Strategic Management of Technological Innovation Melissa Schilling by umsymums33

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									         Strategic Management of
         Technological Innovation
         Melissa Schilling

Chapter 6
     Genzyme’s 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

Organization’s Strategic Direction                                                               6-2
     Genzyme’s Focus on “Orphan Drugs”
     • In 1983, the FDA established the “Orphan Drug Act,” giving seven
       years market exclusivity to developers of drugs for rare (<200,000
       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 R&D
         – 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 world’s third largest biotech company
       proving that a profitable business could be built around small disease

Organization’s Strategic Direction                                              6-3
    • A coherent technological innovation strategy leverages the
      firm’s existing competitive position and provides direction for
      future development of the firm.
    • Formulating this strategy requires:
          – Appraising the firm’s environment,
          – Appraising the firm’s 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

Organization’s Strategic Direction                                          6-4
  Assessing the Firm’s Current Position
  • External Analysis
         – Two common methods are Porter’s Five-Force Model and
           Stakeholder Analysis.
         – Porter’s Five-Force Model
           • Has been used to analyze whether a particular industry as a
              whole will be profitable or to determine an individual firm’s
              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.
                       1. 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)
                       2. Threat of potential entrants. Determined by attractiveness
                          of industry, height of entry barriers (e.g., start-up costs, brand
                          loyalty, regulation, etc.)
                       3. Bargaining power of suppliers. Determined by number of
                          suppliers and their degree of differentiation, the portion of a
                          firm’s inputs obtained from a particular supplier, the portion of
                          a supplier’s sales sold to a particular firm, switching costs, and
                          potential for backward vertical integration - firm produce its
                          own supplies
Organization’s Strategic Direction                                                                    6-5
  Assessing the Firm’s Current Position
                       4. Bargaining power of buyers. Determined by number of
                          buyers, the firm’s degree of differentiation, the portion of a
                          firm’s inputs sold to a particular buyer, the portion of a
                          buyer’s purchases bought from a particular firm, switching
                          costs, and potential for forward vertical integration - supplier
                          enters firm’s business
                       5. 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

Organization’s Strategic Direction                                                                6-6
  Assessing the Firm’s Current Position
        – Recently Porter has acknowledged the role of
            •       The availability, quality and price of complements will
                    influence the threats and opportunities posed by the
            •       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
                    –        The market is so profitable that third-party vendors produce
                             clones or refill the empty cartridge with ink
Organization’s Strategic Direction                                                         6-7
Assessing the Firm’s Current Position
• Five-Force Model

   Assessing the Firm’s Current Position
  Stakeholder Analysis

1. Who are the
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
Assessing the Firm’s Current Position
• Internal Analysis
 – Identify the firm’s strengths and weaknesses. In Porter’s
   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 firm’s strengths and weaknesses are in
   that activity

Assessing the Firm’s Current Position

Value-Chain Analysis
for Take2 Interactive Software
• Take2 Interactive Software
  – Produces Grand Theft Auto video game
  – R&D is considered a primary activity, but the support
    activity of the technology development is not
     • 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 R&D
Value-Chain Analysis
for Take2 Interactive Software
Value-Chain Analysis
for Take2 Interactive Software
  Assessing the Firm’s 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
            • 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.

Organization’s Strategic Direction                                                   6-15
 Assessing the Firm’s 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
Organization’s Strategic Direction                                           6-16
  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 organization’s 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
               • Sony’s 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.)

Organization’s Strategic Direction                                                                    6-17
  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

Organization’s Strategic Direction                                                             6-18
  Identifying Core Competencies and Capabilities
  • Prahalad & Hamel offer the following tests to identify the firm’s core
           • 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, Sony’s 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, Honda’s 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

Organization’s Strategic Direction                                                                              6-19
  Research Brief –
  Identifying the Firm’s 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
                 • 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 firm’s 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.
Organization’s Strategic Direction                                                            6-20
  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
            • 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
            • Corning has made its own evolvability one of its most important core
                    – Invests heavily in research areas likely to provide scientific breakthroughs
                    – Develops pilot plants to experiment with new products and production
                    – 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
Organization’s Strategic Direction                                                                  6-21
   Strategic Intent
• Strategic Intent
  – A firm’s 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
    firm’s core competencies, and draws from all levels of the organization.
     • Canon’s obsession with overtaking Xerox, Apple’s mission of ensuring that everyone has
       a personal computer and Yahoo’s goal of becoming the world’s 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.

   The Balanced Scorecard
• Kaplan and Norton point out that a firm’s 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 shareholder’s expectations, double corporate value in 7
     • 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

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

Theory In Action


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