Technology and Strategy

GEST-S-464

Pr Manuel Hensmans

This class

• Setting a strategic direction for the future

– Analyse present resources and competences

• Apply VRIN framework

– SWOT & TOWS

– Creating a strategic intent for the future

• 8 steps

2

: Customer-led?

• Does strategy reflect customer-led mission & vision? – Google’s mission is “to organize the world's information and make it

universally accessible and useful”

– Google’s vision is to “develop a perfect search engine”

- Customer-led:

- Search engine, Google Book Search, Google Maps, Google Scholar, Gmail, …

- But…

- Google+ puts own social search first, Google buys hardware companies

Motorola, increasing focus on sales advertising space, launch in-game

advertising (AdScape), Facebook-competitor Google Buzz publicises all Gmail

account details without user approval, no user privacy possibilities (all user

details are kept at least 9 months), Android & entry in telephone business,

YouTube from p2p amateur experience to established TV revenue model (most

viewed content is sponsored corporate content)…

3

Real mission & vision ?

• Not really customer-led mission, but…

– « Become the dominant media gateway for any advertising

business »

• Not really customer-led vision, but…

– “challenge Microsoft, Apple, Facebook for the position of world’s

leading information technology company”

• What strategic reality informs real mission & vision? • Compete in terms of distinctive resources & competences!

» Exploit unparallelled information database &

software engineering

» Exploit strategic control over advertising business

4

Morale of the story:

In fast-changing environments…

5

• When the external environment is subject to rapid

change, internal resources and competences offer a

more secure basis for strategy than market or consumer

focus

• In such case, internal resources and competences are

the primary sources of sustainable competitive adv

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

Honda

Technical Research Institute

founded

1st motorcycle:

98cc, 2-cycle Dream D

4 cycle

engine

405cc

motor cycle

Power products:

ground tillers, marine engines, generators, pumps, chainsaws

snowblowers

First product:

Model A clip-on engine for bicycles

The 50cc

Supercub

N360 mini

car 1000cc

Goldwing touring

motor cycle

Acura Car

division

Competes in

Isle of Man TT motorcycle

races

4-cylinder

750cc motorcycle

Portable

generator

Enters Formula 1

Gran Prix racing

Honda

Civic Enters Indy

car racing

1st gasoline-powered

car to meet US Low Emission Vehicle Standard

Civic GS

(natural gas

powered)

Civic Hybrid

(dual gasoline/ electric)

Home co-

generation system

Begins production of diesel

engines

Honda

wins Indy Champi

onship

6

The evolution of

World’s biggest motorcycle producer & leading supplier

automobiles

Yet, never defined itself in consumer terms (motorcycle or motor vehicle company)

But in terms of distinctive capability: expertise in the development of engines

Resources and competences

• Resources are…

– the assets that organisations have or can call upon (e.g.

from partners or suppliers), that is, ‘what we have’

• tangible and intangible assets of a firm

– tangible: factories, products

– intangible: reputation and brand

Company Valuation

ratio

Country Company Valuation

ratio

Country

Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US

Colgate-Palmolive 20.8 US Diageo 7.4 UK

Glaxo Smith Kline 13.4 UK 3M 7.3 US

Anheuser-Busch 12.6 US Nokia 6.7 Finland

eBay 11.2 US Sanofi-Aventis 6.3 France

SAP 10.8 Germany AstraZeneca 5.9 UK

Yahoo! 10.7 US Johnson & Johnson 5.7 US

Dell Computer 10.0 US Boeing 5.7 US

Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US

Procter & Gamble 8.4 US Cisco Systems 5.5 US

Qualcomm 8.3 US Roche Holding 5.5 Switz.

Schlumberger 8.2 US L’Oreal 5.3 France

Unilever 8.1 Neth/UK Altria 5.2 US

PepsiCo 8.0 US Novartis 5.1 Switz.

Firms with the Highest Ratios of Market value to Book Value

(December 2006)

8

What kind of resources explain

high market to book value

ratios?

Most valuable company in the world?

9 |

Apple really

changed that

much in this

period?

Evolution p/e ratio

10 |

WHY?

Four Categories of Resources

• Financial (cash, retained earnings…)

• Physical (plant & equipment, geographic location…)

• Human-intellectual (skills & abilities, patents…)

• Organizational (brand and reputation; culture:

collective experience through

systems, routines & activities…)

11

Resources?

• Brand name = quasi-public good

– Google = heir of not-for-profit Internet

• open innovation & universal data access

• User base

– With about 60% of the world’s internet searches, the Google.com

website is the world’s 2nd most visited website… giving it a

massive potential for market access.

– dominance of online advertising (>30% of US online adverting

revenue) gives it a powerful position in the entire advertising

sector.

12

Resources

• Financial resources

– With its cash reserves, huge cash flow from advertising and

massive capacity for raising debt and equity capital as a result of

it huge market capitalization, Google is well able to broaden its

product range through acquisition.

• Human resources

– Can hire the best and brightest. Its technical staff—software

engineers in particular—are considered among the best in the

industry.

• Culture

– vibrant, open innovation culture combines informality with a huge

emphasis on freedom, creativity, and initiative

13

Resources and competences

• Competences are…

– the ways those assets are used or deployed effectively, that is,

‘what we do well’.

• E.g. product design skill, cooperative relationships

Competences

• Software development

– Google’s search engine was based upon the technical brilliance

of its founders in creating new search algorithms. Google

continues to build depth and breadth to its software engineering

capability

• Easy to use product design

– The dominance of the Google search engine over its early rival

can be attributed primarily to its ease of use. Google continues to

develop products that are easy to use even for users with few

computer skills

15

Competences

• Time to market

– As a result of its culture, systems and people, Google shows a

tremendous capacity to generate new product ideas and new

business initiatives.

One more?

• Government & NGO support for Open Innovation

– “Closed societies will be left behind in Internet world”

• Secretary of State Hillary Clinton

• Open Internet against Chinese, Russian…protectionism

– Human rights bottom line (defended by Western NGOs)

• "Google China Social Innovation Cup for College Students”

16

Strategic capabilities Bundles of resources and competences

Threshold and distinctive capabilities

Focus on distinctive capabilities!

• in theory: Does the resource or competence

provide customer value?

• the practical: Does the resource result in an

increase in revenues, a decrease in costs, or

some combination of the two?

• Distinctive or threshold?

20

Applying VRIN

V – Value of strategic capabilities

Value chain

Case

– Use value chain analysis

• From manufacturing, to new product development, to

purchasing, to supply chain mgt, to component

manufacture, to assembly..to dealership support, and

after-sales services

– Key resources/competences along value chain

• Strong balance sheet to invest in firm infrastructure,

manufacturing capabilities, new product dvpt capability,

effective supply-chain mgt, global distribution, brand

strength, scale-efficient plants with up-to-date capital

equipment,...

22

Assessing a Company’s Resources and Capabilities:

The Case of

RESOURCES Importance

industry

VW’s relative

strength

R1. Finance 6 7

R2. (Green)

Technology

7 6

R3. Plant and

equipment

8 8

R4. Location 6 6

R5. Distribution 8 6

R6. Brands 6 6

COMPETENCES Importance

industry

VW’s Relative

Strength

C1. Product

Development

9 7

C2. Purchasing 7 6

C3. Engineering 7 9

C4. Manufacturing

efficiency

8 5

C5. Financial

Management

6 4

C6. R&D 5 6

C7. Marketing and

Sales

9 7

C8. Government

Relations

4 8

C9. Strategic

Management

7 6

Both scales range from 1 to 10

(1= very low, 10= very high)

23

Compare importance resources and competences

along value chain of industry with Volkswagen’s

relative strengths along its own value chain

Rela

tive

Str

en

gth

VW

Strategic Importance in industry

Superfluous Strengths Key Strengths

Zone of Irrelevance Key Weaknesses

1

1

5 10

5

10

R1

R2

R3

R5 C1 C2

C3

C4 C5

C6

C7

C8

(Hypothetical only)

Appraising Resources and Capabilities

C9

R6

24

Strategy implications

• Principal strengths

– Deep financial pockets, quality of plant & equipment,

engineering capabilities

• Compete on quality and engineering excellence rather

than cost!

– Focus marketing of all brands on these commonalities

• Use deep financial pockets when rivals are struggling!

– E.g. acquire

25

Strategy implications

• Key weaknesses

– Manufacturing costs (resulting from location), mgt capabilities

regarding clear strategic focus & cost competitiveness problem

• Turn German location into reputational advantage

– Reinforced by acquisition of home-grown quality label

• Put in place top mgt team with strategic acumen

– Able to steer in a long-term, strategic direction

• Superfluous strength

– Government relations? – «Foster this competence in emerging economies

– VW biggest car manufacturer in the world thanks to

26

R – Rarity

• Rare capabilities are those possessed uniquely by one

organisation or by a few others only.

– E.g. a company may have patented products, have supremely

talented people or a powerful brand

• Rarity could be temporary

– E.g. patents expire, key individuals can leave or brands can be de-

valued by adverse publicity

Applying VRIN

Rarity: key individuals

• « think different » branding

– Associated with

• (Dis)advantage?

– Rare capability -> core rigidity?

» Steve Jobs helped to fuel « great man » theory

– Search for new « great man »

– Can inhibit change and become key weakness!

28

I – Inimitability

Inimitable capabilities are those that competitors find difficult to imitate or obtain.

– Competitive advantage can be built on unique resources (a key individual or IT system) but these may not be sustainable (key people leave or others acquire the same systems).

– Sustainable advantage is more often found in competences (the way resources are managed, developed and deployed) and the way competences are linked together and integrated.

Applying VRIN

Inimitability Criteria

Inimitability

strategic

capability

Social

Complexity Culture &

History

Causal

ambiguity

30

Social Complexity ( & government lobbying)

• the social relationships entailed in

resources may be so complex that

managers cannot really manage them

or replicate them

The Question of Inimitability

31

Applying VRIN

Unique Historical or Cultural conditions

• first mover advantages

e.g.

• unique innovation culture

e.g. “good people do their jobs in their own way”

The Question of Inimitability

32

Applying VRIN

The Question of Inimitability

Causal Ambiguity Apple, Steve Jobs or design team?

• causal links between strategic capability

and competitive advantage understood?

• bundles of resources and competences fog

these causal links

33

Applying VRIN

Patents

• patents may be a two-edged sword

• offer a period of protection if the firm is

able to defend its patent rights

• required disclosure may actually decrease

the cost of imitation, and the timing

The Question of Inimitability

34

Applying VRIN

Non-substitutability

• Product or service substitution

• E.g. e-mail systems vs postal systems

• No matter how VRI postal services were!

• Competence substitution

– Over-reliance on particular competences

• E.g. Kodak & chemical vs digital processes

• But Rolex vs Casio ?

35

Applying VRIN

Case

• Analyse the strategic capabilities of Dyson in terms of

threshold & distinctive resources and competences

• VRIN of Dyson’s strategic capability?

• Effect of Sir Dyson leaving company? – First, watch interview

36

: : threshold resources?

• engineering design equipment

• product supplies

• manufacturing space

• offices and facilities

• appropriate personnel

• sufficient customers (installed base)

37

:threshold competences

• general mgmt skills including distribution & marketing

• engineering design skills

• cost control through manufacturing in low-cost locations

• quality assurance and control

• the ability to attract customers sufficiently inspired by

design to pay premium prices across different markets

38

: distinctive resources

• James Dyson himself

• the Dyson high-end brand in an otherwise staid market

• an HQ building and related laboratories designed to

foster innovation

• product portfolio and associated patents

• high R&D budget possibly through being privately owned

• history company used extensively in PR & advertising

• ownership of most manufacturing facilities and hence

control over working conditions of employees

– versus other companies that contract out their manufacturing

and can be accused of supporting poor labour conditions

39

: distinctive competences

• continuous inspirational leadership around the value of

engineering

• design engineering competences that transform ideas

into viable products

• competence to make engineering aesthetically attractive

• seamless value chain despite design and manufacturing

being in different locations

• being one step ahead of competitors attracting early

adopter customers and subsequent followers including

premium pricing

• never being boring; always being surprising

40

Q2: VRIN of strategic capability?

• V: Many valuable capabilities

• R: Not products themselves

– But: J. Dyson, design exp & hands-on mgt style

• I: linked innovation activities within culture / history

– Competitors have managed to imitate products

» So, what explains Dyson’s price premium?

» first in market (history)/ aura (design culture)

• N: none in sight, but innovative culture could help

to protect in the future

41

Q3: departure Sir Dyson?

• Compare with

– Hands-on mgt style without Dyson?

– Aura of company

• exclusive design & first in market without Dyson?

• premium price?

» customers willing to pay more to be different and ahead

of the crowd even regarding an object as mundane as a vacuum cleaner

42

Strengths

• Distinctive competences

& resources

Opportunities

• Future Oriented

• Niches

Weaknesses

• Competences &

resources that are

becoming less valuable &

rare and more imitable

Threats

•Vulnerability

• Attack Point

SWOT: summary internal & external analysis

Internal analysis (VRIN)

External analysis (5 forces, any lesson from

the past for the future…)

44 |

Opportunities - Become same reference

standard for mobile search /

ads / apps

- Reinvent quasi-public character

in emerging economies

- Open innovation always wins?

Threats - Monopoly/privacy regulation

- Shift to social search

- Shift to mobile internet apps on

non-Android platforms or Baidu

apps in China…!

- …

Internal analysis External analysis

Strengths - Strong brand/ quasi-public

reputation

- Financial resources

- Internal technical platform

- Culture of innovation

- Government & NGO

relations…

Weaknesses - Search engine’s quasi-public

character eroding?

- can be exported beyond West?

- “Don’t be evil” mission versus

Microsoft “world domination”

syndrome?

-Lack of app control leads to quality

control (Android?)

-…

SWOT (non-exhaustive)

Do SWOT for

45 |

Strengths • Unique innovation/risk culture

•Strong innovation pipeline •Robust margins/ finances •Focus on design (outsource rest)

Opportunities • strong growth in smartphones &

tablets for wealthy global comm.

•Platform network effects

iPod/iPhone/iPad…

•Robust outlook mobile apps/ads

Weaknesses •”Great man” dependence? •Closed architecture/patents &

fast innovation pace/ imitation •outsourcing means no control

working conditions China (damage reputation)

Threats •Rising popularity Android / “Open innovation” always wins?

•Too high-end for em. ecs? • post-Jobs phase of maturity:

investor & engineer attraction? •Dependence on suppliers that are competitors too

Internal analysis External analysis

TOWS: formulate strategic options (future)

47 |

- Step up efforts to strengthen

network economies of scale and

scope (future iWhat)

- Alliance with media content provider

- Build reputation of other Apple

leaders retrospectively (Tim Cook)

- Build Apple University reputation

for future iWhat

- More « open innovation » culture

(emerging economies)

- Invest in new « think different »

branding to rebuild mystique

- Provide compatibility with core

Android apps

- Make killer apps for emerging

economies

- Upgrade supply chain integration

TOWS (non-exhaustive)

Strategic direction: future!

• Vision

– A long-term goal that is ambitious, builds upon and

stretches firm’s strategic capabilities

• Typically looks 10-20 years ahead

• Firm should identify resources and competences needed to

close gap between vision and current position. How should firm

close gap?

Setting direction for future

• PESTEL analysis (10-20 years)

• Scenario analysis

• Strategic customer

• Key success factors

• Strategic groups and strategic capabilities

• Mobility barriers

• Vision

• Acquire, ally or develop internally?

49

50

Macro-environment

Industry

Competitors

Organisation

Case pharmaceutical industry

• Reading

« The global pharmaceutical industry: swallowing a bitter pill »

– Questions

• Two key drivers of PESTEL (10 years ahead)?

– Highest impact

– Bring most uncertainty

• Four scenarios?

– 2 drivers x 2 possible directions for each driver

51

52

Political

• Government focus on industry as easy target in drive to reduce healthcare expenditure; public outcry over safety alerts & international price comparisons; public pressure to fund cancer medicines

Economic

• Pharma sales correlate closely with GDP growth – flattening in established markets, growing in emerging markets; patients pay more for personalised service– correlation sales & income levels patients; availability venture & debt finance to support biotech

Social

• Ageing populations drive increase healthcare costs & demand for medicines; pressure to act ethically rather than pure profit; better informed patients with higher expectations; global convergence; public acceptance new techs such as stem cells and genetic testing

Technological

• Scientific and medical innovation; impact of IT (better informed patients and e-prescribing limitations medical practitioners); shift to personalised healtchare technology

Environmental

• Emphasis on sustainability by investors and employees

Legal

• Increased regulatory scrutiny of drug safety, industry sales & marketing practices; growth in liability claims (especially in the US)

Using the PESTEL for scenario analysis

• Apply selectively

• Avoid death by information overload

• identify key drivers of change?

• most impact in the future

• will bring most uncertainty to the industry, market or

organization

– For each key driver select opposing outcomes

• where each leads to very different consequences.

Goal of scenario analysis is…

• Consider plausible alternative futures

– do not to attempt to predict the unpredictable

• Value = Organizational learning & debate

– Limit key drivers!

– Give memorable titles

– No prediction, forecast or relative probabilities

• How many scenarios?

– Avoid 3 scenarios: increases risk-aversion

• Managers will go for the middling scenario

• Two or four scenarios

– avoid an easy mid-point

• Strategies for each scenario

– Influence & monitor environment to deal with

• Threats & opportunities

55

Scenario analysis (2)

High impact/high uncertainty drivers?

56

• Continuing pressure to reduce healthcare costs

– Shift to price controls, generic substitutes, OTC...

• More educated & demanding consumer-patients

• Scientific advances address high unmet need diseases

– Growth chronic/degenerative illnesses & contagious dis.

– Ageing population & growth global community

• Fragmentation of industries, R&D, pipeline

– Continued M&A: more concentration or vertical integration

• Increasing role & influence NGOs & activist groups

– More transparency, affordable therapeutics & tech transfer

– Bioethics debate

• BRIC challenge to world order

– Challenge patents, new non-market morality, fragmented

regulation

2 key drivers?

57

• Continuing pressure to reduce healthcare costs – Shift to price controls, generic substitutes, OTC...

• More educated & demanding consumer-patients

• Scientific advances address high unmet need diseases – Growth chronic/degenerative illnesses & contagious dis.

– Ageing population & growth global community

• Fragmentation of industries, R&D, pipeline – Continued M&A: more concentration or vertical integration

• Increasing role & influence NGOs & activist groups – More transparency, affordable therapeutics & tech transfer

– Bioethics debate

• BRIC challenge to world order – Challenge patents, new non-market morality, fragmented world

regulation

Path of technology development

2 key drivers?

58

• Continuing pressure to reduce healthcare costs – Shift to price controls, generic substitutes, OTC...

• More educated & demanding consumer-patients

• Scientific advances address high unmet need diseases – Growth chronic/degenerative illnesses & contagious dis.

– Ageing population & growth global community

• Fragmentation of industries, R&D, pipeline – Continued M&A: more concentration or vertical integration

• Increasing role & influence NGOs & activist groups – More transparency, affordable therapeutics & tech transfer

– Bioethics debate

• BRIC challenge to world order – Challenge patents, new non-market morality, fragmented world

regulation

Path of technology development Nature of societal values

59

Focus on Strategic customer

in four scenarios

• Decision-making power is shifting

– From?

• Medical practitioner

– To?

• Payer

– Governments, insurance companies…

60

Past success factors

• Past ksf? – Size R&D investments

– Large marketing and sales forces

• Past market leaders?

– Blockbuster model

• Brands that offered moderate improvements

– In tolerability & convenience

– Sustainably protected by patents

61

62

Key success factors in the future?

• Future ksf?

– Ability to justify premium price with « payers »

– Innovation >> size

• Easy diseases treated; focus on high unmet needs!

• Future market leaders?

• Are perceived as « ethical » enough

• Personalised healthcare

• Highest performance/price ratio

• Diversified enough (hedge bets)

– but leading in each domain

63

Significant innovation

Strategic groups & strategic capabilities

64

Justification

premium price

Generic

Conventional

Vaccines

Biotech

OTC

Bio-

similar

Significant innovation

Strategic groups & growth potential Less / More

65

Justification

premium pricing

Generic

Biotech

Conventional

Vaccines

OTC

Bio-

similar

Significant innovation

Strategic groups & mobility barriers

66

Premium pricing

Generic

Strategic barrier?

Lack of branding and R&D skills Strategic barrier?

Time-to-market manufacturing & distribution skills

Significant innovation (lmore targeted, harder to imitate,

but slower throughput)

Strategic groups & mobility barriers

67

Premium pricing

Strategic barrier?

Highly consolidated, specialised skills required in manufacturing, clinical

trials…

Strategic barrier?

Huge amounts of financial, marketing and

distribution capacity

needed

Vaccines

Significant innovation (lmore targeted, harder to imitate,

but slower throughput)

Strategic groups & mobility barriers

68

Premium pricing

Strategic barrier?

Open innovation skills (public-private), very new R&D processes, very slow

development processes, very innovative culture

Strategic barrier?

Huge amounts of financial, marketing and

distribution capacity

needed

Biotech

Significant innovation (lmore targeted, harder to imitate,

but slower throughput)

Strategic groups & mobility barriers

69

Premium pricing

Bio-

similar

Strategic barrier?

For generic players: Substantial R&D

investment, competitive

advantage is manufacturing excellence

Strategic barrier?

For conventionals: Time-to-market skills needed; very different

non-proprietary culture; more about

manufacturing than sales or innovation

Significant innovation (lmore targeted, harder to imitate,

but slower throughput)

Strategic groups & growth potential Less / More

70

Premium pricing

Generics

Biotech

Conventional

Vaccines

OTC

Bio-

similar Novartis & Merck?

Diversification into generics and

biosimilars (Sandoz)

(pre-empt global generic competition

and parallel trade)

Pfizer & Sanofi?

Diversification into biotech

(more in the pipeline,

Learn from biotech innovation culture)