Achieving a sustainable competitive position is every executive’s desire — and yet the goal of achieving sustainable advantage always seems elusive. Take a look at the table below showing the leading players in the personal computer industry in the 1990s compared with 2015.
|Market share in 1996||Market Share in 2015|
The key players have changed. They are no longer exclusively western firms. Three out of the top five were from Asia, all latecomers to the industry. Such displacement occurred elsewhere too: from heavy machinery to home appliances, from textile manufacturing to automotive.
Even renewable energy, supposedly a nascent industry pioneered by GE, Siemens, Philips, and Vestas, saw the encroachment by China’s Goldwind and Sinovel, which have snatched market share away from these early players. In solar-panel manufacturing, seven of the top ten players are all latecomers to the sector. Nothing cannot be learned and then copied at a cheaper price.
That was exactly the complaint made more than a century ago by the German drug maker Hoechst, against its Swiss copycats CIBA, Giegy, and Sandoz. In the land of counterfeit, or le pays de contre-facteurs in French, Switzerland had not yet established patent law as late as 1888. Local chemists were free, or even encouraged, to imitate foreign inventions.
When antipyrine—the first synthetic fever-reducing drug, was created in the laboratory, the world couldn’t get enough of it, and the Swiss were selling as much of the German imitation as they could make.
Organic chemistry was a hotbed of innovation. But when Alexander Fleming discovered the antibiotic penicillin, everyone understood that the next blockbuster would not come from chemistry alone, but from an entirely new discipline: namely microbiology.
That’s why, after the second world war, nascent pharmaceutical firms from Europe to the US rushed to set up soil-screening programs around the world, looking for exotic fungi, hunting down the pay dirt, in search for ever-more potent antibiotics.
Field workers got soil from cemeteries and sent balloons into the air to collect windblown samples. They hiked down to the bottom of mine shafts, up to the tops of mountains, and anywhere in between.
The study of microbes took centre stage, displacing organic chemistry as the key setting for scientific discovery. Along the way, the world saw a dramatic drop in infectious disease. What was once a nasty, brutal, and often fatal infection was transformed into a curable inconvenience.
Then came the biotechnology revolution, beginning in the 1970s. With the complete scanning of the human genome and the advancement of computational applications, genetic engineering has essentially gone digital. Scientists are now uncovering molecular pathways, discovering the biological underpinnings of even rare cancers. We have seen again a transition into a new knowledge frontier, a discipline under the rubric of genomics and bioengineering.
Today, it takes extravagantly equipped laboratories, huge budgets, and large teams of researchers to remain at the forefront of the industry. Switzerland’s Novartis alone spent a staggering $10 billion on research and development in 2013.
From cancer therapy to HIV treatment, western pioneers still lead the global industry in the latest developments. In contrast to the automotive industry, where global competition has decimated Detroit, the wealth in Basel, where Novartis and Roche are headquartered, seems forever bountiful. Its inhabitants continued to enjoy the highest standard of living in Western Europe.
The secret ingredient
The capital expenditure of the pharmaceutical industry, however, can’t explain why latecomers from emerging economies have failed to overtake Western incumbents. In fact, capital expenditure, trade secrets, and patent protection have barely posed a challenge for latecomers in dominating the sectors of heavy machinery, wind turbines, solar panels, personal computers, mobile phones, and automobiles.
What the history of pharmaceuticals has shown is that it was the leap of knowledge disciplines — from chemistry to microbiology, and then to genomics — that opened new paths for willing pioneers to race ahead. Sustainable advantage turns out to be not so much of a utopian position as an attainable one. Indeed, merely by incorporating new knowledge and constantly changing the rules of the game could a pioneer create headroom for innovation and thus avoid being surpassed by latecomers. That’s the miracle drug that century-old pharmaceutical firms created to keep themselves evergreen.
Managers must therefore ask themselves what knowledge discipline is the most fundamental to their company. What is the core knowledge of your business? And how mature or widely available is it? Where should you leap next?
Howard Yu is the author of LEAP: How to Thrive in a World Where Everything Can Be Copied (PublicAffairs, June 2018), LEGO professor of management and innovation at the IMD Business School in Switzerland, and director of IMD’s signature Advanced Management Program (AMP).
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