Phases of Industrial Growth and Decline

We talk about building a World Class R&D capability for today’s industry, but there may be greater economic and societal forces at play. All industries eventually collapse. The question is when and how do we discern when a particular industry is on the verge of collapse (so we can be the first to withdraw our money)? There are no pat answers, but there are broad brushstrokes to be painted (as discussed below). At a certain point, it falls to industry itself to justify its continued existence, and today we’re asking that question of several established R&D-centric industries. It seems once an industry is at the point of collapse it is no longer a good candidate for transformation into a World Class R&D firm: there is stickiness to organizational forms that cannot be undone.

Exhibit 1: Diagram illustrating phases in the life of an industry. Industries move from earlier to later phases, and rarely go back. The challenge is to identify when an industry has passed into a subsequent phase, which calls for fundamental changes to a firm's approach to business within that industry.
It is difficult to discern in advance whether an industry is merely in a slump or is on an irreversible decline toward its final phases. In the case of traditional industrial R&D, money and new science platforms are not signal enough of a turnaround. We look instead for new organizational forms giving rise to ‘new men’ and ‘new money’. We inaugurated the World Class R&D Institute with the parable of the Sick Building Syndrome: a firm replaces all the people in its building hoping for better results and within a year ends up with the same prejudices, attitudes and Three C’s+ practices seen with the old people. If an industry is in a slump, the first place to look for signs of a turnaround is to the people, and for an R&D-centric industry we look to the researchers and their managers for new attitudes and approaches..

Elsewhere we argue the pharmaceutical industry is on an irreversible decline. They still have the money. They can still acquire new science platforms and do so on an almost daily basis. But it’s an industry dominated by ‘old men’ resistant to change. The sense of foreboding and end-of-life planning is palpable as you walk the halls of their R&D organizations. Researchers are shuffled from one reorganization to the next (centralized?, decentralized?, acquired?) but it’s only a case of the Dutch town painting the whole town pink. There are individuals within industry who can be optimistic and productive in the face of any obstacle: but these few do not an industry make. Today there are far too few of these individuals left in the pharmaceutical industry to stop its decline.

Industries ‘evolve’ in stages, from product innovation, to process innovation, to commoditization. Some firms get ahead of the curve, others get behind. A few intermittent successes will be bandied about as a turnaround, but the euphoria will be short-lived and the curve inexorably heads to the near-zero profits of a commodities provider, and to capital flight. Once a commodity provider always a commodity provider: no further capital investment is available for the industry to climb out of its hole.

Morison describes this evolution quite compellingly in his description of the decline of Big Iron, making way for the new Steel industry.

Phases of Growth and Decline in Industry
Phase 0:
Science Innovation
Deliberate activities to probe the commercial viability of laboratory breakthroughs (laboratory breakthroughs are a dime-a-dozen, relatively speaking, and commercialization+ is still the major hurdle for all blockbuster+ wannabes). This is typically the work of a handful of individuals tinkering in their garage.
Phase 0→1: Product Innovation Takes the science innovation and puts it on firm footing. This Phase secures the first round of financing and gets the first generation of manufacturing facilities up and running. These individuals enjoy the first fruits of commercial success, typically reaping monopoly pricing and the high wages of the innovator / pioneer. In the pharmaceutical industry this phase is represented by the 70-80’s
Phase 1→2: Process Innovation Takes the successes of Phase 1 and puts them on firmer footing from a commercial standpoint: faster, cheaper, better are the mantra. Firms that excel in this phase end up dominating the market. Monopoly (oligopoly) pricing is no longer sustainable. Competitive advantage comes from excellence in manufacturing, commercial acumen and product extensions+ that leverage the basic science innovation. For the pharmaceutical industry this was the 90’s (see: Receptor theory – Pharmacology’s Big Idea).
Phase 2→3: Product Commoditization. Successes from Phase 2 are now widely adopted and available to all newcomers to the industry. Costs are dramatically lower. Smaller companies and start-ups are no longer at a disadvantage on a cost-per-unit basis. R&D seeks modest enhancements to existing products to recapture the glory days of patent protection and monopoly pricing.

Signs of an industry in decline are never unequivocal, but many small signs do give one reason to pause. Standardization is all but mandatory, costs-per-activity become a matter of professional pride, and consolidation sweeps the industry. “Men” are fearful of any change, and focus on fortifying their own positions for the looming collapse. Firms compete to stake out a greater share of an ever-dwindling market. R&D promises (‘the pipeline’) have no further currency on Wall Street. Industry R&D conferences feature fewer-and-fewer sessions on strategy; more and more sessions on the mechanics of today’s activities.

As the decline happens individuals look around and are amazed at the craziness going on around them. It's as though the whole world has gone mad or bad. In ignorance of the larger economic and societal forces at play, they blame their situation on bad management, bad regulations, or just bad luck. But as the decline materializes, monopolistic / oligarchic profits disappear and the ‘invisible hand’ of neoclassical economics takes hold. Revenues get driven down to the point where they equal costs, and profits go to near-zero. Jobs flee to lowest cost geographies. The relative freedom and openness of work found in high-profit industries is replaced by a tyrannical and unforgiving marketplace looking to squeeze out out every penny of profit. Work becomes routinized, monotonous and deadening. Life in a Phase Three industry has arrived.

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