Employing business models for making project go/no-go decisions
C. William Ibbs
As project and portfolio management becomes more strategically focused, the need for tools and processes for determining the right projects to pursue and which to terminate increases. For a firm to maintain a sustainable advantage over its competitors, project and portfolio managers must select projects that can provide an adequate return on investment and drop those that will not. Project and portfolio tools and processes must take a holistic view of projects in order to ensure that the selected projects are meeting the goals of the firm. One such approach is to use business models to evaluate the viability of individual projects. By using business models to make decisions regarding individual projects, and in the broader sense, portfolios of projects, project management is coupling itself with the strategic management of the firm and is positioning itself to make decisions in the best interest of the company’s shareholders.
The more decisions a firm must make regarding which projects to pursue or terminate, the more valuable the decision-making tools and processes are. One industry that must make many such decisions regarding large, complex projects is the biopharmaceutical industry. The overwhelming majority of biopharmaceutical projects that enter clinical trials do not ultimately receive regulatory approval. Most projects are terminated due to excessive toxic side effects or for a lack of efficacy. For the remainder of projects, deciding whether or not to pursue a project is often an economic decision. Because of the high attrition rate of drug projects and the extremely long and costly development process, the prevailing attitude among many companies is to terminate likely failures as soon as possible, or “fail fast.” This research investigates employing a business model approach to making such timely go/no-go decisions.
Using projects from multiple biopharmaceutical companies, this research compares six successful projects that had complete business models and received regulatory approval to six terminated projects with incomplete business models. The primary goal of this paper is to demonstrate that applying business models to individual projects can aid project and portfolio managers with the go/no-go decision-making process.
Defining the Business Model
This research focuses on evaluating project go/no-go decisions not from traditional project metrics, but rather from the basis of a viable project business model. The current project management paradigm centers primarily on evaluating and monitoring projects based on whether or not they are on time, on budget, and within scope. This research looks beyond project-specific milestones and investigates whether or not the executing firm can articulate a viable business model for the project. Because many projects born of research and development efforts are the result of laboratory spillovers, they oftentimes lack a clear path to the marketplace. A business model conveys how a technology is to be commercialized by linking its technical potential to the creation of economic value, often in the face of technical and market uncertainty (Chesbrough & Rosenbloom, 2002). Formulation of the business model involves the assessment of customers, competitive product offerings, and technological risks and opportunities.
Although many practitioners and academics speak of business models with great regularity, very little research literature has been dedicated to the concept of the business model. While the subject has been examined with respect to Internet commerce (Afuah & Tucci, 2001 pp. 43–55), few other industries are discussed with respect to formalized business models. Chesbrough and Rosenbloom (2002) presented the most comprehensive discussion of business models to date. According to their work, the business model is a function of a project’s value proposition, market segment, value chain, cost and profit, value network, and competitive strategy.
The concept of making go/no-go decisions based on business models is appropriate in project management, particularly in the biopharmaceutical industry. Biopharmaceutical companies are spending an increasing amount of capital on R&D to produce technological potential. However, many companies are realizing less economic value, as the number of new chemical entities, which are the basis for new drug products, has been declining since 1996, despite increasing R&D expenditures over the same time period (FDA, 2004). The inability to produce an adequate return on R&D investments can lead companies to reduce or even withdraw from R&D expenditures (Rosenbloom and Spencer (1996) provided multiple chapters where this topic is discussed in detail). The biopharmaceutical industry has seen a reallocation of capital toward marketing and mergers and acquisitions at a time when many development pipelines are drying up and several profitable drugs are leaving patent protection.
Also important is the fact that not all drugs fail for technical reasons. Although the majority of drug development projects fail due to toxicity or lack of efficacy, economic considerations are also a large source of drug terminations (DiMasi, 2001). Simply because a drug is efficacious and presents no serious side effects does not mean that it is in the best interest of the developing company to pursue the marketing of the drug. Oftentimes, the costs for developing the biopharmaceutical project are too high or the development timelines too long for an adequate return on investment to be realized. These are issues that project managers confront every day, and a business model paradigm allows management to make prudent decisions in light of these obstacles.
Furthermore, corporate business models, for better or for worse, constrain the search for new or alternative models for other technologies. If the drug candidate is not a good therapeutic fit with a firm’s product portfolio, the drug may have a better opportunity to reach the market by way of an alternative business model, perhaps one outside of the developing company’s direct control. Therefore, the business model paradigm not only helps companies in determining which projects they should cull from their development pipelines, but it also aids in the search for commercialization opportunities in other arenas.
Research Design and Methodology
Corporate managers and project leadership engaged in the development of biopharmaceutical products at six large multinational corporations were interviewed. Each of these companies has a market capitalization in excess of U.S. $5 billion and derives the overwhelming percentage of both their revenues and profits from biopharmaceutical products. Two projects from each company were assessed, with one having received market approval and the other having been terminated by the original development company.
Because each of these projects is from the biopharmaceutical industry, the markets and competitive environments for each project are comparable. The choice of each of these projects was based on several criteria. Each project must have reached a point where no further clinical development would be undertaken to achieve regulatory approval for a given indication. That is, the product was either approved for marketing or terminated indefinitely for the current indication. Each project was also sufficiently significant within the company to have involved a committee of senior executives for decision-making and oversight. Lastly, each of these projects has been completed within the previous five years with the exception of one, which was given market approval approximately seven years ago.
A market project, in the case of this research, is defined as a project that successfully navigated the clinical trial process, culminating with approval in the United States by the Food and Drug Administration (FDA). A terminated project was one where the project was halted indefinitely for the indication it was being originally developed for during the clinical trial process. Each of the market and terminated projects were of considerable importance to their respective firms at their inception, both from a revenue and product-placement point of view. Projects that had not been officially terminated but appeared to be languishing in the development pipeline with few or no resources dedicated to it were not accepted for this research.
Primary and secondary data was collected for each project. Multiple interviews were conducted with members of the product development team. The interviews focused on determining, for each project, the presence and robustness of the six components of the business model as identified by Chesbrough and Rosenbloom (2002):
- Value proposition: Was value created for the users by the product?
- Market segment: Were the users and/or revenue generators for the product identified?
- Cost structure and profit potential: Were the cost structure and profit potential understood and favorable, given the value proposition and value chain structure?
- Value chain: Was the structure within the firm to create the product understood and the necessary complementary assets identified?
- Value network: Were potential complementors and competitors identified?
- Competitive strategy: Were the means by which the firm could gain and hold advantage over rivals created?
Secondly, the interviews asked managers for their views on of each project’s strengths and weaknesses with regards to the business model for the drug candidate. The interviews were conducted primarily with project team leaders, project managers, and portfolio managers. These personnel had an extensive understanding of the project’s development, overseeing development, manufacturing, and other key functions. Senior executives from four of the companies were also interviewed. The management interviews lasted for approximately 1 to 1.5 hours. All told, approximately four hours of interviews were conducted for each project.
Because each project involves several people, yet only a few people from each project were interviewed, the research was fortified with secondary research. Because each of these companies is overseen by multiple regulatory agencies, such as the FDA and Securities and Exchange Commission, copious amounts of company-generated clinical trial and financial information could be collected and analyzed.
This research methodology has some flaws. First, the sample size of 12 projects restricts potential power and significance tests. Second, the number of interviewees for each project was quite limited. Because business model formulation involves several people within a firm, interviewing a broader cross-section of project personnel and management would certainly have a positive impact on the quality of the research. Lastly, the retrospective assessment of each project by its project leadership can introduce positive bias for projects that achieved regulatory approval or negative bias for projects that were terminated. These problems are not unique to this study since they are common in most retrospective analyses.
A Brief Description of the Projects
Before describing the results of the research, the projects in the sample are summarized, each being disguised to preserve confidentiality. For each project, Figure 1 provides a summary of the type of project, whether it was given market approval or terminated (and the phase of termination) and a summary of the responses to the questions previously presented with regards to value proposition, market segment, value chain, cost and profit, value network, and competitive strategy. The answers to these questions reveal the presence and robustness of each of the components of the business model.
Figure 1: Presence of business model attributes
Findings Regarding the Role of the Business Model on Go/No-Go Decisions
The first thing that stands out about Figure 1 is that all the market projects sufficiently accounted for each component of the business model. Projects that successfully gained regulatory and market acceptance could adequately account for all attributes of the business model. Those that were terminated had failed to clearly present at least one component, and in many cases, multiple components.
The interviews with project leadership and secondary research provided considerable insight into the potential business models for the individual projects. This section summarizes the findings with regards to addressing each portion of the business model in order to successfully pursue regulatory approval for drug development projects.
Due to the large and escalating costs associated with clinical trials, few projects are allowed to continue if they do not have a clear and definable value proposition. Within the sample set of projects assessed during the course of this research, three types of value were observed. Several products had combinations of these factors contributing to their ultimate value proposition.
The first type of definable value is in the form of improving the ease of administration and/or general improvements to product quality. Project 1 greatly improved drug administration by developing a pill-based drug where competing products had to be injected or invasively administered. Similarly, Project 11 was able to develop a pill that allowed for a time-released diffusion of active ingredient, simplifying and reducing the number of daily administrations over competing products. Project 6 combined the active ingredients of multiple products into a single pill, reducing the overall number of administration events. Project 7 allowed for fewer and easier injections than competing products, whereas Project 10 simplified the injection process and overall purity of its product, thus easing administration and reducing the risk of transmitting blood-born diseases.
The second type of definable value for biopharmaceutical products involves a combination of improved efficacy and reduced toxicity. Project 3 showed excellent efficacy in clinical trials, whereas Project 2 both improved efficacy and reduced toxicity relative to competing products. By improving efficacy and reducing toxicity so significantly over competing products, Projects 6 and 7 were granted fast-track status by the FDA, significantly reducing the duration of the regulatory approval process.
The last type of definable value for biopharmaceutical products observed during the course of this research involves a significant extension of an indication-free survival period. Significant extension of own indication-free survival period is perhaps the strongest form of definable value because it is immediately tangible to relevant parties. However, medical and scientific breakthroughs that yield such benefits are also fewer in number than their counterparts. Projects 4 and 8 provided significant cancer-free extensions of life to patients, while Project 12 reduced the relapse rates of a debilitating neurological disorder by 66%. Based on these significant improvements over competing products, these projects are each forecasted to reach blockbuster status (i.e., greater than U.S. $1 billion in yearly sales).
Unfortunately, having a definable value in scientific or medical terms is not always sufficient. For example, Project 7 showed positive efficacy and toxicity profiles during clinical trials and was even fast tracked by the FDA due to its ease of administration. However, statistically proving efficacy became progressively too difficult to achieve. That is, the benefits were too difficult to properly articulate to the FDA. While the drug showed efficacy, reduced toxicity, and was easier to administer than competing products, proving such benefits in a clinical environment set forth by the FDA became too cumbersome and expensive. The project was subsequently terminated.
Other projects were unable to show any definable value over existing products, and were hence dropped from development. Project 1 showed no significant value over existing over-the-counter drugs, while Project 5 displayed no improvements over products in its developing company’s pipeline. Because they showed no significant medical benefits, both projects were terminated early in the clinical trial process.
The key for project and portfolio managers is to properly identify and capture the value proposition in the scope of the project. Project managers are often gatekeepers for ensuring the scope of the project is being met. Once a scope statement articulating value can be established, managers have a basis for ensuring the project is meeting its intended goals. The lack of a value proposition or inability to articulate value should stand as the basis for terminating projects. Without value, projects success is unobtainable.
On a conceptual level, defining the market segment for a biopharmaceutical product seems simple. A product that displays anti-cancer activity in head and neck cancer should be targeted to patients suffering from that particular ailment. However, in early-stage clinical trials, drugs may only show anti-cancer activity. The particular type of cancer it might receive regulatory approval for remains unknown until further clinical trials can be performed. Because of the long clinical trial process, market segments often evolve over time and may not be clear until significant testing has been performed. Companies are often betting that when the market segment does become clear that it is large enough to economically justify pursuing the project.
Although understanding the target market is extremely important, understanding how products are purchased and used is also key, particularly in biopharmaceuticals. For example, drug development firms must understand who prescribes the product, how the patient gets reimbursed, how is the drug administered (by the patient or by a health-care professional), and how often the drug gets administered (regular ongoing administration or single administration). Without knowing these factors, a biopharmaceutical company cannot know who it is actually targeting its product to, in terms of sales. The entire market segment must be understood.
Project 2 was unable to clearly define its target market, mostly because of the developing company’s general lack of expertise in that drug category. Its marketing department initially cast Project 2 aside because they did not see any potential for it in its target market. Its target market was dominated by over-the-counter medications or supplements and patients were often reluctant to discuss their particular health issues due to embarrassment. Not until clinical trials revealed once reluctant patients and a clever understanding of demographic changes did Project 2’s target market become clear.
For the rest of the projects observed, the target markets were fairly easily defined. Many of the projects’ targeted markets with large unmet medical needs and growing demands or very specific markets with key demands that needed to be clearly understood by drug development companies. In each of the cases, the basis of prescription and reimbursement policies were well understood.
As the project evolves from research to development, and the intended scope for the project becomes clearer, the intended market for the product also becomes clearer. As this transformation occurs, project managers are in the position to update the project scope to incorporate these evolutions. Without a clear understanding of which market segment the product is being developed for, marketing the project will be extremely difficult. As such, without a clear definition of the market segment, and by extension a poorly described project scope, project and portfolio managers can suggest project termination as the best course of action for the project.
Cost and Profit
Cost and profit potential are key in deciding whether or not a firm will pursue a project. Both cost and profit are dependent upon the choice of market a product competes in, as well as the value proposition it offers.
Assuming that the product is novel enough and presents a strong enough value proposition that health insurers will reimburse for the product and medical professionals will prescribe the medication, go/no-go decisions regarding biopharmaceutical projects are often reduced to understanding project costs and profit potential.
For the sample of projects analyzed for this research, Projects 1, 2, 6, and 12 had favorable costs for development and strong enough profit potential that they were authorized for continued development. Projects 4, 8, and 10 were considered relatively costly to develop with respect to peer projects, but were pursued due to their enormous profit potential. Both products targeted growing markets with increasing revenue potential. For all these projects, the fixed costs were reasonably low and their forecasted volumes significantly large enough to provide a favorable cost and profit profile.
With the exception of Project 1, all the terminated projects had exceedingly high costs and/or low profit potential. Having high development costs that would dramatically affect profits would generally lead to termination of the project. For example, Project 5’s lack of uniqueness compared to other products negatively impacted its profit potential and hence did not justify the costs for development. Similarly, Project 3’s difficult manufacturing process greatly increased the fixed costs associated with the project. This was deemed too steep of a cost to warrant further development and the project was subsequently terminated internally.
Project 7 presented a unique problem in evaluating cost and profit potential. Project 7’s development firm was granted significant public sector funding to aid in the development of the prospective therapeutic. Despite these funds and a very positive profit potential, the cumbersome clinical trial designed for the project (previously mentioned) became prohibitive as it drove up the costs associated with clinical trials. The project was subsequently terminated. Project 12 presented another unique situation. The developing company was restructuring its organization and refocusing on its core franchise areas. Because Project 12 was not considered to be in a core therapeutic franchise area, it was terminated and its allocated funds re-appropriated by other projects. Again, despite the potential for strong future profits, the project was terminated because its costs were more than the firm was willing to bear.
Managing cost and profit potential in terms of a project’s business model is a natural fit for project and portfolio managers because they are typically intimately involved in monitoring project costs. Therefore, this element of the business model has already, in many cases, gained acceptance as a success criteria among project managers. However, project managers are often key to revenue generation by virtue of their control over their project schedule. The period of time for which a product can generate revenues without competition from generic drugs is a function of the life of the drug’s patents. Because the life of a patent in most countries is finite, the sooner a project is competed, the more time the project has to generate revenue without generic competition. Conversely, each day of delay robs the project of a day of revenue generation. Therefore, if schedules cannot be met, the cost and revenue projections for the project are negatively impacted, hurting the profit potential for the drug. Using a business model framework directly relates project cost and schedule management to profit potential, and hence the viability of drug development projects.
The value chain is the route for delivering products to the intended market, starting with raw materials and ending with a finished product. The value chain must both create value throughout the chain, with the customer residing at the end, as well as allow firms to claim significant portions of the value created to justify their participation (Chesbrough, 2003, pp. 66-67). Discussions of appropriation of value from the value chain is outside the scope of this research but is discussed in great detail by Porter (1980) and Teece (1986).
The development of biopharmaceuticals is highly dependent on many parallel factors. For example, clinical trials are highly dependent on manufacturing because as the drug is being developed, so are the processes required to produce the drug material. As the amount of drug substance required for clinical trials increases (due to the increasing number of subjects treated in Phases I, II, and III of drug development, respectively), manufacturing processes must be scaled up accordingly to meet drug material demand. If the manufacturing process cannot be scaled up, then the clinical trial cannot progress, since clinical trials and manufacturing progress in lock step.
This research sought only to identify whether or not the management for each project had adequately identified the value chain for each project and determined whether or not it could create value that could be appropriated by the firm. Drug development is dependent upon many interdependent activities. Therefore, it is common for firms pursuing such systemic innovations to vertically integrate (Chesbrough & Teece, 1996). Many large biopharmaceutical companies control all aspects of drug development, including R&D, clinical trials, manufacturing, and marketing. The companies observed throughout the course of this research provide few exceptions. With the exception of Projects 3, 11, and 12, all major aspects of drug development were controlled by the developing firm. For Project 3, the developing firm managed all aspects of drug development except manufacturing. This was due largely because it did not have the internal expertise to manufacture the drug and was unable to economically contract with a complementary firm that had the requisite manufacturing capability.
For Project 11, the developing company focused on the manufacturing portion of the value chain, while also supplying a drug delivery technology. The rest of the drug development effort was to be conducted by external collaborators. Project 12 was a joint venture between two companies. The developing company (from the point of view of this research) focused primarily on marketing and sales activities while contributing to R&D. Its partner would perform the clinical trial and manufacturing activities necessary to deliver the product to market.
Vertical integration or using a collaborative process did not directly impact go/no-go decisions for each of these projects per se. However, the management of each of these projects was able to define the value chain necessary to develop each respective therapeutic and articulate its position within their respective value chain. If neither of these activities can be fulfilled, then the viability of the project must be immediately questioned.
Whether drug development is conducted entirely within a single company or its development shared among two or more companies, project managers typically have a deep involvement in the final delivery of a product to market. With respect to managing the value chain, project managers often ensure that the various parties involved in the project are properly coordinated and that project information is collected and disseminated in a timely and appropriate fashion among all project constituents. Proper integration and communications management are essential to identifying and utilizing the value chain effectively. Project managers, therefore, have the opportunity to best identify the presence of a complete value chain necessary for delivering products to their intended markets, as well as whether or not the developing company or companies can secure their rightful portion of the value being created. If a complete value chain does not exist or value cannot be appropriated, then project and portfolio managers have the opportunity to point out that the project may have difficulties providing adequate returns on investment and should be terminated.
Once the value chain is articulated, the developing firm can determine how it will appropriate a portion of the value for itself. Appropriation of value may involve the use of third parties, which may come from the internal vertical corporate structure, externally from the value network at large (Christensen & Rosenbloom, 1995), or from complementary assets (Teece, 1986). For this research, the ability to leverage the value network and obtain the support of necessary third parties outside the immediate value chain was observed.
Project 1 was developed by a vertically integrated firm that controlled and possessed expertise in all portions of the drug development process for the given indication. Despite such expertise, the company lacked certain development tools necessary to define the mechanism of action for the project and it was unable to procure these tools from the market. Fearing that the absence of these tools would retard development in the next phases of development, the project was terminated. Project 2 presented a similar situation with a better outcome. Its developing company lacked expertise in the disease class that the drug was targeting. However, the management of this project was able to enlist external university researchers with a deep understanding of the disease class to compensate for its own shortcoming, thus deftly leveraging the value network. Project 7 similarly leveraged academic expertise in its product development.
The management of Project 12 also chose to leverage the value network by engaging a collaborator to co-develop the drug. This allowed one company to focus on developing the drug and the other to focus on marketing the drug, which played to each of their individual strengths.
Some of the projects analyzed during this research highlight that if the requisite portions of the value chain cannot be gleaned from the value network, then the project may have to be terminated on that basis. Project 3 lacked manufacturing capabilities that could not be economically procured from the market. The cost of developing the necessary manufacturing capabilities was unfeasible (as previously mentioned), so the developing company terminated the project. A similar situation was experienced with Project 11, except in this case a lack of expertise in marketing was the missing skill set.
Much like the management of the value chain previously discussed, project managers have a deep involvement in the management of the value network. Adding to the responsibilities of integration and communications management, managing the value network requires an additional deep expertise in procurement management. If the requisite skills for drug development are not available within the developing firm’s organization, then they must be procured externally in an economically and timely manner. Again, these are capabilities that project managers are often already tasked with providing. As such, project managers are often in the position to determine whether or not a project is feasible based on whether or not the proper capabilities needed to develop the project exist or can be obtained. If not, then project and portfolio managers can use a business model rationale for terminating a development project and save a company from investing in a project that will have extreme difficulties reaching its intended market.
The last attribute of the business model is the determination of a competitive strategy by which the developing firm will gain and hold advantage over competing products and firms. In biopharmaceuticals, a common source of competitive advantage is in the form of intellectual property. That is, many companies have a patent or thicket of patents covering their novel therapies that exclude competitors from marketing closely similar products. This was certainly the case for Projects 2, 4, 6, and 8. (Only projects that were granted regulatory approval are discussed in this section. Because the terminated projects failed to reach the market, any discussion of possible competitive advantages would be speculative.)
There are several other means for creating competitive advantage over rivals in the biopharmaceutical market. Projects 4 and 8 were first to market in their respective disease categories, and the early mover advantage allowed them to lock in customers and gain brand recognition ahead of competitors. It is in this way that time management can create a competitive advantage. Such an advantage will only hold up if subsequent products are only marginally more efficacious or less toxic. The company behind Project 2 was the first to fully understand the size and scope of the target market for its project, providing a substantial advantage in terms of name recognition. Also, this company was one of only a few with a sales force large enough to serve such a large market, precluding smaller companies from competing.
The sales team behind Project 6 was extremely focused and understood its target market much better than its competitors. Because the company focused on one main category of therapeutic, it had developed a deep expertise in all aspects of that market that could not be easily matched by its more diverse and less focused competitors. This advantage limited the amount of competitors willing to contend within this particular market.
Project 10 competed on product quality, as well as the fact that its developing company was the only one with the manufacturing scale to economically manufacture enough product to meet the needs of the market. The fixed costs necessary to meet the manufacturing capacity of Project 10’s parent company are prohibitive, preventing substantial competition from entering the market.
In terms of project and portfolio management, time management is the tool best used to determine if a development project has a competitive advantage. Project managers often have the ability to determine the time necessary to actually deliver a project to market. They can work with portfolio managers and senior company leaders to determine whether or not the delivery timeline will provide an early mover advantage or not. If so, using a business model approach will help project and portfolio managers present a strong case for continuing with project development. If no other competitive advantage exists and the project schedule will not allow for an early mover advantage ahead of the competition, then project and portfolio managers can present to case for terminating the project and reallocating resources to projects with a sustainable advantage over competing products.
From a quantitative perspective, Figure 2 presents the occurrence of missing business model attributes among the six terminated projects. The absence of a viable cost structure and/or desirable revenue potential is implicated in five (83%) of the terminated projects in this sample. The inability to articulate a value proposition, leverage the value network, or develop a sustainable competitive strategy was observed in three (50%) projects each, and inability to adequately define the market segment was observed in just one project (17%). The value chain was neglected because it was recognized in all projects. It is important to note that projects can, and often do, fail due to the lack of multiple business model attributes.
Figure 2: Occurrence of Missing Business Model Attributes
Figure 3 presents the results of a simple statistical analysis of the absence of attributes and the resulting relationship with project termination. The φ coefficients, which represents correlation between two dichotomous variables, and the levels of significance each of the φ coefficients suggests that there is a relationship between four of the attributes and project termination. This association, however, does not indicate strength or direction of the relationship. Additionally, only cost structure and revenue potential has a strongly meaningful φ relationship (0.845) while the others show only a moderate or low relationship to project termination. This suggests that cost structure and profit potential has the strongest consequential relationship with project termination.
Figure 3: Correlation Coefficients Between Project Termination and Missing Business Model Attributes
Implications of Findings
Each of the projects that received marketing approval could address each of the six aforementioned business model attributes, while the terminated projects were missing one or more of the attributes. If such missing business model attributes cannot be expediently rectified during the course of project execution, then the developing company can use those gaps as credible reasoning to consider terminating the project.
During the course of this research, two key observations were made and both were subsequently supported by the qualitative and quantitative findings previously presented. Specifically, many of the missing attributes, and the resulting complications caused by their absence, are interrelated and often causal. That is, an absence of one attribute may lead to the subsequent absence of another. Secondly, the missing attribute that is most commonly implicated in these causal relationships is cost structure and revenue potential. For example, the inability to fill an internal asset void by leveraging the value network, in and of itself, rarely leads to project termination. It is, for example, the realization of the cost for developing that asset internally that typically clarifies the project’s lack of economic viability.
Figure 4 summarizes the observed causal relationship between interrelated missing business model attributes.
Figure 4: Causal Relationship Between Missing Business Model Attributes.
(Relevant attributes are in parentheses)
Missing business model attributes also beset Projects 9 and 11, but those missing attributes were not strongly interrelated. Figure 4 illustrates that in four of the six terminated projects, the missing attributes are interrelated, and in three of those cases it was the absence of one or more attributes that rendered the project economically infeasible. Project managers often understand this interrelation and are thus likely to benefit from using a business model framework for framing go/no-go decisions. This is, at the very least, a partial explanation of why cost structure and revenue potential was a commonly missing attribute among the terminated projects.
Biopharmaceutical projects fail for a myriad of technical reasons. For those projects that escape technical pitfalls, the decision to pursue commercialization must be rooted in sound business judgment. The business model can be used as a heuristic to make such sound judgments, defining how the technical merits of the project can be converted into economic gain. Business models articulate the value proposition, market segment, cost and profit potential, value chain, value network, and competitive strategy involved with bringing a product to market. This research presents 12 projects—six with complete and robust business models and six without—and describes how firms used the attributes of the business model to make go/no-go decisions regarding development. The projects that achieved market approval in the research sample could adequately address each of the individual components of the business model. That is not to say that having a robust business model ensures market success. Rather, this research suggests that the inability to create a sound business plan should give cause to consider terminating the project.
This research identified three types of definable value propositions for biopharmaceutical projects. The difficulty for projects may be in clearly defining the value proposition, particularly if there are alternatives on the market. For the observed sample of projects, clarifying the market segment was fairly straightforward, and this was the easiest of the business model attributes to articulate. The most significant attribute for biopharmaceutical projects was cost and profit potential. Cost and profit are dependent on the other attributes (and vice versa), emphasizing the high level of interdependency among business model attributes. And with most biopharmaceutical companies having more projects than capital necessary to complete them, cost and profit potential often becomes the acid test for go/no-go decisions. All terminated projects except Project 1 had unfavorable cost and profit profiles, which is a difficult correlation to dismiss.
For biopharmaceutical projects, the value chain consists of parallel development of product and processes. This must be understood so that the developing firm(s) can secure a portion of, and derive economic value from, participating in the value chain. The developing firm need not control the entire value chain. Complementary assets and/or third-party contributors can be procured from the external value network. Vertical integration is not necessary in drug development, as the sample projects articulate. In fact many drugs are realized from disaggregated value chains. The value network can be leveraged to access missing value chain components. Lastly, a competitive strategy must be created to ensure a lasting advantage over rivals. The most common form of competitive advantage is in the form of intellectual property, most often in the form of patents. However, companies often fortify their intellectual property advantage with a deep understanding of a therapeutic area that cannot be readily replicated or economic advantages that cannot be easily overcome or by attempting to create an early mover advantage by way of beating their competition to the market.
Whether managing cost, schedule, scope, or any other of the PMBOK® Guide categories, project and portfolio managers are in an ideal situation to observe the completeness of a project’s business model. As such, it is important for project and portfolio managers to understand business models and legitimize them as strategic tools for managing innovative projects.
Terminating projects is often seen as a failure in the eyes of many project participants. However, in the biopharmaceutical industry, projects are terminated with great regularity due to the technical and economic difficulties associated with gaining regulatory approval. The goal then becomes not to prevent failure, but rather to fail as fast as possible to minimize sunk costs.
Using the business model as a tool for project decision-making, firms can make informed go/no-go decisions. A project with a complete and robust business model gives the firm the best opportunity to convert a biopharmaceutical technology into a viable product.
Most important to this readership, project and portfolio managers can use the business model as a tool for framing go/no-go decisions for senior executives. Because much of the information needed to assess the completeness of a business model is managed by project and portfolio managers, business models are powerful tools that do not require a significant change capabilities or mindset for project and portfolio managers. Rather, business models translate project management frameworks, such as the PMBOK® Guide, into a strategic framework. Assessing business models is dependent upon information collected during management of most, if not all, of the PMBOK® Guide categories. By aligning project management with a business model for each project, project and portfolio management lends itself to making credible go/no-go project decisions and becomes further aligned with corporate strategic management.
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