Posted in Marketing & Strategy Articles, Total Reads: 2007
, Published on 15 September 2013
“The pendulum of the mind oscillates between sense and nonsense, not between right and wrong” – Carl Jung
Change has always been a part of life. Sometimes external forces bring upon the change and sometimes the human nature itself. The nature of human - not being satisfied with what it has currently– has always made an impression on human’s action and behavior. A longitudinal observation would show that, many a times, a human shows behavior along directions quite opposite to each other. It oscillates between two extreme positions. Once it decides to take extreme measure along a direction and sometime in future it decides to take the exact opposite. I call it pendulum effect. And the pendulum effect is not limited to human behavior. History witnesses the same effect in different industries as well. The prominence can be found in industries such as personal computers, mobile phones, auto, bicycle and pharmaceuticals.
According to encyclopedia, a pendulum is a weight suspended from a pivot so that it can swing freely. At the extreme points, the pendulum moves towards its equilibrium point because of gravitation pull. When it reaches the equilibrium point, it does not stop there because of inertia of motion and it reaches the other extreme. Then it starts swinging in the opposite direction. A simple pendulum oscillates between these two points indefinitely. Galileo’s this simple discovery was used to track time for a long time. I believe this effect can also be extrapolated to defining human behavior and industry changes as well.
Personal Computer Industry
The first name that comes to mind while hearing the word “operating system” (OS) is the Microsoft. Microsoft’s foundation can be associated with IBM’s decision to disintegrate itself. When IBM was unable to compete against Apple’s computers, it decided to disintegrate itself and play only in its field of core-competencies. The microprocessor was outsourced to Intel, OS was given to Microsoft. The peripherals were developed by very few other companies. As few companies handled one or two products for the whole industry, the margin of these producers drastically improved because of economy of scale. And this also led to more innovation at modular/ component level. An integrated firm disintegrates because of pressure of low margin, high organizational complexities and rigidities.
While disintegration led to component level innovations and companies became more lean and slim, it also became less capable of innovating at architecture level. All products were IBM – compatible and not a single product was IBM. Somewhere IBM lost control on delivering “IBM” experience to the consumers through its products.
Now Microsoft to give a complete “Microsoft” experience to a consumer, it is trying to integrate vertically. Microsoft launched its first notebook plus tablet – Surface. Now it has decided to acquire Nokia – the market leader in mobile phone industry for a long time. The clear message from Microsoft is to innovate at architecture level and produce proprietary systems. So a disintegrated firm decides to integrate to have better control on the architecture and experience of the product.
Thus firms from a same industry have swung between integration and disintegration from time to time.
Players in pharmaceutical industry can be divided into two types: generic drugs or biosimilar drugs manufacturer, branded drugs or biologic drugs manufacturer. Brand drugs are those which have been approved by a body for use and marketing and is protected by patent. Once the patent expires, other drug manufacturer can create “Me-Too” drugs with same active ingredients. The manufacturers then apply for FDA approval and sells these drugs which is known as generic drugs. Mylan, one of the top generic drug manufacturer found that the generic drugs have very low margin and because of price war and commoditized market, the competition is too rigorous. So Mylan developed and produced its first branded drug in 1984 after 23 years of foundation. Now it is increasing investment in development of biologic drugs (a type of branded drugs) and reducing its investment in development of generic drugs. So a generic manufacturer moves toward branded manufacturer because of low margin and commodity type generic drugs market.
Baxter, the well-known and well established player in biologic drugs, according to its annual report 2012, has recently shown interest in development of biosimilar drugs. For branded drugs like biologic drugs, development of a new drug requires high investment and it is a very risky business as evident from the fact that on average only one out of 5000 – 10000 drugs gets approved by FDA. Sometime, the producer cannot even recover its investment. This high risk and high investment force a branded drug manufacturer to swing towards generic drug production.
So firms from a same industry have swung between generic drug production and branded drug production from time to time.
The “pendulum effect” theory helps us observing two strategies that are starkly opposite to each other and are followed by a firm at two different times. One strategy makes sense at that moment of time while the other at a different time. These also try to explain us that strategy is not a science but an art where a firm chooses to follow one option against another; the firm may revisit the options once again and pick the other one against the earlier. So there is nothing pure right or wrong in a strategy. The firm just need to see if the option make sense or nonsense at the very moment.