Principal Advisor, PragMedic, UK
Life sciences companies vary enormously in their size, structure and processes but almost every firm shares the annual ritual of the strategic plan. Whatever the business, the intended outcome of this near-universal process is an agreed view on how the firm intends to win in the market place. As such, it ought to be seen as the most important and fundamental of the firm’s many processes, one that guides all other activities. But catch executives in an unguarded moment and that is not what they describe. They paint a picture of a time consuming task that adds little real value. They talk of the explicit cost of time spent in meetings and crunching data but they also rue the opportunity cost of what could have been achieved in that time but wasn’t. This dissatisfaction is not limited to a few companies nor to those in which executives have not been taught strategic planning techniques. In fact, the inefficiency and ineffectiveness of the strategic planning process is rife across the industry and, if anything, is often worse in companies filled with MBAs. To quote one of my research respondents ‘What we want is rigour, what we get is rigmarole.’ Why is this and how can life science companies make their strategic planning more effective? This question is part of my research into the evolution of the life science industry and the answers are as surprising as they are simple.
The first step in understanding this issue is to see the wood for the trees, as we English say. On the surface, companies use a bewildering array of planning methods and the obvious assumption is that better planning methods lead to better strategic plans. But, as is often the case in management science, the obvious answer is not the right one. Dig beneath the surface and the same basic planning approach is used by almost everyone, albeit with different jargon and acronyms. Stripped of that jargon, almost all planning methodologies are intended to address the same handful of questions. A minority of effective planning firms manage to get good answers to these questions but most don’t, so the answer must lie not in what planning method is used but in the skill with which it is applied. My research into these skill differences reveals that the practice of effective ‘rigour’ firms and their less effective ‘rigmarole’ peers differs fundamentally, as I’ll describe in the following paragraphs. In essence, the differences lie in how firms think about seven fundamental questions.
All strategic planning begins with this question. In rigmarole companies, the answer is typically assumed, implicit and expressed in terms of the product category. ‘We’re in the statins market’ or the ‘immunoassay market’. By contrast, ‘rigour‘ companies define the market explicitly as the customer need to be met: ‘People who need to manage hyperlipidaemia’ or ‘People who need to measure blood protein levels’. This seemingly trivial and pedantic difference is in fact crucially important. This rigorous approach to market definition widens and improves answers to the other six questions, whilst the rigmarole approach narrows and constrains market understanding. Why don’t all firms define their market in this way? This behaviour seems to be culturally embedded. Rigmarole firms are culturally product-oriented, rigour firms are customer-oriented.
Strategic plans concern tomorrow’s market, not yesterday’s, so anticipating the market is essential. In ‘rigmarole’ companies, the emphasis of the anticipation process is on forecasting by extrapolation from historical data: ‘We anticipate the market will continue to grow at 5 per cent p.a.’ for example. Sometimes, an important market trend is considered: ‘Changes in payment systems will increase price pressure’ for example. Rigorous companies recognise that markets are too complex to extrapolate in this simple way. Instead, they gather disparate information about a very wide range of factors in both the technological and social environments. They draw out the implications of these for their market and then, critically, synthesise those numerous implications into a small number of market-shaping factors. The result is a much deeper understanding of what forces are shaping the market and where the market is going. However, most firms stick with simple extrapolation because they feel comfortable with trusted, hard data and simple data manipulation. Equally, they feel uncomfortable with weaving together diverse information from qualitative and quantitative sources and the inductive thinking needed to make sense of it all.
Competitive advantage is, by definition, relative to competitors. In rigmarole companies, competitors are defined as those companies selling similar products. In other words, they are the people trying to erode our market share. Rigorous companies look at the competitive environment in a different way. They see competitors as people trying to erode our profit. This means they consider suppliers and channels, customers, new entrants and substitutes in addition to direct competitors. This gives rigorous firms a much fuller view of the competitive arena. The reason most firms don’t do this seems to be semantics and tradition. Conditioned to defining competitors as product rivals, they blind side themselves to indirect but often more important challenges.
Understanding the differences between customers is fundamental to strategy. In rigmarole companies, segmentation is synonymous with data categorisation. Customers are grouped according to data on things like their current usage, size of the account or perhaps disease stage. In rigorous firms, by comparison, segmentation is synonymous with homogeneity of needs. Data is understood to be nothing more than a proxy for customer needs. It is used to aggregate and divide customers into groups who respond the same way to a given value proposition. This needs-based segmentation enables rigorous firms to target more effectively and design more compelling offers. That most firms don’t segment effectively has been understood for years. It seems to be explained by a fundamental confusion about how segmentation works and, again, the comfort blanket of existing, quantitative data.
Effective strategies focus resources onto those parts of the market where risk adjusted return on investment is optimal. In rigmarole companies, targeting is driven by opportunity size. Firms focus on customers not yet using our products and on large, untapped markets or segments. In rigorous companies, opportunity size is only half of the picture. They also consider the difficulty of seizing that opportunity and target according to both criteria at once. This methodology enables a much more sophisticated kind of targeting that treats the market as a portfolio of customer segments. Like market definition, the failure to target effectively seems to be a cultural issue: organisations with strong sales cultures have no difficulty deciding where to attack but find it much harder to choose where not to focus their efforts.
The most visible part of any strategy is the offer made to the customer. In rigmarole companies, this offer is based on the classic 4Ps of product, price, place and promotion. However, these components are driven by different departments and as a result are often disjointed and driven primarily by internal considerations. In rigorous companies, the offer begins with the needs of the targeted segment and different kinds of value – clinical, economic, systemic, emotional–are built on those needs. The result is more coherent and compelling offer in which the 4Ps are components but not drivers. The failure of most companies to take this customer-centric and holistic value approach derives from the siloed way in which most life science companies are structured and their difficulties in working cross-functionally.
In most companies, metrics have an almost sacred status. What gets measured gets done is a common mantra. In rigmarole companies, the metrics component of strategic plans is focused on what will be spent and what will be earned. Budgets and targets are often the largest, most argued-over section of a plan. Rigorous companies look at metrics in a different way. Budgets and targets are used, of course, but they are only part of a more thoughtful approach to metrics. More effective companies define three categories of things that have to be measured:
• Lag metrics that record what has happened (Sales and profit targets are part of these)
• Lead metrics that predict what will happen (Spending budgets are a component of these)
• Learning metrics that test working assumptions (Budgets and targets contribute little to these).
Used as a synergistic set, these three types of metrics measure outcomes but also allow mid-course corrections to strategy and, via organisational learning, provide better inputs for the next planning cycle. The reason most companies don’t do it this way seems to be the political dominance of finance departments, whose narrow obsession with results distorts the use of metrics, and reward systems, which are usually based on outcomes.
So the differences between effective firms, whose planning is rigorous, and ineffective firms, whose process is a wasteful rigmarole, is surprising but simple. It is not in the questions their strategic planning process addresses, but in how they try to answer the same seven questions everybody else asks.
There is an important, counterintuitive and very practical lesson to be learned here, one that senior executives should apply to their strategic planning processes. Before this research, and based on my twenty years of experience as an executive in the industry, I thought that rigour was synonymous with lots of data, analysis, spreadsheets and charts. In other words, I thought effectiveness in strategic planning is derived from the precision and meticulousness with which the seven questions were answered. But now, having built on my industry experience with almost two decades of academic research into the life sciences industry, I can see that rigour is synonymous with holism, the viewing of the business and market as a whole, integrated system. In other words, meticulous data gathering and precise analysis is necessary but insufficient to an effective strategic planning process. Equally important and more fundamental is the way that firms think about the seven questions. And that way of thinking has less to do with tools and techniques and more to do with the firm’s way of looking at the market, which is often culturally embedded. The important differences between the perspectives of effective ‘rigour’ and ineffective ‘rigmarole’ firms are summarised in box 1. These, my research concludes, are the most important differences between those firms where strategic planning is a rigorous, value-adding process and those where it is a value destroying rigmarole.
Brian D Smith is the world’s leading authority on the evolution of the life sciences industry. Working at Bocconi University, Italy and University of Hertfordshire, UK, his most recent book is “Darwin’s Medicine: How Life Science Business Models are Evolving”. He welcomes questions and comments at firstname.lastname@example.org