Pharma Reform

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