When Gurus Get It Wrong

How can eminent management gurus whose strategy advice proves so valuable across business in general sometimes get it so wrong on pharma? This column provides a few cautionary tales about stumbles involving some of the most celebrated experts. In showing how they went wrong I underline how important it is to understand the specific characteristics of the pharmaceutical industry when introducing new management concepts.

Porter on strategic alliances

Michael Porter, one of the most famous management consultants and the inventor of the concept of competitive advantage, has set himself strongly against strategic alliances. As the apostle of market competition, Porter regards strategic alliances as being anticompetitive.

This may be the case in many industries. But it has not been so in pharmaceuticals, where the diffuse nature of disease makes it difficult for big companies to achieve a dominant position. Porter's attitude appears eccentric to those in the industry for whom alliances have long been a part of the everyday pharmaceutical scenery. I would argue that strategic alliances have resulted in increased competition in the pharmaceutical industry.

Unfortunately this is not the sole example of an eminent management guru getting it wrong in my view as far as pharmaceuticals are concerned. Experts concentrate on concepts that will be convincing to as many industries as possible. They do not often have the time or patience to understand the different facets of each industry. That can make some of their advice irrelevant or positively dangerous for some industries, including our own.

Outsourcing is a sin

The apostle of disruptive technologies is Clayton Christensen. He has shown through dramatic examples the consequences of new technologies taking over from old, such as the wiping out of Kodak by digital photography.

But Christensen has a bee in his bonnet about outsourcing. He believes that when companies outsource, they risk teaching future potential competitors how to enter the market. This risks companies letting know-how out of their grasp and fosters a situation where the vendor becomes their future competition, according to Christensen.

Clayton Christensen has a very broad education and wide experience: he has a medical background but has metamorphosed into a management guru. While his first, highly popular publications in the United States took examples from a variety of industries, he subsequently wrote a book specifically on healthcare. It was in The Innovator's Prescription, which he co-authored in 2009, that Christensen came out against outsourcing. He based this advice on evidence from industries including pharmaceuticals: "Pharma will find a decade on that they have outsourced their core competencies."

Perhaps Christensen was influenced by some big companies such as Pfizer. During the early days of outsourcing—20 years ago—Pfizer took a corporate-wide decision not to outsource any work in drug discovery. The company was then indeed concerned about loss of intellectual property and considered that core competences should be developed in house.

In 2012 Christensen returned to his theme: "We now understand that managing clinical trials is an indispensable element of drug discovery. And so if you outsource that, then you're outsourcing the activities that in the future will be the critical capabilities."

Outsourcing has been going on for many years, and at a significant level since the early 1980s at least, when the first contract research organizations were set up—for example Kendle in 1981, Parexel and Quintiles in 1982, and PPD in 1985. By 2010, outsourcing accounted for over a quarter of all pharma R&D expenditures. PricewaterhouseCoopers found in 2012 that 43 percent of all pharma and life sciences CEOs had outsourced a business process or function in the previous 12 months.

Yet what progress have pharma CROs made in the past 30 years to make inroads into the pharmaceutical industry? The answer is relatively little: certainly, none have made very great progress in developing their own intellectual property. None are close to becoming anywhere near fully fledged pharmaceutical companies. And I doubt whether many of them even have the ambition now to do so.

Generally CROs have only stood a chance of acquiring intellectual property when the bargaining power of the partner has been weak. They have sometimes been able to offer a means of financing projects which start-up companies have had difficulty financing otherwise. It is hardly surprising that none of these deals have so far led to CROs developing products with major commercial potential.

To avoid this potential problem that Christensen is so concerned about, pharma companies outsourcing to CROs or any other type of contract organization only have to ensure they retain their intellectual property. Also, contrary to the situation between start-up companies and CROs, pharma companies have strong bargaining power relative to any CRO and do not need to concede intellectual property rights. Most pharmaceutical companies are also experienced and efficient in putting effective contracts in place and are unlikely to slip up on intellectual property matters. And so the dangers which Christensen is imagining, in an industry which he has recently rather refreshingly admitted he does not fully understand, are in my view illusory.

Pfizer eventually began outsourcing certain R&D functions in the late 1990s. Now they are firm enthusiasts. For example, since 2000 the company has been steadily increasing a variety of preclinical activities it has been setting up with the Chinese company WuXi. Christensen has failed to understand that in pharmaceuticals outsourcing not only works, but it is favored increasingly by pharmaceutical companies who have seen over three decades now how it can work for them. It does not lead to the problem he raises because intellectual property rights for pharmaceuticals under active development will be strong—and pharmaceutical companies will continue to ensure that they keep hold of those rights.

The Japanese are coming..when?

My third example comes from personal experience at the hands of one particular guru. I have mentioned elsewhere the value I consider Gary Hamel and C. K. Prahalad's concept of core competency has for the pharmaceutical industry. But I certainly would not take as carte blanche any other concept that at least the surviving of these two gurus, Gary Hamel, might have in their advice to pharmaceutical companies.

A few years before Hamel's core competency breakthrough, Glaxo sent a score of my colleagues and I on a residential training week at the London Business School. Gary Hamel was then on the staff there. We were addressed by him one morning at the School's elegant Regency facility. The topic of his lecture—for that is what it turned out to be—was Japan. Hamel's message was that the Japanese were coming—and that if we pharmaceutical types did not cater to this and prepare accordingly, our goose would be cooked.

At no stage did Hamel bring in any pharmaceutical element or example to his lecture. As far as we could tell, he did not appear the slightest bit interested in the then not particularly fashionable pharmaceutical industry. For when it came to question time...there was no question time. Hamel simply turned on his heels and departed smartly from the lecture theatre. That left some of us, including me, feeling a little thwarted. We would have liked to point out that actually pharmaceuticals was not exactly a star market for Japanese companies, and not likely to become one in the near future.

Of course, the Japanese pharmaceutical industry has had its successes outside Japan. But it has not improved its position a great deal since then. Indeed you can argue that it has gone backwards, Japan being one of the very few markets perceived as distinctly unfashionable, its thunder stolen by Brazil, Russia, India, and China (the BRIC's) and many other fast-growing developing countries. Within a couple years of our lecture from Hamel, the Japanese economy had imploded, and 20 years later it is still far from healthy.

However eminent management gurus from outside the industry are, and however applicable many of their ideas may be, they are prone to slip up from time to time when they turn to pharmaceuticals. That is usually because they do not have time to consider the key characteristics of any particular industry such as pharmaceuticals. A deep understanding of these specific characteristics is needed to meaningfully asses whether a new concept will work or not—however eminent the source. Many concepts soon prove universally useless. But in some cases what might work in other industries could be disastrous for pharmaceuticals because of its distinctive inherent characteristics.

John Ansell is Senior Partner at the CRO TranScrip Partners. This is an edited extract from his recently published book Transforming Big Pharma—Considering the Strategic Alternatives (Gower Publishing). He can be reached at john.ansell@transcrip-partners.com.