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The road ahead

Our strategy for the future is dependent upon what has happened in the past

Country Road SunsetIf you're reading this article near your computer, look down for a moment at your keyboard. Almost certainly, it is of the QWERTY design that, to an alien, would seem to arrange the letters in a completely irrational way.

The story goes that this arrangement sprang out of the need to minimise the tangling of letters when the first mechanical typewriters were designed. That this same design is ubiquitous in a world of electronic keyboards is the most-often used example of path dependence, the term management researchers use to explain current situations as the result of past decisions.

This piece of slightly obscure management theory has value way beyond your desk. It turns out to be a useful way of improving the way pharma marketers and others design and implement their strategies. The challenge is to understand and apply the theory and that's where this article tries to help.

The origins of path dependency theory seem to be lost in the undergrowth of management research. Academics quibble about where it came from and, to some extent, about exactly what it means. But there's a consensus view that path dependence is a pervasive, persistent phenomenon that can be used to understand complex, real-world situations in everything from politics to technology. In my own work, it's one of the tools I use to understand why some pharma companies are better marketing strategists than others.

Path dependency theory states that the decisions we make influence and constrain what we can do in the future. Researchers talk about weak, semi-strong and strong path dependence, referring to exactly how much a past decision constrains the future.

In pharma companies, for example, it is very easy to see path dependence in the decisions made in phase II and phase III of development. The choices of what trials to do and what to measure are always taken with some indication in mind; as such, they direct the later product development and, to a large degree, the future marketing strategy.

These are often semi-strong path dependencies, by which we mean that it is not impossible to go backwards and 'rewrite history', but it is expensive, difficult and time consuming to such a degree that it may be practically impossible. Such constraints are very important in a practical sense but, from the perspective of a pharma marketer, such strategic implications can seem like 'givens' that we can't change and shouldn't worry about.

Of more immediate interest is how path dependency ideas can help us do a better job of creating strong marketing strategies and making sure they are implemented well. In an everyday pharma marketing setting, path dependence has three uses, corresponding roughly to past, present and future marketing situation.

Using path dependence
The first way in which pharma marketers can use path dependence is to avoid throwing out the baby with the bathwater. I see this happen quite often when I interview brand managers: a new person comes in, with strong ideas about how to build his brand (and perhaps his career). These ideas often involve throwing out some long-established pattern of resource allocation, for instance in attending conferences, supporting key opinion leaders or paying for continuing medical education programmes.

Sometimes, these are wise decisions that reflect a good understanding of the change in market situation, while at other times they may be instinctive, headstrong whims that might harm the business; the challenge is to tell the difference. This is where path dependence ideas help.

With a little practice, it becomes easy to map out the set of decisions that led to the current strategy. This allows the new leader to understand better what he has inherited and make a more balanced assessment of whether to continue, adapt or discard it. In one recent case study, I found that the current strategy was based on a set of assumptions about market dynamics that were many years out of date and so could be discarded. In another, the current strategy was about to be discarded until the path dependence map revealed that it was designed to exploit some important connectivity between early adopters and later adopters. This important piece of tacit knowledge had been lost in a series of re-organisations and was only re-discovered by a thoughtful path dependence analysis. In doing so, the brand team saved itself from a self-inflicted strategy mistake.

Thinking outside the box
The second way pharma marketers can get practical use from path dependency analysis is to help us 'think out of the box', if you will excuse my cliché.

Typically, pharma marketers working on a new strategy are keen to think of new ideas but are constrained by beliefs, which are almost subconscious, about how the market works, how it is segmented and how prescribing decisions are made. These 'invisible' constraints are often deeply embedded in the culture of the company and are hard to change. Since these beliefs were often created at a time when the organisation's leaders were bright young things, challenging the embedded thinking can be politically sensitive.

What is needed is some rational, objective tool for examining current beliefs and strategies and removing them from the political, emotional arena. Path dependence is a good technique for this.

Using it as a tool, the origins of these ideas in the corporate subconscious can be traced back. One therapy area VP called this 'strategy psychotherapy' as he explained how his beliefs about the use of the clinical papers had been changed. We had worked together to draw a path dependence map of current marketing practice and found that the use of peer-reviewed work had its origins in the early stages of his brand's life cycle.

Predictably, the marketing objectives had changed since then and clinical papers had lost importance, shifting to a supporting rather than leading role. Like many flashes of insight, this seemed obvious once illuminated by path dependence, but the tool had revealed something the organisation couldn't see before and also made internal communication easier. 

The third way that path dependency theory can help pharma marketers is slightly more altruistic, in that the work is less useful to the current incumbents but very valuable to the marketers that will follow them. This is because we can use path dependence to preserve options and prevent constraints on future marketers managing our brand or business area. If this seems like a less important use, then it's worth remembering that marketing is a long-term process and that what goes around comes around.

The future-proofing use of path dependence is based on the fact that every decision – especially every major decision – made by, for example, a brand team, can have serious implications for decisions to be made in the future. These implications can become 'amplified' and out of all proportion compared to the original decision.

For example, global brand managers have learned that the order of country launch for a new product can impact strongly on the pricing the product can obtain because of the mechanism of reference pricing. Conversely, many older brands have under-performed in margin terms because launch country order was determined by regulatory approval order, constraining the price possible in later markets.

To avoid this situation, it's valuable to draw path dependencies forward from current or imminent decisions about country focus, positioning, claims and so on. For each decision, it is usually possible to identify a stream of future decisions that will inevitably have to be made. It is also, with practice, possible to draw the parameters or limits of those future decisions and, critically, to calculate how the imminent decisions will decide the limits on those future decisions.

If that seems a little theoretical, think about how the decisions on the post-patent strategies for many statins are being constrained by the earlier positioning decisions of the brand.

Simple but not easy
So path dependence offers a practical tool for managing pervasive and important problems in pharma marketing strategy and implementation. It's surprising that it is used so infrequently, especially in a complex and long term business like ours, which needs it more than most. The remaining questions are, of course, how it is done and what are the obvious places to use it.

Like many strategic management tools, using path dependence is simple but not easy. That is to say, it is easy to explain the outline idea but much harder to apply it in practice because it needs judgement, experience and a good understanding of problem situation.

In simple terms, conducting a path dependency analysis means looking at the current situation as a kind of node or hub into which several paths flow and from which another set of paths flow. Having done that, the relative influence of the historical paths on the present, or the present on the future, have to be assessed, usually by means of judgement as much as by hard data.

Try that now on a problem you face and you will see that a first approximation of a path dependency analysis is quite easy. The reality of course is that hard business problems need more than a first approximation and, if you want to use this tool, practice and care are required.

If then, like me, you type more slowly and make more mistakes than you would like to then you can blame QWERTY and its strong path dependence. Fortunately, modern technology has reduced the impact of this particular path and my PC allows me to go back, correct mistakes and get around the decisions made by the inventors of the typewriter.

As yet, however, no one has invented an 'undo' button for the decisions made by pharma marketers when they create strategy. Until that button is invented, path dependence is a tool that should be used more.

The Author
Dr Brian D Smith is a visiting research fellow at Open University Business School and runs Pragmedic, a specialist consultancy. He is also editor of the Journal of Medical Marketing

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2nd February 2011


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