS-IS • In teg ral • Modular AS-IS BMK BIC Architecture: AS-IS • Fas t • Medium • Slow Harvest Investment Low Technology Clockspeed: Invest & Build Fixed Assets Quantitative Model (Financial) Value Chain Mapping Organizational Supply Chain Chrysler casting supplier Eaton clay supplier Technology Supply Chain engines valve lifters casting manufacturing process clay chemistry Capability Chain Supply Chain Management Quality assurance NVH engineering Underlying Assumption: You have to draw the maps before you can assess their dynamics. R&D VALUE CHAIN DESIGN IS THE ULTIMATE CORE COMPETENCY Since all advantages are temporary, the only lasting competency is to continuously build and assemble capabilities chains. KEY SUB-COMPETENCIES: 1. Forecasting the dynamic evolution of market power and market opportunities 2. Anticipating Windows of Opportunity 3. 3-D Concurrent Engineering: Product, Process, Value Chain CAPABILITIES Fortune Favors the Prepared Firm PROJECTS PROCESS FOR VALUE CHAIN DESIGN 1. Benchmark the Fruit Flies DOUBLE HELIX 2. Map your Supply Chain -Organizational Value Chain BOEING -Technology Value Chain -Competence Chain 3. Dynamic Chain Analysis at each node of each chain map 4. Identify Windows of Opportunity 5. Exploit Competency Development Dynamics with 3-D Concurrent Engineering CAPABILITIES PROJECTS STRATEGY IN 3-D: CASE EXAMPLES Boeing: Static 3-D in airplane Projects Dynamic, Strategic Value Chain, unintegrated w/ Product & Process Intel: Modular Product vs. Process Integral Process and Value Chain Chrysler: Modular Product & Value Chain (weak on process?) Toyota: Integral 3-D in Nagoya (weak on global 3-D?) Strategic Business System Design And Technology Roadmapping 1. Fruit Flies & Temporary Advantage 2. Supply Chain Design & 3-DCE 3. eBusiness Phenomena: Business Model Innovation 4. Telecom Value Chains: A fruit fly example Internet Era Phenomena: eCompetition in Business Model Innovation E-tailing: Benchmarking the eFlies Attack: Amazon, Webvan Market disruption in hopes of making a place Defend: Walmart.com, Ford.com Defense can require costly SC revamping B2B: E2E integration: Cisco, Dell Integration pays off with modular products Marketplace Creation: Freemarkets Reverse auctions reduce short term costs Covisint Common standards reduced supplier investment cost Free & Open Digital Content: Peer-toPeer Sharing/Theft: Napster Industry-shaking disruptions require value chain SWAT team DOT.COM COMPETITION: FOCUS ON THE SUPPLY CHAIN CASE#1: WALMART.COM GOT NO TRACTION Customers Walmart Store Walmart Store Shipper Walmart.com Supplier WalMart Procurement Supplier Alternate Solution: Partner with UPS or Fedex DOT.COM COMPETITION: FOCUS ON THE SUPPLY CHAIN Napster’s New Supply Chain Strategy (go to the end and steal everything!) Identify Talent Develop Songs Napster Vertically Integrated Music Giants Record Music Promote Music Steal Songs Alternate Solution: partner with your competitor Press CD’s Sell to Retail Customer Consumption Strategic Business System Design And Technology Roadmapping 1. Fruit Flies & Temporary Advantage 2. Supply Chain Design & 3-DCE 3. eBusiness Phenomena: Business Model Innovation 4. Technology Roadmapping: A telecom example Sample Optical Network Value Chain: Layers & Players Access Provider Network Mgmt/Maintenance Network Owner Network Construction/install Network Design Network Elements Control Software Box Assembly Modules Actives Passives Fiber Silicon GaAs InP AT&T AT&T Level 3 Nortel Nortel Nortel Nortel Nortel Nortel Nortel Corning Intel Vitesse RF MD Sprint Williams Verizon Fluor Alcatel Lucent Cisco Flextronics JDSU JDSU Lucent Broadcom Hittite TRW etc. etc. etc. etc. etc. etc. etc. etc. etc. etc. etc. etc. etc. etc. OPTICAL VALUE CHAIN: MINI CASE EXAMPLE NORTEL NETWORKS plays at at least three levels of the Optical Network Telecom value chain: 1. Network design & installation 2. Modules (OC-192 network elements) 3. Components (lasers, amplifiers) QUIZ: Should Nortel sell their components business? Hint: How likely are the scenarios of: - An Intel Inside effect in components? - Networks become sufficiently modular as to be assembled by the customer? Roadmap for Electronic Devices Number of chip components 295oK 1018 Classical Age 1016 Quantum Age 77oK 1014 4oK 2010 SIA Roadmap 2005 Quantum State Switch 2000 1995 1012 1010 108 Historical Trend 1990 6 10 1980 104 CMOS 1970 102 101 100 10-1 Feature size (microns) 10-2 10-3 International Technology Roadmap for Semiconductors ‘99 Year 2005 2008 2011 2014 Technology (nm) 100 70 50 35 DRAM chip area (mm2) 526 603 691 792 DRAM capacity (Gb) 8 64 MPU chip area (mm2) 622 713 817 937 MPU transistors (x109) 0.9 2.5 7.0 20.0 MPU Clock Rate (GHz) 3.5 6.0 10.0 13.5 Moore’s Law Transistors per chip 109 ? 108 Pentium 80786 Pro 107 80486 Pentium 106 80386 80286 105 8086 8080 104 4004 103 1970 1975 1980 1985 1990 Year 1995 2000 2005 2010 Disk Drive Development 1978-1991 Disk Drive Dominant Generation Producer 14” 8” IBM Dominant Usage Approx cost per Megabyte mainframe $750 Quantum Mini-computer $100 5.25” Seagate Desktop PC $30 3.5” Conner Portable PC $7 2.5” Conner Notebook PC $2 From 1991-98, Disk Drive storage density increased by 60%/year while semiconductor density grew ~50%/year. Disk Drive cost per megabyte in 1997 was ~ $ .10 Optical Networking is Keeping Up! Capacity Voice growth OC192 OC768 OC48 OC12 Time TDM line rate growth Data growth Optical network capacity growth ”Killer Technologies” of the Information Age: Semiconductors, Magnetic Memory, Optoelectronics “We define a ‘killer technology’ as one that delivers enhanced systems performance of a factor of at least a hundred-fold per decade.” Killer Question: Will Integrated Optics evolve linearly like Semiconductors with Moore’s Law or like Disk Drives with repeated industry disruptions? Example Concept for Integrated Photonics Chip Dr. Gale Petrich, MIT Microphotonics Center Wireless Value Chain & clockspeeds Hardware (Nokia, Moto, Palm, HP) fast C U S T O M E R Device fast O/S (Palm, Windows, Psion) slow Applications (phone, PDA, etc.) medium Standard (CDMA, GSM, etc.) medium Access Equipment (Nortel, Ericcson, etc. medium Provider (ATT, Cingular, Network Design (Sonet, ATM, IP) slow Vodaphone, AOL) Content fast (Yahoo, Quicken, IM, M-commerce, VoiceCommunic Product/Service packages fast WIRELESS VALUE CHAIN:MINI CASE EXAMPLE Wireless Base Stations (WSB’S) comprise 4 key subsystems: Radio Part Digital Signal Processing Modem WSB architectures are -integral & proprietary Suppliers include: Nortel, Moto, Ericsson, Siemens, Nokia Disruptive Modem advances (e.g., MUD) can double Base Station Capacity Transmission Interface Fiber & WireBased Network Modular WSB’s might (1) Stimulate new WSB entrants (ala Dell) (2) Stimulate standard subsystem suppliers (3) lower prices to the network operators (4) Speed base station performance imp. (5) Increase demand for basestations due to improved price-performance ratios. Value Chain of Mobile Virtual Network Operator (MVNO) Integrated Spectrum & Radio Infrastructure Less Integrated Switches Authentication Center Distinct Number Series SIM Cards Billing, Customer Service Sales & Marketing MVNO: MVNO: - -Does Doesnot nothave haveSpectrum Spectrum&&Radio RadioInfrastructure Infrastructure - -Needs Needsaahost hostnetwork network - -Has at least Billing, Has at least Billing,Customer CustomerService, Service,Sales Sales and Marketing and Marketing All Conclusions are Temporary Clockspeeds are increasing almost everywhere Telecoms exhibits fast clockspeed & high volatility Telecom Technology is a clockspeed driver Value chain design is a key competency Study of Fruit Flies can help with crafting strategy