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Complex weave

Value is created at the intersections of many different functions and knowledge domains

weave Pharma is classed as a knowledge-based industry because we make relatively little in relation to our size and the amount of value we create. This is because, by definition, every gram of product we make or hour of service we provide encapsulates lots of knowledge. This increases costs but also justifies the price of pharmaceuticals.

A research-based pharmaceutical company, however, is quite an extreme form of knowledge-based organisation. The value it creates in relation to grams of active ingredient manufactured is huge, even when compared to analogous products such as speciality chemicals or specialised professional services such as law or accountancy. This is because making a pharmaceutical doesn't involve just one type of knowledge, such as chemistry or law. It is a complex weave of technical, clinical, business and many other knowledge domains. In a very real sense, the value created by pharma companies, for both patients and shareholders, is not made in the lab or any other single department, but at the intersections between functions.

The strategic implications of this value-weaving business model are one aspect of our research at the Open University Business School. It reveals that changes in the knowledge environment make a critical difference to how we create competitive advantage.

Knowledge explosion
The way our industry creates value has changed greatly in the past few decades. New technologies, techniques and processes mean that the details of each department's work are quite different from when I began work as a research chemist in 1978. Although these changes have been gradual and department-specific, collectively they add up to a disruptive, systemic transformation in the way the industry works. In short, knowledge has exploded in every clinical, business and technical discipline.

Because human beings can only master a limited amount of knowledge, this has led to an enormous increase in specialisation. Our predecessors could have claimed expertise across the industry but now world-class expertise is defined within disease areas, sub-specialities or even narrower domains. No one can be an expert except in a little pool of knowledge. This has enormous implications for the effectiveness of the knowledge-weaving business model. How some firms are able to make it work better than others is key to creation and maintenance of competitive advantage in the research-based sector of our industry.

Communication boundaries
The immediate consequences of our increasingly knowledge-rich and specialised business environment are that there are many more internal boundaries and communicating across them is harder. The manifestation of this, obvious to all of us every day, is the increased time spent getting things done via globally-spread cross-functional matrix teams. Less visible, but perhaps more expensive, is the cost of project delay or failure when this near-universal way of working proves ineffective. Like a giant version of the party game in which a phrase is distorted as it is whispered down a line of players, what reaches the market is a weak dilution of what the strategy called for. How firms address this challenge, and the inadequacy of the 'best-practice' response, were important findings of our work.

Variations on a theme
The response of most pharma companies to the challenge of cross-functional working is similar, even if it differs in detail. They begin by asking their staff how to do it better. The answer this produces is usually some variation on a common theme. Those who witness the failings of cross-functional teams attribute it to a mutual lack of knowledge about what happens 'on the other side of the fence'. This diagnosis, our work found, is fundamentally correct in that an understanding of what one's colleagues do in other departments does improve team effectiveness. However, the typical pharmaceutical company reaction to this diagnosis is both more costly and less effective than is needed.

The typical second step is to survey staff, asking what they would like to know about other departments. This is a simplistic and, from the point of view of a professional management researcher, naive question because the respondents don't know what they don't know. As a result, what they say they need to know is what they find interesting rather than what they actually need to do their jobs better. Further, they exhibit an irrational bias towards wanting to know about departments they perceive as important or 'exotic'. Marketing scores highly on this scale, as do medical affairs and relatively new areas like health economics.

The results of such surveys are therefore flawed and lead to an ineffective third step, usually based around training or business awareness programmes. These programmes are always expensive in time and often in money too. Training about other departments is not a bad idea but its content, when based on flawed research, is often inappropriate and rarely leads to improved cross-functional working.

All this leads to a dilemma. The basic model is to create value at departmental boundaries by weaving together knowledge from different areas of expertise. But as knowledge explodes and expertise becomes ever narrower, the intersections between knowledge domains proliferate and become harder to cross. Firms correctly identify mutual understanding of different departments as the key to better cross-functional working but, when they try to build that understanding, they waste time and money running 'sheep dip' programmes that satisfy employees' curiosity but don't enhance operational effectiveness.

Solving the conundrum
Identifying this conundrum was the first fundamental outcome of our research programme. The next stage was to examine how, if at all, pharma companies solved the problem. It would be good to be able to say that we found one or two exemplary companies who provided great case studies in how to make cross-functional teams work. Sadly, we didn't. This seems to be a problem in which clear leaders are yet to emerge. However, our results did substantiate the famous quote of science fiction writer William Gibson: "The future is already here, just unevenly distributed."

We found that some firms were groping towards a better model that had three main components. First, they mapped the value connections in their organisation. That is, they identified the most important interactions between functions and characterised who did what and how. To do this, they built on the text-book idea of the value chain, adapted it to reflect the reality that pharma companies do not create value in a linear manner but via a more complex 'value net'.

Second, they looked at the expertise boundaries within the value net. They then identified the specific knowledge needed by both sides of each functional boundary in order to do their job well. This set of knowledge was much smaller and more focused than a general awareness of how corresponding departments worked.

Finally, they developed training programmes that enabled key people to acquire the specific knowledge they needed to work more effectively across functional boundaries. In short, they taught relatively few people only what they needed to know about only those departments they needed to work with. This is a very different model from the typical sheep dip approach. It involves more preparation and much more focused use of resources.

Focus on the synapses
As is often the case, this emerging best practice unwittingly echoed prior thinking, usually only read by academic researchers. This research identifies unusual people who have a different knowledge and skill profile from most of their colleagues. Most of us have 'I'-shaped skills that are deep and narrow, these valuable people combine deep subject expertise with a shallow but appropriate understanding of those functions with which they had to work. Such people are labelled 'boundary spanners' and are said to have 'T'-shaped skills.

What our research had uncovered was a pragmatic way of turning ordinary subject specialists in business, clinical and technical areas into 'boundary spanners' by developing their skills profile from I-shaped to T-shaped. The essence of this approach was to map the value net and then focus development resources on to those key areas that made it work better. To steal a metaphor from one of our respondents - at the synapses.

Knowledge growth
It seems self-evident that, in knowledge-based industries, cross-functional working is essential. What was less clear, until our research uncovered it, was the way in which knowledge growth hinders that essential capability. Models that worked when an individual or team could master a whole domain of knowledge no longer work when that knowledge area grows exponentially and fragments into sub-specialisms. This leaves companies struggling to create value at functional boundaries.

Traditional, unfocused ways of facilitating cross-functional working are at best inefficient but often ineffective. However, as with all good management research, the answer seems to be emerging, unevenly but steadily, from a few leading players. The rate at which other research-based pharma companies learn to build on those lessons will determine who will survive in a market where value creation is closely tied to knowledge management.

The Author
Dr Brian D Smith is a visiting research fellow at Open University Business School and runs PragMedic, a specialised consultancy.
To comment on this article, email pme@pmlive.com

6th May 2009

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