New research paper by Tanaka Business School Professor looks at why some firms are better than others at converting ideas to launched products

Addressing the age-old question of why some firms are better at converting ideas to launched products than others, a new research paper by Jaideep Prabhu et al, will be published.

The new research paper by Jaideep Prabhu (Tanaka Business School), Rajesh Chandy and Om Narasimhan (University of Minnesota), and Brigitte Hopstaken (Daphne Communication Management) will be published in the Journal of Marketing Research this August. The paper studies conversion ability in the context of product development in the pharmaceutical industry. However, the authors believe that the key conclusions of their research will be of interest to firms in any industry that depends on bringing new products regularly to the market-place.

The ability to convert inputs into outputs is a critical driver of success in many fields of endeavour. For example, although many in academia have interesting and promising ideas, only a few appear to be able to convert them into published articles. In the history of oil exploration, the difference between wildcatters who made vast fortunes and those who died penniless despite exploring in the same area often came down to the percentage of "dry-holes" they dug. The quest to convert ideas (or inventions) to launched products (or innovations) is a central feature of technological progress and economic growth for all companies, no matter what size. Firms sink much hard-won capital into generating inventions and bringing them speedily to market. Every stage of product development adds substantially to costs. These costs have large implications for firms, policy makers, and consumers.

For example, some researchers estimate the average R&D cost for a new chemical entity launched in the US pharmaceutical market to be $802 million. Estimates such as these are frequently used in policy debates and decisions. Part of the reason these estimates are so large and controversial is that they take into account the cost of ideas that failed to make it to launch. The odds of a promising idea making it past the various stages of drug development to eventual product launch are, on average, less than one in five. However, the odds can vary substantially across firms. If so, then estimates of development costs per launched product will also vary substantially across firms. And yet, differences in conversion rates are rarely discussed in policy debates. The implicit assumption appears to be that firms have little control over conversion rates, and all firms are subject to the same odds of conversion. The drivers of conversion ability remain a mystery, and research on the issue is rare.

As a response to pressures to innovate, many firms have gravitated toward generating larger numbers of promising ideas, and increasing the speed with which these ideas are taken to the market. However, the authors show in their research paper that a strong focus on speed and on generating many ideas may actually hurt firms, by lowering their conversion ability. Their analysis of over 40 years of data on new product development in a cross-national sample of pharmaceutical firms reveals that firms vary widely in their ability to convert promising drug ideas to launched drugs. Firms with the highest conversion ability are those that focus (on a moderate number of ideas, on ideas of importance, in the firms' areas of expertise) and deliberate (by adopting a moderate level of speed in conversion). Specifically, they find that:

Speed can kill and more ideas can yield less: The optimal speed is around nine years from idea patenting to drug approval. Any speed targets that are set too far below or above this level could be detrimental to the firm's drug development program. Similarly, in contrast to some prevailing beliefs and practice, working on too many ideas simultaneously is counter-productive for firms.
Importance is important: Firms that focus on important ideas have higher conversion ability than firms that don't. The implication of this finding is that managers should, when selecting ideas to pursue, focus on ideas that have important technical and commercial implications. One would expect, of course, that this would be their objective in any case. However, it is not uncommon for firms to pursue ideas that might be incremental and therefore perceived as low risk. The outcome of this, the authors' findings suggest, is that doing so diminishes the firm's likelihood of converting ideas. Important ideas, in contrast to incremental ones, have the advantage of galvanising employees and motivating them to see the idea fructify into a finished product. Firms that focus on important ideas will enjoy high conversion ability.
Experience counts: firms that focus on ideas in technical fields in which they have expertise are better at converting these ideas into approved drugs than firms that don't.
Notes to editors

About Imperial College and Tanaka Business School
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Imperial College's Tanaka Business School is a world-class provider of business education and research, focusing primarily on Imperial strengths in innovation and entrepreneurship, finance and healthcare management. The School offers full-time and executive MBAs, Master's programmes in Finance, Risk Management, International Health Management, Actuarial Finance and Management; and a PhD programme. Tanaka Business School www.imperial.ac.uk/tanaka

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