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2 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEOne key t ask o f t he gener al manager i s t o a cqui re ,

develop, and allocate an organization's resources. Tech-nology is a resource of paramount impor tance to manyorganizations; managing this resource for competitiveadvantage entails integrating it with the firm's strategy.A second key task of the general manager is to developand exp lo it t he f irm's c apa ci ty fo r i nnovat ion. Thi srequi res tha t the general manager be able to assess thefirm's innovative capabilities and identify how they maybe leveraged or improved. Weprovide here a set of toolsthe general manager can use to accomplish both of thesemajor tasks.

Three sections fol low. The f irst def ines a set of keyconcepts concerning technological innovation and thenout li ne s t he ir i nt er re la ti on s. Thi s s te p i s import an tbecause strategic management of technology and inno-vat ion i s a young f ie ld, a nd t he doma in s o f d if fe rent ,par tly overlapping concepts are s ti ll somewhat in f lux.Though we do not c la im that the def in it ions and inter -relations presented here are definitive, they are generallyaccepted by scholars and pract it ioners in the f ie ld , andthey are useful for organiz ing the discuss ion of casesand readings that follows: The second section discussesthe integra tion of technology with business and corpo-rate strategy. The third section presents a : framework forauditing and assessing the firm's innovative capabilities,A brief conclusion follows the third section.KEYCONCEPTSAND THEIR RELATIONSHIPS'Inventions/DiscoverieslTechnologiesAt the origin of the technological innovation process areinventions or discoveries . As Webster points out , "Wediscover what before existed, though to us unknown; weinvent what didnot before exist." Inventions anddiscover-ies are the result ofcreative processes that are often seren-dipitous and very difficult to predict orplan. For instance,Aspartame, a sweetener used in many food and beverageproducts, was a chance discovery. Researchers in univer-sities, the government, and industrial labs following thecanons ofmodern science-as wel l as id iosyncra tic t in-kerers in a garage-playa role in these processes . Basicscientific research refers to activities involved in generat-ing new knowledge about physical, biological, and socialphenomena. Applied scientific research is geared toward,solving particular technical problems. The cumulativebody of sys tematic and codif ied knowledge resul tingfrom scientific research forms the substratum for many,but not all,inventions and discoveries (e.g., the wheel wasnot the result of scientific research).

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The criteria for success regarding inventions and dis-coveries are technical (Is it true/real?) rather than com-mercial (Does i t provide a bas is for economic rents?) .Through patents, inventions and discoveries sometimesallow their origina tors to establi sh a potential for eco-nomic rents with subsequent innovat ions (see below),but there may be a significant time lag (ten years ormore) between doing scienti fic research and using theinventions and discoveries to create successful innova-t ions (superconduct iv ity and genet ic engineering areexamples).Technology refers to the theoretical and practi-cal knowledge, ski ll s, and art ifac ts tha t can be used todevelop products and services as wel l as the ir produc-tion and delivery systems. Technology can be embodiedin people, materials, cognitive and physical processes,p lant , equipment , and tools . Key elements of technol -ogy may be implici t, exist ing only inan embedded form(e.g., trade secrets based on know-how). Craftsmanshipand exper ience usual ly have a large tac it component , sothat important parts oftechnology may not be expressedor codified in manuals, routines and procedures, recipes,rules of thumb, or other explicit articulations. The crite-ria for success regarding technology are also technical(Can it dothejob?) rather than commercial (Can itdothejob profitably?). Technologies are usually the outcome ofdevelopment activities to put inventions and discoveriesto pract ical use . The invention of the t rans is tor (1947),integra ted circuit (1959), and microprocessor (1971),for example, gave rise to successive generations of newtechnologies in the semiconductor industry that were, inturn, applied in areas such as data process ing and tele-communications.Technological InnovationsSome innovat ions are technology based (e.g. , d ispos-able diapers, oversized tennis racquets, electronic fueli nj ec ti on, a nd pe rsonal comput er s) . Ot he r i nnova -t ions , such as new products or services in retai ling andf inancial services, are fac il itated by new technology(e.g., electronic data processing). The criteria for successof technological innovation are commercial, rather thantechnical : A successful innovat ion is one that returnsthe origina l inves tment in i ts development plus someadditional returns. This requires that a sufficiently largemarket for the innovation can be developed. Innovationsare the outcomesof the i nnova t ion proc es s , which can be.defined as the combined activities leading to new, mar-ketable products and services and/or new production anddelivery systems.

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EXHIBIT1 TheRelationships Among KeyConceptsCon~erningTechnological InnovationCjh r"--:- ..:.";,,-

Technical world I - - . . . , CommercY?/'jiv}": ' . .)

PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT

Results

Activities

..,,. \ . . . . _

Different types of innovation have been identified inthe literature. Incremental innovations involve the adap-tation, refinement, and enhancement of existing productsand services and/or production and delivery systems-for example , the next generat ion of a microprocessor.Radical innovat ions involve ent irely new product andservice categories and/or production and delivery sys-tems (e.g. , wireless communica tions) . . Architecturalinnovat ions refer to reconfigura tions of the sys tem ofcomponents that constitute the product (e.g., the effectsof miniaturization of key radio components).Technological EntrepreneurshipEntrepreneurship is afundamental driver ofthe technoloz-ical innovation process. Technological entrepreneurstuprefers to activities that create new resource combinationsto make innovation possible; bringing together the techni-cal and commercial worlds in a profitable way. Adminis-trative capabilities must be deployed both effectively andefficiently. Technological entrepreneurship can involveone individual (indiv idual entrepreneurship) or the com-bined activities of multiple participants in an organization(corporate entrepreneurship)., . .

(-~Z:\.J~,..:.",~). : _ _ . ! '>Activities and OutcomesThis discussion ofkeyconcepts suggests that itisuseful todistinguish between activities and outcomes. Inventions,discoveries, and technologies (outcomes) are the resultof t inkering and exper imenting, as wel l as of sys tem-atic basic and applied R&D (activities). Technological

Administrative capabilities

innovat ions (outcomes) are the resul t ocess, and market development (activities).entrepreneurship involves product, procedevelopment (ac tivi ties) as wel l as theadministrative capabilities.Interrelations Among KeyConcepExhibit 1 shows the relationships amongthe technological innovation process. Ithigities constituting the process and the outcThe process depic ted in Exhibit 1 can sdevelopment or technical activities. In realogical innovation process will almost alwand concurrent rather than unidirectional a

INTEGRATINGTECHNOLOGYAND SPerspectives on StrategyPosit ive versus Normative Views Thestrategy is concerned with the firm's actuhow itcomes tobe.The normative view, onis concerned with what the firm's strategy

The positive view of strategy proposesstrategy reflects top management beliefso f t he f irm' s pas t a nd cur rent s uc ce ss .'concern (a) core competencies, (b) produc'See, for example , R. A. Burgelman, "Corporate EnStrategic Management: Insights f rom a Process StuScience 29( 1983) , pp. 1349- 64 .


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4 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVE,

(C ) ~~'fvalues, and (d) objectives, as well as associationsamong these elements and the firm's success. They can beviewed as the result of organizational learning processes.They drive top management's efforts to establish a strate-gic process that will take advantage of this organizationallearning. Not surprisingly, there islikely tobe a good dealof inert ia associa ted with this set of bel iefs? Hence , tounderstand afirm's strategy, itis necessary notonly to con-sider top management statements and assertions about thefirm's strategy but also to observe what the firm actuallydoes. Quite often, especially in the dynamic environmentsassociated with high-technology firms, there is a diver-gence between professed strategy and strategic action?

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1 1 1 1I l l iI ' l l'I" 1 1 1:'1I,

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Product-Market versus Resource-BasedViews Theproduct-market view of strategy is primarily concernedwith how the f irm competes with i ts products and ser-vices. The resource-based view of strategy is concernedprimarily with how the firm can secure the factorsneeded to create the core competencies and capabilitiesthat form the basis for establishing and sustaining com-pet it ive advantage . Strategy is inherently a funct ion ofthe quant ity and quali ty of a f irm' s capabil it ies. Strat -egy without capabilities has no force. On the other hand,capabilities without strategy remain aimless. Strategyasks the question "How do competencies andcapabilitieshelp create and sustain competitive advantage?" Strategythus articulates the ways in which the opportunities thatare created by the firm's capabilities can be exploited.

During the 1980s, normative views ofproduct-markets trategy received widespread attention . Por ter' s " fiveforces" and"generic strategies" frameworks offered toolsfor explaining why some industries are inherently moreattractive than others, for understanding a firm's strate-gic posit ion relat ive to tha t of i ts r ivals, and for devis-ing strategic actions that can affect the overall industrya tt ract iveness and the s trategic posit ion of individualfirms." Normative statements about core competence andcapabilities-based competition during the early 1990sindicate the growing prominence of the resource-basedview of strategy. 5 Current normative work in strategy

2R. A. Burgelman, "In traorganizational Ecology of Strat egy Makingand Organizational Adaptat ion: Theory and Field Research ," Organi-zation.Science 2 (1991), pp, 239-62.3R A, Burgelman, "Fading Memories: A Process Theory of Strate-gic Business Exit in Dynamic Enviromnents," Administrative Science'Quartqly 39 (1994), pp, 24-56.4M.E. Porter, Competitive Advantage (New York: Free Press, 1985) ,SC.X, Prahalad andG, Hamel , "The Core Competence ofthe Corpora-tion," Harvard Business Review, May-June 1990; G, Stalk , P,Evans,

tha t are of concern to cus tomers . Compafocused cost leadership attempt to achievtainable competitive advantage in a narrowtry segments. To be viable, a company's cs trategy must be based on possess ing a locost infrastructure.

Porter points out that technology stratetially powerful tool for pursuing each ofthstrategies, but that each one requires a soment technology strategy. Also, strategic dboth product and process (manufacturing)can serve the purposes ofboth the differentialeadership strategies. Process-related technkey to product performance and hence dDuring the ear ly 1980s , for ins tance, mexcellence allowed the Japanese DRAM mto differentiate their products along the qualf rom those of many of the Uni ted Sta tes-bfacturers. On the other hand, product-relatedmay be the basis for lower cost. For instandifferent models ofcars in such a way that tmajor structural components (e.g., chassis)cost of the different models.

The l ink between technology strategycompetitive strategies is captured in Exhibi

PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT P

is oriented toward better integrating the product-marketand resource-based views. technology. The remainder of this sec tion focuses onthese key quest ions and discusses the tools necessary

toexamine how a f irm' s technology and business s trat -egy can be integrated most effectively.onnecting Technology and StrategyDuring the 1980s, strategic management scholars begantorecognize technology asan important element ofbusi-ness definition and competitive strategy. For instance,Abell ident if ies technology as one of three principaldimensions of business definition, noting "technologyadds a dynamic character to the task ofbusiness def in i-tion, asone technology may more orless rapidly displaceanother over time."? Porter observes that technology isamong the most prominent fac tors tha t determine therules of competi tion? Friar and Horwi tch expla in the\ 'growing prominence of technology as the resul t of his -\ :torical forces: disenchantment with strategic planning,the success of high-technology firms in emerging indus-.tries, the surge of Japanese competition, a recognition ofthe competitive significance of manufacturing, and theemergence of an academic interes t in technology man-agement,"

But what, precisely, does a general manager consid-e ri ng t he r ol e o f t echno logy i n a f irm' s s tr at egy needto know? According to one school of thought, it isenough to understand the parameters t ransformed bythe technological black box ( the computer or ins tru-men t in que st ion ). Tha t i s, i t i s e nough t o know whatt he t echno logi ca l d ev ic e or sys tem doe s, not how itdoes it. An alternative view argues that unless oneunder st ands t he f unct ioni ng o f a dev ic e and t he l awsthat delineate its limitations, one cannot make effectivejudgments regarding the shaping of relevant technolo-g ie s i nt o succ es sf ul pr oduc ts. The posi ti on t aken i nthis book is that general managers need not have back-g round s i n s ci ence o r engi ne er ing, but t hey do needto inves t s igni ficant effor t in learning to understandt he t echnol ogi es impor ta nt t o t he ir bus ine ss . Theymust a lso ident ify rel iable and t rustworthy sources oft echn ic al a dvi ce . Mos t impor ta nt , t hey mus t be ab leto frame the key strategic questions in relation to

Technology and Competitive Strategy Porter's"generic strategies" concept is a widely used frameworkfor classifying competitive strategies. The generic strat-egies are (a) industrywide differentiation, (b) focuseddifferentiation, (c) industrywide cost leadership, and (d:)focused cost leadership. Companies pursuing industry-wide differentiation seek sustainable competitive advan-t age i n a b road r ange o f i ndus tr y s egmen ts t hr oughoffer ing products or services tha t are bet ter than thoseof competi tors in terms of quali ty , per formance, fea-tures , del ivery, support , and so on. Companies pursu-ing focused dif ferent ia tion attempt to achieve s imilarsus ta inable competi tive advantage in a narrow set ofindustry segments. One objective indication of havingachieved differentiation is customers' willingness topayapremium price. Companies pursuing industrywide costleadership sec;~ sustainable competitive advantage in abroad range of industry segments through offer ing atlower prices products or services that are comparable tothose of competi tors on the relevant set of dimensions

EXHIBIT2 Technological POliciesand Generic Competitive StrategiesGeneric strategy

Overall costleadership Overalldifferentiation Focus-sedifferentFocus-segmentcost leadership

Technological polclesProduct technological change Product development

to reduce productcost by loweringmaterials content,facilitating ease ofmanufacture, slmpll-fying logistical require-ments, etc.Learning curveprocess improvementProcess developmentto enhance economiesof scale

Productdevelopmentto enhance productquality, features,deliverabillty, orswitching costs

Process developmentto support h ightolerances, greaterquality control, morereliable scheduling,faster response timeto orders, and otherdimensions that improvethe ability to perform

Process technological change...- .and L. E , Shu lm an , "Compet in g o n C ap ab il it ie s: The New Rul es o f

Corporate Strategy," Harvard Business Review, March-April1992,6D.Abell, Defining theBusiness (Englewood Cliffs, N.J.: Prentice Hall,1980),7M.E,Porter, "The Technological Dimension ofCompetitive Strategy,"Research on Technological Innovation, Management, and Pol icy 1(1983), pp, 1-33, \ l ' : . .81Friar and M, Horwitch , "The Emergence of Technology Strategy:A New Dimension of Strat eg ic Management, " Technology in Society7(1985), pp. 143-78,

Product developmentto design only enoughperformance for thesegment's needs

Productto meetneeds oparticulasegment

Process developmentto tune productionand delivery systemto segment needsinorder to lower cost

Processto tune tand delivto segmeinorderperforma

Source: M. E.Por ter, ' TheTechnological Dimension ofCompeti tive Strategy, " Research on Techn~/ogicallnnovation, Management, and(1983), pp, 1-33,


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6 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEEXHIBIT3 TheProductlTechnology Matrix

Product A Product B ... Product NTechnology 1 (*)Technology 2echnology 00

Note: Each entry ( *) should establ ish the f irms relat ive s trength v ls -a-v isthe s tate of t he art .Source: Adapted f rom A. Fusfe ld, "How to Put Technology into CorporatePlanning," Techno logy Rev i ew, May 1978. Reprinted with permissionfrom Technol ogy Rev i ew, MIT Alumni Associat ion, 1978.

Technol ogy and Produc t-Marke t St ra te gy A f irm'sstrategy is expressed inthe products and services itbringsto market. One way to get a t the integra tion of a f irm' stechnology andproduct-market strategy is to decomposeeach product or service into its constituting technologiesand assess the relat ive s trength- the degree of dis tinc-t ivecompetence-the f irm has with respect to that tech-nology. Exhibit 3 shows the out line for const ruct ing aproduct/technology matrix.

Although Exhibit 3 is a first step in analyzing a firm'sdegree of integra tion , i t i s often dif ficult to speci fy thevar ious technologies in the matrix a t the appropr ia televel of detail and in their concrete relation to the firm'sproducts. Itisobvious that afirm manufacturing and mar-keting cameras should have competencies in optics, forinstance. But itis not enough to determine the strength ofthe firm's capabilities; itis also necessary to specify howthe f irm' s s trengths in the area of opt ics help the f irm' scameras have higher quality or lower cost.Technology Por tfol io Harri s, Shaw, and Somers sug-gest that once the various technologies have been identi-fied, they can be classified in terms of their importancefor competi tive advantage ." Next, the f irm' s pos it ionrelative to its competitors can be assessed. Technologyimportance needs tobe expressed interms of the valuei t brings to a par ticular c lass of products and the valueit could potentially bring to other product classes for thecustomer/user. The importance of a particular technol-ogy is strongly affected by where itis situated inthe tech-nology life cycle (see p. 7). Relative technology positionshould be expressed inreference to competitors in termsof, for example , patent pos it ion, know-how and trade

9]: M. Harr i s, R. W. Shaw Jr., and W.P . Somers, The Strategic Manage-ment of Technology (N ewYo r k : Bo o z A l le n H am il to n I n c. , 1 9 8 1) .

EXHIBIT4 Developing the Technology PortfolioHigh

Fold

Bet Draw

Cash i n

Low [ __~ ___ __lHigh Low

Relat ive technology posit ionSource: J .M . Har ri s, R . W. Shaw Jr. , and W. P.Somers, The St ra teg iCManagement of Technology (New York: Booz Allen Hamil ton Inc ., 1981)!\

secrets, learning curve effects, and key talent. Relativetechnology position is strongly (but not wholly) affectedby the firm's historical and future levels of investment.

Exhibit 4 presents a f ramework based on these twod imensi ons . Ha rr is, Shaw, and Somer s p ropo se t ha ttechnologies in the "bet" quadrant warrant the f irm' sful l commitment." That i s, the f irm should be wil ling inthose cases to engage infrontier R&D, push the limits ofits product development process, and invest inthe newestequipment.

Techno logi es i n t he " cash i n" quadr ant s houl d beexamined carefully. These technologies may have beenvery impor tant a t one t ime, but changes in the bas is ofcompetition in the industry may have reduced their rela-tive importance. Understanding these changes and whythey came about often leads toinsight into the firm's stra-tegic situation.' ! Also, while "cash in" might suggest thatno further investment in these technologies is warranted,such amove may bepremature ormisguided. Sometimesparts of these technologies continue to be linked in sub-tle ways with other technologies judged to be relativelymote important.Technologies in the "draw" quadrant are a lso posi-t ioned ambiguously . A technology may be placed herebecause ofchanges inthe basis ofindustry competition.1)1this case, the f irm must decide whether to inves t,p robably heavi ly , i n t he t echno logy so a s t o r each ( atleast ) par ity with i ts competi tors or to disengage from

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lOlliid.uF o r e x amp l e, s e e Burgelman, " F ad i ng Memo ri e s, " p p . 24-56.

BusinessEXHIBIT5 Matching Businessand Technology Portfolios

Technology

PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PER

Competitivepositlon

s~o0 L-~ ~ __lPosition

Source: J. M. Harris, R. W. Shaw Jr. , and W. P.Somers, The St ra teg i c Management of Technology (New York:Booz Allen Hami l ton Inc ., 1981).

a particular product or business. Again, it is extremelyimpor tant to ask why and how this change came about .

Technologies in the " fold" quadrant requi re tha t thefirm reconsider its investments in them. Inertial forcesoften lead to continued inves tment in R&D beyond thelevel atwhich reasonable returns can be expected. Regu-lar reviews of investment patterns may indicate a need todisengage and redeploy resources.Technology Por tfol io and Business Por tfol io Manycompanies have multiple businesses in their corporateportfolios, each with its own technologies. Corporatestrategy development has been enhanced by portfolioplanning techniques, but most have failed to pay explicitattention to technology. One such portfolio planning toolis McKinsey's framework based on industry attractive-ness and competitive position dimensions. Harris, Shaw,and Somers suggest examining the relationship betweenthetraditional portfolio planning matrix and the technol-ogy portfolio matrix (see Exhibit 3).12 This is presentedinExhibit 5.

Such analysis offers the possibi li ty of inves tiga t-ing the match (or mismatch) between a f irm' s businessand technology portfolios and its resulting technologyinvestment priorities. For instance, standard strategicanalysis may indicate tha t a par ticular bus iness is in as trong competi tive posit ion in an att ract ive industry.

12Harriset al., The Strategic Management of Technology.

However, technological analysis may indictechnologies supporting this business, whifor competi tive advantage , are actua lly inweak position. This would indicate the neeinvestment in technology development.Technology and the Value ChainIn the broadest sense, the term technologythe entire set oftechnologies employed intheactivities that constitute a firm's value chaishows an example of var ious technologiesvalue chain.

As Por ter points out , any of these technaffect the industry structure or a firm's dor cost position-and, therefore, its competage.!" Hence, it is important for thegeneratrack the evolution of all the technologies tfirm's value activities. Designing a technol(part IIof this book) requires that the firm deach technology can be used for competitivand (b) whether a given technology shouldin-house orprocured.Technological EvOlution and ForecasTechnology Life Cycle Technological co f t he mos t impor ta nt f or ce s a ff ec ti ng apetitive position, and research suggests tha

13Porter, Competitive Advantage.14Ibid.


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scope of innovativeness , and rate of innovativeness.

8 PART ONE: INTEGRATINGTECHNOLOGY ANDSTRATEGY: A GENERALMANAGEMENTPERSPECTIVE PARTONE: INTEGRATINGTECHNOLOGY ANDSTRATEGY: A GENERAL MANAGEMENTPE

EXHIBIT6 Representative Technologies ina Firm'sValue Chain Stages in TechnologyEXHIBIT 7 Technology LifeCycleand Competitive Advantages

Importance of Technologies for Competitive AdvantageHave not yet demonst ra ted potential for chang ing the basis o f competi tion .Have demonst ra ted the ir potential for chang ing the basis o f competi tion .Are embedded in and enable product/process.Have major impact onva lue-added stream (cost , performance, qua li ty).Allow proprietary/patented positions.Have minor impact on value-added stream; common to a ll competi to rs; commo

Life CycleI. Emerging technologiesII. Packing technologiesIII. Key technologies

IV. Base technologiesSource: Adapted from Arthur D. Little,"The Strategic Management ofTechnology," European Management Forum, 1981.

3. What are the firm's needs interms ofinnovative capa-bil it ies to support i ts long- term business and corpo-rate competitive strategies?

ASSESSING INNOVATIVE CAPABILITIESGener al manager s a re r espons ib le f or manag ing t heinnovation process. They must make difficult decisionsabout which innovations will receive managerial atten-t ion and resources . Ins ights into the f irm' s innovat ivepotential and into the barriers toinnovation are necessaryto make effec tive proactive s trategic choices . But howcan general managers assess the innovation potential oftheir organizations? The remainder of this chapter offersa f ramework for doing an innovative capabilities audit. 17Such an audit may help the general manager assess thepotential of existing innovative capabilities and constructa development plan for the future. An audit must addressat least three questions:1. How has the firm been innovative inthe areas ofprod-

uct and service offerings and/or production and deliv-ery systems?2. How good is the f it between the f irm' s current bus i-ness and corporate strategies and its innovativescapa-bilities? 0;

Innovative capabilities Audit FrameworkInnovation depends ontechnological aswell asother crit-ical capabilities in areas such as manufacturing, market-ing and distribution, and human resource management.For example, a.jechnology strategy designed to achievesuperior product performance must be complemented byatechnically trained sales force that can educate the cus-tomer regarding the product's performance advantagesand by a high-quality manufacturing system.Innovative Capabilities Innovative capabilities canbe def ined as the comprehensive set of characteristicsofan organization thatfacilitate and support innovationstrategies. Innovative capabilities exist at the businessunit and corporate (multibusiness) levels.Business uni t-a uni t for which a par ticular s trategyand r esour ce commi tmen t pos tu re c an be def in edbecause i t has a dis tinc t set of product -markets , com-petitors, and resources isa business unit. Aninnovativecapabilities audit identifies the critical variables thatinfluence the innovation strategies at this level.

Corpora te-an audit a t th is level ident if ies the cri tica lvariables that influence both the relationships betweencorporate and business unit levels in terms of innova-tive capabilities and the formulation and implementa-tion of an overall corporate innovation strategy.

Business Unit Level Audit In general, the innovatives trategies a t this level with respect to new products andservices and/or new production and delivery systems canbe characterized in terms of t iming ofmarket ent ry ,technological leadership or followership,

Transportation technology Basic product technology Transportation technol- Media technology Diagnostic andtest-ogy ing technologyMaterial handling technology Materials technology Material handling tech- Aud io and video Communicationnology recording systemtechnology technologyStorage and preservation Machine tool technology Packaging technology Communication sys- Information systemtechnology tem technology technology

Communication system Material handling tech- Communication system Information systemtechnology nology technology technology

Testing technology Packaging technology Information systemInformation system Maintenance methods technologytechnology Testing technology

Building design operation : ' ~ ' :technologyInformation system tech-nology .0'I) Inbound logistics > Operations > Outbound logistics > Marketing sales 2 Service

Source: Adapted with permission ofthe Free Press, a divisionof Macmillan, Inc.,fromM. E.Porter, Competit ive Advantage: Creating and SustainingSuperior Performance (NewYork:Free Press, 1985). Copyright 1985 by Michael E.Porter.

difficult to respond to such changes." Integrating tech-nol ogy and s tr at egy shoul d, t he re fo re , b e a dynamicp roce ss , a nd i t r equi re s t ha t t he f irm under st and t hedynamics of the l ife cycle of the var ious technologies i temploys . Exhibit 7 shows the l ink between stages in thetechnology life cycle and the potential for competitiveadvantage.

""";)\r>,~o",>~(0Technology Forecasting An important element inintegra ting technology and strategy is the capacity toperform systematic technological forecasting. Severalauthors have presented useful techniques, such as tech-nological progress functions (S-curves), trend extrapo-lation, the Delphi method, and scenario development."Under ly ing the capacity toforecast -and, perhaps moreimportantly, to seethe relationships between technologi-cal ly s igni ficant events- is the effor t to gather data sys-.tematically and continuously. Maintaining a log book forthis purpose is often effective.

15A. C. Cooper and D. Schendel, "Strategic Responses to Technologi-cal Threa ts ," Business Hor izons, February 1976, pp. 61-63; M. L.Tushrnan and A. Anderson, "Technological and Organizational Envi-ronments," Administrative Science Quarterly 31 (1986), pp. 439-65;R. Henderson and K. B. Clark, "Architectural Innovation: The Recon-f igurat ion ofExist ing Systems and the Fai lure ofEstablished Firms,"Adminiktrative Science Quarterly 35, no. 1 (1990), pp. 9-30; andBurgelman, "Fading Memories," pp. 24-56.16See , for example , B. Twiss, Managing Technological Innovation(London: Longman, 1980); R. N. Foste r, Innovation: The Attacker'sAdvantage (New York: Summit, 1986); a nd S . C . Whe elwr ight a nd

S. Malcridakis, Forecasting Methods for Management, 5th ed. (NewYork: Wiley-Interscienfe, 1989). .17R.A. Burge lman, T . 1. Kosni k, a nd M . Van den Poe l, " Towa rd a nInnovative Capabilities Audit Framework," inR. A.Burgelman andM.A. Maidique, eds., Strategic Management of Technology and Innova-tion (Homewood, Ill.: Richard D. Irwin, 1988).

Five important categories ofvariables influevation strategies of a business: Resources available for innovative activit Capac it y t o under st and compe ti to rs ' sindustry evolution with respect to innovat

Capacity to understand technological drelevant to the business unit

S tr uc tu ra l and cul tu ra l con text o f t he baffecting internal entrepreneurial behavio

Strategic management capacity to dealentrepreneurial initiatives

These are represented in Exhibit 8 .EXHIBIT8 Innovative capabilities AuditFramework-Business Unit Level

Resourceavailability

Understandingcompetitors'innovative

strategies andindustry evolution

Underbusintechnenvir

Business unitstructural andcultural context

BUSiness unstrategicmanagementcapacity


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10 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEe 1\ deb~ c C( po,c\.dc,~e ')

EXHIBIT9 Innovative Capabilities Audit Framework-Business Unit Level1. Resource Availability and Allocation Level o f R&D funding and evo lu tion :

- I n absolut e t erms- As percent age o f sa le s- As percent age o f t o ta l f irm R&D funding- As compa red t o main compe ti to rs- As compared to leading competi to r

Breadth and depth of ski l ls a t business unit level in R&D, eng ineering , and market research Distinctive competences inareas of technology relevant to business unit Allocat ion of R&D to- Exist ing product /market combinat ions- New product development for exist ing product categories- Development o f new product categories

2. Understanding Competi tors' Innovat ive Strategies and Industry Evolution Intelligence systems and data available Capacity to identify, analyze, and predict competitors' innovative strategies Capacity to ident ify, ana lyze, and predict industry evo lu tion Capacity to ant ic ipa te faci li ta ting /impeding externa l forces relevant to business unit's innovat ive strateg ies3. Understanding the Business Unit's Technological Environment Capacity for technological forecasting relevant to business unit's technologies Capacity to assess technolog ies relevant to business unit Capacity to ident ify technolog ical opportuni ties for business unit4. Business Unit Structural and Cultural Context Mechanisms for managing R&D efforts

Mechanisms for t ransferr ing technology f rom research to development Mechanisms for integra ting d if fe rent funct iona l groups (R&D, eng ineering , market ing , manufacturing) in the new productdevelopment process Mechanisms for funding unp lanned new product ini tiat ives Mechanisms for e lici ting new ideas f rom employees Evaluat ion and reward systems for ent repreneurial behavior

Dominant values and def in it ion of success5. Strategic Management Capacity to Deal with Entrepreneurial Behavior \\ Business unit level management capacity to def ine a substantive development strategy Busi ness uni t l evel m anagem ent c apacity to as sess strategic i mportance of entrepr eneur ial. ini tiati ves \ Bus iness uni t l evel managemen t capac it y t o a ssess relat edness o f en trep reneur ia l i ni ti at ives t o uni t' s core capab il it ie s \ Capacity of business unit level management to coach p roduct c hampions \___ o_Q_u_al_it_y_a_n_d_a_v_a_ila_b_il_ity_o_f_pr_o_d_u_ct_c_h~a_m_p_io_n_s_i_n_th_e_bu_s_i~ne_s_s_u_n_it~ .

but lack the strategic management capacity to channeltheseresources (bothwithintheunit andrelativetocom-petitors' moves). Alternatively, the necessary reso~cesand strategicmanagementcapacitymay bring aboutnewproductswhosetechnologiesare on theverge of becom-ing obsolete.

The first three categories just listed are important".inputs for the formulation of business-unit innovationstrategies; thefinaltwo areimportant forthe implemen-tation of business unit innovation strategies. Exhibit 9lists someof the critical issues for auditing each of thefive categories. This list is not exhaustive; additionalitems maybe addedto reflect theparticulars of differentsituations.The' combination of the five categories determines.therelative strength ofthe business unitfor formulatingand implementing innovation strategies.Thus, the auditshouldaddressthis aswell.For example,a business unitmay have ampleresources for new product development

.Corporate Level Audit The raison d'etre of multi-business firms is ,:based on corporate management'sabilityto identify a'hdexploit synergies. An audit atthecorporate levelthus introduces an additional dimension.Here it is necessary to examine howthe corporate inno-vative capabilities enhance the innovative capabilities

The capacity to understand technologments(e.g., multi-industry scanning andforecasting) Corporate structural and cultural contex Corporatestrategicmanagementcapacittation of synergies in innovation througstrategies;internalcorporateventuringastrategies)

PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PER

EXHIBIT10 Innovative Capabilities AuditFramework-Corporate Level

Resourceavailability

and allocationUnderstandingcompetitors'innovative

strategies andmulti-industryevolution

Understandingcorporate

technologicalenvironment

Corporate structuraland cultural context

Corporatestrategic

managementcapacity

at thebusiness unit level. In other words, it is neces-sary to investigate whether andhow the total corporateinnovative capabilities are larger than the sum of thebusiness units' innovative capabilities. In general, cor-poratelevelinnovativecapabilities can be characterizedintermsof thescopeandrate ofdevelopmentofnew products andservices and/or production and delivery systems thatare derived from combining innovative capabilitiesacross existing business units, thescopeandrate ofnew business development basedon corporate R&D and technology developmentefforts,and thetiming ofentry with respect tothe previous two.Again, five categories of variables are considered forthecorporatelevelaudit,eachof which corresponds toacategory at the business unitlevelbut with a somewhatdifferentemphasis:the capacityto domore thanwhat thebusinessunit coulddo onits own.Exhibit lO'representsthe fivecategories of variables: Resource availability and allocation (e.g., corporateR&D,cash availabilityfor risky projects) Thecapacityto understandmulti-industry competitivestrategiesand evolution (e.g.,corporate strategic plan-ningfor innovation)

Resource availability and corporate levelunderstand the competitive and technoloments again serve as inputs for corporatemulation. Corporate structural and cultuwellas corporatestrategicmanagement cainputsfor corporate strategy implementatilists critical issues to be addressed in eaccarry outthe corporate level audit. As folevelaudit, the combinatoryeffectsof the fofvariables on corporate innovation strateassessed.Audit Frames of Reference One framefor interpreting the results of the innovaties audit is historical--how the current spares to the past; a secondframe of referthe firm's position relative to current comallow major variances with respect to posto be identified.Who Should Do the Audit? General mhave to rely on others to collect much oftion necessary for the audit and for sompretation as well. They will have to decito rely on help from insiders and outsiare likely to have an advantage in undefirm's resource availability and structuralcontext. Outsiders mayprovide a more rement of the firm's strategic managementits ability to understand the competitivelogical environments. The major disadvaninsiders is thepossibility ofa narrowor bit ive. Outsiders , on the other hand, are mmisunderstand internal realities and delivrecommendations.The audit could be under taken by thtegic planning department. More valuwould probably be generated by settingaudit team with representatives from sning, R&D, new product managers, andkmanagers.


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12 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEEXHIBIT 11 Innovative capabilities Audit Framework-Corporate Level1. Resource Availability and Allocation

Corpora te R&D funding level and evo lu tion :- I n absolut e t erms- As percent age o f sales_ As compared to average of main competi to rs- As compared t o leading competitor . . Breadth and depth of ski lls o fcorpora te level personne l in R&D, enqmeennq, and market research

Distinctive competences in areas of technology relevant to multiple business units Corpora te R&D allocat ion to- Exp lora tory research- R&D in suppor t o fma in st re am bus iness- R&D in suppo rt o f new bus iness def in it io n- R&D in support o f new business development

2. Understanding Competitors' Innovative Strategies and Multi-Industry Evolution Intelligence systems and data available .' ., . Capacity to ident ify, ana lyze, and predict competi to rs ' innovat ive strate~les spann ing ~ultl~le Ind~stnes Capacity to develop scenarios concerning evolution of interdependenc~es ,a~ong m.ultlple Ind~stnes Capacity to ant ic ipate facil itat ingl impeding externa l forces relevant to f irm s innovat ive strateg ies

3. Understanding the Corporate Technological Environment Capacity for technolog ical forecasting inmultiple areas Capacity to forecast cross-impacts among areas of technology Capacity to assess technolog ies in multiple areas Capacity to ident ify technolog ical opportuni ties spann ing multiple areas

4. Corporate Context (Structural and C ultural) . . Mechanisms to share technolog ies across business Unitboundanes Mechanisms to def ine new business opportuni ties across business unit boundaries Interna l and externa l organ izat ion designs for managing new ventures Mechanisms to fund unp lanned ini tiat ives Eva luat ion and reward systems for ent repreneurial behavior Movement o fpersonnel between mainstream act iv it ies and new ventures Dominant values and def in it ion ofsuccess

5. Strategic Management Capacity to Deal with Entrepreneurial Behavior Top management capacity to def ine a substantive long-term corpora te de~el~p~e~t strategy Top m anagement capacity to assess strategic importance of entr epreneunal Inltlatlve~ ... Top managemen t capac it y t o a ssess relat edness o f en trep reneur ia l i ni ti at ives t o t he f i rm 's core capa~ lh .t l. es . . , M iddle- level management capacity to work with top management to obtain/main ta in support for new Ini tiat ives (organizat iona lchampioning) . " . M iddle- level management capacity to def ine corpora te strateg ic f ramework for new Ini tiat ives

Middle- level management capacity to coach new venture managers New ven tu re managers' capac it y t o bui ld new o rgan izat io na l capab il it ie s. . , . New venture managers' capacity to d evelop a business strategy for new Inltlatl~~s.. . . .. Ava ilab il ity o f product champions to ident ify and def ine new business opportuni ties outside of mainstream act iv it ies

CONCLUSIONA variety of concepts,tools,perspectives, androles areimportant anduseful to the management of technology,strategy, and innovation. It is thepremise ofthisbook,however,that the leadership of generalmanagersis criti-calto the success ofthese endeavors.Thus,while much -

can be done to assist general managers in these tasks,nothing can substitute for or replace their leadership.Throughoutthe subsequent text andcases-we will high-light not only analytical and organizational approaches,but also methods.andtechniquesfor asserting andexer-cising leadership.

. \.

management expressed reservationspart of a team in Michigan long distanback to Phoenix, Paul drew a crude skdesign, whichwas laternamedthe NC s"No Compromise," because the newpossible simultaneous progress on cperformance.As a co-op student from the Genetute, Paul had not found his stay at thDepartment of JCI very challengingDesign and Analysis Department heldhim. There, he had seen computer simmotive crashes and structural tests. TPaul had observed, would predict actperformance of the seats before they wHewanted tobe ableto dothat.Hari Sankarabecame hismentor in SandAnalysis. Hari wasimpressed withachievement and his engineering taloped a mutual admiration, which turnfriendship. In 1997, after approximatthe Structural Design & Analysis Dquit hisjob to pursue an MBAat the SSchool.Hari later joined the managemenBooz Allen Hamilton inLos Angeles aciate. In July 1998, after his disappoJCI, Paul called Hari about his sketchthat his sketchrepresented a new conmotive seat. They agreed to meet at aVenice,California.WhenHari sawthe aluminumprototyforthefirsttime,heknewthat hewas loo

TECHNOLOGICAL INNOVATION

CASE 11

Ello Engineering, Inc.Hari Sankara and Harald Winkmann

ORIGIN OF ELiO ENGINEERINGAsPaulEliopulled into theparkinglot ofBostrom Seat-ing on a cold and dampAlabama morning in February1999, he reflected on the events that had brought himthere.Barely a fewmonths back, he hadnot even heardof Bostrom Seating. At this moment the first meetingwith thecompany wasa distant memory.Since 1996,Paul hadbeen working on a revolution-ary bike design for which he had received a patent. Hehad lined up investors for that venture and pushed thedesign along for two years , but the venture failed totake off.Paulwanted to improvehis financialposition quicklyso, in February 1998, he flewfrom his home in Phoe-nixto meet with hisold employerin Michigan, automo-tive seat supplier Johnson Controls (JeI), to see if hecould work aspart of a product designteam from hisoff icein Phoenix. He loved Phoenix and had vowedneverto return to theharshwinters of theMidwest. JCI

Source: This case wasprepared by Hari Sankara andHaraldWink-mann, under thesupervision of ProfessorRobert A. Burgelman as abasis for class discussion, rather than to illustrate either effective orineffective handling of a management situation. Copyright 1999bythe Board ofTrusteesof theLeland StanfordUniversity.Allrightsreserved.


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14 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEspecial. Paul's seat was part of a special class of automo-tive seats in the industry called all-belts-to-seat (ABTS),wherein the shoulder belt and lap belt originate from theseat rather than from the auto body. Because the structurall oad s! on an ABTS sea t a re much h ighe r th an i n a con-ventional seat, such seats had typically been very heavyand expensive. The entire automotive seating industry hadbeen trying for years tofinda cost-effective solution totheproblem, and in the meantime they installed ABTS seatsonly in luxury automobiles and high-end sports convert-ibles. Paul's NC seat, however, utilized a new technology.The resulting structure would be low-cost, lightweight,and strong, thereby potentially permitting penetration ofall segments ofthe auto market.

P au l and Har i ent ered i nt o a par tne rs hi p a rrange-ment soon thereafter, founding Elio Engineering. At thispoint , Paul did not have any external sources of fund-ing and squeaked by with personal resources and helpf rom family. After his summer s tint a tBooz Allen , Har iworked out of Phoenix for a few weeks helping advancethe design before returning to Stanford. Elio Engineer-ing did not have the capital to develop the des ign usinga build-and-test approach. The computers and softwareneeded to simulate the tests were so expensive that onlya few For tune 100 companies could afford them. But ina s troke offortune, a t th is very moment the price pointsc ame down . I n add it ion, a round t hi s t ime t he per fo r-mance ofPCs was enhanced and became comparable tothat of expensive work stations, so computer-based test-ing had become affordable (PCs were priced at around$5,000 compared to $25,000 for work stations).

With a couple offunctional prototypes and computer-aided structural analysis to back up their work, Paul andHar i set out to show the concept to the automot ive sea t-ing industry. At th is point Paul had not been working onhis bike invention for s ix months. He had placed all h isb et s on t h e s ea t i nven ti on , a nd he was ver y anxi ou s toreach an agreement quickly . Never theless, he and Har iwere well aware of the enormous potential of the inven-t ion and were determined to get a fai r value in any dealthey would strike. While the auto companies greeted theinvention with a lot of enthusiasm, Elio was-unable toreach afinancial deal, primarily due tothe fact that a fewofthe critical items had not yet been patent protected andhence could not berevealed and because of some internalpolitical issues.

1Automot ive seats have to meet FMVSS (Federal Motor Vehicle Safety, Standard) specification 207/210, which call s for the seat to withs tand6,000 pounds without material breakage.

Not deterred by the setback, Paul and Hari continuedt o advance t he desi gn and t hen app roa ched Bos tr omSea ti ng. A sea t s uppl ier f or t he heavy t ru ck and bu si ndus tr y, Bos tr om Sea ti ng was a who lly owned sub -s id ia ry of Johns town Ameri ca I ndus tri es , I nc . E li ohad l ea rn ed t ha t Bost rom was look ing t o deve lop anABTS sea t. I n Novembe r o f 1998, Pau l and Har i me twith them and presented their seat. Soon thereafter theyconcluded an opt ion agreement to prototype and tes ttheir NC seat.

The team became based atBostrom's site, packagingand developing the seatto fittheir environment. Bostromsigned a letter ofintent with respect to alicensing agree-ment, which would follow successful prototype testing.By ear ly 1999, Elio was able to support three ful l- ti@eengineers with an advance against future royal ties andprototype assistance from Bostrom. Bob Glaspie joinedi n a s t he t hi rd member o f t he El io t eam af te r qui tt inghis job at Structura l Dynamics Research Corpora tion(SDRC) . Pr io r t o t h is , h e had worked wit h Har i i n t heStructura l Analysis Depar tment a t JCI . By February1999, prototype tes ts had proven very promising, andthe OEM (or ig inal equipment manufacturer) cus tom-e r' s r es pons e had a ls o been f avor ab le . I n t he opti onagreement, Bostrom had stipulated that the prototypeshad t o t ake 130 per cent o f t he FMVSS loads. The f irs tt ra ck p ro to types w it hs tood 92 per cent o f th e l oad. I nsub sequen t r edes igns , t he tr ack and re cl in er par ts o ft he s ea t w it hs tood 185 pe rc en t and 115 per cent o f t heFMVSS requi rement , Based on the prototype perfor-mance, Bostrom made a licensing deal with Elio inmid-February.

Bostrom planned to unvei l the NC seat a t an annualt rade show in March of 1999 in Louisvi lle, Kentucky.Whi le they had run into a few design-engineer ing chal-l enge s, t he E li o t eam was con fid en t t ha t t he NC seatwould come together nicely for the March show. In fact,Bostrom intended to ramp up production very soon. Thes iz e o f t he U.S. t ru ck marke t i n 1999 was expec ted t obe around 500,000 uni ts with Bostrom commanding amarket share of 50 percent . The European market wasabout the same size, but Bostrom had no presence there.Elio expected tobe able toget 2 to5 percent royal ties onsales in the truck industry.

AsPaul Elio got ' outof his car a tBostrom one monthbefore the t rade show, he was ref lect ing onhis vis ion ofbringing the seatto the entire automotive industry, poten-t ia lly saving ~ ll ions of l ives around the wor ld . He waswondering ifBostrom would bethe right partner for sucha gigantic task.

SEAT MECHANISM TECHNOLOGIESExisting Seat TechnologiesThe seat sys tem is a key component of a car inter ior. Atypical conventional front seat is priced around $500 toOEMs. The cost of a conventional seat is lower than thatof anABTS seat. A complete sea t sys tem consist ing oftwo front sea ts and a back row is an expensive s tandardpart of a car (on average about $2,500).Conventional Car Front Seat Technology The seatf rame , r ecl in er , a nd se at t ra cks ( sea t ad ju st er ) a remajor components of a convent ional car sea t s truc ture(~xhibit 1). Additional seat components are Suspension,tnm, and foam. These together constitute the seat system(Exhibit 2). The seat mechanism, consisting of reclinerand tracks, constitutes the technological core of the seatsystem asit determines safety, ease of use, comfort, and,with the frame, about 60 percent of the total cost.

While some conventional seat mechanisms are elec-tric, most are manual; thatis, the seat is adjusted alongthe t rack by hand and reclined manually. Manual sea trec liners ~~ not inf in itely adjus table and ins tead relyEXHIBIT1 SeatTrack (Adjuster; Top)and SeatStructure (Bottom)

SECTION ONE: TECHNOLOGICAL

EXHIBIT2 Seat System

on interlocking gears. Most seats manufcompanies are built with single-sided recshoulder bel t i s a ttached direc tly to thethe f loor , which, in the event ofa crash , tload off the seat.

Over the pas t couple of decades , comechanism technology has not exper ienbreakthroughs, and innovation has beenmental. Allcarseatshavehad tomeet strictstandards determined in the United StatesHighway Traffic Safety Administration (Nable to withstand specified minimum crathe conventional seat mechanisms on thethe NHTSA standards, they had a low strratio, and the failure mode at the ultimateacterized by catastrophic failure. In otherforce reached the failure level,the stress oncaused the seat material to break, fracture,resulting in fatal injuries to passengers.

The major benefits of conventional caogy are that the components and materialsinexpensive , l ightweight , and, after decmulated exper ience with the technology,manufacture and assemble.All- Belts-to-Seat (ABTS) Seat Mechanispast twelve to f if teen years , the major secomponent suppl iers , such as Johnson Cand Magna, have attempted to develop aseats. An ABTS seat integrates the seat bethe seat (Exhibit 3).According to feedback from focus

thousands of end users , the main, d irec t


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16 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEsea t mechanism does not rely on gears and is inf in itelyadj us ta bl e bot h f or manua l and e le ct ri c s ea ts , whi chimproves comfort and ease-of-use . The seat s truc tureis a lso easy to assemble and does not requi re expensivehigh-tolerance parts. The technology improves user com-for t by minimizing buzz, squeak, and rat tle problems.Finally, the seat-belt retractor (the component contain-i ng t he bel t s pool ) i n t he E li o des ign i s l oc at ed a t t hebot tom of theback frame, not a t the top as is the case forother ABTS technologies. The bel t i s routed from bot-tom to the top, which reduces the load-carrying require-men t o f t he back f rame by app roxima te ly 20 per cen t.The whole design is sturdy enough that the seat structurewas upon introduction to the market expected to outper-form all o ther major ABTS technologies on the market.The NC seat i s s tronger, l ighter , and cheaper due to thehigh strength-to-weight ratio of its mechanisms. Becausei ts mechanisms are nicely packaged, the sea t s truc tures trength is not compromised. Addit ionally, the des ignsimplicity results in fewer parts and connections, whichin turn reduces the cost.

The NC seat innovat ion represents a major change inthe technological trajectory of seat system technology.As a result, all follow-on technological improvementsare expected to be incremental in nature.

EXHIBIT 3 ABTS Seat Frame (Left) and ABTSSeat System (Right>

advantages of existing ABTS designs over conventionalsea ts are ease of use , h igher comfort level , more att rac-tive appearance, andbetter maneuverability of removableseats? They are also potentially safer than conventionals ea ts s in ce t he ABTS sea t b el t " hugs " t he occupan t i nthe event of a rear col li sion . In the case of a t radi tionalbelt attached to the pillar, onthe other hand, the occupantrecedes f rom the shoulder bel t ashe or she moves rear-ward in a rear impact.However , sea t manufacturers are s ti ll using funda-mentally the same recliner and track concepts asfor con-ventional sea ts . Since the force isno longer def lected tothe pillars and the floor and instead is fully applied to thesea t s truc ture , the sea t has to be much stronger to meetfederal safety regulations.ABTS designs have only been able to meet govern-ment regulat ions by using exist ing rec liners in tandemand adding more metal to the sea t mechanism and struc-ture to sca le up the s trength. As a resul t, a typica l ABTSseatis about twice asheavy asa conventional seat, and thecost of a typical ABTS seat i ses timated tobe more than1.5 t imes higher than that of a convent ional sea t. ABTSseats are priced onaverage around $750 to OEMs.

In all , however , the ABTS system is super ior to con-ventional sys tems, despi te the cos t. Bob Velanovich,JCI's VP. for engineering, offered an additional advan-tage to ABTS technology:

2"1'996 Seat Quality Report," 1. D. Power and Associates; David Sedg-.wick, "Focused on Customers," Crain's Detroit Business, March 25,1996.

Wehave considerable data demonstrating that our [ABTSseat] systempasses all automakers andgovernment safetyspecifications but I'm convinced the Number One rea-son these seats offer the opportunity for increased safetyis because consumers will use seat-integrated safetybeltsmore, sincetheyfitbetter andfeelbetter.'

Elio Engineering ABTS TechnologyThe E li o Eng inee ri ng ABTS sea t mechani sm i s a newstate-of-the-art technology in the automotive seat indus-t ry . The broadly patented mechanism is based on cableand drum elements as opposed to gears." The key benefito f t he new t echnol ogy i s t ha t i t doe s not permi t c at a-s trophic fai lure . A special new load- leveling reclinermechanism' with ahigh strength-to-weight ratio ensurest ha t t he s ea t doe s not f ra ct ur e o r buckl e a t t he f ai lu relevel . When the force diminishes, the sea t s truc ture iss ti ll ful ly funct ional. This const itutes a major techno- .logical breakthrough that had been vigorously pursuedfor many years. In fac t, when Elio met with auto execu-t ives , they confi rmed that the sea ting industry had beenunsuccessfully trying to design a load-leveling reclinerfor quite some time.The design also uses fewer and lighter parts because itis a single-sided recliner. The Elio technology a;llowsforthe sea t tobe at leas t as l ight asa convent ional sea t. The

INDUSTRY AND REGULATORY ENVIRONMENTCustomersThe ult imate user of the technology is thebuyer ofa new(or used) car . However , OEM customers of sea t sys temsuppliers make the buying decisions. The seat system notonly needs to f it the body of a par ticular car model , buta ls o i s p ar t o f t he " to ta l i nt er io r d es ign" o f t h e c ar : t hedoor panel, instrument panel, console, and headliner. TheOEM provides suppl iers with specs as to requi red type,s truc ture s ize, and styling . Most OEMs. used a sophis-t icated market segmentat ion of car purchasers basedon demog raph ic par amet er s, n eeds , a nd lor lifestylesand try to match the car interior accordingly .:Currentlypositioned as a high-end seat, the ABTS seat is installedmostly in luxury and sports cars.

The OEM market i s highly concent ra ted, and buyerpower is enormous (Exhibi t 4). In the Nor th Americanmarket, the "Big Three" U.S. auto manufacturers, Ford,GM, and Daimler Chrys ler, each has somuch power tha tithasbeen able to squeeze the operating margins ofmajorU.S. seat system suppliers (themselves often multibilliondollar companies) down toabout 2to 5percent. With suchan unfavorable bargaining position for seat suppliers, it

3Jame s McCoy , "Next Advance : Bel ts T ha t A re Par t o f t he Sea t, "Buffalo News, March 31,1996. . . _ ."The propr ie ta ry nature of the technology precludes EhoEngmeermg .from revealing greater detail. ,SInnormal rec liners , a fter the peak load ( fa ilure level) isr eached, thel oa d- ca rr yi ng a bi li ty o f t he r ec li ne r d rops t o z er o, whi ch r esul ts i nmaterial fracture.


EXHIBIT 4 U.S. 1998 Light Vehicle MaTotal U.S. Sales : -15 mi ll ion uni ts

NissanHonda 4%6.5% Europea4,9%

DaimlerChrysler16.2%

Ford 25%Source: Donaldson, Lufkin, & Jenrette.

was of paramount impor tance to Elio nocos t i nf orma ti on t o OEMs, such a s t hsimple design that could easily be revers

OEMs prefer mul tiple sources of sand sys tems and often dic ta te tha t onesupplier supply its competitor(s) with itscomponent s, o r s ys tems . I n t he g loba lsystems, the situation is similar and expforced inthe future asOEM consolidationcontinues.

Although the weighting of the purchies, the key criteria are generally safety,a nd comfo rt a nd eas e o f u s e. Some OEseat sys tem so crucial tha t des ign and mhigh-end seats for some car models areOEMs are increas ingly put ting pressurebent suppliers to find cost-effective soluABTS seat systems.Potential Market Size forElio ABTS Seat TechnologyA few years ago when ABTS seats wadvanced p ro to typi ng s ta ge and f ir stcommercially, many industry experts pconvent ional sea t would soon "go the wretor."? In 1996, for example, 1. D. Powe6Michel le Krebs, " Integrated Sea t-Belts for SeWinnipeg Free Press, September 6, 1996.


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18 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEEXHIBIT5 Benefitsof Adopting NCSeat

cal led the Johnson Controls ABTS seat, known as theI nt eg ra ted S tr uc tu ra l Sea t, " a ma jo r i nnovat ion t ha tcould replace convent ional sea ts and seat bel t sys temson many future vehicles,"? Also in 1996 the v.P. of salesand marketing for TRW, a suppl ier ofconventional andABTS seat-belt components, predicted that "looking outto the year 2000; we see 20to 25percent of the vehic lesgoing to integrated seat-belts." Experts anticipate that" in t he nex t t en yea rs , t he re p robabl y won 't b e a s ea tsuppl ier using convent ional sea t-belt sys tems exceptperhaps for speci fic vehic les l ike dump trucks . .. . ,,9Similarly, Johnson Controls claimed that belt-integratedseats would be the industry standard worldwide withinten years.'?

However , the high cost of exist ing ABTS seats hadso far l imited the potential market s ize for ABTS tech-nol ogy t o t he h igh- end s egment s o f t he pas senger ca r

7"Automotive Sea ts f rom JCI Rank Highest inQual ity, Appea l in J. D.Power andAssociates Study," PR Newswire, November 11, 1996..Ron Turner in ibid. . .9f.dColasanti , product manager of sea ting systems for Findlay Indus-tsies, in ibid.lO"Automobile of the future," Newsbytes News Network, January 16,1996.

EXHIBIT6 Global 1997 Vehicle Unit SalesbyRegion

MiddleEastCentralandSouthAmerica

A s i a - P a c i t i c

WesternEurope

NorthAmerica

Benefit Rationale ImplicationOEMs share cost benefits Reduced ABTS weight CostReduced R&D expense NC seat issca leab le and portable across multiple p la tforms CostReduced inventory Fewer parts-less variability and less buffer stock to protect Costcarrying costs against stockoutEnhanced market Improved business capture (including available conventional Cost/revenueposit ion by being low sea t marke t i nN . A. and Europe and new markets inAsia,cost producer Lat in America , and Southern Europe); bet te r marginsDecreased product No c atastrophic modes of f ailure: better energy management; Costliability issues ABTS seat advantages in rear impactDecreased warranty Fewer welds, fewer parts, and f ewer fatigue problems Costissues

(.Increased leverage Sustainable competitive advantage wi th NC seat system -patent Revenuewith OEMs protected; OEMs have t o come to supp li er f or NC sea tFewer production issues Lower t ol er an ce r equ ir emen ts ; t hi nn er g au ge s te el t ha n most s eat s Cos tPremium pricing Innovative design features-zero-chuck (no looseness in t he system), Revenue

continuously variable and continuously engaged track and reclinermechanisms; high strength characteristics; enhanced safety

13.3M(25%)

15.1M(28.4%) BertrandFaure17.7%17M(32%)

5 10 15 20 Munits

Africa

1.2M(2.3%)

3.2M (6.1%)

oSource: 1998 Automot ive News Data Book Supplement.

OEMs and. end u se rs (Exhi bi t 5 ). G iven th at i t wou ldalso significantly reduce unit costs, the technology wasexpected tobe very price competi tive , appeal to a muchwider share of the market, and, eventually, become thetechnology of choice for a ll OEM brands. This wouldsuggest an annual market potential of up to 17 mil lionuni ts in Nor th America orup to 53 mil lion uni ts wor ld-wide (Exhibit 6). The technology could potentially pen-e trate the s izable heavy t ruck, a ircraf t, and passengertrain markets.CompetitorsThe North American automotive seating market was alsohighly concentrated. Two tier-one players, Johnson Con-trols Inc. (JCI) and Lear Corp. almost equally split about60percent ofthe market and had a dominant sh~e world-wide. The number-three player, .Magna, achieved abouta 10 per cent s ha re i n t h e Un it ed S ta te s (Exhi bi ts 7 , 8 ).With $12.6 bil lion (approximately $9 bil lion automo-tive) and $7.3 billion in sales, respectively, JCI and Learwere fairly large Fortune 500 companies. Exhibit 9 givesin-depth company profiles of the three leading tier-onesuppliers, JCI, Lear, and Magna.

Many of the potential competi tors a lready vhad anABTS seat in thei r product por tfol io or were current lyworking onthe technology. Many smaller sea t compo-nent suppl iers were a lso des igning or manufacturingABTS seat mechanisms. However, the designs currently

market. The total U.S. luxury segment of brands! ' hadh it uni t s al es o f 2 .16 mill ion i n 1997 and con st it ut edabout 15percent of the total U.S. light vehicle market.P

On the OEM s ide , t he re was def in it e awa renes s o fABTS' benef it s and strong latent demand for the tech-nology. As early as 1994, Ford's executive director oftheAutomotive Safety and Engineering Standard's office,Robert Munson, predicted that ABTS seat systems wouldbecome standard and ident if ied them asthe key lever toimprove people's safety:

As an indust ry , we should pay mor e a tt en ti on to sea t bel ts .The nex t gener at ion we' re going to see wil l be sea t bel tsthat are par t of the seat . . .. The shoulder-height attachmentpoint automatically moves up and down asthe seat ismovedforward o rback . Tha t r equi res a much s tr onger sea t and amore secure anchor but provides better f it .13 i

A seat s ys tem bas ed on E lio 's ABTS t echnol ogy t hu soffered several strong benefits over existing.models to

11Defined aspassenger vehicles with anaverage base price ofmore than$30,000 including sport-utility vehicles and luxury passenger cars butexcluding several vans and h igh-price pickups, . .12JeanHall iday, "Luxury SUVs Steal Some Horsepower f rom RivalCars," Advertis ii ig Age, September 2 8,1998. '13JimHenry, "Ford Sees Simple Safety Solutions," Automotive News,

c June 6, 1994.


EXHIBIT7 European 1997 Market SAutomotive SeatsTotal European Revenues: -$7.5 Bil

VW3.8% BMWDelphi 3.4% Other

LearCorp. & Keiper -2Source: Automotive News, Lear Corp., 1997 Form

EXHIBIT8 U.s. Seat Systems:1997 MTotal Revenues: -$8.2 Billion

TS Tech OtherDelph i 4%(5%)

6%

Magna10%

Source: Automotive News, Lear Corp., 1997 Form 10

available on the market were not cos t-et ions . Whi le i t was pos si bl e fo r a newemerge atany time, numerous industry exthe oppor tuni ty to see Elio' s des ign acknthe Elio mechanism was a breakthrough


10/24

20 PARTONE: INTEGRATINGTECHNOLOGYAND STRATEGY:AGENERALMANAGEMENTPERSPECTIVEEXHIBIT9 CompanyProfilesJOHNSON CONTROLS, INC.Johnson Controls, Inc., a Wisconsin-based Fortune 500 company, is a g loba l leader in supplying automot ive seating and interio rsystems.Automotive Systems GroupThe Automot ive Systems Group consists o f i ts seating and interior systems business, which designs and manufactures completeautomot ive seating and interior systems for manufacturers ofcars and l ight t rucks, and its bat te ry business, which produces automo-t ive bat teries for the rep lacement and origina l equ ipment markets. The business' seating systems products include seats, seatingfoam pads, mechanisms, metal f rames, and t rim covers. The business' inter io r systems products include overhead systems, doorsystems, f loor conso les, and instrument panels; JCI special izes in the integra tion of e lect ronics into veh ic le inter iors. Worldwide thebusiness is among the top twenty automot ive suppl ie rs, with sales to the top ten automobile companies in the world.

Inaddition to having domestic opera tions, the seating and interiors business has opera tions in the Asia/Pacific reg ion, Canada,Europe, Mexico , South America , South Afr ica, and Austral ia through wholly owned, majority-owned and partial ly owned businesses.JCI opera tes wholly owned and majori ty-owned manufacturing and assembly facil i ties in 137 locat ions worldwide. The businessisthe world's largest suppl ie r o f automot ive seating systems and the largest independent North American suppl ie r o fautomot iveinterior systems, subsystems, and components.

JCI 's seating and interio r systems business has grown signi ficant ly during the last several years. Whi le the seating systemsopera tions have expanded through interna l growth, the interio r systems growth has been fue led byvigorous strateg ic acqutsl tlons.Seating and interio r systems business sales represent approximately 90 percent o f to ta l segment sales. The Automot ive SystemsGroup 's bat te ry business accounts for the remaining portion of the segment 's sales.Major Customers and CompetitionSales to JCI 's major customers, as a percentage of conso lida ted net sales, were asfo l lows for the most recent three-year period:

Customer 1998 1997 1996Ford Motor Company 16% 17% 14%Ge ne ral Mot or s Cor por at ion 1 3% 13% 11%Chrysler Corporation 10% 11% 10%

Source: JohnsonControls 10-K,December 1998.Approximate ly 60percent o f the seating and interio r systems sales over the last three years were to the three automobile manufac-turers l isted in the tab le . In 1998, approximate ly 75 percent o f these sales were domestic, 15percent were generated in Europe, and10percent were att ribu table to other foreign markets. New vehic le sales ofmajor automot ive manufacturers have a major impact onJCI 's opera tions. There fore , this business segment isa f fected by general business conditions in the automot ive industry.

The business' seating systems opera tions principal ly compete inNorth America with Lear Corpora tion and Magna International ,Inc. InEurope, the seating systems opera tions primari ly compete with Lear Corpora tion , Faurecia, and automot ive manufacturers.InNorth America , the business' inter io r systems opera tions compete with Lear Corpora tion ; Davidson Interior Trim, a d iv is ion ofTextron, Inc.; UT Automot ive, a subsidiary o f United Technolog ies, Inc.; and Visteon, a d iv is ion of Ford Motor Company.In Europe,the primary competi to rs are Lear Corpora tion and Sommer All ibert.FinancialsJCI has experienced strong growth insa les aswel l as opera ting and net income unt il end-o f-year 1998. In f iscal year 1998, JCIearned $337 mil lion on sales of$12.5 b il l ion. This included a restructuring charge of$48 mil l ion, to be incurred in the aftermath ofthe Becker acquisition (discussed later).

JOHNSON CONTROLS, INC.Annua l income sta tement ($ millions)

30-Sep-98 30-Sep-97 30-Sep-96 30-Sep-95 30-Sep-94Sales-core business 12,586.8 11,145.4 9,210.0 7,400.7'" 6,870.5Total sales 12,586.8 11,145.4 9,210.0 7,400.7 6,870.5"Cost o fgoods sold 10,776.(2 9,485.6 7,878.3 6,236.0 5,762.0SG&A expense 1,146.6 1,062.7 852.8 769.6 743.3Unusual income/expense 0.0 70.0 f i : & 0.0 0.0 0.0,'Total expenses 11,922.8 10,618.3 8,731.1 7,005.6 6,505.3

~

SECTIONONE: TECHNOLOGIC30-Sep-98 30-Sep-97 30-Sep-96 30-Sep

Interest expense, Non-operational (133.5) (122.7) (73.4) (53Other-net 86.3 21.2 16.0 (3Pre-tax income 616.8 425.6 421.5 338Income taxes 256.0 180.9 171.8 143Income after taxes 360.8 244.7 249.7 195Minority interests (23.1) (24.1) (27.0)Preferred dividends (27(9.5) (9.5) (9.5) (9Netincome (excluding E&D) 328.2 211.1 213.2 158Discontinued operations 0.0 67.9 12.0Accounting change 270.0 0.0 0,0 0Netincome (including E&D) 328.2 279.0 225.2 186.Primary EPS excluding E&D 3.88 2.53 2.58Primary EPS includ ing E&D 1.3.88 3.34 2.73 2.Div idends per common share 0.92 0.86 0.82Shares to calculate primary EPS (millions of shares) 0.84.5 83.5 82.6 82.3

AssetsCash & equivalentsAccounts receivableInventoryOther current assetsTotal current assetsLong-term investmentsProperty plant and equipmentAccumulated depreciation and amortizationProperty p lant and equ ipment , netGoodwill/intangiblesOther long-term assets

JOHNSON CONTROLS, INC.Annua l balance sheet ($ mill ions)

30-Sep-98 30-Sep-97 30-Sep-96 30-~ep-95134.0 111.8 165.2 103.81,821.1 1,467.4 1,376.7 1,287.5428.2 373.4 344.7 355.51,020.9 576.7 962.5 317.1

3,404.2 2,529.3 2,849.1 2,063.9166.2 144.6 128.4 90.83,652.0 3,100.1 2,618.5 3,041.5(1,769,1) (1,567.1) (1,298.3) (1,522.7)1,882.9 1,533.0 1,320.2 1,518.82,084.5 1,560.3 548.2 519.1404.3 281.4 145.3 128.3

7,942.1 6,048.6 4,991.2 4,320.9

1,625.2 1,341.9 1,178.2 983.51,289.5 537.8 248.1 130.239.4 118.4 33.2 67.71,334.3 974.6 723.1 728.14,288.4 ~~ 2,972.7 2,182.6 1,909.5997.5 806.4 752.2 630.0997.5 806.4 752.2 630.00.0 0.0 0.0 0.0714.8 581.6 548.6 441.2

6,000.7 4,360.7 3,483.4 2,980.7

Total assetsLiabilitiesAccounts payableShort-term debtCurrent LTdebt and CLOsOther current liabilit iesTotal current liabilit ies

j

Long-term debtTotal long-term debtDeferred taxesOther long-term liabilit iesTotal liabilities


11/24

EXHIBIT 9 (continued)JOHNSON CONTROLS, INC.

Annua l balance sheet ($ mil l ions)30-Sep-98 30-Sep-97 30-Sep-96 30-Sep-95 30-Sep-94

Stockho lders' equ ityPreferred stock 140.1 143.4 154.6 160.1 164.1Common stock 14.5 14.4 7.2 7.1 7.1Additional paid in capital 569.9 552.6 535.0 520.5 509.9Retained earnings 1,463.3 1,217.9 1,010.7 853.3 730.7

Ii Treasury stock (138.6) (121.0) (70.0) (62.1) (62.4)ESOP debt guarentee (107.8) (119.4) (129.7) (138.7) (146.6)II Total shareho lders' equ ity 1,941.4 1,687.9 1,507.8 1,340.2 1,202.8

Total l iab il it ies and shareho lders' equ ity 7,942.1 6,048.6 4,991.2 4,320.9 3,806 ..9Shares outstanding 84.8 84.1 82.9 82.2 81.3

LEAR CORPORATION

22 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVE

Lear Corpora tion isa Fortune 500 company that was founded in 1917 asAmerican Metal Products. S ince its inception , i thas been asuppl ie r o fautomotive seat f rames to GM and Ford. In 1988, Lear went through a leveraged buyout ini tiated bythe company'smanagement, which eventua lly accelerated growth and set the stage for an Ini tial Pub lic Offer ing in 1994.

Since the LBO, Lear's revenue has experienced impressive growth upf rom $900 mil lion to $7.34 b il lion in 1997. Lear movedbeyond its expertise inseat f rames and is now focusing onthe U.S. market and United Sta tes-based OEMs through interna l growthand acquisi tions ofvarious seat system and subsystem suppl ie rs around the world . These acquisi tions have boosted Lear'sdomestic and g loba l market share and enabled the company to secure 28 percent in the United Sta tes and 18percent share in theWestern Europe seat system market. Through these acquisi tions aswel l asthrough twenty-six joint ventures, Lear has a lsoestab lished a local presence in Russia, South Afr ica , Tha iland, and China aswel las obtained access to the Lat in American market.

Lear now manufactures and suppl ies OEMs with complete automot ive inter iors, including f loor and acoustic systems, doorpanels, instrument panels, and headl iners. Lear iscurrent ly supplying twenty-seven OEMs ofwhich the major customers are Ford,GM, Fia t, Daimler Chrysler, Volvo , Saab, Volkswagen, and BMW. Ford and GM accounted for approximate ly 29 percent and 27percent , respect ively, o f the company's net sales. Over 40 percent o f Lear's revenues are att ribu table to sales in the l ight t ruckcategory (see table).

Light Truck Midsize Compact Luxury/Sport Full Size43% 21% 18% 12% 6%

Source: Form10-K.Lear's main capab il i ty l ies in i ts strong systems integra tion ski lls, such as inseat systems and the ent ire automot ive inter io r.As a resul t o f integra ting components f rom many d if fe rent sources, the f inal system design may not a lways possess the h ighestconceptua l integri ty , but Lear may be more inclined to incorpora te a brand-new innovat ive externa l technology into i ts seat systems.

Lear a lso has adequate g loba l expertise ' in.JIT manufaCturing and anadequate abi li ty to integra te acquisi tions, a lthough it issomewhat beh ind JCI in both. Strong resources such as good eng ineering talent and a customer-focused organ izat iona l structurecontr ibu te to Lear's competi tive advantage. The strong customer focus of i ts organ izat ion and long-stand ing close relat ionships withOEMs allow Lear quickly to become aware ofand address market needs. I ts adequate JIT facil ity network helps the company and itscustomers ach ieve low-cost posit ions and del iver products to OEMs onshort not ice.FinancialsLear has experienced strong growth insa les aswel l as opera ting and net income unt il end-o f-year 1997 (see tab le). InDecember1 .998,however, Lear announced a restructuring p lah entai ling the closure or conso lida tion ofe ighteen manufacturing facil i ties and aCDt in the workforce of 2 ,800 employees, or4 percent , " to improve Lear's cost structure and competi tive posit ioning."

~


LEAR CORPORATIONAnnual income sta tement ($ mil l ions)

31-Dec-97 31-Dec-96 31-Dec-95 31-DecSales core business 7,342.9 6,249.1 4,714.4 3,147Total sales 7,342.9 6,249.1 4,714.4 3,147Cost o fgoods sold 6,533.5 5,629.4 4,311.3SG&A expense 2,883Depreciation 286.9 210.3 139.0 82Other operating expense 41.4 33.6 19.3 110.0 0.0 0.0 0Total expenses 6,861.8 5,873.3 4,469.6 2,977Interest expense, Non-operational (101.0) (102.8) (75.5)Other-net (46(34.3) (19.6) (16.4) (8Pre-tax income 345.8 253.4 152.9 114Income taxes 143.1 101.5 63.1 55Income after taxes 202.7 151.9 89.8 59Minority interestsEquity in affiliates (3.3) (4~0) 1.7 (08.8 4.0 2.7 0Netincome (excluding E&D) 208.2 151.9 94.2Extraordinary items 59.(1.0) 0.0 (2.6) 0.Netincome (including E&D) 207.2 151.9 91.6 59.Primary EPS excluding E&D 3.14 2.51 1.93Primary EPS including E&D 1.3.13 2.51 1.87 1.Div idends per common shareShares to calcu la te primary EPS (mill ions ofshares) . 0 .00 0.00 0.00 0.066.3 60.5 48.9 47.4

LEAR CORPORATIONAnnual balance sheet ($ mil lions)

'31-Dec-97 31-Dec-96 31-Dec-95 31-Dec-94AssetsCash & equivalents 12.9 26.0Accounts receivable 34.1 32.0Inventory 1,065.8 909.6 831.9 579.8Other current assets 231.4 200.0 196.2 126.6304.8 211.8 145.0 79.9Total current assets 1,614.9 1,347.4 1,207.2 818.3Long-term investmentsProperty plant and equipment 0.0 0.0 0.0 30.3Accumulateddepreciation and amortization 1,380.6 1,176.7 860.4 504.5Property p lant and equ ipment , net (441.5) (310.4) (217.6) (150.3)Goodwililintangibies 939.1 866.3 642.8 354.2Other long-term assets 1,692.3 1,448.2 1,098.4 499.5

212.8 154.9 112.9 12.8Total assets ( > 4,459.1 3,816.8 3,061.3 1,715.1


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24 PARTONE: INTEGRATINGTECHNOLOGYAND STRATEGY:AGENERALMANAGEMENTPERSPECTIVEEXHIBIT 9 (continued) SECTION ONE: TECHNOLOGIC

LEAR CORPORATION 31-Jul-98 31-Jul-97 31-Jul-96 31-JulAnnua l balance sheet ($ millions) Cost o fgoods soldSG&A expense 7,582.5 6,366.2 4,811.2 3,85618.131-0ec-97 31-0ec-96 31-0ec-95 31-0ec-94 31-0ec-93 Depreciation 481.7 377.8 16Interest expense 306.2 232.1 190.3 31Liabilities (2.9) (16.5)Other operating expense (4.3)Accounts payable 1,186.5 960.5 786.6 656.7 298.3 Unusual income/expense (23.2) (31.6) (19.6) (0.0 0.0Short-term debt 37.9 10.3 16.9 84.1 48.2 Total expenses 0.0Current LTdebt and CLOs 9.1 8.3 9.9 1.9 1.2 8,480.7 7,031.9 5,355.4 4,32Other current liabilit ies 620.5 520.2, 462.6 238.5 158.1 Other-net 54.2 189.6 0.0 1Total curre~t liabilit ies 1,854.0 1,499.3 1,276.0 981.2 505.7 Pre-tax income 764.3 849.5 500.8 48Long-term debt 1,063.1 1,054.8 1,038.0 418.7 498.3 Income taxes 245.7 232.5 162.3 15Income after taxesTotal long-term debt 1,063.1 1,054.8 1,038.0 418.7 498.3 518.6 617.0 338.5 328Minority interestsDeferred taxes 61.7 49.6 37.3 25.3 15.9 (12.4) (13.6)Other long-term liabilit ies 273.3 194.4 130.0 76.3 3~_.7 Miscellaneous earnings adjustment (19.3) (11(28.4) (19.4) (14.4) 0Total liabilities 3,252.1 2,798.1 2,481.3 1,501.5 1,058.6 Netincome (excluding E&D) 477.8 584.0 304.8 317Stockho lders' equ ity Netincome (including E&D)Common stock 0.7 0.7 0.6 0.5 0.4 477.8 584.0 304.8 317Additional p aid in capital 851.9 834.5 559.1 274.3 156.6Retained earnings 401.3 194.1 42.2 (49.4) (109.2) Primary EPS excluding E&D 6.64 8.29Treasury stock (0.1) (0.1) 0.0 0.0 0.0 Primary EPS including E&D 4.90 56.64Other equity (46.8) (10.5) (21.9) (11.8) 8.0 8.29 4.90 5Dividends PEtfcommon shareTotal shareholders' equity 1,207.0 1,018.7 Shares to calcu la te primary EPS 1.29 1.14 1.08 1580.0 213.6 55.6 71.9 70.4 62.2 61.Total liabilities and shareholders' equity 4,459.1 3,816.8 3,061.3 1,715.1 1,114.3 MAGNA INTERNATIONALShares outstanding 66.9 65.6 56.2 46.1 34.5 Annua l balan ce sheet (mi ll io ns o f Canad ian dol la rs ]

31-Jul-98 31-Jul-97 31-Jul-96 31-Jul-95MAGNA INTERNATIONAL, INC. AssetsMagna International, Inc. is a leading global supplier of technologically advanced automotive systems. The company employs more Cash & equivalentsthan 49,000 people at 159 manufacturing divisions and 31 product development and eng ineering centers throughout North America , 1,019.6Europe, and Asia. Magna designs, eng ineers, and manufactures a complete range ofexterior and interior vehicle systems. Magna Accounts receivable 878.8 1,089.8 413.9has a focus on leading-edge technology and processes, with a sta ted min imum of7 percent o f EBIT invested in Research and Inventory 1,801.9 1,165.0 927.2 670.6Development. This investment paired with eng ineering , manufacturing , and d istr ibu tion synergies among Magna 's e ight automotive Prepayments & advances 1,094.7 669.3 526.1 446.975.6business groups have made itone of the largest automotive parts manufacturers in the world . Other current assets 34.9 24.3 29.90.0 0.0 0.0 0.0Magna Interior Systems (MIS) Total current assetsMagna Interior Systems isone of the world 's largest full-service suppl ie rs o f integra ted interio r systems and components. The 3,991.8 2,748.0 2,567.4 1,561.3Long-term investmentsgroup 's major products include seating , seat t racks, safety restraints, inter ior door panels, instrument panels, conso les, overhead Property plant and equipment, other 147.9 99.9 82.6 75.4systems, and package trays. Property p lant and equ ipment , net 3,737.9 2,071.1 1,509.5 1,304.7Financials Goodwill/intangibles 3,737.9 .2,071.1 1,509.5 1,304.7Magna has experienced strong growth insa les as wel l as opera ting and net income through end-o f-year 1998. Conso lida ted sales Other long-term assets 464.6 297.8 126.5 89.8278.5 111.9increased to $9.2 b il lion . Net income was $454 mill ion compared to $426 mil lion in the previous year, excluding unusual gains 91.3 78.6(see table). Total assets 8,620.7 5,328.7 4,377.3 3,109.8

MAGNA INTERNATIONAL, INC. LiabilitiesAnl1 ual i ncome s ta tement (mi ll io ns o f Canad ian dol la rs ) Accounts payable \

Short-term debt1,785.4 1,069.2 718.5 611.631-Jul- 98 31-Jul- 97 31-Jul~96 31-Jul-95 31-Jul-94 Other current liabilit ies 301.6 44.5 52.9 92.0

gales-Core business 7,691 .8 808.7 466.6 286.7 306.59,190.8 5,856.2 4,795.4 3,883.9 Total current liabilit ies.Total sales r z , ' 2,895.7 1,580.3 1,058.1 1,010.19,190.8 7,691.8 5,856.2 4,795.4 3,883.9 Long-term debt 502.4 248.9 284.0 244.7Total lonq-tarm debt 502.4 248.9 284.0 244.7

[' ii.


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26 PART ONE: INTEGRATING TECHNOLOGY AND STRATEGY: A GENERAL MANAGEMENT PERSPECTIVEEXHIBIT 9 (continued)

MAGNA INTERNATIONALAnnua l balan ce sheet (mi ll io ns o f Canad ian dol la rs )

31-Jul-98 31-Jul-97 31-Jul-96 31- Jul -95 31- Jul- 94Other long-term liabilit ies 277.2 233.5 278.2 263.4 196.9Total liabilities 3,675.3 2,062.7 1,620.3 1,518.2 990.8Stockho lders' equ ityPreferred stock 0.0 0.0 0.0 0.0 0.0Common stock 2,189.5 1,569.3 1,464.4 952.1 942.6Additional paid in capital 894.7 457.8 430.1 0.0 0.0Retained earnings 1,697.8 1,302.3 798.3 561.8 325.2Other equity 163.4 (63.4) 64.2 77.7 52.0Total shareho lders' equ ity 4,945.4 3,266.0 2,757.0 1,591.6 1,31~8

Total l iab il i ties and shareho lders' equ ity 8,620.7 5,328.7 4,377.3 3,109.8 2,310.6Shares outstanding 77.3 70.1 68.5 60.3 59.7

JOHNSTOWN AMERICA INDUSTRIES, INC.Johnstown America Industr ies, Inc. (JAil ) is the parent company of Bostrom Seating . Through its subsidiar ies, i tdesigns and manu-factures components and assembl ies for medium and heavy-duty t rucks and h igh-qual ity, complex iron castings for t ransportat ion-related and a variety o f o ther markets. JAi l conducts i ts business through three opera ting groups within the t ransporta tion industry:t ruck components and assembl ies opera tions, i ron casting opera tions, and f re ight car opera tions.Truck components and assembliesGunite Corpora tion isa leading North American suppl ie r o fwheel-end systems and components such as brake drums, d isc wheelhubs, spoke wheels, and rotors to OEMs in the heavy-duty t ruck industry. Gun ite is a market leader in the product ion of automat ics lack adjusters (braking devices mandated for a ll new trucks produced with a ir brakes since October 1994) and wheel-end com-ponents for ant i- lock braking systems. Inaddition to serving OEMs, Gunite has sign if icant sales to the less cyclica l a ftermarket.Bostrom SE/at ing, Inc. (Bost rom) is a leading manufacturer o f a ir suspension and sta tic seating systems for the medium and heavy-duty t ruck and bus industr ies. Fabco Automot ive Corpora tion (Fabco) is a leading suppl ie r o f steerab le drive axles, gear boxes, andrelated parts for heavy on-/of f-highway t rucks and uti l ity veh ic les.Bostrom seating ,On January 13,1995, JAi l acquired Bostrom S-eating . The total purchase price was approximately $32.4 mil l ion. Bostrom Seatingdesigns, manufactures, and markets a ful l l ine ofa ir suspension and sta tic seating systems. Bostrom is ISO 9001 certi fied . I tsproducts are sold primari ly to the OEM heavy-duty t ruck market as wel l as to the aftermarket. I ta lso suppl ies i ts seating systemsto t he med ium-du ty t ru ck and bus marke ts . Bos trom's sea ts a re o ff ered ass t anda rd o ra s anop ti on bya l l major Nor th Ame ri canheavy-duty t ruck manufacturers. I ts top f ive customers accounted for 83 percent o f Bostrom's 1997 net sales. Navistar accounted forapproximately 30 percent o fsuch sales (includ ing both OEM and aftermarket sales). Bostrom isthe leading market suppl ier for thesupply o fseating for new trucks, with an est imated market share in excess of50 percent .

Bostrom sel ls i ts products through three d istr ibu tion channels: d irect insta llat ion in new veh ic les byOEMs, stocking d istr ibu tors,and t ruck dea lers. I tuses a combination ofd irect salespeop le and independent sales representat ives to service these market chan-nels. Bostrom also sel ls d irectly and, by means of i ts stocking d istr ibu tors, to a large number of smaller OEMs who produce special tyveh ic les, buses, and const ruct ion equ ipment , among other things.

Bostrom's manufacturing facil ity is located in Piedmont, A labama. For a number of i ts OEM customers, Bostrom ships i ts seats tol ine-set ting facil i ties, which i thas estab lished near certa in OEM plants to provide just- in-t ime inventory of seats to the assembly l inein t he o rder t ha t t he sea ts w il l b eused .FinancialsDl/r ing 1997, JAi l 's t ruck components and assembl ies, i ron castings, and f reight car opera tions generated net sales of$284.7,mi l l ion, $130.9 mill ion , and $234.7 mill ion, respect ively. Durin .g 1996, they generated,'ne t sales of $237 mil l ion, $125.1 mil l ion, and$1"97.8 mill ion , respect ively. The signi ficant decline indemand experienced in 1996 :Ad early 1997 in f re ight car opera tionsproduced signi ficant opera ting losses that, coupled with JAi l 's s ign if icant debt service requirements, o ffse t strong opera ti

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