Piada
Organizational Design Analysis of Bayer Pharmaceuticals 1. Introduction During the past couple of months we have been working on assignments involving the Pharmaceutical Industry, and in our particular case, the Pharmaceutical division of Bayer AG. We have been looking at different factors, such as technology, environment, and strategy and have in this time come to learn more about both Bayer and the industry as such. Though a complex industry, its versatility is also what makes the Pharmaceutical Industry very interesting to look at from an organizational perspective. Overall, Bayer AG is currently undergoing some fundamental structural changes, which in many aspects will affect our analysis. The company is introducing a new structure, which, naturally, will involve all the divisions, making them more independent and enabling them to e.g. change the centralization in one particular division. 2. Problem statement In our previous three assignments in the course Organizational Design we have been looking at a few contingencies of our unit of analysis, Pharma, separately. The purpose of this assignment is to make a complete analysis of Pharma. We will start by looking at the current situation of Pharma in order to state the current organizational structure according to Burton & Obel’s framework leading to a total design description and design recommendations. In order to make this framework dynamic and to take a look at the future situation of Pharma we include scenario planning by making a best case and a worst case scenario for a possible future state of Pharma. Finally, we will conclude on whether or not Pharma will be able to make the structural changes necessary in order to face the new environment and our recommendations. 3. Methods As mentioned above, the first part of the assignment – the current situation of Pharma – will be made on the background of the contingency factor framework by Burton & Obel. The specific information on Pharma used in this analysis is gathered from the Internet as well as from our previous three assignments in this course. The analysis of the contingency factors will lead to a total design parameter fit used as the background for commenting on the situation as well as the design parameter misfits there might be, again leading to design recommendations for the current situation of Pharma. To add dynamic into our theory we will look at the future state of Pharma by applying scenario planning to our analysis. On the basis of the scientific articles used in the course as well as the knowledge we have gained about Pharma, and the Pharmaceutical Industry in general, we have made a best case and a worst case scenario for the future state of Pharma. On the ground of the scenarios we will be looking at the possible changes of the organization within Pharma, should the scenarios come true. Finally, we will make an analysis of the future state of Pharma based on the information and the analyses we have made throughout the assignment with some predictions on how we could imagine Pharma to evolve in the future – and how the group would cope with its future state. 3.1. Method critiques and limitations As stated above this paper is an assignment in the course Organizational Design. As the recipients of the paper primarily will be our lecturer and a censor, we will assume that the theories applied throughout the paper are familiar to the recipients. It has been difficult to comment on properties of Pharma as well as management and climate, as the publicly available information on these matters are rather scarce and without the inside-information of Pharma, our comments on these parts are therefore based on assumptions. When discussing the material on Pharma, we have made use of information gathered in the previous three assignments in this course. No parts have been directly copied and the corrections suggested in connection with the grading of the previous assignments, have been taken into consideration and corrected. In our gathering of information on Pharma, we have focused on the material being fit to use in OrgCon, which to some extent may have limited our findings or adjusted the outcome. 4. The current situation of Bayer Pharmaceuticals 4.1. The current Configuration, Size, Age and Ownership of Pharma Pharma is currently part of a divisional configuration under Bayer HealthCare (http://www.news.bayer.com/News/News.nsf/id/2002-0347) and currently employs 26,800 people worldwide. (Bayer Annual Report 2001, p. 66) The Pharmaceutical Department was established in 1888, thus Pharma is an old organization. (http://www.bayer.com /en/bayer/ugeschichte.php). Pharma is an department of Bayer AG, and the ownership can therefore be classified as being ‘Incorporated’. However, from 2003, the core activities of Bayer (being HealthCare, Crop Science, Polymers and Chemicals) are placed into independent subsidiaries within a management holding structure. Thus from 2003 the ownership of Pharma will be classified as an subsidiary. 4.2. The technology Measuring the technology of Pharma is rather complicated due to the fact that there are several departments (Research, Development, Production, Sales & Marketing) and thus each department has its own technological characteristics. In assignment 2 on technology, we looked into the particular characteristics of the departments and consequently made an evaluation of the overall technological dimensions of Pharma. As is shown in table 1, the technology dimensions of the departments vary: In order to make any kind of design prescriptions to our unit of analysis, we decided to define the major activity of it and to focus on it to be more precise. The major activity of the Bayer Pharmaceutical Division can be defined in their own words: “research-based manufacturing company” (www.bayer.com). Thus we will assume that the technology type of Pharma is manufacturing and research, which will make basis for our design prescriptions. The production type is, overall, defined as being mass. Another important measure of the technology is its divisibility, which is related to interdependency and decomposability. Pharma is highly divisible both across the functions of research and development, production, marketing and sales; across the range of products it produces, and also geographically as Pharma has offices in more than 120 countries around the world. However, it is important to note that increasing returns-to-scale in R&D, production or marketing, as well as economies of scope would lead to lower degree of technological divisibility. The overall routineness of Pharma is defined as being engineering (non-routine). 4.3. The environment In assignment 1, we made use of Porter’s five forces model to gather information about the pharmaceutical market and the competitors of Pharma. This provided us with an overview of the environment Pharma is currently facing and the overall environmental dimensions for Pharma are summarized in table 2. What can particularly be emphasized about the environment of Pharma is the growing tendency in the pharmaceutical industry of collaborations across internal and external borders. This environment encourages flexible organizational boundaries rather than constraining structures – and this applies both internally within the specific organizations as well as externally in the industry as a whole (Madhok & Osegowitsch 2000:325). The companies in this industry are somewhat interdependent: “As in no other industry, Pharma must depend on a veritable who’s who of companies to provide everything from access to enabling technology to sales and marketing support. The pharmaceutical industry is unique in this perspective in light of the massive scale of resources invested in these collaborations and the limited guarantee of success.” (http://www.eroom.com/white papers /eroom_pharma_v3.pdf). This, among other things, means that the hostility is medium in the pharmaceutical industry. The industry in general is not hostile, though it is still rather competitive, but we do find that the ‘supporting network’ of the pharmaceutical industry stands out! We find that the uncertainty is high, primarily because of the huge number of products, competitors, suppliers etc. in the market. The value of these different variables seems to be difficult for Pharma to predict. The high level of uncertainty of course also affects the level of equivocality. We believe that equivocality is medium, due to the fact that Pharma to a large extent seeks to monitor its environment. Further, Pharma follows up on new regulations, new technology etc. and makes a great effort to keep up with the changes of its surroundings. This understanding about, which variables that are relevant and how they are interrelated, we find is medium. Complexity is defined as the number of variables in the environment, and whether or not these are interdependent. There are, as mentioned, many variables in the environment of Pharma and these are largely interdependent, therefore we have defined the complexity of Pharma’s environment to be high. 4.4. The management Bayer has introduced a ISO 9000 standard for their managers to follow. (http://www.bayer.com /en/bayer/ub_up_qualitaet.php). The ISO 9000 is, among other things, a system of Quality Management (QM) principles, which “can be used by senior management as a framework to guide their organizations towards improved performance” (http://www.iso.ch/iso/en/iso9000-14000 /iso9000/qmp.html#Principle2). The principles encourages the leaders to create and maintain an internal environment, where the employees understand, are motivated by and involved in the organization's goals and objectives. They seek to diminish miscommunication between the hierarchical levels and further try to equalize all employees according to position. Some of the key goals of QM is to establish trust and eliminating fear, to create and sustain shared values, fairness and ethical role models at all levels of the organization, and to set challenging goals and targets (Appendix 4). Furthermore, the managers should be inspiring, encouraging, and they should recognize people's contributions, which, in turn, should provide the organization with motivated, committed and involved people. Also, they should provide the employees with the required resources, training and freedom to act with responsibility and accountability, which, in turn, would make the employees accountable for their own performance, and eager to participate in and contribute to continual improvement.(http://www.bayer.com/en/bayer/ub_up_qualitaet.php). Following these principles, the motivation and commitment of the employees is a key factor to Bayer, and thus to Pharma. Therefore, we assume that the managers to a large extent aim at motivating and inspire the employees, as mentioned above. However, mutually with the application of QM, the management of Bayer uses a system of Risk Management (RM). This means that they monitor the potential risks of every single process and area of their business, including their employees. In a worldwide legal compliance program they have developed “Binding guidelines and instructions…distributed throughout the enterprise to help ensure that our employees act consistently and safely” (Bayer Annual Report 2001, p.43). Further, the way the employees handle risks and comply with the rules are monitored at all times. This type of management indicates a rather high level of control – even though it does not seem to be more important than motivating the employees. Making use of such strategic tools as QM and RM insinuates that the management of Pharma focuses on long-term planning. Overall, we assume that the management of Pharma has a low preference of microinvolvement, has a preference for long-term decision making and for assuming risk (cf. RM). Seen from an information processing perspective, one might argue that the managers of Pharma seek to motivate through inspiration. However, at the same time they try to maintain a certain level of control and thus, by applying management tools such as QM and RM, they are, as mentioned above, trying to both motivate and control their employees! 4.5. The climate The definition of climate by Burton & Obel is climate being “the prevailing influence or environmental conditions characterizing a group or period, atmosphere, the prevailing set of conditions.” (1998:113). As Burton & Obel furthermore state the climate is the attitudes and beliefs that the individuals in the organization hold – and to look into the organizational climate you should look at the individuals and their perceptions about the organization. Using the seven dimensions to measure the climate (Burton & Obel, 1998:120-121) in Pharma would involve primary data such as interviews and observations of the employees and managers of Pharma. The limitations of this assignment prevent us from doing these interviews and observations, so in order to place Pharma in one of the four climate types (Burton & Obel, 1998:122-137) we can only make assumptions on what the climate might be – or how it should be in order to have a contingency fit. Seen from our point of view it is associated with some kind of prestige working at a well-known and well-established organization such as Bayer. From the Bayer homepage we can read that the company sees its employees as an important resource in accomplishing the company’s goals (morale high – enthusiastic employees) (http://www.bayer.com/en/jobs/index.php). Bayer has also implemented a compensation system involving not only the managers, but all the employees of Bayer based on the individual’s performance and contributions (moderate to high equitable rewards) (http://www.bayer.com/en/jobs/job_entgelt.php). In regards to trust, morale, and leader credibility we assume these to be medium to high based on the above description of Bayer’s use of Quality Management. Also the employee involvement could indicate a low to medium level of scapegoating. The pharmaceutical industry and, thus Pharma, being characterized by innovation and an ever-changing environment leads us to assume that the employees of Pharma have a low resistance to change. On this background we assume that the climate of Pharma is developmental. 4.6. The strategy We elaborated on the characteristics of Pharma to describe the strategy in assignment 3 on strategy. Our findings are presented in the table below: Characteristics Product innovation Process innovation Product/-marketbreadth Technology Concern for quality Price level Capital requirement Value High High/medium High Med. rout. High Medium High Table 3. The characteristics of the strategy of Pharma Following the above findings and the strategy characteristics, we found that Pharma has a Prospector strategy (Burton & Obel, 1998:255-260). Our reason for choosing the prospector strategy in the 3rd assignment was based on the following factors; The pharmaceutical industry is characterized by frequent product innovation, with manufacturers continually developing and marketing new products. This also applies for Pharma, thus being highly product innovative. To improve the efficiency of pharmaceutical research and development, Pharma assembled an extensive network of external collaborations. These collaborations and long-term alliances with leading biotechnology companies give Pharma access to state-of-the-art technologies and leading edge expertise and therefore we assume that Pharma is characterized by medium to high process innovation. Product/market breadth is defined according to the number of products and the number of markets (Burton & Obel, 1998:256). Pharma focuses on five therapeutic categories as well as other ailments that impair the quality of life and life expectancy (www.bayer.com/en /tk/healthcare.php). For each type of disorder, Pharma manufactures a lot of different kinds of products (Appendix 3) and it’s products are sold all over the world. Thus we defined that Pharma has a high breadth of markets and products. In improving the quality of products and services, specific objectives are set so the improvements achieved can always be measured. Meeting these goals is a key prerequisite in improving the quality of products and services in world markets, and we therefore stated that Pharma has a high concern for quality. Price comparison is difficult due to the lack of available information on Pharma’s products, different dosage strengths, forms and efficacy of medicines. Further, other factors such as patents, the existence of substituting products as well as increased government activity in price regulation influence the price level and makes it less transparent. Pharma makes no mention of their price level in the publicly available information, which could imply that their prices are neither high nor low. However, when having a high concern for quality, they might want to underline the quality with high prices and we therefore assume that the price level is high (to medium). As mentioned in part 4.3. the industry requires a large amount of capital. 4.7. The current organizational structure of Pharma Our definitions of the centralization and organizational complexity is primarily based on the indications of parts 4.1 – 4.6. The centralization seems to be low, as the management has a low preference for microinvolvement – when the management does not prefer to get involved with everyday decisions, somebody else has to, and this points towards a low centralization. (Burton & Obel, 1998:102). Furthermore Pharma is a large, divisionalized organization, and it is hard to imagine a high centralization under these circumstances. The organizational complexity has been difficult to determine, as the organizational chart of Pharma specifically is not available. However, it is obvious that the spatial complexity is high, as Pharma has offices in more than 120 countries. Due to the facts mentioned in connection with centralization, one might argue that both the vertical and the horizontal complexity could be medium to high. Overall, we assume the level of organizational complexity to be high. With the use of Quality Management: clarifying, specifying and setting goals, objectives, and targets as well as the use of the system of Risk Management, Pharma seems to apply a system of monitoring and systematism – this insinuates a rather high level of formalization. However, the climate and environment in all, encourages a low level of formalization, enabling the organization to react to changes and to be flexible. Thus, overall, we assume that Pharma has a medium level of formalization. 4.8. Total design fit The current organizational design of Pharma, summarized below, will be our point of exit for commenting on potential misfits. Further, the analysis has also been made in OrgCon, where our findings are supported. Having commented on potential misfits, we will sum up on our design recommendations of Pharma. The contingency factors of Pharma The design parameters of Pharma Management style with a low preference for microinvolvement High organizational complexity Developmental climate Low centralization Large and Incorporated organization Medium formalization Environment:- medium hostility, - high uncertainty, - medium equivocality, - high complexity. A divisional structure Technology: - highly divisible,- manufacturing technology type, - production type is mass, - routineness is engineering. A Prospector strategy Table 4. The organizational design of Pharma, overall. 4.8.1. Situation misfit Usually, a prospector strategy would not fit well with a mass production technology, because a mass production will not be able to adjust quickly and support the prospector and also due to the fact that the prospector requires a more non routine technology that most mass production operations can support. The importance of this misfit, we find, is minor. Manufacturing is the most appropriate classification of the technology type of Pharma, according to the measures of the book. However, when considering the actual, value-added technology type of Pharma and not taking the measures of the book into consideration, one would without doubt classify research as being the main technology type of Pharma. We do find that a prospector strategy would fit well with a research technology (more flexible and non-routine!) (Burton & Obel, 1998:260) and due to this fact the situational misfit is not relevant. 4.8.2. Design Parameters misfits The current level of formalization has been classified to be medium. However, a lower level of formalization is recommendable, as we find that because Bayer has a prospector strategy, a low degree of formalization is required in order for the organization to react quickly. Further, a low formalization will encourage and support the innovative environment of Pharma.