Case 7.

1
BreathEZ
BreathEZ Inc. is a pharmaceutical company that markets products for
treatment of asthma. The company has an existing portfolio of products
that will all lose their patent protection in the next five to ten years. When
the patents expire, it will be possible for anyone to manufacture and sell
the active substances and the expectation is, therefore, that prices for these
drugs will decrease by up to 90 per cent. In order to secure additional
sources of income, it is vital for the company to develop new products that
can be patented. However, because of current fierce competition, it is also
necessary to make ongoing, but smaller improvements to existing products
until they lose their patent protection. Both new discovery and refinement
of existing products is the responsibility of the research and development
(R&D) department.
Unfortunately, the R&D has financially and operationally
underperformed for a number of years. A recent evaluation concluded that
the budget had been consistently overspent by 5–10 per cent per annum. In
addition, the milestones for commercializing new discoveries have lagged
by an average of six months. The refinement of existing products,
however, has consistently met its targets. The R&D department is
currently run as a profit centre with income generated in two main forms.
Each refinement of an existing product is contracted and run as a separate
project paid for by an internal customer, in the form of the marketing and
sales department. New discovery projects are run in a similar fashion,
based on a contract that specifies milestones and timelines. The only
difference is that the internal customer is the CEO, because the size of
funding is much larger and the question of whether or not to continue
individual development projects is a strategic decision.
The CEO is not satisfied with the performance of the R&D department.
One idea is that the current choice of responsibility centre structure is less
appropriate. However, the CEO is unsure about the arguments for and
against.

Required

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You have been asked to analyse the situation and discuss what might be a
better form of responsibility centre, and why.

Please note: As part of your answer, you are expected to (1) characterize
the two forms of responsibility centre (profit centre and your proposed
form); and (2) discuss at least three generic advantages and disadvantages
with profit centres and the proposed form of responsibility centre that are
specifically relevant in the present case.

This is a fictional case for education purposes only, prepared by Ebba Sjögren, Stockholm School
of Economics. © Ebba Sjögren.

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