Phase II research data analysis and theory extension
8.2 Strategic processes for the Commercialisation Options Model
A complementary philosophical approach to ROR
During the second phase of field research Dr. John Holaday referred me to two classic essays on scientific method that he thought might help me in thinking about real options reasoning – in particular how to evaluate and choose amongst options and also how to reduce uncertainty and grow value in the chosen options. The first essay was The
Method of Multiple Working Hypotheses by T.C. Chamberlain (1897) and the other was
Strong Inference by J.R. Platt (1964).
Chamberlain calls for the progression of science through the simultaneous evaluation of multiple hypotheses. He does not believe that simple explanations of complex
phenomena are viable – there are no quick fixes or magic bullets. As the case studies reported in chapter five have shown, there is no single explanation of commercialisation strategy that predicts the chosen business model, but rather, it is better explained by a complex multi-factorial process model such as that I have suggested in chapter five. Chamberlain describes the danger of a singular explanation for a phenomenon, that appears satisfactory, being adopted for widespread use despite not having being tested for its applicability in every situation.
Chamberlain’s multiple hypotheses methodology involves first conceiving every rational explanation of a phenomenon, then developing every tenable hypothesis relative to its value, cause or origin. Each hypothesis in the family should be treated impartially with the investigator “morally forbidden to fasten his affections unduly upon any one.” (p.352) The investigator then proceeds:
knowing well that some of his intellectual children (by birth or adoption) must needs perish before maturity, but yet with the hope that several of them may survive the ordeal of crucial research, since they are often conjoined in the production of the phenomena (p.352).
I hope that the parallel with ROR and commercialisation strategy is obvious. My model recommends that the strategist consider all options up-front, investing in and keeping open many options with the full knowledge that many will perish (be terminated) either actively or through abandonment and in the hope that one or more will reach maturity and be exercised. But how does the strategist or entrepreneur cope with the
development of multiple options? Here, the second essay recommended by Dr. Holaday describes a crucial process for the rapid advancement of science. It may equally be applied to options as a way to distill and refine the most valuable from amongst a myriad of options.
Platt (1964) describes the critical path for “rapid and powerful progress [in science]” as being to devise alternative hypotheses, then to conduct a crucial experiment, with alternative possible outcomes, which will exclude one or more alternative hypotheses and finally to repeat this procedure as many times as needed to refine the possibilities that remain. This concept is the essence of the ‘drop dead’ activities that I have advocated in the second stage of the Commercialisation Options Model.
Platt describes this process as being like climbing a tree – at each fork in the “logical tree” there may be multiples choice (e.g. a right fork, a left fork, a middle fork), the outcome of each crucial experiment telling us which fork we must choose. To quote Platt:
It consists of asking in your own mind, on hearing any scientific explanation or theory put forward, “But sir, what experiment could disprove your hypothesis?” or, on hearing a scientific experiment described, “But sir, what hypothesis does your experiment disprove?” (Platt, 1964, Aids to Strong Inference, para.2)
Platt’s scientific reasoning can be applied to real options in commercialisation strategy. ‘What’, ‘when’ and ‘how’ options can be mapped out like a tree and crucial
experiments or next steps can be devised with a view to trying to disprove or terminate the viability of various options at each fork in the tree, thus inferring that remaining options have greater value.
Together, Chamberlain and Platt suggest a rigorous approach to scientific explanation that first relies on identifying all possible hypotheses and then conducting crucial
experiments that will exclude one or more alternative hypotheses. This is the essence of the Commercialisation Options Model presented in chapter six. However, with the practitioner feedback generated in the second phase of research, together with the eloquent insights of Chamberlain and Platt, I am now better able to articulate the essential processes underlying the Commercialisation Options Model.
Processes synthesized from academic and practitioner sources
The first stage of the Commercialisation Options Model involves identifying all
possible options that the firm has in commercialising its innovation (this is analogous to identifying all possible hypotheses according to Chamberlain’s methodology). I had initially provided the ‘what’, ‘when’ and ‘how’ framework to help in this process. Addressing the practitioner feedback I have added ‘where’, ‘who’ and ‘with whom’ to this framework.
Stage one B of the model involves evaluating the comprehensive range of options identified and deciding which to invest in. There are many ways to undertake this evaluation. I had previously suggested mapping out the various combinations of ‘what’, ‘when’ and ‘how’ options and then calculating risk adjusted NPVs for each, taking into account the inherent risks, costs and rewards.
An alternative process was suggested during practitioner review of the model. It employs qualitative measures rather than quantitative calculations for ranking the attractiveness of alternate options. Each combination could be ranked as
low/medium/high with regard to its rewards, costs and risks. A quick run through would allow a majority of options to be discarded. The process could be repeated to rank the remaining options, or a more detailed quantitative process could be employed to evaluate the more attractive options. Companies may determine their own criteria for ranking options. An example is provided later in this chapter.
The company should then map out the options it has chosen to invest in, or keep open. This is more likely to resemble a tree than a set of distinct linear paths. The trunk of each tree will symbolize the company’s core innovation, the lowest/thickest branch(es) will fork out to include the various ‘what’ options the company is considering. Those in
turn branch out into the various ‘when’ options available to the company. Lastly the highest twigs on the tree will symbolize the ‘how’ options the company wants to keep open for plugging into the value chain.
Once investments have been made in the chosen options the firm’s attention turns to nurturing those options by increasing their value or reducing their inherent uncertainty. This is stage two of my model. Feedback from the practitioner review suggested the first step in this stage should be to define the critical path for each option, integrating the perspectives of all functions of the business. (e.g. finance, manufacturing,
regulatory, clinical development, business development etc.) Drop dead experiments or actions need to be determined for each step on the critical path. Care should be taken to double check that a crucial experiment or action falls at every fork in the option tree as the company must eventually exercise some options and terminate others as it moves towards its optimal interaction with its value chain.
Drop dead or crucial experiments or actions are the equivalents of Platt’s testing of alternative hypotheses. The key to this process is that following the drop dead or crucial activity the company undertakes it should be in the position to make go/no-go decisions on further investments. The challenge being to structure these activities for the greatest reduction in risk at the lowest cost as advocated by McGrath, (2009).
As the firm maps out the critical path and the drop dead or crucial activities at each juncture it should clearly define go/no-go criteria. These should consider cost, time and competition for resources. Such criteria will greatly facilitate the termination of options – an activity that the practitioners generally thought was poorly done in practice.
The practitioner critique suggested that commercial proof of concept is an important element that needs to be built into the critical path for each commercialisation option. This means a firm needs to be very sure that the customer for their product offering is really going to be prepared to meet the firm’s price expectation. The customer can vary greatly from one commercialisation project to another. A firm commercialising in the market for ideas will be selling, licensing or partnering their product to another company. In this instance the other company is the customer. Commercial proof of concept includes gaining assurance that other companies will be interested in buying or
licensing the project under acceptable terms. If a firm is commercialising a project in the product market its customers may be either patients that will pay for the product directly or the customers may be pharmaceutical reimbursement agencies. Each will have its own criteria for making buy/reimbursement decisions and commercial proof of concept involves achieving a reasonable level of assurance that financial returns from the project will exceed development costs.