Reference no: EM133187624

You are the CEO of a large battery company that has a long and famous history in the design, manufacture, and distribution of different types of batteries that are used in a growing variety of industries. Your company is organized into two strategic business units.

One business unit (Business Unit 1) specializes in high-end batteries for critical systems. Some of your best known batteries are used to power cardiac pacemakers (heart implants), kidney dialysis systems, portable diabetes treatment systems, and even space-based life support systems (electronic monitors). Many of these batteries incorporate the use of highly exotic, rare-earth materials whose specific compounds and mixtures are highly proprietary to your company. Your patents (as well as your distinctive way of experimenting with materials) have pretty much given you a lock on this part of the business. These exotic batteries represent the highest form of technology development and refinement that your competitors respect and consider as beyond cutting-edge science. Several executives from the automotive industry have commented that these advanced batteries will do much to boost electric-powered vehicles in the near future, but only if you can scale the business and drive down unit production costs. Companies such as BMW, Daimler, Ford, General Motors, Hyundai, and Toyota have repeatedly approached you about the possibility of doing joint work together to improve the battery's running time and speed of charging. You are flattered, of course, but don't have the manufacturing scale to produce these exotic rare-earth batteries at low cost (at least not yet). Still, it has been difficult for other battery companies to imitate what you are doing, since exotic, rare-earth science is a complex field that requires long experience and scientific insight that comes only with lots of experimentation, testing, and deep research protected by patents. As a constant worrier, you feel that your competitive advantage lead-time and the depth of your scientific capabilities, while impressive, seems shorter than you would like. Your R&D skills and depth of talent are excellent, but you feel as if your manufacturing process is missing something, since you have typically experienced a long glide-path in reducing your unit costs with every new battery size.

The other business unit (Business Unit 2) is better known for its well-recognized battery brands that used in long-lasting, conventional lithium-ion and alkaline batteries for a broad range or devices, including watches, cell phones, and even laptop computers. Customers love your batteries because of their long-lasting qualities, but they pay a price premium for your offerings. Unlike that of some of your competitors, your lithium batteries are high-quality and do not pose the same degree of fire hazard in laptop computers and smartphones. Your R&D team has taken steps to modify the battery chemistry to reduce the overheating when consumers are careless with their products in airplanes, cars, and other environments. This feature has earned your company considerable trust among customers - both consumers and manufacturers - who want to ensure that their products are as safe as possible. This extra safety feature is a tribute to your company's high ethical standards in development and manufacturing, but it also means that your unit costs will probably remain higher than that of rivals. However, Business Unit 2 is beginning to face growing competitive pressures from other manufacturers who are seeking to erode your sizable market share. You are not excessively worried about your competitors yet, but you realize that the battery industry has become significantly more capital-intensive over the years. Business Unit 2 has significant brand equity that captures much customer loyalty, but here too, you begin to wonder how long you can keep charging a price premium for lithium batteries - especially

given the rise of new, ultra-modern manufacturing facilities in the Far East that compete on scale and volume.

A year later, your company has been approached by a smaller battery company (call it X) based in Asia. They approach you with an informal request to begin investigating the possibility of working together on advanced battery technologies. Although you have heard about the company from attending industry conferences in the recent past, you never thought that X was a serious player in the battery or power systems business. Most of the business for X has traditionally come from making standard alkaline batteries that are included in remote controls for television sets, older telephone answering machines, small portable electric fans, low-end digital cameras, and other low-cost, mass-produced consumer electronics products. Since X makes standard alkaline batteries for other manufacturers, they really have no brand equity at all, as they have never sold directly to consumers. They exist as battery suppliers only to manufacturers - in fact, X just recently completed building a large battery manufacturing facility that is designed to provide a wide range of low-cost batteries to all types of consumer electronics companies. From what you hear at industry conferences, X hopes to serve not only its traditional corporate customer base (portable television manufacturers, phone manufacturers, and digital cameras), but also companies that make high-end digital watches, laptop computers, tablets, and portable DVD players used in long airline flights. X has said nothing about what its new manufacturing facility can do, but there is strong reason to believe that X has the talent and the machinery in place to produce both alkaline and lithium-based batteries. Even more uncertain is how well X can formulate the necessary chemical compounds and mixtures that are needed to produce the right balance of smooth, sustained power flow for long-lasting but stable battery life for higher-end products. Little is known about X's manufacturing skills as it relates to quality control and battery safety features either. Yet, X is determined to push ahead since it wants to become the battery source to all kinds of businesses. Since most consumer electronics companies are outsourcing non-core operations to improve their own internal measures of financial efficiency, many of them have decided to use X's batteries rather than to make them on their own. You have also heard rumors that management at X is also anxious to expand beyond the alkaline and lithium business segments to move up the power systems food chain. X's young CEO even drives a prototype electric vehicle made by Tesla, but claims that on some day, at some point, he/she could beat Tesla in its own game. As a former engineer, the CEO likes investing in cutting-edge manufacturing technology since he/she believes that manufacturing competence over time will win out over scientific innovations in the marketplace. He/she thinks that the race for successful product innovation is based on improving manufacturing yield and defect reduction in addition to developing new product ideas in the lab. As impressed as your with the young CEO's ambitions, you have some lingering doubts about the depth and sophistication of X's management team and technology, you politely decline the opportunity to work with X.

Six months have passed, and you are invited to lunch by a friend and former executive who now works at a medical device electronics firm (call them MECO) that builds external portable diabetes monitoring systems and external portable cardiac defibrillators, as well as high-end implantable cardiac pacemaker devices that are installed in the patient by hospitals and doctors. MECO's external, portable medical products are designed and sold for the consumer market, not for hospitals or long-stay medical facilities. They are particularly well-suited for consumers who

are caring for loved ones in the home, where portable medical devices may be needed as a stopgap measure before emergency help or professional help arrives. (Think portable defibrillators that should be in every section of a high-end steakhouse restaurant!) At the lunch meeting, MECO is interested in purchasing large quantities of your most advanced, proprietary, exotic-material batteries for use in their newly designed, implantable cardiac pacemakers. Having worked for you a long time, your friend knows that you have the best scientific reputation and skills in batteries to back up your products. As the conversation lingers, he/she also tells you that MECO has dramatically improved its power system efficiency and maintenance costs for its external portable defibrillators several quarters ahead of schedule. You asked how they were able to accomplish this, since working with portable medical technology requires a different set of manufacturing skills (e.g., lower cost, long production runs, specialized proprietary techniques) than those used for implantable cardiac products made for use in hospitals (e.g., small-quantity, custom-order, but higher unit-cost production). He/she responds by saying that MECO has contracted out most of their battery manufacturing to a company called X, and that they were instrumental in helping us figure out how to best manage power consumption and drainage issues in electronic devices.

Your friend tells you the following: The alliance is structured in a serial manner whereby X initially provides the battery, and MECO does the rest. Increasingly intrigued and simultaneously perturbed by what you hear, you ask for some more specifics about what this relationship is all about. He/she tells you it works like this: You concentrate your effort on designing the latest medical device technology and focusing all of your efforts on making sure that it can work in a variety of different environments (e.g., climates, temperature, altitude, humidity). Once you have finalized a robust portable defibrillator design, you provide it to X, who in turn manufactures the batteries according to the size, weight, and how long you want the defibrillator to keep running. He/she has visited X's battery development and manufacturing facility, and tells you how marveled he/she was:

"These people are able to run such a tight ship - their cost management and yield improvement skills are top-notch. The batteries come out perfect without any seams, leaks, dents, or irregularities on the surface. Yet it is difficult to isolate which department within X is responsible for which activity it does. The external coating of the batteries can take a beating. It's almost like they can coax more out of their equipment without compromising quality. We could not attain the same kinds of battery durability and sustainability in our own factory. It seems like everything related to quality and process improvement in their facilities is so seamless or interconnected that it is difficult to know where one set of competences end and another begins. It is very difficult to see deeply into their organization. Their internal processes blend together so tightly that it is hard to isolate which activity occurs where within the organization. This tightness even extends to how they run their inventory systems and manage their suppliers as well. I don't know how they do it, but it's not obvious that we could duplicate it on our own."

X ships the batteries directly to you, and is even willing, for an added fee, to build the surrounding surge protectors, voltage regulators, transformers, and a few other components that are integrated with the portable defibrillator's power system to finalize a good deal of the end product. What X cannot do is to design the actual microprocessor "brain" that controls how all of these components are integrated together in the actual medical device.

QUESTION

1. Why is X willing to provide additional power system components beyond the actual battery itself for a fee? 

2. What is happening to the underlying configuration of the alliance?