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  1. 1. Working Draft Version 1.04 Page 1 Printed 5/13/10 8:00 A5/P5 “Through the Looking Glass: On Reasserting the Strategic Role of Technology” John W. Peterson Lucent Technologies Inc. May 1998 Conventional wisdom has all but written off the moderate-to-large size technology intensive corporation. Such firms are characterized as too slow, ponderous, and unresponsive to compete effectively for increasing shares of changing markets. In the face of market globalization, intensifying competition, ever shortening cycle times accelerating technology change-out, and highly uncertain futures, such companies have been struggling to leverage two distinct capabilities; strategic thinking and intellectual capital administration (product and process design, technology management, and intellectual property protection). Historically, such leverage has been problematic because in the traditional model of the firm, the domains of strategic planning and application of technology have been as mutually exclusive as the domains of free speech and strict military discipline. Strategic thinking is both a macro level ‘art’ and a prerequisite for long term success. When present, such thinking has direct links into successful micro level practices of operational planning and product evolution management. Both operational planning and product evolution management are means for leveraging innovation and other intellectual capital. Neither approach, macro or micro, has, by itself, adequately bridged the challenges and complexities of the volatile environments of today’s high growth, fast paced, knowledge based industries. This paper proposes a revision to the traditional business value chain model of the corporation and offers some insights into selected ‘management of technology’ related constructs and tools that can help lower the hurdles for the mid to large size technology intensive company. The constructs and tools reflect real time lessons being learned from a consortium of major US firms collaborating in an in-depth analysis of the strategic management of technology and related organizational processes (Management of Accelerated Technology Insertion - MATI). This work is being conducted under the auspices of the National Center for Manufacturing Sciences. The reader should note that the MATI project is still underway and these are early constructs based on initial interviews and process scans and are not yet project team conclusions. INTRODUCTION “Cheshire Puss” she [Alice] began, “would you please tell me which way I ought to go from here?” “That depends on where you want to get,” said the cat. Lewis Carroll There are, at least, five types and levels of critical management skills -- cognitive, advanced, systems integration, creative, and intuitive. Unfortunately, it is a rare management team that is diverse enough to include and genuinely value all five. However, it is only by incorporating these five levels into the appropriate value chain activities that the firm’s ‘dominant1’ management team can create, renew, or sustain strategic advantage. As a team, their skill types must encompass technology innovation and alignment, business process improvement, designing teams and organizations, establishing deliverables and appropriate metrics, and mentoring the professional development of the next generation of leaders. Once beyond the critical skills of the dominant management team, technological innovation, knowledge building, and business process improvement become the critical prerequisites for successful strategic management. Unfortunately, most managers lack a clear understanding of how such prerequisites can be 1 The dominant management team may include players not necessarily part of the senior hierarchy but who have been empowered by their ability to engage and achieve desired outcomes. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 1
  2. 2. Working Draft Version 1.04 Page 2 Printed 5/13/10 8:00 A5/P5 leveraged within the context of the business strategy. This has often led to “poor-to-mediocre business performance.” [Quinn, Baruch and Zien 1997] Knowledge-building processes, especially in the technology intensive enterprise, tend to be complex and nonlinear. They frequently, but not always, require high levels of interaction between the formal and informal organizational networks. They also require constructive confrontation without generating either gridlock or functional discontinuity. Quinn, Baruch, and Zien argue that effective strategic management must leverage the firm’s intellectual capital. That is achieved by creating pride and identity, allowing delegation, and promoting effective interaction, opportunism, and value creation. The dominant management team must create a clear, exciting, and challenging vision that the entire organization understands and embraces. They must create an integrated core business strategy that leverages both technology and business value chain activities to enable significant competitive advantage. They must also establish a conscious portfolio of innovation that balances the company's long-term, short-term, geographical, defensive, and growth needs in a way that allows all the stakeholders to define their roles clearly. Frequently this extends well beyond the immediate bounds of a specific technical focus. The core strategy and associated strategic thrusts must create the focus, the congruency and the excitement that drives business innovation, while supporting the independence, interaction and chaos that are among its essential elements. The detailed implementation of such strategy typically falls to middle managers who must achieve a balance of the requirements of the longer-term strategy against the pragmatic realities of achieving near term business unit commitments. They must also deal with internal resistance to change and get different specialized organizations to cooperate. They too must create for their teams, congruent yet appealing visions, challenging goals and objectives, and a portfolio of investments and programs. They must also make a real commitment to achieving the metrics that define winning. In addition, the firm’s managers and technologists must have a similar understanding of their customers’ business environments, processes and objectives. They must actively monitor the external environment for signals of pending change. They must also closely engage with industry and customer mavens. They must use “quick and rough” working models that help focus the customers’ thinking as well as help to visualize each element of the product or application for the development of prototypes. The resulting technology portfolio defines the types [Peterson 1996] of technological skills and innovations: • Incremental innovation -- which reflects the “natural” evolution of particular systems and or technologies (typically a shorter term minimal threat to an established product unless it establishes an intellectual property position that reads on an industry standard) • Niche innovation -- focused solutions that address a very specific need with limited promise of larger markets or additional applications (typically not a systems level threat) • Revolutionary innovation -- breakthrough technology with much promise but typically a long diffusion horizon (as a result it represents a longer term threat but includes sufficient response time to adopt or design around it) • Architectural innovation -- application of existing or emerging technology in a new way or to solve a problem for which it was not originally considered (typically architectural innovation represents an immediate strategic threat) Most opportunities for incremental, architectural and niche innovation exist at the customer interface. They stimulate the creation of new solutions for both existing and emerging customer problems. As a result, alignment with customer solution space becomes the most important single dimension in business unit commercialization of innovation. Such alignment translates very quickly into the cash investment needed for development and for “returns” projected in the business cases. Unfortunately, the ease of financial measurement may undercut more appropriate growth, positioning, or service strategies that generate greater but longer term returns. Quinn, Baruch, and Zien warn that other appropriate strategies must not be allowed to be undercut by “mechanistic use of accounting or present value tools.” There is more possible value to the firm than simply cash generated. Unfortunately, the value of such intellectual Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 2
  3. 3. Working Draft Version 1.04 Page 3 Printed 5/13/10 8:00 A5/P5 capital is not as easily quantified or as easily explained to the dominant management team as “bottom line” numbers. Strategy - Managing the Present from the Future Voices of the Customers Strategic Balance Strategic Intent Customer Changing Market Performance vs. Desired Future Needs Rules Opportunities Growth Positions Competitive Positioning Market Strategy Differentiation/ Pricing Timing & Segmentation Quality (ISO) Globalization Scenarios Competitive Landscape Gaps & Customer Imperatives Needs Critical Competitive Success Positioning Factors Product Positioning Tcnl g eho y o Competencies Platform Product Line Expansion/ & Capabilities Assessment ToBx ol o Evolution Value Product Roadmaps Chains Competitive Style Temporary Advantages R&D - Innovation Technology Positioning & Efficiency Root Cause Execution Intellectual Life Cycle Sourcing Experience Property Curves Technology Roadmaps Figure 1: The MATI Project has already identified six strategic analytical parameters and some technology focused management tools Pressure on stock price, earnings, and operating efficiencies will limit the firm’s ability to provide continual innovation at the customer interface. The dominant management team must recognize and communicate the need for both corporate and business unit innovation. This should be integrated into both the vision statement and the strategy programs. Unfortunately for some of the technical dreamers, the timing of the cash generated must also align with the pragmatic reality of established deliverables. A simplified model of the firm will be used to help explain the means of aligning technologies with specific strategy thrusts. In this construct, the continuing relevance of the business system, i.e., the enterprise, will be assumed to be determined by the six sets of parameters illustrated above in Figure 1: • Strategic intent, i.e., the vision of the firm and the boundary conditions for achieving competitive advantage • Strategic balance, i.e., identifying an overarching goal and the prioritization of the objectives of the firm (particularly the tradeoff between growth and near term financial performance) • Voices of the customers, i.e., the driving forces in the firm’s markets, geography and the opportunities related to each • Competitive strategies, i.e., the leveraging of the competencies and differentiating capabilities of business and technology value chains • Product strategies, i.e. relative positioning of the firm’s products and their attributes Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 3
  4. 4. Working Draft Version 1.04 Page 4 Printed 5/13/10 8:00 A5/P5 • Technology strategies, i.e., the balancing and prioritization of intellectual property positions and the priorities for investment in innovation, enabling technology development and sourcing Strategic goals and business objectives can then be achieved by leveraging the appropriate business and technology value chain activities to achieve a unique position, and then aligning to deliver to the customer maximum value (within the constraints of the customer’s willingness to pay). This will establish competitive positioning. Strategic competitors will then respond. Their response can be neutralized by further “tweaking” of other business and technology value chain activities. Each “tweak” will establish new or additional sources of advantage and again force the competition to respond. It is incumbent on the firm to precipitate those market discontinuities that allow it to play to its strengths. It the firm does not act, the competitors will. PART 1: CONCEPT AND APPROACH CONTEXT “Everything is in a state of flux, including the status quo” Robert Byrne The relevance and behavior of the technology intensive enterprise and its competitors are reflected in the core businesses of the firms. Core businesses are typically built around a cluster of customers. The equipment systems, that is, the platforms and products sold, provide the customers with unique value or advantage with their end users. The inter-workings of the hardware and software subsystems and routines combine to define the systems’ capabilities and performance. The resulting complex system can then be further defined as a group of interacting components and subsystems that form a more comprehensive system for a specific purpose. The complexity of the system architecture translates into a lack of trivial solutions for complex technological decisions. The drivers and considerations for such decisions include resource requirements, investments (i.e., time, intellectual capital, and financial), the development of “right” solution, the “right” architectures, and the timing to exploit the “right” market windows. Add to that, the complexity of the subsystem, its useful life, longer term maintenance requirements, and replacement of enabling technologies over the life of the system, and a basic understanding of “The Innovators Dilemma: Why Big Companies Fail” [Christensen 1997] begins to form. ON REENGINEERING THE VALUE CHAIN CONCEPT The value chain, as suggested by Michael Porter [Hax & Majluf 1993] is illustrated in on the left side of Figure 2. It has five primary activities, namely inbound logistics, operations, outbound logistics, marketing and sales, and service. They represent the functional activities of creating the product or service and transferring it, both in title and physically, to the buyer, together with any necessary installation and after- sale service. Those functional activities are linked to four “support” activities: procurement, technology development, human resource management, and the firm’s infrastructure The support activities are cross functional, they each support more than one of the primary activities. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 4
  5. 5. Working Draft Version 1.04 Page 5 Printed 5/13/10 8:00 A5/P5 An Evolved Value Chain Concept Technology Push: Technology Value Chain Corporate Domain Business Unit Domain S te ic tra g Systems Level Device Level Strategic Strategy Inve tm nts s e , Sources of Technologies & Technologies & Objectives Elements Offe , a rs nd Technology Competencies Competencies P tform la s •Grow th •R s e ource •C s C pa ros om ny •S te s ys m •(Mic E c ro) le tronic Inte l: rna •Contribution Alloc tions a Inve tm nts s e Arc c s hite ture Te hnolog s c ie •B ine sUnits us s • •Ma t s re rke ha s •C P ore roduc ts •P tform De ig la sn •De e P c g vic a ka ing •Re e rc sa h • • •De lopm nt ve e • • •Othe r • Priorities • • • • • • E rna xte l • • • •P rtne a rs •. • •Allia e nc s • •Cus e tom rs Firm Infrastructure • •S uppliers •Cons nts ulta •Com titors pe Human Resources Management •Unive itie rs s Technology Management Margin Procurement Inbound Assembly/ Outbound Sales & Installation Margin Logistics Operations Logistics Marketing & Service Business Strategy Pull: Business Value Chain Technology Intensive Business Value Added Amount Raw Materials Research Design Engineering Assembly Marketing Distribution Service Value Added Steps Figure 2: The evolved value chain concept reasserts the strategic role of technology and helps integrate it with the pull of business strategy The firm’s infrastructure, processes and structure, support the whole value chain. All the activities should add value to the product or service (generate cash) and incur costs (use cash). Survival depends on generating cash in excess of the value chain costs. As a result, senior management and operational management are constantly seeking ways to increase cash generated while minimizing cash used. In well- managed firms, there is an emphasis on reducing costs sensibly. Cost reductions should not be at the expense of quality or in other areas demanded by the targeted customer sets. In a similar fashion, costs can be added to the extent that they reflect additional attributes or functionality ‘demanded’ by the customer. In this case, 'demanded’ implies customer's willingness to share in the risks and costs associated with the changes. The difference between the total system’s costs and the price at time of sale is the margin. Margin is “grown” by widening the gap between price and total system’s costs. Within the MATI project, the project team is exploring the possibility of redefining the strategic management framework for the technology intensive corporation. One approach is to move technology out of Porter’s value chain (redefined as the business value chain) and adding a parallel ‘technology value chain.’ The ‘technology value chain’ concept (see Figure 3) proposes that the vision and strategic thrusts of the firm be aligned with business and development investment priorities, specific technologies, systems skills and competencies, enabling technologies, and appropriate sources of technology. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 5
  6. 6. Working Draft Version 1.04 Page 6 Printed 5/13/10 8:00 A5/P5 Technology Value Chain Illustration Strategy Pull Corporate Domain Business Unit Domain Strategic Systems Level Device Level Strategic Strategy Investments, Sources of Technologies Technologies Objectives Elements Offers, and Technology & Competencies & Competencies Platforms Strategy Architecture Technology • Value • Attributes • Cross Company • Systems • (Micro) Electronic Internal: Creation • Partnering Investments Architectures Technologies • Business Units • Growth • Licensing • Core Products • Platform Design • Device Packaging • Research • Long Distance • PNS Digital Switch • Optical • Teflon Back- • Research • Growth • Local Access - CM (ATM) Interconnect planes • JPL • Globalization - ORM, RSM, SM • Optical Fabric • VLSI Modules • U of C • Returns • Resource • Core Platforms • Systems’ • Simulation and External • Priorities Allocations • Development Engineering Modeling • Partners • Timing • Volume Priorities • Software • Software Control • Alliances Allocations • Research Funding • Project/Risk and Instructions • Customers • Priorities Levels Management • Interconnection • Suppliers • Process Quality • High Speed • Consultants • Manufacturing Electronics • Competitors • Etc. • Etc. Technology Push Figure 3: The Technology Value Chain. In Figure 3, the technology value chain, the growth objective has been highlighted. This Hypothetical Company intends to position its products to accelerate growth globally, leveraging both local and long distance capabilities of its public access networks digital switch. The switch is being further evolved to provide lower cost of throughput. This is achieved by using optical technologies at the systems level. Among the technologies at the device level are very high speed VLSI modules and Teflon backplanes. The Hypothetical Company intends to source the technology internally from research and from government laboratories and public universities. In the technology value chain, the firm links its unique competencies and dominant skills to add value to basic and enabling technologies. This provides products and systems that align very closely with specific corporate strategy elements and objectives. The chain can be used by the management team to identify the common cross product technologies and skills required to support current and future products and offers. The firm can then identify relative industry positions in these areas, comparing itself to its strategic competitors. It’s skills and competencies can then be assessed in context of the targeted markets. Those skills and competencies needed to support evolution of the enterprise can be flagged and compared to in- house competencies and capabilities. Those required can be retained, gaps can be filled by way of education or recruitment, and those no longer needed can be phased-out. The technology value chain serves effectively to account for the 60-80% of the firm's sales related to the established “core business.” 1.0 ON STRATEGIC INTENT: “Victory smiles upon those who anticipate the changes in the character Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 6
  7. 7. Working Draft Version 1.04 Page 7 Printed 5/13/10 8:00 A5/P5 of war, not upon those who wait to adapt themselves after they occur. General Giulio Douhet (1921) Firms frequently fail to fully communicate their expectations for the longer term. A failure to define those expectations can cause the firm’s management teams to err in the formulation of group, business unit and product family objectives. In some firms, senior management is unable to clearly describe the vision. Instead of tackling the political problem of driving to a consensus and creating a real vision, such firms typically generate a surrogate2. The surrogate, something prepared for public relations purposes, tends to describe the future firm in “warm and fuzzy” terms. Such “warm and fuzzies” frequently lack material information that is prerequisite for the successful focusing of the firm's resources and activities. In the Innovation Explosion, Quinn, Baruch and Zien describe vision as something the dominant management team supports constantly and clearly. This is done in their lives, in their communications, and by repeating stories and anecdotes that grow, add substance, and develop a reality of their own. “Such visions are not the pap of most mission statements but stirring, practical dreams through which people can connect their work-life to their life-work.” Raison d’être is not the firm’s vision. For the commercial manufacturing enterprise, the raison d’être of the firm is to defend and grow the value of the owners' investments in the enterprise. The ultimate mission is to create an “ecstatic customer.” Vision is not strategy, but the logical longer term outcome of effective implementation of an appropriate strategy. Strategy is the means to get to the vision. Strategy is as expressed as an “organizational purpose in terms of its long-term objectives, action programs, and resource allocation priorities.” [Hax & Majluf 1996 p.2]. The path to the vision is not always easy, there are outsiders who attempt to intervene and insiders and other stakeholders that do not always share the vision. There are also some boundaries to what the firm can undertake. Boundaries include the vision, the firm’s average weighted cost of capital, the customer value propositions, and the capabilities of the firm in terms of both the business value chain and the technology value chain activities. [Radnor and Peterson 1997] 2 A vision surrogate should not be confused with different versions of the vision that have been generated to more effectively communicate with different constituencies. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 7
  8. 8. Working Draft Version 1.04 Page 8 Printed 5/13/10 8:00 A5/P5 Vision - Pragmatic Working Boundaries Capital: Capital Customer Value Proposition: Infusion Price Functionality Economic Risk & Value Added Inflation Corporate Discount Rate Quality Support Longer Term Vision Technology Push: Business Strategy Pull: Technology Value Chain Business Value Chain Corporate Domain Business Unit Domain Strategic Strategy S te ic tra g Inve tm nts s e , Systems Level Technologies & Device Level Technologies & Sources of Technology Intensive Business Objectives Elements Offe , a rs nd Technology Competencies Competencies P tform la s •Grow th •R s e ource •C s C pa ros om ny •S te s ys m •(Mic E c ro) le tronic Inte l: rna Value Added Amount •Contribution Alloc tions a Inve tm nts s e Arc chite tures Te hnolog s c ie •B ine sUnits us s • •Ma t s re rke ha s •Core P roduc ts •P tform De ig la sn •De e P c g vic a ka ing •Re e rc sa h • • •De lopm nt ve e • • •Othe r • Priorities • • • • • • E rna xte l • • • •P rtne a rs •. • •Allia e nc s • •Cus e tom rs • •S uppliers •Cons nts ulta •Com titors pe •Unive itie rs s Raw Materials Research Design Engineering Assembly Marketing Distribution Service Value Added Steps Current Future Industry Industry Figure 4: Vision implies managing the present from the future 2.0 ON STRATEGIC BALANCE “Adherence to one principle frequently demands violation of another. Any leader who adheres inflexibly to one set of commandments is inviting disastrous defeat from a resourceful opponent.” Admiral C. R. Brown (1949) Strategy is a military term that has been adapted for use in the business environment3. It's necessary to recognize that the context differs between the national war (corporate) strategy and the battle (business unit) strategy. The vision and the survival of the enterprise are both dependent upon achieving an appropriate balance in these domain relationships. Of course, business unit (battle) strategy must be played out within the context of the corporate (war) strategy [Quinn 1992, Peterson 1996] Business strategies for the enterprise exist at least two levels, both of which must be addressed simultaneously. The first level is macro. It reflects the directions and intentions of the Board of Directors. This is corporate strategy. It consists of the vision, an overarching objective and a small set of “strategic thrusts.” It will define, at a macro level, the priorities and resources to be committed to the elements within the portfolio of business units. At this level, the primary business “battlespace” considerations include appropriate market segmentation and primary drivers that affect those global, national, regional and local segments. The drivers include politics, economics, societal (cultural) and technological considerations. At the macro level, the enterprise’s leadership team is faced with the equivalent of a 3 hence the preponderance of sectional subtitles are military quotes. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 8
  9. 9. Working Draft Version 1.04 Page 9 Printed 5/13/10 8:00 A5/P5 horribly complex non-linear optimization problem. It has a wide range of short lived, time dependent, potential solution sets, none of which is optimal due to the conflicting objectives and interests of multiple external but very influential constituencies. Enterprise strategy is a long term high stakes play. Outcomes are decisive. . [Peterson 1996] At the corporate level, the innovation engine [Levin, Radnor & Thouati, 1997] becomes the key functional driver of future capability. In this arena, because of the power and capabilities of the other players, advantage is fleeting. Influence is frequently more attainable than control At a second or micro level, military strategy reflects the directions and intentions for an individual campaign or battle. In business, battle strategy translates into a business unit operational strategy. At this level, the commander (or management team) attempts to win and maintain share of mind (and assets) from the next higher level of command (management). This is done while the business unit leadership teams are engaged with the competition on a regulated field of play. They are fighting to gain customers’ acknowledgment that the firm provides the best relative performing product at price points the customer is willing to entertain. This too, represents a very complex optimization problem, but tends to be more linear. Although significant, because of the multipliers involved, business unit operational strategy is somewhat less decisive. [Peterson 1996] The Corporate “Battlespace” Within the Context of the Corporate Strategy: Generic Objectives and Major Players High • High Impact - Low Internal Influence: High Impact - Low Internal Influence High Impact - High Internal Influence Cumulative influence of governments, regulators and competitors far exceeds Monitor, Anticipate, Manage for Growth that of the business. It is here that the Im c on Corpora S te y te tra g Precipitate, and Respond and Share LONGER TERM FUTURE is determined. • Regulators • Customers • Competitors • High Impact - High Internal Influence : Day to day commitment of resources to new and emerging opportunities. Low Impact - Low Internal Influence Low Impact - High Internal Influence GROWTH and CURRENT PROFITABILITY are determined here pa t Monitor, Advise, Manage for Efficiency • Low Impact - Low Internal Influence: Counsel, and Defend and Profit Domain of economists, external affairs • Lobbyists • Bureaucracy and attorneys. Economic planning • Attorneys • Functional Support assumptions and DEFENSE of the • Economist enterprise from litigation and adverse regulatory intervention. Low High Inte l Control/Influe e rna nc • Low Impact - High Internal Influence: Domain of legacy products. CORE PROFIT generation. Bureaucracy’s infra- External Pressures structure. Training ground for next Enterprise Positions generation of managers. Figure 5: The corporate battle space and the generic strategy thrusts Strategies must be driven by capabilities and competencies. Functional technical competencies, as well as core competencies, can hold keys to future competitive advantage. [Snyder & Ebeling 1992] What is important is that an appropriate longer term vision for the enterprise be set and understood and embraced by the entire organization. [Radnor and Peterson 1997] The strategies and structures necessary to achieve that vision must then be pursued vigorously. The enterprise must align its information and communication processes to its strategies, align its value chains with its strategies and information processes, and match all the structural components with the value chains and with each other [Eriksen, Peterson, & Wofford 1998]. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 9
  10. 10. Working Draft Version 1.04 Page 10 Printed 5/13/10 8:00 A5/P5 For better or worse, finance is the current universal language of business. Senior management is incented based on their ability to produced results that can be measured in financial terms. As a result, a successful strategy must be able to be translated directly into a projected impact on the firm’s financial performance. As organizations and senior managers pursue multiple objectives some of which may not be focused to achieve the vision or other single overarching goal, it may become necessary to excise some activities and refocus others. Figure 5 illustrates the “Corporate Battlespace. These is the field of play upon which the firm’s management teams must engage and defeat the competition under s series of rules that evolve and change during play. The key players and the generic strategies for each quadrant are outlined. These provide the context for winning. 3.0 THE VOICES OF THE CUSTOMERS “Preconceived notions, especially in war, are dangerous, because they give their own particular colour to all information that comes in; and ... stifle any real understanding of the actual situation...” General Aleksei A. Brumsilov (1915) Globalization and emerging “hypercompetion” [D’Aveni 1995] have changed the marketing demand function. Decades ago, demand was considered a function of supply. That has changed with a vengeance. Typically, supply is now a function of demand. Globally, multiple sources of competent and competitive supply exist for most products. Both markets and individual customers have become sophisticated enough to provide measurable feedback concerning if and how well the supplier is meeting or exceeding customer needs. That feedback, in the language of the dominant management team, is called “revenue growth,” “shares of market,” and “contribution.” In those terms, it’s not difficult to measure customer feedback over time and determine the firm’s real performance against the expectations of the customer. At both the corporate and the business unit levels, to excel, a firm must distinguish itself. It must fully understand the benefit the customer receives from its product or service, and take into account those instances, both positive and negative, that shape that customer's perception of the company. Understanding the customers and becoming sensitive to their needs helps the firm innovate in terms of developing products and delivering services that have more value to a customer than those of the competition. In addition such understanding also enables the firm to begin to influence the strategic alternatives available to strategic and other competitors. Efforts should be channeled into at least three areas: •Assessing "value-in-use" of the firm’s solutions •Analyzing customers' purchasing patterns and expectations •Measuring critical incidents (both failures and those that far exceed expectations) The more complex problem is that customers’ needs are changing faster than solution (product) cycle times. Customer expectations are increasing faster than their “willingness-to-pay.” When the firm first meets the initial expectation threshold for a particular customer, there are two immediate reactions. First, the customer recognizes the firm’s capability and it becomes a prerequisite for future sales. Second, competitors recognize that the performance bar has been raised and they commit to improve their performance to regain a share of the customer's business. [Webster 1994] Webster also describes “three forces that drive customer expectations upward": •The customer's dynamic needs and wants. •The company's promise and delivery of` superior performance. •Competitors' promises that they can do even better. Continuous innovation goes hand-in-hand with responding to the voice of the customer. Firms that attempt to make customers satisfied with only what the firm currently has to offer are doomed to failure in Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 10
  11. 11. Working Draft Version 1.04 Page 11 Printed 5/13/10 8:00 A5/P5 the global marketplace [Webster 1994, Christensen 1997]. Those that are committed to continuous innovation and improvement in products and processes, and that are able to offer better solutions to customer problems, have the greatest potential for success. [Webster 1994 p.68] 4.0 ON COMPETITIVE POSITIONING “...no operation plan extends with any certainty beyond the first encounter with the main body of the enemy” Field Marshal Helmuth Graf von Molke (1800-1891) Creatively defining the market in terms of segments, customer preferences and technology can identify new opportunities for creating short term competitive advantage. Unfortunately, the firm can not afford to take advantage of every opportunity identified. The decision to exploit an opportunity should be related to the firm’s vision and the fit of the opportunity to the five or six strategic thrusts of the firm’s overarching strategy. The specific competencies of the firm and the match between those competencies, the needs of the identified market segment (clustered voices of a customer set) and the attributes of the offer must all align closely. The firm must leverage its distinctive competencies (both technology value chain and business value chain) to achieve the best relative perceived values. • Better, relative to the competition • As perceived by the customer • Value to both the firm and the customer(s). The firm is faced with intensifying global competition, ever shortening cycle times, accelerating technology change-out, significant market globalization, and highly uncertain futures. It must position its product or service as providing a clearly differentiated solution to the customers it is targeting. The firm’s solution must be perceived as a better solution than the way the customer is currently addressing the situation and relatively more profitable to the customer than the solutions offered by competitors. This is the value-in-use relationship. [E.I. du Pont de Neumours & Co 1971] When a number of complex systems solutions compete with each other, and when the market perceives them as essentially cross elastic substitutes, the positioning of an individual offering will depend upon it’s quality and it's pricing relative to the potential alternatives. Customers typically will attempt to position themselves to create a perceived monopsody situation (one customer selecting from commodity products), where price and delivery are the only relevant decision variables. However, the manufacturers of the product or service solution will attempt to position their offering as a differentiated solution with the highest reliability and lowest life cycle cost, thereby justifying a premium price. Successful closure of the “gap” depends on the management team fully understanding the values and costs within the value chains and on the creative skills (sales, negotiations, and customer management), resident within the sales team. Competitive positioning includes understanding the business and value chains of the competition. The objective is to be able to channel competitors into competing in an area where the competitor has no current advantage and the firm has a strength. By so doing, the number of strategic alternatives for each competitor can be minimized. Over time, they will have to redirect resources (financial and intellectual capital) to reposition themselves in the eyes of the customers. Diversion of resources from their strategic intent to play catch-up will weaken their ability to be a strategic player. Over time, they will be relegated to being a niche player fighting local low cost producers for limited “commodity” opportunities. 5.0 PRODUCT POSITIONING “Always remember, however sure you are that you can easily win, there would not be a war if the other man did not think he also had a chance” Sir Winston Churchill (1930) Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 11
  12. 12. Working Draft Version 1.04 Page 12 Printed 5/13/10 8:00 A5/P5 Product positioning must be based on a careful effort to segment the market, understand the needs of the customers and the end-users, and an understanding of how the technology intensive firm’s value proposition addresses the specific needs and concerns of the customers. Product positioning must be implemented through an effective marketing communications plan, not only with promotional materials but also in all the firm’s on-going contacts with the customer. Such contacts include support and development personnel as well as the sales team. The value proposition must be understood and accepted as the basis for all marketing considerations concerning the product. Such considerations range from sales force targeting and pitch content to what the brochures say. [Dovel 1990] The value proposition reflects the quality, functionality, bundled support and pricing positions of the offer. The value proposition is generated by: •A quick reality check to ensure the product is congruent with and will be supported by the business strategy •Understanding the business environmental influences of importance to the customer (customer set) •Understanding the attributes the customers in the targeted segment use to differentiate and judge products •Understanding the positions of the competitors’ offers in this segment •Perceptual mapping of the firm’s product against those of the competition •Selecting a unique position and delivering maximum value to the customer •Use of value chain competencies to pre-empt competitors’ responses 6.0 TECHNOLOGY POSITIONING “The past had its inventions and, when they coincided with a man who staked his shirt on them, the face of the world changed ...” “...The future is pregnant with inventions.” General Sir Ian Hamilton (1921) Technology advances continue to improve systems capabilities. Lasers double in speed every three-and-a- half years, silicon doubles speed every two years and in the last five years, storage space requirements have dropped from 30:1. This makes systems level and enabling hardware technology decisions particularly critical. For example, public networking equipment like the class five central office switch has a useful life (depreciation) of ~15 years [Quinn 1993]. The system’s critical enabling technologies achieve order of magnitude improvements every three to five years. In order to deliver full life cycle value to the system’s purchaser, the manufacturer must make correct decisions concerning hardware technologies, product features and attributes, i.e., reliability, quality, and costs. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 12
  13. 13. Working Draft Version 1.04 Page 13 Printed 5/13/10 8:00 A5/P5 Software Technology Trajectories Code and Repair Skills Barrier caused by Failure to Maintain Pace Relative Value to the Business Customer: Imaging Broadband Source of Data Business Advantage Function Object Automation Oriented Real Time Decision Support Systems GUI Client Server Source Real Time of Parity Transaction Processing >4 GLs CASE Tools 4 GL Survival Code Generators Prerequisite DBMS 3 GL 1st 2nd 3rd Generation of System Figure 6: Complex system architectures must anticipate technology trajectories and allow for periodic software upgrades during the system’s useful life This must be done with much more than a twelve or twenty-four months planning horizon in mind. Functionality and other competitive attributes are, in many instances, enabled over time in software. As illustrated in Figure 6, appropriate positioning on the software technology curve becomes one of the more critical early architectural considerations. Periodic software upgrades illustrate that an appropriate technology decision can simultaneously provide new applications and revenue potential for the customer, extend the competitive life of the hardware platform, and raise the entry barriers for competitors. Failure to anticipate and allow for upgrades may create technology impedance and require earlier than planned retirement and replacement by, and at additional costs and heartburn to, the customer. THINKING ABOUT THE UNTHINKABLE: Technological Discontinuities Technological change-out can alter the fundamental nature of the business. The failure to adapt to technological discontinuity can significantly affect its market share and even destroy the firm. [Christensen 1997] Such a demise transfers resources out of the control of the (former) dominant management team that has demonstrated a lack of competence. The resources are given into the control of a new team whose challenge is to demonstrate their competence. Senior leadership-not-with-standing, the strategic retrenchment or demise of a firm brings hardship to local and regional economies, to say nothing of the damage to its longer term employees. [Radnor and Peterson 1997] Engines of economic growth can be created by new leadership and when firms adapt to new technology. The art of technology forecasting is fast becoming critical business prerequisite. It’s required to prevent damage to firms by allowing them to anticipate technological change while they can still adapt easily. By forecasting and monitoring critical Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 13
  14. 14. Working Draft Version 1.04 Page 14 Printed 5/13/10 8:00 A5/P5 technological threats and opportunities as they occur, the firm can counter threats and capitalize on opportunities. Its managers thereby demonstrate their competence and justify their continued control of the corporation’s resources. They fulfill their responsibility to protect and grow the value and interests of their stockholders, workers, and suppliers, all of whom might otherwise be hurt by an unanticipated technological discontinuity. SUMMARY: On average, over a year’s time, and depending upon the state of the capital markets, somewhere between 10% and 40% of a technology intensive firm’s stock price is directly tied to current operating results. The complement to that, between 60% and 90% of a stock’s price, is based upon the perceived strategic posture of the firm and the markets in which it participates. [Topor 1991] No large body of empirical evidence exists that planning itself will increase share of new market capitalization or increase either profitability or market share. However, it logically follows that alignment of appropriate capabilities, technology and support to address specific needs of a strategic customer set, will improve the probability of the technology intensive firm’s mission success. Add to that, the necessary follow-through and commitment to ensure customer delight with the platforms and support provided, and only factors beyond the influence of the dominant management team can adversely affect the firm. The skills of the firm’s management teams in anticipating and addressing opportunities and performance gaps, identifying the need for and pursuing a viable program of strategic price positioning, and considering and preparing for significant contingencies will help position the enterprise in the eyes of the investment community. In addition, such skills will positively impact stock price and market capitalization (and incentives for the dominant management team). At the strategic level there are two common denominators to mission success. The first is a focus on the needs of specifically segmented customer sets, and the other is commitment to deliver technologies capable of providing strategic customers with unique advantage and support. Because technology and corporate strategy alignment span analysis, planning, implementation and follow-through, it represents an opportunity to establish a core niche of excellence. It expands the concept of core competence by offering that, as a core capability of the management team, its enterprise specific implementation is unique and differentiated from those of its competitors. Such alignment contributes directly to enterprise “share of mind” in the financial investment community. Technology and corporate strategy alignment both defend and add value to the stakeholders’ investments in the enterprise. Corporate success is dependent upon establishing strategic intent, balancing near and longer term objectives, responding to the voice of the customer, positioning the firm and its offers against those of the competition, leveraging technology evolution for competitive advantage, and committing to the corporate strategy at every level of the organization. Unfortunately, such success is not an endpoint, but a beginning. The management teams must think about and plan for the unthinkable. Technology, by its nature is not continuous. The next disruptive technology is even now being invented. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 14
  15. 15. Working Draft Version 1.04 Page 15 Printed 5/13/10 8:00 A5/P5 PART 2: PRAGMATIC APPLICATION -- TEST OF THE CONCEPTS CONTEXT “Nothing bears out in practice what it promises incipiently” Thomas Hardy The technology intensive enterprise has its raison d’être in providing increased value to its constituency base. That base includes “owners,” customers, supply chain members, the communities, its employees, etc. Within the enterprise, there are also multiple groups with goals, objectives, responsibilities and capabilities that vary widely. As a result, the enterprise senior management team must solve the complex non-linear optimization problem of simultaneously defending and growing the value of the enterprise for this multitude of constituencies. This must be accomplished while dealing with the constant acceleration of industry change, competitive pressures from global players, and more frequent market discontinuities. Unfortunately, there is no simple or easy solution set. There is only a wide range of short lived, temporary, time dependent potential solution sets, none of which is truly optimal. As illustrated in Figure 1 of Part 1 (Page 3), the firm must work through the six sets of analytical parameters to align and implement its strategy. Part Two of this paper will focus on how technologies align with specific strategies, and how successful management of those alignments enhances the firm’s performance. But first, a brief introduction to the Lucent Technologies 5ESS 2000TM Switch will be provided. The Hypo-Millennium switch, based on the Lucent 5ESS 2000TM will serve as a golden thread to tie together, at a very high level, the framework of a real world company and a real world product family. However, Lucent’s 5ESS 2000TM Switch is a real and vital product in the Lucent portfolio. Reader beware, the applicable data, while somewhat directionally correct, have been adjusted to illustrate the points without providing precision strategic intelligence to Lucent Technologies’ competitors. But first, a brief introduction to Public Network Switching4: Lucent’s first generation 5ESStm Switch was conceived at a time when the then “state-of-the-art” solid-state technology was rapidly nearing maturity. That first 5ESStm Switch, which in 1984 the International Switching Symposium (Montreal) described as “a world class second-generation digital switch,” [Dubosz 1997] incorporated an innovative distributed architecture that was based on microprocessor technology. It was designed from the ground up as an international platform capable of being adapted to the world’s different telephone systems. That original 5ESStm Switch was also purposely designed to allow regular upgrades or infusions of improved microelectronic and software technologies to enhance capabilities and performance in both local and long distance networks. The original architecture provided customers, the communications services providers, with significant network design flexibility. It also allowed the graceful adoption of enabling technologies emerging after its original design. As a result, the service providers (customers) could routinely add new network services and applications on the original switch. It also enabled a performance reliability level that has not only become the industry standard, but that other digital switch manufacturers are still attempting to emulate. Local public voice network switches primarily deal with analog line inputs from telephone subscribers and thus provide extensive A/D (analog to digital) and D/A (digital to analog) conversions for interfacing with a digital switching fabric. By digitizing the voice and assigning a fixed synchronized time slot to each conversation, multiple connections can be supported cost effectively on a given transmission medium, such as wire pairs, radio channels, or fiber optics. A high level architecture for a “5ESStm like” digital switch is illustrated in Figure 7. It shows how lines, signaling links and service circuits for interoffice transmissions can be connected to time slot interchangers (TSI) within a switching module (SM). Switch modules and groupings of subscriber lines can be remoted either over fiber-optic links or digital T1 facilities. Lines can 4 More than the typical reader really cares to know, but necessary because the tools illustrated in Part 2 link directly back to specific elements of the switch architecture. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 15
  16. 16. Working Draft Version 1.04 Page 16 Printed 5/13/10 8:00 A5/P5 enter the SM directly or by way of a remote access interface unit (AIU). Analog trunks are also terminated, but semiconductor A/D (analog to digital) and D/A (digital to analog) converters are used to multiplex and demultiplex the signals into and out of the TSI. The “Hypo-Millennium” Switch Architecture Administrative Module (AM) Switch Module-2000 •Maintenance Control Center (SM-2000) •I/O Processor •Module Processor •Disks •Time Slot Interchange •Line/Trunk Units •Service Circuits OS Interfaces Communications Module (CM) • Time Multiplex Switch • Message Switch Signaling • Network Clock Interface Data Links Signaling Switch Network Module Remote Switch Module (RSM) lines (SM) • Multi-Module RSM Remote trunks • Stand-Alone Access Interface Fiber Unit (AIU) lines trunks Signaling lines Optical Data Remote Signaling Links Data Module Links lines (ORM) lines trunks Signaling Network Figure 7: Architecture for the “Hypo-Millennium” Switch [cloned, under license, from the Lucent Technologies 5ESS 2000TM digital switch] The 5ESStm Switch also supports termination and switching of Integrated Services Digital Network (ISDN) lines and trunks. Each ISDN line includes two voice or data channels (basic rate interface -- BRI) and a signaling or data channel (primary rate interface-PRI). Each trunk supports 24/30 voice/data channels (BRI) and a signaling channel (PRI.) The packet switching unit (PSU) is resident in the SM. It is used for ISDN control and data switching. The PSU also provides support for wireless functions (for both TDMA and CDMA protocols) and it provides the basis for signal transfer point (STP) functionality. In addition, the PSU provides the packet switching functionality required to support signaling system 7 (SS7) for inter office signaling. Instead of depending on a large central processor, the architecture uses a switching module processor in each SM that acts as a microprocessor-based call aggregating computer. The switch modules are interconnected into a switching system by means of fiber-optic connections to a time multiplexed switch (TMS) in the communications module (CM). The CM incorporates control channels to a message switch and a network clock interface that synchronizes the timing between the message streams. Overall administration and maintenance functionality is provided by a special-purpose computer called the administrative module (AM). The AM includes the maintenance control processor, and input/output processor and memory. Operating systems interfaces are managed in the AM. Using this modular approach, 5ESS 2000TM systems can be designed to serve small local offices of less than 2000-line capacity to larger offices of up to 45,000 trunks and 200,000 lines simultaneously. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 16
  17. 17. Working Draft Version 1.04 Page 17 Printed 5/13/10 8:00 A5/P5 In the early 1990s, as the original 5ESStm Switch began to approach mid-life, Lucent’s second generation class five switching system, the 5ESS 2000TM was introduced. It continues to leverage the original distributed architecture, advances and innovations in enabling hardware and software technologies, and breakthroughs in algorithms. It uses the new technologies to provide even more advanced services and applications at lower price points without forcing customers to abandoned investments in the original 5ESStm Switch . Figure 7 actually depicts both an original SM and an updated “Hypo-Millennium” SM, Hypo’s clone of the Lucent SM-2000TM coexisting in the same architecture. The 5ESS-2000TM leverages state of the art semiconductor, microprocessor, fiber-optic and other enabling technologies including (but not necessarily limited to): •Processors and microprocessors for control •Semiconductor memories and logic circuits for switching •DSPs for tone generation. touch-tone dialing, Voice announcement systems, echo cancellation, and subscriber line functions •Light emitting diodes for fiber-optic interfaces and displays •Semiconductors for subscriber-line and interoffice trunk interfaces, as well as power supply integration and control Lucent’s 5ESS-2000TM switch is unique, largely because of its distributed architecture. Regular infusions of new enabling technologies allow multiple applications to be supported on the same switch simultaneously. Such applications include local and toll call switching, operator and directory services, ISDN, intelligent network, international gateway, as well as wireless TDMA, CDMA, and GSM switching. The Packet Switching Unit (PSU) has played a key role in supporting ISDN and common channel signaling (CCS), as well as DSPs for wireless applications using compressed voice. The increasing capacity of the microprocessor-based call processing computers have allowed for the support of the millions of lines of software code required to manage and control these multiple applications. Although its application to hierarchical voice networks is still the primary use that service provider customers leverage, the evolution of the 5ESS 2000TM digital switching system is continuing. It has the future capability to support the interconnectivity of a full range of multimedia capabilities including data, image, and video applications. Because of these attributes, Hypo is thought to have paid Lucent substantial technology transfer and licensing fees for access to the 5ESS 2000TM technologies. Other central office digital switches are available and provide access, call process and routing, (they help connect subscriber lines to local and long distance voice communications networks.) Digital COs that compete with Hypo’s Hypo-Millennium product are marketed by such companies as Alcatel, Fujitsu, NEC, Nortel, Siemens and , of course, Lucent Technologies. About the Hypothetical Company: Lucent Technologies Inc.5 which will serve as a real world reference for the hypothetical company that will be used to illustrate the tools and techniques advocated in the paper. In 1996, to improve returns to a very divergent set of share-owners, AT&T spun off its captive systems and technology manufacturing businesses. The computer systems operations were consolidated into NCR. The telecommunications systems operations were spun free as Lucent Technologies. With a different dominant management team than had existed under the AT&T ancestor, Lucent moved through a very public “birthing” process and established itself as an independent world class maker of communications equipment and software. That initial strategic objective was met when Lucent's 1996 initial public offering (IPO) earned $3 billion, the largest in US history. Lucent’s initial stock price was just under $30 a share. Sales in 1996 and 1997 reached historically high levels. In October of 1997, the public birthing process was pronounced as completed. In early 1998 Lucent began a phased restructuring. It aligned its business units more directly with its customers and the customer support teams. Organization structures continue to evolve to align with and 5 as seen through the eyes of Hoover Business Profiles, March 19, 1998. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 17
  18. 18. Working Draft Version 1.04 Page 18 Printed 5/13/10 8:00 A5/P5 key on more rapid and efficient responsiveness to customer and market critical requirements. By the end of March of ‘98, revenue growth over the prior “record year” was at 66%. A stock split was declared and the stock price just before the April 1, 1998, two-for-one stock split, had reached more than $135 per share. The market value of the Company was more than $76 Billion. Having spun free, Lucent emerged from the birthing process as an independent world class competitor. Lucent has apparently recognized that communications infrastructure is one key to the new millennium6. Lucent is aggressively expanding its capabilities and competencies to meet the emerging opportunities. . It’s business focus remains on customers, quality and growth. And the senior management team’s vision of Lucent’s role in the next millennium is continuing to unfold. Another company, the Hypothetical Enterprise (Hypo), is very similar to Lucent Technologies. 1.0 THE HYPOTHETICAL FIRM’S STRATEGIC INTENT: Never Yield Ground. It is cheaper to hold what you have than to retake what you have lost. George S. Patton, Jr. Hypo participates in most of the same markets as Lucent. It too is a technology intensive company that attempts to compete based on market and product advantages enabled by its high tech approach to the market place. Hypo’s corporate ancestry also includes a ‘mega-communications’ services provider. Hypo’s vision is ‘soft’. It’s over arching objective is to become the preferred global ‘second supplier’ of communications infrastructure equipment. To that end, it has two strategic goals. The first is to reassert and maintain capital markets' credibility in order to secure access to capital to fund continued growth. The second is to achieve and maintain double digit sales growth equal to 15-20% more than the average of the sales growth of its strategic competitors. (In the markets in which Hypo currently participates, 60% of the global market share is distributed among five players.) Hypo is apparently satisfied with responding to the initiatives of its strategic competitors. It has broken its strategy into a subset of strategic thrusts that are illustrated in Figure 8. 6 Half the world’s population has never made a phone call. A three per cent increase in gross domestic product generally accompanies a one percent increase in teledensity. The potential for emerging economies to leverage (technology enabled emerging) communications capabilities and leapfrog mid-to-upper tier industrialized nations appears to be a source of significant continuing growth opportunities for communications equipment suppliers. Part 1: ISMOT ‘98/PICMET ’99, Part 2: To BeRevised for Research Technology Management Approved for Public Disclosure BL 98.00663 --- Page 18

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