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«HELSINKI SCHOOL OF ECONOMICS (HSE) Department of Marketing and Management MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION IN THE BIOTECHNOLOGY ...»

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HELSINKI SCHOOL OF ECONOMICS (HSE)

Department of Marketing and Management

MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION IN

THE BIOTECHNOLOGY INDUSTRY

Cases Amgen and Genentech

Marketing

Master´s thesis

Paavo Järvensivu, Mikko Laukkanen

Fall 2006

Approved by the Council of the Department ____ / ____ 20____ and awarded

the grade_______________________________________________________

______________________________________________________________

ABSTRACT Managerial cognitions and business model evolution in the biotechnology industry – Cases Amgen and Genentech Paavo Järvensivu, Mikko Laukkanen Master’s thesis, marketing Helsinki School of Economics Fall 2006 Objectives The study aims to discover how business models have evolved in the biotechnology industry by analyzing two US-based case companies, Amgen and Genentech.

Emphasis is put on managerial cognitions and their role in the coevolution of business models and the business environment. The theoretical goals are to improve the existing business model framework, which was chosen as a starting-point, and to find compatible research methods.

Methodology The study uses an abductive case approach, where theory is developed side-by-side with empirical analysis. The selected sources of information are the case companies’ annual reports, complemented with specialist interviews and articles from the public press. The research methodology comprises of mapping all relevant events in spreadsheets, creating narratives describing the business model evolution of the case companies, building learning paths consisting of signals, cognitions, strategies and actions, and finally combining the information under the business model framework.

The framework offers a valuable tool for analyzing business model evolution, making possible a systematic comparison between different companies.

Results The improved business model framework and the methodology used are found to enable the relevant analysis and description of the business model evolution of biotechnology companies. However, the analysis still requires extensive interpretation by researchers. Based on the study, researchers and business managers can learn to better appreciate and understand the role of managerial cognitions and the complex dynamics in the coevolution of business models and the business environment. The study identifies, analyzes and presents those factors that have had influence on the ways the business models of Amgen and Genentech have evolved over time. The differences discovered in the evolution processes also serve as a foundation for further research.

Keywords Business model, managerial cognition,evolution, biotechnology, Amgen, Genentech TIIVISTELMÄ Liikkeenjohdon kognitiot ja liiketoimintamallin evoluutio bioteknologia-alalla – Tapaustutkimuskohteet Amgen ja Genentech Paavo Järvensivu, Mikko Laukkanen Markkinoinnin pro gradu -tutkielma Helsingin kauppakorkeakoulu Syksy 2006 Tavoitteet Tutkielman tavoitteena on selvittää kuinka liiketoimintamallit ovat kehittyneet bioteknologia-alalla. Tapaustutkimuskohteina ovat yhdysvaltalaiset bioteknologiayritykset Amgen ja Genentech. Tutkimuksessa korostetaan liikkeenjohdon kognitioita ja niiden roolia liiketoimintamallien ja yritysten toimintaympäristön yhteiskehityksessä. Teoreettisina tavoitteina on parantaa lähtökohdaksi valittua liiketoimintamalleja kuvaavaa viitekehystä ja löytää yhteensopivia tutkimusmetodeja.

Metodologia

Tutkielmassa käytetään abduktiivista tapaustutkimusmenetelmää, jossa teoriaa kehitetään empiirisen aineistoanalyysin kanssa samanaikaisesti. Valitut tietolähteet ovat yritysten vuosikertomukset, joiden antamaa kuvaa täydennetään asiantuntijahaastatteluilla ja lehtiartikkeleilla. Tutkimusmetodologiana on kartoittaa kaikki oleelliset tapahtumat taulukoihin, kuvata valittujen yritysten liiketoimintamallien kehittyminen narratiiveilla, luoda signaaleista, kognitioista, strategioista ja toimenpiteistä koostuvat oppimispolut ja lopulta yhdistää tiedot liiketoimintamalleja kuvaavaan viitekehykseen. Viitekehys toimii arvokkaana työkaluna, jolla voidaan analysoida yritysten liiketoimintamallien kehitystä ja verrata kehityskaaria systemaattisesti eri yritysten välillä.

Tulokset

Tutkielmassa osoitetaan, että parannetun liiketoimintamalleja kuvaavan viitekehyksen ja käytetyn metodologian avulla voidaan analysoida ja kuvata bioteknologia-alalla toimivien yritysten liiketoimintamallien kehittymistä. Analysointi vaatii kuitenkin tutkijoilta vielä huomattavissa määrin tulkitsevaa päättelyä. Tutkielman avulla akateemikot ja yritysjohtajat voivat paremmin ymmärtää ja ottaa huomioon liikkeenjohdon kognitioiden roolin ja muita kompleksisia piirteitä, joita liiketoimintamallien ja yritysten toimintaympäristön yhteiskehityksellä on. Tutkielmassa tunnistetaan, analysoidaan ja kuvataan tekijöitä, jotka ovat ajan myötä vaikuttaneet Amgenin ja Genentechin liiketoimintamallien kehitykseen. Kehitysprosesseissa havaitut erot antavat myös pohjan tuleville tutkimuksille.

Avainsanat

Liiketoimintamalli, liikkeenjohdon kognitio, evoluutio, biotekniikka, bioteknologia, Amgen, Genentech 1 INTRODUCTION





1.1 METHODOLOGY

1.2 VALIDITY AND RELIABILITY

1.3 SCOPE OF THE STUDY

1.4 THE DEVELOPMENT OF THE BIOTECHNOLOGY INDUSTRY

1.4.1 The development of the financial markets

1.4.2 Partnering in biotechnology

1.4.3 The development of science

1.4.4 Managing biotechnology companies

2 MANAGERIAL COGNITIONS AND BUSINESS MODEL EVOLUTION

2.1 MATERIAL ASPECTS

2.1.1 Business relationships

2.1.2 Strategy, structure and governance

2.1.3 Operations and resources

2.2 MANAGERIAL COGNITION

2.3 CORPORATE CULTURE

3 AMGEN

3.1 EARLY HISTORY

3.2 THE DEVELOPMENT OF AMGEN

3.2.1 Science

3.2.2 Finance and funding

3.2.3 Partnering

3.2.4 People

3.2.5 Political environment

3.2.6 Products, customers and markets

3.3 LEARNING PATH

3.4 CONCLUSIONS THROUGH THE BUSINESS MODEL LENS

3.4.1 Material aspects

3.4.2 Managerial cognition

3.4.3 Corporate culture

4 GENENTECH

4.1 EARLY HISTORY

4.2 THE DEVELOPMENT OF GENENTECH

4.2.1 Science

4.2.2 Finance and funding

4.2.3 Partnering

4.2.4 People and culture

4.2.5 Political environment

4.2.6 Products, customers and markets

4.3 THE LEARNING PATH OF GENENTECH

4.4 CONCLUSIONS THROUGH THE BUSINESS MODEL LENS

4.4.1 Material aspects

4.4.2 Managerial cognition

4.4.3 Corporate culture

5 CONCLUSION AND DISCUSSIONS

5.1 CONCLUSION

5.2 DISCUSSION OF THE CASE ANALYSES

5.3 LIMITATIONS

5.4 IMPLICATIONS FOR ACADEMICS AND BUSINESS MANAGERS

5.5 RECOMMENDATIONS FOR FURTHER RESEARCH

6 REFERENCES

6.1 BOOKS AND SCHOLAR ARTICLES

6.2 PUBLIC PRESS AND COMPANY PRESS RELEASES

6.3 INTERVIEWS

1 Introduction

The biotechnology industry was once predicted to be the next major cornerstone for Finland’s national economy (Finnish Pharma Cluster, 2001). This has encouraged Tekes, the National Technology Agency of Finland, to fund a project called GloStra that studies, among other issues, the evolution of the industry. One of the aims of the project is to better understand the workings of this new industry and to identify some of its factors of success. This paper participates in the project by analyzing the development of the business models used by two large U.S. based biotechnology companies, Amgen and Genentech. Both companies have in excess of a quarter century of history in the industry and have been leaders in its development. Some industry analysts we interviewed in Finland estimated that Finnish biotechnology companies are roughly 10-15 years behind their U.S. counterparts in development. However, the aim of this study is not to provide Finnish companies with concrete guidelines on how to best emulate these successful companies, but rather to increase the general knowledge of business model development and the impact of managerial cognitions in the biotechnology industry.

The term business model is widely used among industry practitioners to describe the way businesses are using their resources in order to create profits. Despite the term’s long existence in the entrepreneurial jargon and the recent enthusiasm of academics in studying the topic, researchers have not reached a consensus regarding the definition, nature, structure and evolution of business models. In addition, the dynamics related to the coevolution of business models and the environments in which they operate have lately received a lot of attention from scholars. We continue this research and select a promising business model framework, built by Tikkanen et al. (2005), as a starting-point for discovering tools to analyze business model evolution. The framework comprises material aspects, such as resources and capabilities, and managerial cognitions that alter the way managers respond to different internal or external signals. We are especially interested in the impact of those cognitions on business model evolution.

The rapidly developing biotechnology industry offers a fruitful setting for studying business models and their evolution. This study aims to provide a useful theoretical framework and methods, with a special focus on managerial cognition, for describing business model development in an environment that is underlined by fast-paced technological advancements. Our specific goals regarding theory are to (i) improve the original framework and (ii) discover compatible research methods, by utilizing the empirical data from two biotechnology companies. The methodology for meeting our goals and then using the improved theory in two empirical case analyses is described in Chapter 1.1.

This paper continues with a description of the development of the biotechnology industry, in Chapter 1.4, in order to give the reader minimum background information about the business model environment. In Chapter 2, a theoretical framework is built and discussed. The framework is tested in Chapters 3 and 4 by analyzing the business model evolution of two biotechnology companies. Chapter 5 will discuss the success and usability of the framework and the research methods used.

1.1 Methodology

As we began planning this paper, we could not find studies that would have directly provided us with proven, suitable methods and frameworks. We concluded that the best data source in our reach for scrutinizing the changes in the business models, and especially the mental models of the top managers of our two case companies, Amgen and Genentech, would be the companies’ annual reports. This is supported by Barr et al. (1992), who studied the cognitive changes in two U.S. based railroad companies by using letters to stockholders to map the managers’ mental models. Although not ideal, the annual reports still provide a good view of the major actions that have taken place while also reflecting some of the prevailing thinking of the top managers. Amgen’s annual reports were available for all the years 1984-2005 during which its shares have been under public trading. Genentech’s annual reports were available only for the years 1982-2005 although it went public already in the year 1980. The missing information for the years 1980 and 1981 was largely covered up in the book ‘From Alchemy to IPO’ by Cynthia Robbins-Roth (2000). The book, paired with ‘The Amgen Story’ by David Ewing Duncan (2005), also provided information about the two companies’ development for the years they were still privately owned and thus not obliged to official, regulated reporting practices. In addition, we selectively used the companies’ press releases and material from their web pages to check factual issues such as dates and figures. To get more deeply into the analytical discussion surrounding the companies, we scanned through dozens of articles by such quality papers as the Pharmaceutical Executive; the articles that we quoted directly are listed in the references. For validating and improving our interpretations, we interviewed seven industry professionals: an executive director of the health care program of Sitra, an independent public foundation, and five executives from leading Finnish biotechnology companies, as well as the country manager for Amgen in Finland. Also two managers from Genentech agreed for telephone interviews, which were used to tweak and confirm the results of our analysis.

To meet the theoretical goals of this study, improving the original framework and discovering compatible research methods, we used a qualitative, abductive case approach, which Dubois and Gadde labeled systematic combining (2002). They define it as a process where “theoretical framework, empirical fieldwork, and case analysis evolve simultaneously.” We started off with a business model framework by Tikkanen et al. (2005) and as the research process advanced, we developed the model further to better suit the description of the evolution of the business models in the biotechnology industry. In unison with the empirical data, we also developed methods for analyzing the case companies. The final process that resulted from the systematic combining approach is depicted next.

We interpreted and derived the top managers’ cognitions from the source materials by analyzing what has really happened, what is said about the intentions, strategies and actual events and then comparing that data against the evolving business environment. We also interviewed several biotechnology specialists in Finland in order to validate our reasoning and then adjusted the interpretations accordingly. To minimize the researchers’ influence and biases, we first systematically registered the events and clues of cognitive changes from the annual reports in spreadsheets. Then we selected the most meaningful sets of data to build narratives of the two companies’ business model development.



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