UCSD Strategic Innovation Simulation The Back Bay Battery Inc Case Study

Strategic Innovation Simulation:
Back Bay Battery
Debrief Slides
HBP Product No. 8875
This PowerPoint presentation was prepared by Harvard Business School Kim B. Clark Professor of Business Administration Clayton M. Christensen and Harvard Business School Robert and Jane Cizik Professor of
Management Practice in Business Administration Willy C. Shih for the sole purpose of aiding classroom instructors in the use of Strategic Innovation Simulation: Back Bay Battery (HBP No. 8873). HBP educational
materials are developed solely as the basis for class discussion. These materials are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management..
Copyright © 2019 President and Fellows of Harvard College.
What are the major takeaways from the
simulation?
• Examine some strategies that were used throughout the simulation
– Discuss some of the underlying theories used to support those strategies
• Tie back to some theories of investing in disruptive technologies
• What are good ways to evaluate performance?
Copyright © 2019 President and Fellows of Harvard College.
General reflections
•
•
•
•
•
•
How do you feel about the simulation?
Are you getting fired?
Do you have clear strategy in choosing R&D options?
Focusing on AGM or SC or both?
How many options you choose?
How to charge price?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
Copyright © 2019 President and Fellows of Harvard College.
Dashboard Screen
The AGM business
starts out looking
really promising.
Copyright © 2019 President and Fellows of Harvard College.
Features Screen
• The largest customer by volume, are generally ok with the AGM product features
– But would like to see a little better energy density and self discharge
Copyright © 2019 President and Fellows of Harvard College.
Features Screen (continued)
• The largest customer by volume, are generally ok with the AGM product features
– But would like to see a little better energy density and self discharge
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• There are a lot of opportunities to spend money on R&D, but most of
those investments will take several years to show results
– In the grand scheme of the sim, is it wise to invest in R&D?
Copyright © 2019 President and Fellows of Harvard College.
R&D investment S-curve
• Due to the S-curve, R&D investment needs some strategical planning.
• It takes time to reach technology breakthourgh.
• Can not try frequent switch of R&D without reaching breakthrough
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
As long as customer needs are met, sales and profits should keep
growing, right?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• Not always – it’s very hard to forecast market downturns and growth
spurts.
– What can cause these unforeseen market changes?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• Declining sales in AGM caused a big miss in the AGM sales estimate, while
supercapacitors exceeded their sales estimate
• Probably need to adjust to the new sales trend in the next period
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
The most glaring problem is that the supercapacitors were sold at a
negative gross margin.
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
The biggest impact on the negative margin was on the amount of
money available to spend on R&D.
Copyright © 2019 President and Fellows of Harvard College.
Class Data: Best Scores

Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Cumulative Profit
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Cumulative Profit
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Notable Runs
•
•
•
•
•
•
•
•
Successful transition to new technology: the run with at least 50% of R&D money
on SC investment with maximum SC revenue growth rate.
Less successful transition to new technology: the run with the lowest SC revenue
growth that spent at least 70% of R&D on SC investment.
Commitment to mature technology: the run with most R&D money (min 50% of
the R&D budget) spent on AGM investment with lower SC revenue growth.
Focused R&D strategy: the run with the highest cumulative profit that invested in 3
or fewer R&D categories in the first 4 round of the simulation
Scattered R&D strategy: the run with the lowest cumulative profit that invested in
at least 6 R&D investment in the first 4 round of simulation.
Long term horizon strategy: the run with the highest revenue growth rate in final
year with continued R&D investment throughout the entire simulation
Finite horizon strategy: the run with the lowest revenue growth rate and halted
R&D investment in the final years.
Rapid erosion of core business: the run with least profitability and the lower 20% of
cumulative AGM revenue.
Copyright © 2019 President and Fellows of Harvard College.
Notable Runs
Copyright © 2019 President and Fellows of Harvard College.
Applying Theories
Copyright © 2019 President and Fellows of Harvard College.
Too Much Data?
The amount of data in the simulation can be overwhelming, making it hard to pick out
the pieces of information that are relevant.
All of the information is about prior periods, telling us little about the future.
Copyright © 2019 President and Fellows of Harvard College.
Disruptive Innovations
•
•
As is the case with most disruptive innovations, supercapacitors are not initially
“good enough” for the majority of markets
– This doesn’t mean that they aren’t selling – they are, just in much smaller amounts
Pay attention to improvement trajectory. As technology improves, it is increasingly
able to serve mainstream customers.
Copyright © 2019 President and Fellows of Harvard College.
Disruptive Innovation
•
•
As is the case with most disruptive innovations, supercapacitors are not initially
“good enough” for the majority of markets
– This doesn’t mean that they aren’t selling – they are, just in much smaller amounts
Pay attention to improvement trajectory. As technology improves, it is increasingly
able to serve mainstream customers.
Copyright © 2019 President and Fellows of Harvard College.
Deliberate vs. Emergent Strategies
•
•
Deliberate (rationalist) strategy: learn->act
Emergent (incrementalist) strategy: act->learn
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan: Thinking About Key Platforms
More
Less
Nature of Technological
Change
More
Create new
market
Radical
Next
generation
Improvement
Impact on Market
Reach new
customers
Sell more products to
existing customers
Less
Replace current
products
Breakthrough
projects
Platform
projects
Derivative
projects
Product/
brand support
Base
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan: Thinking About Key Platforms
• Breakthrough projects: typically employ significant changes to technologies and
processes.
• Platform projects: are those from a market standpoint, enable a company to
reach new customers. They generally don’t introduce new and untried
technologies and process, but they can provide a foundation for other derivative
products.
• Derivative projects: tend to be incremental, i.e., cost-reduction of existing
products or straightforward add-ons or enhancements to existing products or
process.
• Product and brand support projects: are small incremental refinement to
packaging or positioning and generally don’t require a lot of resources.
• Focus investments in key areas
– The classic mistake is to spread investments over too many projects, which results in feature
improvements not being completed in a timely manner
– Staying specialized in a few areas will also increase marketability – not one product can be the
best at everything, so excelling in one area can help increase desire for the product
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan:
• In a new market or one that is undergoing radical changes, the resource
allocation process as moving from right to left.
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan:
• When deliberate strategy making needs to prevail, the process flows more
from left to right.
Copyright © 2019 President and Fellows of Harvard College.
R&D Never Has Enough Funding
If investments get spread too thin, or features aren’t continually kept up to
customer demands, it’s hard to get the feature performance improvements as
early as one may like (and even need) in order to sell the product.
Copyright © 2019 President and Fellows of Harvard College.
Managing R&D Investments
Carefully managing the
number and timing of
R&D investments is the
key to delivering
performance
improvements that
matter (for example,
supercapacitors need a
high energy density).
Copyright © 2019 President and Fellows of Harvard College.
Managing R&D Investments
Carefully managing the number and timing of R&D investments is the key to
delivering performance improvements that matter (for example, supercapacitors
need a high energy density).
Copyright © 2019 President and Fellows of Harvard College.
Day-to-Day Management
Prices must be tracked and continually observed in commodity markets,
such as the battery market. However, product differentiation can
command higher prices than the less specialized competition.
Copyright © 2019 President and Fellows of Harvard College.
Profit or Market Share?
•
There are two main outcomes from pricing the supercapacitors strategically
– Price the battery well below the variable cost and gain market share while incurring a segment loss
– Price the battery slightly below, at, or above cost to increase profits
Copyright © 2019 President and Fellows of Harvard College.
Choosing Market Share
Karina decided to forward-price supercapacitors, keeping the initial $20 price, which was
below variable cost. She invested heavily in SC process improvements (top cumulative
R&D investment) to bring costs down. Once she started seeing a positive gross margin she
dropped her price, but more slowly than costs fell.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Market Share
This gave her strong unit growth in supercapacitors, particularly in the
UPS Segment.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Profit
In contrast, Nolan raised his supercapacitor selling price to $25 so that he at least had
a positive gross profit on sales. He also invested heavily in supercapacitor process
improvement and started bring his price down as he saw cost improvements.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Profit
Nolan took a hit on supercapacitor sales in Year 3 when he increased prices,
and ultimately it looks like he did not have as good a market position as Karina.
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Profit Growth Rate
Interestingly, while Nolan had a higher cumulative profitability growth
rate in supercapacitors of 41.3% vs. -8.9% for Karina, Karina saw a similar
outcome in total revenue from supercapacitors of $7.2 M compared to
Nolan, with $7.4 M.
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Contribution Margin
If we export and plot the profit contributions for the entire time period for
Karina (left) and Nolan (right), we can see that Karina “dug a deeper hole”
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Net Income
And Karina went into the red one year while Nolan was able to stay in the black.
Karina took more risk towards getting fired but managed to save herself in
subsequent years.
Copyright © 2019 President and Fellows of Harvard College.
Forecasting Sales
• Estimating sales, especially of an emerging technology, is challenging for any
company
– Sales are dependent on the set price relative to the market price and the feature performance
of the product compared to desired attributes among competitors
Copyright © 2019 President and Fellows of Harvard College.
Got Fired?
Most managers will get fired for missing sales estimates by too much,
but you can also get fired for losing money three years in a row.
Copyright © 2019 President and Fellows of Harvard College.
Judging Performance
Copyright © 2019 President and Fellows of Harvard College.
Is cumulative profit a good measure?
How do we measure managers?
The going forward value of the business is more dependent on strategic
positioning and future prospects than on past cumulative earnings
Copyright © 2019 President and Fellows of Harvard College.
Key Takeaways
Copyright © 2019 President and Fellows of Harvard College.
The keys to win
Copyright © 2019 President and Fellows of Harvard College.
Challenge Once Again?
Copyright © 2019 President and Fellows of Harvard College.
Advanced Case
• Each period, you need to forecast your sales by
yourself
• Your R&D will be 2-3% of your current forecasted
sales
– The more aggressive your forecast is, the more R&D you
will get
• You will get fired if:
– A significantly negative sales forecast variance in a year
– A consistently negative sales forecast variance of 3 years in
a row
– Or large negative operating profits
Copyright © 2019 President and Fellows of Harvard College.
Strategic Innovation Simulation Self-Reflection Report
This simulation is designed to bridge theories in innovation and the impact of an
emerging, disruptive technology to the real-world context in which managers must make
decisions about investing in innovative technologies under conditions of uncertainty. The
simulation takes you within a decision context where you have to make investment
choices in both mature and emerging technologies under uncertain—and highly
constraining—real-world conditions.
During the simulation, each student will have an opportunity to test various
strategies in an effort to optimize the firm’s profitability over a number of years. View
each repetition as an “experiment” and try to learn the most from it. You will be given
enough “trials” to be able to develop a sensible strategy on how to approach the
investment decision in the specific decision context.
After the simulation, each one of you has to spend time debriefing your strategies
and the lessons learned during the simulation. You are asked to prepare a write-up
(around 3 pages plus needed exhibits) to address the following questions. The deadline
for submitting the simulation report is Mar 15th before class via Turnitin link created in
course content folder.
1. Explain the rationale of your most successful strategy in the simulation. How
did you arrive to this rationale? Did you pursue sustaining or disruptive
innovation strategies as part of your resource (investment) allocation decisions?
Were they successful? What data did you use to decide which target markets to
use for your different products? What was your experimentation strategy in using
the different trials? In your report, you have to clearly explain the used logic, and
also show me the outcomes of the strategy. (Use relevant data and graphs from
the simulation. All your data is archived and you can access it easily.)
2. If you had one more trial effort, what would you have done differently, and
why? Clearly explain the weaknesses of your previous efforts, and convince us on
the benefits of your proposed but untested strategy in this new trial.
3. Going beyond the narrow confines of the simulation, summarize the lessons
you learned via the simulation about investments in innovation in a multiproduct/multi-project organizational context, and on the challenges of allocating
resources between existing technologies & products and new technologies.
Strategic Innovation Simulation: Back Bay Battery
Foreground Reading
Overview
Energy storage plays an important role almost anywhere electricity is used. Portable devices such as
flashlights, phones, laptops, and electric vehicles are familiar to almost everyone, and they typically store
energy in some type of rechargeable battery. Rechargeable batteries and other types of temporary energy
storage systems also play an important role in many systems that are connected to the electrical grid.
Large computer datacenters have warehouse-sized banks of batteries that keep the machines running
during the 10 to 15 seconds it takes to start up backup generators. Off-grid solar and wind power
systems, environmental control systems, and uninterruptable power systems (UPS) also rely on some
kind of energy storage systems to bridge short term outages and provide stable power for a wide range of
applications. This diversity of applications has made battery-based energy storage an enormous, but still
growing, market.
One of the earliest forms of rechargeable battery was the lead-acid battery. The basic design of leadacid batteries was a “flooded cell” with lead plates immersed in a chemical electrolyte (usually sulfuric
acid). Powering the starter motor for automobiles made lead-acid batteries extremely popular, and today
they are widely used in all kinds of vehicles, sometimes even as the primary power source (for example,
in golf carts or fork lift trucks). They are inexpensive and can provide large surges of power on demand.
Their primary disadvantage is that they are heavy for the amount of energy stored, which matters less for
stationary applications. There is an important specialized class of lead-acid batteries known as valveregulated lead-acids (VRLA). These use the same chemistry, but are packaged so that they have better
reliability and performance. The most popular variants are the gel battery (“gel cell”), which uses a semisolid electrolyte, and the absorbed glass mat (AGM) battery which uses a thin ultrafine fiberglass mat to
absorb the electrolyte and separate the lead plates. Both of these types are much easier to handle and
withstand vibration and extreme conditions well. They also withstand freezing better than flooded-cell
batteries, which might experience case cracking.
Smaller rechargeable batteries began as replacements for disposable batteries, and used technologies
like nickel-cadmium (NiCd), nickel-iron (Ni-Fe), nickel metal hydride (NiMH), lithium ion (Li-ion), and
This text was written by Harvard Business Professors Clayton Christensen and Willy Shih for Strategic Innovation Simulation: Back Bay Battery
(HPB No. 8873) for the sole purpose of aiding classroom instructors in the use of the simulation. This text and the simulation are developed
solely as a basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2019 Harvard Business School Publishing. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the
permission of Harvard Business Publishing.
Harvard Business Publishing is an affiliate of Harvard Business School.
lithium polymer. As demands for portable electronic devices rose, makers responded with new sizes and
custom packaging to meet the unique needs of customers.
Li-ion batteries have become the most popular battery chemistry for portable applications today. There
are several different chemical formulations. Portable electronics mostly use a lithium cobalt oxide
chemistry because of their very high energy density, albeit with some safety risks. Lithium iron
phosphate, lithium ion manganese oxide, and lithium nickel manganese cobalt oxide are targeted at
applications like power tools or electric vehicles. There is a fast pace of continuing innovation in different
lithium battery chemistries.
Important battery performance criteria include the following:
•
Energy density. A battery with a higher energy density can store more charge, and thus could
power a device for a longer time, or deliver more power in the same time. This is important for
portable devices. Sleek industrial designs for smartphones, tablets, and laptops drove increasing
demand for thin conformal-fitting Li-ion batteries, while the desire for maximal driving range drove
constant innovation in battery chemistry and packaging.
•
The number of times a battery can be recharged. This is also referred to as recharge cycles. Most
batteries can only go through a limited number of deep discharge-recharge cycles. Many batteries
typically can only stand a few thousand cycles and then they need to be replaced. This is a challenge
for portable device designers; the first failure mode of a smartphone is often the battery’s inability
to hold a charge.
•
Self-discharge to 50%. The time it takes for a battery to self-discharge. Most rechargeable batteries
lose some amount of their charge just sitting on a shelf. This limits their application in devices such
as safety equipment that might sit for unpredictable time periods between use.
•
Recharge time. Fast recharge time is usually a consumer benefit, especially for things like mobile
phones or electric vehicles.
•
Cost. Since small rechargeable batteries tend to come in standard form factors and output voltages,
they are a fungible commodity with almost no barriers to substitution. Different battery types might
require different chargers, but in general the low substitution costs make batteries a highly
competitive commodity.
Historically, battery makers have focused on relatively narrow product segments and technologies.
Disposable battery makers did not become major players in rechargeables, and rechargeable battery
manufacturers tended to stick with a particular technology or product focus (portable electronics, electric
vehicles, etc.).
Back Bay Battery, Inc.
Back Bay Battery started out as a specialist in sealed AGM-type lead-acid batteries. They focused on
industrial applications where the ability to store and deliver power in short surges made them more
attractive than Li-ion batteries. Though AGM batteries were about three times more expensive than
standard flooded cell lead-acids, they were considerably cheaper than Li-ion batteries. They also had
roughly twice the lifetime of conventional lead-acid batteries, and because they were sealed and didn’t
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
2
discharge fumes on overcharging, they found special favor in applications on ships and military
equipment.
Back Bay built a solidly profitable business as a supplier to integrators who built uninterruptible
power supplies both for large systems used in datacenters and the smaller units designed to keep back
office computers or point-of-sale systems running during short outages. The other area where the
company found success was power-management applications requiring many rapid charge/discharge
cycles for short-term power needs.
Back Bay Battery sells into three main market segments that are organized by application type:
•
Automobiles. Several characteristics of AGM batteries make them attractive for high end vehicles.
They can be placed somewhere in the interior of the vehicle or the trunk since they are sealed. The
rising popularity of start-stop engine technology (which improves fuel economy) means an
increased demand from automakers because AGM technology is well suited to the increased
power demands and frequent cycling. They are also beginning to be used for braking energy
recovery (regenerative braking). A generator attached to the drivetrain of a popular European SUV
captures the energy released during braking and uses it to power the many electrical subsystems
on the vehicle. Both of these applications improved fuel efficiency.
•
Warehouse equipment. Automated logistics warehouses use many pieces of equipment that use
electrical power, such stackers and robots, and Back Bay has carved out a growing niche, supplying
batteries for these systems. Many of these systems draw high startup power and they need to
undergo frequent charging cycles.
•
Uninterruptible power systems (UPS). This segment includes backup power systems for large
datacenters. Warehouse-sized rooms are filled with batteries that are switched in to provide power
in the event of an outage. The batteries only need to supply electricity for about 15 seconds, which
is the amount of time it would take to spin up standby diesel generators.
While Back Bay management is quite confident of these three market segments, a widespread interest
in battery technology for pure electric vehicles means large competitive investments in R&D.
Enhancing AGM Lead-Acid Technology
Back Bay Battery spends approximately 2–3% of revenue on R&D. It benefits from some of the
improvements and learning curves resulting from investments made by both itself and others in the
technology. R&D investments can be in things like self-discharge or increasing energy density. They can
also be in process improvement, which is focused on reducing the production cost (often by improving
the yield).
Freshly charged batteries of all types inevitably lose some amount of their charge over time. Back Bay
Battery has been spending to reduce this self-discharge, leading to substantial improvements over the last
two years. Not making the investment would potentially cause the company to be disadvantaged relative
to its competitors. Its AGM batteries are about 3–10 times better than gel cells, and 5–50 times better than
their flooded cell counterparts. The company could spend R&D money in other areas as well. Process
improvement is most likely to lead to manufacturing yield improvements and lower product costs,
though the company is relatively far down the learning curve. If it wants to keep improving energy
density, that is probably one of the more expensive and longer-range R&D programs to invest in. Price
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
3
competition is getting increasingly intense, so the company has to be very careful how it spends its R&D
budget.
Capacitors: An Alternative Energy Storage Device
A capacitor is a device that is made of two electrodes separated by an insulator (a dielectric). When
attached to a voltage source, it can store up charge (energy). If the charging source is removed, it will
then discharge back into the circuit. How much charge a capacitor can store depends on the quality of the
dielectric, the voltage that is applied, and the surface area of the electrodes.
The energy stored in a capacitor is proportional the capacitance, C, and to the square of the voltage, V,
that is applied:
Estored = ½ CV2
To increase the energy stored, one simply needs to increase the capacitance. The most common
capacitors are composed of thin metal foil plates separated by an electrical insulator, which are then
stacked or rolled and placed in a casing. Increasing the capacitance is the major technical challenge.
Capacitors could be wonderful energy storage devices. They charge much more quickly than any kind
of battery, and they don’t have the problem of battery memory or limitations on the number of charging
cycles because there are no chemical reactions that go on inside a capacitor, they simply store charge. The
challenge has been the physical size that is required to store a given amount of energy.
Supercapacitors
Supercapacitors (also known as ultracapacitors) first emerged from research at General Electric in the late
1950s, but there were no known commercial applications at the time. They are essentially a double layer
capacitor that can store far more energy than a typical capacitor, but at a lower voltage. Recently
technological progress has continued to improve their properties. Materials used in making them have
been the subject of intense research in universities and government research laboratories.
Supercapacitors have several major advantages compared to batteries. First and foremost, they can
withstand far more recharge cycles than typical batteries. While an AGM lead-acid might withstand
1500–2000 discharge/recharge cycles, a supercapacitor would see little to no degradation over time. The
other advantage is they have the ability to deliver huge surges of power as well as recharge quickly. This
is reflected in a fast recharge time—they can charge and discharge quickly.
The major disadvantage of supercapacitors is their lower energy density. Current technology
supercapacitors would only be able to hold 10 watt hours/kg, which means that even though they deliver
a lot of power quickly, they can’t sustain this over a long time. The other disadvantage is self-discharge
rate. Supercapacitors lose 40–50% of their energy over the course of a month if they just sat unused. The
AGM versus Supercapacitor table provides a performance comparison for AGM lead-acid batteries and
supercapacitors.
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
4
AGM Lead-Acid versus Supercapacitor Performance Comparison
Characteristics
Energy Density (watt hours/kg)
Power Density (watts/kilograms of weight)
Maximum Number of Recharge Cycles
Recharge Time
Self-discharge (% of charge lost per month)
AGM Lead-Acid
Supercapacitor
55–95
4–10
250
3,000–40,000
1,500–2,000
500,000–1,000,000
3 hour
1 minute
2%
40–50%
Note: Energy density measures how much energy can be stored for a given weight of battery or supercapacitor. Power is measured
in watts, is how much energy can be delivered per second. A high power density means a lot of energy can be deliver per second
given the weight of the battery or supercapacitor. While energy density was traditionally measured in watt hours per liter of
volume, Back Bay used standard package sizes and measured R&D progress in watt hours/kg, a metric that was important to its
customers.
Supercapacitors are thought to be ideal for applications that required bursts of power. Several groups
are also looking at hybrid applications. By pairing a supercapacitor with a battery, one would be able to
reduce the duty cycle on the battery and prolong its life, meaning that in an emergency backup power
supply the supercapacitor could be used to provide short spikes of power, prolonging the life of the
battery that would take care of longer outages. Similarly, in a hybrid car a supercapacitor could collect
the energy from dynamic braking and then feed it into the battery.
The technology for supercapacitors is available for licensing from the leading university research
group. Considerable commercialization work is yet to be done, but some early promising product
applications include emergency lighting, backup power supplies, and portable power tools.
For Back Bay Battery, the R&D investment would be considerable, projects can cost anywhere in a
range of $1–7 million a year for four to over seven years. This reflects the nature of most of the R&D
projects being people and time intensive. Worse yet, there are three major fronts to invest in, and it is
difficult to assess what competitors are setting as their spending priority.
Estimated Project Investments
Available R&D
Projects
Annual
Project Cost
(in millions)
Anticipated
Project Length
Total Cost
(in millions)
AGM Lead-Acid:
Energy Density
$3.0–9.0 M
4–6 years
$12.0–54.0 M
AGM Lead-Acid:
Recharge Cycles
$1.0–6.0 M
5–8 years
Potential
Improveme
nt Range
Types of Projects
900–5,200
watt
hours/kg
AGM battery chemistry is
well established.
Improvements in energy
density rely on changing the
formulation or internal plate
and mat design.
530–1,050
Doubling the number of
recharge cycles will greatly
enhance the value
proposition of AGM cells,
roughly doubling their life
and improving total cost of
$5.0–48.0 M
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
5
Available R&D
Projects
Annual
Project Cost
(in millions)
Anticipated
Project Length
Total Cost
(in millions)
Potential
Improveme
nt Range
Types of Projects
ownership. This could have
a subsidiary impact on
revenue as customers would
not need to replace them as
often. This project would
entail studying the
chemistry and trying to
eliminate causes of
degradation during deep
discharge cycles.
AGM Lead-Acid:
Self-discharge Rate
$2.0–4.0 M
5–8 years
4–7 years
Supercapacitors:
Energy Density
$4.0–10.0 M
4–7 years
5–7 years
105–210
minutes
Rapid recharging improves
value proposition. Look at
the granularity and
distribution of materials
used in manufacturing and
whether there are alternate
structures or manufacturing
methods that lead to faster
recharging.
10–56%
reduction in
unit costs
Process improvement
activities could include
substitutions of less
expensive materials in the
battery casing or packaging,
better utilization of
manufacturing capacity
through kaizen-style
continuous improvement, or
a more efficient supply
chain and materials
handling. Any
improvements at this point
are likely to be hard work,
and the sum of many small
improvements rather than
any large dramatic changes.
900–1,700
watt
hours/kg
Energy density is limited by
the surface area of
electrodes and the spacing
between them. This project
would look at a new type of
$4.0–35.0 M
AGM Lead-Acid:
Process Improvement
$1.0–6.0 M
This will make AGM
batteries more appealing for
devices that do not have
regular access to power. A
project would probably look
at separator layers and
consider material
substitutions to decrease
internal leaking.
$10.0–32.0 M
AGM Lead-Acid:
Recharge Time
$1.0–5.0 M
11–21
months
$4.0–42.0 M
$20.0–70.0 M
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
6
Available R&D
Projects
Annual
Project Cost
(in millions)
Anticipated
Project Length
Total Cost
(in millions)
Potential
Improveme
nt Range
Types of Projects
carbon nanotubes for
application as the electrode.
Supercapacitors:
Recharge Cycles
8,750–17,490
$2.0–9.0 M
5–8 years
$10.0–72.0 M
Supercapacitors:
Self-discharge Rate
$2.0–8.0 M
5–8 years
$1.0–6.0 M
5–7 years
5–7 years
Self-discharge tends to be
through charge leakage
paths, although the root
cause needs to be
understood. Improvement
projects would seek to
reduce these through
substitution of materials.
9–17
minutes
Recharge time is highly
dependent on voltage. This
project would examine
different configurations and
cell voltages to see if there is
a more effective solution.
10–74%
reduction in
unit costs
Manufacturing costs are still
very high because
supercapacitors are early on
the learning curve. Much
work needs to be done on
basic manufacturing process
improvements and supply
chain management.
$5.0–42.0 M
Supercapacitors:
Process Improvement
$3.0–7.0 M
32–63
months
$10.0–64.0 M
Supercapacitors:
Recharge Time
Supercapacitors can already
go through an enormous
number of recharge cycles.
Improvement projects
would have to examine the
root cause of eventual
breakdown and try to
develop solutions around it.
$15.0–49.0
Note: Improvements come from company R&D and to some extent from key materials suppliers’ R&D.
Planning R&D Investments
Market pressures on pricing mean that Back Bay Battery never has quite enough R&D money to spend on
everything its research staff would like to do. On the one hand, the team gets daily pressure from the
sales organization to improve the company’s AGM battery offerings because, in this commodity business,
small performance or technical advantages can swing a large order as pricing is pretty competitive. The
company can tweak its demand by adjusting prices, but needs to be careful not to lose a big customer in
the process. Back Bay also has to factor in how long it will take for those investments to bear fruit. While
some of the scientists wax poetic about the potential of supercapacitors, the technology has major
shortcomings for Back Bay’s core markets today, and the company has to be careful not to dig too deep a
hole financially.
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
7
The product manager at a major auto maker (who happens to be one of Back Bay’s largest customers)
has been encouraging the company to focus on its specific needs for an upcoming refresh of its SUV line.
The customer is looking for higher power density and lower unit battery costs, as they are feeling market
pressure from Asian competitors. He has been shopping for competitive AGM batteries sourced offshore,
and has made clear to Back Bay the importance of remaining price competitive. The rapid recharge time
for supercapacitors would be appealing if the storage capacity were much larger. Focusing on this
customer would consume essentially all of the company’s limited R&D resources.
HAR V AR D B U S INES S P U B LIS HING | Strategic Innovation Simulation: Back Bay Battery
8
LGT5426
Managing Innovation
Session 7
Instructor: Dr Guang Xiao
Review of Session 6
▪ Project management simulation
▪ Balancing three dimensional tradeoffs: cost, schedule, and scope
▪ Causal relations between various decision and project performance.
Session agenda
▪
▪
Agile Implementation
Strategic Innovation Simulation
Date
Topics
1
11/01
Course outline/Introduction
2
18/01
Innovation Strategy
3
25/01
Search for Innovation
4
08/02
Innovation Selection
5
15/02
Innovation Implementation/
Project Management Simulation
6
22/02
Simulation Debriefing/
Innovation Implementation
7
01/03
Strategic Innovation Simulation
8
08/03
Simulation Debriefing/
Capture Innovation Value
9
15/03
Supply Chain Innovation Overview
Process Innovation
10
22/03
Process Innovation
11
29/03
Business Model Innovation
12
05/04
Ching Ming Festival
No Class
13
12/04
Final project presentation
Theme
Effectively Managing
Innovation
Recent Innovation
Applications
Introduction to
Strategic Innovation Simulation
Introduction to Simulation
▪ Learning Objectives
▪ Disruptive vs. Sustaining Innovation
▪ Innovation project selection
▪ Portfolio management
▪ R&D allocation between competing innovation projects
▪ Coordinate market price strategy with R&D investment
Background
▪ Industry context:
▪ Battery industry : 45B$.
▪ Fragmented : 20 manufacturers.
▪ Back bay battery is specialist in sealed AGM-type-acid batteries
▪ Cheaper than Li-ion batteries
▪ Twice the lifetime of conventional lead-acid batteries
Background
▪ Battery performance criteria
▪ Energy density: a battery with a higher energy density can store more charge
and could power a device for a longer time, or deliver more power in the same
time.
▪ Recharge cycles: the number of times a battery can be recharged. The more
the better.
▪ Self-discharge to 50%: the time it takes for a battery to self-discharge. The
longer the better.
▪ Recharge time: The faster the better
▪ Cost: standard rechargeable batteries have the same technical specifications,
and is regarded as commodity. Thus, the cheaper the better.
Background
▪ Back bay sells AGM batteries into three major market segments:
▪ Automobiles: AGM technology is well suited to the increased power
demands and frequent cycling. An increased demand from automobiles due to
the rising popularity of start-stop engine technology.
▪ Warehouse equipment: Automated logistics use electronic power. Many of
these systems draw high startup power and they need to undergo frequent
charging cycles.
▪ Uninterruptible power system (UPS): including backup power systems for
large datacenters. Usually, the battery only need to supply electricity for
about 15 seconds.
Background
▪ Besides specializing in AGM battery technology, the company is also
consider invest and adopt the emerging technology of supercapacitors (SC).
Management Challenges
▪ Back bay battery spends approximately 2-3% of revenue on R&D.
▪ You are the manager in charge of both innovation investment and sales of
both battery products (AGM and SC).
▪ For each type of battery, you can invest to improve the specific performance
along the following dimensions:
▪ Energy density
▪ Recharge cycles
▪ Self-discharge rate
▪ Recharge time
▪ Process improvement (to reduce cost)
Management Challenges
▪
Current view of Super Capacitors: The technology has major shortcomings for Back Bay
core markets today
▪
View of a current customers (automobile)
▪ Needs higher power density at lower prices.
▪ Feels market pressure from Asian Competitors.
▪ Rapid recharge time for ultra capacitors very appealing , but needs much larger storage capacity
▪
Your challenges in making R&D investment:
▪ Investment takes years
▪ Every year you have limited budget to spend.
▪ Different market segment may require different product requirement
▪
Beyond the R&D investment decision, you also need to set prices for each of the two
product.
▪
▪
Demand and market trend are random
Price needs to be competitive in order to win orders.
Performance Evaluation
▪ Sum of Net Profits (from year 2 to year 10.): This is only one of the many
performance criteria.
▪ Market Profile at the End
▪ Market share and growth trajectory in each one of the segments.
▪ Sound Strategic Rationale of Pursued Investments.
▪ Be careful: You can be fired if you incur a large negative operating profit.
▪ You can play the simulation for 15 times. Please do try for different strategies
in making the investment and pricing decisions.
▪ Short term 8 years perspective
▪ Long term over 8 years in the future, how competitive the company is
Now till 3:10pm
Strategic Innovation Simulation:
Back Bay Battery
Debrief Slides
HBP Product No. 8875
This PowerPoint presentation was prepared by Harvard Business School Kim B. Clark Professor of Business Administration Clayton M. Christensen and Harvard Business School Robert and Jane Cizik Professor of
Management Practice in Business Administration Willy C. Shih for the sole purpose of aiding classroom instructors in the use of Strategic Innovation Simulation: Back Bay Battery (HBP No. 8873). HBP educational
materials are developed solely as the basis for class discussion. These materials are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management..
Copyright © 2019 President and Fellows of Harvard College.
What are the major takeaways from the
simulation?
• Examine some strategies that were used throughout the simulation
– Discuss some of the underlying theories used to support those strategies
• Tie back to some theories of investing in disruptive technologies
• What are good ways to evaluate performance?
Copyright © 2019 President and Fellows of Harvard College.
General reflections
•
•
•
•
•
•
How do you feel about the simulation?
Are you getting fired?
Do you have clear strategy in choosing R&D options?
Focusing on AGM or SC or both?
How many options you choose?
How to charge price?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
Copyright © 2019 President and Fellows of Harvard College.
Dashboard Screen
The AGM business
starts out looking
really promising.
Copyright © 2019 President and Fellows of Harvard College.
Features Screen
• The largest customer by volume, are generally ok with the AGM product features
– But would like to see a little better energy density and self discharge
Copyright © 2019 President and Fellows of Harvard College.
Features Screen (continued)
• The largest customer by volume, are generally ok with the AGM product features
– But would like to see a little better energy density and self discharge
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• There are a lot of opportunities to spend money on R&D, but most of
those investments will take several years to show results
– In the grand scheme of the sim, is it wise to invest in R&D?
Copyright © 2019 President and Fellows of Harvard College.
R&D investment S-curve
• Due to the S-curve, R&D investment needs some strategical planning.
• It takes time to reach technology breakthourgh.
• Can not try frequent switch of R&D without reaching breakthrough
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
As long as customer needs are met, sales and profits should keep
growing, right?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• Not always – it’s very hard to forecast market downturns and growth
spurts.
– What can cause these unforeseen market changes?
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
• Declining sales in AGM caused a big miss in the AGM sales estimate, while
supercapacitors exceeded their sales estimate
• Probably need to adjust to the new sales trend in the next period
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
The most glaring problem is that the supercapacitors were sold at a
negative gross margin.
Copyright © 2019 President and Fellows of Harvard College.
Challenges Facing the Manager
The biggest impact on the negative margin was on the amount of
money available to spend on R&D.
Copyright © 2019 President and Fellows of Harvard College.
Class Data: Best Scores
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Cumulative Profit
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Cumulative Profit
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Sales Growth (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Profitability Trend (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (AGM)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Best Scores: Revenue (Supercapacitor)
Copyright © 2019 President and Fellows of Harvard College.
Notable Runs
•
•
•
•
•
•
•
•
Successful transition to new technology: the run with at least 50% of R&D money
on SC investment with maximum SC revenue growth rate.
Less successful transition to new technology: the run with the lowest SC revenue
growth that spent at least 70% of R&D on SC investment.
Commitment to mature technology: the run with most R&D money (min 50% of
the R&D budget) spent on AGM investment with lower SC revenue growth.
Focused R&D strategy: the run with the highest cumulative profit that invested in 3
or fewer R&D categories in the first 4 round of the simulation
Scattered R&D strategy: the run with the lowest cumulative profit that invested in
at least 6 R&D investment in the first 4 round of simulation.
Long term horizon strategy: the run with the highest revenue growth rate in final
year with continued R&D investment throughout the entire simulation
Finite horizon strategy: the run with the lowest revenue growth rate and halted
R&D investment in the final years.
Rapid erosion of core business: the run with least profitability and the lower 20% of
cumulative AGM revenue.
Copyright © 2019 President and Fellows of Harvard College.
Notable Runs
Copyright © 2019 President and Fellows of Harvard College.
Applying Theories
Copyright © 2019 President and Fellows of Harvard College.
Too Much Data?
The amount of data in the simulation can be overwhelming, making it hard to pick out
the pieces of information that are relevant.
All of the information is about prior periods, telling us little about the future.
Copyright © 2019 President and Fellows of Harvard College.
Disruptive Innovations
•
•
As is the case with most disruptive innovations, supercapacitors are not initially
“good enough” for the majority of markets
– This doesn’t mean that they aren’t selling – they are, just in much smaller amounts
Pay attention to improvement trajectory. As technology improves, it is increasingly
able to serve mainstream customers.
Copyright © 2019 President and Fellows of Harvard College.
Disruptive Innovation
•
•
As is the case with most disruptive innovations, supercapacitors are not initially
“good enough” for the majority of markets
– This doesn’t mean that they aren’t selling – they are, just in much smaller amounts
Pay attention to improvement trajectory. As technology improves, it is increasingly
able to serve mainstream customers.
Copyright © 2019 President and Fellows of Harvard College.
Deliberate vs. Emergent Strategies
•
•
Deliberate (rationalist) strategy: learn->act
Emergent (incrementalist) strategy: act->learn
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan: Thinking About Key Platforms
More
Less
Nature of Technological
Change
More
Create new
market
Radical
Next
generation
Improvement
Impact on Market
Reach new
customers
Sell more products to
existing customers
Less
Replace current
products
Breakthrough
projects
Platform
projects
Derivative
projects
Product/
brand support
Base
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan: Thinking About Key Platforms
• Breakthrough projects: typically employ significant changes to technologies and
processes.
• Platform projects: are those from a market standpoint, enable a company to
reach new customers. They generally don’t introduce new and untried
technologies and process, but they can provide a foundation for other derivative
products.
• Derivative projects: tend to be incremental, i.e., cost-reduction of existing
products or straightforward add-ons or enhancements to existing products or
process.
• Product and brand support projects: are small incremental refinement to
packaging or positioning and generally don’t require a lot of resources.
• Focus investments in key areas
– The classic mistake is to spread investments over too many projects, which results in feature
improvements not being completed in a timely manner
– Staying specialized in a few areas will also increase marketability – not one product can be the
best at everything, so excelling in one area can help increase desire for the product
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan:
• In a new market or one that is undergoing radical changes, the resource
allocation process as moving from right to left.
Copyright © 2019 President and Fellows of Harvard College.
Aggregate Project Plan:
• When deliberate strategy making needs to prevail, the process flows more
from left to right.
Copyright © 2019 President and Fellows of Harvard College.
R&D Never Has Enough Funding
If investments get spread too thin, or features aren’t continually kept up to
customer demands, it’s hard to get the feature performance improvements as
early as one may like (and even need) in order to sell the product.
Copyright © 2019 President and Fellows of Harvard College.
Managing R&D Investments
Carefully managing the
number and timing of
R&D investments is the
key to delivering
performance
improvements that
matter (for example,
supercapacitors need a
high energy density).
Copyright © 2019 President and Fellows of Harvard College.
Managing R&D Investments
Carefully managing the number and timing of R&D investments is the key to
delivering performance improvements that matter (for example, supercapacitors
need a high energy density).
Copyright © 2019 President and Fellows of Harvard College.
Day-to-Day Management
Prices must be tracked and continually observed in commodity markets,
such as the battery market. However, product differentiation can
command higher prices than the less specialized competition.
Copyright © 2019 President and Fellows of Harvard College.
Profit or Market Share?
•
There are two main outcomes from pricing the supercapacitors strategically
– Price the battery well below the variable cost and gain market share while incurring a segment loss
– Price the battery slightly below, at, or above cost to increase profits
Copyright © 2019 President and Fellows of Harvard College.
Choosing Market Share
Karina decided to forward-price supercapacitors, keeping the initial $20 price, which was
below variable cost. She invested heavily in SC process improvements (top cumulative
R&D investment) to bring costs down. Once she started seeing a positive gross margin she
dropped her price, but more slowly than costs fell.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Market Share
This gave her strong unit growth in supercapacitors, particularly in the
UPS Segment.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Profit
In contrast, Nolan raised his supercapacitor selling price to $25 so that he at least had
a positive gross profit on sales. He also invested heavily in supercapacitor process
improvement and started bring his price down as he saw cost improvements.
Copyright © 2019 President and Fellows of Harvard College.
Choosing Profit
Nolan took a hit on supercapacitor sales in Year 3 when he increased prices,
and ultimately it looks like he did not have as good a market position as Karina.
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Profit Growth Rate
Interestingly, while Nolan had a higher cumulative profitability growth
rate in supercapacitors of 41.3% vs. -8.9% for Karina, Karina saw a similar
outcome in total revenue from supercapacitors of $7.2 M compared to
Nolan, with $7.4 M.
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Contribution Margin
If we export and plot the profit contributions for the entire time period for
Karina (left) and Nolan (right), we can see that Karina “dug a deeper hole”
Copyright © 2019 President and Fellows of Harvard College.
Comparing Strategies: Net Income
And Karina went into the red one year while Nolan was able to stay in the black.
Karina took more risk towards getting fired but managed to save herself in
subsequent years.
Copyright © 2019 President and Fellows of Harvard College.
Forecasting Sales
• Estimating sales, especially of an emerging technology, is challenging for any
company
– Sales are dependent on the set price relative to the market price and the feature performance
of the product compared to desired attributes among competitors
Copyright © 2019 President and Fellows of Harvard College.
Got Fired?
Most managers will get fired for missing sales estimates by too much,
but you can also get fired for losing money three years in a row.
Copyright © 2019 President and Fellows of Harvard College.
Judging Performance
Copyright © 2019 President and Fellows of Harvard College.
Is cumulative profit a good measure?
How do we measure managers?
The going forward value of the business is more dependent on strategic
positioning and future prospects than on past cumulative earnings
Copyright © 2019 President and Fellows of Harvard College.
Key Takeaways
Copyright © 2019 President and Fellows of Harvard College.
The keys to win
Copyright © 2019 President and Fellows of Harvard College.
Challenge Once Again?
Copyright © 2019 President and Fellows of Harvard College.
Advanced Case
• Each period, you need to forecast your sales by
yourself
• Your R&D will be 2-3% of your current forecasted
sales
– The more aggressive your forecast is, the more R&D you
will get
• You will get fired if:
– A significantly negative sales forecast variance in a year
– A consistently negative sales forecast variance of 3 years in
a row
– Or large negative operating profits
Copyright © 2019 President and Fellows of Harvard College.

Purchase answer to see full
attachment