Strategic Management of

Technological Innovation
Melissa Schilling

Chapter 6
DEFINING THE ORGANIZATIONS
STRATEGIC DIRECTION

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

Organizations Strategic Direction

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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 (<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 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

Organizations Strategic Direction

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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 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
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

4. 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
5. Threat of substitutes. Determined by number of potential
substitutes, their closeness in function and relative price.

Organizations 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 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
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 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

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