Saturday, August 30, 2014
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Why pharma lacks strategic perspective

An article published last year addressed a factor generally associated with corporate failure and success. Although it mentioned the drug industry only peripherally, it says a great deal about why pharma remains stuck in its current down cycle.

Why pharma lacks strategic perspective

by Daniel R. Hoffman, Ph.D.

An article published last year addressed a factor generally associated with corporate failure and success. Although it mentioned the drug industry only peripherally, it says a great deal about why pharma remains stuck in its current down cycle.

The article's author was Benjamin Gilad, a former faculty member at Rutgers School of Management who now teaches competitive intelligence to aspiring, mid-level managers at a private company. Therein lies a major irony because Gilad argues that when companies in most industries fail, it generally does not result from competitors surprising and outmaneuvering them. That is the sort of thing competitive intelligence seeks to discern and prevent, but Gilad considers it a minor factor in a company's ultimate success or failure. Instead he draws a distinction between competitive intelligence and what he calls strategic intelligence. A company's capability at the latter function, together with a willingness to take action based on it, represent what Gilad considers the differentiating factors between corporate survival and extinction.

In industries where the major competitors are large, highly capitalized companies, Gilad maintains that a collapse occurs when all of them start failing to effectively address customer needs. The basic problem of companies in such industries does not result from poor tactical decisions against competitors. Instead, their entire approach to doing business runs aground and, in this respect, they share a common blind spot.

Failing companies typically lose the ability to discern when an industry's business model has grown dysfunctional and how to alter it. This ability to detect the larger picture of a failing business model is an essential part of strategic intelligence. Stated another way, strategic intelligence is the ability to step outside a current business model or paradigm and view the industry from a fresh perspective. 

Gilad illustrates his argument with references to failures this decade among U.S. automobile makers and financial service companies. While he makes only a glancing reference to the pharmaceutical industry, his observations here don't support his case nearly as well.

While the overall point concerning a failure of strategic intelligence clearly applies to pharma, Gilad misses the mark when he claims the industry falls short on this task because it is so highly regulated. This regulation of all industry functions, he claims, makes managers at individual companies fearful of taking strategic departures. Instead, they prefer to safely play follow the leader by using competitive intelligence to uselessly imitate one another. 

At lower operational levels, particularly at the brand and franchise levels, this observation is correct, but Gilad errs in applying that reason to pharma's strategic decision-making and its continuing reliance on an obsolete business paradigm. Other things account for that more persuasively.

While a few senior managers are too dim to know better, many more figure their time atop the corporate ladder will be brief and they don't want to make it even shorter by addressing a systemic, industry-wide problem.

For the past 65 years, pharma companies have been successful by rigidly adhering to a business model without paying attention to strategic perspective. That was OK as long as the model worked, but the elements of that model no longer perform as well and some pharma execs are either clueless or too scared to do otherwise. A small number of them reason that they've gotten this far by following the manual, so there's no reason to change now.

On the other hand, more top managers know exactly what they're doing. After spending their entire careers clawing their way to the top, they figure the current environment will likely give them a half-dozen years there before shareholders grow tired of their acts and replace them. Rather than doing anything to risk shortening those golden years, they figure they'll gain more financial benefit by just milking their tours for what they're worth and then obtaining equity stakes in several startup companies while serving on their boards.

A few of the genuinely smart senior execs secretly know that a fundamental contradiction, one they cannot overcome, will emerge if they develop strategic perspective. That contradiction rests upon the fact that in an industry with a 10-year lead-time for product development, operational planning requires a long-term horizon. Such a multi-year operating approach, however, is not possible in an economy where every large, publicly traded corporation must bow at Wall Street's feet and accede to its demands for short-term management based on quarterly earnings. So once again, better to just make some short-term adjustments and let the long-term go because, frankly, managers believe that in the long run, the IBGYBG mantra holds true -- I'll be gone, you'll be gone.

As a major example of the short run stifling the long, managers forego ongoing, strategic intelligence assessments by tying the budgets for all business services to products. They do that because they consider it safer to prop up their existing and new drug lines. When individual product teams are given budgetary discretion, none of them wants to spend money on anything such as strategic intelligence that likely won't benefit the current year's results. So the process of following a dysfunctional business model continues, full steam ahead. Damn the alternative opportunities and just keep trying to embellish the legacy drug business.

Many pharma execs also know that in a cyclical industry, down periods occur when the science can't deliver new products to advance standards of care. They also know that during such periods, offering other goods and services can help them make it through to the next upturn. The problem, as they secretly recognize but can't admit, is that they know very little about other businesses because their careers in pharma have protected them from the market challenges that companies in other industries must face.

Elsewhere in his article Galad also strays off course with his point that young hotshots are the sorts of people to provide their senior managers with the strategic intelligence needed by adaptable companies.

While fast risers are the people Gilad seeks to attract to his courses, and a business guy's gotta say what he's gotta say, there remains a major problem with putting ambitious, corporate ascenders in positions to possibly point out the emperor's lack of clothes. Hot shots are loath to doing anything that may jeopardize their rise to the C-suites. Conducting a strategic analysis that demonstrates how previous decisions have backed the company into a ditch can create enemies and derail a career rise faster than anything else. 

In an industry such as pharma, where knowledge is experiential rather than formulaic, it follows that strategic perspective requires people with seasoning. Also, an effective strategic analyst must basically function as a truth teller and, as noted, the truth can often sidetrack corporate ambitions. 

So a strategic intelligence manager should be an experienced person without aspirations of getting to the top. He/she has to be a person who makes a deal with one or more fiduciary officers, agreeing to bring them the truth and, in return, they must provide protection against the aspiring sharks whose predatory plans might be exposed by strategic intelligence.

Such seasoned truth tellers are not necessarily that rare. In fact, pharma has laid off thousands of them over the past three years.

The disagreements with Gilad mentioned here are essentially just quibbles over footnotes. He has provided a useful tool that can show one reason why pharma is in the doldrums, together with a necessary step for rectifying the situation. One can only hope the industry will pay attention.


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Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

Michael R. Cohen, R.Ph. President, Institute for Safe Medication Practices
Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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