What Big Pharma Wants in a Partner
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Leadership Sep 2, 2013

What Big Phar­ma Wants in a Partner

For phar­ma­ceu­ti­cal com­pa­nies look­ing to part­ner with biotech start-ups, sci­en­tist rep­u­ta­tion and sta­tus play an impor­tant role

Based on the research of

Ithai Stern

Janet Dukerich

Edward J. Zajac

Some of the most impor­tant strate­gic deci­sions an orga­ni­za­tion can make, says Ithai Stern, involve choos­ing the right alliances and part­ners. Yet while researchers have offered tech­ni­cal expla­na­tions for these deci­sions, few have looked at the social – psy­cho­log­i­cal fac­tors that come into play.

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So Stern, an assis­tant pro­fes­sor of man­age­ment and orga­ni­za­tions at the Kel­logg School, along with col­leagues Edward Zajac, a pro­fes­sor of man­age­ment and orga­ni­za­tions also at the Kel­logg School, and Janet Duk­erich of the Uni­ver­si­ty of Texas, set out to fig­ure out just how exec­u­tives choose busi­ness part­ners. In a recent study, the researchers exam­ined part­ner­ships between large, estab­lished phar­ma­ceu­ti­cal com­pa­nies and start-up biotech firms.

Big Phar­ma, Tiny Start-ups

The biotech rev­o­lu­tion changed the face of drug devel­op­ment, leav­ing Big Phar­ma increas­ing­ly reliant on the knowl­edge base of fledg­ling biotech com­pa­nies found­ed by PhDs — who in turn depend­ed on the large cor­po­ra­tions for fund­ing and oth­er resources. Soon, the whole strat­e­gy of the drug com­pa­nies had shift­ed from empha­siz­ing only inter­nal R&D to devel­op­ing new strate­gic alliances. 

For these tiny biotech firms, form­ing part­ner­ships is every­thing. Their suc­cess depends heav­i­ly on their abil­i­ty to build rela­tion­ships with estab­lished com­pa­nies — and in many cas­es, the ear­li­er, the bet­ter. So what makes a biotech firm more attrac­tive? When it comes to small start-ups, says Stern, the rep­u­ta­tion and sta­tus of a new­ly cre­at­ed com­pa­ny is almost one and the same as its founder.” Just how poten­tial part­ners per­ceive those char­ac­ter­is­tics is crucial.

We’re all try­ing to econ­o­mize on the psy­cho­log­i­cal process­es through which we form perceptions.”

Stern and his col­league sug­gest that the two con­cepts of rep­u­ta­tion and sta­tus are quite dis­tinct, even though they are often con­flat­ed. Rep­u­ta­tion,” they write in the paper, is deter­mined by the val­ue or qual­i­ty of one’s pre­vi­ous actions, while sta­tus is deter­mined accord­ing to a social­ly con­struct­ed order­ing or rank­ing.” So the researchers looked at 325 part­ner­ships cre­at­ed between 1990 and 2003, hop­ing to tease apart the respec­tive roles of sta­tus and rep­u­ta­tion. For their study, the researchers equat­ed sta­tus with the aca­d­e­m­ic rank­ing of the uni­ver­si­ty from which a firm’s founder or top sci­en­tist grad­u­at­ed, and rep­u­ta­tion with his or her pub­li­ca­tion counts and cita­tion rates.

When Rep­u­ta­tion and Sta­tus Align

The team found that how sta­tus and rep­u­ta­tion align is extreme­ly impor­tant to part­ner­ship for­ma­tion. The greater a found­ing scientist’s rep­u­ta­tion, the more like­ly he or she was to suc­cess­ful­ly form an alliance with a phar­ma­ceu­ti­cal com­pa­ny — and to do so ear­li­er. The same was true with status.

More inter­est­ing, though, was the rela­tion­ship between these two fac­tors. When rep­u­ta­tion and sta­tus were both high, they ampli­fied each oth­er. What hap­pens,” says Stern, is that when they align, we use one kind of process to form a per­cep­tion.” This process is known as cat­e­go­ry-based per­cep­tion for­ma­tion — a type of men­tal short­cut. So I see some­one grad­u­at­ed from a great uni­ver­si­ty and also has a great CV. I can econ­o­mize on my men­tal pro­cess­ing and right away cat­e­go­rize her as a star sci­en­tist.” When sta­tus and rep­u­ta­tion do not align, Stern says, I have to go into an analy­sis process,” rep­re­sent­ing a very dif­fer­ent way in which to form a per­cep­tion of someone.

When rep­u­ta­tion and sta­tus were both low, though, the ampli­fi­ca­tion effect was even greater than when they were both high. The dou­ble com­bi­na­tion of low sta­tus and low rep­u­ta­tion,” the authors write, cre­ates a par­tic­u­lar­ly dif­fi­cult sit­u­a­tion for new­ly emerg­ing firms seek­ing alliances, as evi­denced by a par­tic­u­lar­ly retard­ing effect on alliance formation.”

Per­cep­tion For­ma­tion

Stern says he was sur­prised to see the extent to which neg­a­tives had a stronger impact than pos­i­tives. When we form per­cep­tions of oth­ers,” Stern explains, we tend to always remem­ber the neg­a­tives.” This can have major impli­ca­tions for man­agers, who often focus on high­light­ing pos­i­tives but might be bet­ter off try­ing to over­come neg­a­tives. If you are putting togeth­er a team for a start-up com­pa­ny, in oth­er words, you should iden­ti­fy poten­tial short­com­ings and try to find ways to com­pen­sate — such as build­ing teams that com­ple­ment one another.

It may seem like bas­ing busi­ness deci­sions on some­thing as sim­ple as someone’s alma mater is unfair. But to Stern, it is sim­ply human nature. We’re all try­ing to econ­o­mize on the psy­cho­log­i­cal process­es through which we form per­cep­tions,” he says. The under­ly­ing ques­tion is how to inform per­cep­tions of oth­er peo­ple and oth­er com­pa­nies. For years it was obvi­ous that one’s sta­tus and rep­u­ta­tion affect the per­cep­tion of oth­ers. But we are show­ing it’s not one’s rep­u­ta­tion or sta­tus but the align­ment of those signals.”

Featured Faculty

Ithai Stern

Member of the Department of Management & Organizations faculty until 2015

Edward J. Zajac

James F. Bere Professor of Management & Organizations

About the Writer

Hillary Rosner is a freelance journalist based in Boulder, Colorado.

About the Research

Stern, Ithai, Janet Dukerich, and Edward Zajac. Forthcoming. “Unmixed Signals: How Reputation and Status Affect Alliance Formation.” Strategic Management Journal.

Read the original

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