New Challenges in Alliance Portfolio Management - Innovation and Marketing in the Pharmaceutical Industry - page 149

5.1 Introduction

Pharmaceutical fi rms rely increasingly on external R&D as they organize and
restructure to optimize their pipelines. Eli Lilly, for example, is transforming itself
from a fully integrated pharmaceutical company to a fully integrated pharmaceuti-
cal network to “expand the pool of opportunity” (Lechleiter 2010 ). There are many
ways in which pharmaceutical fi rms can expand the pool of opportunity.
First, the licensing exchange market offers opportunities as pharmaceutical fi rms
can purchase, or license-in, externally developed technology. For years, licensing
agreements have been a primary source of opportunity for many pharmaceutical
fi rms to build and sustain their drug pipelines (Simonet 2002 ).
Another route to internalize externally developed knowledge is by acquiring the
entire dedicated technology company. Especially pharmaceutical fi rms that face
reduced internal productivity tend to acquire other fi rms to replenish their research
pipelines (Higgins and Rodriguez 2006 ). Zhao ( 2009 ) fi nds that while reduced inno-
vativeness motivates a fi rm to engage in acquisitions, acquisitions in turn do more
than only compensate for the decrease in innovativeness and also effectively increase
the fi rm's innovation efforts.
A third route to benefi t from external knowledge is by allying with other industry
partners and jointly developing new technologies. In this chapter, I focus on such
alliances and I will argue that alliances offer the benefi t of strategic fl exibility, as
opposed to purchasing licenses or acquiring companies. Eli Lilly, for example, has
formed a Corporate Business Development group for forming alliances to innovate
more effi ciently and more effectively (Eli Lilly 2011 ).
As companies are increasingly engaging in alliance activities to expand the pool
of opportunity, a new phenomenon has emerged: the alliance portfolio, which refers
to a fi rm's collection of alliances. The effects of alliance portfolios on fi rm innova-
tiveness and profi tability have been studied in strategy and organization behavior
(e.g., Hoffmann 2007 ; Ozcan and Eisenhardt 2009 ; Sarkar et al. 2009 ; Wassmer
2010 ) as well as marketing (Cui 2013 ; Cui and O'Connor 2012 ; Wuyts and Dutta
2008 ; Wuyts et al. 2004a ). This domain of research is important, for at least two
reasons.
First, from an academic perspective, the study of alliance portfolios in the phar-
maceutical industry can be approached from different perspectives, all of which
have their merit: a resource perspective, as alliances are vehicles to access external
resources that may complement internal resources; a relational perspective, as alli-
ance portfolios offer unique governance problems; a risk perspective, as alliance
portfolios, if properly designed, serve a risk reduction function; and a cost perspec-
tive, as the cumulative investment costs associated with expansive alliance portfo-
lios can be very substantial.
Second, from a managerial perspective, pharmaceutical companies differ in
terms of their understanding of the phenomenon and their ability to shift focus from
an alliance approach to a portfolio approach. Even if they do realize that a portfolio
is more than the sum of its parts, not all fi rms are equally equipped to reap the
benefi ts from their alliance portfolios.