Many of the industry leaders I interview for my research seem to live in existential fear. They are typically supremely confident people, assured that their decisions are good ones given what they know. But it is a shared characteristic that what they fear is not making the wrong decision but not knowing, or not understanding the significance of, something that would render their strategic choices flawed. Their fear is calmed when we discuss how an evolutionary perspective can reduce that risk. A recent example illustrates this and might help you too. As usual, I’ll make a short scientific diversion before coming back to the practical takeaways.
Darwinian evolution often gives the appearance of design. A giraffe’s neck, an anteater’s tongue and humans’ opposed thumbs all seem designed for a purpose. It’s an illusion of course. The process of natural selection creates an appearance of evolution making design ‘choices’. Back in time, my ancestors and yours ‘chose’ to have cell nuclei, then spines, then to lay live young and so on. Evolution made different ‘choices’ for the ancestors of bacteria, jelly-fish and reptiles, for example. The appearance of deliberate design comes about because the ‘choices’ were dictated by reproductive success. In the circumstances of the time, the ‘choices’ to be eukaryotic, vertebrate and viviparous were ‘right’ for our ancestors because it optimised the survival of the species and its genes. In a sense, these choices were all risk/return trade-offs. Each one had biological costs of some kind but the return on those costs, in terms of gene propagation, was sufficient to make it worthwhile. The evolutionary ‘choices’ that evolution made for my ancestors enabled my species to cover the earth. But the quite different evolutionary choices of prokaryotes led them to make up most of life on earth. The evolutionary risk/return ratios were very different but the pay-off was similar.
Management scientists who, like me, use Darwinian evolution to understand the life science industry, observe the same thing happening in industry. Faced with business model ‘choices’, some companies opt for high-cost, high-return models, which we typically refer to as research based. Other firms opt for lower-cost, lower-return models, which we typically label ‘me too’ or ‘generic’. It’s important to recognise that these are not right or wrong choices. They are simply right or wrong for the situation. The evolutionary ‘choices’ made by research-based companies made them the most profitable companies in the sector. But the quite different evolutionary choices of generics made them the most prescribed products on earth. The risk-adjusted rate of return on the two models is not dissimilar, even if the ratios are very different.
So what’s this got to do with our industry and its leaders’ fear of missing something? Well this Darwinian view can be used to make sense of industry events and put them in perspective. An example of this occurred as I prepared this column. Wu Yiling is chairman of Yiling Pharmaceutical, a Chinese Traditional Medicine (CTM) company. He has recently announced new emphasis on demonstrating the efficacy of some herbal medicines by Western-style studies. Similarly, Tasly Pharmaceutical recently became the first company to get a Chinese herbal remedy through phase III with the FDA. On the surface, this is irrelevant or at best trivial to companies operating traditional research or generic business models. The executives I worked with saw CTM as a different, unrelated market.
But when they looked at it through Darwinian eyes, their perspective changed. These CTM companies are choosing a risk level somewhere between that of research-based and generics and they are expecting returns somewhere between those two models. If they get the numbers right, they might well achieve a better ratio. In some contexts, such as in the massive Chinese and diaspora market, they might even beat the old model. A hint of this occurred with the new Chinese law promising equal status to CTM and Western medicine. From this perspective, in the market to attract investment and win share, CTM may be neither unrelated to nor irrelevant to Western business models. Along with analogous approaches, such as those for leveraging the value of new indications for old medicines or cannabis, for example, CTM plus Western science might be a viable, new and competitive business model. In my research, I call it the Midas Model, because it transforms the mundane into gold.
So, our industry leaders might be right if they lie awake wondering if they’ve missed something important. Apparently trivial things might be signs of something new and fundamentally important. No environmental scanning or business intelligence model can wholly assuage that existential doubt. But a Darwinian perspective can and does offer a new way to look at things and reduce the risk of a nasty strategic surprise.