1. 6-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6 Defining the Organization's Strategic Direction Avimanyu Datta, PhD

2. 6-2 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.

3. 6-3 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.

4. 6-4 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 vertical integration. 5.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.

5. 6-5 Assessing the Firm’s Current Position Five-Force Model

6. 6-6 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.

7. 6-7 Assessing the Firm’s Current Position Internal Analysis 1.Identify the firm’s strengths and weaknesses. Helpful to consider each element of value chain.

8. 6-8 2. Assess which strengths have potential to be sustainable competitive advantage Rare Valuable Non-substitutable Inimitable Resources are difficult (or impossible) to imitate when they are: Tacit Path dependent Socially complex Causally ambiguous Assessing the Firm’s Current Position Competitive Advantage Sustainable Competitive Advantage

9. 6-9 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

10. 6-10 Identifying Core Competencies and Capabilities

11. 6-11 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. Research Brief

12. 6-12 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.

13. 6-13 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.

14. 6-14 The Balanced Scorecard Kaplan and Norton argue that effective performance measurement should incorporate: Financial perspective Customer perspective Internal perspective Innovation and learning Theory In Action

15. 6-15 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. Genzyme’s Focus on “Orphan Drugs”

16. 6-16 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? Genzyme’s Focus on “Orphan Drugs”

17. 6-17 Discussion Questions 1.What is the difference between a strength, a competitive advantage, and a sustainable competitive advantage? 2.What makes an ability (or set of abilities) a core competency? 3.Why is it necessary to perform an external and internal analysis before the firm can identify its true core competencies? 4.Pick a company you are familiar with. Can you identify some of its core competencies? 5.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)? 6.Can a strategic intent be too ambitious?