Is the “Big” in Big Pharma a value creator or liability?

The recent Johnson and Johnson product recall highlighted a concept I have been researching as I reviewed the rapid growth in the pharmaceutical industry over the past several decades. When the financial institutions and auto companies started to fail and were bailed out because they were “too big to fail” I started looking at why and how big companies could have gotten to that point of failure, near collapse, or just outright dysfunction.

The espoused benefits of being “big” include critical mass and economies of scale arguments with opportunities for increased purchasing power and dominant market presence (I know the antitrust lawyers and FTC don’t like that terminology but it is a reality).  Big companies clearly have more leverage and their balance sheets usually allow for more financial and strategic options than are available to smaller companies ( just ask the small banks if they are getting the same favorable terms as the big guys).  Being big used to provide a sense of stability and certainty, a sense of lasting power.   For all the benefits of being “big” however, one has to also consider the challenges as well as the potential liabilities that come along with being a big company.

Companies seem to eventually reach a point at which they are no longer able to leverage the benefits of their organizational size and their size actually begins to work against them.  At this point their organizational size makes it nearly impossible for the company to be managed efficiently and effectively.  This size factor is not necessarily related to the amount of revenue or profits but is more about organizational size relative to the complexity of the business and the market in which the company does business.  There seems to be some breaking point in terms of the cumulative affect of the numbers of people, numbers of companies or divisions within the company, the numbers of countries the company operates in, the layers of management from top to bottom.  It is at this point at which things just start to fall apart.

Here are some things that “big” companies struggle with as they get organizationally larger in size.  They may do these things but it becomes increasingly difficult to do them consistently well across their company at the same high level of proficiency as when they were a smaller company.

  • Management complexity increases
  • Maintaining high personnel standards for expertise, competence, and integrity consistently across the entire organization
  • Intense focus on delivering high impact, value creating results
  • Pinpointing responsibilities and accountability
  • Disciplined expense management and resource deployment
  • Frequent and value added management oversight (inspect what you expect)
  • Senior management and executives personal interactions with customers and employees
  • Frequent, personally engaging corporate communications especially in a global business
  • Aligning organizational goals and objectives with the daily activities of front line employees
  • Comprehensive, insightful strategic planning that factors and address changing market conditions

So what happens when you get “too big?”

  • Expertise and competence are diluted across the larger organization
  • Management oversight becomes less diligent
  • Operational inefficiencies build over time
  • Blurred lines of accountability leads to finger pointing when things go wrong
  • Policies and standard operating procedures become management crutches for managing performance and maintaining control
  • High quality standards are compromised by diminished diligent oversight and lack of intervention
  • Loss of focus on high impact mission critical projects
  • Cultural expectations as delineated in corporate mission and visions statements become meaningless as employees witness an increasing number of breaches by management
  • People management and career development (organizational development) becomes more politically driven than skill, expertise, and performance based
  • Employee morale suffers from management indifference (nobody really cares about what I’m doing anyway)
  • Creative people and people with specialized expertise tend to become frustrated and leave
  • Mistakes and poor decisions go unchecked and become legal and regulatory issues with greater frequency and increasing severity
  • Expenses get out of hand and budgets become bloated
  • Strategic planning becomes business maintenance and risk avoidance rather than innovation to meet customer needs
  • Management and employee training becoming task oriented, generic, and less focused on personnel development
  • Wall Street becomes the customer with executives focused more on quarterly financial results than attending to market needs and expectations
  • Opportunities for breaches in personal and corporate integrity increase

Big Pharma grew fast over the past several decades.  I believe the negative unintended consequences of that growth are now being realized.  I wonder if Boards of Directors and executive teams are considering that their large size may be detrimental to their success and possibly their survival.  More mega-mergers anybody?

mike@pharmareform.com

  • Sardonicus

    I agree with most of your identified risks of a large organization, not all of them.

    One factor which I have found very significant, but not entirely intuitive, is that the number of people involved in accomplishing a single task tends to increase steeply with the size of an organization. How many people does it take to change a lightbulb? Generally one in a small organization, and it may even be the boss himself, if he notices it.

    In a large organization, someone first decides what the standard lightbulb is, and then another person estimates the required number of lightbulbs that need to be replaced every year and requests the budget. A financial manager approves the budget (after asking whether the number of lightbulb replacements can be reduced by leaving the light on), and assigns someone else to negotiate the outsourcing of lightbulb replacement. A health & safety manager evaluates the safety risk and writes a lightbulb replacement SOP. When someone sees a broken light, he or she sends a message to a helpdesk (which generally replies that lightbulb replacement is the task of another team, reachable at a different address), and a planning committee prioritizes the tasks of the light-bulb changer and schedules the replacement. And then, maybe, somebody replaces the lightbulb. Safety rules probably demand that a second person comes along to hold the ladder.

    Big does not have to imply inefficient. Look at the US Army, probably one of the biggest institutions on the planet and rather effective at what it does. The real danger is an an illogical and overly complex distribution of tasks. Small organizations are protected because there are few people over which the distribution can be done. But large organizations do not have to fail.

  • http://www.jfkhealth.com David Avitabile

    Great post on a subject that has vexed me since the first rounds of major M&A activity in pharma started happening.

    Just look at the current state of “big pharma” and ask yourself, has getting bigger paid off for them? Is their size driving greater innovation? Is it lowering operating costs? Are they attracting the best and brightest people?

    I wonder if the best thing for the health of the pharmaceutical industry now would be the exact opposite of consolidation: divestitures and spin-offs that create many more smaller to mid-sized players, focused on specialty markets.

    In fact, compare the continuing woes of Big Pharma to the success of smaller to mid-tier players. Companies like Shire, Cephalon, Novo Nordisk, Lundbeck and Forest Labs.

    I know where I’d rather be working, and which companies I’d rather be courting as clients.

  • http://www.pharmareform.com Mike Wokasch

    David,
    I agree. I think as the healthcare market becomes increasingly cost conscious and more demanding for innovation I believe the advantages of larger organizations diminish and companies with smaller efficient infrastructures and focused research are going to be more likely to meet those expectations. Thanks for the comment. mike@pharmareform.com

  • http://www.pharmareform.com Mike Wokasch

    Sardonicus,
    Thank you for your thoughtful comments. I love your light bulb analogy. It supports the idea that the larger the organization the more management has to rely on expertise, competence, and integrity of the employees to get the results it expects (delivering the task, changing the light bulb). At any point, if you have a breakdown the task does not get done. If the task is not mission critical or doesn’t expose the company to harm or customer issues, it probably goes unnoticed until there is a cumulative effect (lots of light bulbs are out and you can’t see anymore to get the mission critical tasks done).

    While I have never been in the army, (commissioned officer in the Public Health Service as a pharmacist) I believe the army is a great example of focusing on expertise, competence, and integrity to manage their large organization to get very complex tasks executed. I believe this start with basic training, developing expertise (not just the ability to do something), insisting on competence (do it until you can do it well, even if you are sleep deprived, if necessary), and reinforcing a culture of integrity throughout their careers. My impression is the US army and other armed forces may be one of the best at training for expertise and competence and instilling a culture of integrity and applying this with attention to detail in execution and attentive management oversight with timely corrective interventions that are seen as part of the learning process rather than micromanagement.

    And last, I agree. Large organizations do not have to fail, but they will all struggle with the issues discussed (maybe not all of them at any one time) more so than smaller companies and at some point, their organizational size will eventually lead to unintended consequences, some of which may be detrimental to the company image or finances.
    Again, thank you for the insightful contribution.
    mike@pharmareform.com