10.5 Case B: Disruptive innovation at Tonowanda10.5.1

Background

Ralph Chase, VP of Sales for Tonawanda Industries, was thrilled with theorder for 10,000 custom parts from Caliber Press Manufacturing. Tonawandaand Caliber had a successful supplier-customer relationship going back morethan two decades, but recently competition from imported parts was depress-ing profit margins on sales. This most recent order from Caliber involved aprotracted negotiation, and Ralph felt he was lucky getting a $75 unit price,knowing this drove down the product unit margin to just under $25. Notclose to a 50% margin, he thought, but well take it. An argument madeby Tonawanda to Caliber was that the cost of raw materials, not labor, droveprice.As a fresh new project manager at Tonawanda, Julia Haverstock was as-signed to the Caliber project and given the lead to ensure project execution.The Caliber parts were not a typical design for Tonawanda, but close enoughthat none of the managers were concerned. About two weeks after the Caliberagreement was signed, Julia discovered that a slightly different alloy composi-tion would cut Tonawandas material and manufacturing costs by $12.50 perunit. She did note that the change in properties was likely to compromiseintegrity of the final parts, but not so much that the average bear wouldnotice. It would have to be a fairly remote use condition for Caliber to ever de-tect a difference. Her engineering manager, Jason, was not at all familiar withthe technology, and offered the advice, If you say it works, then it works.We need the business and I like good news.Julie decides to seize the moment and presents her disruptive innovationat the weekly project team meeting. Ralph Chase and Todd Hopkins (recentlyhired from VOT), VP of Marketing, are at the meeting. Todd is curious aboutthe average bear and if anyone would really know the difference. Juliebecomes slightly concerned and indicates, It seems unlikely the performancedifference would be noticed unless Caliber was looking closely and performedindependent tests, which we know they never do. I believe a majority of theparts will perform fine, but a few might have shorter lives. I dont reallyknow. By now, Todd and Ralph are joyful. Todd says, What a great hireyou were, Julie. Youve just increased our margins close to our favorite 50%mark and everybody is going to win. This disruptive technology thing reallydoes pay off! Lets make sure we require an NDA to block the need to sharedetails.Later, Julie starts to become more concerned. Ralph, as the sales personwho signed the agreement, shouldnt you tell Caliber about the substitutematerial? Excuse me? Hello? Ralph asks. Look, weve got a long-termrelationship with Caliber, and they expect innovation from us. If we satisfyCalipers needs with good quality parts and youve just said we will whatexactly is the problem? Wow, Julie thinks to herself, I feel like somethingis missing. Are we providing what was promised? Contractually? And so even if Caliber is satisfied with the improved product, shouldnt they be given theopportunity to decide if the change is acceptable? Maybe benefit from loweredcost? Julie decides to explore these questions further with Todd. He replies,I dont see a problem, Julie. This is business, not engineering. The NDAwill protect us. Were not in the business of giving away money, you know.Besides, as a new employee, dont you want to be known as an engineer whounderstands business? Julie decides there is nothing further for her to do.The new parts based on her disruptive innovation are produced.As the first shipment is prepared to be sent to Caliber, Julie hesitates whenasked to sign a report verifying that the specifications for the part have beenmet; she is sensitive to the usage of the new materials and notices that theoriginal composition of the metal is listed rather than the new material. Shetells Todd that she needs some time to think about the situation. When sheis out for lunch Todd persuades Shannon, another project manager, to sign.Julie is upset about Shannons certification, but Todd indicates, Ive knownShannon a long time. We worked together at VOT, and she reviewed thesituation and saw no problems. We needed to get the order on the trucks andyou were out of the office; there was nothing else I could do. The NDA keptus from updating documents.

10.5.2 Grand challengeInvestigate the following issues:

1. Identify at least three issues and write a one-sentence summary of eachissue.

2. Pick one of the issues and expand in more detail; use 3 to 4 brief points.Consider how tables and figures from prior chapters can be used to re-inforce or explain your points (will potentially save a lot of writing).

3. Select the one most urgent issue that needs action immediately.Be sure to identify who, when, where, and why