In a market characterised by change, it is a truism that life science companies must adapt to survive. Yet such change is notoriously difficult, as the extinction of our industry’s great names shows. Between 1988 and 2011, for example, the Pharmaceutical Research and Manufacturers of America (PhRMA) lost 75 per cent of its members. This attrition suggests that CEOs lack the tools to manage the evolution of their firms. Change management, for its fads and models, is an unscientific discipline. This is a gap that my University of Hertfordshire research group is beginning to fill with original and useful new research.
All good science uses strong theory and ours applies Darwinian Evolution to the life sciences sector. Far from being only a biological theory, evolutionary science has been used for decades to explain how industries change. Both biological species and business models evolve by Darwinian natural selection: variation, selection and amplification of information-carrying entities. In organisms, we call these entities genes; in organisations they are habitual activities called routines. And just as thousands of genes work together to express proteins that lead to physiological traits, thousands of routines combine to create capabilities that lead to organisational traits. The gradual shift in gene distribution that leads to speciation is mirrored by the mimicking of routines that leads to new business models. How the life science industry changes over time is not like evolution, it is evolution, as shown in figure 1 and 2.
Our research uses evolutionary science to explain how the life sciences industry came into being and to predict how the market environment is shaping its newly emerging business models . One practical outcome of this work is an understanding of why and how some organisations evolve faster and more successfully than others. In short, success lies in a firm’s DNA. In other words, companies that adapt well, do so by modifying their ‘routineome’ to express the necessary capabilities and so develop the organisational traits that are demanded by the market’s new selection pressures. By contrast, firms risk extinction when they leave their ‘routineome’ substantially unchanged and try to superimpose traits by training or restructuring. This fails, leaving unchanged business model traits that are selected against by the new environment. To draw a parallel with biology, it is as if unsuccessful firms try to train a chimpanzee to talk whilst successful companies genetically engineer the ape to express the genes necessary for speech. The routineome is as fundamental to organisations as the genome is to organisms.
If the genetic engineering analogy explains successful organisational transformation, it also elucidates the difficulty of the process; the organisational version of gene therapy process is just as complex and challenging as the biological one. Our research reveals that life science companies which that have achieved organisational transformation go through five deliberate steps to engineer their routineome, as shown in figure 3.
Step 1: Reify the intended model
The first step in routineomic modification is to make concrete the intended business model. Our work reveals the emergence of 26 new life science business models that differ along multiple dimensions such as innovation levels, target markets, vertical integration and technology breadth. Each model requires different traits in innovation, operations and customer management and so requires a routineome specific to the model. To succeed, firms must choose which model they want to adapt to and think through what that model looks like in their particular part of the market. Our work sees examples of this in companies such as Roche, Novo Nordisk and Medtronic, all of whom are moving towards differentiated new business models but it also sees negative examples in companies such as Teva and Pfizer, which seem unable to focus. Without a reified view of the intended new business model, it is impossible to transform the current model.
Step 2: Identify the distinctive traits
Just as a giraffe’s neck and prehensile tongue characterise the species and makes it successful, a business model’s traits such as its strategies, structures and processes characterise it and enable its competitiveness. And, as with animal species, traits vary greatly between business models. Illumina’s new business GRAIL, demands processes for combining technologies but also for integrating with oncology patient pathways and sample management operations. By contrast, AZ seems to be developing a model in respiratory that requires the organisation to collect data and extract value from millions of smart inhalers. Whatever model is reified in step 1, it is characterised by a number of distinctive organisational traits, many of which may be novel and necessary to evolve. So the identification of these essential, new and model-defining traits is the vital second step in driving the firm’s evolution.
Step 3: Specify the necessary capabileome
The phenotypic traits of a species are a result of its unique proteome, its complement of proteins that do the work in every cell. The business model analogue is its capabileome, the set of capabilities that allow the organisation to function and enable its traits. Changing the business model therefore means modifying the capabileome, which is more challenging than it sounds. Most firms concentrate on changing 1st order capabilities, which are the most visible and enable competitiveness. Examples of these include generating good clinical data, manufacturing efficiently and selling to key accounts. However, our work suggests that firms tend to neglect 2nd order capabilities, which allow the organisation to reconfigure its assets. These include creating market insight, strategy making and cross-functional working. Since capabilities work together, an incomplete capabileome will lead to dysfunctional traits, as we observe, for example, when firms fail to achieve market access or to localise global strategies effectively. Without a clearly specified capabileome, attempts to create a new model will fail.
Step 4: Map the corresponding routineome
An organism’s unique proteome is the expression of its unique genome. Analogously, an organisation can only create the necessary capabileome if it has the necessary routineome. Routines, the small, stable sets of activities that the organisation performs almost unconsciously, are the equivalent of genes. Clusters of routines act together and express capabilities, either 1st order or 2nd order. In the latter case, the enabling role of 2nd order capabilities means they behave rather like genetic switches, turning on or off 1st order capabilities. Routines are much smaller than business processes and examples include activity sets for identifying differentiating motivators, which contributes to the market segmentation capability, and setting strategy aligned goals, which contributes to the cross-functional working capability. Every new business model trait requires a number of new capabilities, each of which requires a number of new routines. So an essential fourth step in organisational evolution is the mapping of the required target routineome.
Step 5: Acquire the necessary new routines
The target routineome for an intended new business model will differ from the firm’s existing routineome in proportion to the differences between the old and new business models. The more innovative the new business model, the more engineering of the routineome is needed. Life science companies can acquire new genes in one of three ways: exaptation, routine capture or via a holobiont.
Exaptation is the repurposing of routines currently used in other capabilities. For example, activities that contribute to preparing regulatory dossiers can be adapted to the compilation of market access submissions. Exaptation works when the activity is generalisable but fails when it is not. In market access, it often fails but in financial accounting exaptation seems to be a more viable approach.
Routine capture, like its gene namesake, is the incorporation of new routines from outside the organisation. For example, activities that contribute to product invention or discovery can be imported from universities or small biotechs. This works when the imported routines are allowed to function independently, like Sanofi does with Genzyme and Roche do with Genentech, but capture fails when the routines are hampered by host organisation routines or cultures.
The third way to acquire new routines is via a holobiont. These are symbiotic networks of organisms or of organisations. Holobionts work well when the gather together complementary organisations that interact in a mutually beneficial way. We see this in the increasing number of networks combining big life sciences companies, academic institutions, charities and governments. Holobionts fail either when they lack critical component members or when the relationship between members is not symbiotic and becomes exploitative. We see this happen in some transactional supplier-customer networks.
In practice, life sciences companies acquire their new routines from a combination of all three sources. In any case, the acquisition of new routines, along with the removal of some old ones, is essential to express new capabilities, create new organisational traits and so transform the business model.
The genetically modified organisation
Genetically engineering the organisation may seem like nothing more than an extended metaphor, but that would amount to underestimating the importance of evolutionary science. Biologists have shown us that almost everything about an individual, from hair colour to political attitudes, is more or less influenced by the information that is stored in, expressed from and replicated by our genes. The application of Darwin’s powerful idea to the life sciences industry now reveals that everything about an organisation, from innovation rate to patient-centricity, is more or less influenced by the information carried in its routines. Understanding this for primates tells us why we can’t train a chimp to talk. Understanding this for life science companies tells us how we can accelerate our firm’s evolution.
This article is based on Professor Smith’s latest book “Darwin’s Medicine: The Evolution of Life Science Business Models.”
Brian D Smith is a world-recognised authority on competitive strategy in the pharmaceutical and medical technology sectors. He researches the evolution of the sector at the University of Hertfordshire, UK and SDA Bocconi, comments and questions on firstname.lastname@example.org.