Enterprise Design for Dynamic Complexity:
Enterprise Product Strategy
Ted Piepenbrock
October 2003
Research Partnership Structure
Industry
Sponsor
Intermediary
Research
Vehicles
Academic
Partners
© Ted Piepenbrock
© Massachusetts Institute of Technology
2
MIT’s Research on Lean
3-Dimensional Concurrent Engineering
Enterprise
Product
© Ted Piepenbrock
Production System
Supply Chain
© Massachusetts Institute of Technology
3
World Class Lean Enterprises
© Ted Piepenbrock
Southwest
All Others
American
GM
Ford
Chrysler
Toyota
Market Capitalization
1998-2001
Delta
Service
Example:
Manufacturing
Example:
Market Capitalization
2002
© Massachusetts Institute of Technology
4
Corporate “Eating Disorders”
Market Capitalization
1998-2001
15
10
“Lean”
GM
Chrysler
Auto Production (millions)
20
Ford
Toyota
(data from The Machine That Changed the World)
US
Production
“Anorexic Lean”
“Bulimic Lean”
5
Japanese
Production
1947
© Ted Piepenbrock
1954
1961
1968
Year
1975
1982
1989
© Massachusetts Institute of Technology
5
“The World’s Worst Industry”
“There is no worse business of size that I can think of than the airline
business. Since it began in 1903, the industry has had an overall net
loss… If there was a capitalist on Kitty Hawk, he would have shot the
plane down.”
Warren Buffet
“World’s Most Successful Investor”
© Ted Piepenbrock
© Massachusetts Institute of Technology
6
“The World’s Worst Industry”
Total
Airline Profits
(1970-2002)
$20 b
“Higher, Faster, Farther”
Network Carriers
Hub & Spoke Networks
Wide Body Planes
$15 b
Southwest
All Others
Delta
American
$10 b
Market Capitalization
2002
$5 b
$0 b
“Better, Faster, Cheaper”
Low-Fare Carriers
Point-to-Point Networks
Narrow Body Planes
-$5 b
-$10 b
-$15 b
-$20 b
1970
© Ted Piepenbrock
1975
1980
1985
1990
1995
2000
2005
2010
2015
© Massachusetts Institute of Technology
7
Commercial Aircraft
% Market Share
in Commercial
Airplane Deliveries
100%
US
B.F.C.
Enterprise
50%
H.F.F.
Corporation
EU
Time
1970
© Ted Piepenbrock
1980
1990
2000
2010
© Massachusetts Institute of Technology
8
Agenda
•
Product Development & the “Lean Heavyweights”
Heavyweights
•
Enterprise Design for Dynamic Complexity
•
Technology & Industry Roadmapping
•
“Lean”
Lean Revisited
© Ted Piepenbrock
© Massachusetts Institute of Technology
9
Product Development
& the “Lean Heavyweights”
© Ted Piepenbrock
© Massachusetts Institute of Technology
10
Aerospace Industrial Evolution
Higher, Faster, Farther
Better, Faster, Cheaper
(Integral Product &
Supply Chain Architecture)
(Modular Product &
Supply Chain Architecture)
Dominant Design
Product Innovation
Process Innovation
Boeing
Airbus
Number of Firms
Time
Fluid Phase
(1900-1950)
© Ted Piepenbrock
Transitional Phase
(1950-1980)
Specific Phase
(1980-2020)
© Massachusetts Institute of Technology
11
Organizational Re-Architecture
Programs
Higher, Faster, Farther
Vertical Functional Focus
Marketing
(Engineering)
Produce
(Manufacturing &
Supplier Mgmt.)
Better, Faster, Cheaper Products
Horizontal Customer Focus
Product Innovation
Process Innovation
Customers
Dominant Design
Number of
Firms
Time
Fluid Phase
(1900-1950)
© Ted Piepenbrock
Define
Transitional Phase
(1950-1980)
Specific Phase
(1980-2020)
© Massachusetts Institute of Technology
12
The “Lean Heavyweight”
Higher, Faster, Farther
Marketing
Product
Development
Manufacturing
Lightweight Project Manager
Better, Faster,Cheaper
Customer
Demands
Marketing
Product
Development
External Integration
(Strong Concept Champion)
© Ted Piepenbrock
Manufacturing
Customer
Deliveries
Internal Integration
(Strong Project Coordinator)
Heavyweight Project Manager
(“Shusa”)
© Massachusetts Institute of Technology
13
Enterprise Development is
Large-Scale Product Development
© Ted Piepenbrock
© Massachusetts Institute of Technology
14
Mastery of Dynamic Complexity
Human Complexity
Low
High
Low
Product
Design
Dynamic Complexity
Tame
Problems
Platform
Design
Corporation
Design
Messy
Problems
High
© Ted Piepenbrock
Negotiated
Problems
Wicked
Problems
Enterprise
Design
© Massachusetts Institute of Technology
15
Enterprise Dynamics
© Ted Piepenbrock
© Massachusetts Institute of Technology
16
Airline Profitability Dynamics
Deregulation
$25b
Airline Profitability
$20b
$15b
$10b
$5b
$0b
-$5b
-$10b
-$15b
-$20b
1900 1910
1920 1930
1940
1950 1960 1970
1980
1990 2000
2010
Year
© Ted Piepenbrock
© Massachusetts Institute of Technology
17
Airline Profitability Dynamics
Total
Airline Profits
10-year Period
of Oscillation
(like Juglar waves of
machine-investment cycles)
(1970-2002)
$20 b
Stop
Placing
New
Orders
$15 b
$0 b
7E7 Delivery
$5 b
A380 Delivery
Deregulation
$10 b
Begin
Placing
New
Orders
-$5 b
-$10 b
-$15 b
-$20 b
1970
© Ted Piepenbrock
1975
1980
1985
1990
1995
2000
2005
2010
2015
© Massachusetts Institute of Technology
18
Closing the Business Case
Year
© Ted Piepenbrock
> 15 years
2026
2021
2016
2011
$11.6
billion
2006
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
-8,000
2001
$ million
NPV
Base Case
Best Case Scenario
Worst Case Scenario
© Massachusetts Institute of Technology
19
Lean Segmentation of Market
(Notional)
Total
Airline Profits
Network Strategy:
10 year, $10 b
batched launches
(1970-2002)
$20 b
“Higher, Faster, Farther”
Network Carriers
Hub & Spoke Networks
Wide Body Planes
$15 b
$10 b
$5 b
$0 b
“Better, Faster, Cheaper”
Low-Fare Carriers
Point-to-Point Networks
Narrow Body Planes
-$5 b
-$10 b
Low Fare Strategy:
3 year, $3 b
continuous flow launches
-$15 b
-$20 b
1970
© Ted Piepenbrock
1975
1980
1985
1990
1995
2000
2005
2010
2015
© Massachusetts Institute of Technology
20
Enterprise Complexity
© Ted Piepenbrock
© Massachusetts Institute of Technology
21
Commercial Airplane Enterprise
Transportation
Network
$200 billion in Sales
(spread over 20 years)
Airplanes
Reliable Transport Network
(Strategic Economic Engine)
Airlines
$
(e.g. JAL & ANA)
Tax Breaks,
Bailouts
Sales
Revenues
$
NPV
!
Boeing
$10 billion in N.R. Costs
(investment risk)
Government
(e.g. Japanese)
$
Taxes,
Votes
Offset
Agreements
$
Suppliers
(e.g. Mitsubishi,
Kawasaki, Fuji)
PP&E
+
R&D$
Risk-Sharing
Skilled Work-Placement
Components &
Sub-Assemblies
© Ted Piepenbrock
© Massachusetts Institute of Technology
22
Enterprise Boundaries
Gov’t
BCA
Airbus
Gov’t
Unions
Unions
Suppliers
Suppliers
World-Class
Aerospace Company
© Ted Piepenbrock
World-Class
Aerospace Enterprise
© Massachusetts Institute of Technology
23
Strategic Architecture
The Realm of “Public Goods”
and “Protected Commodities”
Government / Regulatory Policy
Dynamics
Airbus
Business Cycle
Dynamics
Industry Structure
Dynamics
Boeing Corporate Strategy
Dynamics
© Ted Piepenbrock
Product/
Technology
Dynamics
The Realm of “Private Goods”
and “Differentiated Products”
© Massachusetts Institute of Technology
24
Technology & Industry
Roadmapping
© Ted Piepenbrock
© Massachusetts Institute of Technology
25
Industrial Dynamics
Government / Regulatory Policy
Dynamics
Business Cycle
Dynamics
Industry Structure
Dynamics
Corporate Strategy
Dynamics
© Ted Piepenbrock
Product /
Technology
Dynamics
© Massachusetts Institute of Technology
26
Disruptive & Sustaining Technologies
Performance
stomers
u
C
t
a
h
t
ry
Trajecto
e
c
n
a
m
Absorb
n
a
c
Perfor
r
o
Demand
ed et
erv Mark
s
ies
g
er the
v
o
O of
ol
hn
dle
c
d
i
M
Te
g
nin
rs
i
a
try that Custome
s
Scuto
e Traoje
f
c
rb
n
a
m
r
o
f
an Abso
c
y
Per
r
o
r
d
n
toa
Djeecm
s
a
r
gie
T
o
l
o
e
nc
hn
c
a
Te
orm rved ket
f
e
r
v
Pe er-se e Mar
pti
u
d f th
r
n
is
U
o
fD
dle
d
o
i
M
y
tor
c
e
j
rs
Tra
e
Custome
t
c
a
h
t
y
n
r
cto
a
rmerformance Traje can Absorb
o
f
r P
or
Pe
Demand
t
e Marke
h
t
f
o
d
n
le
Upper E
, Profitab
g
in
d
n
a
(Dem
rs)
Custome
es
tur
c
e
t
lity
hi
arc tiona
l
gra nc
nte ith Fu
I
h
wit ors w
s
e
it
i
an mpet
p
m
Co at co
be
Market
e
h
t
f
o
e
Middl
mers)
o
t
s
u
C
’s
(Today
res
ctu
e
t
i
h
arc eed &
r
a
ul
Sp
od with
M
n
h
s
wit titor izatio
s
e
ie mp om
an
t
mp at co Cus
o
e
C
b
t
e Marke
h
t
f
o
d
n
Lower E
profitable
n
U
,
g
in
nd
(Undema s t o m e r s )
Cu
Time
© Ted Piepenbrock
© Massachusetts Institute of Technology
27
Products for “Unprofitable” Customers
Targeting “Profitable” Customers
© Ted Piepenbrock
Targeting “Unprofitable” Customers
© Massachusetts Institute of Technology
28
The Disruptor and the Disrupted
© Ted Piepenbrock
© Massachusetts Institute of Technology
29
The Evolution of Disruption
500 seat
Wide Body
Commercial Jet
100 seat
Narrow Body
Commercial Jet
50 seat
Regional Jet
5 seat
Eclipse
Air Taxi
1 seat
Aeromobile
© Ted Piepenbrock
© Massachusetts Institute of Technology
30
The Evolution of Disruption
Growth
Fractional
Aircraft Ownership
40
37
30
20
10
Air Travel Growth
Both are normalized to 1.0
1.5
1993
© Ted Piepenbrock
1994
1995
1996
1997
1998
1999
2000
Time
© Massachusetts Institute of Technology
31
Lean Revisited
© Ted Piepenbrock
© Massachusetts Institute of Technology
32
Capturing Value
Integrated “Lean” Enterprise:
• In mature/saturated markets, with reduced/variable
customer in-flows…
• Construct a right-sized, integrated, flexible enterprise
to capture value so that…
• Waste is eliminated and flexibility is maximized.
Is there something you don’t know
about your enterprise?
Traditional “Mass” Enterprise:
• In a rapidly growing homogenous market,
with large customer in-flows…
• Construct a large, expensive, inflexible monument
to capture value, but…
• Poor integration creates holes through which value
leaks out (waste!)
© Ted Piepenbrock
© Massachusetts Institute of Technology
33
Architecture of a Lean Enterprise
3. Control Variability of Input (Mura)
3
1
Is there something you don’t know
about your enterprise?
1. Remove Waste (Muda)
2
2. Make Enterprise Flexible (Muri)
© Ted Piepenbrock
© Massachusetts Institute of Technology
34