Assignment: Which of the two concepts, if any, would you recommend Spectre

to invest in? What would be your strategy for commercializing the chosen
concept(s)?

SPECTRE LTD.

In early 1998, discussions were running high at Spectre Ltd., a UK-based IT and
communications products company. The subject of the controversy was two new
business concepts developed at the group’s Central Research Laboratories. The
question that had to be resolved was whether Spectre should enter any of these
new businesses, thereby initiating a diversification that many felt necessary for
the stability and long-term growth of the company.

Company Background and History

Spectre traced its origin back to 1978, when Professor Goulding at Cambridge
University together with three doctoral students started government consulting
services in data security and image coding. In the mid-1980s, Spectre converted
from consulting activities to the development and sales of software and systems
solutions. In the years that followed, the company made significant innovations
in wireless information systems and secure communications systems, and
quickly earned a reputation as an aggressive technological innovator.
The dramatic growth of the IT and telecommunications industries resulted
in several consecutive years of growth and sizable profits. As staff at Spectre’s
Central Research Laboratories used their increasing financial freedom to pursue
ideas that reflected more or less personal interest, new innovation projects
tended to become increasingly unrelated and adventurous. At the same time,
voices were heard about the need to change the company’s strategic and financial
balance. John Read, an accountant by training, was appointed chief executive
officer after only two years in the company. Read recognized the risks and what
he considered over-heated growth of the IT and telecommunications industries,
which accounted for more than three-quarters of Spectre’s sales and profits. In an
effort to reduce the company’s strategic and financial exposure, he began to
divert some of the company’s cash flow into a select number of internal
development projects.
To encourage internal innovation, Read established a research fund and a
corporate venturing department that were to promote innovative developments
outside the company’s immediate interests. Among the first projects financed
was one proposed by Godfrey Hounsfield, a research scientist in Spectre’s
Central Research Laboratories. Hounsfield’s proposal for a new method for

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cancer treatment, direct cancer radiotherapy, DCR, opened up an opportunity for
the company to diversify in the exciting and fast-growing medical electronics
field. A second project, championed by Diane Lambert, also at Central Research
Laboratories, concerned the commercialization of the plasma lamp, which was
often described as the “fourth generation” light source.

DCR

In simple terms, Hounsfield’s research proposal was to study the possibility of

combining traditional computerized tomography, which created a three-
dimensional image of an object by taking multiple X-ray measurements of the
object from different angles, with the simultaneous use of radiation therapy for
the treatment of cancer. Although the technology represented a conceptual
breakthrough, the technologies it harnessed were quite well known and
understood. Essentially, it linked X-ray, data processing, tumor markers and
radiation therapy in a complex and precise manner. The real development
challenge consisted of integrating software and the mechanical, electronic, and
radiation components into an accurate, reliable, and sensitive system.
Progress was rapid, and clinical trials of the DCR system were under way
by late 1996. At about the time of the clinical trials, Dr. John Powell, formerly
managing director of Texas Instrument’s U.K. subsidiary, joined Spectre as a
technical director. He soon became convinced that the company was involved in
too many diverse small-volume lines. In his words, “Spectre was devoted to too
many products and dedicated to too few.” Because the DCR project built on the
company’s substantial and well-established electronics and communication
equipment capability, Powell believed it gave Spectre an important opportunity
to enter an exciting new field. He felt this was exactly the type of effort in which
the company should be prepared to invest several million pounds.

The Medical Equipment Industry

The medical equipment industry was dominated by five major global companies.
Siemens of Germany was estimated to have almost one quarter of the total world
market, closely followed by Philips of the Netherlands, and Compagnie Generale
de Radiologie (CGE), subsidiary of the French giant Thomson Brandt. Although
General Electric had an estimated 30% of the large U.S. market, its weak position
abroad gave it less than one fifth of the world market. The fifth largest company
was Picker, with 20% of the U.S. market. The United States was by far the most
important single market, and thought to represent 35-40% of the world market
for medical equipment.

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 When the DCR technology was developed, there existed several other
important technologies for the treatment of cancer. In severe cases, doctors often
prescribed strong treatments like chemotherapy or radiation therapy. While
these treatments were effective against the cancer, they could also have an
adverse effect on the patient’s body and result in many side effects. In addition, a
wide range of alternative therapies with more or less proven success rates had
been gaining in popularity over the past few years. However, none of these
technologies offered the potential advantages of speed and accuracy the DCR
technology presented.

United States Market Potential

Because of its size, sophistication, progressiveness, and access to funds, the U.S.
medical market clearly represented the major opportunity for a new device such
as the DCR system. Spectre management was uncertain about the sales potential
for their new product, however.
As of 1998, there were around 7,000 hospitals in the United States, ranging
from tiny rural hospitals with fewer than 10 beds to giant teaching institutions
with 1,000 beds or more.

Number of Hospitals
Size Long-term
(number of beds) Short-term (chronic) Total
__________________________________________________

Less than 100 3,110 375 3,485

100-299 1,905 385 2,290
300-499 575 140 715
More than 500 540 91 631
___________________________________________________

Total 6,130 991 7,121

Since the price of a DCR system was expected to be around $800,000, only the
largest and financially strongest short-term institutions would be able to afford
one. Little penetration of private clinics was foreseen. But Spectre was
encouraged by the enthusiasm of the physicians who had seen and worked with
one of the prototypes. In the opinion of one leading American neurologist, at
least 170 machines would be required by major U.S. hospitals. Indeed, he
speculated, the time might come when a medical institution would feel ethically

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compelled to employ the new technology. Apart from these broad statistics and
estimates, Spectre had little ability to forecast the potential of the U.S. market.

The Investment Decision

By late 1997, it was clear that the clinical trials were successful and Spectre
management had to decide whether to make the investment required to develop
the DCR business. One group of senior managers felt that direct Spectre
involvement was undesirable for three reasons. First, Spectre lacked medical
product experience. In the late 1990s, Spectre offered only one very small medical
product, a remote patient monitoring device, which represented less than 0.5% of
the company’s sales.
Second, they argued that the manufacturing process would be quite
different from Spectre’s experience. A large portion of its electronics work had
been in the job shop mode required in producing small numbers of specialized
defense products on cost-plus government contracts. In DCR production, most of
the components were purchased from subcontractors and had to be integrated
into a functioning system.
Finally, many believed that without a working knowledge of the North
American market, where most of the demand for the new technology was
expected to be, Spectre might find it very difficult to build an effective operation
from scratch. Among the strongest opponents of Spectre’s self-development of
this new business was one of the technology’s earliest sponsors, Dr. Broadway,
head of the Central Research Laboratory. He emphasized that Spectre’s potential
competitors in the field had considerably greater technical capabilities and
resources.
As the major proponent, John Powell needed convincing market
information to counter the critics. In early 1998, he asked some of the senior
managers how many units they thought would sell in its first 12 months. Their
first estimate was five. Powell told them to think again. They came back with a
figure of 12, and were again sent back to reconsider. Finally, with an estimate of
50, Powell felt he could go to bat for investment, since at this sales level he could
project handsome profits from year one. He then prepared an argument that
justified the new product’s fit with Spectre’s objectives, and outlined a basic
strategy for the business.
Powell argued that self-development of the DCR system represented just
the sort of vehicle Spectre had been seeking to provide some focus to its
development effort. By definition, diversification away from existing product-
market areas would move the company into somewhat unfamiliar territory, but
he firmly believed that the financial and strategic payoffs would be huge. The

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new product offered access to global markets and an entry into the lucrative
medical equipment field. Although the U.S. medical equipment market was
generally considered the most competitive in the world, he believed Spectre had
built a sufficient technological edge and that learning how to operate in this
competitive environment would allow Spectre to transform itself into a truly
global player.
Powell claimed that the expertise developed by Hounsfield and his team,
coupled with protection from patents, would give Spectre three or four years,
and maybe more, to establish a solid market position. He argued that
investments should be made quickly and boldly to maximize the market share of
the product before competitors entered. Other options, such as licensing, would
impede the development of the product. If the licensees were the major medical
equipment suppliers, the might not promote the new product aggressively since
it would cannibalize on their sales of traditional equipment and consumables.
Smaller companies would lack Spectre’s sense of commitment and urgency.

The Proposed Strategy

Because the DCR technology incorporated a complex integration of some

technologies in which Spectre had only limited expertise, Powell proposed that
the manufacturing strategy should rely heavily on outside sources of those
components rather than trying to develop the expertise internally. This approach
would not only minimize risk, but would also make it possible to implement a
manufacturing program rapidly.
He proposed the concept of developing various “centers of excellence”
both inside and outside the company, making each responsible for the continued
superiority of the subsystem it manufactured. For example, within the Spectre
U.K. organization a unit called SE Labs, which manufactured digital displays,
would become the center of excellence for the system’s viewing console and
display control. An outside vendor with which the company had worked in
developing the new product would be the center of excellence for data
processing. Finally, a newly created division would be responsible for
coordinating these subsystem manufacturers, integrating the various
components and assembling the final product at a facility in the town of Hayes,
not far from the Central Research Laboratories site.
Powell emphasized that the low initial investment was possible because
most of the components and subsystems were purchased from contractors and
vendors. Even internal centers of excellence such as SE Labs assembled their
subsystems from purchased components. Roughly, outside vendors were to
account for 75-80% of the system’s manufacturing costs. Overall, Powell felt his

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arrangement greatly reduced Spectre’s risk - the $ 8 million investment was a
substantial one for the company, representing more than the funds available for
capital investment over the coming year.
The technology strategy was to keep Central Research Laboratories as the
company’s center of excellence for design and software development, and to use
the substantial profits Powell was projecting from even the earliest sales to
maintain technological leadership position. Powell would personally head up a
team to develop a marketing strategy. Clearly, the United States had to be the
focus of Spectre’s marketing activity. Its institutions were more commercial in
their outlook than those in other countries and tended to have more available
funds. Powell planned to set up a U.S. subsidiary as soon as possible, recruiting
sales and service personnel familiar with the North American health care market.
Given the interest shown to date in the new technology, he did not think there
would be much difficulty in gaining the attention and interest of the medical
community. Getting the $800,000 orders, however, would be more of a challenge.
In simple terms, Powell’s sales strategy was to get machines into a few
prestigious reference hospitals, then build from that base.

The Plasma Lamp

Having arrived at Central Research Laboratories some two years earlier, Diane
Lambert brought extensive knowledge and experience from previous
employment in the U.S. defence industry. Her particular fields of expertise that
had brought her to Spectre were power supply and microwave technologies,
both of which were critical components of the newly proposed plasma lamp.
Lambert had first come in contact with the new technology while working
together with a major U.S. client, who was interested in developing alternative
sources of light for use in underground complexes. While the project never
resulted in a commercially viable product, Lambert continued working on the
technology on her spare time and more or less as a hobby project. At Spectre’s
Central Research Laboratories, she found the technical facilities to conduct more
extensive research and practical tests.
The outcome of these efforts was the plasma lamp, based on the principle
of exciting sulphur (or a closely similar material) enclosed in a glass bulb with
microwave energy, much in the same way as in a microwave oven. The sulphur
was ionized to form a plasma, which emitted visible light with a spectrum
closely resembling that of daylight, but with very small ultraviolet and infrared
components. Essentially, the plasma lamp consisted of a power supply, a
magnetron that generated microwaves, and a transparent quartz bulb containing

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sulphur and an inert gas. The very intense light was diffused either by a long
tubular light-pipe made from special plastic sheet or via secondary reflectors.
The plasma lamp was described as the fourth-generation light source,
following the incandescent lamp, the fluorescent tube and the high intensity
discharge lamp. Representing a fundamentally new lighting technology, the
lamp was characterized by a unique light output that was similar to daylight.
Some of the advantages over established alternatives were a unique and superior
spectral distribution of light, low UV and IR radiation, very long life, and flicker-
free output. Unlike fluorescent tubes and discharge lamps, the plasma lamp
contained absolutely no mercury or other harmful heavy metals. The plasma
lamp was thought to be particularly suitable for lighting areas such as industrial
buildings, supermarkets, sports complexes, and hospitals. But management
believed there were many more potential applications, for example in the
cultivation of plants or in medical treatments that required bright daylight.
While initially John Powell had been backing the plasma lamp project, his
increasing involvement in the DCR technology lately seemed to have reduced
some of his early enthusiasm. Instead, Lambert’s project had gained vivid
support from Peter Grace, Spectre’s marketing director. Grace saw almost
limitless potential in the new technology, and was convinced it possessed the
requisite novelty and technical qualities to make it a marketable alternative to the
more traditional lighting sources.

The Lighting Industry

At the current stage of development, the plasma lamp was best suited for
applications in industrial environments. In this field, traditional competitors
included lamp producers such as Philips, General Electric and Siemens (Osram,
Sylvania). They manufactured traditional lamps such as fluorescent tubes, metal
halogen lamps, and low- and high- pressure natrium lamps in highly automated
processes. Together, the firms accounted for almost 95% of the European market.
Other important actors were the firms who developed and adapted lighting
fittings to the lamp manufacturers’ products, and were typically also involved in
some form of manufacturing. Lighting fitting firms sold partly directly to larger
customers, partly through retail outlets and various installation firms. Grace
estimated there were more than 1,000 of these firms active in the European
market, and knew through personal contacts that Philips was one of the larger
players in this area. The remaining suppliers of lighting products and systems
were consulting firms, architects, and electrical and lighting contractors.
The total market for lamps and lighting systems was estimated at several
billion pounds, but the size of the market for industrial applications was

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relatively uncertain. Some preliminary calculations suggested that professional
lighting products generated sales of about one billion pounds in the United
Kingdom alone (see table below). Yet, the ultimate market potential was
dependent on the extent to which the plasma lamp technology would be able to
replace existing alternatives.

Year Total Sales Growth (%)

(Million £)
__________________________________

1990 1,030
1991 1,074 (2.5)
1992 982 (8.5)
1993 901 (8.2)
1994 896 (0.6)
1995 916 2.2
1997 944 3.1

The U.K. market for professional lighting products

The Proposed Strategy

Very much like the DCR concept, commercialization of the plasma lamp was to
draw upon a number of outside suppliers, particularly with respect to the most
important technological components. Some years ago, the U.S. company Fusion
Systems, which made UV lamps for industrial use, had discovered and patented
the fundamental technological principles. A family-run enterprise, Fusion
Systems saw the development of the new technology as a long-term effort, and as
a means to secure funds for further development had shown interest in licensing
the technology. Grace’s preliminary contacts with Fusion Systems had confirmed
that reaching a licensing agreement would indeed be possible, and he had
already started contemplating an outright acquisition of the company.
The second critical component of the plasma lamp was the plastic sheet
that covered the light tube. The sheet was manufactured by 3M, where it
represented one many innovations with applications in only a few and relatively
narrow market niches. Spectre, in turn, was to develop the electronic equipment
that regulated the high-voltage power supply. It was expected that further
development of the electronic equipment would allow for dimming and remote
monitoring of installed systems. In the long term, Grace saw significant potential

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in the development of advanced light management systems. As Spectre would
only be responsible for the production of electronics, assembly and marketing,
up-front investments were relatively limited. Ongoing talks with Fusion Systems
further suggested the possibility of sharing some of the initial marketing
expenditures. With limited up-front investments, Grace was confident the
product line would soon turn into a significant cash generator. In the long run,
this would enable Spectre to invest in more substantial research and
development efforts, aimed at improving the technology and assuming
technological leadership in the industry.
To create initial interest in the new concept, Grace and Lambert had
secured a trial installation at the U.S. National Air and Space Museum in
Washington. A second large installation had been made at one section of the U.K.
postal sorting service in London. Comparative interviews with workers at the
postal sorting service had confirmed that work had become easier and the
working atmosphere had improved, and both Lambert and the innovation had
already started generating a considerable amount of media attention. While
Grace anticipated worldwide demand for the new product, it was clear that
initial marketing efforts had to be concentrated on the U.K. and the most
important European markets. Since neither installation nor service required the
use of specially trained personnel, the use of agents was considered the most
feasible alternative to secure access to other international markets.

The Decision

In March 1998, Spectre’s chief executive, John Read, considered the two
proposals in preparation for a board meeting. Were these the diversification
opportunities he had been hoping for? What were the risks? Could the projects
be successfully managed, and how? If he decided to back any of the proposals,
what kind of strategy and implementation program would be necessary to
ensure their eventual success?