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TITLE:  SPURRING GROWTH IN DYNAMIC SECTORS: A Paradigm Shift in Biotech
        Strategy and Management
        Management Strategies for a New Marketplace
SOURCE: ISB News Report, USA, by Anastasia L Thatcher
        http://www.isb.vt.edu/news/2005/news05.jul.htm#jul0504
DATE:   Jul 2005

------------------- archive: http://www.genet-info.org/ -------------------


SPURRING GROWTH IN DYNAMIC SECTORS: A Paradigm Shift in Biotech Strategy
and Management

Part 2 of 2: Management Strategies for a New Marketplace

Last month, Part 1 of this article highlighted some of the dangers of
unqualified growth of biotech firms including non-optimal market sizes,
destructive competitive actions, environments that reward fraud, and
higher costs to support increasingly complex operations. However, these
failings should not undermine the importance of smart growth for
businesses in particular industries, product phases, or affected by
specific market dynamics. Firm growth is typically more important within
an industry that is growing as a whole. New industries, like biotech, are
more likely to require growth than mature or declining industries.

More importantly, this article does not seek to discourage growth fueled
by value-added activities and novel innovation. Rather, it is trying to
probe biotech management to ask, should my company grow? When is growth a
good idea? Sustainable growth stems from enhancing the value proposition
to a larger natural market. In determining whether new firms survive,
managers should not ask whether a firm can engage in "business as usual,"
but rather can it do something different from incumbent firms--is it an
agent of change?1 Success in today's environment is discovered in
strategies that ingeniously find and create value, not simply promote
traditional growth.


How to grow: Networking & alliances

A new breed of biotech firm is prospering by growing through downsizing.
Instead of maintaining competitiveness by leveraging operational
functions across a massive scale, these firms are keeping only the
intellectual capital that is critical to its competitive advantage in-
house and then outsourcing the rest. The model works well for several
reasons. First, biotech firms can reduce the risk and time it takes to
achieve productivity improvements by contracting with specialist vendors
who are more efficient and nimble. In recent years, small biotech start-
ups have been more successful at developing products and then licensing
the technology to larger firms with superior manufacturing and marketing
capabilities, thereby creating value for both parties2. Secondly, by
outsourcing and partnering, biotech firms gain access to global learning
networks that facilitate technology transfer and industry-wide innovation
without incurring M&A integration costs and premiums. Lastly, through
strategic outsourcing, fixed costs become variable and the organizational
model is more flexible and responsive to the market, eliminating the need
to coordinate vast global operations and employees.


How to grow: Deploy resources more effectively

Managers of small biotech firms are certainly aware of the disadvantages
they face in terms of scale production, access to capital, as well as
limited human and technological resources. Nevertheless, economists have
found the persistence of small-firm predominance striking--constant across
almost every industry, across time, and across developed nations. One
economist postulated, "Virtually no other economic phenomenon has
persisted as consistently as the skewed asymmetric firm size distribution
[favoring small firms]."3 Successful managers leverage the ability for
small firms to compete by creatively employing factor inputs. For
instance, smaller firms can avoid labor rigidities and therefore can
become more competitive through workforce relations. Additionally, such
firms are typically more "flat" and can therefore avoid the costly
management hierarchy needed in larger firms. Lastly, small companies can
implement more flexible production and new product development methods--
they effectively pursue critical strategies of timely process and product
innovation.


How to grow: Manage for innovation

Navigating growth in today's competitive environment requires
sophisticated management practices that many start-up biotech firms lack.
Particularly for companies moving from late discovery to commercial
development, the need to adopt more disciplined management is paramount.

One study has found a striking bottom-line differential between those
firms with strong management and those without. Mardis, Aibel, and
Associates, a biotechnology management consulting firm, demonstrated a 20
percentage point gap in the average annual growth rate in market value
between public biotechnology companies that make use of best management
practices and those that do not4. Looking at total valuation over ten
years, the analysis of North American biotech firms found that the firms
in the top half of the sample, in terms of effective management
practices, outperformed those in the bottom half by more than a four-to-
one margin, on average. For instance, the impact for a biotech firm with
a market capitalization of $200M, over ten years, translates into a value
gap of over $2B between well and poorly managed firms. However, they
found that only 5% of biotech companies have adopted the full range of
practices defined as constituting operational excellence. Specifically,
their study stresses the importance of five key management practices in
the biotech sector:

1. Structuring the business around cross-functional processes and programs;

2. Use of budgeting as a strategic tool, not a perfunctory exercise;

3. Rewarding managers and teams for setting and then achieving aggressive
objectives;

4. Establishing a well-understood process for shutting down ineffective
programs; and

5. Treating management as a professional discipline, not a part-time job.

More generally, economic research has shown that increasing competitive
pressure via new firm entry is particularly prevalent in sectors where
small firms tend to have the innovation advantage, such as in
biotechnology. Yet such research also shows that these industries tend to
be more turbulent, making it more difficult to survive. For this reason,
it is imperative for small firms and start-ups to implement management
structures that promote factors found to increase the probability of long
term success. Across small businesses, four themes in management
consistently appear to create an environment that spurs successful growth:

? Atmosphere of innovation The organization must be receptive to
innovation. Policies and practices are needed to create an
entrepreneurial climate.

- Capability to innovate The organization must undertake systematic
measurement of the company's performance with respect to innovation, and
must cultivate the ability to learn through doing to improve performance.

- Innovation in the management system The enterprise must formulate a
clear organizational structure, with regard to staffing and managing, and
to compensation, incentives, and rewards. The enterprise should not
combine the management and innovation departments.

- Innovative Action This refers to the action steps taken to innovate,
such as use of new marketing channels, adoption of new process
technology, or movement into new areas. However, it is not recommended
that the firm move out of its original field to achieve innovation
through diversifications, or by trying to achieve innovation through
acquisition.

Specifically, researchers surveyed small, newly established enterprises
and tested the impact of the four themes above by identifying nine
activities that promoted growth sustainability:
(1) clear enterprise vision;
(2) full delegation of authority and democratic leadership system;
(3) a system for encouraging employee suggestions;
(4) implementation of education and training;
(5) implementation of employee stock options;
(6) an R&D system and undertaking R&D activity;
(7) attaching importance to employee career planning;
(8) internal management through an intranet system; and
(9) online marketing. 'Innovative actions' resulted in the most
impressive sustainable sales growth, while cultivation of an 'innovative
atmosphere' and 'capability to innovate' within the organization had the
greatest impact on profits.

More specifically to the biotech arena, different managerial skills are
needed at different stages of company growth. Biotech companies tend to
have strong leaders during the early stages of growth, but unfortunately
do not often develop management structures needed for later stages. The
task of evolving organizational and operational practices, especially in
cases where the company is still led by an original "scientist-founder,"
can be a difficult, if critical, transformation6. Typical impediments to
successful transformation include failing to plan adequately, failing to
dedicate sufficient resources, inadequacies in communication, a lack of
proactively addressing cultural resistance, and an inability to deal
effectively with staffing issues.

The Mardis, Aibel, and Associates' survey (mentioned above), which
interviewed 200 biotech executives, revealed that managers became
increasingly dissatisfied with their own performance as their company
grew. Tellingly, the executives reported that tracking and measuring
performance, building integrated performance management systems, creating
cost-efficient repeatable processes, having world-class IT, and finding
good outsourcing supplies were the activities that received the least
management attention. Yet these are the very activities found to foster
innovation and create competitive advantage. Indeed, a shortfall of
experienced managers with a biotechnology background has begun to be
recognized. Business schools are responding, such as the University of
Buffalo, which recently launched a concentration in biotech management
courses at the graduate level7. The hope is that a new generation of
leadership, trained to develop and implement proven management
techniques, will help promising biotech firms bridge the chasm between
capital-intensive product development and profit-intensive product
commercialization.

The pressures to grow are real and intense for many small and medium-
sized firms. However, the underlying motivation for growth--firm survival--
is often not served through growth-focused strategies. Instead, small
biotech firms can leverage competitive advantages available to them,
specifically because they are small, such as more market-focused
products, strategic flexibility, and specialized competencies. Most
importantly, if firms can implement managers and management systems that
focus on innovation and entrepreneurship rather than unqualified growth,
the propensity for long-term success is secured.


Selected References

1. Kenneth Preston. Managing Growing Companies course taught at New York
University, Stern School of Business, 2004

2. Why Some Start-ups Choose Cooperation Over Competition. Strategic
Management, Wharton. Apr 7, 2004. Available at: http://
knowledge.wharton.upenn.edu/article/961.cfm

3. Audretsch DB. (1995) Innovation and Industry Evolution. MIT Press

4. New Study Shows Common Management Practices can Cost a Typical Biotech
Company $2B in Market Value. Mardis, Aibel, and Associates, LLC.
PRNewswire. Jun 7 2004

5. Hsueh L and Tu Y. (2004) Innovation and the Operational Performance of
Newly Established Small and Medium Enterprises in Taiwan. Small Business
Economics 23 99-113

6. Creeping Over the Chasm: Biotech's Perilous Managerial Transitions. In
Vivo: The Business and Medicine Report. Dec 2003

7. Williams F. Biotech base needs a few good managers in Buffalo, N.Y.
Knight Ridder Tribune Business News. Jul 22, 2004


Anastasia L. Thatcher Life Sciences Strategist New York City
alt232@stern.nyu.edu




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