Swallowing the Innovator's Rx - Pharmaceutical Executive


Swallowing the Innovator's Rx

Pharmaceutical Executive

Taking Action Now

These disruptive forces are affecting sectors within the healthcare industry in different ways and on different time lines. For some, The Innovator's Prescription will therefore read like a playbook describing how to achieve significant growth by enabling and accelerating the process of care decentralization and patient engagement. Others will see it as a "final notice" that their time as a leader is coming to a close unless they significantly redirect their efforts. The time lines in each circumstance will vary, but neither will be overnight transformations. We therefore suggest a few actions that established and emerging leaders can take to thrive during this period of disruption.

Understand your stakeholders' "jobs to be done" Peter Drucker once said, "The customer rarely buys what the business thinks it sells him." This concept underpins the notion of the job to be done. Rather than defining a patient by the progression of his disease, or by vague psychographics, this approach can provide actionable information by focusing on what the customer actually hopes to accomplish (e.g., taking care of the family, avoiding disruption to the career). For physicians, critical "jobs" might be building a practice, negotiating higher reimbursement, attaining accreditation, or minimizing the amount of time spent on callbacks.

The jobs approach is particularly complex in the pharmaceutical arena because each member of the value network—physicians, patients, hospitals, pharmacies, and payers—has a different set of jobs to do. Understanding the jobs of these different stakeholders, as well as their satisfaction with current or emerging solutions, is a crucial first step in understanding how the forces of disruption are affecting your business.

Complete a portfolio analysis to establish your "time line to disruption" Pharmaceutical firms, buoyed by their key products, have achieved success for several decades with a strategy of pursuing silver bullets. They have not had to complete rigorous portfolio management exercises.

As the environment changes, firms need be more judicious, expansive, and balanced. Focusing on the full range of functional, emotional, and social jobs will help refine your perspective on the expected life cycle of current treatments and the potential impact of each compound in your pipeline. For many companies, this exercise serves three purposes:

  • It uncovers a significant "growth gap" between the "confidence-weighted" value of current and pipeline treatments versus the growth required to meet market expectations
  • It may shorten the expected viable life cycle of existing offerings, as the broader definition of competition eliminates blind spots and exposes unforeseen weaknesses
  • It identifies gaps in your portfolio and pipeline that present opportunities for growth but are receiving insufficient attention or resources

Consider changes to your business model If we accept that the healthcare market as we know it is being transformed by disruption, it stands to reason that the business models that thrived in the old economy will not sustain us into the next industry iteration. As such, we must rethink the fundamental architecture of the company in light of the emerging value network, and aggressively realign as required.

As outlined in the recent Harvard Business Review cover article "Reinventing Your Business Model" (Johnson, Christensen, Kagermann, December 2008), four business-model components must be aligned to obtain maximum value from the market:

  • Customer Value Proposition. First and most important, a successful company has found a way to create value for customers—that is, a way to help customers get an important job done. The more important the job is to the customer, the lower the level of customer satisfaction with current options, and the better your solution is than your competitors' at getting the job done—the greater the value for your company.
  • Profit Formula. The profit formula is the blueprint that defines how the company creates value for itself. People often think that profit formulas and business models are interchangeable, but how you make a profit is only one piece of the model. In total, it consists of the revenue model, cost structure, margin model, and resource velocity.
  • Key Resources. The key resources (or assets) are the people, technology, products, facilities, equipment, and brand required to deliver the value proposition to the targeted customer. The focus here is on the key elements that create value for the customer and company, and the way those elements interact.
  • Key Processes. Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales, and service. Key processes also include a company's rules, metrics, and norms.

Often, companies find it impossible to reshape their architecture, as existing customers and stakeholders demand continued support under the old structure. Business schools teach that strategy informs the customers' value propositions, which then inform choice of profit model, resources, and processes. But firms can become captive to an inversion of this approach, where the rear view mirror of resources and processes guide future strategies. In these instances, strategic acquisitions may be necessary to rapidly introduce a new business model. As this more future-ready model grows in response to macro-industry shifts, the old model can naturally recede.

To underscore the need for such actions, we often advise clients to explore a series of "what if" scenarios to determine how well positioned their model is to respond. For instance, Dell asked "What if we sold direct?" and reinvented the PC market while stranding many competitors who never challenged their model this way. http://Salesforce.com/ asked "What if we sold software as a service?" and redefined the economics of that industry. UPS asked "What if we took a broader view of our customers' jobs?" and looked beyond package shipping to supply chain management and logistics solutions.

For pharmaceutical companies, we offer the following questions to help start the intellectual explorations:

  • What if US pharmaceutical payers adopted a different model for reimbursement, e.g. the Japanese model of pricing based on the cost in other nations?
  • What if Medicare cut reimbursement rates for all drugs by 25 percent?
  • What if the percentage of people covered by integrated fixed-fee providers like Kaiser Permanente increased to 25 percent from the current 5 percent?
  • What if comparative-effectiveness studies become government-sponsored cost-effectiveness studies?

Leadership for Changing Times

Companies facing a broad market disruption often look to their best and brightest leaders to assess the situation and plan a response. But the skills that enabled these leaders to drive significant value in the old economy are not the same skills required to lead an organization through a radical restructuring. In well-established markets, stakeholders, competitors, regulations, and technologies are all known. Leaders therefore tend to be individuals who demonstrate the ability to efficiently allocate resources and deliver predictable "slightly better than my competitor" results.

Recognizing and responding to market disruptions requires a broader lens and an ability to foresee potential threats and opportunities. Success in this more ambiguous environment depends on a willingness to experiment and maintain flexibility in responding to new information. Such "risky" behavior has not been encouraged in the traditional environment, and it should therefore come as no surprise that the requisite skills to lead in this manner have not been developed organically.

As with the business model transition, it is advisable to look outside and graft these skills onto a leadership team rather than expecting old-model leaders to change. We advocate looking for the right "schools of experience" for such additions, people whose resumes demonstrate that they have thrived in the environments you envision. Past entrepreneurial efforts are always a good indicator of a candidate's comfort with ambiguity.

Another source of this talent is acquisitions. In these situations it is important to remember that you are buying your way into the future of the healthcare economy. When Best Buy bought The Geek Squad, a firm representing a tiny fraction of Best Buy's overall revenue, it knew that the acquisition would have to have an impact far beyond the balance sheet if Best Buy was to succeed in a services-based business model.

Once you have introduced these new perspectives into the mix through recruiting or acquisition, remember why you did it, and seek to have your organization conform to the newcomers' style versus requiring the newcomers to conform to the legacy model. This may, for a time, require that two autonomous groups be established—one to serve the legacy market and one to drive to a leadership position in the new.

It is clear that not only are disruptive forces at work in healthcare today but that America needs disruption to occur if we are to provide care to an aging population without going bankrupt. New technologies, new business models, and a general reset of the value network are the only means to achieve these objectives. Along the way, pharmaceutical companies can either lead this transformation or be overcome by it. For those that choose to lead, the changes must start now or there simply won't be enough time to complete the migration before the new economy is upon us. For those who choose to stay the course, you may put your faith in acquisitions and lobbying to maintain leadership positions, but you cannot hold back the tides of disruption indefinitely.

Kevin Bolen is a Senior Director with Innosight LLC, a strategy and innovation consultancy founded by Clayton Christensen and based in Watertown, MA. Jason Hwang, MD is the co-author with Clayton Christensen and Jerome Grossman M.D. of The Innovator's Prescription: A Disruptive Solution for Health Care (McGraw-Hill, 2009). He is also the co-founder and Executive Director, Healthcare of the Innosight Institute, a non-profit think tank based in San Francisco. Stephen Wunker is a Senior Partner and Healthcare Practice Leader with Innosight.


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