Technological, Structural, andStrategic Change in the GlobalPharmaceutical Industry -The Finnish BiotechnologyIndustry

Malin Brännback*), Juha Näsi**) andMaija Renko*)

*)Turku School of Economics and Business Administration/InnomarketRehtorinpellonkatu 3, FIN-20500 Turku, FinlandE-mail: malin.brannback@tukkk.fi; maija.renko@tukkk.fi

**)Tampere University of Technology/Industrial ManagementP.O. Box 541, FIN-33101 Tampere, FinlandE-mail: juha.nasi@tut.fi

INNOMARKETTurku School of Economics and Business AdministrationDepartment of MarketingTechnical Reports No. 8February 2001ISBN 951-738-973-6ISSN 1456-7598

INNOMARKET

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Abstract

This paper reviews the technological, structural, and strategic change within theglobal pharmaceutical industry, which started in 1973 with the success of recombinantDNA. These changes significantly impact the industry paradigm and the strategy logicof a firm. We then focus on the developments within the Finnish biotechnologyindustry during the past five years and the future prospects and study how the industryparadigm and the strategy logic have changed and how these changes impact futureprospects of the Finnish biotechnology industry.

Keywords: pharmaceutical industry, biotechnology industry, industry recipe,company paradigm, strategy logic, strategic change

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1. Introduction

The pharmaceutical industry has during the past two decades been dramaticallyrestructured. Biotechnology has emerged as a complement to traditional drug R&Dand has formed a new R&D paradigm. Today the pharmaceutical industry is theleading industry in developing biotechnological applications. Turnover created bybiotechnologically engineered products is growing rapidly at an annual rate of 25percent (Nakahara, 1999). Today, the development of biotechnological applications isdivided between existing large companies (still the majority) and small, newlyestablished companies (Smith and Fleck, 1988; Corstjens, 1991; Arnst and Carey,1998), which may also be called new drug discovery companies (DDCs1).

Prior to the 1980s, drug discovery was primarily based on organic chemistry for thedevelopment of new chemical entities (NCEs). In the pharmaceutical R&D process,extensive amounts of chemical compounds were explored and incremental structuralmodifications were made on drug prototypes, all this organised around highlystructured processes for carrying out mass screening programs. As a result of thisparadigm, we only have 500 known targets today, although there are thousands ofmedicines on the market. With the sequencing of the human genome the number oftargets is expected to reach potentially 3000-10,000 (Gambardella et al., 2000,Robbins-Roth, 2000) or even higher (Oliver, 2000). Since the 1980s biologics hasevolved as the new dominant logic of drug R&D. The so-called molecular biologyrevolution, which started in the mid-70s has introduced drastic changes in thepharmaceutical R&D base. This revolution has opened new opportunities for thediscovery and production of medicines. Simultaneously, it has brought along a radicalshift in the knowledge base and in research procedures that have enabled thetransition from more or less random screening to “discovery by design” (Gambardellaet al., 2000, Robbins-Roth, 2000).

Based on the general technology-driven strategic changes described above, this paperstudies the consequences of technological change on structural and strategic change ofan industry. We start by looking at the profound global changes and then look at thedevelopments within the Finnish pharmaceutical industry during the past five years.The technological change has not only had consequences on structure and strategy,but also on what we should call the industry. Is it a pharmaceutical one, or is theproper name today biotechnology industry (in short biotech), or are these separateindustries, or should they be called life sciences or is that too broad (Enriquez andGoldberg, 2000)? Are other industries members of the pack? Do we see theemergence of a new industry recipe, company paradigm, and strategy logic?

In the early 1980s there were thirteen drug companies in Finland. Through mergersand acquisitions the number was reduced to two in ten years. From the mid-1990ssmall biotechnology companies or so-called DDCs have been established at anaccelerating speed. The DDCs focus their business on drug discovery anddevelopment up to phase II clinical trials, after which partnerships are sought for withBig Pharma for phase III and commercialisation. The DDCs are small, employingapproximately 10 persons and an annual turnover of ¼��PLOOLRQ��$�KDQGIXO�RI� WKHVH 1 In this paper the abbreviation DDC refers to drug discovery companies, although in some othercontexts it has been used to refer to drug delivery companies.

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employ approximately 50 persons with an annual turnover not exceeding ¼��PLOOLRQ�The companies within the Finnish biotechnology industry have formed the FinnishPharmacluster. However, it is unclear whether the cluster meets the characteristics ofa cluster as is the case of more established clusters, e.g. the Finnish forestry cluster(Mäkinen, 1999, Brännback and Mäkinen, 2000).

The structure of the paper is the following. In the second section we will discuss threeconcepts of strategy facilitating a deeper understanding of strategic and structuralchange. In section three we will describe the technological change brought aboutadvances in biotechnology. In section four we will describe the structural changes inthe industry seen from a global perspective. In section five we will focus on theFinnish biotech industry. Finally, we will discuss the implications of technologicaland structural change on the concepts of industry recipe, company paradigm andstrategy logic. Our conclusion is that the changes have been of such magnitude thatthey pose very real managerial challenges already for existing Big Pharma, and ofcourse, even more so for start-up biotechnology companies. Hence additional researchis required and a few potential research questions are presented.

2. Industry Recipe, Company Paradigm, and Strategy Logic in theContext of Change

For the past years the concepts of industry, business, and corporate factors and theirimpact on profitability differences between firms have attracted much attention(Rumelt, 1991, Bowman and Helfat, 2001). The immense interest is due toglobalisation of business during the past decades and the convergence of industries.Traditionally, the concept of an industry has been a way of categorising organisations,which compete in similar environments, i.e. they serve the same market bymanufacturing similar products (Porter, 1980, Johnson and Scholes, 1988). Barney(1991) argues that firms within an industry are identical in terms of strategicallyrelevant resources they control and the strategies they pursue (Barney, 1991).However, the strategies pursued are not necessarily identical and this is due todifferences in managerial decision-making processes due to differences in thecognitive orientation of managers (Finkelstein and Hambrick, 1996), i.e. differencesin dominant logic (Prahalad and Bettis, 1986).

It is also thought that within an industry there are certain common beliefs andassumptions, which are held as consistent and realistic (Grinyer and Spender, 1979).These are known as industry recipe. Other concepts used by various authorsbelonging to this same family are e.g. industrial wisdom (Hellgren and Melin, 1993)cognitive maps (Eden et al, 1983, Eden and Radford, 1990, Huff, 1990, Brännback,1996), dominant logic (Prahalad and Bettis, 1986). A sub-set of an industry recipe isthe company paradigm, which is a representation of managerial perceptions and viewsof how to succeed in their business environment. The starting point here is cognitionand personal constructs (Kelly, 1955) or the idea of a status quo (Argyris et al 1985),sometimes also referred to as worldviews (Weick, 1969, Checkland, 1981, Checklandand Scholes, 1998), which develop over time and tend to be persistent (for extensivelists of related concepts see Laine, 2000). Company paradigm can significantly impactthe success or failure of an organisation. It can provide means for creating asustainable competitive advantage (SCA) or it can inhibit necessary change (Johnsonand Scholes, 1988). At the core of the company paradigm we find the strategy logic of

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the firm (Näsi et al, 1996, Laine, 2000) (see, Figure 1). Strategy logic is defined asfollows:

“Strategy logic of a firm comprehends a set of core elements in harmony or coordination,steering the whole of a firm towards survival and success. Strategy logic is subjective logicrepresenting the thinking of key person(s) in the firm..” (Näsi et al, 1996, p. 23; italics addedby authors)

According to Näsi et al (1996), the strategy logic of a firm dictates what needs to bedone. The nature of the strategy logic changes incrementally hosting dominating ideasand principles, which guide decision-making processes concerned with marketing andproduct decisions, acquisitions and mergers, investments, etc.

Thus, the strategic way of thinking by executives is generally very stable (Prahaladand Bettis, 1986, Bettis and Prahalad, von Krogh and Roos, 1994, 1996, Laine, 2000)where the process of retrofitting, i.e. incorporating new insights into establishedpatterns of thought is often nearly overwhelming. This is due to the human naturewhere people’s fundamental beliefs and values change very slowly – if at all (Schein,1992). If the firm operates in an industry with a stable industry recipe with a strongcompany paradigm, there will be considerable difficulties in implementing radicalstrategic change. Yet, technological change may just require the adoption of a newstrategic way of thinking, a new perception of the business per se, provided thecompany intends to stay in business. And very fast.

The Pharmaceutical Industry

Industry Recipe X

Company Paradigm Y

Strategy Logic Z

The Agri IndustryThe Agri Industry

Industry Recipe XIndustry Recipe X

Industry Recipe XIndustry Recipe X

Industry Recipe XIndustry Recipe X

The Food IndustryThe Food Industry

Industry Recipe XIndustry Recipe X

Industry Recipe XIndustry Recipe X

Industry Recipe XIndustry Recipe X

The Pharmaceutical IndustryThe Pharmaceutical Industry

Industry Recipe X’’Industry Recipe X’’

Company Paradigm Y’’Company Paradigm Y’’

Strategy Logic Z’’Strategy Logic Z’’

The Biotechnology Industry

Industry Recipe X’

Company Paradigm Y’

Strategy Logic Z’

TechnologicalChange

Figure 1: The impact of technological change on industry recipe, company paradigm,and strategy logic.

In order to understand the relevance of industry recipe to the strategic managementprocess it is necessary to clarify the relationship. As pointed out by several authors(Johnson and Scholes, 1988, Finkelstein and Hambrick, 1996, Näsi, 1996, Prahaladand Bettis, 1986, von Krogh and Roos, 1994, 1996, Mintzberg et al, 1998, Laine,2000, to mention a few) strategy is first and foremost the result of a cognitive process,i.e. it is created by people based on their perceptions of environmental forces andorganisational capabilities where the former generally are regarded as opportunitiesand threats and the latter as strengths and weaknesses (Day, 1990). The recipebecomes the backbone of the strategic management process and a formula for how

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things ‘are done around here’. Johnson and Scholes (1988, p. 41) claim that “..it islikely that purely analytical questioning of the recipe not only will be taken asevidence of the analyst’s lack of understanding of the problems of the business butmay actually be perceived as an political threat, rather than objective analysis, for itwill very likely be perceived as an attack on those most associated with core beliefs..”.

Moore (1996) uses a different set of concepts for the purpose of staking out theboundaries of what we used to call industry. According to Moore, there is the corebusiness at the heart of all activities (see, Figure 2). The core business includes thefocal firm, but also direct suppliers and distribution channels. The following level isthe extended business, which goes further down in the value system includingsuppliers of direct suppliers, suppliers of complimentary products and services, directcustomers and their customers. The final layer Moore calls a business ecosystem orthe business system as used by Suoniemi and Brännback (2000) includingstakeholders (investors, owners, trade associations, and labour unions), competingorganisations having shared product and service attributes and business processes, andgovernment agencies or other semi-governmental regulatory organisations. The modelpresented by Moore draws on the ideas from stakeholder theory (Näsi, 1995), Porter’sclassical 5-forces model (Porter, 1980), the value chain concept (Porter, 1985), andthe concept of strategic groups (Porter, 1980, McGee and Thomas, 1986, Cool andSchendel, 1987, Fiegenbaum and Thomas, 1990, 1995, Brännback and Mäkinen,2000) and captures the consequences of changes in an industry or industries, wherethe relevant issues subject to strategic decision-making also change.

The Business SystemThe Business System

The Extended BusinessThe Extended BusinessThe Core BusinessThe Core Business

Core Business•core contributions•direct suppliers•distributions channels

Extended Business•direct customers•customers of my customers•suppliers of complementaryproducts and services•suppliers of my suppliers

The Business System•stakeholders, including investors, owners, trade associations, labour unions•competing organisations having shared product and service attributes, business processes•government agencies and other semi-governmental regulatory organisations

Figure 2: The business system model (adapted from Moore, 1996, see Suoniemi andBrännback, 2000)

The idea of incremental changes in the strategy process rests firmly outside the hightechnology, high change industry, such as the information and communicationstechnology industry (ICT) and more recently pharmaceuticals or biotechnologyindustry. In these industries technological change is the major change driver of the

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industry with significant implications on the strategic decision-making process andthe success of a firm. The technological change can be such that it changes the R&Dparadigm giving rise to changes in how firms compete and contributing to new formsof collaborations within the traditional industry. The technological change may evenbe such that it impacts several other industries through knowledge spill-over, i.e. thenew technology may yield profits or other benefits to parties who are not regarded asthe original owner of the technology thus blurring the industry boundaries. In such acase the industry recipe, company paradigm, and the strategy logic will change for anumber of industries and the definition of the concept of industry will requireretrofitting.

Technological change can either lead to process innovation where, e.g. the R&Dprocess is radically changed or it may lead to product innovation or both. Thetechnological change can be incremental at first but have much more dramaticconsequences once the technology has won wider acceptance leading to the change ofan entire industry. This is called punctuated equilibrium, i.e. strategies developincrementally with periodic transformational changes (Romanelli and Tushman, 1994,Johnson and Scholes, 1999). As shown in Figure 1 (see, p. 4) the technologicalchange in pharmaceuticals has not only impacted the pharmaceutical industry, butalso the food industry and the agricultural industry, to mention a few (see alsoRodriguez and Goldberg, 2000). Oliver (2000) adds several other industries, such asthe materials industry (both organic and non-organic materials), mining,environmental remediation, forestry, and health services. In fact, Oliver (2000) arguesthat biotechnology will impact every industry within the next few decades leading tothe convergence of industries thus forming new business systems (Figure 2).

According to Moore’s rationale the core business can in fact be part of severalbusiness systems and the convergence of industries and knowledge spill-over enablean industry to be part of several business systems (Figure 3). The dotted circles inFigure 3 depict this described complexity within which company paradigms, strategylogic are to be formed.

Regardless of the number of industries, the key point is that the definition of abusiness becomes cumbersome, in particular if industry membership is regarded as acentral variable. In traditional terms the industry has been regarded as a key elementbecause it defines the competitive scope and scale, it provides insights about theproduct market, and customer segments, i.e. basic elements in strategic decision-making (Porter, 1980). Now the industry as a unit of analysis may prove unsuitable.

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The Food IndustryThe Food Industry

Industry Recipe XIndustry Recipe X

Company Paradigm YCompany Paradigm Y

Strategy Logic ZStrategy Logic Z

The Health Care Service Industry

Industry Recipe X

Company Paradigm Y

Strategy Logic Z

The Agri IndustryThe Agri Industry

Industry Recipe XIndustry Recipe X

Company Paradigm YCompany Paradigm Y

Strategy Logic ZStrategy Logic ZThe Pharmaceutical Industry

Industry Recipe X’’

Company Paradigm Y’’

Strategy Logic Z’’

The Biotechnology Industry

Industry Recipe X’

Company Paradigm Y’

Strategy Logic Z’

The Materials IndustryThe Materials Industry

Industry Recipe XIndustry Recipe X

Company Paradigm YCompany Paradigm Y

Strategy Logic ZStrategy Logic Z

Figure 3: The formation of multiple business systems from the convergence ofindustries, where firms in one industry can be part of several business systems. Theindustries shown are not conclusive, only illustrative.

3. Technological change - The Biotech Revolution

Biotech’s genesis goes back to the farmers some 5000 years B.C. who noticed thatcertain varieties of crops grew better in some conditions than others. A follow-up tothe success of hybrid plants took place 1000 B.C. when farmers cross-bred the best oftwo breeds – the female horse and the male donkey - creating an entirely new animal,the mule. Hence the mule became the first genetically engineered species. Ever since,advances in biotechnology have continued (http://biotechbasics.com/timeline.html).The developments relevant in this context are more recent starting with theunravelling of the structure of DNA some 45 years ago. However, the start of thetechnological change, which is changing numerous industries took place in 1973when Herbert Boyer and Stanley Cohen successfully recombined DNA from oneorganism with that of another. The first biotech companies started to emerge. In 1978,the first of them, Genentech, struck a deal with Eli Lilly to develop geneticallyengineered insulin. In 1982 Eli Lilly acquired FDA approval for human insulin, whichwas the first gene-spliced product to reach the market. On October 14, 1980 the firstbiotech initial public offering (IPO) took place, i.e. Genentech went public startingwith a $35 per share that within less than an hour of listing went up to $88. For nearlytwo decades the entire development took place in the US. It is only recently in thesecond half of 1990s that the rest of the world has caught on, Europe in particular.

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Therefore, most data we have at hands is US-based, but that is also why we need tolook closer at the US biotech industry in analysing this field.

However, technology as such is not necessarily an indicator of that somethingradically new is under development. Moreover, the notion of high technology hastended to be ascribed to information systems technology alone. Pharmaceuticals andbiotech are high technology but it is worth stressing that advances in biotechnology iscurrently turning traditional low tech (such as food industry) into high tech, a changewhich certainly creates managerial challenges for that particular industry.

There are two indicators, which define an industry as high technology: R&D spendingand patent approvals. Biotechnology is by far the most R&D intensive of all majornon-defence industries. On average, biotechnology companies (the data presentedhere concerns primarily the US, but there is no reason to believe the figures to be anysmaller in other parts of the world) spent $69,000 per employee on R&D in 1995,compared to $7651 for all corporations. Top five biotech companies in the worldspent an average of nearly $121 400 per employee per year, whereas toppharmaceutical spent $40,000 per employee per year. Expressed in total operatingcost (on average) for biotech firms, R&D account for an astronomical 36 percentwhereas the corresponding figures for original equipment manufacturers (OEM) is 5percent and 10-15 percent for ICT industries. The largest markets currently forbiotechnology products and processes are pharmaceutical products, agriculture, andenvironmental remediation. Market activity is highly concentrated in medicalapplication, which accounts for over 90 percent of current sales. Ten-year projectionssuggests that the market for biotech products will more than triple in real terms andthat medical markets will continue to account for nearly 90 percent of sales. Othersectors will be impacted by the biotech revolution, the major ones being health care,chemicals, agriculture, mining and environmental remediation. Together theseaccount for almost 15 percent of the US GDP.

The primary criteria for patent approvals are: (i) commercial potential of theinnovation and (ii) uniqueness of the innovation. The number of patent approvals is areasonably good quantitative indicator of the increase in commercially usefulknowledge. Patents represent just a proxy for new knowledge, but the best oneavailable.

The US Patent and Trademark Office publishes data on the number of patentapprovals for over 250 technology categories. The number of patents in the four mostbasic biotechnology areas are shown below in Table 1 and Figure 4.

Table 1: The number of patent approvals during the period 1977-1997 (Oliver, 2000).

Year Drugs Microbiology Multicellular organisms RecombinantDNA

1977 660 591 0 141982 730 711 1 1111987 958 1099 19 2041992 1691 1965 52 3561997 3372 4178 318 506

Total 7411 8544 390 1191

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0100020003000400050006000700080009000

1977 1982 1987 1992 1997

Drugs Microbiology

Multicellular organisms Recombinant DNA

Total

Figure 4: Growth of biotech patents approval

From 1986 to 1988 the FDA approved only 10 new bio-engineered drugs. Althoughthe number is perhaps low they set the pattern for future. Despite the stock crash in1987 the industry survived and entered the next decade with a growing number ofcompanies reaching clinical trial stage each month. Companies raised a record $2billion in the first half of 1991. Actual sales reached nearly $6 billion. In 1993SmithKline Beecham and Human Genome Sciences made an alliance which changedthe outlook for the entire industry. In 1995 16 bio-engineered drugs were approvedand 20 the following year. The number of IPOs increased 537 percent in 1997, marketcapitalisation increased 60 percent. Globally 1200 antibodies are either on the marketor in development. The deal between Genentech and Eli Lilly took place in 1978. In1998 Bayer made a deal with Millennium worth $456 million. For a 14 percent stakein Millennium, Bayer has the future rights to 256 drug targets. Guilford and Amgenmade another deal for $466 million. Market capitalisation for Biogen in 1999 wasmore than $3.4 billion and Amgen $8 billion. The alliances between Big Pharma andbiotech had become the spine of the industry (see section 4 for more).

Pharmaceutical applications are expected to dominate sales of biotech products for atleast the next decade. In Table 2 some estimates of global biotech sales and USbiotech sales are shown. Other industries likely to be affected by the developments inthe biotechnology industries are health care, chemicals and allied products,environmental services, agriculture and forestry, and mining.

Over the next few years pharmaceutical research is expected to increase drug targetareas to record 25 000 (currently less than 500). This exploding increase will comefrom new research methods and from the identification of the human genetic code.Even if only 25 percent of these new targets show genuine potential it will mean a 14-fold improvement.

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Table 2: Biotech Global Product Sales and Forecast (2000, 2005, and 2010) in USDbillion and US sales (1996 and 2006)2.

Key Sectors 1996Actual

2000 2005 2006 2010 ‘00-’10 Growth ppa

Human Terapeutics 7.6 11.7 20.6 24.5 36.3 12Human Diagnostics 1.8 2.5 3.7 4.1 5.4 8Agriculture 0.3 0.78 1.95 1.7 4.2 18Specialities 0.3 0.55 1.17 1.6 2.4 16Non-Medical Diagn. 0.2 0.32 0.48 0.5 0.7 8Total 10.2 15.85 27.9 32.4 49.00 12World Total NA 25.00 35.00 NA 85.00

We have thusfar focused on the developments in the U.S., but this is only natural, asthe global biotechnology industry is lead by the U.S. biotech industry. AlthoughEurope is showing strong development the lead is a fact. For example, GordonBinder, CEO of Amgen (see Chart 1 on Amgen) stated “..Amgen raised $400 millionbefore it sold anything at all,..That combined with the university research base, is whyAmerica leads and will continue to lead the world in biotechnology.” (Oliver, 2000, p.151).

Chart 1: Amgen in short (Oliver, 2000).

Amgen was founded in 1980 as AMGen, short for Applied Molecular Genetics, by a small group ofscientist and venture capitalists with an initial investment of a humble $80,000. Amgen raised fundsthrough three public offerings (1983, 1986, and 1987). On June 1, 1989 Amgens first product, thegenetically engineered Epogen, received FDA approval. Epogen revolutionised the treatment ofanaemia associated with chronic renal failure. By the end of 1989 the sales accounted for $96 million –by 1998 the corresponding figures were $1.4 billion. Their second product, Neupogen, received FDAapproval in February 1991 with annual sales accounting for $1.1 billion by 1998. In October 1997 theirthird product, Infergen acquired FDA marketing approval. Between 1989 and 1997 these two productswere the only ones on the market. Between 1986 and 1996 the average annual return to investors was67.8 percent compared with the runner-up Oracle’s 53.5 percent for the same period. Amgen’s revenuegrowth was 108.1 percent with the runner-up Sunamerica’s 60.9 percent. Amgen invested $663 millionin R&D in 1998 alone and had research collaborations with 200 colleges and universities. Amgen is theonly biotech company that has been able to develop two or more commercially successful products(Oliver, 2000).

With the complete mapping of the human genome and biotechnology as the newemerging research paradigm, we are in many respects witnessing the emergence ofthe Biotech Age. Leading economic indicators support such a conclusion. First, thereare some 2000 biotechnology organisations in the US, more than 1000 in the EU andanother 1000 around the world. With a year-over-year revenue increase ofapproximately 45 percent in 1996 biotech is the fastest growing business segment inthe EU. Second, market capitalisation of the US biotechnology industry increased 12percent in 1997 from $83 billion to $93 billion. Nearly $500 million of private capitalwas invested in EU companies in 1997 and $30 billion in US pharmaceuticalbiotechnology firms alone. Third, over 200 million people world-wide have beenhelped by the more than 90 biotechnology drug products and vaccines. Fourth, the USbiotech industry currently employs more than 153 000 people in high-wage, high-

2 This table is based on data from two sources. The figures for 1996 and 2006 are taken from Oliver,2000 and the other figures are based on data from Consulting Resources Corporation. The idea withcombining the sources has been to show the magnitude of the US market in comparison with the rest ofthe world as well as to show that the forecasts are similar in size.

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value jobs, approximately 1/3 of biotech companies employ less than 50 persons, 2/3employ less than 135 persons.

Biotechnology has not only moved drug R&D from chemistry-based to biology-based, it is also changing the way the industry values blockbuster drug development.Traditionally, the industry has focused on developing blockbuster drugs. However,this is now, due to advances in pharmacogenomics, changing towards developingmore segmented groups of drugs. Thus instead of one class of hypertension drugs,there could be several classes, enabling genetically targeted drugs. Precise drugs canbe configured for distinct gene types, potentially leading to more effective andefficient treatments. Currently, $8 billion worth of prescribed medicines do not workin the expected way and treatment has to be discontinued. In Finland only 30 percentof prescribed treatment is carried out as prescribed. The rest is discontinued either byorders of the physician or by the fact that the patient does not comply to theprescription for numerous reasons (Vainio, 1989). Nevertheless the drug industry ismoving towards personalisation, i.e. to treat the person not the disease.

The biotech industry is, as we have argued, an extremely high-risk industry, withestimates of only 1 out of every 10 biotech firm succeeding in bringing a product tomarket. Nevertheless, new firms are constantly entering the field and vast amounts ofresearch funding are provided each week. The reason for this are the potentiallyastronomical rewards. For example, 60 percent of the drug targets of Bristol-MyersSquibb come from contracted biotechnology laboratories. Big Pharma needs biotech’sspeed and intelligence and biotech needs Big Pharma’s funding. Those traditionalpharmaceutical companies that are not investing in genomics are not expected tosurvive very long. Biotech’s weakness has often been thought to be size, but as theexample of Amgen shows it can also be its strength in intensified research efforts.Biotech firms have an increased possibility to focus on orphan drug3 development,which Big Pharma might not find attractive. Moreover, the operating costs are muchlower for biotechs as their infrastructure is much smaller.

4. Structural change - Marriage of Convenience

Although the (pharmaceutical and biotechnology) industry has experiencedexceptionally high annual growth for several consecutive years there are only a fewbiotechnology companies with net profits. In 1994 there were four companies in theworld showing net profits – Amgen, Chiron, Genentech, and Genzyme. The numberhas steadily risen and by the end of 2000 the number was projected to be 22.Nevertheless, the entire biotechnology industry is still unprofitable (Amdjadi et al,2000). The traditional pharmaceutical industry is however, highly profitable. The highannual growth is projected to slow down, because of a large number of drugs are dueto go off patent in a few years and because of fewer candidates in the pipeline.Consequently, in the search for growth the industry is expected to concentrate evenfurther.

The number of Big Pharma companies are currently less than 15 (Oliver, 2000) andthe number is expected to decrease even further (Amdjani et al, 2000) in a few years

3 Orphan drugs are drugs developed for illnesses, which do not affect large percentages of thepopulation, and would therefore not be regarded as profitable or worthwhile. The illnesses are howevergenerally severe and therefore regarded as important.

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time. Projections suggest that more than 80 percent of the global drug market will becontrolled by less than ten companies. Big Pharma companies are engaged in strongglobal competition. Within biotech similar rivalry has not been found because thereare still so many unmade discoveries. On the other hand, the year 2000 was the firstyear when the biotechnology industry became truly borderless. These companies arenot only going global by setting up foreign subsidiaries to manage their clinical trialsand marketing activities. These companies are creating entirely new companies thatare the synthesis of skills and expertise from many different areas transcending bothtime and distance. This borderlessness applies to mergers and acquisitions, alliances,spin-offs as well as subsidiaries. In fact, the trend today is for companies to go publicon two different continents through dual listings. For example, a London-based firmlisted its shares on the London Stock Exchange and the Singapore exchange, and aDanish company listed not only locally but also on Germany’s Neuer Markt (VanBrunt, 2001). Nevertheless trans-border activity focuses on mergers and acquisitions(M&A). M&A used to be the type of activity carried out by Big Pharma. Biotechcompanies have intensified their actions on this front during the entire year 2000. Thebiotech companies accounted for almost 130 deals between January and November2000. In most cases a U.S.-based biotech company is the acquirer. The major driver iscash. In Table 3 we show the number of M&A, their value expressed in billions ofUSD during 1994-1999.

The changes seen within the pharmaceutical industry have essentially been driven bytechnological change, a decreasing number of new block-buster drugs, i.e. a decreasein R&D throughput, soaring health care expenditures due to an ageing populationleading to tightening price regulations, globalisation of markets, and increasingcompetition. Firms have therefore in seeking new sources of growth been forced torestructure. A common recipe has thus been an M&A in order to gain access totechnological advancement or for the purpose of gaining market access.

Table 3: The number of mergers and acquisitions and their value in billions of USDduring 1994-1999 (Amdjadi et al, 2000)

YEAR NUMBER OF DEALS TOTAL VALUE1994 45 $ 3.01995 55 $ 2.01996 63 $ 4.61997 73 $ 2.31998 87 $ 5.91999 73 $19.1

Mergers and acquisitions (M&A) have certainly proved their right with respect togaining access to global markets and distribution channels. However, whether M&Ahave been successful in securing increased R&D productivity is largely doubted. Forexample, quantitative evidence of firm size and the impact on R&D activity is mixedand limited (Henderson and Cockburn, 1996). Henderson and Cockburn (1996)suggest that there are significant returns to size in pharmaceutical research, but thatonly a small portion of these returns are derived from economies of scale. Jaffe (1986)argues that the R&D of technological neighbours increase R&D productivity. Gravesand Langowitz (1993) again, have found evidence for decreasing returns to scale inR&D. Pavitt et al (1987) suggest that both very small firms and very large firms wereproportionately more innovative than more moderate-sized firms. Controversially,

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mergers and acquisitions are often motivated by the desire to spread R&D costs over awider base and to gain control of R&D in competitive firms (Freeman and Soete,1999), rather than to improve the firm’s R&D performance. Production, distributionand promotion performance is often largely dependent upon sufficient firm size andscale economies. Size also gives access advantages to information from the benefitsof experience and access to markets from mechanisms such as reputation and relations(the ability to work with regulatory authorities, for example) (Yeoh and Roth, 1999).

Collaboration in high technology markets can take many forms. Alliances,partnerships, and joint ventures were already mentioned. In the context of hightechnology innovations Hamel (2000) uses the metaphorically ‘Silicon Valley’ todescribe science parks. Although Silicon Valley geographically exists, Hamel usesthis expression to describe areas where a high knowledge concentration and highinnovativeness exists often so that business and university-based researchcommunities work closely together, as indicated earlier by the CEO of Amgen (p. 9).Amgen’s CEO, as well as Jaffe (1986), Henderson and Cockburn (1996), Yeoh andRoth (1999), and Oliver (2000) refer to the impact of the knowledge spill-over effect,and how knowledge can be leveraged and stretched across company boundaries.

Table 4: Top ten acquisitions and mergers, their leading market segments, and valuein millions USD (Amdjadi et al, 2000).

ACQUIRING FIRM ACQUIRED FIRM TOTAL

VALUE

LEADING MARKET SEGMENT

Johnson &Johnson

Centocor 4,900 Mab technology, Chron’s disease, angioplasty,transplantation

Warner-Lambert(Pfizer)

AgouronPharmaceuticalsInc.

2,100 HIV, solid tumors, macular degeneration,common cold

Celltech Chirosciences 1,447 Mab technology, leukemia, pain, asthma,rheumatoid arthritis

Pharmacia &Upjohn(Pharmacia)

SUGEN 650 Small molecule inhibitors, cancer,angiogenesis inhibitors

MilleniumPharmaceuticals

LeukoSite 635 Mab technology, leukemia, Chron’s disease,stroke

Gilead Sciences NeXstarPharmaceuticals

550 Liposomal drug delivery, antifungal, flu,Kaposi’s sarcoma, Cytomegalovirus, retinitis

Alza Corporation SEQUSPharmaceuticals

580 Mechanical drug delivery, urology, ADD, ADHD

MedImmune U.S. Bioscience 440 Mab technology, colorectal cancer, transplantationCorixaCorporation

RibiImmunoChemResearch

58.5 Adjuvants, melanoma and breast cancer vaccines

V.I. Technologies PentosePharmaceuticals

41 Treatment of blood products for viral inactivation

In Table 4 we show top ten M&A, their value expressed in millions of USD and theirleading market segments. As can be seen from the tables the dollar values are huge,however, it is doubted whether M&A will contribute to R&D productivity positively.The real value appears to be much more successfully captured through collaborations,i.e. alliances, partnerships, and joint ventures. Although the number of collaborationshas grown tremendously they have not been able to raise similar amounts of capital,

15

which may be due to the fact that they are early-stage deals (Table 5.). Thesegenerally do not raise vast amounts of money (Robbins-Roth, 2000).

Table 5: Number of biotechnology collaborations and their value in billions of USD(Amdjadi et al, 2000).

YEAR NUMBER OF DEALS TOTAL VALUE

1994 117 1.91995 165 3.21996 180 2.81997 226 4.51998 221 3.71999 477 3.8

Established pharmaceutical companies have experienced complex processes ofadaptation to new, academic-like organisation methods in their R&D. Overall, theimportance of publicly generated scientific knowledge for industrial innovation hasincreased not only in the pharmaceutical but also in a number of other knowledgeintensive industries. Research networks and virtual R&D organisations have beendeveloped to enable collaboration between universities, public and private researchcentres and both established and new biotechnology and pharmaceutical firms.

Despite the lack of empirical evidence, it is possible that M&A of companies provesto be a feasible strategy in the long run as the new “general purpose” researchtechnologies of combinatorial chemistry, high throughput screening and genomicsincrease firm-specific economies of scope that relate to knowledge spillovers acrossprojects and departments (Gambardella et al. 2000). Science parks show promisebecause academic and firm collaboration are key drivers of these formations provingeffective and efficient platforms for networking and shared knowledge creation.Hence, today’s feasible strategies cover the formation of strategic alliances forenhancing R&D productivity as well as gaining access to global marketing anddistribution channels necessary for the commercialisation of a new drug. Thesealliances have the potential for solving the major macro-level problem evident in theindustry today; established companies need access to R&D resources of the smaller,specialised companies, while research units and biotechnology companies need accessto commercialisation knowledge. In addition to strategic R&D alliances we have seenthe formation of networks and clusters all aiming at developing virtual corporateconstellations enhancing collaboration (Mäkinen, 1999, Brännback and Mäkinen,2000).

Indeed, the M&A activity and collaborations between Big Pharma and biotech firmsare marriages of convenience, where both parties stand to gain. Pharmaceutical R&Dtoday requires fusion of multiple technological disciplines of which a profoundknowledge is required. The exponential growth in the amount of biologicalinformation available to biotechnological research is generating an industry that canbe characterised as “high clock-speed” where the ability to create networks in whichresources, knowledge and information circulate rapidly and at a low cost is becominga critical success factor (Chiesa & Manzini, 1997, Campbell, 1998, David andGrindley, 1998).

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In the era of the old R&D paradigm, pharmaceutical R&D processes (see, Figure 5)involved large laboratories and disciplined internal organisational procedures, whichbecame the sources of competitive advantage generally in the form of economies ofscale. As the industry evolved, these economies of scale along with additionalorganisational capabilities to manage the processes of pharmaceutical R&D anddelivery acted as powerful barriers to entry in the industry (Suoniemi and Brännback,2000). A number of pharmaceutical companies in the past succeeded throughimitation and generic competition after patent expirations, as well as throughconcentration on local markets and product niches. The molecular biology revolutionhas introduced major changes in the processes of discovery and in the organisation ofresearch. It has also provided a wealth of business opportunities as each stage in theR&D process (see, Figure 5) contains a number of sub-sets and technologies thatserve as a potential base for establishing a business. Today we have companies whosesole business idea rests on R&D within the preclinical stage, where Phase I or anyother simply is outside of their business idea. We also have a number of tool-boxorganisations whose business idea is to provide technological solutions or serviceswithin one particular phase – only. This is radically different from the previousstrategy logic, where the entire R&D process was seen as proprietary uniqueknowledge that needed to be managed in-house and carefully protected fromcompetitors (Bogner and Thomas, 1994). The new situation requires noveltechnological and organisational capabilities for creation of sustainable competitiveadvantages. New technological opportunities have freed the entry of new firms –suppliers of specific technological solutions and intermediate products to largercompanies - to this industry. (Gambardella et al. 2000; Robbins-Roth 2000)

Discovery(2-10 years)

Preclinical TestingLaboratory and animal testing

Phase I20-80 healthy volunteers used to determine safety and dosage

Phase II100-300 patients used to lookfor efficacy and side effectsPhase III

1000-5000 patiens used to monitoradverse reactions to long-term use

Regulatory Review/Approval

Additional PostmarketingTesting

Years

0 2 4 6 8 10 12

P re cl inica l

Cl inica l

Figure 5: The drug development process

5. The Finnish Biotech Industry

The current Finnish pharmaceutical industry is dramatically different from what itused to be little over a decade ago. The industry was from the WWII all the way to the1990s primarily focused on serving the domestic market. Product patent was enforced

17

in 1988 with a seven-year transition period when both product patent and processpatent formed the basis of uniqueness. Prior to 1988 when product patent wasenforced, uniqueness was based on process patent. In the middle of the 1970’s, thefirst steps towards developing original drugs – new chemical entities (NCEs) –weretaken. Finnish Bioindustries (http://www.finbio.net) currently lists 110 companies(incl. 3 Big Pharma companies) (See, Table 6). The list includes DDCs (16),companies in the diagnostics (29), biomaterials (8), food and feed (17), industrialenzymes (3), agro (7), service sectors (19), and other related fields (8). The totalnumber of 110 companies employ 8, 200 persons half of which are employed by BigPharma. The total annual turnover for the Finnish biotech industry accounted for ¼1,342 million half of which is generated by Big Pharma. Hence the Finnish industry iscurrently split in two halves, where the traditional Big Pharma represents one half andthe rest covers for the other half. The key question is for how long?

Table 6: Biotechnology industry in Finland in 1999 (Finnish Bioindustries,www.finbio.net)

SECTOR NUMBER OFCOMPANIES

ANNUAL TURNOVER(¼0,//,21�

PERSONNEL

DDCs 16 16 220

BIG PHARMA 3 640 4210

DIAGNOSTICS 29 300 2050

BIOMATERIAL 8 20 90

FOOD AND FEED 17 260 1050

INDUSRTIALENZYMES

3 68 270

AGRO 7 14 130

SERVICE COMPANIES 19 12 110

OTHERS 8 12 70

TOTAL

TOTAL EXCL. BIGPHARMA

110

107

1342

702

8200

3990

When product patent became the only basis for uniqueness in 1995, which alsocoincided with Finland becoming a member of the EU, a wealth of new companieshave been established in the industry (Figure 6). The reasons for this ”boom” aremultiple, but can mainly be summarised into two categories. Firstly, the globalmolecular biology revolution, and secondly, the changes in the nationalmacroeconomic environment and the restructuring of the established domesticpharmaceutical companies have contributed to the accelerating speed of new companyestablishment. The number of established drug companies in Finland, which in theearly 1980s totalled thirteen, was reduced to two in ten year’s time. As the remaining

18

companies introduced more focused strategies than before they had to abandon someof the research areas from their wide portfolios. The researchers involved in theseareas were made obsolete. Some became founders of new independent biotech start-up firms. Other start-up firms grew out of university scientists entering the businessarena. In other words, the development in Finland followed the same pattern as theUS biotech industry experienced in the late 1970s and early 1980s.

There were other reasons for the emergence of the current Finnish biotech industry.Over the past decade external funding of the universities had grown steadily partlydue to a decrease in governmental base funding to universities. Especially theresearch intensive Finnish DDCs are dependent on research in universities; theyparticipate actively in academic research projects and capitalise on them. The co-operation between industry and universities has traditionally been strong in thetechnical fields and this co-operation was further intensified during the overallrecession in the 1990s. For example science parks in nearly every city withuniversities have been established during the 1990s, i.e. Helsinki, Turku, Tampere,Kuopio, and Oulu. The driver in these science parks has been the ICT industry but thebiotech field has followed, and today these two fields both reside within these scienceparks. The US and Finland have been found to be among the most effective nations interms of university-industry collaboration (Kankaala and Lampola, 1998).

The growth of the industry and the establishment of start up companies have beenboosted by the increasing availability of venture funding, both private and public.Although the early stage development of innovations still largely depends on theavailability of public funding, the private venture capital industry is an increasinglyimportant source of finance. The Finnish private equity and venture capital industrywas practically non-existent till the beginning of the 1990’s, but today it iscomparable to most other European countries. When the amount of investments madeby private equity and venture capital companies is compared to the GNP, Finlandranks third in Europe, after the UK and the Netherlands. (Finnish Venture CapitalAssociation 2000) All these changes in the macroenvironment have promoted thedevelopment illustrated by Figure 6.

It is obvious that the developments within the overall biotech industry are technology-driven. However, those days are far behind when scientific excellence alone ensuredglobal business success. For example, after the stock crash in 1987 venture capitalistshad learned their lesson and started to ask for experienced executive managementexpertise in addition to scientific excellence. These kinds of managers were onlyfound in Big Pharma and some executives left Big Pharma to head small start-upbiotechnology companies. Given the increasing number of these companies there hasfor some time been a global shortage of executive management expertise. This sameshortage applies to Finland as well. For Finland the situation is even morecomplicated as there is a very limited number of executives and opinion leaders fromthe field per se, due to the small size of the country on the one hand and the paststructure of the industry on the other. Moreover, the industry has mainly been adomestic market fairly protected from foreign competition leaving it with amanagerial pool lacking experience in global business management. The lack ofglobal executive management competencies is a very real threat to future businesssuccess based on the high quality scientific research available.

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Figure 6: Biotechnology industry in Finland, number of companies founded per year(Finnish Bioindustries 2000)

In attempting to envision the boundaries of a new industry recipe, within which apotential company paradigm could evolve, which in turn would form the basis of acompany strategy, we considered a necessary starting point to study the strengths andweaknesses on the one hand and opportunities and threats on the other of the industryas perceived by the actors within this industry. The strengths, weaknesses,opportunities and threats are basic elements in an company paradigm (Johnson andScholes, 1988, 1999). Hence we start with a study of the collective strengths,weaknesses, opportunities, and threats (SWOTs) of the Finnish biotech industry.

The presented SWOTs are based on interviews made with 31 executives anduniversity representatives within the field between December 1999 and August 2000.Additional information was collected through a mail survey sent to 100representatives of Finnish Big Pharma, DDCs, service companies, universities’pharmaceutical research, technology companies, national agencies and associations,and venture capitalists.

The presented items in each category can be grouped into four major issues:technological competencies, collaborative abilities, availability of necessary humanand financial resources, and business management knowledge, i.e. market accesscompetencies.

The primary strengths of the industry clearly lie in the technological and scientificexpertise and know-how, which is proven through strong patent positions and marketleadership in a few targeted segments. Even small market segments in thebiotechnology markets can be profitable customer bases for companies with a lowlevel of fixed costs and products tailored especially to the needs of the specificsegments. The number of new patents held by Finnish companies is expected tosignificantly increase with up to 43% by the year 2003. Secondly, additional strengthsare generated by strong traditions in industry and university collaboration, and an

20

ability to stretch and leverage high quality R&D expertise through knowledgespillover effects. Finally, due to the small size of the companies and the small numberof companies, the industry can draw on a unique characteristic – good networkingbetween companies. Virtually all top executives and senior managers, includingleading scientists know one another, through past joint attendance to same universitystudies or joint pasts in the same companies.

The weaknesses are concentrated around lack of business knowledge and lack ofadequate funding. The deficiencies in business knowledge are most present in the lackof marketing knowledge, both theoretical and practical, and a small domestic market,which does not give the companies the possibility to ‘practice’ in small scale beforeup-scaling operations for global business. Porter (1990) argues that the competitivenature and the size of the domestic market is significant in importance to a firm’sability to operate on the international arena. Similarly, in the Finnish forestry industryone senior vice president stated that the strong concentration of the world’s leadingindustry in the Nordic countries has allowed the companies to rehearse at home, thusmaking them better prepared for the challenges on the global business arena. There isno reason to believe that this would not apply to the biotechnology industry as well.Moreover, it has been perceived that the small company size is also a weakness.However, in a global comparison this does not seem to be a real weakness. Forexample, one third of the US biotech companies employ less than 50 persons and twothirds less than 135 persons. Thus, small size measured in terms of the number ofpersonnel is a general characteristic throughout the industry. In the case where mostbiotech companies lack cash flow in the beginning, the size of the personnel is acritical cost factor where management has to weigh between increasing personnelcosts and the availability of necessary funding for R&D. Many considered the factthat most of these organisations are less than five years old a weakness. Finally,although it was considered a strength that the employees that are available are highlyexperienced it was at the same time pointed out that there are not enough of these. Inother words, the industry is growing faster than the availability of properly skilledpersonnel, especially since there is a growing need for cross-scientific skills.

Hence the strengths rest on strong technical and scientific expertise and networkingand collaborative abilities and skills. Weaknesses are focused around lack of businessknowledge and adequate funding.

The opportunities for the industry come from major and constant advances inbiotechnology and increasing as well as internationalising demands for products andservices, which originate out of huge unmet medical needs and an ageing populationin all Western countries. The fact that the numbers of biotech companies areconstantly growing is generating new possibilities for alliances, partnerships and jointventures on a global scale.

Major threats are (i) the intense international competition, which reflects the statedweakness in global business knowledge, (ii) the potential future lack of qualifiedpersonnel as there is a growing concern over the fact that the number of personsleaving for retirement is exceeding the number of young people coming on the jobmarket, (iii) the possible future lack of funding, and (iv) the uncertainty in legislativeand governmental actions.

21

The opportunities and threats can again be grouped so that the opportunities stemfrom technological advances and collaborative abilities to which is added the businessdimension in terms of growth in demand and growth of markets. The threats again arederived out of business knowledge to which is added a stakeholder managementdimension, lack of financial and human resources.

A general conclusion is that the technological and scientific competencies areremarkable but there is real threat in the ability to capitalise on these competenciesdue to significant lack in business management competencies. Our survey alsorevealed that the quality and performance of domestic industry actors in areas relatedto pharmaceutical science and research rank remarkably better than quality andperformance of domestic actors in the fields related to marketing, commercialisation,and production. This is proof of the fact that the changes in the field have beentechnology-driven but at the same time the markets have become global requiringsignificant theoretical and practical business knowledge in terms of abilities tomanage major business changes and abilities to create new business strategies, whichare challenging even for experienced executives.

Hence there have been changes in two key areas: technology and business. We have asituation where the strategy logic is cognitively residing in the old paradigm, wheremarkets were fairly protected, competition modest and business operations focused ongrowing market shares or at a minimum keeping the current market share. The newsituation does not only require fast learning of basic business skill, but also skills thatprovide proper guidance within a new strategy logic of which very littledocumentation exists, and ultimately even with those newly acquired skills possessthe ability to create a new strategy logic. A strategy logic of which no previousexperience exists against which to benchmark performance.

6. Discussion and conclusions

In the previous section we concluded that there is a real lack of business managementcompetencies, which may threaten the ability to capitalise on the scientific andtechnological competencies. In this paper we are not discussing which specific skillsor competencies are lacking, but leave it for a later sermon. The focus of this paperhas been to understand the strategic changes brought about profound technologicalchanges. We have claimed that a new industry recipe, company paradigm, andstrategy logic is evolving. In section two, Figure 3 we indicated that a company can,as a result of the convergence of industries find itself as part of multiple businesssystems. This implies for example, that previously when one industry recipe wouldapply in this new situation we find a multi-dimensional reality where managerialdecision-making processes are transposed into a multi-recipe context (see Figure 7).

A multi-recipe context means that the traditional industry boundaries are challengedand that the potential served market extends far beyond previous markets, and that thenumbers of competitors and stakeholders increase. In such a situation the definition ofa business becomes crucial. Such a definition can, however, take many forms, due tothe various numbers of logics within strategic thinking (Brännback and Näsi, 2001).

22

For example Normann (1977) claims that a description of a business idea involves thedescription of (i) the niche in the environment dominated by the company, in otherwords the company’s territory, (ii) the product system in the system that are suppliedto the territory, (iii) the resources and internal conditions in the company by themeans of which dominance is acquired. Obviously this definition applies in a single-recipe industry, but it conveys the firm belief in some existing industry boundaries,which now are coming tumbling down.

,QGXVWU\�5HFLSH��[��\������Q�

&RPSDQ\�3DUDGLJP��[��\������Q�

6WUDWHJ\�/RJLF��[��\������Q�

Figure 7: Multi-dimensional recipes, company paradigms, and logics of strategy

Abell (1980) claims that an individual business definition determines marketboundary definition. The business definition and its importance to the company isfurther confirmed by the claim that a strategic plan comprises three classes ofdecisions i) the definitions of the business (related diversified strategy,product/market strategy, segmentation and positioning strategy), ii) objectives(corporate portfolio, product portfolio, budget allocation), and iii) functional strategydecisions. This again rests on the same kind of logic as the idea in this paper, wherestrategy logic is a sub-group to the company paradigms, which in turn is a sub-unit toindustry recipe.

Karpik (1981, p. 396) argues that any classification of strategies must satisfy threerequirements: (i) comparison of all actions which, directly or indirectly deliberately orunconsciously, impinge upon the economic system, regardless of the social actorsconcerned: firms, banks, research centres, etc., (ii) the study of relations betweenorganisations’ choices and the groups which compose them, and (iii) the study ofdiscrepancies between meanings experienced and actual behaviour, which involvesocial orientations, forms of organisation and power relationships. These form,according to Karpik, a logic of action. It is in particular the second and the thirdrequirement, which are relevant for our discussion. The second requirement isconcerned with the organisations, which contribute to the formation of an industryrecipe or recipes. The third requirement points at the strategy logic of the firm.

23

How does this rationale translate into the context of the Finnish biotech industry? Aspointed out previously, the Finnish pharmaceutical industry has been subject todramatic changes since the early 1980s. Changes, which are due to changes in thebusiness environment as well as technologies used in R&D and production.

In the early 1980s there were a dozen drug companies whose business was based onmanufacturing and marketing of me-too drugs. None of the Finnish drug companieshad generated their own NCE before 1980. The first Finnish original drug wascommercialised in the early 1980s. Product patent became efficient in 1988, butduring a seven-year transition period both product and process patents were sources ofuniqueness. During the entire 1980s a massive restructuring took place throughnumerous acquisitions reducing the number of companies to two. The biotechnologyboom, which started in the late 1970s early 1980s in the US reached Finland duringthe 1990s and the new generation of the Finnish pharmaceutical industry started toemerge from the mid-1990s. Along this profound change in the industry structurecame the biotechnology revolution, which resulted in the emergence of entirely newindustry, the biotechnology industry, which enabled a number of related industries toconverge, and the formation of the life science industry was taking place (Enriquezand Goldberg, 2000, Oliver, 2000).

From a strategy point of view and in particular one concerned with managerialcapabilities, the Finnish pharmaceutical industry had been a highly domestic market,where market share had been the key focus of managerial decision-making. Theindustry prior to 1980 and during the 1980s did not prepare the companies or themanagers for the massive globalisation of the entire industry in the 1990s. Likewise,since R&D activities primarily were concerned with developing me-too products,which are by far much less expensive to develop, it did not prompt the industry toprepare itself for a massive shift in the R&D base. Needless to say, the acquisitions,which took place during the 1980s made a number of persons obsolete. Some peoplewere made to leave the companies, others left more or less voluntarily because thenew corporate culture prompted such events. A number of those who left became thenew generation of entrepreneurs in the biotechnology industry. The experiences ofthese entrepreneurs were rooted in the old industry recipe and the old logic of action,which was a single industry recipe and very much of domestic character. The newbusiness environment was to be global and a multi-recipe industry.

Alike the biotechnology start-ups in the US during the 1980s, the new Finnishcompanies were founded by persons primarily with a scientific background, with verylittle hands-on business management experience and in particular global businessmanagement experience. Some of these entrepreneurs come out of the academicresearch community with no business experience what so ever. Hence a number ofquestions emerge, which serve as a fruitful basis for future research, both from atheoretical and an empirical perspective. The primary questions are:

• Based on what kind of key assumptions are strategy logics formed in this newsituation, logics of strategy, which form the basis of corporate success?

• What are the key characteristics of a multi recipe strategy logic?• What kind of company paradigm emerges?• What are the key characteristics of a multi recipe company paradigm?

24

In this paper we have analysed the developments within the biotech industry andshown the huge consequences for the industry structure due to technological change.The other theme has been the implications on strategy, which the changes in structureand technology have. The managerial challenge is there for existing pharmaceuticalindustry, but even more so also for these new biotechnology companies. We claimthat the new strategy logic is still emerging within the entire multi-recipe industry.Because the industry is in the middle of transition it is obvious that very littledocumentation of actual success exist, what is more there is a lack of theoreticalguidance as well. However, as becomes evident, at this point we can only indicatewhat kind of strategic changes lie ahead on an industry level, a company level, and onthe individual managerial level. It is obvious that additional research is required andthe four research questions mentioned above provide a good starting.

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