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Hollow victory: the dangers of success

How success can trap companies and make them vulnerable to competition
Hollow Victory

In our research about how pharma companies are adapting to a changing market, the capacity of firms to change is obviously an important factor. Firms vary greatly in this respect and, surprisingly, the predictable stereotypes of big, slow corporations and little, nimble speciality companies seem to be poor predictors of reality. Of much greater significance is current or recent performance; successful firms almost always demonstrate much less change capacity when compared to firms that are failing to achieve their goals, even though the former usually have more time and resources to enable change.

Our observations are striking examples of 'The Competency Trap', a phenomenon first discussed in the academic literature by Levinthal and March in 1993 but anecdotally mentioned for decades before that. This trap threatens the most successful pharma companies and allows their less successful followers to overtake them, so it is worth understanding its mechanism and how to avoid it. 

When we look at pharmaceutical companies caught in the competency trap, the first thing we observe is that they can be caught by the head or by the tail. By that, we mean that there seem to be two different ways that the trap grips firms. The first is characterised by an inability of a firm to see that it needs to change and, because this is primarily a failing of the firm's leadership, we often refer to it as trapped by the head. The second, perhaps more perplexing, is when a firm's leadership seems to see the need for change but cannot to respond to the change.

In our work, we refer to these firms as being trapped by the tail. It's an important difference because it calls for two different methods of release. The confidentiality of our research means that we can't name examples of trapped firms but there are many of both categories. For example, several firms' leaderships we studied appeared 'in denial' of the market shift from value defined as clinical outcome to value defined as health economic outcome. This is typical of the firms caught by the head, where the leadership can't see the threats of market changes even when surrounded by mountains of data and analysis.

Among the symptoms that characterise such firms are repeated emphases on some technical feature of the product – side effect profile perhaps, or ease of use – that, market signals indicate, are only of minor importance to their customer. By contrast, tail trapped firms are recognisable by a clearly frustrated leadership who are very aware of market threats but are exasperated by their inability to get their organisation to respond. A strong example of this was a CEO who complained that “We live in a market where the prescriber now has 10 per cent of the decision and yet my brand teams continue to spend 90 per cent of resources on them”. Examples of head and tail trapped companies are not restricted to commercial functions, however. We've seen analogous situations in many other functions, for instance in research and development when either leaders close their eyes to technological trends or their subordinates hamper change by clinging to pet projects.

Escaping the trap
The above is probably quite recognisable to readers of this article, since the competence trap captures many firms. However, its success suggests that familiarity with the trap doesn't mean that pharma executives understand how the trap works or how to get out of it. Building on the work of earlier researchers, our work is beginning to suggest some ways that pharmaceutical companies can escape or, better still, avoid it altogether. The clues lie in the observation with which we opened this article – it is successful firms who are trapped most often and who find it hardest to escape. Investigating further, the competency trap seems to have three separate mechanisms: short-sightedness, specialness and skewed-ness, each of which is amplified by success. 

Short-sightedness is the failure to see that the future may not be like the present. In head-trapped companies, this is seen in refusal to acknowledge long-term trends that don't agree with short-term trends, as described in the examples above. In tail-trapped firms, it is seen in when middle-managers demand quantitative evidence to justify change but, because of current success, do not apply the same burden of proof to the status quo. In both cases, change is stifled. Ironically, the ubiquity of IT and data systems makes this worse, as historical data easily outweighs sparse data about the future. An interesting example of this was one firm who, because it had data about prescriber inquiries but not about patient inquiries, felt it unnecessary to incorporate patient motivations into its market segmentation map. Short-sightedness then is the disease that kills successful companies in changing markets, when the future is never like the past. 

Specialness is the discounting of information that comes from a situation that is not identical to the firm's own. In both head-trapped and tail-trapped companies, those who should absorb and make sense of information apply what one of our respondents called “a filter of conceit”. This powerful metaphor described how successful firms regard themselves as special in some way and, when they receive information they don't want to hear, they filter it out on the grounds that their firm is not the same as any other. A good example of this was a Marketing VP who, when we asked what lessons he had absorbed from the experiences of other firms, said “Nothing really, because we're so unique”. Ironically, he worked in a mature, primary care market that had very close parallels with many others but he could dismiss each analogue market on the grounds of either his firm's therapy area, size, life cycle stage, company history or some combination of those. Specialness then is the disease that kills successful companies that work in complex markets, where analogues are always imperfect.

Even the most successful pharma companies risk being overtaken by their less successful followers 

Skewed-ness is the unconscious attribution of false meaning to observed reality. In all real-world situations, it is possible to interpret facts in more than one way and in all firms judgment is imperfect. But success seems to breed a persistent bias in which successful outcomes are always attributed to deliberate decisions while failures are often attributed to chance or exceptional events. In head-trapped companies, leaders use successes to support their strategy and attribute failure to 'irrational' decisions by customers, regulators or HTAs. In tail-trapped companies, success is attributed to hard work and failure to lack of resources. In neither case are the facts objectively assessed for what lessons they might hold. An interesting example of this was a firm developing a therapy/diagnostic combination who consistently attributed its failure to the politics between two of its customer groups – physicians and pathologists. Skewed-ness is the disease that kills successful companies when, as is usually the case, data is imperfect and objective judgement is essential.

Good news for failing firms?
So the 3-mechanism competency trap is highly effective and especially so for successful companies. But every cloud has a silver lining and the same factors that lead to the demise of successful firms mean that firms that are, or feel like, they are failing seem to have less susceptibility to the competence trap. 

The short-sightedness mechanism, for example, has its origins in a desire for the future to be like the past, which of course is not true for unsuccessful or less successful firms. So, in contrast to the firms they are trying to emulate, less successful firms look at market trends with an open mind and hope to see something new. Similarly, such firms reverse the burden of proof on change. As one firm put it “If we're failing, we need good reasons not to change”.

The second mechanism of specialness can affect successful and unsuccessful firms but in the latter it is eroded by its obvious conceit: “We could make excuses for why we're failing, but that makes us look bad”, to paraphrase one respondent. Somehow, pleading specialness seems more socially acceptable among successful firms than among those whose results are unimpressive. Instead, struggling firms are more likely to look for parallels in other markets or firms that they can learn from and build upon. And the third mechanism of skewed-ness also seems to be much less effective in firms that are falling behind. This is less because they do not misinterpret reality than because any interpretation of a reality points towards change. So leaders have few successes that they can attribute to their own brilliant strategies and too many failures to believably blame others. And middle-managers' complacency is similarly eroded when defeats begin to exceed victories. As a result, the bad habits of struggling companies to misinterpret reality are corrected by the harsh lessons of unarguably poor performance. 

Not an unbeatable trap
The competency trap ultimately creates a kind of self-correcting market mechanism in which successful firms suffer a disadvantage to those they look down upon. And, over time, this allows firms once viewed as failures to move up the league table by a combination of their own success and the leaders' failure. The mechanism is imperfect and slow acting but the turnover of companies in the 'Top 50 Pharma' league tables shows that it is working.

But perhaps the most important lesson to come out of research was that the competency trap, effective as it is, could be beaten. The fact that a handful of firms – Bayer, Merck, Johnson & Johnson to name but three – have stayed at the top for more than a century tells us that. Truly great pharmaceutical firms have understood the three mechanisms already and look to the future, see themselves as unexceptional and try to make balanced assessments of successes and failures. Avoiding the competency trap is at least part of the reason for their success.

Article by
Professor Brian D Smith

a world-recognised expert in competitive strategy in the pharmaceutical and medtech sectors. He welcomes questions and comments via email

10th April 2014

From: Sales, Marketing

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