Leading pharma companies are achieving rapid, large-scale performance improvements using a multifaceted approach that realizes short-term gains & builds long-term capabilities at the same time
The COVID-19 pandemic has been a disruptor of historic proportions across industries, economies, and lives. In the global pharmaceutical industry, it has caused problems in short-term cash flow and threatened supply reliability. But even before the pandemic, the industry had been facing several hurdles, including the declining value of new launches, challenges to growth in emerging markets, and increasing regulatory scrutiny.
It is not surprising, then, that accelerating performance is now a priority for pharmaceutical companies. Unfortunately, they are finding that their traditional approaches—portfolio reallocations, geographic diversification, and lean cost models—are not generating the desired benefits within the required short time frames. Some leading organizations, however, are demonstrating the effectiveness of a new approach: enterprise-wide performance acceleration (EPA), which simultaneously drives top-line growth, improves profitability, and optimizes cash flow. In our experience, EPA programs have generated incremental revenue growth of 10 to 15 percent, increased EBITDA by 4 to 6 percent, and enhanced return on invested capital (ROIC) by more than 3 percent within two years.
To achieve this sort of rapid, large-scale, and transformational change, companies need to realistically assess their readiness, set aspirational goals, and create a plan for achieving their goals. After that, it becomes a matter of execution.
A multifaceted approach to rapid improvements
EPA is a multifaceted approach to rapidly drive growth, profitability, and return on invested capital (ROIC). It has three major dimensions. The first involves making strategic choices that assess overall options for value creation across geographies and business units, including resource-allocation choices. For example, a leading animal-health pharma company, using an EPA program focused on profitability, shifted to a radically simpler portfolio with 40 percent fewer SKUs. They also implemented an operating model that emphasized agility, using a zero-based approach to simplify critical processes.
The second dimension is driving performance acceleration through a mix of top-line growth, profitability, and cash-flow improvements. For top-line growth, companies can explore multiple initiatives that bring quick results, such as debottlenecking supply and savings opportunities that can bring down unit costs to improve product competitiveness. For profitability improvement, a focus on all direct and indirect cost categories such as procurement, manufacturing, and corporate overhead can drive bottom-line financial performance. To drive cash-flow improvement, optimizing the working capital is often the focus.
Ensuring that performance improvement is sustainable is the third important component, and it should be embedded in EPA programs from conception. Organizations should assess talent-to-value (T2V) to identify key roles, and then resolve any gaps discovered in talent and capabilities. They should also emphasize building capabilities at scale by utilizing state-of-the-art digital and analytics tools in coordination with broad change-management initiatives.
What does success look like?
A successful EPA program can drive significant change in performance by helping to create an organization and operating model that supports sustainable performance improvement and by building new and robust institutional capabilities. For example, a global generics pharma company faced declining EBITDA and a lower ROIC when compared with its peers. It undertook a holistic EPA program to transform procurement, supply chain, manufacturing, and commercial operations in multiple markets. In addition to unlocking potential performance gains, the program also focused on sustainability. This included setting up a dedicated continuous-improvement and capability-building infrastructure across functions. Within two years, these initiatives resulted in a 10 to 15 percent increase in sales in select markets, a 4 percent increase in EBITDA, and a 3 percent increase in ROIC.
The seven critical success factors of EPA
(1) A fact-based analysis to assess the organization’s potential for performance acceleration
(2) A mindset that measures risks based on long-term value rather than short-term gain
(3) Leadership buy-in that makes EPA a top management priority, with leaders visibly modeling the change
(4) A performance-oriented organizational culture with the necessary talent and capabilities to sustain value over time
(5) A disciplined approach to execution that ensures rapid and transparent performance management
(6) Line-led leadership efforts to take charge of the change program, set goals, make commitments, and execute plans
(7) Flexibility, combined with domain and functional expertise, to tailor value-capture initiatives to each business and function
Putting EPA into action
An EPA program focuses on the long-term structural changes needed to sustain performance and, at the same time, quick wins to build momentum. The approach has three distinct phases:
(1) Facts, data, and objective diligence
This phase starts with an enterprise-wide performance diagnostic to quickly identify areas of opportunity. Deep dives into high-opportunity areas can help validate and build confidence in the feasibility of outcomes.
A holistic health assessment provides insights into the organization’s readiness to move forward. This health checkup can include:
● Expert-led interviews to assess leadership mindsets, processes, and capabilities
● Organization-wide benchmarking with best-practice tools and approaches
●A T2V assessment for key roles and capabilities
With an understanding of the potential for improvements in both performance and operational health, the organization can align on an aspirational goal. To achieve this consensus, some companies have organized “go-and-see” visits to peer organizations that have completed similar efforts. Companies have also conducted day-long “visioning workshops” to imagine future states that can inspire leadership and promote collective goals.
(2) Bottom-up planning
Once an organization defines its performance and operational goals, it can start planning how it will achieve them.
Leaders will need functional knowledge and expertise to map out granular initiatives at the business unit and functional level. Several tools and processes can support these efforts across the organization, including creating a repository of ideas and templates for different business units and functions, a structured methodology for prioritizing ideas and weekly tracking, and best-practice digital tools.
Additionally, this phase builds organization-wide commitment and conviction, with key leaders motivated to own and drive the effort. Conviction is grounded with a compelling story about why the organization needs to change, what it needs to do, and how it can move into the proposed future quickly. This change story is disseminated across the organization through various communications channels and interactions, such as town-hall meetings, digital campaigns, newsletters, and one-to-one conversations that engage internal key leaders and influencers. For example, a generics pharma company that embarked on an EPA journey to improve profitability focused the change narrative on what improved profitability would mean in terms of the company’s ability to fund R&D projects and innovation, and how that would improve prospects for the company’s future growth.
A T2V assessment helps appoint people with the right capabilities to critical roles as senior leaders work to align business priorities and promote enabling mindsets. Activation workshops can be held to enable the effort across the organization.
At the end of the planning phase, the organization should have a detailed, near-exhaustive list of well-evaluated and viable ideas and initiatives underwritten by leadership. Also, the organization should be equipped with a set of enablers supported by a compelling change story, as well as mobilized leaders and influencers.
For instance, one midsize pharma company in Asia was taken over by a private- equity fund that wanted to accelerate value creation. The company undertook a comprehensive EPA program to unlock growth that began by identifying opportunities. That was followed by 12 weeks of Bottom-up planning phase to detail out initiatives across operations, working-capital optimization, and growth. Based on T2V assessment, the company brought in new talent to strengthen critical roles. The program eventually doubled growth for the company’s key business unit and led to an overall EBITDA improvement of 7 percent within 18 months.
(3) Transformation implementation
The final phase of EPA is focused on execution and requires the deployment of organizational enablers to embed key capabilities and processes that will sustain performance gains over time.
Companies typically name a chief transformation officer (CTO) as an end-to-end performance and health steward. In addition, a transformation office and governance architecture may be established to empower the CTO.
To build capabilities critical to both driving and sustaining the EPA effort, companies look to digital initiatives such as gamified learning. For example, one pharma company had tried multiple classroom-based capability-building programs for its procurement function, with limited results. The company then deployed a gamified learning platform that included over ten interactive modules that were easily accessible on smartphones and desktops. This significantly increased engagement and led to at-scale capability building in the procurement function over just a four-month period.
To embed key processes crucial to driving and sustaining the EPA effort, successful companies typically redesign two to three end-to-end business processes to capture value.
At the end of the implementation phase, the aim is to have a strong infrastructure in place that will allow the organization to drive new ideation, build capabilities, and simplify processes to sustain the performance improvements achieved during the EPA effort.
Driving a step change in performance
EPA works well in a variety of situations. These may include acquisitions, in which new private-equity owners are seeking to improve profitability and cash generation before exiting in the typical three-to-five-year window; family-owned businesses planning an IPO; companies responding to external shocks that impact business sustainability (such as a major product going off patent), and underperforming businesses that need to quickly address cash crunches or debt obligations that are coming due.
Recent disruptions and challenges brought on by the pandemic have made it even more important for organizations to accelerate performance. A holistic EPA effort, with its sharp focus on value capture and execution excellence, can make a significant contribution to driving the next wave of growth and profitability for pharma companies.
About the authors
Vikas Bhadoria is a senior partner in McKinsey’s Delhi office, where Saptarshi Mukherjee is an expert associate partner; Jean-Baptiste Pelletier is a senior partner in the Lyon office; and Vamshidhar Reddy is a partner in the Chennai office.
The authors wish to thank Ulf Schrader and Vishnukaant Pitty for their contributions to this article.
(This article was originally published by McKinsey & Company, www.mckinsey.com Copyright (c) 2022 All rights reserved. Reprinted by permission)
Subscribe To Our Newsletter & Stay Updated