Selecting the Competitive Terrain (Chapter 7)

Instructor: J. Christopher Westland, Professor, ISMTTime: Tue & Thu 1:30pm-2:50pmVenue: Rm. 4333Duration: 5 Sep – 7 Dec

Text. McGrath & MacMillan, The Entrepreneurial Mindset, HBS Press 2000

Contact: Office: 852 2358 7643 Fax: 852 2358 2421 Email: westland@ust.hk URL: http://teaching.ust.hk/~ismt302/

Week Topic Readings Industry Profile Practicum

5-Sep-06 What is Innovation? Lecture Notes 1

Chapter 1 

How Successful Companies Get Innovative

Mad Catz, Inc.

Great Innovations (videos)

12-Sep-06 Business Needs: Framing the Challenge

Lecture Notes 2

Chapter 2   

Why Business Models Matter

False Faces (perceptual reversals)

19-Sep-06 Building Blockbuster Innovations Lecture Notes 3

Chapter 3   

3M and Norton 

Slice and Dice (Attribute Maps pp. 24-35)

The Role of the Practicum

26-Sep-06 Redifferentiating Products: New Technology or New Uses

Lecture Notes 4

Chapter 4 Recognizing the Potential of an Innovation

 

Think Bubbles (Quizzing to understand the customers’ experiential context pp. 50-56)

3-Oct-06 Disruptive Innovation Lecture Notes 5

Chapter 5 The Disk Drive Industry Industrial Design Competition

10-Oct-06 Building Breakthrough Competences

Chapter 6 Dell Computer (It’s not about the computing)

The Idea Box (Dr. Fritz Zwicky’s morphological box)

17-Oct-06 Mid-term ExamVenue: Rm4333

Time: 1:30pm - 2:50pm

19-Oct-06 Selecting Your Competitive Terrain

Chapter 7 The Excavator Industry Hall of Fame (forced connection)

24-Oct-06 Assembling Your Opportunity Portfolio

Chapter 8 Motorola’s Iridium Satellite System 

Cherry Split (fractionation)

31-Oct-06 Executing Your Entrance Strategy

Chapter 9 PETCO Tug-of-War (force-field analysis)

7-Nov-06 Putting Discovery-Driven Planning to Work

Chapter 10

  Ideatoons (pattern language)

14-Nov-06 Managing Under Uncertainty Chapter 11

Innovation the Microsoft Way

Future Fruit (rationalizing future uncertainty)

21-Nov-06 Entrepreneurial Leadership Chapter 12

  Clever Trevor (talk to a stranger)

28-Nov-06 

Strategy as Discovery Chapter 13

  Circle of Opportunity (forced connection)

5-Dec-06 Course Wrap-up

7-Dec-06 Final ExamVenue: Rm4333

Time: 1:30pm - 2:50pm 

Innovation = Invention + Commercialization

O p p o r tu n ityR eg is ter

In ven tio n s

Ide a

s

Com

mercial O

pportunities

Inno va tio n

C o re C o m p etences :A ssessm ent & Investm ent

M ark et E ntra nce &C o m p etitive S tra teg y

A d ap tiveE x ecutio n

Competences:Building Breakthrough CompetencesSelecting a Competitive Terrain

What to do with your Opportunity Register

Assuming you’ve been religiously adding to your Opportunity Register

You should by this time have a lot of different ideas for new and marketable products

Then the question becomes: Which projects should you take on; emphasize;

continue? The answer depends on your competences

Two Realities

Competitors simply cannot allow you to go unchallenged

and must try to erode your position

Understanding where to create a competitive position that cannot easily overcome is thus essential

You are not only competing with other organizations in customer markets You are also competing with them in the capital

markets for critical funds that you need to build future competitive position

Competences

You best (perhaps your only) opportunities to

compete are Where Product Market

Needs Cross with

Competences

Y o u rC o m p eten ces

P ro d u ct M a rk etO p p o r tu n ities

C o m pe ti to r A'sC o m pe te nc e s

C o m pe ti to r B 'sC o m pe te nc e s

C o m pe ti to r C 'sC o m pe te nc e s

Yo u r C o m p eten c e

Chasing the Market

M a rk e t B

C ap ab ilit ies1 0 y ear s

ag o5 y ear s

ag o

2 y ear sag o

C ap ab ilit iesT o d ay

P r o jec ted

M a rk e t D

M a rk e t A

Ta rg etedM a rk et

C o m pe titive S pa c e

You Convince Competitors and Financiers By …

Proving that your ideas can perform on Key Metrics (e.g., Profit) Show me the money!

This raises the question: “What are the important Metrics?”

The answer is complex … and is not necessarily “Profit” Accounting metrics like Profit

Measure the Past Competitors and Financiers are interested in your future!

Future Profits, Revenues, etc. are Unknown

Thus Other Measures both needed and More Important than Profit!

Delivering on 7-10 critical ‘Key Ratios’

This is what Investors and Venture Capitalists will look for The particular accounting statement measures That indicate whether your strategy is

succeeding or not

The exact set of measures depends on your business model and your strategy

Some Key Ratios

Valuation Price to Sales Price to Book Value Enterprise Value to Sales EV / EVITDA PEG Factor (price/earnings to growth) Price to Research Reinvested Return on Equity IS Sales, Earnings and Equity per Share Staff Costs to Sales Directors Remuneration to Net Income Sales and Profit per Employee Margins Cash Flow Op Cash Flow / Op Profit Price to Free Cash Flow Discounted Cash Flow BS Current Ratio & Acid Test Debtors Days and Creditor Days Stock Days and Stockturn Equity Gearing (OE to borrowed funds) Return on Capital Employed Z-score (output from a credit-strength test that gauges the likelihood of

bankruptcy )

       

Magic Numbers: The 33 Key Ratios That Every Investor Should Know by Peter Temple Each of the ratios contained in this part looks at the ways in which share prices can be combined with measurements from the various...

Intellectual Property: Your Most Valuable Asset

Property Rights: What is Ownership?

Affymetrix profits rest on exploiting patent rights.

Patents are designed to encourage innovation; they protect novel, useful and non-obvious

ideas. Yet many firms are pursuing a more perverse

route – patent hording. IBM obtained over 3000 patents last year

and earned more than $3 billion in revenue from intellectual property licensing.

Oracle, L,ucent, Sony and Motorola were up there too.

Intellectual Property Lawsuits at Affymetrix c. 2000

M u lt ily t e

I n cy teG e n o m ics

Eu ro pe a n Pa te n t O f f ice( to o v er tu r n Af f y m etr ix

p a ten t)

M o to ro la

S y n te n i

Na n o g e n

H y s e q

Pro to g e n eL a bo ra to rie s

G e n eL o g ic

O xfordG e n e

T e ch n o l ogy

Affym e tr i x

A pplie dB i os ys te m s

6 /9 9 US

6/99 UK

6 /0 01 0 /9 9

1 0 /9 9

1 0 /9 9

9 /9 8

1 /9 89 /9 8

1 /9 8

8 /0 0 12/9

9

8 /0 0

8 /9 8

1 2 /9 7

8 /9 7

7/0 0

4 /0 0

10 /99

P l ai nt i ff D e fe ndantM M /Y Y

Flavors of Intellectual Property

Copyright Patent Trade secret Trademark

Issues Right of publicity Privacy

The Concept of Intellectual Property

US Law sets the global precedent

Rights to have government prevent someone from using information Core attribute: Excludability = ability to exclude

from valuable use of information Legal infrastructure to enable exclusion

Creates tollbooths To appropriate production benefits To bar competition

Downside: creates input and coordination costs

Copyright and Distribution Technology

Creature of print (paper chase) Rights attach to distribution “bottleneck” “fixed in tangible medium of expression”

Extended to other media with similar distribution features (film, broadcast, CD)

“Tollbooth” artificially congests the the information resource

The challenge of the World Wide Web Change of “tollbooth” technology

Copyright basics

Easy to create No formalities to creation (post-1989) Minimal creativity necessary

Not raw data Digitized copies of analog works? No registration or © required

Long life = +70 to 95 years No right to idea (not property) Right to control use

Does not apply to databases Vests in author (even if publisher owns it)

Digital Millennium Copyright Act

“carrier” exemption All they do is provide routing facilities

Caching exemption notice & takedown

Server space; information exchange facilities; indexes or search engines Action to remove if infringement becomes

known, or on receipt of notification

ISP’s “Safe Harbor”

You won’t be sued by either side As an ISP with

Copyright obligations to the owner And contractual obligations to your users

ISPs are the New Publishers

Challenges from WWW

What is “a copy” or “distribution” RAM access (as in browsing) is a copy Caching is exempted Framing (HTML)

Concern with advertising driven new media products

Linking Napster, Gnutella

Diamond Rio is “space shifting” similar to VCR “time shifting”

Challenge is where to put bottleneck/tollbooth ISP?

Patents

Everyone knows that the system is broken

But they all choose to exploit it Tim O’Reilly

For a patent to be issued an invention must be

Novel Useful Non-obvious

Amazon one-click?

Patent hording IBM obtained over 2700 patents last year (900 on

software) It earns more than $1 billion in revenue from intellectual

property licensing Oracle, Walker Digital, Lucent, Sony and Motorola are

up there too

Patent search looks for “prior art”

Patent office’s antiquated system hobbles the government

Jeff Bezos of Amazon.com suggests Banning software patents all together Shortening thieir life from 17 years Create a huge centralized searchable database

of “prior art”

Opposition period

A more workable approach suggested by Robert Merges of UC Berkeley Set up a formal “opposition period” after a patent

is reviewed but before it’s granted, Where “probational” patents are posted on the

Web for several months, allowing competitors to submit prior art and shoot

down bad patents Eliminates system’s relaiance on PTO

databases and systems

FedEx’s War on Distance

A Case Study in Geographical Scaling

Fred Smith: the innovator

"The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible."

A Yale University management professor in response to Fred Smith's paper proposing reliable overnight delivery service

before Smith went on to found Federal Express Corp.

The FedEx Way

Compete for customers

Using new technologies

i.e., the increasing size and speed of jets

That restructure the geography of space time money

Overnight Delivery

Smith reasoned that he could turn Post Office economics upside-down

Post Office delivery optimized distance traveled

time was not a critical value,

package handling was cheap.

Smith saw that new air technology could let him ignore distance traveled

… and instead, optimize speed and handling to create new market value

Lock-in is not forever

In flat letter overnight delivery, Smith used: first mover advantage active management of the business ecology linking and leveraging (network externalities) “locked-in” customers

But Group III fax quickly substituted for overnight flat delivery

Automation at FedEx FedEx Web site allows clients

to bypass its Call Center

Network convergence: Customer, tracking and inventory

databases Locations Integration of Internet into Intranet

Convergence at Fed Ex

Common platform for: Electronic Commerce Direct Marketing Logistics

Data is kept in one place Instantly linking source and usage points for data Counters the high obsolescence rate for Fed Ex data

Bottom Line: Fed Ex saved 2 call centers/20,000 employees Customers get more information to answer their questions, faster, and in

more usable form

FedEx Profited fromValue-chain Innovations

These often involve a massive restructuring of the value-chain

...and a change in the ownership of various functions in the value-chain

Core Competences ‘Delivery’ and the ‘Web Center’ businesses

Identify the business of the firm

Identify the key activities on the value chain, and differentiate them from supporting activities

Identify the critical success measures generated for each activity (supporting and key).

Strategy Drivers

Specific metrics that reflect the level of activity in processes that drive growth and profit

Strategy Drivers are defined by (and define) a firm’s Core Competences

Then: Strategy Drivers

M an u f ac tu r in gValu e Ad d ed

C o n s u m er

M ater ia lL ab o r

C ap ita l

5 0 %

3 0 %

2 0 %

11 0 %

Now: Strategy Drivers in knowledge intensive businesses

M an u f ac tu r in gValu e Ad d ed

C o n s u m er

M ater ia lL ab o r

C ap ita l

5 %

5 %

1 0 %Kn o w led g eI n teg r a to r

Kn o w led g eI n teg r a to r

Kn o w led g eI n teg r a to r

Kn o w led g eI n teg r a to r

K n o w led g e B as e (u n certainclaim s , co n t rib u t io n s an d

p ro p erty rig h t s )

8 0 %

11 0 %

M an u fac tu ring

S p ec if ica tio n s

F in ished

P ro d u c t 2 0 %

Dell’s Computer

A Case Study in Technology Acceleration and Organizational Scaling

Where is the Innovation?

Innovation = Invention + Commercialization Where has Dell innovated?

Is this innovation in: Product? Process? Service? Commercialization?

What kind of innovators work at Dell?

Inventors? Boundary Spanners? Evangelists? Mentors? Project Managers? Someone else?

Chasing the Market Where is it going for Dell?

M a rk e t B

C ap ab ilit ies1 0 y ear s

ag o5 y ear s

ag o

2 y ear sag o

C ap ab ilit iesT o d ay

P r o jec ted

M a rk e t D

M a rk e t A

Ta rg etedM a rk et

C o m pe titive S pa c e

Computer and the Dynamo(Paul David)

Dynamos (motors and generators) were large and expensive in 1880 By 1910 they became small and cheap enough that they were used

in everything: Cars Refrigerators Vacuum Cleaners Etc

Computers were large and expensive in 1980 By 2005 they became small and cheap enough that they were used

in everything: Watches Cameras Telephones Cars Refrigerators Vacuum Cleaners Etc

Computers reached an Inflection Point in 2005

T im e

Cost

I n f lec tio n

Dell’s War on Inventory

In less than 20 years, Michael Dell moved from cluttered dorm-room operations

to a $60 billion a year company, Outperforming traditional rivals

Hyper-efficient supply chain

Dell is relentless in negotiating the best prices from suppliers, and

driving those savings through the supply-chain.

To do that, Dell replaces inventory with information.

Materials costs account for about 74% of Dell’s revenues

about $45 billion in 2000 Lowering materials costs by 0.1% can have a bigger

impact than improving manufacturing productivity by 10%.

Where other competitors carry one to three months of inventory, Dell carries 5 days.

Since materials costs in the computer industry fall by around 1% per weeks, carrying 5 days versus one month of inventory is around

6% of materials cost.

Safety stocks are very expensive

But they are very difficult to reduce. Reduction requires complete and accurate information and forecasts

about production and procurement. Dell has standardized worldwide on i2 Technologies’ software,

with hourly updates of all information from customers to suppliers. five hours’ worth of inventory on hand, including work in progress.

This increases cycle time at Dell’s factories and reduces warehouse space.

The warehouse space is replaced with more manufacturing lines in a virtuous cycle Dell has traded property for information.

Customers

Dell’s online customer procurement Website puts Dell in contact with more than 40,000 customers worldwide daily – giving them more than 40,000 opportunities to forecast

demand and balance supply. For example, Dell can alter supply constraints through

promotions and substitutions. If inventory is low on Sony 17-inch monitors, Dell can offer a

19-inch model at the 17-inch price. This moves a lot of demand in real-time.

Competitors selling through retail channels cannot do this!

The bottom-line

Dell writes off less than 0.1% of total material costs in excess and obsolete inventory

Their competitors write off 2% to 3%.

Dell’s ‘Build to Order’ Business

Identify the business model

Identify the key activities on the value map

Identify the drivers of strategy and value generation

What is Dell’s Value Proposition

Business Model:

Value Chain Integrator

Virtual Manufacturer Build to order (BTO) system gives mass customization

Closely knitted partnership of upstream suppliers

Suppliers manufacture standardized sub assemblies

Meet closely developed standards for quality.

Information sharing is the critical link to managing multiple suppliers setting more accurate demand forecast thus reducing inventory levels to 5 days.

This lowers costs due to reduced depreciation & obsolescence

E-Commerce channel drives BTO and allows lower inventories

Brand Equity #1 presence in PC & Business magazines

TV campaigns

Step 2: Key Activities on Value Chain

Subcontr.

Manufact

Direct Sales

(e-Tailing)

SystemBTO

To Customers

AdvertisingOn Line &

Off line support

I2Supply Chain

Mgmt

R&DComponent

Suppliers

Payments

Critical Drivers (Internal)

Subcontract Manufacturing Cost of Sub Components (Motherboard, HDD, Monitor, FDD

etc..)

BTO System Assembly # of days of Inventory

Direct Sales Average revenue per customer

Corporate, Government (relationship accounts) Small Business, Consumer (transactional accounts)

Five Forces?

Strategic Forces (External)

Drivers Geographical Organizational Technological NetworkThe internet helps to break down the geographical boundaries and reaches out to a wider market

Form virtual organizations with other suppliers

Uses i2 technology to integrate and manage supply chain

Connect multiple suppliers to deliver an integrated solution

Customers Mainly corporate and government

Suppliers Dell is able to leverage on its supply chain to deliver quality and timely products; hence lowering their own inventory.

Barrier to Entry Very high because it is not easy to apply and execute using Dell’s model

Availability of Substitutes

No easy substitutes in terms of low price, quality and service

Rivalry between competing firms

Strong competition in the server market

Key Stats

Revenue :57.40B Qtrly Revenue Growth (yoy):5.00%

Profit Margin :5.02% Operating Margin :6.96% Return on Assets :10.92% Gross Profit :9.95B EBITDA :4.43B Diluted EPS :1.23

UPGRADES & DOWNGRADES HISTORY

Date Research Firm Action From To 16-Oct-06 Prudential Initiated Overweight 5-Oct-06 Prudential Initiated Overweight 3-Oct-06 Am Tech/JSA Research Downgrade Buy Neutral 18-Aug-06 Goldman Sachs Downgrade Neutral Sell 18-Aug-06 UBS Downgrade Neutral Reduce 15-Aug-06 Cowen & Co Initiated Neutral 24-Jul-06 Citigroup Upgrade Hold Buy 21-Jul-06 AG Edwards Downgrade Buy Hold 30-May-06 First Albany Downgrade Buy Neutral 19-May-06 Credit Suisse Downgrade Outperform

Neutral

What is Dell’s New Strategy?

Computers are a commodity Inventory is still a factor, but there are fewer

savings to be made Does Dell Stay with its Core Capabilities?

Intermediating / Progressive change

Or does it chose new markets and rebuild? Radical / Creative change

What influences either choice?