Disruptive technology and interdependence: The relationships of BioMEMS technology and pharmaceutical firms

Journal of High Technology Management Research 15 (2004) 73 – 89

Disruptive technology and interdependence: The relationships of BioMEMS technology and pharmaceutical firms Virginia W. Gerde a,*, Raj V. Mahto b,1 b

a Duquesne University, 600 Forbes Avenue, Pittsburgh, PA 15282, USA Fogelman College of Business, University of Memphis, Memphis, TN 38152, USA

Accepted 22 September 2003

Abstract The developments in the biological microelectromechanical systems (BioMEMS) industry have gone largely unnoticed by pharmaceutical and health care firms. We propose that the lack of linkages between the pharmaceutical and BioMEMS industries is based on the disruptive nature of BioMEMS technology. Using resource dependence and network theories, we present a model of the development of linkages based on resource interdependence and the nature of technology. We discuss the implications for increased innovation output. D 2003 Elsevier Inc. All rights reserved. Keywords: Disruptive technology; Network linkages; Biotechnology

1. Introduction People suffering from Types I and II diabetes are using small, wristwatch-sized devices that monitor and regulate blood sugar in the body by use of insulin (Foremanek, 2001). People suffering from tumors may take pills containing microdevices that are triggered by external or internal signals and release growth inhibitors to combat tumor cells (Cao, Lai, & Lee, 2001; Dehlinger, 1999). Microdevices, or electrodes inserted into the brain, can generate electrical signals in people with Parkinson’s disease to produce antigens by electrical simulation (Kleps, Angelescu, Vasilco, & Dascalu, 2001; Metsger, Wilson, Schumann, Matthews, & Maitland, 2002; Southwick, 2001). These are some examples of

* Corresponding author. Tel.: +1-412-396-4907. E-mail addresses: [email protected] (V.W. Gerde), [email protected] (R.V. Mahto). 1 Present address: Fogelman College of Business and Economics, University of Memphis, Memphis, TN. Tel.: +1-901-678-4531; fax: +1-901-454-5851. 1047-8310/$ - see front matter D 2003 Elsevier Inc. All rights reserved. doi:10.1016/j.hitech.2003.09.005

74

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

current tests in innovative technology in the biological microelectromechanical systems (BioMEMS) industry. The potential of BioMEMS technology is mind-boggling as this technology has made it possible to manufacture devices the size of less than one-hundredth the thickness of a human hair. Devices of such sizes are not visible to the unaided eye (Ahmed, Bonner, & Desai, 2001; Clermont, Kandzari, Khouri, & Ferrari, 2001; Desai, Chu, et al., 1999). BioMEMS has opened the gates to a new frontier in health care that can take advantage of our current knowledge of health care and pharmaceuticals as well as substantially improve efficiency and quality of care. BioMEMS is still an emerging technology and is being labeled as a disruptive technology, a term that is reserved for technologies that change the mindset, paradigm, or the way business is done. In contrast, biotechnology and bioinformatic technologies are seen as complementary because they enhance the current product development and improve efficiencies in existing products and services.2 In this case, BioMEMS can change the landscape of health care delivery and maintenance. Much research has focused on the role of new technology and high-tech developments in an industry; however, there is a lack of information on how business adapts to disruptive technology. In this paper we focus on the differences between complementary technology and disruptive technology. Complementary technology builds on or works with existing technology and is seen as another step in the growth of an area. For example, the technology that improves or increases the efficiency of a machine would be considered complementary. Typically, complementary technology is accepted because it builds on current knowledge, and it is easier to grasp the development and advantages. In contrast, disruptive technology is technology that by definition disrupts the current state of affairs. For example, the microchip could be considered disruptive technology. This paper analyzes the behavior of industries affected by the emergence of disruptive technologies, specifically the pharmaceutical industry and developments in the BioMEMS field. After describing the technology and the stakeholder framework, we discuss the formation of linkages in a network based on resource dependency theory. Then we present a model to predict the formation of linkages among firms based their interdependence and the type of technology. Using network theory, we present several proposition about the behavior of firms in each environment and predict the behavior of the abovementioned companies and reasons behind it.

2. BioMEMS technology An emerging technology, BioMEMS will alter the health care field in terms of drug delivery, health monitoring, treatment therapies and health care maintenance. For example, instead of taking drugs that affect the whole body, the patient can have the drug released at the specific pain-causing site. Currently, in many cases the dosage of drug required is higher than that required by the body as the system is inefficient. Reducing the dose will reduce possibilities of overdose and still lessen pain. A drug’s efficiency increases because of tremendous improvement in delivery of drugs to affected parts of the human body (Cao et al., 2001; Dehlinger, 1999). In this promising conjunction of biology with microelectromechanics, bioengineer Dorian Liepmann is working to perfect credit-card-sized devices

2

In this paper, we use the terms bioinformatics and biotechnology interchangeably.

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

75

that will deliver drugs to a patient without the dosage and timing problems associated with pills or injections (Sanders, 1999). Combined with the field of microfludics, there is potential for additional mechanisms to be placed in the body to help with treatment. So, the quantity of drug required overall will decrease significantly. This disruptive technology will impact pharmaceutical firms directly through the change in demand of products and indirectly through changes in the health care equipment and delivery systems. Diagnostic equipment and systems manufacturing companies will be most affected by BioMEMS technology. BioMEMS has made possible devices such as Lab on Chip, which can analyze blood, urine, saliva, DNA, and other compounds (Petersen et al., 1998). Tejal Desai, an assistant professor of bioengineering at the University of Illinois at Chicago, has cured rats with diabetes in tests using insulinsecreting devices (Desai, Hansford, et al., 1999; Philipkosi, 2001). For years, researchers have been trying to insert capsules in the body that can perform corrective tasks. However, the body often rejects foreign objects, so antibodies attack and destroy them. Dr. Desai created a BioMEMS device of a capsule with insulin producing cells inside and very small pores on the surface. The pores are only 7 nm across, which is big enough to let insulin out but small enough to keep antibodies from entering (Desai, Chu et al., 1999; Philipkosi, 2001). Another area of research focuses on the introduction of small MEMS devices into to the body that destroy tumor and cancer cells without affecting other parts of the body (Martin & Grove, 2001). This will reduce the need for medicine that is required to cope with side effects of chemotherapy. There are many examples like these but it is not possible to list all of them. Many academic institutions are currently involved in research in the field of BioMEMS. The University of California, Berkeley’s Health Science Initiative, is one example of an organization involved in finding medical applications for BioMEMS devices. However, the resources needed to bring the technology through development to testing are immense. Developments in BioMEMS are concentrated in research institutions of high-technology start-up firms. BioMEMS is a disruptive technology that necessitates a paradigm shift in the treatment of the disease. The market for BioMEMS is highly uncertain (Hatfield, Tegarden, & Echols, 2001). Disruptive technology differs from complementary technology in that, as Metcalfe and Gibbons (1989) noted, the structure of the requisite knowledge base differs sharply between technological regimes. Therefore, a shift to new technological regimes (such as to microprocessors) requires a leap in conceptual change as opposed to an incremental step. Since BioMEMS has the potential to reduce the amount of drugs required for treatment, to make available many analyzing devices like Lab on Chip for testing blood, saliva, or urine, and to change the treatment regimens, the BioMEMS industry will definitely affect the pharmaceutical industry, medical laboratories, and companies manufacturing devices such as insulin pumps, pacemakers, and others. So, how will these industries react to the new developments in BioMEMS? Using the stakeholder framework, the following section details the relationships among the stakeholders in the BioMEMS and pharmaceutical industries.

3. Stakeholder framework To understand the relationships among the industries, we present a map of the various stakeholders. This framework is particularly useful for analyzing the resource dependence and interde-

76

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

pendence of the firms and their stakeholders. It is also appropriate to discuss network relationships and innovation after establishing the power and dependency issues in that particular business environment. We have identified eight stakeholder groups for discussion here, although such a ‘‘map’’ can be refined for a particular firm, product, or issue. Fig. 1 illustrates the stakeholder groups and their relationships. As seen in the figure, the major stakeholders for both the pharmaceutical companies and BioMEMS firms are universities, governmental regulating agencies, patients, doctors, health maintenance organizations (HMOs), nongovernmental organizations (NGOs), and bioinformatics companies. Although there are many other stakeholders including suppliers and stockholders, we limited our analysis to these because they are the leading stakeholders that affect pharmaceutical companies directly in their decisionmaking process or behavior (Rowley, 1997). We explore paths companies can take or what behaviors could be expected in reaction to this emerging, disruptive technology. Is a competitive or collaborative approach possible, and if so what are the advantages and disadvantages of each? The seemingly simple answer to the questions above is as follows: To survive firms have to respond to their stakeholders, and so it is it necessary for firms to secure key resources. The resources and relationships are described next. 3.1. Universities Pharmaceutical companies are looking for new technology and knowledge because the drug discovery business is one of high risk. Less than 1% of drug discoveries results in a commercial product. Those that succeed will take 10 to 15 years to reach the market, with an average invested cost of nearly $500 million. Complicating this equation is the fact that only 3 of the 10 products produce a profit. Pharmaceutical companies spend billions of dollars on research and search for new drugs as well as

Fig. 1. Selected stakeholder map of pharmaceutical and BioMEMS industries.

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

77

fund research projects at universities. The average budget in the pharmaceutical industry for research and development (R&D) is around 20% of the revenue of the company. Any new development in the field of human health will affect the pharmaceutical companies and their position in the health care market. Universities are involved in research in fields that can directly affect human health, and so they will affect the behavior of pharmaceutical companies. Pharmaceutical firms need to be aware of the universities’ activities for potential innovative output. Pharmaceutical companies may form linkages with the universities by funding research projects and seeking consultancy. The pharmaceutical companies then license the new technology emerging from the universities, thereby directly increasing their innovation output and forming barriers for entry into the market. Universities and research institutions are often agents of change and are usually involved in the search for new knowledge and its applications. These institutions may offer different paradigms to collaborating or partnering firms, and thus they help these partners increase their innovative output, which directly affects the commercial success of the firms. University research is often the initial setting of a new startup company, since the firm may be based on new knowledge or technology developed through the university. As these start-up companies become competitors for the existing market players, the existing players are likely to form linkages with the start-up. The existing firms may license the technology or buy out the start-up, so they incorporate the new technology into their firm. The existing players may form linkages with the start-up to benefit from the knowledge and technology but also to limit the risk to the larger firm. Some type of collaborative relationship is usually seen because the technology is complementary to the existing market technology. In other words, the technology may enhance or work with existing technology already in the market. However, these start-ups may not build on or complement existing products or ways of providing a service in the existing market. The technology could be considered disruptive, and therefore not ‘‘fit’’ into our current way of doing business (Downes, Mui, & Negroponte, 2000). As a result sometimes universities become competitors for companies before the technology is accepted in the market. Then the universities take on the responsibility for growing the new start-up firm, marketing the start-up, and making society aware of benefits of new technology. An example of this is the development and success of Atheros Communications, a start-up firm that provides technology that uses a 5-GHz band of the radio spectrum for wireless devices (Tam, 2001). The firm uses an integrated chip and radio system that is produced with a less expensive process than that used for the typical wireless device chip. Started by academics from Stanford and the University of California at Berkeley, the firm found its technology at odds with existing technology. The technology was viewed as disruptive to the subindustry of wireless devices, but Atheros Communications went forward with its own commercialization. 3.2. Governmental regulating agencies In the United States, the Food and Drug Administration (FDA) controls approval of specific drugs or techniques for treating patients. Companies have to follow sets of rules and procedures determined by the FDA before a drug or food product is allowed to enter the market. As regulating agencies come up with new guidelines, the pharmaceutical companies’ product development and research is directly affected. The regulating agency also monitors for side effects of a drug after it is launched in the market.

78

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

The FDA could ask a company to withdraw the drug from the market if it does not meet its requirements. This was the case of the diabetes drug Rezulin, and the withdrawal greatly damaged the reputation of its manufacture Parke-Davis and Warner Lambert. The restrictions and different guidelines set by regulating agencies may affect the innovation output of firms in the health care market. 3.3. Customers In general the customers of the pharmaceutical companies can be considered to be doctors, patients, and HMOs. Doctors and HMOs are strongly connected with pharmaceutical companies, as they are the key components of the market. Pharmaceutical companies track every move of these two stakeholders, as they are essential for their survival. After the FDA and other regulating agencies, these stakeholders affect the decision making and behavior of the pharmaceutical firms the most. As the consumers, patients are the final customers of the drugs and know the benefits of the drug. Any change in patient perception about the drug or about the company will affect the drug sales, which in turn affects the commercial success of the firm. A variety of attributes can affect the sales and strategies of the pharmaceutical companies: work environments, geographical location, living standards, and other factors that affect the health of patients and their response to the drugs. 3.4. Nongovernmental organizations NGOs also affect the behavior of pharmaceutical firms to some extent. There are several international and national organizations like Oxfam International and Global Health Council, with many objectives in providing health care and access to health care. These organizations, whether recognized by the companies as stakeholders, are indeed stakeholders. They can influence the companies and industries by influencing government agencies directly as well as public opinion. Firms cannot afford to neglect the concerns of NGOs completely. The importance of NGOs in health care is recognized by different and international agencies like World Health Organization (WHO). WHO now routinely conducts Public Interest NGO Pharmaceuticals Roundtable, where NGOs play an active role in providing technical and policy issues to governments and pharmaceutical companies. In South Africa, Doctors without Borders and Treatment Action Coalition were actively involved in AIDS drug trial cases. These organizations defied the existing international intellectual property law and used generic cocktail drugs for their AIDS patients. They lobbied and influenced the South African and other governments to eventually be able to make and dispense generic versions of certain drugs. The Brazilian government has also changed their intellectual property law to allow local firms to sell generic version of the drugs. Many other organizations like Health Action by People (in India) oppose the trial of harmful drugs on the local population. In the last decade, the most notable action of NGOs has been the opposition of hormonal birth control pills and their testing on humans because of safety factors. Other NGOs like Ralph Nader’s Consumer Tech Group support price control for drugs, which would decrease the margin of profit and hence resources for R&D for pharmaceutical firms. So, pharmaceutical firms have to keep NGOs informed about products and practices. Constant communication and trust is essential in maintaining a relationship with these groups (Rowley, 1997). NGOs working in the field of health care can be the first ones to take issue with a particular company’s product or practices. They educate others, increase public awareness of the issue, and form

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

79

coalitions to affect change in the firm or its strategies. Information can spread quickly and rapidly, affecting mass opinion. If companies do not react responsibly, then they risk negative publicity, commercial capital, or success. 3.5. Bioinformatics firms The other industry that has affected, or revolutionized, the pharmaceutical industry is bioinformatics. Bioinformatics companies have the technical resources to decode information stored in the human genes. Bioinformatics companies greatly increase the efficiency of drug discovery by increasing the information flow as a result of increasing processing speed. This directly affects pharmaceutical companies. Pharmaceutical companies have accepted theses changes with an open heart because the technology is complementary; it matches their paradigm. Bioinformatics companies form symbiotic relationships with pharmaceutical companies, as the former could increase its time to market with a new device/drug and the latter could increase its efficiency (George, Zahra, Wheatley, & Khan, 2001). The developments in the field of bioinformatics also will influence the success of pharmaceutical firms that are using bioinformatics for drug discovery. Pharmaceutical companies were quick to realize the benefits of utilizing bioinformatics, and they formed collaborative or symbiotic relationships (Hagedoorn, 1993; Hagedoorn & Schakenraad, 1994; Helfat, 1997; Liebeskind, Oliver, Zucker, & Brewer, 1996). 3.6. BioMEMS firms Unlike the ties with bioinformatics firms, the ties of pharmaceutical firms with BioMEMS firms are uncertain or weak if present at all, because MEMS technology is still emerging, and the potential benefits are not yet fully realized. Established firms face considerable challenges in adapting their knowledge base to cope with a shift in the prevailing technology regime (Mitchell, Roehl, & Slattery, 1995). Previous problem-solving heuristics, artifacts, and material technologies become invalid or are seriously impaired by paradigm shift (Dosi, 1982, 1988), and specialized information processing assets can actually hamper adaptation to the new technological regime by reducing the firm’s flexibility (Henderson & Venkatraman, 1991). The need to establish external linkages as a vehicle for adapting the firm’s technological knowledge base becomes imperative for competitive survival (Nicholls-Nixon, 1995). Westiney (1988) also supported this point through her observation that when an industry experiences major change in the technological basis of competition, firms are placed in a position of having to reconstruct their ‘‘knowledge network’’: defined as the array of the external organizations with which the firm is cooperating to develop knowledge from which it is drawing existing knowledge. This was the situation that confronted incumbent firms in the pharmaceutical industry with the emergence of bioinformatics technology: Established firms formed relationships with universities and new biotechnology firms to access the public domain technologies needed to build their own internal technological capabilities (Mitchell & Singh, 1996). BioMEMS technology presents a change in the concepts of drug delivery and treatment options. The disruptive nature of BioMEMS technology has not been embraced by the pharmaceutical industry as the complementary bioinformatics technology was. This difference in adoption and collaboration is complicated by the resource dependency of both the BioMEMS and the pharmaceutical industry. Resources, structure, and coordinating costs within strategic networks are critical to the performance and functioning of firms in the network (e.g., Gulati, 1998, 1999; Gulati, Nohria, & Zaheer, 2000). In the

80

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

following section we utilize resource dependence and network theories to illustrate four possible situations and the predicted behavior in each.

4. Theoretical development of the model To predict the types of linkages that will form or not for the success of the companies, we have chosen two variables to describe the environment and possible network developments: nature of technology and resource interdependence. As described previously, technology can be described as either complementary or disruptive and several examples have been given. Resource interdependency is a significant factor in a stakeholder relationship (Rowley, 1997). How dependent is one stakeholder on the resources of another? The three factors that gauge the interdependence of a firm and stakeholder are 1. the primacy of the resource, 2. the amount of control the interest group has over the resources, and 3. the substitutability of the resources for the firms (Welcomer, Cochran, & Gerde, in press). High interdependence will lead to high direct linkage formation tendency. A firm needs access to resources of another firm; therefore, it would like to form a direct linkage, or tie. Several scholars have examined the appropriateness of networks for studying interdependent strategic alliances and the relationships within a complex system (e.g., Kraatz, 1998; Krackhardt, 1992; Mahoney & Pandian, 1992). The best example is the linkage formation of biotechnology and bioinformatics companies with pharmaceutical companies. Pharmaceutical companies would like to shorten their product development cycle and they can achieve this goal through use of the technical expertise of biotechnology and bioinformatics companies. The start-ups will require customers in the future and can currently use the knowledge and expertise. By forming an alliance with pharmaceutical companies, they easily get customers and resources for further development. Low interdependence will lead to a tendency of low linkage formation. The example of this is the alliance formation chances between a footwear company like Nike and a pharmaceutical company like Pfizer. As they are not dependent on the resources of the other company, they are less likely to form an alliance. Complementary technology will add to the efficiency of the collaborating companies, so it is valued by the partnering companies. Because complementary technology is beneficial to a firm, it will lead to higher direct linkage formation. Disruptive technology will lead to less linkage formation, as firms would like to do what they are currently doing and there is threat of disruption in existing operations. The obstacle of understanding the new technology also exists. The potential or current application may not be fully appreciated. This leads to the conclusion that there will be less linkage formation. An example of two firms can be used to illustrate. A start-up that is working on an improvement to an already established technology, such as catalytic converters, is very dependent on the automotive industry for access to testing facilities and general acceptance of the product as a part of another product. With this start-up we can suppose that the higher the interdependence of the firm’s resources, the higher the chance of linkage formation between them because it is a complementary technology. A different

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

81

start-up may be dependent on another industry or firm for a resource, but if the technology is disruptive, the chances are less for linkage formation. The interaction of technology and firm interdependence of collaborating firms leads to interesting results that can be summarized by the matrix given in Fig. 2. The four situations are described below. 4.1. High interdependence and complementary technology If a firm is highly interdependent, it cannot survive in the market without forming alliances. Complementary technology helps a firm to improve its current products or services that will help it in acquiring market share or improving financial performance. The firm has to form direct linkages if it has high interdependence, which means it needs an outside resource that is not possible without direct linkage formation. The firm cannot use the technology without the permission and technology transfer from the firm. The example that highlights this point is the alliance between on-line retailers and security software companies such as VeriSign. Online retailers have high interdependence on the software industry for providing the best shopping experience for the customers. The security software is complementary technology for on-line retailers because it helps them to improve the shopping experience for their customers. To use the security software the retailer has to license the software for use. This results in a direct linkage between the software company and the on-line retailer. 4.2. Low interdependence and complementary technology The use of a Xerox invention by Apple Computers (Apple) is the best example of this combination that leads to more direct linkages. Apple had low interdependence as it was a vertically integrated operation. The mouse, which was invented at Xerox, helped Apple to make the operation of its computers easy to use by clients. The mouse was complementary technology for Apple as the mouse helped to improve Apple products and built on the existing concept of a personal computer. This resulted

Fig. 2. Model of linkage formation based on nature of technology. Examples provided in parentheses.

82

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

in more direct linkage for Apple as it had to use Xerox technology that required knowledge and other resource transfer. 4.3. High interdependence and disruptive technology The combination of these two factors will likely lead to more direct linkages than if there is low interdependence. This is because the larger firm would like to take advantage of the disruptive technology ahead of competitors in the market. It may or may not have plans for the disruptive technology, but the important aspect is the control over it compared to its competitors. It may be that the firm cannot use the new technology unless it gets an exclusive contract or license for use of the disruptive technology. This will result in more direct linkages. If the firm does not want to disrupt its current operations by the arrival of disruptive technology, then it will also want to form direct linkages with the firm having disruptive technology. This is because by forming direct linkages through alliance formation or acquisition, it can influence the timing and development of disruptive technology. The example that highlights this point is the acquisition of Intellisense by Corning Corporation. Corning is a leading manufacturer of optical fiber used in telecommunications. Corning has high interdependence to new developments in optical signal transmission. Intellisense is a start-up company with technology in MEMS, a disruptive technology. The technological expertise of Intellisense gives it the capability to manufacture optical fiber cables through MEMS technology that might disrupt current operation of Corning, and so Corning acquired Intellisense to use its technical expertise. This resulted in strong direct linkage for Corning. 4.4. Low interdependence and disruptive technology Low interdependence leads to tendency of fewer or no linkages. Disruptive technology also leads to fewer or no linkages. The combination of both of these factors leads to a situation with no incentive for linkages. If the firm has low interdependence, then it will not be interested in the development of other companies that are not related to its field. The disruptive technology will disrupt or cannibalize the current operation of the firm, so it will lead to fewer or no linkage formation. As the firm thinks that the development or emergence of disruptive technology will not affect its current operations, it would not likely form an alliance. One example is the rise of convenience stores from the traditional gas service station. The phenomenon was largely ignored by the grocery store industry at the time. Later, the supermarkets had to compete for customers who only wanted a few items. The pharmaceutical firms that are not forming alliances with the BioMEMS industry may be assuming that BioMEMS technology is not related to the pharmaceutical industry, or there is a combination of low resource interdependence and disruptive technology. When a pharmaceutical firm is forming an alliance, it may perceive the BioMEMS firm as a potentially disruptive technology, but one that should be controlled or monitored.

5. Formation of linkages The pharmaceutical firms that form linkages with BioMEMS companies may realize the latter’s positive effect on pharmaceutical companies’ innovation output. The linkage formed between the two

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

83

could be either direct or indirect. If the linkages are direct, then the pharmaceutical companies will benefit as they will have access to technology and knowledge required without investing much in R&D. Pharmaceutical firms will increase their innovation output as a result of the direct linkage formation with BioMEMS companies. This follows from Ahuja (2000a), ‘‘the more direct ties that a firm maintains, the greater the firm’s subsequent innovation output.’’ The BioMEMS companies’ innovation output will also increase as a result of this linkage formation, as the number of direct ties it will have will increase. BioMEMS companies will also have access to already established marketing and sales channels of pharmaceutical companies. This will be a major advantage for BioMEMS companies, as they do not have sufficient resources to set up their own marketing and sales infrastructure. According to Pennings and Harianto (1992), the companies that form such linkages will enjoy major innovation advantages as the knowledge flow increases across their boundaries. However, the linkage preference of BioMEMS and pharmaceutical companies in terms of direct and indirect linkages is directly proportional to the value of resources each controls. These resources are capital and technology or knowledge. The linkage formation also depends on the interdependence of firms on each other’s resources. Direct linkage between the pharmaceutical and BioMEMS industries will lead to a combination of their technical and commercial capital resources. Combination of commercial capital will be a deficiency-removing action for the BioMEMS start-ups. The combination of technical capital will play a major role. BioMEMS as a destructive technology will bring new knowledge to the pharmaceutical industry, and pharmaceutical firms will enjoy major innovation advantages because of this infiltration of new, or alien, technology (Pennings & Harianto, 1992). In addition, most innovation occurs through borrowing rather than inventing (March & Simon, 1958). To benefit from BioMEMS technical capital, pharmaceutical companies will form direct linkages for resources transfer. The linkage formation or collaboration between both pharmaceutical and BioMEMS firms can bring to both access to R&D complimentary skills from different fields. Under such circumstances, collaboration can enable firms to enjoy economies of specialization without the prior investments entailed by internal development. This could lead to larger projects, and larger projects generate more knowledge than smaller projects. So, the larger the projects, the more knowledge acquired and more innovation outputs. The linkage between firms in pharmaceutical and BioMEMS industries can later help to form indirect linkages with bioinformatics companies and help in knowledge spillovers or knowledge transfer bioinformatics to BioMEMS. As the number of direct linkages formed by pharmaceutical companies increases their innovation, output should also increase (Ahuja, 2000a). This leads us to our first proposition. Proposition 1: The number of linkages and collaboration relationships formed outside the industry is directly related to a firm’s innovation output. Two companies will form linkages if each of them has something of value to the other. One can present two firms, A and B, and the resources they control, a and b, respectively. Firm A has Resource a and Firm B has Resource b. Resource a is necessary for the survival or success of Firm B, Resource b is essential for Firm A, and the condition is that these resources are not available to any other firm in the market. As both firms have complementary resources, they will form a direct linkage to access each other’s resources for survival and success in the marketplace. If Resource a can improve the performance

84

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

of Firm B only slightly, but Resource b is necessary for the survival of Firm A, then Firm B will have more influence in the linkage formation. This imbalance of power is because Firm A will not survive if it does not get Resource b from Firm B, but Firm B can survive without Resource a even though its performance will be slightly affected. Firm B will likely have more influence in the direct linkage between them than Firm A does, as its resources are more valuable, and vice versa. In the case of an alliance between pharmaceutical and BioMEMS firms, the same conditions apply. This leads us to our second proposition. Proposition 2: If there is a linkage between pharmaceutical firms and BioMEMS firms, in which case both need resource sharing, then both of them will influence each other proportionally to the importance of their resources and inversely to the importance of others resources. There is another scenario in which BioMEMS companies are started by companies already having MEMS capabilities to leverage their technical expertise. In this case, BioMEMS companies will have access to the commercial resources of the parent organization, they will be more densely connected, and their centrality will be higher in the network because of their inheritance. These BioMEMS firms will then have access to the commercial capital of their parent companies and will have technical knowledge. As they are densely connected in the network and have commercial and technical capital, they would not likely form linkages (Ahuja, 2000b). BioMEMS companies are in a superior position, as they probably will be lacking just pharmaceutical knowledge. They would like to form an alliance that is not detrimental in maintaining their technical advantage in the market place. They would not like to share their resources with the alliance partners but would like to share their knowledge with pharmaceutical firms to increase their innovation output. So these firms may prefer more indirect linkages with pharmaceutical firms in which there is knowledge spillover and not resource transfer among collaboration firms. The value of BioMEMS resources to pharmaceutical firms will be higher if they do not have technical expertise in the BioMEMS field. In this case pharmaceutical firms would like to form direct linkages, which will allow resource transfer between it and BioMEMS firms, so they can share in the technical capital of the BioMEMS firms. Because BioMEMS firms would not prefer to have resource transfer, any direct linkage formation between it and pharmaceutical companies will be influenced more by it according to Proposition 2. The pharmaceutical firms will be eager to form relationships and will accept minority roles by paying a higher price. This will also affect the R&D of new drugs, as pharmaceutical firms may not abandon the chemicals, which have important application in medication but have side effects. This is because the side effect might be eliminated or reduced to insignificant level by focusing the reaction to specific microlevel accuracy. This alliance will prompt pharmaceutical firms to look for chemicals for usage in drug production, which were previously abandoned or not considered because of their toxicity to the human body. The R&D expenditure of firms will focus more on finding new chemicals for usage as drugs rather than finding the chemicals that do not have high toxicity for humans. This will unleash the repository of large chemicals available on earth at the benefit of pharmaceutical firms and thereby human health. This leads us to our third proposition. Proposition 3: In a linked relationship between pharmaceutical firms and BioMEMS firms, when one is seeking resource sharing and the other knowledge spillover, then the latter will exert the greater influence and control over the decision making in the relationship.

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

85

Pharmaceutical firms have higher commercial capital compared to BioMEMS firms, i.e., they have complementary assets like marketing channels, financial resources, chemical expertise, and others that could be helpful to BioMEMS and may help pharmaceutical firms to face radical technology change. This radical technology change is occurring because of developments in BioMEMS. Pharmaceutical firms can have either an exploration alliance or a collaborative or exploitative alliance with BioMEMS firms. The exploitation alliance is more suitable to pharmaceutical firms as they have complementary assets for commercialization of BioMEMS technology. The technological capital of the pharmaceutical firms is in their ability to produce new drugs. As patented drugs give the owner exclusive rights of manufacturing, these decide the power and influence enjoyed by the firms. The more patented drugs a firm has with it, the higher the influence of the firm is in industry and in the network. So, this gives pharmaceutical firms more technological capital. The firm having higher number of patented drugs will have higher commercial capital because of the control over the supply of the drugs. Thus it is unlikely alliances will form (Ahuja, 2000b). The firms manufacturing generic drugs have technical resources that are not valuable to BioMEMS firms or other firms in the network. So generic drugs do not give pharmaceutical firms any advantage in collaboration. This leads to situations where the influence of pharmaceutical firms in collaboration is negative (Proposition 3). The situation changes when pharmaceutical firms manufacturing generic drugs have commercial capital. In that case they are attractive in the network and have higher chances of linkage formation. The higher the chances of linkage formation, the higher the influence it may have in the collaborative linkage. The strategic conduct of firms in an industry is influenced not only by the properties of their relationships taken one at a time, but also by the overall structure of interfirm relationship networks (cf. Wellman, 1988). In this respect, the pharmaceutical firms are more densely connected in the network compared with BioMEMS firms. Some pharmaceutical firms are more densely connected compared to others in the industry and so are more central compared to other firms and command more power in the network. The structure of an industry network plays an important role in both firm performance and industry evolution (Gulati, 1998, 1999). Since external relationships provides access to key resources, the structure of relationship networks describes the asymmetric access that rivals have to raw materials, information, technology, markets, or other crucial performance requirements. The dynamic network perspective says that networks will change over time as the network participants take advantage of opportunities to improve their position in the network. As Barley (1986) proposed, major restructuring occurs only when organizations face ‘‘exogenous shock.’’ In their study of network context, Burkhardt and Brass (1990) showed that early adopters of a new technology increased their power and centrality to a greater degree than did later adopters. This should make firms anywhere in the network desire to form linkages with exogenous technology firms like BioMEMS. This is because the firms that are central to the network would like to maintain their power and influence in case of change of network structure (network reinforcing), and the firms that are loosely connected would like to gain prominence or centrality (network loosening) (Madhavan, Koka, & Prescott, 1998). The overall ability of industry innovation output increases by the linkage formation between these two industries. The companies in both industries benefit as do the stakeholders because of an increase in the innovation output.

86

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

6. No formation of linkages Pharmaceutical companies will be resistive to linkage formation with firms outside their field. In the BioMEMS environment, pharmaceutical companies may not think BioMEMS is a viable alternative to or competitor of its technical knowledge base and commercial capital. As Pennings and Harianto (1992) eloquently stated, ‘‘On the voyage to new territories we are attracted to what looks familiar to or consistent with what we already know’’ (p. 31). The impact of this aspect of human nature is magnified if it is seen in light of Dr. Gautam Ahuja’s hypothesis: ‘‘the interaction between technical and commercial capital has a negative impact on linkage formation. The higher a firm’s technical and commercial capital, the fewer the number of linkages formed by the firm’’ (Ahuja, 2000b, p. 431). Combining these two statements, the possibility of pharmaceutical firms collaborating or forming linkages becomes negligible. In a study of biotechnology start-ups, Shan, Walker, and Kogut (1994) predicted and found that one element of a firm’s network position, the number of collaborative relationships it formed, was positively related to its innovation output. If there is no linkage formation then the chances of innovation output of the companies in both industries decrease. The companies in both industries and their stakeholders miss an opportunity that another firm may see. This leads us to our fourth and final proposition. Proposition 4: The higher the technical and commercial resources of a firm, the fewer the number of linkages formed and hence a lower level of innovation output of the firm.

7. Implications and conclusion The difference in linkage formation behavior of pharmaceutical companies to biotechnology and bioinformatics companies is because these companies have complementary technology for the pharmaceutical companies. These companies help pharmaceutical companies in reducing product development cycle and increasing efficiency. However, a change in the delivery of insulin and the possible elimination of the need for drugs in the treatment of cancer may destroy the market for some of the existing drugs. This will disrupt the operations of many pharmaceutical companies. BioMEMS companies are doing research in the area of drug delivery, diagnosis of diseases through lab on chip, and many other new health care techniques. As the field of operation for companies in these areas is the same, it would seem that pharmaceutical firms would have been actively seeking alliances with the new start-ups in BioMEMS technology. As with previous technological advances, it could be expected that the pharmaceutical industry would have formed strong bonds or at least collaborated with BioMEMS companies as they did with bioinformatics companies. The linkage between BioMEMS and pharmaceutical companies could have been equally beneficial for both industries, as it would increase the innovative output of pharmaceutical companies, and the start-ups could acquire the knowledge base or capital necessary to fabricate and test new devices. Control over these devices could lead to significant benefits in the marketplace. The linkage is specifically beneficial to pharmaceutical firms, as it will increase its chances of innovation output. As Pennings and Harianto (1992) noted, ‘‘a firm will enjoy a major innovation advantage if it can manage the flow of ideas that enter across its boundaries’’ (p. 29). This is a major advantage when the firm

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

87

belongs to an industry that undergoes an infiltration of ‘‘alien,’’ or disruptive, technologies such as the semiconductor into machine tool industries. For major innovations in health care, there can be collaborations involving knowledge about the disease and drug delivery inside body. The pharmaceutical industries and BioMEMS medical device manufacturing companies could collaborate across industry boundaries for innovation. As BioMEMS devices are measured in nanometers, they can be used to deliver drugs to the targeted area and adjust for changing physiological conditions. If BioMEMS devices are used as delivery vehicles for drugs, then pharmaceutical firms may decrease the time for new product development cycle since the side effects and stabilization problems will be significantly less to meet the prescribed limits of the regulating agencies. This will substitute many resources of pharmaceutical companies and in turn free up resources for the development of new drugs and hence increase chances of innovation output and commercial success. Why should BioMEMS companies form linkages with pharmaceutical companies? BioMEMS firms can benefit from the pharmaceutical firms’ knowledge base of molecular interaction and other specific areas. The access to other stakeholders and capital would also improve the BioMEMS success. The BioMEMS companies will get access to markets and marketing channels developed by the pharmaceutical companies without investing much of their resources. The benefits above lead to the conclusion that the firms in both industries should form linkages, direct or indirect, for resource transfer. BioMEMS is an emerging technology and there are very few companies currently in this field. As start-ups, they face the challenges associated with other startups, such as funding, brand name, and setting marketing and sales infrastructure. In addition, the start-ups have few alliances in their network. It is likely they are loosely connected in the network and will have low centrality and low density in the network. High-tech start-ups generally have higher technical resources but low financial resources. BioMEMS firms in their initial stage may seek to form linkages to increase centrality and density, but only with companies with the needed resources. Since it takes two (at least in our dyad studies of relationships in networks) to form an alliance, the other firm has to be willing to form an alliance and see the benefit to itself from such linkages. The linkage formation between pharmaceutical firms and BioMEMS firms will increase the chances of innovation output of both industries and benefit their stakeholders. The chance of no linkages being formed is also high, because the pharmaceutical firms may already have the financial resources and technical resources to maintain (as they see it) their innovation output. Further research is needed in the field to establish the difference and similarities between the linkage formations of pharmaceutical firms with bioinformatics companies and how it affects the linkage formation with BioMEMS companies. To test the research propositions put forth in this article, scholars will first need to operationalize the essential constructs elaborated here—organizational resources, firms’ collaborational intent (whether to share resources or generate knowledge spillover), the number of linkages and collaborations firms are engaged in, firms’ relative influence and control over joint decision making, and innovation output. Some of these constructs may be capable of being measured objectively using readily available secondary data, for example, measures of relevant firm resources (number of scientists employed) and innovation output (number of patents granted), while others may not be evident to outsiders (the number of linkages and collaborations) and so may require self-reporting by involved firms or by knowledgeable outsiders such as a panel of industry analysts or experts. Finally, some constructs reflect managerial mind-set or intentions (e.g., collaborational intent) or beliefs (relative

88

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

influence over decision making) and so can best be assessed via subjective appraisal using attitudinal measures provided by involved managers. Disruptive technology presents great challenges for firms, large or small. The ability to recognize the technology and its potential as well as to form linkages favorable to both the start-up and the larger firm will be critical to the success of businesses now and as the future unfolds.

References Ahmed, A., Bonner, C., & Desai, T. A. (2001). Bioadhesive microdevices for drug delivery: A feasibility study. Biomedical Microdevices, 3, 89 – 96. Ahuja, G. (2000a). Collaborative networks, structural holes, and innovation: A longitudinal study. Administrative Science Quarterly, 45, 425 – 455. Ahuja, G. (2000b). The duality of collaboration: Inducements and opportunities in the formation of interfirm linkages. Strategic Management Journal, 21, 317 – 343. Barley, S. R. (1986). Technology as an occasion for structuring: Evidence from observations of CT scanners and the social order of radiology departments. Administrative Science Quarterly, 21, 78 – 108. Burkhardt, M. E., & Brass, D. J. (1990). Changing patterns or patterns of change: The effect of a change in technology on social network structure and power. Administrative Science Quarterly, 35, 104 – 127. Cao, X., Lai, S., & Lee, L. J. (2001). Design of a self regulatory drug delivery devices. Biomedical Microdevices, 3(2), 109 – 118. Clermont, P. J., Kandzari, D. J., Khouri, S., & Ferrari, M. (2001). Nanotechnology needs for cardiovascular sciences. Biomedical Microdevices, 2(1), 9 – 10. Dehlinger, P. J. (1999). Patent watch: Powering biomedical devices. Biomedical Microdevices, 2(1), 9 – 10. Desai, T. A., Chu, W. H., Rasi, G., Sinibaldi-Vallebona, P., Guarino, E., & Ferrari, M. (1999). Microfabricated biocapsules provide short-term immunoisolation of insulinoma xenografts. Biomedical Microdevices, 1(2), 131 – 138. Desai, T. A., Hansford, D. J., Kulinsky, L., Nahsat, A. H., Rasi, G., Tu, J., Wang, Y., Zhang, M., & Ferrai, M. (1999). Nanopore technology for biomedical applications. Biomedical Microdevices, 2(1), 11 – 40. Dosi, G. (1982). Technological paradigms and technological trajectories: A suggested interpretation of the determinants and directions of technological change. Research Policy, 11, 147 – 162. Dosi, G. (1988). Sources, procedures, and microeconomic effects of innovation. Journal of Economic Literature, 26(3), 1120 – 1171. Downes, L., Mui, C., & Negroponte, N. (2000). Unleashing the killer app: Digital strategies for market dominance. Boston: Harvard Business School Press. Foremanek, R. (2001, May – June). FDA approves watch-like device to monitor blood sugar levels. FDA Consumer Magazine, 35(3) (http://www.fda.gov/fdac/features/2001/301_dev.html). George, G., Zahra, S. A., Wheatley, K. K., & Khan, R. (2001). The effects of alliance portfolio characteristics and absorptive capacity on performance: A study of biotechnology firms. Journal of High Technology Management Research, 12, 205 – 226. Gulati, R. (1998). Alliances and networks. Strategic Management Journal, 19, 293 – 317. Gulati, R. (1999). Network location and learning: The influence of networks resources and firm capabilities on the alliance formation. Strategic Management Journal, 20, 397 – 420. Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal, 21, 203 – 215. Hagedoorn, J. (1993). Understanding the rationale of strategic technology partnering: Interorganizational modes of cooperation and sectoral difference. Strategic Management Journal, 18, 339 – 360. Hagedoorn, J., & Schakenraad, J. (1994). The effects of strategic technology alliances on company performance. Strategic Management Journal, 15, 291 – 309. Hatfield, D., Tegarden, L., & Echols, A. (2001). Facing the uncertain environment form technological discontinuities: Hedging as a technology strategy. Journal of High Technology Management Research, 12, 63 – 76. Helfat, C. E. (1997). Know-how and asset complementarity and dynamic capability accumulation: The case of R&D. Strategic Management Journal, 18(5), 339 – 360. Henderson, J. C., & Venkatraman, N. (1991). Understanding strategic alignment. Business Quarterly, 55(3), 72 – 78.

V.W. Gerde, R.V. Mahto / Journal of High Technology Management Research 15 (2004) 73–89

89

Kleps, I., Angelescu, A., Vasilco, R., & Dascalu, D. (2001). New micro- and nanoelectrode arrays for biomedical applications. Biomedical Microdevices, 3(1), 29 – 33. Kraatz, M. S. (1998). Learning by association? Interorganizational networks and adaptation to environmental change. Academy of Management Journal, 41, 621 – 643. Krackhardt, D. (1992). The strength of strong ties: The importance of Philos in organizations. In N. Nohria, & R. G. Eccles (Eds.), Networks and organizations: Structure, form and action ( pp. 216 – 239). Boston, MA: Harvard Business School Press. Liebeskind, J. P., Oliver, A. L., Zucker, L., & Brewer, M. (1996). Social networks, learning and flexibility: Sourcing scientific knowledge in new biotechnology firms. Organization Science, 7, 428 – 443. Madhavan, R., Koka, B. R., & Prescott, J. E. (1998). Networks in transition: How industry events (re)shape interfirm relationships. Strategic Management Journal, 19, 439 – 459. Mahoney, J. T., & Pandian, J. (1992). The resource based view within the conversation of strategic management. Strategic Management Journal, 13, 363 – 380. March, J. G., & Simon, H. (1958). Organizations. New York: Wiley. Martin, F. J., & Grove, C. (2001). Microfabricated drug delivery systems: Concepts to improve clinical benefits. Biomedical Microdevices, 3, 97 – 108. Metcalfe, J. S., & Gibbons, M. (1989). Technology, variety and organisation: A systematic perspective on the competitive process. In R. Rosenbloom (Ed.), Research on technological innovation, management and policy, vol. 4 ( pp. 153 – 193). Greenwich, CT: JAI Press. Metsger, M. F., Wilson, T. S., Schumann, D., Matthews, D. L., & Maitland, D. J. (2002). Mechanical properties of mechanical actuator for treating ischemic stroke. Biomedical Microdevices, 4(2), 89 – 96. Mitchell, W., Roehl, T., & Slattery, R. J. (1995). Influences on R&D growth among Japanese pharmaceutical firms, 1975 – 1990. Journal of High Technology Management Research, 6, 17 – 32. Mitchell, W., & Singh, K. (1996). Survival of businesses using collaborative relationships to commercialize complex goods. Strategic Management Journal, 17, 169 – 195. Nicholls-Nixon, C. (1995). Responding to technological change: Why some firms do and others die. Journal of High Technology Management Research, 6, 1 – 16. Pennings, J. M., & Harianto, F. (1992). The diffusion of technological innovation in the commercial banking industry. Strategic Management Journal, 13, 29 – 58. Petersen, K. E., McMillan, W. A., Kovacs, T. A., Northrop, M. A., Christel, L. E., & Pourahmadi, F. (1998). Towards next generation clinical diagnostic instruments: Scaling and new processing paradigms. Journal of Biomedical Microdevices, 1, 71 – 79. Philipkosi, K. (2001, October 29). Tiny capsules float downstream. Wired News (October 29) (story location: www.wired.com/ news/medtech/0,1286,47934,00/html). Rowley, T. J. (1997). Moving beyond dyadic ties: A network theory of stakeholders influences. Academy of Management Review, 22, 887 – 910. Sanders, R. (1999, October 6). UC Berkeley’s Health Science Initiative: Research summaries and story ideas. Press release. Available at: http://www.berkeley.edu/news/media/releases/99legacy/10-6-1999b.html. Shan, W., Walker, G., & Kogut, B. (1994). Inter-firm cooperation and startup innovation in the biotechnology industry. Strategic Management Journal, 15, 387 – 394. Southwick, K. (2001, April 2). The MEMS microcosm: Health care. Forbes ASAP, 52 – 56. Tam, P. (2001, January 25). Wireless networking advances through Atheros. Wall Street Journal, B7. Welcomer, S., Cochran, P., & Gerde, V. (2003). Power and social behavior: A structuration approach to stakeholder networks. In J. Andriof, S. Waddock, B. Husted, & S. Rahman (Eds.), Unfolding stakeholder thinking: Management and performance. Sheffield, UK: Greenleaf, in press. Wellman, B. (1988). Structural analysis: From method and metaphor to theory and substance. In B. Wellman, & S. D. Berkowitz (Eds.), Social structures: A network approach. Cambridge: Cambridge University Press. Westiney, E. (1988). Domestic and foreign learning curves in managing international cooperative strategies. Cooperative strategies in international business ( pp. 339 – 346). Lexington, MA: Lexington Books.