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Life cycle

How the industry has to change to survive

Fallen sycamore podsIt has become traditional to manage a product's life cycle as it goes from launch through growth to maturity and decline. It is nothing new to say that the tactics for managing a product have to be adjusted to suit its life cycle stage. Less well understood however is the idea of 'industry life cycle', the concept that whole industries are born, grow and eventually die. Yet it is a well accepted tool in strategic management, providing a useful guide to what will happen next and how to respond to inevitable changes. So what does industry life cycle tell us about the future of the pharmaceutical industry; how it will change and how, if at all, companies and marketers will survive those changes? To answer this, we need to understand the foundations of life cycle theory and how it applies to the context of our own, particular situation.

Inevitable ageing
Life cycle theory, like most management research, is not as academic as many managers think. It emerged not from the febrile imagination of some professor but from the repeated observation of patterns across many industries. Although those observations varied in detail, certain trends could be seen. First, new ways of meeting old needs emerged, sometimes as a result of technological advances (the development of organic synthesis in the late 19th Century for instance), sometimes as a result of market changes (the socio-political movement towards universal healthcare in the post-War western world, for example), sometimes a combination of both. Then, seeing the success of innovators in the new industry, followers piled in, driven by large profits and low barriers to entry. This crowd, which makes it unattractive for any more new entrants, then battles it out among each other. This battle leaves only a few bigger players and a shoal of minnows with profits concentrated in the hands of the industry leaders. Eventually, however, market and technological changes make life difficult for even those leaders and the profit of the industry declines. Industry death happens as either those leaders die or transform themselves into different types of firms. In any case, a new industry – that is, a new way of meeting the customers' needs – emerges from the bones of the old.

It was these observations that were melded by academics into life cycle theory, an explanation of how whole industries age as inevitably as human beings do. It has proven a practically useful explanation in many sectors, although the basic idea has been refined as more is understood about what drives the life cycle and how it applies to particular industries. The challenge for pharmaceutical companies and marketers is to apply it in practice and decide how they can best be a survivor.

Tipping Points
One of the most practically useful aspects of the theory of industry life cycle is that it is relatively easy to make a rough judgement of an industry's 'age' or life cycle stage. Tell-tale signs like growth rate, margins and strategies act like wrinkles and grey hairs, providing strong clues not only to where the sector is now, but also to what might happen next. Take, for example, some of the big therapy areas that currently dominate sales in the pharmaceutical industry. Typically primary care products, such as antidepressants and lipid-lowering agents, exhibit concentration of market share and, as prescription medicines, declining growth rates. These are two characteristic signs of reaching maturity. Along with other markers, such as gross profit margins and relative product differentiation, these tell-tale signs reveal that many of the major therapy areas are mature. Since the industry is, in simple terms, the sum of its therapy areas, this suggests that the industry is ageing. This is a simplification, of course, and some therapy areas are younger than others. However, data point clearly to an industry that is, at best, no longer in its growth phase and may even be approaching decline.

Unfortunately, this broad analysis cannot predict exactly where in the life cycle we are and precisely when we will enter decline. The most recent thinking about industry life cycle points to evidence that industry ageing is not a smooth, linear process. Rather, industries have 'tipping points' at which circumstances combine to push the industry over the edge into rapid decline. It is not hard to see signs of that in the pharmaceutical industry. Government pressures to reduce prices and promote generics, the increase in parallel importing and the attitudes of developing markets to intellectual property rights are all portents of an industry that might – in a very short period of time – progress, metaphorically, from a fit and active early middle age to a frail and vulnerable old age. We cannot know for sure if this is going to happen, but by the time we can prove it, it will be too late. Just like planning for old age, the trick is to anticipate the future and be ready for it.

The Future is Here
If industry life cycle theory applies to pharmaceuticals as well as it has explained other industries, we are in for a very different future. If the latest thinkers are right, that future may happen so quickly that we will need to pre-empt it rather than react to it. The trick in doing so may be in the final assertion of the theorists that when one industry life cycle declines, it is usually replaced by another. Pharmaceutical companies should not ask how they can survive change in approximately their current form but instead ask how they can become the new form of industry and, in effect, replace themselves. That question may be even harder to answer if, as some theorists suggest, the transition will be non-linear and chaotic so that traditional methods of extrapolation and forecasting do not work.

The best hope of anticipating our industry's future, and therefore pre-empting it, may lie in the ideas of the futurologists. They live by the mantra of William Gibson, a science fiction writer, who is often cited as saying that the future is already here, just unevenly distributed. Or to put in another way, the first indicators of how the industry will look are already visible but camouflaged among other, less useful signals. In the context of pharma, the most powerful signs are in three areas: technology, market forces and industry reactions. Synthesising those together using industry life cycle theory suggests a future that is fragmented and response strategies that are both radical and difficult.

Looking for a sign
Knowing that signs of the future are likely to be found in market, technology and industry change helps us spot movements that are important. Industry changes are the closest to home: good examples of this are specific events like GSK's restructuring of its R&D process and Takeda's radical reshaping of its sales process. Changes in market forces include the rise of co-payments, the more sophisticated application of 'fourth hurdle' cost-effectiveness barriers and also the rise of developing countries that leap-frog, rather than copy, Western healthcare systems. Technological changes come in two kinds: the explosion of knowledge in each disease area and changes in enabling and supporting sciences – such as information and communication technology and diagnostics.

Together, these signs hint at a fragmentation of pharmaceutical company business models as firms choose different adaptations to market conditions. This idea of fragmentation of the pharma model echoes an important assertion of industry life cycle theory: that when a traditional model declines, it may be replaced not by one but by several new models. Whereas, 30 years ago, most researched-based pharma companies had similar models and differed mainly in size, the business models of first-, second- and third-tier firms are now diverging. So, we should look for not one new business model, but several.

On the origin of species
So the decline and death of the traditional pharma business model not only seems inevitable, but may also be precipitous. Early signs and the forces acting on the market suggest fragmentation. What will this look like and how can companies prepare for this new world? We can predict some broad answers. There may be four general types of pharmaceutical company:
• The researchers: using R&D to focus on technically difficult problems, their model will include high margins, small volumes and strong relationships with clinicians. The technical difficulty of this model may see it delivered not by single companies but by fluid strategic alliances of partners, each of which specialises in a different part of the product development process. These firms will need to excel at product development.
• The disease managers: using detailed knowledge and processes to manage whole value chains for healthcare providers, their model will be lower margins and depend on key account relationships with providers. The essence of this business model will be excellence in customer intimacy and tailoring their service. These firms will need to excel at understanding and meeting their clients' broader disease management needs from a health economics perspective.
• The commoditisers: Using low-cost business models to attack large-volume markets with low clinical demands, their model will focus on excellence in supply-chain management and economies of scale. Ruthlessly disciplined, these firms will need to excel at cost management and tendering processes.
• The straddlers: These firms will attempt to copy the three other forms, offering good products, service and competitive pricing. This category may be the largest in the medium term, but it is unlikely to be more than a transitory stage. Eventually, straddlers will need to transform themselves into one of the three other forms or die.

Early prototypes of these four models exist already in areas like biotechnology, medical consumables, generics and some of our existing medium-sized firms, but the fully-evolved form of each will be as similar to current models as Homo sapiens is to the early primates. Just as important, the nature of the three forms will be so different from each other that they will no longer really be one industry. They will not compete with each other and will be seen as distinct and different.

Evolutionary Advantage
If the industry life cycle predications of our industry future are right, how should firms prepare for this fragmented future? Other areas of strategic management research suggest three key things that will maximise the evolutionary advantage of firms:
• Make broad choices early. Even though the uncertainty of the future means that precise predictions are bound to be wrong, there is still value in making broad guesses. Foremost among these is to forecast which of the new forms your own firm may be able to evolve into.
• Start building knowledge and capabilities. Each of the three forms will have very different capabilities and knowledge bases, and survival in each of the new industries will mean competing against well-evolved rivals with specialised capabilities.
• Remain flexible. Despite the need to evolve quickly into one of the general forms, the detailed characteristics of the successful firm will be hard to predict in an uncertain world. The only option is to keep options open and retain the ability to adapt the details of structure, strategy and capabilities as the market evolves.

The future of our industry, while impossible to predict perfectly, is not a completely random walk – to steal a physicist's metaphor. We can be sure it will change, perhaps dramatically, and we can also have reasonable certainty that our industry will fragment into several sub-industries. We can even be reasonably confident about the general way to facilitate our own firm's evolution. The great uncertainty is the capability and willingness of our industry's leaders to meet an inevitable future.

The Author:
Dr Brian D Smith is a research fellow at the Open University and runs PragMedic, a specialist strategy consultancy
To comment on this article, email 

7th January 2009


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