Between 1992 and 1996, Luxor Technologies had seen their business almost quadruple in the wireless communications area. Luxor’s success was attributed largely to the strength of its technical community, which was regarded as second to none. The technical community was paid very well and given the freedom to innovate. Even though Luxor’s revenue came from manufacturing, Luxor was regarded by Wall Street as being a technology-driven company.
The majority of Luxor’s products were based on low-cost, high-quality applications of the state-of-the-art technology rather than advanced state-of-the-art technological breakthroughs. Applications engineering and process improvement were major strengths at Luxor. Luxor possessed patents in technology breakthrough, applications engineering, and even process improvement. Luxor refused to license its technology to other firms, even if the applicant was not a major competitor.
Patent protection and design secrecy were of paramount importance to Luxor. In this regard, Luxor became vertically integrated, manufacturing and assembling all components of its products internally. Only off-the-shelf components were purchased. Luxor believed that if it were to use outside vendors for sensitive component procurement, they would have to release critical and proprietary data to the vendors. Since these vendors most likely also serviced Luxor’s competitors, Luxor maintained the approach of vertical integration to maintain secrecy.
Being the market leader technically afforded Luxor certain luxuries. Luxor saw no need for expertise in technical risk management. In cases where the technical community was only able to achieve 75 to 80 percent of the desired specification limit, the product was released as it stood, accompanied by an announcement that there would be an upgrade the following year to achieve the remaining 20 to 25 percent of the specification limit, together with other features. Enhancements and upgrades were made on a yearly basis.
By the fall of 1996, however, Luxor’s fortunes were diminishing. The competition was catching up quickly, thanks to major technological breakthroughs. Marketing estimated that, by 1998, Luxor would be a follower rather than a market leader. Luxor realized that something must be done, and quickly.
In January 1999, Luxor hired an expert in risk analysis and risk management to help it assess the potential damage to the firm and to assist in development of a mitigation plan. The consultant reviewed project histories and lessons learned on all projects undertaken from 1992 through 1998. The consultant concluded that the major risk to Luxor would be the technical risk and prepared Tables I and II. Table I shows the likelihood of a technical risk event occurring. The consultant identified the six most common technical risk events that could occur at Luxor over the next several years, based on the extrapolation of past and present data into the future. Table II shows the impact that a technical risk event could have on each project. Because of the high probability of state-of-the-art advancements needed in the future (i.e., 95 percent from Table I), the consultant identified the impact probabilities in Table II for both with and without state-of-the-art advancement needed.
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