Technology Strategy. Professor Rebecca Henderson MIT Sloan School of Management

Transcription

1 Technology Strategy Professor Rebecca Henderson MIT Sloan School of Management

2 Effective strategies address three key problems: How will we Create value? How will we Deliver value? How will we Capture value?

3 And answer seven critical questions: How will we create value? How will the technology evolve? How will the market change? How will we capture value? How should we design the business model? Where should we compete in the value chain? How should we compete if standards are important? How will we deliver value? How do we manage the core business and real growth simultaneously? How do we use our strategy to drive real resource allocation?

4 I assumed that you knew: How will we create value? How will the technology evolve? How will the market change? How will we capture value? How should we design the business model? Where should we compete in the value chain? How should we compete if standards are important? How will we deliver value? How do we manage the core business and real growth simultaneously? How do we use our strategy to drive real resource allocation?

5 Thus the course focused on: How will we create value? How will the technology evolve? How will the market change? How will we capture value? How should we design the business model? Where should we compete in the value chain? How should we compete if standards are important? How will we deliver value? How do we manage the core business and real growth simultaneously? How do we use our strategy to drive real resource allocation?

6 Why have a strategy? 1. To make choices

7 Why have a strategy? 2. To be able to change it

8 The strategic challenge evolves down the S curve Performance Maturity Takeoff Discontinuity Ferment Time

9 The nature of technical work changes Performance We need to be responsive & flexible but controlled Can we make 100,000? And service them? Will it work? Exploration, fun, creativity key Will it work? Exploration, fun, creativity key Time

10 The marketing challenge evolves Performance Stay close to your customer really close Do we have any reference customers? Who needs this? Who needs this? Time

11 The ways in which a firm captures value also evolve dramatically Performance We may not be leading edge but you d rather buy from us because We can sell it, make it, service it, ship it Most of the time Speed, IP Differentiation, Frontier performance key Speed, IP Differentiation, Frontier performance key Time

12 The organizational challenge changes significantly Performance Coordination & control critical Entrepreneurial Energy critical Entrepreneurial Energy critical Time

13 Successful firms thus need several strategies Performance Mature Strategy Takeoff Strategy Growth Strategy Ferment Strategy Time

14 How shall we create value?

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

16 Tools for value creation Predicting Technological Change The Delphi Model Trend extrapolation Predicting the Evolution of Customer Needs Basic segmentation Crossing the chasm New technologies, new needs

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

18 Trend extrapolation: Semiconductors Frequency (MHz) # Transistors (m) Frequency (M Hz) # t ransistors(m) Year

19 Issues in Trend Extrapolation Which parameter shall I predict? Do all good things come to an end? Exploring the difference between progress as a result of the passage of time, and progress as the result of returns to effort Predicting progress in complementary technologies

20 Do all good things come to an end? Technological exhaustion Physical limit? Performance Performance is ultimately constrained by physical limits E.g.: Sailing ships & the power of the wind Copper wire & transmission capability Semiconductors & the speed of the electron Time

21 Modeling the returns to effort vs. time Performance Performance may be a non linear function of effort expended: in mature industries more and more effort may lead to less and less progress, while progress in emerging industries may be surprisingly fast Effort

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

23 Market Evolution over the Life Cycle Market segmentation Crossing the chasm New markets, new needs: The Innovator s Dilemma

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

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

26 Understanding market dynamics: Crossing the chasm: (Moore) Units Bought Crossing the chasm? Early Adopters Early Majority Late Majority Innovators Laggards Time Making the transition from early adopters to early majority users often requires the development of quite different competencies: e.g. service, support capabilities, much more extensive training.

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

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

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

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

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

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

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

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

35 What can be done? Ready, aim, fire Small scale experiments Virtual products Lead user research } Significant resources required!

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

37 Or: What determines the Inventor s Share? Suppliers Customers Imitators, followers Inventor

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

39 Two key ideas: Uniqueness Do great ideas make great riches? Controlling the knowledge generated by an innovation Complementary assets Can we make money without being unique? Controlling the assets that maximize the profits from innovating

40 Complementary assets are: Available Tightly held Uniqueness is: Easy to maintain Hard to maintain

41 Uniqueness & Complementary Assets over the Life Cycle: Figure by MIT OCW.

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

43 Using the model to dive deeper: Taking advantage of positive feedback to build strong complementary assets: In marketing & R&D (Calloway) In process technology (Goodyear) In network externalities (Qualcomm, Nokia) Building an understanding of which assets may be available: Are there spillovers? What is the shape of the learning curve? What is the structure of demand? Do network externalities create value?

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

45 Power in the Value Chain

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

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

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

49 Powerful suppliers and buyers may constrain profitability Suppliers Buyers

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

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

52 Key Questions: When should an entrepreneurial firm develop it s own: Manufacturing Distribution Sales.. capabilities? When should a mature firm outsource it s: Manufacturing Distribution Sales.. capabilities?

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

54 Key Considerations: How easy is it to write contracts? How tight is the IP regime? How much uncertainty is there? Specificity of the asset how thick is the market? What will happen to entrepreneurial energy? What will be the key complementary assets going forward?

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

56 So make (i.e. do it in-house) if: There are significant IP worries There are likely to be contractual problems We can t be sure of getting the fair price We can t be sure they ll do the work right I.e., when market are thin or there is limited information We have unique competencies that are relevant Or could create them And if buying won t destroy everyone s incentives to be creative and energetic

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

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

59 Standards and Strategy: Competing in Increasingly Open Worlds

60 Thinking about the dynamics of the strategic space Access is: Open Closed Public Details of standards are available to all: no single firm has control over how they evolve: no charge for their use Standards are owned and controlled by the public sector but are not freely available Control is: Private E.g. TCP/IP, HTML Details of standard are made available to all: but owner has control over how the standard evolves and may charge for use E.g. Nintendo, Palm OS E.g. Cryptography Technology may be standard, but details are not made available beyond the firm E.g. Landmark Graphics, IBM 360

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

62 What do producers prefer? Access is: More Open More Closed More Public Control is: More Private

63 What do customers prefer? Access is: More Open More Closed More Public Control is: More Private

64 If network effects are important, markets may tip 1 Probability the next consumer chooses to buy A 0 0 A s share of installed base 1 28

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

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

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

68 Making money in an open world

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

70 Where s the money? Competition in an open private world

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

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

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

74 Connecting to Other Strategy Frameworks PIE & The Delta Model

75 P.I.E.=Value Created PIE represents the upper bound on the actual earnings of an industry. $ Industry Demand PIE Opportunity Cost of Resources Industry Quantity

76 Main drivers of P.I.E. Absence of good substitutes pushes out demand Presence of strong complements pushes out demand Population/Income growth pushes out demand Changes in the long-term industry cost structure

77 Value Capture=The Four Slices Even if potential earnings are high, actual earnings are limited by the extent that: A. Entry is easy. B. Competition with existing rivals is intense. C. Suppliers control needed inputs. D. Buyers act as one to bargain hard. Essentially, all of these forces act to drive price to marginal cost (or vice versa), eliminating producer surplus.

78 The Delta Model: Three Distinct Strategic Options System Lock-In System Economics Market Dominance Achieving Complementor share Total Customer Solutions Customer Economics Cooperation Achieving Customer Share Best Product Best Product Product Economics Rivalry Achieving Product Share

79 The Triangle: Options for Strategic Positioning System Lock-In Dominant Exchange ebay, Yellow Pages Proprietary Standard Microsoft, Intel Exclusive Channel rural Wal-Mart Horizontal Breadth Fidelity Low Cost Southwest Airlines, Nucor Total Customer Solutions Redefining the Customer Relationship Saturn Customer Integration EDS Best Product Differentiation Sony Wega

80 Managing Organizational Competence

81 The last of the three key questions... How will we Create value? How will we Deliver value? How will we Capture value?

82 How can we manage the core business and real growth simultaneously?

83 In summary: I I see, he said, you re suggesting that we invest millions of dollars in a market that may or may not exist but that is certainly smaller than our existing market, to develop a product that customers may or may not want, using a business model that will almost certainly give us lower margins than our existing product lines. You re warning us that we ll run into serious organizational problems as we make this investment, and our current business is screaming for resources. Tell me again just why we should make this investment? - Divisional Manager, Telecommunications Equipment Provider

84 The Organizational Challenge: Entrepreneurial Drive, Freedom from the old ways Startups Successful growth unites entrepreneurial insight with effective coordination B as U Control & Coordination

85 What can be done? Lead: Build the ambidextrous senior team: communicate the strategy, allocate resources Structure: Explore transitional and intermediate forms Incent: Explain just what s in this for me? Build: Lay the foundations for a new culture, new expectations

86 Choose a structure that fits the firm s strategic positioning and skills Entrepreneurial Energy Acquire/ Partner Joint venture/ alliance Internal venture Build inside existing unit Control & Coordination

87 Manage it using every lever that you have Entrepreneurial Drive, Freedom from the old ways Acquire/ Partner Joint venture/ alliance Internal venture? Build inside existing units Control & Coordination

88 Building growth thus requires doing many things right YES Recognize opportunity? NO YES Invest in market? NO YES Build new business model? NO YES Organize NO ambidextrously? NO YES Actually fund project? YES Embrace success? NO

89 Strategic Issues YES Recognize opportunity? NO YES Invest in market? NO YES Build new business model? NO YES Organize NO ambidextrously? NO YES Actually fund project? Org. Issues YES Embrace success? NO

90 Actually Doing Technology & Product Strategy

91 The innovation funnel Phase I Phase II Phase III Launch

92 A Range of Tools Risk adjusted NPV Decision Trees Simulations e.g. Monte Carlo Closed Formulas e.g. Black-Scholes Differential Equations Pros Established methodology widely accepted and understood Relatively easy and quick to implement A building block for more complicated valuation methods Incorporates decision making and uncertainty Determines optimal decisions Transparent and easy to understand. Building block for other more complicated valuation methods. Allows for complicated and multiple uncertainties spanning both discrete and continuous outcomes. Easier to model non-standard uncertainties Elegant, easy to implement with formula in hand A numerical solution incorporating optimal decisions and (possibly) both continuous and discrete uncertainties. Cons Does not allow for contingent decisions Collapses many decisions and outcomes down to a single scenario Does not account for managerial ability to react to information. Trees can become complicated with many decisions and uncertainties. Essentially limited to discrete decisions and discrete characterization of uncertainties. Methods do not determine optimal policies. Programming becomes complicated with many decisions and uncertainties. Less transparent than trees Limited to relatively simple decisions and uncertainties. Many simplifying assumptions usually have to be made to obtain closed form solutions. Extremely difficult, if not impossible, to implement in realistic situations. Time Consuming Does not allow for many different uncertainties.

93 An Example Consumer Value Perception Low Resource Moderate Resource High Resource Enabling Technology New Core Product New Benefits Improvement Variant No Change Breakthrough Radical Next Generation Platform Derivative Incremental Product Support Base

94 Successful Implementation: Common Lessons Senior management commitment & involvement Senior steering committee Empowered champion Diagnostic phase Aligned with the market As well as with the existing culture and organization A designed implementation plan Up front With appropriate expectations Allocating resources to match the design.

95 Summary

96 Effective strategies address three key problems: How will we Create value? How will we Deliver value? How will we Capture value?

97 And answer seven critical questions: How will we create value? How will the technology evolve? How will the market change? How will we capture value? How should we design the business model? Where should we compete in the value chain? How should we compete if standards are important? How will we deliver value? How do we manage the core business and real growth simultaneously? How do we use our strategy to drive real resource allocation?

98 Understanding the life cycle is critical : Technology Markets Competition Organization Maturity Takeoff Ferment

99 Technology strategy on one slide: Startup Asset Supplier Create Deliver Capture? NFigure by MIT OCW Text

100 Good Luck!