The Art of Start:...with a Little Help from Management Theory
Jan Rosier, Elan Chair of the Business of Biotechnology
UCD Michael Smurfit Graduate School of Business & School of Biomolecular and Biomedical Science
February 19th 2014
J Rosier – Elan Chair of the Business of Biotechnology
1 What is a management theory?
2
A management theory attempts to explain and predict social phenomena
as they occur in organizations
Management research is a systematic inquiry into social phenomena in organisations that increases our knowledge about organisations and the individuals in these organisations
J Rosier – Elan Chair of the Business of Biotechnology
Examples of management theories
3
Why are some people successful in making other people ‘follow’ them?
Transformational theory
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Do CEOs, and the decisions that they take, matter?
Populationecologytheory
Examples of management theories
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How do firms grow?
Theory of the growth of the firm
Examples of management theories
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Why are some firms more productive?
Stupidity-based theory of organisations
Examples of management theories
J Rosier – Elan Chair of the Business of Biotechnology
2. Why is theory useful?
7
There is nothing more practical than a good theory
Kurt Lewin (1890-1947)
J Rosier – Elan Chair of the Business of Biotechnology
2. Why is theory useful?
8
Jean Piaget (1896-1980)
Knowledge is constructed on cognitive structures and is used to understand – and increase your understanding – of the world around you
5 theories
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that will help you think about start-up’s
Signalling theory(Spence, 1973, 1974; Podolny, 1993, 2005): Signaling theory describes behavior when two parties have access to different information. The sender signals information, to its own benefit, and modifies the behavior of the receiver
Young springbok Antidorcas marsupialis ‘stotting’ or ‘pronking’
1
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Agency theory (Principal – Agent theory)(Gompers & Lerner, 1999; Sahlman, 1990)A ‘principal’ (VC) monitors an ‘agent’ (biotech entrepreneur)to align their interests to create shareholder value under conditions of information asymmetry
2
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Pecking Order theory(Corporate finance - Roberts, 1991; Watson and Wilson, 2002): the cost of financing increases with asymmetric information
3
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Intellectual Capital theory(Theoretical foundation in information economics – Understanding how human, structural, relational, reputational, and social capital contribute to the value and survival of the firm)
4
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Resource Based theory(Barney and Clark, 2007): Why do some firms achieve better economic performance than others continuously?
5
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Theory 1
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Signalling theory
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C (p)ES
EUR
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IPOinvestment attraction
E Ownership of the company
Leland and Pyle (1977)
‘Good’companies
‘Bad’companies
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Odds of external investment attraction
Business management expertise0 1
1
3 (2,71)p.015
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Odds of external investment attraction
General technological expertise0 1
No impact
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Odds of external investment attraction
Academic status0 1
No PhD/professor
PhD/professor
1
4 (4,22)p.002
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Venture survival
Business management expertise0 1
1
2 (2,2)p.04
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Academic status0 1
No PhD/professor
PhD/professor
Venture survival
No impact
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Theory 2
Agency theory
A ‘moral hazard’ occurs when an agent with more information to act has the
intention to behave inappropriately from the perspective of the agent
with less information
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A MORAL HAZARD
SITUATION
‘Any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly’ (Paul Krugman, Nobel Prize 2008)
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VC ES
EURR
&D
kn
ow
led
ge
R&D scientists: self-monitoring and enterprising agents
27
!
28
R&D scientists can take directions that affect the direction of thewhole company1
R&DR&D
CEO
Grove, 1996; Burgelman et al., 2004; Christensen and Diehl, 1997
‘...single individuals can sometimes take initiatives that affect the direction of the entire company’
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R&DR&D
2CEO
R&D scientists are autonomous and independent knowledge workers
Alvesson, 2004; Florida, 2002; Marks, 2011
‘A knowledge worker in life science R&D is a self-monitoring and enterprising agent, basically outside of the full control of management’
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3CEO
R&DR&D
R&D scientists see further
Styhre, 2009
Market
Possibilities
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4CEO
R&DR&D
R&D scientists have knowledge that CEOs have difficulty to imagine
Styhre, 2009
‘R&D did not feel their top managers were
capable to see the full implications of the new
tools and techniques’
VC’s will interfere with the USO as predicted by agency theory...
i. Affirmative covenantsii. Negative covenantsiii.Non-compete clausesiv.Board representationv. Special voting rightsvi.Dismiss management clausevii.Monitoring devicesviii.Bad leaver clauseix.Stand stillx. Force an exit
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because of .... moral hazard
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Theory 3
Pecking order theory
Entrepreneur
Internal funding
Friends, family and fools
Venture capital
Banks
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SOURCE OF CAPITAL
INFORMATION ASYMMETRY
COST OF CAPITAL
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Theory 4
Intellectual capital theory
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Relationalcapital
Socialcapital
Humancapital
Structuralcapital
Reputationalcapital
SUCCESSIntellectualCapital
(leading to IP)
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Relationalcapital
Socialcapital
Humancapital
Structuralcapital
Reputationalcapital
SUCCESS
EURIntellectual
Capital(leading to
IP)
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Relationalcapital
Socialcapital
Humancapital
Structuralcapital
Reputationalcapital
SUCCESS
EUR
Inte
llect
ual
grav
ity
IntellectualCapital
(leading to IP)
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Relationalcapital
Socialcapital
Humancapital
Structuralcapital
Reputationalcapital
SUCCESS
EUR
Inte
llect
ual
grav
ity
STAR S
CIEN
TIST
Wha
t is th
e va
lue
of a
sta
r
scie
ntist
?
IntellectualCapital
(leading to IP)
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SUCCESS
EUR
Inte
llect
ual
grav
ity
STAR S
CIEN
TIST
For each article written by a star-scientist, as or with a firm as employee, additional funds of an average of 1.1 million $ are obtained (Darby and Zucker, 2002)
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The Matthew effectin start-up management
‘For all those who have, more will be given and they will have an abundance; but from those who have
nothing even what they have will be taken away’
(Matthew 25,29)
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Theory 5
Resource based theory
Why do some firms continuously achieve better economic performance than others?
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Biotech question:
Why are some biotech/pharma firms more effective in developing new patentable drugs than others? (Henderson and Cockburn, 1994)
Answer: it is caused by their ‘architectural competence’: the ability to facilitate cooperation among the different scientific disciplines required to develop patentable drugs
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If a firm has resources that are:
• valuable,
• rare, and
• costly to imitate, and…
• the firm is organized to exploit these resources,
That are combined into capabilities then the firm can expect to enjoy a sustained competitive advantage.
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The Question of Value
• in theory: Does the resource enable the firmto exploit an external opportunity?
• in practice: does the resource result in a continued flow of new ideas?
The Question of Rarity
• a resource must be rare enough that perfect competition has not set in
• if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)
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The Question of Imitability
• the temporary competitive advantage of valuableand rare resources can be sustained only if competitors face a cost disadvantage in imitatingthe resource
» intangible resources are usually more costly to imitate than tangible resources
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The Question of Organization
• a firm’s structure and control mechanismsmust be aligned so as to give people abilityand incentive to exploit the firm’s resources
• Examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.
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Valuable? Rare?Costly toImitate?
Exploited byOrganization?
CompetitiveImplications
No
Yes
Yes
Yes
Yes
Yes Yes Yes
No
No
No Disadvantage
Parity
TemporaryAdvantage
SustainedAdvantage
RECIPE FOR SUSTAINED ADVANTAGE
EconomicImplications
Below normal
Normal
Abovenormal
Abovenormal
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SUCCESFULL USO
Signalling theory
Agencytheory
Peckingordertheory
Intellectualcapitaltheory
Resource basedtheory
54321
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CONCLUSION