Very similar firms often achieve very different results. This is explained by their genetic switches.
Life science firms exist to meet the needs of patients whilst simultaneously creating value for their shareholders or owners. That much is obvious. It is also apparent that firms vary greatly in their ability to do these two things; the different longevities of companies tell us that. What is much less clear is why firms differ so much in their ability to thrive in the market environment. Even harder to understand is why very similar firms, with benchmarked processes, produce very different results, as we observe in the recent very different performances of the big, research-based Pharma and Medtech companies. Of course, luck pays some part in this and “culture” is often used as an overreaching, ill defined explanation. However, neither of these are very useful rationalisations. My research into the evolution of the life sciences industry suggests a more tangible cause: the intriguing idea that firms have the equivalent of regulatory DNA.
To understand these ideas, we need first to understand what research has revealed about the nature of organisational capabilities, their origins, and how they differ from each other. A capability is nothing more than a process that enables something to happen. In that respect, processes are analogous to the proteins that do the bulk of the work in biological systems. And just as proteins are expressed by genes, so capabilities are expressed by ‘organisational routines’ — small, stable and reproducible patterns of activity that every company uses to store information about how to do things. Your body has a genome of thousands of genes that expresses a proteome of up to a million proteins, from testosterone to haemoglobin. Your organisation has a routineome of thousands of routines that express a capabileome of tens of thousands of capabilities, from raising an invoice to screening a drug candidate.
But the biology-industry analogy can be taken one step further. Whilst some of your genes express functional proteins that perform some kind of metabolic function, other genes express regulatory proteins whose function it is to bind to specific DNA sequences, so turning on or off other, functional genes. In the same way, my work is uncovering that an organisation’s routineome expresses three kinds of different capabilities, two of which are analogous to functional proteins and one of which is better understood as analogous to regulatory proteins. See box.
Both hygiene and differentiating capabilities are very visible to customers and competitors. We can see if a firm lacks them (for example, in the case of Theranos lacking hygiene capabilities for compliance) and when a firm has them (for example, Illumina’s strong differentiating capabilities in product development).
Because they are visible to competitors, hygiene and differentiating capabilities are the most likely to be imitated by rivals. Consequently, they are less valuable as explanations of long-term, sustained organisational effectiveness. That leaves us with dynamic capabilities, the organisation’s equivalent of regulatory proteins, which create and shape other capabilities. We know that, in biology, creatures with almost identical functional genes can differ greatly because of small but crucial differences in regulatory genes and proteins. The finches of the Galapagos Islands that inspired Darwin are good examples of this, although Darwin knew nothing of DNA regulation, of course. Such biological analogues hint that even small differences in a firm’s dynamic capabilities, which are analogous to its regulatory proteins, may be the explanation for substantive differences in effectiveness between firms that look superficially very similar.
The challenge for management scientists then is to identify those capabilities that act as regulatory switches, enabling and disabling other parts of the firm’s routineome and so leading to differences in organisational effectiveness. Every organisation, like every organism, probably has a large number of dynamic capabilities that act in a complex manner in different parts of the company. However, my research has uncovered four dynamic capabilities that have fundamental, systemic influence on an organisation’s effectiveness. In that sense, they are analogous to master regulatory genes and proteins, influencing a cascade of subsidiary capabilities and so directing the overall development and effectiveness of the firm. These four master dynamic capabilities are described in the following paragraphs.
This is the capability to create knowledge that has the characteristics of an organisational strength. In other words, knowledge that is valuable, rare, hard to copy and upon which the organisation can act. Although insight creation is often conflated with customer insight, it can equally be knowledge relating to any part of the value chain. Insight creation enables other capabilities by reshaping and improving knowledge assets, which is necessary for differentiating capabilities such as proposition development. For example, insight into how payers vary according to their risk attitudes enables a firm’s differentiating capability to understand market heterogeneity and to develop and target extended value propositions. Similarly, insight into causes of cost variation in the supply chain enables firms to develop an industry-leading cost base, whilst insight into disease mechanisms can inform drug discovery. In all cases, the ability to create some new piece of valuable, rare, inimitable and organisationally useful knowledge is a dynamic capability that switches other, differentiating capabilities on and off.
The capability to create insight is often confused with the capability to gather, process and analyse data. In fact, whilst such organisational routines for data processing are often a necessary prerequisite to creating insight, they are rarely sufficient. On its own, data processing may lead to new knowledge but generally of the generic type that is easily available to all firms in the sector and which does not enable differentiating capabilities. The creation of true market insight almost always requires routines for inductive or deductive learning processes (or a combination of both) in addition to data processing.
This is the capability to envision a desired future situation, the broad path towards that situation, and to communicate that vision effectively throughout the organisation. (Note that although this term is often used loosely, my use of it is influenced by Bass’s important work on the topic.) Transformational leadership enables other capabilities by allowing firms to prioritise the differentiating capabilities they need to develop, thereby allowing resources to be allocated accordingly. For example, a clear vision of the future development of a given technology can enable the differentiating capability of selecting from alternative new product possibilities on the basis of commercial viability. Similarly, the clear communication of a vision of operational excellence can enable the disciplined maintenance of a low cost base supply chain.
Transformational leadership is often confused with either detailed management or charismatic leadership. In fact, attention to detail and charisma may contribute to transformational leadership, but they do not appear to be sufficient on their own. Rather, clarity of vision and consistency in using that vision to guide action seems to be central to the way in which transformational leadership enables differentiating capabilities.
This is the capability to perform tasks across functional boundaries. My use of the term here is based on another of my research streams and covers two aspects of cross-functional working: alignment of individual behaviours and managing intra-organisational conflict. Cross-functional working enables other capabilities by minimising negative behaviours, such as politicking, and maximising positive behaviours, such as information sharing. For example, pooling of information about patent loss, customer needs and technological possibilities enables the differentiating capability to identify opportunities for profitable imitation. Similarly, positive interaction between headquarters and operating affiliates enables, in global companies, the effective localisation of global competitive strategies.
The capability to work cross-functionally is often confused with collaborative teamwork and structural devices such as brand teams and other matrix structure working groups. In fact, whilst such commonplace management techniques often contribute to cross-functional working, they may also hinder it by blurring task ownership and encouraging compromise instead of consensus. Effective cross-functional working involves the alignment of goals and removal of sources of conflict, such as shared resources and asymmetries of status.
This is the capability to process complex information effectively. It combines two elements: the ability to combine knowledge from multiple disciplines and the ability to use that information in a rational, considered manner. Critical, metadisciplined thinking enables other capabilities by enabling better choices between options and overriding irrational, habitual decision making behaviour. For example, critical, metadisciplined thinking may avoid the allocation of resources between countries on traditional, population-based lines and instead lead to resource allocation based on the existence of targeted, global segments. This dynamic capability may also significantly change the assessment and comparison of market opportunities, so altering choices about which market to attack and thus shaping resource allocations.
Critical, metadisciplined thinking is often confused with evidence-based decision making. Whilst the use of data to support decisions is often a component of critical thinking, life science firms often mistakenly assume that the only good kind of data is quantitative and so restrict their evidence base. Critical, metadisciplined thinking is characterised by using multiple types of data and combining methods from both natural and social sciences.
To summarise then, superficially similar life science companies often differ greatly in their performance and effectiveness, even when many of their major processes are very similar. This is an important and puzzling paradox. Although luck and culture may partly explain this phenomenon, if we are to learn from the most effective companies, we need a better understanding of what makes them different. Clearly, the answer lies in superior capabilities, expressed by distinctive organisational routines. However, neither hygiene capabilities nor differentiating capabilities seem to provide a sustainable explanation of firm effectiveness. Instead, dynamic capabilities seem to be the answer. Just as significant differences between genetically similar organisms can be explained by small differences in regulatory proteins, significant differences between superficially similar life science companies can be understood in terms of small differences in their dynamic capabilities, which enable and disable the other abilities throughout the value chain. And, just as all regulatory proteins are not equally important, there appear to be four dynamic capabilities that are dominant influences on firm effectiveness.
The practical implications for this are clear. The leadership and management of life science companies need to concern themselves with their firm’s entire complement of necessary capabilities – its capabileome – but they need to pay particular attention to the organisational routines that
express the four master dynamic capabilities. Without these four switches of success, every other process in the organisation’s metabolism will be at best hindered and at worst incapacitated.
Brian D Smith is the world’s leading authority on the evolution of the life sciences industry. Working at Bocconi University, Italy and University of Hertfordshire, UK, his most recent book is “Darwin’s Medicine: How Life Science Business Models are Evolving”. He welcomes questions and comments at firstname.lastname@example.org