Teradyne’s Aurora Project

Solving The Innovator’s Dilemma

Sailu Challapalli, Michael Chu, Annie Kuo, Emily Liu, Arundhati Singh, Erick Tseng

Roadmap Background

Teradyne Motivation & Background Organization

The Innovator’s Dilemma CMOS Windows NT

The Aurora Project Analysis of Aurora Extending the Aurora Methodology Conclusion

Thesis The Aurora Project solved the

Innovator’s Dilemma However, the Aurora methodology

is not a guaranteed solution to the Innovator’s Dilemma

Sources Key interviews

Alex d’Arbeloff, CEO and Chairman Marc Levine, Product Group Manager Hap Walker, Group Engineering Manager Tom Newman, VP Corporate Relations Gordon Saksena, ICD Engineer

Harvard Business School Video interviews Case studies

Bedford plant trip

Introduction: Teradyne Founded in 1960 by MIT alumni Alex

d’Arbeloff and Nick DeWolf Headquartered in downtown Boston Industry leader for Automatic Test

Equipment (ATE) for semiconductor manufacturing

Annual sales of $1.8 billion 8,000+ employees worldwide Also a market leader in software,

telephone, and PC Board testing

Teradyne’s OrganizationAlex d’Arbeloff

Chairman and CEO

Alex d’ArbeloffChairman and CEO

Owen RobbinsVice Chairman and CFO

Owen RobbinsVice Chairman and CFO

George ChamillardPresident and COO

George ChamillardPresident and COO

James PrestridgeVice Chairman

James PrestridgeVice Chairman

Integra Test(Aurora)

Integra Test(Aurora)

Mixed Signal(ICD)

Mixed Signal(ICD)Memory TestMemory TestLogic Test

(VLSI)

Logic Test(VLSI)

Finance and ControlFinance and Control

Sales and ServiceSales and Service

Alex d’Arbeloff Chairman and

CEO of Teradyne Heterogeneous

Engineer Vision Networking Business acumen History of

experimentation

The “Innovator’s Dilemma”

Established firms follow a technology trajectory in accordance with customer demands

These firms are not mobile enough to respond to emerging disruptive technologies

Technology Trajectories

Per

form

ance

Time or Engineering Effort

Sustaining Technology

Disruptive Technology

Key Components of Innovator’s Dilemma

Innovator’s Dilemma Teradyne

Sustaining Technologies: BipolarUNIX

Disruptive Technologies: CMOSNT

Barriers to Innovation: Industry veteranCustomer-driven

Value Network: High-end ATE

Disruptive Technology Characteristics

Cheaper and smaller Initially worse performance Higher trajectory slope Gains initial foothold in low end markets

Potentially Disruptive Technologies in Semiconductor ATE CMOS Windows NT

ATE Hardware:CMOS As Disruptive Technology

CMOS vs. Bipolar ECL Lower speed Lower accuracy Higher level of integration Less power consumption Simpler design

Industry trend toward CMOS

ATE Software:NT As Disruptive Technology Windows NT vs. UNIX

Traditionally less powerful workstations

Not compatible with customers’ installed UNIX base

Reduced software development time and cost due to OLE/COM

Industry trend towards Windows

The Rise of CMOS and Windows NT

Per

form

ance

Time or Engineering Effort

Bipolar, UNIX

CMOS, Windows NT

Key low end niche market was microcontrollers

Roadmap Background The Aurora Project

Motivations and Goals Implementation Results Solving the Innovator’s Dilemma

Analysis of Aurora Extending the Aurora Methodology Conclusion

Market Environment Highly cyclical Semiconductor

Testing Industry

ATE

indu

stry

in

rece

ssio

n

Reco

very

1986 1990 1993 1995

Reco

rd e

arni

ngs

Aurora Project: Motivations Emergence of new technologies:

CMOS as predominant semiconductor technology Windows NT as operating system

Competitors developing new technologies Credence

“It was clear that our industry was recovering very quickly, and at that point I was looking beyond what we were doing to

see what the holes were”

– Alex d’Arbeloff

Aurora Project Investigate CMOS and Windows NT Produce smaller, cheaper testers Target new customers in low-end

ATE market Microcontrollers

Small market share Trade-off accuracy for cost

Aurora Project: Implementation Challenges

Teradyne as an immobile firm Large Established Customer-driven Public company

Key Leaders Marc Levine appointed

general manager Experienced software

engineering manager in ICD

Total Quality Management (TQM) manager

Hap Walker Background in hardware,

software, and tester design

Aurora Project Created as small division

Separate facilities in Bedford, MA Separate budget

Internal hires and new recruits “Start-up” culture

Quick development Reported directly to board of directors

The New Look and Feel...

J973 VLSI Tester J750 INTEGRA Tester

vs.

J750: A Technical Success

Reduced costs by 25% “Zero footprint

system” Elimination of bulky

mainframe and interconnection cabling

95% parallel test efficiency for up to 32 devices

J750 IG-XL test software uses Windows NT

A Financial Success Total orders valued over

$200M in less than 2 years Fastest product ramp in

Teradyne history

1995

Start

of A

urora

Proj

ect

1998

100 Sys

tem

s sol

d

350 Sys

tem

s

sold 500 S

yste

ms

sold

1999

2000

Solving the Innovator’s Dilemma

Innovator’s Dilemma Aurora Project

Identification of DisruptiveTechnologies:

CMOSNT

Selecting Suitable Markets: Microcontrollers

Dependence on Customers: New market chosen

Constraints Imposed By aLarge Corporation:

Creation ofautonomous division“Start-up” culture

Roadmap Background The Aurora Project Analysis of Aurora

Sources of Internal Resistance

Extending the Aurora Methodology Conclusion

Sources of Internal Resistance

Emigration of Talent Customer Satisfaction Technical Feasibility Previous Instances of Failure

Emigration of Talent Open mobility across divisions

Entrepreneurial Empowers employees

Gambling the firm’s best engineers on a risky venture Failure would waste valuable resources

Managers fear loss of talent to the Project Jeopardizing the firm’s core business

Customer Satisfaction: Lack of Customer Interest Testing business is very customer-driven

Based on long, well-developed relationships Teradyne must be very responsive to

customer needs Very little customer interest in Aurora

Most customers required greater accuracy Customers preferred familiar technology

Avoid wasting resources retraining technicians

Customer Satisfaction: “The Customer is Always Right”

Teradyne managers felt obliged to listen to customer needs and recommendations

Managers did not want to devote resources to undesired technology

“These projects are big bets. So you bet the division every time you do one of these

things… The problem is that your customers lock you in.”

– Ed Rogas, Vice President of Logic Test Division

Technical Feasibility Doubts about meeting device

specifications Device Speed Device Accuracy

Software Compatibility Backward compatibility with previous

product line Compatibility with other Integra test

products

Past Failures: History of Experimentation

Alex d’Arbeloff has a history of suggesting new technologies to the firm Kinetrix J401 Tester

Many past projects were unsuccessful Many of these projects were also met

with internal resistance but then initiated with d’Arbeloff’s backing

Roadmap Background The Aurora Project Analysis of Aurora Extending the Aurora Methodology

Past Failures

Conclusion

Aurora’s Extensibility

Is the Aurora methodology a formula for solving the Innovator’s

Dilemma…

1) Within Teradyne?2) In any other company?

Past Failures: Kinetrix Foray into Semiconductor Handling

Business Populated by 12 companies with no

economies of scale to step forward Technology was not developed with

customers in mind Collaborated with MIT mechanical engineers

Customers did not find the device familiar

Past Failures: J401 Tester Project Goals

85% cheaper than existing testers Easier to program

Implementation D’Arbeloff set up a new facility three blocks

away from Boston headquarters Tom Newman hired internally to lead

initiative Startup culture

Past Failures: J401 Tester Results

Successfully met product specifications Product was 75% cheaper Programming interface was extremely

user-friendly No market adoption

Still too expensive for new intended market

No “correlation in test” Sold only 24 testers in first two years

(compare to Aurora’s sales of 350)

J401 Tester: A Direct Correlation to Aurora Both projects were…

Extremely ambitious Met with similar internal resistance Initiated thanks to Alex d’Arbeloff’s

persistence and backing Set up as startup ventures Technically successful

Roadmap Background The Aurora Project Analysis of Aurora Extending the Aurora Methodology Conclusion

Conclusion The Aurora Project did solve

Christensen’s Innovator’s Dilemma Overcame hurdles that are typical of large,

established firms Established a new product trajectory Technology was successfully reintegrated

back into the firm

Conclusion (continued) Teradyne has not developed a

formula for success Too many uncontrollable forces

Market conditions Technical feasibility Company culture

The Alex d’Arbeloff Factor

“It may be that you need a CEO like Alex d’Arbeloff as part of the formula [for solving the Innovator’s Dilemma]. He’s a

very bright, very persistent person and he understood entrepreneurial startups.”

– Marc Levine, Aurora Project Manger

Closing Remarks “Discovering markets for emerging technologies

inherently involves failure, and most individual decision makers find it very difficult to risk

backing a project that might fail because the market is not there.”

– Clayton Christensen, The Innovator’s Dilemma

“One must always be prepared for failure. Failure does not result in professional death. Instead,

we must wrap failures back into the firm.”

– Tom Newman, J401 Project Manager

Questions

Teradyne’s Aurora Project:Solving the Innovator’s

Dilemma