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- 1. MIT OpenCourseWare http://ocw.mit.edu 15.912 Technology Strategy Fall 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
- 2. 15.912 Technology Strategy Professor Jason Davis MIT Sloan School of Management
- 3. Effective strategies address three key problems: How will we Create value? How will we Capture value? How will we Deliver value?
- 4. Effective strategies address 3 key problems: • How will we create value? – How will the technology evolve? – How will the market change? – How do we organize effectively? • How will we capture value? – How do we compete to gain sustainable competitive advantage? – How should we compete if standards are important? • How will we deliver value? – How should we execute the strategy? – How do we make strategic decisions and take decisive action?
- 5. Why have a strategy?
- 6. Why have a strategy? 1. To make choices and take actions
- 7. Is This Your Project Pipeline? (A Log Jam)
- 8. Why have a strategy? 2. To be able to change it
- 9. Performance The strategic challenge evolves down the S curve Ferment Takeoff Maturity Discontinuity Time
- 10. The nature of technical work changes Performance We need to be responsive & flexible but controlled Will it work? Exploration, fun, Can we make creativity key 100,000? And service them? Core Ideas: Will it work? Forecasting S curves? Exploration, fun, creativity key Time
- 11. The marketing challenge evolves Performance Stay close to your customer – really close Who Do we have needs this? any reference customers? Core Ideas: Market segmentation Who The Innovator’s Dilemma Time needs this?
- 12. 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 Time Speed, IP Differentiation, Frontier performance key Core Ideas: 5 forces Appropriability Complementary assets
- 13. The organizational challenge changes significantly Performance “Entrepreneurial Energy” critical “Coordination & control” critical “Entrepreneurial Energy” critical Core Ideas: Managing the organizational dynamics of discontinuity Time
- 14. That is, Technology Strategy is hard because it involves doing strategy in highly dynamic environments: ‐ high velocity ‐ high complexity ‐ high ambiguity ‐ high unpredictability
- 15. Strategic Challenge of Technology Markets: Unpredictability and Ambiguity SOURCES IMPLICATIONSIMPLICATIONS •Planning is limited market evolution are hard to predict! •Future S-curves and •Reacting is insufficient •Traditional strategies of “defend a position” and •Blurred timing and paths “leverage core from products to business •Shifting competitive basis, competence” are models incomplete •Lack of control over key •Shift from “closed” internal technology resources innovation to “open” 14 innovation with partners
- 16. How shall we create value?
- 17. Creating Value: • Understand how technologies will evolve – (Both your own and those on which you rely) • Understand how customer needs will evolve • Organize effectively to develop world class products and services that meet customer needs
- 18. Tools for value creation • Predicting Technological Change – Limits and Growth Rates – Trend extrapolation • Predicting the Evolution of Customer Needs – Basic segmentation – Crossing the chasm – New technologies, new needs • Utilize moderate structure and dynamic organizational processes
- 20. 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
- 21. 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
- 22. 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
- 23. The Unexpectedly Long Old Age of Optical Photolithography Source: Henderson, 1995. 19600.1 1 100 1000 100010 1965 1970 1975 YearCumulative R&D effort, person years 1980 1985 1990 Minimumfeaturesize(microns) Minimumfeaturesize(microns) Image by MIT OpenCourseWare.
- 24. S‐Curves, Real and Imaginary Source: Henderson, 1995. 1970 0 1 2 3 4 5 6 7 8 9 10 1975 Resolution(microns) 1980 Year 1985 1990 1995 Realized perf. Pred. optical limit Image by MIT OpenCourseWare.
- 25. Implications of the S‐curve • Technological performance is a function of effort, NOT time • R&D is often less productive when focused on either early prototypes or mature technologies • Managing the transitions between S‐curves is a critical strategic task: sticking with an old S‐curve can be disastrous
- 26. S‐curves often challenge existing organizations severely Alignment Equipment Step & Step & Firm Contact Proximity Scanners Repeat I Repeat II Cobilt 44 < 1 Kasper 17 8 7 Canon 67 21 9 Perkin-Elmer 78 10 < 1 GCA 55 12 Nikon 70 Total 61 75 99+ 81 82+ Source: Henderson & Clark, 1990.
- 27. But they also create major opportunity • Corning glass – Cookware to optical fiber • Nokia – Rubber boots to cell phones • IBM – Mainframes to PCs to Services • Eli Lilly – “Random” drug discovery to genetics and genomics
- 28. The Evolution of Markets or Predicting the pattern of customer needs
- 29. A Key Framework: The industry life cycle Era of Ferment/ Discontinuity Maturity “Dominant design” emerges Incremental Innovation
- 30. Maturity The Industry Life Cycle as an S curve Performance Discontinuity Takeoff Ferment Time
- 31. What is the relationship between the S curve and the diffusion curve? Performance Cumulative sales => ? Time Time
- 32. Diffusion is Hard…start with limits and growth • Supply: – Technology S‐curves! …a natural constraint. – Effective Organization …we’re not there yet. • Demand: – Ultimate Market Limit…changes with demographic growth & changing preferences – Rate of Information Transfer – Substitutes – … • Competition: – Price competition can shift growth… • …and the interactions between Supply, Demand, and Competition!
- 33. Market Evolution over the Life Cycle • Market segmentation • Crossing the chasm • New markets, new needs: – The Innovator’s Dilemma
- 34. The Key Question: Who buys a technology as it evolves? Performance Time
- 35. Understanding market dynamics: Basic segmentation (Rogers) Units Bought Early Adopters LaggardsInnovators Time Early Majority Late Majority Adopters differ by, for example, social, economic status - particularly resources, affinity for risk, knowledge, complementary assets, interest in the product
- 36. Understanding market dynamics: Crossing the chasm: (Moore) Units Bought Early Adopters LaggardsInnovators Time Early Majority Late Majority Crossing the chasm? 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.
- 37. Managing customers at moments of discontinuity Who buys a technology when it is first introduced? Performance New technologies sell to: - New customers - With new needs - Often at lower margins Time
- 38. Initially, PDAs did not seem to be a threat to PCs: Speed, Power, Memory PCs PDAs ? Time
- 39. PDAs sold to customers with different needs: Speed, Power, Memory PCs PDAs Weight/cost
- 40. But as PDAs improve they may come to challenge PCs ?Speed, Power, Memory PCs PDAs Weight/cost
- 41. Or consumer preferences may change ? Speed, Power, Memory PCs PDAs Weight/cost
- 42. “Disruptive” technologies may threaten established firms Performance Established technology Mainstream customer needs Invasive Technology Niche customer needs Time Clay Christensen: The Innovator’s Dilemma
- 43. Managing the change in customer groups may be the hardest task! Performance Leading edge customer focused research may be a critical capability Effort
- 44. What can be done? • “Ready, aim, fire” • Small scale experiments } Significant resources required! • Virtual products • Lead user research
- 45. Creating Value: • Understand how technologies will evolve – (Both your own and those on which you rely) • Understand how customer needs will evolve • Use technologies to develop world class products and services that meet customer needs – How? • Get lucky…works once or twice • Do it consistently with effective Organization Structures and Processes – e.g., Apple, Google
- 46. Effective Organization changes during discontinuities How do we manage incremental innovation? Performance How do we manage discontinuous innovation? Time
- 47. Strategic Challenge: Changing Environments are Unpredictable and Ambiguous! SOURCES IMPLICATIONSIMPLICATIONS •Planning is limited market evolution are hard to predict! •Future S-curves and •Reacting is insufficient •Traditional strategies of “defend a position” and •Blurred timing and paths “leverage core from products to business •Shifting competitive basis, competence” are models incomplete •Lack of control over key •Shift from “closed” internal technology resources innovation to “open” 46 innovation with partners
- 48. Potential Solution: Organizational Structures that respond to change Organizational Structures enable coordinated responses to environmental change by shaping action in real-time Unit NetworksUnit Networks Alliance NetworksAlliance Networks HierarchyHierarchy RolesRoles RulesRules
- 49. Amount of Organizational Structure can vary greatly!LowLow MediumMedium HighHigh Hierarchy Hierarchy RulesRules Unit NetworksUnit Networks Alliance Networks Alliance Networks
- 50. Inverted U‐shaped Relationship btwn the Amount of Structure and Performance •Fundamental Relationship illustrates the tension between efficiency and flexibility •Observed in multiple industries and for multiple types of structure: • Hierarchy • Roles • Rules • Networks Chaotic ConstrainedConstrained
- 51. New Modeling and Evidence suggests Asymmetry and Dependency on Market Dynamism • Asymmetry: more forgiving on the side of too much structure • Optimum is less structured and more severe in less predictable environments
- 52. Examples: Simple Rules in Dynamic Markets Company Simple rules •Priority Rules helped Intel shift from DRAMs to Intel® Microprocessors •Simple Rules about minimum project size •Copy Exactly •Clear ranking molecules types as research Pfizer® priorities •Maximum number of molecule types pursued at any one time •Projects “killed” according to step charts Miramax Films® The Crying Game Pulp Fiction The English Patient Life is Beautiful Shakespeare in Love •Movies must –Center on a basic human condition and flawed, but sympathetic character –Have a clear beginning, middle, and end •Disciplined financing (50% more efficient than industry standard)
- 53. Explains mysterious organizational phenomena: • Liability of newness: less structured entrepreneurial firms can “collapse from within” while large firms w/ more structure can “muddle through” with little innovation • Maintaining optimal structure is more precarious (more V‐like than U‐like!) in unpredictable markets: – Emerging markets – High‐technology industries • Effective strategy is more simple in highly dynamic markets – Less structure enables more flexible responses
- 54. Key Lessons about Organization Structure • Managers need to manage not only the Content but the Amount Structure • Employees can (and sometimes should) subvert structures! • Structure is merely a constraint on action…the right side of the inverted U‐shape suggests that improvisation and creativity must be combined with structure to produce innovations. • Organizational Processes that change over time are as strategically important as Organizational Structures that do not…
- 55. How shall we capture value? Uniqueness, Complementary Assets & the Structure of the Value Chain
- 56. Or: What determines the Inventor’s Share? CustomersSuppliers Imitators, Inventor followers
- 57. Is it the case that great ideas = pots of money? Value captured Value created (through “raw” invention) ViagraViagra NylonNylon Xerox (early)Xerox (early) Xerox (late)Xerox (late)AppleApple Coca ColaCoca Cola Wal MartWal Mart DellDell RC ColaRC Cola
- 58. Three key ideas: • Uniqueness – Controlling the knowledge generated by an innovation: being the only game in town • Complementary Assets – Controlling the assets necessary to exploit the knowledge generated by innovation • Five Forces & the Value Chain – Understanding the dynamics of power in the value chain
- 59. Uniqueness and Complementary Assets Complementary assets are: Available Tightly held Easy to maintain Uniqueness is: Hard to maintain
- 60. Uniqueness & Complementary Assets over the Life Cycle: Complementary Uniqueness Assets Maturity Takeoff Ferment
- 61. Managing discontinuities means managing complementary assets: Maturity Performance Discontinuity Takeoff Which of my complementary assets are useful? Ferment Time
- 62. Using the model to dive deeper: • Taking advantage of positive feedback to build strong complementary assets: – In marketing & R&D (Novartis) – In process technology (Intel) – In network externalities (Google, 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?
- 63. An example Demand Volume Price Capacity Average Utilization production costs Scale Economies Learning
- 64. Managing discontinuities means managing complementary assets: Maturity Performance Discontinuity Takeoff Which of my complementary assets are useful? Ferment Time
- 65. Industry Structure and the Value Chain
- 66. Entrants Substitutes Suppliers BuyersRivals Porter’s “5 (actually at least 7) Forces”: Thinking about the balance of power Entrants Substitutes Rivals Political, regulatory and“Complementors” institutional context Suppliers Buyers
- 67. Entrants Substitutes Suppliers BuyersRivals C.Assets/Uniqueness speak to Rivalry and the Threat of Entry. Entrants Substitutes Suppliers BuyersRivals
- 68. Entrants Substitutes Suppliers BuyersRivals Porter reminds us to think about the structure of the value chain: Entrants Substitutes Suppliers BuyersRivals
- 69. Suppliers Buyers Powerful suppliers and buyers may constrain profitability Suppliers Buyers
- 70. Making money from Innovation: Summary • Creating value is not enough: • It is important to capture value as well • Value can be captured through a variety of mechanisms, including uniqueness and complementary assets • Value capture strategies change over the life cycle • Technology strategy and business strategy should thus be intimately linked
- 71. Make vs. Buy
- 72. Comparing “make” vs. “buy” Startup Startup Asset Asset Supplier Supplier
- 73. 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?
- 74. Make vs. Buy over the life cycle Performance Mostly Buy? Mostly Make? ???? ???? Time
- 75. 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
- 76. 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?
- 77. Standards and Strategy: Competing in Increasingly Open Worlds
- 78. Thinking about the dynamics of the strategic space Access is: Open 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 Public 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
- 79. In practice these boundaries are fuzzy: Access is: More More Open Closed More Public Control is: More Private IBM 360 Linux Symbian CDMA Windows Mercury/ Corba
- 80. There are two sources of network effects • Direct network effects – Network size – Value increases with the number of other individuals who own the same product • E.g.: Telephones, fax machines • Indirect network effects – Complementary products/services – Value increases with the number of complementary products that are available • E.g.: CDs, software, VHS/Beta – Learning by using – Standards mean customers invest only once in learning to use the technology: • E.g.: Qwerty keyboard, Autocad
- 81. With Strong Network Effects Market Share Itself Creates Value Value of standards Driven product Value to consumer Conventional product Actual (or anticipated) size of the installed base 31
- 82. If network effects are important, markets may “tip” 1 Probability the next consumer chooses to buy A 0 A’s share of installed base 1 28 0
- 83. 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
- 84. 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
- 85. Business models in the different quadrants The technology is: Closed Open Compete on a Public level field Move to “soft” standards? Control is: Encourage the Private “ecosystem” Embrace/extend Deliver a best in class system
- 86. Strategic Management of Platforms and Ecosystems
- 87. Managing Platforms Involves Industrial and Technological Leadership in Four Areas • Four Levers of Platform Leadership: – Scope of activities: in‐house vs. ecosystem activities – Technology design and IP: features/functions in platform – Encouraging relationships with complementors – Internal organization that facilitates platform changes Gawer & Cusumano, “Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation,” Boston: Harvard Business School Press.
- 88. Ecosystem dilemmas of Platform Leaders • On the one hand, platforms create enormous incentives to “squeeze” your ecosystem: – Extending the platform into their space – e.g., envelopment • e.g. Microsoft: Windows platform now includes important middleware not originally part of the platform – Releasing your own complementary products in the critical areas (high growth, or strategic control points) • e.g., Microsoft: enters key complementor markets that are high growth (Office suite) or offering strategic control points (IE & the browser wars) • But complementors must have an incentive to innovate…if you squeeze them they’ll exit! They create much (if not most) of the value for the platform!
- 89. How to resolve this dilemma? We’ll examine Intel’s solution, 1990‐2004 • Dilemma: Capture value from Microprocessor platform, but don’t curtail value Creation by Ecosystem in many complementary markets… – E.g., Security, PCI, USB, DVD, Video, Motherboards, Audio, and many others… • Step 0: Consider entering markets where you have competencies – Avoid markets where Intel has no competency, no matter how tempting at the time (e.g., internet software) • Hard to resist temptation: 5 failed entries into internet software became quick exits – Consider entering some complementor markets…but do so carefully… (the rest of the strategy is about how to do so) The rest of this deck adapted from: Gawer & Henderson, 2007, “Platform Owner Entry and Innovation in Complementary Markets: Evidence From Intel” Journal of Economics and Management Strategy, Vol 16, Number 1, 1-34
- 90. Value Delivery
- 91. What went wrong at Medtronic? Declining Performance Overload Pressure to meet short term targets No time for thinking through strategy No decisions
- 92. Remembering Organizational Change in Medtronic; How did they fix things? “Best Practice” • Clear, committed leadership • Well articulated strategic goals – “He cleaned up the front end…” • Coherent management philosophy • Measures and incentives • Processes and practices • A sense of urgency • That reinforce each other
- 93. Product Development Processes and Practices • Speed – “Being fast eliminates so many other problems…” – Clear product definition process, rooted in strategy • Platform strategy – Leverage technology across the range – Clearly differentiate technology development from product development • Cross‐Functional Teams • Project documentation • Phase definition • Rhythm • Market inputs
- 94. Funnels & Project Plans
- 95. The innovation funnel Phase I Phase II Phase III Launch
- 96. An Innovation Funnel Example Initial marketing and technical concepts Idea Generation Contract Launch Proposal Post Launch Review Gatekeeper Gatekeeper Feasibility Concept refinement and prototype creation Product optimization Commercialization Production & Distribution Capability Launch & Rollout Tracks success of Gatekeeper Gatekeeper Charter Cross-functional One page description of development plan proposed project including including project plan as objective, rationale and contract between team development routes. Early and Gatekeeper. Commercial Assessment and key learnings Launch Plan including from launched CEP approval request. products KEY = GATE = DOCUMENT
- 97. Less Is More: Medical Products Co. 36 21 8 5 Before After Before After # of Projects # of Projects in Portfolio Launched /Year
- 98. Develop the ability to manage ambidextrously Performance Different expectations, control systems, incentives. “High conflict, high respect” conversations Time
- 99. Building the ambidextrous organization • 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
- 100. Summary
- 101. Effective strategies address three key problems: How will we Create value? How will we Capture value? How will we Deliver value?
- 102. Effective strategies answer 7 critical questions: • How will we create value? – How will the technology evolve? – How will the market change? – How do we organize effectively? • How will we capture value? – How do we compete to gain sustainable competitive advantage? – How should we compete if standards are important? • How will we deliver value? – How should we execute the strategy? – How do we make strategic decisions and take decisive action?
- 103. Understanding the life cycle is critical : Competition Organization Technology Markets Maturity Takeoff Ferment
- 104. Startup Asset Supplier Technology strategy on one slide: Create CaptureDeliver ?
- 105. Good Luck!