Business Exposed4
I call this “collective inertia”. Every existing player in the
industry was afraid to break the mold and take the plunge. I
have also learned, studying many rms in many different lines
of business, that most industries have similar idiosyncracies that
everybody adheres to but nobody really remembers why we’re
doing it that way.
But hardly anyone dares to challenge it. And that is where the
business opportunity lies. If you’re the rst one to spot the silly
convention (just to name a few candidates: buy-back guarantees
in book publishing, detailing in the pharmaceutical industry,
insane working hours in investment banking) and do it differ-
ently, it might just make you a heck of a lot of money.
And it would save many of us customers from a daily elbow in
the face.
Pharma – the devil is in the detailing
Let me give you an example of what I think might be a case of
“collective inertia”, although admittedly I have no hard evidence
of such. But they sometimes do seem like a bunch of monkeys
(staring at a banana): pharmaceutical companies.
51
n
Management happens
What do you think pharmaceutical companies spend most of
their money on? R&D: the search for new drugs? Think again.
True, pharma companies spend a great deal on R&D; studies
show it makes up about 14 percent of their revenue. Yet, they
spend about a third of their revenues on marketing. That’s right,
on average, pharmaceutical companies spend two to three times
as much on the marketing of a drug as on its development.
(Hence, next time you hear a pharma executive claim they need
to charge such a high price for drugs because of the high costs of
R&D, frown at him ercely!)
By far the largest chunk of these marketing expenses are taken
up by the practice of “detailing”; that is, a vast army of company
representatives visits physicians to shower them with infor-
mation, free samples, and persuasive arguments (and a “healthy
dose” of free gifts and travel), claiming that the company’s
drug is wonderful and really does what it says on the tin. The
raison d’être of this practice is that physicians – human as they
(often) are – only remember and hence only prescribe a limited
number of drugs; much fewer than are in existence. Therefore it
is important for a pharma company to make sure that physicians
know their drugs; they’ll hammer them into their brains (with
brute force if necessary!).
Moreover, over the past decade or so, the army of representatives
has been expanding with particular vigor. For example, in the US
alone, between 1996 and 2000, the herd of quacks with suitcases
full of pills and ointments rose from an already impressive
41,800 to a fearsome 83,000 pharma-suits.
Yet, is this practice of “detailing” really effective? Hmm . . . (at
best).
Research has shown, for example, that on average it takes three
visits to induce one new prescription. It also takes an average of 26
additional free samples to generate one additional prescription.
Hardly impressive, I’d say. Then why do most pharmaceutical
companies continue to rely on detailing? Well, there are also
studies – mostly internal research by the pharma companies
Business Exposed6
themselves – that do not provide unambiguous evidence that
detailing does not work. Hence, they’re not 100 percent sure that
it is an outdated practice. They fear there is a risk that if they stop
using the practice they will lose money. And that’s a risk they’re
not willing to take.
But, you might add, they’re currently also at risk of losing money
because they are continuing the practice. And you’d be right.
However, we know from research – for example, on variations
of “prospect theory”, by Nobel Prize-winners Kahneman and
Tversky – that people are often a lot more comfortable with the
risk of losing money when everybody else is making the same
mistake than with the risk of losing money when they’d be the
odd one out (even if the latter amount is considerably less than
the former).
For example, if a company were to stop detailing but it turned
out they were wrong and they’d lose market share and money as
a result of it, we (the public) would say, “You’re stupid – nobody
else did it”. Currently, rms might be losing (a lot more) money
because they continue detailing, but now none of us say they’re
stupid, because everybody is still doing it and we’re just not sure
that the practice is not effective. Hence, the risk of breaking the
mold is perceived to be much higher than an undue acceptance
of the status quo.
It is a situation very similar to that of the newspaper companies
discussed earlier who were reluctant to switch to a tabloid-size
format some years ago: they were just not sure that smaller
newspapers would be popular. Hence, while everybody was
printing broadsheet, nobody dared take the plunge and make
the paper smaller.
It takes someone to break the mold and show
the way. Usually, that is an outside entrant
or a rm in nancial distress (who just had
to take a risk) – just like The Independent
was in nancial distress when it was the
rst to launch a small-size newspaper. Since
those scenarios (outside entrants, nancial
‘‘
It takes
someone to break
the mold and show
the way.
’’
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