5.6.1 Proactiveness
On the basis of previous literature, Sandberg (2005, pp. 53–54) defines market proactiveness as “either acting based on the information gathered about the market before the circumstances have had a direct impact on the firm, or deliberately influencing and creating changes in the market.” Any successful strategy has to
Proprietary activities
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Resource channels Product
develop- ment
Industry Institutional
arrange- ments Laws, regulations Legiti-
mation Standards
Market consump- tion
Market creation
& demand
Competi- tion Cultural
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Resource endow-
ments Financing
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insurance Science &
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Competence training &
accreditation
address the market environment. However, the concept of a market or served market and the concept of a customer are indeed complex especially when discussing an early-stage firm in the biotechnology industry. When is a biotechnology product commercialized? Is it when it receives FDA approval 15 years after a molecule
when? If that question is difficult, we also have to deal with who is who? That is, who are the customers or customer groups that have to be reached and that have to buy into the product? These questions are important because depending on how they are answered the forces shown in Fig. 5.2 will be defined differently.
Many early-stage biotechnology firms will argue that they do not have to worry about the patient or the doctors (the consumers in the end market – demand) since they are not addressing that end market. They think only patents are critical. In fact, most young firms have a scientific concept that has yet to be transformed into a commercially viable offering of any sort. Many firms have not formed a clear understanding of what the ultimate offering could be, and are unable to even target a market. All these firms really have is potentially enormous potential. For example, let us assume that a biomaterials firm developing technology that could become hip replacement products is interested in the market size. A market researcher would analyze the market potential and try to establish a possible target market.
Upon closer discussions with this firm, it may be revealed that hip replacements are just one option among other sketches of potential outcomes. In fact, the firm may have no real idea what the technology ultimately will become. The firm is, in other words, light years from the ultimate commercialization of a future innovation.
A firm in the abovedescribed case should also worry about issues limiting demand, such as reimbursement systems. Typically these firms argue that they really do not have to worry about a reimbursement system since they are selling their patented replacement parts to medical supply houses or hospitals. Again, given their enormous distance from the end market, such a line of reasoning may make sense. However, it is important, even at this stage, to have an understanding of what forces influence ultimate demand.
As a conclusion, market proactiveness is an essential part of strategic thinking in early-stage biotechnology firms. Proactiveness is also a key quality required from those firms that will be challenging the marketplace through a Schumpeterian- type innovation. The only way to revolutionize the marketplace and to create demand for something inherently novel is through proactive deeds and market foresight.
5.6.2 Fit
The emergent strategies of many entrepreneurial biotechnology firms have to be formulated as a result of the interplay between the business environment (including market) and resources available to the firm (Fig. 5.2). One of the enduring assumptions in the strategy formulation literature is that the appropriateness of a drug candidate that has passed Phase II clinical trials to a larger pharmaceutical was discovered? Is it when an early-stage biotechnology company sells off a lead
company, who has the resources to complete the Phase III clinical trials. When is compound to another biotechnology company? Is it when a firm licenses off a
firm’s strategy can be defined in terms of its fit, i.e., match with the environmental or organizational contingencies facing the firm (Andrews 1971). The pursuit of strategic fit has traditionally been viewed as having desirable performance implications (Miles and Snow 1994). In an ideal situation, the resources of a firm would be aligned with the environment, including market needs. If environmental conditions change through either the emergence of new opportunities or threats, then according to the resource-based view of firms (Wernerfelt 1984; Barney 1991), it is not obvious that an organization should change its strategy to achieve better fit with environmental conditions. This is especially the case if such changes are a clear misfit with established organizational strengths (Zajac et al.
2000). While resource arguments have typically been tested in a large corporation setting, they have been used to explain how entrepreneurs can create competitive advantages (Alvarez and Busenitz 2001; Fiet 2002). In very young ventures, resources act as inducements to experiment, take risks, and make proactive strategic choices. Resources also are deployed as buffers in periods of economic duress. Finding a balance between proactive and risky strategic choices based on technological and scientific resources of a firm on one side, and the changing business environment of the firm on the other is a major strategic challenge for these young firms. The practical aspects of this challenge were highlighted by the hip replacement technology example.
In addition to strategic fit perspective, the environment–resources linkage can be approached from learning perspective. With regard to technological learning, Cohen and Levinthal (1989) suggest that in order for a firm to be able to exploit external knowledge from the environment, it needs to have the internal skills to understand this knowledge and its potential uses. Absorptive capacity concerns a firm’s ability to adapt and exploit external scientific and technical knowledge from the environment. With regard to learning about markets, the concept of market orientation has been developed within marketing literature. Market orientation of the firm refers to adapting and exploiting external knowledge concerning customers, competitors, and relevant changes in the market environment (Kohli and Jaworski 1990; Kohli et al. 1993; Jaworski and Kohli 1993). This kind of knowledge acqui- sition is the prerequisite for Kirznerian-type innovation, which is based on superior understanding of markets and ways to serve those markets. The reluctance (or inability) of highly technology-oriented companies to employ a breath of market knowledge in their strategic decision-making often leads them to introduce products that evolve “naturally” from their current technology base. This can happen without regard to the needs of markets or even end users (Sheth and Ram 1987).
Contrast this with an early-stage start-up that has a high level of market orientation. This is a firm that effectively generates, disseminates, and responds to market intelligence (Kohli and Jaworski 1990). This type of firm can develop an understanding of markets within the whole organization. This, again, has a potential to promote the firm’s alertness to relevant market information available in the business environment. If market-oriented thinking is present at all levels and in all functions of an organization through effective dissemination of market intelligence, all the employees, not just the business development managers, can absorb market knowledge from the environment (Renko 2006).
It is evident that for many firms the technology base of the firm has been developed in a proactive manner, while the strategies used to focus the firm on its markets are more reactive. Instead of finding a true strategic fit between the market environment and the firm’s technology resources, young technology firms often only try to match their technology with the available opportunities for funding resources. More specifically, the influence of resource availability in the form of governmental research funding, license and royalty streams, as well as venture capital at later stages influence firm strategies with regard to target markets.
5.6.3 Reactiveness
Technological and scientific achievements should be behind the establishment of most knowledge-intensive, biotechnology-based ventures. For example, a single drug discovery project, or biotechnology platform process, may give rise to several development candidates for a variety of different medical indications.
Companies can select some therapeutic indications for in-house development, and license out others. For example, a firm may keep a human application for in-house development while licensing out animal applications. Decisions such as these are at the heart of the business strategies employed by entrepreneurial biotechnology ventures, who are trying to transition to a revenue model and move up to a higher tier (1, 2, 3, or 4), as described earlier. These strategies are often based on issues of perceived revenues and revenue sources.
As early-stage entrepreneurial biotechnology firms are small and highly R&D- intensive, they typically spend all their financial resources on additional R&D (Oliver 2000). Thus, the dominant strategic concern is the next round of financing to continue research. Consequently, the research undertaken is not always long- term goal directed, but often dictated by the immediate demands of the research fund provider. New firms are highly dependent on research grant or contract dollars (usually governmental or private foundation). The firms often state that they conduct cutting-edge scientific research, which reflects their academic orientation. Sometimes the real goal of the R&D firm is to find sufficient funds to just do research.
The global funding environment for early-stage biotechnology companies has clearly changed over the past decade. To secure financing, many companies have felt compelled to move their technology away from a service model to a focus on a product-based strategy. Early-stage companies have also shifted away from platform technologies to clinical development businesses. Both of these adjustments have been largely triggered by investors, who understand that their exits are driven by late-stage clinical products (Chaya 2005).
5.6.4 Traditions and History
The traditional operating strategies of most early-stage biotechnology firms are focused on achieving enough funding through research grants, angel investors, formal venture capital, or initial public offering to enable the firm to develop a drug beyond Phase I or Phase II clinical trials. At this point, the firm might enter
into a strategic alliance (to obtain additional research dollars) with a large pharmaceutical company, or license the product to a large pharmaceutical firm. It commercialize the product on the world market. Perhaps the early-stage R&D firm will obtain some royalty stream from the development.
This choice of a “standard” or “typical” biotechnology business model that investors seem to be happy to finance creates a number of issues. Drug discovery and development has become a longer and more expensive process. As companies reposition their business, the need for capital has increased considerably. There are significant risks involved, but many management teams see having product candidates in the development pipeline as the only option in the current climate to create a more sustainable long-term business (Chaya 2005). When business models are determined by investors’ preferences, and not by the actual fit between a firm’s resources and market needs, many potentially good firms fail. Failures cannot always be attributed to technology defects, or the lack of understanding of customers’ needs. Many of the failures of new biotechnology firms result from a mismatch between the optimal business model that could fit the company’s technology with market needs, and the actual business model required by venture capitalists for the firm to gain financing.
A proactive market management approach is not always at odds with fulfilment of short-term goals of a biotechnology firm, namely, finding access to funding. If venture capitalists place high value on market aspects in their investment decision- making, then these requirements are directly reflected on the potential investment targets. In the venture capitalists’ view, the expectation of high financial returns from a biotechnology investment is mainly correlated with the size and growth of markets targeted by the firm, and the radical nature of its innovations (Tyebjee and Bruno 1984). A firm’s market orientation should have a positive effect on external investors’ willingness to invest in the firm. A consistent finding from previous research is that venture capitalists and business angels place importance on the abilities and characteristic of firm management when making investment decisions (Shepherd and Zacharakis 1999; Muzyka et al. 1996). Additional criteria in investment decision-making include product characteristics (proprietary features, competitive advantage, potential to achieve strong market position), market characteristics (size, growth, limited competition), and returns (potential for high returns, clear exit opportunity) (Fried and Hisrich 1994; Sweeting 1991). A market-oriented firm should be knowledgeable of its market characteristics. By providing good communication of positive market characteristics the new firm can have a positive effect on investors’ willingness to invest in the firm (Renko 2006).