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Pages 13-31 of Text Book: Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGrawHill, 2009.
Case I-1 Elio Engineering Inc. 1
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
Hari Saknkara
Technical Capabilities JCI Benchmarking Department JCI Structural Design and Analysis Department 1996 -1998
A patent: revolutionary bike design Failed venture
Technical Capabilities: 1988 1997, JCIs Structural Design & Analysis Department MBA training 1998 Summer Intern at Booz Allen Hamilton, a management consulting firm
Feb. 1998
A new seat design No Compromise
Feb. 1999
A cost effective new seat design - a special class of ABTS Utilizing new technology Resulting structure: Low cost, Light weight, Strong
Features
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
Case I-1 Elio Engineering Inc. 5
Early 1999
Support 3 full-time engineers an advance against future royalties Prototype assistance from Bostrom Seating
Feb 1999
Prototype tests promising OEM customers response favorable A licensing deal - based on the prototype performance
Case I-1 Elio Engineering Inc. 6
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
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A new load-leveling recliner mechanism with a high strengthto-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 Stronger, Lighter, and Cheaper Does not permit catastrophic failure
Key benefits:
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Ease of Manufacturing
Easy to assemble Does not require expensive high-tolerance parts
Case I-1 Elio Engineering Inc. 13
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
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Rationale
Reduced ABTS weight NC seat is scalable and portable across multiple platforms
Implication
Cost Cost Cost
Reduced Fewer parts less variability and less inventory buffer stock to protect against stockout carrying costs 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
Case I-1 Elio Engineering Inc.
Cost/ revenue
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(cont.)
Implication
Cost
Deceased No catastrophic modes of failure; better product liability energy management; ABTS seat advantages issues in rear impact Decreased Fewer welds, fewer parts, and fewer fatigue warranty issues problems Increases leverage with OEMs Fewer production issues Premium pricing Sustainable competitive advantage with NC seat system patent protection; OEMs have to come to supplier for NC seat
Cost Revenue
Lower tolerance requirements; thinner gauge Cost steel than most seats Innovative design features zero check (no looseness in the system), continuously variable and continuously engaged track and recliner mechanisms; high strength characteristics; enhanced safety
Case I-1 Elio Engineering Inc.
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 21 some time to come Case I-1 Elio Engineering Inc.
Competitor Analysis
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Competitor Analysis
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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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)
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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 liabilities
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Financials (continue):
Annual Balance Sheet Stockholders 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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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
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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 Incs 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
Case I-1 Elio Engineering Inc. 30
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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 its integrating capabilities Likely to receive a relative small piece of final products 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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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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Capabilities Requirements
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 Elios 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 Elios technology strategy aligned with the requirements for a successful entry into the automotive market?
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Conclusion
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