For an enthusiast, witnessing any organization growing consistently, is indeed exhilarating. This becomes even more interesting at a time when challenges and frequent surprises in the business environment become a new normal. A robust short, medium and long growth strategy turns out to be a necessity for sustaining the business excellence over a long period of time. This is applicable even to the pharma players in India.
The Chief Executive Officer (CEO) of an organization usually assumes the role of chief architect of this strategy, which needs to be subsequently approved by the Board of Directors of the company concerned, collectively. The Board holds the CEO, who ultimately carries the can, accountable to deliver the deliverables in creating the desired shareholder value.
Two basic types of growth strategies:
Based on the CEO’s own experience, and also considering the expectations of the Board of Directors, together with the investors, the CEO opts for either of these two following types of basic growth strategies, or a mix of these two in varying proportions:
- Organic growth: Growing the business through company’s own pursued activities, or all growth strategies sans Mergers and Acquisitions (M&A) or by any other means not external to the organization.
- Inorganic growth: Growing the business through M&A or takeovers.
There is nothing fundamentally wrong with either of these two types of basic growth strategies, or their mix in varying proportions. Nevertheless, it is generally believed that with the basic ‘Organic’ growth plan, the companies, or rather their CEOs have a greater degree of sustainable control in various critical areas. These often include, retaining senior management focus on the organizational core strength for sustainable excellence, or even maintaining the organizational culture and people management style, without any possible conflict in these areas.
In this article, I shall explore different aspects of these two basic growth strategies for sustainable business excellence. To illustrate the point better, I shall draw upon examples from two large but contrasting pharma companies. Let me begin this discussion with the following question:
When does a company choose predominantly inorganic growth path?
Its answer has been well articulated in an article of the Harvard Business Review (HBR). It says: “High-growth companies become low growth all the time. Many CEOs accept that as an inevitable sign that their businesses have matured, and so they stop looking internally for big growth. Instead, they become serial acquirers of smaller companies or seek a transformative acquisition of another large business, preferably a high-growth one.”
That said, none can deny that the short to medium term growth of a company following M&A is much faster and its market share and size become much larger than any comparable organizations pursuing the ‘Organic Growth’ path. Thus, more often than not, such initiatives create a ‘domino effect’, especially in the pharma industry, across the world.
Inorganic growth and key management challenges:
The short and medium-term boost in organizational performance post M&A, comes with its complexities in meeting similar expectations of the Company Board, shareholders and the investors, over a long period of time. This is besides all other accompanying issues, such as people related and more importantly in setting the future direction of the company. The cumulative impact of all this, propels the CEO to go all out for a similar buying spree. When it doesn’t materialize, as was expected, both the Board and the CEO are caught in a catch 22 situation. As mentioned earlier, I shall illustrate this point, with the following recent example covering some important areas.
The examples:
“Please don’t go, Ian Read. That’s the message Pfizer’s board of directors has made loud and clear to the almost-65-year-old CEO, who could very well retire with a $15.7 million pension package.” This is what appeared in an international media report on March 16, 2018.
Analyzing the current challenges faced by the company, the media report interpreted the indispensability of Ian Read in an interesting way. It reported: “The pharma giant considers Read the most qualified person to steer the company through a host of challenges, from oncology trial disappointments to investor pressure to make a big acquisition.” Investors are also, reportedly, sending clear signals to the CEO about the tough road ahead.
Thus, Ian Read “who turns 65 in May, also must remain CEO through at least next March and not work for a competitor for a minimum of two years after that to be eligible,” reported Bloomberg on March 16, 2018. It is interesting to note at this point that Mr. Read has been the Chief Executive Officer (CEO) of Pfizer – the world’s largest pharmaceutical company, since 2010.
A different CEO rated as ‘Top Performing’ pharma leader:
Pfizer CEO’s ‘exemplary leadership and vision’, has been captured in the Proxy Statement by the Independent Directors on the Board of the Company. However, Harvard Business Review (HBR) in its 2016 pan-industry ranking of the “best-performing” CEOs in the world, featured Lars Rebien Sorensen – the then outgoing CEO of Novo Nordisk. He topped the list for the second successive year. Sorensen achieved this distinction ‘Mostly, for his role overseeing astonishing returns for shareholders and market capitalization growth.’ All the CEOs were, reportedly, evaluated by HBR on a variety of financial, environmental, social, and governance metrics.
Interestingly, in the 2017 HBR list for the same, when the Novo Nordisk CEO was out of the race, no pharma CEO could achieve this distinction or even a place in the top 10. Pablo Isla of Inditex (Spanish clothing retailer), Martin Sorrell of WPP (PR major in the UK) and Jensen Huang of NVIDIA (American technology company occupied the number 1, 2 and 3 spots, respectively.
Two interesting leadership examples:
I shall not delve into any judgmental interpretations on any aspect of leadership by comparing the Pfizer CEO with his counterpart in Novo Nordisk. Nevertheless, one hard fact cannot be ignored. The accomplishments of Pfizer CEO were evaluated by its own Board and were rated outstanding. Whereas, in case of Novo Nordisk CEO, besides the company’s own Board, his performance evaluation was done by the outside independent experts on the HBR panel.
Was there any difference in their growth strategy?
Possibly yes. There seems to be, at least, one a key difference in the ‘growth strategy’ of these two large pharma players.
- Novo Nordisk is primarily driven by ‘Organic growth’ with a focused product portfolio on predominantly diabetes disease area, besides hemophilia, growth disorders and obesity. This has been well captured in the company’s statement on February 6, 2017 where it says: “Organic growth enables steady cash returns to shareholders via dividends and share repurchase programs” and is driven by its Insulin portfolio.
- Whereas, Pfizer, though in earlier days followed an ‘organic’ growth path, subsequently changed to ‘Inorganic Growth’ route. Pfizer’s mega acquisitions, in its quest for faster growth to be the world’s largest pharma player, include Warner Lambert (2000), Pharmacia (2002) and Wyeth (2009). The key purpose of these acquisitions appears to expand into a diversified product portfolio of blockbuster drugs.
Pfizer did contemplate changing course:
In 2010, barely two weeks on the job of CEO, Pfizer Inc., Ian Read indicated breaking up the company into two core businesses. However, after six years of meticulous planning, on September 26, 2016, the company announced: “After an extensive evaluation, the company’s Board of Directors and Executive Leadership Team have determined the company is best positioned to maximize future shareholder value creation in its current structure and will not pursue splitting Pfizer Innovative Health and Pfizer Essential Health into two, separate publicly traded companies at this time.”
Sustained value creation following the same path not easy:
After the decision to operate as one company and consolidate the business pursuing similar ‘Inorganic Growth’ strategy, Pfizer went ahead full throttle to acquire AstraZeneca for USD119 billion. But, on May 19, 2014, AstraZeneca Board rejected it. Again, on April 05, 2017, Reuters reported, “Pfizer Inc. agreed on Tuesday to terminate its $160 billion agreement to acquire Botox maker Allergan Plc, in a major victory to U.S. President Barack Obama’s drive to stop tax-dodging corporate mergers.”
Apparently, the current Pfizer CEO is now expected to finish his unfinished agenda, at least for the short to medium term, as the current blockbuster drugs continue losing the steam.
Conclusion:
It’s a common belief that slowing down of a company’s business performance is a compelling reason for its switch from the ‘Organic’ to ‘Inorganic’ growth strategy. The new CEO of Novo Nordisk – Lars Fruergaard Jorgensen also appears to subscribe to this view. While, reportedly, including negative growth at the low end in constant currencies in its guidance for 2017, Jorgensen apparently, confided that M&A will now be a part of the company’s growth search.
On facing a similar situation, the above HBR article suggested the CEOs to fight the short-term pressures of the business cycle of moving away from the ‘Organic’ growth path. This can be overcome by various means, as good ideas for organic growth can always attract required resources and support.
While choosing an appropriate basic growth strategy for the organization – ‘Organic’ or ‘Inorganic’, the CEO’s focus should be on what is best for sustainable and long-term business performance, without being trapped by the prevailing circumstances. Thus, addressing the internal causative factors, effectively, would likely to be a better idea in resolving the issue of a sustainable business performance. This is regardless of the underlying reasons, such as gradually drying up the new product pipeline while blockbuster drugs are going off patent, or due to several other different reasons.
Nevertheless, in the balance of probability, ‘Organic’ growth strategy appears to be less complex and is fraught with lower business risks and uncertainties. Consequently, it reflects a greater likelihood of sustainable achievements for the CEO, and in tandem, a long-term financial reward for the shareholders, investors, and finally the organization as a whole.
By: Tapan J. Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.