Course Wrap Up

Technology Strategy Effective strategies address three key problems: How will we Create value? How will we How will we Deliver value? Capture value? And answer seven critical questions: z How will we create value? – How will the technology evolve? – How will the market change? z How will we capture value? – How should we design the business model? – Where should we compete in the value chain? – How should we compete if standards are important? z How will we deliver value? – How do we manage the core business and real growth simultaneously? – How do we use our strategy to drive real resource allocation? I assumed that you knew: z How will we create value? – How will the technology evolve? – How will the market change? z How will we capture value? – How should we design the business model? – Where should we compete in the value chain? – How should we compete if standards are important? z How will we deliver value? – How do we manage the core business and real growth simultaneously? – How do we use our strategy to drive real resource allocation? Thus the course focused on: z How will we create value? – How will the technology evolve? – How will the market change? z How will we capture value? – How should we design the business model? – Where should we compete in the value chain? – How should we compete if standards are important? z How will we deliver value? – How do we manage the core business and real growth simultaneously? – How do we use our strategy to drive real resource allocation? Why have a strategy? 1. To make choices Why have a strategy? 2. To be able to change it The strategic challenge evolves down the S curve Performance Maturity Discontinuity Takeoff Ferment Time The nature of technical work changes Performance We need to be responsive & flexible but controlled Can we make 100,000? And service them? Will it work? Exploration, fun, creativity key Will it work? Exploration, fun, creativity key Time The marketing challenge evolves Performance Stay close to your customer – really close Do we have any reference customers? Who needs this? Who needs this? Time The ways in which a firm captures value also evolve dramatically Performance We may not be leading edge but you’d rather buy from us because… We can sell it, make it, service it, ship it Most of the time Speed, IP Differentiation, Frontier performance key Speed, IP Differentiation, Frontier performance key Time The organizational challenge changes significantly Performance “Coordination & control” critical “Entrepreneurial Energy” critical “Entrepreneurial Energy” critical Time Successful firms thus need several strategies Performance “Mature” Strategy “Takeoff” Strategy “Growth” Strategy “Ferment” Strategy Time How shall we create value? Creating Value: z Understand how technologies will evolve – (Both your own and those on which you rely) z Understand how customer needs will evolve z Develop world class products and services that meet customer needs Tools for value creation z Predicting Technological Change – The Delphi Model – Trend extrapolation z Predicting the Evolution of Customer Needs – Basic segmentation – Crossing the chasm – New technologies, new needs Delphi Models z Ask the experts! – A committee? – Structured questionnaires? z Pros – Field experts are often years ahead of day to day practice: technologies do not “come from no where” z Cons – They sometimes have little knowledge of possible applications – They can be enthusiastic Trend extrapolation: Semiconductors 600 10 9 8 7 400 6 300 5 4 200 3 2 100 1 0 1984 1986 1988 1990 1992 Year 1994 1996 1998 0 2000 # T ran sisto rs (m ) F req u en cy (M Hz ) 500 Frequency (M Hz) # transistors(m) Issues in Trend Extrapolation z z z z Which parameter shall I predict? Do all good things come to an end? Exploring the difference between progress as a result of the passage of time, and progress as the result of returns to effort Predicting progress in complementary technologies Do all good things come to an end? Technological exhaustion Physical limit? Performance Performance is ultimately constrained by physical limits E.g.: Sailing ships & the power of the wind Copper wire & transmission capability Semiconductors & the speed of the electron Time Modeling the returns to effort vs. time Performance Performance may be a non linear function of effort expended: in mature industries more and more effort may lead to less and less progress, while progress in emerging industries may be “surprisingly” fast Effort The Evolution of Markets or Predicting the pattern of customer needs Market Evolution over the Life Cycle z z z Market segmentation Crossing the chasm New markets, new needs: – The Innovator’s Dilemma The Key Question: Who buys a technology as it evolves? Performance Time Understanding market dynamics: Basic segmentation (Rogers) Units Bought Early Majority Late Majority Early Adopters Innovators Laggards Time Adopters differ by, for example, social, economic status -particularly resources, affinity for risk, knowledge, complementary assets, interest in the product Understanding market dynamics: Crossing the chasm: (Moore) Units Bought Crossing the chasm? Early Majority Late Majority Early Adopters Innovators Laggards Time Making the transition from “early adopters” to “early majority” users often requires the development of quite different competencies: e.g. service, support capabilities, much more extensive training. Managing customers at moments of discontinuity Who buys a technology when it is first introduced? Performance New technologies sell to: - New customers - With new needs - Often at lower margins Time Initially, PDAs did not seem to be a threat to PCs: Speed, Power, Memory PCs ? PDAs Time PDAs sold to customers with different needs: Speed, Power, Memory PCs PDAs Weight/cost But as PDAs improve they may come to challenge PCs ? Speed, Power, Memory PCs PDAs Weight/cost Or consumer preferences may change Speed, Power, Memory PCs ? PDAs Weight/cost “Disruptive” technologies may threaten established firms Established technology Performance Mainstream customer needs Invasive Technology Niche customer needs Time Clay Christensen: The Innovator’s Dilemma Managing the change in customer groups may be the hardest task! Performance Leading edge customer focused research may be a critical capability Effort The marketing strategy issue at a major materials supplier: SBU 1 CR&D CR&D $100m Biomaterials work ? SBU 2 The Market SBU 3 ? What can be done? z z z z “Ready, aim, fire” Small scale experiments Virtual products Lead user research } Significant resources required! How shall we capture value? Uniqueness, Complementary Assets & the Structure of the Value Chain Or: What determines the Inventor’s Share? Suppliers Imitators, followers Customers Inventor Is it the case that great ideas = pots of money? Value captured Coca Cola Coca Cola Wal Wal Mart Mart Dell Dell Xerox Xerox (early) (early) Viagra Viagra Nylon Nylon Apple Apple Xerox (late) RC Xerox (late) RC Cola Cola Value created (through “raw” invention) Two key ideas: z Uniqueness – Do great ideas make great riches? • Controlling the knowledge generated by an innovation z Complementary assets – Can we make money without being unique? • Controlling the assets that maximize the profits from innovating Complementary assets are: Available Easy to maintain Uniqueness is: Hard to maintain Tightly held Uniqueness & Complementary Assets over the Life Cycle: Managing discontinuities means managing complementary assets: Maturity Performance Takeoff Discontinuity Which of my complementary assets are useful? Ferment Time Using the model to dive deeper: z Taking advantage of positive feedback to build strong complementary assets: – – – z In marketing & R&D (Calloway) In process technology (Goodyear) In network externalities (Qualcomm, Nokia) Building an understanding of which assets may be available: – – – – Are there spillovers? What is the shape of the learning curve? What is the structure of demand? Do network externalities create value? Managing discontinuities means managing complementary assets: Maturity Performance Takeoff Discontinuity Which of my complementary assets are useful? Ferment Time Power in the Value Chain Porter’s “5 (actually at least 7) Forces”: Thinking about the balance of power “Complementors” Suppliers Suppliers Entrants Entrants Political, regulatory and institutional context Rivals Rivals Buyers Buyers Substitutes Substitutes C.Assets/Uniqueness speak to Rivalry and the Threat of Entry. Entrants Entrants Suppliers Suppliers Rivals Rivals Substitutes Substitutes Buyers Buyers Porter reminds us to think about the structure of the value chain: Entrants Entrants Suppliers Suppliers Rivals Rivals Substitutes Substitutes Buyers Buyers Powerful suppliers and buyers may constrain profitability Suppliers Suppliers Buyers Buyers Does this mean that if the money is down (up) stream we should forwards (backwards) integrate? If the money is in lobster restaurants, should the lobster fisherman go into the restaurant business? Key Questions: z When should an entrepreneurial firm develop it’s own: – – – – z Manufacturing Distribution Sales ….. capabilities? When should a mature firm outsource it’s: – – – – Manufacturing Distribution Sales ….. capabilities? Comparing “make” vs. “buy” Startup Startup Asset Asset Supplier Supplier Key Considerations: z How easy is it to write contracts? – How tight is the IP regime? – How much uncertainty is there? – “Specificity” of the asset – how “thick” is the market? z What will happen to “entrepreneurial energy”? z What will be the key complementary assets going forward? Make vs. Buy over the life cycle Performance Mostly Buy? Mostly Make? ???? ???? Time So “make” (i.e. do it in-house) if: z z There are significant IP worries There are likely to be contractual problems – – – z We can’t be sure of getting the “fair” price We can’t be sure they’ll do the work “right” I.e., when market are “thin” or there is limited information We have unique competencies that are relevant – Or could create them z And if buying won’t destroy everyone’s incentives to be creative and energetic But remember… z z z One cannot “buy” profit – if everyone knows it is there – it will be in the price Besides, shouldn’t we “stick to our knitting”? Wouldn’t you rather deal with an independent firm, whom you could fire, than an internal subsidiary? Make vs. Buy Entrepreneurial Drive, Freedom from the “old ways” Buy? Make? Control & Coordination Standards and Strategy: Competing in Increasingly Open Worlds Thinking about the dynamics of the strategic space Access is: Open Public Details of standards are available to all: no single firm has control over how they evolve: no charge for their use E.g. TCP/IP, HTML Closed Standards are owned and controlled by the public sector but are not freely available E.g. Cryptography Control is: Private Details of standard are made available to all: but owner has control over how the standard evolves and may charge for use E.g. Nintendo, Palm OS Technology may be standard, but details are not made available beyond the firm E.g. Landmark Graphics, IBM 360 In practice these boundaries are fuzzy: Access is: More Open More Public Control is: Linux Symbian IBM 360 CDMA More Private More Closed Windows Mercury/ Corba What do producers prefer? Access is: More Open More Public Control is: More Private More Closed What do customers prefer? Access is: More Open More Public Control is: More Private More Closed If network effects are important, markets may “tip” 1 Probability the next consumer chooses to buy A 0 0 A’s share of installed base 1 Tipping dynamics differ with the strength of network effects Products with extensive N.effects Value to consumer Products with “threshold” network effects Conventional product Actual (or anticipated) size of the installed base Markets with moderate network effects only tip once critical thresholds are reached 1 Probability the next consumer chooses to buy from Firm A 0 1 Firm A’s actual or anticipated share of installed base Will this market tip? Market Share Service Provision T-Mobile Orange NTT DoCoMo Vodafone Network Operation Applications Series 60-90 Value Share UI Microsoft Linux Symbian Symbian Symbian Operating Systems Device Design Nokia Motorola Symbian Siemens Samsung EMS Players Device Manufacture Windows Clones and Asians Sony Ericsson BREW Chipset Design Chipset Manufacture Series 60-90 Vodafone Live!Live! Windows UIQ Microsoft SavaJe Microsoft TI Motorola Infineon I-250 and beyond W-CDMA Qualcomm Making money in an open world Where’s the money? Competition in a closed, private world Where’s the money? Competition in an open private world Where’s the money? The challenge of an open public world Making money in an open public world z Competing on a level playing field: – Do it better, faster, cheaper, in a more integrated way… – Leverage “complementary assets” z Be part of the evolution of the playing field: – Exploring “soft” standards Soft standards in action: “Soft” standard Perf. Public standard Time Connecting to Other Strategy Frameworks PIE & The Delta Model P.I.E.=Value Created PIE represents the upper bound on the actual earnings of an industry. $ Industry Demand PIE Opportunity Cost of Resources Industry Quantity Main drivers of P.I.E. z Absence of good substitutes pushes out demand z Presence of strong complements pushes out demand z Population/Income growth pushes out demand z Changes in the long-term industry cost structure Value Capture=The Four Slices z ™ Even if potential earnings are high, actual earnings are limited by the extent that: A. Entry is easy. B. Competition with existing rivals is intense. C. Suppliers control needed inputs. D. Buyers act as one to bargain hard. Essentially, all of these forces act to drive price to marginal cost (or vice versa), eliminating producer surplus. The Delta Model: Three Distinct Strategic Options System Lock-In • System Economics • Market Dominance • Achieving Complementor share Total Customer Solutions • Customer Economics • Cooperation • Achieving Customer Share Best Product • Product Economics • Rivalry • Achieving Product Share The Triangle: Options for Strategic Positioning System Lock-In Dominant Exchange eBay, Yellow Pages Proprietary Standard Microsoft, Intel Exclusive Channel rural Wal-Mart Low Cost Southwest Airlines, Nucor Horizontal Breadth Fidelity Total Customer Solutions Redefining the Customer Relationship Saturn Customer Integration EDS Best Product Differentiation Sony Wega Managing Organizational Competence The last of the three key questions... How will we Create value? How will we How will we Deliver value? Capture value? How can we manage the core business and real growth simultaneously? In summary: z “I see”, he said, “you’re suggesting that we invest millions of dollars in a market that may or may not exist but that is certainly smaller than our existing market, to develop a product that customers may or may not want, using a business model that will almost certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into serious organizational problems as we make this investment, and our current business is screaming for resources. Tell me again just why we should make this investment?” - Divisional Manager, Telecommunications Equipment Provider The Organizational Challenge: Entrepreneurial Drive, Freedom from the “old ways” Startups Startups Successful growth unites entrepreneurial insight with effective coordination BB as as U U Control & Coordination What can be done? z Lead: – Build the “ambidextrous” senior team: communicate the strategy, allocate resources z Structure: – Explore transitional and intermediate forms z Incent: – Explain “just what’s in this for me?” z Build: – Lay the foundations for a new culture, new expectations Choose a structure that fits the firm’s strategic positioning and skills Entrepreneurial Energy Acquire/ Partner Joint venture/ alliance Internal venture Build inside existing unit Control & Coordination Manage it using every lever that you have Entrepreneurial Drive, Freedom from the “old ways” Acquire/ Partner ? Joint venture/ alliance Internal venture Build inside existing existing units unit Control & Coordination Building growth thus requires doing many things right YES YES YES YES YES Recognize opportunity? NO NO Organize NO ambidextrously? Build new business model? Invest in market? NO Actually fund project? NO YES Embrace success? NO YES YES Strategic Issues YES YES YES YES Recognize opportunity? NO NO Organize NO ambidextrously? Build new business model? Invest in market? Actually fund project? NO NO Org. Issues Embrace success? NO Actually Doing Technology & Product Strategy The innovation funnel Phase I Phase II Phase III Launch A Range of Tools Risk adjusted NPV Pros • Established methodology widely accepted and understood • Relatively easy and quick to implement • A building block for more complicated valuation methods Cons • Does not allow for contingent decisions • Collapses many decisions and outcomes down to a single scenario • Does not account for managerial ability to react to information. Decision Trees Simulations e.g. Monte Carlo Closed Formulas e.g. Black-Scholes Differential Equations • Incorporates decision making and uncertainty • Determines optimal decisions • Transparent and easy to understand. • Building block for other more complicated valuation methods. • Allows for complicated and multiple uncertainties spanning both discrete and continuous outcomes. • Easier to model non-standard uncertainties • Elegant, easy to implement with formula in hand • A numerical solution incorporating optimal decisions and (possibly) both continuous and discrete uncertainties. • Trees can become complicated with many decisions and uncertainties. • Essentially limited to discrete decisions and discrete characterization of uncertainties. • Methods do not determine optimal policies. • Programming becomes complicated with many decisions and uncertainties. • Less transparent than trees • Limited to relatively simple decisions and uncertainties. • Many simplifying assumptions usually have to be made to obtain closed form solutions. • Extremely difficult, if not impossible, to implement in realistic situations. • Time Consuming • Does not allow for many different uncertainties. An Example Consumer Value Perception Enabling Technology New Core Product New Benefits Low Resource Improvement Moderate Resource Variant High Resource No Change Breakthrough Radical Platform Next Generation Derivative Incremental Product Support Base Successful Implementation: Common Lessons z Senior management commitment & involvement – Senior steering committee – Empowered champion z Diagnostic phase – Aligned with the market – As well as with the existing culture and organization z A designed implementation plan – Up front – With appropriate expectations z Allocating resources to match the design. Summary Effective strategies address three key problems: How will we Create value? How will we How will we Deliver value? Capture value? And answer seven critical questions: z How will we create value? – How will the technology evolve? – How will the market change? z How will we capture value? – How should we design the business model? – Where should we compete in the value chain? – How should we compete if standards are important? z How will we deliver value? – How do we manage the core business and real growth simultaneously? – How do we use our strategy to drive real resource allocation? Understanding the life cycle is critical : Technology Competition Markets Organization Maturity Takeoff Ferment Technology strategy on one slide: Startup Asset Supplier Create Deliver ? Capture