Chapter 6 DEFINING THE ORGANIZATION

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Strategic Management of Technological Innovation
Melissa Schilling

• Chapter 6DEFINING THE ORGANIZATIONS STRATEGIC
  DIRECTION

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Genzymes Focus on Orphan Drugs

• Genzyme was founded in 1981 by scientists
  studying genetically inherited enzyme diseases
• Adopted a very unusual strategy of developing
  drugs for rare diseases rather than blockbuster
  drugs.
• Developing a drug takes 10-14 years at an average
  cost of 800 million to perform the research, run
  the clinical trials, get FDA approval and bring
  the drug to market
• Blockbuster drugs earn revenues of 1 billion or
  more and are sold to millions of people with
  chronic illnesses
• Genzyme concentrated on the orphan drug market
  that had a market of only a few thousand people
• Requires smaller clinical trials, less
  advertising, smaller sales force, less
  competition
• Insurance companies would be willing to cover the
  drugs due to the severity of the diseases and a
  limited number of patients for the drug

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Genzymes Focus on Orphan Drugs

• In 1983, the FDA established the Orphan Drug
  Act, giving seven years market exclusivity to
  developers of drugs for rare (lt200,000 patients)
  diseases.
• Also chose unusual strategy of doing its own
  manufacturing and sales rather than licensing to
  a large pharmaceutical company.
• Diversified into side businesses to fund its RD
• Chemical supplies
• Genetic counseling
• Diagnostic testing
• The company went public in 1986, raising 27
  million
• Their first drug, Cerezyme, was sold to 4,500
  patients at a yearly cost of 170,000 (annual
  revenue of 800 million). The drug is required to
  be taken for the lifetime of the patient.
• By 2006, Genzyme was the worlds third largest
  biotech company proving that a profitable
  business could be built around small disease
  populations

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Overview

• A coherent technological innovation strategy
  leverages the firms existing competitive
  position and provides direction for future
  development of the firm.
• Formulating this strategy requires
• Appraising the firms environment,
• Appraising the firms strengths, weaknesses,
  competitive advantages, and core competencies
• Articulating an ambitious strategic intent.
• Determining the key resources and capabilities
  the firm needs to develop or acquire to meet its
  long-term objectives

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Assessing the Firms Current Position

• External Analysis
• Two common methods are Porters Five-Force Model
  and Stakeholder Analysis.
• Porters Five-Force Model
• Has been used to analyze whether a particular
  industry as a whole will be profitable or to
  determine an individual firms chances for
  success via a vis its competitors
• Discount retail industry as a whole is very
  competitive and thus unattractive for new
  entrants but an individual entrant such as
  Wal-Mart could be profitable because of its
  scale, use of advanced technology, location
  strategies, etc.
• Degree of existing rivalry. Determined by number
  of firms, relative size, degree of
  differentiation between firms, demand conditions,
  exit barriers (for firm to leave the market)
• Threat of potential entrants. Determined by
  attractiveness of industry, height of entry
  barriers (e.g., start-up costs, brand loyalty,
  regulation, etc.)
• Bargaining power of suppliers. Determined by
  number of suppliers and their degree of
  differentiation, the portion of a firms inputs
  obtained from a particular supplier, the portion
  of a suppliers sales sold to a particular firm,
  switching costs, and potential for backward
  vertical integration - firm produce its own
  supplies

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Assessing the Firms Current Position

• Bargaining power of buyers. Determined by number
  of buyers, the firms degree of differentiation,
  the portion of a firms inputs sold to a
  particular buyer, the portion of a buyers
  purchases bought from a particular firm,
  switching costs, and potential for forward
  vertical integration - supplier enters firms
  business
• Threat of substitutes. Determined by number of
  potential substitutes, their closeness in
  function and relative price.
• Substitutes are not competitive products but can
  fulfill a strategically equivalent role for the
  customer
• Other coffeehouses are competitors to Starbucks
  but bars, restaurants, beer, soft drinks are
  substitutes
• Buses are substitutes for airlines

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Assessing the Firms Current Position

• Recently Porter has acknowledged the role of
  complements.
• The availability, quality and price of
  complements will influence the threats and
  opportunities posed by the industry
• Must consider
• how important complements are in the industry,
• whether complements are differentially available
  for the products of various rivals (impacting the
  attractiveness of their goods), and
• who captures the value offered by the
  complements.
• The ink cartridge market is extremely profitable
  to desktop printer manufacturers and thus the
  cartridge of one company is incompatible with the
  printer of another company
• The market is so profitable that third-party
  vendors produce clones or refill the empty
  cartridge with ink

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Assessing the Firms Current Position

• Five-Force Model

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Assessing the Firms Current Position

• Stakeholder Analysis

1. Who are the stakeholders?
2. What does each stakeholder want?
3. What resources do they contribute to the
   organization?
4. What claims are they likely to make on the
   organization?

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Assessing the Firms Current Position

• Internal Analysis
• Identify the firms strengths and weaknesses. In
  Porters model of a value chain, activities are
  divided into primary activities and support
  activities
• Primary activities are those directly related to
  the product or service provided by the firm
• Support activities are those indirectly related
  to the main business of the firm
• Each activity can then be considered from the
  view of how it contributes to the overall value
  produced by the firm and what the firms
  strengths and weaknesses are in that activity

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Assessing the Firms Current Position
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Value-Chain Analysis for Take2 Interactive
Software

• Take2 Interactive Software
• Produces Grand Theft Auto video game
• RD is considered a primary activity, but the
  support activity of the technology development is
  not considered
• Because all the game manufacturing is performed
  by the console producers rather than by Take2,
  its primary technology activities center on
  design and games which is part of RD

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Value-Chain Analysis for Take2 Interactive
Software
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Value-Chain Analysis for Take2 Interactive
Software
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Assessing the Firms Current Position

• Once the key strengths and weaknesses are
  identified, the firm can assess which strengths
  have potential to be a source of sustainable
  competitive advantage to implement its strategic
  intent for the future
• To be a source of sustainable competitive
  advantage, resources must be Rare, Valuable,
  Durable and Inimitable
• Rare and valuable resources may yield a
  competitive advantage, but that advantage will
  not be sustainable if the firm is incapable of
  keeping the resources or if other firms can
  imitate them
• A positive brand image can be a rare and valuable
  resource, but it requires ongoing investment to
  sustain it or else it will erode
• Technological advances are reverse-engineered,
  skillful marketing campaigns are copied,
  innovative HR practices copied, etc.

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Assessing the Firms Current Position

• Resources are difficult (or impossible) to
  imitate when they are
• Tacit resources of an intangible nature, such
  as knowledge, that can not be readily codified in
  written form
• Path dependent dependent on a particular
  historical sequence of events
• Socially complex they arise through the
  interaction of multiple people
• Causally ambiguous the relationship between a
  resource and the outcome it produces is poorly
  understood
• Talent is considered to be a tacit and causally
  ambiguous resource an inherent trait that can
  not be trained and the methods by which
  individuals acquire it or tap into it is poorly
  understood
• A first-mover advantage is a path-dependent
  advantage that can not be copied only one firm
  can be first

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Identifying Core Competencies and Capabilities

• Once a baseline internal analysis has been
  established, a firm can move on to identifying
  its core competencies and formulate its strategic
  intent
• Core Competencies A set of integrated and
  harmonized abilities that distinguish the firm in
  the marketplace.
• Competencies typically combine multiple kinds of
  abilities e.g.,
• Managing the market interface
• Building and managing an effective infrastructure
• Technological abilities
• Several core competencies may underlie a business
  unit and several business units may draw from
  same competency.
• The organizations structure and incentives must
  encourage cooperation and exchange of resources
  across strategic business unit boundaries
• Core competencies should
• Be a significant source of competitive
  differentiation
• Cover a range of businesses
• Be hard for competitors to imitate
• Sonys core competency is miniaturization which
  arises from harmonizing multiple technologies
  (liquid crystal displays, semiconductors, etc.)
  and is leveraged into multiple markets (TVs,
  radios, PDAs, etc.)

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Identifying Core Competencies and Capabilities

• Prahalad Hamel compare competencies to roots
  from which grow core products such as major
  components or subassemblies
• Core products, in turn give rise to business
  units, whose fruits are the various end products
  of the company
• Individuals in the corporation should be viewed
  as corporate assets that can be redeployed across
  the organization and not wed to a particular
  business unit

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Identifying Core Competencies and Capabilities

• Prahalad Hamel offer the following tests to
  identify the firms core competencies
• Is it a significant source of competitive
  differentiation? Does it provide a unique
  signature to the organization? Does it make a
  significant contribution to the value a customer
  perceives in the end product?
• For example, Sonys skills in miniaturization
  have an immediate impact on the utility customers
  reap from its portable products.
• Does it transcend a single business? Does it
  cover a range of businesses, both current and
  new?
• For example, Hondas core competence in engines
  enables the company to be successful in
  businesses as diverse as automobiles,
  motorcycles, lawn mowers, and generators.
• Is it hard for competitors to imitate? In
  general, competencies that arise from the complex
  harmonization of multiple technologies will be
  difficult to imitate. The competence may have
  taken years (or decades) to build. This
  combination of resources and embedded skills will
  be difficult for other firms to acquire or
  duplicate.
• According to Prahalad and Hamel, few firms are
  likely to be leaders in more than five or six
  core competencies. If a company has compiled a
  list of 20 to 30 capabilities, it probably has
  not yet identified its true core competencies.
• By viewing the business as a portfolio of core
  competencies, managers are better able to focus
  on value creation and meaningful new business
  development, rather than cost cutting or
  opportunistic expansion

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Research Brief Identifying the Firms Core
Competencies

• Gallon, Stillman and Coates offer a step-by-step
  program for identifying core competencies.
• Module 1 -- Assemble a steering committee,
  appoint a program manager, and communicate the
  overall goals of the project to all members of
  the firm. An exhaustive inventory of capabilities
  should be compiled.
• Module 2 -- Constructing an inventory of
  capabilities categorized by type. Assess their
  strength, importance, and criticality.
• Module 3 Organize capabilities by both their
  criticality and the current level of expertise
  within the firm for each.
• Module 4 Distill competencies into possible
  candidates for the firm to focus on. No options
  should be thrown out yet.
• Module 5 -- Testing the candidate core
  competencies against Prahalad and Hamel's
  original criteria.
• Module 6 -- Evaluate the firms position in the
  core competency vis a vis the competition. The
  firm can now identify any areas in which it needs
  to develop or acquire missing pieces of a
  particular competency.

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Risk of Core Rigidities

• When firms excel at an activity, they can become
  over committed to it and rigid.
• Incentives and culture may reward current
  competencies while thwarting development of new
  competencies.
• Dynamic capabilities are competencies that enable
  the firm to quickly respond to change, emerging
  markets and major technological discontinuities
• e.g., firm may develop a set of abilities that
  enable it to rapidly deploy new product
  development teams for a new opportunity firm may
  develop competency in working with alliance
  partners to gain needed resources quickly.
• Corning has made its own evolvability one of its
  most important core competencies
• Invests heavily in research areas likely to
  provide scientific breakthroughs
• Develops pilot plants to experiment with new
  products and production processes
• Manages its relationships with alliance partners
  as an integrative and flexible system of
  capabilities that extend the firms boundaries not
  as individual relationships focused on particular
  projects

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Strategic Intent

• Strategic Intent
• A firms purpose is to create value not just by
  cutting costs or improving operations but by
  developing new businesses and markets and
  leveraging corporate resources
• Strategic intent is a long-term goal that is
  ambitious, builds upon and stretches firms core
  competencies, and draws from all levels of the
  organization.
• Canons obsession with overtaking Xerox, Apples
  mission of ensuring that everyone has a personal
  computer and Yahoos goal of becoming the worlds
  largest Internet shopping mall (Hamel Prahalad)
• Typically looks 10-20 years ahead, establishes
  clear milestones for employees to target
• Without it, firms follow their customers instead
  of leading them
• Firm should identify resources and capabilities
  needed to close gap between strategic intent and
  current position.

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The Balanced Scorecard

• Kaplan and Norton point out that a firms methods
  of measuring performance will strongly influence
  whether and how the firm pursues its strategic
  objectives
• They argue that effective performance measurement
  is more than just reliance on financial
  indicators. It should incorporate
• Financial perspective
• Goals meet shareholders expectations, double
  corporate value in 7 years
• Measures return on capital, net cash flow,
  earnings growth
• Customer perspective
• Goals improve customer loyalty, offer
  best-in-class customer service
• Measures market share, percent of repeat
  purchases, customer satisfaction surveys

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Theory In Action

• Internal perspective
• Goals reduce internal safety incidents, build
  best-in-class franchise teams, improve inventory
  management
• Measures number of safety incidents per month,
  franchise quality rating, inventory costs
• Innovation and learning perspective
• Goals accelerate and improve new product
  development, improve employee skills
• Measures percentage of sales from products
  developed within the past 5 years, average length
  of the new product development cycle, employee
  training targets
• The scorecard may have to be adapted to fit
  different markets and businesses, but a 2002
  survey found that approximately 50 of Fortune
  1,000 companies in the US and 40 in Europe use
  some version of the balanced scorecard

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Theory In Action