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Developing and Managing a Successful Technology & Product Strategy Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) 253-6618, Email:

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Presentation on theme: "Developing and Managing a Successful Technology & Product Strategy Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) 253-6618, Email:"— Presentation transcript:

1 Developing and Managing a Successful Technology & Product Strategy Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) ,

2 Who are you, and why did you come?

3 Who am I? Eastman Kodak LFM Professor, MIT Sloan School Eastman Kodak LFM Professor, MIT Sloan School SB in Mechanical Engineering, MIT SB in Mechanical Engineering, MIT PhD in Business Economics, Harvard PhD in Business Economics, Harvard Research focus: Building on technology to generate growth: why is it so hard and what can be done? Research focus: Building on technology to generate growth: why is it so hard and what can be done? Work in: Semiconductor capital equipment, Aerospace, Automotive, Branded Consumer Goods Pharmaceuticals & Biotech, IT, Telecommunications Work in: Semiconductor capital equipment, Aerospace, Automotive, Branded Consumer Goods Pharmaceuticals & Biotech, IT, Telecommunications

4 What is a strategy anyway?

5 Effective strategies answer three key questions: How will we Create value? How will we Capture value? How will we Deliver value?

6 How will we create value? How will we create value? –How will the technology evolve? –How will the market change? How will we capture value? 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? How will we deliver value? How will we deliver value? –How do we manage the core business and growth simultaneously? –How do we use our strategy to drive real resource allocation?

7 Outline: Why do I need an innovation strategy? Why do I need an innovation strategy? How will we create value? How will we create value? How will we capture value? How will we capture value? How will we deliver value? How will we deliver value? Doing strategy in practice Doing strategy in practice

8 Why have a strategy?

9 Why have a strategy? 1. To make choices

10 Is This Your Project Pipeline?

11 Overload at PreQuip Active Projects (formal development projects by number) Resources Required for Completion (months) Months to Completion (desired) Implied Development Resource Allocation (months) This yearNext yearYear after that (customer support, troubleshooting) All Other Support Activity–– 430 Total Development Requirements–– Available Resources (months)–– 960 Rate of Utilization (percent)––

12 Overcommitment destroys productivity Average Value-Added Time on Engineering Tasks Number of Projects per Engineer 100% 80% 60% 40% 0% 20%

13 The Timing and Impact of Management Attention Phases Index of Attention and Influence High Low ACTUAL ACTIVITY MANAGEMENT PROFILE Knowledge Acquisition Concept Investigation Basic Design Prototype Building Pilot Production Manufacturing Ramp-Up ABILITY TO INFLUENCE OUTCOME

14 Why is it so hard to kill project #26? Its a good project! Its a good project! Good managers can meet stretch goals Good managers can meet stretch goals (and Im a good manager) (and Im a good manager) Making difficult decisions takes time & energy Making difficult decisions takes time & energy Its very hard to kill projects without a strategy

15 Reasons to have a strategy: 2. To be able to change it

16 A Key Framework: The industry life cycle Era of Ferment/ Discontinuity Dominant design emerges Maturity Incremental Innovation

17 The Industry Life Cycle as an S curve Performance Time Ferment Takeoff Maturity Discontinuity

18 The S-curve Maps Major Transitions Performance Time Ferment Takeoff Maturity Discontinuity

19 Transitions often challenge existing organizations severely

20 But they also create major opportunity Corning glass Corning glass –Cookware to optical fiber HP HP –Instrumentation to computers IBM IBM –Mainframes to PCs to Services Eli Lilly Eli Lilly –Random drug discovery to genetics and genomics

21 Discontinuities are hard! Answers to the key strategic questions: Answers to the key strategic questions: –How do we create value? –How do we capture value? –How do we deliver value? CHANGE! CHANGE!

22 Course Outline: First Day: First Day: –How will we create value? How will the technology evolve?How will the technology evolve? How will the market change?How will the market change? –How will we capture value? How should we design the business model?How should we design the business model? Where should we compete in the value chain?Where should we compete in the value chain? How should we compete if standards are important?How should we compete if standards are important? Second Day: Second Day: –How should we deliver value? How do we manage the core business and real growth simultaneously?How do we manage the core business and real growth simultaneously? How do we use our strategy to drive real resource allocation?How do we use our strategy to drive real resource allocation?

23 How shall we create value?

24 The first of 3 key questions How will we Create value? How will we Capture value? How will we Deliver value?

25 Creating Value: Understand how technologies will evolve Understand how technologies will evolve –(Both your own and those on which you rely) Understand how customer needs will evolve Understand how customer needs will evolve Develop world class products and services that meet customer needs Develop world class products and services that meet customer needs

26 Agenda Predicting Technological Change Predicting Technological Change –The Delphi Model –Trend extrapolation Predicting the Evolution of Customer Needs Predicting the Evolution of Customer Needs –Basic segmentation –Crossing the chasm –New technologies, new needs

27 Can one forecast the path of technological change? No NoBut Delphi models Delphi models Forecasting by analogy Forecasting by analogy Trend extrapolation Trend extrapolation

28 Delphi Models Ask the experts! Ask the experts! –A committee? –Structured questionnaires? Pros Pros –Field experts are often years ahead of day to day practice: technologies do not come from no where Cons Cons –They sometimes have little knowledge of possible applications –They can be enthusiastic

29 Forecasting by Analogy The Internet will be like: The Xbox will be like: Personalized medicine will be like:

30 Forecasting by Analogy Is nanotechnology like semiconductors? Is nanotechnology like semiconductors? Or like biotechnology? Or like biotechnology? Or like something else altogether? Or like something else altogether?

31 Simple molecules <1nm IBM PowerPC 750 TM Microprocessor 7.56mm×8.799mm 6.35×10 6 transistors semiconductor nanocrystal (CdSe) 5nm m Circuit design Copper wiring width 0.2 m red blood cell ~5 m (SEM) DNA proteins nm bacteria 1 m Nanometer memory element (Lieber) bits/cm 2 (1Tbit/cm 2 ) Dimensions in Silicon and in Biology SOI transistor width 0.12 m control biological machines diatom 30 m

32 Is nanotechnology like biotechnology?

33

34 Trend analysis The future is often much like the past, only more so The future is often much like the past, only more so

35 Trend extrapolation: Semiconductors

36 Issues in Trend Extrapolation Which parameter shall I predict? Which parameter shall I predict? Do all good things come to an end? 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 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 Predicting progress in complementary technologies

37 Do all good things come to an end? Technological exhaustion Performance Time Physical limit? 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

38 Evolution of Measurement-While-Drilling tools S-Curve Positive Mud Pulse Positive Mud Pulse 2nd Generation Continuous M.P. - 1G Negative Mud Pulse Continuous M.P. - 2G Continuous M.P. - BPSK 3G Continuous M.P. - FSK 3G Physical limit: signal attenuation R&D Effort (measured in Generations = +/- 3 years ) Performance = Data Transmission Rate (bit per second) Shallow wells only All well conditions Dominant Design = Continuous Mud Pulse Telemetry

39

40 The Evolution of Palomars Products: Laser Based Skin Treatment 400 pounds E2000 Ruby Laser LightSheer 120 Pounds Material ProductPriceCost Year EpiLaser$150K$80K1996 E2000$130K$60K1997 LightSheer $100K$40K1998 SLP1000 $65K$25K2000 EsteLux $40K$ 4K2001 MediLux$50K$ 4K2003 NeoLux$30K$ 4K2003 StarLux$80K$ 5K2004 Lux Handpieces$10K$ 1K Home Devices ? ? ? MediLux 48 pounds

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42 Moores Law at Work $0.01 $0.10 $1.00 $10.00 $ $1, $10, $100, $1,000, $10,000, $100,000, $1,000,000, [Source: Hans P. Moravec ] Dollars per MIP 10x reduction every 7.5 years 10x reduction every 4.25 years

43

44

45 Modeling the returns to effort vs. time Performance Effort 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

46

47 Reflections on the S Curve Which unit of analysis? Which unit of analysis? –Industry? Firm? Technology? Product? Which dimension of performance? Which dimension of performance? Effort vs. time? Effort vs. time? Can performance limits be predicted? Can performance limits be predicted? The S curve is best viewed as a tool for triggering discussion, not as a scientific reality The S curve is best viewed as a tool for triggering discussion, not as a scientific reality

48 The Evolution of Markets or Predicting the pattern of customer needs

49 Market Evolution over the Life Cycle Market segmentation Market segmentation Crossing the chasm Crossing the chasm New markets, new needs: New markets, new needs: –The Innovators Dilemma

50 The Key Question: Who buys a technology as it evolves? Performance Time

51 Understanding market dynamics: Basic segmentation (Rogers) Units Bought Time Innovators Early Adopters Early Majority Late Majority Laggards Adopters differ by, for example, social, economic status -- particularly resources, affinity for risk, knowledge, complementary assets, interest in the product

52 Understanding market dynamics: Crossing the chasm: (Moore) Time Innovators Early Adopters Early Majority Late Majority Laggards 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. Crossing the chasm? Units Bought

53 Managing customers at moments of discontinuity Performance Time Who buys a technology when it is first introduced? New technologies sell to: - New customers - With new needs - Often at lower margins

54 The Innovators Dilemma: Disruptive technologies may threaten established firms Performance Time Established technology Mainstream customer needs Niche customer needs Invasive Technology Clay Christensen: The Innovators Dilemma

55 Unpacking the Innovators Dilemma: The case of the power bar

56

57 Step & Repeat aligners initially sold to customers with different needs: Speed Yield Scanning Projection Aligners Step & Repeat Aligners

58 But then they improved enough to take the whole market Speed Yield Scanning Projection Aligners Step & Repeat Aligners

59 Scanning Projection Aligners S&R 1 S&R 2

60 Initially, PDAs did not seem to be a threat to PCs: Speed, Power, Memory Time PCs PDAs ?

61 PDAs sold to customers with different needs: Speed, Power, Memory Weight/cost PCs PDAs

62 But as PDAs improve they may come to challenge PCs ? Speed, Power, Memory Weight/cost PCs PDAs

63 Or consumer preferences may change ? Speed, Power, Memory Weight/cost PCs PDAs

64 Exercise: Industry Evolution Consider the two industries: Consider the two industries: –Publishing (Books or music) –Cellular telephony For each industry: For each industry: –Sketch the relevant S curves. What are the appropriate (technical) measures of performance? Are there more than one?What are the appropriate (technical) measures of performance? Are there more than one? Where is this industry now? Are there major growth areas or discontinuities on the horizon?Where is this industry now? Are there major growth areas or discontinuities on the horizon? –Sketch the likely trajectory of customer needs Choose one industry and be prepared to present your results to the group Choose one industry and be prepared to present your results to the group

65 Managing the change in customer groups may be the hardest task! Performance Effort Leading edge customer focused research may be a critical capability

66 The marketing strategy issue at a major materials supplier: The Market SBU 3 SBU 2 SBU 1 ? $100m Biomaterials work CR&D ?

67 What can be done? Ready, aim, fire Ready, aim, fire Small scale experiments Small scale experiments Market research of all kinds: Market research of all kinds: –Conjoint analysis –Direct customer contact –Virtual products –Lead user research Significant resources required? Significant resources required?

68 Creating Value: Understand how customer needs will evolve Understand how customer needs will evolve Understand how technologies will evolve Understand how technologies will evolve –(Both your own and those on which you rely) Develop world class products and services that meet customer needs Develop world class products and services that meet customer needs

69 How shall we capture value? Uniqueness, Complementary Assets & the Structure of the Value Chain

70 The second of two key questions: How will we Create value? How will we Capture value? How will we Deliver value?

71 How shall we capture value? How should we design the business model? How should we design the business model? Where should we compete in the value chain? Where should we compete in the value chain? How should we compete if standards are important? How should we compete if standards are important?

72 Or: What determines the Inventors Share? Customers Inventor Suppliers Imitators, followers

73 Is it the case that great ideas = pots of money? Value captured Value created (through raw invention) Viagra Nylon Xerox (early) Xerox (late) Apple Coca Cola Wal Mart Dell RC Cola

74 Three key ideas: Uniqueness Uniqueness –Controlling the knowledge generated by an innovation Complementary assets Complementary assets –Controlling the assets that maximize the profits from innovating Understanding the dynamics of the value chain Understanding the dynamics of the value chain –Should we buy our suppliers? Distributors? –Should we outsource our manufacturing… distribution… sales… capability?

75 Uniqueness is very important: If a particular innovation, or the knowledge on which it rests, can be completely appropriated (i.e., completely controlled or protected) then the innovating firm may be able to maintain a unique position. This is a tremendous source of bargaining power. If a particular innovation, or the knowledge on which it rests, can be completely appropriated (i.e., completely controlled or protected) then the innovating firm may be able to maintain a unique position. This is a tremendous source of bargaining power.

76 Sources of Uniqueness Intellectual property protection Intellectual property protection –Patents Finite lengthFinite length The right to prohibit producingThe right to prohibit producing –Copyrights The right to prohibit copyingThe right to prohibit copying Secrecy Secrecy –Trade secrets & non compete clauses –Tacit knowledge Speed Speed

77 IP in historical perspective

78 The 2003 Intellectual Property Owners Association Survey on the Strategic Management of Intellectual Property in Americas Corporations Iain Cockburn Boston University and NBER Rebecca Henderson MIT and NBER

79 Survey methodology Targeted at senior IP managers, typically Chief Patent Counsel Targeted at senior IP managers, typically Chief Patent Counsel Depth at the expense of breadth: 18 page questionnaire, more than 120 questions! Depth at the expense of breadth: 18 page questionnaire, more than 120 questions! Core sample frame: IPO membership, supplemented with additional mailing to Delphion list Core sample frame: IPO membership, supplemented with additional mailing to Delphion list Response rate: 1/3 of IPO membership, 5% of others. N=66. Response rate: 1/3 of IPO membership, 5% of others. N=66.

80 Sample characteristics Sample of responding companies dominated by large manufacturing companies Sample of responding companies dominated by large manufacturing companies –Chemicals 22% –IT and communications 44% –Life sciences 15% –Mechanical 16% Average sales $20bn, 2001 market cap $44bn Average sales $20bn, 2001 market cap $44bn Average of 14 full time IP attorneys, 264 patent applications, $91MM licensing revenue Average of 14 full time IP attorneys, 264 patent applications, $91MM licensing revenue

81 We found: Many companies report limits to the effectiveness of patents: 43% (!) agree that many of our most important ideas cannot be effectively protected with patents Many companies report limits to the effectiveness of patents: 43% (!) agree that many of our most important ideas cannot be effectively protected with patents Yet most rate formal IP rights the most important means of controlling the use of technology Yet most rate formal IP rights the most important means of controlling the use of technology Contract law (NDAs, NCAs etc.) also highly rated Contract law (NDAs, NCAs etc.) also highly rated

82 Strategic use of IP? Our overall impression is that the IP strategy of the majority of companies is defensive Our overall impression is that the IP strategy of the majority of companies is defensive –Non-confrontational responses to competitors –Relatively conservative and cautious policies Companies are ambivalent about the role of IP in business strategy Companies are ambivalent about the role of IP in business strategy –Many report that profitability and returns to R&D are linked to strong IP positions and aggressive strategic posture, but few report activity by their company consistent with this…

83 Competitive interaction in IP 65% of surveyed companies report that the most profitable companies in their industry react aggressively to IP activity by competitors 65% of surveyed companies report that the most profitable companies in their industry react aggressively to IP activity by competitors But But –Less than 20% would attempt to fence in an aggressive competitor by building IP assets –More than 90% do not always evaluate competitor reactions when filing patents –Only 1/3 anticipate triggering an arms race if many new patents are filed

84 So It is critically important to proactively develop an IP strategy that is tightly integrated to the strategic goals of the business It is critically important to proactively develop an IP strategy that is tightly integrated to the strategic goals of the business But… But…

85 Uniqueness is powerful but often difficult to maintain Legal mechanisms can be costly to create, and then even more costly to enforce: and sometimes they require public disclosure Legal mechanisms can be costly to create, and then even more costly to enforce: and sometimes they require public disclosure Secrecy may be difficult to maintain Secrecy may be difficult to maintain Speed is hard work, and sometimes imitable Speed is hard work, and sometimes imitable

86 What are Complementary Assets? Those assets that allow a firm to make money, even if the innovation is not unique: Those assets that allow a firm to make money, even if the innovation is not unique: The answer to the question: The answer to the question: –If our innovations were instantly available to our competitors, would we still make money? Why?

87 In the best case, complementary assets should be tightly held Complementary assets that are tightly held are not easily available to entrants or to most competitors Complementary assets that are tightly held are not easily available to entrants or to most competitors

88 Types of Complementary Assets Things you can do Things you can do – Manufacturing capabilities – Sales and service expertise Things you own Things you own – Brand name – Distribution channels – Customer relationships COMPETENCIES RESOURCES

89 In successful firms, competencies create resources, and vice versa: CompetenciesResources

90 Exercise: Complementary assets are: AvailableTightly held Position: Frozen foods Publishing Cell phones Your industry/firm Easy to maintain Hard to maintain Uniqueness is:

91 Uniqueness & Complementary Assets over the Life Cycle: Ferment Takeoff Maturity Uniqueness Complementary Assets

92 Managing discontinuities means managing complementary assets: Performance Time Ferment Takeoff Maturity Discontinuity Which of my complementary assets are useful?

93 Uniqueness & Complementary Assets: Strategic Imperatives Defend uniqueness if possible and appropriate Defend uniqueness if possible and appropriate Build complementary assets in advance of competition Build complementary assets in advance of competition At moments of discontinuity ask: At moments of discontinuity ask: –Are my complementary assets useful? –If so, which ones?

94 How shall we capture value? How should we design the business model? How should we design the business model? Where should we compete in the value chain? Where should we compete in the value chain? How should we compete if standards are important? How should we compete if standards are important?

95 Power in the Value Chain

96 Porters 5 (actually at least 7) Forces: Thinking about the balance of power Entrants Substitutes Suppliers Buyers Rivals Political, regulatory and institutional context Complementors

97 C.Assets/Uniqueness speak to Rivalry and the Threat of Entry. Entrants Substitutes Suppliers Buyers Rivals

98 Porter reminds us to think about the structure of the value chain: Entrants Substitutes Suppliers Buyers Rivals

99 Powerful suppliers and buyers may constrain profitability Suppliers Buyers

100 Does this mean that if the money is down (up) stream we should forwards (backwards) integrate?

101 If the money is in lobster restaurants, should the lobster fisherman go into the restaurant business?

102 Key Questions: When should an entrepreneurial firm develop its own: When should an entrepreneurial firm develop its own: –Manufacturing –Distribution –Sales –….. capabilities? When should a mature firm outsource its: When should a mature firm outsource its: –Manufacturing –Distribution –Sales –….. capabilities?

103 Exercise: Under what conditions should an entrepreneurial firm develop its own: Under what conditions should an entrepreneurial firm develop its own: –Manufacturing –Distribution –Sales –….. capabilities? And when should it subcontract/partner for them? And when should it subcontract/partner for them?

104 Comparing make vs. buy Startup Asset Supplier Startup Asset Supplier

105 Key Considerations: How easy is it to write contracts? 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? What will happen to entrepreneurial energy? What will happen to entrepreneurial energy? What will be the key complementary assets going forward? What will be the key complementary assets going forward?

106 Make vs. Buy over the life cycle Performance Time Mostly Buy? Mostly Make?????

107 So make (i.e. do it in-house) if: There are significant IP worries There are significant IP worries There are likely to be contractual problems There are likely to be contractual problems –We cant be sure of getting the fair price –We cant be sure theyll do the work right –I.e., when market are thin or there is limited information We have unique competencies that are relevant We have unique competencies that are relevant And if buying wont destroy everyones incentives to be creative and energetic And if buying wont destroy everyones incentives to be creative and energetic

108 But remember… One cannot buy profit – if everyone knows it is there – it will be in the price One cannot buy profit – if everyone knows it is there – it will be in the price Besides, shouldnt we stick to our knitting? Besides, shouldnt we stick to our knitting? Wouldnt you rather deal with an independent firm, whom you could fire, than an internal subsidiary? Wouldnt you rather deal with an independent firm, whom you could fire, than an internal subsidiary?

109 Control & Coordination Make vs. Buy Entrepreneurial Drive, Freedom from the old ways Make Buy

110 Standards and Strategy: Competing in Increasingly Open Worlds Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) ,

111 What is a standard? A standard is a specification that allows for interoperability A standard is a specification that allows for interoperability Eg: Eg: –Cups and lids –Pistons and engines –Telephones and sockets –Speakers and amplifiers –Hardware and software

112 Questions: What is a standard? What is a standard? What are switching costs? What are switching costs? What are network effects? What are network effects? What is positive feedback? What is positive feedback? What does increasing returns mean? What does increasing returns mean? What does it means when a market tips? What is lock-in? What is lock-in? What is the significance of winner-takes-all? What is the significance of winner-takes-all?

113 Answers: A standard is a particular interface, format or system that allows for interoperability A standard is a particular interface, format or system that allows for interoperability Switching costs are incurred when a customer changes from one supplier or marketplace to another. The greater the costs, the more difficult it is to switch Switching costs are incurred when a customer changes from one supplier or marketplace to another. The greater the costs, the more difficult it is to switch A product or technology benefits from network effects or network externalities if a significant part of its value to a consumer lies in the size of its (actual or anticipated) installed base, or market share A product or technology benefits from network effects or network externalities if a significant part of its value to a consumer lies in the size of its (actual or anticipated) installed base, or market share Positive feedback involves a chain of consequences that produces a dynamic outcome by feeding off itself – an amplification effect Positive feedback involves a chain of consequences that produces a dynamic outcome by feeding off itself – an amplification effect Success becomes self-reinforcing with increasing returns to scale. Demand creates further demand Success becomes self-reinforcing with increasing returns to scale. Demand creates further demand If consumers believe that one standard is going to capture a very large share of the market, and that a competing standard is not viable, then the market will tip towards the more successful standard If consumers believe that one standard is going to capture a very large share of the market, and that a competing standard is not viable, then the market will tip towards the more successful standard Lock-in occurs once a market has tipped. Switching costs may be high, and it is therefore difficult to get a market to tip to an alternative standard Lock-in occurs once a market has tipped. Switching costs may be high, and it is therefore difficult to get a market to tip to an alternative standard The Microsoft operating system monopoly exemplifies winner-takes-all The Microsoft operating system monopoly exemplifies winner-takes-all

114 Outline Moving from product to systems competition Moving from product to systems competition Coming soon to an industry near you: the push for public open standards Coming soon to an industry near you: the push for public open standards Will all markets tip? – managing the complexity of standards evolution Will all markets tip? – managing the complexity of standards evolution Making money in an open world Making money in an open world

115 Its not just about high technology Bicycles Bicycles Financial services Financial services Health care Health care Automobiles Automobiles

116 The challenge Performance Time Selling products Selling (parts of) interconnected systems

117 Selling Products Customers who care about products on their own terms: is this the right product for me? Customers who care about products on their own terms: is this the right product for me? Build the best product Build the best product –Best designed –Lowest cost –Most reliable Selling Interconnected Systems Customers who care about the total system experience: will this connect with the rest of my world? Control the architecture Or Influence the architecture and build the best products within it

118 These transitions raise both strategic and organizational questions Performance Time What strategy should we pursue? How do we execute it?

119 The push for public open standards

120 The pros and cons of open standards Pros Pros Cons Cons Pros Cons

121 Thinking about the dynamics of the strategic space Control is: Public Private Access is: OpenClosed 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 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 Standards are owned and controlled by the public sector but are not freely available E.g. Cryptography Technology may be standard, but details are not made available beyond the firm E.g. Landmark Graphics, IBM 360

122 IBM 360 In practice these boundaries are fuzzy: Control is: More Public More Private Access is: More Open More Closed Linux Symbian CDMA Windows Mercury/ Corba

123 Control is: More Public More Private Access is: More Open More Closed Conventional logic (1): What do customers prefer?

124 Conventional logic (2): What do producers prefer? Control is: More Public More Private Access is: More Open More Closed

125 Wireless communications in transition Network Operation Applications Operating Systems Device Design Chipset Design UI VodafoneNTT DoCoMo MotorolaSiemens TI Qualcomm Device Manufacture Chipset Manufacture Service Provision Motorola I-250 and beyond Infineon OrangeT-Mobile Microsoft Linux Vodafone Live! W-CDMA BREW SavaJe Windows Microsoft Live! Sony Ericsson Clones and Asians EMS Players Samsung Microsoft UIQ Nokia Symbian Series Symbian Market Share Value Share

126 Will all markets tip? Or: Getting a standard established

127 Tipping Markets tip when one standard becomes the preferred choice of nearly every consumer Markets tip when one standard becomes the preferred choice of nearly every consumer –VHS –Windows on the PC Not all markets tip: in some markets multiple standards co-exist Not all markets tip: in some markets multiple standards co-exist –UNIX vs. Windows on servers –Sony vs. Microsoft in video games –Palm vs. Windows CE in PDAs –Multiple standards in cellular phones

128 Great products vs. Architectures Great Products Consumers base their purchase decision on the intrinsic value of the product to them Consumers base their purchase decision on the intrinsic value of the product to them What would this be worth to me if I were the only buyer in the world? What would this be worth to me if I were the only buyer in the world? Competition on the basis of features, price etc Competition on the basis of features, price etc Architectures Consumers base purchase decisions on the size of the (actual or projected) installed base and/or the (actual or projected) availability of network externalities How many other people are likely to buy this product? Competition on the basis of the size of network effects: installed base, availability of complementary products etc

129 31 With Strong Network Effects Market Share Itself Creates Value Value to consumer Actual (or anticipated) size of the installed base Value of standards Driven product Conventional product

130 28 If network effects are important, markets may tip Probability the next consumer chooses to buy A As share of installed base

131

132

133 VHS Betamax

134 Tipping dynamics differ with the strength of network effects Value to consumer Actual (or anticipated) size of the installed base Products with extensive N.effects Conventional product Products with threshold network effects

135 Markets with moderate network effects only tip once critical thresholds are reached Probability the next consumer chooses to buy from Firm A 1 0 Firm As actual or anticipated share of installed base 1

136 Will this market tip? Network Operation Applications Operating Systems Device Design Chipset Design UI VodafoneNTT DoCoMo MotorolaSiemens TI Qualcomm Device Manufacture Chipset Manufacture Service Provision Motorola I-250 and beyond Infineon OrangeT-Mobile Microsoft Linux Vodafone Live! W-CDMA BREW SavaJe Windows Microsoft Live! Sony Ericsson Clones and Asians EMS Players Samsung Microsoft UIQ Nokia Symbian Series Symbian Market Share Value Share

137 How are standards established? Standards win when a critical mass of consumers have adopted them Standards win when a critical mass of consumers have adopted them OR: OR: When a critical mass of key players believe that the standard will be adopted. When a critical mass of key players believe that the standard will be adopted.

138 Establishing a standard: Sun Sun founded in 1982 to focus on the workstation market Sun founded in 1982 to focus on the workstation market Open standard: Open standard: –Standard components, –UNIX operating system

139 Sun (2) 1980: Apollo founded 1980: Apollo founded 1983: Apollo has $18m in sales, dominates the workstation market -- uses a proprietary operating system 1983: Apollo has $18m in sales, dominates the workstation market -- uses a proprietary operating system 1983: Sun has $1m in sales, mostly to universities 1983: Sun has $1m in sales, mostly to universities Lead customer, Computervision likes the technology but doesnt find the company credible -- we love your technology but there is no way you can supply it. Apollo is the standard in the industry, well financed and well managed. Lead customer, Computervision likes the technology but doesnt find the company credible -- we love your technology but there is no way you can supply it. Apollo is the standard in the industry, well financed and well managed. What should Sun do? What should Sun do?

140 Establishing a standard Introduce a great product Introduce a great product Come to market ahead of competition Come to market ahead of competition Build expectations Build expectations Develop, or encourage the development of, complementary products and services Develop, or encourage the development of, complementary products and services Give it away: put the standard in the public sector Give it away: put the standard in the public sector

141 Making money in an open world

142 Wheres the money? Competition in a closed, private world

143 Wheres the money? Competition in an open private world

144 Wheres the money? The challenge of an open public world

145 Making money in an open public world Competing on a level playing field: Competing on a level playing field: –Do it better, faster, cheaper, in a more integrated way… –Leverage complementary assets Be part of the evolution of the playing field: Be part of the evolution of the playing field: –Exploring soft standards

146 Business models in the different quadrants Control is: Public Private The technology is: OpenClosed Compete on a level field Move to soft standards? Run hard Encourage the ecosystem Embrace/extend Run hard Deliver a best in class system Run hard

147 Exploring soft standards A soft standard is a specification that is completely compatible with current public standards but offers enhanced functionality and performance A soft standard is a specification that is completely compatible with current public standards but offers enhanced functionality and performance It offers customers the security of knowing that they have avoided being locked in and an upgrade path to the public standard It offers customers the security of knowing that they have avoided being locked in and an upgrade path to the public standard Plus the functionality and performance of a more finely tuned technology Plus the functionality and performance of a more finely tuned technology May permit significant premium pricing and the generation of customer loyalty May permit significant premium pricing and the generation of customer loyalty

148 Soft standards in action: Perf. Time Public standard Soft standard

149 Managing soft standards Maintaining customer trust is critical: Maintaining customer trust is critical: –The instant they come to believe youre trying to lock them in, there will be trouble The technology task is complex. The soft standard must be: The technology task is complex. The soft standard must be: –Better than the public standard –Compatible with the current version –Compatible with future versions Ensuring that the soft technology is embodied in future generations of the technology may be a central strategic goal Ensuring that the soft technology is embodied in future generations of the technology may be a central strategic goal

150 Summary The move from product to system competitions raises both strategic and organizational issues The move from product to system competitions raises both strategic and organizational issues And increases the force behind the push for open standards And increases the force behind the push for open standards Not all markets tip: but as network effects (connectivity, complementary services, tools, products) become more important, more and more will. Not all markets tip: but as network effects (connectivity, complementary services, tools, products) become more important, more and more will. Getting a private standard established in these kinds of worlds is likely to be very hard Getting a private standard established in these kinds of worlds is likely to be very hard Fortunately, there are ways to make money in an open world - but managing a soft standard requires sustained attention Fortunately, there are ways to make money in an open world - but managing a soft standard requires sustained attention

151 Summary

152 Two day outline: How will we create value? How will we create value? –How will the technology evolve? –How will the market change? How will we capture value? 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? How will we deliver value? 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?

153 Putting the pieces together…. Ferment Takeoff Maturity Technology Markets Competition Organization

154 Tomorrow: Organizational Competence & Change Performance Time ??

155 For tomorrow: KODAK Evaluate Kodaks digital imaging strategy to date Evaluate Kodaks digital imaging strategy to date –B+ or F? How would you evaluate the decision to invest in digital imaging: How would you evaluate the decision to invest in digital imaging: –In the 80s? In the 90s? Now? Given that they made the decision to invest, how would you evaluate their execution? Given that they made the decision to invest, how would you evaluate their execution? What should Kodak do next? What should Kodak do next? –Where should they try to play in the digital value chain? –How should they organize their digital efforts?


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