rewiring electronics - ibm

IBM Global Business Services

Electronics

IBM Institute for Business Value

Discovering strategies for sustainable growth from a business ecosystem perspective

Rewiring electronics

IBM Global Business Services, through the IBM Institute for Business Value, develops fact-

based strategic insights for senior business executives around critical industry-specific and

cross-industry issues. This executive brief is based on an in-depth study by the Institute’s

research team. It is part of an ongoing commitment by IBM Global Business Services to

provide analysis and viewpoints that help companies realize business value. You may contact

the authors or send an e-mail to [email protected] for more information.

Rewiring electronics IBM Global Business Services�

IntroductionElectronics represent a growing value add for today’s product markets, but electronics companies seem reluctant to choose what appears to be the most promising growth strategy: diversification with new products into new markets. An ecosystem analogy can help electronics companies better understand how they can interact with each other to surface new opportunities, ease entry into new markets and achieve sustainable growth. Strategies based on innovation rather than domination can enable growth of the entire ecosystem – and the companies that comprise it. By taking the ecosystem view, global electronics companies can capture new growth by focusing on markets where electronics products are a core value add.

In search of profitable growthIn the 2004 IBM Global CEO study, electronics executives cited growth as the top priority for their industry.1 Respondents overwhelmingly considered profitable growth (revenue growth paired with cost reduction) to be the primary key to success (see Figure 1). But IBM research also indicates that they tend to rely on the traditional strategies of market penetration, product development and market development to achieve growth. As Figure 2 shows, diversification – growing with new products in new markets – ranked lowest among perceived strategic opportunities for growing revenues.

Figure 1. Profitable revenue growth is the key concern of global electronics executives.

Contents

1 Introduction

1 In search of profitable growth

3 The limits of traditional strategies

6 Breakthrough growth potential through diversification

7 Diversification in new markets with new products: the ecosystem view

10 Assessing the health of electronics ecosystems

11 Adapting the business model to find and support an ecosystem role

12 An ecosystem health check: the telecom electronics ecosystem

14 Leveraging the ecosystem view to realize electronics industry diversification

15 Managing profitable growth: finding your ecosystem role

16 About the author

16 About IBM Global Business Services

17 References

Revenue growth

Cost reduction

Asset utilization

Risk management

Effectiveness improvements

0 20 40 60 80 100

Source: “Your Turn: The Global CEO Study 2004,” IBM Global Business Services.Percent

ElectronicsAll industries


Figure 2. Electronics executives tend to focus on traditional approaches to achieve growth.

In interviews conducted by the IBM Institute for Business Value, electronics executives indicated that their reluctance arises from a high perceived risk of pursuing diversification in the wake of recent market downturns. While strategic retrenchment is often an appropriate response to uncertain conditions, over time the urge to avoid risk can take on a life of its own – often to the detriment of companies in highturnover markets like electronics.

Indeed, analysis by IBM shows that playing it safe is not a winning strategy in today’s electronics marketplace. The rate of electronics industry revenue growth has been falling since the end of the late1990s boom era and is not expected to rebound in the coming years. The telecom industry provides one example. As seen in Figure 3, after growth spikes in 2000, electronics companies within the telecom industry value chain – from telecom equipment providers to semiconductor manufacturers – are in most cases stagnant or even suffering declining revenue growth.

Figure 3. Today’s common strategies yield limited success in meeting growth and industry leadership objectives.

“One of the challenges for

the industry is that we have

a tendency to become risk-

averse. You must take risks,

think out of the box and not

accept incrementalization.

That’s been the strength of

this industry. I’m concerned

that people have become

more conservative because

of the last three years.”

– Ned Barnholt, President and

CEO of Agilent Technologies 2

New products and services

New markets

Customer intimacy

New channels

Diversification

0 20 40 60 80 100Percent

ElectronicsAll industries

Source: “Your Turn: The Global CEO Study 2004,” IBM Global Business Services.

60

50

40

30

20

10

0

-10

-20

-30

-40

-50

Perc

ent r

even

ue g

row

th

2000 2003

Communication equipment manufacturersEMSODMSemiconductorSemiconductor capital equipment

2001 2002

Source: IBM Institute for Business Value analysis of public company information.

2004 20072005 2006 2008


The limits of traditional strategiesIn short, electronics companies are failing to pursue the full range of growth opportunities available to them. Analysis by IBM suggests that this problem stems from overreliance on traditional approaches to expanding the business (see Figure 4). Of the four classic growth strategies laid out by business theorist Igor Ansoff,3 today’s electronics companies tend to focus too heavily on the three most traditional – market penetration, market development and product development – while largely ignoring the fourth: diversification. A brief review of Ansoff’s matrix can shed light on how this strategic imbalance is limiting the growth of electronics markets.

Figure 4. Most electronics companies leverage only three of Ansoff’s four growth strategies.

Market penetrationWith the market penetration strategy, companies try to increase market share for existing products in mature markets. A competitive mainstay of the electronics market, this approach succeeds or fails based on a company’s ability to improve established products, lower prices or both.

The shortcoming of market penetration is that it does little to mitigate the historical volatility and thin profit margins of the electronics industry. Demand for semiconductors, for example, can swing wildly through a single cycle – by several orders of magnitude beyond the change in global GDP in most cases.4 And with profit margins at 5 percent or lower in most segments of the electronics market, electronics companies are left with scant resources to invest in product improvement.

Old

Prod

ucts

MarketsNew

New

Old

DiversificationGrow with new products in new

markets

Product development

Grow new products in the same market

Market development

Grow with same products in new

markets

Market penetrationGrow market

share with same products in the same markets

Source: Adapted from Ansoff, H. Igor. “Strategies for Diversification.” Harvard Business Review, 1957.


Market penetration depends heavily on the ability of constant process innovation to beat the entire market. For example, many companies in the semiconductor industry compensate for high fixed innovation costs by concentrating on highvolume products to realize a high return on R&D investment. But this starkly links profitperunit to sales volume. To grow, a semiconductor maker must gain ground against rivals in an established market – never an easy task – or cut nonR&D costs, which offers limited opportunity for boosting margins.

Reliance on market penetration presents particular problems for electronics companies during periods of difficulty. If a struggling semiconductor maker is forced to cut R&D costs, for example, the move can quickly reduce the competitiveness of its products. With a growth strategy limited to existing products and markets, this sets up a vicious cycle whereby declining innovation further erodes market share.

Market developmentThe second strategy, market development, relies on companies pushing existing products in new industries and geographical markets. As globalization continues apace, this strategy is considered imperative among electronics companies. In “Your Turn: The Global CEO Study 2004,” conducted by IBM Global Business Services, more than 70 percent of electronics industry respondents cited entry into lowcost countries and new market opportunities as top priorities.6

But like market penetration, the market development strategy is not without shortcomings. Global entrants into emerging markets face stiff competition, both from each other and from established local players. In China, for example, companies like TCL and Haier are the setting the pace and taking market share from Western companies.7 Moreover, as electronics companies crowd into new markets, competition among established global brands and local companies drives prices down.

Downward price pressure from global sourcing has cut into Nokia’s profits over the past year as it reduced prices to maintain global market share. The company relied on China and Latin America for growth, even as its share of the traditional European market declined. As a recent article noted in The Wall Street Journal, “Nokia paid a price for restabilizing its market share quarter-on-quarter with lower average

selling prices and profits.”9

Product developmentLike market development and market penetration, the third traditional strategy, differentiation through innovation and new product development, is recognized by electronics CEOs as vital to competitive success. In the most recent IBM CEO survey, more than 90 percent of electronics industry respondents cited faster response to market needs and the development of new products and services as high priorities.10

“There is a high correlation

between market share

and profitability.”

– Dominik Asam, Infineon Senior

Vice President, Investor Relations,

M&A and Ventures 5

“Chinese companies often

use low prices to try to break

into overseas markets. Even if

they do not win any business,

they end up affecting prices in

these markets.”

– Niel Ransom, Alcatel CTO 8


It is easy to understand the appeal of differentiation. Refining the product development process to be speedier and more responsive can lead to greater market share by positioning the manufacturer as a first mover that gives customers what they want. Reengineering product development processes to shorten the time from invention to manufacture can also dramatically reduce the time to positive cash flow, thereby boosting growth and profitability.

A major Japanese consumer electronics company focused on dramatically improving product innovation to cut time-to-market by 20 percent, avoiding a potential loss of US$80 million in sales.11

But while electronics companies recognize the differentiating power of responsiveness and innovation, executing a strategy based on these imperatives is easier said than done. The problem lies in the inherent difficulty of developing compelling new products and delivering them quickly. Today, too many electronics products take too long to get to market, a shortcoming that results in cost overruns and lost opportunities. Nearly two of every three electronics products takes more than 100 days to bring to market,12 and only 25 percent of new electronics products are launched on time.13

These delays also translate into lost revenues – a problem that is especially pronounced in the fastturning product segments that make up the vast majority of the electronics industry (i.e., everything barring industrial automation and defense electronics). In the fastest segments of the electronics industry, a delay of 12 months can lead to revenue losses of 90 percent.15

Breakthrough growth potential through diversificationTaken together, market penetration, market development and product development are generally effective at generating incremental growth. Electronics companies will continue to pursue these traditional strategies as they strive to keep pace with competitors. But the very fact that these paths are so widely traveled renders them less likely to lead to results that exceed shareholder expectations.

To realize breakthrough growth potential, the three traditional approaches should be combined with the strategy described in Ansoff’s fourth quadrant. As an approach to growth, diversification is not new. Indeed, Ansoff made it the focus of his work back in the mid1950s. But the longstanding perception that diversification is too risky has kept companies from fully exploring its possibilities. For today’s electronics companies, however, risk aversion has itself become a limit to growth. With so many established product categories and markets reaching the saturation point, electronics companies need a new avenue for realizing breakthrough growth potential.

“Speed has a value of its own!”

– Hans-Martin Schweizer,

Infineon Senior Vice President of

Corporate Logistics 14

“Electronics companies

struggle against two forces:

commoditization and

saturation. Commoditization

because competitors

quickly duplicate any

technological edge and

consumers increasingly do

not differentiate between

brands. Saturation because

eventually everyone already

has a DVD player or a cell

phone and further market

growth is more gradual.

These two forces drive down

margins and hurt electronics

companies financial results.

The solution is to look for

adjacent spaces where the

electronics company can grow

its business.”

– George Bailey, IBM Electronics

Industry Global Practice Leader


The time is ripe for electronics companies to put the diversification approach into practice. As electronics claim a growing share of the valueadd in many products and industries, opportunities are arising to create new offerings and develop new markets for them. Product innovation need not be limited to discretely packaged electronics devices, but can also take the form of integrated components that add functionality to products from other industries. Likewise, new markets can include industries that could be extended – or even redefined – through electronics valueadds (see Figure 5). The following list hints at the diversification opportunities being created:

In the automotive industry, the percentage of value add represented by electronics (both hardware and software) is set to grow from 26 percent in 2000 to 48 percent in 2010 (from 10 percent in 1970).16

• Voice-over-IP. As broadband Internet becomes pervasive in developed markets and voiceoverIP (VoIP) technology reaches maturation, electronics companies have an opportunity to capture large portions of the valueadd now controlled by traditional telephone carriers. For example, by the end of 2003, more than 100,000 IBM employees were using VoIP services (including IP phone users and VoIP WAN users). Most were unaware their service had been changed. This trend is prompting companies such as Cisco Systems to diversify from their traditional networking space by equipping offices and homes with IPenabled telephones that directly connect to the Internet and route calls through data networks.

• MP3, MPEG4. The widespread adoption of MP3 (and other algorithms for shrinking the digital “footprint” of music and video files) is breaking the dominance of traditional sales channels. Smart electronics companies are leveraging this trend to pursue diversification strategies. Apple Computer is shaking the music distribution business with its highly successful iTunes directsales platform and the accompanying iPod player.17 For electronics companies, the fundamental shift in the entertainment market enabled by digital file compression, broadband connectivity and portable storage devices opens up new opportunities for hardware, software and services. This same convergence will soon make it possible to offer similar services for video.

• Remote health care. As healthcare costs reach unsustainable levels, remote health monitoring technologies promise not only to reduce expenses but also to boost the health of patients. Companies such as Siemens Medical Solutions and Philips Medical Systems once sold medical devices only to hospitals; now they are joining with consumer electronics companies (and business units) to offer inexpensive devices and services for monitoring patients at home. While today nurses and doctors play a major role in remote monitoring for disease indication, consulting and infrastructure installation, automation of these capabilities may become possible as the technologies proliferate.


Figure 5. New growth areas are expanding electronics’ value-add.

Diversification in new markets with new products: the ecosystem viewTraditional reluctance to delve into Ansoff’s diversification quadrant is understandable. The risk of introducing new products into new markets is often perceived as too high for serious consideration. If demand is difficult to gauge when new products and new markets are considered separately, it must be even more so when the two factors are combined. To overcome this reluctance, electronics companies need a new way of thinking about the marketplace that gives them more confidence in their ability not only to gauge, but also to mitigate, the risks of diversification.

Research conducted by the IBM Institute for Business Value, in conjunction with University of Kiel,18 Germany, and parallel research conducted by Harvard Business School professor Marco Iansiti,19 shows that an ecosystem analogy can help companies manage the risks of diversification by fostering an attitude of collaboration and mutual success. The research bases its observations on the many points of similarity between the conditions that make up a healthy business environment and those required for healthy natural ecosystems.20

Source: IBM Institute for Business Value.

Auto

Healthcare

Telecom

Media

Electronics

Finance

Retail

...

A&D

NCO VoIP

MP3

RFID


In today’s networked world, the complexity of business collaboration has grown to the point that it resembles a natural system. By showing how the rich interdependencies of natural systems can illuminate business relationships, an ecosystem view of the market can help electronics companies overcome their risk aversion through a better understanding of market dynamics and deeper insights into diversification strategies.

Dominators, keystones and niche playersLike the species that populate natural ecosystems, businesses do not exist in a vacuum; they are part of a complex set of relationships defined by competing and complementary value nets. Each company’s value net consists of its particular set of customers, suppliers, complementors and competitors. As highlighted in the research, business ecosystem participants tend to exhibit certain behaviors that cast them in one of three roles.

• The dominator. Like an invasive species with no natural predators, dominators attempt to drive off competitors by controlling the entire ecosystem. These powerful organizations integrate vertically and horizontally to own value creation capabilities and push proprietary systems. They expect other companies to adhere to their processes and requirements, locking out organizations that refuse to comply or attempt to establish proprietary rivals.

• The keystone. The keystone understands the role of other keystones and the contributions of niche players, evaluating the ability of partner organizations to innovate and utilize resources and services as a distributed effort. Acting as an ecosystem hub, the keystone connects partner organizations via common standards and makes the flow of information transparent. The keystone’s focus is not on controlling the marketplace but on attracting other organizations by creating platforms and sharing solutions. The keystone strives to sustain value creation while balancing value extraction and sharing.

Instead of trying to dominate the entire competitive landscape, keystones strive to establish innovation strategies that facilitate the overall health of the ecosystem. To differentiate against dominators, keystones promote openness and collaboration among organizations within the ecosystem by establishing platforms and services that innovators can tap into.

“More often than not, when a

technical discontinuity comes

along, the dominate company

will try to extend the life of

its existing product with the

result that they end up losing

the market.”

– Niel Ransom, Alcatel CTO 24


Case study: Yellowstone’s keystone speciesLong considered a menace to campers, wolves were driven out of Yellowstone National Park in the early 20th Century. After a 70-year absence, the predators were brought back to the park in 1995 in an effort to reestablish the region’s natural ecosystem. One unexpected result of the move was a dramatic recovery for the park’s cottonwood trees, which scientists had feared were headed for extinction. In the decades when the wolves were absent, elk herds were free to graze on the cottonwood seedlings that lined the park’s mountainside streams. The overgrazing decimated the cottonwood population, which, in turn, led to erosion and an overall decline in wildlife that rely on the streams. With the return of the elk’s natural predators, more cottonwood seedlings survived, and the ecosystem began to recover. As it turns out, wolves are a keystone species of the Yellowstone ecosystem.21

• The niche player. Whether companies or units within a larger enterprise, niche players rely on facilitators to work in concert with the other organizations that comprise the ecosystem. These relatively small, differentiated specialists leverage the capabilities provided by keystones to deliver much of the value of the ecosystem. Niche players understand the roles of the keystones and the services they offer. Niche companies form loose connections with keystones to reduce the risk of losing innovation capabilities and failing to deliver. Niche players place a premium on agility, developing rapid innovation processes to stay on the edge of the ecosystem, where they can constantly reinvent themselves. Challenges faced by niche players include avoiding commoditization and steering clear of areas claimed as core capabilities by the ecosystem’s keystones.

TSMC, a Taiwanese semiconductor foundry, makes its production facilities open to specialist chip designers. For example, niche player nVidia uses TSMC’s facilities to produce innovative and cutting-edge graphics chips for PCs. Innovations are more successful in this keystone-niche player relationship than either player could expect independently. 22

Electronics companies can realize more sustainable growth by eschewing the dominator role and choosing a keystone or niche strategy within the business ecosystem. Rather than attempting to own every capability, keystones and niche players influence each other in ways that complement their own capabilities. Both roles require maintaining a low physical profile (through outsourcing) and leveraging the innovations and services of the value net to fill gaps or weaknesses. In the ecosystem view, innovation and operations rely on influencing assets that the company does not own.23

Rewiring electronics IBM Global Business Services�0

Assessing the health of electronics ecosystemsElectronics companies can improve growth opportunities by striving to develop a healthy ecosystem that delivers longevity and a propensity for growth. What makes up a healthy business ecosystem? The research conducted by IBM and the University of Kiel, and confirmed by Marco Iansiti of Harvard Business School, identified three core key components of healthy natural ecosystem – productivity, robustness and diversity – and mapped them to business ecosystems.

The productivity of the ecosystem is a measure of its ability to transform capital or new technology into net income or new products. A productive ecosystem features high rates of return on invested capital, revenue growth and platform maturity.

The robustness of the ecosystem is a measure of its imperviousness to environmental changes, like new technologies and economic cycles. A robust ecosystem features low volatility, strong finances (including positive cash flow and low debttoequity ratios), high EBIT margins (as a buffer for investment) and good credit ratings.

The diversity of an ecosystem is a measure of its capacity to attract new niche players through the creation of valueadded functions over time. A diverse ecosystem features a wide variety of new, revenuegenerating products and is populated by small and mediumsized companies (or agile parts of large companies) that handle diverse functions.

The overall health of the ecosystem has a direct impact on the businesses that populate it. In an unhealthy business ecosystem, a dominator extracts more value than it creates, leaving niche players with little margin to pursue innovation. Productivity declines as members enter, which hampers the attraction of new niche players and the growth of variety in products and technology.

Web auctioneer eBay illustrates how a keystone can radically change or create new business ecosystems. As a keystone, eBay facilitates the trading activities of many different buyers and sellers – a loosely coupled population of niche players ranging from large corporate vendors like IBM, Home Depot and Sears to the hundreds of thousands of individual power sellers in the U.S. who make a living selling on eBay.

Loose coupling is one key component of the eBay ecosystem’s success. Had the power sellers been required to join the eBay company outright, the explosion of marketing innovation they created would not likely have occurred. Instead, the “loose coupling” arrangement provides eBay’s power sellers the leeway to attract buyers in myriad innovative ways. From a buyer’s perspective, choosing from many competing sellers is more advantageous than buying from a single source. Yet eBay bidders also enjoy all the convenience buying from a single, integrated system.

Rewiring electronics IBM Global Business Services��

The ecosystem that supports eBay also supports a diverse range of other niche players, including online appraisers, trading assistants, newspaper classifieds and selling tools such as PayPal. Today eBay supports more than 125 million users who buy and sell 350 million listed items.25 Gross merchandise sales grew from US$390 million in its first year to US$23.8 billion by 2003.26

Adapting the business model to find and support an ecosystem roleTo evaluate their ecosystem opportunities, electronics companies can use component business modeling (CBM), a methodology that envisions the business as a set of collaborating business activities. Unlike process modeling, which describes how a business does what it does, CBM focuses on what the company does (and why) by modeling the business as a clearly defined set of business components. As Figure 6 illustrates, CBM sees each component as a “business in microcosm” that offers a service to other business components, whether part of the same company or another company.

For electronics companies, CBM provides a useful tool for analyzing and prioritizing potential roles within an ecosystem. Using CBM, a company can discover keystone or niche opportunities by analyzing the “component map” of its business.

Figure 6. To evaluate ecosystem opportunities, a company can analyze the activities performed by roles within and outside its four walls as represented by CBM.

Business administration

Financial management

Product/process Production Supply chain

Marketing and sales

Services and Technology

Direct

Control

Execute

Business purposeActivities

Resources

Applications

Infrastructure

Component

governance

Process maps identify the activities that are grouped

into components

A business component is a separate entity serving a

business need with activities, input and output services

The components are then combined into a corporate or

ecosystem model

Source: IBM Global Business Services.


Different components can be leveraged to facilitate ecosystem health (keystone strategy) or generate value directly (niche strategy). Mapping a company’s strengths and priorities (as revealed by CBM analysis) to the corresponding capabilities of partner firms can reveal redundancies, gaps and opportunities within the ecosystem:

• Common infrastructure and resources can be shared with other firms in the ecosystem.

• Business components can be concentrated in firms that operate them as core capabilities.

• Interactions among components can be standardized, whether between partner firms or within a single organization.

• Information sharing opportunities can be identified.

• Investment opportunities can also be identified in niche players pursuing indemand innovation.

By periodically reevaluating its complete set of components against key measurements – such as valueadded, productivity, and contribution to the ecosystem – a company can continuously optimize its business model and actively influence the ecosystem in which it plays.

Case study: remote healthcare monitoring

A global medical systems manufacturer is building a communications platform, based on an open

architecture, to provide connectivity for devices that enable remote health monitoring in the home.

Telemonitoring devices – which may be manufactured internally or supplied by third parties – such as

wireless blood pressure monitors and glucose meters, collect and transmit vital signs data, as well as

responses to daily healthcare inquiries, to a healthcare provider over the patient’s telephone line. By

accessing patient information via the Internet on a secure server, the nurse or doctor can intervene

quickly if the data indicate a problem. Otherwise, patients can rest assured that the home measurement

devices are enabling their healthcare provider to remotely monitor their condition each day.

An ecosystem health check: the telecom electronics ecosystemIBM analysis of a typical ecosystem – in this example telecommunications – shows that it struggles with overall productivity and robustness. As shown in Figure 7, platforms are leveraged across all sectors of the ecosystem. But results are modest in terms of return on investment and revenue growth, and low profitability and stock volatility erode the robustness of the ecosystem.


Figure 7. Today’s telecom ecosystem struggles with overall productivity and robustness.

Figure 8 shows that, while niche players can find a reasonable number of roles in the telecom electronics ecosystem, a low rate of innovation leaves them with little opportunity for growth or profitability. Telecom operators have learned to withstand fierce market pressures, but many of the supporting electronics companies are saddled with weak balance sheets and business models.

Figure 8. Although there is some diversity in the telecom ecosystem, niche players struggle with growth and profitability.

Productivity

Telco electronicsTelco operators

Source: IBM Institute for Business Value analysis.

RobustnessDiversity

5.00

4.00

3.00

2.00

1.00

Capital equipment

Semiconductor

EMSTelco OEM

Telco operator

5.00

4.00

3.00

2.00

ROICRevenue growthPlatform maturityAverage

Capital equipment

Semiconductor

EMSTelco OEM

Telco operator

5.00

4.00

Beta factorEBIT marginFinancial strengthCredit ratingAverage

Platforms are leveraged, but achievement from the activities is low

Productivity assessment of 52 major companies

Bad profitability and stock volatility make the ecosystem not very robust

Robustness assessment of 52 major companies

Source: IBM Institute for Business Value analysis.

3.00

2.00

1.001.00


Leveraging the ecosystem view to realize electronics industry diversificationContinuing to execute on the traditional strategies – market penetration, market development and product development – is an imperative for electronics companies. For those with a leading market position, R&D process innovation will continue to play an important role, even as product innovation remains a challenge in a fiercely competitive market. Implementing best practices in product development can overcome lackluster performance in timetomarket and timetovalue in the electronics industry. And expansion into China, India, Eastern Europe, South America and other emerging markets will remain a vital piece of the growth puzzle, one that requires clever partnering strategies to avoid a “metoo” approach as global firms and local players rush to compete for the same customers.

But in today’s complex, fastpaced, global marketplace, these strategies will only get electronics companies so far. By itself, a traditional approach will not allow electronics makers to pull away from the pack. For companies seeking breakout growth, the challenge is to move beyond lowerrisk, traditional growth strategies to achieve exceptional results.

Smart electronics companies will focus on diversification strategies. Targeting other industries, where electronics represents an expanding core value add, is one avenue. This take on Ansoff’s fourth quadrant represents a huge opportunity that electronics companies are not pursuing aggressively.

Understanding the ecosystem and choosing a keystone or niche strategy within it can help a company overcome risk and realize its diversification goals. With a health check to measure the productivity, robustness and diversity of potential ecosystems, companies can find a healthy, promising ecosystem and select a role that complements rather than dominates other organizations. For keystones, establishing and continuously investing in a platform that supports niche player innovation will differentiate them while simultaneously growing the whole ecosystem and the companies that comprise it.

Despite the recent uncertainties of the global marketplace, historical cycles show a high current potential for growth in the electronics industry. As illustrated in Figure 9, a new “bubble” is not a requirement for significant growth. Rather, finding the right role in the right ecosystem can help electronics companies realize their ultimate goal: sustainable, profitable growth.

“[Companies need to be]

focused not on defensive

dominance, but on agility,

change and collaboration.”

– Sam Palmisano, IBM Chairman

and CEO 28

“In specific markets,

like mobile phones, the

challenge is to produce new

products that are also not

more expensive. So new

process innovation is crucial!

However, this is very risky,

since changing processes

typically requires massive

investment (for example, in

new machines).”

– CTO interviewed in IBM study 27


Figure 9. Growth potential, no bubble required.

Managing profitable growth: finding your ecosystem roleAssessing your current behaviors is an important first step to finding your role in the right electronics ecosystem. As your firm considers how to achieve breakthrough growth, ask yourself the following questions to find out where you stand today and to identify the next steps:

Are you trying expand market share in as many markets as possible?

Are you defeating incumbent competitors by buying them or pushing them out of the market?

Do you encapsulate your processes, technology and services so you control every aspect of them?

Then yours is a strategy focused on defensive dominance that needs to be redirected to agility, managed change and collaboration.

Are your products often too late or over budget when they finally come to market?

Do you see other electronics companies doing extensive business in your “new” market?

Is it becoming harder to improve processes that make your highest volume products?

Then move to tighten up your internal business models and look beyond your usual strategies to ecosystem opportunities.

3.0

2.8

2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

Perc

ent c

ontri

butio

n of

ele

ctro

nics

in

dust

ry to

U.S

. GDP

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2002

Source: IBM Institute for Business Value analysis of U.S. Bureau of Economic Analysis data.


Are you afraid to expand beyond your home turf because past strategies have failed?

Are niche players developing better ideas that you wish you had developed?

Are investments, alliances and partnerships taking too long to negotiate and often failing to deliver?

Then begin building collaborative platforms that others can build upon, eliminate conflicting parts of the ecosystem model and influence more than control.

As the electronics industry evolves and becomes even more complex, it is essential that companies understand how their networks function, how key firms within the right “ecosystem” can support innovation, how different actions enhance or damage operational productivity and how the right approach can encourage healthy, vibrant environments where new products and new firms emerge on a regular basis. To discuss ways your company can leverage the ecosystem view to achieve breakthrough growth, please email us at [email protected]. To browse other resources for business executives, visit our Web site:

ibm.com/bcs

About the authorDr. Hagen Wenzek leads the Global Electronics Team at the IBM Institute for Business Value. He is active in both academic and business research projects, helping spark new and innovative business strategies across the Electronics industry. Hagen can be reached at [email protected].

ContributorsIBM Institute for Business Value: Linda Ban, Sandy Kearney and Penny Koppinger

IBM Global Business Services: Jonathan Cooper, Thomas Dressler and Daniel Graf

IBM Research: Ivan Blum and Dr. Iris Ginzburg

Stephan Göthlich, University of Kiel

Dr. Marco Iansiti, Harvard Business School

About IBM Global Business ServicesWith consultants and professional staff in more than 160 countries globally, IBM Global Business Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues, and the ability to design, build and run those solutions in a way that delivers bottomline business value.


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14, 2004. http://www.reedelectronics.com/electronicnews/article/CA4529193 Ansoff, H. Igor. “Strategies for Diversification.” Harvard Business Review. 1957.4 IBM Institute for Business Value analysis.5 IBM Institute for Business Value interview. 2004.6 “Your Turn: The Global CEO Study 2004,” IBM Global Business Services. 2004.7 IBM Institute for Business Value analysis based on “Haier’s purpose.” The

Economist. March 18, 2004. http://www.economist.com/business/PrinterFriendly. cfm?Story_ID=2524347

8 IBM Institute for Business Value interview. 2004.9 Gonsalves, Antone. “MobilePhone Market Could Be Overheating.” TechWeb.com.

September 2, 2004. http://www.techweb.com/wire/mobile/4620082110 “Your Turn: The Global CEO Study 2004,” IBM Global Business Services. 2004.11 IBM Global Business Services client experience.12 IBM Institute for Business Value. “IBM Global Supply Chain Survey 2003.” 2003.13 Ibid.14 IBM Institute for Business Value interview. 2004.15 IBM Institute for Business Value analysis.16 Berger, Roland. “Automotive Engineering 2010: Achieving More From Less.” Roland

Berger Strategy Consultants. July 20, 2004. http://www.rolandberger.com/pdf/rb_press/public/RB_automotive_engineering_2001_20040802.pdf

17 Musgrove, Mike. “IPod Helps Lift Apple’s FourthQuarter Profit.” The Washington Post. October 14, 2004. http://www.washingtonpost.com/wpdyn/articles/A308222004Oct13.html.

18 Göthlich, Stephan E. “From Loosely Coupled Systems to Collaborative Business Ecosystems.” Paper No. 573, University of Kiel. May 2003. http://www.bwl.unikiel.de/bwlinstitute/gradkolleg/de/kollegiaten/goethlich/Business% 20Ecosystems%204b%201,5Z.pdf

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19 Iansiti, Marco and Roy Levien. “The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability.” Boston: Harvard Business School Press, 2004.

20 Göthlich, Stephan E. and Hagen Wenzek. “Underlying principles of business ecosystems.” June 29, 2004. http://www.wiwi.unimuenster.de/~06/igt/papers/Workshop02/Abstracts/Hr_S_Goethlich_H_Wenzek/Goethlich,%20Wenzek_ Underlying%20Principles%20of%20Business%20Ecosystems.pdf

21 “Wolves are rebalancing Yellowstone ecosystem.” Oregon State University. October 29, 2003. http://www.brightsurf.com/news/oct_03/EDU_news_102903_d.php

22 Iansiti, Marco and Roy Levien. “The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability.” Boston: Harvard Business School Press, 2004.

23 Ibid.24 IBM Institute for Business Value interview. 2004.25 “Company Update.” eBay. October 2004. http://investor.ebay.com/downloads/

CorporatePresentation.pdf26 Ibid.27 IBM Institute for Business Value interview. 2004.28 Remarks made during presentation at Rensselaer Polytechnic Institute’s

National Innovation Initiative (NII) Regional Summit. September 8, 2004.

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