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TIM 172A MOT I: Homework 2  (Problem Solving, Functional Maps, Strategy) Reading: Ulrich & Eppinger, PDD, Chapters 1-4; three class handouts on Canvas:  Intel; Disk Drive Industry; and Competitive Strategy. (Work on the homework problems and do the readings concurrently.) --------------------------------------------------------------------------------------------------------------------- Homework Problems (Due Thursday, 07 October 2021): Before working on the readings and problems develop, and submit a plan and time-schedule for producing high-quality homework (your product) in efficiently and on time.  For each problem use the structured problem-solving process: define the problem; plan the treatment of the problem; execute the plan; check your work; learn and generalize.  1. Disk Drive Industry: Read the disk drive industry handout. Carefully study the functional maps in Fig 1.3, 1.4, 1.5, and 1.7. For each map answer the following: (1) what is the meaning and significance (value) of the map? (2) how would a disk drive company use this map? and (3) what high-level conclusions can be drawn from the map? Using the appropriate functional map attempt to predict the nominal price that a disk drive manufacturer would charge (in “1982 dollars”) for 1MB of memory in the year 2016? Convert the 1982 dollars price to an equivalent 2016 dollars price, and attempt to compare your result against some actual manufacturer’s price. 2. Intel: Read the Intel Case Study and then work on the following problems.  a) Perform a competitive analysis of Intel’s industry/market landscape using Porter’s five (six) forces model. Be sure to clearly explain your approach and results. Draw appropriate conclusions.  b) What are the key relationships between (the players involved in) each force of the business landscape? (E.g., how did Intel deal with competitors, etc.)  c) Using the appropriate (clearly stated) framework, assess Intel’s competitive, technology, and product/market strategy from the company’s inception (in 1968) to 1997. How have Intel’s technology strategy, product market strategy, and developmental goals changed from its inception in 1968 to 1997? What were the key driving forces that triggered these changes?  Suggestion: Use the three-stage process on Pages 17-19 of the Lecture Notes for Competitive Strategies in Technology Management handout. Stage 3 of the process will require the creation of the appropriate functional maps for the evolution of technology, product, manufacturing, market, etc. TIM paper/for function map/微信图片_202110062101474.png TIM paper/for function map/微信图片_202110062101475.png TIM paper/for function map/微信图片_202110062101476.png TIM paper/for function map/微信图片_202110062101477.png TIM paper/steps/微信图片_20211006210146.png TIM paper/steps/微信图片_202110062101461.png TIM paper/steps/微信图片_202110062101462.png TIM paper/steps/微信图片_202110062101463.png TIM paper/steps/微信图片_202110062101464.png TIM paper/steps/微信图片_202110062101465.png TIM paper/steps/微信图片_20211006210147.png TIM paper/steps/微信图片_202110062101471.png TIM paper/steps/微信图片_202110062101472.png TIM paper/steps/微信图片_202110062101473.png TIM paper/study guide/Disk Drive Industry Case Study_0.pdf TIM paper/study guide/Intel Case Study 1968-1997.pdf TIM paper/study guide/Lecture Notes on Competitive Strategy.docx S.Desa, TIM 172A Lecture Notes for Competitive Strategies in Technology Management Lecture Notes for Competitive Strategies in Technology Management (Note: these notes, intended to supplement your class notes, are excerpts from a larger chapter on the same subject, which contains other frameworks and a detailed example.) Introduction “Successful and unsuccessful strategies shape a company’s destiny.” – R.A. Burgelman, Strategy is Destiny Technology firms, in general, perform three important and interrelated activities: strategy, planning, and operations, each having a different intent and time horizon. The function of strategy, which has a time horizon of years, is to set the long-term direction or position of the firm (e.g., define the technology, product, or service that the firm intends to develop, and determine the intended market for it). The function of planning, which has a time horizon of several months to years, is to translate long-term strategy into medium-term activities (e.g., determining the portfolio of projects the firm should execute, the time-phased planning of these projects, resource allocation). The function of operations, which has a time horizon of days to months, is to translate medium-term planning activities into short-term product design, development, and delivery activities (e.g., prototyping, manufacturing, product release, product shipment). In this chapter we address strategy. There are several different types of strategy, including competitive strategy, technology strategy, product market strategy, financial strategy, and supply-chain strategy. For a technology company to be successful, all these strategies need to be aligned with each other, as well as with the business goals of the firm. Competitive strategy, which is the focus of this chapter, is the highest level of strategy in a firm. It is intimately related to the mission and vision of the firm, and serves to set the direction for all the other strategies of the firm. There are several schools of strategy formation: design, planning, and positioning (Mintzberg, 1998). In this chapter we focus on two important schools/frameworks for strategy-creation or “strategy-making” that are particularly important for high-technology companies. The first framework is the so-called “positioning” approach of Porter (Porter, 1980), which views strategy-making as an analytic process performed at the industry-market structural level. The second framework (not included in these notes) of Burgelman (Burgelman 2002), based on evolutionary organization theory, views strategy-making as an evolutionary process performed at three levels: industry-company level, company-level, and intra-company level. When these two frameworks are combined, an integrated approach to competitive strategy emerges: from industry-market level all the way to intra-company level. A unique aspect of creating competitive strategy for a technology company (and in particular a high-technology company) is that the time-scales for the evolution of markets, industries, and technologies tend to be much shorter (“faster”) than those of other industries. For this reason, the strategy frameworks of the positioning school need to be augmented with functional maps (Clark and Wheelwright, 1993). Functional maps capture the evolution of the market, industry, and technology relevant to the company, and provide necessary predictive insight for strategy-making. 1.1 Objectives of the chapter The objectives of this chapter are as follows: 1. Describe the positioning framework for the creation of competitive strategy. 2. Provide an integrated competitive strategy process which is useful in developing competitive strategy in a technology company. 3. Demonstrate the application of this process using a detailed example of a high technology company (this is the INTEL problem assigned as homework: HW #2, Problem 1 ). 1.2 Organization of the chapter In Section 2, we establish the overall context for analyzing and designing the competitive strategy in a firm. In Section 3, we describe the positioning framework of Porter (Porter, 1980), for developing competitive strategy within a technology company. The two key elements of this framework, structural analysis of industry and development of competitive strategy, are developed in this section. Section 4 describes the organizational evolutionary theoretic approach for strategy-making. The creation and use of functional maps is explained in Section 5. The positioning framework, the evolutionary organization theoretic framework, and functional maps are combined in Section 6 to develop a process for competitive strategy-making in a technology company. Section 7 demonstrates the application of the process to an extended and detailed example. Section 8 summarizes the chapter and draws conclusions. Overall context and types of Strategy We analyze competitive strategy within the overall context of technology firms, which operate within an industrial subcategory (e.g., the computer industry, the consumer electronics industry, the cellular phone industry). Each industry serves a market comprised of the buyers or customers of the products and services offered by that industry. Figure 1 goes here Figure 1 shows a structural representation of the technology company from the stretegic viewpoint. Four important types of strategy are identified: technology strategy, marketing strategy, competitive strategy, and financial strategy. All strategies must be driven by and aligned to the vision, mission, and business goals of the firm. Business goals are usually expressed using quantitative metrics such as market share, revenue, and growth. The objective of technology strategy (Clark and Wheelwright, 1993) is to guide the technology company in developing, acquiring, and applying technology for competitive advantage. An important part of technology strategy is defining technical capabilities (e.g., advanced device design, rapid prototyping, automated assembly) that provide competitive advantage. The primary objectives of product/market strategy are twofold: first, define what differentiates the product from its competitors; second, identify market segments for the product, the customer needs of these segments, and the corresponding products (i.e., product lines) that will be offered to these segments. One important output of product/market strategy is defining the product roadmap necessary to realize business goals. This roadmap will include setting sales volume goals and pricing. The focus of this chapter, competitive strategy, is the high-level strategy used by the firm to realize its business goals (in particular, profitability in the face of competition). Competitive strategy conventionally refers to how the firm competes at the industry-market level (Porter, 1980). However, in the rapidly evolving industry and market landscape of high-technology, competitive strategy, in turn, depends on three levels of strategy-making as follows (Burgelman, 2002): 1. Industry-company level: at this level the firm must determine its strategic position, its core competencies, and its strategic action. 2. Company level: at this level strategy-making involves induced strategy and autonomous strategy. 3. Intra-company level: at this level the internal autonomous strategy is created. The success of a high technology company depends upon its ability to integrate each of these results in successful strategic action. In other words, what the company actually does (e.g., developing and marketing product lines) results in the realization of its business goals. The first strategy framework, described in Section 3, analyzes competitive strategy at the industry-market level using Porter’s “Five Forces” approach (1980) to examine the structure of the industry and the resulting dynamics between functional groups of players (e.g., competitors, suppliers, etc.) in that industry. In this positioning approach, strategy is viewed as taking a generic position in a competitive market. The second strategy framework, described in Section 4, analyzes strategy-making at the industry-level, company level, and intra-company level using evolutionary organization theory (Burgelman 2002). In the evolutionary organizational theory approach, each company is an organizational ecology within which strategy emerges via two basic mechanisms, external selection and internal selection. When companies start, because they are new and relatively small¸ the external selection mechanism dominates. As a company grows in size and becomes more established, internal selection plays an increasingly important role. Two other strategy types are closely related to competitive strategy: financial strategy and supply chain strategy. Financial strategy includes issues such as capital budgeting and portfolio management (i.e., deciding which technology and product development projects to fund in order to maximize cumulative expected profit). Supply chain strategy specifies the service, distribution, and operations functions that the company should do well in order to successfully realize its competitive strategy. Each of these functions may be performed either in-house, outsourced, or both. The “Positioning” Framework We first present a historical overview of the positioning/analytical school of strategy. Then, we develop the five forces framework (Porter, 1980) and a corresponding competitive strategy. We will use the personal computer industry to illustrate this approach. Historical Overview The analytical approach to strategy started in the 1960s and culminated in the year 1980 when Michael Porter published “Competitive Strategy”. Porter was influenced by the field of industrial organization, which focuses on analyzing industries rather than individual firms. The positioning school of strategy is based upon the following assumptions: the marketplace is competitive; strategy is a generic position in the marketplace; and strategy formation is the selection of a generic position based on analysis (Mintzberg, 1998). The overall underlying assumption is that industry or market structure drives position which drives the organizational structure of the firm. The Boston Consulting Group (BCG) introduced two techniques: the growth-share matrix and the experience curve. The growth-share matrix for a firm, developed in the early 1970s, is a 2x2 matrix with “growth” along one dimension and “market share” along the other. Each of these variables can take one of two values, “high” or “low”. Therefore, the product portfolio of a firm can be expressed as one of four types, each with a well-defined meaning: “star” (high growth, high market share), “question mark” (high growth, low share), “cash cow” (slow growth, high share), or “dog” (slow growth, low share). The strategic approach using this matrix is to have a portfolio balanced mainly between cash cows (the stable business of the firm, e.g., “MAC” computers in the case of Apple) and stars (e.g., the iPod, in the case of Apple). The experience curve, developed in 1965-66, is based on the idea that a firm’s accumulated experience influences costs and prices. The central claim of the experience curve, as expressed by Ghemawat, is “for each cumulative doubling of experience, total costs would decline roughly 20\% to 30\% because of economies of scale, organizational learning, and technical innovation” (1999). In 1971, the consulting firm McKinsey developed the GE/McKinsey nine-block matrix called the Industry Attractiveness-Business Strength matrix (Ghemawat, 1999). This plots business strength along one axis, and industry attractiveness along the other axis, each evaluated as high, medium, or low. The basic idea is to divide the company into “strategic business units (SBUs)”, and then make the appropriate strategic recommendations for each SBU depending upon its “location” in the matrix. These methods of portfolio analysis have some drawbacks. First, the recommendations for each SBU are very sensitive to the method of portfolio analysis employed. Second, the mechanical process of using historic industry and company data to determine recommendations usually led to adjusting and modifying current initiatives rather than addressing how to deal with existing and new forms of competition. In 1979, Gluck suggested a four-phase strategy to improve this process: financial planning, forecast-based planning, externally-oriented planning, and strategic management (Ghemawat, 1999). Portfolio analysis also came under attack from Hayes and Abernathy in 1980, who contended that the methods used tended to focus on reducing financial risk at the expense of technological innovation. However, portfolio analysis brought out two important high-level determinants of the profit potential or profitability of firms: industry attractiveness, which is the profit potential of an individual industry relative to other industries; and the competitive position of the specific company within a given industry. These two determinants play an important role in Porter’s analytical approach to competitive strategy that emerged in 1980 (detailed in the next section). The structural analysis of industry, a cornerstone of Porter’s approach, can be viewed as an extension of two earlier frameworks: microeconomic supply-demand analysis, and industrial organization (IO), which focuses on the relation between the structure of industries and their profit potential. Porter relaxed the two basic assumptions of supply-demand analysis (many competitors and homogeneity of competitors), while expanding the focus of IO to business strategy. The Five Forces Framework and Competitive Strategy In this framework there are two stages in the creation of competitive strategy, each stage corresponding to a high-level determinant of profitability mentioned in the previous section (industry attractiveness and competitive position). The first stage is a structural analysis of the attractiveness of the industry in which a given company is embedded. In this stage, known as a Porter framework, five forces that influence industry attractiveness are identified, as well as the factors (e.g., number of competitors, size of competitors, capital requirements) that determine the intensity of each force. The purpose of the Porter framework is to relate the intensity of competition in a given industry (as qualitatively measured by the combined strength of the five forces) to the attractiveness of the industry, defined as its ability to sustain profitability. Based upon the structural analysis, a particular company may be in a very attractive industry (e.g., pharmaceuticals) or in an unattractive industry (e.g., steel). Note that even if a firm competes in an unattractive industry, it can still be highly profitable by choosing the proper competitive position within that industry. The second stage of strategy creation addresses the competitive strategy available to the firm in order to achieve a strong competitive position. Ideally, a firm would want to be in a very attractive industry (e.g., pharmaceuticals) and have a strong competitive position within the industry (e.g., large pharmaceutical firms such as Smith Klein or Glaxo). The Porter (five forces) framework utilizes the following terms: industry, market, competitors, new entrants, substitutes, buyers, and sellers. The term industry denotes (1) the manufacturers (or producers) and (2) the suppliers of a primary product or service, as well as (3) the manufacturers of alternative products and services that could serve as a substitute. For example, the (conventional) personal computer (PC) industry would include PC manufacturers like Dell and Apple, suppliers of semiconductor chips like Intel and Micron, suppliers of storage drives like Seagate, suppliers of software such as Microsoft, etc. Substitute products include pen-based tablet PCs and small hand-held personal digital assistants (PDAs). In the five forces framework described below, manufacturers and producers will be designated as (1) competitors in the industry if they already have established products, (2) new-entrants if they are trying to enter the industry, or (3) substitutes, if they provide alternative (substitute) products. The term market denotes the buyers (or customers) of the product or service. For example, the market for PCs would include enterprises and individual consumers. The analytical process of strategy analysis and creation can be decomposed into the following five steps. 1. Create a map of the industry in which the technology company is embedded. There are five key sets of players that constitute the business landscape: competitors, new entrants, substitutes, suppliers, and buyers. Identify key players (companies) for each industry. Perform a Porter analysis of the industry structure. The five forces influence the intensity of competition in a particular industry, and therefore the profitability of the firms within the industry: Force 1: the degree of rivalry (or competition) between the competitors; Force 2: the threat of new entrants (or the inverse of this force, the barrier to entry); Force 3: the threat of substitutes; Force 4: Buyer Power (to demand lower prices); Force 5: Supplier Power (to increase material prices). For each force, determine the key structural determinants which affect the intensity of the force. Porter and Ghemawat provide a detailed set of the determinants for each force, some of which are given in the table below. In the last column of this table we indicate plausible values of each force for the PC industry in the nineteen nineties. Table 1 goes here Determine the attractiveness of the Industry. In theory, one would qualitatively determine the strength of each force, as indicated in the third column of the above table, then determine the cumulative or combined intensity of the five forces. The collective intensity or strength of the forces will determine the structural strength of the industry, as characterized by attractiveness (profit potential) of the industry. The profit potential is measured by the long term return on invested capital (ROIC). If the collective strength of the forces is high, as in the steel industry, then the corresponding profit potential or attractiveness is low, and vice-versa. At one extreme of this analysis is the perfectly competitive free market, where there are numerous firms all offering very similar products that cannot be differentiated (therefore, the force of rivalry is high), entry is free (therefore, the threat of both new entrants and substitutes is high), and bargaining power of both suppliers and buyers is low (therefore, they are unable to influence price). Using the PC industry of the 1990s as an example, the qualitative values of the forces shown in the last column of the above table would lead one to conclude that the cumulative strength of the five forces was medium-to-high, and therefore the attractiveness of the industry (i.e., its profitability) was medium-to-low. The PC industry in the 1990s would therefore not be attractive to new entrants. In fact, in the early 2000s, HP’s computer business was unprofitable, and IBM sold its computer business to Lenovo (It is important to note that HP’s unprofitability in computer business in the early 2000s cannot be attributed solely to industry attractiveness being low, but is also due to issues associated with its acquisition of the computer company Compaq). Select a competitive positioning strategy The basic premise of Porter and Hall was that for a firm to be successful (within a given market) it had to compete based on one of two sources of competitive advantage: cost (i.e., by providing low cost products), or differentiation (i.e., by differentiating its products from its competitors with respect to quality and performance). Porter also proposed that a firm needs to select its strategic target: either by offering a product to the entire market (“market-wide”), or offering a product for a particular market segment. Using these two dimensions (“source of competitive advantage” and “strategic target”), Porter proposed the following three generic competitive strategies: Cost Leadership: offering the lowest cost products to the entire market Differentiated: offering highly unique products (as perceived by the customer) to the entire market Focused: offering products which serve the needs of a niche segment of the market Porter’s claim is that for a company to be successful in the industry in which it operates it must choose between one of the three generic strategies: cost leadership, differentiated, and focus. If one uses the personal computer industry in the US during the 1990’s as an example, then the competitive strategies of the major players were as follows: Dell was the low-cost leader; HP had a differentiated strategy with high-quality products; Apple had a focused strategy, targeting a narrow market segment of users who whom the user-experience (look, feel, and graphical user interfaces) were extremely important; and IBM had a mixed strategy. Link competitive strategy to strategic planning (Ghemawat 1999) In order for a company to derive competitive advantage within its industry, the company needs to maximize, relative to its competitors, the difference between the buyer’s willingness to pay and the costs incurred in delivering the product to the buyer. Therefore, the next step in competitive analysis is for the company to link competitive strategy to strategic planning by analyzing all the activities involved in differentiation and cost. The value chain (Porter, 1985) is an extremely important tool for this analysis. According to Porter, “the value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation.” A three step process for using these activities, first to analyze costs, then to analyze the buyer’s willingness to pay, and finally to explore different strategic planning options to maximize the difference between those two factors, is developed in (Ghemawat, 1999). Finally, it is important to keep in mind that competitive strategy needs to evolve, especially in a high-technology company where markets, industries, and technologies, are changing relatively rapidly. A good example of the evolution of competitive strategy is IBM’s strategic decisions to evolve from a product-based company in the early 1990s to a services-led company at the present time. In the early nineties, when the company was in trouble, IBM closely examined its business model and strategic direction, and decided to “stay whole” by moving its focus from products and hardware to solutions. One result of this strategic shift was the creation of IBM Global Services in the mid-nineties. By the late-nineties the company moved into e-business solutions, and extended this model in the 2000’s to “business-on-demand”. One result of these shifts in strategy was IBM’s decision to exit the personal computer market by selling its PC business to Lenovo. A useful framework for understanding these shifts in competitive strategy within a company is the Evolutionary Organizational approach, discussed in the following section. A useful tool to guide the shifts in competitive strategy is the functional map described in Section 4. Functional Maps The integrated approach to strategy for a technology company, which relates company strategy to the company’s business goals, business strategy, technology strategy, and product marketing strategy, is an important unifying feature of our approach to developing competitive strategy in a technology firm. Since markets, industries, technologies, and products for a technology company are continually evolving, the functional map is an indispensable tool that plays a vital role in the creation of strategy, and, in particular, competitive strategy (Clark and Wheelwright, 1993). A functional map essentially is a time-based evolutionary map of one or more key metrics for an important organizational function (e.g., a product performance metric map for the engineering function in a technology firm, such as the well-known Moore’s Law in the semiconductor industry). Since the time-scales for the evolution of markets, industries and technologies for technology companies, especially “high-tech” companies, is short compared to other industries, the creation of the appropriate functional maps is critical to strategy formation in a technology company. As an example, in the relatively short span of four decades, the dominant form of mobile information technology evolved from mainframes accessed via terminals, to servers accessed via physically networked personal computers, to internet-based and mobile computing accessed wirelessly. Here are some useful “dimensions” along which to create functional maps for strategy creation: a) Evolution of the industry in which the enterprise operates (changes in technology, customer needs, competitive landscape, etc.) b) Evolution of strategy - business, technology, and market - of the enterprise c) Evolution of technology (including manufacturing), product platforms, and product lines of the enterprise d) The processes used for technology, product, and process development within the enterprise e) Growth (or decline) of the enterprise with respect to of market share, revenues, costs, profits, etc. f) Organizational structure of the enterprise g) Key decisions made at different stages in the life of enterprise, and the drivers for these decisions h) The interconnections and relationships between all the above dimensions A multi-dimensional functional map for Intel is given in the next section. As an example of how functional maps can shape strategy, we look to the information technology industry. A functional map of the Information Technology Industry from the 1990s to the 2000s would reveal a shift from “products” to services”. The value of the Services business in this industry in 2007-08 was approximately $750B (billion), with IBM as the leader at $54 billion. Seeing this shift in the industry and the need to build competitive strength, HP ($17B) acquired EDS ($21B), one of the largest service companies on the Fortune 500. The combined share of HP and EDS ($38B) allowed HP to compete more robustly with IBM in the expanding IT services market. The software industry provides another simple example of the use of a functional map in creating strategy. In the 2000s the software market was moving from a “packaged” product to online software, where individuals could get software that is mostly free, supported by advertising. Google used its leadership on the Web to provide online software that competes with Microsoft’s packaged software. Understanding this shift from packaged software to online applications, and the corresponding change in the revenue model from direct sales (of product) to advertising, Microsoft aggressively entered the online advertising business. Process for developing competitive strategy in a technology firm If we combine Porter’s positioning framework for competitive strategy with Burgelman’s evolutionary organization theoretic framework, then augment these with the creation of relevant functional maps, the resulting process of developing competitive strategy in a company can be decomposed into four stages, as follows. Stage 1: Company Analysis 1. Establish the business goals and objectives (ROI, \%market share, revenue, and growth aspirations). 2. Determine the technology strategy and product market strategy for the company. 3. Define the overall development goals and objectives to align business goals, technology, and market strategies. 4. Develop the functional evolutionary maps of the markets and industry in which the company is embedded. Create functional maps (time-based evolutionary maps) for technology, product market, and manufacturing strategy …