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Resource-Rich Firms Make Attractive Business Allies

business allies

This article by HEC Paris appears originally on Knowledge@HEC.

A business partnership is much like a marriage. Both parties bring something to the table and join forces to make their alliance a success.

In a recent study, Denisa Mindruta, Mahka Moeen and Rajshree Agarwal explore partnerships between pharmaceutical and biotechnology firms. They discover that financial support only goes so far, while investment in research capabilities makes firms more attractive. There is a top-down sorting of firms when alliances are made, with those who do the best research becoming allies.

Firms form strategic alliances and combine resources and capabilities. To fill gaps in research pipelines, partnerships between pharmaceutical and biotechnology firms are commonplace. “Pharma-biotech alliances are often made before discoveries, when firms don’t know if the outcome will be commercialized,” says Denisa Mindruta. “Since contracts are made based on products that don’t yet exist, it is the attributes of the partners that are important when an alliance is made.” There are many factors involved in forming an alliance. Each party will have expectations of what their partner will supply. But no one really knows what determines the success of any given pharmaceutical-biotechnology firm partnership.

Two sides to every partnership

The study of business alliances has previously assumed that picking a partner to ally with is like buying a product. “If a firm wants to buy a computer, they will need to choose between computers with different configurations and select the one that best matches requirements and budget,” Mindruta explains. “When considering a biopharmaceutical partnership, the pharma firm will assess all potential biotech partners and then decide on their ally.” In this scenario, it is assumed that the chosen biotech firm will agree to the partnership. But, what if there are other, more attractive, pharma firms to ally with?

A pharma-biotech matching game

Mindruta and co-workers saw that they needed to look at the partnership as a whole, and also take into account both partners’ perspectives. They developed a matching game for biopharmaceutical alliances, based on previous research carried out by sociologists and economists. “Matching processes have been studied in many real-life contexts,” Mindruta explains. “From marriage to college admissions to recruitment; in all cases, partnerships are made, but it is not always obvious how desired partners were attained.”

When a matching game was played in the context of marriage, Nobel Laureate Gary Becker found that it is not all about love. When choosing a spouse, factors such as education, income, religion, and psychological traits create a sorting market. Individuals have preferences for attributes that they want in their spouse but cannot attain. As Mindruta explains, “They may want to marry Marilyn Monroe, but she might have better options to choose from and won’t be available. In the case of business alliances, one firm might be attractive to another because it fills some gaps in knowledge or expertise, but the firm in search of an alliance also needs to think about what it can offer other potential partners.”  In other words, whether in marriage or in business, the synergy created through partnership is a result of both partners being able to bring something to the table.

Inequalities reveal partnership synergy

The team created their own matching game and played it with a number of pharmaceutical and biotechnology firms. They looked at existing pharma-biotech partnerships during 1996-2006, and switched partners around to simulate what partnerships might look like if competitors had made alliances. Real alliances were thought to create more value than the theoretical ones created through swapping. Through analysis using mathematical inequalities, Mindruta and colleagues could determine what drives alliance formation. They found that this new way of thinking about biopharmaceutical partnerships is far more accurate than previous methods that omit competition and look at partnerships from a one-sided buyer perspective. They saw that it accurately predicted partnerships and the synergies that lie behind them. 

Patterns of partnership

In creating a large dataset from multiple partnerships, Mindruta and colleagues were able to find the patterns behind matching. They observed top-down sorting in that pharmaceutical and biotech firms with greater research capabilities ally with one another. Mindruta notes, “This shows that research investments made by a pharma-firm in the past make it a more attractive partner to biotech than a firm that has outsourced all of its research capabilities. We conclude that investing more in research will enable firms to make stronger alliances.” This top-down sorting was also seen in terms of firm size. Greater size translates into more extensive research facilities and development programs, and so larger companies tend to ally with other large companies.

Money cannot buy partnership

Mindruta concludes by stating, “It is important to realize that, just like love, money can’t buy a better alliance partner. When it comes to business partnerships in a competitive market, both partners must contribute something and contributions go beyond financial resources. Firms cannot buy their way up the hierarchy and ally with top research firms. They have to make the necessary initial investment into their capabilities to have access to key allies in the future.” The research team is now looking at other aspects of biopharmaceutical alliances to see how aspects such as the drug pipeline, drug manufacturing specializations and networks of doctors influence partnership creation.

Based on an interview with Denisa Mindruta on her paper “A two-sided matching approach for partner selection and assessing complementarities in partners’ attributes in inter-firm alliances,” co-authored with Mahka Moeen and Rajshree Agarwal (Strategic Management Journal 2016).

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