Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 6
DEFINING THE ORGANIZATION’S
STRATEGIC DIRECTION
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
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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
populations
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Overview
• 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
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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 WalMart 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
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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.
•
•
•
Organization’s Strategic Direction
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 Firm’s 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 Firm’s Current Position
• Five-Force Model
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Assessing the Firm’s 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 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
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Assessing the Firm’s Current Position
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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
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 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
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 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
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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 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.)
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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 firm’s 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, 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
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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
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 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.
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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 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.
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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
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
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