Open Innovation – a useful approach for pharmaceutical SMEs? Silvia Adelhelm Centre for Entrepreneurship and Innovation at the University of Potsdam, August-Bebel-Str. 89, 14482 Potsdam, Germany. E-mail: [email protected] Andreas Braun* Centre for Entrepreneurship and Innovation at the University of Potsdam, August-Bebel-Str. 89, 14482 Potsdam, Germany. E-mail: [email protected] Guido Reger Centre for Entrepreneurship and Innovation at the University of Potsdam, August-Bebel-Str. 89, 14482 Potsdam, Germany. E-mail: [email protected] * Corresponding author

Abstract: This paper presents the preliminary results of the applicationoriented research project ‗Open Innovation in Life Sciences‘. On the basis of qualitative data and desk research we analyzed the innovation management of the partnering pharma companies in general and their existing open innovation management in particular. The results indicate that the innovation processes within pharmaceutical SMEs are structured rudimental. To a certain extent, companies already apply open innovation, albeit merely in an unstructured and opportunistic way. The interviewed SMEs show reluctance to share information, but a preference to absorb information in a risk-averse manner. Finally, interesting avenues for future open innovation research in the life sciences industry are presented.

Keywords: Open innovation; small and medium-sized enterprises; SME; pharmaceutical industry; action research; KMDL; knowledge modelling and description language

1 Introduction The pharmaceutical industry which is distinguished by an intensive research and a high innovational potential has experienced radical structural changes since the late 1990s. The transformation process is driven through changes in technology (i.e. the necessity to streamline the cost- and time-intensive development process and to integrate advances in sciences and technologies) (Jungmittag et al. 2000; Gassmann et al. 2004a), economy (i.e. the globalization of the pharmaceutical business and the competition with generic drug companies) (Clark/Ofer 2004; Betz/Fleßner, 2004) and politics (i.e. the harmonization of the approval requirements, price pressure and governmental regulations) (Piachaud 2004; Nusser 2007). As one major consequence, pharmaceutical companies are facing a so called ―productivity paradox in R&D‖ (Gassmann et al. 2004a). In spite of increasing spending on research and development (R&D), the number of new products enjoying a success on the market is declining. Although virtually no other sector spends more money on research and development, the R&D process in the pharmaceutical industry lasts 12 years on average. In Germany, for instance, the average investment for a new molecular entity (NME) amounted to $ 800 million in 2007 (VFA 2008; Gassmann et al. 2004b). Pharmaceutical companies have attempted to overcome these challenges by two sometimes interlinked strategies: merging with other companies (Orhaghi 2009) and/or concentrating on core competences (Gassmann et al. 2004a). None of these strategies adequately matches the requirements of small and medium-sized companies, especially in Germany. The German pharmaceutical industry is structured predominantly around medium-sized firms, 90% of the 900 pharmaceutical companies employ no more than 500 staff members (Roventa et al. 2006). Due to inherence of restricted resources and the limited capability on managerial know-how, SMEs have to find new ways to cope with the challenges imposed by the changing market forces on the one hand and the realignment of big pharma on the other hand (Becker et al. 2007). In this context, particularly open innovation management offers SMEs new opportunities, but also new challenges in innovation management (Vanhaverbeke et al. 2008). To this day, an integrated scientific perspective involving the application areas of open innovation, the pharmaceutical industry and SMEs has hardly occurred.

The aim of the paper therefore is, to evaluate both the chances and the risks the open innovation approach presents for pharmaceutical SMEs with respect to the changing market structures. This research question is an integral part of a holistic approach of the project ‗Open Innovation in Life Sciences‘ at the University of Potsdam together with German SMEs in the pharmaceutical industry.

2 Open innovation framework and past research In the past, most technology-oriented companies preferably used internal R&D and innovation resources to develop and commercialize new products (Chesbrough 2003; Gopalakrishnan/Bierly 2006). The corresponding innovation strategy is called ‗closed innovation‘ strategy. In pursuing this kind of strategy, firms rarely interacted with the external environment when generating new ideas or commercializing new products. The internally focused logic of closed innovation created a virtuous cycle of innovation: Investments in R&D led to technology and product innovations, which increased sales and profits via the existing business model. A part of these profits were reinvested in R&D for new innovation projects which resulted in further breakthroughs. „Companies must generate their own ideas and then develop them, build them, market them, distribute them, service them, finance them, and support them on their own‖ (Chesbrough 2003, xx).

At the end of the 20th century, though, a number of factors led to the erosion of the closed innovation paradigm (Gassmann/Enkel 2006; Gerybadze/Reger 1999): 

Globalization



New market players



Shorter product life cycles



Lower R&D budgets



Escalating R&D costs

The open innovation paradigm has been introduced by Chesbrough responding to the emerging phenomena as described above. Hereby, Chesbrough assigns external resources a significantly higher importance than this has been the case in times of closed innovation. „Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firm look to advance their technology‖ (Chesbrough 2003, xx).

According to his research results Chesbrough defines open innovation as follows: „(…) open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively‖ (Chesbrough 2006, 1).

Finally, innovations in the open innovation thinking follow three different paths as concluded in the research done by Gassmann and Enkel (Gassmann/Enkel 2006): first, the outside-in process targeting the integration of external knowledge or knowledge bearers, second, the inside-out process gearing to exploitation of innovations and technology externally, and third, coupled processes describing cooperative innovation process with complementary partners or competitors in strategic alliances or network structures (see fig. 1). Figure 1: Three innovation paths in open innovation

Outside-in process

Locus of Innovation inside the company

External Knowledge into the company

Company Locus of Innovation inside the company

Inside-out process Exploitation outside the company

Coupled process

Joined Innovation and Exploitation

Source: Open Innovation, Gassmann/Enkel, 2006

Generally spoken, company boarders in the open innovation paradigm can be seen as permeable towards the external environment which allows for an increased knowledge flow between the focal firm and outside partners (Kogut/Zander 1992; Tushman 1977). Consequent thinking along the entire value chain and the design of new business models support the success rate of the three described core open innovation processes. Against this background, it has turned out essential for companies to develop a well-balance innovation strategy representing both rather closed and rather open innovation approaches – depending on the respective contingency factors.

3 Methodological approach This research aims to discuss the aspects and problems derived from that. In the following, we present the relevant research gaps, the research question and the design of our study.

Research gaps and research question On the basis of the considerations in chapter 2, we claim that open innovation is not an imperative for every company and every innovation case. Furthermore, the open innovation paradigm can be characterized as an eclectic theory combining and analyzing ideas from different veins (Christensen et al.; Von Hippel 1989). What deserves further attention is the opening up of business models, value chains and industries (Gopalakrishnan/Bierly 2006; Becker/Zirpolli 2007). Finally, although there has been large support for the necessity of having simultaneously explorative and exploitative business models (Gupta et al. 2006), only few studies have been able to describe how companies can develop such models and how they should organize for it (Fredberg et al. 2008). After all the excitement for open innovation in general, there is still much potential in discussing aspects of open innovation against the background of specific situations – such as the innovation challenges of pharmaceutical SMEs. The pharma segment is known as being highly research intense and interdisciplinary (Schumacher/Reiss 2008) but it has already entered the maturity stage in the life cycle. Contrary to the biotech industry, the pharma market is under strong pressure due to, for example, decreasing innovation efficiency, escalating R&D time and costs, increasing competition and market consolidation. Given these trends, pharmaceutical companies require an adequate change management and innovation management system to identify new market potential, to adapt existing structures and to develop the right innovation capabilities. These challenges gain additional importance considering the blurring boundaries of the different life sciences segments, in particular in terms of linkages between pharma with biotech and healthcare. Consequently, innovation processes become more complex which leads to novel requirements for pharma companies with regard to the integration of different knowledge categories. Pharma SMEs in particular are affected by this trend to innovate to a greater extent in joint project structures together with other market players. Thus, they need to strive for more open innovation processes across company and industry boundaries (Cavalla 2003; Chiaroni et al. 2008). In doing so, SMEs might gain the capability to tap crucial innovation potentials by bundling distributed complementary knowledge. Given these research gaps, the objective of this paper is to address the following research question: What chances and risks does the implementation of the open innovation approach present for pharmaceutical SMEs with respect to the changing market structures?

Research design of the study Departing from the research gaps this study is designed as an action research (AR) study. Our empirical investigation is mainly exploratory which implies to improve the understanding of the applicability of open innovation for the pharmaceutical industry. In doing so, the AR method serves as a kind of collaborative research approach. AR favours cooperative research settings and has a long lasting tradition in social sciences and more recently also in business and economic sciences (Cunningham 1993; Reason/Bradbury 2008). A summarizing definition for AR could be as follows: ―Action research simultaneously assists in practical problemsolving and expands scientific knowledge, as well as enhances the competencies of the respective actors, being performed collaboratively in an immediate situation using data feedback in a cyclical process aiming at an increased understanding of a given social situation, primarily applicable for the understanding of change processes in social systems and undertaken within a mutually acceptable ethical framework‖ (Hult/Lennung 1980, 247).

This methodology is particularly appropriate for our research question which targets the chances and risks and the implementation of open innovation. Among all the participatory research methods, the inherent advantage of iterative learning and development makes AR especially well-suited to the study (see also figure 2).

Figure 2: Action research process

Learning

Problem understanding

Analyse data

Research team

cycle 4

Problem understanding

Analyse data

Analyse data

Analyse data

Research team

Research team

Gather initial data

Agree project

cycle 2

Research team

cycle 1

Gather initial data

Agree project

cycle 3

Problem understanding

Problem understanding

Gather initial data

Gather initial data

Agree project

Agree project

Time

Source: New trends in innovation and customer relationship management: A challenge for market researchers, Maklan et al. 2008.

In AR, problem-solving and knowledge expansion are pursued simultaneously; one can say that research is carried out rather with than on the research subject. In contrast to traditional scientific paradigms, AR does not establish tight limits and controls on the experimental situation while the knowledge created is particular, situational and out of praxis (Coghlan 2004). The potential disadvantages of AR such as little distance to the research subjects or specificity of the practical problems have to be minimized in order to profit from the advantages of AR. Thus, AR represents the method of choice for strongly applicationoriented research projects. The starting point of our study is both a scientific research question and a practical problem. As with most AR projects, this study is structured around a series of work cycles (Maklan et al. 2008) with an evolving research agenda. Work cycle 1: Analyse and evaluate current situation In a first step, the research team met to evaluate the existing innovation management systems of all three project companies. The results of these SWOT workshops served as a base for the next project steps. Work cycle 2: Digging deeper In a second step, expert interviews provided insights into the different phases of the innovation process and into various other innovation management aspects such as knowledge flows, innovation strategy or project management approaches. These results were transferred into

innovation process models revealing strong and weak spots in each of the existing innovation management models. Work cycle 3: Best practice concept In a third step, that has not yet taken place, a best practice open innovation concept is to be developed by means of an intense exchange of methods and approaches between the participating firms and by means of best practice cases from the innovation management literature. Ensuing from the results, a quantitative survey is to be designed so that the empirical data base can be broadened. All the results will be embraced in a best practice open innovation concept that is to be implemented and validated together with the partner firms. Work cycle 4: Generalization and diffusion of the findings In a final step, the project results and empirical validation cycles are used to enhance the robustness of the developed best practice concept. It is an objective of the research project to generalize the elaborated concept to a certain extent for the pharma and life sciences industry.

4 Preliminary results In this section, the results of work cycle 1 and work cycle 2 are presented in greater detail. Based on in-depth interviews, we modeled the current innovation process in each partner company and identified a set of paradoxical situations.

Modelling the innovation process with KMDL One of the first means in the project was to determine the present situation of the innovation process in the partner companies. Therefore, a series of in-depth interviews was conducted and evaluated based on the Knowledge Modeling and Description Language (KMDL). This softwarebased method aims to capture, analyze and improve knowledge-intensive business processes, e.g. the innovation process, on various levels of detail. On the process level, the flow of rather abstract tasks is displayed. A more detailed description of certain operations, including the knowledge and information flow, is achieved on the activity level (Fröming/Fürstenau 2007). KMDL provides a library of shapes to model the process flow. These are: 

tasks – representing a set of activities which determine according to their sequence the chronology of the process;



roles – defining actors and/or departments in charge of certain tasks on an rather abstract level. A role can be performed by several persons.



information systems – indicating information and communication systems to gather, save, process, analyse, utilize, transfer or visualize information;



control flows – forming the linkages between a sequence of tasks (i.e. control flow) and the belonging of persons and/or information subjects to certain tasks (i.e. affiliation) (Gronau et al. 2005).

As supplement to the existing library the two additional shapes ‗external roles‘ and ‗external information systems‘ were introduced to display possible open innovation activities in the existing innovation processes. Figure 3 displays a small extract of the innovation process of one of the partner companies (see figure 3). All processes were evaluated by the project partners in further workshops. The example shows that to some extent external sources are already employed in the innovation process, however this is done neither on a regular basis nor in accordance to strategic considerations. Figure 3: Short sequence of the innovation process in one of the partner companies

Source: Own considerations

The analysis of the models indicated further research needs. Therefore, we identified three questions of further, deeper investigation within the KMDL framework. These are: 

How and by whom are external interfaces in terms of open innovation managed?



How and by whom are major decision-making within the innovation process made?



What happens with unrealized ideas within the innovation process?

These areas of interest will be subject of further research on the activity level. The aim is to identify and analyze the knowledge and

information flow as well as the internal and external roles involved in these processes.

Identifying four paradoxical situations Interviews from this exploratory study reveal a paradoxical situation for our partner companies. In the following section, each paradox is discussed separately. Paradox 1: Innovative – in spite of a fractional innovation process Each of the partner companies claims to be ‗innovative‘ – although they put emphasis on different aspects according to their setting in the value chain and their product mix respectively. Two companies which predominantly act as service provider define innovation as the successful completion of a service contract for their direct customer, whereas the other company includes the consumer perspective to a greater extent. The interviews indicate that to a certain degree the innovation process is structured and formalized rudimentarily. The various phases are only described roughly, responsibilities are divided inadequately and resource allocations are widely unplanned. The CEO of one of the companies described the situation as following: ―We develop without plan.‖ The presented results are in accordance to previous findings to the innovation process in SMEs (Rüggeberg/Burmeister 2008; Herstatt et al. 2001). Nevertheless, two companies have taken on substantial efforts recently to improve the existing processes by introducing a formalized idea generation and idea assessment process respectively. All investigated partner companies have recognized the necessity for further improvement in structuring the innovation process. Paradox 2: Open in the innovation process – but only one-way The companies perceive open innovation as a valuable approach for themselves in particular and the pharmaceutical industry in general. To some extent, suppliers, customers and external experts (i.e. patent attorneys, intermediaries and consultants) have already been integrated in the innovation process. Partly, this is result of the limited resource capacities inherent for SMEs. Nevertheless, the companies show an aversion to conduct open innovation due to the fear of unintended knowledge leakages. Therefore, a strategic approach to implement open innovation has not been initiated yet. In particular, the companies favor a one-way strategy with a clear preference for gathering information (outside-in processes) and the reluctance for disseminating information (inside-out processes). The procedure of coupled processes (e.g. in the form of co-operations) depend rather on operational prerequisites than on strategic decisions. Again, these results confirm previous studies on the open innovation approach of SMEs, especially the objection to share ideas and technologies generated within the organization (Rüggeberg/Burmeister 2008).

Paradox 3: Productive – in spite of limited methods competencies The investigated companies are without doubt successful in their business area with a portfolio of promising products. However, neither their common project nor portfolio management capabilities are very distinctive. The methods in use are standardized good practice quality guidelines and regulations for the pharmaceutical industry (GxP such as Good Clinical Practice – GCP; Good Laboratory Practice – GLP; Good Manufacturing Practice – GMP) and therefore to a large extent externally motivated. Concerning economic-related methods competencies, the analyzed companies display different stages of development. In one firm nearly all project and execution competencies are predominantly based on experience of long-serving staff members. The other companies have implemented various methods particularly to assess ideas in the early phases of the innovation process with checklists, portfolio analysis and business plans. These findings correspond with the limited managerial know-how and project expertise discussed in the literature on SMEs (Herstatt et al. 2001). Paradox 4: Lean and flexible – but insufficient knowledge flow The investigated companies stand out due to a lean and flexible structure with few hierarchical levels and a limited number of employees. These characteristics ground for the assumptions that knowledge and information may flow easily. However, the interview results indicate an interface problem between departments. Employees of different divisions have no clear understanding of the processes, actions and responsibilities of adjoining working groups. This finding casts a diming light on potential open innovation activities since good internal cooperation is perceived as an essential precondition to good external cooperation (Hillebrand/Biemanns 2004).

5 Conclusion and outlook The research project ‗Open Innovation in Life Sciences‘ started with an analysis of the current closed and open innovation management strategies in the partnering pharma companies. Based on these results, a second step embraced the modelling of the existing innovation processes. The subsequent analysis of the models indicated further research needs which represent the third step in the project agenda. In particular, we identified three questions of further, deeper investigation within the KMDL framework. These are: 

How and by whom are external interfaces in terms of open innovation managed?



How and by whom are major decisions within the innovation process made?



What happens with unrealized ideas within the innovation process?

These areas of interest will be subject of further research on the activity level. The aim is to identify and analyze the knowledge and information flows as well as the internal and external roles involved in these processes. To complement the qualitative research results, we will also conduct an online based survey with the aim to broaden the view on open innovation practices in the life sciences industry in Germany. The research data generated by this mixed method approach will be finally incorporated in a holistic open innovation management framework.

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