To bring clarity to any discussion on innovation with our clients we distinguish between three different types of innovation: efficiency, sustaining, and transformative innovation.

Three types of innovation

Those three different types of innovations have different risk and return profiles that require different skills, resources and support from the organization. Knowing the different types of innovation your company wants to invest in and the right mix in the portfolio is the first step in developing the right innovation strategy for your organization.

Efficiency innovation

‍Efficiency innovation is about exploring opportunities that improve operational aspects of a company’s existing business models. They don’t change the business model in a substantial way. Typical examples include technologies that improve operations, distribution, or support, and process innovations that make an organization more effective.

Sustaining innovation

Sustaining innovation is about exploring opportunities that build on top of a company’s existing business models to strengthen it and keep it alive. Typical examples of sustaining innovation are new products and services, new distribution channels, new support and production technologies, or geographical expansions.

Transformative innovation

Transformative innovation is the most difficult innovation. It’s about exploring opportunities outside of the traditional field of a company. This type of innovation usually requires a radical change or expansion of a company's business models. It includes opportunities that help a company expand and create new growth, but also covers opportunities that disrupt the existing businesses. Transformative innovation helps position a company for the long term.

When thinking about how to apply this framework for innovation it's helpful to understand: what are the business objectives pharmaceutical companies need to achieve?

Rather than seeing each initiative as a standalone, view it from a portfolio perspective so you can better decide what type of innovation should be applied to deliver on your growth strategy.

Here are a couple of examples of what pharmaceutical companies are trying to achieve and how this framework can help.

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Innovating existing businesses

In pharma this typically applies to the core business, with medicines and therapies that are already successful in the market. The question here is how can we keep improving and iterating on the business model to continue growing revenues.

If a patent is expiring soon, then speed is of the essence and you may look to apply efficiency innovation practices that focus on driving down costs or technology that can improve operations. The advantage of this type of innovation is that you can roll it out fairly quickly and the financial impact is immediate.

Alternatively, if you are looking to enter into a new market with the same value proposition you can explore opportunities that build on top of its existing business model (sustaining innovation).  

For example, how might we create new partnerships, new channels or even build new capabilities to deliver the product?

Here you can be a little more adventurous by looking at the configuration of your business model and what can be added, removed or re-designed. The trick is how might we experiment with the business model without risking the core business?

The option here is to run small experiments in a smaller market and see if there is traction. These are often referred to as the in-market brands. If they become successful then there is opportunity to scale to other markets.

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Launching new products

Pharmaceutical companies often need to launch new medicines in the pipeline. More than just launching a new product, it is about finding the right scalable business model for a successful launch. It is not just about a new molecule, but the entire business model that surrounds it so it can deliver on its growth objectives.

For example, a company comes up with a medication that you only need to inject once a month instead of taking daily tablets. Some questions to ponder upon:

• How do you now frame the value proposition of this new medication, and how do you create value for the patients?
• How does this new value proposition impact doctors, another important customer segment.
• Does this now also change the price or even revenue model for the medication?
• What are the right channels to deliver this?
• Since the users (patients) are usually not the ones paying for the medication but rather the insurance companies, how does this impact your partnerships?

All of these questions point to the importance of thinking more strategically about the entire business model and the impact of changing one variable on the others.

There are several ways of looking at this scenario.

For instance, you can look at launching the new medicine through a sustaining innovation lens by changing one or two variables such as delivering the product through a new channel or developing new distribution capabilities.

Or, you can look at it through a transformative innovation lens by incorporating elements that are completely new to the business such as:

• What if you were able to transform the value proposition to both a product and service by incorporating digital health applications?
• How might including bio health metrics not only transform the desirability of your value proposition but also impact the feasibility and viability of your business model.

While transformative innovation has a higher level of risk and uncertainty and rarely offers quick returns, it is far more likely to offer protection from disruption and position your company for the long term.

While transformative innovation has a higher level of risk and uncertainty and rarely offers quick returns, it is far more likely to offer protection from disruption and position your company for the long term.”

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The first step to creating a future-proof business

Knowing what type of innovation your company wishes to incorporate is the first step in bringing clarity to understand what is the right innovation strategy for your company. The next is knowing the right mix of the different types of innovation within your portfolio. And that will depend on a number of variables: the speed of the innovation, what kind of financial return you’re looking for and whether it will help your business weather any potential future disruptions.