Networks and Alliances in Biotechnology - Literature review Example

?Networks and alliances in biotechnology Introduction The rate of voluntary agreement and inter-organizational alliances between the firm related to the services, technologies, co-creation of products, sharing and exchange has increased since 1980s and has accelerated in many industries (Gulati 2007). The growth of the pharmaceuticals, which in turn lead to the emergence of biotechnology industry, provides valuable insight regarding the role of networking and alliance that changed the shape of both the industries. Many of the biotechnology industry analysts has devoted time and effort for evaluating the alliances of the individual firms and assigning market values to them based on the quantity and quality of the relationships (Powell, Koput and Smith-Doerr, 1966; Powell, 1998). It is general perception among the people in the market that the organization with higher quality collection of alliances will perform better in the long run, which leads to higher market valuation of the firms. The report prepared by the analysts of Goldman Sachs (2005) on the biotechnology firms has closely studied the alliances and has published a long list of such alliances, which suggested that there were quite large number of alliances in this sector. Apart from this, a study conducted by Baum, Calabrese and Silverman (2000) on biotechnology firms of Canada has found that the new firms are more capable of leveraging alliances, especially R&D alliances and are seen to grow at a higher rate. This report focuses on the strategic alliances in the biotechnology firms and unleashing their importance and implications. Primary activities of the Biotechnology Firms Biotechnology is one of the most important emerging technologies that generate several applications, which are applied to various fields such as healthcare, fine chemistry, food industry, agriculture and even in the environmental development. Biotechnology encompasses various research methods and technologies that are applied in various sectors. For instance “recombinant DNA technology can be used to produce large molecule medicines in the pharmaceutical sector, create new crop varieties in the agricultural sector, or create micro-organisms that produce industrial enzymes for the chemical sector” (Organisation for Economic Co-Operation and Development, 2005, p. 6). Reasons for collaboration of the biotechnology firms The alliance formation of the biotechnology firms has gained enough attention from many scholars. These scholars have tried to track the motives of the firms behind the alliances and have found quite significant number of reasons. The cost and risk of innovation involved in the product development for the biotechnology firms are quite high so a majority of the firms look for sharing these risk and cost involved through strategic partnership. Apart from this, the biotechnology firms look for entering into strategic alliance with established rivals in order to avoid direct competition with those rivals in the product market. Keeping these motives in mind the two key driver that encourages the formation of alliance are firstly the accessibility to the knowledge and other complementary resources and secondly the search for legitimacy. Accessibility to the knowledge and other complementary resources An organization can be well defined as an open-system whose survival is highly dependent on the exchange of resources with various environmental aspects such as the competitors, buyers and suppliers. For biotechnology firms the need for accessibility to knowledge and other resources is due to the challenge that they face in commercialising the process and the development of the products that are considered to be highly resources-intensive. A large number of biotechnology firms do not have the significant amount of required resources necessary for the execution of the process leading to the development of product; moreover, the intense competition leads to the further squeezing of the existing resources. Thus, strategic alliances provide a way of accessing the much-required resources that plays crucial role in boosting the viability of a firm. Research has shown that the biotech firms enter into partnership when they realise that either their resources are inferior as compared to that of the partners or they have been fully utilised by the firm (Odagiri 2003). For instance, by partnering with the pharmaceutical companies the firm will not only gain government approval for new products but also will gain expertise in clinical development, distribution channel and production facilities. The biotechnology firms are generally seen to lack these downstream capabilities and resources and are hence, required to search for potential partners in order to access these. Knowledge is another resource that gains huge importance in the biotechnology sector as many of the firms are not directly involved into sales of any product, for these firms proprietary knowledge is extremely important. Developing a deep and broad knowledge base of knowledge is not restricted to a single organization but the locus of innovation moves beyond the boundaries into the network of alliances, which allows the whole industry to access the diversified pool of knowledge (Sytch, and Bubenzer, 2008). Search for legitimacy In a technical environment, the survival of the firm is largely dependent on its reliance to the production efficiencies and accessibility to the resources. Many of the new biotechnology firms that are innovation-driven and nimble lack the underpinning of legitimacy, which can be defined as a public endorsement and social justification. Due to the newness of the organization most of the biotechnology firm do not have the required validation necessary for a stable exchange relationship and also the experience required for the delivery of the services and the product in the market. Most of the biotech companies lack product that they can display and instead merely just owns the right to a set of ideas with vague commercial viability. Therefore, building legitimacy is regarded to be extremely crucial in case of biotechnological ventures and more particularly for the new players in the industry. This is due to the fact that the market participants on whom they large depend for their reputation, physical and financial capital faces high level of uncertainty related to the quality of the biotech services and products. Therefore, strategic alliances with the prominent partners are one of the most effective way in which the firms can gain legitimacy. Thus, by securing the public validation, the level of uncertainty linked with the biotech firms will lead to significant amount of competitive and economic benefits (Sytch, and Bubenzer, 2008). Method of choosing a partner The above discussion shows that the biotechnology firms usually enter into strategic alliance for getting accessibility to legitimacy, knowledge and other complementary resources. In this context, they favour those partners who provide superior legitimacy and better knowledge and resource endowments. A strong influence of homophily, in which the similarity among the firm fosters co-identification and mutual trust that in turn increases the likelihood of partnership. Many of the partnership in biotechnology related to research and development has taken place if their founders have graduated from same college or educational institutions. This does not signify the social ties but reflects the sense of shared identity. For the new entrant biotechnology firms the allies are formed by choosing partners that have similarity with their previous partners along with homophily also plays a leading role here, where the firms that occupy similar places in the market gets readily attracted to each other as they draw similar expectation and obligation to each other. The biotechnology firms gravitate towards the potential partners who utilize upper stratum members with identical affiliation. Though the biotechnology firms are seen to affiliate with similar partners but studies shows that those firms who are underperforming with respect to their peer reference group or historical performances are seen to venture outside coming out of their comfort zone and searching for foreign partners. In strategic alliance bilateral choice is extremely important where the main biotechnology firm and its respective partner should be motivated with each other to enter into alliance. Therefore, both the partners consider factors like the gain of legitimacy along with reputation that they will gain while entering into partnership (Sytch, and Bubenzer, 2008). Young biotechnology firms as knowledge brokers Biotechnology industry is characterised as knowledge-intensive sector. Knowledge creation and its transfer within the firm or the institutions are considered to be crucial in the process of market entry, developing the market and formation of the firm. The young biotechnology firms are seen to exhibit a close link with the scientific research, which is highly important as explicit knowledge in codified form for the development of product. A majority of the founders in the biotechnological firms are usually seen as employees of specialised research institutions or universities and are less firmly linked to the institution. Because of these reasons most of the biological companies are closely located to the research institutions. As knowledge is closely linked to an individual so a powerful intermediate institution linking to the market access and excellent research is very important. These intermediates function more as brokers for acquiring purchase orders, venture capitals and so on. They serve as bridge between the science and the market. The scientist must be well aware of their economic utilization of their idea and so aim towards gaining of enough knowledge. At the same time they should also open biotechnology firms and utilise their knowledge. Many of the young biotechnology firms are seen to open up to the option of scientific know-how via social network of academic researchers as in general they are founded by university researchers or recruit them as employees (Karlsson, Johansson and Stough, 2005). Impact of network characteristics on biotechnology firm’s innovation Partner’s quality: The quality of the partner is an important attribute of the partners in collaborative network. The partners with high quality does not only benefits the focal partner by bringing in high quality resources but also acts as an indicator of firm quality to the potential investors. The biotechnology industry operates in a highly uncertain environment where the firms have quite a large set of novel yet uncertain and untested products. Many of the research and development projects are seen to fail because of creating a distinctive place for the uncertain products. In such a scenario the biotechnological firms are more eager to form alliance with organizations that have high status so that the focal firm is able to depend on high-quality relation (I. Demirkan and S. Demirkan, 2012). Diversification of Partnership: Diversification of partnership leads to heterogeneity of knowledge, which is of higher importance in the biotechnology industry. Heterogeneity in knowledge base refers to variation in the knowledge and expertise brought to the network via collaboration with not only the researchers of other biotechnology firms but also with other diversified organizations such as pharmaceutical companies, research institutes and universities. These institutional collaborations are expected to expand with an increase in commercialisation of academic research and transformation of research findings into both marketable commodities and intellectual property such as patents (I. Demirkan and S. Demirkan, 2012). Intensity of partnership: Intensity of partnership or the relational strength can be defined in terms of emotion and time invested in a relationship along with the reciprocity that is involved within the members of the network with major aspect of interpersonal trusts. The quality or strength of relationship is impacts the availability of resources and willingness of the network members to offer know-how and information that enhances the innovation. In biotechnological firms, collaborations through co-authorship involve heavy investment of time, which creates intimacy among the researchers. Thus, creation of ideas and innovation is directly linked to the strength of relationship, social interaction, time and effort (Nooteboom and Stam, 2008). Conclusion The above discussion reveals that strategic alliance is very important for biotechnology firms as the development of product involves high amount of risk both in terms of cost and return. In order to mitigate this risk strategic alliance is an effective way. Moreover, this alliance also offers accessibility to a large base of diversified knowledge, other complementary resources and legitimacy. Due these large numbers of benefits the organizations are more inclines towards choosing their partners very strategically keeping the reputational, knowledge base and other resources in mind. The network characteristics such as partner qualities, the diversity of partners and the intensity of the partnership are seen to create significant impact on the innovation of the biotechnology firm. In this context it is seen that high quality partnership; diversification in partnership that leads to variation in knowledge base and high intensity in the relationship brings higher amount of innovation in the biotechnological firms. References Baum, J.A., Calabrese, T. And Silverman, B.S. 2000: Don’t do it alone: Alliance network composition and startups’ performance in Canadian biotechnology. Strategic Management Journal, 21, 267-294. Demirkan, I. and Demirkan, S., 2012: Network Characteristics and Patenting in Biotechnology, 1990-2006. Journal of Management, 38(6), 1892-1927. Goldman Sachs, 2005: Strategic alliances in biotechnology, Goldman Sachs Global Equity Research, New York. Gulati, R., 2007: Managing network resources: Alliances, affiliations, and other relational assets, Oxford University Press, Oxford. Karlsson, C., Johansson, B. and Stough, R., 2005: Industrial Clusters and Inter-firm Networks, Edward Elgar Publishing, Massachusetts. Nooteboom, B. and Stam, E., 2008: Micro-foundations for Innovation Policy, Amsterdam University Press, Amsterdam. Odagiri, H., 2003: Transaction costs and capabilities as determinants of the R&D boundaries of the firm: A case study of the ten largest pharmaceutical firms in Japan. Managerial & Decision Economics, 24, 187-211. Organisation for Economic Co-Operation and Development, 2005: A Framework for Biotechnology Statistics. Online available http://www.oecd.org/sti/inno/34935605.pdf, accessed 31 December 2013. Powell, W. W., 1998: Learning from collaboration: knowledge and networks in the biotechnology and pharmaceutical industries. California Management Review, 40(3), 228-240. Powell, W.W., Koput, K.W. and Smith-Doerr, L., 1966: Interorganizational collaboration and the locus of innovation: Networks of learning in Biotechnology. Administrative Science Quarterly, 41(1), 116-145. Sytch, M. and Bubenzer, P., 2008: Research on strategic alliances in biotechnology: an assessment and review, in Patzelt, H. and Brenner, T. (eds.) Handbook of Bientrepreneurship, Springer, New York, 105-131. Online available http://webuser.bus.umich.edu/msytch/pdfs/Sytch%20and%20Bubenzer%20HdbkBio%202008.pdf, accessed on 06 Oct 2013. Read More