When new innovations fall prey to ecosystem failure

When new innovations fall prey to ecosystem failure

An innovation blind spot cost Philips Electronics US$2.5bn in the form of write-offs. They brought out the magnificent HDTV in 1980; unfortunately they were 20 years too early. The hi-definition cameras and transmission standard – which were needed to make HD deliver – failed to arrive in time. However, this was somewhat less painful than Pfizer’s R2.8bn write-off from Exubera – a ‘sure winner’.[1]

Exubera – not so exuberant

In the early 2000s there were more than 370 million diabetics worldwide of which a fair share had to administer insulin by injection. Inhalable insulin (like an asthma pump) was seen as a major breakthrough. There is a great deal of reluctance when it comes to having to administer insulin by people who develop type 2 diabetes later in life (type 2 is mainly due to an unhealthy diet and poor lifestyle choices).

The stigma of the injection results in an unfortunate five- to eight-year window between the time the type 2 patient should start on insulin injections and the time they actually begin treatment. The new method of inhalable insulin was seen as the magic bullet – not only would it decrease the window of type 2 treatment, but would also allow insulin-dependent users to simply inhale as opposed to inject. The stage was set for a blockbuster product.

Pfizer was the leader in inhalable insulin with Exubera, and it wasn’t long before they received FDA approval in 2006, but with a caveat: all patients must have a lung function test prior to therapy, to make sure their lungs could actually absorb the insulin. Fair enough. Pfizer predicted sales of US$1.2bn in the first year. The result? US$12m – 1% of target. So it came as no surprise that they pulled the plug on Exubera with a painful write-off of US$2.8bn.

One broken link breaks a chain

Although a first-generation and bulky product, Exubera did not fail because of what it could or couldn’t do. It failed because the ecosystem would not support it. When pharmaceutical companies roll out a new product, they usually target the specialists first (in this case endocrinologists) to whom the GP’s would look for guidance. That wasn’t a problem – endocrinologists loved the product, but it was the FDA caveat that sunk the whole deal.

To check lung function you needed to have a spirometer, which you can find at your local GP. However, lung function is the domain of mostly pulmonologists who treat asthma sufferers, not endocrinologists who treat diabetes. So, to comply with FDA requirements, the patient visited the specialist, and then needed to go to the GP for the lung function test, and then come back to the specialist (for which the patient would probably have to wait another month for an appointment). Not a great scenario for the patient (or the medical aid that now needed to fork out for an extra two visits). Coupled with the introduction of a new generation of ‘insulin pens’ making administration easier, the death of Exubera was sealed.

Run-flats go flat

In 1992, a group of Michelin executives set themselves a goal to come up with the next big innovation in tyres. The result was the PAX system, or as we know it – the run-flat tyre. Market research showed overwhelming support for the product amongst customers and car manufacturers alike. Mercedes were first to sign on. And then a host of other carmakers. Unfortunately so did Mini. When I got my first flat tyre, I felt smug in the knowledge that I could ride up to 50km to a tyre service centre that would repair the tyre, and I’d be on my way. I had only ridden about 10km when I pulled into a tyre replacement centre.

They inspected the car and told me I needed a new tyre. It also had to be a run-flat to match the others on the vehicle. I reluctantly paid four times the amount of what a regular tyre would have cost. I chalked that up to bad luck. Until I had my second flat. This time I was told that, not only was the tyre beyond repair, but that I would need two tyres as the mismatch in tread was too great to just replace the one. I ambled over to the pharmacy to get a repeat of my tranquiliser, and was now the proud owner of three new run-flats that cost the equivalent of a month’s payment on the car. Actually a little more, but who’s counting?

The broken link

I have eventually discovered the tyre dilemma. And so did Michelin. To fix a run-flat requires specific knowledge and equipment. Cars were being launched with run-flats, but the service centres that could repair them were non-existent (you needed special equipment and training that the tyre service centres were reluctant to adopt – much easier just to tell the customer you can’t fix it – and sell them a new one). Car manufacturers started to pull out. I’ve just purchased our third Mini, and in perusing the invoice I noticed the one item that sent a shiver down my spine. Run-flats. I certainly hope they’ve sorted out the service centre issue.

Failures such as the above did not come about because of lack of consumer insight, or even demand, but because the brand’s ecosystem was deficient. In the case of Philips HDTV, there wasn’t any content; for Exubera it was simply the absence of a spirometer in the endocrinologist’s office and for Michelin there was no network to repair run-flats. The lesson? Always check the ecosystem – it just takes one link to break the chain.

1. Ron Adner. The wide lens – a new strategy for innovation. Penguin Books, 2012.