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MBA Program

McGraw−Hill Primis

ISBN: 0−390−50558−7

Text: Richard Ivey School of Business — The University of Western Ontario

Harvard Business School General Management Cases

Harvard Business School POM Cases

Course:TMGT/540Management of R&D and Innovation Processe

University of PhoenixGraduate Business and Management

McGraw-Hill/Irwin��

MBA Program

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MBA Program

Contents


3M: Profile of an Innovating Company 1

Case 1

Richard Ivey School of Business — The University of Western Ontario

WAVERIDER COMMUNICATIONS, INC.: THE WIRELESS LAST MILE 21

Case 21


Disruptive Technology a Heartbeat Away: Ecton, Inc. 35

Case 35


ACER GROUP’S R&D STRATEGY − THE CHINA DECISION 54

Case 54


Hewlett−Packard: Singapore (A) 68

Case 68

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3M: Profile of an Innovating Company

Case 1© The McGraw−Hill Companies, 2001

Harvard Business School 9-395-016January 3, 1995

Professor Christopher A. Bartlett and Research Associatee Afroze Mohammed prepared this case as the basis for classdiscussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1995 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. Nopart of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted inany form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without thepermission of Harvard Business School.

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As a perennial winner in Fortune magazine’s annual poll of American CEOs todetermine “The Ten Most Admired Corporations,” 3M was almost universally recognized asone of the world’s most consistently innovative companies. Indeed, Fortune described it as “akind of corporate petri dish that fosters a culture of innovation.” In an era when largecompanies were struggling to reignite employees’ entrepreneurial spark, 3M was thebenchmarking standard.

Yet, in November 1991, as “Desi” DeSimone assumed the job of CEO in the midst of aworldwide recession, he was more focused on 3M’s uncertain future than on its glorious past.Beyond the stagnating sales and declining margins he knew would be reflected in his firstannual report (see Exhibit 1), DeSimone was aware that the company faced some longer termchallenges. With a portfolio of over 100 core technologies being leveraged into some 60,000products which it sold in 200 countries, some observers were beginning to ask whether this $14billion giant with over 88,000 employees could continue its extraordinary innovation-poweredgrowth and expansion. It was a question that the new CEO knew he would have to confronthonestly. A lot more than the continued admiration of his Fortune 500 peers depended on it.

The Beginning: Foundations of 3M’s Values

In 1902, on the basis of a report that deposits of corundum, an abrasive mineral, hadbeen found nearby, five businessmen from Two Harbors, Minnesota invested $1,000 each toform Minnesota Mining and Manufacturing (3M). When it was learned that the mineral depositwas not commercially viable, management decided to manufacture its own sandpaper. Butinitial manufacturing efforts were not much more successful than its earlier miningperformance, and losses continued. Things began to change only after a young bookkeepernamed William L. McKnight took the place of 3M’s sales manager who had quit in frustrationover the product’s continuing quality problems. By communicating directly with the 3M plant,he gradually resolved the quality problems; and by taking the product directly to customers’front-line operations he helped develop new applications. Finally, after 14 years of losses, thecompany turned a profit in 1916.



Case2 © The McGraw−Hill Companies, 2001

395-016 3M: Profile of an Innovating Company

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The Founding Philosophy

Despite continuing struggles, 3M’s first quarter century was a vital period that saw theemergence of many of the values and beliefs that subsequently guided the company’sdevelopment. One pivotal event occurred in 1916 when McKnight, now the general managerresponsible for sales and production, authorized the creation of a laboratory to deal with thecontinuing problems with 3M’s sandpaper. It was a tiny 6 x 11-foot enclosure staffed by a singleemployee, but its impact on product quality was immediate. Within 18 months a larger lab wasbuilt and the seeds of 3M’s technology-driven culture were sown.

A second influential event occurred when McKnight received a letter from an inkmanufacturer named Francis Okie asking for samples of every mineral grit size used forabrasives. Curious to find out why he had not written to a mineral supply house, McKnightdispatched a salesman who reported that Mr. Okie seemed to be a very creative man with anidea for developing a waterproof sandpaper. Eventually, McKnight persuaded Okie to join 3Mas the company’s first dedicated product developer. The resulting patent-protected “Wetordry”waterproof sandpaper found immediate acceptance, particularly in dust-filled automobileplants and repair shops. Its success not only confirmed the value of research andexperimentation within 3M, it also established product differentiation as the key to commercialsuccess.1

Another critical event occurred in 1925, when Dick Drew, a young laboratory technician,was sent to deliver sandpaper samples to an auto repair shop for testing. Seeing the problemsthat workers were having refinishing the new style two-tone paint jobs, the brash 23-year-oldtold the shop manager he could help. Back at the lab, Drew began to work with sandpaperadhesives, eventually developing a paper coating that held tightly but also stripped off easily.Masking tape was born, and quickly found wide acceptance. The experience was significant notonly in confirming that innovation was driven by matching technology to customer needs, butalso because it represented the first step on a voyage of diversification that was to lead thecompany far from its simple abrasive and adhesive origins.

As the 3M salesforce continued to relay customer needs to the company’s expanding lab,technicians adapted the abrasive and tape product line to a variety of applications. No suchadaptation was more important than the experiment conducted to coat DuPont’s newly-introduced cellophane with adhesive to solve a customer’s need for a moisture-proof tape for aninsulation job. Although the particular application was unsuccessful, the innovativedevelopment created an enormously successful product launched in 1930 as “Scotch”Cellulose Tape.

Having seen how the efforts of capable and motivated individuals were able to turn analmost bankrupt venture into a highly successful company, McKnight and his managementdeveloped an unshakable belief in the power of individual entrepreneurship. Organizationally,this belief was translated into what 3Mers described as “a climate that stimulates ordinarypeople to produce extraordinary performances.”

1Okie was a brilliant, but absentminded and unconventional individual. Among his many inventions, heeven tried to develop a product that would allow men to sandpaper their face rather than shave, and foryears followed the practice himself. A by-product of his employment may have been a tolerance in 3M’sculture for quirky genius.




3M: Profile of an Innovating Company 395-016

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Post-War Growth: Leveraging the Capabilities

Building on the solid operations and the strong principles established in 3M’s firstquarter century, it was the accountant-turned-salesman, William L. McKnight, who led thecompany into an era of diversification and expansion that spanned from the Great Depressionto the postwar boom years. As 3M’s president from 1929 to 1949, then chairman from 1949 to1966, he oversaw a development process that transformed a $1 million, U.S.-based industrialabrasives and adhesives firm into a $1 billion international corporation with a highly diversifiedportfolio of businesses built on a broad and expanding technology base. What made theachievement unique, however, was the company’s ability to do so while retaining the early legacy oftechnological innovation, market responsiveness, and institutionalized entrepreneurship.

Expanding and Leveraging the Technology Base

In the process of developing its product line of coated abrasives and pressure sensitivetapes, 3M quickly amassed a strong knowledge of materials technologies and an impressivecapability in the precision coating process. To leverage and expand this expertise, in 1937McKnight approved the creation of a Central Research Laboratory (CRL), thereby launching atechnological development program that resulted in a product-market explosion within 3M.

In the culture that emerged, opportunities were generated by both external demand andinternal capability. Externally, expanding product applications led to new customer needs thatcreated new development opportunities. The simple tape business, for example, led to scores ofnew opportunities: electrical tape customers pulled the company into research on specializedtechnologies from new conducting materials to electrical connectors; reflective tape applicationsresulted in the development of traffic control and safety systems; and magnetic tape users led3M technologists into new applications in audio and video recording.

Internally as well, the culture encouraged employees to recognize how existingproducts, processes, or technologies could be leveraged into new market opportunities. Forexample, the development of coating process technologies led to research on heat sensitivepaper, which in turn got the company involved in duplicating technologies. Even research intobasic raw materials contributed to the technology expansions, when, for example, a detailedstudy of flurochemical compounds resulted in the development of a by-product that became thebasis for products like “Scotchgard” fabric protector. Over time, the products, processes andmaterials that were the roots of 3M’s knowledge grew into a technology tree with over 100branches, and bearing a prolific crop of new products (see Exhibit 2).

The pace and scope of this development program was possible only because members of3M’s research community recognized the value of sharing their knowledge. Building on thetechnology leveraging process originated by Dick Drew when he applied adhesives know-howto develop masking tape, 3M developed a strong and clearly articulated company norm:“While products belong to businesses, technology belongs to the company.” Although thisphilosophy was easily implemented in the days when 3M’s technologists were linked in atightly-knit informal network, as the company’s research community grew and its technologybase expanded, more formal mechanisms were required to maintain the free-flowing transfer ofknowledge.

The Technical Council allowed the heads of its increasingly dispersed labs to meet on aregular basis. In addition to their monthly meetings, this group (numbering about 80 people by





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the early 1990s) held a three-day annual retreat to discuss company priorities and items ofcommon interest. Always on the agenda was the issue of cross-unit technology transfer.

Even more broadly encompassing was the Technical Forum, a body created in the early1950s and composed of “senators” drawn from the practicing scientists and technologists ineach of 3M’s 80-odd U.S.-based labs. The role of this body was to facilitate grass roots scientificcommunication across horizontal and vertical organizational boundaries. One important rolewas to represent the concerns of the scientific community to top management. Another was tomanage its scores of specialized “chapters” whose purpose was to allow researchers fromdiverse operations but with similar special interests to hold seminars or invite speakers on theirnarrow scientific specialty. Finally, they organized the Annual Technology Fair, a three-dayinternal event in which 3M’s scientists showcased their latest findings. Walking from exhibit toexhibit, members of the scientific community learned about the company’s latest developmentsdirectly from their colleagues.

Through these and other formal channels and forums, the company was able tomaintain the vital networks of informal contacts that connected its scientific community. Therelationships were strengthened by a strong norm that encouraged any company scientist tocontact any other to discuss a problem or ask for advice or help. As a result, even as thecompany grew, technologies continued to diffuse rapidly, becoming adapted and refined asthey did.

Product Development: Linking Technologies to Markets

3M did not think of itself as a “high tech” company, but rather as “a creative companythat needs a high level of technology.” The recognition that continuous, market-oriented,technologically based development was 3M’s lifeblood was institutionalized in the formalobjective that 25% of its sales should come from products introduced within the most recentfive-year period.

From his experiences as a sales manager, struggling with sandpaper quality problems,McKnight felt that a continuing exchange of ideas between employees in sales, manufacturing,and research would give the company “tripod-like stability.” Salesmen were encouraged toprovide feedback to production people, plant engineers and technologists routinely discussednew product designs, and researchers were often pulled into customer’s plants. Managementencouraged employees to pursue ideas stimulated by such interaction and exposure, by activelypromoting individual entrepreneurship. For example, one well-known policy encouragedresearchers to spend up to 15% of their time pursuing projects of interest to them. Through such“bootlegging” activity, 3M has stumbled on literally scores of new products and technologies, but inthe words of one early company leader, “You can only stumble if you’re in motion.”

Another value that supported innovation and experimentation was management’sstrong belief in supporting projects even when no large market potential was evident. From itsearly experience of developing profitable specialized adhesives to attach upholstery, trim, andrunning board mats for the auto industry, grew a policy which was expressed as “make a little,sell a little.” This philosophy encouraged those with good ideas to pursue them, not onlybecause niche markets were profitable, but also because many products and technologiessubsequently found applications never dreamed of by the original entrepreneur. Thedevelopment of a nonwoven material originally launched as a niche decorative ribbon product,for example, eventually spawned scores of other products straddling 19 divisions, fromprotective facemasks to surgical tape to Scotch Brite cleaning pads.





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McKnight believed that such innovative development was feasible only in anorganization in which people were given considerable freedom. He told his managers:

Those men and women to whom we delegate authority andresponsibility, if they are good people, are going to want to do their jobs in theirown way. These are characteristics we want and should be encouraged as longas their way conforms to the general pattern of the operation.

To develop and retain such “good people,” 3M managed its human resource practices ina way that ensured entrepreneurs were recognized and appreciated. A “dual ladder” careertrack allowed those who wanted to develop in research, engineering or marketing to progresswhile pursuing their professional interests. Achievement was rewarded not only by promotionbut also by recognition. The greatest achievement for a 3M scientist, for example, was to beinducted into the Carlton Society, an honor reserved for those who had made the mostexceptional scientific and technical contributions to the company. As the importance of teamefforts increased, these too were recognized through the company’s Golden Step AwardProgram.

Even more powerful than such formal awards was the informal recognition given tosuccessful entrepreneurs through the oft-repeated stories of major accomplishments thatconverted mortals into semi-legendary figures. One of the common themes in the many storiesof innovation that circulated through 3M was the way in which individual persistence andcommitment triumphed over management indifference or organizational rejection. Newemployees soon heard about the persistence of Alvin Boese, who succeeded in perfectingnonwoven fibers by continuing his experiments in spite of three successive rejections of hisproposals by management. Or how Philip Palmquist, the pioneer of 3M’s reflective technology,defied orders to stop working on reflective sheeting, and by working in his lab at night,developed the technology that gave birth to the highly successful “Scotchlite” technology. Orhow a project team working on a new generation of insulated clothing materials continuedbootleg development despite management’s attempts to stop it on the grounds that it was notan appropriate business for 3M. This lattermost story is likely to be told by CEO “Desi”DeSimone, who would most likely reveal to his listener that it was he who tried to stop theproject, which nonetheless continued, culminating in 3M’s highly successful Thinsulate brand ofinsulated outerwear.

But the company also recognized that risk taking would only continue if itsmanagement process permitted what McKnight called “well-intentioned failure.” He preached:

Mistakes will be made, but if a person is essentially right, the mistakeshe or she makes are not as serious in the long run as the mistakes managementwill make if it is dictatorial and undertakes to tell those under its authorityexactly how they must do their job. Management that is destructively criticalwhen mistakes are made kills initiative, and it is essential that we have manypeople with initiative if we are to continue to grow.

Through such strong ingrained values, 3M managers learned to ensure that when aproject failed, those involved in it were not penalized, but were supported in their efforts toquickly move on to something new. And stories of how “failed” technologies eventually foundapplications were almost as numerous as more linear success stories. Most recently,





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management made much of the development of an extremely weak adhesive by a scientist whowas trying to create the opposite properties. Eventually, the “failed” development was pickedup by another technologist who saw its weak sticking power as an asset, and ended up creatingPost-it® notes.

Developing the Organizational Model

As its portfolio of products and technologies grew, 3M found operations increasinglydifficult to manage. In 1944, McKnight experimented with a new organization form by creatingan adhesives division and giving a division general manager full responsibility for its operation.The experiment succeeded, and by 1948 he was ready to reorganize the entire company intoseven divisions, each with its own research lab, production operation, and sales force. Over theyears, divisions proliferated, driven by the company’s growing product and marketdiversification, and by a management philosophy that retained its strong bias towards smallentrepreneurial units. Ex-CEO Ray Herzog explained 3M’s “grow and divide” concept:

Over the years, we’ve discovered that when a division reaches a certainsize, it has a tendency to spend too much of its time on established products andmarkets and a lesser amount on new products and businesses. When we breakout new businesses and appoint a new management team, we find, almostwithout exception, that the new division begins growing at a faster rate. We alsostimulate the established division to find other new products and markets tomeet its growth objectives.

By the late 1960s, however, the proliferation of divisions could no longer be managed directlyby the president, and the company decided to cluster divisions with related products andmarkets into groups. Under the “grow and divide” concept, management expected thishierarchy of organizational units to evolve organically. Promising product developmentprojects would grow into departments, successful departments would be spun off as newdivisions, and large divisions would become the basis for new groups.

While the “grow and divide” philosophy decentralized sales, production, anddevelopment to the operating level, McKnight and his successors also set stretching growth andperformance targets to drive performance in the divisions. In addition to the objective ofhaving 25% of sales come from new products, each division was expected to contribute to a veryclear set of corporate financial performance targets: to generate annual inflation-adjustedgrowth in sales and earnings of 10%, pre-tax profit margins above 20%, and return onshareholders equity of 25%. Furthermore, management kept tight control over these operationsthrough a strong corporate staff and a sophisticated control system. The corporate controller’soffice provided top management with analysis of divisional performance, drawing oninformation provided by their staff member controller located in each division. And thesestandards and controls were applied uniformly as Herzog explained:

Just as important as our belief in flexible organization is our convictionthat 3M’s growth and profitability should come not from a few of our productlines, but from each and every 3M profit center around the world. We recognizesome of our businesses as established, but none as mature, and exempt none ofthemnot even the oldestfrom striving to meet our standards for growth andprofitability.





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International Expansion

McKnight had long preached that if 3M didn’t expand abroad, its competitors would,using international markets to build their strength to battle 3M at home. But despite the factthat he had obtained worldwide patent protection for Wetordry sandpaper, and had dispatchedhis eastern division sales manager to Europe to establish distributorships in the early 1920s,most of the company’s overseas activities were channeled through the Durex Corporation, aholding company created jointly by 3M and eight other abrasives companies to manufactureand sell products in seven overseas countries. It was only after the court-ordered dissolution ofDurex in 1951 that 3M began building its own overseas operations in earnest.

On the basis of its share of the old Durex companies, 3M created an InternationalDivision. After building this original group of six subsidiaries, the company started anaggressive expansion program (“the second round”) under what became known as the FIDOprincipleFirst In Defeats Others. Subsidiaries were usually started small, and built throughself-generated and self-financed growthan international extension of the “make a little, sell alittle” principle. The parent company’s influence on these autonomous subsidiaries was exertedthrough its seats on the local company’s board, through its control over the products andtechnologies vital to the subsidiary’s growth, and through the 3M planning and control process.Powered by entrepreneurial energy and stretched by ambitious growth targets, 3M managersbegan looking towards international markets as an obvious source of growth, and by 1973overseas sales had passed the $1 billion mark.

3M at 75 Years

The 1977 Annual Report carried a bittersweet message. While announcing a growth insales and earnings figures that seemed to signal an end to the downturn caused by theworldwide recession, it also reported the death of William L. McKnight, the company’s spiritualleader. With sales of almost $4 billion, there was a sense of impending transition within 3M. Inits typically frank manner, the company confronted the growing concerns in the managementreview section of its 1977 annual report: “Bigness can be an obstacle to growth, because inbigness you tend to lose communication. And when you lose communication, you lose thecontinuity of philosophy which is so important in 3M.”

The free-ranging discussion also acknowledged that profitable growth in the futurewould not be as easy to achieve. First, economic slowdown and foreign competition were likelyto slow domestic growth. Second, international expansion, a powerful growth engine for 25years, would become more difficult. And finally, 3M’s leadership acknowledged that thecompany’s vital new product development capability had been operating less effectively inrecent years. While the discussion concluded that many of the problems contributing to theinnovation slowdown were now behind it, there was still a note of reservation in management’sassessment. (“I think the flow of new products is good,” said the CEO. “This isn’t to say itcouldn’t be better.”) This was not the usual expression of confidence and excitement withwhich top management normally described its innovative capacity.

As the company moved towards the 1980s, it seemed that the combination of externalchallenges and internal changes were likely to demand management’s attention. In fact, thedecade that followed proved to be one requiring substantial adjustment, restructuring, and evenredefinition of some of 3M’s past policies and practices.





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3M Under Lou Lehr (1980-1985): Building a New Base

Assuming the CEO’s job in 1980, 35-year 3M veteran, Lou Lehr, was immediatelychallenged by a renewed outbreak of inflation and global recession following the second “oilshock.” While trying to deal with the short-term performance pressure this created, Lehr alsowanted to confront some of the long-term transition issues management had been facing.Among the important priorities he set for the company under his leadership were a majorreorganization to allow more cross-unit coordination, a new emphasis on formal strategicplanning, and the expansion and leveraging of 3M’s technological base.

Redesigning the Structure

One of Lehr’s first priorities was to assess management’s ability to deal with theconsequence of the company’s institutionalized entrepreneurshipan ongoing diversificationprocess that had led to the addition of 15 new divisions and five new product groups during theprevious decade alone. As 3M continued to exploit the rich interaction between its 85 basictechnologies, its 40-odd major product markets, and its direct access to 50 countries worldwide,Lehr’s concern was that the company’s diversity which he termed “our greatest strength” wasleading to “a fragmentation of effort.”

In 3M’s biggest reorganization in 30 years, the new CEO decided to collect the entireportfolio of 42 divisions and 10 groups into four business sectors based on their relatedtechnologies. (See Exhibits 3 and 4.) The primary objective, to facilitate the development anddiffusion of technologies across closely related divisions, was supported by giving each sectorits own laboratory. In the new configuration, the Central Research Laboratories were toconcentrate on long-term basic research that would lead the company into entirely newbusinesses; the new sector labs had a mandate to focus on the core technologies that woulddrive medium term (five to ten year) growth in the businesses they supported; and the divisionlabs were to continue to work on developing the new products and processes with immediateapplication or potential.

The new sector structure also allowed a gradual adjustment of 3M’s historicalphilosophy of creating fully-integrated, self-sufficient divisions. In a number of businesses,particularly those facing competitive price pressure (specialty chemicals, pressure-sensitivetape, and audio and videotape, for example), stand-alone manufacturing divisions were createdto concentrate scale and to focus on productivity and quality improvements. And asmanagement began emphasizing market development as much as product development, unitslike the Automotive Trades Division and the Commercial Office Supplies Division developed asspecialized channels delivering products from numerous 3M divisions to a focused market.

Formalizing the Planning

At least as impactful as the structural change was the business planning responsibilitygiven to the executive vice presidents named to head the new sectors. On a rotating basis, eachheaded up a new 12-person Corporate Strategic Planning Committee which oversaw the formalplanning process modeled after the systems developed in GE in the early and mid-1970s.Designed as a classic “bottom-up/top-down” process, division plans were prepared in responseto broad corporate strategy targets. After being reviewed and consolidated by successive





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management layers, these became the basis for short-term corporate objectives that framed abottom-up, budget planning process in the second half of the year.

To provide an additional strategic perspective at the group level, some 20 StrategicBusiness Centers (SBCs) were defined. Cutting across divisions, they could be as broad as theTape SBC, which encompassed industrial, consumer, medical, electrical, auto systems, anddiaper tapes; or as narrow as the photographic SBC, which corresponded to a single division.These were the “thought centers” gathering the strategic information on markets andcompetitors that became both an important input to the planning process and the basis forsetting their performance measures.

Particularly at the division level, managers found the new format-driven processcounter-cultural. Having become accustomed to informal planning on the basis ofopportunities they themselves perceived, and to being measured against industry, market andcompetitive standards they themselves determined, many had neither the expertise nor theenthusiasm to adapt during the first few cycles. Gradually, however, as the system movedaway from what one manager described as “planning by the pound,” line managers becamemore accepting in their attitude and sophisticated in their approach. In the words of onedivision manager, “By focusing attention externally, and particularly on competitors, it joltedus out of our short-term, operational mentality.” A senior staff planning manager describedanother benefit:

For the first time we were forced to evaluate lots of projects, productsand even whole businesses that just weren’t performing. Pretty quickly, wecleaned out the scores of activities that had been struggling along for years. Andeventually, we were forced to confront some major problems such as our copierbusiness which we eventually spun off as a joint venture. In a company sofocused on expansion, cutting out businesses was an entirely new experience.

Boosting Technology Investment

As a chemical engineer whose development of surgical tape had led the company intothe health care business, Lehr was a strong believer in the need to maintain and expand 3M’stechnological base. As a result, he wanted to increase substantially an R&D budget that hadbeen squeezed by 3M’s need to borrow large amounts at high interest rates in the mid-1970s.Over Lehr’s six years as CEO, 3M’s spending on R&D more than doubled from $238 million(4.4% of sales) in 1979 to $507 million (6.5% of sales) in 1985, providing a new impetus toinnovation that boosted the key measure of sales from products introduced over the past fiveyears over the 25% level again.

The new organization structure, planning process, and funding policies had anenduring impact on 3M’s product and process development. In 1993, a division vice presidentexplained:

Previously innovation was driven by management asking researchers,“What rabbit can you pull out of the hat to meet our targets?” We relied on apool of technology, some talented people, and a supportive culture to createinnovations by spontaneous combustion. The individuals who came up with thenew products were heros, no matter what the fit with existing businesses ormarket access. So there were hundreds of initiativesyou could do anything.





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But as development became more expensive and riskier, we needed the focusand discipline of the new structure and processes.

But Lehr didn’t want his new structures and planning process to stamp out individualefforts and serendipitous discoveries. To ensure research efforts unrelated to specific divisionalpriorities could still occur, he authorized the establishment of the Genesis program to provideindividuals with up to $50,000 seed money to support further research on any promising idea.And to boost individual recognition in a time of more pressure for team projects, the Circle ofTechnical Excellence was created to recognize achievement through peer nomination.

Finally, in an attempt to build on the long established resource-sharing tradition that thetechnologists had mastered, Lehr launched an ambitious program called “Cooperating forGrowth” which aimed at changing the company’s technically specialized sales forces intobroad-based problem solvers able to provide links to 3M’s full range of products. Cross-division “sales clubs” were organized by region to allow specialists to meet over lunch on amonthly basis; general “trade fairs” and special customer “trade shows” were organizedthrough the collaboration of multiple divisions; and one-on-one referral meetings or joint salescalls were encouraged. But despite the prodigious effort, most felt that the program hadachieved only modest success.

Impact and Performance

Respected as a leader who communicated a strong vision of the future, Lehr’s actionswere particularly bold in a difficult business environment. In contrast to 3M’s 14% averageannual growth in both sales and earnings during the 1970s, in the first half of the 1980s theaverage annual sales growth fell to 5% while net income remained essentially flat from 1980 to1985. A worldwide recession, a stubbornly overvalued dollar, and a major challenge by foreigncompetitors (particularly from Japan) all contributed to the problem. These were the challengesthat would confront Allen “Jake” Jacobson, the bottom-line focused veteran who took over asCEO in early 1986, vowing to deal with “a storm of competition we can’t run away from.”

3M Under “Jake” Jacobson (1986-1991): Imposing a New Discipline

Among the most valuable parts of the legacy Lehr left to Jacobson was a technology basebroadened and strengthened by the addition of more than 20 new technologies. Several, such asmicroreplication and microporous membranes, seemed to have broad and immediate productapplication, and as the product pipeline filled, the percentage of sales from new productsincreased, passing 30% by 1988.

On the liabilities side, however, 3M’s cost of goods sold had increased from 54.7% in1979 to 60.5% by 1985, accounting for almost the entire drop in net income from 21.2% to 14.0%of sales. (See Exhibit 1.) This increasingly uncompetitive cost structure had already forced thecompany to withdraw from or spin-off several operations including such core businesses asaudio tapes and copying machines. As competitive pressures increased both in its old linebusinesses like abrasives and office supplies, as well as newer fields like magnetic media,Jacobson concluded that 3M had to make some major changes to its traditional strategies.





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Increasing Productivity and Competitiveness

In 1985, as president of 3M’s U.S. operations, Jacobson had initiated a program that hedubbed “J35”the J stood for Jake and the 35 stood for his five-year target percentage reductionin manufacturing labor content and manufacturing cycle timeand when he became CEO thefollowing year, he made the targets worldwide. At the same time, the disciplined planningprocess was forcing managers to recognize and respond to growing external pressures on bothselling prices and raw material costs. Together these external and internal forces werereshaping the way 3M managers thought about competitive strategy. Chuck Harstad, divisionvice president for the Commercial Office Supply Division (COSD) explained:

Historically, our drive for profit and our preference for developingpremium-priced products aimed at market niches meant that we were notcomfortable competing on price. As a result, we never fully developed ourmanufacturing competencies. And when competitors followed us, we wouldrefuse to confront themit was always easier to innovate our way into a newniche. By the mid-1980s we had begun to change that and develop newstrategies that were revolutionary within 3M culture.

Viewing the highly profitable Post-it note product as competitively vulnerable, Harstadand his COSD management team revolutionized their approach by redefining the strategicobjective as maintaining a 90% global market share. Confronting the need to reduce costs andadopt more aggressive competitive strategies, they decided, for example, to challenge lower-priced American competitors like Avery and Ampad by introducing a Highland brand productline and pricing it at half the level of the original Post-it note. By entering into a co-labelingagreement with a major German distributor which had previously been importing a Japaneseproduct, they not only cut off market access for the Japanese, they also acquired a strong allywith whom they could challenge an emerging German competitor.

This new strategic approach required a major change in management mentalities atmultiple levels. Within the division, there was initial skepticism that a 90% share objective wasachievable. And among higher level managers, there was resistance when Harstad presentedhis co-labeling strategy. But despite one top manager’s comment that he hoped the contractwould never be signed, in classic 3M style they allowed the division to make its own decision.

Other divisions, particularly those selling mature products like sandpaper, or operatingin highly competitive segments like videotape, were learning that market share and unit costmeasures were as important as new product percentage and net profit. In Harstad’s words,“We learned how to competehow to focus on competitive objectives, not just internalprojects.”

A More Disciplined Development Process

While Jacobson was determined to continue Lehr’s commitment to funding R&D at arate about twice that of the average U.S. industrial company, he also began to emphasize theneed to convert such investment into a more effective source of competitive advantage. Inparticular, he wanted the company to become more focused in its choice of projectdevelopment, and faster in bringing new products to market.





12

Again, the roots of this approach could be traced to divisions which had felt thecompetitive need to change. For example, in the mid-1980s there was concern in theOccupational Health and Safety Division (OHSD) that its business relied almost entirely on itsoriginal 20-year-old dust and mist respirators. In an attempt to reduce its eight- to nine-yearlead time in bringing new products to market, division management created Action Teamscomposed of technology, production, and marketing specialists, and charged them with theresponsibility of developing and delivering new products. Within a couple of years, theseteams had brought several major new OHSD products to market, and other divisions werereporting similar fast development successes using cross-functional teams.

As group vice presidents began transferring these practices across divisions, Jacobsonsupported and accelerated the process by highlighting the successes as models for thecorporation. The team approach received a major boost with the construction of a major newfacility in Austin, Texas, designed specifically to facilitate cross-functional interaction andencourage teamwork. Some like David Kolander, vice president of OHSD, felt that there hadbeen a fundamental shift in 3M’s management:

The day of the individual entrepreneur is over at 3M. Whenever an issuearises now, we create teams. In OHSD, we have 12 Action teams to work onproduct development, 15 “Challenge 95” teams to effect cost reduction andprocess improvement, six Strategy teams to analyze the needs of each of ourproduct market segments, and various others to meet specific needs. We stilllike to talk about the brilliant inventor who converts his innovation into a newbusiness, but I can’t think of one of our 50-odd divisions that is led by aninventor. Today’s leaders must be able to develop and manage teams.

As well as ensuring that new products moved to market more quickly, the companyalso began to adopt a more disciplined approach to defining, selecting, and funding projects.Chuck Reich, vice president of the Dental Products Division, described the change:

Previously a scientist could work on a project for years, with money justdribbling out to support it and management not really knowing how much hadbeen invested or what the potential was. Today we try to do a lot more sortingout early. We ask for a product positioning statement right up front, and if it’snot clear, it won’t be funded. . . . So now, instead of running 100 programs as wedid before, our division is focused on 12, from which we should have 10successes.

A division’s selection of projects was further controlled and refined by a technical auditprocess managed by the Corporate Technical Planning and Coordination group. Established inthe 1960s to track 3M’s diverse R&D activities, the technical audit had become a much moresophisticated and important management tool in the 1980s, serving to monitor the projectselection process and help allocate R&D resources among sectors. Using a data base containingover 25 years of information on hundreds of projects, the corporate group had developeddetailed models that helped them predict the likely success of a program based on an analysisof technical factors (such as assessed strength of technology and manufacturability), businessfactors (such as financial potential and competitive position), and administrative factors (such asaudited organization, planning, and staffing). Focusing primarily on high-stake developmentprograms, an audit team reviewed the current work of each lab every two or three years,reporting their findings and recommendations to the lab and division management. The team’s





13

credibility stemmed from the fact that it was a peer evaluationhalf of its 12 members typicallycame from the lab being audited, while the others were drawn from corporate technical staffand from other 3M labs familiar with the technology under review.

In a corporate initiative called “Pacing Programs,” each division was asked to identifythe handful of development programs that could “make a major difference” in terms of volumeimpact, or could “change the basis of competition” for their business. The 100 or so newproduct and process programs identified were then given corporate priority for both fundingand management attention. However, there was some concern that the new emphasis on focus,speed, and discipline had cost the system some of its freedom and flexibility. One division vicepresident said:

There is clearly less freedom in the labs than there was 10 or 15 yearsago, and that means it’s less fun for the researchers. As a result, there are moremotivation and morale issues to deal with today. The other impact of thegreater efficiency is that it’s hard for most people to find the 15% of their time towork on their own ideas, and I wonder how much room we have left forserendipity.

Focus on Customers and Markets

Another major priority for Jacobson was to ensure that the company’s technologicalcapabilities did not overwhelm its customer sensitivity and market focus. He continued Lehr’semphasis on quality defined in terms of meeting customer expectations, but characteristicallyattached a productivity measure to ita 35% reduction in the cost of quality, which he added tothe J35 targets for 1990.

Like Lehr, Jacobson also tried to increase 3M’s effectiveness in what he described as“resource sharing.” In place of Lehr’s ambitious but only modestly successful “Cooperating forGrowth” program, the company initiated a more internally-focused emphasis on “relatedselling.” The objective was to reinforce and broaden the role of specialized distribution units inselling products from multiple divisions through specialized channels such as office supplydealers, automotive body shops, or hospital purchasing offices.

But it was in the area of international market expansion that Jacobson saw theopportunity for the most immediate improvement. With market penetration at only half theU.S. rates, overseas sales accounted for only 37% of total sales in 1985. Jacobson encouragedmajor investments in offshore technical resources and manufacturing capabilities in an effort toexpand overseas sales to a target level of 50% of the company’s total.

Impact and Performance

When he retired in October 1991, “Jake” Jacobson looked back with some pride at thecompany’s achievement. The 10% average annual sales growth had been greatly aided by theinternational expansion, and in each year between 1986 and 1990, 3M had exceeded its goal ofaccounting for 25% of its sales from new productsin fact, for the last three years thepercentage had exceeded 30%. Furthermore, over the five-year period, earnings per sharegrowth averaged 15.6% per annum against a corporate objective of 10% or better. On the J35productivity targets, the company had achieved a 35% reduction in labor content, a 40% drop inthe cost of quality, and a 21% cut in manufacturing cycle time over his five-year tenure.





14

All this had required substantial financial investment. Annual R&D investment hadbeen maintained in the range of 6.5% to 6.6% of sales, amounting to more than $3.5 billion overfive years. Aggressive capital investment during the period, particularly in plantmodernization, had totaled $4.9 billion. Nonetheless, return on stockholders’ equity averaged20.9% between 1986 and 1990, compared to the corporate target of 20%-25%, while return oncapital employed averaged 25.2% against the objective of 27%. With such a performance, thecompany again made Fortune’s list of “America’s Ten Most Admired Companies,” its sixthappearance in seven years. In addition, 3M was named R&D Magazine’s Corporation of theYear, and on his retirement, Jacobson was name Manager of the Year by the NationalManagement Association.

But because many of the changes implemented during the 1980s had challenged andeven overturned some of the company’s established practices, some voiced concern about thefuture. One senior manager reflected on the uncertainty:

We are trying to maintain opportunities for the classic individualentrepreneur, but the more carefully planned, team-oriented approach seems tobe diminishing the centrality of the innovative genius. In addition, the need forbigger technology bets and for greater speed to market has made the small-scale“bootlegging” approach and the incremental “make a little, sell a little”philosophy less common in many of our businesses. And we are not spinningoff new, self-sufficient divisions like we did in the 1960s and 1970s. In fact, our“divide and grow” approach seems to have been replaced by a reverse tendencyto consolidate organizational units and specialize them by function.

Other observers questioned whether all the changes were sufficient to convert 3M into asuccessful innovator in the high tech businesses it had entered. Commenting on the continuedpoor performance of 3M’s memory technologies business, an industry consultant suggested:“This is a business of rapid decisions, short product life cycles and tough managements, and 3Mcan’t compete in an industry like that.” Forbes magazine concluded:

The company’s well-deserved reputation as an innovator rests largely onincremental improvements in slow moving markets such as adhesive tapes,films, abrasives and coatings, where its proprietary technology tends to hold upwell. It simply isn’t geared to businesses where today’s hot seller can betomorrow’s inventory glut.2

Whether these doubts had any basis in fact would be an issue for “Jake” Jacobson’ssuccessor to answer.

3M Under “Desi” DeSimone (1992): Preparing for the Future

On November 1, 1991, Livio “Desi” DeSimone, a 34-year 3M veteran, succeededJacobson as CEO. The 54-year-old was described in one report of his appointment as “atextbook example of the quintessential 3M CEO.” Joining as an engineer, DeSimone graduallyprogressed into more managerial positions, largely on international assignments, becoming

2“A Hard Way to Make a Buck,” Forbes, April 29, 1991, pp. 134-137.





15

managing director of 3M’s Brazilian company in the early 1970s. After overseeing the LatinAmerican area in the late 1970s, he spent the next decade in senior corporate positions headingeach of the company’s four business sectors. A high energy, consensus builder, he was knownas a manager who got results, but with a much looser style than his extremely focused,discipline-oriented predecessor.

Asked to describe his own management approach, he said he would try to combine theattributes of his three predecessors: Ray Herzog’s charismatic motivating style, Lou Lehr’sability to bring the best out of an individual, and “Jake” Jacobson’s discipline, focus andobjectivity. However, he recognized he would be leading an organization that was quitedifferent from the company he joined in the 1960s. DeSimone reflected:

The old 3M model isn’t dead, but in recent years a greater command andcontrol capability has been overlaid on it. It’s simply another variable formanagement to use. Autonomous action by people in the organization is stillthe key. But now we have a better architecture for emergency intervention.

Senior management’s role is to create an internal environment in whichpeople understand and value 3M’s way of operating. It’s a culture in whichinnovation and respect for the individual are still central. If you have a seniormanagement who have internalized the principles, you create a trustrelationship in the company. The top knows it should trust the process ofbottom-up innovation by leaving a crack open when someone is insistent that ablocked project has potential. And the lower levels have to trust the top whenwe intervene or control their activities. It all depends on good communication.

Our job is really one of creation and destructionsupporting initiativewhile breaking down bureaucracy and cynicism. It’s also one of balancingfreedom and control. Don’t forget that even in the McKnight era, there wasstrong monitoring and financial standards that allowed him to intervene in acrisis.

Like Lehr, DeSimone moved quickly to reorganize, regrouping the company’sbusinesses from four sectors into three. He also continued Jacobson’s productivity initiativeswith new five-year targets aiming for a reduction in unit manufacturing cost of 10% in realterms, and a 35% reduction in cycle time, and re-energized and refocused Lehr’s qualityinitiative as a program committed to total customer satisfaction.

But perhaps the most dramatic new challenge he set for 3M was in raising the ante forfaster, more efficient product development. While retaining the company’s three aggressivefinancial goals (10% earnings growth, 27% ROCE, and 20%-25% ROE), he increased its bestknown objective of achieving 25% of sales from products introduced within the past five years.In the future, the target would be 30% of sales from products introduced within the last fouryears to reflect the new strategic imperative to develop and bring innovations to market faster.He backed this objective with an increase in R&D funding to $1 billion in 1992, a levelrepresenting 7.2% of sales.

The task facing DeSimone was substantial. Following annual sales and earnings growthof around 13% in the 1970s and almost 8% through the 1980s, the new decade had begunsluggishly for 3M. In the midst of a worldwide economic slump, sales for the first three years ofthe 1990s grew at an annual rate of less than 5%, while earnings remained essentially flat. And





16

performance against the other two key financial goals was also disappointing: the 1992 returnon equity of 18.8% had fallen below the 20% target rate for the past two years, while the ROCEhad dropped even more dramatically after 1989, plunging more than eight percentage points to19.7%, far short of the 27% target.

As the company became larger and more diverse, some observers had begun to ask evenmore fundamental questions about 3M’s ability to maintain its unique ability to drive growththrough innovation. With $14 billion in sales and almost 90,000 employees spread across 47product divisions and national companies in 57 countries, some felt that 3M had become toolarge, too diverse, and too widely dispersed to be managed effectively. It was a challenge whichDeSimone would have to face.




395-

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395-

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Disruptive Technology a Heartbeat Away: Ecton, Inc.


Harvard Business School 9-699-018Rev. March 11, 1999

Dr. Edward G. Cape, MBA 1998, prepared this case under the direction of Professor Clayton M. Christensen as the basis forclass discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. Nopart of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted inany form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without thepermission of Harvard Business School.

1

Disruptive Technology a Heartbeat Away:Ecton, Inc.

On a pleasant day in the spring of 1998, Michael Cannon and Christopher Knellwalked toward the cardiology suite of Mt. Sinai hospital in Manhattan’s Upper East Side. AsPresident and Director of Engineering at Ecton, Inc., a Philadelphia based start-up, the twowere to meet the Director of the Cardiac Echo laboratory to begin patient trials of the Ectonimaging system. Mt. Sinai had agreed to serve as one of seven testing centers for the newdevice, which Ecton planned to release within the next year. Cannon knew that his compactecho machine, which he carried under his arm by a single handle, would have to performcompetitively in a room filled with state-of-the-art echo machines made by long-standingcompetitors such as Hewlett Packard -- each machine weighing more than the average NFLlinesman and costing nearly a quarter of a million dollars.

Over the next four years, Cannon was planning to sell 7000 of his units for $38,000apiece against this competition. But he worried about how he might penetrate a market thatseemed to have been held so tightly for so long by capable, entrenched competitors – andabout what mix of product features and services might appeal to the customers he neededto target.

Ultrasound Technology and Echocardiography

Doppler echocardiography instruments (“echo machines”) are generally large (5’ x 4’x 4’) and heavy (400 lbs) devices on wheels, as shown in Exhibit 1. To view the functioningof the heart, the face of the transducer, which was usually no larger than 9 squarecentimeters, was placed on the patient’s chest at various angles. The transducer deliveredultrasound waves into the body and these waves were reflected back to the transducer asthey crossed interfaces of different acoustic impedance. More simply, the ultrasoundbounced off the internal structures of the body and returned to the transducer. Thetransducer converted the returning sound into electronic signals that were processed by theinternal computers of the instrument, to create an image of internal body tissues. Theseimages were then displayed on the screen for the user, and videotaped for storage and off-




699-018 Disruptive Technology a Heartbeat Away: Ecton, Inc.

2

line analysis. The Appendix describes more completely the ways in which this technologyworked.

Compared to other diagnostic imaging techniques such as cardiac catheterization1 ormagnetic resonance imaging (MRI), echo machines were relatively mobile, and could easilybe wheeled to multiple locations in a hospital. Most exams were performed in an “echo lab”which was located in the cardiology department. Cardiology departments typically owneda number of echo machines (depending on the patient load of the department), and theywere operated by technicians known as “echo techs.” Echo techs were trained to perform astandard sequence of images which were recorded on video tape for off-line “reading” bycardiologists. If necessary, the attending cardiologist could order special views for certainpatients to be added to the echo tech exam, or the cardiologists could perform the imagingin the lab themselves if they needed to interrogate a specific area of the heart in great detail.

Increasingly, echo machines were also being wheeled into surgery suites to be usedin combination with a special peripheral called a transesophageal transducer. This transducerwas passed down the throat and into the esophagus of the sedated patient so that the heartcould be imaged from behind. This technique was particularly useful for heart surgery inwhich tissue or a heart valve was repaired, since possible errors in the repair could bedetected before the chest was closed. Echo machines also were often called to the intensivecare unit (ICU) to image the heart functions in post-operative patients or others with cardiacdifficulties. The instruments were even occasionally taken to the individual rooms ofpatients who had been admitted to the hospital and were too ill to be transported to theecho lab. Often, the need to move the instrument and a tech to other locations in the hospitalcould be disruptive to patient flow through the cardiology department’s echo lab.

Other areas in the hospital in which echocardiography equipment might be used hadalso been suggested, such as emergency rooms, outpatient clinics and satellite clinics, but itwas very difficult for these non-cardiology specialty locations to justify the capitalexpenditure required for a new echo machine.

The Market

The world ultrasound market in 1997 was estimated at $2.1 billion.2 Fifty-fivepercent of this comprised the “general imaging” market, in which physicians usedultrasound to create images of relatively static structures in the body, not including theheart. Cardiology customers comprised 35% of the market. Instruments sold to thecardiology market were used to detect structural and motion dysfunction of the heart wallsand valves, to measure hemodynamics, and to detect leakage through closed valves (whichshould prevent reverse flow when behaving normally). Instruments were priced fromabout $80,000 for lower-quality machines to high end instruments whose prices approached$300,000. The most sophisticated ultrasound instruments such as Acuson Corporation’s

1 In catheterization, physicians inserted a device into a large artery, typically in a patient’s leg. The device wasthen pushed or threaded upward through the vessel into the heart, in order to obtain a clear view, or to performa procedure such as stenting or angioplasty.2 Alex. Brown & Sons, “The Coming Revolution in Ultrasound.” Research Report, March 5, 1997.




Disruptive Technology a Heartbeat Away: Ecton, Inc. 699-018

3

new Sequoia model provided image quality that was beginning to rival the clarity ofmagnetic resonance imaging (MRI) in some applications.

Approximately 4 million heart perfusion exams3 had been performed using invasive,non-ultrasound techniques in 1997, and experts anticipated that the total market forultrasound equipment would grow modestly in 1998 and beyond. The intense pressures tocontrol escalating health care costs proved to be a blessing in disguise for makers of high-quality ultrasound equipment, because ultrasound exams were typically less expensive thancompeting techniques such as MRI and cardiac catheterization. Hospitals and physicianshad therefore become very interested in advanced versions of Doppler echocardiographyinstruments that would potentially replace more expensive methods of obtaining images ofsoft internal body tissues. In addition, the fact that many purchases of new machines hadbeen deferred in the early 1990s at the onset of managed care efforts, meant that substantialpent-up demand for more modern equipment was likely to be unleashed in the future.

In addition to these economic drivers of growth in the ultrasound industry, severalnew applications were on the horizon which portended further potential growth of themarket. As described previously, increasing use in surgical and intensive care settingssuggested that these departments might increasingly purchase units that would bededicated to their applications, if the units were more affordable. And as managed careorganizations were working to push patient care out of expensive hospitals and into lessexpensive out-patient facilities, simpler, lower-cost ultrasound technologies that could beused in these settings seemed to be important. For example, some pediatricians werefrustrated at the difficulty of assessing whether infants had congenital defects in the waytheir hips had formed. These needed to be detected early, so that corrective devices orsurgery could be prescribed in a timely way. But x-ray diagnosis was expensive,inconvenient, and involved the use of ionizing radiation. Ultrasound could be used moresafely, but it was not economical in a managed care environment to screen every infantthrough large, expensive hospital ultrasound labs, given the low probability that anyparticular infant might have the defect. Some posited that inexpensive, compact ultrasoundmachines that could be used in individual physicians’ group offices might actually be a cost-effective way to screen for a host of problems before sending patients toward the moreexpensive facilities, tests and procedures that ultimately would provide the necessarydiagnostic precision.

One of the most exciting innovations that promised to enable substitution ofechocariography for more expensive and accurate imaging techniques such as MRI andcatheterization was a technique called contrast echocardiography. Ultrasound images areenhanced by the presence of gaseous microbubbles in the blood. In early 1998, severalcompanies were developing and testing “contrast echo agents,” which consisted of smallbubbles of gas enclosed in a spherical shell approximately 4 microns in diameter, formedfrom biological materials such as albumin or polysaccharides. These could be injected intothe blood, in order to reflect clearer images of blood flow. The appendix describes thistechnology in greater detail.

3 In a perfusion exam, physicians studied how blood flowed, or perfused, into the tissues of the heart in order tonourish the heart muscle. Their objective typically was to determine if blood vessels were becoming clogged in away that would prevent blood from reaching an area of muscle—causing the muscle to degenerate orprecipitating a heart attack.





4

The contrast agents were being developed by a number of pharmaceuticalcompanies. In 1998, these agents were only effective if they could be injected directly intothe blood in the heart through a catheter. If the agents were injected non-invasively throughan IV in the arm, for example, the coating of the microbubbles tended to be destroyed as theblood passed through the lungs – before it reached the portion of the heart that needed to beimaged. One of these agents, Albunex, had recently received regulatory approval for use,but had not yet been approved for reimbursement by insurers. Their concern was that theadditional image clarity created by this agent, which was partially destroyed when crossingthe lungs, made little difference in the accuracy of diagnosis, or in patient outcomes.Preliminary results had shown that when Ecton’s instrument was used with an agent thathad been injected via catheter directly into the heart, Ecton’s image clarity was very close tothat provided by the established competitors’ machines.

The market for ultrasound instruments was expected to grow significantly with theproliferation of contrast agents. These prospects for ultrasound-based technologies to gainmarket share from MRI and invasive perfusion, combined with the new applications forultrasound described above, led the major cardiac ultrasound manufacturers (Hewlett-Packard, Acuson, Advanced Technology Laboratories, and others - see Exhibit 5) tomobilize for an intense battle for market share. It seemed clear that the leadingmanufacturers would wage this war by delivering sophisticated new echo modalities4 anddrastically improved images to the customer – creating threats to Ecton’s potential, as wellas possibly creating opportunities.

Barriers to Entry in Echocardiography Product Markets

Cardiology departments tended to choose the companies from which they buy theirecho instruments through criteria with complex historical antecedents. As Dopplerechocariography began to proliferate in the early 1980s, several aggressive academiccardiologists became leading experts in the specialty. Institutions such as MassachusettsGeneral Hospital, University of California at San Diego, the University of Alabama atBirmingham, and the Mayo Clinic developed active echo research divisions, where Fellowsin Cardiology were trained and innovative diagnostic techniques were developed, oftencombining the principles of fluid dynamics, the physics of ultrasound, and the science ofcardiology into sophisticated methodologies and diagnostic algorithms. In the pediatriccardiology setting, centers of excellence emerged at The Children’s Hospital in Boston, theUniversity of California at San Francisco, and the University of Michigan.

The directors of these centers would often embrace specific machines, and as theirprotégés completed their training and diffused into other centers, they would carry loyaltyto the instruments on which they trained (primarily Hewlett Packard). Throughout the1980s and 1990s, “short courses” on echocardiography - usually two day seminars held inconjunction with international conferences of the American Heart Association or AmericanCollege of Cardiology - would be populated by speakers who could in many cases be tracedto mentors at the core institutions above. The attendees at these courses would typically be

4 “Modalities” refers to additional features and functions, which enable physicians to view and learn more aboutthe body tissues they are investigating.





5

individuals from lower powered, non-academic hospitals who were just getting intoDoppler echocardiography. These individuals would typically have heavy clinical loadsback home and were already intimidated by having to learn the basic physics of ultrasoundand fluid dynamics necessary to optimize the use of ultrasound. Thus, they were highlyunlikely to deviate from the instrument choices made by the luminaries -- instrumentswhich they had used to generate the visually striking slides shown at the courses.

As a result of this internal reinforcement, by 1998 the cardiac ultrasound marketconsisted of a small group of major players (Hewlett-Packard, Acuson, AdvancedTechnology Laboratories, see Exhibit 2) and a few minor players, all of which had heldreasonably constant shares for more than a decade despite ongoing upgrades, innovationsand heated competition for market share. Hewlett-Packard had benefited to an exceptionalextent from this system, having been a first mover in the field and the training device for amajority of Fellows in the U.S. in the 1980s and 1990s. All of the leading manufacturerscultivated this system, and devoted extensive resources to maintaining good relationshipswith the clinical centers which they serviced. Indeed, one would often hear an echo labreferred to as an “HP lab” or an “Acuson lab.” Hence, although entrepreneurs such asMichael Cannon and his colleagues could reasonably expect to design a marketableinstrument, the chance of breaking into the above system was slim in the absence of a trulygroundbreaking development.

Adding to this difficulty was consolidation in the hospital industry and the relatedconsolidation of suppliers. It was becoming common, for example, for blanket supplycontracts covering vast product lines to be established between hospital groups and majormanufacturers. This practice enticed many major suppliers to seek competitive advantageby acquiring broader lines of equipment, services or supplies. For a start-up company, inmany cases it seemed that being acquired offered the only entré into the hospital market.

Competitive Activities

Due to the competitive but inertial nature of the ultrasound industry, mostinnovations in ultrasound were enhancements of existing, highly complex machines, inresponse to clinical demands to provide better quantitative information or to create imagesthat hitherto had been available only from more expensive techniques such as MRI. HewlettPackard had led the way in producing sophisticated edge detection algorithms, whichallowed the user to automatically trace the internal border of the cardiac chambers and thento process the successive frames to obtain biomechanical characteristics of the heart. Acusonhad developed a reputation for providing superior image quality. Its “Sequoia” model,introduced in 1996, produced images that some felt could realistically compete with thesuperior but cumbersome method of MRI. ATL and Acuson had also introduced Dopplerinnovations such as “color Doppler power” and “color Doppler energy,” which allowedusers to display the power of the returning Doppler signal in addition to the blood cellvelocities. Several companies were working on a new method for imaging contrast agentscalled “Second Harmonic Imaging.” This method removed confusing signals generated bythe heart tissue, so that the perfusion of the contrast agents could be more clearly followed.And a number of these companies were working to produce three-dimensionalechocardiography, which would be a major step toward displacing MRI.





6

Ecton, Inc.

Ecton, Inc. had been founded in early 1996 with the goal of developing “technologieswhich allow cardiac ultrasound to become a screening and monitoring tool, instead ofmerely an expensive diagnostic laboratory method.”5 The centerpiece of Ecton’sdevelopment efforts was a new Doppler echocardiography instrument that was compactand easy to use. Exhibit 3 shows a schematic of the instrument and illustrates its portability.Its strategy was to price the instrument at about $38,000, less than half the price of the low-end full scale machines then on the market. Cannon planned to introduce its machines inmarkets outside the traditional cardiology settings (i.e., echo labs). Because of its low costand compact size, Cannon hoped that the instrument could generate new marketopportunities in ICUs, surgery departments, emergency rooms, physician offices, and otherplaces that would not typically approve the capital expenditure for a conventional echomachine.

The company was led by President Michael Cannon, who had been an executive for11 years with the Interspec division of ATL, a manufacturer of ultrasound instruments.Cannon had been with Interspec from the start-up stage to its ultimate status as one of theworld’s leading ultrasound companies, and had participated in marketing, productdevelopment and business development. A team of talented engineers, each of thempreviously with Interspec, comprised the product development core of the new company.Christopher Knell was director of engineering, overseeing three principal engineers KevinRandall, Joseph Urbano, and Andrew Wood. Biographical information about the fivefounding members is summarized in Exhibit 4.

Due to the compact size and the desired price point, Ecton’s instrument mightnecessarily be of a lower technical quality in most modalities than conventional instruments.However, having assembled an extraordinarily talented team of engineers, a key andongoing question in product design was: how close could and should the new instrumentapproach the capabilities of conventional instruments with respect to each modality (i.e.,echo image quality, color Doppler images, velocity accuracy, contrast echo sensitivity)?Cannon and his colleagues believed that the instrument could approach the quality ofexisting instruments in selected modalities in a reasonable amount of time if developmentefforts were targeted toward those tasks. Other modalities of the instrument mightpresumably perform at a level below that demanded in a traditional echo lab, but at a levelhigh enough to satisfy the users in the alternative markets.

Ecton’s engineers had been particularly successful in producing excellent imagequality, and based on this success, the engineers had been able to produce prototypes thatseemed to challenge higher level machines in the area of contrast imaging. The Ectonmachine was not expected to be as performance-competitive in the other four or five basicmodalities on the instrument. It definitely offered fewer features and less versatility thanthe standard machines.

5 Quotation taken from Ecton, Inc.’s original business plan.





7

Protection of Intellectual Property.

It was not clear whether the fundamental structure of Ecton’s instrument hardwarewould be patentable. As of the spring of 1998, Ecton had expended little effort to patent itstechnology, although an investigation had ensured that the company did not infringe uponexisting patents. The company relied on trade secrets to protect software innovations. Onlyrecently had the company begun to speculate that the overall design of the product mightindeed be patentable in a fundamental and far-reaching way.

Financing

Ecton had raised $400,000 from private investors in its first round of funding inAugust of 1996. These funds were augmented by an additional $100,000 from the BenFranklin Technology Center of Southeastern Pennsylvania, a state-funded organizationdesigned to promote the development of new high technology businesses and jobs in thestate. This start-up capital had been used to produce the first working prototype of theimaging system.

In July of 1997, Ecton raised an additional $1.5 million in a second round of privatefinancing -- much of which came from the same group of investors but at a more attractiveprice. These financings produced the ownership structure shown in Exhibit 5. At the timeof its second round of financing, Cannon and the investors had anticipated that fullyworking Ecton prototype instruments would be ready by the following summer (1998).Cannon felt that the current financing could take Ecton to that stage, and he began toconsider the trade-offs between obtaining third-round funding to finance a push forwardwith manufacturing, marketing and sales strategies, versus a strategy of finding a largerfirm that might acquire Ecton. Such a potential suitor might provide the resources andexpertise for marketing and production efforts, and allow the Ecton team to liquidate someof their equity in the company.

As of the spring of 1998, Ecton had received no funding from venture capital (VC)firms. Cannon had approached several VC firms after the initial $0.5 million seed funding,but found little interest. No respected market research reports suggested that a significantmarket for such small, portable machines would be emerging. At the time Ecton waslooking for funds, VCs regarded medical imaging as a capital equipment industry, whichwas not attractive. Businesses such as therapeutic disposables (i.e., cardiovascularcatheters), information technology, and medical services were far more en vogue amongstVC investors at the time. Cannon was nonetheless quite satisfied with his financing resultsin the spring of 1998, since the firm’s equity was still held closely by the founders and asmall group of investors who shared the company’s strategic objectives and expectations.

Boards of Directors and Clinical Advisors

Cannon established actively involved board of directors and advisers. Biographicalinformation on the board of directors is provided in Exhibit 6. Cannon characterized themas active, making real contributions in the areas of strategy, intellectual property protection,financing and fundraising. The members of the Board had extensive experience in medicaldevice and technology start-ups. Directors received 1500 stock options on an annual basis,





8

plus expenses, in exchange for their service. All outside members of the Board had investedin the company and brought in other investors.

Cannon also recruited a number of leading clinicians to serve on Ecton’s Board ofClinical Advisors. They included Randolph Martin, M.D., who had played a key role in theproliferation of Doppler echocardiography since its earliest stages of development. JohnRoss was a Philadelphia-based echocardiographer on the faculty at Hahnemann University.Daniel Tritch, M.D., offered a viewpoint from the private practice and primary carephysician angles, both critical potential alternative markets for the Ecton instrument. Hewas director of a large private practice in Ft. Wayne, Indiana, which provided primary andemergency care. Flordeliza Villanueva, M.D. of the University of Pittsburgh Medical Centerwas a specialist in the field of contrast echocardiography and provided advice on theimplementation of the contrast algorithms of the instrument.

Phase III Plan - March 1998

Excitement was building at Ecton in the spring of 1998. The company had arrangedfor initial clinical imaging tests with seven medical centers in Philadelphia, Pittsburgh,Atlanta, New York, Charlottesville, VA, Rochester, MN, and Ft. Wayne, IN. From thecompany’s inception, Cannon and his colleagues had struggled with a looming question:once the company achieved reasonable evidence that their product could performacceptably, should they ramp up their marketing and production efforts, or should theyseek exit strategies? Despite the thrill of being involved in delivering a new dimension ofcardiac diagnosis to the market, Cannon had a responsibility to maximize the value of Ectonshares for his investors and, indeed, Ecton’s founding team. Cannon did not believe that thecore Ecton group added any particular value in terms of marketing, sales, and production,such that additional value would potentially be added by positioning Ecton for acquisitionby a larger firm that could bring expertise and economies of scale to the marketing, sales,and distribution of Ecton instruments. From an end-user perspective, it also seemed that theintegration of Ecton’s promising system into one of the established companies would be themost efficient way of distributing the technology to the physicians who would put themachines in action.

In March of 1998, Cannon had prepared a “Phase III Plan” which outlined Ecton’sproposed path for the coming year. It included a five point strategy:

1. The overall strategy is to position the company to be acquired.

2. Continue to build Ecton’s value through concentration on technology and productdevelopment. Remain highly focused on completing the initial version of the productand starting work on new and advanced product developments.

3. Minimize outlays for marketing, sales, and production programs and concentrate sellingefforts to a targeted list of influential “seed” accounts. Proceed with the belief that, atleast through the Spring of 1999, extensive product sales will be less important to apotential acquirer than continued advances in technology.

4. View September 1998 through March 1999 as a transition period during which attractiveacquirers would be actively pursued, at the same time that contingency preparations





9

were made for more extensive independent marketing and production, should thisbecome necessary or advisable.

5. The next round of financing was anticipated to be approximately $2.5 million.Established investors were expected to provide most or all of this new capital.

Point 3 was causing some concern. Like most start-ups, a quantitative valuation forEcton was not easy to do. Cannon was likely to face difficult negotiations with a potentialacquirer, and the fact that the company had not initiated marketing, sales, and productionwould limit Cannon’s negotiating leverage. For the reasons outlined above, it was highlyunlikely that Ecton’s $38,000 instrument could be sold to mainstream cardiology echo labs.Instead, it would likely be embraced by alternative markets that were in need of echoimaging but were unable to justify the capital expenditure for a traditional machine. In itsoffering memoranda, Ecton had included some estimates of the cumulative global marketfor its machine in the years 1999-2003 as approximately 20,000 units. These estimates did notinclude some potential but risky sources of revenue that could dramatically boost sales ofEcton instruments if they played out.

For example, developing nations were experiencing an increased incidence of heartdisease. Cardiology clinics in these countries were buying large numbers of pre-owned echomachines that had been written off by centers in the more developed nations. By producinga basic quality instrument at a price point near that of the used machines, Ecton might find asignificant market for its machines in these countries. Its portability would be an additionaladvantage considering the poverty and relatively poor transportation infrastructure in someof these countries that often led physicians to do their work in the field. Nonetheless,Cannon admitted, any sales projections were pure guesses. He was unsure how he couldbuild the case that Ecton had the potential to crack open this huge market, unless in factthey had begun to crack it open before attempting to sell the company.

If Ecton did reach a stage where doing its own marketing was necessary, thecharacteristics of the customer were not clear in light of changes in hospital structure,despite the fact that alternative markets had been identified. For example, it was typical inmany hospitals to call the echo machine from cardiology to the ICU if such an exam wererequired. Often, a cardiologist would go with the machine to the unit, or at least read theecho after the imaging had taken place. The billing process for such exams was currentlyvery complex as fees would be allocated between the ICU division and the cardiologydivision -- for insurance reimbursement management purposes. Because cardiologistswould also be required to attend in the ICU for post-operative cardiac patients, somehospitals’ ICU departments were considering hiring a cardiologist, who would work solelywithin the ICU department. Thus, although it was quite clear that ICUs could be asignificant market for Ecton machines, in 1998 it was not clear whether there was an in-placedecision-making infrastructure that could decide how to buy and use an Ecton Instrument.

Cannon was also concerned about the impact that an acquisition might have onEcton’s product development process. The entire founding team had worked together atInterspec, a medium-sized ($65 million annual sales) manufacturer of ultrasound equipmentthat had in 1994 been acquired by ATL, Inc., a large manufacturer ($450 million annualsales). Coming from that environment, where development projects were constantly beinginterrupted to solve problems with products in the field or to rescue other projects that werein trouble, the founders had been exhilarated at how straightforward the development of





10

Ecton’s first product had been. With such a clear focus and few distractions, the Ectondevelopment team had met most of their project milestones on schedule, at significantlylower cost than they had planned, based upon their past experience. The Ecton foundersworried that if their company were absorbed into a larger organization after acquisition,their development efforts for next-generation products would get mired in the same sort ofcomplexity that they had experienced at ATL and Interspec. Perhaps, they reasoned, theirefforts would be more successful in the long run if they remained independent until theyhad refined a development process (at this point Ecton had only developed a product once)that might survive acquisition and integration.

Michael Cannon wondered how the coming year would unfold. Would theestablished cardiology and emerging alternative markets absorb Ecton’s innovation? Woulda larger acquiring firm facilitate that penetration, or destroy the innovative culture that hadbrought Ecton to its current stage? The company had operated on a long term strategy thatassumed being acquired and the financial structure reflected this. Minimal capital had beenraised and a minimal corporate infrastructure had been built. If Ecton proceeded withmarketing, sales, and production steps, what type of customers should it target?





11

Appendix: Additional Detail on Ultrasound Technology

Ultrasound refers to sound waves with a frequency above the audible range (ingeneral, 20,000 Hz is cited as the maximum audible frequency for humans). It is used innumerous contemporary medical technologies, usually with the goal of noninvasivelyimaging solid structures or measuring the velocity of materials such as blood cells.Echocardiography, for example, is an ultrasound technique used by cardiologists to obtaincross-sectional images of the heart in what appears to be real time. Exhibit 7 (upper panel)shows frames from an echocardiogram. This “long-axis” view of the left side of the heartclearly delineates the left ventricle, the left atrium and the opened mitral valve whichseparates the two chambers. Such snapshots of the heart can be updated approximatelythirty times per second and displayed in video format on conventional instruments. Sincethe adult resting heart rate is about 70 beats per minute (or, slightly faster than one beat persecond), frames viewed at a frequency of 30/second are for most practical purposes in realtime. Echocardiography has revolutionized the field of diagnostic cardiology over the pasttwo decades. Prior to the advent of echocardiography, invasive techniques such as cardiaccatheterization were used to assess most common heart lesions before undertaking surgicalcorrection. (Cardiac catheterization, unfortunately, is a time consuming process, often semi-quantitative at best, involves the use of ionization radiation in some cases, and can be atraumatic experience for the patient.)

Doppler Echocardiography allows blood cell velocities to be obtained in addition to theimages of solid structures. As shown in Exhibit 7 (lower panel), a cursor can be placed onthe echocardiographic image to select a location of velocity measurement, and the velocitiesare then displayed on a strip chart-type section of the video screen (this is commonlyreferred to as “spectral Doppler”). Alternatively, using the technique of color Dopplerechocardiography, velocities can be displayed throughout the cardiac chamber in a colorcoded fashion. Color Doppler was introduced to the cardiology market in the early 1980sand was available on most ultrasound instruments sold in 1998. “DopplerEchocardiography” usually refers to instruments that can provide echocardiographicimaging and Doppler measurements through the spectral and color flow techniques.Doppler echocardiography replaced a number of invasive exams by allowing the physicianto assess hemodynamics (blood flow information) in a noninvasive fashion. For example,obstructed heart valves were traditionally characterized by a measurement of pressure dropacross the valve. The pressures on both sides of the valve were measured directly by acatheter interfaced to a pressure transducer, after it had been passed through the patient’sarteries and into the heart chambers. Using Doppler echocardiography, the cardiologist wasable to measure the abnormally high velocity blood flows ejecting from the narrowed valve,and convert these velocities into the desired pressure gradient using engineering principles(in this case, the Bernoulli equation). This velocity information could be obtainednoninvasively and quickly by simply placing the Doppler transducer on the patient’s chest.The exam could be performed in virtually any setting to which the “echo machine” could bepushed on its wheels. (Although catheterization was playing a reduced role as a diagnostictool, it was gaining activity in the treatment of disease, by replacing moreinvasive/traumatic methods such as open heart surgery in some cases. For example,obstructed heart valves that previously required surgical replacement with a prostheticvalve, could often be expanded by a balloon mounted on the end of a catheter in 1998.)





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One of the most exciting innovations that promised to enable substitution ofechocardiography for more expensive and accurate imaging techniques such as MRI andcatheterization was a technique called contrast echocardiography. Ultrasound images areenhanced by the presence of gaseous microbubbles in the blood. In early 1998, severalcompanies were developing and testing “contrast echo agents,” which consisted of smallbubbles of gas enclosed in a spherical shell approximately 4 microns in diameter, formedfrom biological materials such as albumin or polysaccharides. The bubbles reflected theultrasound waves back to the transducer with much greater clarity than could be achievedsimply by attempting to image normal blood. In using contrast echo techniques, a contrastagent was injected through a needle in the patient’s arm, after which it passed through theveins into the right side of the heart, then to the lungs, and finally into the left side of theheart which is the primary pumping chamber and the location of most heart disease inadults. Contrast enhanced blood pumped from the left ventricle passes through the aorta tonourish the body’s tissues, but a small portion of it is diverted into the coronary arteries tofeed the heart tissue. Therefore, an echo image of the heart of a patient who has received aninjection of contrast agent would show enhanced image intensity in the regions of hearttissue where the agent has perfused. If the coronary arteries become blocked, the hearttissue begins to die in the regions of non-perfusion and no enhancement will occur in theseregions. By viewing an echocardiogram of a contrast-injected patient, the cardiologist couldmap with greater accuracy regions of the heart tissue which were enhanced by the presenceof contrast agents, and those that were not -- thus identifying in a noninvasive mannerregions of the heart tissue that were beginning to receive reduced blood flow at very earlystages before a heart attack was likely to occur.

Contrast echocardiography had been shown to work well in experimental studies inwhich the agents were injected directly into the left ventricle using a catheter. Developers ofcontrast agents, however, were having some difficulty in designing agents which couldsurvive passage across the lungs after injection in a less invasive site. Selected agents hadshown promise in clinical trials and were awaiting FDA approval. In early 1998, it wasoverwhelmingly felt by cardiologists, scientists, and Wall Street analysts following theindustry, that high quality agents would reach useful clinical applications within 1-2 years.

In the future, it was suggested by some that the agents might be of use as drugdelivery agents, since it was well known that the agents can rupture in the presence ofinterrogation by ultrasound: i.e., by encapsulating a drug within the shell, then targeting thedesired delivery point with ultrasound, as the agents pass they would rupture and releasetheir contents to the target.





13

Exhibit 1 - A Typical Echocardiography Machine.

Source: Ecton, Inc.





14

Exhibit 2 - Major Cardiac Ultrasound Manufacturers, 1996

Company Market Share (%)

Hewlett Packard 64%

Acuson 11%

ATL 9%

Toshiba 6%

Biosound 5%

Vingmed 4%

Others 1%

Source: Casewriter estimates, synthesized from various sources





15

Exhibit 3

drawing provided by Ecton





16

Exhibit 4 – Founders of Ecton, Inc.

Michael G. Cannon had been in the healthcare industry for over 16 years. For 11 yearshe was a marketing and general management executive with (ATL) Interspec, Inc. Cannonjoined Interspec at its inception and was a central figure in building the company from astart-up to a part of the world’s largest diagnostic ultrasound company. He directed themarketing, product development and business development for products in the cardiology,radiology, vascular and surgical markets and had extensive responsibilities in worldwidesales management. He holds a B.A. from Haverford College, with Honors, and a graduatediploma from the Wharton Management Program at the University of Pennsylvania.

Christopher B. Knell had 17 years of engineering and management experience indesigning complex data acquisition and real-time signal processing systems. He hasmanaged technologically complex projects involving signal and image processing, hardwaredesign, software design and system integration. Knell managed product development forInterspec, Inc. for over 8 years. He is expert in the areas of ultrasound system architectures,digital scan conversion techniques, video graphics applications and digital imageacquisition. He holds a B.S. in Electrical Engineering from Virginia Polytechnic Instituteand State University and an M.S. in Systems Engineering from Drexel University.

Kevin S. Randall is an analog and RF design engineer with a series of technical andproduct accomplishments in the area of high resolution diagnostic ultrasound. He has beenthe lead designer of linear, convex, annular phased and linear phased array beamformers inhis 10 years at (ATL) Interspec. His work has resulted in numerous innovations in the areasof low noise switching, high dynamic range and high data rate data acquisition circuitryand filter design. Randall holds a B.S. in Electrical Engineering from Lehigh University andan M.S. in Electrical Engineering from Drexel University.

Joseph A. Urbano spent nine years at (ATL) Interspec managing system level designand development through manufacturing with a concentration in blood flow detection withcolor flow mapping and spectral Doppler processing, as well as digital scan conversion.Urbano has extensive digital signal processing expertise and has worked extensively withfast memory interfaces, state machines, video circuits, digital filters, algorithm developmentand microprocessors. He has a B.S. in Electrical Engineering from Drexel University and anM.S. in Electrical Engineering from the University of Pennsylvania.

Andrew J. Wood developed ultrasound beamformers and color flow and Dopplerprocessors at (ATL) Interspec for 8 years. He is an expert in developing medical imagingsystems to meet worldwide regulatory standards, including European EMC regulations andISO9000. He is a certified ISO9000 internal auditor. At GE Aerospace and RCA AdvancedTechnology Laboratories, Wood has a B.S. in Electrical Engineering from RensselaerPolytechnic Institute and an M.S. in Electrical Engineering from Drexel University.

Source: Private Placement Memorandum





17

Exhibit 5 - Ownership Structure

Owner Percent After SecondFinancing Round (1997)

Percent Expected After ThirdFinancing (1998)

Founders 60 40

Largest Individual Shareholder 5 15

Members of an “Angel”Investor Group

10 10

All Others 25 35

Total 100 100

Source – Ecton, Inc.





18

Exhibit 6 - Board of Directors

Biographical sketches of Michael G. Cannon and Christopher B. Knell, internaldirectors, were included in Exhibit 6. Ecton’s outside directors were:

Michael B. Keehan was of counsel with the law firm of Potter, Anderson & Corroon,Wilmington, Delaware. He was the former Vice President and General Counsel of Hercules,Inc. of Wilmington, Delaware. In addition to chemical engineering, Mr. Keehan’s careerinvolved a leadership role in patent and intellectual property as well as general corporatelaw. He was a member of the Executive Committee, Intellectual Property Section, andCorporate Practice Section of the Delaware Bar.

Lennart Hagegard was an active private investor and merchant banker in thePhiladelphia area where he was President of Select Ventures and a leader in several privateinvestment organizations. He held a number of senior management positions in operationsand finance with ASEA Brown Boveri in Switzerland and his native Sweden.

George J. Magovern, MD was a leading cardiothoracic surgeon. In 1998 Dr. Magovernserved as Executive Vice President for Health Services Delivery and Professor of Surgery atAllegheny University of the Health Sciences/Allegheny General Hospital. For nearly 30years Dr. Magovern was director of the Department of Surgery at Allegheny General. Hewas a co-founder and director of Respironics, Inc., a Pittsburgh-based manufacturer ofcardio-pulmonary healthcare products. Dr. Magovern had published widely and was aninternational pioneer in the development of new techniques in cardiothoracic surgery.

Bernard Steinberg, Ph.D., was an authority on advanced arrays and imagingtechnology, having led in development of high resolution microwave radar imaging andadaptive signal processing for defense applications. Most recently, Dr. Steinberg hadconducted pioneering research in ultra-high resolution ultrasound imaging for the detectionof breast disease. Steinberg was a Professor of Electrical Engineering at the Moore School ofEngineering, University of Pennsylvania, and was Director of the University’s Valley ForgeResearch Center. Steinberg was co-founder, Chairman, and Chief Scientist of Interspec, Inc.

Source - Private Placement Memorandum - July 1997





19

Exhibit 7: Images of a Heart’s Function, Taken from an Echo Cardiography Machine


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Hewlett−Packard: Singapore (A)


Harvard Business School 9-694-035Rev. June 7, 1994

Research Associate George Thill and Professor Dorothy Leonard-Barton wrote this case as the basis for class discussionrather than to illustrate either effective or ineffective handling of an administrative situation. The selected data have beendisguised and altered to protect the proprietary interests of the firm.

Copyright © 1993 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,recording, or otherwise—without the permission of Harvard Business School.

1

Hewlett-Packard: Singapore (A)

In September 1991, General Manager Tommy Lau and Frank Cloutier, research anddevelopment manager for Computer Products Singapore (CPS), met to discuss developing a newproduct—Hewlett-Packard’s first Asian language printer—with which it would enter the extremelycompetitive Japanese market. While HP held almost half the inkjet market worldwide (see Exhibit1), the company had only a limited presence in the Japanese printer market, where Epson and Canondominated. The time seemed ripe to tackle what Cloutier regarded as “the most difficult market inthe world.” If HP were to compete successfully against its Japanese competitors, Lau and Cloutierreasoned, the company must challenge them in their home market. CPS felt ready for this next logicalstep towards its ultimate goal of owning a worldwide mandate to develop and manufacture somefuture HP printer product line. However, the venture entailed significant risk. A market failurewould not only affect the U.S.-based printer division’s bottom line; it could possibly be interpreted asindicating that Singapore was not ready for such a challenging undertaking.

Hewlett-Packard History

Hewlett-Packard (HP), founded in 1939 by Bill Hewlett and Dave Packard, began as aprovider of electronic products and systems for measurement (such as oscilloscopes and voltmeters)and computation. Over the years the company diversified into computer and computer-relatedperipherals such as printers. By 1990, HP had more than 70 divisions, 90,000 employees worldwide,and sales in excess of $13 billion. International sales represented over half that amount, and thecomputer products’ share (computer equipment, networking products, peripherals, and calculators)was more than 75% of total sales (see Exhibit 2 for financial information).

In the late 1960s, Bill Hewlett sent a high-powered team to search for an Asian manufacturinglocation in addition to the one HP had in Japan. After visiting several locations, the team returnedwith a strong recommendation to select Singapore. As team leader, John Doyle, recalled, “Thegovernment was stable, understanding, responsive, reliable, and honest. Potential employees seemedto be energetic, educated, honest, creative—and they spoke English, which would help build teamcohesion.” Hewlett-Packard’s long-term vision for Singapore was to build a product design anddevelopment capability; however, it was clear that much training would be necessary before thatvision could be realized.




694-035 Hewlett-Packard: Singapore (A)

2

Computer Products Singapore (CPS)

1970s: From Assembling Parts to Assembling Products

Singapore had been identified as a provider of low-cost labor, and in 1970, operations startedwith the extremely labor-intensive stringing of computer core memories. However, core memorieswere soon obsolete in the fast-changing electronics business. In 1971, the Singapore governmentgranted “pioneer status” tax incentives (i.e., 0% tax rate) to encourage HP to expand operations.

In 1973, CPS moved into higher technology products when HP replaced core memorymanufacturing with the assembly of the HP-35 calculators. The calculator represented CPS’s firstopportunity to manufacture an entire product rather than components.

The Singapore facility grew rapidly, and by 1977 was manufacturing calculators, computerkeyboards, solid state displays, integrated circuits, and isolators. All these products were designedand developed in the United States and then transferred to Singapore for production. (See Exhibit 3for HP Singapore’s Manufacturing History)

Early 1980s: From Assembly to Cost Engineering

By the early 1980s, CPS engineers had gained so much experience in manufacturing thatSingapore’s products were often higher quality and lower cost than comparable ones produced in theUnited States. Thus, in 1981, HP moved some of the production of its sophisticated HP41C hand-held programmable calculators to CPS. CPS proposed a cost reduction program for this product as aformal extension of the kind of cost engineering it had been doing for all products. As Lau recalled,“There was no specific dollar-figure that we wanted to reach; our goal was to see how far we couldgo.”

One opportunity for lowering cost lay in redesigning the calculator to use fewer integratedcircuits, but at the time, Singapore engineers were inexperienced in circuit design. With the approvalof U.S. headquarters, CPS therefore started a center to work on designing application-specificintegrated circuits (ASICs). “Without the design capability and the ability to do chip integration,whatever cost reduction plan we had might not have happened,” noted Lau. A group of 20 CPSengineers and technicians went to the United States for more than a year to learn about design.Having ASIC expertise on both sides of the globe enabled the calculator division to create aproductive division of labor. Designers in the United States determined the functional specificationsof the circuitry, and CPS engineers then created the detailed layout and routing of the integratedcircuits. This new expertise enabled CPS to reduce the number of ICs in the calculator.

By 1983, the reduced number of ICs and other cost-cutting changes had loweredmanufacturing costs of the calculator by 50%, and HP shifted the entire production to Singapore.Recalled Lau: “We always delivered what we committed to do. When we said we would get it done,no one in the U.S. doubted it. They knew that we would find a way to do it.” At the same time, inorder to support HP’s application for extension of the privileged tax status, CPS needed to convincethe Singapore government that the division was conquering new technological worlds—not just cost-engineering. CPS therefore successfully petitioned their U.S.-based HP licensors to expand itsmanufacturing responsibilities and also to shift some R&D responsibilities to Singapore.

Larry Brown, a manager in the Colorado peripherals division with over 10 years experiencein both research and manufacturing, was asked to set up the CPS R&D organization. He had a strongbackground in plastics, printed circuit board manufacturing, subassembly, and final assemblythrough his work on printers and keyboards. A mechanical engineer who had taken the unorthodox




Hewlett-Packard: Singapore (A) 694-035

3

step in his career of voluntarily leaving engineering design to learn more about manufacturing,Brown was initially dubious about living half way around the world. “I had to look Singapore up onthe map,” he admitted ruefully. However, he was pleasantly surprised when he visited Singapore,and soon became an ardent champion for developing the talent he found. “We had conveyor belts ofcalculators, happy and motivated workers, very bright engineers, and tremendous manufacturingstrength—but all latent,” he recalled. “People wanted to succeed if they were given a chance.”

Brown’s charter was to help grow Singapore’s manufacturing capabilities in high volumeand low cost subassembly and to initiate development activities, and keyboards, an extremely highvolume product, offered much cost cutting potential. “Assuming we were successful with themanufacturing ramp up to full volume,” Brown said, “we would develop a team that could take fullcharge of designing the next generation keyboard.” The first generation keyboard was designed inCalifornia and tested through low volume production of about 50 units a day, before being moved toSingapore, to be produced at a volume of 1,000-1,200 per day. With the keyboards, CPS had to learnnew technologies, some of which had been pioneered in the United States.

For instance, a technique called dye sublimation offered an alternative to creating each plastickey cap in a keyboard as a separate inventory item. Since HP planned to market keyboards in morethan 20 different languages, and each keyboard had 120 keys, thousands of different key caps wouldhave to be produced. The new technology allowed molding all the keycaps blank and subsequently,in a single step, imprinting them with 120 characters, in multiple colors and languages.

Another transferred technology was the flexible membrane switch, developed by a smallcompany in Wisconsin. Previously, mechanical switches were used to signal that a key had beendepressed, but these switches were notoriously unreliable. In the flexible membrane switch, circuitrywas printed on two facing pieces of material, which were then assembled with an airspace betweenthem. When the key cap above them was depressed, the airspace gap closed, creating an electriccontact. These vastly improved switches reduced the annualized failure rate from 125% to 1%.

The manufacturing ramp up for the keyboard was highly successful. As Brown put it, “Thework ethic was all that you had ever heard of, the ramp was flawless, the focus on quality was thereright away, and CPS’s ability to identify opportunities to reduce costs without sacrificing quality wasapparent.”

The CPS R&D Team

In 1984, a team was established to take full charge of developing the next generation ofkeyboards, with quality improvement as its major goal, at even higher volumes. Setting up this teamhad proved challenging. Unlike the U.S., where engineers preferred to work in research anddevelopment, Singapore’s traditional strength lay in manufacturing. Moreover, CPS had a clear trackrecord in incremental improvement but no experience in development. Many people in Singaporequestioned whether local engineers would be willing to take on the significant risks involved in R&Dwork; even if they were, engineers graduating from local universities at that time had not receivedthe requisite training. However, after interviewing both local managers and engineers, Brownidentified an initial three-member team, supplemented by engineers who had attended graduateschools in the U.S., the U.K., and Australia. By October 1984, the team comprised 15 engineers andtechnicians.

Brown knew his team had to meet HP’s high standards for development work: “We got nocredit just because we were young, inexperienced, understaffed, or underfunded. We had to performat HP levels with what we had—and at low cost.” Although the team started with no equipment,that allowed Brown to argue for investment in state-of-the-art technology. As a result the R&D andplastics engineers, had the largest HP UNIX workstation network in all Asia. A very advanced mold





4

flow simulation software package was purchased from Australia, and CPS was among the first to usefully automated plastic injection molding.

CPS engineers took full advantage of every tool offered to them, as Brown recalled: “Peopledived into every tool, software package, and workstation that was available. They would go page bypage through manuals and learn every feature and subfeature inside every package until theybecame really comfortable with the computer aided tools.” This expertise stood the CPS engineers ingood stead when they traveled to the U.S., earning them respect for their knowledge of the advancedtools. Brown carefully cultivated the relationships between U.S. and CPS engineers; the Singaporeanswere given a couple of extra days whenever they traveled to the U.S. and assigned to a U.S. host. Thehost was encouraged to spend some time with the Singapore engineers, showing them the RockyMountains or taking them out for Mexican food.

Brown himself worked on adjusting his management style to the local culture. “It took me 18months and some major faux pas to become an insider,” he remembered. For instance, he learned toformulate questions in a way that enabled his authority-conscious engineers to respond: “If Isuggested answers to my engineers, to them this became the only possible solution.” He had to fosteran environment that encouraged experimentation: “Initially, it was difficult for people to understandwhy they should risk offering a design that might in fact prove not to work.” Brown found that theengineers wanted to spend much more time in testing their ideas than would U.S. engineers: “ Wehad to work out an approach toward risk that would work culturally. We spent a lot of time oncomputer simulation, feasibility studies, and statistical design of experiments to decrease the actualrisk of failure, because failure is unacceptable in Singapore. However, all this work had unexpectedbenefits in the end; we had the fastest, most trouble-free production ramp-up I ever experienced.”

The small size of the development team enabled close cooperation with manufacturing, andteam members leveraged knowledge from wherever they could. They worked with the Wisconsinsuppliers to design the new flexible membrane switches, for instance. “The vendor learned a lotabout driving down costs,” said Brown, and “we learned a lot about the chemistry of carbon-basedadhesives.” The second generation keypad also incorporated a new technology identified by Lee KimBok, a CPS manager hired from General Electric, Singapore. Brown considered him “the brightestplastics person I’d ever seen.” At a European trade show, Lee saw a new but unproved technologyfor inserting the key caps on the sheet of metal that constituted the keyboard base. Whereas,previously, the 120 key caps were inserted one-by-one in an equivalent number of round holes in themetal sheet, the outsert molding technology would enable HP to mold the plastic to the metal in oneoperation. “It was a gutsy idea,” Brown recalled. “There was zero draft” (i.e., no tolerances). CPSengineers simulated the production carefully, but produced no physical prototypes. To their greatsatisfaction, the special machine a Japanese vendor had built for them produced an excellent qualitypart, the very first time.

The CPS R&D team went on to design a third generation of keyboards in 1986, after which itassumed sole responsibility for developing and supplying HP keyboards. Singapore was also giventhe responsibility for supplying the mouse and data tablets. By the time Brown left Singapore in1987, the R&D team had grown to 35 people, and HP’s investment in the group represented about $8million (U.S.) a year.

The Move to Printers

During the same period that work on keyboards was bringing new technologies and skills toCPS and the R&D team was being formed, an important new product was transferred from theUnited States. Responsibility for producing the so-called “ThinkJet” printer (Thermo-Inkjet), HP’s





5

first inkjet product, was moved to Singapore a bare four months after its initial introduction into theU.S. market in 1983, and the transfer represented a big challenge for Singapore.

The speed of the transfer suggested both CPS’s increasing skills and the significant costadvantages of producing in Singapore. Beyond the tax incentive of pioneer status and lower laborcosts (see Exhibit 4), Singapore offered the opportunity to completely re-source parts. When theproduct was manufactured in the U.S., 80% of its parts came from U.S. or European vendors; after thetransfer to Singapore, this proportion would be reversed, with 80% of materials sourced in Asia. “Re-sourcing for the ThinkJet was very eye-opening for us,” Lau recalled. “Whereas calculators had apretty simple structure with a couple of ICs, the printers were a completely different animal. Theyhad gears, mechanism, metal parts, and complicated plastic parts. We had never before explored thepotential in this part of the world for sourcing these parts.” The physical proximity of U.S. supplierswas considered essential for effective communication during development, but moving to Asianvendors reduced costs immediately by as much as 20%.

Producing the ThinkJet in Singapore launched Asian expertise in the inkjet technology andalso aided in the growth of high-volume manufacturing skills. As Engineering Manager Lim KokKhoon recalled, “Line processes now became critical. Before, when we produced at low volume,stopping the line was no big deal. But now inventory would pile up fast. Quality became asignificant issue, and logistics were critical.” CPS implemented statistical quality control, and went toa just-in-time inventory pull system. The division set some very ambitious goals: to support aproduction volume of 20,000 per month, with a yield at the two main test stations of over 95% and astation time of less than 30 seconds. The annualized failure rate in the field should reach less than 2%within a year, and cost should be reduced at 10%-20% each year.

From 1984 to 1985, the manufacturing costs of the ThinkJet were driven down by 30%, aboutone-third of which was attributable to line efficiencies and the rest to the lower Singapore overhead,quality improvements, and lower-cost materials sourcing. Automation was key. CPS engineersreduced the number of screws, for example, for easier fastening. The number of manual processeswas reduced for both safety and reliability reasons. The high voltage testing was automated, as weresome of the simplest assembly tasks. The packaging of the printer was completely automated.Robots picked up the finished product, placed foam in the box, positioned the printer on top of thefoam, added more foam, folded the box shut, taped it, and labeled it ready for shipping.

Inkjet Technology

Inkjet technology was originally developed at HP labs for use in a low energy, battery-powered printer for a desk calculator. Since power was highly correlated to cost, the inkjet hadinnate cost advantages over laser printers. Moreover, it promised significant growth potential (seeExhibit 5).

The basic printhead structure for HP thermal inkjet printers consisted of the ink chamber inwhich a resistor was surrounded by ink (see Exhibit 6). When an electric current heated the resistor,the adjacent ink was vaporized, creating a bubble that forced an ink droplet out on the paper throughan exit nozzle. After the droplet left the nozzle and the bubble collapsed, capillary force drew inkfrom the feed chamber to refill the nozzle. The electrical connections from the printhead to theprinter were provided by the flexible interconnect circuit. Whereas the original ThinkJet printheadhad 12 nozzles and required special paper, all subsequent printers had 50 of them and used plainpaper. The ThinkJet resolution of 96 dots-per-inch was better than the 72 dots-per-inch of the existing9-wire printers and provided better-formed characters. However, the upcoming laser printers wererapidly redefining the meaning of letter quality. (Print quality was defined in dots-per-inch.)





6

The Economy InkJet Printer

By the mid 1980s, CPS had pushed automation and cost reduction for the thermal inkjetprinters as far as possible without re-engineering the product. As Product-line manager Cheah said,“HP was beginning to get more global, more international, and its procurement capability wasgrowing. Consequently, re-engineering became the dominant contributor to cutting cost.” Yet, CPSdid not have responsibility for the product design—Hewlett-Packard’s Vancouver division (VCD)did. CPS engineers examined two sources of information to target redesign opportunities. First,corporate marketing surveys identified causes for failure in the field and the top 10 customercomplaints. Second, CPS’s own experience on the production line suggested opportunities forimprovement. Since the product had not been originally designed with robotic assembly in mind, thepotential for further automation was limited. If these problems could be addressed, the engineersreasoned, printer manufacturing costs could be driven down another 30% on top of the 30% alreadyachieved.

CPS therefore proposed to Vancouver that the ThinkJet be re-designed for the lowest possiblemanufacturing cost and higher quality. The proposal included four major changes:

1. Integrating the two circuit boards (input/output board and motherboard) intoone. The resulting reduction in number of parts and interconnects wouldincrease reliability and quality and lower costs. While the proposal did not spellout the details of such a new design, CPS was 60%-70% confident this could bedone.

2. Moving the power supply, which currently occupied a significant part of one ofthe circuit boards, outside the printer and including the supply in the packingbox with the printer. Pre-built by an outside vendor, the power supply would belighter weight and, CPS was confident, less expensive.

3. Changing the mechanical design in two ways. First, redesign for automation andassembly, so that the single integrated PC board would be the last piece induring assembly, hence more easily accessed for testing and servicing; second,use lighter, less-expensive materials.

4. Making two levels of print quality available to the customer—draft or final. Thiswould be accomplished by rendering the bi-directional print head capable ofeither repeating the same line for double-dot resolution, or skipping down to thenext line to print in the lighter-color, single-dot mode.

The best feature of the proposal was its planned payback period of six to nine months, a vastimprovement over the traditional two to three years. The CPS team had determined that it would notpropose the project unless payback could be realized in less than one year.

The redesign was to be done in Vancouver by two Singapore engineers and Lim Kok Khoonas project manager. Because manufacturing processes were designed to a set of specifications, it wasimportant that the team be co-located with the engineers who had designed the original printer,However, noted Lim, “There is always an evolution of design—a reason why people have changedthings along the way. In redesign, you have to understand the considerations the original designersmade, so you can avoid replicating some of the problems they encountered.” Moreover, thisinformation could not be gained from documents alone. While so-called “laboratory change orders”in the original design were documented in the “lab book,” such orders occurred quite late in thedesign cycle. Earlier design decisions were recorded only in the engineers’ personal notebooks—if atall. Therefore, as Lim observed, “It is inevitable that you have to talk to the designers.” The U.S.design team comprised perhaps 20 people, all of whom could not come to Singapore. Furthermore,





7

CPS engineers believed they could learn a great deal about managing research and development ifthey lived for a while in the design atmosphere.

With help from the Vancouver engineers, Lim and his fellow engineers successfullyredesigned the ThinkJet. They then returned to Singapore to replicate their success on two otherprinters in the family with different PC interfaces. These two, the RS232 (serial interface) and theEconoJet Centronics (parallel interface used by most manufacturers) were mechanically almostidentical to the ThinkJet. The design for automation was especially gratifying and “fell in placenicely,” as Lim recalled. The lessons learned were further applied in reducing costs of HP’s highlysuccessful DeskJet printer (average annual manufacturing cost savings of 15%), which wasintroduced in 1988.

The Alex Project

With each succeeding generation of products, cost saving opportunities in Singaporediminished as cost reduction potential was increasingly recognized during product development inVancouver and incorporated into the initial product design. For example, the 50% cost savings on thefirst transferred products decreased to only 10% on later products because sourcing was nowperformed jointly by Vancouver and Singapore.

By January 1988, the CPS group had accumulated significant engineering expertise. FrankCloutier, one of the inkjet pioneers in the U.S., had replaced Larry Brown. The CPS group felt readyto take on the development of an entire new product. Cloutier concurred: “We wanted to movebeyond advanced manufacturing to do world-class R&D. HP wanted to utilize [the Singaporeemployees] in a better way than any other company, by integrating them closer and closer into thefundamental strategy. We also wanted to build products for as low cost as anybody on the planet.”The Alex project was set up with extremely ambitious targets—to develop within 18 months a newcomputer printer based on HP’s highly successful inkjet technology. Prior HP inkjet models haddriven a wide wedge into the low end of the laser printer market. This new product would challengethe inexpensive (but low print quality) dot matrix market, internally described as the low endpersonal convenience and office (PCO) printer market.1 It was clear to everyone in the printerdivision (both in Vancouver and in Singapore) that manufacturing costs for such a product wouldhave to be incredibly low. Given product life cycles in the 12- to 18-month range, Vancouver believedthey could ride into the market on the coattails of the recently introduced DeskJet, only if the Alexproduct came out within an unprecedented 18 months.

Vancouver had primary responsibility for the product and program. Singapore, as licensee,primarily focused on lowering costs. The idea was to leverage both sides’ capabilities: CPS wouldpush the cost envelope and work on manufacturing processes while Vancouver engineers wouldpush design innovation. Development work was divided evenly between the two sites, withSingapore taking charge of electronics, sourcing, design for manufacture, a few of the mechanicalparts that were very similar to those on the DeskJet, testing (HP developed new standards forsoftware and firmware testing and documentation in this project), and tooling. Vancouver wouldtake the design lead for new and redesigned mechanical parts—carriage, paper path, andtransmission gears to advance the paper—and for the ergonomic considerations (i.e., packaging,displays, keypad). The software built into the integrated circuits in the machine (i.e., the firmware)was to be developed by a team of three Singapore firmware engineers, supervised by a U.S. manager

1 As in the Deskjet, the resolution of the “Alex” printer was planned to be 300 dots-per-inch compared with 100dpi for the average matrix printer.





8

in Vancouver. Finally, Singapore would manufacture the new printer, and Vancouver would marketit.

The project was launched in early 1988. After laying out the design objectives in apreliminary data sheet and performing a preliminary product investigation, including thedemonstration of the product’s technical feasibility and confirmation of the product specifications,the team set a target manufacturing release date of September 1989.

By fall of 1988, however, the project was four months behind schedule. The slip in schedulewas attributable to a change in project manager in Vancouver as well as a number of technicalproblems. Bringing down costs turned out to be more difficult than expected. The encoder, whichprovided information about the position of the printhead carriage and controlled the carriage motorspeed, would have to be cut to less than one-fifth of its cost in the DeskJet, for instance, and novendor could provide it at that cost. Replacing the traditional belt that moved the print head laterallyover the paper with a wire would reduce costs—but the wire could not perform adequately toachieve the desired print density of 300 dots-per-inch. A standard polymer paten for advancing thepaper would be 70% or 80% the cost of the DeskJet’s proprietary rubber paten, but the cheaper onewould be slippery, possibly causing the paper to skew easily. The keypad, situated on the top of theDeskJet, was redesigned for Alex with more attention to human factors. Relocated on the front ofAlex at a comfortable 60 degree slant, it was designed to be separately built and then assembled intothe machine. Hence it was detachable, and it failed the usual HP “drop test” for all such parts.Moreover, the small gap between it and the body of the printer made the machine vulnerable toelectro-static discharge.2

Working on all these technical problems across continents and time differences was verychallenging. Moreover, although the two segments of the Peripherals Division had always had a lotof contact, this was the first time that they had to coordinate working styles in a joint project. Therewere the usual differences caused in all projects by the sometimes conflicting priorities of productdesign engineers and manufacturing. The Vancouver designers tended to concentrate on how toachieve the best functionality, and to table concerns about sourcing for later consideration. TheSingapore crew, concerned about high-volume production, wanted to make sure that any changesanticipated could in fact be accommodated by their vendors. The Vancouver team tended to assumethat such changes could be made.

Prototyping for the majority of components—and all those on the engineering critical path—was done in Vancouver. The Asian vendors with whom CPS usually worked were totallyunaccustomed to short turnaround times and often unwilling to interrupt their long runs for highvolume products to turn out just a few dozen prototypes. However, Vancouver prototyping shopswere often interested in providing the service only if assured of also receiving the large volume orderwhen the product went to market. Recognizing the need to cultivate prototyping capabilities inSingapore, Vancouver sent an engineering team to assist CPS in November 1989. A small lot ofprototype versions was built with production tooling, and tested in Singapore.

As the project dragged on, the Singapore team located in Vancouver began to long for homeand their families. Eighteen months was twice the time they had expected to be away, and freshchallenges arose almost daily. Another issue always lurking in the background of the project was theessential question for Vancouver: should they transfer responsibility for their core business toSingapore?

2 In the DeskJet design, the keypad was built in the system and could not be detached. With the current design,the keypad was separate and the resulting gap could create an electrostatic discharge; users could receive a smallbut irritating electrostatic shock when they touched the keypad.





9

Despite these challenges the CPS team had made much progress in reducing costs. The costsreflected in the laboratory prototype tested in January 1990 were still considered by some to be 40%too high, but CPS was confident that when the product was actually moved to Singapore for high-volume production, they could reap the same kind of cost reductions they had managed on theThinkJet. However, the overhead of carrying two project teams began to appear too costly to divisionmanagement. Moreover, the schedule had slipped drastically. The management challenges ofcoordinating a product development project effort when the team members were separated by 7,000miles, a 15-hour time difference, and considerable variation in work styles, were more significantthan anyone had realized at the outset of the project.

Managing International Co-development

Over the years, the series of projects culminating in the Alex project had revealed somecultural differences between the U.S. and Singapore that complicated project management.Singaporeans were accustomed to more consensual decision making and a more hierarchical system.Asked to decide on a design feature, they were prone to delay until they could check with theircolleagues. They considered it an important courtesy to determine how a desired change in one partof the product might affect manufacturability or sourcing. The American team members were moreaccustomed to making individual decisions, within clearly articulated task boundaries. As Cheah putit, “The division of labor in any undertaking here at CPS tends to be less clear. People are systemoriented; they tend to see their work as optimizing the system through their individual contributions.In the U.S., engineers divide the system in process steps and work on optimizing these steps beforefitting them back in the system. There is no right way to do things; those are just two differentapproaches toward project work.”

Differences in educational systems in the two cultures also occasioned some challenges. Fromkindergarten on, Asian schools emphasized the accrual of facts and knowledge. The Singaporeanswere indefatigable in pursuit of detail; they amazed their American counterparts with their ability toremember and access information, for instance in technical manuals. For their part, Americanengineers had been trained since grade school to initiate, to question, and to value the inspiration thatconstituted 1% of invention, more than the perspiration that constituted the remaining 99%(according to Thomas Edison’s formula). Singapore engineers were often reluctant to challenge theirU.S. counterparts, not only because they had to build a case for their position in English—theirsecond language—but because their education had emphasized listening more than persuasion.Tommy Lau recalled that “the only way to convince [the U.S. counterparts] was, if the engineers werephysically together, to show the part, or to do whatever it was. But because of the distance, we didnot usually have the luxury to physically demonstrate our points. Here in Singapore, we needed tolearn how to sell, persuade, and convince.”

Despite these challenges, there were obvious advantages to be reaped from learning how tomanage development teams whose members were separated by time, space, and culture. For onething, asynchronous work schedules could be an advantage, as colleagues could work on a givenresearch and development issue around the clock, given a 12-hour time difference. When one groupgot up in the morning, they could build on the work done while they slept. Furthermore, diversebackgrounds could yield different yet highly complementary skills.

The Capricorn Proposal

In early May 1990, Dick Hackborn, executive vice president for HP’s Computer ProductsOrganization, decided to relocate the Alex project to Vancouver. By that time Alex was 15 monthsbehind the original schedule. At first, Vancouver believed that moving the development to one





10

single site would accelerate the process and ensure no further delay. However, by September, Alexwas 18 months behind schedule and moving back to Vancouver had only increased the costs. Theproject was canceled.

Despite initial disappointment at the cancellation of Alex, the people in Singapore felt thatthey had learned a lot about printing architecture and project management in general. In late 1990,after CPS had been split into the Asia Personal Computer Division (APCD) and the Asia PeripheralsDivision (APD) (responsible for printers and other peripherals), Singapore proposed anotherdevelopment project (code name, Capricorn). APD would produce a Japanese language printer—entirely in Singapore. Cloutier noted, “The logical thing for us to do in Asia was build printers forAsia.” Lau added, “We felt that we could do more. Our goal had always been to eventually do afinished product in Singapore.” The technology developed for the ThinkJet already provided the highresolution capabilities for printing the complex Japanese language characters. The development timewould be considerably shortened because Capricorn would use the mechanical design of the DeskJetprinter and the identical chassis. Its outward appearance would be totally unchanged. (See Exhibit7); only the software and firmware would need to be adapted to the Japanese characters. Capricorncould almost certainly match Japanese competition in both price and features. The only exceptionwas that there would be no time to develop the capability to print addresses on postcards—astandard or optional feature on competitors’ models.

Despite the headstart provided by borrowing from the DeskJet design, the challenge wouldstill be very significant. First, Japanese customers, whose purchase decision tended to be heavilydriven by brand-name recognition, did not know HP. Yokogawa-Hewlett-Packard, the three-personjoint-venture sales office in Japan, had discovered that if the Japanese customers did not know acompany, they shied away from purchasing, fearing the company might not be in business in thefuture. Also, although the DeskJet was quite small compared with other HP models, it was largerthan competitors’ machines. Office space was at an absolute premium in Japan. Therefore theDeskJet would enter the market without many distinct competitive advantages. However, theSingapore team reasoned that learning about the Japanese market would take a couple of years, andthere was no point in delaying.





11

Exhibit 1 Inkjet Printer Market Share in 1990

HP

47%

Canon

19%

Apple

19%

Kodak11%

Others4%

Source: Douglas Finlay, “Office Printers: Higher Quality, Lower Prices,” The Office, V.113, No. 5, May 1991, p. 42.




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14

Exhibit 3 Hewlett-Packard, Singapore Manufacturing Revenue (all divisions)

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17

Exhibit 6 View of Print Cartridge and Printhead

Source: Company documents





18

Exhibit 7 DeskJet Printer (basis for Capricorn)

Source: Company documents

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