DYNAMIC CAPABILITIES IN NEW PRODUCT DEVELOPMENT: THE CASE OF ASUS IN MOTHERBOARD PRODUCTION

TECHNOLOGY MANAGEMENT (MM-494)

Submitted by: Mohammad Mashhood Khan Muhammad Bin Jamil Bajwa Umer Tariq

2008132 2008158 2008263

ABSTRACT
This empirical research applies the dynamic capability perspective to the field of new product development. Our major focus is in the time-to-market competition of motherboard production in IT hardware industry. Product developments of motherboard follow standards of CPUs and chipsets. The dominant architecture of motherboard has been set by Intel and elaborated by Asus. This research studies how processes, positions, and paths of Asus improve its new product development performance. The result shows that sustainable competitive advantages of Asus stem from high-performance routines both inside and outside the firm. The process of integration and coordination, the process of learning, practicing and accumulation of core competence, the process of reconfiguration and transformation work jointly to shape the best practices in its industry. Positions of technological teamwork and supply chain clustering consolidate its competitive advantages. Learning from OEM operations and collaboration with key suppliers increase technological opportunities and mark the road ahead.

INTRODUCTION
In 2008, 92.4 percent of the global output of motherboards or one hundred and thirty five million pieces in total were produced by Taiwanese firms. Since the collective efforts of Intel and Taiwanese computer hardware manufacturers in establishing the global dominant design of computer hardware, the focus of new product development of computer hardware has shifted from design competition & substitution to elaboration of dominant design. In the new era of incremental but rapid change, the competitive advantage of firm rests on distinctive ways of coordinating and combining operations. Shaped by their difficult-to-trade knowledge assets and complementary assets, Taiwanese computer hardware manufacturers have adopted similar evolutional paths to capture increasing returns of the dominant design, From the prospective of product architecture, computer hardware is a modular system with motherboard being the central part containing CPU and interfaces for other modules such as Memory, chipsets, video card, and other peripheral equipment. Motherboard controls not only the processing, operation and storage functions of computer hardware but also the connections with all peripherals such as printer, keyboard, and display, etc., It is the key component influencing performance and stability of computer hardware. The understanding of computer hardware cannot be thorough without a full knowledge of the product design and development of motherboard. We conduct our empirical research of motherboard using dynamic capability perspective. The global competitive battles in high-technology industries such as semiconductors, computer hardware, and computer software have demonstrated the need for a theory to understand how competitive advantage is achieved. In this new era of incremental but rapid change, identifying new opportunities and organizing management activities effectively and efficiently are more fundamental than strategic leaps and Machiavellian maneuvers which distract managers from seeking to build more enduring sources of competitive advantage. Focusing on

the motherboard industry, the objective of this paper is to study how winners, especially Asus from 1989 to 2009, in the motherboard industry developed firm-specific capabilities and how they built up core competences in responding to the shifting business environment.

LITERATURE REVIEW
According to the dynamic capability perspective (Teece et al., 1997), winners in the global market of information technology related business have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and deploy both internal and external competences. Anderson and Tushman (1990) emphasize timely responsiveness using the concepts of technological discontinuity and dominant design. They propose that before a dominant design is selected, it is an era of ferment with design competition and substitution. After the rise of a dominant design, it is an era of incremental change with elaboration of dominant design. Winning strategies in these two eras are fundamentally different. In the era of ferment, it is better to experiment different form factors or product deigns to assess market response. In the era of incremental change, it is better to focus on efficiency and market penetration. With Intel as the long established dominant design provider in the motherboard industry, incremental change is the rule of game. Firms may attempt to achieve greater market segmentation by offering different models and price points. They may also attempt to lower production costs by simplifying design or improving production process. Accumulations of small improvements by competing firms can make big difference in competition for market share (Schilling, 2008). George and Hout (1990) argue that time-to-market or project development time is another source of competitive advantage. Because product life cycles of IT related products are short, efficiencies in new product development and time-to-market capability become important. For firms which lag behind considerably in its speed of new product development, the possibility of falling to a vicious circle is high. Sun and Zhao (2010) also reveal that TQM, teamwork, value analysis and quality function deployment (QFD) are all positively correlated with the speed of new product development, which means quality management philosophy and tools have a positive influence on the speed of new product development. Minguela-Rata and Arias-Aranda (2009) indicate that both multifunctional teams and execution of activities under an overlapping approach are positively related with shorter development time and higher product quality. Macro (1998) points out that integration and coordination process is the other source of competitive advantage. For a new developed module to function, other components have to be integrated around it with effective layout. In other words, for new CPUs and chipsets to function according to their designs, other components in the motherboard have to be redesigned and assembled with coordination. The whole system has to be taken into

consideration. Furthermore, technology, techniques, methods and individual skills are all necessary sources of competitive advantage, but not sufficient to achieve excellence (Conti, 2010). The fundamental role of the organizations culture, shared values in particular, also has to be taken into consideration. Kawagami (1998) and Harada (2000) bring other perspectives to this field of study by introducing the concepts of collaboration and knowledge accumulation. Kawagami argues that collaboration of hardware manufacturers with key component suppliers and with other local suppliers have to be cultivated for the R&D and production system to function effectively. Harada considers competitive advantage as a function of knowledge accumulated from past experience and newly acquired ones. Such perspectives are shared by Dahlgaard-Park and Dahlgaard (2010). They propose that before companies try to improve their processes of innovation and new product development they must improve the areas of leadership, people, and partnerships. Dervitsiotis (2010) further describes that for any organization to address effectively the innovation challenge, periodic assessment of innovation output, innovation input and innovation process itself is necessary.

RESEARCH METHODOLOGY
The research methodology of this study is divided into two parts. The first partuses archival data such as company annual report, ITIS industrial report and related literature. The second part uses case study with in-depth interviews of managers from Asus and Intels subsidiary in Taiwan. We applied the dynamic capability perspective to the empirical research of new product development management of Asus in the motherboard industry. The research objective is to explain what competitive advantages Asus possesses, how Asus rise to the top of motherboard industry, and why these best practices are easy to replicate insides Asus but hard to duplicate for its competitors. Such a study on firm capabilities needs to be understood not in terms of quantitative calculation, but mainly in terms of organizational structures and managerial processes which support productive activity. In this study we identify several classes of factors that will help determine a firms distinctive competence and dynamic capabilities. We organize these in three categories: processes, positions, and paths. But the content of these processes and the opportunities they afford for developing competitive advantage at any point in time are shaped significantly by the assets the firm possesses and by the evolutionary path it has adopted. Hence organizational processes shaped by the firms asset positions and molded by its evolutionary and co-evolutionary paths, explain the essence of the firms dynamic capabilities and its competitive advantage (Teece et al., 1997).

ISSUES ON NEW PRODUCT DEVELOPMENT OF MOTHERBOARD

Dominant design of motherboard Dominant design means a product design that is adopted by the majority of producers, typically creating a stable architecture on which the industry can focus its efforts (Schilling, 2008). The dominant architecture of motherboard is set by Intel and modified by Asus. As shown in Figure 1, the major component of motherboard is north-bridge chipset with CPU socked into it. Video card and memory chip are also slotted to the north-bridge chipset. South-bridge chipset plays a minor role with USB, mouse, keyboard, and BIOS connected to it. Manufacturers which develop chipset needs to follow the standard of CPU. And, manufacturers which develop the motherboard must follow the standards of CPUs and chipsets. Intel, which is the dominant design provider of CPUs and chipsets, can dictate the architecture of motherboard. Motherboard manufacturers follow such architecture with the elaboration of dominant design set by Intel. It is possible to develop various new types of motherboards which can load different CPUs, chipsets, memory, Interface cards and the like. Namely, circuit design and layout of the number of extended slots, the size of memory capacity, the specification of the other parts which excludes CPUs and chipsets are left for motherboard manufacturers to develop.

Time-to-market performance as determining factor

During the stage of incremental change after the dominant design has been selected, motherboard manufacturers cease to invest in learning about alternative design architectures and instead invest in refining their competencies related dominant architecture. Most competition revolves around improving components and processes rather than altering the product architecture. Firms focus their efforts on developing component knowledge and elaboration skill. Once a new CPU inside the north bridge chipset has been introduced, motherboard manufacturers develop their new motherboard accordingly. As a result, competitive advantage in the motherboard industry comes not only from quality and cost, but also from elaboration of new product development. Furthermore, because product life cycles of these new products are short, time-to-market performance becomes a determining factor for the few competitive motherboard manufacturers that are equally good in managing component design and cost. Product life cycles of Pentium 4 CPU series, and the motherboard developed around it, shortened from 1-3 years to 6-12 months and finally to 3-6 months beginning from year 2000. For those motherboard manufacturers without good new product development management

and time-to-market performance, they have to rush their newest motherboards to the market, only to find that these products are at the end of their product life cycle. Case study and research propositions

Processes
CPU and chipset are the most important key components of motherboard. If technical information on the standard of latest chipset and CPU can be acquired earlier, the new model of the motherboard can be developed faster than competitors. Since Intel is the dominant leader of the supply chain, working collaboratively with Intel becomes important for the motherboard manufacturers. Since Asus and other Taiwanese motherboard manufacturers produce the majority of motherboards in the world, Intel offers these manufacturers Direct Account status with preferential treatments. As the CEO of Intels subsidiary in Taiwan pointed out that Intel valued Asus as a Direct Account customer because of its capabilities in new product development. With former experiences in installing Acers 386 CPU, Asus had demonstrated its new product development ability before it became a Direct Account customer of Intel. As a Direct Account customer of Intel, Asus enjoyed not only discount advantage in purchase of chipsets but also expeditious information of the latest CPU and chipset standards for concurrent new product development. For instance, Intel often informed Asus technological standards of its latest CPU and chipset about 4-6 months before they were commercialized. Asus could design and lay out the motherboard according to these standards in advance of the prototypes of CPU and chipset from Intel arrived about two months before their commercialization. Installation, testing, and debugging of the latest motherboard from Asus could be done in the same time. Intel also dispatched FA (Field Appliance) engineers to support Asus in solving the problems of heat radiation, stability of current, and readjustment of layout etc. that related to the motherboard. By doing so, Asus could shorten the lead time of development and improve its time-to-market performance. This is in accordance with the research of Tahon (2009) that the support from Intel was essential in the development of the Taiwanese ODM business model, especially in the motherboard and notebook PC industries in the 1990's. That is, part suppliers integrated key parts from Intel in the modules they developed and coordinated seamlessly with Intel to enhance the dynamic capability of these motherboard producers. Thus, we propose that: Proposition 1A: Integration and coordination enhance the dynamic capability in new product development. Asus had also built up its dynamic capability from learning, practicing, and accumulation of core competence in designing motherboard during its OEM operations for internationally competitive firms. The CEO of Intels subsidiary in Taiwan used the following OEM collaboration of Asus and Compaq as an example: When price competition of the PC market became intense in the middle of the 1990's, Compaq outsourced its computer hardware from Taiwanese

manufactures to reduce cost. Asus improved its new product development capability from its production line at the same time. Compaq began its joint research programs with the motherboard manufacturers in Taiwan in 1997. Then, Compaq withdrew its own design development team, and moved all of its in-house design operations to Taiwanese manufacturers in 1998 when the design capability of Taiwanese manufacturers became as good as that of Compaq. Asus was able to evolve from OEM production to ODM production with the added design function. Finally, Asus began to excel with its newly built dynamic capability when time-to-market performance was critical in the global competition of PC industry. Thus, we propose that: Proposition 1B: Learning, practicing, and accumulation of core competence enhances the dynamic capability in new product development. During the 80s, the majority of Taiwanese motherboard manufacturers focused on standardization, cost reduction, and production efficiency. Assembling efficiently all components on the printed circuit board was their major concern. They followed product standards set by others, which made them always six months late for the market. Asus defied these practices and focused on product design and time-to-market performance. Recognizing the importance of innovation in value creation, it strived to be one of the first movers in the high-end markets. For example, Asus developed its Catch386/33Catch486/25 and marketed them at the same time with those of IBM. Orders for these motherboards were 75 thousand per month in1992. Later on in 1994, its factory in Taipei was certificated for ISO9002. Following these reconfigurations and transformations, Asus began its pursuit for time-to-market performance with production automation and economy of scale. Its production capability increased to 1 million per month in 1998, and Asus was ranked top 18 in IT business by Business Week in the same year. In 2009, Asus was the market leader in motherboard with 33 percent market share. It sold 22.5 million motherboards that year. Thus, we propose that: Proposition 1C: Reconfiguration and transformation enhance the dynamic capability in new product development.

Positions
Founded by four engineers in 1989, Asus relied on R&D capability to excel in the highly competitive IT hardware market. Teamwork and brainstorming in product development differentiated Asus from other motherboard manufacturers. R&D engineers worked as a team in reducing electromagnetic radiation, in developing heat scattering module, and in testing of

noise, whereas those in other manufacturers worked alone on similar jobs. For instance, Asus developed Q-FAN technology in 2001. Responding to the problem in controlling heat and noise, the research team worked collectively in adjusting the rotation speed of FAN according to CPU temperature. Such teamwork quieted down the noise of FAN rotation, and improved the efficiency in heat radiation. Technological teamwork also prevailed among different functional departments inside Asus. The office of production engineer (PE) responsible for process design was staffed with engineers from R&D department to insure smooth implementation of partly parallel development process. Such a practice promoted closer coordination between different stages of new motherboard development and minimized the chance that R&D would design motherboards that were difficult or costly to manufacture. It also eliminated the need for timeconsuming iterations between design stages and shortened overall cycle time. Thus, we propose that: Proposition 2A: Technological teamwork enhances the dynamic capability in new product development. Clustering of Asus and most of its supply chain members facilitated dependable procurement of components. Table 1 shows key suppliers of Asus and the cost ratio of each key component. Except CPU and chipset, other parts and component such as semiconductor, printed circuit board, connector etc. came from domestic manufacturers. Ninety percent of the suppliers, about 400 firms, of Asus are domestic. Most suppliers cluster around the production base of Asus in Taoyuan, the others are in nearby Hsinchu Science Park. All of them are within onehour-drive distance, which makes it easy in securing timely delivery, in exchanging product and market information, and in reducing transportation cost. For domestic components, Asus purchased them from more than one supplier and demanded just-in-time delivery. However, Asus holds safety stock of components with long purchase lead time, such as ASIC or PCB. Thus, we propose that: Proposition 2B: Clustering of supply chain members enhances the dynamic capability in new product development.

Paths
From its modest beginning, Asus had been able to take advantage of its technological opportunities and learned the latest design standard and technology from its OEM operations for international brand-name firms. Product quality and production process of Asus improved further after several rounds of harsh demands from those internationally competitive firms. The vice president of Asus described those days when Asus transformed from a newcomer to one of the market leaders as follows: The challenge rises when dealings with the brand-name firms. It is a chance to study and growth for us. The efficiency of our production line was able to improve dramatically because of the demanding requests from SONY. We were able to come into contact with the newest design techniques and standards after taking their OEM orders of motherboard for servers. Along the path of OEM operations, Asus had built up a reputation of

being a high end product manufacturer with dependable quality. As the product manager of Asus emphasized the following: For customers whose primary concern is high quality, we are the first choice. For customers whose primary concern is low cost, Foxxcon is their choice. Thus, we propose that:
Proposition 3A: Learning from OEM operation for brand-name buyers enhances the dynamic capability in new product development.

Wu and Weng (2010) argue that the relationship between manufacturers and suppliers has turned from antagonist to collaboration. Our case supports their proposition that both parties can be mutually benefited through partnerships. In our case, collaboration of Asus and Intel has been built on mutual trust and mutual benefit. In the final stage of new product development and before commercialization, Intel would send its prototypes to Asus for testing. Asus put these CPUs and chipsets into its motherboards and tested how well they run. Asus then passes the test results back to Intel. Intel could compare these test results with its own and decided which final adjustments to take. Such collaboration was far beyond arm-length transaction prevailing in other business sectors. Collaboration with mid-sized local suppliers was through technical assistance and management support, which was based on long-term relationship. For key components which could not be standardized, such as PCB or ASIC, Asus offered its help in co-designing to the local suppliers. The logistic manager of Asus, Mr. Liao, elaborated such a relationship that: We are the leading manufacturer of motherboard. Local suppliers want to have long-term business relationships with us, because it helps not only their new product development capability but also their reputation as top-ranking suppliers. Asus benefited from such collaboration too. By improving the quality of the components, Asus improved the built-in quality of its own motherboards. Thus, we propose that:
Proposition 3B: Collaboration with key suppliers enhances the dynamic capability in new product development.

DISCUSSION & CONCLUSION

Our empirical research using dynamic capability perspective shows how asset accumulation, replicability, and inimitability improve the new product development of Asus. It also shows how competitive advantages of Asus in motherboard industry are achieved. As shown in Figure 2, the sustainable competitive advantages of Asus stemfrom high-performance routines inside the firm. The process of integration and coordination, the process of learning, practicing and accumulation of core competence, the process of reconfiguration and transformation work together to shape the best practices in its industry. Position of technological teamwork and position of supply chain clustering consolidate its competitive advantages. Learning from OEM operations and collaboration with key suppliers increase technological opportunities and mark the road ahead. This is in accordance with the dynamic capability perspective proposed by Teece et al. (1997) that strategy involves choosing committing of long-term paths or trajectory of competence development. Furthermore, from its years of operation, Asus has built nontradble soft assets such as collaboration and organizational experience which make it difficult for competitors to copy. It is also in agreement with the concepts about organizational capability to learn and organizational capability to innovate proposed by Dahlgaard-Park and Dahlgaard (2010). Our study shows that Asus excels with a corporate culture which is characterized by respect for people and partnerships, and continuous improvements of processes and products. Whereas the dynamic capability perspective is firm specific and considers the role of industrial structure endogenous, our study of Asus in the IT hardware industry indicates that strategic intents of key firms in the supply chain may have to be studied further. Asus not only promotes the culture of cooperation inside its own firm, but also cultivates collaboration among supply chain members. From its humble beginning, Asus manages to collaborate with its supply chain members. In the long run, such collaboration benefits Asus and its supply chain members by collectively garnering sustainable competitive advantages as a team.

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