Alliance Effectiveness for Joint R&D Project Performance - New Insights into Measurement Techniques

Alliances are an increasingly popular way for companies, particularly those in the pharmaceutical industry, to stretch their R&D budgets. Large firms often partner with biotechnology companies in an effort to jumpstart lagging drug development pipelines. Are these partnerships effective? More importantly, ask Professors Hoang and Rothaermel, and consultant Sreten Simac, how can we measure their effectiveness?

by Ha Hoang, Frank Rothaermel and Sreten Simac
Last Updated: 23 Jul 2013

Alliances are an increasingly popular way for companies to stretch their R&D budgets. Yet research shows that many do not live up to expectations. Understanding the dynamics within individual alliances is an under-researched topic in strategic management, say Ha Hoang, Associate Professor of Entrepreneurship and the Rudolf & Valeria Maag Fellow in Entrepreneurship at INSEAD, Frank Rothaermel, Broad School of Management, Michigan State University, and Sreten Simac, Theron Consulting, Berlin, Germany. They set out to introduce new measurement methodologies in this Working Paper.

The authors began their research by looking at existing research on alliance performance, noting that while alliance performance is a joint outcome, it has not been linked to characteristics of all the partners involved. Some early studies on alliance performance equated alliance termination with failure, even though termination may be a result of partners having successfully achieved their objectives. Ensuing studies looked at the longevity of alliances, while others have resorted to perceptual measures by one of the partners or of the stock market’s response to an alliance announcement.

In this paper, the authors propose new theoretical and methodological constructs, drawing on operations management, economics, and organization theory to illustrate the benefits that can accrue through accumulated alliance experience over time. Their specific focus was R&D alliances. In particular, they differentiated between the alliance experience gained with a specific partner versus a generalized alliance experience gained across a diverse set of organizations.

The team identified all pharmaceutical companies active globally in biotechnology between 1980 and 2000, then further looked at all collaborative biotechnology partnerships that the companies had entered during the time. (The sample dropped from an initial 43 to 30 during the sample period due to significant industry consolidation.) “Project success” was equated with the successful completion of a new drug development project resulting in an FDA approved, marketable new drug.

Results offered a number of insights. First, there is a clear suggestion that alliance experience matters. However it appears that what impacts joint project success the most is the experience of the pharmaceutical company’s biotechnology partner. Surprisingly, in opposition to the “practice makes perfect” adage, results showed a diminishing of marginal returns, suggesting that learning benefits may taper off over time (perhaps because firms enter the most promising alliances first). Though the authors hypothesized that partner-specific alliance experience would have a positive impact on subsequent alliance performance, results did not support this.

The team identified a number of project-level control variables that were significant predictors of joint project success. As expected, the later the project was initiated in the study time frame, the lower its probability of a successful completion due to the protracted nature of the new drug development process. Additionally, the greater the number of drug indications the project targeted, the higher its probability of success. Finally, projects that resulted from patent-protected intellectual property were also more likely to succeed.

On the managerial level, results suggest some points for intervention for alliance managers. First, firms should assess whether they are allocating sufficient resources and organizational support to the alliance. Larger pharmaceutical firms may face greater obstacles in leveraging their experience due to size and complexity, which may hinder storage and access of alliance experience. In these cases, firms would do well to focus on knowledge management, creating systems to coordinate and disseminate information between alliance managers across projects and time so that the organizational memory can be leveraged in future alliances.

INSEAD 2003

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