3 Who am I? Eastman Kodak LFM Professor, MIT Sloan School SB in Mechanical Engineering, MITPhD in Business Economics, HarvardResearch 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
5 Effective strategies answer three key questions: How will weCreate value?How will weDeliver value?How will weCapture value?8
6 How will we create value? How will the technology evolve?How will the market change?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 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? How will we create value?How will we capture value?How will we deliver value?Doing strategy in practice485
11 Overload at PreQuip Rate of Utilization (percent) –– 289.9 307.9 226.9 5412386286243527521515329ResourcesRequired forCompletion(months)Active Projects12345.2627282930(formal developmentprojects by number)Implied Development ResourceAllocation (months)This yearNext yearYear after that40385092244862602914361721501380932322120958241220436930183Months toCompletion(desired)(customer support, troubleshooting)All Other Support Activity––430Total Development Requirements––278329562178Available Resources (months)––960Rate of Utilization (percent)––289.9307.9226.9
12 Overcommitment destroys productivity AverageValue-AddedTime onEngineeringTasks100%80%60%40%20%0%123456Number of Projects per Engineer
13 The Timing and Impact of Management Attention PhasesKnowledgeConceptBasicPrototypePilotManufacturingAcquisitionInvestigationDesignBuildingProductionRamp-UpHighABILITYTO INFLUENCEOUTCOMEIndex ofAttention andInfluenceACTUALACTIVITYMANAGEMENTPROFILELow
14 Why is it so hard to kill project #26? It’s a “good” project!Good managers can meet stretch goals(and I’m a good manager)Making difficult decisions takes time & energyIt’s 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/DiscontinuityMaturity“Dominant design”emergesIncrementalInnovation14
17 The Industry Life Cycle as an S curve PerformanceMaturityDiscontinuityTakeoffFermentTime617
18 The S-curve Maps Major Transitions MaturityPerformanceDiscontinuityTakeoffFermentTime617
19 Transitions often challenge existing organizations severely
20 But they also create major opportunity Corning glassCookware to optical fiberHPInstrumentation to computersIBMMainframes to PCs to ServicesEli Lilly“Random” drug discovery to genetics and genomics
21 Discontinuities are hard! Answers to the key strategic questions:How do we create value?How do we capture value?How do we deliver value?CHANGE!
22 Course Outline: First Day: Second Day: How will we create value? How will the technology evolve?How will the market change?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?Second Day:How should 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?485
24 The first of 3 key questions How will weCreate value?How will weDeliver value?How will weCapture value?8
25 Creating Value: Understand how technologies will evolve (Both your own and those on which you rely)Understand how customer needs will evolveDevelop world class products and services that meet customer needs
26 Agenda Predicting Technological Change The Delphi ModelTrend extrapolationPredicting the Evolution of Customer NeedsBasic segmentationCrossing the chasmNew technologies, new needs
27 Can one forecast the path of technological change? ButDelphi modelsForecasting by analogyTrend extrapolation
28 Delphi Models Ask the experts! Pros Cons A committee? Structured questionnaires?ProsField experts are often years ahead of day to day practice: technologies do not “come from no where”ConsThey sometimes have little knowledge of possible applicationsThey can be enthusiastic
29 Forecasting by Analogy The Internet will be like:Personalized medicine will be like:The Xbox will be like:
30 Forecasting by Analogy Is nanotechnology like semiconductors?Or like biotechnology?Or like something else altogether?
31 Dimensions in Silicon and in Biology red blood cell~5 m (SEM)diatom30 mSimple molecules<1nmDNAproteinsnmbacteria1 m10-1010-510-910-710-610-810-410-310-2mPhoto credits, bio, L-RGFP: RCSB Protein Data BankE.Coli: Dennis KunkelRed Blood Cells: James A. Sullivan,Diatom: Dept of Biology, Indiana UniversitySilicon, L-RCdSe nanocrystal: Andreas Kadavanich, Alivisatos Group, Dept of Chemistry, UC BerkeleyNanotube memory device: Lieber Group, Dept of Chemistry, Harvard UniversitySOI transistor/Cu wiring/PowerPC Microprocessor chip: IBMSOI transistorwidth 0.12msemiconductornanocrystal (CdSe)5nmCircuit designCopper wiringwidth 0.2mNanometer memory element(Lieber)1012 bits/cm2 (1Tbit/cm2)IBM PowerPC 750TM Microprocessor7.56mm×8.799mm6.35×106 transistorscontrol biological machines
36 Issues in Trend Extrapolation 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 effortPredicting progress in complementary technologies
37 Do all good things come to an end? Technological exhaustion Physical limit?PerformancePerformance is ultimately constrainedby physical limitsE.g.:Sailing ships & the power of the windCopper wire & transmission capabilitySemiconductors & the speed of the electronTime920
38 Evolution of Measurement-While-Drilling tools S-Curve Physical limit: signal attenuationContinuous M.P. - FSK 3GContinuous M.P. - BPSK 3GPerformance = Data Transmission Rate (bit per second)Continuous M.P. - 2GShallow wells onlyAll well conditionsContinuous M.P. - 1GPositive Mud Pulse 2nd GenerationNegative Mud PulsePositive Mud PulseDominant Design = ContinuousMud Pulse TelemetryR&D Effort (measured in Generations = +/- 3 years )
42 Moore’s Law at Work 4.25 years 10x reduction every 7.5 years $1,000,000,000.0010x reduction$100,000,000.00every 7.5 years$10,000,000.00$1,000,000.00$100,000.0010x reduction every4.25 years$10,000.00Dollars per MIP$1,000.00$100.00$10.00$1.00$0.10$0.01195919691979198919992009[Source: Hans P. Moravec ]
45 Modeling the returns to effort vs. time PerformancePerformance 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” fastEffort920
47 Reflections on the S Curve Which unit of analysis?Industry? Firm? Technology? Product?Which dimension of performance?Effort vs. time?Can performance limits be predicted?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 segmentationCrossing the chasmNew markets, new needs:The Innovator’s Dilemma29
50 The Key Question: Who buys a technology as it evolves? PerformanceTime30
51 Understanding market dynamics: Basic segmentation (Rogers) UnitsBoughtEarlyMajorityLateMajorityEarlyAdoptersLaggardsInnovatorsTimeAdopters differ by, for example, social, economic status --particularly resources, affinity for risk,knowledge, complementary assets, interest in the product141931
52 Understanding market dynamics: Crossing the chasm: (Moore) UnitsBoughtCrossing the chasm?EarlyMajorityLateMajorityEarlyAdoptersLaggardsInnovatorsTimeMaking the transition from “early adopters” to “early majority” users oftenrequires the development of quite different competencies: e.g. service,support capabilities, much more extensive training.201432
53 Managing customers at moments of discontinuity Who buys a technologywhen it is firstintroduced?PerformanceNew technologies sell to:- New customers- With new needs- Often at lower marginsTime2133
54 The Innovator’s Dilemma: “Disruptive” technologies may threaten established firms Invasive TechnologyEstablished technologyPerformanceMainstream customer needsNiche customer needsTimeClay Christensen: The Innovator’s Dilemma34
55 Unpacking the Innovator’s Dilemma: The case of the power bar
60 Initially, PDAs did not seem to be a threat to PCs: Speed,Power,MemoryPCs?PDAsTime35
61 PDAs sold to customers with different needs: Speed,Power,MemoryPCsPDAsWeight/cost35
62 But as PDAs improve they may come to challenge PCs ?Speed,Power,MemoryPCsPDAsWeight/cost35
63 Or consumer preferences may change Speed,Power,MemoryPCs?PDAsWeight/cost35
64 Exercise: Industry Evolution Consider the two industries:Publishing (Books or music)Cellular telephonyFor each industry:Sketch the relevant S curves.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?Sketch the likely trajectory of customer needsChoose one industry and be prepared to present your results to the group24
65 Managing the change in customer groups may be the hardest task! PerformanceLeading edge customerfocused research may bea critical capabilityEffort2436
66 The marketing strategy issue at a major materials supplier: BiomaterialsworkCR&DSBU 3SBU 2SBU 1??
67 What can be done? “Ready, aim, fire” Small scale experiments Market research of all kinds:Conjoint analysisDirect customer contactVirtual productsLead user researchSignificant resources required?
68 Creating Value: Understand how customer needs 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
69 How shall we capture value? Uniqueness, Complementary Assets & the Structure of the Value Chain
70 The second of two key questions: How will weCreate value?How will weDeliver value?How will weCapture value?
71 How shall 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?
72 Or: What determines the Inventor’s Share? SuppliersCustomersImitators,followersInventor54
73 Is it the case that great ideas = pots of money? Coca ColaXerox (early)Wal MartViagraDellNylonValuecapturedAppleXerox (late)RC ColaValue created(through “raw” invention)53
74 Three key ideas: Uniqueness Complementary assets Controlling the knowledge generated by an innovationComplementary assetsControlling the assets that maximize the profits from innovatingUnderstanding the dynamics of the value chainShould we buy our suppliers? Distributors?Should we outsource our manufacturing… distribution… sales… capability?5539
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.58
76 Sources of Uniqueness Intellectual property protection Secrecy Speed PatentsFinite lengthThe right to prohibit “producing”CopyrightsThe right to prohibit “copying”SecrecyTrade secrets & non compete clauses“Tacit” knowledgeSpeed59
78 Boston University and NBER The Intellectual Property Owners Association Survey on the Strategic Management of Intellectual Property in America’s CorporationsIain CockburnBoston University and NBERRebecca HendersonMIT and NBER
79 Survey methodologyTargeted at senior IP managers, typically Chief Patent CounselDepth at the expense of breadth: 18 page questionnaire, more than 120 questions!Core sample frame: IPO membership, supplemented with additional mailing to Delphion listResponse rate: 1/3 of IPO membership, 5% of others. N=66.
80 Sample characteristics Sample of responding companies dominated by large manufacturing companiesChemicals 22%IT and communications 44%Life sciences 15%Mechanical 16%Average sales $20bn, 2001 market cap $44bnAverage 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”Yet most rate formal IP rights the most important means of controlling the use of technologyContract 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 defensiveNon-confrontational responses to competitorsRelatively conservative and cautious policiesCompanies are ambivalent about the role of IP in business strategyMany 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”ButLess than 20% would attempt to “fence in” an aggressive competitor by building IP assetsMore than 90% do not “always evaluate competitor reactions” when filing patentsOnly 1/3 anticipate triggering an “arms race” if many new patents are filed
84 SoIt is critically important to proactively develop an IP strategy that is tightly integrated to the strategic goals of the businessBut…
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 disclosureSecrecy may be difficult to maintainSpeed is hard work, and sometimes imitable60
86 What are Complementary Assets? Those assets that allow a firm to make money, even if the innovation is not unique:The answer to the question:If our innovations were instantly available to our competitors, would we still make money? Why?61
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 competitors62
88 Types of Complementary Assets Things you can doManufacturing capabilitiesSales and service expertiseThings you ownBrand nameDistribution channelsCustomer relationshipsCOMPETENCIESRESOURCES63
89 In successful firms, competencies create resources, and vice versa:
91 Uniqueness & Complementary Assets over the Life Cycle: MaturityTakeoffFerment8052
92 Managing discontinuities means managing complementary assets: MaturityPerformanceDiscontinuityTakeoffWhich of my complementaryassets are useful?FermentTime617
93 Uniqueness & Complementary Assets: Strategic Imperatives Defend uniqueness if possible and appropriateBuild complementary assets in advance of competitionAt 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?Where should we compete in the value chain?How should we compete if standards are important?
96 Porter’s “5 (actually at least 7) Forces”: Thinking about the balance of power Political,regulatory andinstitutionalcontextEntrants“Complementors”SuppliersRivalsBuyersSubstitutes69
97 C.Assets/Uniqueness speak to Rivalry and the Threat of Entry. EntrantsSuppliersRivalsBuyersSubstitutes69
98 Porter reminds us to think about the structure of the value chain: EntrantsSuppliersRivalsBuyersSubstitutes69
99 Powerful suppliers and buyers may constrain profitability 69
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 it’s own: ManufacturingDistributionSales… capabilities?When should a mature firm outsource it’s:
103 Exercise:Under what conditions should an entrepreneurial firm develop it’s own:ManufacturingDistributionSales… capabilities?And when should it subcontract/partner for them?
104 Comparing “make” vs. “buy” StartupAssetSupplierStartupAssetSupplier
105 Key Considerations: 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 be the key complementary assets going forward?
106 Make vs. Buy over the life cycle PerformanceMostly Buy?Mostly Make?????????Time617
107 So “make” (i.e. do it in-house) if: There are significant IP worriesThere are likely to be contractual problemsWe can’t be sure of getting the “fair” priceWe can’t be sure they’ll do the work “right”I.e., when market are “thin” or there is limited informationWe have unique competencies that are relevantAnd if buying won’t destroy everyone’s incentives to be creative and energetic
108 But remember…One cannot “buy” profit – if everyone knows it is there – it will be in the priceBesides, shouldn’t we “stick to our knitting”?Wouldn’t you rather deal with an independent firm, whom you could fire, than an internal subsidiary?
109 Control & Coordination Make vs. BuyEntrepreneurialDrive,Freedom fromthe “old ways”MakeBuyControl & Coordination
110 Standards and Strategy: Competing in Increasingly Open Worlds Professor Rebecca HendersonMIT Sloan School of Management Phone: (617) ,
111 What is a standard?A standard is a specification that allows for interoperabilityEg:Cups and lidsPistons and enginesTelephones and socketsSpeakers and amplifiersHardware and software
112 Questions: What is a standard? What are switching costs? What are network effects?What is positive feedback?What does increasing returns mean?What does it means when a market “tips”?What is lock-in?What is the significance of “winner-takes-all”?
113 Answers:A standard is a particular interface, format or system that allows for interoperabilitySwitching costs are incurred when a customer changes from one supplier or marketplace to another. The greater the costs, the more difficult it is to switchA 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 sharePositive feedback involves a chain of consequences that produces a dynamic outcome by feeding off itself – an amplification effectSuccess becomes self-reinforcing with increasing returns to scale. Demand creates further demandIf 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 standardLock-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 standardThe Microsoft operating system monopoly exemplifies “winner-takes-all”
114 Outline Moving from “product” to “systems” competition Coming soon to an industry near you: the push for public open standardsWill all markets “tip”? – managing the complexity of standards evolutionMaking money in an open world
115 It’s not just about high technology BicyclesFinancial servicesHealth careAutomobiles
117 Selling Interconnected Systems Selling ProductsCustomers who care about products “on their own terms”: is this the right product for me?Build the “best” productBest designedLowest costMost reliableSelling Interconnected SystemsCustomers who care about the total system experience: will this connect with the rest of my world?Control the architectureOrInfluence the architecture and build the best products within it
118 These transitions raise both strategic and organizational questions What strategyshouldwe pursue?PerformanceHow do we execute it?Time617
121 Thinking about the dynamics of the strategic space Access is:OpenClosedDetails of standards areavailable to all: nosingle firm has controlover how they evolve:no charge for their useE.g. TCP/IP, HTMLStandards are ownedand controlled by thepublic sector but are notfreely availableE.g. CryptographyPublicControl is:Details of standard aremade available to all:but owner has controlover how the standardevolves and maycharge for useE.g. Nintendo, Palm OSTechnology may bestandard, but detailsare not made availablebeyond the firmE.g. Landmark Graphics,IBM 360Private64
122 In practice these boundaries are fuzzy: Access is:MoreOpenMoreClosedMorePublicLinuxSymbianControl is:IBM360CDMAMercury/CorbaWindowsMorePrivate64
123 Conventional logic (1): What do customers prefer? Access is:MoreOpenMoreClosedMorePublicControl is:MorePrivate64
124 Conventional logic (2): What do producers prefer? Access is:MoreOpenMoreClosedMorePublicControl is:MorePrivate64
125 Wireless communications in transition Market ShareService ProvisionT-MobileOrangeNTT DoCoMoVodafoneNetwork OperationApplicationsVodafone Live!NokiaSymbianSeries 60-90MicrosoftLinuxMicrosoftLive!MicrosoftWindowsUIMotorolaSiemensSamsungSony EricssonUIQSavaJeOperating SystemsWindowsValue ShareDevice DesignClones and AsiansDevice ManufactureEMS PlayersBREWChipset DesignMotorola I-250 and beyondInfineonQualcommW-CDMAChipset ManufactureTI
126 Or: Getting a standard established Will all markets tip?Or:Getting a standard established
127 TippingMarkets “tip” when one standard becomes the preferred choice of nearly every consumerVHSWindows on the PCNot all markets tip: in some markets multiple standards co-existUNIX vs. Windows on serversSony vs. Microsoft in video gamesPalm vs. Windows CE in PDAsMultiple standards in cellular phones
128 “Great products” vs. “Architectures” Consumers base their purchase decision on the intrinsic value of the product to themWhat would this be worth to me if I were the only buyer in the world?Competition on the basis of features, price etcArchitecturesConsumers base purchase decisions on the size of the (actual or projected) installed base and/or the (actual or projected) availability of network externalitiesHow 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 With Strong Network Effects Market Share Itself Creates Value Value of standardsDriven productValue toconsumerConventional productActual (or anticipated) size of the installed base3144
130 If network effects are important, markets may “tip” 1Probabilitythe nextconsumerchooses tobuy A28A’s share of installed base12841
134 Tipping dynamics differ with the strength of network effects Products withextensive N.effectsValue toconsumerProducts with“threshold”network effectsConventional productActual (or anticipated) size of the installed base44
135 Markets with moderate network effects only tip once critical thresholds are reached 1Probabilitythe nextconsumerchooses tobuy fromFirm A1Firm A’s actual or anticipated share of installed base
136 Will this market tip? Market Share Service Provision T-Mobile Orange NTT DoCoMoVodafoneNetwork OperationApplicationsVodafone Live!NokiaSymbianSeries 60-90MicrosoftLinuxMicrosoftLive!MicrosoftWindowsUIMotorolaSiemensSamsungSony EricssonUIQSavaJeOperating SystemsWindowsValue ShareDevice DesignClones and AsiansDevice ManufactureEMS PlayersBREWChipset DesignMotorola I-250 and beyondInfineonQualcommW-CDMAChipset ManufactureTI
137 How are standards established? Standards “win” when a critical mass of consumers have adopted themOR: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“Open” standard:Standard components,UNIX operating system
139 Sun (2)1980: Apollo founded1983: Apollo has $18m in sales, dominates the workstation market -- uses a proprietary operating system1983: Sun has $1m in sales, mostly to universitiesLead customer, Computervision “likes the technology but doesn’t 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?
140 Establishing a standard Introduce a great “product”Come to market ahead of competitionBuild expectationsDevelop, or encourage the development of, complementary products and servicesGive it away: put the standard in the public sector
142 Where’s the money? Competition in a closed, private world
143 Where’s the money? Competition in an open private world
144 Where’s the money? The challenge of an open public world
145 Making money in an open public world 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:Exploring “soft” standards
146 Business models in the different quadrants The technology is:OpenClosedCompete on alevel fieldMove to “soft”standards?Run hardPublicControl is:Encourage the“ecosystem”Embrace/extendRun hardDeliver a best inclass systemRun hardPrivate64
147 Exploring soft standards A “soft” standard is a specification that is completely compatible with current public standards but offers enhanced functionality and performanceIt offers customers the security of knowing that they have avoided being “locked in” and an upgrade path to the public standardPlus the functionality and performance of a more finely “tuned” technologyMay permit significant premium pricing and the generation of customer loyalty
148 Soft standards in action: Perf.PublicstandardTime
149 Managing soft standards Maintaining customer trust is critical:The instant they come to believe you’re trying to lock them in, there will be troubleThe technology task is complex. The “soft” standard must be:Better than the public standardCompatible with the current versionCompatible with future versionsEnsuring that the “soft” technology is embodied in future generations of the technology may be a central strategic goal
150 SummaryThe move from “product” to “system” competitions raises both strategic and organizational issuesAnd increases the force behind the push for open standardsNot 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 hardFortunately, there are ways to make money in an open world - but managing a “soft” standard requires sustained attention
152 Two day outline: How will we create value? How will the technology evolve?How will the market change?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 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…. TechnologyCompetitionMarketsOrganizationMaturityTakeoffFerment87
155 For tomorrow: KODAK Evaluate Kodak’s digital imaging strategy to date “B+” or “F”?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?What should Kodak do next?Where should they try to play in the digital value chain?How should they organize their digital efforts?