WEMBA, Mgmt 802 Class 9: first half of 5th session

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TUM, Class 3 Thursday
Reinventing Ourselves (Eli Lilly)
Internal Ventures and Ambidexterity
(3M, Nokia, Hermes)
JMPennings TUM 2004
1
Strategy and Innovation:
Monday 15.30-1830
• Part I, Day 3
– Reinventing (Ely
Lilly)
– Start New Page
• 3M,
• Hermes
• Part II, Day 3
– Tipping Point
– Networking:
Combining Old or
New
JMPennings TUM 2004
2
From Inertia Into Future with new
Paradigm
• Today:
– Use current skills, structure to add new product
lines (Ely Lilly)
– Internal venturing (3M, Hermes)
– Networking: Combining Old or New, or
Rebundling Old into New Paradigm
JMPennings TUM 2004
3
Reinventing ourselves:Ely Lilly
• How do we organize, make people work
together on an routine vs novel basis?
• How do we know customers? Are are
current customers the ones we should listen
to?
JMPennings TUM 2004
4
Pharma and Biotech(1)
• Key Players: Merck, Glaxo-Welcome, Roche,
Pfizer, Novartis, BMS
• Search for New Chemical Entities (NCE), large
R&D budgets in search of a “blockbuster” drug
• Hit rate very, very low (lower than roulette!)
• First (before WWII) major NCE: Penicillin
• From “discovery” to “development” (three
phases), to “approval” to “market launch “
JMPennings TUM 2004
5
Major Thrust of Pharma Strategy
• R&D driven: what enters the pipe line from
“discovery” , Phase 1-3 research and
testing to FDA approval and market launch?
• Marketing injected: how do we penetrate
the therapeutic area where we position
ourselves?
JMPennings TUM 2004
6
Pharma and Biotech(2)
• Strategy of firms:
– R&D (Merck: beta blockers) or Market (Pfizer:Viagra))
Driven
– Joint ventures with biotech firms to latch onto new
paradigms
– Big consumers of R&D funds to fill the “pipeline”
– Regulatory Approval (eg FDA) a key hurdle to get to
market
• Is drug safe, and does it produce health benefits?
– Top Management, also “go-no.go committee” tends to
be science oriented, but Pfizer, Novo Nordisk etc. are a
little more market oriented
– Competencies in certain “therapeutic areas”:
• Cardiovascular, endocrine,
pulmonary,
JMPennings
TUM 2004 bones, digestive
system, brain, etc.
7
Pharma and Biotech(3)
• Examples of blockbusters drugs:
–
–
–
–
–
Prozac (Ely Lilly: depression)
Tagamet ( Glaxo: ulcers)
Zantac (Glaxo: ulcers)
Viagra (Pfizer: impotence)
Cozaar (Merck: hypertension)
• Examples that firm destroying Drugs:
– Vioxx (Merck, MSD)
• Patents expire after 17 years:
– Generics (Israel, India, China)
JMPennings TUM 2004
8
Pharma and Biotech(4)
• Paradigm Shifts:
– Move from chemical to biological
competencies
– Doctors as “customers” become less critical in
buying decisions as insurance and other factors
become more powerful
– IT is now a major part of drug discovery
process (Bioinformatics: programmers become
molecular biologists!)
JMPennings TUM 2004
9
Strategy
• Corporate
• Business
• Function
JMPennings TUM 2004
10
Ely Lilly
• General Strategy: market-product
positioning?
• Insulin Strategy?
• Organization Design?
• Fit Insulin Strategy and Design??
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11
Ely Lilly
• What is Ely’s General (or Corporate) Strategy:
market-product positioning
– Therapeutic areas?
– R&D emphasis?
– Pipeline?
• What is Ely’s Insulin (or Business) Strategy
– NE Strategy?
• What is Ely’s Organization design?
– Spaghetti or matrix, or functional?
• Fit?
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12
Ely Lilly’s Corporate Strategy
• Portfolio of projects:
– Like DuPont: LT investments
– Filling drug pipeline before current patents
expire
– Competencies in R&D, FDA
– Competencies in Therapeutic Areas such as
Psychopharmacology and Endocrinology
JMPennings TUM 2004
13
Lilly’s Insulin LoB Strategy
• S-curve Pursuit
–
–
–
–
–
Cleaner insulin (“NE”- bias)
Humulin and Match
Pricier
“Detailing” (Internists,Endocrinoligists, HMOs, etc.)
Prozac minset!
• Emergent landscape response
– > 1994 IT investments, Internet based education, CDS centers
– Diversification (Glucose meters)
– Half-baked efforts to get locked into novel insulin market
JMPennings TUM 2004
14
Business of Insulin
Two companies dominate the worldwide insulin market.
In 1999 Eli Lilly had 48 percent of the worldwide market in volume terms and Novo
Nordisk had 44 percent,
according to IMS Health, the leading market research
firm tracking the global pharmaceutical industry.
A distant third was Hoechst, which has since merged with Rhône-Poulenc to form
Aventis, with 5.5 percent.
In the U.S. Lilly has an 86 percent share of the retail pharmacy market
compared to Novo's 14 percent. But Lilly's share drops to 78 percent
when you factor in insulin use in hospitals and elsewhere where prescriptions aren't
required.
Only these two companies manufactured insulin sold in the United States in 1999,
although Aventis is poised to enter this market.
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And in….2003
Danish Novo Challenges American Rival Eli Lilly
Apparently, more and more Americans prefer Danish insulin products to local products and as a result Novo
has now a 27 percent share of the world’s largest market.
Last year, the American insulin market increased by 7.6 percent.
In the same year, Novo’s sale increased by 12 percent and the Danish company
is now gaining in on its closest American – and world wide – competitor Eli Lilly.
The reason for the increase is that patients are changing from the traditional types
of insulin to the more efficient analog insulin that is sold at a higher profit.
Novo’s CEO, Lars Rebien Sørensen, informed analysts that the American business of Novo is developing
in a positive direction. However, Novo is now left
with one problem and that is the depreciation of the American dollar which has caused a lower income for the
company in America than expected.
In Europe, where the Danish medical company has a 60 percent share
of the market the development is likewise positive. Novo is gaining compared to Eli Lilly though the increase
is a little less. In Japan, however, Novo has experienced a decrease,
though they still hold a 76 percent share of the market.
JMPennings TUM 2004
16
Same technology, new dominant design,
meeting different needs is “disruptive technology”
See, again,... Bulk pack's Rosenbloom & Christensen (Class 2)
NE Strategy
Purity
of Insulin
NovoN
Performance demands for
old diabetic patients
Pure,
syringe based
Less than pure
pen based
Performance demands for
new diabetic patients
Year
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17
Lilly’s Organization Structure
(note what about Information & Incentive Systems??)
• Corporate:
– <1994 R&D-Medical Division-Marketing Research
– >1995 Marketing ->Endocrine (with Diabetes
Care)-Central Nervous System-Internal Medicine
• “Affiliates”:
– National Markets Marketing-Distribution-Sales
• Strategic:
– Planning Committees
JMPennings TUM 2004
18
Ely Lilly in Indianapolis
Sales
“ Affiliates”
HQ
Mfct
R&D
Discovery
Pre-Clinical
Clinical
PsychoPharma
Endocrine
Marketing
IM
Psycho
-Pharma,
Endocrine
Regional Sales
Local sales
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“NE”
Period 1940s-2003:
Fewer side effects
Efficacious
Profitable
…but some orphan drugs ok
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From Overcoming Inertia to Joining
the New Paradigm
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Who is the ”customer” and does Ely Lilly listen to her?
(e.g., Lilly’s Prozac)
Insulin
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From Overcoming Inertia to Joining
the New Paradigm
• German Setting
– Advertising not permitted
– EU
– Other issues?
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Ely Lilly Lesson?
• Internal Linking: Organizational design
impedes or enhances innovation
– insulin product (development, marketing, testing, etc.)
located in wrong departments,wrong levels
• External Linking: Market driven stratgey
precludes access to customers-that-matter
and their needs
– obsessed with endocrine specialists, pharmacists,
HMOs, etc
• Similar lessons elsewhere
– e.g., Xerox focus on
Procurement rather than IT
JMPennings TUM 2004
people, bleak prospects
24
Take-aways on Locking into New
Dominant Design, day 3, Part 1
• Firms need to reinvent themselves:
– internal linking:
• establish tools for interdepartmental coordination
• if necessary, create a new design fitting new product
architecture, with information and reward systems
– external linking
• create tools for customer intelligence
• beware of talking to the “right” customers
• create mechanisms for detecting “wrong” customers,
i.e. discovering new and eventual mainstream
market segments
JMPennings TUM 2004
25
“Parking Place” of Projects
• Products take on the organizational environment
in which they are placed
– Engineering approach
– Customer demands
– Business Process
• Give a hammer and everything looks like a nail
• Examples: Discount retail and Martha Stewart,
Woolworth and Woolco, Endocrine and Insulin
pens, IB and retail brokerage
JMPennings TUM 2004
26
Occupational Bias (quotes from your
professor)
• If you think carpenter you see hammers
• If you give her a hammer, everything to her
looks like a nail
• If you meet endocrinologist, you talk or
hear about hormones and endocrine
imbalances
JMPennings TUM 2004
27
Why firms are blocked from
getting customer information?
• because they do not care
• because they lack intelligence devices
– Lead User Analysis (compare Dominik’s
Forschung)
– blocked channels
– careers and incentives
– locked in to wrong types of customers
JMPennings TUM 2004
28
Design: link with each other and
link with market
Internal Linking: build bridges between R&D,
Marketing and CDCs, between “go-nogo
committee” and ‘affiliates”
External Linking: create firm-customer interfaces
JMPennings TUM 2004
29
Issue of wrong customers,
or:
how firms get entrapped in vanishing market segments while oblivious of new ones
• Market contains current and emerging
segments
– price, functionality
• Emerging segments are typically not on
incumbents’ radar screen
• Emergent (and thus small) markets cannot
satisfy growth
JMPennings TUM 2004
30
Ely Lilly Lessons
• Firm had no parking space in Marketing for
convenient insulin products
• Misalignment
– pay, metrics, accountability, external linking
• Interventions
– Re-matrix the structure
– create insulin-based incentives for all silos
– create a separate business
JMPennings TUM 2004
31
Strategy and Innovation:
Monday 15.30-1830
• Part I, Day 3
– Reinventing (Ely
Lilly)
– Start New Page
• 3M,
• Hermes
• Part II, Day 3
– Tipping Point
– Networking:
Combining Old or
New
JMPennings TUM 2004
32
3
Management
4
6
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
Management
4
6
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
M anagement
4
6
R&D
5
6
1
Creativity
M arketing
5
Production
5
2
Innovations
O ther
departments
From a Two-Product Firm to....a Three Product Firm
JMPennings TUM 2004
33
The Challenge of Ambidexterity
New Businesses
Old (“Rustbelt”) Businesses
JMPennings TUM 2004
34
How Do Innovators Develop New Organizations?
JMPennings TUM 2004
35
From Paper to Electronic
(Virtual) Medium
JMPennings TUM 2004
36
Ambidexterity: writing with Left (old)
and Right (new) Hand
Exploration
The Incubator
PARC
The Ambidextrous
Organization (Adobe, Apple, Palm)
Bureaucracy
The Document Company
Exploitation
JMPennings TUM 2004
37
• Cannot create new companies
• Warning for all Fortune 500, DAX 50
FTS100 companies and beyond?
• It is very hard to write with both hands, to
be ambidextrous
JMPennings TUM 2004
38
Paradigm Shifts from Day 1
• Examples:
–
–
–
–
From Wooden Tennis to Wide body Rackets
From 35 MM Film Cameras to Digital Imaging
From Handy to Skype Phones
From Steel to Aluminum Engines
JMPennings TUM 2004
39
Ambidextrous Firm
• Firm with employees who are “Janusian”
• Firms who are “Janusian
– (like the locomotive which can go forward and
backward)
– Both exploitation and exploration.
– Tolerance for differences
JMPennings TUM 2004
40
3M as Example
• 15% Rule: internal ventures
• Ambidextrous Firm
• Build the ramp up of your new slopes while
old dominant designs fall off the slope
JMPennings TUM 2004
41
3M, innovation and strategy:
take-aways
• Strategy dictates portfolio of business, anchored in
core competencies
• Dilemma of sticking to the knitting, yet buying
options to get out of competency traps, latch on to
new customers & technology
JMPennings TUM 2004
42
Hermes
• Innovation
– Autonomous
– Induced
• Implementation
– Five levers
•
•
•
•
•
structure
scorecards
incentives,
culture
people
JMPennings TUM 2004
43
Hermes (1)
• http://www.memorexlive.com/index_flash.h
tml
JMPennings TUM 2004
44
Hermes (2)
• Over the past 40 years, much has changed.Memorex (i.e.
Hermes Systems) hs moved from Audio Cassettes (1971)
to VHS cassettes (1979). From Floppy Disks (1993) to
Recordable CDs (1996). And from Rewritable CDs (1997)
to Recordable DVDs with enough capacity to hold an
entire set of encyclopedias. Yet while our media continues
to evolve, some things remain unchanged. Like our
commitment to provide customers with the highest quality
products at the best value. By offering quality, value and
performance, Memorex has become the digital recording
company of the last century. And it's why we'll continue to
be the digital company of the 21st century.
JMPennings TUM 2004
45
Hermes (2a)
•
•
•
•
•
•
•
Magnetic Tapes (1962)
Audio Cassettes (1971)
VHS cassettes (1979)
Floppy Disks (1993)
Recordable CDs (1996)
Rewritable CDs (1997)
Recordable DVDs with enough capacity to
hold an entire set of encyclopedias
– …….memoryJMPennings
stick, flesh
TUMcard,
2004 www?
46
Hermes (3)
JMPennings TUM 2004
47
Hermes (4)
• Computer Storage
• Memorex, Hanny, HK
(HNNYF)
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48
….so Memorex
• Still Going Strongly
• Successive Paradigms and Their S curves!
JMPennings TUM 2004
49
Hermes: Take aways on Internal
Hybrids
• Internal ventures to be part of tomorrow’s
dominant design
• Spillover (knowledge transfer) from new
ventures to rest of firm
• Challenge of post-IV integration
• Re-establish organizational integrity
– people, operations, synergy (scope), culture
• Liquidation of dog division when they cease to
produce cash
– (i.e., Iomega predecessor)
JMPennings TUM 2004
50
Strategy and Innovation:
Monday 15.30-1830
• Part I, Day 3
– Reinventing (Ely
Lilly)
– Start New Page
• 3M,
• Hermes
• Part II, Day 3
– Tipping Point
– Networking:
Combining Old or
New
JMPennings TUM 2004
51
Networking: Internal and External
The Tipping the Market
JMPennings TUM 2004
52
Networking
• The bonding of people to bundle the pieces
of an innovation
• WHO you know take precedence of WHAT
you know
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53
Network Effects
• Direct (benefit is greater if more users)
– WiFi, webcafe, Kazaa, fuel cells,
• Indirect (benefit hinges on complements)
– Voice IP, Digital Camera, Internet Trading
– Enhance the arrival of Tipping Points
JMPennings TUM 2004
54
Networking organizations
• Construction, entertainment and publishing
• Broadway and its tipping point…
• Hypertext Firms like Berteslmann, Alcoa
and Booz
• Do you know a networking organization?
JMPennings TUM 2004
55
Networks in Broadway
Musicals
The Business and Artist Network
Network Emergence
Lyricist
Librettist
Composer
Producers
Choreographer
Director
Costume Designer
JMPennings TUM 2004
56
1892
Year 15
Artists
Continuing: 35
New:
05
Total:
40
JMPennings TUM 2004
Small World: No
57
1893
Year 16
Artists
Continuing: 40
New:
10
Total:
50
JMPennings TUM 2004
Small World: No
58
1894
Year 17
Artists
Continuing: 50
New:
38
Total:
88
JMPennings TUM 2004
Small World: Yes
59
1895
Small World: Yes
Year 18
JMPennings TUM 2004
Artists
Continuing: 88
New:
75
Total:
163
60
1896
Small World: Yes
Year 19
JMPennings TUM 2004
Artists
Continuing: 163
New:
56
Total:
199
61
1898
Year 21
Artists
Continuing: 199
New:
99
Total:
298
Small World: Yes
JMPennings TUM 2004
62
1892
1893
Year 15
Year 16
Artists
Cont:35
New:05
Total:40
Artists
Cont:40
New:10
Total:50
SW: No
SW: No
1894
1895
Year 17
Year 18
Artists
Cont:50
New:38
Total:88
Artists
Cont:088
New:075
Total:163
SW: Yes
SW: Yes
1896
1898
Year 19
Year 21
Artists
Cont:163
New:056
Total:199
SW: Yes
JMPennings TUM 2004
Artists
Cont:199
New:099
Total:298
63
SW: Yes
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What’s Next
•Tipping not only in market
or sector, but also within firms
•Change agents, innovators
and palace revolutions
as creators of internal tipping
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Could a new, incompatible innovation
or paradigm gain a footing within
Booz:
• A (superior) new paradigm may not gain a
footing
• Many new, incompatible paradigms have
been introduced to firms successfully
JMPennings TUM 2004
68
Strategy and Innovation:
Monday 15.30-1830
• Part I, Day 3
– Reinventing (Ely
Lilly)
– Start New Page
• 3M,
• Hermes
• Part II, Day 3
– Tipping Point
– Networking:
Combining Old or
New
JMPennings TUM 2004
69
Networking and Architecture
Social Capital as Core Rigidity
• Organization Structure and Two-key car
“architecture” (GM)
• Social capital as key asset (Seafax)
• Strategic Alliances, MP and who shall I ask for a
dance to produce a Tipping Point?
• Dismantling Booz’ networks to create new
template for consulting
JMPennings TUM 2004
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Core Competencies
• Knowledge that provides a competitive
advantage
• Core capabilities are embedded in:
–
–
–
–
human capital
social capital
technical systems
managerial systems
• While core skills enhance development,
they might also inhibit development
JMPennings TUM 2004
71
Core Rigidities (as distinct from
core competencies)
• Competency Traps
– NE Strategy
• Forgetting Difficulties
– Old skills get in the way (Cobol vs C++;
driving on the wrong side of the road in Ireland
vs BRD)
• BA&H’s??
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72
BA&H: competencies and rigidities
• Old Assets
• New Assets
– Fiefdoms
– Customized Consulting
– Free market
• Lots of structural holes,
and weak ties
• Each network engenders
its own unique consulting
service architecture
– Formal networks (Matrix!)
– SIGs and KOL
– One-size-fits-all
• Dense network, formal
and informal, social and
virtual
• Pre-imposed network
assumes well established
consulting service
template
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BA&H Core Rigidities
• Integrated Solutions rather than “Products”
(e.g.BCG)
• Partners’ fiefdoms with shared brand equity
• Internal free market “as a disability”
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Booz Allen 1994 efforts to move
away from old skills
• V2K (Build Internal Social Capital):
– Target Clients
– Triple Crown Teams
– Knowledge Engine (Matrix, SIGs, KOL)
• One-size-fits-all: replication templates
– Standardized Solutions
– Sourcing, BPR thru “campaign selling”
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High
Custom Solutions
Richness:
Level of
Customization
Standardized “Products”
BPR, BSC, SigmaSix, “Waterfalls”
Management Gurus
Low
Few
Many
Reach: How Many Clients
and what impact do we have?
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Possible Solutions BA&H
• Rotate partners across clients
• New Consulting Outfit, with different brand
name
• Re-engineer the sales process
• Compare Oticon
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Booz Allen’s 2000-4 Internal KM
Innovations
•
•
•
•
•
“e-Audit”
“Fast Track” KM Capability
“e-Education Webcast” (weekly)
Career Development Passports
Occasionalization (reports on current
issues)
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Implications BA&H
• Even in firm with prima donnas, there are
distinct capabilities, processes
• You got network internally, before
launching a service externally
• Many innovations exist already deep in the
trenches; challenge is to locate and to
transfer them
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Emerge with Emerging Paradigm
• Internal Hybrids
– Oticon, Booz
• External Hybrids
– mcc
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