Is Merck's Medicine Working?
Spurred by the Vioxx fiasco, CEO Clark is trying to revamp the drug giant's culture
Business week, July 30, 2007

This is a great article on the revamping of a major company faced with a crisis. I want to focus on the importance of “managing the cost, not the rate of failure” as part of the broader effort. I suggest going to the artcle: http://www.businessweek.com/magazine/content/07_31/b4044063.htm?chan=search



Richard Clark was flustered and unprepared when he was thrust into the CEO job at Merck & Co. (MRK ) on May 5, 2005. It was the darkest hour in the pharmaceutical giant's 114-year history. Merck was drowning in liability suits stemming from Vioxx, its $2.5 billion-a-year arthritis drug, which it had to pull from the market because of a link to heart attacks and strokes. Two other blockbusters worth a combined $7 billion in annual sales were facing patent expirations. And Merck's labs, which other companies once hailed as a bastion of scientific innovation, were crippled by a culture that buried good ideas under layers of bureaucracy. But in the morass, Clark saw opportunity. "A crisis is a terrible thing to waste," says the CEO……………

KILL FEE

If fraternizing with insurance executives sounds bizarre, consider this: Merck is rewarding scientists for failure. One of the hardest decisions any scientist has to make is when to abandon an experimental drug that's not working. An inability to admit failure leads to inefficiencies. A scientist may spend months and tens of thousands of dollars studying a compound, hoping for a result he or she knows likely won't come, rather than pitching in on a project with a better chance of turning into a viable drug. So Kim is promising stock options to scientists who bail out on losing projects. It's not the loss per se that's being rewarded but the decision to accept failure and move on. "You can't change the truth. You can only delay how long it takes to find it out," Kim says. "If you're a good scientist, you want to spend your time and the company's money on something that's going to lead to success."

Management consultants say rewarding misses as well as hits is the right idea, and one that the entire industry will need to adopt. "The earlier you determine when something should be killed, the better," says Charlie Beaver, vice-president at consultant Booz Allen Hamilton Inc. Still, he warns, changing a corporate culture from one that thrives on success to one that also accepts failure "is a very large hurdle to overcome."

While Clark is encouraged by the results of his changes so far, he's still haunted by the culture of complacency that left companies like his stuck in an innovation rut. "If you ever feel comfortable that your model is the right model, you end up where the industry is today," he says. "It's always going to be continuous improvement. We will never declare victory."

Western Union Empire Moves Migrant Cash Home
By JASON DePARLE
Published: NYT, November 22, 2007

http://www.nytimes.com/2007/11/22/world/22western.html?_r=1&oref=slogin&ref=todayspaper&pagewanted=all

Talk about an example of innovating across the whole business design (target customers; desired outcomes for these customers; value proposition in the context of competition; and value capture mechanisms including how to secure your position) to drive organic growth……..

WASHINGTON, Nov. 21 — To glimpse how migration is changing the world, consider Western Union, a fixture of American lore that went bankrupt selling telegrams at the dawn of the Internet age but now earns nearly $1 billion a year helping poor migrants across the globe send money home.

Migration is so central to Western Union that forecasts of border movements drive the company’s stock. Its researchers outpace the Census Bureau in tracking migrant locations. Long synonymous with Morse code, the company now advertises in Tagalog and Twi and runs promotions for holidays as obscure as Phagwa and Fiji Day. Its executives hail migrants as “heroes” and once tried to oust a congressman because of his push for tougher immigration laws.
“Global migration is the cornerstone of how we’ve grown,” said Christina A. Gold, Western Union’s chief executive.

With five times as many locations worldwide as McDonald’s, Starbucks, Burger King and Wal-Mart combined (a huge “hidden asset” to build from), Western Union is the lone behemoth among hundreds of money transfer companies. Little noticed by the public and seldom studied by scholars, these businesses form the infrastructure of global migration, a force remaking economics, politics and cultures across the world.
Last year migrants from poor countries sent home $300 billion, nearly three times the world’s foreign aid budgets combined.

Western Union’s dominance of the industry casts it in a host of unlikely new roles: as a force in development economics, a player in American immigration debates and a target of contrasting attacks.

Its unparalleled reach gives millions of migrants a safe way to transmit money, and may even increase the amounts sent. But critics have long complained about its fees, which can run from about 4 percent to 20 percent or more. And the company’s lobbying for immigrant-friendly laws has raised the ire of people who say it profits from, or even promotes, illegal immigration.
Western Union tracks migrants so closely that it has made pitches to illegal immigrants just released from detention camps. Its agent in Panama offered customers legal aid to keep them from being deported.

After settling a damaging lawsuit that accused it of hiding large fees, Western Union set out a few years ago to recast its image, portraying itself as the migrants’ trusted friend. It has spent more than $1 billion on marketing over the past four years, selectively cut prices and charged into American politics, donating to immigrants’ rights groups and advocating a path to legalization for illegal immigrants……….

………The Philippines requires each outbound migrant to attend a predeparture seminar. Western Union paid to offer migrants instructions on sending money home. “We tell them about the services of Western Union,” said Steve Peregrino, the marketing director in the Philippines, “with the basic idea of seeking out Western Union when they go abroad.” In and around the waiting room, reviews are positive…………
……….Western Union’s founders set out in 1851 to build the first telegraph giant. A decade later, they had linked the coasts, a feat celebrated in a Zane Grey novel and a Hollywood film, both called “Western Union.” Airmail and faxes left telegrams obsolete, and the company went bankrupt in 1992.

It emerged two years later with a focus on its money transfer service (its fundamental strength) and was acquired in 1995 by the Colorado corporation First Data. Flush times followed. Fueled by the surge in migration, international money transfers were growing by 20 percent a year.

Metrics for Innovation
Sheila Mello
May 22, 2007
Innovate Forum
http://www.innovateforum.com/innovate/article/articleDetail.jsp?id=428371

This article touches on a critical issue, how to measure success in innovation. This approach is particularly relevant when considering "option plays", i.e., when the level of uncertainty is too high to have "good" numbers—at this stage do not ask for a business plan but the potential value you can create for your target customers. Go to the complete article for the full impact.

Question: Why are financial metrics the wrong yardstick for evaluating potential products for a portfolio and what should companies use instead?

Mello: Hindsight clearly indicates which products and services you ought to have added to your product portfolio when you were doing last year's plan. Lacking a crystal ball, most companies currently rely on a frighteningly inaccurate mix of erroneous financial projections, analysis of past successes or failures, and strong emotion to decide which innovations are worthy of commercialization. The prevalence of an approach that often resembles the efforts of medieval alchemists to transform base metals into gold in part explains why the failure rate for new product introductions is so startlingly high (estimates range from 50 percent to 90 percent).

Instead of profit potential or ROI, companies should measure something else: customer value. So why aren't they? One reason companies don't use customer value as a metric in determining what goes into their portfolios is that they believe they can't measure value before a product is created. They wonder how to determine whether a customer will pay for a product or service that's not yet fully developed.

The starting point for measuring customer value is a documented, repeatable research process to collect information that represents the voice of the customer. A robust, fact-based system to clearly identify both expressed and latent customer needs also provides a common, unambiguous language to discuss projects with product development teams. Instead of arguing over unreliable financials or engaging in political one-upsmanship, teams can focus on getting done what's needed to meet customer needs.

Traditional approaches to gathering VOC data -- such as focus groups, customer surveys, and informal research by marketing staff -- fall short of providing the deep insights needed to reveal true (and often unarticulated) customer needs. In short, if you simply ask what customers want, you may never gain the insights into their needs that allows for true innovation. (Ken Olsen of Digital Equipment Corporation is reported to have said in 1977, "There is no reason anyone would want a computer in their home," and customer surveys probably would have proven him right.)

An effective VOC process involves interviewing techniques such as probing questions, digging down for the so-called golden nuggets, storytelling about customer problems, and structured first-hand observation followed by quantitative Kano analysis. (The Kano Method, developed by Dr. Noriaki Kano of Japan's Tokyo Riko University in the 1980s, is, at its simplest, a series of two-part multiple-choice questions about user needs.) Using these methods, companies can determine the functionality that products must satisfy, as well as those features that delight, disgust, or elicit indifference in customers. With this data in hand, companies can separate potential winners from losers before launching into product development. Taking this method of analysis up a level to executive management allows companies to evaluate entire product portfolios using customer value as a yardstick

Achieving Full Potential: How Companies Can Increase their Global Presence
Knowledge@wharton.upenn.edu
September 5 , 2007

The excerpt of this article discusses some important points on the basic challenge of sustaining growth....

Over the next decade, 25% of the companies that exist today will disappear, either because they will merge with others or go bankrupt. In an interview with Universia-Knowledge@Wharton, Chris Zook, director of global strategy at consulting firm Bain & Co., discusses the key factors that will allow companies to survive the challenges of increasing their presence in the global marketplace. His ideas are presented in a book titled, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth. The book will be published in Spain this month.

UK@W: What are the main problems that companies face when they try to grow?

Chris Zook: Most companies aspire to aggressive growth targets, but very few --only one in ten worldwide -- achieve more than a modest level of sustained and profitable growth, which we define as: 5.5% real revenue and profit growth...

Bain’s growth research has shown that successful strategies naturally move through a cycle from focusing on the essence of their competitive advantage (I prefer competitive separation which implies that your competitive advantage/position is in part of the offering that is critical to your customer), their “core,” to expanding into new “adjacent” markets or businesses, and finally, the most difficult stage, to redefining their core. In my most recent book on growth, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, [I discuss] the main problem that we see today, which is that industries are becoming more turbulent at a faster and faster pace. This means that the most profitable activities in an industry are shifting more quickly, and that competitive differentiations (separations) are becoming harder to maintain. Because the cycle is speeding up, huge risks emerge from misjudging where you are in the cycle.

UK@W: What have companies done to get to this point?

Zook: Companies are at different stages of their life spans and not every company is undergoing a crisis in the core that requires redefinition. One of the most difficult decisions a company can face is whether to remain focused on extracting full potential from the core business or, instead, to begin the search for hidden sources of new potential. Knowing your company’s coordinates on a Focus-Expand-Redefine (F-E-R) cycle is the first step when it comes to making correct and well-timed decisions that improve the odds of sustaining or renewing profitable growth.

Each stage of the F-E-R cycle requires a different set of strategic principles that companies must follow. Profitable growth starts by rigorously defining the core business -- knowing how it differs from your competitors. During the Focus phase, there are three keys to success: core business definition, consistently lowering your cost position and discouraging competitors from investing in your core. Doing these three things right results in what Bain calls “full potential.”

As companies begin to reach full potential in their current core, three new imperatives emerge in the Expand phase: first, developing a repeatable formula that allows you to replicate your competitive differentiation in businesses or markets that are outside your core; second, investing in bringing that formula to new geographies, new customer segments or new channels; and, third, avoiding over-expansion by recognizing that the odds for success decline when you try to expand too far from the core.

Finally, as the pace of turbulence and change continues to accelerate, companies will find their strategies for growth reaching a natural limit much earlier in their history. As companies expand globally, they become more established, but also more complicated. You accumulate customer segments, business platforms and capabilities whose value you do not immediately recognize.

UK@W: What are the solutions for each one of these main problems?

Zook: Successful redefinitions are based on “hidden assets” -- customer assets, growth platforms or underutilized capabilities which suddenly assume a center role in how you look at your business going forward. (Go the Wharton web site for a full description of “hidden assets)