So many failed business strategies…

May 14, 2017

The unofficial theme of my 15^th business school reunion was: Founders or CEOs with failing business strategies missing the advice that might save their companies. I heard countless stories of companies teetering recklessly on the creation of new capabilities that nobody wanted or needed. And in each example the story teller was a high-level executive or investor with industry expertise and a broad understanding of the business. So, what’s going on?

On the one hand, if you need strategic help you’re in good hands with MBA grads with 15 years of post-MBA experience. And it’s no surprise that we have front row seats to some of the worst train wrecks in the global economy. These are exactly these kinds of minds and hands needed to solve difficult problems. Further, as much as I respect my classmates some degree of discounting of their perspectives is in order – I certainly don’t want to suggest that we have all the answers. But what struck me was that these stories weren’t coming from the career consultants, they were coming from Chief Financial Officers, Chief Marketing Officers, and other operational professionals. These stories were being told by individuals who were brought in to do another job, other than strategy, but being smart, observant students of business they could diagnose the problems and develop viable solutions.

I want to illustrate something general about business that becomes particularly important in Market Access. Why aren’t these business leaders listening to their junior executives? Why are investors continuing to fund companies with bad business models? Why don’t my classmates quit and find something more fruitful to do? (the answer here is simple, almost everybody in these kinds of companies was either ‘riding it out,’ currently out or in the process of leaving, or job searching).

Why don’t business leaders listen to their (junior or other) executives?

I’m not clear on this. I think that our business culture has developed into a command and control type of so called ‘leadership.’ We mistake direction for leadership. Clearly people closest to the customer have ideas and insights that management does not. And the reverse is true too. There does need to be some form of positive feedback loops from BOTH bottom to top and top down. Problems develop when one part of the organization (sales or product development or compliance) becomes too powerful – and management gets the sense that if they listen to these loud voices they’re being accountable to the rank-and-file. The questions are always to whom? And why?

Further, we may also mistake excellent management (keeping the business alive and running smoothly) with strategic vision and industry leadership. If the highest levels of management benefit largely from keeping the company going, why do they care whether the assets are viable after they’ve left the company for retirement or another CEO/Senior Leadership Team role?

Here are three highly stylized examples adapted from stories reported to me this weekend – (stylized to protect both company and individuals – they do NOT represent any real companies)

A media company currently contracts with music labels and bands to buy the rights and then resells these titles to the likes of Apple Music, Spotify, Amazon Prime, etc. The CEO’s vision was good for the competitive environment from the past, and they are probably 3 years behind in terms of the way they do business with the labels, how they serve the product to their customers, etc. My friend was reporting to the CEO and continuously drove the company to develop new business models and the technologies to support them. Instead of developing a medium-term defensible and unique position, the company continues the same middling strategies – and it looks like my friend will leave the company as revenues and long term fortunes decline.

Here the CEO’s inability to articulate the company’s vision lead to a lack of direction and an inability to hear and integrate outside thinking. You can improve a strategic vision that doesn’t exist.

A healthcare company has developed a product for a foodborne ailment. The first dosing regimen wasn’t realistic and my friend asked the clever entrepreneur/developer/CEO to reformulate. The reformulation was successful and the product was ready for immediate commercialization. However, the start-up had none of their Series A funds left. With a market ready product, the company raised another large tranche. But instead of going directly to the market with the available presentation, the CEO decided to go directly into an end stage consumable. My friend, who is both an advisor and investor in the company, advised against as it limits the company’s potential marketing and partnering scope while dramatically limiting potential consumer product exposure.

Here the CEO’s tunnel vision and lack of marketing chops lead to the development of a product that few will want to buy and a missed opportunity to partner more broadly and expose the product to a much larger audience.

Friends working as junior executives for global fortune 50 companies complained of a limited ability to change the course of business units they oversaw much less the general strategic vision of their companies. A few mentioned ‘just riding it out’ – and these are not the kinds of brains we need riding anything out.

Here brilliant junior executives feel marginalized and ignored as they are subjugated to direction from above instead of being able to set their own courses for their businesses and employees.

The problem

There’s a problem with the way we invest in, incent senior management, and structure companies. With massive consolidation comes the intrinsic problem that the biggest companies in any industry have a strong survivorship bias. The biggest companies can make hundreds of mistakes and still soldier along. Small companies, on the other hand, succeed or fail often due to one product or one extremely unwise decision.

Why, therefore, are we providing excellent MANAGERS huge financial incentives to keep large companies profitable? Are they taking any risk? I’d argue that with large golden parachutes they make a ton of money for failure and only slightly more for success. That’s not an environment where creativity at the Junior Executive level is going to win out.

Why not split these companies into fast growing parts and cash cows – and hire and pay the appropriate management teams for each division? Having one giant conglomerate with a ‘growth’ mandate means that the highest levels of management can continue in their jobs despite being completely wrong about where the growth drivers for the future will develop within their own companies. So long as the company grows a total of 5% it doesn’t matter if management missed an opportunity to grow it by much more.

In smaller companies the problems may be more acute once the vision goes haywire. Investors are often bound to the CEO through equity and corporate history – American Apparel is probably the best/worst example – how can the other investors remove the CEO to save everyone’s investment and re-establish corporate direction?

One possible solution – Internal competition

Truly independent boards of directors could identify skilled professionals to run the mature divisions with excellence as well as the in-house entrepreneurs to develop the business opportunities of the future. We can then imagine a healthy and friendly competition between divisions where rewards are handed out according to performance (medium-term, not quarterly!). Each manager could be weighed against her opportunities and leaders can be reassigned as needed. There’d be a REAL war of talent for hard working, outspoken employees at all levels – since part of the evaluation would be made based on resource utilization and the folks closest to the work often know where to make the best investments.

Another solution – it’s free and easy, but under used

Enable the voices of the ‘black hats’. It’s not fun seeing negativity in every situation. It’s not enjoyable to work with someone who always sees the flaws with everything you’re doing. And, if Pete from Accounting never has a positive thing to say about the company or the management team, maybe he needs to find another job. On the other hand, if Pete spends 80% of his time seeing flaws that others don’t, or that others are too scared to admit, and has solutions 20% of the time – why aren’t we listening to Pete? Is it better to let our CUSTOMERS find the flaws? Or to have them blow back at our company through lost sales or regulatory findings and government actions? It’s bloody HARD to speak up in many corporate cultures even to provide reasonable solutions for obvious flaws and gaps.

The most beautiful thing about this suggestion is that it’s FREE! 100% No external vendors needed, nothing. All we need is to change our mindset to see constructive criticism as the first step toward improvement. As employees, we are often closest to the products and services we produce and can therefore see things before they become a problem in the market.

A related solution – be more humble – Business Strategy comes from everywhere in your company

In each example employees and advisors already had solutions for the companies’ most intractable challenges. Unfortunately, none of these people were the CEO or on the company’s Sales or Marketing teams. Instead they were financial, operational, information technology, or other ‘support’ staff. Because of their “non-strategic roles,” their strategic insights were marginalized or ignored. This makes no sense – why pay a premium to hire professionals with years of experience on top of an internationally competitive MBA, and then don’t listen to their advice? Why hire outsiders to help develop your strategy, before sitting down and really listening and internalizing your own direct reports’ visions? Who else has your best interests at heart? Who else has more aligned incentives than you? In every example, the story teller had enough equity that it “mattered” to them financially. They cared and genuinely believed that they were providing valuable advice.

Tying it all together (generally)

It’s also possible that investors (PE for portfolio companies, boards of directors, CEOs) should make more of an effort to identify key thought leaders at the Junior Executive level (2-4 levels below the CEO) and develop pathways to communicate with these managers directly. Note that these thought leaders may NOT be the high fliers identified by management for promotion – those kinds of people will simply spout the company line and regurgitate information from the current annual plan. Similarly exclude round-table discussions as all feedback in front of peers and superiors will be whitewashed. Anonymous surveys could be good but present their own challenges. One-on-one discussions directly or via highly respected and impartial consultancies would work.

Are most of the answers the same and in support of the messages presented in the Board Docs? Are there significantly different responses from some business units that suggest a change in leadership or direction are needed?

If it sounds like I’m highly skeptical of CEOs and Senior managers it shouldn’t. But having put together board presentations and seen the process I’ve been alarmed at how much a management team could control the narrative IF THEY WANTED to do that. In my experience, there was no need to since the corporate culture was very strong, we all had the same financial instruments, and the company was doing consistently well. Merger after merger, I became more amazed that management doesn’t do more checking in with folks two or more layers below them – especially in key parts of the organization, like pricing, market access, finance, product development, regulatory, etc.

Tying together for Pricing/Market Access

I was recently asked what I thought would be the greatest improvement in pharmaceutical development. I said that biomedical companies of all types should put the Market Access/Pricing professionals IN-CHARGE of the development activities in the place of the commercial liaison. Certainly, clinical and regulatory professionals need to lead those R&D verticals. We can all agree that getting people to pay for our new innovations is the single most difficult challenge facing the industry today. And many companies that I respect have put together cross-functional development team where various stakeholders participate. But these teams haven’t demonstrated a marked improvement in product approvals or overall increased access. There are numerous reasons for this. And the main one is that we’re adapting a twenty-year-old development model to fit current commercial dynamics. It just doesn’t work.

Instead (and here I’m exaggerating for effect, you should not read into this about any of my previous employers) the folks on the cross-functional team all bring their biases for keeping their teams fully engaged and employed. For example, the Health Economics folks come with a highly academic view of the problem – and one that’s closely tied around what work they can do to help move the product along. And this is great. But when everyone comes up with the safest possible suggestion for the development plan it’s often not the most potentially profitable development plan. It becomes a full employment plan instead.

Thus, the pricing team becomes the black hats. We’re the black hats of pharma product development and business development (I almost always HATED the first presentations of development plans), but years later I would have to package and sell that junk to global payers. Sure, in my ideal world we might get fewer products in development – but the products that were developed would be much higher value. We might get fewer successful clinical trials because trials would be powered for superiority versus market leaders – but the products that would come to market would be higher value and clearly differentiated.

Like the other examples above there’s too much money chasing too few viable, differentiated ideas. Worse early stage investors don’t want to know the real intrinsic value of their products in development so long as they can move them for a profit down the chain. But I’m taking stock in three things – one is we can’t go on like this forever, the decreasing productivity of the industry is legendary. Second as we get older, my classmates may fill the CEO/decision maker role. Third, eventually boards and investors will get more savvy as to how to cultivate ideas at all levels – while balancing the important command-and-control function of good corporate governance.

Confirmation bias being what it is these changes will probably take longer than I hope but be here before I know it. I’ll think that I’m right when I see it.