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Abstract

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

The paper analyses the development of newly started bioscience firms in terms of their capabilities and changes in their business models. The study consists of eight retrospective case studies stemming from their foundation over a period of 5–15 years. Empirically the paper finds that all the firms quickly develop a technological capability at the time of their foundation, and over time all firms added distinctly new business capabilities. Seven firms radically changed their business models by identifying and exploiting new opportunities by drawing on their existing business capability combined with a new, different technological capability. The initial technological capability – the firms' ‘ticket to entry’– does not seem to be relevant to explain the process of firm development. These initial technological capabilities are surprisingly seldom leveraged within the cumulative process of opening up additional opportunities and business models. The paper concludes by creating a model and discusses some reasons for the findings.


Introduction

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

Development of new knowledge-based firms increasingly occupies a crucial point in modern society. There are many theories that are helpful in explaining endogenous, ongoing changes within firms, including opportunity discovery and entrepreneurial alertness, scale and scope in production and distribution, market dynamics, capabilities, organizational learning and innovations (e.g., Kirzner, 1973, 1997; Chandler, 1990; Teece, 2007). Nonetheless, the development and change of new firms is still rather poorly understood. One potentially fruitful way of analysing firm changes is by the process of understanding how and why opportunities are exploited by firms.

Opportunities refer to conjectures about how economic ends can be achieved in a profitable way (Shane & Venkataraman, 2000; Sarasvathy, 2001). Depending on what a firm knows, Shane (2000) shows that previous experiences and accumulated knowledge shape what opportunities are discovered and how they are further developed into a viable business. While opportunity identification is a cognitive process, the exploitation of opportunities is dependent on action in the real world. Exploitation of opportunity means a commitment to market entry, which includes those activities and investments committed to appropriate returns from the innovation arising from the opportunity (Choi & Shepherd, 2004). Much entrepreneurship research per se focuses on entrepreneurial processes involving individuals discovering opportunities. However, to analyse the development of young firms, this paper does not deal with the initial entrepreneurial activities of opportunity discovery per se. Instead, we begin where the entrepreneurship literature ‘tends to stop’ by focusing on the continuous process of business development of young firms in terms of changes in their business models. These concepts are related in that the identification and exploitation of new opportunities can cause changes in business models. The business model is a framework for conceptualizing a viable profit generating business logic.

Research has shown that unevenly distributed knowledge lies behind the differential ability to identify and exploit opportunities (Shane & Venkataraman, 2000). In line with Grant (1996), we therefore suggest that it is the firm's knowledge or capability, and its ability to generate knowledge that lies at the core of an epistemologically sound theory of the firm (p. 46). There is, however, not much scholarly work on why and how firms change their business models from the perspective of their capabilities (Morris, Schindehutte & Allen, 2005).

Our purpose is therefore to analyse the development of new firms by characterizing the relation between their developed capabilities, and the opportunities they identify and exploit over time. This is done by observing differences in the set of capabilities that these firms exploit and whether they change their business model. The paper studies eight bioscience firms from their foundation over a period of 5–15 years. The focus is on the relation of changes (if any) of the capabilities the firms utilize by analysing which accumulated capabilities were essential for acting towards new opportunities. As this paper will show, by focusing on this type of new firm, we can capture radical changes in what firms do in a relatively short time span.

Literature Review

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

Capability-based theories should be useful to understand change and development of firms (Montgomery, 1995; Mathews, 2002). Nevertheless, few studies have been performed on firms from the perspective of combining capabilities and new firm change and development (Chandler & Hanks, 1994; Alvarez & Buzenitz, 2001; Brush, Greene & Hart, 2001).

According to the capability view of the firm, the firm can be described as systemic interactions among resources, which allow the firm to perform different activities effectively. These ongoing interactions within a social and systemic context provide the firm with specific advantages (Black & Boal, 1994). The capabilities of the firm are rooted in evolved social relationships resulting in an advantage to undertake different activities (Kogut & Zander, 1992; Nahapiet & Ghoshal, 1998). As the capabilities of a firm are organizationally embedded, they are also locally dependent and cannot rapidly be imitated or diffuse outside the special context in which they have evolved.

The capabilities of the firm evolve only gradually over time.1 The set of capabilities within the firm at any moment are influenced by past choices, and follow a path of competence development. Therefore, the current activities impose a boundary on what the firm's internal repertoire is likely to be in the future. The leverage of capabilities mainly occurs across time, by repetition, in which the execution of activities within the firm becomes highly effective. Leverage may also occur within related and coherent diversification in which capabilities can be redeployed within similar activities (Helfat & Raubitschek, 2000). This means that there is a link between opportunities and capabilities as opportunities arise from possibilities to re-combine the deployment of internal resources and competencies of a firm in various ways (Penrose, 1959; Holmén, Magnusson & McKelvey, 2007).

Endogenous firm changes occur by building on the capabilities that currently exist in a firm (Dierickx & Cool, 1989; Aldrich, 1999; Brush, Greene & Hart, 2001; Pettus, 2001). These capabilities provide the firm with the means to act upon the emerging opportunities which the firms discover (Penrose, 1959; Sarasvathy, 2001). The description of the firm as a bundle of capabilities provides no explicit direction regarding which activities a firm should perform. Instead, the business model framework may explain the logic of the activities performed within a firm.

There is not any generally accepted definition of business models but scholars do agree that the business model concerns how a firm creates value, the internal source of the firm's advantage, and how the firm will capture value (Morris, Schindehutte & Allen, 2005). While the created value is related to the perceived wants of a user (Menger, 2004 [1871]; Lepak, Smith & Taylor, 2007), the business model is understood as a detailed specification of the activities a firm undertakes to exploit an identified opportunity.

Strangely enough, very little is known why and how firms actually change their business models (Morris, Schindehutte & Allen, 2005). However, by definition changes in the business model can include changes in how customers are approached, how goods are distributed, how the revenue model is designed and so on (Amit & Zott, 2001; Chesbrough & Rosenbloom, 2002; Magretta, 2002; Markides & Charitou, 2004; Morris, Schindehutte & Allen, 2005). From the managers' perspective, the business model can be dynamic as they can try out or experiment with an idea of a viable business, which is tested and revised depending on customer feedback (Magretta, 2002; Murray & Tripsas, 2004; Sanz-Velasco, 2007). Therefore, the business model can evolve by adapting to environmental feedback (Murray & Tripsas, 2004). This feedback can be very concrete and detailed in the sense that a particular product may benefit from an additional service, the costs of manufacturing is too high relative to the value it provides to customers, or there may be a need to change the distribution channels to reach potential new customers.

Identification and exploitation of opportunities can change firms' business models because they outline what a firm perceives as feasible to do and in what manner it can expect to profit from future businesses (Hsieh, Nickerson & Zenger, 2007).2 On the other hand, they also outline the processes the firm undertakes to create a viable business around the new opportunity. This means that some opportunities that a firm exploits lead to a new business model. Importantly, a change of business model can be caused by great differences from one opportunity to another (Gavetti & Levinthal, 2000). An essential issue here concerns the amount of change of the business model (Murray & Tripsas, 2004). It may be suggested that the more radical the change in the identified and exploited opportunities, the greater the degree and the larger amount of simultaneous change of the business model is likely to be.

Firms are characterized by scarce resources in terms of knowledge, skills, time and money. In other words, capabilities are often underused. This means that it is unlikely that the firm can and does act on all of the identified opportunities. The ‘amount’ of opportunities that the firm acts upon should therefore be lower than the ‘amount’ it identifies (Moran & Ghoshal, 1999). In a similar vein, the amount of opportunities that result in successful business models tends to be smaller than the amount of opportunities it exploits.

Our way to conceptualize how firms develop is to relate the capabilities of the firm with the new opportunities the firm exploits following its foundation. Because the capabilities of a firm are central to what the firm can do, the composition of developed capabilities becomes essential for the firm to capture the value it creates for its customers (users). Thus, we propose that endogenous changes of business models partially depend on the available inherited capabilities. The adoption of new business models is hence constrained by the inherited capabilities of a firm.

Conceptualizing the firm by the evolved set of capabilities and business models developed to exploit identified opportunities raises an important set of questions regarding the development of young firms. In what way is the development of young firms dependent upon past accumulated capabilities? In what ways do capabilities provide additional opportunities for the firm to explore?

Research Design

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

This paper studies firms within the emerging biotechnology industry. Bioscience firms can be said to represent an extreme version of knowledge-intensive firms. As they are science-based, at the time of foundation they tend to rely on external funding rather than markets for survival and growth. Furthermore, they lack complementary assets to exploit many of their innovations. In this way, bioscience firms can be viewed as an extreme case of a technology-intensive firm, so that they can work as an empirical and theoretical contrast to large firms and small firms in other sectors.

To analyse the changes in firms, we focus on the firms' initial and subsequent capabilities and business model (Brink, 2007). This is done by observing differences in the first and the second ‘set’ of capabilities that the companies utilize.

The research design was based around a theoretically grounded explorative methodology (Yin, 2003; Dul and Hak, 2007). Eight firms were studied. This gave the study theoretical saturation in that incremental learning was minimal because of observation of similar phenomena. Additional empirical investigations thereby ceased (Eisenhardt, 1989). To capture the process and interplay between experimentation within business models and capability development, the firms were sampled to have a minimum of 20 employees and an operational history of at least five years.

Each case study is based on archival analysis of firm development and technological activity based upon both private and public information such as patents, annual reports, business plans and internal documents. The secondary data of each case study was complemented by transcribed semi-structured interviews with two independent respondents, ranging for about 1 to 1.5 hours. The interviews were focused on identifying and characterizing the nature of the business model, opportunities and capabilities at different points in time. Not all business models or capabilities are likely to have been found given the brevity of the interviews and the nature of documents as data sources. This is not a serious shortcoming in this study as the focus is whether or not the early opportunities and capabilities differed and if the early utilized capability even was present in subsequent periods. After each case a long case study was written describing the development of each firm.

Our analysis is based upon operationalization of concepts according to a number of theoretically derived constructs; see Table 1 (Miles & Huberman, 1984). These constructs were used in the analysis of each case for each firm in order to map the interactions between competencies and resources forming capabilities and the sequence of development of the studied bioscience firms.

Table 1. Operationalization of Concepts
Concept definitionConcept clusterKey referencesConstruct (empirical proxies)
CapabilityResources, competenciesLeonard-Barton (1992); Siggelkow (2002)Human, physical/ technological, organizational systems, organizational values
Business modelValue creation, appropriabilityMorris, Schindehutte and Allen (2005); Magretta (2002)Value offer, costs, targeted customer, distribution mechanism

Capabilities were operationalized as being formed by mutually supported resources and competencies emphasized during the interviews. This operationalization is in accordance with Siggelkow's (2002) definition where the capabilities of the firm constitute the specific configuration of the interdependencies of activities, policies, structural elements and individual resources. Our operationalization is also in line with Leonard-Barton (1992) who defines capabilities into four reinforcing levels of human, technological, formal organizational such as management systems and finally informal organizational such as values and norms.

Business model changes were operationalized by analysing whether there were changes in one or more of the business model dimensions, such as value offer, customer group and so forth; see Table 1. During the interviews and in the secondary data, we looked for evidence that the development of the new business model was based on the identification and exploitation of an opportunity after the foundation of the firm. Our analysis emphasizes the distinction between radical and incremental changes of business models. ‘Radical’ changes of business models refer to occasions were the logic of the firms' business models has changed simultaneously within more than one aspect or dimension, e.g., simultaneous change of target customer and delivery mechanism. This makes a ‘radical’ change empirically and analytically distinct from the slight alteration or adaptation of the initial business model which frequently occur within entrepreneurial ventures.

Empirical Cases

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

This paper investigates eight bioscience firms. For the purpose of the analysis each case was described in a long case study consisting of approximately 10 pages. Due to space limitations, each case is just briefly summarized and described below.

To commercialize a promising new pharmaceutical substance developed at a local university, Company A was founded in 2000 by three entrepreneurs. Through access to financial resources, the ownership of intellectual property (IP) was acquired. The initial business model was to develop the substance until the final development stages in the traditional drug development process. At the later stages in the development process, Company A intended to enter a partnership with a large, global pharmaceutical firm. The original business model aimed at outsourcing as many activities as possible and to keep Company A small and adaptable.

Over the years Company A maintained the objective to develop the pharmaceutical substance towards a stage of proof-of-concept, conducting preclinical, phase I and II studies in order to be able to out-license the final drug. The most profound change to the business model has been a slight modification and focus regarding the type of target disease. Company A has narrowed down its plethora of potential targets. As the initial product has been further developed, Company A has gradually expanded in size. Nevertheless, Company A has not developed any profoundly new competencies. Instead, the growth in terms of new employees and resources has reinforced and strengthened the company within its original capabilities. Already from the start, Company A had employees skilled within biological engineering, clinical preparation and research, regulation and medical compliances, and finance and project management. These capabilities continue to be the backbone of their business model. As Company A has grown, the only new capabilities that have evolved are within communication and data management. For Company A, the original business model, as well as the capabilities necessary for realizing its visions, have proved to be remarkable stable.

Company B was founded in the mid 1990s by a single entrepreneur to commercialize a new promising substance suitable for cosmetic applications developed at a distant university. He could do this only after a slow and painstaking effort to raise enough capital to take over IP rights. At the backbone of the original business model was the idea to outsource as many activities as possible to keep a lean organization. Preparing for the commercialization of the forthcoming innovative product, a handful of complementary products were licensed and a small organization around the distribution of these started to be developed.

After a couple of years, Company B was forced to radically change its business model. With just a cosmetic application and not any proven clinical application, the high costs of ensuring product safety could no longer be justified. From the initial focus on cosmetic applications, the company changed to a purely therapeutic focus. For Company B this involved rather large changes in terms of necessary capabilities. Several new employees had to be recruited in order to build up additional competencies in running extensive clinical trials. In addition, Company B had to develop external relationships with medical professions around the world in order to ensure that a suitable disease was targeted. Simultaneously the emerging business set up around distribution of complementary healthcare products were wound down and sold.

To commercialize a promising technology, Company C was spun off from a research institute in 1998 by two senior researchers. To finance the venture, a business model centered on selling research and consultancy services to research institutes and some commercial partners was developed. In parallel, the company ran several internal research projects. After two years, two internally developed product innovations were launched. At this time much of the production was outsourced. After another three years, the two product innovations reached breakeven. However, at this point, Company C radically changed its business model and capabilities. The trigger was the acquisition of Company C by a foreign company, which gave Company C access to foreign sales, marketing and distribution organizations. However, just a couple of months later, the foreign firm went bust. As a result, the original entrepreneurs bought back Company C, including the new business-oriented capabilities in sales and marketing. After the buyback, the existing service agreements and consultancy business were discontinued. In addition, a range of small internal research projects were cancelled. Instead, Company C focused on the commercialization of its two product innovations. At the same time, the company acted to create complementary assets in terms of internal production and test facilities and competencies, instead of relying on outsourced services. In this way, Company C completely changed its initial business model of accessing expensive capital equipment through the market to a business model in which expensive equipment were held internally.

Company D was spun off from a large health care firm in the mid-1980s. The founders were four entrepreneurs who had been working on a promising platform technology for diagnostic purposes. They left as the health care firm refused to continue to develop and commercialize the technology. To broaden the product range of Company D, a small R&D group was formed. Gradually the company grew by adding products focusing on small niche markets. In addition, Company D expanded its market coverage and started exporting. After several years of product development, the company stood at a crossroads. An internally developed radically new technological platform was in need of additional funding. As this new technological platform could replace the previous platform technology generation, Company D could also out-license the new technological platform to its product market competitors. After failing to raise more capital, a strategic decision was taken to adopt a business model entirely focused upon the development of the new platform technology. All the previously developed manufacturing and distribution capabilities were therefore sold. The business model of Company D thus switched from manufacturing diagnostic products for niche markets, towards one where they focused on generating revenues from licensing its newly commercialized technological platform.

Company E was spun off from a university-based research group after they lost a nationwide application. To finance their company, they began to sell contract research services to a private firm. The initial business model of Company E was to work as a contract research organization within protein analysis. While the contract research provided their daily bread and butter, the group went on to develop a new technology for protein analysis. During the first year Company E bought old equipment and rented very expensive but essential equipment from their former university. After the first year, Company E began to diversify away from the pure contract research business model to increasingly focus on the internally developed protein analysis technology. To minimize the capital requirements and still maintain the ownership over the firm, the R&D took place in partnership with another firm. From this moment, Company E had a business model increasingly focused on the development and sales of research equipment rather than conducting contract research. The contract research business received decreasing attention as this was seen to only provide revenues for keeping the business going but without providing any real future rewards.

The management team also started to leverage their gained experience in running a start-up company. One of the major decisions involved starting a small venturing activity. The idea was to sublet some of the office and laboratory space, and to provide advice to other university spin-outs in exchange for a small equity stake. The expansive growth of Company E continued the following year when the group of design engineers, which had been involved in the initial development of the prototype, was taken over and integrated within Company E.

Later on, a group of researchers within diagnostic applications were taken over from a local biotechnology firm, which was going through a business reconstruction. Based on this, Company E shifted to a new business model dealing with how to find and analyse proteins based upon the proprietary developed analytical instrument. The goal was to use the developed prototype analytical instrument within the discovery of potential drug targets. At this time, competing technological solutions began to appear. Together with the unexpected slow sales of their proprietary analytical instrument, this made Company E unsure of whether their research equipment could find any more buyers. As a result, Company E once again drastically changed the business model by cancelling the commercialization of their technological platform. Instead, they focused upon the discovery business, which had evolved out of the original contract research business but which now had access to the internally developed prototype equipment.

Company F was founded by a rather large research group who had been developing diagnostic technologies in a local research institute. The institute sold contract production and other basic research services to the research community, primarily universities. However, as the institute was diversifying away from the university environment it provided an opportunity for the research group to target additional markets besides the academic market. At the time of the start-up, manufacturing of the first commercial diagnostic kits commenced. To leverage a core technology, Company F set up a business model aimed at selling diagnostic kits to the human and the veterinary markets.

After ten years, Company F had several distribution agreements that gave them a global presence but they had also developed internal marketing resources and a distribution organization. At this time, two important changes altered the situation for Company F. Company F was first unable to provide a complete set of complementary diagnostic products based on its proprietary technology platform. This was a serious drawback, as the clinical professions increasingly demanded standardized packages of diagnostic kits rather than stand-alone applications. The second important change was a breakthrough within one of its small research projects, which had been running on a small scale during the futile efforts to provide a complete set of diagnostic products. While this small project had been developed in close collaboration with another firm, Company F had maintained the ownership of the vital patents.

The unexpected breakthrough led to a radically changed business model. To invest both in the new research project and to continue the development of products for the original diagnostic business, Company F sold off the original technologies, distribution, marketing as well as its manufacturing resources and organization. In addition, the original diagnostic technology and the new applications required significantly different production as well as distribution. Since the benefits of maintaining both businesses in-house were small, a decision was made to sell the original business and disband the related product development group. As a result of this decision, Company F was able to fund the continued development of the new promising technology.

Company G was founded by a group of senior scientists who had failed to win a major research grant. The firm was set up to develop some technologies; Company G was financed by private investors as the technologies were deemed to have huge commercial potential. The business model was designed to develop biologically based therapeutics with the focus to increase the scale of production of biological agents for therapeutic applications. After the first year of basic research to ramp up biological production, an intermediate goal was set in which Company G was to focus on the development of therapeutics in a specific disease area. Company G now developed a distinct business model working towards the major revenues from the therapeutic application within this particular disease area. However, Company G also undertook several parallel research trajectories.

During the first year, Company G entered a number of research collaborations with public and private actors, dealing with a range of different disease applications. As a consequence, Company G maintained its focus upon the therapeutic business model but at the same time developed a general capability of working with the commercial production of biological substances. This capability was based upon the accumulated skills, specialized procedures and new technologies required to ramp up production of biologics.

Company G soon ran into large difficulties when it tried to raise additional funding for its therapeutic blockbuster idea. As the CEO of Company G realized this, Company G cut costs and tried to come up with a more lucrative proposal. To save money, several tracks of potential further research directions within several different therapeutic applications were discontinued. The financial crisis resulted in a radical shift in the business model. Company G changed from the therapeutic approach, focused upon the development of a proprietary therapeutic product, towards a business model built around the development and usage of the biological substance as a research tool and to provide such services to major pharmaceutical research corporations.

Company H was founded when a group of private investors bought a bankrupt firm that had produced basic pharmaceutical agents. The idea was to turn the organization and facilities into a contract research manufacturer of biologically produced substances towards the expanding university-based research market. Initially Company H focused on biological production with the intent to use the production capabilities to provide services in ramping up manufacturing and to shift between the productions of different short-term products. Therefore, Company H employed biotechnical process scientists and engineers.

To appropriate returns from their ramp-up capabilities, new projects (customers) had to be reached over time rather than just relying on its existing customer relations. To fully develop such a business model, additional, complementary capabilities had to be added to the firm in order to find customers and markets for the internal competencies in up-scaling and manufacturing. The evolved business model hence included the expansion of the internal marketing and sales group. During this period, Company H also started to fund a university-based research group active in cancer research in exchange for the product rights of their lead compound. Company H believed their capabilities in ramping up production should fit this area well. After 5 years of operations, Company H faced a strategic choice. Either they could invest in their ability to upgrade production facilities to further increase the scale of operations, or they could invest substantially more in the pharmaceutical research performed. Company H chose to radically change its business model by discarding the focus on ramping up production with the exception of the internal drug development project. Indeed, all remaining long-term investments and up-scaling efforts were now devoted towards the drug development effort where the product development for the original business in production of research reagents was discarded and the remaining proprietary products out-licensed.

As the development of the drug project progressed, Company H needed to add clinical trials and financial competencies. These had initially been performed in collaboration with external partners but as the uncertainty around one of its major drugs was reduced, Company H decided to integrate these activities internally. As a result, Company H was transformed into a ‘real’ drug development company. To proceed with the clinical development into phase 2 of the drug, new clinical development and regulatory affairs staff were employed. A drug discovery group was recruited and co-operation with a nearby university was started to complement the ongoing drug discovery research.

The expansion of clinical requirements for production of the drug in phase 2 clinical trials increased so that Company H was forced to recruit more pharmaceutical production personnel. As the clinical trials increased the demands on its manufacturing resources, opportunities for contract manufacturing were reduced. Gradually Company H realized the importance of licensing their drug to the pharmaceutical industry. As a direct result of the rising need to make a technological licensing deal, a new CEO was recruited with a background in licensing and technology venturing.

At this point Company H realized the need to simultaneously out-license the initial drug product while simultaneously in-license or internally generate a subsequent pharmaceutical product to leverage their accumulated skills in clinical development and financial connections. The business model slightly changed once again, from being focused on developing the initial drug project, to actually become a stable and viable drug development firm.

Findings

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

The case study summaries show that there is a pattern to how these bioscience firms have developed in that all of the firms changed their configuration and set of capabilities, at least by adding a distinctly new business capability, see Table 2. The case studies also showed that, with the exception of one firm, Company A, seven out of eight of the bioscience firms in our study radically changed their business models on at least one occasion within five years of its foundation. ‘Radical’ here refers to a change in several of the main dimensions of the business model, including the offer, the customer, distribution and revenue model. Of the seven firms that did change their business models, only one company did not develop an additional, distinctly different technological capability but did continue to exploit its initial technological capability that was present at the time of its foundation. This means that six out of eight firms discarded their initial technological capability within a few years after the companies were started in order to develop new capabilities suitable for acting within the new business models.

Table 2. Empirical Findings
 Developed new business capabilities after firm foundation (within research collaboration, financing and marketing)Underwent a radically changed business modelMaintained initial technological capabilityDeveloped additional technological capability
Yes (No. of firms)8727
No (No. of firms)0161

Analysis

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

Our major finding is that for these investigated new firms the crucial capabilities that the firms utilized subsequent to their foundation are different forms of business capabilities. These were developed some time after the firms' foundations. This business capability stands in quite some contrast to the firms' original specialized technological capability which allowed them to set up a new firm.

Above, we asked the question, in what way is the development of young firms dependent upon past accumulated capabilities? Based on the eight case studies of bioscience firms, there are two answers to this question. First, as the case of Company A showed, one answer is that the development of a company's business model can crucially depend on ongoing exploitation and development of the capability the firm possessed at the time of its foundation. However, to exploit the opportunity, this company added business capability as its technological capability was not sufficient to develop a viable business model. A way to interpret this is that it is the complementarity of two distinctly different (disjoint) capabilities that allow the firm to exploit the opportunity by developing a fully-fledged business model. Undoubtedly a firm cannot fully function as a business organization without the capabilities to lead, manage and run the business on a daily basis. These business capabilities, even though they seem to be fairly generic, obviously have a value in their own right as they potentially can be combined and leveraged with other capabilities to realize and act on other, emerging, opportunities.

Second, the case studies also found that all but one of the firms radically changed their business model. Only one of these companies, Company C, continued to exploit its initial technological capability during the entire time of study. For the rest of the companies, Companies B, D–H, the identification and development of new radically different opportunities are based on the firms subsequently developed complementary capabilities and not by further leveraging their initial technological capability (see Figure 1). For these companies, the initial technological capability ‘disappeared’ in the sense that it was not of any significance in exploiting the new opportunity. This means that in general, there is only a partial and indirect link between the original technological capabilities and the sequences of opportunities that these firms pursue and act upon. From a capability perspective, the development of the firm is thus partially continuous and partially disruptive as new capabilities are added and the old are de-emphasized or disbanded. The linkage between the initial technological capabilities that the companies used to pursue an initial opportunity is hence only an indirect link to subsequent opportunities.

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Figure 1. Chages in Capabilities and Business Models

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We infer from the empirical material, that the initially exploited opportunity, with the help of the initial technological capability, either is frequently emptied or perceived to be inferior by the firm or its investors to the subsequent opportunity which the firm acts upon. This should not be interpreted that these technological capabilities necessarily disappear and are lost ‘forever’. Rather the technological capabilities are not essential for the firm's new, radically changed business model. Indeed, the initial technological capabilities were made redundant within six of the studied firms because of both exogenous factors, such as innovations made by competitors, and/or endogenous factors, such as the choice to focus on opportunities that are perceived to be superior.

Our other research question was, in what ways do the capabilities provide additional opportunities for the firm to explore? Based on the case studies, we can sketch out an abstract endogenous model of these processes. The exploitation of an opportunity is based on some technical capability. All of the studied firms initially possessed a technological capability. (It is not likely that this is a general finding because the studied firms were selected from a science and technology-intensive industry.) Over time, the initial technological capability was not only developed but combined with a new business capability, which was disjoint to the technological capability. However, to develop the firms' business model, the complementarity between the capabilities was crucial. The reason is that the technological capability provided the firms with the ability to create a specific offer to customers but could not secure, for example, distribution, further financing or a viable revenue model. On the other hand, the business capability allowed the firms to reach customers but it was not helpful in creating a value offer. Hence, it is the complementarity among the capabilities that is essential to develop a functioning business model for the bioscience firms.

Over time, for many but not all of the firms the economic usefulness of the complementarities of the capabilities decreased. The firms searched for new opportunities to exploit. As they had created new capabilities, they could use these to identify and start to exploit new opportunities. As in the ‘first round’ just after the launch of the companies, this exploitation is based on the ongoing development of complementary capabilities. An abstract version of this pattern is that over time, capabilities are created, combined and, at times, terminated as a consequence of the processes of opportunity exploitation. An endogenous result of this ongoing experimentation is that new opportunities are identified. The choice of what opportunities to exploit depend on factors endogenous and exogenous to the firm.

The result is a model stating that the development of firms consists in how they identify and exploit opportunities by dynamically combining and deploying internal resources and competencies. This means that firms shape dynamic complementarities among capabilities in order to create a viable business model.

Discussion and Conclusion

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

This paper analyses the development of young bioscience firms by characterizing the relation between their evolved capabilities and changes in their business models. Within the firms that acted on new opportunities, empirically observed as firms that underwent radical business model changes, we observed that the initial technological capability did not play any role in identifying and exploiting the major new opportunity after the launch of the companies (see Figure 1). This is highly surprising given the large role high-tech and science-based young firms are given within public policy. Such policies generally picture these technological areas as having ample opportunities for future development. This assumption may be correct in that bioscience firms manage to find new opportunities, but this study indicates that the initial reason for their existence is likely to soon cease to play any role. Therefore, we find, perhaps somewhat surprisingly, that it is not the initial technological capabilities per se that open up new opportunities but rather the business capabilities.

Indeed, for most of the firms studied there was a linkage between the business capability and the new opportunity (and the development of the new business model). That is, firms do succeed in adopting business models in which they initially lack critical technological capabilities and in adopting business models which only partially leverage their accumulated capabilities. The empirical findings imply that these accumulated capabilities do not entirely define and determine the opportunities these firms act upon, in terms of the requirements of capabilities needed to succeed with the new and radically changed business models. Instead, these firms leverage parts of their accumulated set of capabilities by gradually adding, developing and scrapping additional capabilities. These firms experiment by acquiring and/or building up additional capabilities to leverage their internal accumulated capabilities. For these firms the struggle is to continue to develop internally technological capabilities to match the opportunities to be exploited.

From our perspective the evolution of these small firms is dependent upon the further development and recombination of their capabilities as well as the opportunities identified. A major issue concerns the stability of capabilities upon which these firms develop. For the firms studied, the technological capabilities are not stable over time. In particular, even when leverage of capabilities occurs, changes of technological capabilities are prevalent to, at least, the same extent as within any other kind of capabilities. The extent to which this is a general finding is not known. However, the bioscience industry is ‘science-based’ in the sense that the knowledge base is not cumulative on the level of the product (Nelson & Winter, 1982). This means that we might expect a different pattern outside the biosciences. For the firms active in the bioscience industry, a greater focus upon business capabilities rather than technological capabilities might be advantageous. These business capabilities, as suggested by our study, seem to be more sustainable. For actors within the bioscience-based industries, this might be surprising and somewhat counter-intuitive as this is an industry with a great technological focus.

Our findings could be criticized from the perspective that firms radically change their business model because their technological capability becomes obsolete. We would like to emphasize two counter-arguments that were evident in the firms studied; first, the technological capability is de-emphasized because of both the success and the failure of its technology! If a technological capability allows a firm to solve a problem by creating a product, and the knowledge base of the area is non-cumulative, the success of the firm will destroy the future economic usefulness of the developed technological capability once another firm invents around. This was observed for several of the studied companies. Second, this means that the leverage of other capabilities besides the technological capability could be interpreted as the relative higher value of such capabilities within other settings and business models rather than due to the failure of the technological capabilities per se. The implications from our research refer to the accumulation of technological capabilities which are not the prevalent determinants for the development of biotechnology firms. The managerial implication is to pay attention to the development of other kinds of capabilities which can generate value and opportunities independently of the strict technologically oriented business model.

The concept ‘radical business model change’ is an a-theoretical construct. These changes were grounded on a convenience criterion as they had high face validity (‘made sense empirically’). However, whether the dichotomy radical vs. incremental change of business model is more generally useful is not known. Nonetheless, we suggest that this dichotomy can be useful to differentiate and explain differences in how firms develop. Important research questions include how frequent radical changes of business models are and how the firm leverages its existing capabilities to radically change its business model. Finally, the relation between how firms identify and exploit new opportunities, whether or not the business model changes radically, is unclear. This relation needs to be investigated as it might be supposed that this is one determining factor of how firms go about creating sustainable competitive advantage.

Acknowledgements

  1. Top of page
  2. Abstract
  3. Introduction
  4. Literature Review
  5. Research Design
  6. Empirical Cases
  7. Findings
  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References

We would like to thank Professor Maureen McKelvey at the School of Business, Economics and Law at Gothenburg University, as well as the anonymous reviewers and academic friends who all helped us to improve our paper. In addition, we would like to express our gratitude for the financial support from the RIDE research center as well as the Australian Endeavour Europe Award.

Notes
  • 1

    We do not intend to draw any distinction between ‘static’ capabilities and dynamic capabilities. Our starting point is that all capabilities within the firm are social and as such may undergo gradual change.

  • 2

    There is not necessarily a strict sequentiality between the identification of an opportunity and its exploitation. It is common that the nature of an opportunity is only understood long after the firm has commenced the activities to exploit the opportunity. Therefore, firms may begin to exploit an opportunity before it has been identified.

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  6. Empirical Cases
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  8. Analysis
  9. Discussion and Conclusion
  10. Acknowledgements
  11. References
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Johan Brink was born in 1976. From 2002 to 2007 he was a PhD student at Chalmers University of Technology, Sweden. His research activities have been concerned with growth and development of knowledge-intensive research firms within the life-science industry. Johan currently works as a Management Consultant at Kunskapspartner, based in Lund, Sweden. He graduated from Chalmers University of Technology in 2001 with an MSc in biotechnology engineering. From September 2005 to August 2006, he spent time as a visiting PhD student at the Business School, University of Queensland Australia.

Magnus Holmén is an associate professor at Chalmers University of Technology, Sweden. His research is generally concerned with innovation management and economics of innovation. Current research includes studies of firm and research group experimentation, and business model diversification. He has a master's degree in electronics engineering and engineering mathematics. From 2002 to 2005 he was a research associate at the Australian National University, Australia.