Innovation and Networking: IntraEntrepreneur Alliances and as Brokers

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Innovation and NetworkingIntra/Entrepreneur
Alliances and as Brokers

• TUM 2004 Day 4
• Mercedes Benz-Smart Car
• Presentations

2
From Internal to External Hybrids, Day 4

• From 3M, Hermes, Eli, Booz
• to
• MCC Smart Car

3
Strategy and Innovation

• Part I, Day 5
• External Hybrids
• When is Virtual Virtuous?
• Joint Ventures and Other External Networks
• Part II, Day 5
• smart car
• Presentations

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Hybrids

• Internal Hybrids
• Skunkworks
• Spaghetti Structure
• Incubators
• External Hybrids
• Equity Joint Ventures
• Outsourcing
• Strategic Alliances
• Subcontractors

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When is virtual virtuous?(2)

• PLUS
• Bureaucracy is bad, flexibility is good
• Small is beautiful
• High powered incentives (free agents)
• MINUS
• External coordination
• Partners cannot align strategically
• Loss of control, fear of IP loss

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When is virtual virtuous?(3)

• Modular (single) versus Systemic (architectural)
  innovations
• Explicit versus tacit knowledge (knowledge can be
  sticky!)
• Systemic Innovations require tacit knowledge and
  information sharing throughout an entire
  production system
• Standard setting difficult when virtual

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When is virtual virtuous?(4)
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When is virtual virtuous?(2)

• PLUS
• Bureaucracy is bad, flexibility is good
• Small is beautiful
• High powered incentives (free agents)
• MINUS
• External coordination
• Partners cannot align strategically
• Loss of control

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Firm A
Firm B
Internal or External Hybrid
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External Hybrids

• Should we become virtual (perhaps because we lack
  co-specialized assets), or should we be paranoid
  about poachers of our IP?
• Governance and market control with or without
  managerial oversight?
• Our firm has good or poor appropriability regime?

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When is virtual virtuous?(1)(Chesbrough Teece
paper)

• External Hybrids
• Joint ventures
• Sub contractors
• RD Partnerships
• Keiretzus
• Chaebols
• Consortia
• Minority Interest
• Bamboo Network and Guanxi
• Strategic Alliance
• Outsourcing

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Todays case

• Smart

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MCC Questions

• What are some of the key car innovations in last
  25 years?
•  Product (airbag, one key car, aluminum engine)
  or process (JIT, kanban, outsourcing) innovations?
  
• One versus two key car designs
• Why could US car makers not make subcompacts and
  mini cars?
• Issue of product architecture and organizational
  structure (no spaghetti structure to mold a new
  design)
• Is MCC car a major (product, process) innovation?
• New product or new organization
• Was External Hybrid (DC and Swatch, etc.) a
  success or failure?

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The challenge of making a compact car (Japan vs
US, 1980s)

• A large car, write small
• Architectural (or systemic) rather than stand
  alone (or modular) innovation
• Pinto, Vega and Gremlin
• Small is beautiful
• Large write small

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Ford Pinto
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Pinto Lots of Storage Space
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From a Fan
From a Critic
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(No Transcript)
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Value Chain and Design of Structural
Relationships
Organization Structure(spaghetti) or External
Hybrid (smart)

• Product Architecture
• (Pinto, 2 key car)

VP RD
Blue print
Component A
Group A
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Systemic Innovations

• Alone or with others
• Spaghetti structure, skunk work or outsourcing,
  partnerships?
• External Hybrids

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Can DaimlerChrysler do better?

• From MB S-class to smart car product
• New product architecture or that M-word
• From in-house to external hybrid
• Swatch, Bosch, Krupp etc.
• New social network of units, departments, people

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Smart Car

• Swatch Mercedes Artorsmart
• What innovation attributes
• Product, Process, Ownership
• Nature of Partnership
• Changes in Partnership
• MB divorced itself from Swatch

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The market of small cars

• The smart car targets the small car sector
• A- and B-segment cars
• Western Europe is the single largest market
• Preference factors for small cars
• Space
• Price
• Fuel Consumption
• Local Tax System
• Availability
• Ford believes that tiny cars will eventually
  account for about one-third of the market
• Pinto Manufacturer (could not make tiny cars.)

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Strengths of Swatch

• The innovative Swiss watch maker of the early
  80s
• Strengths
• Design, modernity, marketing, technology

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Strengths of Mercedes

• The oldest car maker in the world, known for
  building the finest luxurious
• Strengths
• Design, innovation, strength, quality,
  technology, comfort, reliability, durability,
  German thoroughness,

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The smart concept

• Transposing the Swatch paradigm to the car
  industry
• A new concept of mobility by Nicolas Hayek, the
  CEO of Swatch urban, small, ecologic, rental
  contracts

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Benefits of the alliance for Swatch

• Confirm its reputation as a innovative firm
• Share risk
• Use its technology in new areas
• Gain insight in new technology and a new industry
• Take advantage of its brand name, design and
  marketing skills

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Benefits of the alliance for Mercedes

• Input on design and marketing
• Share risk and costs
• Test a new market concept
• Swatchs reputation for quality
• Utilize some of its existing production
  facilities

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Assessment of the failure for both sides

• Mercedes
• Cannot abandon the project (would lose 1.5bn,
  damages in brand image relationships with
  suppliers)
• Better towards 2004, but how many years would
  be necessary for positive NPV ?
• Swatch
•  We havent lost anything in the SMART
  adventure .
• Good advertisement for Hayek and Swatch Group.

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Strategy and Innovation

• Part I, Day 4
• External Hybrids
• When is Virtual Virtuous?
• Joint Ventures and Other External Networks
• Part II, Day 4
• smart car
• Jerry Sanders and San Francisco Science
• Wrap Up

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Some background Theory on Strategic Alliances
and InnovationSmart..
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Hybrids

• Internal Hybrids
• Skunkworks
• Spaghetti Structure
• Incubators
• External Hybrids
• Equity Joint Ventures
• Outsourcing
• Strategic Alliances
• Subcontractors

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Mercedes
Swatch
smart car
Internal or External Hybrid Mercedes and its
Swiss Partner, Swatch
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External Hybrids

• Should we become virtual (perhaps because we lack
  co-specialized assets, or should we be paranoid
  about poachers of our IP?)
• Governance and market control with or without
  managerial oversight?
• Our firm has good or poor appropriability regime?

35
When is virtual virtuous?(1)(Chesbrough Teece
paper)

• External Hybrids
• Joint ventures
• Sub contractors
• RD Partnerships
• Keiretzus
• Chaebols
• Consortia
• Minority Interest
• Bamboo Network and other Guanxi
• Strategic Alliance
• Outsourcing

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Smart is becoming a success for Mercedes
2001 sold in 14 countries (Europe, Japan)
represents 8.5 of the micro car market
segment 2002 sold in more than 17
countries 2003 launched in Australia, target
130 000 cars Next steps US market (Production
in Brazil)
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(No Transcript)
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Mercedes Sales Aug 2003
 
Mercedes-Benz passenger cars
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Smart Car 2002
DaimlerChrysler Smart Sales 2001

• Last year the markets with the strongest sales
  were again 
• Germany (46,705) and 
• Italy (30,031), followed by 
• France (8,738) and 
• Switzerland (6,131). Double-digit growth rates
  were achieved in 
• Holland (16.9 percent), 
• Italy (16.1 percent), 
• Austria (14.6 percent) and 
• Spain (13.8 percent).
• The total sales figure of 116,162 cars for last
  year also includes the first right-hand
• drive smart City-Coupés for the Japanese and
  British markets.
• Compared with the competitors in the minicar
  segment, by November 2001 this meant
• that MCC smart had a 8.58 percent share of the
  European market.

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Take aways on MCC

• Systemic Innovation Innovation with others has
  many advantages, but issues of architectural
  ownership
• Structure Innovation Car as a Lego challenge
  whose design and/or production of parts can be
  outsourced
• External Hybrid Greenfield vs Brownfield and
  curse of asset legacy
• Loss of brand equity and other losses such as IP

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Networks Between Organizations

• Formal ties, such as board interlocks,
  supplier/client relationships, joint ventures,
  etc.
• Informal ties, such as friendship, Families
  (compare guanxi) and advice networks of managers
  that span organizations.
• Inter-organizational networks serve multiple
  functions they are sources of goods money,
  trust, information, influence, obligation.

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Silicon Valley VC Example Kleiner Perkins
Caufield Byers

• A venture capital firm founded in 1972.
• Funded Genentech, AOL, Sun, Compaq, Lotus,
  Netscape, Amazon.com, Intuit, Excite, _at_Home,
  Google, Zagat, ....
• Over time, KP has built an immense Japan-style
  keiretsu a network of multiplex ties between
  the firms it has funded
• interlocking ownerships/partnerships/joint
  ventures
• interlocking directorships
• The bottom line KPs returns rank among the top
  5 earned by VC firms nationwide. Fortune
  estimated 210M profit in 1996/97.

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Kleiner Perkins Network Overall
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(No Transcript)
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Kleiner Perkins Historical Investment Activity
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Kleiner Perkins Historical IPO Activity
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Kleiner Perkins Update Profits from Just One
Investment

• Juniper Networks (JNPR), which makes internet
  routers, underwent an IPO 25 June, 1999.
• Capital returned to limited partners 4.8B.
• KP receives 30 of all profits?? its share of
  the JNPR IPO stock distribution was 2.1B.
• As of 11/01, KP VII held ??13M shares worth 345M
  (share price ?26.5).
• As of 11/1/02, JNPR was trading at 6.921/share,
  after NS take over announcement (Feb 2004)
  26.60/share.
• KP VII 255M fund, invested in ?30 companies.
• Ignoring all other investments made by the fund,
  JNPR returned almost 20x the total fund, net to
  the LPs.

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4 Questions For TUM MBAs

• How would you benchmark your division against
  comparable divisions in Chinese firms
• Any intelligence on their innovative efforts,
  tolerance for differences
• Disruptive Effects of New Technologies New
  Markets (paradigms)
• Fault lines?
• Assessing Future Markets (Null Segments)
• CSR, Listening to Right Customers, Accepting the
  Paradox
• New Forms of Organization, to resolve paradox of
  old and new businesses, to be ambidextrous

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This weeks wrap up

• The strategy of firms is locked into a paradigm
• As markets and technologies evolve strategy is
  misaligned
• Old firms (and their value chain), with their
  inertia, face obsolescence new firms start with
  a clean slate who survives?
• Firms need to address the paradox of old and new
• Ambidexterity

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Todays wrap up for NankaiU(2)

• We should ask what is our dominant design? Our
  Paradigm? Are we locked in? With our customers?
  With strategic partners?
• Ecology
• Industry/market
• Firm
• Departments
• Do new Paradigms, Markets emerge? What does
  radar-screen show?
• Xerox, Kodak, Nokia, 3M, Hermes, Mercedes
• Do we have intelligence to sense the market,
  technology? Do we even have radar screens?

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This weeks wrap up

• Have we a stake in possible New Paradigm?
• Take options on new technologies while milking
  old cash-cows
• Ely Lilly, 3M
• Co-existence tame and wild ducks in one firm
• Hermes Systems, Booz smart
• Do we have new business models, structures,
  different from the conventional businesses?
• Internal Ventures, Flexible people, Rule Breakers
• US Navy and Sims

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Wrap Up

• Day 1 Strategy and Innovation
• Day 2 Inertia in Photography and US Navy
• Day 3 Internal Hybrids with Oticon, 3M, Hermes
  Systems, BAH
• Day 4 External Hybrids on MMC and Presentations
  to combine all this know-how