New Challenges in Alliance Portfolio Management - Innovation and Marketing in the Pharmaceutical Industry - page 157

( 2010 ) recently argued that diversity is benefi cial at moderate levels (i.e., an
inverted-U-shaped effect). Interestingly, though, he did not fi nd empirical support
for that argument; on the contrary, Phelps found evidence for a positive linear effect.
Since this fi nding rejects the arguments derived from learning theory, we may want
to look for alternative explanatory theories.
Interestingly, the assumptions of knowledge assimilation in each alliance and
integration across alliances also seem to contradict what we observe in practice, i.e.,
large pharmaceutical fi rms' actual strategies. Pharmaceutical fi rms increasingly
incorporate options in their deal structures (Ernst & Young 2010 ): they make initial
investments in risky alliances with the option to further invest in the future, when uncer-
tainty is reduced and the most promising alliances can be identifi ed. Option logic in
alliance portfolio management thus refers to the possibility to postpone choice.
Option-based collaborations are the primary vehicle for GSK to develop new
medicines, as indicated by the following quote from their Worldwide Business
Development brochure: “We seek organizations that have a robust discovery engine
and the capability of developing compounds to clinical proof of concept, at which
point GSK would have the option for further development and commercialization”
(italics added). This approach is quite different from SmithKline Beecham's
approach in the 1990s when it determined project portfolio composition and
resource allocation in one and the same phase (Sharpe and Keelin 1998 ). A real
options approach implies that (part of) resource allocation decisions are postponed
to a later phase.
Similar to GSK, Eli Lilly makes equity investments in promising emerging com-
panies that have the potential to contribute to fi rm value in the long run (Lechleiter
2010 ). As a fi nal example, Novartis allies with biotechnology fi rms in diverse tech-
nology domains to increase the likelihood that some of these alliances will success-
fully produce superior drugs (Novartis Venture Fund activity reports). In sum,
pharmaceutical fi rms do not seem to consider each alliance as a source of knowl-
edge that should be assimilated and integrated, contrary to what learning theory
assumes; rather, they increasingly adopt a real options perspective with regard to
their alliance portfolio to more effectively deal with risk. 2
Formally, an investment in a real option (a particular domain of knowledge) con-
veys the right, but not the obligation, for a fi rm to make further investments or defer
such investments in the future (McGrath and Nerkar 2003 ). Real options reasoning
can be applied in any context characterized by uncertainty regarding the link
between investments and outcomes, time dependence of future events on current
decisions, and a possibility to exercise options (Chatterjee et al. 1999 ; Kogut and
Kulatilaka 1994 ).
Central to real options reasoning is that the value of an options portfolio increases
with its diversity. If real options reasoning is adopted by most fi rms, we should
2 Interestingly, a further analysis of the data described in the excerpt showed that internally diversi-
fi ed fi rms faced lower turbulence in terms of profi tability and stock prices, which may be indicative
of reduced vulnerability to risk as a consequence of diversifi cation.