Annals of Business Administrative Science Vol.2, No.2 (April 2003)

Organizational Capability and Competitive
Advantage in Pharmaceutical Product Development
Kenichi KUWASHIMA
Graduate School of Business Sciences, University of Tsukuba
E-mail: kuwa@gssm.otsuka.tsukuba.ac.jp

Abstract: Most existing researches treated pharmaceutical product development
process as a sort of “black box.” This paper, however, will focus on the productdevelopment process to explore the organizational capabilities and effective
development patterns. Interviews and statistical analyses with leading companies inJapanese pharmaceutical industry indicated that “go or no-go decision” is thesignificant organizational capability, in fact differing among companies, which effects
performances in pharmaceutical product development process. This organizational
capability is accumulated through experiences in pharmaceutical productdevelopment projects.
Keyword: product development, organizational capability, pharmaceutical industry

1. Introduction

computers, and software industries (Clark &What are the organizational capabilities that

Fujimoto,

influence performances in pharmaceutical product

Eisenhardt & Tabrizi, 1995; Iansiti, 1998). However,development? In the last decade, studies in fields ofininnovation

technologydevelopment process has been deemed rather as amanagement focused on organizational capabilities“black box.” There were company level studies on

and the origin of competitive advantage in productmanagement

development process of automobile, main frame

nevertheless, few investigated management andmanagement

and

1991:

pharmaceuticaland

Cusumanoindustry&Selby,studies,organizational

1995;

product

capabilities,

21

Kuwashimaorganizational capabilities of product development

some sort of management mechanism, organizational

process (Bierly & Chakrabarti, 1996; Gambardella,factor, or organizational capabilities

1995; Graves & Langowitz, 1993; Henderson &performance directly. Development stage consists ofCockburn, 1994; Omta, Bouter, & van Engelen,

pre-clinical test and clinical test. We focus mainly on1994).

the latter test stage to reveal organizational

influencedevelopment,

capabilities in pharmaceutical product development

likelihood of success is extremely low; one in few

process, which so far has not been revealed.

thousands to 10 thousand (JPMA, 2002). Where

Moreover, we present that organizational capabilities

possibility of success is so extremely low and owes

differ among companies in fact.

Inpharmaceuticalproduct

rather to mere chance or luck, it has been consideredthat pharmaceutical product development is like2. Competitive Advantage in Clinicaltreasure hunting and impossible to manage. However,Development Stage

when we take a closer look, some parts of theWe interviewed in total 20 personnel in charge of

product development process do not coincide withclinical development, R & D planning, corporate

popular theory while some parts do. Pharmaceuticallicensing, and other, in six major Japanese

product development process consists of discovery

pharmaceutical companies to explain factors which

stage, in which chemical compounds potential of

influence product development performance inbecoming

andclinical development stage. Each interview lasted

development stage, in which discovered chemical

about two to three hours, and additional follow-up

compounds are developed into new products. In thequestions were asked over telephone and e-mail. The

discovery stage, management is possible on theme

interviewees listed “decision of go or no-go,”decision and resource allocation yet, discovery of“protocol of clinical test,” “selection of clinicalnew chemical entity is affected by chance or luck.

development theme,” and “know-how on filling in

Additionally, research activities are operated on

new drug application form” as factors which

individual

therefore,influence product development stage performance.

organizational management at this stage is restricted

Among these, “decision of go or no-go” was theand performance relies largely on talents ofmost frequently named factor, which nearly allresearchers. Thus, it is popularly believed that thisinterviewees regarded significant.

newmedicines

researchers’

arelevel,found,stage is impossible to manage.

“Decision of go or no-go” refers to the decision

However, development stage differs frommaking of whether to adopt candidates of new drugs

discovery stage where development activities arefor clinical testing and to carry forward the clinicalorganized and little owes to chance or luck. Here,testing phase. This decision is critical for the whole22

Pharmaceutical Product Development
process,Thus, pharmaceutical product development ishowever, its weight becomes greater from clinicalforced to make the decision to terminate once a

development stage onward. This results from the fact

defect is reported in clinical development stage of athat clinical development requires billions of yen, yetcertain chemical compound. Basically, investments

once decided in this stage, chemical compounds

on the project sink when the decision to terminate isstructure cannot be changed or corrected in later

made. Therefore, in clinical development stage, thestages, that is, design modification as in generalmost influential factor on product development

product development become impossible. In otherperformance,words, the sole problem solving measure from thisdevelopment, is the capability to decide “go orstage is the “decision to go or no-go.” Most products

no-go” correctly on chemical compounds without

as automobiles allow “problem-solving by designprospect.

pharmaceuticalproductdevelopmentmodification”

throughout

development

process.

Onthewholethethat

isefficiency

ofproduct

productother

3. The Decision Pattern of Japanese

hand,pharmaceuticals allow design modification, that is,

Pharmaceutical Companies

correction of chemical compounds structure, in the

We conducted statistical analysis using data of 10

early stages, nevertheless, from clinical development

major Japanese pharmaceutical companies; namely,

process onward, problem-solving can only be

Chugai, Daiichi, Eisai, Fujisawa, Ono, Sankyo,

managed by deciding “go or no-go.” This is the mostShionogi, Takeda, Tanabe, and Yamanouchi, todistinctive feature of pharmaceutical products.

verify any difference between companies in decision
patterns at clinical development stage. Precisely, we

Table 1. Data Set

compared the ratio which clinical development

samples
Chugai

23

Daiichi

36

Eisai

42

Fujisawa

62

Ono

24

Sankyo28

Shionogi

32

Takeda41

Tanabe30

Yamanouchi

41

theme in each company progress from Phase I to
Phase II and to Phase III by survival analysis method.
Table 1 shows sample numbers of each company.
From the analysis, χ2 was 20.64 in log-rank test,
and 18.38 in Wilcoxon test, both of which weresignificant at 5%. This implies that patterns ofsurvival distribution function among firms show
statistically significant difference.
Differences in pattern of survival distributionfunction among firms can be taken as the differencesin decision making capabilities. As we have23

Kuwashima
trade-off is the most critical issue for

Table 2. Comparison of Survival Rate

pharmaceutical companies.

Order in Survival Rate
In Total

After Phase IIChugai78Daiichi56Eisai

99Fujisawa

84Ono

107Sankyo

12

Shionogi

410Takeda

61Tanabe

35Yamanouchi

23As we have seen, clinical test consists ofPhase I, Phase IIa, IIb, and Phase III. Cost
increases drastically from Phase IIb, and Phase
III cost even more. Considering above makeupof development costs, an effective approach toovercome the problem is to; carry forward test
to clinical stage with compounds which arepresumably safe and effective on human body,terminate test on unpromising compounds
before Phase IIb, that is, when they pass PhaseIIa. We shall call this pattern “spread catch netwide, pull at once at the right moment.” In fact,
they say among pharmaceutical manufacturersthat the best pattern of compound selection ismentioned, clinical testing is extremely costly.

to determine the potential by Phase IIa so that there

Therefore, superficially, companies showing higher

is no dropout in Phase IIb, which makes success rate

success rates at clinical development stage would
possess

higherdecisionmakingafter Phase IIb a 100%.

capabilities.

Consequently, what reflects capabilities ofHowever, pharmaceutical companies must minimize
clinicaldevelopment

cost

while

pharmaceutical manufacturers is assumably notminimizing“success rate in clinical development,” but “decision

opportunity cost as well. Which is to say, if thepattern of go or no-go.” In an interview of major

company aims to minimize clinical development cost

Japanese pharmaceutical companies, most namedalone, they should run clinical tests on only

Takeda Chemical Industries, Ltd. as having great

auspicious compounds. Nevertheless, by doing so

clinical development capability (Kuwashima, 1999).

opportunity cost occurs that compounds withHowever, we can see in our analysis that Takeda ispotentials of market introduction may be dropped. In

sixth among 10 in clinical development stageorder to minimize opportunity cost, the company

success rate (Table 2). On the contrary, when we

may take an antithetical approach: to run clinicallook at survival distribution function, that is decision

tests on every compound with slightest possibility ofpattern of go or no-go, Takeda draws an almost ideal

market introduction. Yet, this requires enormous

pattern (See Figure 1). Figure 1 compares theamount of money. Thus, how to manage this24Pharmaceutical Product Development
Figure 1. Survival Distribution Functions

survival rate

100Takeda
Upper 5 companies' average
Lower 4 companies'average
0clinical test
start

PhaseⅠ

PhaseⅡ

PhaseⅢ

marketintroduction

phase

Note: Upper 5 companies; Daiichi, Sankyo, Shionogi, Tanabe, and Yamanouchi.
Lower 4 companies; Chugai, Eisai, Fujisawa, and Ono.

survival distribution function between Takeda andamong ten. Therefore, the reason that Takeda isother nine pharmaceutical companies dealt in ourhighly evaluated among pharmaceutical industry lies

analysis. We divided the other nine companies in two

not in its clinical development success rate but ingroups with higher clinical development success rate

survival distribution function pattern: especially inand lower clinical development success rate. There is

the pattern after Phase II (Table 2).

a difference between higher and lower group insuccess rates, however, both groups draw a

4. Conclusion

downward slope after Phase II. In contrast, Takeda

We focused on product development process, whichdraws a horizontal survival distribution function

haveafter Phase II. Clinical development success rate ofpharmaceutical industry in order to examine

Takeda after Phase II is 100%, which is best among

effective10; though success rate through all phases is sixthorganizational capabilities on the firm’s performance.
25

been

regardedproductasa“blackdevelopmentbox”

patterninandKuwashima
From interviews and statistical analyses, we revealed

Transactions on Engineering Management, 43(4),that the effective compound selection pattern is to368-380.

“spread catch net wide, pull at once at the right

Clark, K. B., & Fujimoto, T. (1991). Productmoment” at clinical development stage, whereby “godevelopment performance: Strategy, organization,or no-go” decision is the critical organizationaland management in the world auto industry.

capability. Moreover, we showed that there isBoston, MA: Harvard Business School Press.

actually difference among firms concerning thisCusumano, M. A., & Selby, R. W. (1995). Microsoftability.

secrets. New York: Free Press.

How do firms build such organizational
capability?

Knowledge

andknow-howEisenhardt, K. M., & Tabrizi, B. N. (1995).

inAccelerating adaptive process: Product innovation

pharmaceutical product development could not bein the global computer industry. Administrativeeasily acquired but accumulated within the firm

Science Quarterly, 40, 84-110.

through learning by doing multiple numbers ofGambardella, A. (1995). Science and Innovation:

product development projects. As a matter of fact,

The US pharmaceutical Industry during the 1980s.

Takeda,Cambridge: Cambridge University Press.

which

provedtopossess

higherorganizational capability in our research, experiences

Graves, S. B. & Langowitz, N. S. (1993). Innovative

more clinical development projects than other majorproductivity

pharmaceutical companies according to data frompharmaceutical industry. Strategic Management

1977 to 1996 (Kuwashima, 1999).

Journal, 14, 593-605.

andreturns

toscaleintheHowever, mere experience in numbers ofHenderson, R. & Cockburn, I. (1994). Measuring

projects would not build organizational capability. Incompetence? Exploring firm effects in theorder to reflect project experiences in organizational

pharmaceutical research. Strategic Management

capabilities, the quality of the experience isJournal, 15, 63-84.

substantial as well as retention of acquired

Iansiti, M. (1998). Technology integration. Boston,knowledge. Future research should try to analyze theMA: Harvard Business School Press.

formation process of organizational capabilities in

JPMA

consideration of these respects.

(2002).

DataBook2002.

Japan

Pharmaceutical Manufacturers Association.
Kuwashima, K. (1999). Iyakuhinn no kenkyu

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