Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 107

3.3.3.3 Interactions Among Projects

Extant literature has recognized the importance of considering project interdepen-
dencies in portfolio selection decisions (Aaker and Tyebjee 1978 ; Baker and
Freeland 1975 ; Blau et al. 2004 ; Childs and Triantis 1999 ; Czajkowski and Jones
1986 ; Dickison et al. 2001 ; Santhanam and Kyparisis 1996 ; Weber et al. 1990 ;
Weingartner 1966 ).
Gear and Cowie ( 1980 ) specifically distinguish between two types of interdepen-
dencies in R&D: internal and external interaction. Internal interaction exists when
the resource requirements and benefits of a project are impacted (in magnitude and/
or timing) by the selection or rejection decisions of other projects. Fox et al. ( 1984 )
further classify the internal interactions into three categories: (1) cost or resource
utilization interaction; (2) outcome, probability, or technical interaction; and (3)
benefit, payoff, or effect interaction. External interaction or “shocks” arises over
time from overall environmental changes in social and economic conditions whose
effects cut across multiple projects.
For example, if a firm could pursue two projects which require common skill
sets, it could leverage the same pool of personnel, thus achieving cross-fertilization
of ideas and avoiding duplication of skill sets in the organization. However, the
internal interaction plays a role as changing the scope of one project affects the tim-
ing and impact of the other due to common resources. An example of external inter-
action would be scientific knowledge addressing potential solutions to new diseases
that could either depreciate the efforts of multiple projects using older technology,
or provide a new market opportunity for existing projects.
The literature on optimal project selection and prioritization we have examined
thus far have focused on internal interactions, while environmental changes leading
to external interactions are less commonly modeled since these can quickly lead to
a proliferating number of factors and large decision trees. One solution is to use
simulations to model these interactions (e.g., Blau et al. 2004 ; Childs and Triantis
1999 ). However, a closed form optimal solution may still be preferable to investi-
gate the effect of outcome/technical interactions on project selections and sequenc-
ing and is an open topic for researchers to pursue.

3.4 Portfolio Execution Issues

While accurate portfolio evaluation and effective portfolio optimization strategies
are necessary conditions for developing a successful new drug portfolio, execution
is where the rubber meets the road for pharmaceutical firms. Portfolio execution
translates strategies into action. In this section, we discuss four execution issues: (1)
the impact of organizational design on portfolio performance; (2) how to manage
the frequency of change in the portfolio and organization; (3) acquisition and licens-
ing choices (the make or buy decision); and (4) incentive design to motivate deci-
sion makers to take actions in the firm's best interest.