Developing and Managing a Developing and Managing a Successful Technology Successful Technology

& Product Strategy & Product Strategy

Professor Rebecca Henderson

MIT Sloan School of Management Phone: (617) 253-6618, Email: Rhenderson@mit.edu,

http://www.mit.edu/people/rhenders/home.html

Who are you, and why did you come?Who are you, and why did you come?

Who am I?Who am I?

Eastman Kodak LFM Professor, MIT Sloan SchoolEastman Kodak LFM Professor, MIT Sloan School SB in Mechanical Engineering, MITSB in Mechanical Engineering, MIT PhD in Business Economics, HarvardPhD in Business Economics, Harvard Research focus: Building on technology to generate Research focus: Building on technology to generate

growth: why is it so hard and what can be done?growth: why is it so hard and what can be done? Work in: Semiconductor capital equipment, Work in: Semiconductor capital equipment,

Aerospace, Automotive, Branded Consumer Goods Aerospace, Automotive, Branded Consumer Goods Pharmaceuticals & Biotech, IT, Telecommunications Pharmaceuticals & Biotech, IT, Telecommunications

What is a “strategy” What is a “strategy” anyway?anyway?

Effective strategies answer three key Effective strategies answer three key questions:questions:

How will we Create value?

How will weCapture value?

How will weDeliver value?

How will we create value?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 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?

How will we deliver value?How will we deliver value?– How do we manage the core business and growth How do we manage the core business and growth

simultaneously?simultaneously?– How do we use our strategy to drive real resource allocation?How do we use our strategy to drive real resource allocation?

Outline: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 practiceDoing strategy in practice

Why have a strategy?Why have a strategy?

Why have a strategy?Why have a strategy?

1. 1. To make choicesTo make choices

Is This Your Project Pipeline?

Overload at PreQuipOverload at PreQuipActive Projects

12345...

2627282930

(formal developmentprojects by number)

5412386

28624

35275

21515329

ResourcesRequired forCompletion(months)

82412204

369

30183

Months toCompletion(desired)

Implied Development ResourceAllocation (months)

This year Next year Year after that

4038509224

4862406029

146236

1720

1501380930

0230

220

1200

9500

(customer support, troubleshooting)All Other Support Activity –– –– 430 430 430

Total Development Requirements –– –– 2783 2956 2178

Available Resources (months) –– –– 960 960 960

Rate of Utilization (percent) –– –– 289.9 307.9 226.9

Overcommitment destroys Overcommitment destroys productivityproductivity

Average

Value-Added

Time on

Engineering

Tasks

Number of Projects per Engineer

100%

80%

60%

40%

0%

20%

65431 2

The Timing and Impact of Management The Timing and Impact of Management AttentionAttention

Phases

Index of Attention and

Influence

High

Low

ACTUAL

ACTIVITYMANAGEMENT

PROFILE

KnowledgeAcquisition

ConceptInvestigation

BasicDesign

Prototype Building

PilotProduction

Manufacturing Ramp-Up

ABILITYTO INFLUENCEOUTCOME

Why is it so hard to kill Why is it so hard to kill project #26?project #26? It’s a “good” project!It’s a “good” project! Good managers can meet stretch goals Good managers can meet stretch goals

(and I’m a good manager)(and I’m a good manager) Making difficult decisions takes time & energyMaking difficult decisions takes time & energy

It’s very hard to kill projects without a strategyIt’s very hard to kill projects without a strategy

Reasons to have a strategy:Reasons to have a strategy:

22. . To be able to change itTo be able to change it

A Key Framework: A Key Framework: The industry life cycleThe industry life cycle

Era of Ferment/Discontinuity

“Dominant design” emergesMaturity

IncrementalInnovation

The Industry Life Cycle as an S curveThe Industry Life Cycle as an S curve

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

The S-curve Maps Major TransitionsThe S-curve Maps Major Transitions

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Transitions often challenge existing Transitions often challenge existing organizations severelyorganizations severely

Cumulate share of sales of photolithographic alignment equipment, 1962-1986, by generation Contact Proximity Scanner S&R (1) S&R (2) Cobilt 44 <1 Kasper 17 8 7 Canon 67 21 9 P-Elmer 78 10 <1 GCA 55 12 Nikon 70 Total 61 75 99+ 81 82+

But they also create major opportunityBut they also create major opportunity

Corning glassCorning glass– Cookware to optical fiberCookware to optical fiber

HPHP– Instrumentation to computersInstrumentation to computers

IBMIBM– Mainframes to PCs to ServicesMainframes to PCs to Services

Eli LillyEli Lilly– ““Random” drug discovery to genetics and genomicsRandom” drug discovery to genetics and genomics

Discontinuities are hard!Discontinuities are hard!

Answers to the key strategic questions: Answers to the key strategic questions: – How do we create value?How do we create value?– How do we capture value?How do we capture value?– How do we deliver value?How do we deliver value?

CHANGE!CHANGE!

Course Outline:Course Outline: First Day:First Day:

– How will we create value?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 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 should we deliver value?

• How do we manage the core business and real growth How do we manage the core business and real growth simultaneously?simultaneously?

• How do we use our strategy to drive real resource allocation?How do we use our strategy to drive real resource allocation?

How shall we create value?How shall we create value?

The first of 3 key questionsThe first of 3 key questions

How will we Create value?

How will weCapture value?

How will weDeliver value?

Creating Value:Creating Value:

Understand how technologies will evolveUnderstand how technologies will evolve– (Both your own and those on which you rely)(Both your own and those on which you rely)

Understand how customer needs will evolveUnderstand how customer needs will evolve

Develop world class products and services that meet Develop world class products and services that meet customer needscustomer needs

AgendaAgenda

Predicting Technological ChangePredicting Technological Change– The Delphi ModelThe Delphi Model– Trend extrapolationTrend extrapolation

Predicting the Evolution of Customer NeedsPredicting the Evolution of Customer Needs– Basic segmentationBasic segmentation– Crossing the chasmCrossing the chasm– New technologies, new needsNew technologies, new needs

Can one forecast the path of Can one forecast the path of technological change?technological change? NoNo

ButBut Delphi modelsDelphi models Forecasting by analogyForecasting by analogy Trend extrapolationTrend extrapolation

Delphi ModelsDelphi Models Ask the experts!Ask the experts!

– A committee?A committee?– Structured questionnaires?Structured questionnaires?

ProsPros– Field experts are often years ahead of day to day Field experts are often years ahead of day to day

practice: technologies do not “come from no where”practice: technologies do not “come from no where”

ConsCons– They sometimes have little knowledge of possible They sometimes have little knowledge of possible

applicationsapplications– They can be enthusiasticThey can be enthusiastic

Forecasting by AnalogyForecasting by Analogy

The Internet will be like:

The Xbox will be like:

Personalized medicine will be like:

Forecasting by AnalogyForecasting 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?

Simple molecules<1nm

IBM PowerPC 750TM Microprocessor

7.56mm×8.799mm6.35×106 transistors

semiconductor nanocrystal (CdSe)5nm

10-10 10-510-9 10-7 10-610-8 10-4 10-3 10-2

m

Circuit designCopper wiringwidth 0.2m

red blood cell~5 m (SEM)DNA

proteins nm

bacteria1 m

Nanometer memory element(Lieber)1012 bits/cm2 (1Tbit/cm2)

Dimensions in Silicon and in BiologyDimensions in Silicon and in Biology

SOI transistorwidth 0.12m

control biological machines

diatom30 m

Is nanotechnology like biotechnology?Is nanotechnology like biotechnology?Patents

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

0 2 4 6 8 10 12 14 16 18 20

Years

SemiconductorsBiotechnologyNanotechnology

Is nanotechnology like biotechnology?Is nanotechnology like biotechnology?Venture Capital

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

0 2 4 6 8 10 12 14 16 18 20

Years

Semiconductors

Biotechnology

Nanotechnology

Trend analysisTrend analysis

The future is often much like the past, only more soThe future is often much like the past, only more so

Trend extrapolation: SemiconductorsTrend extrapolation: Semiconductors

0

100

200

300

400

500

600

1984 1986 1988 1990 1992 1994 1996 1998 2000

Year

Freq

uenc

y (M

Hz)

0

1

2

3

4

5

6

7

8

9

10

# Tr

ansi

stor

s (m

)

Frequency (MHz)#transistors(m)

Issues in Trend ExtrapolationIssues 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 Exploring the difference between progress as a result

of the passage of time, and progress as the result of of the passage of time, and progress as the result of returns to effortreturns to effort

Predicting progress in complementary technologiesPredicting progress in complementary technologies

Do all good things come to an end?Do all good things come to an end?Technological exhaustionTechnological exhaustion

Performance

Time

Physical limit?

Performance is ultimately constrainedby physical limits

E.g.:Sailing ships & the power of the windCopper wire & transmission capabilitySemiconductors & the speed of the electron

Evolution of Measurement-While-Drilling toolsS-Curve

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

1 2 3 4 5 6 7 8 9

Positive Mud Pulse

Positive Mud Pulse 2nd Generation

Continuous M.P. - 1GNegative 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 )

Perf

orm

ance

= D

ata

Tran

smis

sion

Rat

e (b

it pe

r sec

ond)

Shallow wells onlyAll well conditions

Dominant Design = Continuous Mud Pulse Telemetry

Improvements in Modem Speed

0

10000

20000

30000

40000

50000

60000

1960 1965 1970 1975 1980 1985 1990 1995 2000

Time

Mod

em S

peed

, Bps

The Evolution of Palomar’s Products: The Evolution of Palomar’s Products: Laser Based Skin TreatmentLaser Based Skin Treatment

400 pounds

E2000Ruby Laser

LightSheer

120 Pounds

MaterialMaterialProductProduct PricePrice CostCost Year YearEpiLaserEpiLaser™™ $150K$150K $80K$80K 19961996E2000E2000™™ $130K$130K $60K$60K 19971997LightSheerLightSheer™™ $100K$100K $40K$40K 19981998SLP1000SLP1000™™ $65K$65K $25K$25K 20002000EsteLuxEsteLux™™ $40K$40K $ 4K$ 4K 20012001MediLuxMediLux™™ $50K$50K $ 4K$ 4K 20032003NeoLuxNeoLux™™ $30K$30K $ 4K$ 4K 20032003StarLuxStarLux™™ $80K$80K $ 5K$ 5K 20042004

Lux HandpiecesLux Handpieces $10K$10K $ 1K$ 1K 2002-42002-4Home DevicesHome Devices ? ? ? ? ? ?

MediLux

48 pounds

0

20

40

60

80

100

120

140

160

1994 1996 1998 2000 2002 2004 2006

YearPr

ice,

Cos

t $00

0

PriceCost

Moore’s Law at WorkMoore’s Law at Work

$0.01

$0.10

$1.00

$10.00

$100.00

$1,000.00

$10,000.00

$100,000.00

$1,000,000.00

$10,000,000.00

$100,000,000.00

$1,000,000,000.00

1959 1969 1979 1989 1999 2009[Source: Hans P. Moravec 1998-2003]

Dol

lars

per

MIP

10x reductionevery 7.5 years

10x reduction every 4.25 years

Semiconductor Performance: Minimum Line Width over Time

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Year

Min

imum

Fea

ture

Siz

e

Semiconductor Performance: Minimum Line Width over Time

0.1

1

10

100

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Year

Min

imum

Fea

ture

Siz

e

Modeling the returns to Modeling the returns to efforteffort vs. vs. timetime

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

Semiconductors: Minimum feature size vs "effort"

0.1

1

10

0 10000 20000 30000 40000 50000 60000

Cumulative commerical patents

Min

imum

feat

ure

size

Reflections on the S CurveReflections on the S Curve

Which unit of analysis? Which unit of analysis? – Industry? Firm? Technology? Product? 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 The S curve is best viewed as a tool for triggering discussion, not as a “scientific reality”discussion, not as a “scientific reality”

The Evolution of MarketsThe Evolution of Markets

oror

Predicting the pattern of Predicting the pattern of customer needscustomer needs

Market Evolution over the Life CycleMarket Evolution over the Life Cycle

Market segmentationMarket segmentation Crossing the chasmCrossing the chasm New markets, new needs: New markets, new needs:

– The Innovator’s DilemmaThe Innovator’s Dilemma

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

Performance

Time

Understanding market dynamics:Understanding market dynamics:Basic segmentation (Rogers)Basic segmentation (Rogers)

UnitsBought

Time

Innovators

EarlyAdopters

EarlyMajority

LateMajority

Laggards

Adopters differ by, for example, social, economic status -- particularly resources, affinity for risk,knowledge, complementary assets, interest in the product

Understanding market dynamics:Understanding market dynamics:Crossing the chasm: (Moore)Crossing the chasm: (Moore)

Time

Innovators

EarlyAdopters

EarlyMajority

LateMajority

Laggards

Making 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.

Crossing the chasm?

UnitsBought

Managing customers at momentsManaging customers at momentsof discontinuityof discontinuity

Performance

Time

Who buys a technologywhen it is firstintroduced?

New technologies sell to:- New customers- With new needs- Often at lower margins

The Innovator’s Dilemma: “Disruptive” The Innovator’s Dilemma: “Disruptive” technologies may threaten established firmstechnologies may threaten established firms

Performance

Time

Established technology

Mainstream customer needs

Niche customer needs

Invasive Technology

Clay Christensen: The Innovator’s Dilemma

Unpacking the Innovator’s Dilemma: Unpacking the Innovator’s Dilemma: The case of the power barThe case of the power bar

Step & Repeat aligners initially sold to Step & Repeat aligners initially sold to customers with different needs:customers with different needs:

Speed

Yield

Scanning ProjectionAligners

Step & RepeatAligners

But then they improved enough to take the But then they improved enough to take the whole marketwhole market

Speed

Yield

Scanning ProjectionAligners

Step & RepeatAligners

Changing Tradeoffs in Photolithography

0

20

40

60

80

100

120

140

0 1 2 3 4 5 6

Yield

Spe

ed (w

afer

s/m

ing) Scanning

ProjectionAligners

S&R 1

S&R 2

Initially, PDAs did not seem to be a Initially, PDAs did not seem to be a threat to PCs:threat to PCs:

Speed,Power,Memory

Time

PCs

PDAs

?

PDAs sold to customers with different PDAs sold to customers with different needs:needs:

Speed,Power,Memory

Weight/cost

PCs

PDAs

But as PDAs improve they may come to But as PDAs improve they may come to challenge PCschallenge PCs

?Speed,Power,Memory

Weight/cost

PCs

PDAs

Or consumer preferences may changeOr consumer preferences may change

?

Speed,Power,Memory

Weight/cost

PCs

PDAs

Exercise: Industry EvolutionExercise: Industry Evolution Consider the two industries:Consider the two industries:

– Publishing (Books or music)Publishing (Books or music)– Cellular telephonyCellular telephony

For each industry:For each industry:– Sketch the relevant S curves. Sketch the relevant S curves.

• What are the appropriate (technical) measures of What are the appropriate (technical) measures of performance? Are there more than one?performance? Are there more than one?

• Where is this industry now? Are there major growth areas Where is this industry now? Are there major growth areas or discontinuities on the horizon?or discontinuities on the horizon?

– Sketch the likely trajectory of customer needsSketch the likely trajectory of customer needs Choose one industry and be prepared to present your Choose one industry and be prepared to present your

results to the groupresults to the group

Managing the change in customer Managing the change in customer groups may be the hardest task!groups may be the hardest task!

Performance

Effort

Leading edge customerfocused research may be a critical capability

The marketing strategy issue at a major The marketing strategy issue at a major materials supplier: materials supplier:

The Market

SBU 3

SBU 2

SBU 1

?$100m

Biomaterialswork

CR&D

?

What can be done?What can be done?

““Ready, aim, fire”Ready, aim, fire” Small scale experimentsSmall scale experiments Market research of all kinds:Market research of all kinds:

– Conjoint analysis Conjoint analysis – Direct customer contactDirect customer contact– Virtual productsVirtual products– Lead user researchLead user research

Significant resources required?Significant resources required?

Creating Value:Creating Value:

Understand how customer needs will evolveUnderstand how customer needs will evolve Understand how technologies will evolveUnderstand how technologies will evolve

– (Both your own and those on which you rely)(Both your own and those on which you rely)

Develop world class products and services that meet Develop world class products and services that meet customer needscustomer needs

How shall we capture How shall we capture value?value?

Uniqueness, Complementary Assets & Uniqueness, Complementary Assets & the Structure of the Value Chainthe Structure of the Value Chain

The second of two key questions:The second of two key questions:

How will we Create value?

How will weCapture value?

How will weDeliver value?

How shall we capture value?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 How should we compete if standards are important? important?

Or: Or: What determines the Inventor’s Share?What determines the Inventor’s Share?

Customers

Inventor

Suppliers

Imitators,followers

Is it the case that Is it the case that great ideas = pots of money?great ideas = pots of money?

Valuecaptured

Value created(through “raw” invention)

ViagraNylon

Xerox (early)

Xerox (late)Apple

Coca ColaWal MartDell

RC Cola

Three key ideas:Three key ideas:

UniquenessUniqueness– Controlling the knowledge generated by an innovationControlling the knowledge generated by an innovation

Complementary assetsComplementary assets– Controlling the assets that maximize the profits from Controlling the assets that maximize the profits from

innovatinginnovating

Understanding the dynamics of the value chainUnderstanding the dynamics of the value chain– Should we buy our suppliers? Distributors?Should we buy our suppliers? Distributors?– Should we outsource our manufacturing… Should we outsource our manufacturing…

distribution… sales… capability?distribution… sales… capability?

Uniqueness is very important:Uniqueness is very important:

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

Sources of UniquenessSources of Uniqueness

Intellectual property protectionIntellectual property protection– PatentsPatents

• Finite lengthFinite length• The right to prohibit “producing”The right to prohibit “producing”

– CopyrightsCopyrights• The right to prohibit “copying”The right to prohibit “copying”

SecrecySecrecy– Trade secrets & non compete clausesTrade secrets & non compete clauses– ““Tacit” knowledgeTacit” knowledge

SpeedSpeed

IP in historical perspectiveIP in historical perspectiveUS Patents granted per 1000 population

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

The 2003 The 2003 Intellectual Property Owners AssociationIntellectual Property Owners AssociationSurvey on the Strategic Management of Survey on the Strategic Management of

Intellectual Property in America’s CorporationsIntellectual Property in America’s Corporations

Iain CockburnIain CockburnBoston University and NBERBoston University and NBER

Rebecca HendersonRebecca HendersonMIT and NBERMIT and NBER

Survey methodologySurvey methodology

Targeted at senior IP managers, typically Chief Patent Targeted at senior IP managers, typically Chief Patent CounselCounsel

Depth at the expense of breadth: 18 page Depth at the expense of breadth: 18 page questionnaire, more than 120 questions!questionnaire, more than 120 questions!

Core sample frame: IPO membership, supplemented Core sample frame: IPO membership, supplemented with additional mailing to Delphion listwith additional mailing to Delphion list

Response rate: 1/3 of IPO membership, 5% of others. Response rate: 1/3 of IPO membership, 5% of others. N=66.N=66.

Sample characteristicsSample characteristics

Sample of responding companies dominated by large Sample of responding companies dominated by large manufacturing companiesmanufacturing companies– Chemicals 22%Chemicals 22%– IT and communications 44%IT and communications 44%– Life sciences 15%Life sciences 15%– Mechanical 16%Mechanical 16%

Average sales $20bn, 2001 market cap $44bnAverage sales $20bn, 2001 market cap $44bn Average of 14 full time IP attorneys, 264 patent Average of 14 full time IP attorneys, 264 patent

applications, $91MM licensing revenueapplications, $91MM licensing revenue

We found:We found:

Many companies report limits to the effectiveness of Many companies report limits to the effectiveness of patents: 43% (!) agree that “many of our most important patents: 43% (!) agree that “many of our most important ideas cannot be effectively protected with patents”ideas cannot be effectively protected with patents”

Yet most rate formal IP rights the most important means Yet most rate formal IP rights the most important means of controlling the use of technologyof controlling the use of technology

Contract law (NDAs, NCAs etc.) also highly ratedContract law (NDAs, NCAs etc.) also highly rated

Strategic use of IP?Strategic use of IP?

Our overall impression is that the IP strategy of the Our overall impression is that the IP strategy of the majority of companies is majority of companies is defensivedefensive– Non-confrontational responses to competitorsNon-confrontational responses to competitors– Relatively conservative and cautious policiesRelatively conservative and cautious policies

Companies are ambivalent about the role of IP in Companies are ambivalent about the role of IP in business strategybusiness strategy– Many report that profitability and returns to R&D are linked Many report that profitability and returns to R&D are linked

to strong IP positions and aggressive strategic posture, but to strong IP positions and aggressive strategic posture, but few report activity by their company consistent with this…few report activity by their company consistent with this…

Competitive interaction in IPCompetitive interaction in IP 65% of surveyed companies report that the most profitable 65% of surveyed companies report that the most profitable

companies in their industry “react aggressively to IP activity companies in their industry “react aggressively to IP activity by competitors”by competitors”

But But – Less than 20% would attempt to “fence in” an aggressive Less than 20% would attempt to “fence in” an aggressive

competitor by building IP assetscompetitor by building IP assets– More than 90% do not “always evaluate competitor reactions” More than 90% do not “always evaluate competitor reactions”

when filing patentswhen filing patents– Only 1/3 anticipate triggering an “arms race” if many new Only 1/3 anticipate triggering an “arms race” if many new

patents are filedpatents are filed

SoSo

It is critically important to proactively develop an IP It is critically important to proactively develop an IP strategy that is tightly integrated to the strategic goals strategy that is tightly integrated to the strategic goals of the businessof the business

But…But…

Uniqueness is powerful but often Uniqueness is powerful but often difficult to maintaindifficult to maintain

Legal mechanisms can be costly to create, and then Legal mechanisms can be costly to create, and then even more costly to enforce: and sometimes they even more costly to enforce: and sometimes they require public disclosurerequire public disclosure

Secrecy may be difficult to maintainSecrecy may be difficult to maintain Speed is hard work, and sometimes imitableSpeed is hard work, and sometimes imitable

What are Complementary Assets?What are Complementary Assets?

Those assets that allow a firm to make money, even if Those assets that allow a firm to make money, even if the innovation is not unique:the innovation is not unique:

The answer to the question:The answer to the question:– If our innovations were instantly available to our If our innovations were instantly available to our

competitors, would we still make money? Why?competitors, would we still make money? Why?

In the best case, complementary assets In the best case, complementary assets should be should be tightly heldtightly held

Complementary assets that are tightly held are not Complementary assets that are tightly held are not easily available to entrants or to most competitorseasily available to entrants or to most competitors

Types of Complementary AssetsTypes of Complementary Assets

Things you can doThings you can do– Manufacturing capabilitiesManufacturing capabilities– Sales and service expertiseSales and service expertise

Things you ownThings you own– Brand nameBrand name– Distribution channelsDistribution channels– Customer relationshipsCustomer relationships

COMPETENCIES

RESOURCES

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

Competencies Resources

Exercise:Exercise:

Complementary assets are:Available Tightly

held

Position:Frozen foods PublishingCell phonesYour industry/firm

Easy to maintain

Hard tomaintain

Uniqueness is:

Uniqueness & Complementary Assets Uniqueness & Complementary Assets over the Life Cycle:over the Life Cycle:

Ferment

Takeoff

Maturity

UniquenessComplementary

Assets

Managing discontinuities means Managing discontinuities means managing complementary assets:managing complementary assets:

Performance

Time

Ferment

Takeoff

Maturity

DiscontinuityWhich of my complementary assets are useful?

Uniqueness & Complementary Assets: Uniqueness & Complementary Assets: Strategic ImperativesStrategic Imperatives

Defend uniqueness if possible and appropriateDefend uniqueness if possible and appropriate Build complementary assets in advance of competitionBuild complementary assets in advance of competition At moments of discontinuity ask:At moments of discontinuity ask:

– Are my complementary assets useful?Are my complementary assets useful?– If so, which ones?If so, which ones?

How shall we capture value?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?

Power in the Value ChainPower in the Value Chain

Porter’s “5 (actually at least 7) Forces”: Porter’s “5 (actually at least 7) Forces”: Thinking about the balance of powerThinking about the balance of power

Entrants

Substitutes

Suppliers BuyersRivals

Political, regulatory and institutional context

“Complementors”

C.Assets/Uniqueness speak to Rivalry C.Assets/Uniqueness speak to Rivalry and the Threat of Entry.and the Threat of Entry.

Entrants

Substitutes

Suppliers BuyersRivals

Porter reminds us to think about the Porter reminds us to think about the structure of the value chain:structure of the value chain:

Entrants

Substitutes

Suppliers BuyersRivals

Powerful suppliers and buyers may Powerful suppliers and buyers may constrain profitabilityconstrain profitability

Suppliers Buyers

Does this mean that if the Does this mean that if the money is down (up) stream money is down (up) stream

we should forwards we should forwards (backwards) integrate?(backwards) integrate?

If the money is in lobster If the money is in lobster restaurants, restaurants,

should the lobster fisherman go should the lobster fisherman go into the restaurant business?into the restaurant business?

Key Questions:Key Questions:

When should an entrepreneurial firm develop it’s own:When should an entrepreneurial firm develop it’s own:– Manufacturing Manufacturing – DistributionDistribution– SalesSales– …….. capabilities?.. capabilities?

When should a mature firm outsource it’s:When should a mature firm outsource it’s:– Manufacturing Manufacturing – DistributionDistribution– SalesSales– …….. capabilities?.. capabilities?

Exercise:Exercise:

Under what conditionsUnder what conditions should an entrepreneurial firm should an entrepreneurial firm develop it’s own:develop it’s own:– Manufacturing Manufacturing – DistributionDistribution– SalesSales– …….. capabilities?.. capabilities?

And when should it subcontract/partner for them?And when should it subcontract/partner for them?

Comparing “make” vs. “buy”Comparing “make” vs. “buy”

Startup

Asset

Supplier

Startup

Asset

Supplier

Key Considerations:Key Considerations:

How easy is it to write contracts?How easy is it to write contracts?– How tight is the IP regime?How tight is the IP regime?– How much uncertainty is there?How much uncertainty is there?– ““Specificity” of the asset – how “thick” is the market?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 What will be the key complementary assets going forward?forward?

Make vs. Buy over the life cycleMake vs. Buy over the life cycle

Performance

Time

Mostly Buy?

Mostly Make? ????

????

So “make” (i.e. do it in-house) if:So “make” (i.e. do it in-house) if:

There are significant IP worriesThere are significant IP worries There are likely to be contractual problemsThere are likely to be contractual problems

– We can’t be sure of getting the “fair” priceWe can’t be sure of getting the “fair” price– We can’t be sure they’ll do the work “right”We can’t be sure they’ll do the work “right”– I.e., when market are “thin” or there is limited I.e., when market are “thin” or there is limited

informationinformation We have unique competencies that are relevant We have unique competencies that are relevant And if buying won’t destroy everyone’s incentives to And if buying won’t destroy everyone’s incentives to

be creative and energeticbe creative and energetic

But remember…But remember…

One cannot “buy” profit – if everyone knows it is there One cannot “buy” profit – if everyone knows it is there – it will be in the price– it will be in the price

Besides, shouldn’t we “stick to our knitting”?Besides, shouldn’t we “stick to our knitting”? Wouldn’t you rather deal with an independent firm, Wouldn’t you rather deal with an independent firm,

whom you could fire, than an internal subsidiary?whom you could fire, than an internal subsidiary?

Control & Coordination

Make vs. BuyMake vs. Buy

EntrepreneurialDrive,Freedom from the “old ways” Make

Buy

Standards and Strategy:Standards and Strategy:Competing in Increasingly Competing in Increasingly

Open WorldsOpen Worlds

Professor Rebecca Henderson

MIT Sloan School of Management Phone: (617) 253-6618, Email: Rhenderson@mit.edu,

http://www.mit.edu/people/rhenders/home.html

What is a standard?What is a standard?

A standard is a specification that allows for A standard is a specification that allows for interoperabilityinteroperability

Eg:Eg:– Cups and lidsCups and lids– Pistons and enginesPistons and engines– Telephones and socketsTelephones and sockets– Speakers and amplifiersSpeakers and amplifiers– Hardware and softwareHardware and software

Questions: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 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”?

Answers:Answers: A A standardstandard is a particular interface, format or system that allows for is a particular interface, format or system that allows for

interoperabilityinteroperability Switching costsSwitching costs are incurred when a customer changes from one supplier or are incurred when a customer changes from one supplier or

marketplace to another. The greater the costs, the more difficult it is to switchmarketplace to another. The greater the costs, the more difficult it is to switch A product or technology benefits from A product or technology benefits from network effectsnetwork effects or or network externalitiesnetwork externalities

if a significant part of its value to a consumer lies in the size of its (actual or if a significant part of its value to a consumer lies in the size of its (actual or anticipated) installed base, or market shareanticipated) installed base, or market share

Positive feedbackPositive feedback involves a chain of consequences that produces a dynamic involves a chain of consequences that produces a dynamic outcome by feeding off itself – an outcome by feeding off itself – an amplificationamplification effect effect

Success becomes self-reinforcing with Success becomes self-reinforcing with increasing returns to scaleincreasing returns to scale. Demand . Demand creates further demandcreates further demand

If consumers believe that one If consumers believe that one standardstandard is going to capture a very large share of is going to capture a very large share of the market, and that a competing the market, and that a competing standardstandard is not viable, then the market will is not viable, then the market will ““tiptip” towards the more successful ” towards the more successful standardstandard

Lock-inLock-in occurs occurs once a market has once a market has tippedtipped. . Switching costsSwitching costs may be high, and it may be high, and it is therefore difficult to get a market to tip to an alternative standardis therefore difficult to get a market to tip to an alternative standard

The The MicrosoftMicrosoft operating system monopoly exemplifies “ operating system monopoly exemplifies “winner-takes-allwinner-takes-all””

OutlineOutline

Moving from “product” to “systems” competitionMoving from “product” to “systems” competition Coming soon to an industry near you: the push for Coming soon to an industry near you: the push for

public open standardspublic open standards Will all markets “tip”? – managing the complexity of Will all markets “tip”? – managing the complexity of

standards evolutionstandards evolution Making money in an open worldMaking money in an open world

It’s not just about high technologyIt’s not just about high technology

BicyclesBicycles Financial servicesFinancial services Health careHealth care AutomobilesAutomobiles

The challengeThe challenge

Performance

Time

Sellingproducts

Selling (parts of)interconnected

systems

Selling ProductsSelling Products

Customers who care about Customers who care about products “on their own products “on their own terms”: is this the right terms”: is this the right product for me?product for me?

Build the “best” productBuild the “best” product– Best designedBest designed– Lowest costLowest cost– Most reliableMost reliable

Selling Interconnected Selling Interconnected SystemsSystems

Customers who care about the Customers who care about the total system experience: will total system experience: will this connect with the rest of my this connect with the rest of my world?world?

Control the architectureControl the architectureOrOr

Influence the architecture and Influence the architecture and build the best products within itbuild the best products within it

These transitions raise both strategic These transitions raise both strategic and organizational questionsand organizational questions

Performance

Time

What strategy should

we pursue?

How do we execute it?

The push for public open The push for public open standardsstandards

The pros and cons of open standardsThe pros and cons of open standards

ProsPros

ConsCons

ProsPros

ConsCons

Thinking about the dynamics of the Thinking about the dynamics of the strategic spacestrategic space

Control is:

Public

Private

Access is:Open Closed

Details of standard aremade 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: nosingle firm has control over how they evolve: no charge for their use

E.g. TCP/IP, HTML

Standards are owned and controlled by thepublic sector but are not freely available

E.g. Cryptography

Technology may be standard, but detailsare not made availablebeyond the firm

E.g. Landmark Graphics, IBM 360

IBM360

In practice these boundaries are fuzzy:In practice these boundaries are fuzzy:

Control is:

MorePublic

MorePrivate

Access is:MoreOpen

MoreClosed

Linux

Symbian

CDMAWindows

Mercury/Corba

Control is:

MorePublic

MorePrivate

Access is:

MoreOpen

MoreClosed

Conventional logic (1):Conventional logic (1):What do customers prefer?What do customers prefer?

Conventional logic (2):Conventional logic (2):What do producers prefer?What do producers prefer?

Control is:

MorePublic

MorePrivate

Access is:

MoreOpen

MoreClosed

Wireless communications in transitionWireless communications in transition

Network Operation

Applications

Operating Systems

Device Design

Chipset Design

UI

VodafoneNTT DoCoMo

Motorola Siemens

TI

Qualcomm

Device Manufacture

Chipset Manufacture

Service Provision

MotorolaI-250 and beyond Infineon

OrangeT-Mobile

MicrosoftLinux

VodafoneLive!

W-CDMA

BREW

SavaJeWindows

Windows

Microsoft

Live!

SonyEricsson

Clones and Asians

EMS Players

Samsung

MicrosoftUIQ

Nokia

Symbian

Series60-90

Series60-90

Symbian SymbianSymbian

Market Share

Val

ue S

hare

Will all markets tip?Will all markets tip?

Or:Or:Getting a standard establishedGetting a standard established

TippingTipping

Markets “tip” when one standard becomes the Markets “tip” when one standard becomes the preferred choice of nearly every consumerpreferred choice of nearly every consumer– VHSVHS– Windows on the PCWindows on the PC

Not all markets tip: in some markets multiple Not all markets tip: in some markets multiple standards co-existstandards co-exist– UNIX vs. Windows on serversUNIX vs. Windows on servers– Sony vs. Microsoft in video gamesSony vs. Microsoft in video games– Palm vs. Windows CE in PDAsPalm vs. Windows CE in PDAs– Multiple standards in cellular phonesMultiple standards in cellular phones

““Great products” vs. “Architectures”Great products” vs. “Architectures”Great ProductsGreat Products Consumers base their Consumers base their

purchase decision on the purchase decision on the intrinsic value of the product intrinsic value of the product to themto them

What would this be worth to What would this be worth to me if I were the only buyer in me if I were the only buyer in the world?the world?

Competition on the basis of Competition on the basis of features, price etcfeatures, price etc

ArchitecturesArchitectures Consumers base purchase Consumers base purchase

decisions on the size of the decisions on the size of the (actual or projected) installed (actual or projected) installed base and/or the (actual or base and/or the (actual or projected) availability of projected) availability of network externalitiesnetwork externalities

How many other people are How many other people are likely to buy this product?likely to buy this product?

Competition on the basis of Competition on the basis of the size of network effects: the size of network effects: installed base, availability of installed base, availability of complementary products etccomplementary products etc

31

With Strong Network Effects With Strong Network Effects Market Market Share Itself Creates ValueShare Itself Creates Value

Value toconsumer

Actual (or anticipated) size of the installed base

Value of standardsDriven product

Conventional product

28

If network effects are important, If network effects are important, markets may “tip”markets may “tip”

0

1

0 1

Probabilitythe next consumer chooses to buy A

A’s share of installed base

Probability of Purchase vs Share of sales: Betamax

0

20

40

60

80

100

120

0 20 40 60 80 100 120

Share of installed base

Sha

re o

f sal

es

Share of installed base vs purchase probability: VHS

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100

Share of installed base

Sha

re o

f sal

es

Annual Production: VHS vs Beta

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1974 1976 1978 1980 1982 1984 1986 1988 1990

Year

Ann

ual P

rodu

ctio

n, T

hous

ands

of u

nits

VHSVHS

BetamaxBetamax

Tipping dynamics differ with the Tipping dynamics differ with the strength of network effectsstrength of network effects

Value toconsumer

Actual (or anticipated) size of the installed base

Products withextensive N.effects

Conventional product

Products with“threshold”

network effects

Markets with moderate network effects only Markets with moderate network effects only tip once critical thresholds are reachedtip once critical thresholds are reached

Probabilitythe next consumer chooses to buy fromFirm A

1

0Firm A’s actual or anticipated share of installed base

1

Will this market tip?Will this market tip?

Network Operation

Applications

Operating Systems

Device Design

Chipset Design

UI

VodafoneNTT DoCoMo

Motorola Siemens

TI

Qualcomm

Device Manufacture

Chipset Manufacture

Service Provision

MotorolaI-250 and beyond Infineon

OrangeT-Mobile

MicrosoftLinux

VodafoneLive!

W-CDMA

BREW

SavaJeWindows

Windows

Microsoft

Live!

SonyEricsson

Clones and Asians

EMS Players

Samsung

MicrosoftUIQ

Nokia

Symbian

Series60-90

Series60-90

Symbian SymbianSymbian

Market Share

Val

ue S

hare

How are standards established?How are standards established?

Standards “win” when a critical mass of consumers Standards “win” when a critical mass of consumers have adopted them have adopted them

OR:OR:

When a critical mass of key players believe that the When a critical mass of key players believe that the standard will be adopted.standard will be adopted.

Establishing a standard: SunEstablishing a standard: Sun

Sun founded in 1982 to focus on the workstation Sun founded in 1982 to focus on the workstation marketmarket

““Open” standard: Open” standard: – Standard components, Standard components, – UNIX operating systemUNIX operating system

Sun (2)Sun (2)

1980: Apollo founded1980: Apollo founded 1983: Apollo has $18m in sales, dominates the 1983: Apollo has $18m in sales, dominates the

workstation market -- uses a proprietary operating workstation market -- uses a proprietary operating systemsystem

1983: Sun has $1m in sales, mostly to universities1983: Sun has $1m in sales, mostly to universities Lead customer, Computervision “likes the technology Lead customer, Computervision “likes the technology

but doesn’t find the company credible” -- “we love your but doesn’t find the company credible” -- “we love your technology but there is no way you can supply it. technology but there is no way you can supply it. Apollo is the standard in the industry, well financed Apollo is the standard in the industry, well financed and well managed.”and well managed.”

What should Sun do?What should Sun do?

Establishing a standardEstablishing a standard

Introduce a great “product” Introduce a great “product” Come to market ahead of competitionCome to market ahead of competition Build expectationsBuild expectations Develop, or encourage the development of, Develop, or encourage the development of,

complementary products and servicescomplementary products and services Give it away: put the standard in the public sectorGive it away: put the standard in the public sector

Making money in Making money in an open worldan open world

Where’s the money?Where’s the money?Competition in a closed, private worldCompetition in a closed, private world

Where’s the money?Where’s the money?Competition in an open private worldCompetition in an open private world

Where’s the money?Where’s the money?The challenge of an open public worldThe challenge of an open public world

Making money in an open public worldMaking 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…Do it better, faster, cheaper, in a more integrated way…– Leverage “complementary assets”Leverage “complementary assets”

Be part of the evolution of the playing field:Be part of the evolution of the playing field:– Exploring “soft” standardsExploring “soft” standards

Business models in the different Business models in the different quadrantsquadrants

Control is:

Public

Private

The technology is:Open Closed

Compete on a level field

Move to “soft” standards?Run hard

Encourage the“ecosystem”

Embrace/extendRun hard

Deliver a best inclass system

Run hard

Exploring soft standardsExploring soft standards

A “soft” standard is a specification that is completely A “soft” standard is a specification that is completely compatible with current public standards but offers compatible with current public standards but offers enhanced functionality and performanceenhanced functionality and performance

It offers customers the security of knowing that they It offers customers the security of knowing that they have avoided being “locked in” and an upgrade path have avoided being “locked in” and an upgrade path to the public standard to the public standard

Plus the functionality and performance of a more finely Plus the functionality and performance of a more finely “tuned” technology“tuned” technology

May permit significant premium pricing and the May permit significant premium pricing and the generation of customer loyaltygeneration of customer loyalty

Soft standards in action:Soft standards in action:

Perf.

Time

Publicstandard

“Soft” standard

Managing soft standardsManaging soft standards

Maintaining customer trust is critical:Maintaining customer trust is critical:– The instant they come to believe you’re trying to lock The instant they come to believe you’re trying to lock

them in, there will be troublethem in, there will be trouble The technology task is complex. The “soft” standard The technology task is complex. The “soft” standard

must be:must be:– Better than the public standardBetter than the public standard– Compatible with the current versionCompatible with the current version– Compatible with future versionsCompatible with future versions

Ensuring that the “soft” technology is embodied in Ensuring that the “soft” technology is embodied in future generations of the technology may be a central future generations of the technology may be a central strategic goalstrategic goal

SummarySummary

The move from “product” to “system” competitions raises The move from “product” to “system” competitions raises both strategic and organizational issuesboth strategic and organizational issues

And increases the force behind the push for open And increases the force behind the push for open standardsstandards

Not all markets tip: but as network effects (connectivity, Not all markets tip: but as network effects (connectivity, complementary services, tools, products) become more complementary services, tools, products) become more important, more and more will. important, more and more will.

Getting a private standard established in these kinds of Getting a private standard established in these kinds of worlds is likely to be very hardworlds is likely to be very hard

Fortunately, there are ways to make money in an open Fortunately, there are ways to make money in an open world - but managing a “soft” standard requires sustained world - but managing a “soft” standard requires sustained attentionattention

SummarySummary

Two day outline:Two day outline: How will we create value?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 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?

How will we deliver value?How will we deliver value?– How do we manage the core business and real growth How do we manage the core business and real growth

simultaneously?simultaneously?– How do we use our strategy to drive real resource allocation?How do we use our strategy to drive real resource allocation?

Putting the pieces together….Putting the pieces together….

Ferment

Takeoff

Maturity

TechnologyMarkets

CompetitionOrganization

Tomorrow: Tomorrow: Organizational Competence & ChangeOrganizational Competence & Change

Performance

Time

?

?

For tomorrow: KODAKFor tomorrow: KODAK

Evaluate Kodak’s digital imaging strategy to dateEvaluate Kodak’s digital imaging strategy to date– ““B+” or “F”?B+” or “F”?

How would you evaluate the decision to invest in How would you evaluate the decision to invest in digital imaging:digital imaging:– In the 80s? In the 90s? Now?In the 80s? In the 90s? Now?

Given that they made the decision to invest, how Given that they made the decision to invest, how would you evaluate their execution?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?Where should they try to play in the digital value chain?– How should they organize their digital efforts? How should they organize their digital efforts?