WotM: Pharma - a complex matrix of strategic choices will drive the organization design. | ON THE MARK WotM: Pharma - a complex matrix of strategic choices will drive the organization design. | ON THE MARK
29th April 2015 Admin

WotM: Pharma – a complex matrix of strategic choices will drive the organization design.

By Peter Turgoose, Senior Consultant

The changes that we are seeing mooted in the Pharmaceuticals sector, and in some cases playing out, present us with some fascinating challenges when viewed through an organization design lens. What we are seeing is both a fragmentation of the traditional value chain which flows from initial identification of need, through R&D, clinical trials, commercial production, and sales, alongside a need for the integration of different designs as a result of M&A activity.

In the traditional Pharmaceutical model serving western markets we have seen organizations designed to deliver a positive return on R&D investment through the maximisation of margins once the product has successfully moved into commercial production, with returns declining once the product has been genericised.  A company owns and controls all the work and activity in the value chain end-to-end, with their value leadership coming from the products that they develop.  In simple terms, these companies have a very specialised ‘front-end’ designed around product groups, with an operationally excellent ‘back-end’ which pushes the product into chosen markets where demand is created by need, with price as a secondary consideration.  This business model is based on making long-term investments in R&D at the beginning of the value chain, which can be recovered through high margin sales some years later.  In this business model the power lies in R&D, they are deciding which products to develop and trial, and are thus deciding which products go into commercial production and forward into the market.

In the proposed new world the end-to-end value chain is no longer owned by a single company.  The value chain is being split at the point before commercial production begins; one company focused on the start of the value chain investing in R&D to deliver a licenced formula for a product which it will ‘sell on’ to another company working at the end of the value chain to produce and sell the product. This model presents some interesting strategic questions for both companies, the answers to which will have a fundamental impact on the way in which they design their organizations.

The first big question revolves around which company identifies the market need and generates demand?  If it is the R&D company, it puts itself in the position where its business model relies on selling to the highest bidder amongst the competing production companies. This model would require a quite different organization design to one where the production companies are identifying the need and generating demand.  In this model the production companies are identifying the product and buying the R&D capability from the lowest bidder.  In the first model the power is in R&D and with the product, a model in which one might argue that there is little change to the current state, whereas in the second model the power shifts to an operationally excellent production capability.

The second question is more for the production end of the value chain, the answer to which will drive the focus of any M&A activity. Should the production company be product focussed or market/geographically focussed? At one extreme of this we would see one company producing one product group globally; at the other extreme we would see companies focussed on producing all products for one market/geography – both of which are anti-competitive. Whatever choice is made will require different M&A strategies and lead to different organization design issues.

In summary, there is a complex matrix of possibilities for the strategic choices within the Pharmaceutical sector over the next few years, each of which will drive a different organization design.  The danger is that the strategic choices are made without deliberately addressing the organization design. If this happens, costs will rise and we may well see some well-known names disappear from the market.

ON THE MARK’s experience and passion for collaborative business transformation that’s supported by pragmatism, systems thinking, and a belief in people is unparalleled. OTM has been in business for 26 years and is a global leader in organization design consulting.

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