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Survival instincts

CEOs must overcome indecision, ego and poor knowledge of company strengths when deciding which model to adopt for the future
Tree in the desert

This is the third in a series of three articles from Brian D Smith about the future of pharmaceutical marketing.

Other articles in the series:
1 - Evolutionary theory
2 - Fierce creatures

Changes in pharma's market environment will drive the extinction of current business models and the evolution of new ones. What will pharma companies have to do to survive and thrive in this new world? This third in a series of three articles looks at the decisions that the pharmaceutical industry's leaders face.

The first two articles in this series described how evolutionary theory and observable facts point to the transformation of the pharmaceutical industry. The future is one of multiple business models, each superbly adapted to its sub-habitat. This means that pharma companies will have to make clear choices or face drifting towards extinction. Such decisiveness will be difficult, but the outcomes of the three-year research project upon which these articles are based aim to provide some guidance.

Which kind of company?
Earlier in this series, the seven new pharma business models that will evolve were described. The first, most fundamental decision facing pharma CEOs concerns which of these to guide the company towards. Unlike biological organisms, executives can consciously guide the evolution of their company, but it is fraught with three inherent dangers to which many companies will fall victim.

The first is the danger of indecision. Because each business model is very different and requires capabilities specific to its habitat, the seven models are, largely, mutually exclusive. For example, firms that attempt the hyper-efficiency of a 'Monster Imitator' model at the same time as the discovery excellence of the 'Genii' model will, inevitably, find themselves straddling the two strategies and competitively compromised in both. The research indicates that the models, although all pharmaceutical businesses, are as distinct as related species of specialised animal. Aardvarks, giraffes and elephants, for example, are all hoofed animals, but a hybrid of the three would not compete well in any habitat.

The second danger is that of ego. The research suggests that the Genii business model, with its scientific prestige, is the default choice for most of today's companies. Yet this is a relatively small habitat and likely to be extremely crowded. A more rational, successful leader will consider carefully which of the seven models fits closest with the firm's current capabilities and organisational culture. For example, applying current distinctive capabilities to become a 'Disease Manager' type of company may be a far better strategy and, without a clearly superior culture and capability for discovery and development, the choice of Genii model may be an expensive mistake.

The third danger is that of poor self-knowledge. To make the right choice depends on understanding objectively what are the true strengths of the organisation. For example, firms may perceive themselves to have strengths in discovery when their true strength lies in the trust their corporate brand has acquired over decades. A firm that truly understands its strengths would therefore make different and much better choices than one that is deluding itself.

To achieve the rich, varied injection of new practices that is required, pharma will need to import ideas from other sectors

Which new genes?
The decision about which new business model to adopt provides the CEO with a list of actions, because each model implies a new set of practices and capabilities (the corporate equivalent of genes) that the firm must nurture. As the next section describes, developing new capabilities is difficult, but it is impossible unless a firm's leadership has agreed a clear, complete list of what is needed. The research shows that the key to identifying what new capabilities are needed is to understand that the pharma company of the future will need three distinct types of organisational capability:

•  Core capabilities:
Those needed just to operate in a market; they confer no advantage but lack of them means certain failure. In the future pharmaceutical industry, these will include negotiating complex regulatory and market access problems and managing the perceptions of a cynical, media-led public. However, they will also include understanding increasingly complex customer networks of payer, prescribers and patients and, compared to today, developing frugal business processes.

•  Distinctive capabilities:
Those that will allow firms to compete and, importantly, that are different for each of the seven business models. The 'value-picker' model, for example, will have to excel at spotting niche opportunities. The 'lifestyle manager', by contrast, will need to develop complex, integrated value propositions rather than simple products.

•  Dynamic capabilities:
Those that enable change in the organisation and are, as such, the most precious and problematic. They will include practices that allow firms to create market insight, to build on that insight to create strong strategies and to execute them via complex alliance networks.
Choosing a future business model for a firm is the first task of a pharma CEO and identifying the new practices and capabilities that the new business model will need is the second. Both are difficult and they are only the preparatory steps towards the new future of pharma. The third, most difficult question to address is how to develop those new capabilities faster than the competitors.

In both biological and economic evolution, survival ultimately depends on changing faster than the competition. For organisms, this means obtaining better genes, usually via sex. For firms it means new practices, usually by importing new ideas. Before engaging on an orgy of training, however, take a moment to consider the implications of pharma's future competitive landscape. Because rapid changes in the social and technological environment will fragment the market, three important lessons can be drawn. First, the practices needed will be very different from those of today. Second, they will vary greatly between business models. Finally, many of these practices, like the actuarial skills of disease managers or the luxury branding skills of the 'health concierge', do not come from the pharmaceutical industry, but from other sectors. The industry will need to introduce lots of new genes that are very different to its current DNA.

These three consequences of the pharma market environment have huge ramifications for how the most successful firms will acquire their new practices. Traditionally, pharma is addicted to the idea of 'best practice'. It sees approaches like Customer Relationship Management or Key Account Management as panaceas. It then tries to acquire them via mergers, consultants, recruitment or other methods. However, it is almost always pharma's instinct to borrow ideas from other pharma companies, believing this industry to be special or unique. This is the corporate equivalent of incest and it simply recirculates the same old genes. To achieve the rich, varied injection of new practices that is required, pharma will need to import ideas from many other sectors and in so doing, break this habit.

Facing the future
This series of three articles has endeavoured to summarise the extensive, radical findings of a large-scale research project. Applying modern ideas of evolutionary economics has enabled the prediction of a complex, fragmented market landscape that will drive the evolution of several new business models and the extinction of the ones that are familiar today. That prediction of speciation and extinction both identifies and guides the decisions that need to be made by today's industry leaders.  If they make and implement the right decisions, this industry will continue to contribute hugely to society. If they fail, both society and the industry will be much the worse for it.

About this article
This series of articles has been drawn from research conducted by Brian D Smith, as featured in the book 'The Future of Pharma', published by Gower in the UK. The book is based on two years of research and interviews with 35 pharma CEOs and thought leaders and uses evolutionary science to predict how the industry will change and how firms must change with it.

PMLiVE readers can purchase copies of the book, with a personalised dedication from the author, at the substantially discounted price of £45 including postage and packaging worldwide (RRP £65), by quoting 'PME3' when purchasing the book via the online bookstore:

Other articles in the series
1 - Evolutionary theory
2 - Fierce creatures

Dr Brian D SmithThe Author
Dr Brian D Smith
is a world-recognised authority on strategy in the pharmaceutical and medical technology markets. He is an Adjunct Professor at SDA Bocconi in Milan and a Visiting Research Fellow at the Open University Business School in the UK. He is editor of the Journal of Medical Marketing and author of over 200 books and papers including his latest work, 'The Future of Pharma', research from which forms the basis of this article.

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The Future of Pharma 3 

1st September 2011


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