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Developing and Managing a Successful Technology & Product Strategy Professor Rebecca Henderson MIT Sloan Developing and Managing a Successful Technology & Product Strategy Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) 253 -6618, Email: [email protected] 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? l l l Eastman Kodak LFM Professor, MIT Sloan School SB Who am I? l l l Eastman Kodak LFM Professor, MIT Sloan School SB in Mechanical Engineering, MIT Ph. D in Business Economics, Harvard Research focus: Building on technology to generate growth: why is it so hard and what can be done? Work in: Semiconductor capital equipment, Aerospace, Automotive, Branded Consumer Goods Pharmaceuticals & Biotech, IT, Telecommunications

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

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

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

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

Why have a strategy? Why have a strategy?

Why have a strategy? 1. To make choices Why have a strategy? 1. To make choices

Is This Your Project Pipeline? Is This Your Project Pipeline?

Overload at Pre. Quip Active Projects (formal development projects by number) 1 2 3 Overload at Pre. Quip Active Projects (formal development projects by number) 1 2 3 4 5. . . 26 27 28 29 30 Resources Required for Completion (months) Months to Completion (desired) Implied Development Resource Allocation (months) This year Next year Year after that 54 123 86 24 8 24 12 20 4 40 38 50 92 24 14 62 36 172 0 0 23 0 22 0 352 75 215 153 29 36 9 30 18 3 48 62 40 60 29 150 13 80 93 0 120 0 95 0 0 All Other Support Activity (customer support, troubleshooting) –– –– 430 430 Total Development Requirements –– –– 2783 2956 2178 Available Resources (months) –– –– 960 960 –– 289. 9 307. 9 Rate of Utilization (percent) –– 226. 9

Overcommitment destroys productivity Average 100% Value-Added Time on 80% Engineering Tasks 60% 40% 20% Overcommitment destroys productivity Average 100% Value-Added Time on 80% Engineering Tasks 60% 40% 20% 0% 1 2 3 4 5 6 Number of Projects per Engineer

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

Why is it so hard to kill project #26? It’s a “good” project! l Why is it so hard to kill project #26? It’s a “good” project! l Good managers can meet stretch goals (and I’m a good manager) l Making difficult decisions takes time & energy l It’s very hard to kill projects without a strategy

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

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

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

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

Transitions often challenge existing organizations severely Transitions often challenge existing organizations severely

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

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

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

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

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

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

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

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

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

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

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

Dimensions in Silicon and red blood cell in Biology ~5 m (SEM) DNA proteins Dimensions in Silicon and red blood cell in Biology ~5 m (SEM) DNA proteins nm Simple molecules <1 nm diatom 30 m bacteria 1 m 10 -10 10 -9 10 -8 10 -7 10 -6 m 10 -5 10 -4 10 -3 10 -2 SOI transistor width 0. 12 m semiconductor nanocrystal (Cd. Se) Nanometer memory element 5 nm (Lieber) 1012 bits/cm 2 (1 Tbit/cm 2) 4 control biological machines Circuit design Copper wiring width 0. 2 m IBM Power. PC 750 TM Microprocessor 7. 56 mm× 8. 799 mm 6. 35× 106 transistors

Is nanotechnology like biotechnology? Is nanotechnology like biotechnology?

Is nanotechnology like biotechnology? Is nanotechnology like biotechnology?

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

Trend extrapolation: Semiconductors Trend extrapolation: Semiconductors

Issues in Trend Extrapolation l l Which parameter shall I predict? Do all good Issues in Trend Extrapolation l l 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

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

Evolution of Measurement-While-Drilling tools S-Curve Co n Performance = Data Transmission Rate (bit per Evolution of Measurement-While-Drilling tools S-Curve Co n Performance = Data Transmission Rate (bit per second) tin Physical limit: signal attenuation uo us M . P. Co nti nu o Co n tin ive Ne ga tiv e. M Po sit M ive ud P uls e Co nti ud Pu lse 2 n d. G en M ud Pu lse nu o us M . P. -1 G SK 3 G M . P. -B PS K 3 G uo us M . P. Po sit us -F -2 G Shallow wells only All well conditions era tio n Dominant Design = Continuous Mud Pulse Telemetry R&D Effort (measured in Generations = +/- 3 years )

The Evolution of Palomar’s Products: Laser Based Skin Treatment E 2000 Ruby Laser Light. The Evolution of Palomar’s Products: Laser Based Skin Treatment E 2000 Ruby Laser Light. Sheer 400 pounds Medi. Lux 48 pounds 120 Pounds Product Epi. Laser™ E 2000™ Light. Sheer™ SLP 1000™ Este. Lux™ Medi. Lux™ Neo. Lux™ Star. Lux™ Lux Handpieces Home Devices Material Price Cost $150 K $80 K $130 K $60 K $100 K $40 K $65 K $25 K $40 K $ 4 K $50 K $ 4 K $30 K $ 4 K $80 K $ 5 K $10 K $ 1 K ? ? Year 1996 1997 1998 2000 2001 2003 2004 2002 -4 ?

Moore’s Law at Work $1, 000, 000. 00 10 x reduction every 7. 5 Moore’s Law at Work $1, 000, 000. 00 10 x reduction every 7. 5 years $100, 000. 00 $10, 000. 00 Dollars per MIP $1, 000. 00 $100, 000. 00 10 x reduction every 4. 25 years $10, 000. 00 $100. 00 $1. 00 $0. 10 $0. 01 1959 1969 1979 1989 1999 [Source: Hans P. Moravec 1998 -2003] 2009

Modeling the returns to effort vs. time Performance may be a non linear function Modeling the returns to effort vs. time 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

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

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

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

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

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

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

Managing customers at moments of discontinuity Performance Who buys a technology when it is 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is it the case that great ideas = pots of money? Value captured Coca 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)

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

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

Sources of Uniqueness l Intellectual property protection – Patents • Finite length • The Sources of Uniqueness l Intellectual property protection – Patents • Finite length • The right to prohibit “producing” – Copyrights • The right to prohibit “copying” l Secrecy – Trade secrets & non compete clauses – “Tacit” knowledge l Speed

IP in historical perspective IP in historical perspective

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Power in the Value Chain Power in the Value Chain

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

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

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

Powerful suppliers and buyers may constrain profitability Suppliers Buyers Powerful suppliers and buyers may constrain profitability Suppliers Buyers

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

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

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

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

Comparing “make” vs. “buy” Startup Asset Supplier Comparing “make” vs. “buy” Startup Asset Supplier

Key Considerations: l How easy is it to write contracts? – How tight is Key Considerations: l 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? l What will happen to “entrepreneurial energy”? l What will be the key complementary assets going forward?

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

So “make” (i. e. do it in-house) if: There are significant IP worries l So “make” (i. e. do it in-house) if: There are significant IP worries l There are likely to be contractual problems l – – – 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 l And if buying won’t destroy everyone’s incentives to be creative and energetic l

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

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

Standards and Strategy: Competing in Increasingly Open Worlds Professor Rebecca Henderson MIT Sloan School Standards and Strategy: Competing in Increasingly Open Worlds Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) 253 -6618, Email: [email protected] edu, http: //www. mit. edu/people/rhenders/home. html

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

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

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

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

It’s not just about high technology l l Bicycles Financial services Health care Automobiles It’s not just about high technology l l Bicycles Financial services Health care Automobiles

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

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

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

The push for public open standards The push for public open standards

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

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

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

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

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

Wireless communications in transition Market Share Service Provision T-Mobile Orange NTT Do. Co. Mo Wireless communications in transition Market Share Service Provision T-Mobile Orange NTT Do. Co. Mo Vodafone Network Operation Applications Series 60 -90 Value Share UI Motorola Nokia Chipset Design TI Symbian Siemens Samsung EMS Players Device Manufacture Chipset Manufacture UIQ Microsoft Sava. Je Microsoft Linux Symbian Operating Systems Device Design Series 60 -90 Vodafone Live! Sony Ericsson Motorola Infineon I-250 and beyond Windows Microsoft Windows Clones and Asians BREW W-CDMA Qualcomm

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

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

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

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

If network effects are important, markets may “tip” 1 Probability the next consumer chooses 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

VHS Betamax VHS Betamax

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

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

Will this market tip? Market Share Service Provision T-Mobile Orange NTT Do. Co. Mo Will this market tip? Market Share Service Provision T-Mobile Orange NTT Do. Co. Mo Vodafone Network Operation Applications Series 60 -90 Value Share UI Motorola Nokia Chipset Design TI Symbian Siemens Samsung EMS Players Device Manufacture Chipset Manufacture UIQ Microsoft Sava. Je Microsoft Linux Symbian Operating Systems Device Design Series 60 -90 Vodafone Live! Sony Ericsson Motorola Infineon I-250 and beyond Windows Microsoft Windows Clones and Asians BREW W-CDMA Qualcomm

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

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

Sun (2) l l l 1980: Apollo founded 1983: Apollo has $18 m in Sun (2) l l l 1980: Apollo founded 1983: Apollo has $18 m in sales, dominates the workstation market -- uses a proprietary operating system 1983: Sun has $1 m in sales, mostly to universities Lead customer, Computervision “likes the technology but doesn’t find the company credible” -- “we love your technology but there is no way you can supply it. Apollo is the standard in the industry, well financed and well managed. ” What should Sun do?

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

Making money in an open world Making money in an open world

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

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

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

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

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

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

Soft standards in action: “Soft” standard Perf. Public standard Time Soft standards in action: “Soft” standard Perf. Public standard Time

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

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

Summary Summary

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

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

Tomorrow: Organizational Competence & Change Performance ? ? Time Tomorrow: Organizational Competence & Change Performance ? ? Time

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