The Sources and Consequences of Value Chain Configuration Strategy: Evidence from the Global Biopharmaceutical Industry

A growing literature in strategic management research highlights the concept of the industry value chain, which involves series of activities such as R&D, production, and marketing that enable the creation of value for an industry’s intermediate actors and end-market customers (Jacobides, 2005; Porter, 1985). Research has established that firms need to make two choices with regard to the industry value chains they are associated with: which activities they will participate in (Kapoor, 2013; Alcacer and Oxley, 2014) and, in turn, whether to undertake these activities internally and/or through ties with external partners (Capron and Mitchell, 2012; Jacobides and Billinger, 2006; Jacobides, McDuffie and Tae, 2016); together, these choices constitute a firm’s value chain configuration strategy (Mitchell, 2014). To date, though, we have limited understanding of whether different aspects of value chain configuration strategies complement or substitute for each other or, in turn, how value chain configuration strategies associate with firms’ subsequent performance. This exploratory study addresses two questions: (1) what factors shape firms’ value chain configuration strategies, focusing on complementarity or substitution between choices of activities and (2) how do the value chain configuration strategies associate with the firms’ subsequent innovation and financial performance?

The study examines more than 300 firms in the global bio-pharmaceutical industry between 1973 and 2015. We define the biopharma industry value chain in terms of upstream (research, development, clinical trials) and downstream (production, regulatory, marketing, distribution activities), finding extensive internal and external activity at each point along the value chain. Our preliminary results concerning the sources and consequences of value chain configuration choices are intriguing. In terms of the sources of activity, rather than substituting for each other, the extent of external upstream value chain choices complements both internal upstream and external downstream activity. In turn, major innovation performance (initial new drug approvals) associate with external upstream activity; by contrast, innovations along a trajectory (subsequent drug launches after an initial approval) associate with internal upstream activity. Finally, both the stock market and customers appear to reward complementary value chain strategy: financial performance (market cap, net income, and sales) associates with both external and internal upstream value chain activity. This work in progress provides a base for assessing the sources and consequences of value chain configuration strategies.