Earthquakes are rocking our industry
If your company is involved in providing products or services to the ‘drug development chain,’ that is, the chain of companies devoted to discovering, developing, refining, testing and introducing new pharmaceutical compounds and devices, you know that the market is undergoing seismic shifts. The market landscape is changing – quickly. Rather than having the luxury of worrying about a level playing field, you’re being asked to play on a field that is rocking violently. How can you best compete under these conditions?
To find one answer to this question, let’s look carefully at the marketplace, which is being buffeted by several major forces right now. Chief among these are:
- The patent cliff
- An increase in outsourcing
Taken together, these have major implications for companies working in the drug development chain who are seeking a strategic competitive advantage. Let’s take a look at these and discuss how their confluence can point the way to strategic choices that can build a strong competitive position.
The patent cliffWhat use to be a vertically integrated market is now becoming splintered.
It’s no secret that many major drugs are going to lose patent protection in the next 3-4 years. This loss of patent protection is known as the “patent cliff,” so-called because of the steep decline in revenues expected to affect Big Pharma’s blockbuster drugs. This is forcing the major players to contract. As they shed employees, these previously vertically integrated companies will be carefully re-defining their core competencies. They will be relying more on in-licensing. What used to be a vertically integrated market controlled by a few large companies is now becoming splintered.
The increase in outsourcing
These drug companies are going to be sharpening their market focus. Pfizer, maker of the world’s best selling drug, Lipitor, is going to be getting out of research focused on heart disease. And this is just one example; there are many others, and the turmoil will persist throughout the drug development chain. There will be a continued hunt for significant opportunities to drive top line growth, and an increase in outsourcing to control expenses. The end result: a significant increase in demand for suppliers. One source reports that as much as one in every five dollars spent on R&D is going to an “outside expert.”
Competition is going to be fierceThe end result: an increase in competition.
The contraction of Big Pharma means that many former employees will be looking for jobs – and not only in sales. Many companies are curtailing R&D spending or shrinking their R&D staffs. Many of these employees will see the industry’s increase in outsourcing and in-licensing as an opportunity, and start their own companies, using their own networks within the industry for their initial contracts. Coupled with this is the increase in offshore participation in the drug development process; the FDA is opening overseas office in China, India, Europe, and Latin America. The end result: an increase in competition, both from generalist organizations willing to do anything to survive, and from more specialized competitors.
Driving towards success?
The drug development industry is characterized by several factors, including but not limited to:
- Contraction of the major players
- High cost of development for a finished product
- Presence of significant regulatory oversight
- Increased outsourcing to suppliers
- Increased worldwide competition
Situations like this have been faced by many other industries, but one that stands out is the automobile industry. Just as the major drug companies used to control drug development all the way from the initial stages of R&D through final marketing, so the auto manufacturers used to build the entire car, from mining the ore all the way through final assembly. When Henry Ford started his car company, vertical integration was one of the few ways to control the quality of the final product. The Ford Motor Company even farmed sheep to make the wool used in the seat covers.
There were many hundreds of independent car manufacturers in the early part of the previous century. More than a hundred years later, that number has contracted by a couple of orders of magnitude, and all bets are off about the survival of even some of the biggest giants. Increasing competitive pressure over the last century forced the auto manufacturers to focus on their core competencies. In a majority of cases, the manufacture and assembly of sub-components was spun off to more capable, more specialized suppliers. The major automobile companies do not now build alternators, or seats, or ride control systems. They limit their activities to the design, assembly and marketing of vehicles, leaving a large portion of the remaining tasks to suppliers.
Competition among automotive parts suppliers
As the automobile manufacturers shifted from vertically integrated to dependent upon suppliers, several things occurred in sequence. Initially the increase in demand for suppliers caused an increase in the supply. As the market matured, there was a shake-out, and only the most competitive suppliers remained.There will be a growing demand for suppliers.
The drug development industry is in a similar situation. As Big Pharma abandons its vertically integrated business model, there will be a growing demand for suppliers. This need will be filled by a rise in the number of suppliers, and then followed by a ‘shake-out’ during which the number of suppliers will be culled by competitive pressures.
Looking back, with hindsight, which are the automotive suppliers that succeeded? Those that succeeded had the following. They had a clearly defined market focus, and a clearly defined target customer. They were able to promote a clear and compelling differentiating benefit, an advantage to their customers available only by choosing them as a supplier. In addition, they were able to provide a clear and compelling reason to believe in the benefit that was verifiable by their customer-to-be, before purchase.Vertical integration has given way to a network of supplier relationships.
Of course, the timing of the consolidations in the automobile and drug development industries is different, but some similarities are obvious: What used to be an industry with many smaller players has consolidated dramatically. These consolidated giants tend to focus on marketing and a small number of other core competencies. Vertical integration has given way to a network of supplier relationships. And success among these suppliers is due in large part to specialization, and strong relationships with their customers. They don’t try to make every component in the car, just a few, and they do it so well that the barriers to entry are high for competitors.
How do you compete?
The drug development chain is in turmoil. Yes, the need for services is projected to increase. But the number of companies competing for business is expected to increase as well; competition will be fierce. And the economic downturn will encourage some suppliers to sell on (low) price alone, hoping to keep the doors open long enough to weather the storm. Meanwhile, selling on price will depress profits for the entire segment.
Just as in the auto industry, specialization is one strategy that will provide competitive benefits to life science and biotech service firms working along the drug development chain. First, specialization encourages a clearly defined market focus. You will be less tempted to chase after work outside your core capabilities. Second, specialization makes it easy to define (and to build a list of) your target customers. Third, a specialist’s expertise and experience provide a clear differentiating benefit, when compared with generalist competitors. And fourth, you will be able to provide compelling reasons to believe in your claims, as your list of successful engagements grows.
These four factors: a clearly defined market focus, a clearly defined target customer, a clear and compelling differentiating benefit, and a clear and compelling reason to believe are exactly the factors that we said would be necessary to compete in any market facing these fundamental pressures. Specialization can provide all of these things, and so is worth careful consideration as a competitive strategy.
Specialization is not for everyone
Specialization doesn’t work for all life science companies. Drug development companies that are hoping to sell molecules to Big Pharma have already specialized (in the therapeutic targets of their molecules) The large service businesses that compete successfully in several industry segments (e.g., Quintiles) clearly don’t need to specialize to compete. The firms that sell on price alone (e.g., some overseas suppliers) don’t need to specialize to compete. However, if you are not the biggest, and not the cheapest, how do you win business? What will be your “secret sauce,” your differentiating benefit? Why will customers choose you? You are not the biggest, so your breadth of service is going to be more limited. You are not the cheapest, so you have to provide additional value. The clearest way to differentiate yourself is to narrow your focus, to go deep rather than broad or cheap.
The smaller the firm, the more important it is to specialize. Companies are most comfortable buying from firms that are in roughly the same market position (e.g., market leaders like to buy from market leaders). When selling to firms that are significantly larger, specialists remove one of the objections that decision makers often think, but will rarely state out loud, “They’re too small.” This objection might take the form of, “Can you handle our project?” and specialists can answer this by saying, “This kind of project is the only type we do handle.”
The benefits of specializationSpecialization provides several key benefits.
When you ‘go deep’ rather than big or cheap, specialization provides several key benefits. First it is easier to provide value to clients. As you spend time in your chosen market sector, you will notice trends that generalist competitors won’t. These insights will enable you to address your customers’ issues more efficiently. Second there is a significant opportunity to charge higher fees. (Heart surgeons charge more than primary-care physicians, after all.) Third, it is easier to fight the commoditization of your market segment by being a specialist. Specialists offer methods and insight unavailable from generic providers and this rarity decreases the chance that you will be seen as just another supplier. Specialists face less competition, in general. Fourth, specialization makes it easier for your customers-to-be to make a decision to choose you, and the sales cycle will be less about selling, and more about consulting.
Define your specialization precisely
If you are going to specialize, there are some things that you must do. You must define your specialty clearly. You can’t specialize in everything. The decision to specialize is a tough one, because it feels like you will be walking away from a lot of opportunity. But the opportunities you walk away from will be replaced by work for which you are more clearly suited, work that you hopefully enjoy more, and work that has the potential to be more profitable. The decision to specialize comes with a certain amount of fear. Remember, however, that the narrower your focus, the more distinct you will be from your generalist competitors, and the easier it will be for your customers-to-be to choose you on the basis of your expertise.
Declare your specialization clearly
You must declare your specialization, loud and clear. The internet has reduced the cost of identifying potential suppliers to almost nothing. In less than an hour, anyone can find just about anything. That is wonderful, as it means that your customers-to-be will have an easy time finding you. But it also means that they’ll have an easy time finding your competitors – all of them, both the generic ones and the specialists. Declare your specialization clearly, and you will draw towards you those companies that fit your definition of a perfect customer, and repel those who don’t.
You must announce your specialization, which means being explicit in all your marketing materials about what your specialization is, and what benefits it provides your customers. Declaring your specialty means stating this clearly in all the ‘touchpoints’ where customers-to be come in contact with you. (I’ll talk more about these touchpoints in a future issue.)
You should also be very specific about where you direct your marketing activities. Remember how I said that one of the benefits of specialization is that building a list of customers gets easier? The same is true for choosing what marketing channels you use to communicate with your customers-to-be; this too should get easier. In general, you will be able to eschew expensive channels like advertising in expensive, generalist journals, in favor of more targeted approaches, e.g., direct mail, participation in trade shows that cater to your market niche, advertising in more specialized publications, etc.) As you narrow your market focus, you will be able to rethink the marketing channels you use in terms of your positioning and brand character. The first step, how you actually define your positioning and your brand character, are complex subjects that unfortunately are too extensive to go into here.
Specialization is no panaceaSpecialization can help your competition position.
Specialization is no panacea. Competing is hard enough, and is more difficult when playing on a field rocked with the seismic shifts that our industry is currently undergoing. While it will not guarantee success, specialization can help your competitive position, however, by increasing the relevance of your service offerings to your customers-to-be, and providing a compelling differentiating benefit that distinguishes you from your less specialized competitors.
Ideas on which this newsletter were based come from many sources, including David C. Baker (recourses.com) and Blair Enns (winwithoutpitching.com).
 contracting from 40 to only 11 from 1960 to 2000; www.bcg.com/impact_expertise/publications/files/Shifting_Battlegrounds_July_2007.pdf –