MEASURING COMPETENCE? EXPLORING FIRM EFFECTS IN PHARMACEUTICAL RESEARCH Rebecca Henderson and Iain Cockburn Summary by Shweta Gaonkar

Main Idea Empirical study on the effects of heterogeneous organizational 'competence' in competition in the context of pharmaceutical research. Prior research has shown heterogeneous firm effects to account for variability in profits across firms (Cool and Schendel, 1988; Hansen and Wernerfelt, 1989; Rumelt, 1991) Few others point to idiosyncratic firm capabilities shaping both diversification strategy as well as firm performance (Hitt and Ireland, 1985; Montgomery and Wernerfelt, 1988) But these are measure of competence at aggregate level.

Organizational ‘Competence' As A Source of Competitive Advantage For an organizational 'competence' to be a source of competitive advantage it must meet three conditions: It must be heterogeneously distributed within an industry; It must be impossible to buy or sell in the available factor markets at less than its true marginal value; and It must be difficult or costly to replicate (Barney, 1986; Wernerfelt, 1984; Peteraf, 1993)

Classification of Competence To structure empirical analysis, they draw on literature of distinguish two broad classes of capability: 'component competence' or the local abilities and knowledge that are fundamental to day-to-day problem-solving, 'resources' (Amit and Schoemaker, 1993) and 'knowledge and skills' or 'technical systems' (Leonard-Barton, 1992; Teece, Pisano, and Shuen, 1992) 'architectural competence' or the ability to use these component competencies-to integrate them effectively and to develop fresh component competencies as they are required 'capabilities' (Amit and Schoemaker, 1993), 'integrative capabilities' (Lawrence and Lorsch, 1967), 'dynamic capabilities' (Teece et al., 1992), 'implicit/social' or 'collective' knowledge (Spender, 1994), 'organizational architecture' (Nelson, 1991), 'combinative capabilities' (Kogut and Zander, 1992), 'managerial systems' and 'values and norms' (Leonard-Barton, 1992), and 'invisible assets' (Itami, 1987)

Component competence Hypothesis 1: Drug discovery productivity is an increasing function of firm-specific expertise in particular disciplinary areas. Hypothesis 2: Drug discovery productivity is an increasing function of component competence in particular disease areas.

Architectural competence Hypothesis 3: Firms with the ability to encourage and maintain an extensive flow of information across the boundaries of the firm will have significantly more productive drug discovery efforts, all other things equal. Hypothesis 4: Firms that encourage and maintain an extensive flow of information across the boundaries between scientific disciplines and therapeutic classes within the firm will have significantly more productive drug discovery efforts, all other things equal

The Econometric Model To explore the hypothesis we measure the ‘important patent’ (one that was granted in two of the three major jurisdictions) and hypothesize that patent counts are generated by a production function: y = f(x,β) where y is patent counts, x is a vector of inputs to the drug discovery process that includes a firm's core competencies, and p is a vector of parameters. The assumption that the dependent variable is distributed Poisson is quite strong hence they test for specification error. For 'Scale, scope and spillovers' they focused on the role of the size and shape of the firm's research portfolio in shaping research productivity, including quantitative measures of firm size and scope, program size, and intra- and inter-firm spillovers in Equation : y = f(x,β)

The Data They use both qualitative and quantitative data drawn from a larger study of research productivity in the pharmaceutical industry. These data were obtained from both public sources and from the internal records of 10 major pharmaceutical firms. The 10 major pharmaceutical firms include both European and American firms and between them account for approximately 28 percent of U.S. R&D and sales and a somewhat smaller proportion of worldwide sales and research. For the qualitative data they drew on secondary sources including the national press, reference texts, academic textbooks, medical journal articles and reports by both consultants and the Office of Technology Assessment to track the organizational and scientific history of the industry

Exploring firm heterogeneity architechtu ral conmpeten ce total stock of patents as an additional measure of firm heteroge neity, but it is not significan t

Exploring Firm Heterogeneity local competence, KPATS, the stock of patents previously obtained in each program. Introduces measure for architectural competence

Validity of Poisson specificat ion

Conclusion and Discussion Find support for the importance of 'competence' as a source of advantage in research productivity. Results suggest that a focus on 'architectural' or 'integrative' or 'combinative' capabilities as a source of enduring competitive advantage may provide useful insights into the sources of enduring differences in firm performance with few challenges in terms of methods Comparison of the results of our analysis conducted at the firm level with that conducted at the program level suggests that a significant fraction of any firm effect in research productivity identified at the aggregate level may simply reflect a failure to control for the structure of the research portfolio. Measure of architectural competence can be subjected to criticism regarding the problems with interpretation. For example PROPUB is closely correlated with several other measures, particularly to indicators of its geographical location and of its degree of involvement with academic science.