Project Setbacks can have a Positive Impact on Collaborative Value
Hu, Y., Mc Namara, P. & Piaskowska, D. Project Suspensions and Failures in New Product Development: Returns for Entrepreneurial Firms in Co-Development Alliances. Forthcoming in Journal of Product Innovation Management. DOI: 10.1111/jpim.12322
Setbacks and failures are an integral part of any innovation process. How can firms turn their prior setbacks and failures into a future success? Might past setbacks, where a firm temporarily suspends a project, have a different impact on value creation in future projects compared to the experience of absolute project failures? How might the value created through a collaboration rise or fall when collaborators have a history of project setbacks or failures? We studied these questions in the context of the development of new drugs in alliances between entrepreneurial biotechnology firms and established pharmaceutical companies.
The development of new drugs to improve human health is costly, uncertain and complex, yet vital to the future of humanity. Collaboration between entrepreneurial firms and established pharmaceutical firms is often used as a method to explore new drugs, bringing the new ideas of the entrepreneurial firm and combining them with the development and commercialisation skills of the established firm. We calculated the financial value created by such collaborations as the rise (or fall) in stock price of the entrepreneurial firm caused by the formation of the alliance. On average stock prices rose by almost 5% and this rise in value was significantly impacted by the experience that the entrepreneurial firm had in suspending and killing unpromising projects in the past. In some cases this resulted in millions of euros of value created or lost.
Our research showed that past experience of project suspensions can increase the value of a collaboration, especially where the collaboration is exploring risky new ideas in the early stages of new product development. We believe this is because prior project suspensions reflect a firm’s ability to manage their product development portfolio such that unpromising projects are suspended quickly. This saves resources for now (or permanently), whilst enabling the project to be resurrected once science or understanding advance to enable it to move forward again. Our research also showed that prior absolute project failures had a very different and negative impact on firm value created with new collaborations. Past failures (or killing off) of drug development projects may signal more serious issues in a firm’s technology portfolio, portfolio management, and product development capabilities.
The power of such signals from past failures depends on the stage in the product development process at which an alliance is formed. Human nature is such that we tend to view distant-future occurrences more optimistically, and focus more on the desirability of success rather than its actual feasibility, as compared to near-future occurrences. That’s why to minimise the damage resulting from past failures, entrepreneurial firms may best enter co-development alliances at exploratory stages of product development.