Looking Beyond The Horizon

Innovative Technologies & Services

Archive for May, 2008

You have probably heard about Six Sigma. But, what is NINE SIGMA?

Posted by evolvingwheel on May 12, 2008

Open innovation is the buzzword of the current time. After reading Chesbrough’s article on Open Innovation, I went to Google and ran few searches on open innovators. Some wonderful articles and links came back. What impressed me is the potential of open innovation in bringing down amplifying product innovation costs in big corporations. However, one specific aspect of the idea that caught my attention is open innovation intermediary. NINE SIGMA is one such open innovation intermediary that matches the technology needs and questions from companies (referred to as Innovation Seekers) with the possible solutions from a huge network of scientists, university researchers and technology incubators (referred to as Solution Providers). Few other such intermediaries are Innocentive and YourEncore. As I looked up a bit more about NINE SIGMA, I found something interesting. The president and CEO of NINE SIGMA, Paul Stiros, is a former director in P&G’s Corporate Innovation & Knowledge Group. No surprise that the person at the top comes from the breeding ground of open innovation in corporate America.

Please click on the NINE SIGMA logo to read an interview with Paul Stiros in Business Week.

What sounded more interesting is the trend. Think about it. Currently, large companies are reaching out through these intermediaries to seek knowledge and information to innovate their product development value chain. Cost and time are becoming extremely critical as these two gets costlier day-by-day. Often, predatory competitive landscape doesn’t give the company R&Ds and management enough space and time to pursue research that demands considerable time and resources. This is the trigger point – these companies reach out to the intellectual capital outside their boundaries through NINE SIGMAs. But, there is a risk when the innovation seekers can bypass these intermediaries and create their own brokerage house to gather knowledge from outside. In return, they can provide their IPs as incentive for agile and specialized contributors. In fact, it kind of resembles the early days of Priceline, Expedia, and Orbitz. The airline companies initially sold cheap seats through them. But, soon these airliners got smart, and went out with their own bandwidth to create a customer base and cut the middleman.

One other question I got is the protection of IP and hence competitive edge when a company embarks on open innovation. Chesbrough argues that when IP is not locked down but shared across a transparent but reciprocal partnership, the strength of that partnership creates the competitive edge and barrier to entry for other companies outside the partnerships. Now, if knowledge is an enabler, then can the source of that knowledge become a complementary asset for the innovation seeker? Read a nice discussion in the link below:

Balancing IP Security and Open Innovation

Image: Paul Stiros @ NINE SIGMA

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Value capture in context of uniqueness and complementary assets.

Posted by evolvingwheel on May 3, 2008

The ‘Value Capture’ model in technology industry has left me intrigued about several issues in the hi-tech segment. As I read more and more about the framework of value capture in context of the uniqueness of a product and the availability/nature of complementary assets supporting innovation, I felt the urge to use structured thinking in rationalizing the profitability and sustainability of a product of the current time. So here what I plan to do. I will first create a personal evaluative model (just for fun) that would help me to evaluate the success (monetization) of an innovative product. Next, I am going to toss that product into the model and analyze the outcome. The essence of the effort is to figure out if I can derive some pointers to identify the success or anticipated success of the product. The motivation of doing this arose from one of my peers (Seph Skeritt – given at the end) who ran a similar model in his industry of interest.

Here’s my N-step model:

Step 1: Current value captured by the product (if any)
Step 2: Define and characterize uniqueness (if any).
Step 3: Identify/define the complementary assets? Analyze/identify if complementary assets are tightly held or easily available. (Is it a sharable value chain?)
Step 4: Check if uniqueness can be retained (competitive landscape) and if value can be sustained
Step 5: Conclude and post forecast/outcome

The product: iPhone

Step 1: As quoted by Strategy Analytics: ‘Boston, MA – October 18, 2007 – The latest Strategy iPhoneAnalytics data from its ProductTRAX program projected that nearly 1.1 million units were delivered to US consumers through the combined AT&T and Apple outlets during Q3, totaling 1.325 million units since the iPhone was launched in late Q2. “The iPhone has become AT&T’s top selling device, commanding some 13 percent of AT&T’s overall handset sales, and the 4th top selling handset in the US market,” according to Barry Gilbert, VP of the Strategy Analytics BuyerTRAX programs’.

So, the numbers look quite captivating and I will start with the assumption that the Q3 numbers show how Apple has captured value from its iPhone in the recent past.

Step 2: iPhone is the first commercialized smartphone with touchscreen that absolutely WOW-ed the industry. The phone also came with other features like auto-adjustable screen (portrait-to-landscape), triangulation locator, ambient light-sensitive brightness, and tons of productivity and gaming tools. Besides, the phone carried an iPod with it that just shifted gears and brought music to the mobile domain – Apple’s answer to the increasing challenge posed by mobile operators and competing devices bringing music to cellphones. Further, Apple vigorously protected its IP by having super-private access to the Apple mobile OS and putting a SIM-lock for its carrier partner AT&T.

Thus the uniqueness of iPhone is completely appropriated (D. J. Treece).

Step 3: In this segment, Apple had the advantage of different complementary assets not just limited to within the corporation. Apple itself provided the design, brand, and the global scale. The complementary assets extended to deep relationships that Apple developed with it’s suppliers in bringing the iPhone from the lab to the market. You can find the full supply-chain of iPhone in this link (http://www.flickr.com/photos/49228180@N00/362225946/sizes/o/). Other than the touch screen and wifi, all its components are coming from outside of the US. Apple could reach economy of scale by the strength of these partnerships.

The most significant complementary asset came from the MNO partnership with AT&T. One and only AT&T carried iPhone on its product portfolio in the US. Thus, the economy of scale from rollout to adoption depended heavily on AT&T’s coverage and scalability of its own data/voice network.

Installed base: Apple enters the market here with iPod’s success and critical mass derived from interest in the MP3 player and iTunes. Hence, iPhone landed with a decent installed base delivered by brand equity and a distinct category identification of mobile-music. Furthermore, the tie-up with AT&T created the network externality that generated the inflection point observed in positive feedback loop. One can only use iPhone if he is on AT&T. So, more people get’s on AT&T to use iPhone. This helps AT&T capture value which then delivers value back to iPhone. This is an indirect network effect. However, there is also a brand loyalty with iPod and users of iPod have the back compatibility of porting their iTune library to the iPhone easily. This helps to retain the existing installed base and doesn’t create overshot customer.

You may keep in mind that Apple had a great advantage. In reaching inflection points through network effects, a company has to create critical mass before getting to that point. iPhone, with the sheer greatness of the product, showed the ability to draw crowds to that inflection point very fast.

Hence, the complementary assets are tightly held and Apple doesn’t operate across any sharable value chain (a value chain that can be used by a competitor).

Step 4: To understand the sustainability of the uniqueness, let’s observe the competitive landscape. With iPhone’s success, several device manufacturers and MNOs started working on similar smartphones with amplified vigor. The following touch-phones are very close to the market –

HTC Touch P3450 (http://www.plemix.com/phone-htc-touch-phone%20pda)
Samsung F700 (http://gizmodo.com/gadgets/cellphones/samsung-f700-smartphone-looks-awfully-familiar-234901.php)
LG KE850 (http://www.mobilewhack.com/lg-ke850-prada-officially-announced/)
MEIZU M8 (http://www.mobilewhack.com/meizu-m8-an-apple-iphone-look-alike/)

Now, I wonder how the competitive landscape will evolve when non-ATT network operators pick these phones up and run on their marketing bandwidth. One other thing that could matter is penetration pricing and better complementary assets provided by the competitors. There had been serious complaints about ATT’s EDGE speed. See the faltering numbers for iPhone in 2008 Q1 here (http://www.rcrnews.com/apps/pbcs.dll/article?AID=/20080426/SUB/464074023/1015).

But, AT&T paid heed and started launching its 3G network in the US metropolitan areas – a move perfectly juxtaposed with Apple’s 3G iPhone launching by June end. Hence, ATT as a network externality strongly held close to Apple’s phone, is creating ‘value’ to capture ‘value’ and augment that value to iPhone’s profitability. Further, ATT is planning to subsidize the phone by $200. A great move to sustain the value capture trajectory.

I think this gives a perfect example of the evolution of uniqueness & complementary assets over the lifecycle (shown in the powerpoint).

Step 5: Considering the above discussion, we do see several of these dynamics in play right now that have helped Apple to capture a lot of value and at the same time have triggered a slower growth during 08 Q1. However, the complementary asset in terms of partnership with ATT may still help iPhone sustain growth. So, even though the competitive landscape unfolds and the uniqueness of the product dissolves, iPhone may still be able to capture value leveraging its partnership with the carrier.

Below are two graphics on the complementary asset over product lifecycle

Blog_Lifecycle.ppt

A similar model/analysis explored by Seph Skeritt in Social Networking.

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