CPET 575 Management of Technology Technological Innovationlin/CPET575_MangOfTech/2014S/1-Lectures/CAS… · CPET 575 Management of Technology Technological Innovation ... • Received

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CPET 575 Management of Technology

Technological Innovation

Case I-1 Elio Engineering, IncLecture Note & Summary

by

Professor Paul I-Hai Lin

Pages 13-31 of Text Book:

Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGraw-Hill, 2009.

Case I-1 Elio Engineering Inc.

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Outline

Origin of Elio Engineering

Seat Mechanism Technologies

Industry and Regulatory Environment

Technological Barriers and Risks

Capabilities Requirements for Players in Automotive Seats and Comparative Company Profiles

Decision Time


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Elio ABET Seat Technology Analysis Seat Mechanism Technologies

Industry and Regulatory Environment• Customer, Potential Market Size, Competitors, Barriers to Entry

• Role of Upstream or Downstream Products or Firms, Regulatory Issues

Technological Barriers and Risks• Bottlenecks to Commercializing the Technology

• Manufacturing Issues

• Relevant Supporting Technologies for Elio’s ABTE Seat Mechanism

Capabilities Requirements for Players in Automotive Seats and Comparative Company Profile

Decision Making


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Origin of Elio EngineeringPaul Elio Technical Capabilities

• JCI Benchmarking Department

• JCI Structural Design and Analysis Department

1996 -1998• A patent: revolutionary bike

design

• Failed venture

Feb. 1998• A new seat design “No

Compromise”

Feb. 1999

Hari Saknkara Technical Capabilities: 1988 –

1997, JCI’s Structural Design & Analysis Department

MBA training

1998 Summer Intern at Booz Allen Hamilton, a management consulting firm


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1998 First venture meeting: Paul & Hari, at Venice,

CA Agenda

• ABTS (All-Belts-To-Seat)• Announcement & comments

A cost effective new seat design - a special class of ABTS

• Features

Utilizing new technology Resulting structure: Low cost, Light weight,

Strong• Potential: penetration of all segments of auto market


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1998 - Follow up activities Partnership arrangement New product design

• Funding: further R&D, computer & simulation software• Product Design Methodology: Build-and-Test approach• Intermediate Outcomes: Prototypes, simulation results

First business adventure• Show the concept (set invention) to automotive seat industry• Fair value of the new design & concept• No patent protection

Second try• Bostrom Seating, a seat supplier for the heavy truck and bus

industry• Concluded an option agreement to prototype and test their

NC seat


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Nov. 1998: New product development at Bostrom Seating• The Elio team – based at Bostrom Seating• Packaging & developing the seat• Received a letter of intent with respect to licensing

agreement (would follow successful prototype testing)• Stipulated testing requirements (in the option agreement)

130 percent of FMVSS loads (Federal Motor Vehicle Safety Standard)

Early 1999• Support 3 full-time engineers – an advance against

future royalties

• Prototype assistance from Bostrom Seating

Feb 1999 • Prototype tests – promising• OEM customer’s response – favorable

• A licensing deal - based on the prototype performanceCase I-1 Elio Engineering Inc.

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Origin of Elio Engineering March 1999

• Bostrom Seating plan to unveil the NC seat at the March 1999 Trade Show at Louisville, KY

• Elio team – run into a few design-engineering challenges• Bostrom plan for bring new product to the market

Time: Intended to ramp up production very soon

U.S. Market• Market segment: U.S. truck market• Market size: 500,000 units • Market share: 50 percent• Elio royalties: 2 to 5 percent on sales in the truck

industry

European Market (no presence), Asian Market? Paul Elio’s Vision

• Bring the seat to the entire automotive industry• Potentially saving millions of lives around the world• If Bostrom Seating would be the right partner?


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Seat Mechanism Technologies Existing Seat Technologies

• Typical conventional front seat (~$500 to OEM)• A complete seat system – two front and one back row

(~$2,500 to OEM)• ABTS seat – cost?

Conventional Car Front Seat Technology• Seat Mechanism (~60 percent of total cost)

Exhibit 1 Seat Mechanism: Seat Track (Adjuster), Seat Structure (recliner)

Manual or electric motor adjustment control Seat belt (shoulder belt)

• Exhibit 2 Seat System: Seat structure, track, suspension, trim, and foam

• No major breakthroughs; Incremental innovations• NHTSA (National Highway Traffic Safety Administration)

Safety standard - crash loads specification• Major benefits: inexpensive components and materials,

lightweight, matured technology, easy to manufacture and assembly


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All-Belt-to-Seat (ABTS) Seat Mechanisms

ABTS development attempts• Major industry players during 1984 -1999: Johnson

Controls, Lear, and Magna

• Exhibit 3: ABTS Seat Frame and ABTS Seat System

ABTS advantages over conventional seats• Ease of use

• Higher comfort level

• More attractive appearance

• Better maneuverability

• Potential safer (seat belt hugs the occupant in the event of rear collision)

Current ABTS technology• Use the same “recliner” & “track” concepts

• Need a must stronger seat structure to meet safety standardCase I-1 Elio Engineering Inc.

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Current ABTS technology• Use the same “recliner” & “track” concepts

• Need a much stronger seat structure to meet safety standard

• Weight twice as heavy as a conventional seat

• Cost:

Average $750 to OEM

About 1.5 times higher


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Seat Mechanism TechnologiesElio Engineering ABTS Technology

A new state-or-art technology• Broadly patented mechanism based on “cable” and “drum”

elements as opposed to gears

• Major technological breakthrough A new load-leveling recliner mechanism with a high strength-

to-weight ratio to ensure that the seat does not fracture or buckle at the failure level

When the force diminished, the seat structure is still fully functional

• Key benefits: Stronger, Lighter, and Cheaper

Does not permit catastrophic failure


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Seat Mechanism TechnologiesElio Engineering ABTS Technology

Other Innovative design features & improvements• Use fewer and lighter parts (single-sided recliner): as light

as a conventional seat

• Improved comfort and ease of use

Infinitely adjustable both for manual and electric seats

Minimizing buzz, squeak, and rattle problems

• Seat-belt retractor (the component containing the belt pool)

Located at the bottom of the back frame

Reduce load-carrying requirements of the back frame by 20%

Ease of Manufacturing• Easy to assemble

• Does not require expensive high-tolerance parts Case I-1 Elio Engineering Inc.

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Industry and Regulatory Environment: Customer

Ultimate user of the technology – buyers of a new (or used) car

Decision maker -OEM customers of seat system suppliers, need to fit• The body of a particular car model

• Part of the “total interior design”: door panel, instrument panel, console, and headliner

The OEM provides the suppliers with• Specifications – type, structure size, and styling

• Other spec. factors: demographic parameters, needs, and/or lifestyles for matching car’s interior


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Industry and Regulatory Environment: Customer The OEM market

• Highly concentrated, and buyer power is enormous

• Able squeeze the operating margins of major U.S. seat system suppliers (ten multibillion dollar companies) down to 2 to 5 percent

• Exhibit 4 – U.S. 1998 Light Vehicle Market Share Total U.S. sales: ~ 15 million units

• Big three U.S. automakers: Ford (25%), GM (29.1%), and Daimler Chrysler (16.2%)

• Prefer multiple sources of seat technologies and systems

• Often dictate seat technology, components, or systems

OEM In-house seat system• Design & manufacturing some high-end seats

Supplier selection criteria • Safety, cost, reliability, comfort and ease of use


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Industry and Regulatory Environment: Customer

Elio Engineering’s Concerns• Recognize unfavorable bargaining position for seat supplier

• Important consideration - not to release exact cost info to OEMs

• Can be easily be reversed engineered


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Industry and Regulatory EnvironmentPotential Market Size for Elio ABTS Seat Technology

Current ABTS seats market• Limited only to high-end market segments of the passenger

car market (high cost)

• Luxury segment brands – unit sales of 2.16 million in 1997; 15% of total U.S. light vehicle market

• OEMs awareness of ABTS’s benefits and strong latent demand for the technology; improving people’s safety

• Exhibit 7 European 1997 Market Share in Automotive Seats – Total European Revenues: ~$7.5 billions: Johnson Controls 27.3%, Lear Corp & Keiper 24.6%

• Exhibit 8 U.S. Seat Systems: 1997 Market Share Total Revenue: ~$8.2 Billion: Johnson Controls 31%, Lear Corp 28%, Magna 10%


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Industry and Regulatory EnvironmentPotential Market Size for Elio ABTS Seat Technology

Future ABTS seats market • Exhibit 6 Global 1997 Vehicle Unit Sales by Region

• Annual market potential of up to 17 million units in North America

• World-wide up to 53 million units

Other Potential Markets - Elio’s ABET technology• Heavy truck

• Aircraft

• Passenger train


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Exhibit 5 Benefits of Adopting NC Seat

Benefits Rationale Impli-cation

OEMs share cost benefits

Reduced ABTS weight Cost

Reduced R&D expense

NC seat is scalable and portable across multiple platforms

Cost

Reduced inventory carrying costs

Fewer parts – less variability and less buffer stock to protect against stockout

Cost

Enhanced market position by being lower cost producer

Improved business capture (including available conventional seat market in N.A. and Europe and new market in Asia, Latin America, and South Europe); better margins

Cost/revenue


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Exhibit 5 Benefits of Adopting NC Seat (cont.)

Benefits Rationale Impli-cation

Deceased product liability issues

No catastrophic modes of failure; better energy management; ABTS seat advantages in rear impact

Cost

Decreased warranty issues

Fewer welds, fewer parts, and fewer fatigue problems

Cost

Increases leverage with OEMs

Sustainable competitive advantage with NC seat system – patent protection; OEMs have to come to supplier for NC seat

Revenue

Fewer production issues

Lower tolerance requirements; thinner gauge steel than most seats

Cost

Premium pricing

Innovative design features – zero check (no looseness in the system), continuously variable and continuously engaged track and recliner mechanisms; high strength characteristics; enhanced safety

Revenue


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Competitor Analysis Highly concentrated North America automotive seating

markets

General Assessment Info • Two 1st-tier players

Johnson Controls Inc. (JCI) & Lear Corp split 60% of market, Fortune 500 companies, also had a dominant share worldwide

• No. 3 player – Manga

10% share in U.S.

• Many potential competitors (not cost effective solutions)

Already had an ABTS seat in product portfolio or were currently working on the technology

Many small seat component suppliers were also designing or manufacturing ABTS seat mechanisms

• Elio Engineering Competitive Advantage: cost & functional, for some time to come Case I-1 Elio Engineering Inc.

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Competitor Analysis

Both Johnson Controls Inc. (JCI) & Lear Corp• Significant economies of scales in manufacturing and

distribution

• Global presence

• Fairly strong relationships with OEMs

• Fast and easy access to OEMs for new products

Lear Corp – competitive advantages• Outsource more of the design and manufacturing work

• Acts as a seat “system integrator”

• Strong supplier network – critical success factors

Other small suppliers• Focus on niche markets for seats and/or specialize in

certain seat components


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Competitor Analysis

JCL (reputation and capabilities) – competitive advantages• Strong at effectively integrating strategic acquisitions into

organizational structure• Heavily vertically integrated• Design and manufacturing expertise• Able to handle complex manufacturing challenges on a

large scale• JIT (Just-in-time) capabilities – supplier choice for Japanese

automakers• Excellent seat system and total car interior engineering

capabilities• Strong expertise in Concurrent engineering and software

tools• Ability to manage the seat system development form

concept to production for OEM


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Competitor Analysis

Summary• Currently, no clearly superior ABTS technology on the

market

• JCI and Lear had the advantage of leveraging their existing relationships and distribution networks for their ABTS products


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Exhibit 9 Company Profiles

For three companies: Johnson Controls, Inc., Lear Corporation, and Magna International

Description of the Company

Major Customers and Competitions

Financials: • Annual Income Statement ($millions)

• Annual Balance Sheet


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Exhibit 9 Company Profiles (cont.)

Financials: • Annual Income Statement ($millions)

Total sales

Total expenses: • Cost of goods sold

• SG&A (Selling, General & Administrative) expense

• Unusual income/expenses

Pre-tax income

Income after tax

Net income (excluding E&D – exploration & development)

Annual Balance Sheet


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Financials: • Annual Balance Sheet

Assets

• Cash & equivalents

• Account receivable

• Inventory

• Prepayments & advances

• Other current assets

Total current assets

• Long-term investments

• Property plant and equipment, other

• Property plant and equipment, net

• Goodwill/intangibles

• Other long-term assets

Total assets

Liabilities• Account payable

• Short-term debt

• Other current liabilities

Total current liabilities• Long-term debt

Total long-term debt• Other long-term liabilities

Total liabilities


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Financials (continue): • Annual Balance Sheet

Stockholder’s equity• Preferred stock

• Common stock

• Additional paid in capital

• Retained earnings

• Other equity

Total shareholders’ equity

Total liabilities and shareholders’ equity

Share outstanding


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Industry and Regulatory Environment:Barriers to Entry (BTE)

Classification of Incumbents: Tier-one, tier-two, and tier- three suppliers

As a Tier-one Supplier

• Huge scale advantages in “manufacturing and distribution”

• At the far end of learning curve in terms of

Design, development, and manufacturing processes

• For standard product and incremental innovations

Lower cost position and shorter time to market

• Strong ties to OEMS – position advantage

Almost impossible to be replaced

Emphasize reliability and standard processes


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As a Tier-two Supplier

• Possible with innovative technologies to be rewarded through new contracts directly with an OEM

• Extreme difficulties in

Manufacturing & distribution

• BTE is lower in

Design & development part of the value chain

• An example:

Meritor Automotive Inc’s Seat Adjusting System

Developed an ABTS seat mechanism, one of the lightest and most easily packaged

Selected by GM, in 1998, to supply the OEM with 100 percent of power and manual seat adjusters for new GM truck program


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As a Tier-three Supplier or Below

• Faced fairly low BTE at the tier-three supplier level or below

• Hundreds of small to medium component suppliers –possessed no significant sustainable competitive advantage


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At least two major option (due to board patent protection)

1. Enter the market as a tier-three or tier-two supplier of seat mechanisms or seat structures (outsource manufacturing to avoid major capital investment)

• Advantages:

Could supply its technology to all tier-one suppliers

Greater control over its core ABTS technology

• Disadvantages:

Cannot build it’s integrating capabilities

Likely to receive a relative small piece of final product’s total value

Significantly increased the technological and market risk – due to lacking manufacturing and marketing expertise


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At least two major option (due to board patent protection)

2. Partner with one of the tier-one or tier-two suppliers, or with an OEM and develop and market the seat in a joint venture, or through a licensing agreement

• Advantages

Receiving substantial resources

Significantly reduce technological and market risks

• Disadvantages

An exclusive partnership with a tier-one or OEM would limit the size of total market

Less control over its core ABTS technology and depending on its bargaining position, with a potentially lower margin


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Industry and Regulatory Environment Role of Upstream or Downstream Products or Firms

• A small portion of tier-one supplier with direct access to the OEMs

• Many tier-two and tier-three suppliers of components and raw materials, with very limited market power

• Exceptions

OEMs insist that tier-one suppliers source from certain tier-two suppliers to ensure access to a particular component or technology

Regulatory Issues• Seat suppliers had to fulfill strict federal safety standards

set by NHTSA and codifies in the Federal Motor vehicle Safety Standards (FMVSS)

• Demonstrate product safety


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Technological Barriers and Risks Bottlenecks to Commercializing the Technology

• Federal safety requirement

Major structure test

• Material science

Raw materials – insufficient knowledge

Untested performance under extreme temperature condition

• Large capital requirements (if manufacture in-house)

• Lack of competencies in manufacturing and distribution

• Lack of access to OEMs

• Other OEM Challenges

Stringent seat design requirements

Certification requirements and supplier preferences

Unknown end-user about preference of seat style and ABTS seats


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Technological Barriers and RisksManufacturing Issues

Manufacturing complexity & cost of a car seat• Number of parts/Tolerance requirements/Strength of the

material used

Elio’s ABTS Technology• Fewer parts/ Lower tolerance requirements/Lower strength

materials

Major manufacturing issues• Not its core competence

• Need large capital, building a new plant

• Common processes: stamping, pressing, welding, casting, and injection molding

• Implementation of a JIT delivery system

• Concurrent engineering – additional challenge Case I-1 Elio Engineering Inc.

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Technological Barriers and RisksRelevant Supporting Technologies for Elio’s ABTS Seat

Mechanism

Concurrent engineering (supporting technology)• Allow the development team to understand technologies

and products from a “manufacturability” standpoint during the early design stage, and

• Communicate product info to Design, Manufacturing, Marketing, and Management

• Achieve more robust designs, reduce development cost, facilitate implementation readiness, and decrease time-to-market

• Need to access to and skills in integrated CAD, CAM, and CAE software


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Technological Barriers and RisksRelevant Supporting Technologies for Elio’s ABTS Seat

Mechanism

Material science

• Material are often found by trial and error

• It can be outsourced to material science specialists


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Capabilities Requirements A variety of capabilities to compete successfully

Tier-one requirements• Strong relationships with OEMs

• A large global presence and scale

• Ability to manage the seat system development from concept to production for OEMs

• Strong supplier network

• Fast-time-to market, Low cost, High quality Position (Engineering capabilities)

Concurrent engineering

In-house design and interior system

• State-of-art manufacturing technology

• JIT capabilities

• Vertical integration


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Exhibit 10 Comparative Capabilities Profile of Selected Players

OEM Relationships

Global Scale

Tier-Two Relationships

Total Program Management

Acquisition Capabilities

Vertical Integration

Just-in Time

Purchasing

Manufacturing Technology

In-House Design

System Level Testing

Comfort Engineering

CAD/CAM/CAE

Benchmarking

Research & Development

Product Development Process

Interior Systems Capabilities

Financial Strength


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Decision Time Is in Feb. 1999, four months past

The NC design had developed substantially

The Bostrom alliance agreement for the truck market had been concluded.

The questions about Elio’s strategy for entery into automotive still remained. Paul & hari realized that they needed answers to these questions in the coming days.

Should Elio joint venture with Bostrom?

Should it partner with a tier-one or tier two automotive supplier?

Was Elio’s technology strategy aligned with the requirements for a successful entry into the automotive market?


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Conclusion


Documents

CPET 575 Management of Technology Technological Innovationlin/CPET575_MangOfTech/2014S/1-Lectures/CAS… · CPET 575 Management of Technology Technological Innovation ... • Received