TUM, Class 3 Thursday

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TUM, Class 3 Thursday

• Reinventing Ourselves (Eli Lilly) Internal
  Ventures and Ambidexterity (3M, Nokia, Hermes)

2
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

3
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

4
Reinventing ourselvesEly 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?

5
Pharma and Biotech(1)

• Key Players Merck, Glaxo-Welcome, Roche, Pfizer,
  Novartis, BMS
• Search for New Chemical Entities (NCE), large RD
  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

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Major Thrust of Pharma Strategy

• RD 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?

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Pharma and Biotech(2)

• Strategy of firms
• RD (Merck beta blockers) or Market
  (PfizerViagra)) Driven
• Joint ventures with biotech firms to latch onto
  new paradigms
• Big consumers of RD 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, bones,
  digestive system, brain, etc.

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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)

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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!)

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Strategy

• Corporate
• Business
• Function

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Ely Lilly

• General Strategy market-product positioning?
• Insulin Strategy?
• Organization Design?
• Fit Insulin Strategy and Design??

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Ely Lilly

• What is Elys General (or Corporate) Strategy
  market-product positioning
• Therapeutic areas?
• RD emphasis?
• Pipeline?
• What is Elys Insulin (or Business) Strategy
• NE Strategy?
• What is Elys Organization design?
• Spaghetti or matrix, or functional?
• Fit?

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Ely Lillys Corporate Strategy

• Portfolio of projects
• Like DuPont LT investments
• Filling drug pipeline before current patents
  expire
• Competencies in RD, FDA
• Competencies in Therapeutic Areas such as
  Psychopharmacology and Endocrinology

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Lillys Insulin LoB Strategy

• S-curve Pursuit
• Cleaner insulin (NE- bias)
• Humulin and Match
• Pricier
• Detailing (Internists,Endocrinoligists, HMOs,
  etc.)
• Prozac minset!
• Emergent landscape response
• gt 1994 IT investments, Internet based education,
  CDS centers
• Diversification (Glucose meters)
• Half-baked efforts to get locked into novel
  insulin market

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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
LillyApparently, more and more Americans prefer
Danish insulin products to local products and as
a result Novo has now a 27 percent share of the
worlds largest market.  Last year, the American
insulin market increased by 7.6 percent.  In the
same year, Novos 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.  Novos 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.
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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
Less than pure pen based
Pure, syringe based
Performance demands for new diabetic patients
Year
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Lillys Organization Structure(note what about
Information Incentive Systems??)

• Corporate
• lt1994 RD-Medical Division-Marketing Research
• gt1995 Marketing -gtEndocrine (with Diabetes
  Care)-Central Nervous System-Internal Medicine
• Affiliates
• National Markets Marketing-Distribution-Sales
• Strategic
• Planning Committees

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Ely Lilly in Indianapolis
Sales Affiliates
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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?
Convenience
(e.g., Lillys 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
  people, bleak prospects

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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

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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

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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

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Why firms are blocked from getting customer
information?

• because they do not care
• because they lack intelligence devices
• Lead User Analysis (compare Dominiks Forschung)
• blocked channels
• careers and incentives
• locked in to wrong types of customers

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Design link with each other and link with market

• Internal Linking build bridges between RD,
  Marketing and CDCs, between go-nogo committee
  and affiliates
• External Linking create firm-customer interfaces

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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

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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

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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

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From a Two-Product Firm to....a Three Product Firm
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The Challenge of Ambidexterity
Old (Rustbelt) Businesses
New Businesses
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How Do Innovators Develop New Organizations?
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From Paper to Electronic (Virtual) Medium
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Ambidexterity writing with Left (old) and Right
(new) Hand
The Incubator PARC
The AmbidextrousOrganization (Adobe, Apple, Palm)
Exploration
Bureaucracy The Document Company
Exploitation
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• 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

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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

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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

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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

42
3M, innovation and strategytake-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

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Hermes

• Innovation
• Autonomous
• Induced
• Implementation
• Five levers
• structure
• scorecards
• incentives,
• culture
• people

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Hermes (1)

• http//www.memorexlive.com/index_flash.html

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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.

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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
• .memory stick, flesh card, www?

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Hermes (3)
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Hermes (4)

• Computer Storage
• Memorex, Hanny, HK (HNNYF)

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.so Memorex

• Still Going Strongly
• Successive Paradigms and Their S curves!

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Hermes Take aways on Internal Hybrids

• Internal ventures to be part of tomorrows
  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)

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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

52
Networking Internal and External The Tipping
the Market
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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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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

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Networking organizations

• Construction, entertainment and publishing
• Broadway and its tipping point
• Hypertext Firms like Berteslmann, Alcoa and Booz
• Do you know a networking organization?

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Networks in Broadway Musicals
The Business and Artist Network
Network Emergence
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1892
Small World No
Artists Continuing 35 New
05 Total 40
Year 15
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1893
Small World No
Artists Continuing 40 New
10 Total 50
Year 16
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1894
Small World Yes
Artists Continuing 50 New
38 Total 88
Year 17
60
1895
Artists Continuing 88 New
75 Total 163
Small World Yes
Year 18
61
1896
Artists Continuing 163 New
56 Total 199
Small World Yes
Year 19
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1898
Artists Continuing 199 New
99 Total 298
Small World Yes
Year 21
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1892 Year 15
1893 Year 16
Artists Cont35 New05 Total40
Artists Cont40 New10 Total50
SW No
SW No
1894 Year 17
1895 Year 18
Artists Cont50 New38 Total88
Artists Cont088 New075 Total163
SW Yes
SW Yes
1896 Year 19
1898 Year 21
Artists Cont163 New056 Total199
Artists Cont199 New099 Total298
SW Yes
SW Yes
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Whats Next

• Tipping not only in market
• or sector, but also within firms
• Change agents, innovators
• and palace revolutions
• as creators of internal tipping

68
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

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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

70
Networking and ArchitectureSocial 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

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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

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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)
• BAHs??

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BAH competencies and rigidities

• Old Assets
• Fiefdoms
• Customized Consulting
• Free market
• Lots of structural holes, and weak ties
• Each network engenders its own unique consulting
  service architecture

• New Assets
• 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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BAH Core Rigidities

• Integrated Solutions rather than Products
  (e.g.BCG)
• Partners fiefdoms with shared brand equity
• Internal free market as a disability

75
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 BAH

• Rotate partners across clients
• New Consulting Outfit, with different brand name
• Re-engineer the sales process
• Compare Oticon

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Booz Allens 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 BAH

• 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