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The emergence of new technologies, while holding great promise for society, often threatens the viability of established companies. There are plenty of well-known examples of this, such as the Eastman Kodak Co. and Polaroid Corp. and the advent of digital photography. In many of these cases, the core challenge for established companies stems not from a lack of recognition of or investments in emerging technologies. Instead, it stems from the challenge of commercializing an emerging technology whose economic attractiveness with respect to the company’s existing business model is not at all obvious in the near term.
Today, managers in many prominent sectors, including autos, financial services, energy, and health care, face the challenge of pursuing emerging technologies that carry a high degree of uncertainty with regard to their economic viability and their companies’ competitive position. However, what is sometimes lacking is an understanding, guided by systematic empirical evidence, of what managers can do to overcome this challenge. Our research offers some insights.
To understand the challenge, one first needs to recognize the distinction between the new idea (invention) and its subsequent commercialization through a product or service (innovation). This is important because, within established companies, the decision-making processes and logic governing inventions differ significantly from those governing commercialization. Engineering and scientific personnel typically drive inventions within new technological domains, whereas business development and marketing managers drive the subsequent commercialization. The guiding logic for inventions tends to be around the search for superior solutions to existing problems or unmet customer needs, while the guiding logic for commercialization tends to be around improving the competitiveness and profitability of the business.
These logics may be mutually consistent in the case of some emerging technologies (such as energy-efficient vehicles and wireless telephony). However, in other cases, they create organizational tensions stemming from business model considerations related to how established companies create and capture value. For example, engineers at Xerox Corp. in the 1970s pioneered key inventions in information technology (such as the graphical user interface and Ethernet computer networking). But Xerox did not aggressively pursue commercializing these innovations itself because the company’s top management thought they did not fit with the company’s existing copier-based business model.
We studied such tensions and possible solutions to them through a two-year field study of the pharmaceutical industry. This industry has witnessed an important technology shift fueled by the emergence of biotechnology-based therapeutics. However, despite the enormous promise, there has been and continues to be substantial uncertainty about when scientific discoveries will emerge, whether those discoveries will achieve clinical success, and how commercialized drugs will create value for the different actors. We collected detailed data on investments in research and drug development for the top 50 leading global pharmaceutical firms from 1989 to 2008, and we interviewed more than 20 industry experts. Detailed findings from our study were published in the Academy of Management Journal.
We focused our examination on two new biotechnologies that emerged in the late 1980s and that gathered lots of attention: monoclonal antibodies and gene therapy. Both technologies represented a radical departure from traditional chemistry-based therapies, faced a high degree of scientific and commercial uncertainty, and required established companies to invest in new competences. Despite the challenges, many established companies initiated research in both technologies and generated patented inventions. But we observed that the extent to which established companies’ research investments led to drug development activities differed significantly between monoclonal antibodies and gene therapy. While inventions were being readily translated into downstream drug development and commercialization in monoclonal antibodies, that was not the case for gene therapy.
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This can be explained in part by the fact that monoclonal antibodies and gene therapy differ significantly in their fit with the existing pharmaceutical business model. Monoclonal antibodies, like traditional chemistry-based drugs, are standardized treatments targeted at mass markets and prescribed over the long term, resulting in recurring costs for patients and insurers. As a result, monoclonal antibodies represent a good fit with the traditional pharmaceutical business model.
In contrast, gene therapies are typically one-off or significantly less frequent personalized treatments for patients with genetic disorders, administered by specialized physicians. Consider an application of gene therapy to treat hemophilia A and B. Such treatment is predicated on a one-time personalized injection, which not only threatens the existing market for hemophilia treatment but also presents a lack of clarity regarding how such a new treatment would be priced and reimbursed. Hence, gene therapy represents a case of a technology that disrupts the existing business model. As we confirmed through our interviews, it is this disruptive nature that made it difficult for gene therapy inventions within established companies to garner resources toward subsequent development and commercialization.
We also explored how managers could overcome this challenge — and discovered that the answer lies in the organizational design through which companies pursue emerging technologies. We found that gene therapy research that was conducted in-house or via external research contracts, where the established pharmaceutical company made the development and commercialization decisions, was less likely to move toward commercialization because of the conflict with the company’s existing business model. Companies were more likely to pursue subsequent gene therapy development and commercialization when the research was conducted via alliances with startups and universities, or within a separate research unit that was acquired. In such situations, the decision making with respect to drug development and commercialization was structurally separated from the parent organization and involved outsiders from startups whose mental models differed from those of executives within established companies.
The implication of our research for executives is clear: When evaluating emerging technologies, managers should assess not only the new functionality and associated competences that their companies may need to develop but also whether the emerging technology has a significantly different customer value proposition and profit equation. (Think, for example, of digital imaging and photographic film manufacturers, gene therapy and pharmaceutical companies, or self-driving cars and automakers). The greater the incompatibility between the emerging technology’s business model and the company’s existing business model, the greater will be the organizational challenge that the company will face in commercializing it.
Managers can then mitigate this challenge by creating an organizational structure where resource allocation and decision making around emerging technologies are decoupled from the established company and involve outsiders with different mental models. This can be achieved through strategic alliances and acquisitions of startups or research units. Alliances may offer greater flexibility, whereas acquisitions may provide greater control over the technology and intellectual property. Alternatively, pioneering companies could create new units such as Amazon’s Lab126 and Google X through aggressive hiring. However, such a structure often comes with an added burden for a company’s leaders, since they must manage the competing demands of the core business and the emerging technology initiatives.
Today many businesses are confronted with disruptive technologies such as 3-D printing, artificial intelligence, cloud computing, the internet of things, personalized medicine, and renewable energy. An important consideration for managers is to move beyond the decisions of whether and when to invest to the question of how to invest in such emerging technologies. While executives may initiate preliminary explorations in these technologies, they may be constrained by the logic and decision-making processes underlying inventions and their subsequent development and commercialization. But with appropriate organizational designs, executives can help sustain their companies’ success — even in the face of an ever-shifting technology landscape.