Innovate and Grow - Part I

Turbulent Times Ahead

We are emerging from a few years of turbulence when the market forces significantly impacted healthcare and life sciences growth. On the one hand, the pandemic increased funding for research, development, and adoption of innovations. A massive growth of personal protective equipment (PPE) companies, telehealth, digital health, COVID-19 tests, vaccines, and therapeutics followed. On the other hand, several challenges that emerged during or after the pandemic are still ongoing. Staff shortages and increasing costs due to inflation continue to pressure the system. Despite AI/ML technologies growing fast, their adoption is lagging in most organizations. 80% of biopharma leaders admit that digital transformation should happen quicker, and 60% complain about the shortage of digital expertise. However, the new biotechnologies (e.g., CRISPR, cell and gene therapies, and mRNA, among others) are on a solid path to deliver more products shortly. The geopolitical unrest, inflation, and push for sustainability keep pressure on supply chains, fostering developments of end-to-end visibility, the need for addressing counterfeit medications, waste management, and creating a transformation toward agile distribution. Changes in patient behaviors and increasing patient-generated data are accelerating patient-centric changes in the ecosystem and decentralizing healthcare delivery. The push for equitable health and inclusion affects clinical trials, hiring practices, and leadership development. The pandemic caused a significant influx of capital into life sciences and digital health, but it was not sustainable. It's time to focus more on clinical validation and return on investment. Several companies are affected by high interest rates and more difficult access to VC funding, leading to the closure of several clinical trials and a few bankruptcies.

Getting into survival mode in the face of these challenges is tempting, yet it would be a counterproductive solution. There is no guarantee that the market will return to its pre-pandemic status. On the contrary, faster development of new technologies, increasing political tensions, and societal changes will continue to create difficulties ahead. The question is how to innovate faster and more efficiently without increasing the risk.

How to Manage the Uncertain Future

Some market trends are visibly shaping the environment now, and it is obvious that addressing them is necessary. Others are emerging, and it is too soon to predict their influence on future business. And some other trends may be in a very nascent state or just a fad. Obviously, we cannot consider all of them equally. Yet, suppose we miss an essential market force or are unable to address it in a timely manner. In that case, the company may not be relevant anymore a few years from now, outsmarted and outmaneuvered by competitors. In addition, timelines are compressed now, and we must act faster to understand the market and develop innovations.?

In 2000, Mehrdad Baghai, Steven Coley, and David White proposed the three horizons framework to help companies address various types of innovations and related levels of uncertainty. The framework is still relevant and helpful and has been enriched by work done by Magnus Penker and Innovation 360 Group (https://innovation360.com/) around different leadership styles and cultures needed to manage the innovation pipeline across three horizons.

It's important to acknowledge that three horizons do not translate into timelines, although there were attempts in the past to associate them with specific industry dynamics. They are related to levels of uncertainty – with horizon one being the least uncertain and horizon three the most.

Horizon 1

Horizon 1 (H1) innovations focus on improving existing products and processes to expand market share or venture into adjacent market segments. The goal is to enhance business efficiency, productivity, and profitability. H1 innovations are based on existing market knowledge and current company capabilities.

Startups and emerging companies may focus exclusively on H1 and only after they achieve success, move strategic thinking toward the future across H2 and H3. Mature companies should consider all three horizons when planning their current and future growth.

H1 innovations are always incremental, and examples include creating a new line extension for an existing drug to improve the ease of use or safety, process improvement in manufacturing to lower the costs of goods, or iterative design changes to a medical device.

Managing H1 innovations requires a steady and focused leadership style, called the "Spiral Staircase," where leaders and employees climb upwards without losing the overall goal, focusing on the next few steps and building on the previous steps. Spiral staircase innovators create a profound sense of core purpose, letting everyone know their innovation contributions are essential and giving teams sufficient autonomy.

Horizon 2

Horizon 2 (H2) is the next "big thing," expected to generate significant revenue and profit in the subsequent stage of the company's growth. H2 innovations focus on developing new products and services that require developing new capabilities and allowing expansion into new markets. They can be incremental or radical (otherwise called breakthrough), and the goal of this stage is data collection for regulatory and commercialization purposes.

Management of H2 innovations mainly includes prototyping and testing. For example, the product development stage, which is very long and complex in the life science industry, is solely devoted to ensuring commercialization success through a robust product profile and fast time to market. This stage also includes business experiments, such as testing product profiles with customers, gathering advice from the advisory boards, and collecting market data to inform the commercial strategy.

In addition to products, H2 innovations may be new business or pricing models, digital transformations, or process improvements. Examples of H2 innovations, currently being tested and even adopted on a smaller scale in the life science industry and healthcare, are mRNA vaccines against diseases other than COVID-19, AI technology, 3D printing of human tissue, or the use of drones to deliver medical supplies.

The H2 innovation pipeline is typically managed through the stage gate process and assessing their net present value (NPV) to make go-no-go decisions quickly and avoid unnecessary costs.

Companies that are strong H2 innovators express three different leadership styles:

1. "Cauldron" is an entrepreneurial style where the status quo is frequently challenged, is characterized by intense but constructive criticism, and encourages taking risks. This style promotes innovativeness and adaptability. Ideas are thrown into the mix, and new entities emerge, hence comparison with a cooking process.
2. "Fertile Field" is a style where the organization tries to use existing capabilities and resources in a new way. Fertile field innovators manage their core competencies and strategic assets portfolio by bringing people together across organizational boundaries. This style helps to share information and discover opportunities. They gather, disseminate, and track new ideas for all employees and determine when and whether to spin off a growing business, compared with a fertile field where new plants can grow successfully.
3. "PacMan" is a style where companies invent, outsource, and finance startups, frequently leading to big companies acquiring new technologies or investing in and nurturing new businesses, often outside the organization's core operations.

Horizon 3

Horizon 3 (H3): These are long-term opportunities with high uncertainty that will not generate revenue quickly but will eventually be responsible for the company's future success. However, the recent pandemic immediately created a high level of uncertainty, and the industry had to act in a fast-changing environment, with new SARS-COV-2 variants constantly challenging newly developed drugs and vaccines and scientific data accumulating at "warp speed." So, believing we have plenty of time to decipher an uncertain future is not smart.

H3 innovations focus on creating breakthrough technologies and developing new business models to transform the industry. They are always radical (or breakthrough) and may be disruptive or blue oceans (creating new demand, not disrupting any particular sector). Examples of H3 innovations include emerging technologies in the early stages of ideation and testing, such as quantum computing, precision medicine, nanomedicine, or artificial organs. Companies have already put small bets on some of these technologies, trying to understand how they could be prototyped and tested for future use in medicine (in other words, how they can move to the H2 pipeline). These companies use the "Explorer" leadership style, exploring possibilities and investing time and money without making "go" or "no-go" decisions too quickly. The goal is to collect insights and create plausible scenarios for the company to understand the strategic value of H3 innovations.

The biggest mistake is putting probabilities on H3 innovations, treating them like H2, and making decisions based on the stage gate process. They are not ready for it. The market forces and technological developments still need to be fully understood, so the NPV cannot be calculated appropriately. The only option is to measure the Opportunity Value based on scenarios.

Management Across Horizons

There is much talk about innovative culture, but it is sometimes difficult to pinpoint the specific behaviors that may be helpful to support the company's strategy. For example, entrepreneurial founders of startups may have problems managing the business once they enter the commercialization phase because they lack the Spiral Staircase leadership style. On the other hand, a big company with processes that govern very successful H2 pipeline management may be missing capabilities related to H3 innovations and, therefore, be outcompeted by someone with the Explorer leadership style. Once the new technology is ready for H2, an Explorer will have more insights and be able to move faster through the development process. So, successful companies must deploy leadership styles suitable for all three horizons.

Most companies are unsure what mix of innovation capabilities and leadership styles they have and how they differ across departments and geographies. However, there is a way to assess them very precisely, thanks to the work of Magnus Penker, who created the most extensive business innovation database in the world, including more than 5,000 companies from more than 100 countries. Correlations within the database help to link capabilities, leadership styles, and cultures to growth generated through innovations (InnoSurvey?). Therefore, an assessment through InnoSurvey?, combined with specific recommendations based on the company strategy, can help identify strengths, weaknesses, and untapped potential and design a path forward to becoming better innovators.

A more specific description of innovation capabilities and the InnoSurvey? will be the topic of Part II of this article, so stay tuned!

Invitation

Two live meetings will be held in the next few months for those who want to learn more, improve their company growth, and start the New Year by launching a systematic innovation management playbook:

In Lyon, France, on January 23, 2024: https://innocircle.net/lyon/.

In Las Vegas, NV, USA on March 21, 2024: https://innocircle.net/las-vegas/ (early bird price available until January 31).

InnoSurvey? will be free to all participants, with individual reports of the company's innovation capabilities, leadership styles, culture, and specific recommendations. It's a unique opportunity to get together with industry leaders and innovation experts for an interactive event that will transform your organization. ??

Kasia Hein-Peters, MD, is the founder of Abante Scientific in Las Vegas, NV. Every business has different challenges, and the approach to the company growth strategy and innovation management may be different. Dr. Hein-Peters has a Green Belt in Innovation Management and can work with you to improve your company’s performance and meet strategic goals. You can schedule a meeting here.

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Sources:

1. Innovation 360 Group (https://innovation360.com/)
2. T Sherpa “3 challenges faced by Life Sciences in 2023 (and how to overcome them)” Barrington James 3/14/2023 (https://barringtonjames.com/post/3-challenges-faced-by-life-sciences-in-2023-and-how-to-overcome-them)
3. “2023 Global Life Sciences Outlook” Deloitte 5/17/2023 (https://www2.deloitte.com/cn/en/pages/life-sciences-and-healthcare/articles/global-life-sciences-sector-outlook-2023.html)
4. JM Teoxon, K Gill and N Connors “2023 Trends in the Life Sciences Industry” Eisner Amper 1/10/2023 (https://www.eisneramper.com/insights/technology/life-sciences-2023-trends-catalyst-0123/)
5. AB van Putten, M Baghai and IC MacMillan “Rethinking Valuation So You Don’t Miss a Good Deal” HBR December 02, 2010 (https://hbr.org/2010/12/rethinking-valuation-dont-miss)