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Under pressure

Six inexorable forces shaping our industry's evolution

Under pressure

As Voltaire said, to find good answers we have first to ask good questions. Nowhere is this more true than in the life science industry, in which everyone from CEOs downwards is asking what future business models will look like. So what are the good questions that might help us answer this important question?

The clue lies in the complex adaptive nature of our market. Such systems can't be predicted by simple extrapolation; they operate by the non-linear, chaotic rules of Darwinian evolution. In evolutionary terms, business models are analogous to species and selection pressures either favour or disfavour variations in their traits, leading to speciation or extinction. So the right question to ask is what selection pressures are at work in the life science sector. The answer, emerging from years of research by my University of Hertfordshire research group, is that six fundamental shifts in our industry's environment are silently but effectively deciding which business models will thrive and which will go the way of the dodo.

Before describing those findings, it's worth being clear about what we are and are not looking for. It's tempting to focus on one or more of the many dramatic technological changes we see occurring, such as the internet of things or any of the 'omics' revolutions in biology. But this would be simplistic in two ways. Firstly, it would consider only the technological environment and ignore equally important sociological factors such as demography, economics and globalisation. Secondly, it would not allow for the interaction between environmental factors. To really understand, we need to take a complexity approach. First, collate thousands of individual market facts about how the market environment is changing then repeatedly sort, shuffle and structure that data until regular patterns - emergent properties in the jargon - appear. When this is done for the life science industry, those six great shifts emerge. Those shifts favour and disfavour certain strategies, structures and other traits and lead to the evolution of new business models, just as natural habitats favour certain biological traits and lead to new species. The six shifts and their concomitant selection pressures are described in the following paragraphs.

The Value Shift

A shift in the definition of the value from improved clinical outcome as defined by healthcare professionals to a complex, context-specific definition of value defined in terms of clinical, economic and other factors by a combination of healthcare professionals, payers and patients or their proxies

The value shift is a change both in how value is defined and by whom. It is also an increase in the complexity of value definition. It arises from the interaction of a number of separate social factors such as demographics, healthcare inflation, rising expectations and disease patterns.

The value shift creates a selection pressure in favour of business models that can understand multi-dimensional, customer-perceived value and can create that context-specific value through a combination of product, services and pricing. At the same time, the value shift creates a selection pressure against models that understand value only in terms of clinical outcomes as defined by healthcare professionals and value-creation only in terms of products.

The Global Shift

A shift in the demand and supply patterns for healthcare from western-oriented with limited heterogeneity based on clinical requirements to global geographic spread that is heterogeneous in clinical requirements, payer preferences and patient needs

The global shift is a change in customers' and competitors' location, needs and behaviour. Importantly, it includes not just globalisation of demand but also fragmentation of customer needs to accommodate many non-clinical factors such as aesthetics and convenience. It creates multiple, diverse global segments within any disease area. It arises from the interaction of trade internationalisation, multinational corporations, increasing and polarising global wealth and subsequent maturation and fragmentation of customer needs.

It represents a move from ... treating illnesses by symptoms to ... managing individual well-being

The global shift applies a selection pressure in favour of business models that can understand market heterogeneity and deliver value to targeted segments on a global basis. At the same time, the global shift creates a selection pressure against models that view market heterogeneity only in clinical terms, are unable to focus their resources appropriately and cannot deliver customer-specific value globally.

The Holobiont Shift

A shift from organisations with predominant centres and well-defined, stable boundaries and scope to polycentric networks with fluid, ill-defined boundaries and scope

The holobiont shift is a change in the way firms structure themselves and work with other firms. It involves both a reduction in what firms do themselves and an extension of what they do with partners. In essence, it is a shift from big, self-contained firms to networked organisations that are more complex, more fluid and less well defined than we are used to. It arises from the combination of changes in capital markets, changes in transaction costs within and between companies, the specialisation of corporate capabilities and the increasing need to mitigate business risk.

The holobiont shift applies a selection pressure in favour of business models that can build and manage dynamic, symbiotic networks of complementary organisations and use that structure to improve returns, reduce risk or some combination of the two. At the same time, the holobiont shift creates a selection pressure against models that persist in having unicentric structures and simple supplier networks.

the Systeomic Shift

A shift in our understanding and management of physical and mental health from reactive, population-based and hierarchical to proactive, personalised and participatory

The systeomic shift is a change in the sector's scientific paradigm. It represents a move from a 19th century view of medicine as treating illnesses by symptoms to a systems approach managing individual well-being. It is based on technologies, such as bioinformatics, gene sequencing, biomarkers and synthetic biology that make systems biology and systems medicine possible.

The systeomic shift applies a selection pressure in favour of business models that can translate system medicine into an improvement of returns or a reduction risk at any point in the value chain. Conversely, it creates a selection pressure against business models that remain based on a reductionist, hierarchical, population-based understanding of disease or injury.

The Information Shift

A shift in the collection, storage, use and communication of information from small-scale, fragmented, unidirectional and deductive to large-scale, integrated, pervasive and inductive

The information shift is a change in how we collect and use information. Importantly, it influences not only how we discover and develop drugs, devices and other medical technologies but also how we produce products, deliver services and understand our customers' needs. It is based upon platform technologies such as biosensors and improved chips, memories and batteries. These enable connectivity, wearable technology, artificial intelligence and new data analytical capabilities.

The information shift applies a selection pressure in favour of business models that use information to improve returns or reduce risk, whether that is in R&D, operations or sales and marketing. The obverse is that the information shift creates a selection pressure against models that continue to use information in a small-scale, fragmented, unidirectional and deductive manner.

The Trimorphic Shift

A shift from organisations that are relatively similar in how they distribute effort across their value chain to organisations that are strongly focused on either customer intimacy, operational excellence or product excellence

The trimorphic shift is a three-way polarisation of resource focus within companies. It involves research-based firms becoming more innovative, low-cost firms becoming more efficient and customer-centric firms becoming excellent at tailoring their value propositions. It arises from advances in supply chain architectures, research and development technologies and sales and marketing methodologies. It is complemented by the polarisation and specialisation of corporate cultures in line with their business model.

The trimorphic shift applies a selection pressure in favour of business models that focus on creating value by either product excellence, operational excellence or customer intimacy and by targeting the parts of the global market that will respond to such a specialised offer. Similarly, the trimorphic shift will apply a selection pressure against models that 'straddle' across the three approaches. Such firms, who may have good products, efficient operations and effective sales and marketing processes will find themselves at a disadvantage to those more focused firms with either excellent products, hyper-efficient operations or the ability to identify and satisfy very small and specific customer segments.

The net result of the six great shifts will be a mass speciation of business models in the life science industry

Selection Pressures
The six great shifts identified by our research are fundamental, emerging properties of the complex adaptive system that is the life science industry. They create selection pressures that are pervasive, acting on every change in strategy, structure and process to either favour it or disfavour it. Over time, they lead to the emergence of new business models and the disappearance of old ones. However, these selection pressures act in a complex and uneven manner. All six act simultaneously on every firm and they also interact with each other. But they do not act evenly across the industry. The systeomic and information shifts, for example, act strongly on innovative companies but, arguably, less so on follower companies. The trimorphic and holobiont shifts act more strongly on smaller companies, who can form holobionts that allow them to compete with industry giants. The global shift and value shift affect the whole industry but the details of their effects vary between disease areas.

To add to this complexity, business models can adapt to selection pressures in a number of ways. They can react to the value shift by reducing costs or by creating more effective products. They can respond to the systeomic shift by developing their technology further or by integrating it with other technologies. They can adapt to the holobiont shift by becoming a network hub, a spoke or a bridge between networks. These complexities mean that the net result of the six great shifts will be a mass speciation of business models in the life science industry. Just like the explosion of biological species in the Cambrian Explosion, there will be many more types of business model in the future than there are now and they will be more diverse, more specialised and more effective than those of today. Asking and answering the question about what selection pressures are acting on our industry is the first step in predicting that complex, speciated future. The next, identifying and describing the business models that will emerge, is the subject of the second article in this series.

The articles in this series are based on the forthcoming book Darwin's Medicine: The Future of the Pharma and Medtech industryProfessor Brian D Smith welcomes comments and questions at brian.smith@pragmedic.com

4th March 2016

The articles in this series are based on the forthcoming book Darwin's Medicine: The Future of the Pharma and Medtech industryProfessor Brian D Smith welcomes comments and questions at brian.smith@pragmedic.com

4th March 2016

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