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’

29

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

31

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)

41

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