Defining the Strategic Direction

for Technological Innovations

Prof. Se-Joon Hong

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 Lecture Note Part 5
 Defining the strategic direction for innovations
 Will begin with a story of a biotechnology company
 Basic tools of strategic analysis
 Role of complementors
 Managing complementors (hard power, soft power)
 Stakeholder analysis (Monsanto case, Uber
case: what are the lessons?)
 Genzyme’s Focus on
“Orphan Drugs”
 Genzyme
 Founded in 1981 by scientists studying genetically inherited
enzyme diseases
 One of the world’s leading biotech companies (with 2008
revenues of $4.6 billion)
 As of early 2009, the company was on target to reach its
stated goal of 20 percent compound earnings growth from
2006-2011
 Became of full-owned subsidiary of Sanofi in 2011 ($20 billion)
 In this industry, developing a drug takes 10-14 years
and costs an average of $1 billion to perform the
research, run the clinical trials, get FDA approval, and
bring a drug to market
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 Genzyme’s Focus on
“Orphan Drugs”
 Adopted a very unusual strategy of developing
drugs for rare diseases rather than “blockbuster”
drugs
 Smaller markets, but fewer competitors
 Small number of patients and the severity of the diseases
would make insurance companies less likely to resist
reimbursement
 Requires much smaller, more targeted sales approach
 The factors above suggested that drugs for rare diseases
might support higher margins than typical drugs

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 For Example
 Patients taking Genzyme’s orphan drug
(Cerezyme) paid an average of USD170,000 a
year
 About 7,000 patients committed to taking the
drug
 They have to take the drug for LIFE!!
 Do the math
 170.000 x 7,000 a year = $1.2 billion
 Genzyme’s Focus on
“Orphan Drugs”
 Remaining independent
 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 (e.g.,
chemical supplies business, genetic counseling,…)
 Timing was on Genzyme’s side
 In 1983, the FDA established the “Orphan Drug Act,”
giving seven years market exclusivity to developers
of drugs for rare (<200,000 patients) diseases

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 Overview
 A coherent technological innovation strategy
leverages and enhances the firm’s existing
competitive position and provides direction for
the future development of the firm
 The essence of strategy is being different
(Porter’s view)
 Strategy is the creation of a unique and valuable
position, involving a different set of activities
 To choose activities that are different from rivals’

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 Assessing the Current Position
 Some standard tools of strategic analysis
 External Analysis
 Porter’s five-force model
 Complementor analysis
 Stakeholder analysis
 Internal Analysis
 Value-chain analysis

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 Complementors: Friends or Foe?
 Are they friends? Really?
 Although complementors share many goals
(e.g. the desire to expand the common
market), their interests are frequently not in
sync
 They overlook the fact that the economics of their
businesses and their strategies are radically different
 Often mistakenly assume that both companies would
support the same standards
 As a result, tensions can develop in many areas (e.g.
pricing, technology, and control of the market)

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 The Dark Side of
Complementor Relations
 Relationships with complementors are typically
double-edged
 With complementors, the pie grows  Win-win
 But then there’s a tug-of-war with your
complementor over who’s going to be the main
beneficiary
 Ideally, you want to price yours high while your
complementors price theirs low (airlines vs. resorts)
 Extremely difficult to persuade them to meet your
terms
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 Complementor Analysis
 The first step in managing complementors is to
develop a deep understanding of their
economics, strategies and goals, capabilities,
incentives for cooperation, and any potential
areas of conflict

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 Complementor Analysis
 Apple and Intuit
 Apple: Even with a relatively small market share,
Apple makes money by selling its computers and
devices at premium prices over those made by
competitors
 Intuit: Has to spend 20% of its revenues into R&D;
so high volume is critical to cover these costs 
windows-based market is more attractive than Apple
market
 It was very difficult for Steve Jobs to persuade Intuit
to continue producing Apple version programs

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 Complementor Analysis
 After considering your complementors’ economics,
you need to dive into the details of their business
models
 Are they primarily interested in creating new markets or
serving the installed base?
 Are they leaders or followers?
 Where does your business model overlap with theirs?
 Are there inherent conflicts in such areas as pricing,
speed of product introduction, market creation, or
customer education?
 The more you know about the potential conflicts,
the better you can manage them effectively

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 Complementor Management
 Once you understand your complementors’
business models, you can employ a broad
range of techniques to influence their behavior
 Hard power: resorting to carrots and sticks to get
what you want
 Soft power: relying on persuasion through indirect
means; it leads others to want what you want
instead of forcing or bribing them to do as you wish

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 Hard Power
 Typically based on traditional measures of
strength, such as market share, brand equity,
control of distribution channels or cash
 Examples
 Bill Gates’ threat to halt development of Office for
Mac unless Apple adopted MS’s Web browser
 Sony’s bid to attract developers to its video game
platform by cutting licensing fees in half

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 Hard Power
 Hard power has disadvantages
 Turning repeatedly to hard power does little to build trust
between companies  discouraging deep cooperation
 Especially when hard power takes the form of outright
payments rather than coercion (real sense of common
purpose is absent)
 The greatest danger of hard power is that it can inspire a
backlash: likely to drive complementors to depend on a
more powerful partner and to strive to reshape the
industry structure in their favor (e.g. Microsoft vs. Intel)

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 Intel vs. Microsoft
 MS and Intel have clear incentives to promote two
common goals: growth in the PC market and
improvement in the Wintel standard
 This commonality of interests has yielded much fruitful
collaboration
 By coordinating investments in new features and
performance, two companies can not only expand the
market but also raise barriers to imitation and make it
more difficult for competitors to grab a piece of the pie
 Bill Gates “We will fill the vessels you build with more
software”

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 Intel vs. Microsoft
 But conflict has been a constant theme in the
Wintel relationship
 “Like two porcupines trying to mate”
 MS has often needed Intel less than Intel needs MS
 when there was a clash, MS often had the
advantage

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 Intel vs. Microsoft
 Different business models and competitive
conditions they face
 Intel makes money on sales of microprocessor that
go into new PCs  constant innovation becomes
critical to Intel’s strategy (seeking better
performance)  it often takes a new OS to achieve
the full power of a latest chip
 But, MS can prosper for a while without Intel’s help
because it generates big profits by selling upgrades
and applications to the installed base
 Intel faces fierce price competition with competitors,
but MS has had little (price) competition

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 The MMX Fiasco (mid 1990s)
 Historically, MS has repeatedly used hard power to
bend Intel to its will
 Intel invested a big money to add a set of new
instructions to its microprocessor to speed multimedia
processing, and planned to spend another $250 million to
make the new MMX chip take off
 Unless MS agreed to make a relatively simple
modification to Windows, most applications would be
unable to access the performance advantages of the new
chip
 AMD was also pressing MS to support its own multimedia
technology 3DX

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 The MMX Fiasco
 The situation created a difficult problem for MS
 If Intel went ahead with MMX, the H/W platform could
split into competing strands (AMD: 3DX)
 MS would have to supply an MMX-enabled version of
Windows and a different version for AMD chips, which
would confuse consumers and multiply MS’s costs
 To solve this problem, MS turned to hard power
 It demanded Intel license MMX to other chip makers at
no charge in return for MS’s support for MMX
 Of course, Intel was reluctant to comply, but saw no
choice

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 The MMX Fiasco
 MMX was a potential source of competitive
advantage that Intel had developed at great
expense
 But, Intel had to accept MS’s terms  “MMX for everyone
was better than MMX for no one”
 AMD also built MMX into its microprocessors
 MMX was a huge success, but Intel could not use MMX to
differentiate itself, the average selling price for its
microprocessors was much lower than planned, and so
were its profits
 Intel eventually made moves to lessen its dependence on
MS and limit MS’s ability to use hard power

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 The MMX Fiasco
 Intel learned lessons in the hard way
 Intel’s support for Linux
 In late 1990s, Intel invested in Red Hat and VA software,
two major providers of Linux software and services,
became a strong sponsor on driving corporations to
adopt Linux
 Intel can profit by supplying chips used in Linux servers,
and strengthened its position in relation to MS
 Intel’s chips were adopted by Apple too
 MS’s lesson: If you push a complementor too hard, you
risk a backlash

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 Soft Power
 Soft power can build legitimacy and trust
 Examples of soft power include:
 Providing complementors with market intelligence or
information about future product plans to foster
cooperation
 Supporting institutions that serve an industry or
professional community
 Entering into strategic commitments, such as
establishing a new standard or jointly developing a
new technology
 Formulating a compelling vision that incorporates
the health and wealth of complementors
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 Building Soft Power
 Intel helped make Wi-Fi the standard for wireless
computing  Because no one would buy a
Centrino laptop if there was no Wi-Fi service (the
complement)
 Intel’s strong commitments to Wi-Fi (i.e., launched a
$300 million marketing campaign), complementors
jumped on the Wi-Fi bandwagon

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 Building Soft Power
 Steve Jobs persuaded and convinced the major
music companies to sell digital music by
formulating a vision that incorporates the welfare
of complementors
 Direct contacts with music executives and stars (e.g.
Bono, Sheryl Crow)

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 Limitations of Soft Power
 In the face of a determined assault, soft power can
fail
 Netscape was defeated by MS’s hard power
 Soft power can be slower and more cumbersome
to wield than hard-power resources (Joseph Nye)
 Its precise effects can be difficult to trace
 It rarely produces sudden changes in direction
 For large companies, soft power often sets the stage for
the more effective use of hard power

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 Hard Power? Soft Power?
 How should companies decide which approach
(hard/soft) to use?
 A careful diagnosis of the strategic situation the
companies face
 Factors that play significant roles in determining the
relative value of hard and soft power
 A company’s capacity to exercise hard power
 The importance of having a large variety of complements

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 Capacity
 Exercising hard power successfully requires
extensive resources
 The effective use of hard power may not lie within
every company’s grasp
 Soft power, in contrast, offers more options to
smaller companies that lack the deep pockets
of a major corporation
 Weaker players may even have an advantage
 Potential partners are often more willing to work
with smaller firms, having less reason to fear them

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 Variety of Complements
 If success depends on tight integration with one
vital complement, hard power may be relatively
cost-effective
 You might be better off concentrating on one or a few
complementors  over time, the complementor may get
locked into the relationship so that hard power becomes
even easier and cheaper to use
 However, in many cases, the more the merrier
 For car manufacturers, more service stations are better
 Under such conditions, soft power may be more effective
(hard power can be a resource drain)

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 Smart Power
 To get the most out of complementors, companies
should dip into both toolboxes
 “Smart power is neither hard nor soft, it is both” (Joseph
Nye)
 When Apple opened the iTunes store in 2003, it relied
primarily on soft power (e.g. it reduced the risks by
offering safeguards against piracy)
 When Apple’s contracts with the music companies came
up for renewal, it turned to hard power: given the
dominant position of Apple in the market (over 80%),
Apple decided not to raise the music companies’ cut, and
the music companies had no choice but to comply

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 Smart Power
 Ultimately, conflict among complementors is
inevitable
 Smart power (both hard and soft) can help
companies manage the dark side of
complementor relationships
Stakeholder Analysis,
Monsanto Case

Dr. Se-Joon Hong

 Stakeholder Analysis
 What is stakeholder analysis?
 A process of systematically gathering and analyzing
qualitative information to determine whose interests
should be taken into account when developing
and/or implementing a strategy
 Who is a stakeholder?
 Actors (persons or organizations) with a vested
interest in the strategy being promoted

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Stakeholders
 Stakeholder Analysis
 Why is stakeholder analysis important?
 To identify the key actors and to assess their
interests, positions, alliances, and importance related
to the strategy
 This allows managers to interact more effectively
with key stakeholders and to increase support for a
given strategy
 When this analysis is conducted before a strategy is
implemented, managers can detect and act to
prevent potential misunderstandings about and/or
opposition to the strategy or program

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 Stakeholder Analysis
 A stakeholder analysis can emphasize
 The stakeholder management issues that are likely
to impact the firm’s strategy
 The issues that the firm ought to attend to due to
their ethical or moral implications

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 Stakeholder Analysis
 The first step is to identify all the parties that will
be affected by the behavior of the firm, and for
each party,
 What are the stakeholder’s interests?
 What resources do they contribute to the organization?
 What claims are they likely to make on the organization?
 Stockholders, employees, customers, suppliers, the local
community, government, rivals, civil rights organizations,
labor unions,…  how are they related?
 Which will be the most important from the firm’s
perspective?  priority to handle?

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 Today
 We must incorporate the added constraints of
social and environmental pressures as well as
future generations (e.g. climate warming issue)
 Emerging convergence-based products/services
typically involve a wider range of stakeholders
 Many stakeholders have contradictory demands (e.g.
complex business and public policy implications)
 Conflicts among scientific, political, ethical, religious,
cultural, social, and economic issues

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 Example: Monsanto Co.
 A chemicals company in the 70s
 Entered the emerging field of bioscience in the 80s and
90s by pioneering the development of genetically
modified (GM) crops that reduce the need for pesticides
and herbicides
 The company successfully made the difficult and risky
transition from chemicals to bioscience
 Example: Monsanto Co. (2)
 Monsanto’s customers and partners had similar
interests (the production of safe, high-output, low-
cost crops)
 However, Monsanto began encountering major
opposition from environmental groups, anti-
globalization activists and European consumers
 Concerns/fears about genetic modification, increased pest
resistance, and possibility of the seed companies
becoming too powerful
 Example: Monsanto Co. (3)
 Monsanto failed to recognize the complex, ambiguous
and ultimately disruptive impact of such secondary
stakeholders
 It was successful at technological innovation, but failed at
sustainable innovation
 Didn’t’ recognize ethical, religious, cultural, social, and
economical issues very well
 Example: Monsanto Co. (4)
 Today, Monsanto continues to struggle with a
tarnished image
 According to a poll (Harris Poll, 2014), the company
ranked third-most-hated company in the U.S.
 Uber Case
 21st century technology confronts 20th century
regulation
 How non-market factors such as regulation impact
an organization’s innovative products/services?
 Uber case highlights a situation common to
innovators in which the innovator is in conflict with
laws and regulations developed to address issues
related to established players
 Uber Case
 Uber, an innovator
 A hybrid of taxi and limousine service
 Customers call for a limousine using their mobile
device
 Many customers are willing to pay for the quick
availability, comfort, and ability to get service from
parts of cities not routinely covered by cabs
 Uber was in a regulatory grey area
 Regulations for taxis and limousines were different
Taxis & Limos: Serious Deficiencies
for Customers
 Taxicabs: unpleasant, dirty, poorly maintained,
unsafely driven, difficult to find often in many
locales (denial of service 乘車拒否, many taxis
avoid certain areas)
 Sometimes, denial of service by drivers for racial or
other reasons (e.g. elderly passengers or patients)
 Limos are expensive and unavailable on short
notice
 Stakeholders?
 Politicians
 Officials
 Political groups
 Electorates