Technical Challenges in Production of $100 Laptop by Nicholas Negroponte - Case Study Example

? CASE STUDY ANALYSIS Introduction 3 Apparent Issue 3 Real Issue 3 Relevant Facts 4 SWOT Analysis 5 Options 11 Implications 11 Recommendations 12 Evaluation 12 References 13 Introduction Professor Nicholas Negroponte launched a $ 100 Laptop in 2003 with the Media Lab of MIT. This project was later transformed into a nonprofit association founded by him in 2005, called “One Laptop Per Child” (OLPC). This case study is about various technical challenges in production, and marketing challenges the association has to face in the challenging external environment filled by the threats of competitors, ever changing technology and the product substitutes. Apparent Issue Despite the high PC adoption rate in certain regions OLPC is finding difficulty in convincing the respective governments to invest heavily in his project. He needed investment in one million at a time by a nation in Laptop and including all expenditures the price tag could go to $ 200 million to $ 250 million. Negroponte decided not to venture into production until he has firm commitments from governments to buy at least five million machines outside USA. Competitors were increasingly lowering their product prices with no such restriction. Real Issue The real issue was the shift in technology. The emerging markets were likely to be wire-less centric rather than PC- centric. Hence it was more viable to distribute internet enabled cell phones to children for education rather than trying to built and distribute Wi-FI enabled mesh networks with donated or subsidized Laptops as was being done by OLPC. The problem was of disruptive innovation and market evolution. Relevant Facts OLPC is facing many different challenges and varied situations both internally and in the external environment. In the table below is the list of the few most relevant and important facts concerning OLPC. FACTS EVALUATION FINACIAL In 2006 AMD, Google, Red Hat, News Corp. gave at least $ 29 million to fund the project and pledged additional money for the future. + OLPC needed an order of one million laptops at a time to start its production. - MARKETING The $ 100 Laptop proved to be a misnomer. The initial cost was close to $ 150 per machine. ? OLPC find it difficult to sell the idea. The poor underdeveloped countries that are still striving for basic necessities of life find it difficult to invest such huge amount on laptops instead of basic education. _ COMPETITORS Competitors were multiplying in number both nationally and internationally and well renowned business oriented companies were giving tough competition by continuously offering their low priced products. _ Emerging technologies such as internet enabled cell phones were cheaper and have more consumer acceptance in poor countries. ? ORGANIZATION Intel started working together with OLPC in July 2007 and started mass production + Due to request of OLPC for Intel to stop marketing its low cost laptops Intel terminated the partnership with OLPC in January 2008. ? TECHNOLOGY Design engineers of OLPC not only were successful in reducing cost through innovative technology but also solved the problem of lack of electricity with hand crank. + Enhanced Wi-Fi range created wireless mesh to enable out of range machines to connect to internet. + SWOT Analysis SWOT analysis is the most effective tool that provides the framework for the analysis of the business environment. It is considered more effective because in a way, it combines the Porters five forces with the PEST analysis. It requires careful prioritization of strong opportunities and threats. Wrong selection may lead to weaker opportunities and threats coming in the analysis. SWOT analysis provides both internal and external analysis and provides a critical analysis of strengths, weaknesses, opportunities and threats. It helps organizations in developing its strategies like SO that emphasizes on utilizing strengths to capture the opportunities. WT strategy focuses on minimizing weaknesses and threats. ST strategy focuses on using strengths in minimizing threat whereas WS strategy is focused on minimizing weaknesses while focusing on strengths. In the same way opportunities can be utilized to minimize weakness WO and threats OT depending on the strategy of the company. (Gerry Johnson, 2008). SWOT analysis of the company reveals the major strengths and weaknesses of the OLPC that is presented in the tabular form below. The external environment or the macro environment has a strong impact on the all activities and strategies of the organization. These factors include political, social, economic, legal, technological and eco-environmental factors. Two models are used to analyze the force and impact of these factors. These two models are called “PESTEL Analysis” and “Porters five forces”. An industry’s attractiveness is evaluated through Porter’s five forces model. According to the model the forces that affect an industry are the threat of entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and the level of rivalry among the existing competitors. The evaluation determines the attractiveness or unattractiveness of the industry and also helps in formulating strategies for obtaining competitive advantage. The attractiveness of an industry in turn determines the overall profitability of the industry measured through overall return on investment. It requires utilizing the existing industry environment to gain competitive advantage. Out of the five forces the strongest competitive force indicates the profitability of the industry and forms the most crucial part of strategy formulation. If the affect of forces is intense then the industry is said to be unattractive that is companies in the industry will not earn attractive return on their investments while if the forces are not intense then the industry is attractive and the companies in the industry earn substantial return on their investments (Porter, 2008) The analysis of the Porter’s five sources i.e. buyer power, supplier power, threat of entrants, threat of substitutes and rivalry reveals the following results. Buyer power is relatively high because of high price sensitivity, greater buyer volume, minimal product differences and the availability of substitute products. Supplier power is low because volume is important for suppliers, switching cost of suppliers and firms in the industry is not high and backward integration is more plausible than forward integration. Threat of new entrants is low because of high economies of scale, high capital requirements and long propriety learning curve. Rivalry is high due to sluggish growth of industry, minimal product differences, low switching costs and lack of diversity of competitors. Threat of substitutes is high because of the relative price performance of the substitutes and the high buyer propensity to substitute. This makes the overall industry moderately unattractive. PESTEL is a part of external analysis in which impact of Political, Economical, Social and Technological, eco- environmental and legal factors are analyzed. PESTEL forces are beyond the control of firms in the industry. The identification of the impact created by the PESTEL factors is an important way of analyzing the external environment in which a business operates. Based on this analysis companies decide how to respond to these external forces them which combined together form the opportunities and threats in the SWOT analysis. In our case study political force are the most influential. According to Negroponte it is very difficult to convince governments to invest in the project. Political governments have to seek the acceptance before making such heavy investment. Gaining the commitments of governments and the actual money is a big issue. Economic forces are also high. Most of the underdeveloped countries are so impoverished and determined to meet their basic needs that they find it unviable to invest scarce resources in Laptops. Technology is also another powerful source in our case. Wi-Fi enabled cell phone is the emergent technology. The effect of these PESTEL analysis combined with Porter’s five forces pulls it towards unattractiveness of the industry. Utterback’s model of market evolution and the changing state of innovation is very effective in explaining the various stages an innovation has to go through. According to his model the product innovation is highest in the first stage, at the start of the new market when it is struggling to find the dominant design. The dominant design is discovered with the interaction of the product innovation and the customer adoption. Once the dominant design is identified the market emphasizes on process innovation. The objective of process innovation is to find the most effective and efficient way to produce that dominant product. Different stages leads market to shift from fluid to transitional to specific. At specific stage both product innovation and process innovation declines. Specific stage is very crucial, assets and skills become specific to the product. It is crucial because at this stage firms become vulnerable to competence destroying changes in the market e.g. MP3 has replaced CDs (Utterback, 1996). Our product of $ 100 Laptop has also passed through the same stages. It was going through the production of dominant product in 2006. Different designs and technologies were being tried, to make it cost effective, and to overcome the problem of lack of electricity availability among its users. They also had to reengineer for more hot and humid temperature. Special arrangements were also made to make it water proof and dust resistant, to make it suitable for the usage of children. This production of dominant design took more than a year. OLPC has also passed the process innovation stage. With the help of Quanta computers it can produce 1 million PC’s in a month. OLPC is in the last stage of innovation that is very specific. Competition is high. All the competitors have also introduced a low priced version of their product. With the emergent technology of Wi-Fi enabled cell phone OLPC is faced with competence destroying changes in the market. Bill Gates of Microsoft is also an advocate of distributing internet enabled cell phones to children for education purposes. Christensen model is another model that explains creative destruction. According to this model when a new innovation is competence destroying it makes the capabilities of the former competitor obsolete. It becomes difficult for the firm to compete in the market. According to Christensen the specific stage of Utterback’s model actually sets the ground for disruptive innovation. Thus firms must take into account the emerging product that may disrupt the current product and also must have knowledge of disruptive technologies so that they can plan before hand (Christensen, 1997). In our case the Wi-Fi enabled cell phones may not act as a disruptive technology for laptops in general and it may not make them obsolete but it is disruptive technology for OLPC who is designing special Laptops for school children because cell phones are far cheaper and customer adoption rate is very high for them. SWOT showing strengths and weaknesses Strengths Weaknesses Good will of suppliers. Quanta computers was willing to produce a million laptops per month Easy access to capital. $29 million was given by technology companies to fund the project. Low cost of production as compared to competitors due to innovative design that made possible lower the price. $ 100 laptop proved to be a misnomer actual price was higher Innovative technology in the product to create wireless mesh through a mini network. Highly talented technical staff hired from different countries Production in bulk at least one million at a time to get economies of scale Product overcame the shortage of electricity problem with its own energy. SWOT Analysis showing the opportunities and threats Opportunities Threats Buyers high price sensitivity, greater buyer volume, minimal product differences and the availability of substitute products Suppliers Volume is important for suppliers, switching cost of suppliers and firms in the industry is not high and backward integration is more plausible than forward integration Rivalry Sluggish growth of industry, minimal product differences, low switching costs and lack of diversity of competitors. Entrants High economies of scale, high capital requirements and long propriety learning curve Substitute Relative price performance of the substitutes and the high buyer propensity to substitute Respective govt.’s unwillingness to invest, economic in viability for very poor nations, emergent technologies Options Using Ansoff’s model for growth strategy provides a useful framework for analyzing a firm’s strategy. The four considerations proposed by him are market penetration, market development, product development and diversification. Each has its own set of risks and capabilities to produce (Ansoff, 1965). OLPC needs to concentrate on market development keeping in view the high adoption rates in certain regions that can be done through alliances as it did with Intel. The other strategy is product development it show try to utilize the technology of cell phone in its laptop that will help reduce the cost and will enable the company to compete with cheaper Wi-Fi enabled cell phones. OLPC has the strength of very talented staff that helped him design and produce laptops that could work without electricity. The talented team should work in this direction. It will help the company minimize threat with its strength. The company with this new technology can also benefit from the first mover advantage. It will help the company establish its name in the market and capture the target market before competitors (Marvin B. Lieberman, 1998). Implications The option of market development has lesser risk in the short run but greater risk in the long run. In the short run it can be successful in selling the idea in different region. In the long run it may fail because of the emergent technology. The product development strategy is more risk but beneficial in the long run. It is risky because of the high investment required in research and development. The success is not guaranteed. Recommendations Although the option of product development is riskier but I would still recommend it because of its strategic success. If this technology succeeds it will give competitive advantage to OPLC. The real issue is emergent technology and with the company’s strength in its technical staff capability in designing and development it is not impossible to make use of that technology in laptop. Evaluation Business score card keep track of the financial, internal business process, customer and learning and growth component of the organization. It keeps tack if the business vision and strategy is in alignment with objectives and measures objectives and initiatives. Learning and growth department is taking initiatives to achieve objective that can be measured through their success in designing. To achieve the mission OPLC should appear as a low price Laptop to customer the initiative is reducing cost and measure is lowest price. It is a nonprofit organization so financial success is not primary objective. The recommendation will do well in learning and growth, financial and customer perspective. References Ansoff, I. (1965). Corporate Strategy. New York: McGraw-Hill. Christensen, C. M. (1997). The Innovator's Dilemma : When New Technologies Causes Great Firms to Fail. USA: Harvard Business Press . Gerry Johnson, K. S. (2008). Exploring Corporate strategy:Text and cases. New Delhi: Pearson Education. Marvin B. Lieberman, D. B. (1998). First mover (dis)advantage. USA: Stanford University. Porter, M. (2008). On Competition. USA: Harvard Business Press. Utterback, J. M. (1996). Mastering the dynamics of innovation. USA: Harvard Business Press. Read More