Case i 1 Elioenrg Lin b&w

CPET 575 Management of Technology Technological Innovation Case I-1 Elio Engineering, Inc Lecture Note & Summary by Professor Paul I-Hai Lin

Pages 13-31 of Text Book: Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGrawHill, 2009. Case I-1 Elio Engineering Inc.

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Outline     

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Origin of Elio Engineering Seat Mechanism Technologies Industry and Regulatory Environment Technological Barriers and Risks Capabilities Requirements for Players in Automotive Seats and Comparative Company Profiles Decision Time

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Origin of Elio Engineering Paul Elio 

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Hari Saknkara

Technical Capabilities • JCI Benchmarking Department • JCI Structural Design and Analysis Department 1996 -1998

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• A patent: revolutionary bike design • Failed venture 

Technical Capabilities: 1988 – 1997, JCI’s Structural Design & Analysis Department MBA training 1998 Summer Intern at Booz Allen Hamilton, a management consulting firm

Feb. 1998 • A new seat design “No Compromise”

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Feb. 1999

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Origin of Elio Engineering 1998  First venture meeting: Paul & Hari, at Venice, CA  Agenda • ABTS (All-Belts-To-Seat) • Announcement & comments 

A cost effective new seat design - a special class of ABTS

• Features  

Utilizing new technology Resulting structure: Low cost, Light weight, Strong

• Potential: penetration of all segments of auto market

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Origin of Elio Engineering 1998 - Follow up activities  

Partnership arrangement New product design • Funding: further R&D, computer & simulation software • Product Design Methodology: Build-and-Test approach • Intermediate Outcomes: Prototypes, simulation results

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First business adventure • Show the concept (set invention) to automotive seat industry • Fair value of the new design & concept • No patent protection

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Second try • Bostrom Seating, a seat supplier for the heavy truck and bus industry • Concluded an option agreement to prototype and test their NC seat Case I-1 Elio Engineering Inc.

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Origin of Elio Engineering 

Nov. 1998: New product development at Bostrom Seating • The Elio team – based at Bostrom Seating • Packaging & developing the seat • Received a letter of intent with respect to licensing agreement (would follow successful prototype testing) • Stipulated testing requirements (in the option agreement)  130 percent of FMVSS loads (Federal Motor Vehicle Safety Standard)

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Early 1999 • Support 3 full-time engineers – an advance against future royalties • Prototype assistance from Bostrom Seating

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Feb 1999 • Prototype tests – promising • OEM customer’s response – favorable • A licensing deal - based on the prototype performance Case I-1 Elio Engineering Inc.

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Origin of Elio Engineering 

March 1999 • Bostrom Seating plan to unveil the NC seat at the March 1999 Trade Show at Louisville, KY • Elio team – run into a few design-engineering challenges • Bostrom plan for bring new product to the market  Time: Intended to ramp up production very soon

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U.S. Market • • • •

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Market segment: U.S. truck market Market size: 500,000 units Market share: 50 percent Elio royalties: 2 to 5 percent on sales in the truck industry

European Market (no presence), Asian Market? Paul Elio Vision • Bring the seat to the entire automotive industry • Potentially saving millions of lives around the world • If Bostrom Seating would be the right partner? Case I-1 Elio Engineering Inc.

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Origin of Elio Engineering Feb. 1999 - Paul Elio Vision  Bring the seat to the entire automotive industry  Potentially saving millions of lives around the world  If Bostrom Seating would be the right partner?

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Seat Mechanism Technologies 

Existing Seat Technologies • Typical conventional front seat (~$500 to OEM) • A complete seat system – two front and one back row (~$2,500 to OEM) • ABTS seat – cost?

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Conventional Car Front Seat Technology • Seat Mechanism (~60 percent of total cost)  Exhibit 1 Seat Mechanism: Seat Track (Adjuster), Seat Structure (recliner)  Manual or electric motor adjustment control  Seat belt (shoulder belt) • Exhibit 2 Seat System: Seat structure, track, suspension, trim, and foam • No major breakthroughs; Incremental innovations • NHTSA (National Highway Traffic Safety Administration) Safety standard - crash loads specification • Major benefits: inexpensive components and materials, lightweight, matured technology, easy to manufacture and assembly Case I-1 Elio Engineering Inc.

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Seat Mechanism Technologies  

All-Belt-to-Seat (ABTS) Seat Mechanisms ABTS development attempts • Major industry players during 1984 -1999: Johnson Controls, Lear, and Magna • Exhibit 3: ABTS Seat Frame and ABTS Seat System

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ABTS advantages over conventional seats • • • • •

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Ease of use Higher comfort level More attractive appearance Better maneuverability Potential safer (seat belt hugs the occupant in the event of rear collision)

Current ABTS technology • Use the same “recliner” & “track” concepts 10 Case I-1 Elio Engineering Inc. • Need a must stronger seat structure to meet safety standard

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Seat Mechanism Technologies 

Current ABTS technology • Use the same “recliner” & “track” concepts • Need a much stronger seat structure to meet safety standard • Weight twice as heavy as a conventional seat • Cost:  Average $750 to OEM  About 1.5 times higher

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Seat Mechanism Technologies Elio Engineering ABTS Technology  A new state-or-art technology • Broadly patented mechanism based on “cable” and “drum” elements as opposed to gears • Major technological breakthrough 

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A new load-leveling recliner mechanism with a high strengthto-weight ratio to ensure that the seat does not fracture or buckle at the failure level When the force diminished, the seat structure is still fully functional

• Key benefits:  

Stronger, Lighter, and Cheaper Does not permit catastrophic failure

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Seat Mechanism Technologies Elio Engineering ABTS Technology  Other Innovative design features & improvements • Use fewer and lighter parts (single-sided recliner): as light as a conventional seat • Improved comfort and ease of use  Infinitely adjustable both for manual and electric seats  Minimizing buzz, squeak, and rattle problems • Seat-belt retractor (the component containing the belt pool)  Located at the bottom of the back frame  Reduce load-carrying requirements of the back frame by 20% 

Ease of Manufacturing • Easy to assemble • Does not require expensive high-tolerance parts Case I-1 Elio Engineering Inc.

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Industry and Regulatory Environment: Customer 

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Ultimate user of the technology – buyers of a new (or used) car Decision maker -OEM customers of seat system suppliers, need to fit • The body of a particular car model • Part of the “total interior design”: door panel, instrument panel, console, and headliner

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The OEM provides the suppliers with • Specifications – type, structure size, and styling • Other spec. factors: demographic parameters, needs, and/or lifestyles for matching car’s interior

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Industry and Regulatory Environment: Customer 

The OEM market • Highly concentrated, and buyer power is enormous • Able squeeze the operating margins of major U.S. seat system suppliers (ten multibillion dollar companies) down to 2 to 5 percent • Exhibit 4 – U.S. 1998 Light Vehicle Market Share Total U.S. sales: ~ 15 million units • Big three U.S. automakers: Ford (25%), GM (29.1%), and Daimler Chrysler (16.2%) • Prefer multiple sources of seat technologies and systems • Often dictate seat technology, components, or systems

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OEM In-house seat system • Design & manufacturing some high-end seats

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Supplier selection criteria • Safety, cost, reliability, comfort and ease of use Case I-1 Elio Engineering Inc.

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Industry and Regulatory Environment: Customer 

Elio Engineering’s Concerns • Recognize unfavorable bargaining position for seat supplier • Important consideration - not to release exact cost info to OEMs • Can be easily be reversed engineered

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Industry and Regulatory Environment Potential Market Size for Elio ABTS Seat Technology  Current ABTS seats market • Limited only to high-end market segments of the passenger car market (high cost) • Luxury segment brands – unit sales of 2.16 million in 1997; 15% of total U.S. light vehicle market • OEMs awareness of ABTS’s benefits and strong latent demand for the technology; improving people’s safety • Exhibit 7 European 1997 Market Share in Automotive Seats – Total European Revenues: ~$7.5 billions: Johnson Controls 27.3%, Lear Corp & Keiper 24.6% • Exhibit 8 U.S. Seat Systems: 1997 Market Share Total Revenue: ~$8.2 Billion: Johnson Controls 31%, Lear Corp 28%, Magna 10% Case I-1 Elio Engineering Inc.

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Industry and Regulatory Environment Potential Market Size for Elio ABTS Seat Technology  Future ABTS seats market • Exhibit 6 Global 1997 Vehicle Unit Sales by Region • Annual market potential of up to 17 million units in North America • World-wide up to 53 million units 

Other Potential Markets - Elio’s ABET technology • Heavy truck • Aircraft • Passenger train

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Exhibit 5 Benefits of Adopting NC Seat Benefits

Rationale

Implication

OEMs share cost benefits

Reduced ABTS weight

Cost

Reduced R&D expense

NC seat is scalable and portable across multiple platforms

Cost

Reduced Fewer parts – less variability and less inventory buffer stock to protect against stockout carrying costs

Cost

Enhanced market position by being lower cost producer

Cost/ revenue

Improved business capture (including available conventional seat market in N.A. and Europe and new market in Asia, Latin America, and South Europe); better margins

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Exhibit 5 Benefits of Adopting NC Seat Benefits

(cont.)

Rationale

Implication

Deceased No catastrophic modes of failure; better product liability energy management; ABTS seat advantages issues in rear impact

Cost

Decreased Fewer welds, fewer parts, and fewer fatigue warranty issues problems

Cost

Increases leverage with OEMs

Sustainable competitive advantage with NC seat system – patent protection; OEMs have to come to supplier for NC seat

Revenue

Fewer production issues

Lower tolerance requirements; thinner gauge Cost steel than most seats

Premium pricing

Innovative design features – zero check (no looseness in the system), continuously variable and continuously engaged track and recliner mechanisms; high strength characteristics; enhanced safety Case I-1 Elio Engineering Inc.

Revenue

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Competitor Analysis 

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Highly concentrated North America automotive seating markets General Assessment Info • Two 1st-tier players  Johnson Controls Inc. (JCI) & Lear Corp split 60% of market, Fortune 500 companies, also had a dominant share worldwide • No. 3 player – Manga  10% share in U.S. • Many potential competitors (not cost effective solutions)  Already had an ABTS seat in product portfolio or were currently working on the technology  Many small seat component suppliers were also designing or manufacturing ABTS seat mechanisms • Elio Engineering Competitive Advantage: cost & functional, for 21 some time to come Case I-1 Elio Engineering Inc.

Competitor Analysis 

Both Johnson Controls Inc. (JCI) & Lear Corp • Significant economies of scales in manufacturing and distribution • Global presence • Fairly strong relationships with OEMs • Fast and easy access to OEMs for new products

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Lear Corp – competitive advantages • Outsource more of the design and manufacturing work • Acts as a seat “system integrator” • Strong supplier network – critical success factors

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Other small suppliers • Focus on niche markets for seats and/or specialize in certain seat components Case I-1 Elio Engineering Inc.

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Competitor Analysis 

JCL (reputation and capabilities) – competitive advantages • Strong at effectively integrating strategic acquisitions into organizational structure • Heavily vertically integrated • Design and manufacturing expertise • Able to handle complex manufacturing challenges on a large scale • JIT (Just-in-time) capabilities – supplier choice for Japanese automakers • Excellent seat system and total car interior engineering capabilities • Strong expertise in Concurrent engineering and software tools • Ability to manage the seat system development form concept to production for OEM Case I-1 Elio Engineering Inc.

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Competitor Analysis 

Summary • Currently, no clearly superior ABTS technology on the market • JCI and Lear had the advantage of leveraging their existing relationships and distribution networks for their ABTS products

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Exhibit 9 Company Profiles For three companies: Johnson Controls, Inc., Lear Corporation, and Magna International  Description of the Company  Major Customers and Competitions  Financials: • Annual Income Statement ($millions) • Annual Balance Sheet

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Exhibit 9 Company Profiles (cont.) 

Financials: • Annual Income Statement ($millions)  Total sales  Total expenses: • Cost of goods sold • SG&A (Selling, General & Administrative) expense • Unusual income/expenses   

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Pre-tax income Income after tax Net income (excluding E&D – exploration & development)

Annual Balance Sheet

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Exhibit 9 Company Profiles (cont.) 

Financials: • Annual Balance Sheet  Assets • Cash & equivalents • Account receivable • Inventory • Prepayments & advances • Other current assets  Total current assets • Long-term investments • Property plant and equipment, other • Property plant and equipment, net

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• Goodwill/intangibles • Other long-term assets Total assets Liabilities • Account payable • Short-term debt • Other current liabilities

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Total current liabilities • Long-term debt

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Total long-term debt

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Total liabilities

• Other long-term liabilities

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Exhibit 9 Company Profiles (cont.) 

Financials (continue): • Annual Balance Sheet  Stockholder’s equity • • • • •  

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Preferred stock Common stock Additional paid in capital Retained earnings Other equity

Total shareholders’ equity Total liabilities and shareholders’ equity Share outstanding

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Industry and Regulatory Environment: Barriers to Entry (BTE) 

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Classification of Incumbents: Tier-one, tier-two, and tier- three suppliers As a Tier-one Supplier • Huge scale advantages in “manufacturing and distribution” • At the far end of learning curve in terms of  Design, development, and manufacturing processes

• For standard product and incremental innovations  Lower cost position and shorter time to market • Strong ties to OEMS – position advantage  Almost impossible to be replaced  Emphasize reliability and standard processes

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Industry and Regulatory Environment: Barriers to Entry (BTE) 

As a Tier-two Supplier • Possible with innovative technologies to be rewarded through new contracts directly with an OEM • Extreme difficulties in  Manufacturing & distribution • BTE is lower in  Design & development part of the value chain • An example:  Meritor Automotive Inc’s Seat Adjusting System  Developed an ABTS seat mechanism, one of the lightest and most easily packaged  Selected by GM, in 1998, to supply the OEM with 100 percent of power and manual seat adjusters for new GM truck program Case I-1 Elio Engineering Inc.

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Industry and Regulatory Environment: Barriers to Entry (BTE) 

As a Tier-three Supplier or Below Faced fairly low BTE at the tier-three supplier level or below • Hundreds of small to medium component suppliers – possessed no significant sustainable competitive advantage •

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Industry and Regulatory Environment: Barriers to Entry (BTE) 

At least two major option (due to board patent protection) 1. Enter the market as a tier-three or tier-two supplier of seat mechanisms or seat structures (outsource manufacturing to avoid major capital investment) •

Advantages: Could supply its technology to all tier-one suppliers  Greater control over its core ABTS technology Disadvantages:  Cannot build it’s integrating capabilities  Likely to receive a relative small piece of final product’s total value  Significantly increased the technological and market risk – due to lacking manufacturing and marketing expertise 

•

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Industry and Regulatory Environment: Barriers to Entry (BTE) 

At least two major option (due to board patent protection) 2. Partner with one of the tier-one or tier-two suppliers, or with an OEM and develop and market the seat in a joint venture, or through a licensing agreement • Advantages  Receiving substantial resources  Significantly reduce technological and market risks • Disadvantages  An exclusive partnership with a tier-one or OEM would limit the size of total market  Less control over its core ABTS technology and depending on its bargaining position, with a potentially lower margin

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Industry and Regulatory Environment 

Role of Upstream or Downstream Products or Firms • A small portion of tier-one supplier with direct access to the OEMs • Many tier-two and tier-three suppliers of components and raw materials, with very limited market power • Exceptions  OEMs insist that tier-one suppliers source from certain tier-two suppliers to ensure access to a particular component or technology

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Regulatory Issues • Seat suppliers had to fulfill strict federal safety standards set by NHTSA and codifies in the Federal Motor vehicle Safety Standards (FMVSS) • Demonstrate product safety Case I-1 Elio Engineering Inc.

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Technological Barriers and Risks 

Bottlenecks to Commercializing the Technology • Federal safety requirement  Major structure test • Material science  Raw materials – insufficient knowledge  Untested performance under extreme temperature condition • Large capital requirements (if manufacture in-house) • Lack of competencies in manufacturing and distribution • Lack of access to OEMs • Other OEM Challenges  Stringent seat design requirements  Certification requirements and supplier preferences  Unknown end-user about preference of seat style and ABTS seats Case I-1 Elio Engineering Inc.

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Technological Barriers and Risks Manufacturing Issues  Manufacturing complexity & cost of a car seat • Number of parts/Tolerance requirements/Strength of the material used 

Elio’s ABTS Technology • Fewer parts/ Lower tolerance requirements/Lower strength materials

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Major manufacturing issues • Not its core competence • Need large capital, building a new plant • Common processes: stamping, pressing, welding, casting, and injection molding • Implementation of a JIT delivery system • Concurrent engineering – additional challenge Case I-1 Elio Engineering Inc.

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Technological Barriers and Risks Relevant Supporting Technologies for Elio’s ABTS Seat Mechanism  Concurrent engineering (supporting technology) • Allow the development team to understand technologies and products from a “manufacturability” standpoint during the early design stage, and • Communicate product info to Design, Manufacturing, Marketing, and Management • Achieve more robust designs, reduce development cost, facilitate implementation readiness, and decrease time-tomarket • Need to access to and skills in integrated CAD, CAM, and CAE software

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Technological Barriers and Risks Relevant Supporting Technologies for Elio’s ABTS Seat Mechanism  Material science • Material are often found by trial and error • It can be outsourced to material science specialists

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Capabilities Requirements  

A variety of capabilities to compete successfully Tier-one requirements • Strong relationships with OEMs • A large global presence and scale • Ability to manage the seat system development from concept to production for OEMs • Strong supplier network • Fast-time-to market, Low cost, High quality Position (Engineering capabilities)  Concurrent engineering  In-house design and interior system • State-of-art manufacturing technology • JIT capabilities • Vertical integration Case I-1 Elio Engineering Inc.

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Exhibit 10 Comparative Capabilities Profile of Selected Players           

OEM Relationships Global Scale Tier-Two Relationships Total Program Management Acquisition Capabilities Vertical Integration Just-in Time Purchasing Manufacturing Technology In-House Design System Level Testing

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Comfort Engineering CAD/CAM/CAE Benchmarking Research & Development Product Development Process Interior Systems Capabilities Financial Strength

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Decision Time   

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Is in Feb. 1999, four months past The NC design had developed substantially The Bostrom alliance agreement for the truck market had been concluded. The questions about Elio’s strategy for entery into automotive still remained. Paul & hari realized that they needed answers to these questions in the coming days. Should Elio joint venture with Bostrom? Should it partner with a tier-one or tier two automotive supplier? Was Elio’s technology strategy aligned with the requirements for a successful entry into the automotive market? Case I-1 Elio Engineering Inc.

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Conclusion

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