An evolutionary view of corporate development: Gist-brocades

15.2. An evolutionary view of corporate development: Gist-brocades.

This section analyzes aspects of corporate strategy and corporate development from the perspective of the EVT formalism. We perform a broad-brush analysis of the development of the Dutch company Gist-brocades. This presents a stepping-stone for the formulation of some general features of corporate strategy and corporate development. For convenience sake, we study the period of evolution of Gist-brocades unto the point where it merges with DSM in 1998.

Gist-brocades emerges as “Nederlandse Gist en Spiritus Fabriek” (NGSF) in 1870 as a producer of baker’s yeast and the associated product alcohol. Its founding rests on a clear market need as the community of bakers asks for more reliable alternatives for the yeast sources available in those days. The manufacturing of the products of the new company rests on fermentation technology using agricultural resources, such as grains. Fermentation is in those days a quite elusive and new technology. The scientific understanding that microorganisms are the source of useful products such as ethanol creates the new technology. Today, we call this the competence to use a microorganism, in the case of baker’s yeast the eukaryotic organism Saccharomyces cerevisiae, to produce useful products. In this case, these products are baker’s yeast for the leavening of bread and ethanol for e.g. beverages and perfumes. In the 1990s, Gist-brocades is a co-leader in the European market for baker’s yeast and it discontinued the production of ethanol earlier.

The first decades of the 20^th century, witness the addition of industrial chemicals such as acetone and butanol, geared at totally different markets, to the portfolio of products of the company. The basis of this expansion is that fermentation, in this case fermentation of bacteria, allows the production of these products from agricultural resources, such as grains and sugar containing crops. The company achieves this step into a new market by expansion into a slightly different, but much related, competence than the one the company is familiar with through its baker’s yeast activities. Fermentations based on bacteria expand the competence base and the information set of the company by adding a different, but closely related, type of information. Today, we consider this an example of competence-based expansion. It allows the company to extract economic value from a market need new to the company. The First World War fuels this opportunity as it shifts the pattern of demand for industrial chemicals.

We expand a little bit on the notion of a competence. A competence (Prahalad and Hamel (1990)) is a complex integration of disciplines, technologies and other types of knowledge and routines. In general, it allows the production of useful products for a number of markets. In addition, it is difficult to copy, because it is a complex integration of disciplines honed by

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competing for sources of economic value over a number of years. Finally, it has a distinctive influence on the ability of the company to make products that allow it to couple to sources of economic value, fueled by market needs. It has a distinctive impact on competiveness. A competence is, in line with the general formalism of EVT, of an informational nature, it is part of the “DNA” of the company. The recognition of the importance of competence development results the founding of an R&D department in NGSF at the end of the 19^th century. In this respect, the company follows a general feature of industry in those days.

Today, the production of industrial chemicals is the realm of the fossil resources based industries and the products disappeared from the portfolio of the company. Clearly, the company is unable to follow the shift in the resource base for the production of the products, as this requires a very different information set. With the disappearance of these products, this disappearance of part of the phenotype, the fermentation competence remains part of the genotype of the company.

At the end of the Second World War, a new opportunity arises to expand the business scope of NGSF. During the War, the Allies develop Penicillin production based on the fermentation of the mould Penicillium chrysogenum. This rests on the discovery of Penicillin as an antibiotic substance in 1928 by Fleming (1929). The Allies use penicillin at the end of the Second World War to treat battlefield infections, an important cause of impairment of soldiers. Again, the fermentation capabilities, competence based expansion, allow NGSF to enter a new market, the pharmaceutical market, shortly after 1945. At the date of the merger with DSM in 1998, Gist-brocades is the largest producer of Penicillins and derived substances worldwide.

Penicillins naturally occur in two varieties, called Penicillin G and Penicillin V. These products share a chemical structure called the ȕ-Lactam moiety, but differ in a side chain attached to that moiety. Penicillins prove to be quite successful antibiotics and variations on the chemical structure of the natural penicillins develop. These are the so-called semi-synthetic penicillins. Ampicillin and amoxicillin are notable examples. Today, amoxicillin is still widely used in antibiotic therapy. To enter the market for semi-synthetic penicillins based on the fermented product Penicillin G, the company needs to acquire a new skill, a new information set. Expertise on the chemical modification of the fermentation product needs development. The company develops it in a largely organic way, based on sizeable R&D-efforts.

At the end of the 1950s, the kernel develops for an important new major step in the beginning of the 1960s. A new competence based expansion in fermentation comes in reach. The introduction of protein splitting enzymes in household detergents leads to a large new market for products based on fermentation. A range of other enzyme-based products adds to the potential. The market for industrial enzymes develops. The company evolves to a large player in industrial enzymes, but it sold its activities in some of the larger commodity enzymes in the 1990s. The expansion into the industrial enzymes market needs new additions to the competence base. Application expertise and modern genetics, e.g. recombinant DNA technology and later on genomics, for the production of enzymes, augment the company’s genome. This again largely derives from R&D driven organic development, although the company acquires some critical technologies from third parties. A distinctive new competence complements the skill bases in fermentation technology and chemistry, resulting in broadening of the company’s information set.

At the end of the 1960s, the earlier entry of the company in the pharmaceutical market through penicillins prompts a major move. The company merges with Brocades, a company operating in the end user market for pharmaceutical products, to form Gist-brocades. This is an example of a customer-based expansion of the company, completely different from the earlier competence-based expansions.

With the merger, the company acquires new capabilities in marketing pharmaceutical specialties and the development of new pharmaceutical products. That merger takes place in

157 an era when the pharmaceutical industry shows strong growth. In the eighties and nineties of the 20^th century, the pharmaceutical industry shows signs of consolidation and the players in the industry rapidly grow in size and become dependent on sharply increasing efforts and investments in the development and marketing of new medicines. The activities of Gist-brocades do not keep pace with these developments and the company decides to sell its pharmaceutical activities to the Japanese pharmaceutical company Yamanouchi at the end of the eighties. However, it retains its position in fermentation and chemistry based ingredients and active products for ȕ-Lactam antibiotics.

The beginning of the 1980s, welcomes a new customer-based expansion of Gist-brocades, again largely by acquisition. It expands its position in the bakery market by moving into products for the production of bread and pastry beyond baker’s yeast. The company enters the markets for bread improvers and pastry ingredients. This leads again to a sizeable expansion of its competence base, the information set on which it operates again diversifies. The move also leads to new outlets for its existing technology base in enzymes, as bread improver enzymes complement its product portfolio. Such market based expansions, witnessed by Gist-brocades’ expansion in pharmaceuticals and bakery products are customer-specialist types of expansion.

Fig. 15.1 summarizes this bird’s eye view of the development of Gist-brocades unto the merger with DSM.

After this discussion of Gist-brocades and its historical development and evolution, we generalize the picture. A company often starts out as a narrow market-competence combination. It enters a “niche” market representing a need to which it couples to generate economic value. To supply the product to couple to the economic value source, it needs an adequate information set, a competence base. It can acquire it from the outside or it can develop it organically. In addition, the reverse can apply, the company may have a captive competence base, e.g. based on new scientific developments, for which it sees opportunity to create and couple to a source of economic value in the market. In this way, an initial customer base and matching competence base result. In the beginning, this competence base is far from perfect and it further develops, and the customer base expands by co-evolution with the

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fermentation ind. chemistry

fermentation ind. chemistry drug developm.

enzyme techn.

appl. bakery modern genetics Yeast/alcohol

Chemicals

Penicillin

Pharma/ Enzymes

Bakery Ingr.

Fig. 15.1. The corporate history of Gist-brocades.

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gradually perfecting competence base or information set.

After a while, the company sees a new outlet for its activities. As an example, this exists in new markets that become available to the company based on its existing competence base.

This is a critical strategic moment in the history of the company. In almost all cases, such expansion involves larger statistical entropy, uncertainty, than furthering the existing customer base/competence combination. It involves a substantial risk and exposure, and the future success is far from certain. The company management needs to make a bounded rationality decision to grasp the opportunity or not. Both decisions have an important historical significance in terms of the unknown future development paths that become open to the company. In terms of the theory of evolution of dissipative structures, the company reaches a bifurcation point.

After entering the new market, the company no doubt finds out that its competence base does not optimally suit the requirements of the new market and it sees the need to evolve its information set to serve the new market in an optimal way. This results in gradual organic adaptation of its competence base to the new customer base, or, alternatively, acquisition of

Numberofmarkets

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one many

Number of competences

competence driven one stop shop

niche player customer driven

Fig. 15.3. Corporate development strategies.

Market A Market B Market C

Comp. A Comp. B Comp. C

Fig. 15.2. Co-evolution of market exposure and competence base.

159 an already existing competence in the market. Such acquisition is again a major critical strategic move that may further shape the range of futures that are open to the company. Fig.

15.2 shows this development. After a while, the process repeats itself and the competence base needs to change accordingly. The figure illustrates the co-evolution of the company and its competence base.

Fig. 15.3 illustrates the strategies deployed in the development of a corporation. An emerging company starts out as a niche player based on one market and a product. From there it can move in two directions. It can take its competence base as a starting point and move to new markets. Its competence base stays rather homogeneous, although it augments its basic competence with market specific aspects of the competence. Market specific knowledge and applications expertise integrate in the competence base. In many companies, the growth resulting from this strategy leads to a partial splitting of the company in market specific business units. The business units develop their own market specific competence base, and this relaxes the span of control of management. In addition, a greater rate of experimentation is possible without getting in problems with the copying fidelity limit. The problem associated with this move, is that the focus on the basic competence diminishes and this challenges harvesting the synergy fruits of the combined skill bases. This mitigates if the business unit structure does not follow the entire internal value chain, e.g. if the basic competences remain concentrated in a central R&D unit.

The second approach with reference to Fig. 15.3 is that the company sticks to its market and develops a broader range of competences to support a growing range of needs in the specific market. This generally results in a less focused competence base and often requires acquisition of new competences. Examples of both of the developments highlighted above, appear in the historic development of Gist-brocades.

Of course, a mixture of these strategies is also possible, and the ultimate picture is that of the one-stop shop: Many markets and many competences. History in industry shows that this latter strategy is difficult and often proves unsuccessful in the end.

The bifurcation diagram depicted in Fig. 15.4 closes this discussion. The start of the diagram shows the start up of the company and it enters a phase of gradual development unto point A in the diagram.

At point A, we need a critical decision regarding corporate development. It reflects a critical choice of strategic direction. An example of such a point is the entrance of Gist-brocades in

A

B

C

Fig. 15.4. A bifurcation diagram of the development of a corporation.

Time Strategic

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the penicillin market in the last stages of World War II. After this decision, the company locks into either the branch AB or the branch AC. Both branches lead to different critical strategic opportunities at point C or B. By repetitive strategic decision points, very different historical paths are open to the development of the same primary initiative. The difficulty in managing such a process is that, at the time of the strategic decisions, the future opportunities that may result are unknown, whilst the possible paths of further development critically depend on the option chosen. A reconstruction of the historical path of the evolution of the company is only possible ex-post. Only looking back allows identifying the logic behind the evolution of the company. In fact, the evolutionary picture is importantly shaped by bounded rationality decision-making and hence contains elements of chance.

Many examples of such developments appear in the history of companies. The history of Gist-brocades discussed above, features the entrance in penicillin production at the end of World War II. Based on this move, it attempts an entry in the by then growing market for ethical pharmaceuticals when it merges with Brocades in the late 1960s to form Gist-brocades. This entry did not last as Gist-brocades sold it ethical pharmaceuticals business in the late eighties.

The company became a producer of food ingredients, enzymes and intermediates and active ingredients for penicillins and cephalosporins. The nowadays leading ethical pharmaceuticals company Pfizer made the same decision in the said world war. It entered production of penicillin based on fermentation expertise that emerged from its activities in the production of citric acid by fermentation. It spins of the production of citric acid, discontinues the production of penicillins towards the end of the 20th century and becomes one of the leading pharmaceutical houses with a successful track record in the development of new ethical drug ever since the 1960s. This example shows that companies with a similar competence base in the past can show historical developments that result in very different companies with a presence in very different market and drastically different competences and information sets later on.