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Building the Future

Transforming your business model is difficult, but doable - here’s how

Building the future

In my previous articles in this series, I described my research findings about the forces shaping our industry (Under Pressure, PME February 2016), the 26 new business models created by those forces (Explosive Evolution, PME June 2016) and how firms select which model to evolve into (Choosing Destiny, PME September 2016). In this final article, I describe the process that takes a firm from its present into its future. In most firms, this is an implicit process but, from my interviews with senior executives, it is possible to identify an explicit procedure that others can learn from.

Step 1: Identifying competitive traits
The starting point for building a new business model is the decisive choice of one or more models, as described in Choosing Destiny. That done, the next step is to define the traits of that model upon which its competitive advantage will depend. A simplified example, for the sort of 'Secular Grail' model typified by Roche's Dx/Rx approach or Novo's AI developments. Of course, this list is different for each model and the important thing is to identify all of the traits of the chosen model that characterise its commercial viability.

Box 1: Example of business model traits

A 'Secular Grail' business model must exceed all other approaches in:

  • Identification and selection of relevant emergent technologies
  • Development of combined technologies to marketable status
  • Creation and demonstration of superior health economic value propositions
  • Identifying and managing the portfolio of global segments
  • Maintaining superiority over lower cost imitators.

Step 2: Identifying your capabileome
Just as your phenotypic traits are the result of your proteome, a model's competitive traits are the result of its capabileome: its entire complement of necessary capabilities. And just as a proteome characterises a species, a capabileome characterises a business model. The biological analogue goes further. Just as we have functional and regulatory proteins, so a firm has functional hygiene and differentiating capabilities that do the work and regulatory dynamic capabilities that enable those functional capabilities. There are thousands of capabilities in a typical model's capabileome but most are common to most models. For that reason, firms trying to transform their model focus on identifying those capabilities that distinguish their new model from their old one. These tend to be a few tens of very important differentiating and dynamic capabilities.

Box 2: Types of capabilities
  • Hygiene capabilities, which allow an organisation to operate in the market but which do not provide any sort of competitive advantage. For example, compliant manufacturing.
  • Differentiating capabilities, which allow an organisation to perform value-creating tasks in a manner superior to the competition. For example, contextual market segmentation.
  • Dynamic capabilities, which allow an organisation to enable its functional capabilities. For example, creating unique and valuable insight.

Step 3: Designing your holobiont
Many organisms only function effectively with the help of other organisms. The human microbiome is an example of this but a coral reef is a better one. In the same way, the co does not express all of the traits and capabilities of its business model alone but with its network of partners, suppliers and others members of its holobiont, as biologists call such symbiotic networks. The key feature of effective business model holobionts is the allocation of their activities to optimise risk and return. In practice, this means assessing for the criticality and cost of each of the most important capabilities and then finding the right set of symbiotic partners while at the same time developing a limited set of core capabilities in-house.

Box 3: Types of microfoundations
  • Attributes of group members, including their knowledge, abilities and behaviours
  • Group process, including its stages, sequencing and rigidity
  • Team structure, including hierarchy, scope of activity and connectivity
  • Conflict management methods, including their breadth, proactivity and pervasiveness.

Step 4: Identifying organisational routines
The holobiont design process identifies a small number of critical capabilities that must be developed and expressed in-house. These are essential to the business model and are also what makes the firm attractive to its holobiont partners. Just as proteins are expressed by genes, every capability is the expression of one or usually more organisational routines. These are small, stable subprocesses by  which the organisation stores information about how to do everything it does, from hiring the right people to designing an extended value proposition.This shows how one capability important to customer-intimate models, that for creating actionable knowledge from the customer experience, can be deconstructed into six organisational routines. This essential step therefore involves taking each of the core capabilities and deconstructing it into the set of organisational routines that create that capability.

Figure 1: Allocating capabilities across the holobiont

Low costHigh cost
High criticalityDevelop internallyDevelop with partners
Low criticalityMaintain efficientlyOutsource to suppliers

Step 5: Building the microfoundations 
Identifying the organisational routines is a necessary but insufficient step in creating the firm's core capabilities and competitive traits. Just as genes depend on a specific set of base pairs, effective routines function because of their microfoundations. There are four types of microfoundation, and it is necessary for all four to be designed appropriately for a routine to work. The final step in business model building is therefore to design microfoundations that enable routines that express capabilities that make possible the model's characteristic competitive traits.

Figure 2: Identifying organisational routines 

Building the future figure 2 

Creating competitiveness 
In this necessarily brief summary of what I've uncovered of how life science firms build their business models, I have skimmed over many detailed findings. However, there are three fundamental discoveries to take away. The first is that business model transformation is not superficial. Firms that simply restructure and rebrand miss their opportunity and fail to adapt successfully to our changing market. Second, successful business model transformation is a meticulous, methodical process. It demands the stepwise process described and firms that skip or skim steps are unlikely to succeed. Finally, business model building is complex. The essential set of competitive traits are the result of a massive capabileome, including a large number of totally new capabilities. Each of these requires several new organisational routines that are in turn built on a set of four carefully designed microfoundations. A single error at any of these stages means the new business model will not function effectively. To take the biological analogy one step further, think of diseases like cystic fibrosis that are caused by single nucleotide polymorphisms. This complexity explains two things. First, it is easier to fail at business model transformation than succeed. Second, the ability to transform is, in our rapidly changing market, the only sustainable source of competitive advantage.

This series of articles is based on Professor Smith's new book Darwin's Medicine: How Life Science Business Models are Evolving.

PME readers can buy it at a 50% discount by going to the website of the publisher, Routledge, and quoting discount code DAR230.

Article by
Professor Brian D Smith

is a world-recognised authority on the evolution of the life science industry.

13th December 2016

Article by
Professor Brian D Smith

is a world-recognised authority on the evolution of the life science industry.

13th December 2016

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