I have a lot of sympathy for Theranos, the innovative diagnostics company, and its visionary CEO Elizabeth Holmes. One minute lauded, the next pilloried, their attempts to reshape healthcare have recently been overshadowed by regulatory issues. This fall from grace has important lessons for us all and can be explained by evolutionary science. As usual, let me explain the science before I return to the practical lessons for the life science industry.
As explained in Andreas Wagner’s wonderful book, The Arrival of the Fittest, biological evolution is a game of blind man’s buff. Genetic variation results in species stumbling through a multidimensional evolutionary space, each mutation a random step towards no particular goal. Many, many variations can occur and accumulate with no discernible impact on the biological viability of the species. Some genomes get tantalisingly close to making a huge difference in evolutionary fitness, only to take the next, random step in the opposite direction. The point of Wagner’s explanation is that many changes are needed to make a positive difference while only one or two are needed for evolutionary progress to fail.
Now, as regular readers of this column will know, my own academic research applies the concepts of evolutionary science to the life science sector. Just like a biological system, our industry is a complex adaptive system. Firms are analogous to organisms, they have their own DNA in the form of organisational routines and there are groups of organisations that share the same DNA, which we call business models. These are directly analogous to species and they evolve by mutation of their routines.
The parallels [between biological and]… industry evolution are strong and informative
Linking back to Wagner’s ideas about wandering through a multidimensional evolutionary space, the parallels with industry evolution are strong and informative. A firm will vary or mutate its routines, deliberately or otherwise. These variations accumulate and, once enough changes have occurred, the organisation will develop a new trait, such as an organisational capability, that it did not have before and which increases its evolutionary fitness. Equally, it may mutate many routines and get teasingly close to developing a new capability but fall just short of that evolutionary step. The only significant difference, in theory, is that while the biological mutation of genes is random and unguided, the mutation of organisational routines is supposed to be deliberate and guided by the careful ruminations of highly intelligent executives. I say ‘in theory’ because there has been some very interesting empirical work that suggests that practice is different. Hannah Marshall and others have measured and compared the extinction rates of firms and biological species. These researchers find that the ‘intelligent’ mutation of firms and the random mutation of biology result in pretty much the same outcome. It is, to quote Marshall, ‘as if managers act at random’.
So what does this mean in practice? Well, a CEO trying to evolve a new, innovative business model is, in effect, trying to accelerate evolution by directing the mutation of his or her firm’s DNA, its ‘routineome’. The CEO has no option; it has to be done to get to market first and better. But, as Wagner’s work tells us, it’s easy to get it wrong. In particular, it’s easy to make lots of successful mutations and get most of the way to a fabulous new model only to find that a tiny number of key mutations either weren’t done or went wrong. Looking from the outside, this seems to be Elizabeth Holme’s problem at Theranos. Great technological and commercial capabilities but something went wrong in the part of Theranos’s routineome that expresses the genes for regulatory capabilities. From what I can see, Ms Holmes is a seriously bright woman and my bet is she’ll fix the problem. But the fact that such an innovative firm can stumble as it explores its evolutionary space is evidence of how hard this is. And there is hope for other firms. What we know about the routineomes (and the complementary capabileomes) of different life science business models is improving all the time. That’s what I spend my life researching.
The takeaway? If you’re trying to design a business model or evolve an old one, think through the traits it needs and how that translates into its routineome. That puts you into a position to do your own equivalent of genetic engineering. Without that knowledge, you really are playing blind man’s buff. With it, you’re not guaranteed to get there but you’re less likely to take a fall like Theranos. And in developing a new business model, just as in developing a new product, anyone who falls because they haven’t made use of the latest research in the field isn’t just unlucky, they’re naïve.