JMPennings TUM 20041 TUM, Class 3 Thursday Reinventing Ourselves (Eli Lilly) Internal Ventures and...

JMPennings TUM 2004 1

TUM, Class 3 Thursday

Reinventing Ourselves (Eli Lilly) Internal Ventures and Ambidexterity

(3M, Nokia, Hermes)


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


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


Reinventing ourselves:Ely 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?


Pharma and Biotech(1)• Key Players: Merck, Glaxo-Welcome, Roche,

Pfizer, Novartis, BMS• Search for New Chemical Entities (NCE), large

R&D 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 “


Major Thrust of Pharma Strategy

• R&D 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?


Pharma and Biotech(2)

• Strategy of firms:– R&D (Merck: beta blockers) or Market (Pfizer:Viagra)) Driven– Joint ventures with biotech firms to latch onto new paradigms– Big consumers of R&D 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.



• 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)



• 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!)


Strategy

• Corporate

• Business

• Function


Ely Lilly

• General Strategy: market-product positioning?

• Insulin Strategy?

• Organization Design?

• Fit Insulin Strategy and Design??


Ely Lilly

• What is Ely’s General (or Corporate) Strategy: market-product positioning– Therapeutic areas?– R&D emphasis?– Pipeline?

• What is Ely’s Insulin (or Business) Strategy– NE Strategy?

• What is Ely’s Organization design?– Spaghetti or matrix, or functional?

• Fit?


Ely Lilly’s Corporate Strategy

• Portfolio of projects:– Like DuPont: LT investments– Filling drug pipeline before current patents

expire– Competencies in R&D, FDA– Competencies in Therapeutic Areas such as

Psychopharmacology and Endocrinology


Lilly’s Insulin LoB Strategy

• S-curve Pursuit– Cleaner insulin (“NE”- bias)– Humulin and Match– Pricier– “Detailing” (Internists,Endocrinoligists, HMOs, etc.)– Prozac minset!

• Emergent landscape response– > 1994 IT investments, Internet based education, CDS centers

– Diversification (Glucose meters)

– Half-baked efforts to get locked into novel insulin market


Business of InsulinTwo 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.


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 Novohas now a 27 percent share of the world’s largest market. Last year, the American insulin market increased by 7.6 percent. In the same year, Novo’s 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. Novo’s 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.


Pure, syringe based

Less than purepen based

Performance demands for old diabetic patients

Performance demands fornew diabetic patients

Purityof Insulin

Year

Same technology, new dominant design, meeting different needs is “disruptive technology”

See, again,... Bulk pack's Rosenbloom & Christensen (Class 2)

NE Strategy

NovoN


Lilly’s Organization Structure(note what about Information & Incentive Systems??)

• Corporate:– <1994 R&D-Medical Division-Marketing Research

– >1995 Marketing ->Endocrine (with Diabetes Care)-Central Nervous System-Internal Medicine

• “Affiliates”:– National Markets Marketing-Distribution-Sales

• Strategic: – Planning Committees


Ely Lilly in Indianapolis

HQ

R&D Mfct Marketing

Discovery Clinical Pre-Clinical PsychoPharma IMEndocrinePsycho

-Pharma,

Regional Sales

Local sales

Endocrine

Sales “ Affiliates”


“NE”

Period 1940s-2003:Fewer side effectsEfficaciousProfitable …but some orphan drugs ok


From Overcoming Inertia to Joining the New Paradigm


Con

ven

ien

ce

Who is the ”customer” and does Ely Lilly listen to her?

Insulin

(e.g., Lilly’s Prozac)


From Overcoming Inertia to Joining the New Paradigm

• German Setting– Advertising not permitted– EU – Other issues?


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


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


“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


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


Why firms are blocked from getting customer information?

• because they do not care

• because they lack intelligence devices– Lead User Analysis (compare Dominik’s

Forschung) – blocked channels – careers and incentives– locked in to wrong types of customers


Design: link with each other and link with market

Internal Linking: build bridges between R&D, Marketing and CDCs, between “go-nogo

committee” and ‘affiliates”External Linking: create firm-customer interfaces


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


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





• 3M, • Hermes




M anagem ent

R& D5

46

2

Production5

O therdepartm ents

3

Innovations

1

Creativity6

M arketing5

M anagem ent

R& D5

46

2

Production5

O therdepartm ents

3

Innovations

1

Creativity6

M arketing5

M a n a g e m e n t

R & D5

46

2P r o d u c t io n

5

O th e rd e p a r tm e n ts

3

In n o v a t io n s1

C re a t iv i ty6

M a rk e t in g5

From a Two-Product Firm to....a Three Product Firm


The Challenge of Ambidexterity

Old (“Rustbelt”) BusinessesNew Businesses


How Do Innovators Develop New Organizations?


From Paper to Electronic (Virtual) Medium


Ambidexterity: writing with Left (old) and Right (new) Hand

Exp

lora

tio

n

Exploitation

BureaucracyThe Document Company

The AmbidextrousOrganization (Adobe, Apple, Palm)

The IncubatorPARC


• 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


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


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


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


3M, innovation and strategy:take-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


Hermes

• Innovation – Autonomous– Induced

• Implementation– Five levers

• structure• scorecards • incentives, • culture• people


Hermes (1)

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


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.


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?


Hermes (3)


Hermes (4)

• Computer Storage• Memorex, Hanny, HK

(HNNYF)


….so Memorex

• Still Going Strongly

• Successive Paradigms and Their S curves!


Hermes: Take aways on Internal Hybrids

• Internal ventures to be part of tomorrow’s 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)





• 3M, • Hermes




Networking: Internal and External The Tipping the Market


Networking

• The bonding of people to bundle the pieces of an innovation

• WHO you know take precedence of WHAT you know


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


Networking organizations

• Construction, entertainment and publishing

• Broadway and its tipping point…

• Hypertext Firms like Berteslmann, Alcoa and Booz

• Do you know a networking organization?


Networks in Broadway Musicals

ChoreographerProducers

Librettist

Lyricist

Director

Composer

Costume Designer

The Business and Artist Network Network Emergence


1892 ArtistsContinuing: 35New: 05Total: 40

Small World: No

Year 15



Year 16

Small World: No



Year 17

Small World: Yes



Year 18

Small World: Yes



Year 19

Small World: Yes



Year 21

Small World: Yes


1892Year 15

1893Year 16

1894Year 17

1895Year 18

1896Year 19

1898Year 21

SW: No SW: No

SW: Yes SW: Yes

SW: Yes SW: Yes

ArtistsCont:35New:05Total:40







Number of New Plays and New Artists

0

20

40

60

80

100

120

Years

Artists

Plays

Tipping Pt


Number of Artists in the Network

0100

200300

400500

600700

800900

1000

Years

Art

ists

Tipping Pt.


New Artists per Play

0

1

2

3

4

5

6

7

8

Years

New

Art

ists Tipping Pt.


What’s Next

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


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





• 3M, • Hermes




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


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


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)

• BA&H’s??


BA&H: 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


BA&H Core Rigidities

• Integrated Solutions rather than “Products” (e.g.BCG)

• Partners’ fiefdoms with shared brand equity

• Internal free market “as a disability”


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”

JMPennings TUM 2004 76Reach: How Many Clients and what impact do we have?

Few Many

Richness:Level ofCustomization

High

Low

Management Gurus

Standardized “Products” BPR, BSC, SigmaSix, “Waterfalls”

Custom Solutions


Possible Solutions BA&H

• Rotate partners across clients

• New Consulting Outfit, with different brand name

• Re-engineer the sales process

• Compare Oticon


Booz Allen’s 2000-4 Internal KM Innovations

• “e-Audit”

• “Fast Track” KM Capability

• “e-Education Webcast” (weekly)

• Career Development Passports

• Occasionalization (reports on current issues)


Implications BA&H

• 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


Emerge with Emerging Paradigm

• Internal Hybrids– Oticon, Booz

• External Hybrids– mcc

JMPennings TUM 20041 TUM, Class 3 Thursday Reinventing Ourselves (Eli Lilly) Internal Ventures and...

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