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Invisible constraints on the company environment can hinder effective strategic change

Broken egg shellsLet's take some truths to be self-evident. Our market is changing fundamentally. As a result, the pharmaceutical industry of 2020 will look very different from that of the present; some firms of today will thrive, but many will die, by acquisition or otherwise.

Neither shareholders nor employees can be as sure of a lucrative future as they were. Given this reality, there isn't a boardroom in the industry that isn't asking what changes are necessary to survive and thrive in the future. But we also know that changing the direction of a large, complex organisation like a pharmaceutical company is very difficult.

It is safe to predict that all firms will attempt change; only some will succeed and not all of those will change in the right way to thrive. Senior industry executives are asking themselves how to survive, thrive and avoid becoming a footnote in the industry's history. To get the right answer, they need to ask better questions and then to understand what we already know about the hidden forces that constrain and hinder even the most dynamic firms.

As wise executives know, the key to getting the right answer is to ask the right question. "How do we survive and thrive?" is not a 'well-posed problem', because it doesn't have just one answer. In fact, it probably has as many answers as there are firms, and the ideal strategy for survival is not industry-general but company-specific. Upon examining the recent history of the industry and noting that many great firms have gone, a better question can be formulated.

In most cases, these firms recognised the need to change and made strenuous efforts to adapt to the evolving market. Often, the changes they attempted, like strategic acquisition, re-engineering product development, re-focusing sales and marketing, were exactly the same as the changes enacted by those firms that survived. Looking carefully at the corporate strategies reveals little difference between those that succeeded and those that failed. A better question to ask is, therefore, what differentiates those firms that made change work from those that didn't and became acquisition fodder? This question has a clearer answer.

Significant change
Successful firms made significant change happen, while the others merely "rearranged the deckchairs on the Titanic", making cosmetic changes that had no strategic impact. This is shown in the contrasting strategic acquisition programmes of Roche and Merck, for example, or the speed of change in GlaxoSmithKline versus Pfizer, when each appointed a new CEO. So the answer to the "how do we survive?" question seems to be about understanding and overcoming barriers to organisational change.

This is critically important, because decades of previous research have provided a lot of useful knowledge with which to understand strategic change and so better manage companies.

The founding father of this area of management research was Philip Selznick, an American sociologist whose early work broke the mould of existing theories about how organisations work. He realised that modern firms, especially those filled with knowledge-workers, aren't like ant colonies; individuals act in their own interests, which may not be the same as those of the firm. As a result, the forces acting on companies are much broader than the technological and market forces traditionally considered when crafting strategy. Modern institutional theory, as it is called, recognises that firms adapt not just to the market, but also to the internal demands of employees and to the external demands of the wider environment. This may sound like so much academic theorising, but it is key to understanding the "how to survive" problem because, without the broader view of institutional theory, firms are only aware of a small part of the constraining environment within which they work. Change leaders who do not understand institutional theory are playing with only half a pack of cards.

These ideas were developed further by Walter Powell and Paul DiMaggio, whose article, "The Iron Cage Revisited", took its metaphor from the earlier work of Max Weber, the famous German sociologist. The metaphor is apt, because DiMaggio and Powell argue that, contrary to what we might think, firms do not make purely rational decisions about how to survive. Instead, their strategic choices are driven by the need to conform to what internal and external stakeholders expect, leading to a set of often subtle, implicit pressures that drive strategy and hinder change. DiMaggio and Powell identified three types of institutional pressures.

The first, which they called coercive institutional pressure, referred to governmental regulations and laws, and is obvious in the pharmaceutical industry. It is almost impossible, for example, to imagine a pharmaceutical company trying to challenge the expectations of regulators and the healthcare establishment.

The second, called normative institutional pressure, referred to the cultural expectations on the organisation, often channelled through the professional standards and norms of its employees. Initially, this appears to be less important in the pharmaceutical industry until the influence of medical affairs or other professional departments is considered, for example. Through the beliefs and behaviours of such groups, the cultural expectations of a society constrain how a company can act. The third of DiMaggio and Powell's forces is mimetic institutional pressure and refers to the tendency of firms to copy each other and adopt similar practices, so as to not look too different from others in the industry. Such forces are often seen in relatively self-contained industries like pharmaceuticals and they are carried by sector-specialist consultancies and by senior managers who move within the industry. Subtly and invisibly, ideas like 'industry best practice' act to limit fresh thinking and constrain change within a firm.

Together, this complex web of forces leads to many firms becoming "institutionalised", conforming to this mould of invisible but powerful forces. DiMaggio and Powell noted that organisations tended to look like each other in many areas, a phenomenon they called "Institutional Isomorphism". It is easy to see strong trends towards institutional isomorphism and its consequence of resistance to real change in the pharmaceutical industry. This is the "iron cage" to which DiMaggio and Powell referred and is an important clue to understanding why some firms affect real change and succeed while others dither and fail.

So, ability to change is key to survival and institutional theory and isomorphism are good explanations of why some companies change and some do not. By using this well-founded management research, executives can work with a broader palette of change management ideas and realise that success is not just about redrawing the organisation chart, but also about managing change-opposing forces. But what might this mean in practice? How should industry leaders behave differently as they attempt the strategic change that is necessary to survive in a turbulent market? Four lessons emerge from our research at the Open University Business School.

Beyond the superficial
First, identify the real changes implied by any new strategy. This means looking beyond the superficial changes, such as titles and structures, and identifying how the new organisation will really differ in behaviour and activity from what has gone before. So, for example, changing the titles of sales executives to Key Account Managers is not important, but shifting sales activity from prescriber to payer is. Reorganising marketing into therapy area teams is not important, but designing strategy processes around markets, instead of products, is.

Second, recognise the constraints of institutional pressures. This means acknowledging how coercive, normative and mimetic pressures might interact with, and hinder, the real changes implied by a new strategy. So, for example, a competitive position based on overall disease management value for payers, rather than simply detailing differences in product claims to prescribers, might well conflict with the normative expectations of sales and marketing professionals. Similarly, an approach to segmentation based on a novel insight might run contrary to the expectations of external data providers. In any case, executives should expect institutional pressures to hinder real change.

Third, develop approaches to manage and deflect institutional pressures. This means analysing which pressures conflict with the strategic change and then crafting practical management responses. For example, this might mean making changes in leadership, process and culture in key internal departments, or undertaking a deliberate and careful communication policy with external stakeholders whose expectations are jarred by the new strategy. Without deliberate management, institutional forces almost always smother change.

Finally, be aware of rational myths. This term, coined by John Meyer and Brian Rowan, is the framing of irrational, emotive decisions as rational, logical decisions. These are the common responses of interest groups, either internal or external, when strategic change pushes against their expectations and norms. In such cases, because it is socially unacceptable to oppose change on emotive grounds, resistance to change is usually manifested as a detailed argument, often based on selective use of information but underpinned by the group's irrational belief about what it perceives is right.

For example, the redesign of product development processes is sometimes subverted by medical or technical departments using superficially rational arguments but which are based, in fact, on their own agenda. Similarly, the globalisation of clinical development processes may be resisted by superficially rational arguments that may really derive from emotive positions.

Institutional theory isn't the most accessible area of management research and it is consequently tempting to ignore it. But executives do this at their peril. In the global pharmaceutical industry, change is imperative, but making it happen means having to break out of the invisible iron cage.

The Author
Dr Brian D Smith is a visiting research fellow in the Marketing and Strategy Research Unit at the Open University Business School. He also runs Pragmedic a specialist consultancy.

To comment on this article, email

9th March 2010


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