Coopetition as an Entrepreneurial Strategy: an Exploratory Study of UK Biopharmaceutical SMEs Călin Gurău and Frank Lasch

This paper investigates the specific characteristics of R&D coopetitive projects developed by UK biopharmaceutical SMEs, interpreted from the perspective of an entrepreneurial strategy. The coopetitive approach represents a necessity for companies involved in highly dynamic industrial sectors, characterized by a high level of competition. Based on the analysis of primary data collected from 24 UK SMEs, involved in 19 coopetitive agreements, the study identifies the specific stages of the entrepreneurial approach, and the specificity of managerial strategies, depending on the type of coopetitive agreements. As in the case of entrepreneurial strategies, the coopetitive projects are characterized by uncertainly, risk and complexity, requiring from the participating managers opportunity identification and creation, risk-taking, problem solving and value creation skills. _____________________________________________________ Dr. Călin Gurău is Associate Professor of Marketing at GSCM - Montpellier Business School, France, since October 2004. His present research interests focus on the Business Strategies of SMEs, High-Technology Marketing, and Marketing Strategies on the Internet. Dr. Frank Lasch is Associate Professor and Research Director at GSCM – Montpellier Business School. He teaches and conducts research in entrepreneurship, focusing on entrepreneurial and coopetitive strategies in high-technology sectors.

Introduction In the last 10 years, coopetition became the focus of a growing number of publications (Gnyawali, He and Madhvan 2006; Gnyawali and Park 2009; Padula and Dagnino 2007). These studies demonstrate that coopetition can provide certain advantages to business organizations, increasing the diversity of technological assets, and combining dispersed complementary resources. Using coopetition, firms can innovate and develop quicker new 1

products and/or services (Ritala and Hurmelinna-Laukkanen 2009). As a rule, the industries characterized by short product cycles, a strong technological convergence and high R&D costs, such as software, electronics or biotechnology, are specifically adapted for coopetitive firm strategies (Gnyawali and Park 2009). The classical model of closed innovation was based on the need to control the innovation process and its outputs (Chesbrough 2003). Nowadays, this model is challenged by the evolution of the market structure. The focus of market exchanges has shifted from transactions to relationships, and the value-chain model advocated by Porter is often replaced by a value-constellation (Normann and Ramirez 1993), which implies a process of value cocreation among the various actors of the commercial environment (Vanhaverbeke and Cloodt 2005). In this context, the model of open innovation becomes often a necessity for sustaining the competitiveness of the firm in the face of rapid and unpredictable market evolutions (Herstad, Bloch, Ebersberger and van de Velde 2008). In order to speed the R&D process, firms often initiate collaborative innovation projects with other organizations that can sometimes represent their direct or indirect competitors (Lichtenthaler and Ernst 2008). The logic of coopetition is particularly strong in high-technology sectors, where SMEs get specialised in a focused area of scientific research. In these conditions, the solution to an R&D problem is often found in competing organizations that have similar strategic targets and research capabilities. Two main definitions of coopetition have been developed in the specialized literature. Brandenburger and Nalebuff (1996) have developed a large perspective, in which coopetition includes all the relations developed between complementary organizations. Bengtsson and Kock (2000) have, on the other hand, a more specific definition, in which the coopetitors are direct competitors. In this situation coopetition represents an organisational behaviour that is both cooperative and competitive, between firms that offer the same type of product/service to 2

the same consumer segment. In this study, the working definition is the one developed by Bengtsson and Kock (2000). Competition is considered as a horizontal relationship, a situation of rivalry between two or more organisations that target the same segment of customers. This study attempts to re-interpret and analyze coopetition as an entrepreneurial strategy. Taking into account the specific characteristics of entrepreneurship (Ahmad and Seymour 2008; Peneder 2009): problem-solving, opportunity identification and exploitation, risk-taking, and value creation, the study proposes a synthetic model, which, on one hand, explains the processuality of coopetition, and, on the other hand, provides a procedural map that can be applied by managers involved in various types of coopetitive agreements to enhance the success of this strategy. The study develops this interpretative framework considering the situation of biopharmaceutical SMEs in the UK biotechnology sector. The reasons for choosing this particular area of investigation was twofold: first, the biopharmaceutical sector represents a typical

environment

for

the

application

of

coopetitive

strategies,

and

second,

biopharmaceutical firms are perfect examples of entrepreneurial ventures.

The Competitive Context of the UK Biopharmaceutical Sector The pharmaceutical sector has become more complex in the last 30 years, being characterised by the creation of new enterprises, some of them spin-offs of larger corporations, or entrepreneurial ventures founded by scientists and academics, the fragmentation of markets, an increased level of competition, and the continuously raising cost and complexity of the product research and development process. Before the 1970s, the innovation process was fully concentrated in the big pharmaceutical firms, who had the necessary resources to concentrate the skills, equipment 3

and infrastructure required to develop new product and therapy procedures. The innovation process and the commercial exploitation of the new product were closely controlled by the company. One of the most revolutionary changes in the life sciences sector was the discovery or genetic engineering techniques, which had as a direct effect the exponential multiplication of biotech research enterprises, many of them working in the area of human health. Although the rate of creation of these firms was very high, few of them succeeded to survive long enough to develop a final product or a viable service platform. The most successful ones have often been acquired by large pharmaceutical corporations, which wanted to internalise the innovation assets specific for these firms. However, an interesting phenomenon was taking place. The innovativeness of the newly acquired biotech enterprises was quickly declining after their integration in the hierarchical structure of the large corporation (Briggs 1994). On the other hand, highly creative employees from large pharmaceutical corporations, unsatisfied by the tight control of the firm on R&D operations were leaving the firm to create innovative start-ups. The same process took place in universities and research institutes, fuelled by a developing venture capital market that offered these entrepreneurs the required resources to develop independent firms. The model of centralised innovation was under increased pressure to change. In the 1990s, the pharmaceutical firms reduced the number of strategic acquisitions and started to focus on more flexible forms of collaborations, such as strategic alliances and joint ventures (Acharya 1999). The biotech firms became in many respects an intermediary stage between academic research and large corporations, adapting the laboratory work to the requirements of productive technological activities.

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The new startups encountered an important problem: although they were capable to develop an innovative idea and to patent it, they did not have the necessary resources to commercially validate the innovation and to develop a market-ready final product. For most innovative therapeutic drugs, the development process is extremely long, risky and expensive. The development of new medicines requires the screening of a huge number of initial candidate substances (the success ratio is one in 4000), it can take 10 years or longer, and costs more than $300 million (Dorabjee, Lumley and Cartwright 1998; Persidis 1996). The complete value-added chain of activities between the generation of a new idea and the commercialisation of the final product can be divided into 3 main stages: product innovation; product development and product commercialisation (Evans and Varayia 2003; Walsh 1993). Each of these stages comprises a series of essential activities and processes (Chandrasekar, Helliar, Lonie, Nixon and Power 1999; Chiaroni, Chiesa and Frattini 2009; Evans and Varayia 2003):  Stage I - product innovation: to generate the seed-idea; to test the scientific originality and validity of the seed-idea; to gather the necessary human, technological and financial resources for the development of the original idea; to create the product prototype; to patent the product prototype and/or the production process;  Stage II - innovation validation and product development: to organize and start a pilotscale manufacturing; to test the product; to collect the results of trials and to submit an application for the product approval to the specialised governmental authorities; to obtain the approval of the specialised governmental authority for the mass commercialisation of the product;  Stage III - product commercialisation: to initiate the market research process; to identify the needs of potential customers and to delimitate the main customer segment; to design an appropriate marketing-mix strategy in order to transform the customer 5

needs

in

a manifested market

demand

(product,

price, distribution and

communication) integrated into a high value offer; to implement the marketing-mix strategy on the targeted market segment; to develop the market and to improve the offer. In these conditions, many small firms understood that their expertise and capabilities cannot cover the entire research and development of new products, and became focused on their specific competitive advantage, located in the first or the second stage of the process. On the other hand, they initiated collaborations with large pharmaceutical corporations, which had the complementary resources to finalise the R&D operations. On the other hand, the universities and the research institutes were obliged to develop the links business organisations in order to fund the high costs of research equipment and research grants, which fuelled the academic research process. Many academics developed a dual role, being involved in one or more biopharmaceutical firms, while continuing to teach and conduct research in universities. All these transformations of the pharmaceutical sector had a strong impact on the innovation model, determining the gradual transition of a closed, highly centralised innovation system to an openly managed innovation framework with multiple sources of scientific competencies, technological assets, and resources. Considering the above analysis of the evolutionary trends in the pharmaceutical sector in the last 30 years, it can be concluded that the development of open innovation systems in the pharmaceutical industry was determined by a series of specific conditions that were often simultaneous and inter-dependent:  the complexity of the innovation process, necessitating resources that cannot be developed internally by a single organisation;  the dynamics of competition forcing the organisation to accelerate the innovation process; 6

 the risk of innovation, which requires a combination of expertise and flexibility that can be often realised only through the collaboration of various highly specialised firms in innovation networks;  the specific innovative conditions that cannot be reproduced in large organisations. These specific conditions have forced biopharmaceutical companies to initiate open innovation strategies not only with collaborators but also with existing or potential competitors, in order to accelerate the process of product research and development. Despite the theoretical and practical importance of this topic, there are very studies that investigate the management procedures and challenges related with open innovation strategies in the biopharmaceutical sector (Chiaroni et al. 2009).

Research Methodology In order to develop, and investigate the relevance of, the proposed framework, an inductive approach was adopted and applied. In the first phase of the research project, a series of articles, reports and market studies have been accessed and analyzed in order to assess the relevance of the biopharmaceutical sector as an area of study, and to identify the specific characteristics of entrepreneurial strategies. In the second phase, 36 UK SMEs involved in coopetitive agreements in the last five years have been identified, using the Recombinant Biotech database. After receiving a formal invitation to participate in this research project, 24 companies involved in 19 coopetitive agreements have accepted to provide additional information about their managerial and operational approach. The unit of analysis was represented by coopetitive projects realized between UK biopharmaceutical SMEs. In order to increase the reliability of data, only the

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coopetitive projects in which at least two partners provided information have been retained for this study. Phone interviews have been realized with the CEO or the Business Development Manager of these 24 organizations, which lasted between 25 and 30 minutes, and which addressed issues concerning the (1) specific characteristics of coopetitive projects, (2) the perceived areas and level of risk related with each coopetitive agreement, (3) the main methods applied to manage, control and reduce the risk of these partnerships, and (4) the general outcomes of the coopetitive agreement in terms of value creation. The interviews have been recorded and then transcribed and analyzed using qualitative discourse analysis techniques, in which the main themes developed by respondents have been identified and interpreted in relation to the specific competitive position of the company.

Results

The Entrepreneurial Elements of Coopetitive R&D projects Primary data analysis validated the effectiveness of the entrepreneurial strategy framework in explaining and interpreting coopetitive agreements of UK biopharmaceutical SMEs. The four characteristics of entrepreneurial strategies: problem solving, opportunity identification and exploitation, risk-taking (and risk management), and value creation, have been identified in all the analysed coopetitive agreements. However, it is important to emphasize that in some coopetitive agreements only one of the partners adopts an active attitude in all the phases of the coopetitive process.

The Specific Stages of the Coopetitive Entrepreneurial Process

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Based on the information provided by respondents, the entrepreneurial process of the coopetitive agreement can be described in three distinct phases, each requiring specific skills, resources and actions: a. necessity: the coopetitive process starts with the recognition of a specific organizational problem. The interviewed managers emphasised that in the initial phase, the process is entirely problem-oriented: “We do not plan to initiate coopetitive agreements, and this does not represent a specific strategy for our company. However, when we are doing it, everything starts with an organizational problem, usually in the area or R&D. We suddenly realise that the project we develop has to move to a new stage, for which we do not have all the necessary competencies, technologies or resources” (CEO, Company 4).

Searching for possible

solutions, the manager eliminates as inefficient the development of internal solutions, and as inexistent the opportunity/availability of a classical type of partnership: “It was an obvious choice. On one hand we did not have the time to develop the technology ourselves – it would have delayed the project with at least two years and we could not afford that. On the other hand, none of the other companies in the market had this technology, with the exception of our direct competitor” (Manager, Company 17). The elimination of alternative solutions follows sometimes a strict procedural process, however, in most cases, the analysis is based on the knowledge and personal network of the manager/entrepreneur. We can consider this stage as the expression of a problem-solving process, which is characteristic for an entrepreneurial approach dedicated to business survival and development.

b. opportunity: the manager identifies one or more competitors as potential partners in a coopetitive project; initiate preliminary contact, and evaluates the possibility of a successful organizational interaction. This stage is paramount for the initiation of a coopetitive partnership, and corresponds to the entrepreneurial skill of opportunity recognition. However, 9

it is more than this, since the manager/CEO takes also the necessary steps to investigate and exploit this opportunity: “Knowing that we need to work with our direct competitor is only the beginning of the struggle. We know that there is a solution to our needs, but we still have to enact this solution. The fact that a competitor might be involved in our project has to be analysed carefully, in order to assess the level of potential risk. Unlike other solutions, this particular situation requires a deeper level of analysis. The decision must be taken on an informed basis.” (Business Development Manager, Company 12). A simple statistics of the investigated firms show that 62.5% apply a formal process of collecting and analysing information about the possible collaboration partners, while the remaining 37.5% are using an informal evaluation system, based on the personal knowledge of the manager or of the board of directors. On the other hand, the initial contact with the future partner requires sensitivity and diplomacy: “We hesitated a long time to contact our competitor simply because we did not know how to approach him properly. A direct demand could have been interpreted as an open recognition of our weakness to deal with the problem, representing an important competitive information. Because of this we tried to approach the situation differently and we ask ourselves what they [the competitor] might need from us. In other words we tried to mask our problems by knowing the weakness of our potential partner” (Manager, Company 9). Another direct expression of opportunity recognition, is the specific way in which the potential partner is engaged: “We found out that our accountant knew the financial director of the competing firm – they went to the same university, in the same cohort. It is through him that we arranged our first meeting …” (CEO, Company 4). In other situations, the initial contact was facilitated by a professional conference or a similar even: “ […] it was this workshop organised by the DTI concerning international collaboration and exporting, where I saw the director of the competing firm. It was a great opportunity – I approached him, we 10

took lunch together, we discussed … When I felt that it was the right moment I started to tell him about our problems and I asked him for some general advice. Luckily, he was very open and admitted that probably they can help us to move on with the project” (Business Development Manager, Company 19). Four of the interviewed managers indicated that the initial contact was facilitated by non-executive directors who acted in the board of director of both companies.

c. capability: the manager(s) involved in the coopetitive agreement need to identify, allocate and manage the necessary resources (people, time, organizational assets, managerial experience, etc.) in order to relate and work with the coopetitive partner, and ultimately, to solve the organizational problem identified in the first phase. The successful management of the coopetitive project is influenced by the previous experience of the coordinating team and by the degree of confidence developed between coopetitive partners (see Table 1): “It is no surprise that we developed three coopetitive agreements with the same partner. The first project was the most difficult, because we had to build up confidence, but the following two went smoother” (Manager, Company 16). Other important factors for ensuring a good collaboration is a clear definition of the rights and responsibilities of the parties (including conflict resolution measures), supported by clear and frequent communication between the collaborating teams: “There is really just one solution to any time of problem or misunderstanding: frequent and open communication” (CEO, Company 11).

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Table 1. Main success factors for the management of coopetitive projects Success factors

Frequency of responses

Percentage

Clear identification and evaluation of risks

14

58.3

Previous experience of the management team

19

79.2

Good level of confidence in the coopetitive partner

22

91.7

Clear and frequent communication with the coopetitive partner

15

62.5

Clear definition of the rights and responsibilities of each party, and of conflict resolution methods

17

70.8

The main challenge faced by business organizations during coopetitive agreements is to disclose to their partner the necessary information for an effective joint collaboration, and, on the other hand, to protect their confidential data and technology. The solution to this challenge varies depending on the specific type of coopetitive projects.

Specific Differences between the Types of Coopetitive R&D Projects The data provided by respondents indicate two main types of coopetitive R&D projects:  customer-driven projects: which are created and maintained at the specific request of a customer whose demands can only be satisfied by the joint work of two or more competing organizations. This is the case of a governmental agency that requires the rapid development of a new vaccine, or the situation in which a multinational 12

corporation demands the identification of a new active substance in order to further develop a therapeutic drug. This type of demand is often too complex for a single firm, and the short delivery deadline forces the biopharmaceutical SMEs to initiate collaborations with other organizations that have similar scientific competencies. 9 out of the total of 19 coopetitive agreements studied in this paper are included in this category.  partner-driven projects: are developed at the specific request of a biopharmaceutical firm that encounters specific problems in its R&D process. The organization attempts to find solutions to its problem, some of these coming from external sources. If the only or the best solution is provided by a competing organization, the firm attempts to initiate a joint project/operation characterized by an exchange of information, technology or licenses. During this operation, the firm will trade some of its resources or assets for the required solution; in other cases, when both organizations have the same dilemma, the two firms may join efforts to generate and test new ideas. This category of open innovation coopetitive agreements included 10 projects out of the 19 studied in this article.

The Management Procedures Applied to Implement Coopetitive Agreements The management of these two main types of cooperative R&D projects applies a combination of completely different values, priorities and procedures. In the case of customer-driven projects the two parties actively collaborate and share information technology and resources, with the main goal of finishing the project by the specified deadline. In most cases, the result of the project is sold to the customer, and therefore creates no problems regarding the sharing of a jointly developed intellectual property. However, when this is the case, the two organizations initiate conflicting negotiations, debating their 13

rights to own the newly developed technology. Unfortunately, this situation is seldom envisaged at the beginning of the coopetition project, and therefore no contractual clause is dedicated for its resolution in the joint R&D agreement. In five of the customer-driven coopetitive agreements investigated in this study, the customer itself had the initiative to initiate negotiations and has actively participated in the management of joint operations. This involvement provided clear technological standards and a sense of direction for the companies involved in the coopetitive relationship. The main stages of the project and the interaction procedures have been defined from the very beginning, which has significantly facilitated the collaboration between the two competitors. The research team was coordinated by project leaders representing the two coopetitive organizations, but also included a scientific consultant from the client organization, who supervised closely the gradual development of the required solution. In the four remaining customer-driven coopetitive agreements (half of which involved three coopetitive partners), the customer has only contacted one of the participating companies, and formulated a specific technological request. Then, this firm initiated a strategic scanning of the existing competitive environment, analyzing the existing competencies of various organizations from the same strategic group, in relation to the technological requirements defining the research project. One or more direct competitors were then selected on the basis of its/their organizational capabilities, and then approached with a research proposition. Usually, the company initiating the negotiations was disclosing the true nature of the project – based on the request of the customer organization. All the respondents describing this situation emphasized that the external nature of the request helped the competing organizations to approach the project more objectively, and find a common understanding as a basis for collaboration. However, the partnership remained limited both in time and in object: the joint research team included only the personnel that were strictly 14

involved in the project, and the information exchanged was carefully selected. The joint team was co-directed by two or three project managers – each one representing a firm involved in the coopetitive agreement. As soon as the project was finalized, the solution was transmitted to the client organization and the benefits were shared between partners according to the initial agreement; then, the partners reassumed the competitive stance. On the other hand, the partner-driven projects were characterized by a limited involvement of the coopetitive organizations that attempt from the beginning to initiate a game of quid pro quo. No step is taken further unless it is repeatedly negotiated and clarified in terms of resource investment and sharing of eventual gains or losses. Each party attempts to disclosed only the minimum necessary for the progress of the joint project, however, this is often an unrealistic approach since the scientific knowledge and technological capabilities cannot be separated in clearly defined pieces. The best situation is characterized by a common problem shared by both organizations: in this case the two parties are closely collaborating to find a solution, and then quickly separate after finding a satisfactory result. Sometimes, these projects are limited to a cross-licensing operation, eventually completed with specific personal training and technology transfer. The coordination of the project is usually made by a representative of the firm initiating the request, but any resource or information shared by the other partner(s) has to be initially approved by the manager of partner organizations, which introduces a lengthy bureaucratic procedure and significant delays. Usually, the most successful of such project is either licensing, cross-licensing, or exchange of a clearly specified information, which does not involve a lengthy process of negotiation and collaboration.

The Main Problems Experienced by Coopetitive Organizations and the Corresponding Solutions 15

The two situations of coopetition described above present specific differences in terms of the number and type of challenges presented to the participating organizations. First of all, it is important to emphasize that customer-driven projects have less problems and organizational conflicts than the partner-driven ones. The problem is clearly defined from the beginning and the direct or indirect involvement of the client organization speeds and simplifies the negotiation, and then the collaboration process. In these circumstances the coopetitive partners suspect less that the involvement of the other organization is determined by opportunistic plans, and they are more open to exchange information or experience. The request of the client organization acts like a confederating aim, which transforms the collaborative situation into a win-win game. In fact, the majority of problems/challenges outlined by the respondents involved in this type of project were the ones related to finding and applying the appropriate technology and processes necessary to formulate the final solution, and not so much with the collaboration itself. It can be therefore concluded that customer-driven project are generally characterized by innovation-related challenges. In contrast, the partner-driven projects are mainly confronted with relationship-related challenges. In most cases, the organization that is solicited to participate in the joint project can never entirely escape the impression that the initiator has a hidden agenda – nevertheless they need the benefits offered in exchange for their participation. This idea creates an atmosphere of mistrust and deception, which is expressed by the careful analysis of each demand for new information or technology. The negotiation of various terms and conditions is not limited to the initial phase of the project, and is usually repeated in each new stage of the project. The solution adopted by the managers of the collaborating firms is to reinforce control and limit the shared resources to the minimum necessary to finalize the project. However, among the investigated projects, several partner-driven partnerships experienced less relational problems, either because the firms have already collaborated in the past, or 16

because the managers of the two firms knew each other on an informal basis, which created the conditions for a more trustful relation.

Concluding Remarks This study presents an original framework for analytically interpreting the processuality of coopetitive agreements developed between UK biopharmaceutical SMEs. The model of entrepreneurial strategy is applied to explain the specific elements that need to be taken into account by organizational managers, in order to successfully initiate, manage and conclude a coopetitive project. The findings clearly indicate the internal mechanisms that are applied in the case of two types of coopetitive projects. The paradox is determined by the natural need for the two organizations to open their boundaries and share resources, technology and knowledge during the joint R&D project; but, on the other hand, the situation of direct competition induces the fear that any disclosure will be opportunistically exploited by the other party. This fear is less acute in the situation of a customer-driven project. Indeed, these projects are often coordinated directly by the customer, which clarifies from the beginning the contractual terms of the collaboration and the sharing of resulting benefits. On the other hand, partner-driven projects represent symptomatic examples of managerial paranoia, when the need to simultaneously disclose and protect technology or information creates significant barriers for the successful completion of the joint R&D project. These findings present a series on relevant implications both for academics and practitioners. From an academic point of view, the organizational behavior in coopetitive situations is still insufficiently studied. A theoretical framework of the main phases of interorganizational relationships should be developed, with a more precise identification of the challenges and processes that characterize each phase. Then, the research can identify and 17

propose a series of best practices that can illustrate success stories of coopetitive projects, using a case study approach. On the other hand, practitioners can use the findings presented in this study to increase the efficiency of their open innovation projects. Understanding the specific characteristics of each type of coopetitive agreements can help biopharmaceutical to avoid the recurrent problems in the phase of negotiation and implementation, and to approach the innovation partners in a more open and trustful way. However, this model should be validated and further developed by future studies.

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