1. WK 8 DA – Discussion Assignments:
This week’s discussion activity focuses on how firms create, acquire, and manage knowledge through
innovation strategy. This discussion will be graded with your Week 10 discussion activity.
Staircases to Growth Analysis, MarketPower Implications, Resource Implications, & Real Options
Financial Model (AstraZeneca/AZN)
AstraZeneca currently embraces all 7 strategic staircases to growth to sustain short, mid, and long-term
value creation and effective SVM.
In the short-term, AZN maximizes the profit potential from new and existing drugs already
commercialized to maximize its current customer base (Staircase 1).It has a ($700M+) AZ & Me
prescription savings program and has sophisticated cross-selling techniques via predatory marketing and
substantial brand equity/patient dependencies with the help of sophisticated wholesalers and specialty
distributors (and the help of brand promotion by physicians which is an industry standard).
Through the commercialization of new products and aggressive acquisition structure, it is highly
innovative which is evident by its high EVA, capital capacity, geographic scope (100+ operating
countries),economiesofscale and scope, and unique resources. Technology transfer,medical
entrepreneurs,financial institutions, research establishments, and universities are essential to improve its
growth potential and develop scientific breakthroughs – the same as Johnson and Johnson.
When generic drugs or intensified competition to compete and develop a new product threaten such
profits and revenue, it relies on acquisitions (inorganic) and current and future product pipeline
advancement (organic) growth to enhance market power, profitability, and advance its strategic
competitive advantages. Effectively, AZN leverages intellectual capital and financial capacity with
innovative strategiesbased on resources – such as privileged assets (brand equity, consumer
dependencies, value network, IP, specialty knowledge, tech transfer/collaborative contracts); special
relationships; and growth-enabled competencies (financing and financial capacity, portfolio risk
management, deal structuring, regulatory management, and capital productivity enhancement) when new
medications are successfully developed and commercialized or it acquires other firms to advance its
profit and market potential. These growth-enabled competenciesare not unique,however,to AZN as
the largest pharma players incorporate similar growth-enabled competencies. The other innovation
strategies based on resources (specific core competencies, privileged assets,and special relationships) are
unique to AZN – leveraging market power.
Innovation is dubbed instrumental to SVM effectiveness in the long-term for future operating
sustainability and pipeline risk management for AZN. Innovation is necessary to compete and grow in the
monopolist (biosuperior and branded) pharmaceutical industry (excluding the generic and biosimilar
market segments). Such innovation maximizes its newcustomer attraction through therapeutic
specialization via newproduct commercialization and economiesofscope via acquisitions (action
innovation strategies). Thus, magnifying product diversity and mitigating pipeline risk (Staircases 2
+ 3).
AZN discovers, develops,manufactures, markets/labels/brands, and commercializes its medications
in-house. The only value-chain activity not in-house is distribution – another pharma segment which
is highly concentrated just like large-pharma, but with less players – principally 3 mega-wholesalers with
relatively low bargaining power. Large-pharma undertakes excessive product failure and capital intensity
risks and demands a premium for such. Hence large-pharma retains moderate-high bargaining power over
its wholesalers/specialty distributors – increasing market power and profitability. This value-delivery

2. system has evolved into cross-selling and complex logistics over time to leverage excess profits and
sustainability in the short and long-term (Staircase 4). Tiered/other discriminatory pricing strategies
and predatory marketing techniques facilitate excess profitability via monopoly protected patents – even
though the risk that a rival firmis competing to discover the same drug simultaneously is high. A truly
diverse current and future product pipeline is key to maximizing SVM – especially the latter.
With an aggressive acquisition structure via horizontal integration; relative bargaining power over
distributors and wholesalers (buyers); and influence over governmental regulations – AZN is
improving its industry structure. Vertical integration is essentially captured in-house minus
distribution (which has relatively low bargaining power over large-pharma mentioned in Staircase 4)
(Staircase 5).
Geographic expansion into newregions (100+ operating countries) and into newbusiness arenas
(finding areas in their existing operations to specialize in and expanding established skills to include 7
therapeutic areas of specialized focus over time) are also essential to AZN’s growth and industry
dominance as the 7th
largest pharmaceutical company worldwide (Staircases 6 + 7).
With a high EVA upwards of 22.03% (Significant Monopoly > 10%), long-term innovation and
sustainability is paramount to continuously leveraging market power and profitability in excess of its
competition. Innovation strategies based on resources – specifically core competencies, growth-
enabling competencies, privileged assets,specialized relationships, and acquisitions – foster the
effectivenessoflong-term intellectual capital, market power, and profit growth. These innovation
strategies in the form of resources and actions, and implementing the 7 staircases to growth framework,
have permitted AZN to leverage a higher than competing EVA by effectively integrating value-creation
opportunities to foster further growth and sustainability, innovation, and intellectual capital.
These innovation strategies based on resources and actions can be expanded via new product
development/commercialization and future acquisitions. Continuing to advance its product pipeline
organically and inorganically will further advance such unique, technically advanced, and specialized
resources and capabilities to deliver long-term value creation. AZN has high market power and unique
resources required to innovate. Constantly exploiting newopportunities will improve the potential the
derivative ofits profits will growin excess ofits capital invested via constant intellectual capital
advancements. Thus, improving its market competitiveness and profit growth.
Real Options Financial Model (Horizon Approach) Implementation
AZN employs all 3 of the horizons in the RealOptions Financial Model. It relies on key competencies
and profit drivers complimentary to its core business model to deliver short-term value. It builds
momentum in emerging product advancements and different therapeutic areas in that it aggressively
invests in mid-long-term growth via product pipeline expansion into existing and advancing/acquiring
new capabilities. This creates a diverse array of real options for long-term business continuity and market
power sustainability. In turn, this leverages its potential to offset the cumulative product failure rate with
many new investment opportunities to build its capabilities and constantly create value.
Subsequently, AZN has created a strategic objective (starting in 2016) to produce one BLA (Biologics
License Application) per year which is necessary after phase 3 clinical trials to market a new drug. This
will deliver short and long-term value and leverage SVM with shareholder wealth maximization.
Producing a greater EVA/operating margin with sound stability in earnings growth potential (by realizing
1 BLA/yr) will improve the material impact the realoptions financial model will have on advancing
AZNs capabilities, unique resources, long-term options, and shareholder value-creation ability. AZN has

3. a diverse array and a high magnitude of mid-long term biologics in its product pipeline. Acquisitions and
strategic alliances/collaborative contracts have recently been used to uphold growth of its current core in
the short and mid-term since patent expires became an industry bottleneck. Securing options for the
future is a key component to AZNs ability to transform innovation into realized long-term profit,
growth, and market power. With over 140+ current and long-term products in its pipeline, only a few
new products will produce growth as the cumulative product failure rate is in excess of 80% industry
wide. The difference to incremental/smaller investments, however, is that these products require extensive
capital and sophisticated risk management techniques.
References:
Baghai, M., Coley, S.C., & White, D. (1996). Staircases to growth. Mckinsey Quarterly.
1. Relying on the Staircases to growth paper,analyze each of the seven staircases,identify which of the
seven staircases is your organization using to grow? Which ones would you recommend, why? Has your
organization enough market power so that such growth strategies may help to create value?
2. Which of the resources (platforms or capabilities) mentioned in this paper is your organization
implementing? Explain one by one, how they could be expanded or implemented in your organization.
Are they unique resources, why?
3. Does your organization implement the three horizons approach that McKinsey proposes? If not, make
your own proposal for each horizon. Be creative.