1.

Outlining of master thesis

Research questions: How can pharmaceutical firms support project selection with
management control tools?

Innovation managers in pharmaceutical firms are accused of adoption of a more narrow

perception of the scope for innovation (Tidd, 2017). Innovation can be looked upon as a key
driver for gaining and maintaining competitive advantage, securing survival and promoting
growth (Lynn and Akgün, 1998). Due to their future-oriented nature, innovations are
characterized by high uncertainty and complexity (Reid and De Brentani, 2004), thus bearing
high risk of failure (Heidenberg and Stummer, 1999). In the years 1960-2000, a study of
1,736 new drugs revealed a long tail of unsuccessful products in the pharmaceutical sector.
Almost two-thirds were incremental innovations, and a further 20% were simple imitations
(Achilladelis and Antonakis, 2001; Tidd, 2017). Innovation managers in such firms are
accused of doing ‘more of the same’, instead of adapting to new challenges. This can be done
by creating complementary routines for successful innovation, but identifying and learning
such routines can be hard in practice (Tidd, 2017). Therefore, innovation management control
(IMC) is essential to recognize and evaluate risks and challenges early on throughout the
innovation process and to optimally support innovation management with valuable
information (Adams et al., 2006).

Additionally, most innovations require substantial investments and consume significant

amounts of resources (Cordero, 1990). The dominant industry logic is that the pharmaceutical
businesses will continue to be driven by greater and more efficient R&D, coupled with
additional but more focused marketing. There have been many significant innovations in
products and processes, but analysis of patent data suggests pharmaceutical innovations
follows a conservative search strategy for innovations in the industry, and the opportunity to
broaden the innovation repertoire (Tidd, 2017). IMS is an interdisciplinary research field that
combines two disciplines: management control (MC) and innovation management. MC can
be defined as “the process by which managers influence other members of the organisation to
implement the organisations strategies” (Anthony and Govindarajan, 2007: 17). MC includes
elements such as performance measurement, coordination and incentive systems and is used
for planning, information support, decision making, ex-post evaluation and motivation.
Traditionally MCS literature focused on formal financial controls, such as budgets or
financial performance indicators. But also, informal, non-financial controls, such as cultural
control, has also been discussed in literature (Strass and Zecher, 2013).

The dominant ‘big pharma’ model is predicated on a relatively simple linear, technology-
push model of the innovation process: a capability to perform increasingly elevated levels of
internal R&D in an efficient, ‘machine like’ manner, and coupling this with an even more
expensive global marketing and sales capability. This machine model of innovation has
resulted in the need for a proliferation of strategic alliances, particularly between major
pharma companies and small specialist biotech firms to feed the machine new inputs, and
consolidation through merger and acquisition to commercialise the outputs (Tidd, 2017). In
addition to a very long tail of unsuccessful products during the period studied, 1960-2000
(Achilladelis and Antonakis, 2001; Tidd, 2017), there were no consistent pattern in the
correlation between the scale of medical or health outcome improvement, and the commercial
success of individual products (Grabowski and Vernon, 2000). It appears that developments
in biotechnology are following a similar incremental path as innovations in pharma firms, at
least partly due to the dominance of large pharma in testing and commercialisation
(Nightingale and Martin, 2004). And partly, because larger, more experienced biotechs have
become more astute at exploiting their position to sell lower-quality projects (Rothaermel and
Deeds, 2004). As a solution, management control tools make the firm better at identifying
whether a project is to be initiated, continued or discontinued, which gives underlining
support to the selection of projects (Chiesa, V., Frattini, F., Lazzarotti, V., Manzini, R.,
2009). Further, management control tools make it possible to govern project selection by
making strategic, technological and resource-based choices. An optimal product portfolio is
achieved by allocating resources, evaluating, selecting and terminating [innovation] projects
(Adams, R., Bessant, J., Phelps, R., 2006). Management control tools makes it possible to re-
orientate projects before failure by validating and specifying key areas of use (Godener, A.,
Söderquist, K.E., 2004). R&D projects selection decision is described as a process by which
an intermittent stream of changes are made to a lists of currently active or proposed projects.
It includes generating alternatives, determining when a decision is required, collecting data,
specifying constraints and criteria, and recycling. The decision is viewed as embedded within
a hierarchical, diffuse budgeting and planning process (Baker, 1975). However, the more
recent MC literature has argued that the individual elements of an MCS should not be used
independently (IMC as a package) without considering potential interdependencies of the
elements (Simons, 1999: Malmi and Brown, 2008; Grabner and Moers, 2013), which can
limit MC’s effectiveness and efficiency (Chenhall, 2003, Ferreria and Otley, 2009).
Therefore, the design and use of MCS must acknowledge that the different elements of MCS
may be complements or substitutes and, as such, reinforce each other (MCS as a system)
(Ferreira and Otley, 2009). Some complementary routines can have been established and are
associated with successful innovation management under discontinues conditions. Basic
elements of such routines have been observed, like an interpretive schema (how the
organisation sees and makes sense of the world) and operating routines (how the organisation
responds to signals and manages innovation) (Tidd, 2017). Following this point, R&D project
selection will be used as a complement to a MCS system in pharmaceutical firms.

Illustration:

RISKS: Market and

technology changes

Management’s
selection of
innovative
projects
Initiate, continue, or
discontinue projects?

Making strategic, technological

and resource-based choices?

Evaluate, select, or
terminate projects?
Allocation of Re-orientate projects
resources to before failure?
projects?