It will take far more than factory closures to simplify the pharma industry, write Melvin Jay and Professor Simon Collinson.
When pharmaceutical giant Novartis announced it was likely to close its West Sussex (UK) factory, it came as no surprise to the pharmaceutical industry — as Pfizer, AstraZeneca and Glaxo had done the same. While these closures can be seen as an attempt by these companies to reduce complexity within their operations, it will take far more than this to simplify the pharmaceuticals industry.
The Global Simplicity Index (GSI), which studied the 200 largest companies in the world, demonstrated that the pharmaceutical industry is one of the most complex. It also found that geographical diversity is just one of many drivers of complexity. Addressing this form of complexity in isolation will do little to attack the overall problem, and a more rigorous and concerted attack on harmful complexity is needed.
The GSI proved that on average the world’s largest companies are wasting 10.2 per cent of their annual profits (EBITDA) each year due to bad complexity. Developed by the Simplicity Partnership and Warwick Business School, the study found that many companies are now too complex to perform at their best and are becoming slower to react to changing economic and competitive forces.
Complexity can initially benefit a business, as it develops methods for managing people and adds divisions, new processes, products and strategic initiatives. However, if left unchecked, these systems can proliferate and become over-engineered. This is what we call the ‘Complexity Curve’ — an inverted U-shape graph that shows how complexity naturally reaches a tipping point, after which any benefits are outweighed by costs.
With highly technical R&D programmes, strict regulation and sophisticated products it is tempting to argue that complexity is an inevitable consequence of operating in the pharma industry. But if this was true, all pharmaceutical companies would have similar levels of complexity. However, our study shows a wide variation.
Companies such as GlaxoSmithKline and Sanofi-Aventis have lower levels of ‘bad’ complexity than their rivals, including Novartis, Johnson & Johnson, Pfizer and Roche. Additionally, the GSI identified Bayer as the company within the industry who was struggling the most with excessive complexity.
So why aren’t these companies doing something about it? Perhaps complexity has been placed on the ‘too difficult’ pile. Identifying all of the sources of complexity within a business is not easy — our survey found over 100!
So how should the pharmaceutical industry address this problem?
Firstly managers need to identify and weed out the value destructive complexity in their departments. Benchmarking against competitors can quickly show the company where complexity is highest and most damaging. Once harmful complexity is identified, action plans can be developed to simplify the company.
Secondly the management behaviours that cause complexity need to be addressed. Managers need to see how their decisions create complexity and be trained on how to simplify their businesses. They should also avoid new sources of complexity from springing up by putting in place an evaluation process to test the complexity impact of new initiatives. Finally, managers should identify and nurture the kinds of complexity that add value.
It is vitally important for pharmaceutical firms to view complexity more holistically. Although closing factories and R&D centres will reduce operating costs, it will not be enough to reduce the stifling levels of complexity within the industry. This requires complexity to be reduced in strategy, organizational structure, process and many other areas of business. Additionally, it requires a change in management behaviours to ensure that complexity does not creep back into the organization.
Melvin Jay (Founder of Simplicity) and Professor Simon Collinson (Professor of International Business and Innovation at Warwick Business School) are co-authors of The Global Simplicity Index.