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Darwin's Medicine blog

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School.

Dead man’s shoes

Obsolete business models are making space for the new

I spend my much of my professional life researching the evolution of new business models in the life sciences industry. Unsurprisingly, I often see parallels between business and biology that are both academically interesting and practically useful. But recent comments by Joe Jimenez, CEO of Novartis, made me think of one particularly strong correspondence between the history of life's evolution on earth and the current wave of change sweeping across our industry. And since that analogy allows us to draw important lessons let me explain what it is and what it can tell us about how to ensure our own businesses survive and thrive.

In industry evolution, business models are the equivalent of species, with each firm occupying a slot in the taxonomy of business models. Looking at our industry it is striking that, for the past few decades, there have been relatively few distinct species. So although every firm looks unique at a detailed level, most life science companies can be categorised into one of a few basic types: research-based, generic, biotech for example. There are differences within these groups of course but each type shares business model fundamentals and the categories have remained pretty static for decades now. Those of you who have moved between companies will recognise this.

We need to be alert to those business models that are dying off and creating ecological gaps

This small number of models brings to mind a period in Earth's history, beginning about 542 million years ago, in which both the number of species and their diversity leapt suddenly. For example, most major animal groups appeared at this time. Evolutionary biologists ponder over this sudden, non-linear change and give three, connected explanations for it; environmental change, ecological gaps and niche creation. To simplify a complicated, fascinating story, changes in the environment led to the demise of older life forms and created gaps for new ones to fill. These new forms interacted with the environment to shape habitats for themselves and other species. The result was the huge, beautiful flowering of life we call the Cambrian explosion. In a relatively short period of time, geologically speaking, life on planet Earth blossomed and changed beyond all recognition.

Back to the life sciences industry and my research, which points to our very own little Cambrian explosion. So far in my research, I've identified the emergence of something like 25 or so new business models. As in biology, these many different forms all represent evolutionary 'choices' about the best way to survive in a competitive environment. It is simply that for life forms survival equates to reproductive success while for businesses survival equates to risk-adjusted rate of return on investment. In both biology and business, evolution's search for ways to survive leads to complexity and a diversity of forms.

How does this analogy help us in practical terms? Well, analogies are simply a vehicle for transferring lessons from one context to another. And, since evolutionary biologists have been learning for longer than the management scientists, they have some interesting things to teach us. Transferring their ideas to the life sciences industry tells us three things. Firstly, it's not enough to simply note that our environment is changing; we have to understand how these changes combine to favour and disfavour particular business models and not others. Secondly, we need to be alert to those business models that are dying off and creating ecological gaps. That's what Joe Jimenez's comments were about; he was flagging up the imminent demise of the 'research-led but value-secondary' business model that has dominated our industry landscape since the Second World War. Finally, we need to understand how the fragmentation of industry business models creates its own habitat. It does this by offering a range of investment options and this 'niche creation' is something I'll write about in future issues of Darwin's Medicine.

As in biology, real value comes from understanding the interplay of these three factors and their implications. Firms that grasp and apply these three lessons from biological evolution to their understanding of the evolution of the life science industry have a chance at managing their own chances of survival. Those that don't will survive only in the industry's fossil record.

29th September 2015

From: Sales

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