Firm-level transformational process

This sub-section determines the conceptual focus of latecomer firms’ organisational mechanisms of technological learning by drawing on ideas about firms’ exploratory learning. There are two conceptually useful dimensions of organisational transformation.

One deals with latecomers’ technological development practices in proceeding with drug R&D (Sub-section 3.3.3.1). The other considers the organisational mechanisms that correspond to technological development practices (Sub-section 3.3.3.2).

development; (b) the presence of the network with no direction toward the development goals; (c) the presence of the network toward the development goal, but ‘the outcomes from its components are mutually inconsistent (misaligned)’.

67 It is particularly related to the mix of two heterogeneous institutional spheres and its potential risk to undermine the key characteristics of exploration. The operational mechanisms of the science system are strongly affected by the business system and therefore affected by the more profit-creating rules; they will lose the diversity of scientific research and thus ultimately lose the innovation sources (Kaufmann and Tödtling 2001).

3.3.3.1 Technological development practices

The R&D process and R&D strategy are the two conceptual constituents of technological development practices. The R&D process for a new drug is the actualisation process of an exploratory mode of technological learning (g). R&D strategy involves the commercial effectiveness of latecomers’ technological development practices in the changed competition environment (h).

g) Exploration practices in the R&D process

If they attempt to develop new drugs, latecomer firms essentially pass through a transformation from exploitation-centred to exploration-oriented technological learning.

New-drug R&D requires a change in the process logic and habits of technological learning, in comparison with the development of generic drugs.

Specifically, the production of generic drugs is mainly based on technological exploitation, although the imitative production itself can be regarded as an outcome of exploration in the very early stages of learning for latecomers. The development of generic drugs hardly needs the discovery and validation process of drug candidates – the dominant methods and detailed goals of development are already known. Interactive learning thus takes place in a relatively codified manner and under the well-defined division of R&D tasks.

In contrast, the original development of new drugs needs a high degree of scientific discovery and validation. Scientific research is highly explorative and takes a long time.

Simultaneous and dense interaction between R&D actors and across R&D tasks is needed for joint validation and optimisation. In other words, the characteristics of exploratory learning are notably expressed in the new-drug R&D process.

Latecomers’ new-drug R&D practices can be understood as adapting to the key characteristics and conditions of exploration, as well as unlearning the ingrained learning mode of exploitation.

h) R&D strategy in the transitional phase

As noted, firms’ exploratory learning is ultimately directed at creating economic profit. In this regard, business-oriented exploration needs strategic consideration to cope with the changing competitive environment in the transitional phase. That is, new drugs to be developed through exploratory learning should be sellable in competition with drugs launched by Big Pharma.

To begin with, in broad terms, the stepwise catch-up model seems to be strategically effective in the overall catch-up path of the KoPI. The KoPI has initiated catch-up through

following the reverse PLC and then entering new-drug R&D stages like other successful catch-up industries have done.

However, entry into the transitional phase faces latecomers with a more complex catch-up environment (Chapter 2, Sub-section 2.4). First, they face direct competition with Big Pharma. Second, they are exposed to broader technological and institutional contexts, as their R&D expands to both upstream science and downstream clinical development.

For example, the inclusion of new drugs in latecomers’ product portfolios forces them to deal with various institutional contexts, such as drug pricing and approval-related institutions. Third, they must grapple with the emerging biotechnology paradigm with unarticulated markets, which provides both opportunities and threats for catch-up.

Therefore, identification of the strategic response of the changing technological, market and institutional environment is crucial to understanding latecomers’ exploratory learning.

Based on the literature review on latecomer firms’ transitions (Chapter 2, Sub-section 2.3.1), the changes in paths, focal area and commercialisation of new-drug R&D are considered to analyse latecomers’ strategic strengths and weaknesses.

3.3.3.2 Organisational mechanisms

The other area of focus lies in organisational mechanisms of technological exploration.

This issue includes organisational and managerial adaptation to the key characteristics of exploration and casting off the organisational routine of exploitive learning (e.g.

Levinthal and March 1993, Benner and Tushman 2003, Raisch and Birkinshaw 2008).

In particular, organisational structure is crucial because the design and operation of organisational structures for R&D can influence latecomer firms’ organisational capability in dealing with the key mode of technological learning for developing innovative drugs.

Additionally, individual-level issues, such as the role of senior management and organisational code, are underlying factors of organisational transformation.

i) Organisational structure

A company can balance the two seemingly incompatible types of learning by setting up

‘dual organisational structures’ that perform exploitation and exploration (Duncan 1976).

Through operating a dual organisational structure, firms can guarantee their present (through exploitation) and future (through exploration) survival (Levinthal and March 1993). Ambidextrous organisations are composed of loosely coupled exploitive and exploratory sub-units; each sub-unit should be internally consistent in terms of culture, goals and individuals (Benner and Tushman 2003).

More specifically, in order to guarantee autonomous exploratory learning, firms may operate smaller sub-organisations devoted to exploration while concurrently running larger sub-organisations committed to exploitation (Tushman et al. 1997). Explorative sub-units are ‘smaller and decentralised with loose cultures and processes’, whereas exploitive sub-units are ‘larger and more centralised, with tight cultures and processes’

(ibid.). This physical separation of sub-units has been one of the prominent theoretical solutions for building ambidextrous organisations.

However, in the context of latecomer firms, the most important thing is not balancing exploration and exploitation, but on enhancing exploration. Therefore, the organisational structure of R&D must be reconfigured away from technological exploitation. In this context, two characteristics of exploration are particularly related to organisational structure. One is the influence of the structure of R&D organisations on the interactive learning between R&D teams. A multidisciplinary knowledge base and integral product nature impose the need for active and simultaneous interaction (Chapter 2, Sub-section 2.4). The other is associated with the organisational design for sustaining exploratory learning. It considers latecomer firms’ high vulnerability if they continue exploratory learning.

j) The role of senior management

Top management, often company owners in the case of the KoPI, also plays an important role in sustaining the vulnerable learning mode of exploration. Striking a balance between the two modes of learning requires not only the autonomous operation of exploratory sub-organisations, but also the contextual guidance, coordination and integration of the two learning patterns (e.g., Andriopoulos et al. 2009, Raisch et al. 2009).

For example, coordination is critical in resolving tensions and conflicts that arise during resource allocation to each sub-unit. Guiding whether R&D organisations focus on more incremental (exploitive) or radical (explorative) innovation activities is also vital. These tasks are the responsibility of senior management teams (Tushman, Anderson et al.

1997, Benner and Tushman 2003, Jansen et al. 2008).

Therefore, for latecomer firms, the theoretical focus here examines whether top management promotes or interrupts the initiation and strengthening of exploratory learning. As noted, exploratory learning is particularly vulnerable in a latecomer firm because of a lack of short-term profitability and need for long-running R&D; such firms are financially weak and small in size. Because of this, initiative taken by top management is likely to be a critical factor.

k) Organisational code

March (1991) identifies the relationship between individual behavioural patterns and organisational code as an influential factor in conducting exploration. The exploitation-oriented organisational inertia of latecomer firms may inhibit the emergence of exploration-oriented learning by individual researchers when the company starts new-drug R&D. A generalised solution is the proper turnover of individuals to sustain exploratory learning (March 1991).