I just came back from vacation in Northern Michigan (check out Art’s Tavern in Glen Arbor if you are ever in that neck of the woods) where I crossed off a number of books from my reading list including How Will You Measure Your Life? By Clayton Christenson.
I’m a big fan of Christenson’s theories on business and economics. I learned of his most recent book when I saw an interview he did to promote his most recent work. More on this in a moment. If you’re not familiar with Christenson, you’re really missing out. His theory of disruptive innovation is one of the most surprising and fascinating theories of modern industrial evolution. The examples of its application are legion. But for now, I’ll focus on how it applied to Blockbuster (the market share incumbent) and Netflix (the disruptive upstart).
Essentially, the theory states that disruptive innovators enter the market from lower margin tiers. They then progress up the market at an accelerated clip – where the market leading incumbent is unable to keep up. Here’s how it played out in the DVD rental biz. Remember when you needed to return the videos or DVDs to Blockbuster and you couldn’t make the time to get back to the store? So you ended up returning them on your way home from work on a Tuesday and paid $10 or so in late fees.
Turns out, that $10 accounted for 60% or so of Blockbuster’s revenue. And you didn’t like paying it, but you did. Because it was better than the alternative – which for a long time was nothing. Then along comes Netflix. They don’t have late fees. And you pay $20 or so a month, and you have to wait for the movies to be returned, but at least you don’t pay late fees. So maybe you try it for a while.
Now here’s the important part. The executives at Blockbuster heard about Netflix – and they heard about it long before you did. And they studied it. And here’s what they said: “We make more money off of late fees. If we do this, we reduce our margins. And reducing margins is BAD. And these guys are small, and you have to wait to get your DVDs. So we shouldn’t get into this business.”
The problem is, this logic makes perfect sense. Perfect sense that is, unless you know how the story ends. Consumers reject the higher margins, adjust their habits, and go with a more cost-efficient solution which meets their needs. And over time, that more cost-efficient solution evolves. The selection improves. The DVDs ship faster. The cost comes down. Eventually, it evolves to the point where you ask “Hey. Why did I ever go with Blockbuster in the first place?”
Christenson said the profit was no longer in the pills – it was in some kind of services which surround the pills. However, he said he didn’t know enough about the pharmaceutical business to identify exactly what those services were.
So that’s the basis of disruptive innovation – thinking about the problem in a new way, developing a new business model, and innovating at a clip which your competition cannot keep up with. In the interview, Mr. Christenson was asked about what Pharma could do, and if it was poised to be disrupted. In fact, another one of Christenson’s books, The Innovator’s Prescription, talked about this. Christenson said the profit was no longer in the pills – it was in some kind of services which surround the pills. However, he said he didn’t know enough about the pharmaceutical business to identify exactly what those services were.
Pharma and Mobile Health
Recent evidence in the ability of mobile apps to aid significantly in behavior modification gives me a pretty good idea of what those services might be. There are commercially successful mobile apps designed to help you control your portions and food intake, train you to get off the couch to running a 5K race, and help you sleep better. In fact, some companies are seeking 510K approval from the FDA to provide evidence-based mobile apps which demonstrate that you are more likely to control a chronic disease with the aid of a mobile application.
The well on Blockbuster ran dry long ago, and the well on blockbuster drugs is running empty too. Could mobile health be the next wave for life sciences? And do pharmaceutical companies have the discipline to make the investment in lower margin products which one day may subsume their current business? I’d say they need to make the investment now and focus on their core business – health. Otherwise, they risk being relegated to the same fate as VHS.