Swallowing the Innovator's Rx

Jul 01, 2009
By Pharmaceutical Executive Editors

Jobs in Complex Treatments
"When angioplasty was introduced, it captured the imagination of cardiologists and surgeons differently. Surgeons were skeptical about this new procedure. Cardiologists saw this as an incredible opportunity to treat patients with ischemic heart disease."

Take Two Surgeries and Call Me in the Morning
This comment, made several years ago by the chief of cardiothoracic surgery at a hospital in Miami, summarizes the driving force behind the rapid ascent of angioplasty—and the decline in the number of bypass surgeries. Were we to go back to him today, we'd likely hear a similar story of how statins reduce demand for angioplasty by preventing the buildup of arterial plaque. This series of irrevocable market shifts from one solution model to another (often a cheaper, easier-to-adopt solution) is called "disruptive innovation"—and it will save America from our looming healthcare crisis.

In-sourcing Enables Targeting
This article provides a brief introduction to the latest thinking in this area, based on the research completed in support of The Innovator's Prescription: A Disruptive Solution for Health Care, a new book by Clayton Christensen, Jerome Grossman, and Jason Hwang. We will also offer suggestions on proven, practical actions pharmaceutical leaders can take to not merely survive the current disruption, but thrive.

The Power of Disruption

From Bleach to Biomarkers
Let's begin by explaining the origins of the disruptive innovation theory. Introduced in 1997 when Clayton Christensen published The Innovator's Dilemma, the term "disruptive innovation" was coined to define the business phenomenon perhaps best exemplified in the sobering failure of Digital Equipment Corporation (DEC) in the 1980s and early '90s. DEC was a high flier in computing, with its mainframe-beating minicomputers amassing unprecedented revenue and profit growth for more than a decade. The company's leaders graced magazine covers; best-selling books heralded its management philosophies; its performance seemed unstoppable. Then, with unthinkable speed, DEC collapsed.

Unlike more recent failures, this fall had nothing to do with unethical transactions or high-risk investments. In fact, looking back, few fault the decisions DEC's leaders made before and even during the fall. These executives pursued the most profit-rich market segments, they listened to the needs of their best customers and responded well to them, and they aligned their sales and executive performance packages around these objectives. What they didn't do was perceive that the minicomputer industry was in the process of being disrupted by the rise of the personal computer.

It's easy to see why DEC's leadership didn't react to the PC as a threat. The new machines had nowhere near the power of DEC's minis. They didn't, at first, meet the needs of DEC's customers. And they offered much lower margins than the company's traditional products.

But in 1980, the cost of the minicomputer was $200,000, whereas a PC was just $2,500. As the unit cost of computing tools plummeted, millions of people were able to "consume" technology. As a result, IT spending expanded exponentially, creating decades of growth for multitudes of firms. Disruption was not the end of an industry—but rather its reinvention and expansion. The brave few who bucked conventional wisdom and drove the transformation to the PC, and later to mobile platforms, reaped significant rewards. For those who failed to recognize the signs and respond, the results were devastating.

Our chief of cardiothoracic surgery is describing the same principles of disruption that took down the mighty DEC, and showing how they have irreversibly changed the market for bypass surgery. To surgeons, angioplasty was a curiosity and nothing more. It didn't fit within their business model. Cardiologists, however, saw the new procedure as a means to radically expand their care offerings, and quickly adopted it. As cardiologists' techniques and technology improved (for example, with the introduction of drug-eluting stents), angioplasties were used with increasing frequency, until they eventually outnumbered bypass procedures. The next wave of disruption in cardiac care is already in evidence, as preventive drugs such as statins have dramatically reduced the need for angioplasty.

It can take a decade or more for a disruptor to gain traction. Think of mobile phones disrupting land lines, Target disrupting Macy's, or ambulatory surgical centers disrupting hospitals. The transition almost never displaces the existing solution immediately or completely (many cardiac bypass procedures are still completed every year), that's why company leaders so often ignore the early stages of disruptions. Rather, the market for the prevailing solutions erodes as a convergence of advances in technology, business models, and value networks conspire against the best-intentioned, best-informed efforts of legacy providers.

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