Expert insight:

11 simple rules of business model transformation in pharma and medtech

By Prof. Dr. Brian D. Smith, expert-trainer of the Transforming Your Pharma & Medtech Business Model - Choosing, Designing and Building From 26 Emerging Alternatives course.

(This article is based on Brian's new book, "Darwin's Medicine: How Business Models in the Life Science Industry are Evolving", which is available from Amazon and all good book shops, both hard copy and electronically.)

The scientists in your team know that all good thinking is underpinned by a robust theory. Scientists wouldn’t read a paper on enzyme kinetics that wasn’t based on induced fit theory, or listen to a geneticist who hadn’t heard of DNA expression.

By contrast, almost everything that is written about business model transformation in pharma and medtech is atheoretical. It is not underpinned by a coherent, substantiated explanation of how the world works. Instead, business executives are bombarded with a web of opinions, conjectures and guesses, often wrapped up in buzz words and acronyms.

This is especially annoying when one realises that there is a good, well-researched science of business model transformation. Those seeking details can read Prof. Brian Smith’s new book, “Darwin’s Medicine: How Life Science Business Models are Evolving”, but here is his summary in 11 easily digestible bites:

Rule 1: Think of Your Business Model as a Species

The biggest problem with most of what you read about business models is that it never defines what one is. Darwin would tell you that a business model is a taxonomic category: a group of firms that meet the challenge of survival in a similar way. For example, all firms that compete by making discontinuous innovations based on new science and selling it to institutional payers, like governments, belong to one “species” of business model. Firms of that kind have much more in common with each other than they do with firms of another business model, such as those that compete by selling branded me-toos to consumers. Thinking of business models as species clarifies the task of business model transformation.

Rule 2: Think of Your Firm as an Interactor

Biology is about organisms. From humans and wildebeest to starfish and e.coli, all organisms interact with their environment and it is the success or failure of those interactions that drives evolution. For that reason, evolutionary scientists refer to organisms of any kind as “interactors”. In the same way, business is about organisations. From global pharma companies and minnow medtech start ups, these interact with the market environment of payers, prescribers, patients, regulators and so on. It is the success or failure of those interactions that drives the evolution of the life science industry. Thinking of your firm as an interactor helps the design of new business models.

Rule 3: Understand that Your Firm is Defined by its Traits

Before our capability to easily extract and sequence DNA, we recognised biological species by their distinctive physical traits. Biologists still classify animals according to whether or not they have spines, lay live young or have even or odd numbers of toes. In the same way, life science business models have characteristic traits such as research intensity, marketing capabilities or operational efficiency. We mistakenly refer to the pharma or medtech business model but in truth the research based firm, the generic manufacturer and those firms that create value through service more than product are very different creatures and quite distinct business models. Defining the necessary traits of a new business model is the first step towards it.

Rule 4: Recognise that Every Business Model Has a Distinctive Capabileome

Darwin’s observations were limited to phenotypic traits, such as the beaks of his famous Galapagos finches. He would have been enthralled to learn that such traits are determined by the creatures’ proteome, its complete complement of proteins. In the same way, the traits of an organisation, such as its structure and strategy, are determined by its capabilities, the complete set of which is called the capabileome. And just as the proteomes is characteristic of a biological species, every different business model has a characteristic capabileome. Understanding the new capabilities implied by business model transformation is essential to the transformation.

Rule 5: Recognise the Importance of Your Firm’s Genome

For all his genius, Darwin knew nothing of the mechanism of heredity. It was left to his successors to realise that what makes evolution possible is that genes store information and can be copied. In the same way, Nelson and Winter realised that firms carry organisational routines – small, stable sets of activity – that store information about everything from buying stationary to completing a 510K. And these organisational routines can be replicated, which is why they, like genes, are called replicators. So although CEOs habitually speak of their firm’s DNA in a metaphorical sense, it is in fact an analogue. A firm’s identify is carried in its routineome, just as yours is carried in your genome. Engineering your firm’s routineome is the core of business model transformation.

Rule 6: Learn Your ACGT

Geneticists see a string of nucleotides, with a surprisingly short alphabet of four letters, as the foundations of genes and hence protein expression and traits. Changes in this genetic code explain both successful and unsuccessful adaptations. In a directly analogous way, management scientists see the origins of organisational traits, capabilities and routines as combinations of four different microfoundations: Attributes of individuals, Conflict management mechanisms, Group processes and Team structures. Their initial letters are a contrivance but a useful one, because changes in microfoundations enable successful business model transformation.

Rule 7: See Market Changes as Selection Pressures

The evolution of biological species is a blind process, without aim. It is the result of selection pressures: environmental conditions that favour some phenotypic traits, and the genes that create them, whilst disfavouring others. My pale skin is the result of genes favoured by higher latitudes as my ancestors moved from Africa to Europe. The same is true in the evolution of life science business models, which are the result of the market favouring and disfavouring certain business model characteristics. Today, for example, we can see the payer environment selecting against business models that fail to demonstrate health economic value and in favour of those that can reduce costs. Appreciation of the market’s selection pressures is the only way to guide business model transformation.

Rule 8: View the Market as a Complex, Adaptive System

Early ecologists uncovered bilateral relationships between species, such as pollinators and flowering plants. Their successors came to see that view as simplistic and to understand ecosystems as complex adaptive systems in which everything is connected to everything else. Economic evolutionary scientists see their domain the same way. They see business habitats as a web of technological and social factors. The former includes life science technologies, such as genetics and pharmacology, but also complementary technologies from information and materials sciences, among others. The latter includes man-made systems, from the economy and research institutions to healthcare services and payer systems. Business model transformation is impossible without an appreciation of how complex adaptive systems work.

Rule 9: Anticipate an Inconstant Process

Business models then are groups of organisations with very similar routineomes and hence similar capabileomes and traits, such as strategies. They are directly analogous to biological species, which are groups of organisms sharing very similar genomes and hence similar proteomes and traits, such as anatomy and physiology. Changes in both business models and biological species are the result of changes in the environment, as evolution does its adaptive work. A characteristic of both forms of evolution is “punctuated equilibrium”, when long periods of relative stasis are interrupted with busts of rapid change. The life sciences industry seems to be going through just such a burst right now, creating a sense of urgency for business model transformation.

Rule 10: Expect Speciation

When Darwin scribbled in his notebook, the question he was trying to answer was why? Why are there so many varied forms of life? Eventually, he reached the conclusion that this speciation was the inevitable result of evolution by natural selection, which stumbles blindly in every direction, seeking and over time finding every possible way of surviving. The evolution of business models is no different and in the recent past we have observed, for example, the speciation of the traditional pharma company into research intensive, generic, biotech and other sub-species. And this process is accelerating, with my own research identifying no less than 26 emerging business models in the life science industry. This future of speciation provides the competitive context for your own business model transformation.

Rule 11: Business is Almost, but Not Quite, Exactly Like Biology

Darwinian evolution is therefore, as J Stanley Metcalfe explained, not simply a biological theory. Its explanatory power applies to any complex adaptive system, including that of the life science industry. But there is one important difference. Whilst all evolution is driven by variation of replicators and interactors, their selection and then amplification, the variation of biological systems is essentially random; driven by mutation and sexual shuffling of genes. The haphazard way in which organisations manage change often creates an effect that is indistinguishable from random, but this need not be so. Equipped with an understanding of how industries evolve, firms can understand the selection pressures acting on their business and envisage how their business model needs to change. That vision allows them to specify the necessary capabileome and the routineome that expresses it. Ultimately, that allows them to genetically engineer their microfoundations, like some organisational CRISPR scientist.

Business model transformation, then, need not be synonymous with vapid and science-free waffle. Darwin’s dangerous, brilliant idea and its application to management science tells us that the normal course of things is that life science companies will evolve in the same random, slow and wasteful manner we see in nature. But the same science tells us that it need not be that way. Following Darwin’s rules, leaders can manage and accelerate the evolution of their business models through a process analogous to genetic engineering. But first they must understand the science.