Professor Brian Smith, Visiting Research Fellow at The Open University Business School, Adjunct Professor at SDA Bocconi in Milan.
Emerging practice in pharmaceutical industry offers new ways to improve the annual business plan review process.
The size and reach of pharmaceutical (pharma) companies varies greatly: from vast multinational global conglomerates to small start-up companies; from speciality firms to those spread across almost every therapy area. Despite this variation, our research shows that the annual business review is used almost universally in the industry to formulate and implement competitive strategy.
Despite the time and effort invested in these reviews, only a small minority of the companies we studied actually thought the process was valuable. By studying this minority, three valuable lessons emerge for the industry as a whole.
Lesson 1: The two sides think differently
Executives usually think in terms of sales, profit and return on investment (ROI) and justify their plan in that language. Business owners and CEOs think in terms of risk-adjusted ROI and evaluate a plan in terms of not only what it promises but also the probability of it delivering on that promise. This small but critically important difference in perspective explains the weaknesses of the business plan review process in most pharma companies.
By contrast, those unusual pharma company executives who have overcome this problem share a common way of thinking about business risk as a three-component model summarised in Figure 1.
Lesson 2: Pay attention to sub-categories of commercial risk
Although technical and political can be important, it is the understanding and assessment of commercial risk that is crucial to pharma companies. To analyse commercial risk more effectively, it should be broken down into three further categories, as shown in Figure 2.
This sub-division of commercial risk is important because it allows executives to a) focus their attention on whatever type of risk is most important to their particular business, and b) to then analyse that critical risk in detail.
We found that leading companies talk of each of the three categories as having multiple sub-components (see Figure 3). Market risk, for example, is a combination of risks associated with estimating total market volumes, market category shares and forecast growth rates. In the innovative markets where market risk is important, all of these estimates have wide margins of error and these are the primary cause of commercial risk. Share risk, by contrast, is important in mature markets and arises from the nature of the competitive strategy, especially how well it addresses market segmentation, targeting and positioning and how well it anticipates market trends. In the commoditising markets where profit risk is the focus of executives’ attention, the key issues are costs, prices and competitive response.
A lack of attention to any of these factors leads to commercial risk. In total, our research identified 15 sub-categories of commercial risk. Few companies managed all of them but the best companies pay close attention to those that are important to their particular business.
Lesson 3: Carry out Marketing Duo Diligence at two levels
The third lesson is to carry out a practical application of the risk perspective, which we named Marketing Due Diligence[i], to avoid a wasteful, often sub-optimal process. This works at two levels.
At the level of those who evaluate and approve business plans, business owners and their CEOs use these ideas to assess business plans rigorously and methodically. The Marketing Due Diligence process then becomes a kind of diagnostic tool, systematically revealing any areas of the plan in which commercial risk has not been well understood or managed. By focusing according to product category life cycle stage, boards find this approach not only effective but efficient, allowing them to prioritise their time onto parts of the plan where poorly-managed risk is most likely to be found.
At the level of those who prepare and present business plans, executives in various commercial functions use these ideas to guide their planning process, in effect using Marketing Due Diligence as a kind of checklist to ensure what they present to the board is as strong as it possibly can be and, importantly, is expressed in the language of risk-adjusted ROI. Again, product category life cycle stage allows prioritisation of executives’ efforts but each of the three main components of commercial risk can be managed better and mitigated.
Professor Brian D Smith researches strategy in pharmaceutical markets at The Open University Business School and SDA Bocconi, Italy. He welcomes comments and questions both here and at brian.smith@pragmedic.com
[i] A summary of Marketing Due Diligence
- Business plan reviews need to discuss risk-adjusted ROI
- Commercial risk has three main components
- The risk profile of a business is related to its product category life cycle stage
- Each component of commercial risk has a number of elements
- Each element can be understood and managed by an appropriate technique
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