Technology & Innovation: Sandisk versus Kingston Technology

Sandisk is an S&P 500 public company traded on the NASDAQ (SNDK). The company manufactures and sells solid state NON-VOLATILE memory and was founded in 1988 by Dr. Eli Harari. From inception to the present day, growth came as a result of two primary factors: 1) Flash technology for which Sandisk now has a virtual treasure trove of patents, (almost 5,000), and 2) More than a half dozen large and significant acquisitions.Sandisk

Kingston Technology is a private company. The company manufactures and sells solid state VOLATILE DRAM (originally) and NON-VOLATILE memory.  Founded in 1987, Kingston is jointly owned by two Taiwanese-American businessmen, Mr. David Sun, and Mr. John Tu. From inception to the present day, growth came as a result of two primary factors: 1) Understanding along with deep semiconductor supplier relationships, and 2) Organic growth.Kingston

Both companies began around the same time more than 25 years ago, and both companies generate about $6 billion per year in annual revenue. But other than a similar product portfolio they couldn’t be more different beyond the same solid state electronics manufacturing industry:

  1. Sandisk spends $750 million per year on Research and Development (R&D). Kingston spends zero.
  2. Sandisk generates $720 million per year on royalty and license fees associated with its patents, this revenue is at 100% gross margin, and makes up over 1/3rd of their after-tax profit. Kingston has no revenue from royalty and license fees, no patents, and no R&D. (Gagnon, 2013)
  3. Sandisk is vertically integrated, sharing semiconductor fab capacity with Toshiba. Kingston is horizontally integrated and purchases components from semiconductor suppliers like Toshiba.
  4. Sandisk is always at the leading edge of flash technology with the newest products in the industry. Kingston waits until technology is mature, even in the autumn of the product life cycle, before manufacturing and selling.
  5. Sandisk lost almost $2 billion in 2008. Kingston Technology has never lost money.

So lest you look at boring Kingston Technology, with no technology of their own, basically buying semiconductor chips and adding another 10% of value-add in the form of DRAM Modules, Solid State Drives, Secure Memory cards and USB drive enclosures, and call them RED OCEAN, think again. This company has a net worth of more than $2 billion with absolutely no debt at all. According to Forbes each owner was not the least bit wealthy when they started the business yet today are worth $4 billion each.

Kim and Mauborgne argue in “Value Innovation” (2004) that a given company is either a “Pioneer, a Migrator, or a Settler.” Clearly the hands-down Pioneer winner in the world according to Flash Memory is Sandisk Corporation. Sandisk started the flash business, they developed the technology platform, and 37% of their after-tax profits come from their intellectual property billings. And just as clear is the fact that Kingston Technology is a “Settler.” They employ no technologists, and for the most part their manufacturing and sales teams have only superficial knowledge of how the products function. None of them could quote “Ohm’s law” to you.

Both have grown their revenue to comparable size, $6 billion per year. But Sandisk lost $2 billion in 2008 while Kingston has never lost money and has minted billionaires in both owners.

There is nothing “BLUE OCEAN” about Kingston, only Sandisk (Barwise, 2012). “Existing markets” would be a strong indication that Kingston is a RED OCEAN player, yet an unbiased financial analysis might conclude Kingston is the superior business model having achieved the same revenue growth without ever losing money and therefore imposing far less risk and volatility on the potential investor.

The example Barwise and Meehan provide with Samsung (2012) misses the mark. Samsung, one of a half dozen big chaebols in Korea, took the post-WWII manufacturing playbook of Japan and went on to trounce Japan economically. But they did not do so “making the competition irrelevant,” nor by “developing radical new products that create uncontested market space.” No. They took on Apple, a company no other competitor would dare have the audacity to touch. It was Apple who appears to fit the “BLUE OCEAN” characterization, not Samsung.

So what did Samsung do then to ultimately exceed Apple’s market share in the smartphone? They did so through a brilliant strategy and by following a tried and true business planning model that goes something like this:

 

Business Planning

As ubiquitous and wonderful as Apple’s new iPhone was, Samsung sought to document all of the customer complaints:

  1. Too expensive
  2. Limitation on phone service carrier (initially)
  3. Small screen
  4. Apple way or the highway (no flexibility)
  5. Few colors, few models to choose from

So the vision was followed by their newly minted strategy: Build and sell smartphones that address every Apple shortcoming (Fast follower? Settler?).

All of the innovation-related articles that have been propagated since Clayton Christensen’s 1997 seminal work entitled “Innovators Dilemma,” have the same major flaw: They presume to have uncovered some business breakthrough that deals with the success stories of breakthrough or “disruptive” technologies. But any company can do well and be accretive with good business planning techniques (see above). And we all should not strive to be breakout disruptors generating obscene profits based upon new technologies protected by patents and launched on proprietary platforms. All such strategies have a limited run of it since eventually competing open technology systems will, as a matter of course, be adopted.

Remember the Boston Consulting Group Quadrant:

 

Boston Consulting Group

Each company, division and product is in some stage of their life cycle.  And each life cycle calls for different management strategies.  Innovators are focused only on the northeast corner of the quadrant.  But stars, cash cows and even dogs have important roles to play and smart managers know just how to play them.  ~r

References

Barwise, P., & Meehan, S. (2012). Innovation beyond blue oceans. Market Leader, (Q4),. 24–27. 2. Buisson, B., & Silberzahn, P. (2010). Pages 24-27.

Kim, W. Chan and Renée Mauborgne (2004), “Value Innovation,” Harvard Business Review, Vol. 82, No. 7/8, pp. 172–180.

Gagnon, P. (2013). The business model of patent assertion entities in IT: unilateral restraints of competition or business as usual?. Journal of Antitrust Enforcement, 1(2), 375-417.

 

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