31-33 - CAPABILITY DEVELOPMENT - Strategic behaviour

In my academic field of Generalized Darwinism, life sciences companies roam the healthcare ecosystem like animals in a jungle. And like animals, these firms only survive if they have the capabilities to do so. The harsh realities of the jungle and of the market mean, for example, that neither a bird with a broken wing nor an FDA non-compliant life sciences company will survive for long. In business as much as in biology, it is capabilities that count. Life sciences companies know this. They spend a lot of resources recruiting people with industry experience and many supporting firms profit by supplying ‘industry tailored’ training.

But there are two flaws in this ‘industry tailored’ model of capability development. First, the life sciences industry, like the jungle, isn’t a homogenous environment – it has many sub-habitats. Just like the jungle has rivers, undergrowth and treetop canopies, each of which demands quite different survival capabilities, so the life sciences sector varies in its care settings, payer environments and technology contexts.

There was a simpler time, decades ago, when the capabilities needed to succeed were similar for all life sciences companies. But no one today would suggest that a small molecule, generic primary care company needs the same capabilities as an orphan drug, speciality company. And a large oncology-focused company exists in a different healthcare habitat from either. Second, the life sciences jungle isn’t static. Sociological forces, like demographics and economics, and technological forces, from systems biology to artificial intelligence, are shaping the healthcare ecosystem just like climate change is transforming some natural environments. These two truths of today’s life sciences industry – heterogeneity and dynamism – have an important practical implication: the traditional approach of adopting ‘industry best practice’, which is simply a euphemism for ‘those capabilities that worked for others, yesterday’, is unlikely to make a firm capable of surviving and thriving in its own, particular market habitat tomorrow.

Market heterogeneity and dynamism mean that capability development in our industry today is qualitatively different from decades past. The days when firms could simply copy capabilities from anywhere in the industry by emulating ‘best practice’ are long gone. Whether you’re an individual concerned with your own skills or a leader responsible for your firm’s wider capabilities, you now need to think deeply about three distinct but connected questions. First, what are capabilities and where do they come from? Do you understand the differences between hygiene, differentiating and dynamic capabilities, their complementarity and their microfoundations? Second, what are the capabilities required of your future business model? How do they differ in priority and design from those of your existing business model? And finally, how can you embed and maintain those capabilities? How do you build them to be both adaptable and sustainable? In this and the next three articles in this series, I’ll address those existential questions.

Your firm’s capabilities are simply its abilities to do things effectively. They are not the same thing as individuals’ knowledge, skills and attributes or the firm’s assets and resources, although all of those things are ingredients of a firm’s capabilities. In my academic research, I draw parallels between biological proteins and business capabilities, because they are the workhorses of the organism and the organisation respectively. And just as each species of animal has a characteristic proteome of thousands of proteins, each life sciences firm has a capabileome of thousands of capabilities that is characteristic of its particular business model.

The proteome/capabileome parallel goes further. Just as there are several kinds of biological protein, such as antibodies, enzymes and hormones, there are three kinds of capability. Hygiene capabilities are those that are essential to survival, such as the capability for regulatory compliance. Differentiating capabilities are those that create competitive advantage, such as the capability to design a compelling value proposition. Dynamic capabilities are those that enable other capabilities, such as being able to create market insight, which enables strategising. Your firm’s capabileome will include many of each of these three kinds of capability. And just as you share some of your proteome with other species, many of your firm’s capabilities will be the same as those of other life sciences companies. Equally, some of your firm’s capabilities will be characteristic of your business model and shared only with some very similar firms.

The final parallel between biological proteins and business capabilities is that they are each the expression of deeper factors. Proteins are expressed by genes that are written in the four letter code of bases, ACTG. Similarly, capabilities are the expression of organisational routines, the many little sub-processes that combine to allow your firm to, for example, segment the market or prepare cash flow projections. And just as genes are built from base pairs, organisational routines are built on a set of four microfoundations, as shown in figure 1. If you look carefully, you will see that these microfoundations, like their analogous base pairs, abbreviate to ACTG.

The parallels between capabilities and proteins, routines and genes, bases and microfoundations are much more than extended metaphor; they are a useful model that guides capability development. If you wanted to transform an organism’s capabilities, to teach a chimpanzee to talk for example, then training would be insufficient. You would need to reengineer its genome. In exactly the same way, if you want to transform an organisation’s capabilities, from primary care focus to a speciality focus for example, you will need to change the microfoundations that shaped those newly necessary capabilities.

A business model is all those firms that share the same or very similar strategies, structures, capabilities and cultures. In my research, I identified no less than 26 different business models in the life sciences sector, as shown in figure 2. Each of these is very different from the others but firms that adopt the same business model are very similar to each other, even if they operate in different markets. So your firm’s business model is unlikely to be unique. You are likely to share it with many other similar firms. At the same time, your business model is likely to be very different from many other firms in the industry. In the jungle that is the healthcare ecosystem, each life sciences business model is analogous to a species. Each business model is exquisitely adapted to a particular habitat within the market and, consequently, not well suited to other habitats in the market. Imagine, for example, Alexion’s rare disease business model trying to compete with, say, Viatris in generic small molecules, or vice versa. For leaders tasked with capability development this speciation of life sciences business models has two fundamental implications, the first regarding the choice of capabilities, the second concerning their development and maintenance.

Consider first the decisions your firm has to make about what capabilities it needs. Just as different species need different capabilities, so too do different business models. For example, those firms investing heavily in rare-disease business models, such as J&J, need the capabilities to find and engage with their very small patient populations, whilst a branded generic company, such as Sandoz, does not need that capability.

At the same time, Sandoz, Teva and other generic companies know that they need to be highly capable in the tendering processes that are quite alien to rare disease markets. These are very obvious examples, chosen to make a point, but if you think carefully about almost any other capabilities – continuing medical education, omnichannel design, market access – it will soon become clear that each business mode requires its own characteristic capabileome, just as each animal species has a characteristic proteome. Within each business model, capabilities will vary in detail but are, at a fundamental level, quite similar. This means that copying ‘industry best practice’ makes little sense unless what you actually mean is ‘best practice for my business model’. Even then, imitation of others’ capabilities makes little sense unless it allows for how your market is changing and for the business model you want to be in the future, rather than what business model you have been in the past.

Now consider how to build and maintain the capabilities you have decided are essential for your future business model. As discussed above in my example about the talking chimp, capabilities can’t be implanted merely by training. The embedding of any given new capability in your firm involves two equally essential steps. First, identifying what routines are needed to express the new capability. For example, the capability to create market insight is expressed by, among others, routines for inductive, abductive and deductive translation of information into knowledge. Once the necessary organisational routines are identified, they must be enabled by assembly of the required microfoundations. For example, the routine for abductive knowledge creation requires, among other microfoundations, understanding of abductive reasoning, groups designed to combine qualitative and quantitative abilities and team processes for iterative knowledge building loops. When I study firms that are highly capable in any respect, their capabilities are always underpinned by the right routines built on the appropriate microfoundations. Conversely, firms that demonstrate capability weaknesses show either gaps in their routines or flaws in their microfoundations, or both.

This understanding of capability development, based as it is on the principles of evolutionary science and developed from years of practical application in life sciences companies, boils down to a road map for life sciences leaders, as summarised in figure 3. In essence, if life sciences leaders want their firms to compete in the future, it’s not sufficient to simply change strategy and structure. It’s capabilities that count. And the right capabilities can’t be copied from elsewhere. They must be built, from their microfoundations and organisational routines, to fit with the future market environment in which you must survive and thrive.

Changing an organisation’s microfoundations – why capabilities count

Capabileomes

Business model speciation

Building the future