Wave of Change in Pharmaceutical Industry

The pharmaceutical industry is one of the most dynamic industries and has been constantly evolving. But recent advances in medical technologies, drug discovery and biotechnology has further accelerated this evolution and change in the pharma industry. Although the industry is constantly evolving, the business models of the pharma industry can be divided broadly into three phases.

Initially the pharma companies heavily relied on one or few drug compounds that generated majority of revenue. These were popularly called as “blockbuster” drugs, for instance Viagra was a blockbuster drug for Pfizer. These blockbuster drugs were patent protected and companies owning these patents enjoyed the exclusive profits. This was called the Pharma 1.0 model or the “blockbuster model”. But as the patents begin to expire and small biotech companies started to emerge and compete with traditional pharma companies a wave of business remodeling came along. The pharma companies started to replenish their product pipelines by acquiring these biotech companies and started to diversify their portfolio. Companies started to enter different areas like consumer products, animal health, specific therapeutic areas like oncology and diabetes. This second phase was the cost-efficient and diversified portfolio model called Pharma 2.0. Even though pharma companies are still trying to adjust and succeed in this model, there is another wave of change that is approaching. This is Pharma 3.0.

The Pharma 3.0 Model (Source: Ernst and Young, Progressions)

The pharmaceutical industry is witnessing the entry of non-traditional players like health IT companies, mobile app companies, and many other players enter into the traditional pharma industry. There has been a total investment of about USD 20 billion by these new entrants in the pharma industry. These investments are focused on improving patient experience and providing additional services. In addition, pharma companies continue to struggle with expiration of existing patents. In next five years almost USD 70 billion worth of drugs will lose their patents. Simultaneously the patient (consumer in this case) is getting more and more educated and informed, and has therefore started to demand more services and benefits for their money. Interestingly, the new non-traditional players are successfully serving to these new demands, like mobile apps for monitoring a disease or social media platforms to generate awareness and network people with similar diseases. These advances present significant challenge and at the same time a unique opportunity for the traditional pharma companies to adapt to this rapidly changing industry. In the Pharma 3.0 model, as Ernst and Young explains- “The companies will succeed or fail based not just on how many units of a product they sell, but rather on their ability improve health outcomes, with patients and payers squarely in the middle.” 

The pharma companies need to remodel and innovate new business strategies. The primary step would be to shift focus to put the patient at the center of the business model and focus on providing healthy-outcomes for the patients. This will involve making new collaborations, especially with new entrants in pharma industry, driving the brand value from customer experience rather than product efficacy, and innovative partnerships. This wave of change will make sure that only those companies that are able to adapt fast to this change will survive. This might not be a very good news for traditional pharma companies but is a definitely good sign of change for the patient and consumers.

References:

• Progressions: Building Pharma 3.0. E&Y. 2012.
• Beyond Borders: Global Biotechnology Report. E&Y. 2012
• Pharma 3.0: A call for collaboration and experimentation. PharmaVoice. Vol 11. Number 6. June 2011

Shifting Strategies in the Orchestral World

The nonprofit classical music industry has been riddled with financial strife in recent years, with major symphony orchestras enduring labor strikes, mounting deficits, and for some, ending operations.  In an industry that has taken a largely classical approach to its strategic planning—functioning on the premise that the production and presentation of classical music is highly predictable with little room for change or innovation—those orchestras that are surviving, and even more so, those that are thriving, appear to be shifting into a visionary mode.

So what makes the orchestral marketplace predictable? First, the production of symphonic music is highly systematic. Utilizing roughly the same structures for nearly a century, symphony orchestras create their product (orchestral performances) by hiring unionized musicians via collective bargaining agreements, employing management personnel to facilitate the execution of rehearsals and performances, and programming repertoire a season (fall through spring) at a time, usually several calendar years in advance. Moreover, the funding for orchestral organizations is obtained through largely repetitive, known mechanisms: ticket buyers, individual donations, corporate support, grants, and public (governmental) funding. Perhaps most importantly, the product itself is inherently limited by the corporate structure that surrounds it. As a 501(c)(3) organization, orchestral organizations exist, by law, to advance their missions—the promulgation of orchestral music. While the nuances of that mission can, do, and should change over time, the product at the core of the organization is constant…whatever the market demands.

Therein lies the rub. As costs have increased over the last several decades, demand has not kept pace. While that particular analysis is a subject unto itself, how symphony orchestras have responded to that reality illustrates well why strategic planning itself requires strategy. As Reeves et al write, “Sometimes, not only does a company have the power to shape the future, but it’s possible to know that future and to predict that path to realizing it.” Those orchestras leading the field today are the ones that have embraced the malleability of the field, recognizing that the survival of this industry that by other measures is in decline, requires actively shaping its future—so that it has one.

The embrace of online technologies is one example of those orchestras that have molded an environmental factor to its advantage as part of a visionary plan for the future. From free live streaming webcasts—such as those launched by the Detroit Symphony Orchestra—to mobile apps to engage in orchestral experiences from buying tickets to listening to concert excerpts—like that of the Sydney Symphony Orchestra—select orchestras have marshaled resources and executed plans to cater to classical music consumers desires beyond that of the physical concert hall.

In a particularly bold instance of long-term, nearly radical, planning, the musicians of the Charleston Symphony Orchestra voted on Friday to decertify its labor union, fundamentally altering their bargaining position and drastically reimagining the orchestra’s future.

While only two small examples, the actions of these and several other major symphony orchestras reflect a significant shift in strategy, bearing out the argument that for companies in decline, the environment indeed “becomes mores malleable again, generating opportunities for disruption and rejuvenation” (Reeves, 9).

Incorporating Disruption into Strategy

Wednesday, October 30th, 2013

Incorporating Disruption into Strategy

by Teja Setty (vts@andrew.cmu.edu)


Strategy is the creation of a unique value proposition for the customer which is in tune with the organizations vision. Often successful strategies are based on the organizations ability to have a vision for the future, and requires them to be able to make the hard decision.

Disruptive changes are a frequent occurrence with the evolution of technology, but whether the incumbent wins or the entrant wins is a case of who is better prepared, and who better evaluates the potential of the disruptive technology. Netflix has been a great example of being both an entrant, and also an incumbent.

Blockbuster the brick and mortar DVD rental company was a heavy weight incumbent with a presence all over the country with a business model that had lasted a long time however when technological changes allowed for evolution, they did not make the right decisions and evolve to deliver the best value to its customers. Netflix replaced the antiquated business model with a mail in online rental option which offered great convenience to its customers. This disruption led to the steady decline of brick and mortar movie rental companies, and made Netflix a very successful organization.

Netflix could have fallen prey to its own success the same way Blockbuster did, however their constant desire to evolve, and be at the forefront of disruptive technologies enabled them to envision their streaming service, which was the next big disruption. As an organization, Netflix's willingness to embrace the next big change, and also their willingness to downsize their previous business model ensured that they survived even though they were the incumbents.

In conclusion disruptive changes are the norm at present, but whether the incumbent wins or the entrant wins all comes down to the organizations strategy and their approach to change. The organization should not embrace every change in the market, but should constantly be willing to embrace changes with a potential to significantly alter their current present value proposition.  

M&A in the Consulting World: PwC & Booz Co.

From my academic studies and career exploration, I have come across 2 interesting areas that are dynamically changing due to market pressures and regulatory factors: the health care space and consulting services. They are very different domains but they draw surprisingly similar corollaries in terms of their strategies.

Healthcare industry trend
Consolidation of healthcare organizations (HCOs) are escalating as Healthcare Reform is being implemented. HCOs must become part of a health network to meet the standards of an Accountable Care Organization (ACO), to leverage different service members in the network to remain competitive (e.g., steadier patient revenue stream through incentivized referral system), and to spread out the cost of very expensive health IT platforms with the ultimate goal of being able to provide a patient end-to-end service within the network. This environment puts the "UPMCs" of the world in a very good position to gobble up smaller independent HCOs who can no longer remain financially afloat in the current market environment. However, if UPMCs do too much M&A then they risk the chance of having greater scrutiny from the the regulatory agencies for fair competition/ anti-monopoly.

Relevance

Professional services like consulting is facing a similar issue. The consulting industry is dominated primarily by a few key global players (e.g., McKinsey, BCG, Bain & Co., The Big 4, etc.)  in different functional services and whatever is left over in the market is taken up by much smaller independent consulting firms. Consulting service was identified as a lagging industry in this week's McKinsey Quarterly article, "The Strategic Yardstick You Can't Afford to Ignore" and it mentioned that companies can be divided into class systems like our society with high-class rich companies staying rich. What determines whether a company is in the higher class is size and double-digit growth. In the current consulting industry, firms want to offer its client a full-suite of end-to-end services and solutions, from advisory to audit, from strategy to implementation. In the same respect, big firms are gobbling up smaller firms.

Event
http://dealbook.nytimes.com/2013/10/30/pricewaterhousecoopers-to-buy-booz-consulting-firm/?_r=1&

The focus of this blog is on PwC, a Big 4 auditing firm. In 2002, it sold off its consulting arm to IBM because of threats of regulatory smack-down due to conflict of interests (i.e., a firm cannot provide impartial auditing to a client that it already provides consulting services for). PwC then started rebuilding its consulting services and has managed to climb back up as one of the best consulting firms. Now it plans to expand its advisory service and recently it announced it will purchase Booz & Co. These are both 2 very big players.

Significance

This action puts PwC at a very strong advantage in terms of expanding its Advisory services but also brings to question the limits of the M&A strategy in an industry where growth might correlate to a stronger propensity for conflicts of interest and regulatory consequences since it will still have its auditing services. On the other hand, I am sure this move was a response to the changing needs of its clients such as the ones in the U.S. healthcare industry (U.S. is about ~40% of PwC overall business).

http://www.pwc.com/gx/en/annual-review/facts-figures.jhtml

Question

For big firms like PwC that seek growth, what is a good strategy to hedge against the risk of being hit by regulatory agencies for providing services that are ultimately at ends with one another in terms of interests?

Blackberry: A Lesson in Strategic Planning

The article, "The Real Value of Strategic Planning" highlights the limitations of a company's formal strategic planning program.  The relevancy of this article to our course of study focuses on the methods that a company can use to increase the benefits of its strategic planning initiatives.  Although a company often develops its best strategies through informal meetings and planning, a well thought out strategic planning strategy can be used to lead a company through significant market upheavals and sudden changes.  One company whose strategic planning failed its growth initiatives is Blackberry.

Blackberry once dominated the smart phone market.  Its strengths included a strong privacy and security platform as well as its keyboard.  Blackberry strategically positioned itself as the market leader in government and corporate business.  It was an early entrant into the industry and enjoyed tremendous market share.  Over time, however, Blackberry was unable to keep a hold of its strong market share and industry leader position.  

Blackberry, did not align its strategic initiatives to a changing maketplace.  New entrants like Apple's iPhone and Samsung's line of smart phones correctly identified new features and applications that its users demanded and developed its R&D and development strategies accordingly.   Meanwhile, Blackberry stubbornly held on to its initial strategy of producing devices that satisfied outdated needs like security and a traditional keyboard.

Strategic planning must be used by corporations to correctly identify trends in the marketplace, new user needs and innovative features.  Blackberry failed to recognize the need for enhanced multimedia capabilities, innovative design and user-demanded applications.  As such, it fell behind in R&D and could not satisfy the changing market landscape.  Blackberry recognized the need to meet the new requirements of the marketplace after many new entrants into the industry had emerged and captured marketshare.  As such, it played catch up to all these new products and suffered catastrophic loss in market share.  Blackberry showed how hard it is to overcome a lack of correct strategic planning and permanently lost users to more innovative brands.

Corporate strategy departments must ask, "At what point is it required for a company to change its fundamental product?"  "What market conditions indicate a need for new features and overhaul of current technologies?"  "Are incremental changes a desired approach to test and meet user needs or is a fundamental overhaul necessary to stay ahead of competition?"

Think, Plan or Work, Act, Reinforce ?

Man reacts dynamically to changes in his surrounding. “Fight or flight” is a proverb commonly heard. In dark moonlight, the pupils dilate to increase vision. A blood clot prevents tremendous amounts of blood to flow out of the human system thereby preventing loss of life. If a company, in times of turbulence follows a similar approach, they can achieve unprecedented success.

Strategic planning process should not take a traditional blackboard and pen and paper approach where employees are informed about the steps to be followed to reach a strategic goal; rather it should be a continuous nurturing process of “preparing minds”, shaping mindsets of the workers to think in a direction that would lead to successful strategic decisions which would ultimately differentiate a firm from its competitors.This is exactly what Henry Mintzberg points out in his article “The Real Value of Strategic Planning” by explaining how real strategy is developed informally in hallway conversations, flights, etc. When a company is faced with challenging situations it is this nurturing of employees and managers that will help them save the firm as these practical experience will have an upper hand that following book defined procedures to save the firms future. “Real strategy is made in real time”.

The four perspectives to translate a company’s vision and strategy entail managing customers efficiently, financing to make shareholders happy, having streamlined business processes and an adaptive learning environment. With these factors in place, a company can build a strategic management system by having a clear vision, communicating to middle managers, translating organization wide scorecard to templates that can be used by other business units, eliminating non- strategic investments, reviewing these business unit scorecards periodically and refining organizations vision to check if they are in line with the new strategy.

Reference:

https://www.google.com/search?q=strategy&espv=210&es_sm=119&source=lnms&tbm=isch&sa=X&ei=t5NwUsT4GaTfsATynYCQBA&ved=0CAkQ_AUoAQ#facrc=_&imgdii=_&imgrc=LUnHUm-aYvzmfM%3A%3BApoAmjc4PiIKGM%3Bhttp%253A%252F%252Fwww.bain.com%252Fbainweb%252Fimages%252Fcms%252Fhot_topic%252Farticle_chart_Clarify_strategy.gif%3Bhttp%253A%252F%252Fwww.bain.com%252Fpublications%252Farticles%252Fclarify-strategy-choose-where-how-to-win.aspx%3B600%3B400

Strategically Planning Healthcare

As the ACA is implemented and a few score million American citizens sign up for health insurance with the Government, strategic planning has become imperative for all organizations in the pharmaceutical distribution system (PDS). Current changes in reimbursement mechanisms, broader health regulations for coverage and a humongous effort to serve millions has forced managers of pharmaceutical manufacturers, wholesalers, and community and institutional pharmacies to strategically plan for the future. Government agencies and third party payers expect the provision of pharmaceutical products and services to be cost-effective, keeping costs to a minimum and demanding excellence in patient care.

The PDS strategically plans for the future by using the following framework:

1. Specification of goals and objectives: review mission statement, identify stakeholders, define customer and market needs
2. Internal and external assessment: strengths and weaknesses (evaluating personnel, product lines, geographic outreach, R&D initiatives, development of cost effective therapies); understanding competitive forces (e.g. community vs. hospital pharmacies) and the advent of alternative delivery systems, including managed health care organizations and mail order pharmacies
3. Generation of strategy alternatives: generate strategies based on research and development of medical breakthroughs, new marketing techniques to improve quality of care, and formation of collaborative programs with managed health care organizations. Wholesalers may consider offering more services to current customers, negotiation of prime vendor contracts and increased distribution of generic pharmaceutical and over-the-counter products. Possible strategies for both community and hospital pharmacies include improved documentation of pharmaceutical services in an effort to justify reimbursement by third party payers, increased use of technology (computerization, automation, robotics) and public relations programs to educate the public regarding the mission of pharmacy practice.
4. Evaluation of strategy alternatives: alternatives both feasible and infeasible
5. Strategy selection and implementation: these projects and programs include pricing, and additionally defining warranties, labeling etc. for pharmaceuticals products
6. Monitoring and feedback: evaluating macro and microenvironment; various strategic tools like the Balanced Scorecard, the BCG Grid and Porter’s Five Forces are used to constantly update the system.

I am interested in studying the roadblocks which might emerge as we see a shift in the healthcare system in terms of coverage, services and delivery routes. While long term planning is more structured, in the current scenario of chaos, what tactics will the entire industry use to streamline processes?

References:

• Strategic Planning, The Economist, March 16th 2009 - http://www.economist.com/node/13311148
• Igor Ansoff, The Economist, July 18th 2008 - http://www.economist.com/node/11701586
• Strategic Planning in the Pharmaceutical Distribution System by Stephen Birdwell, Ohio State University - http://archive.ajpe.org/legacy/pdfs/aj5802193.pdf

How does a student learn strategy?

By Andrew Yenchik

Does a student learn strategy through academic exercise, experiment, and lecture?  Or does a student learn strategy through experience, failure, and on-the-job training?  This question has peaked my interest during the past week of lecture and readings – and I’ve attempted to find a suitable answer to quench my question.

This past summer I interned at USAA as a Program Manager.  One main job function was to participate in the yearly strategic planning activities for each line of business.  Each Program Manager manages the strategic planning, budgeting, and execution of projects within one line of business.  At USAA, these lines of business are banking, property and life insurance, and investments and financial planning.  Moreover, some programs span multiple lines of business, such as data analytics or social media.  I quickly learned as the social media Program Manager that no Porter’s Five Forces or Disruptive Innovation framework would guide me through the rigors of yearly strategic planning.

As I reflect on my recent strategic planning internship experience, I realize that those Program Managers who planned, strategized, and implemented at the highest levels and with the most impact were those that had the most years of experience at USAA – not those that had the best training in strategy or the most experience strategizing in general.  For some reason, institutional knowledge outranked academic knowledge when it came to strategy.

As a student, how do I learn strategy, especially as my experience showed me that experience trumped frameworks and 2x2 matrices?   How do I learn enough in graduate and the first few months or years in a new job to be effective, efficient, and valuable as a strategic thinker and planner?  Even McKinsey agreed that the best way to assure your strategy beats the market is by “digging into the timeless strategic question of why [you] make money.”  [1]  And how you make money can be the secret sauce that no firm wants to share. If I don't know the sauce, what do I do?

I’ve found a few ideas, at least, to set my course during my time in academia.  I’ll share what I think and invite your comments and questions.

First, it appears unimportant which you learn first, strategy frameworks or specific industry experience.  Both are needed in tandem to perform these strategic planning activities. My frustrations regarding lack of USAA specific experience is most likely similar to a fellow Program Manager with years of USAA specific experience and no training on SWOT analysis, balanced scorecards, and budget controls.  However, my value can come as one who understands the academic side of strategy and can quickly and adeptly learn the interworking of a firm (how they make money).  Then, applying the academic side of strategy to that specific firm occurs rapidly and fluidly.  This is the training that can set me apart as a strategist and consultant.   

Second, learning the frameworks, 2x2 matrices, charts, and flows does have a purpose.  How can I expect to convey my ideas and convince others, both specific to a firm and to a certain strategic idea, if I can’t communicate those ideas effectively and clearly?  While arrows and boxes may seem hard to memorize and weird to interpret, most have a purpose to convey a specific idea – and idea that I might need to convey to a top-level executive or ground level engineer.  Drudging through the monotony does have a higher purpose.

Third, the ability to apply strategic ideas quickly and accurately doesn’t always work.  If being a good strategist is a combination of academic knowledge and industry expertise, then why do in-depth strategic planning processes often fail or get set aside at firms like USAA? As Kaplan and Beinhocker reveal, “Companies that achieved such success used strategic planning not to generate strategic plans but as a learning tool to create ‘prepared minds’ within their management teams.” [2]  Perhaps the most important value such strategic planning can bring to a firm and an individual like myself is the skill-set of failing fast, learning fast, and being a prepared mind for the next intense strategic hallway discussion.

In browsing for more literature regarding my question, How does a student learn strategy?, I came across the book, The Strategist: Be the Leader Your Business Needs, written by Cynthia Montgomery.  Montgomery is a Harvard Business School (HBS) professor, best selling HBR writer, former head of the Strategy Unit at HBS, and many more accomplishments I won't take the space to list.  The title, coupled with Montgomery's accomplishments, attracted me to do some research on the book.

In an interview with Forbes, Montgomery gives an answer to almost my exact question.  When asked "How can you be a strategist in a company if you’re a young worker? What are the challenges and opportunities?” she responded:  “It takes time to develop the skills and sensibilities of a strategist. Part of it is ‘science’ – straight-up analytical ability, but a lot of it is judgment, a lot of it is feel. Being a strategist is a way of seeing, a way of thinking, a way of acting. One learns to do it well through practice.”  [3]  What an answer - I've got a long way to go, but appear to be on the right track!  I think this book will be my next read.  What do you think - how does a student really learn strategy?

References

[1] http://www.mckinsey.com/insights/strategy/the_strategic_yardstick_you_cant_afford_to_ignore

[2] The Real Value of Strategic Planning (Kaplan and Beinhocker, MIT Sloan Management Review, Winter 2003)

[3] http://www.forbes.com/sites/danschawbel/2012/09/03/how-to-become-the-strategist-your-company-needs/

Amazon: A Strategic Player

 Jeff Bezos said, “I’m going to do this crazy thing. I’m going to start this company selling books online”. And then he revolutionized the retail industry.

History

Amazon started as Cadabra.com in 1994, an online book selling company.  After succeeding in the online book retail space, Amazon rapidly diversified into other product lines to become the world’s largest online retailer. [1]

To see Amazon’s complete history, visit http://amazongenius.com/timeline-history-amazon-com/

Amazon’s strategy incorporates the three principles of strategy mentioned in the “What is Strategy?” paper by Michael Porter.

1. Creation of a unique and valuable position:

Amazon achieves strategic advantages by performing activities that are different from its rival. Amazon’s has made major moves such as launching the Amazon Prime membership program and the Kindle Reader. These moves help it create a unique and valuable position. It launched the Kindle Reader to closely match the digital reading experience with the traditional experience, a move its competitors did not follow. To gain traction, it offers the Kindle at low prices and allows Amazon Prime members to download many eBooks for free.

2. Making Trade -Offs

In the last quarter, Amazon’s sales have grown by 22% but the net income fell by 45%. [2] The fall in income is because its Chief Executive Officer, Jeff Bezos, is investing significant capital into the delivery network, cloud-computing services and line of Kindle e-readers and tablets. These investments impact short-term profit but help achieve high growth. [3]

As we can see, Amazon is making a trade off. It is foregoing short term profits by investing heavily in research and selling goods at lower costs to create an amazing user experience and capture a significant market share respectively. By doing so, it also creates entry barriers for new entrants. Amazon sells a wide variety of products to counter customer power and eventually become the “to-go” store for shopping.

3. Creating a fit amongst company's activities:

Amazon fits its activities such that one activity’s value is enhanced by its other activities. All of its activities are aligned towards becoming a dominant online retailer. It does so by creating a “wow” customer experience and growing rapidly. Amazon’s easy return policy ensures customer satisfaction and return purchases. To make purchasing quick and easy, Amazon launched the one-click shopping feature. It launched Prime membership to allow members to get free delivery for many items, stream 41,000 movies and TV and borrow over 350,000 titles. Non-Prime members also get free shipping for orders worth over $25. [4]

It started expanding rapidly by launching new products such as Kindle and aggressively acquiring companies to provide a wider variety of products. Amazon is not only creating barriers to entry but is also reducing customer power by offering such a high number of products. Customers are likely to shop at Amazon because most products demanded by users are available at the online store. It is also appears formidable to rivals by its accelerated growth.

What Next?

Amazon has recently unveiled plans to launch Amazon coins – Users can purchase Amazon coins and spend them on Amazon.com. Users of Amazon coins get discounts when shopping Kindle Fire apps, games and in-app items. [5] Do you think Amazon Coins will be an effective component of Amazon’s strategy?

REFERENCES:

[1]  "Timeline History Amazon.com." AmazonGeniuscom. N.p., n.d. Web. 30 Oct. 2013. <http://amazongenius.com/timeline-history-amazon-com/>.

[2] Cooper, Charles. "Amazon Profit Falls by Almost Half, but Sales Rise 22 Percent."CNET News. CBS Interactive, 29 Jan. 2013. Web. 30 Oct. 2013. <http://news.cnet.com/8301-1023_3-57566473-93/amazon-profit-falls-by-almost-half-but-sales-rise-22-percent/>.

[3] Kucera, Danielle. "Amazon Sales Growing Ahead of Holiday Shopping Season."Bloomberg.com. Bloomberg, 25 Oct. 2013. Web. 30 Oct. 2013. <http://www.bloomberg.com/news/2013-10-24/amazon-revenue-tops-estimates-before-holiday-quarter.html>.

[4] "Amazon.com: Amazon Prime." Amazon.com: Amazon Prime. N.p., n.d. Web. 30 Oct. 2013. <http://www.amazon.com/Amazon-Services-LLC-Prime/dp/B00DBYBNEE>.

[5] Rao, Venkatesh. "Why Amazon Is The Best Strategic Player In Tech." Forbes. Forbes Magazine, 14 Dec. 2011. Web. 30 Oct. 2013. <http://www.forbes.com/sites/venkateshrao/2011/12/14/the-amazon-playbook/2/>.