Teradyne’s Aurora Project

1. Teradyne’s Aurora Project Solving The Innovator’s Dilemma Sailu Challapalli, Michael Chu, Annie Kuo, Emily Liu, Arundhati Singh, Erick Tseng

2. Roadmap • Background • Teradyne • Motivation & Background • Organization • The Innovator’s Dilemma • CMOS • Windows NT • The Aurora Project • Analysis of Aurora • Extending the Aurora Methodology • Conclusion

3. Thesis • The Aurora Project solved the Innovator’s Dilemma • However, the Aurora methodology is not a guaranteed solution to the Innovator’s Dilemma

4. Sources • Key interviews • Alex d’Arbeloff, CEO and Chairman • Marc Levine, Product Group Manager • Hap Walker, Group Engineering Manager • Tom Newman, VP Corporate Relations • Gordon Saksena, ICD Engineer • Harvard Business School • Video interviews • Case studies • Bedford plant trip

5. Introduction: Teradyne • Founded in 1960 by MIT alumni Alex d’Arbeloff and Nick DeWolf • Headquartered in downtown Boston • Industry leader for Automatic Test Equipment (ATE) for semiconductor manufacturing • Annual sales of $1.8 billion • 8,000+ employees worldwide • Also a market leader in software, telephone, and PC Board testing

6. Teradyne’s Organization Alex d’Arbeloff Chairman and CEO James Prestridge Vice Chairman Owen Robbins Vice Chairman and CFO George Chamillard President and COO Logic Test (VLSI) Memory Test Mixed Signal (ICD) Integra Test (Aurora) Finance and Control Sales and Service

7. Alex d’Arbeloff • Chairman and CEO of Teradyne • Heterogeneous Engineer • Vision • Networking • Business acumen • History of experimentation

8. Established firms follow a technology trajectory in accordance with customer demands These firms are not mobile enough to respond to emerging disruptive technologies Technology Trajectories The “Innovator’s Dilemma” Performance Disruptive Technology Sustaining Technology Time or Engineering Effort

9. Key Components of Innovator’s Dilemma

10. Disruptive Technology • Characteristics • Cheaper and smaller • Initially worse performance • Higher trajectory slope • Gains initial foothold in low end markets • Potentially Disruptive Technologies in Semiconductor ATE • CMOS • Windows NT

11. ATE Hardware:CMOS As Disruptive Technology • CMOS vs. Bipolar ECL • Lower speed • Lower accuracy • Higher level of integration • Less power consumption • Simpler design • Industry trend toward CMOS

12. ATE Software:NT As Disruptive Technology • Windows NT vs. UNIX • Traditionally less powerful workstations • Not compatible with customers’ installed UNIX base • Reduced software development time and cost due to OLE/COM • Industry trend towards Windows

13. Performance CMOS, Windows NT Bipolar, UNIX Time or Engineering Effort The Rise of CMOS and Windows NT Key low end niche market was microcontrollers

14. Roadmap • Background • The Aurora Project • Motivations and Goals • Implementation • Results • Solving the Innovator’s Dilemma • Analysis of Aurora • Extending the Aurora Methodology • Conclusion

15. Market Environment • Highly cyclical Semiconductor Testing Industry ATE industry in recession Record earnings Recovery 1986 1990 1993 1995

16. Aurora Project: Motivations • Emergence of new technologies: • CMOS as predominant semiconductor technology • Windows NT as operating system • Competitors developing new technologies • Credence “It was clear that our industry was recovering very quickly, and at that point I was looking beyond what we were doing to see what the holes were” – Alex d’Arbeloff

17. Aurora Project • Investigate CMOS and Windows NT • Produce smaller, cheaper testers • Target new customers in low-end ATE market • Microcontrollers • Small market share • Trade-off accuracy for cost

18. Aurora Project: Implementation Challenges • Teradyne as an immobile firm • Large • Established • Customer-driven • Public company

19. Key Leaders • Marc Levine appointed general manager • Experienced software engineering manager in ICD • Total Quality Management (TQM) manager • Hap Walker • Background in hardware, software, and tester design

20. Aurora Project • Created as small division • Separate facilities in Bedford, MA • Separate budget • Internal hires and new recruits • “Start-up” culture • Quick development • Reported directly to board of directors

21. The New Look and Feel... vs. J973 VLSI Tester J750 INTEGRA Tester

22. J750: A Technical Success • Reduced costs by 25% • “Zero footprint system” • Elimination of bulky mainframe and interconnection cabling • 95% parallel test efficiency for up to 32 devices • J750 IG-XL test software uses Windows NT

23. A Financial Success • Total orders valued over $200M in less than 2 years • Fastest product ramp in Teradyne history Start of Aurora Project 500 Systems sold 350 Systems sold 100 Systems sold 1995 1998 1999 2000

24. Solving the Innovator’s Dilemma

25. Roadmap • Background • The Aurora Project • Analysis of Aurora • Sources of Internal Resistance • Extending the Aurora Methodology • Conclusion

26. Sources of Internal Resistance • Emigration of Talent • Customer Satisfaction • Technical Feasibility • Previous Instances of Failure

27. Emigration of Talent • Open mobility across divisions • Entrepreneurial • Empowers employees • Gambling the firm’s best engineers on a risky venture • Failure would waste valuable resources • Managers fear loss of talent to the Project • Jeopardizing the firm’s core business

28. Customer Satisfaction: Lack of Customer Interest • Testing business is very customer-driven • Based on long, well-developed relationships • Teradyne must be very responsive to customer needs • Very little customer interest in Aurora • Most customers required greater accuracy • Customers preferred familiar technology • Avoid wasting resources retraining technicians

29. Customer Satisfaction: “The Customer is Always Right” • Teradyne managers felt obliged to listen to customer needs and recommendations • Managers did not want to devote resources to undesired technology “These projects are big bets. So you bet the division every time you do one of these things… The problem is that your customers lock you in.” – Ed Rogas, Vice President of Logic Test Division

30. Technical Feasibility • Doubts about meeting device specifications • Device Speed • Device Accuracy • Software Compatibility • Backward compatibility with previous product line • Compatibility with other Integra test products

31. Past Failures: History of Experimentation • Alex d’Arbeloff has a history of suggesting new technologies to the firm • Kinetrix • J401 Tester • Many past projects were unsuccessful • Many of these projects were also met with internal resistance but then initiated with d’Arbeloff’s backing

32. Roadmap • Background • The Aurora Project • Analysis of Aurora • Extending the Aurora Methodology • Past Failures • Conclusion

33. Aurora’s Extensibility Is the Aurora methodology a formula for solving the Innovator’s Dilemma… 1) Within Teradyne? 2) In any other company?

34. Past Failures: Kinetrix • Foray into Semiconductor Handling Business • Populated by 12 companies with no economies of scale to step forward • Technology was not developed with customers in mind • Collaborated with MIT mechanical engineers • Customers did not find the device familiar

35. Past Failures: J401 Tester • Project Goals • 85% cheaper than existing testers • Easier to program • Implementation • D’Arbeloff set up a new facility three blocks away from Boston headquarters • Tom Newman hired internally to lead initiative • Startup culture

36. Past Failures: J401 Tester • Results • Successfully met product specifications • Product was 75% cheaper • Programming interface was extremely user-friendly • No market adoption • Still too expensive for new intended market • No “correlation in test” • Sold only 24 testers in first two years (compare to Aurora’s sales of 350)

37. J401 Tester: A Direct Correlation to Aurora • Both projects were… • Extremely ambitious • Met with similar internal resistance • Initiated thanks to Alex d’Arbeloff’s persistence and backing • Set up as startup ventures • Technically successful

38. Roadmap • Background • The Aurora Project • Analysis of Aurora • Extending the Aurora Methodology • Conclusion

39. Conclusion • The Aurora Project did solve Christensen’s Innovator’s Dilemma • Overcame hurdles that are typical of large, established firms • Established a new product trajectory • Technology was successfully reintegrated back into the firm

40. Conclusion (continued) • Teradyne has not developed a formula for success • Too many uncontrollable forces • Market conditions • Technical feasibility • Company culture • The Alex d’Arbeloff Factor “It may be that you need a CEO like Alex d’Arbeloff as part of the formula [for solving the Innovator’s Dilemma]. He’s a very bright, very persistent person and he understood entrepreneurial startups.” – Marc Levine, Aurora Project Manger

41. Closing Remarks “Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.” – Clayton Christensen, The Innovator’s Dilemma “One must always be prepared for failure. Failure does not result in professional death. Instead, we must wrap failures back into the firm.” – Tom Newman, J401 Project Manager

42. Questions Teradyne’s Aurora Project: Solving the Innovator’s Dilemma