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Pharma execs need to discard conventional thinking and prepare their organizations for bursts of sudden, dramatic change, argues Brian Smith.

Pharma execs need to discard conventional thinking and prepare their organizations for bursts of sudden, dramatic change, argues Brian Smith.

In The future of pharma, I suggested that the history of the pharma sector gives us some idea of what to expect next: speciation into new business models, each requiring new organizational capabilities.

If you accept that as working hypothesis, the obvious next question is: How fast will this happen?

There are two schools of thought.

The first is the conventional one, founded on extensive data, sound assumptions, and used by most strategic planners in the business.

To sum it up, were a slow-moving market, constrained by difficult science, barriers to entry and regulation, and our market will change only slowly and gradually.

I have a lot of time for that perspective. I sat through a presentation along these lines very recently, and it was impossible to fault the facts or the analysis, which projected that the generic sector would grow as patents expire but remain a small sliver of the profit pie.

It was a convincing thesis, but one of evolutionary biologist Leslie Orgels sayings was running through my head.

Sudden, dramatic change

Orgel coined the maxim Evolution is smarter than we are.

I was reminded of it because the projections in that presentation were based on linear thinking, something classical economics teaches us to follow but modern economic theory increasingly tends to eschew.

While classical economic ideas take their cue from physics and the idea of dynamic equilibrium, more modern ideas take their inspiration from evolutionary biology and the idea of complex, adaptive systems.

As well as having different origins, the two schools of thought lead to different projections of the industrys future.

If the traditional approach suggests gradual industry evolution, the modern evolutionary approach suggests a future more like the punctuated equilibrium model of evolution suggested by Stephen Jay Gouldnothing much happens for ages and then there is sudden, dramatic change.

Thats a scary thought for big (and not so big) pharmaceutical companies, which are not renowned for flexibility.

So its worth considering how that might pan out in real life. 

Market complexity

Evolution works by variation, selection, and amplification.

In terms of business models, that means companies vary their approaches, one or more seems to work better than the others, and then lots of firms copy it.

Importantly, however, this tends not to be a linear process.

Because markets are complex systems that involve the interaction of lots of entities (businesses, authorities, consultancies, etc.), the result is usually a non-linear feedback mechanism in which there are sudden bursts of change.

If we imagine an example of this in pharmaceutical markets, some hard-up payer may decide to retrospectively apply its health technology assessment to all of the products on the market in a certain therapeutic class.

The result might be that very little on the market is worth its price when compared to a very cheap generic alternative.

So the market very rapidly tilts so that generics are the standard for anything except certain niche indications.

In response, the investment shifts away from product development and line extensions to supply chain management, further driving down the price to a small fraction of what it is today.

Wal-Mart, working with an emerging market manufacturer, gains 70% share in two years, enthusiastically aided by payers across the world looking at huge savings.

Beyond linear assumptions

Okay, so you can easily quibble with the detail of the example, but to do so would be to miss the point, which is to look beyond linear assumptions.

If we look at the rise of the emerging economies, or the rapid growth of consumer affluence in recent decades, or many other examples of how real economies have changed over time, the case for linear models is not strong.

By contrast, theories of evolution, complexity, and adaptive systems seem to provide better explanations of reality.

The take home lesson for this is of little use to brand managers or other middle managers fighting for share of this years market.

Rather, these are lessons for very senior managers who need to shape their organization for the future.

For them, this new way of thinking says that large, efficient but inflexible organizations are risky holdings for shareholders.

At any moment, the market may shift suddenly and at a speed that typical present-day organizations cant hope to match.

Investors know this, and it is part of the reason share prices are depressed.

To manage that risk and revive the share price, companies will need to anticipate these bursts of change and build organizational structures that can adapt whenor better yet, beforethey happen.

Dr. Brian D Smith is an author, academic, and advisor in competitive strategy in medical markets. He is editor of the Journal of Medical Marketing, a research fellow in the marketing and strategy unit at the Open University Business School, and runs specialist strategy consultancy Pragmedic.