Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 101

time-series data set of 255 radical innovations introduced by 66 firms, for which com-
plete accounting and financial data were collected. Sorescu et al. ( 2003 ) find that (1) the
majority of radical innovations come from a minority of firms, (2) the financial rewards
across firms have a large variance, (3) firms with better marketing and technology sup-
port benefit more from radical innovations, and (4) firms that have a portfolio with
greater depth and breath obtain higher rewards from radical innovations.
Yeoh ( 1994 ) argues that radical innovations are also characterized by their speed
of global introduction, with one definition suggesting such drugs demonstrate mul-
tinational approval by at least six major industrialized countries within 4 years.
Yeoh ( 1994 ) demonstrates using a dataset of “global” NCEs that such radical inno-
vations are more likely when the development is self-originated, competitive inten-
sity is low, and the firm has prior experience in the therapeutic category.
It seems that being an innovator and investing in radical innovation can pay off
handsomely. However, considering risks and commitments associated with radical
innovations, a natural question arises as to the extent a firm should focus on radical
innovation versus “surer bets” that are incremental innovations.

3.3.2.3 Selection and Balance between Incremental

and Radical Innovation

When should firms favor incremental versus radical innovation? Ali et al. ( 1993 )
examine the effects of firm characteristics on project selection. They set up a game-
theoretic model in which duopolists face two business opportunities and two alter-
natives strategies, i.e., a radical innovation project and an incremental innovation
project. Firm characteristics such as their differential efficiencies in completing
projects, differences in the degree of substitutability between the two types of prod-
ucts, and first mover advantages are examined. They find that beyond the project
development costs and reward flows, some firm characteristics (e.g., firms' com-
parative efficiencies in developing projects), project characteristics (e.g., technical
uncertainties), and market characteristics (e.g., potential demand substitutability
between different types of new products) will all affect the optimal choice between
a radical innovation project and an incremental innovation project.
Chao and Kavadias ( 2008 ) use a theoretical framework based on strategic buck-
ets to examine the balance between incremental and radical innovation. Strategic
buckets divide the R&D budget into a set of smaller subsets each of which is aligned
with a particular innovation strategy, to lower the bias of project valuation tools
such as NPV or real options against radical innovation due to the long-term rewards
and high likelihood of failure if the entire portfolio was considered as a whole. They
point out the trend among firms to move towards incremental-innovation-dominated
portfolios and suggest that the right balance depends on the amount of interaction
between performance drivers such as technology and market parameters (complex-
ity) and the degree of environmental instability. Specifically, the portfolio should
emphasize radical innovation when there is high complexity but low instability (as
radical innovation can break away from local performance optima), and incremental