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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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Origin of Elio Engineering
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
Case I-1 Elio Engineering Inc.
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Origin of Elio Engineering
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
Case I-1 Elio Engineering Inc.
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Origin of Elio Engineering
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 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?
Case I-1 Elio Engineering Inc.
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Origin of Elio Engineering
Feb. 1999 - Paul Elio 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?
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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Seat Mechanism Technologies
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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Seat Mechanism Technologies
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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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%
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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Exhibit 9 Company Profiles (cont.)
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
Case I-1 Elio Engineering Inc.
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Exhibit 9 Company Profiles (cont.)
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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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Industry and Regulatory Environment:Barriers to Entry (BTE)
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
Case I-1 Elio Engineering Inc.
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Industry and Regulatory Environment:Barriers to Entry (BTE)
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
Case I-1 Elio Engineering Inc.
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Industry and Regulatory Environment:Barriers to Entry (BTE)
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
Case I-1 Elio Engineering Inc.
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Industry and Regulatory Environment:Barriers to Entry (BTE)
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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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
Case I-1 Elio Engineering Inc.
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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?
Case I-1 Elio Engineering Inc.
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Conclusion
Case I-1 Elio Engineering Inc.