Customer Loyalty driving R&D

Corporate Executive Board has another one of their useful lists: Six Myths of Customer Loyalty. R&D managers probably are a key driver of customer retention and loyalty and three of these myths are relevant to R&D:

Myth 3: Customer Loyalty Efforts Should Focus on What Customers Say is Most Important
Myth 5: Developing Personal Relationships with Customers is the Best Way for Sales to Drive Loyalty
Myth 6: Employees Who Don’t Face Customers Cannot Affect Customer Loyalty

The idea is that one has to balance internal evaluation with voice of the customer.  Customers are becoming more fickle (necessarily – competitive pressure are enormous throughout the ecosystem.  As pointed out in a Forbes article: The New Normal: Your Customer Is In The Driver’s Seat:

“Today’s consumers are more diverse, more inter-connected and more demanding than ever. Their expectations are rising while their propensity to be loyal to companies is declining, so (let’s face it) they are in the driver’s seat. The questions for companies today are then: Are companies orchestrating where consumers go, and are they making the trip pleasant?”

Some key concepts to keep in mind when R&D managers interact with Product Managers or Marketing…
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Big Pharma’s stalled R&D machines

Reuters has a Special Report: Big Pharma’s stalled R&D machine.  The industry is under tremendous pressure to develop new products and address new emerging markets:

One factor forcing Big Pharma to rethink its business model is the huge number of patents that are set to expire over the next five years. As patents run out on blockbuster prescription tablets like Pfizer’s $12 billion-a-year cholesterol medicine Lipitor and AstraZeneca’s $5 billion heartburn pill Nexium, cut-price generics are sure to rush in and slash margins. Between now and 2015 products with sales of more than $142 billion will face copycat competition, according to IMS Health, the leading global supplier of prescription drug data. It is the biggest “cliff” of patent expiries in the history of the pharmaceuticals industry.

Add in tougher regulatory hurdles and a brutal squeeze on healthcare budgets as cash-strapped governments push austerity programs and it’s little wonder that drug companies are cutting back and shifting focus. The strategy so far has been to buy promising new drugs from outside developers and boost investment in the relative safety of non-prescription consumer products. Big drugmakers are also moving into new markets — with Asia at the top of everybody’s list. It all adds up to a redesign of the multinational pharmaceutical company. In the 21st century, says Isaly, Big Pharma will primarily be a distribution business.

However, the existing/historic R&D model does not seem to work effectively:

The problem is, Big Pharma doesn’t have nearly enough new drugs in the pipeline to replace all those it is about to lose. Since 1950 — virtually the dawn of the modern era of medicine — a total of 1,256 new drugs have been approved by the U.S. Food and Drug Administration (FDA). But the industry today produces roughly the same number of new medicines that it did 60 years ago.

Ten years ago there was a lot of hope that process-led research systems would industrialize the hunt for new drugs. But that optimism may have been misplaced. A spike in drug approvals in the mid-1990s, it turns out, was not the result of any fundamental improvement in productivity but largely down to the FDA clearing a backlog of applications after the introduction of a new system under which companies paid “user fees” to help speed the process.

Despite pouring billions into research — more than $65 billion last year in the U.S. alone — the number of new drugs launched annually has fallen 44 percent since 1997, according to CMR International, a Thomson Reuters subsidiary.

It appears that the PE ratio of pharmaceutical firms have dropped below that of consumer goods companies such as P&G.  Instead of figuring out a way to make R&D more effective, the industry seems to want to move towards a more consumer goods model and cut R&D as much as possible:

The move to cut R&D, he says, is one of the most profound changes in the industry in decades. Some firms are pulling back from problematic areas like depression, where proving the value of new medicines in clinical trials is fiendishly difficult. Lack of progress in this field is a prime reason behind Glaxo’s decision to cut research in Verona. Other firms are cutting back in areas that used to be their bread and butter. Pfizer, for instance, is trimming research into cardiovascular drugs and AstraZeneca is ending discovery in psychiatric medicine. Instead of pouring money into R&D themselves, drugmakers are turning to smaller firms, outsourcing routine research functions and even buying in smart blue-sky discovery work.

However, the large gross margins can not be sustained in a non-R&D discriminated business.  Hence the industry seems to want to outsource R&D to contract research organizations (CRO):

They’re also happy to pick up Big Pharma’s leftovers. Glaxo, for example, is negotiating to sell its Verona site to a U.S.-based CRO called Aptuit. Parexel International Corp, which is based in Boston and conducts clinical trials for drugmakers around the world, is busy hiring hundreds of new staff — many of them refugees from Big Pharma. “It’s a brain shift,” says Parexel’s chief executive and founder Josef von Rickenbach. “The rate of outsourcing has continued to tick up pretty much every year across all clinical trial activities.”

Does it not mean that the fundamental problem is not necessarily that R&D is ineffective, but that is costs too much?  R&D will be not outsourced to CRO who can maintain lower costs and higher efficiencies by leveraging economies of scale.  My question is: How large does a company have to be for economies of scale to be no longer make a difference?  What does a company give up in strategic / competitive advantage by outsourcing critical R&D?


How to improve performance reviews

The article Yes, Everyone Really Does Hate Performance Reviews  in Wall Street Journal has some good advice on making performance reviews more effective:

The good news is that none of this is the way things have to be. The one-sided, boss-dominated performance review needs to be replaced by a straight-talking relationship where the focus is on results, not personality, and where the boss is held accountable for the success of the subordinate (instead of just using the performance review to blame the subordinate for any problems they’re having). In this new system, managers will stop labeling people ‘good guys’ and ‘bad guys’ — or, in the sick parlance of performance reviews, outstanding performers, average performers, and poor performers to be put on notice. Instead, they’ll get it straight that their job is to make everyone reporting to them good guys.

This is important (if difficult) in R&D management – especially larger organizations.  Most engineers tend to dislike performance reviews any way.  The fact that engineers work in cross-functional teams and have multiple bosses makes reviews even more difficult.  Functional managers may not have all the information about actual work performed by an engineer on a project team, while the project manager may not know the discipline involved sufficiently to value the effort.  Interesting conundrum.