Jeff I2K: Learning From Each Other

It’s almost a year since Jeff (Jeffrey B. Kindler) took over at the helm-of-affairs at Pfizer, the world’s leading pharmaceutical company, and so, it may not be fair to compare him with his name-sake who succeeded the legendary Jack Welch at GE. It’s not just because, come September, Jeff (Jeffrey R. Immelt) would already have spent 5 years there, but also because of the inherent differences between the two companies. For instance, GE’s turnover in 2006 was almost 4 times that of Pfizer ($168 bn vs $ 48 bn). That’s because GE is a multi-category conglomerate unlike Pfizer which is limited to the pharmaceuticals space. These are fundamental differences, to name but two.

However, I think it would be fair to compare the two Jeffs, since both head companies that are most admired in their respective categories. The comparison would be interesting in terms of their vision, the leadership and the management style adopted by them to crystallize that vision. In short, the comparison would be to see how the two have led their respective companies. Both GE and Pfizer are on the threshold of transformation, and how a company transforms itself to accommodate for changes in the operating environment, depends a great deal on the people who lead it. Both Jeffs took over their respective companies in very different circumstances. What Mr. Immelt took over from Jack Welch was not just a fine-tuned productivity machine. He took over a huge legacy. He took over a position where constant comparison of leadership style and practice with his predecessor would be made. Investors might not have given him the benefit of doubt. Mr. Kindler, on the other hand, had no such legacy bogging him down. He succeeded Henry McKinnell, who was not too popular with investors or the Board, at least not when he left. On that count, he had it much easier. He got into action immediately. He had to!

“Clouds have darkened over Big Pharma”, said a late January article in The Economist. Investors had lost faith in drug companies’ growth prospects. A new report from Accenture, a consultancy firm, had calculated that a whopping $1 trillion of “enterprise value” (which measures future profitability of companies) had been wiped out. Mr. Kindler knew it was up to him to set the pace of change repercussions from which would percolate through the entire industry. He had to demonstrate to the Street that Pfizer continued to be a profitable business while he was still grappling with the Torcetrapib issue and an increasingly dry pipeline. He would either be known as a man who changed the way business in the sector was done or would be condemned to infamity. Either way, for Mr. Kindler, it was a tough call. He was firefighting!

In contrast, when Mr. Immelt took over, GE was a company which had taken management innovation very seriously. Mr. Welch had taught managers to apply their imagination relentlessly to the task of making work more efficient. Mr. Immelt, through a series of high-profile initiatives, aimed to create a mind-set to maintain bottom-line discipline while fuelling top-line growth. His vision was to grow; but that growth was not to come through geographical expansion and acquisitions. He knew that GE was process driven and he wanted to make organic growth a process. For Mr. Immelt, all the great work of his predecessor had bought him time to drive change. He was not firefighting!

Traditional Organizational Strength
At GE, Mr. Immelt immediately put two of its traditional strengths – process orientation and the ability to develop, test and deploy management ideas – in service of a different goal. That goal was to make growth a process in GE. “We’re now in a slow growth world,” Mr. Immelt had once told Harvard Business Review Editor, Tom Stewart. He had also said that he realized the market was more global after 9/11 and that investors would place a premium on companies that could generate their own growth. One of the first decisions Mr. Immelt took as CEO was to “throw a billion dollars into research” because he knew that growth would be driven by innovation. “Investing in growth capability allows the company to deliver through economic cycles”, he wrote in his letter to investors on Feb 9th, 2007.

How did Pfizer change to adapt to the post 9/11 economy? How did Mr. Kindler take this great operating company and add to it while making sure that nothing was lost? Did he try to capitalize on Pfizer’s inherent strengths to begin a process of growth? Pfizer is in a business where innovation is the order of the day. In 2005, Pfizer invested $7.9 billion into R&D, easily the largest investment of that nature in the sector. That kind of investment was needed to keep the pipeline full. In today’s world, a full pipeline is a competitive advantage. Yet, in January this year, Mr. Kindler announced large scale cuts in R&D spending. He unveiled a strategic overhaul of a magnitude rarely seen in the business. The world’s biggest drugs firm cut 10,000 jobs, about a tenth of its global workforce. About a fifth of its sales force in Europe and America will lose their jobs this year and up to five research centers and several manufacturing sites closed down. “There are no longer any sacred cows,” promised Mr. Kindler. Contrast this with GE. Mr. Immelt apart from investing a billion dollars in research spent a 100 million more in renovating GE’s research center in upstate New York! Analysts called Mr. Kindler’s decision a knee-jerk reaction. He called it “investment optimization”.

It is not clear why he had to do it. Margins in pharmaceuticals are decent – to say the least. Shouldn’t Mr. Kindler have worked on bringing in higher revenue? Couldn’t he have cut costs in non-core areas such as G&A? Let’s assume he’s done it and that the impact on the bottom line wasn’t strong enough. But shouldn’t there be more spending in R&D and in marketing? Wouldn’t Pfizer have seen higher margins because it would have a better flow of new products and services? Pfizer could have saved billions by shifting manufacturing and research bases to low cost regions like India and China. That would have also helped Pfizer to work with the government, in India, to iron out concerns related to Intellectual Property Rights (IPR). After all, the Indian government declared that companies would be granted a 5-year exclusivity period to market their products, if they brought in research dollars to India. In the light of Pfizer’s decision to expedite globally patented product launches in India, this was a golden opportunity.

Customer and Market Focus
At GE, Mr. Immelt looks to run transformative change. Since 2001, he directed his team to quickly assess gaps for growth and filled them through an aggressive acquisition strategy which spanned across 2003. Once convinced that gaps were filled, he proceeded to pull together his best people in Sales and Marketing and formed the ‘Commercial Council’, a core inner group of advisers. These were not fancy MBAs or swanky suits. These were people who had their ears and eyes as close to the ground as possible. These were people who worked closely with customers and who could help bring the voice of these customers into the organization. Mr. Immelt decided that he had to listen to his people. People with ideas!

Mr. Kindler might have a similar practice in New York. How does someone outside of the US make his ideas heard? Does Mr. Immelt listen to people outside of GE’s headquarters? My guess is that he does. It might not be directly. However, a company cannot continue to do well unless it has its ears close to the ground. To get a pulse of the market, GE must listen to its customers everywhere and not just in Corporate Headquarters.

Pfizer could do well to institutionalize the ‘listening to ideas’ theme. For instance, it could have blogs for employees or any route of communication outside the usual, formal one – the email. A section on Pfizer’s intranet titled “Tell Jeff What You Think” is limited to 300 characters! That’s a lot to tell Jeff what I think! He may have his version of the ‘Commercial Council’, but its not showing up in his communication to the Pfizer world, or, in any of the decisions that percolate down the totem pole. This is from an internal standpoint. Mr. Kindler – LISTEN TO YOUR PEOPLE, LISTEN TO THE CUSTOMER! Chances are you won’t need McKinsey or Bain, if you do! That’s cost saving again.

From an external standpoint, at GE, Mr. Immelt realized that the only way in which the company would get paid in the marketplace was by demonstrating to investors that the success story was repeatable. For that, growth had to be made a process! He had to define the process and set the right metrics.

At Pfizer, how is Mr. Kindler’s strategy doing with investors? Pfizer’s share price rose and then fell after the Torcetrapib debacle which recently claimed John LaMattina, Pfizer’s R&D Chief. Did the share price rise because of investor confidence in Mr. Kindler or as a pat on the Board’s back for showing Hank McKinnell the door? Will Mr. Kindler be able to convince investors that his new strategy, unveiled in January, is sustainable?

Developing Markets
Mr. Kindler’s initiative of talking to different customer groups such as the American Medical Association (AMA) is indeed credible. However, I suspect the talks were less from a “tell me what you need” mode that CEOs adapt while talking to important customer groups. Mr. Kindler’s discussions might have been more from the point of view of addressing changes in the HealthCare Policy of the Democrats. He also spent time talking to regulators and insurance companies to tell them that clamping down on drug prices may not be the ‘real problem’ in the Federal Government’s Healthcare Policy.

The real problem, said Mr. Kindler, was to ensure that more people have access to medicines and healthcare by ensuring they are brought under the Social Security scheme. This is a great idea for a country like the United States. What about third world and developing world countries? What about self-pay markets like India? ~70% of people here do not even have access to basic healthcare. Pfizer is a company that makes money from countries outside the US. While the US is the single largest pharmaceutical market, shouldn’t Pfizer think about other markets – especially developing/emerging markets which are expected to drive business growth? Does Pfizer have an India specific strategy? GE does!

GE’s strategy is not just India specific but one for driving growth in developing markets. Mr. Immelt is clear that when a product is developed for India or SE Asia, it is not simply an American product that is “defeaturized”. While this level of customization is still aspirational at GE, Mr. Immelt is working on a big reorientation in employee thinking. He wants his people to move from a ‘defeaturing’ mindset to a customer optimization mind-set. This means that GE is developing a business plan which would leverage its global knowledge base and use levers specific to local markets to drive growth. This is what Sony Chairman; Akio Morita famously called “Glocalization”. I am surprised how Mr. Kindler is not too familiar with this term!

Work on this has already begun. GE recently commissioned 50 people in India to work with the Tata Group on developing the “Rs. 1 lakh car” which is assumed to use a lot of plastic. Why? GE has high stakes in the plastics business. To capitalize on opportunities like this, GE recently promoted their CFO in India, Tejpreet (TP) Singh Chopra, who knows key bureaucrats and stakeholders – a sure advantage over ex-pat CEO, Scott R. Bayman. Investors rewarded GE instantly. Share prices in India rose 10% in the week following the announcement.

Similar developments took place in Pfizer India in mid 2005. However, Pfizer did not leverage the change to its advantage. GE already began work by sending an executive team that met with key government officials, last week, to assure them of large scale plans in India and their added interest to invest in projects in the infrastructure sector such as roads, real-estate, ports and airports. GE is clear about how they want to leverage global technology to build products ‘in the market and of the market’ – jargon for a localization strategy.

At Pfizer, an executive team, with Mr. McKinnell, came to India last summer on a similar mission. Not much fruit was borne from that visit, either due to misplaced remarks by Mr. McKinnell against Indian generic companies or Pfizer’s plans for India not considered ‘exciting’ enough by the Indian administration. Let’s hope Mr. Kindler’s visit in early June kick-starts a serious effort from Pfizer to build and execute an India specific strategy. Mr. Kindler – INDIA IS AN IMPORTANT MARKET. LEVERAGE ITS STRENGTHS!

Pricing
While Pfizer and most of the pharmaceutical world, faces flak in the press about its pricing (Sutent/Glivec/Avastin), the industry has made no serious attempt to adopt tier-pricing strategies to suit market needs and affordability. This, ostensibly, is to control parallel trade.

If companies were indeed serious about “improving access to more and more people”, as Mr. Kindler and others of the tribe have claimed, a better alternative to including more people under US Social Security like schemes would be to shift manufacturing facilities into India. Indian generic manufacturers have increasingly demonstrated to governments in the Western world that it is possible to provide low-cost, high-quality products manufactured in India. Incidentally, the largest number of US-FDA approved manufacturing facilities outside the US is in India. If large scale production shifted to India, economies of scale would come into play and reduce costs of bulk drugs. Medicines could therefore be produced at a fraction of current costs while not compromising on quality. This would help firms take their products to peoples of many different countries thus helping achieve quantum growth and not incremental growth by, for instance, including relatively small numbers into the Social Security scheme for healthcare insurance.

So how would firms make the billions of dollars that are needed to get drug entities from the labs to the markets? While medicine costs would drastically reduce, it would be also possible to have differential pricing strategies (without worrying about parallel trade) and still make money to redeploy into research. The quantum of money made would surely reduce initially, but would even out as increased volumes would offset initial low revenue streams. It is time to rethink the entire R&D value chain since this is the single largest money guzzler for pharma and profitability is bound to increase when firms innovate to improve efficiencies and cut costs in research while also making more money from low cost & high quality manufacturing. Its time that we take heed of the mixed global sentiment about the pharmaceutical industry. This should help us strive to create discipline around pricing strategies. Is it not true that when it comes to the prices we pay, we study them, we map them, and we work them? But with the prices we charge, we’re too sloppy.

How would large scale shifting of research and manufacturing to India and China affect G-7 economies? BPO off-shoring did create news initially, but then eventually died down. Would this catalyze the ‘reverse brain-drain’? What percentage of US GDP does the pharmaceutical industry comprise? I don’t know the answers. The question is – IS MR. KINDLER THINKING OF THIS AS AN ALTERNATIVE WHEN HE PROMISES THAT HE IS WORKING TOWARDS ENSURING MEDICINE ACCESS TO THE NEEDY?

What stops Pfizer from adopting aggressive growth plans like GE? Is it the nature of the industry with regulators and watchdogs eyeing companies with suspicion? Or is it an inherent lack of confidence? Have we considered vertical integration? Isn’t this a good hedge strategy, now with dwindling pipelines and looming off-patent business? If Pfizer is to work towards increasing access to quality healthcare for more people, this sounds like a good idea! But, like someone said in a meeting, “Its not our core competency”!! Lets hope we realize what our core competency is….and realize it quickly!

Good luck, Mr. Kindler! We surely hope Pfizer stays strong at the top!

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