The role of decision rights in co-development initiatives

Problem definition: How should decision rights be allocated between firms occupying different positions in the value chain to maximize the value of a co-development project? Academic/Practical Relevance: We contribute to the OM literature on the benefits and challenges of co-development initiatives by looking at the design of optimal governance structures that specify the allocation of rights to make certain decisions. Our problem is motivated by real-world challenges observed in co-development project initiation discussions between technology companies. We utilize a game-theoretic model to study the allocation of the ex-ante right to set the contract terms and the ex-post right to choose which contract to implement, once the market potential is realized. Results: First, we find that delegating more control to a party, does not necessarily imply that the party will be incentivized to exert greater effort. Specifically, we show that allocating both rights to the seller as opposed to only the ex-ante right, actually reduces his effort. Second, when the buyer has low bargaining power, the ex-post decision right should be delegated to the seller, i.e., the party with lower exposure to the effort-contingent outcome. Otherwise, the ex-post decision right should be delegated to the buyer but the ex-ante right should be held by the seller. Finally, we show that simple contracts with decision rights outperform a spot contract when the ex-post bargaining power of one of the parties is substantially higher. Managerial Implications: Our results offer insights for how managers should structure the optimal governance structure for co-development projects. We also identify when and how companies should delegate rights to their partners to maximize the value of the project. We show that the optimal governance structure depends crucially on the position in the value chain of the party with the higher bargaining power

Is diversity (un)biased? Project selection decisions in executive committees

Problem definition: Is a committee comprised of more or less cognitively diverse members better at approving the “good” projects and rejecting the “bad” ones? Academic/Practical Relevance: We contribute in the operations management literature by accounting for the fact that critical selection decisions are often made by a committee rather than a single decisionmaker. Understanding how the magnitude of diversity affects the decision quality of such a committee is an important consideration for practitioners. Results: We utilize a game-theoretic model to show that diverse perspectives are rarely “averaged out”. Instead, diversity leads to systematic biases in project selection. To mitigate the effect of diverse perspectives, managers need to uncover the sources of diversity: do they originate from different individual valuations and preferences, or they express different assimilations of the information that arises during the project execution? We show that this distinction is crucial. Higher preference diversity always leads to higher likelihood of making the wrong decision. Higher interpretive diversity, may be beneficial for the organization. Managerial Implications: A clear managerial action is the need to identify and reduce such preference diversity. Senior management can achieve this by highlighting the need for more transparency in the pipeline of the business units. Moreover, our analysis shows that interpretive diversity can be a powerful managerial lever to influence the propensity for Type I and II errors. The latter might be easier to manage than the organizational structure

Resource allocation decisions under imperfect evaluation and organizational dynamics

Research and development (R&D) projects face significant organizational challenges, especially when the different units who run these projects compete among each other for resources. In such cases, information sharing among the different units is critical, but it cannot be taken for granted. Instead, individual units need to be incentivized to not only exert effort in evaluating their projects, but also to truthfully reveal their findings. The former requires an emphasis on individual performance, whereas the latter relies on the existence of a common goal across the organization. Motivated by this commonly observed tension, we address the following question: How should a firm balance individual and shared incentives, so that vital information is both acquired, and equally importantly, disseminated to the entire organization? Our model captures two key characteristics of R&D experimentation: information is imperfect and it is also costly. Our analysis yields several important implications for the design of such incentive schemes and the management of R&D portfolios

Lemons, or squeezed for resources? Information symmetry and asymmetric resources in biotechnology

Thousands of biotech companies are developing promising products, but have insufficient resources to complete the clinical testing process, while large, well-funded companies have increasingly focused on the need to access external innovation. As a result, licensing deals are an essential and growing part of this industry. Yet, casting a shadow over the licensing market is the classic Lemons Problem: Does asymmetrical information put licensees at a severe disadvantage, leading to a market dominated by inferior opportunities, with the best products retained for internal development? Our analysis of clinical stage products developed over three decades shows that there is no Lemons Problem. We discuss the results of this first apples-to-apples analysis of the biomedical licensing market, and suggest reasons why the Lemons Problem does not exist where it might be most expected – in a high technology, knowledge-based industry

The risk of de-risking innovation: optimal R&D strategies in uncertain times

We develop a framework for driving innovation under highly ambiguous conditions. Our analysis of the most novel medicines of the past 20 years shows that a very large group of small companies created more breakthroughs, at considerably less overall cost, than a much smaller group of very large companies. Our findings present the first large-scale empirical validation of the theoretical literature predicting the superiority of decentralized parallel searches in ambiguous environments. Accordingly, companies that attempt to “de-risk” the innovation portfolio by narrowing their search efforts to minimize failures run the risk of filtering out the next breakthrough

When science is not enough: a framework towards more customer-focused drug development

The purpose of this study was to identify the key barriers to a customer-focused drug development process and develop a comprehensive framework to overcome them. METHODS: The paper draws on existing literature, both academic and practitioner, across a range of disciplines (innovation management, marketing, organizational behavior, behavioral economics, health economics, industry reports). On the basis of this extensive review, a conceptual framework is developed that offers concrete suggestions on how organizations can overcome the barriers and enable a more customer-focused development process. RESULTS: The barriers to collaboration are organized into three distinct categories (economic, behavioral, organizational), and within each category, a one-to-one mapping between barriers and solutions is developed. CONCLUSION: The framework is specifically designed with the objective of offering actionable and practical advice to executives who face these challenges in their organizations. The paper provides a unique theoretical contribution by synthesizing findings from several academic disciplines with concrete examples from the pharmaceutical industry. FUNDING: Mundipharma International Limited.Mundipharma International Limite

Rival signals and project selection: insights from the drug development process

Project selection decisions are complex because they must balance not only financial returns, project risk, and fit with strategy, but also competitive circumstances. A rival’s project development efforts provide two pieces of information: a market rivalry signal, indicating potentially heightened competition in a market, and a technological signal, indicating a possible solution to a problem in that market. We hypothesize that these signals affect a firm’s likelihood of project selection in opposite directions, and that the timing of the signals matters for selection. We examine the drug development pipelines of the top 15 pharmaceutical companies from 1999–2016 to examine how rival projects drive the decision to progress a drug from preclinical laboratory trials to clinical trials in humans. Early-stage rival projects provide a stronger market rivalry signal, and they are associated with a decreased likelihood of the firm selecting its own project to compete in the same market. Late-stage rival projects signal technological feasibility and are associated with an increase in the likelihood of selection. We then exploit heterogeneity in market potential (i.e., disorder prevalence/incidence) and a molecular compound’s technology (i.e., therapeutic modality) to independently manipulate the salience of the two signals. Finally, we provide evidence on how selection based on rival signals informs project success. Information from rival projects prompts the selection of more successful drugs, but only after a threshold when sufficient uncertainty has been resolved

Renovation as innovation: is repurposing the future of drug discovery research?

The first data on repurposing provides support for recent initiatives seeking new uses for failed drugs, but those efforts should not be at the expense of continued investment in basic research

When Science is Not Enough: A Framework Towards More Customer-Focused Drug Development

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