Going back to the garage: business model learnings from the world of IT

 

It has long been recognised that the pharmaceutical industry needs a shift in its business model, in order to survive and thrive in the new healthcare age, where companies need to react quickly to advances in technology and changing market conditions. However, many struggle to make this shift, or see how it can be achieved at an industry or even company wide scale.

I have worked a lot in the past with companies in the IT sector such as Hewlett Packard, IBM and Cisco and for inspiration we could look at the shifts made in that industry. Around the turn of this century, the technology world faced many analogous issues to pharmaceuticals: a fast moving and highly competitive industry, where double digit growth had significantly stalled; there was a heavy reliance on R&D, but its innovations were quickly commoditised; and new complex customer and influencer networks including for the first time both consumers and large global powerful retail organisations with tough procurement systems and product short lists. Sound familiar?

The renaissance of the IT industry since that time, offers some lessons for the pharmaceutical industry, as it was business model innovation and diversification which became the saviours of the industry.

There are many examples; the Apple story and their focus on products that are state-of-the-art for design and ease-of-use is well known, as is that of Dell, who re-invented the product specification and distribution model enabling them to get closer to their consumers. One of the forefathers of the industry, Hewlett Packard, famously went "back to the garage": an initiative inspired by the garage from which its founders, Messers Hewlett and Packard, first established their partnership. Struggling to keep up in the internet age, the company went back to the future, invigorating its long-neglected research arm to focus on disruptive technologies, to become a customer-focused and integrated provider of information appliances.

Let us look in a little more detail at two specific examples that demonstrate the value of business model transformation: Acer and IBM.

Acer is one of the lesser known success stories of the industry. In 2012 Acer was the fourth largest personal computer company in the world but it was not always so. The organisation was struggling in the late 1990s. Then as many in the industry flocked to imitate and emulate Dell's direct model, Acer took a different route. The company shifted from being a manufacturer to a designer, marketer and distributor of products, while shifting its production to contract manufacturers. The business model behind this transformed Acer from a high technology, hardware-focused company, to a customer-centric company. It made a significant shift and investment in third party channels that drove high levels of customer service. By selling their manufacturing functions, Acer was also free to source hardware from multiple suppliers ensuring they had the 'fresh' but not always first in class products which customers wanted. Success was immediate: from 2000 to 2003 company sales increased 48 percent to $4.6 billion and have continued to rise ever since.

IBM made perhaps the biggest transformation of all. In 2005, the company sold its loss making personal computing business to the Chinese company Lenovo. Just think about that for a second. IBM, International Business Machines, BIG BLUE itself, sold its PC business! Such a move would not have been countenanced just a few short years before. Instead of merely selling and servicing technology, IBM became an IT and business service business. It focused its vast internal resources – from software programmers to research scientists – to help companies re-work their own business processes. The move was whole-hearted and transformational. The number of employees focused on business rather than pure technology leapt from 3,500 in 2002 over 50,000 in 2005. IBM made many acquisitions to enable that leap including that of PwC consulting. It is constantly looking to refine and transform its model. Today it is investing in big data technology; a smart move considering that every day, we create 2.5 quintillion bytes of data – so much in fact that 90% of the data in the world has been created in the last 2 years alone.

As I said, it was not only business model innovation but diversification that shifted the fortunes of the IT industry. Companies took different routes but what they all had in common was their focus on delivering value creating solutions, collaborating with customers, influencers, policy makers and even competitors and re-defining their model to best support their business. Perhaps going 'back to the garage' to define our own innovative business models might have a similar impact for the pharmaceutical industry too.

By David Coleiro
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