Chapter 6
Defining the Organization's Strategic Direction
Avimanyu Datta, PhD
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
6-1
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.
6-2
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
1. Degree of existing rivalry. Determined by number of
firms, relative size, degree of differentiation between
firms, demand conditions, exit barriers.
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
vertical integration.
6-3
Assessing the Firm’s Current
Position
4.
5.
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
vertical integration.
Threat of substitutes. Determined by number of potential
substitutes, their closeness in function and relative price.
Recently Porter has acknowledged the role of complements. Must
consider:
a) how important complements are in the industry,
b) whether complements are differentially available for the
products of various rivals (impacting the attractiveness of
their goods), and
c) who captures the value offered by the complements.
6-4
Assessing the Firm’s Current
Position
• Five-Force Model
6-5
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.
6-6
Assessing the Firm’s Current
Position
•
Internal Analysis
1. Identify the firm’s strengths and weaknesses.
Helpful to consider each element of value chain.
6-7
Assessing the Firm’s Current
Position
2. Assess which strengths have potential to be
sustainable competitive advantage
•
•
•
•
Rare
Valuable
Non-substitutable
Inimitable
Competitive
Advantage
Sustainable
Competitive
Advantage
• Resources are difficult (or impossible) to imitate when they are:
•
•
•
•
Tacit
Path dependent
Socially complex
Causally ambiguous
6-8
Identifying Core Competencies
and Capabilities
• Core Competencies: A set of integrated and
harmonized abilities that distinguish the firm in the
marketplace.
• Competencies typically combine multiple kinds
of abilities.
• Several core competencies may underlie a
business unit.
• Several business units may draw from same
competency.
• Core competencies should:
• Be a significant source of competitive
differentiation
• Cover a range of businesses
• Be hard for competitors to imitate
6-9
Identifying Core Competencies
and Capabilities
6-10
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.
• 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.
6-11
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.
• 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.
6-12
Strategic Intent
• Strategic Intent
• A long-term goal that is ambitious, builds upon and stretches firm’s
core competencies, and draws from all levels of the organization.
• Typically looks 10-20 years ahead, establishes clear milestones
• Firm should identify resources and capabilities needed to close
gap between strategic intent and current position.
6-13
Theory In Action
The Balanced Scorecard
Kaplan and Norton argue
that effective performance
measurement should
incorporate:
• Financial perspective
• Customer perspective
• Internal perspective
• Innovation and learning
6-14
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.
• Smaller markets, but fewer competitors
• Requires less advertising, smaller sales force
• 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 pharmaceutical company.
• Diversified into side businesses to fund its R&D.
• By 2009, was one of the world’s largest biotech companies with
10,000 employees in 40 countries.
6-15
Genzyme’s Focus on
“Orphan Drugs”
Discussion Questions:
1. How does Genzyme’s focus on orphan drugs affect the
degree of competition it faces? How does it affect the
bargaining power of customers?
2. How does focusing on orphan drugs affect the types of
resources and capabilities a biotech firm needs to be
successful?
3. Does Genzyme’s focus on orphan drugs make sense?
Do you think Genzyme has a long-term strategic intent?
4. Why do you think Genzyme has diversified into other
areas of medicine? What are the advantages and
disadvantages of this?
5. What recommendations would you offer Genzyme for
the future?
6-16
Discussion Questions
1.
2.
3.
4.
5.
6.
What is the difference between a strength, a competitive
advantage, and a sustainable competitive advantage?
What makes an ability (or set of abilities) a core competency?
Why is it necessary to perform an external and internal
analysis before the firm can identify its true core
competencies?
Pick a company you are familiar with. Can you identify some of
its core competencies?
How is the idea of “strategic intent” different from models of
strategy that emphasize achieving a fit between the firm’s
strategies and its current strengths, weaknesses, opportunities
and threats (SWOT)?
Can a strategic intent be too ambitious?
6-17