Pharmaceutical Industry: Innovation “is generating a change in the value proposition”

By October 23, 2013 1 comment
business model

A faster pace of innovation, new business models… the pharmaceutical industry, like many other sectors, has not been spared the need to adapt to the tech revolution.

Interview with Valérie Sabatier, Assistant Professor of Strategy and Director of the Doctor of Business Administration Programme at the Grenoble School of Management for US and Switzerland, on the publication of a paper she co-wrote, entitled ‘When technological discontinuities and disruptive business models challenge dominant industry logics: Insights from the drug industry’, published in Technological Forecasting and Social Change.


L'Atelier: What distinguishes today’s technological innovations from those in the past? What are their particular features?


Valérie Sabatier: We observe that the pace of innovation is speeding up. Of course in the past there were technology discontinuities that had a strong impact on processes or products, but now the pace has accelerated and barriers between industries have come down. We now need to think about strategy in parallel with innovation. The strategic rules which we’ve been following up to now no longer work very well and although in the past technology more or less dominated industry, this is no longer the case.


So what about the pharmaceutical industry?


The contribution which our paper makes to this subject is to point out that aside from innovation there are four other major areas that have changed. First of all the value network and the way companies collaborate. In the pharmaceutical industry in particular we’ve seen new players emerge, especially smaller and medium-sized companies. Secondly, the business model has evolved from a single uniform model to a plethora of models. Very often in fact we’re seeing a range of different business models at one and the same company – one which obeys the current rules, the others being disruptive models. Thirdly, we’ve seen the arrival on the market of new entrants, which follow entirely different rules. We’ve seen this in the music industry too, where a variety of business models based on the Internet have proliferated, yet the major players continue to make money with the same old business model. It was in fact the arrival of Apple on the scene which changed the rules of the game there with a brand new business model. The small players don’t have the clout to change the rules. Lastly, a change in the type of value proposition is helping to transform the medicines industry. The value proposition is no longer based on a single product aimed at very large markets but on providing services and solutions. The industry is now looking to develop a care ecosystem, for instance with medicines plus video games. This change in the value proposition is affecting the whole industry.


But doesn’t innovation continue to follow the clusters model?


Valérie Sabatier: Yes, that’s right, we still have the innovation cluster effect. This was of course even more the case in the design theory that was dominant twenty years ago. But today there is no longer any real dominant design. Rather what we do have is a dominant logic – i.e after a certain time all the business models follow the same logic. So it’s very much in the interests of incumbent companies to maintain the sector’s dominant logic.


So how can a company adapt its business model to these changes in value proposition?


What an incumbent company – one of the pharmaceuticals majors for instance – has to do is to try to uphold the existing rules of the game, while at the same time investing in the new business models. The major companies act as a sort of gatekeeper. They control what in the field of strategy are known as ‘specific complementary assets’, i.e. what a company needs in order to capture the value that is created. The challenge is not only to create value but also to capture it. We’ve seen many startups create a great deal of value – new medicines, new products – without being able to capture it, so that basically their return on investment is poor or even non-existent. The players that do capture value are those positioned at the end of the value chain, those who control entry to the market. It’s therefore in their interests to uphold the rules of the game for as long as possible and even erect new entry barriers.


Isn’t restriction on market entry actually destructive of innovation?


Yes, of course it is, and so the smaller players have to find an alternative way around the problem by investing in new value networks, especially with partners from outside their own industry. This is exactly what we’re observing now, that the barriers between sectors are coming down and the lines between different industries are becoming blurred.

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1 Comment

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Submitted by kalyankar.raj1 (not verified) - on April 26, 2014 at 10:29 am

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