Project Suspensions and Failures in New Product Development: Returns for Entrepreneurial Firms in Co‐Development Alliances

Abstract

Entrepreneurial biotech and large pharmaceutical firms often form alliances to co-develop new products. Yet, new product development (NPD) is fraught with challenges that often result in project suspensions and failures. Considering this, how can firms increase the chances that their co-development alliances will create value? To answer this question, the authors build on insights from signaling theory to argue that prior project suspensions provide positive signals leading to an increase in value creation, while project failures have the opposite effect. In addition, drawing on insights from temporal construal theory, this research predicts that the strength of these effects is contingent on the stage along the exploration-exploitation continuum at which the alliance is formed. The authors undertook event study analyses of 248 alliances formed by 104 biotechnology firms from the United States and Europe listed on eight stock exchanges over an 8-year period between 1996 and 2003. The results confirm that prior NPD project suspensions have a stronger value creation effect (or prior failures have a weaker value destruction effect) in the case of exploration alliances in the upstream of NPD processes than in the case of moderate-scale exploitation alliances in the downstream of NPD. This study is among the first to examine how both prior NPD project suspensions and failures of firms affect the abnormal returns achieved from codevelopment alliances. This research therefore contributes to the innovation literature by honing a better understanding of setbacks and failures in NPD. Moreover, the findings contribute to the literature on strategic alliances by identifying new conditions under which firms can create or preserve value. This research also contributes to signaling theory by providing evidence of the moderation effect caused by the signaling environment. Finally, this study contributes to the entrepreneurial literature on value creation for entrepreneurial firms in alliances following adverse events. Practitioner PointsManagers should be aware that signaling suspensions and failures to investors can influence their expectations of future NPD performance and consequently impact shareholder value created through subsequent NPD alliances. Proactive portfolio management, including deprioritization of existing projects while allocating and re-allocating resources to active projects, can send out positive signals to investors to create better value in NPD alliances. For those firms planning to build a culture of tolerance toward failure, entering co-development alli-ances may be more desirable at exploratory stages of the NPD process than later on.

The role of intellectual capital in new product development: Can it become a liability?

“…First, this article is among the first to recognize and empirically study the liability of intellectual capital in the context of NPD trajectories and the options firms have to mitigate these effects. By doing so, we contribute to the literature on new product development and, in particular, to recent studies on project termination and discontinuation (Behrens et al, 2016;Eliëns et al, 2018;Guler, 2018;Hu et al, 2017;Khanna et al, 2018;Shepherd et al, 2014), the importance of fast and frequent failure (Cannon and Edmondson, 2005;Khanna et al, 2016) and the research stream on intellectual capital and innovation (Delgado-Verde et al, 2016;Subramaniam and Youndt, 2005;Wang et al, 2014).…”

Mitigating Negative Side Effects of Innovation Project Terminations: The Role of Resilience and Social Support

“…Third, in this study theory on the antecedents of IRP is developed and tested, which was not considered by Moenkemeyer et al (2012). In sum, this paper conceptually and empirically prepares the ground for further empirical research on the consequences of adverse events in innovation, which is long needed given the large share of innovative endeavors that end in failure (Corbett et al, 2007;Hu, McNamara, and Piaskowska, 2017;Shepherd et al, 2011Shepherd et al, , 2014, and the poorly understood consequences of such professional setbacks for the affected individuals. The paper thus advances theory on innovation management at large, as it is important and overdue to consider the human cost of innovation project terminations to arrive at a more comprehensive theory.…”

Strategic agility and persistence: HEM's entry into the Russian market of expendable materials for clinical laboratories

“…The second option was project suspension. Such suspensions often occur in biotech and pharmaceutical firms because of volatility in regulations, shifts in targeted markets, loss of initial investment sources, and other reasons (Hu, McNamara, & Piaskowska, ). The major difference between project failures and project suspensions is that a project that has been killed is unlikely to be restarted, whereas a suspended project can be more readily restarted.…”