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Telephone Industry Value Chain Model

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					   Mapping the Telecom Value Chain:
A Roadmap for Communications Networks

                                             Excerpts from




            Professor Charles Fine
     Massachusetts Institute of Technology
         Sloan School of Management
      Cambridge, Massachusetts 02142
                  May 2001
               charley@mit.edu
            http://www.clockspeed.com
 Tel: 1-617-253-3632, Fax: 1-617-258-7579
      Mapping the Telecom Value Chain:
   A Roadmap for Communications Networks

1. Fruit Flies & Temporary
   Advantage
2. Value Chain Design & 3-DCE
3. eBusiness Phenomena:
   Business Model Innovation
4. Telecom Value Chains:
   A fruit fly example
   Value Chain Design in a Fast-Clockspeed
                    World:
         Study the Industry Fruitflies
Evolution in             Evolution in
the natural world:       the industrial world:
                          INFOTAINMENT is faster than
FRUITFLIES
                          MICROCHIPS is faster than
     evolve faster than
                          AUTOS evolve faster than
MAMMALS
                          AIRCRAFT evolve faster than
     evolve faster than
                          MINERAL EXTRACTION
REPTILES
                          THE KEY TOOL:
THE KEY TOOL:
                          Cross-INDUSTRY
Cross-SPECIES             Benchmarking
Benchmarking              of Dynamic Forces
of Dynamic Forces
 Cisco’s End-to-End Integration for
     its Fulfillment Value Chain
                                                  • New product development on-line
                                                      with supply base
     Customers                                    • Technology Supply Chain Design:
                                                       Innovation through Acquisition


                                Cisco            Finished Product flows direct to
  Order info
                                                     customer via logistics
  flows direct to                                    supplier
  Cisco and suppliers
                                               Contract
                                               Manufacturers
• Single enterprise information system
• Dynamic replenishment, direct fulfillment,
     merge in transit                                              Component
• Customer orders through Cisco                                    Suppliers &
     Connection online                                             Distributors
       Cisco’s Strategy for
   Technology Value Chain Design
1.Integrate technology around the router to
  be a communications network provider.
2. Leverage acquired technology with
  - sales muscle and reach
  - end-to-end IT
  - outsourced manufacturing
  - market growth
3. Leverage venture capital to supply R&D
  Volatility Amplification in the Supply Chain:
                 “The Bullwhip Effect”




Custome   Retailer Distributor   Factory Tier 1 Supplier Equipment
r

Information lags
Delivery lags                       SOLUTIONS:
Over- and underordering             Countercyclical Markets
                                    Countercyclical Technologie
Misperceptions of feedback
                                    Collaborative channel mgmt
Lumpiness in ordering                (Cincinnati Milacron & Boeing)
Chain accumulations
                                    Supply Chain Volatility Amplification:
                                    Machine Tools at the tip of the Bullwhip
                                           % Chg. GDP       % Chg. Vehicle Production Index       % Chg. Net New Orders Machine Tool Industry
                             100
“We are experiencing a 100-year flood.” J. Chambers, 4/16/01
                            80



                            60



                            40
  % Change, Year to Year




                            20



                             0
                             1961   1963     1965   1967   1969   1971   1973    1975   1977   1979   1981   1983   1985   1987    1989   1991


                           -20



                           -40



                           -60

                                      "Upstream Volatility in the Supply Chain: The Machine Tool Industry a
                           -80        E. Anderson, C. Fine & G. Parker Production and Operations Manag
                                      Vol. 9, No. 3, Fall 2000, pp. 239-261.
 INDUSTRY CLOCKSPEED IS A COMPOSITE:
 OF PRODUCT, PROCESS, AND ORGANIZATIONAL
              CLOCKSPEEDS

 Automobile INDUSTRY CLOCKSPEED


   THE                           THE
Automobile                   Automobile
product technology
                     THE MANUFACTURING
                  Automobile COMPANY
                              organization
                PRODUCTION
                   PROCESS
           process technology
 Automobile CLOCKSPEED IS A MIX OF
       ENGINE, BODY & ELECTRONICS


                  Automobile

 ENGINE               BODY            ELECTRONICS
                  medium clockspeed   fast clockspeed
slow clockspeed


ISSUE: MOST AUTO FIRMS OPERATE
AT ENGINE OR BODY CLOCKSPEEDS;
IN THE FUTURE THEY WILL NEED TO
RUN AT ELECTRONICS CLOCKSPEED.
         Clockspeed drives
Business Strategy Cadence
          Dynamics between New Projects
          and Core Capability Development:
          PROJECTS MUST MAKE MONEY
          AND BUILD CAPABILITIES




   CORE                               NEW PROJECTS
CAPABILITIES                               (New products,
                                           new processes,
                                            new suppliers)



Leonard-Barton, Wellsprings of Knowledge
 The Strategic Leverage of Value Chain Design:
              Who let Intel Inside?
1980: IBM designs a product, a process, & a value chain
  Customers


                                         Intel

                     IBM  Intel Inside

                                         Microsoft
 The Outcome:
      A phenomenonally successful product design
      A disastrous value chain design (for IBM)
 LESSONS FROM A FRUIT FLY:
     THE PERSONAL COMPUTER

1. BEWARE OF INTEL INSIDE
     (Regardless of your industry)
2. MAKE/BUY IS NOT ABOUT WHETHER IT IS
     TWO CENTS CHEAPER TO OUTSOURCE
3. VALUE CHAIN DESIGN CAN DETERMINE
     THE FATE OF COMPANIES AND INDUSTRIES,
     AND OF PROFIT AND POWER
4. THE LOCUS OF VALUE CHAIN CONTROL
     CAN SHIFT IN UNPREDICTABLE WAYS
                 Automotive Power Dynamics
                 of Technology Value/Content

         1965                                 2005
                                                     Steel
                Steel
 Autos           -styling             Autos
                 -structural integrity
                                              Electronics
                Elec.                           -$/vehicle
                                                -customer interface


Will electronics replace sheet steel . .
  . . . as the most integral subsystem in the automobile,
  driving shifts in the relative strategic and financial
  importance of various members in the supply chain?
               Strategic Design of
       Automotive Electronics Value Chains
Customers
                     Ford                Visteon
                     Auto Opns

                       GM
                       NAO              Delphi


               Toyota
                        Denso Inside?
                                                   Supplier

              ChryslerJCI Inside?
                                                   Supplier
             Mercede   Delphi Inside?

             s
                 Vertical Industry Structure
              with Integral Product Architecture
 Computer Industry Structure, 1975-85
                                  IBM             DEC              BUNCH
Microprocessors



                                   All Products




                                                                    All Products
                                                    All Products
Operating Systems

Peripherals

Applications Software

Network Services

Assembled Hardware

(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)
      Horizontal Industry Structure
    with Modular Product Architecture
  Computer Industry Structure, 1985-95
Microprocessors                         Intel
                                         Intel               Mac
                                                              Moto    TI     etc
                                                                      AMD      etc

Operating Systems
                                        Microsoft               Mac    Unix
Peripherals                            IntelEpson         Mac         TI etc
                                 HP                    Seagate         etc etc

Applications Software
                                  Microsoft      Lotus   Novell         etc
Network Services
                              AOL/Netscape Microsoft            EDS etc
                                                                     etc
Assembled Hardware
                              HP Compaq          IBM     Dell         etc
                                                                       etc
(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)
     THE DYNAMICS OF PRODUCT ARCHITECTURE
          AND VALUE CHAIN STRUCTURE:
                      THE DOUBLE HELIX


                    INTEGRAL PRODUCT    MODULAR PRODUCT
     NICHE          VERTICAL INDUSTRY   HORIZONTAL INDUSTRY
  COMPETITORS
                                                                  TECHNICAL
                                                                  ADVANCES



    HIGH-
 DIMENSIONAL                                                            SUPPLIER
 COMPLEXITY                                                             MARKET
                                                                         POWER


                         PRESSURE TO    PRESSURE TO
   ORGANIZATIONAL       DIS-INTEGRATE   INTEGRATE
      RIGIDITIES                                               PROPRIETARY
                                                                 SYSTEM
                                                              PROFITABILITY




Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
               THE DOUBLE HELIX
             IN OTHER INDUSTRIES
• TELECOMMUNICATIONS--
  – “MA BELL” was Vertical /Integral
  – BABY BELLS & LONG LINES & CELLULAR are Horizontal/Modular
  – Today’s Verizon is going back to Vertical /Integral
• AUTOMOTI VE--
  – Detroit in the 1890’s was Horizontal/Modular
  – Ford & GM in the mid 1900’s were Vertical /Integral
  – Today’s Auto Industry is going back to Horizontal/Modular
• TELEVISION--
  – RCA was Vertical /Integral
  – 1970’S THROUGH 1990’S were Horizontal/Modular
  – Today’s media giants are going back to Vertical /Integral
• BICYCLES--
  – Safety Bikes to 1890’s boom to Schwinn to Shimano Inside
   TELECOMS: IN THE BEGINNING,
THERE WAS VERTICAL INTEGRATION
      AND MARKET POWER



           VOICE           VIDEO       CORPORATE DATA
       COMMUNICATION   ENTERTAINMENT




                          CABLE &        DATA
         TELEPHONE                     NETW0RKS
          NETWORK        BROADCAST
                         NETWORKS
                                           DAVE CLARK,
                                             LCS, MIT
IP BEGAT CONVERGENCE & LOSS OF MARKET POWER
               THE HOURGLASS




              SHOPPING, PORTALS, SEARCH,
           MUSIC, VIDEOS, JOKES, CHAT, EMAIL,
             PORNOGRAPHY, DATA, ETC., ETC.




                        IP



        FIBER OPTIC NETWORKS, CABLE MODEMS,
             DSL CONNECTORS, SWITCHING            DAVE
               SUBSTATIONS, ETC., ETC.           CLARK,
                                                RPCP, MIT
Controlling the Chain Through Distribution:
      The End of P&G Inside ?

  • Controlling the Channel Through Closeness to Customers:
  •     consumer research, pricing, promotion, product development

  Customers

                          Retailer

                                                      P&G
                          Retailer

                          Retailer
Controlling the Chain Through Distribution:
    Beware of Walmart Outside


    Controlling the Channel Through Closeness to
      Customers:
      Chain Proximity
   Customers          WalMart
                      Retailer

                       Retailer
                                                P&G
                       Retailer

                                   WalMart Private Label
         • Battle for Channel Control -
• Proprietary Systems v. Closeness to Customers




                              AMD
 Customers


              Compaq
                             Nexgen
              Dell


              Gateway
                               Intel
Volatility Amplification in “The Bullwhip Effect” and
 Clockspeed Amplification in “The Speedup Effect”




 Customer     Retailer     Distributor   Factory      Tier 1     Equipment


    Inventories & Orders fluctuate more
as you look upstream, tough on suppliers, but



  Web Site               PC Maker        Chip maker            Equipment
  Developer                                                      Maker

Clockspeeds accelerate as you head downstream,
          closer to the final customer
Mutually Reinforcing Clockspeed Drivers:
Technological Innovation & Competitive Intensity

                     Technological
                +    Innovation in
                     Computing &
                    Communications                 +
                                             Industry &
  Industry &                                Organization
 Organization                               Clockspeeds
 Clockspeeds

  +                 Competitive
                    Intensity from
                    Reduced Trade
                    Barriers and
                                        +
                    Internet Commerce
Media Supply Chains: An Industry at Lightspeed


Customers       The box                The Pipe           The Content
                              (Access, Metro, Backbone)
             Wired Phone                                  Video/Audio:
                                 Land-
                                 basedTelco:              Movies & Art
                                  -copper POTS            & News & Sports
            Wireless phone
                                  -fiber
                                 -DSL                     News/articles/books
               PC/laptop          Cable                   (newspapers &
                                  Networks                        magazines)
               PDA           Wireless:
                              -broadcast TV
                                                        Communication:
              Television      -CDMA, TDMA, GSM
                                                        voice & video & email
                              -satellite/microwave
                             Retail Outlets                   Banking
               VCR
                             -Borders:
                             -Blockbuster                    Education
                Page         -Seven-Eleven
                  r                                           Shopping
                               Delivery (e.g., Fedex)
                                                            Internet, et al
   ALL COMPETITIVE ADVANTAGE
         IS TEMPORARY
Autos:
Ford in 1920, GM in 1955, Toyota in 1990
Computing:
IBM in 1970, DEC in 1980, Wintel in 1990
World Dominion:
Greece in 500 BC, Rome in 100AD, G.B. in 1800
Sports:
Bruins in 1971, Celtics in 1986, Yankees no end
The faster the clockspeed, the shorter the reign
      Mapping the Telecom Value Chain:
   A Roadmap for Communications Networks
1. Fruit Flies & Temporary Advantage


2. Value Chain Design & 3-DCE
3. eBusiness Phenomena:
   Business Model Innovation
4. Telecom Value Chains:
   A fruit fly example
        VALUE CHAIN DESIGN:
          Three Components
1. Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)

2. Partner Selection
(Choice of suppliers and partners for the chain)

3. The Contractual Relationship
(Arm’s length, joint venture, long-term contract,
     strategic alliance, equity participation, etc.)
IMPLEMENTATION OF VALUE CHAIN DESIGN:
EMBED IT IN 3-D CONCURRENT ENGINEERING



                                                      Recipe, Unit Process
                  PRODUCT
                                        PROCESS
                 Performance
                 Specifications            Technology, &
                                           Process Planning
                                                              Details,
                                                              Strategy


 Product Architecture,
                          Time, Space, Availability Manufacturing System,
 Make/Buy components
                                                      Make/Buy processes
                          VALUE CHAIN
        ARCHITECTURES IN 3-D
     INTEGRALITY VS. MODULARITY


Integral product architectures feature
       close coupling among the elements
 - Elements perform many functions
 - Elements are in close spacial proximity
 - Elements are tightly synchronized
  - Ex: jet engine, airplane wing, microprocessor
Modular product architectures feature
       separation among the elements
 - Elements are interchangeable
 - Elements are individually upgradeable
 - Element interfaces are standardized
 - System failures can be localized
-Ex: stereo system, desktop PC, bicycle
VALUE CHAIN ARCHITECTURE


Integral value-chain architecture
     features close proximity among its elements
   - Proximity metrics: Geographic, Organizational
                         Cultural, Electronic
     - Example: Toyota city
     - Example: Ma Bell (AT&T in New Jersey)
     - Example: IBM mainframes & Hudson River Valley
Modular value-chain architecture features multiple,
        interchangeable supplier and standard interfaces
     - Example: Garment industry
     - Example: PC industry
     - Example: General Motors’ global sourcing
     - Example: Telephones and telephone service
DESIGNING ARCHITECTURES FOR PRODUCTS &
 VALUE CHAINS: THE NEED FOR ALIGNMENT


       VALUE CHAIN ARCHITECTURE
       (Geog., Organ., Cultural, Elec.)
                    INTEGRAL         MODULAR
PRODUCT
             Jet engines
ARCHITECTURE                              Polaroid
             Microprocessors
                                          Nortel
   INTEGRAL  Mercedes vehicles

                  Automotive         Personal Computers
                  Supplier Parks     Bicycles
   MODULAR                           Chrysler Vehicles
                                     Cisco
       DESIGNING ARCHITECTURES FOR
        PRODUCTS & VALUE CHAINS:
         MODULARITY VS. OPENNESS

    ARCHITECTURAL
    PROPRIETARINESS
                   CLOSED           OPEN
ARCHITECTURAL
STRUCTURE       Pentium Chip
                                     Linux
   INTEGRAL     Mercedes Vehicles
                SAP ERP
                                    Palm Pilot
                IBM Mainframes        software & accessories
    MODULAR     Microsoft Windows   Phones & service
                Chrysler Vehicles   Web-based ERP

     INFORMATION ARCHITECTURE MUST
         REFLECT BUSINESS MODEL
         In/Outsourcing: Sowing the Seeds
      of Competence Development to develop
 dependence for knowledge or dependence for capacity




       Dependence                              Independence
        Amount of                                Amount of
          Work                                      Work

+        Outsourced
        knowledge        +          +          Done In-house
                                                 knowledge      +
        +/or supply                              +/or supply
Supplier              Amount of   Internal               Amount of
Capability            Supplier    Capability             Internal
                      Learning                           Learning

             +                             +
 Technology Dynamics in the Aircraft
             Industry:
LEARNING FROM THE DINOSAURS

              Japanese
    +        appeal as
           subcontractors                              U.S. firms’
                                                       appeal as
                                                       subcontractors
Japanese                    + outsources
                            Boeing
                                   +
Industry
Autonomy                         to Japan
                            (Mitsubishi Inside?)
+
             Japanese                                     U.S.
              industry                                  industry
              size &                                     size &
                          +
             capability
                                                   -   capability
 SOURCEABLE ELEMENTS


             PROCESS ELEMENTS

                     ENGINEERING


       CONTROLLER    ASSY

    VALVETRAIN
                     TEST
   BLOCK
                       I4   V6     V8
                                        PRODUCTS



SUBSYSTEMS
         Strategic Make/Buy Decisions:
Assess Critical Knowledge & Product Architecture

                                                        INDEPENDENT FOR
                                        DEPENDENT FOR
                                                          KNOWLEDGE &       INDEPENDENT FOR
                                         KNOWLEDGE
                                                         DEPENDENT FOR    KNOWLEDGE & CAPACITY
                                          & CAPACITY
     ITEM IS INTEGRAL ITEM IS MODULAR




                                                            CAPACITY

                                               A           BEST               OVERKILL
                                           POTENTIAL    OUTSOURCING              IN
                                          OUTSOURCING   OPPORTUNITY           VERTICAL
                                             TRAP                           INTEGRATION




                                             WORST           CAN                BEST
                                          OUTSOURCING        LIVE            INSOURCING
                                            SITUATION       WITH              SITUATION
                                                         OUTSOURCING



Adapted from Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
          Strategic Make/Buy Decisions:
Also consider Clockspeed & Supply Base Capability



                              DEPENDENT FOR                           DEPENDENT FOR                    INDEPENDENT FOR
                           KNOWLEDGE & CAPACITY                       CAPACITY ONLY                  KNOWLEDGE & CAPACITY
DECOMPOSABLE




                                      Clockspeed                                 Clockspeed                                 Clockspeed
                                             Fast Slow                              Fast Slow                               Fast Slow
   (Modular)



                           Few Many




                                                                      Few Many




                                                                                                             Few Many
               Suppliers




                                                          Suppliers




                                                                                                 Suppliers
                                                  OK
                                         Watch
                                          it!

                                             Clockspeed                             Clockspeed
    INTEGRAL




                                                                                                                           Clockspeed
                                              Fast Slow                              Fast Slow                              Fast Slow
                                  Few Many
                      Suppliers




                                                                         Few Many




                                                                                                                Few Many
                                                             Suppliers




                                                                                                    Suppliers
      Adapted from C. Fine, Clockspeed, Chap. 9
              Qualitative analysis of strategic
             importance uses five key criteria

                                             Value chain elements with high customer
                                              

           Customer                          importance and fast clockspeed are generally
          Importance:                        strategic (unless there are many capable
             • High
             • Medium                        suppliers)
             • Low                                          Competitive position is seldom the
                      Technology                             primary consideration for strategic
                      Clockspeed:                            importance, rather it serves as a
                        • Fast
                        • Medium                             “tie-breaker” when other criteria are
                        • Slow
                                  Competitive                in conflict
                                     Position:
   When many capable               • Advantage
                                    • Parity
    suppliers exist, knowledge      • Disadvantage
    may be considered
    commodity and                            Capable Suppliers:
    development should be                            • None                      Possible Decisions
                                                     • Few                     (Knowledge & Supply):
    outsourced                                       • Many
                                                                                   • Insource
   Architecture is considered a                                                   • Outsource
    constraint for the sourcing decision                      Architecture:        • Partner/Acquire
                                                                  • Integral       • Partial Insource
    model, controls the level of                                  • Modular
                                                                                   • Partial Outsource
    engineering that must be kept in                                               • Invest
    house for integration purposes                                                 • Spin Off
                                                                                   • Develop Suppliers
      developed by GM Powertrain, PRTM, & for Subsystems
Model Criteria are applied differently for Products than Clockspeed, Inc.
 Sourcing Strategy Decision Tree -
  High Customer Importance Path


                                                                                        Low
                                                                       Customer
  High Customer Importance Path                              High      Importanc
                                                                          e?
                                    Technology Slow
                             Fast
                                    Clockspeed
                                         ?
         Strong    Competitive Weak           Strong
                                                   Competitive
                                                              Weak
                    Position?                       Position?




                      None Capable Many                                                        None Capable     Many
                          Suppliers?
    Minimal                                                        Non         Man          Minimal Suppliers?
   Outsource -                  Few                                 e Capable             Outsource -
              Minimal                              Modular
                                          Architectur        Minimal Suppliers? y                          Few
     Invest                                   e?                                           Invest for
             Outsourc              Modular
                          Architectur                       Outsource Fe                                                 Modular
                                                                                                                 Architectur
                              e?
                                          Integral           - Maintain                      Parity,                 e?
             e - Invest                                                     w
                       Integral                                Internal         Architectur Develop                 Mostly
                                                                                                              Integral
                                    Minimal                 Knowledge
                                                                                    e?     Suppliers             Outsource
                                   Outsourc                  (possibly                                            - Specify
                     Minimal e - Equity                                      Integral
                                                              develop                         Modular Partial           &
                   Outsource / Acquire                                           Partial
                    - Equity /            Minimal            suppliers)                               OutsourcIntegrate
                                                                               Outsour
                     Acquire           Outsource -                      Partial ce (less              e - Invest             Outsource
                       and              Equity/Acq                      Outso integral                     in                   All
                                                         Outsourc
                     Partner               uire &                        urce compon Outsourc Internal
                                                           e All
                                          Partner                                 ents)        e All Capabilit
                                                                                                            y
Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.
 Sourcing Strategy Decision Tree -
  Low Customer Importance Path

                                                                   Customer
                                                          High                    Low
                                                                   Importance                                     Low Customer Importance Path
                                                                       ?
                                                                                   Technolog
                                                                           Fast        y     Slow
                                                                                   Clockspee
                                                                                      d?

                                Competitiv
                  Strong            e             Weak                                                                Competitiv Weak
                                                                                                                 Strong
                                Position?                                                                                  e
                                                                                                                       Position?



               Non           Man                                                                                              None              Many
                   Capable                      None CapableMany                                 None Capable Many                    Capable
                e             y
                  Suppliers?                       Suppliers?                                       Suppliers?                       Suppliers?
                           Fe                  Minimal   Few                                                                     Develop
     Architectur
              Modular      w                                                                               Few                             Few
         e?                                  Outsource                                                                  Outsourc Supplie
                                                              Outsour                                                                       Outsourc
                                              -Develop                                                                    e All   rs and
              Minimal                                          ce All                       Modular Architectur
                                                                                   Architectur               Modular                          e All
    Integral                                 Suppliers Mostly                                                                    Outsour
             Outsour           Architectur                                             e?               e?
                                                  Outsource                                                                         ce
                ce -               e?
                                          Modula  , Develop                                 MinimalIntegral    Spin-
             Develop          Integr                                              Integral                                            Develop
                                             r       More                                   Outsour           off and
             Supplier           al                                                                                                    Supplier
     Minimal                                      Suppliers                                   ce -            Develo
                 s                                                                 Minimal                                             s and
     Outsour                                        and/or                                                       p
                                 Partial                                           Outsour Develop                                    Outsour
       ce -                                         Some                                    Supplier          Suppli
                               Outsource                                             ce -             Partial                          ce All
     Maintain                                     Integratio                                   s                ers
                      Partial                                                      Maintain          Outsour
                                         Outsourc     n
                     Outsourc                                                        and                ce
                                           e All  Capability
                        e                                                          Develop
                                                                                   Supplier
                                                                                      s
                                                                                                                                                 Data is still
                                                                                                                                                 preliminary



Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.
            Actual knowledge work compared to
                          outcome of Decision Framework

                              Percentage of Knowledge Work Currently Done
                                  0%              50%           100%
   Knowledge Work that 100%




                                                                                No
                                                                            Outsourcing
                                                                                      Minimal
                                                                                    Outsource-
   Should be Controlled




                                                                                   Equity/Acquire
                                                                          Minimal    & Partner
                                                                        Outsource-
      Percentage of




                                                                          Maintain
                                                                          Internal
                                                                        Knowledge
                                                                                         Partial
                                                                                      Outsource
                                                                          Mostly
                                                                        Outsource -
                                                                         Specify &
                                                                         Integrate       Mostly
                                                                                        Outsource -
                                                                                       Develop More
                                                                                         Suppliers
                                                                        Spin-off and
                                                                          Develop
      %
      0




                                                                         Suppliers

                                                                                       Outsource All



Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.
   Every decision requires qualitative and
 quantitative analysis to reach a conclusion

                                                                                                                                                                                                                                                                                        Knowledge
                                                                                                                                                                                                                                                                                    Supply




                                                                                                                                                                                                                                               High
                                                                                                                                                                                                                                                                  Improve                    Invest &




                                                                                                                                                                                                                          Qualitative
                                                                                                                                                                                                                                                                 Economics                     Build




                                                                                                                                                                                                                            Value
                                                                                                                               Strategic
     Qualitative Model                                                                                                        Importance
      Customer
     Im portance:
                                                                                                                                                                                                                                                                Divest/                      Harvest
                                                                                                                                                                                                                                                               Outsource                   Investment
       •   H ig h
       •   M e d iu m
       •   Low


                        Technology




                                                                                                                                                                                                                                              Low
                        Clockspeed:
                          • F as t
                          • M ed iu m
                          • S lo w
                                         Com petitive
                                          Position:
                                        • Ad van t ag e
                                        • P arity
                                        • Disa d va n ta g e
                                                                                                                                                                                                                                                          Low                      Quantitative     High
                                                          Capable Suppliers:
                                                               • No n e
                                                               • F ew
                                                               • M an y                      Possible Decisions:                                                                                                                                                                     Value
                                                                                                • In s o ur ce
                                                                                                •   O u ts o u rc e
                                                                                                •   P a rt ne r/ A c q u ir e
                                                                          Architecture:
                                                                             • In teg ral
                                                                                                •   P a rt ia l In s o u rc e
                                                                             • M o d u lar      •   P a rt ia l O u t so u rc e
                                                                                                •   In v e st
                                                                                                •   Sp in O f f
                                                                                                • D e v e lo p S u p pl ie rs

                                                                                                                                                                 Engine A
                                                                                                                                                                   EVA                                    PBIT                                            Revenue
                                                                                                                                          Engines
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                                                                                                                                                                                   NOPAT
                                                                                                                                                                                                                           .
                                                                                                                                                                                                                                                                                         EVA
                                                                                                                                                                    AS-IS
                                                                                                                                                                            BIC




                                                                                                                                                                                                                                                 AS-IS
                                                                                                                                                                                                           AS-IS




                                                                                                                                                                                                                                                                COGS
                                                                                                                                                                                                                   BIC




                                                                                                                                                                                                                                                    BMK
                                                                                                                                           AS-IS
                                                                                                                                                    BIC




                                                                                                                                                                                        AS-IS
                                                                                                                                                                                                BIC




                                                                                                                                                                 Engine B
                                                                                                                                                                   EVA

                                                                                                                                  GMPT
                                                                                                                                   EVA                                                                                          Taxes
                                                                                                                                                                   AS-IS
                                                                                                                                                                            BIC




                                                                                                                                                                    .
                                                                                                                                                                    .
                                                                                                                                                                    .                  Capital
                                                                                                                                                                                       Charge                             Net Assets
                                                                                                                                                                                                                                                               AS-IS
                                                                                                                                                                                                                                                               BMK
                                                                                                                                                                                                                                                                       Working
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Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.
        Value Chain Mapping
 Organizational Value Chain
                                  casting            clay
  Chrysler         Eaton          supplier         supplier


  Technology Value Chain
                                      casting                    clay
   engines      valve lifters      manufacturing              chemistry
                                      process

  Capability Chain
Supply Chain Management     Quality assurance          NVH engineering    R&D



    Underlying Assumption: You have to draw
  the maps before you can assess their dynamics.
     VALUE CHAIN DESIGN IS
THE ULTIMATE CORE COMPETENCY
Since all advantages are temporary,
the only lasting competency is to continuously build and
assemble capabilities chains.
KEY SUB-COMPETENCIES:
1. Forecasting the dynamic evolution of market
power and market opportunities
2. Anticipating Windows of Opportunity
3. 3-D Concurrent Engineering:
Product, Process, Value Chain            CAPABILITIES   PROJECTS



Fortune Favors the Prepared Firm
         PROCESS FOR
      VALUE CHAIN DESIGN

1. Benchmark the Fruit Flies           DOUBLE   HELIX

2. Map your Supply Chain
      -Organizational Value Chain
                                            BOEING
      -Technology Value Chain
      -Competence Chain
3. Dynamic Chain Analysis
      at each node of each chain map
4. Identify Windows of Opportunity
5. Exploit Competency Development Dynamics
      with 3-D Concurrent Engineering
                                         CAPABILITIES   PROJECTS
        STRATEGY IN 3-D:
         CASE EXAMPLES
Boeing: Static 3-D in airplane Projects
        Dynamic, Strategic Value Chain,
         unintegrated w/ Product & Process
Intel: Modular Product vs. Process
       Integral Process and Value Chain
Chrysler: Modular Product & Value Chain
          (weak on process?)
Toyota: Integral 3-D in Nagoya
          (weak on global 3-D?)
Components of Product, Process,
  and Value Chain Strategy




                                              • Mission Statement
 • Customer Needs                             • Operating Objectives
 • Market Segments                            • Policies & Procedures
 • Product Architecture                         -Structural: Bricks, Tech, Org
                                                -Infrastructural:
                                                     HR, Business Processes


                          1. Sourcing: Make/Buy
                          2. Partner Selection
                          3. Relationship Design
                          (spot, alliance, equity, etc.)
                          4. Logistics System Design
                          5. Inventory management Policies
                          6. Relationship Management
                          7. Value Chain Architecture
      Mapping the Telecom Value Chain:
   A Roadmap for Communications Networks
1. Fruit Flies & Temporary Advantage
2. Value Chain Design & 3-DCE

3. eBusiness Phenomena:
   Business Model Innovation
4. Telecom Value Chains:
   A fruit fly example
          Internet Era Phenomena:
 eCompetition in Business Model Innovation

             Benchmarking the eFlies
E-tailing:
  Attack:
       Amazon, Webvan Market disruption in hopes of making a place
  Defend:
       Walmart.com, Ford.com Defense can require costly SC revamping
B2B:
 E2E integration:
       Cisco, Dell Integration pays off with modular products
 Marketplace Creation:
       Freemarkets Reverse auctions reduce short term costs
       Covisint Common standards reduced supplier investment cost

Free & Open Digital Content:
  Peer-toPeer Sharing/Theft:
       Napster Industry-shaking disruptions require value chain SWAT team
        Internet Era Phenomena:
  eCompetition in Business Model Design


E-tailing:
  Attack: Amazon, Webvan
  Defend: Walmart.com, Ford.com, Office Depot.com
B2B:
 E2E integration: Cisco, Dell
 Marketplace Creation:eSteel, Ariba, Freemarkets, Covisint
 Product Development: Cisco
Customer as Product Manager:
 Product Innovation/Pricing/Design/Spec/Tracking/Delivery:
      Dell, Herman Miller, Reflect, iMotors, Fedex, Priceline
Free & Open Digital Content:
  Constructive Collaboration : Linux, Lego, Palm Pilot
  “Anarchistic Constructive” Conversation: Cluetrain
  Ubiquitous Sharing/Theft: Napster, FreeNet, Gnutella
        DOT.COM COMPETITION:
      FOCUS ON THE SUPPLY CHAIN

CASE#1:
      WALMART.COM GOT NO TRACTION

Customers
                  Walmart                     Supplier
                   Store

                  Walmart         WalMart
                   Store        Procurement


                  Walmart.com                 Supplier
        Shipper
  DOT.COM COMPETITION: FOCUS ON THE SUPPLY CHAIN
           Napster’s New Supply Chain Strategy
              (go to the end and steal everything!)


Identify                           Vertically Integrated
 Talent
           Develop                     Music Giants
            Songs
                     Record
                     Music
                              Promote
                               Music
                                         Press
                                         CD’s
                                                      Sell to
                                                      Retail
             Steal
             Songs                                       Customer
                                                        Consumption
        Matching Supply Chain
       Strategies with Products
                Demand
               uncertainty
                 (C.V.)

   Pull         H
                             I           II
                         Computer     Furniture


                             IV         III
   Push         L       Books & CDs   Grocery     Delivery cost
                    L                    H         Unit price

                    Pull              Push
Prof. David Simchi-Levi, MIT
 Cisco’s Value Chain Design

        Product                               Process
         Design                               Design
• minimal prototype iteration     • orders go from CCO website to CM’s
• shared product databases        • products go from CM’s to customer
• highly modular products            via logistics supplier
• joint with suppliers            • order & forecast data online to
                                    supply chain



              • innovation through acquisition
              • outsourced manufacturing (e.g., Solectron)
              • outsourced logistics (e.g., Fedex)
              • independent for knowledge in IT system
                        Value Chain
                           Design
      Chrysler’sExtended Enterprise Model
Key Elements of the model:
  1. Build Trust in Relationships
       -ask for suggestions and act on them
       -honestly and aggressively seek mutual benefits
       -communicate frequently and broadly across the org.
          (understand each other’s problems)
       -manage the relationship constantly
       -pre-select suppliers very early and work together
       -act for long-term gain, avoid short-term temptations
Stallkamp: “You are our supplier forever if you can be the leader in cost,
quality, technology, and delivery. If you fall behind, we will give you a
chance to catch up. If you cannot catch up (with our help), we will drop
you.”
     Chrysler’s Extended Enterprise Model

Key Elements of the model (continued):
 2. Share cost savings
      -start with target costs and learn jointly
      -provide economic incentives for partnerships
      -share data with scorecards on performance
      -collaborate to reduce system costs along the entire chain
      -better to have a low-cost supplier than a low-price supplier
 3. Develop products jointly
      -utilize co-located, cross-functional teams; common CATIA
 4. Develop both a strategy toward each supplier
      (how strategic; areas of joint interest), and
      a strategy for each commodity
      (e.g., we only source tires from Goodyear & Michelin)
            Chrysler’s RESULTS

Lower development costs:
       joint incentives, ECN’s come early
Faster development speed:
       early involvement, fewer late ECN’s
Lower procurement costs:
       less time haggling and soliciting bids
Lower production costs:
       suppliers get scale, more advanced planning
Improved quality:
       joint incentives, better designs

     Three Secrets to success:
 Relationships, Relationships, Relationships
      Mapping the Telecom Value Chain:
   A Roadmap for Communications Networks
1. Fruit Flies & Temporary Advantage
2. Value Chain Design & 3-DCE
3. eBusiness Phenomena:
   Business Model Innovation
4. Telecom Value Chains:
   A fruit fly example
   Network Communications Roadmap:
         Start with Static Maps

Fiber and Cable-based Networks
     Optical Networks

Wireless Networks
  ”Killer Technologies” of the Information Age:
Semiconductors, Magnetic Memory, Optoelectronics


 “We define a ‘killer technology’ as one that
   delivers enhanced systems performance of a
   factor of at least a hundred-fold per decade.”
      C.H.Fine & L.K. Kimerling, "Biography of a Killer Technology:
      Optoelectronics Drives Industrial Growth with the Speed of Light,”
      published in 1997 by the Optoelectronics Industry Develoment
      Association, 2010 Mass Ave, NW, Suite 200, Wash. DC 20036-1023.


Killer Question:
  Will Integrated Optics evolve linearly like
  Semiconductors with Moore’s Law or like
  Disk Drives with repeated industry disruptions?
  Roadmap for Electronic Devices
Number of chip components
 1018                                                          295oK
                   Classical Age                 Quantum Age
 1016

 1014                                           77oK

                                          4oK
 1012                                 2010
                       SIA Roadmap 2005       Quantum State Switch
 1010                           2000
                             1995
  108 Historical Trend
                      1990         CMOS
  106
              1980
  104
        1970
  102
    101               100            10-1              10-2       10-3
                              Feature size (microns)
  Horst D. Simon
   International Technology Roadmap for
            Semiconductors ‘99


Year                     2005   2008   2011   2014
Technology (nm)          100      70    50      35
DRAM chip area (mm2)     526    603    691     792
DRAM capacity (Gb)         8            64
MPU chip area (mm2)      622    713    817     937
MPU transistors (x109)    0.9    2.5    7.0   20.0
MPU Clock Rate (GHz)      3.5    6.0   10.0   13.5
                                    Moore’s Law
Transistors per chip
  109
                                                                                             ?
  108

                                                                      Pentium 80786
  107                                                                   Pro
                                                      80486
  106                                                      Pentium
                                        80386
                                   80286
  105
                          8086

  104          8080
        4004
  103
    1970         1975         1980         1985         1990          1995    2000    2005       2010
                                                     Year
Source: Joel Birnbaum, HP, Lecture at APS Centennial, Atlanta, 1999
       Disk Drive Development
             1978-1991

 Disk Drive Dominant             Dominant         Approx cost per
 Generation Producer               Usage            Megabyte
     14”            IBM          mainframe               $750
      8”         Quantum Mini-computer                   $100
    5.25”         Seagate       Desktop PC                $30
     3.5”         Conner        Portable PC               $7
     2.5”         Conner        Notebook PC               $2
From 1991-98, Disk Drive storage density increased by 60%/year
while semiconductor density grew ~50%/year. Disk Drive cost
per megabyte in 1997 was ~ $ .10
           Optical Networking
             is Keeping Up!


                                            Voice growth
                                            TDM line rate
                                    OC768   growth
                            OC192           Data growth
Capacity




                     OC48                   Optical network
              OC12                          capacity growth




                                    Time
             Optical Technology Evolution:
              Navigating the Generations
             with an Immature Technology

             1              2             3             4                    5
Timeline     Now            Starting      Starting      3-5 years            5-15 years
Stage        Discrete       Hybrid        Low-level     Medium               High-level
             Components     Integration   monolithic    Monolithic           monolithic
                                          integration   integration          integration

Examples     MUX/           TX/RX         TX/RX         OADM,                Transponder
             DEMUX          module        module        Transponder
                            OADM          OADM          Switch
                                                        Matrix

Core         FBGs, Thin-    Silicon       Silica        InP, ??              InP, ??
Techno-      film,          Bench,        Silicon
logies       fused fiber,   Ceramic       InP
             mirrors        substrates

How many     1              2-5           2-5           5-10                 10-XXX
Functions?
Industry     Integrated     Integrated/   Integrated        DOUBLE            DOUBLE
                                                                     HELIX             HELIX
Structure                   Horizontal    /Horizontal


        Dr. Yanming Liu, MIT & Corning
Collaborative Supply Chain Development can
 support Shared Costs and Shared Learning
      in a fast-clockspeed environment


          Can Telecom learn from Sematech?
           “Coffee & Donuts” plus Technology Focus


  Intel
                                          Advantest      Fujitsu
                Supplier                                Computer
  IBM
                             Nikon            Fujitsu
                Supplier
  TI                                          Chips
                                                           Fujitsu
 AT&T
                           AMAT
                Supplier

 Moto.
                             Canon          NEC
                                                          NEC
                                            Chips
                                                        Computer
  et al.                                       Ando

   U.S. “Co-opetition in the 1980s”                     NEC
          Optical Network Value Chain:
                Layers & Players

Access Provider
Netw Mgmt/Maint
Network Owner
Netw contr/install
Netw Design
Netw Elements
Control Software
Box Assembly
Modules
Actives
Passives Fiber
Silicon
GaAs
               Optical Networks Roadmap
Optical Taxonomy By Scott Clavenna and Peter Heywood http://www.lightreading.com
                Optical Networks Roadmap
Optical Taxonomy By Scott Clavenna and Peter Heywood http://www.lightreading.com
  Opportunity: Provision services directly      Carrier Wish List
  from DWDM systems                              Longer distances
  Solution Structure: More integration           Smaller footprint
  between DWDM & the services layer.
                                                 More channels per fiber
  Evidence: the “optical packet node”
  and the intelligent optical switch.            Greater capacity per channel
                                                 Improved
                                                    optical channel monitoring
  Nortel, Fujitsu, and Hitachi have integrated DWDM into their
  Sonet/SDH equipment. Other vendors have promoted "open" systems
  that can be used in conjunction with any vendor's equipment and are
  not limited to carrying Sonet.

Optical Taxonomy By Scott Clavenna and Peter Heywood http://www.lightreading.com
         OPTICAL VALUE CHAIN:
          MINI CASE EXAMPLE

NORTEL NETWORKS plays at at least three levels of
  the Optical Network Telecom value chain:
1. Network design & installation
2. Modules (OC-192 network elements)
3. Components (lasers, amplifiers)
QUIZ: Should Nortel sell their components business?
Hint: How likely are the scenarios of:
- An Intel Inside effect in components?
- Networks become sufficiently modular as to be
  assembled by the customer?
                                  Optera Metro

        Network topology
(C. Thompson & R. Berryman, MIT)



        Access
Metro
                     Regional




                           Long Haul
                                         Media Value Chain
                (C. Thompson & R. Berryman, MIT)


    Content                                                          Pipe                                                            Box                  Customer
   Aggregator                                 Service Provider / Network Operator                                                  Service             Enterprise
Web Portals                         Access                         Metro                           Backbone                                            Other Carriers
ISP Portals (eg AOL)                                        Network Owner                                                     Box Distributor          Multi-tenant buildings
MSN                                 Access                         Metro                           Backbone              Retail, Service Providers     Residential Customers
Entertainment Portals                                       Network Builder                                                     Box Builder
Gaming Portals                  Access                           Metro                          Backbone                 Home Gateways, servers
Financial Portals         Systems    Solutions            Systems     Solutions         Systems       Solutions          (Nortel, Lucent, Nokia)
    Generator           "God box"       Multi-Service   SONET/DWDM     Aggregation    Transport     Managed Wavelength    Component Supplier
Streaming Video         CO Nodes             SMS        CO Nodes           Grooming   Sw itching    Services              Hardware         Software
Financial Services                                                                                                         Boards            Apps
Applications                                                                                                               Modems            NOS
Phone Calls                                                                                                               Drives etc         Tools
Webpages                                                                                                                    Semionductor / IC
Games                                                     Component Supplier                                             Chips, memory etc
                                         Hardware                                   Software                             (Intel, Motorola, Broadcom)
                        Boxes          (Transport nodes, switches Applications (Network Planning & Provisioning)
                                       routers, aggregators etc)
                        Modules        (ADMs, OADMs, Line Cards, Systems       (Network OS, OSS)
                                       multiplexers, modems etc)
                        Components     (Boards, lasers, filters etc) Tools     (Routing & switching algorithms)

                        Chips          (Network processors, ASICs) Protocols          (SONET, IP, MPLS etc)

                        Materials
        Microphotonics Technology Bottlenecks
                   (Prof. Rajeev Ram, MIT)

   100 Channel OADM
o   mircoring – resonating ring
o   Photonic crystals – photonic band gap
o   Thin film filters
o   AWG – Large
o   Bragg gratings (isolation) –
o   Fiber gratings (bulky)
o   Diffraction grating (bulk)
   Waveguide Isolators
   LN-SOA (low noise silicon optical amplifier)
   Optical Computing
o   Waveguides on IC
o   Optical Sources on CMOS
    Wireless Value Chain
            & clockspeeds

                        Hardware (Nokia, Moto, Palm, HP) fast
    Device                 O/S (Palm, Windows, Psion) slow
C   fast
U                      Applications (phone, PDA, etc.) medium
S
                       Standard (CDMA, GSM, etc.) medium
T
      Access
O     Provider        Equipment (Nortel, Ericcson, etc. medium
M     (ATT, Cingular,
                       Network Design (Sonet, ATM, IP) slow
E     Vodaphone, AOL)
R
    Content fast            Product/Service packages fast
    (Yahoo, Quicken,
    IM, M-commerce,
    VoiceCommunic
    Wireless Communications
        Market Analysis

       Industry Structure
       Supply Chain: Industry, Cell Phone, Network
       Business Cycle: Vertical/Integral vs. Horizontal Modular
       Evolution and Adoption of Services
       Market Share
       Standardization
       Internet Converging with Wireless Telecommunications
       Laws and “Laws” Guiding Development of Technology




(J. Gower & S. Constance, MIT & Siemens)
  Wireless Marketplace
   Value of Exchanges Between Supply Chain Links

          Application                    Content
          Developers                    Providers




                          Network                                    End-User
                          Operators                                  Consumer

                                                      Retail VAR
                                                      Radio Shack
                                                      Circuit City



                                                                 Exchanges Between Links
         Infrastructure                 Device
                                                                          Information
            Provider                  Manufacturers                       Partnership

                                                                          Cash-flow
(J. Gower & S. Constance, MIT & Siemens)                                  Exchange
  Wireless Marketplace
   Links Are Consummated on Exchanges
                                 Applications provide
                               efficient access to content
      Application                                                  Content
      Developers                                                  Providers

                                                                                       Content sites must
                   Network Operators           Content must meet                       develop brand and
                   need applications to         target customer                        drive greater
                    enhance services            segments needs                         accessibility


     Infrastructure                                          Consumer agrees on service contract
  supports applications              Network                                                         End-User
                                     Operators                                                       Consumer
                                                                     VARs sell service contracts
                                                                            as middleman

                                                                                  Retail VAR       VARs sell devices as
                 Infrastructure facilitates                                        Radio Shack        middleman
                                              Device must gain network
                  network management                                               Circuit City
                                                       access

                                                                             Users must be able to operate device

    Infrastructure                                      Device
       Provider                                       Manufacturers
                            Air interface compatibility

(J. Gower & S. Constance, MIT & Siemens)
  Wireless Marketplace
  Wireless Industry Structure: 5 Forces
                                        Market Entry
                                        •Proprietary learning curve
                                        •Economies of scale
                                        •Capital requirements
                                        •Brand identity
                                        •Switching costs
                                        •Expected retaliation
                                        •Proprietary products



   Supplier Power                       Firm Rivalry                      Buyer Power
                                        •Industry concentration ratio
   •Supplier concentration                                                •Bargaining leverage
                                        •Fixed costs/Value added
   • Importance of volume to supplier                                     •Buyer volume
                                        •Industry growth
   •Differentiation of inputs                                             •Buyer information
                                        •Intermittent overcapacity
   •Switching costs of firms                                              •Brand identity
                                        •Product differences
   •Threat of forward integration                                         •Price sensitivity
                                        •Switching costs
                                                                          •Product differentiation
                                        •Brand identity
                                                                          •Substitutes available




                                        Substitutes
                                        •Switching costs of adopters
                                        •Buyer propensity to substitute
(J. Gower & S. Constance,               •Relative price performance of
 MIT & Siemens)                         substitutes
       Wireless Marketplace
       Industry Structure: 5 Force Analysis
                                             Market Entry             Entry
                                            Network Operator            Hard

               Network                      Infrastructure Provider   Difficult     Device
Many




               Operator                     Device Manufacturer       Difficult     Manufacturer
                                            Application Provider        Easy
                                            Content Provider            Easy


        Supplier Power            Power        Competition            Rivalry       Buyer Power             Power
        Network Operator          Many      Network Operator           Intense    Network Operator          Strong
        Infrastructure Provider   Intense   Infrastructure Provider    Intense    Infrastructure Provider    Weak
        Device Manufacturer       Intense   Device Manufacturer        Intense    Device Manufacturer       Strong
        Application Provider       Weak     Application Provider       Weak       Application Provider       Weak
        Content Provider          Strong    Content Provider           Strong     Content Provider           Weak


                                                                                   Content Enabler
Few




                                               Substitutes            Number
                                            Voice/Data Network         Many
                                                                                   Infrastructure
             Content                        Network Components          Few
                                                                                   Provider
             Provider                       Cell Phones                Many
                                                                                   Application Provider
                                            Applications&Content        Few
           Unattractive                                                               Attractive
   Wireless Marketplace
   Wireless Device Supply Chain (Horizontal/Modular?)
                                              Software Radio
                                                 Vanu Inc.             VAR Sellers
 Non-Circuit     Circuit Board          Application                                        Voice and/or
                                                        Device
  Component       Component             Developers                                            Data
                                                      Manufacturers
 Manufacturers   Manufacturers           OS & AP                           Network          Customers
                                                                           Operators

   Upstream                                                                                Downstream

EXAMPLES
  • Microphone   •   DSP              • Operator      •   Cell Phones •    Radio Shack     • Personal use
  • Speaker      •   Microprocessor     System        •   PDAs         •   Circuit City    • Enterprise use
  • Battery      •   ROM Chips        • WAP           •   Smart Phones •   Best Buy        • Public services
  • Dial Pad     •   Flash Memory     • iMODE         •   SIM Pads     •   Sprint Store
  • Case         •   RF Transceiver   • SMS           •   Controls     •   Verizon Store
                                                      •   LANs
COMPANIES
  • Sharp        •   TI               • Aether        •   Nokia       •    BT, FT, DT
  • Phillips     •   ADI                Systems       •   Motorola    •    Radio Shack         N/A
  • NEC          •   Intel            • Microsoft     •   Ericsson    •    Sprint
  • Fujitsu      •   Motorola         • Phone.com     •   Siemens     •    Cingular
  • Panasonic    •   National S.      • Sun           •   Samsung     •    NTT Do Co

(J. Gower & S. Constance, MIT & Siemens)
Wireless Marketplace
Wireless Device Components




                                                                  Micro-processor




                     Phone                                        Flash
                     Battery                                      Memory
                     -lithium                                     -SID Chip
                     iodine
     Microphone
     & Speaker
                                                 Digital Signal
                                                 Processor
      Keypad and
      contacts
                   (J. Gower & S. Constance, MIT & Siemens)
   Wireless Marketplace
    Wireless Network Supply Chain(Vertical/Integral?)
                                Mercury Computers             American Tower
 PSTN/Internet   Cell Switching        Base Station                                      Voice and/or
                                                       Infrastructure       Network
  Component       Component            Component                                            Data
                                                         Providers          Operators
 Manufacturers   Manufacturers        Manufacturers                                       Customers


   Upstream                                                                              Downstream

EXAMPLES
 • WAP Server    • Mobile Operators   • Antennas       • Base Station • Voice & Data     • Region Users
 • WAP Gateway     Switch Center      • Radio            Assembly       Service          • National Users
 • PSTN          • Packet Control       transceiver    • Tower        • Services &       • Global Users
   Gateway         Unit               • Channelizer      Assembly       Features
 • GPRS          • Base Station       • Modem          • Switching    • Billing
   Gateway         Controller         • Transmission     Optimization
                                        Interface
COMPANIES
  • Nortel       •   Nortel           •   Nortel       •   Nortel       •   BT, FT, DT
  • Sun          •   Nokia            •   Nokia        •   Nokia        •   Sprint           Voice
  • Siemens      •   Siemens          •   Siemens      •   Motorola     •   Cingular           &
  • Motorola     •   Ericsson         •   Ericsson     •   Ericsson     •   Bell South       Data
  • Lucent       •   Motorola         •   Motorola     •   Siemens      •   NTT Do Co
                 •   Lucent           •   Lucent       •   Lucent
(J. Gower & S. Constance, MIT & Siemens)
Wireless Marketplace
Wireless Voice Circuit Switch Network Components

               Step 1:                        Step 3:                        Step 5:
               Base Station Controller        Mobile Operator’s Circuit      Public Switch
Base Station                                  Switch Voice Network           Public Switched
               Converts signal from
Operations                                    Internal network supporting    Telephone Network
               base station to land line
               friendly format                voice services




                  BSC          MSC            MO          GMSC        PSTN
                                             CSVN

           Step 2:                                      Step 4:
           Mobile Switching Center                      Gateway Mobile Switching Center
           Keeps track of users and sends               Connects a mobile network to the
           them calls when necessary.                   public switched telephone network
           Includes: Home locator, visitor              and to other operators with which it
           locator, equipment identity,                 has roaming agreements
           authentication, and message
           center

                                                    (J. Gower & S. Constance, MIT & Siemens)
   Wireless Marketplace
     Wireless Data Packet Network Components
                                     Step 2, 3, or 4:                          Step 7
   Base Station                                                                WAP Gateway
   Operations     Step 1:            Serving GPRS Support Node
                    BSC              It connects to various databases to       Remote access server
                                     locate and authenticate traffic. Acts     for WAP
                      Step 2:        as a router instead of a switch
                       MSC                                                            Step 8:
                                                                                       Internet



                                                 MO                          WAP                   WAP
                  BSC       MSC       SGSN                    GGSN
                                                CSVN                         GATE     Net         SERVER


                                                         Step 6:
                      PCU                                Gateway GPRS Support Node
                                                         Converts data packets to & from
            Step 1, 2, or 3:                             GTP to TCP/IP
            Packet Control Unit
            Needed to adapt base station for       Step 5:                             Step 9:
            packet data. Point at which data       Mobile Operator’s Packet            WAP Server
            departs from a voice network-          Switched data network               Where WAP Data
            GPRS                                   Internal network for                is stored
                                                   providing data services
(J. Gower & S. Constance, MIT & Siemens)
    Wireless Marketplace                           (J. Gower & S. Constance, MIT & Siemens)

    Wireless Devices Becoming Horizontal & Modular
                                                -Massive adoption of handsets capacity     Device       Manufacturers

     US
                                                 strained as outsourcing coordination
              -Motorola-Devices                  becomes apparent
                                                                                           Cell Phone   Nokia, Motorola,
                                                                                                        Siemens, Ericsson,
 Abroad       Ericsson/Nokia/NTT Devices        -International demand & competition                     Samsong
                                                -Consumer Expectations Increase            PDA          Handspring, Palm,
                                                -Avg. # of Components 550 to 900
                    1980-85
                                                                                                        Compaq, Casio,

                                                                    1999-2001              SIM Pads
                                                                                                        Sony

                                                                                                        Sony, Siemens,
                                                                                                        Nokia

                                                                                           Smart        Kyocera, Ericsson
                                                                                           Phones
                       INTEGRAL PRODUCT                  MODULAR PRODUCT
                       VERTICAL INDUSTRY                 HORIZONTAL INDUSTRY

1985-1990              2005E-2010E                        1997-1999                            2001-2002E
          NICHE             Software Radio                 2G Digital Phone                TECHNICAL
       COMPETITORS             Emerges                     Shift to Messaging              ADVANCES
                                                           and Data
   Phone Becomes Easy                                                                    Outsourcing Devices
        to Carry                                                                         -Flextronics & EMS
         HIGH-                      PRESSURE              PRESSURE                         SUPPLIER
      DIMENSIONAL                       TO                   TO                            MARKET
       COMPLEXITY                 DIS-INTEGRATE          INTEGRATE                          POWER

                                                                                          PROPRIETARY
                                   1996-97
    ORGANIZATIONAL
       RIGIDITIES                                             2003E                         SYSTEM
                                                                                         PROFITABILITY
Complexity of phone increases        -US 1996 Telecom Act
                                     -DSP & Flash Chips               -Qualcomm liciences Chip Sets for Phone
Avg. # of Components 200 to 550                                       -Motorola & Others follow
                                     accelerate as PC Sales slow
Wireless Marketplace                       (J. Gower & S. Constance, MIT & Siemens)

Wireless Infrastructure Still Vertical & Integral
                                                     -Network costs focus attention on Spectral
    US    -Motorola, Nortel                           Efficiency and Network Optimization
                                                     -Pressure from Consumer for data services
Abroad     Ericsson,Nokia,Siemens                     and from device manufacturers to provide
                                                      faster data rates
                  1980-90                                               2001-2005E
                               INTEGRAL PRODUCT
AMPRS AT&T & Baby Bells        VERTICAL INDUSTRY
 BT, FT, Vodaphone, NTT                                         MODULAR PRODUCT
                               2007E-2010E                      HORIZONTAL INDUSTRY
1990-1995                           Convergence of
-US 1996 Telecom Act             Wireline to Wireless IP                               TECHNICAL
                                         & 3G                                          ADVANCES
     NICHE
  COMPETITORS
                                                                                         SUPPLIER
-American Tower, ArrayComm       PRESSURE                                                MARKET
                                     TO                                                   POWER
     HIGH-                     DIS-INTEGRATE
  DIMENSIONAL
                                                                PRESSURE
                                    1995-2001                      TO                PROPRIETARY
   COMPLEXITY                                                                          SYSTEM
                                    -US 1996 Telecom Act       INTEGRATE
                                                                                    PROFITABILITY
                                    -Spectrum Auctions $$$$$
    ORGANIZATIONAL
                                    -Vender Financing                    2006E
       RIGIDITIES      -2.5-3 G Costs, ROI cycle shrinks
                       -IP Standardizing PSTN/Packet Interface
                       -Demand for data service increases complexity
 Mobile Industry Evolution: THE DOUBLE HELIX
  Are we moving horizontally and towards modular products?



                                             Sprint, AT&T,               Nokia, Ericsson,
                                               Cingular,                    Motorola,
                 AT&T & Motorola              Voicestream,               Siemens, Sanyo,
                                               BT,DT,FT,                    Panasonic,
                         INTEGRAL PRODUCT
                                                                          Cisco, Nortel,
                                              MODULAR PRODUCT
           NICHE         VERTICAL INDUSTRY    HORIZONTAL INDUSTRY
        COMPETITORS
                                                                         TECHNICAL
                                                                         ADVANCES

            AMPRS-                                  GPRS, 3G, IP
                                                                    Flextronics & EMS
          HIGH-QoS
                                                                                SUPPLIER
       DIMENSIONAL
                                                                                 MARKET
       COMPLEXITY
                                                                                 POWER

                             PRESSURE TO      PRESSURE TO
        ORGANIZATIONAL      DIS-INTEGRATE      INTEGRATE
           RIGIDITIES                                                PROPRIETARY
                                                                        SYSTEM
                                                                     PROFITABILITY
                                2G-Digital, FCC
                                 PCS Licenses                Qualcomms CDMA, W-
                                                              CDMA, CDMA 2000

(J. Gower & S. Constance, MIT & Siemens)
                     3G System Specification for DSP/Memory[1]



                                  2G Terminal                              3G Terminal
    System Spec                   1998                 2002                  2002

    Memory Size                   4 Mb                 16 Mb               64 Mb

    Radio Channel                 30 MIPS              30 MIPS             > 200 MIPS
    Speech Coding                 3-20 MIPS            3-30 MIPS           30 MIPS
    Voice Control                 -                    50 MIPS             50 MIPS
    Video Coding                  --                   --                  > 200 MIPS
    Processor                     8-16 bit 10 Mhz                          16-32 bit ARM

        [1] Source: Nokia announcement, Electronics Times, March 12 2001,page 65.

    Current Battery Technology -> Power Requirement:             < 200-250 mW



Analysis by Sonny Wu, MIT & Nortel
                          Technology Curves for E2PROM, Java Card and NetCardio[1] Module




  Metric                                             E2PROM                            Java Card                         NetCardio Module

  Memory                                             FLASH                             Embedded Flash                    FeRAM
  Size                                               8-30KB                            64KB                              4-8MB
  Access Time                                        100mSec                           100mSec                           100 nSec
  Energy per 32b write[2]                            1J                               2J                               1nJ
  R/W Cycle                                          500K                              500K                              1010
  Voltage                                            5V                                3.0 V                             1.5 V
  CPU                                                None                              8-16 bit ARM/MIPS                 32bit ARM
  ClockSpeed                                         5-10 Mhz                          50Mhz                             100Mhz
  Current Cost                                       $0.50                             $3-5                              $10*[3]
  [1] NetCardio is an MIT start up by the Author and other Sloan and EECS students working on next generation
  Smart modules for wireless applications using low power Encryption and FeRAM technology.
  [2] Data Source: “A survey of Circuit Innovation in Ferroelectric RAM” by A. Sheikholeslami, Proceedings of The IEEE, Vol.88,No 5, May 2000
  [3] Cost estimated by David Lim of Sloan ( from Chartered Semiconductors) using Flash memory processing data.




Analysis by Sonny Wu, MIT & Nortel
                                        Intelligent Wireless Module®



     Subsystem Spec              Radio/DSP                   Encryption                                FeRAM
     Die Size:                   10 mm2                      50 mm2                                    100 mm2
     Performance:                1000 MIPs                   1024 bit RSA                              4 MB
     Power:                      100 mW                      100 mW                                    50 mW
     Die Cost:                   $5
     Packaging:                  $2
     Testing:                    $3
     Overhead:[1]                $2-$5
     Subtotal Cost               $12-15                      Pricing of Module                         $20-25 each

     [1] assume volume scale of 200M to 500M units/year: equivalent to $1.0 B US of amortization of R&D and Mfg O/H


     1. Low Cost Single Chip Module
     2. Interoperate with wireless appliances
     3. Enabler for Customized wireless services

Analysis by Sonny Wu, MIT & Nortel
                                        Intelligent Wireless Module®



     Subsystem Spec              Radio/DSP                   Encryption                                FeRAM
     Die Size:                   10 mm2                      50 mm2                                    100 mm2
     Performance:                1000 MIPs                   1024 bit RSA                              4 MB
     Power:                      100 mW                      100 mW                                    50 mW
     Die Cost:                   $5
     Packaging:                  $2
     Testing:                    $3
     Overhead:[1]                $2-$5
     Subtotal Cost               $12-15                      Pricing of Module                         $20-25 each

     [1] assume volume scale of 200M to 500M units/year: equivalent to $1.0 B US of amortization of R&D and Mfg O/H


     1. Low Cost Single Chip Module
     2. Interoperate with wireless appliances
     3. Enabler for Customized wireless services

Analysis by Sonny Wu, MIT & Nortel
Mobile Industry Evolution: THE DOUBLE HELIX
Are we moving horizontally and towards modular products?


                                       Sprint, AT&T,               Nokia, Ericsson,
                                         Cingular,                    Motorola,
           AT&T & Motorola              Voicestream,               Siemens, Sanyo,
                                         BT,DT,FT,                    Panasonic,
                                                                    Cisco, Nortel,
                   INTEGRAL PRODUCT     MODULAR PRODUCT
     NICHE         VERTICAL INDUSTRY    HORIZONTAL INDUSTRY
  COMPETITORS
                                                                  TECHNICAL
                                                                  ADVANCES
    AMPRS-QoS                                GPRS, 3G, IP
                                                              Flextronics & EMS
    HIGH-
                                                                         SUPPLIER
 DIMENSIONAL
                                                                          MARKET
 COMPLEXITY
                                                                          POWER

                       PRESSURE TO      PRESSURE TO
  ORGANIZATIONAL      DIS-INTEGRATE      INTEGRATE
    RIGIDITIES                                                 PROPRIETARY
                                                                  SYSTEM
                                                               PROFITABILITY
                          2G-Digital, FCC
                           PCS Licenses                Qualcomms CDMA, W-
                                                        CDMA, CDMA 2000
WILL MOBILE INTERNET BRING BACK
   VERTICAL INTEGRATION
    AND MARKET POWER?
     CHOSEN              CHOSEN
               CHOSEN                CHOSEN
    CONTENT             CONTENT
              CONTENT               CONTENT




                                  PRIVATE
    PRIVATE   PRIVATE   PRIVATE
                                  NETWORK
    NETWORK   NETWORK   NETWORK
OR WILL OPEN-ARCHITECTURE
VOICE PORTALS REINVIGORATE
      THE HOURGLASS



       SHOPPING, PORTALS, SEARCH,
   MUSIC, VIDEOS, JOKES, CHAT, EMAIL,
      PORNOGRAPHY, DATA, ETC.ETC.




           IP/3G/POTS



FIBER OPTIC NETWORKS, CABLE MODEMS,
     DSL CONNECTORS, SWITCHING
        SUBSTATIONS, ETC.ETC.
 WIRELESS VALUE CHAIN:MINI CASE EXAMPLE
Wireless Base Stations (WSB’S) comprise 4 key subsystems:




               Radio
                Part                                              Fiber &
                                           Transmission           Wire-
                                                                  Based
             Digital Signal   Modem        Interface
                                                                  Network
             Processing


   WSB architectures are              Modular WSB’s might
       -integral & proprietary        (1) Stimulate new WSB entrants (ala Dell)
   Suppliers include: Nortel,         (2) Stimulate standard subsystem suppliers
   Moto, Ericsson, Siemens, Nokia     (3) lower prices to the network operators
   Disruptive Modem advances          (4) Speed base station performance imp.
       (e.g., MUD) can double         (5) Increase demand for basestations due
       Base Station Capacity               to improved price-performance ratios.
 Wireless Marketplace            (J. Gower & S. Constance, MIT & Siemens)

 Trends in the Standard Adoption
Clockspeed
 Networks     Spider webs around standards are becoming sticker
              Standards contracting towards a data solution
              Wireless LAN—Death of Home RF
              Narrow bandwidth vs. Broad bandwidth
  Slow
  Devices     Convergence moving towards a single chip
              Components are shared among devices
              Carriers moving towards outsourcing
Quicker

 Middleware   The race is on for a operating system standard
                Will the operating system run on all devices
                Will software radio become the disruptive tech.
              Are ASPs back with wireless applications & solutions?
  Fast!
  Wireless Study             (J. Gower & S. Constance, MIT & Siemens)

 Present Map of Wireless Investment in Standards
              1.0 G                 AMPS                                  NAMPS
Networks
              2.0 G   CDMA IS-95        TDMA          GSM        FDMA          IDEN          PDC
              2.5 G   CDMA 2000        GPRS-eGSM            EDGE-eTDMA          IDEN      HSCSD
              3.0 G           CDMA 2000                                   wCDMA

              LAN          Home RF                      Wi-Fi                    Bluetooth

                           Pagers                     Phones                      PDAs
 Devices      DSP      TI-TMS320C54            ESP              PalmDSP               DSP1609ND
             RAM         SRAMs                FeRAM             SDRAM                 SDRAM

             FLASH      NOR-FLASH               NAND-FLASH                    SST-SuperFLASH




Middleware
              OS      EPOC          Palm OS     Windows CE          MLinux        FLEX        NMS

              AP      WAP/WML         HTML      CDPD        iMode       SMS      MeXe        IASw
 Wireless Study (J. Gower & S. Constance, MIT & Siemens)
  Trends within the value-chain

 Networks      Spider webs around standards are becoming stickier
               Standards contracting towards a data solution
               Wireless LAN may drive standard convergence
               Narrow bandwidth vs. Broad bandwidth

 Devices
               Convergence moving towards a single chip
               Components are shared among devices
               Carriers moving out of manufacturing components
Middleware
               The race is on for a operating system standard
                 Will the operating system run on all devices
               ASPs are back with wireless applications
         Value Chain of Mobile Virtual
          Network Operator (MVNO)


Integrated
                Spectrum                  Authenti-   Distinct              Billing,
                                                                  SIM                   Sales &
                 & Radio       Switches    cation     Number             Customer
                                                                 Cards                 Marketing
              Infrastructure               Center     Series               Service



    Less
 Integrated
                                     MVNO:

                                     - Does not have Spectrum & Radio Infrastructure
                                     - Needs a host network
                                     - Has at least Billing, Customer Service, Sales
                                     and Marketing

Eelco de Jong, MIT
   MVNO Example 1: Virgin Mobile
   -Launched in Nov. 1999 in UK,
   wants to become a global player,
   leveraging its worldwide brand
   -Host network: One 2 One (Deutsche Telekom)
   Virgin purchases wholesale minutes from One 2 One
   -Virgin does not require customers to buy a new handset -
   only a Virgin SIM card (for US$ 20).
   Little handset subsidization. Simple pricing structure

   -Extensive content offering, targeting the mass-market

   -Low ARPU, but also low customer acquisition costs

Eelco de Jong, MIT
     MVNO Example 2: Financial
    Times & Carphone Warehouse



  Announced in March 2001,
  joint venture between FT, Carphone and BT Cellnet

  Targeting business consumers, who will receive
  a WAP-enabled FT-branded phone

  - Financial Times will provide content
  - The retailer Carphone will provide billing, customer service,
   leveraging existing services in this area
  - Cellnet will provide the host network
Eelco de Jong, MIT
  All Conclusions are Temporary

Clockspeeds are increasing almost everywhere

eCommerce is a clockspeed driver

Value chain design is a key competency

Study of eFlies can help with crafting strategy

				
DOCUMENT INFO
Description: Telephone Industry Value Chain Model document sample