Strategies in the news (February 6, 2023)

Staying on Top (a supplement to The Strategy Toolkit)

1.  What next for buy-now-pay-later startups?

“Candidly, ‘buy now, pay later’ is just a feature,” says David Sykes, Klarna’s chief commercial officer. “If all you’re doing is offering the ability to break a purchase up into instalments, we don’t think, long term, that’s dynamic enough.” Two of the other big global B.N.P.L. players, Affirm and Afterpay, have never turned an annual profit, either…

“Sykes said Klarna was at least as focused on improving the overall shopping experience as it was on helping consumers pay for products. This means offering comparison shopping within the Klarna app, and providing discounts.

“Affirm offers other types of loans, such as monthly instalments at 10% interest. A spokesperson for the company said B.N.P.L. was “the beginning of a whole new domain of products and even companies.”

* Ledbetter, James, “Buy Now, Profit When?”, Dealbook, The New York Times, January 30 2023 (https://www.nytimes.com/2023/01/28/business/dealbook/buy-now-pay-later-struggles.html)

The return of higher interest rates (and WACC) is causing everyone to rethink their strategies for financial services and products.  Just look at Amazon’s decision to start charging for delivery of grocery orders below $150…

2. Speaking of inflation, what strategies can you use in a time of stagflation?

“As they head into battle with the stagflationary monster, bosses will deploy a mix of strategies. More of them will seek to pass cost increases on to customers… The best-placed companies will be those with strong pricing power, either because they sell essential products for which demand is generally sturdy—think, say, of the consumer goods churned out by Nestlé—or because they have brands that customers trust and value.

“Some companies will resort to the ruse of “shrinkflation”—making chocolate bars smaller, for example, while leaving prices unchanged. Others will seek to hold down costs through efficiency gains. Already, higher energy bills in Europe have started to reshape some companies’ supply chains…

“Perhaps the trickiest attempts to hold down costs will involve workers’ wages…  With costs rising and demand wobbling, managers may shift from suitors to adversaries… and the threat of lay-offs will begin to loom.”

https://www.economist.com/the-world-ahead/2022/11/18/companies-must-battle-the-beast-of-stagflation

What worked under the past decade of low interest rates and “growth at all costs” business models has to change in a time of higher interest rates and slow to no growth...

3.  So you want to create your own Harry Potter invisibility cloak…

“Shine a flashlight at a cat at night, and its eyes will appear to glow. That’s because cats—along with owls and many other nocturnal animals—have a reflective tissue layer behind their retinas. The adaptation increases their sensitivity to low levels of illumination by giving the retina a second chance to absorb photons.

“A similar strategy can boost the amount of light absorbed by any material. For a material placed in an optical cavity, light passes through it many times. And under the right conditions, nearly all the light is eventually absorbed, even by a weakly absorbing medium. Such a system is an example of what’s known as a coherent perfect absorber (CPA), which achieves its performance with the help of interference effects…

“Until recently, CPAs worked only for a specific spatial mode and direction of propagation, both of which severely limit the eligible signals. Now Ori Katz of the Hebrew University of Jerusalem, Stefan Rotter of Technical University of Vienna, and their colleagues have demonstrated a CPA that overcomes those limitations.  Taking inspiration from an established laser design, their simple setup widens the range of acceptable wavefronts for perfect absorption.”*

* Hill, H., “Time-reversed laser absorbs nearly all light,” Physics Today, November 2022: 21-2 (https://physicstoday.scitation.org/doi/full/10.1063/PT.3.5118)

A great example of innovating by translating findings from one field of study to another (in this case from laser physics to optics), with initial encouraging results (increasing wavelength absorption from 15% to 95%, i.e. near-complete) and potential applications to all electromagnetic waves, acoustic waves, etc.  Trip to Hogsmeade, anyone?

4.  How animals use mucus to survive

“Animals are under constant pressure to survive in their surrounding environment, and they have evolved countless strategies to adapt, colonise, and reproduce successfully in their habitats.¹ Almost acting as materials scientists, animals may directly manipulate complex fluids around them or secrete complex fluids themselves to fulfil a specific task. Mucus, for example, demonstrates a wide range of rheological properties depending on its physiological purpose—locomotion, sexual reproduction, protection against predators, or one of countless other uses. And when conditioned properly, sand present in the habitat can be used for movement or for predation.

“Rheologically active materials—those with unusual or nonlinear responses to an applied force (stress) or deformation (strain)—often have clearly defined action windows, so matching the material properties with an animal’s desired outcome is essential. To exploit the rheological properties for the specific task, the animal therefore must sense and, if needed, manipulate the rheology of the surrounding complex fluids. Rheology and materials science provide a valuable approach to study materials originating from the habitat or secreted by an animal, with implications for biomimetic materials design and ethology.”

* Fischer, P., “Sand and mucus:  a toolbox for animal survival,” Physics Today, December 2022: 30-7 https://physicstoday.scitation.org/doi/full/10.1063/PT.3.5137

Initial studies of the locomotion of gastropods (snails and slugs) and sand swimming reptiles, of the predatory habits of velvet worms and tidal seagulls, of the reproduction habits of leopard slugs, and the defence mechanisms of hagfish are just a few of the ways that animals have adapted mucus to survive.  What else will we discover as we study other species, and how will we use these discoveries in new biomaterials?

5.  Thunderstorms ahead in cloud computing

“Ironically for a hardware business, another big chunk of the cloud-chip spoils may end up with firms that offer the best software. Nvidia’s popular programming language, cuda, already makes it easier for developers to boost the performance of its chips. For now, the cloud giants seem content to work with Nvidia rather than try to compete with its specialised software. But they are first and foremost software firms, so this peaceful co-existence may not last forever. All this should worry incumbents like Intel and Nvidia. For cloud users, it almost certainly means better, cheaper and ever more invisible services.”

https://www.economist.com/business/2022/10/06/the-cloud-is-the-fiercest-front-in-the-chip-wars

Software, with its compelling advantages in terms of feature differentiation and attractive margins, continues to turn upside down the hardware business…

6.  If you can’t beat’em, join’em…

“Despite being approved in 2016, the first adalimumab (Humira) biosimilar, Amjevita from Amgen, has finally launched in the United States. All of the adalimumab biosimilars had reached settlement agreements with AbbVie, the maker of the reference product, that kept the biosimilars off the US market until 2023.

“Amgen’s deal with AbbVie gives it 6 months on the market before any other adalimumab biosimilars could launch. While adalimumab biosimilars are just now launching in the United States, there have been options available in Europe and elsewhere for years.

According to Amgen, there will be 2 tiers of pricing for Amjevita. One pricing will be a 5% discount to the reference product’s list price, while the other pricing will be a 55% discount. The 5% discount will be available to payers after taking into account rebating and discounting practices by pharmacy benefit managers. The larger discount will be available when insurers do not take advantage of those discounts and rebates.

“In 2021, the reference product generated $20.7 billion in revenue worldwide, and in the over 20 years since it launched, Humira has brought in $200 billion in total sales.”

https://www.ajmc.com/view/first-humira-biosimilar-amjevita-launches-in-the-united-states

More than 10 years ago, Amgen was staring at their own “patent cliff”, in which multiple blockbuster products were scheduled to lose patent protection.  They made the strategic decision to “fight fire with fire”, launching their own new business unit to develop biosimilars to take on the big blockbuster products, like Humira, of their competitors.  Fast forward to today, and Amgen appears to have a winning strategy on its hands…