Merck, Vioxx and You

I don’t know how you feel about the recent $253 million Vioxx judgment against Merck. If you subscribe to the stereotype that pharmaceuticals are big evil entities that care only about making money, then you’re thrilled. If you subscribe to the stereotype that vulture trial lawyers use sleazy tactics to bleed a legitimate corporation, then you’re depressed.

I think both stereotypes are excessive, but I’ll tell you what bothers me. Several jurors admitted, without any sense of regret or embarrassment, that they basically ignored the science that Merck presented. The science indicated, not with 100% certainty but certainly well beyond “a reasonable doubt”, that the plaintiff’s husband did not die from using Vioxx. But the jurors didn’t care about that. They conceded that they found the science boring and irrelevant. The only thing that aroused them was Merck’s “apparent” decision to conceal from the public certain experimental findings which suggested that the painkilling drug might lead to cardiac problems—hence the $24 million to plaintiff Carol Ernst for mental anguish, and $229 million in punitive damages to punish the bastards at the big, cold, heartless corporation. Yes, Texas law will cut that award significantly, but the damage is done, and at this point there are 4200 more lawsuits representing 7500 plaintiff groups coming up. I’m sure that with this verdict, those numbers will grow. I can just see a bunch of Vioxx users, and lawyers, thinking, Hey, Merck is rich. Let’s get in on the action.

I have no problems holding Merck financially accountable for either withholding data on health effects or for promoting a drug that actually caused somebody’s death—as long as there is real, non-junk scientific evidence to support both claims. But it seems to me that we are on a very slippery slope when the main motivation of jurors is to stick it to a company as much as possible because it’s big. No company is big enough to withstand thousands of mega-million dollar verdicts. Merck stock is off 40% and even if the company doesn’t fold outright, it won’t see any earnings growth for the rest of this decade.

Tough luck you say. Fine. But who is going to develop and make the new medicines we depend on? There are risks and nasty side effects to every drug you take; check out the warning labels. Further, you know this decision will impact every other drug companies. How likely are they to take the kinds of long-term risks we want them to take in developing the kinds of medicines we hope they’ll develop? Remember that Vioxx has been a great drug for millions of people, better for them than anything else on the market. It’s off the market now, and who knows what else in Merck’s pipeline (and Glaxo’s, and Pfizer’s, and Shearing Plough’s, etc.) is off the R & D fast track now as well.

I’m not an apologist for Big Pharma. Merck ought to pay when the evidence clearly demonstrates that a customer died because the company failed to disclose data that would have convinced the customer and his or her physician to avoid the drug. Personally, I think that will happen in some trials, but it didn’t happen in this one. Instead, a lynch mob mentality among jurors coupled with straight-up greed among lawyers created a huge precedent that will have a significant impact on Merck and other pharmaceuticals. Some of that impact will be good, like more disclosure with side effects. A lot of that impact will be bad--depressing risk and investment for next-generation drugs. And that will impact me and you, unless we want to rely on trial lawyers for new medicines.

Down with “One Stop Shopping!”

If there’s one phrase I’d eliminate from corporate strategy sessions right away, it’s “one stop shopping”. This is a phrase that is diabolical in its effects, for it often makes otherwise sensible executives salivate with infantile glee. Their eyes glaze as they visualize incoming hordes of customers spending gobs of money and never leaving for another competitor, because somehow, the company magically provides them with an all-inclusive integrated A to Z menu of terrific products and services that they absolutely must have, forever.

There’s only one problem with this vision. It’s a fantasy. The underlying assumption is that customers will comply with this rosy scenario. They don’t. As one of my clients told me: “Just because I keep a couple checking and money market accounts for quick liquidity at Bank X, why would Bank X assume that I’ll let them issue my credit cards or manage my retirement portfolio?” When Phil Condit headed Boeing a few years ago, he stated flatly that “we don’t buy engines, auxiliary power units, and avionics on one purchase order, and we don’t expect to in the future.” Instead, the company continues to scan the global marketplace for—surprise!—the suppliers that can provide the best price-value mix in each product line, and then buys accordingly.

When AT&T was still independent, it learned this lesson the hard way. During the 1980’s-1990’s debacles under CEO’s Bob Allen and Mike Armstrong, the strategic premise was that customers wanted to buy all their telecom services (long-distance, Internet, cable TV, webTV, cellular, etc.) from one provider. To make this “all-things-to-all-customers” menu-building even remotely possible, and scalable, AT&T for years binged on massive, debt-ridden acquisitions.

The only problem is that the darn customers didn’t cooperate. Like intransigent children, we insisted on picking and choosing different services from different providers, depending on where we’d get optimal value. And on the institutional end, it got worse: corporate customers became increasingly wary of tying their fortunes solely to one provider, and like individual customers, they chose AT&T for one or two things and found better alternatives for the remainder elsewhere—a tale that all suppliers have been hearing with increasing frequency. Darn those customers—they consistently screw up our carefully developed strategic plans, which is why Armstrong, before his ignominious departure, was frantically considering everything from divestiture to unbundling to write-offs as the company’s stock continued to tumble south.

I don’t care what your consultants and investment bankers tell you, you can’t do it all, and even if you wanted to, customers wouldn’t let you. So concentrate on doing a few things really great, not a whole bunch of things with mediocrity. Pay close attention: The wider the net you try to cast, the more cumbersome, costly and complicated your organization will be, and the more your company’s talent, resources, management attention, creative capacity and customer care will be spread too thin, or simply scattered in a bewildering fashion.

To paraphrase the famous "Field of Dreams" line, if you keep on building it, they won’t come. And then you’re stuck with a big empty stadium.

Google dominating Microsoft? Gimme a Break!

Maybe it’s because I live in northern California rather than Seattle, but I can’t seem to open a local newspaper or magazine without seeing the faces of Sergey Brin and Larry Page, the baby-faced billionaire founders of Google. I give them, and Google, all the credit in the world. Apparently the market does too, valuing the company at, more or less, a remarkable $300 a share (Brin and Page aren’t into splitting stocks). But where I draw the line is when I read that Google is kicking Microsoft’s butt. Writers love to use sports and jock lingo to describe the business world, but reality is much more complicated than that.

So let’s put things in a perspective that I’m pretty sure that Brin and Page would subscribe to. First of all, Google doesn’t dominate Microsoft. Nobody dominates Microsoft. Google dominates search. Google concentrates on excellence in every conceivable permutation of one thing: search. Everything else (e-mail, photo software) is a loss-leader to build the entre and customer loyalty for the search brand. The upshot? Google is not competing with Microsoft, though I think Microsoft is competing with Google. Microsoft is frantically following the lead of Google, be it in video file search, local area search, desktop search, search designed for cellphones, scholarly journal search, etc.

What does Microsoft dominate? Well, sometimes it’s hard to tell. Microsoft’s “one-stop-shopping” strategy has turned it into a steady, dividend-issuing mature company that the Economist likens to a utility, “safe for widows and orphans.” Nothing wrong with that. There’s also nothing wrong with the fact that at nearly $40 billion, Microsoft is ten times the size of Google with a core quasi-monopoly product line called Windows and Office, all growing at 15% annually. We should all have such problems!

Yet low-priced or zero-priced competitors like Linux, Firefox, SimDesk and even Yahoo! continue to chip away at Microsoft’s core, and the company doesn’t seem to have fresh alternatives. Its huge R & D budget is indiscriminately applied to numerous directions, because the company is into just about everything digital: servers, videogames, media, photography, browsers, operating systems, e-mail, blogging, whatever—but really, what keeps Microsoft strong are the only two suites which the company does dominate big-time-- the basic Windows and Office products. So there’s your answer as to what Microsoft dominates.

At the end of the day, Google has the momentum and Microsoft is a follower in search. But that doesn’t mean that Google is kicking Microsoft’s butt. Microsoft is so much larger and is in so many sectors that Google couldn’t, and shouldn’t compete in. Even though Google has an unbelievable $81 billion market cap, Microsoft’s is even more astronomical—nearly $300 billion—which means the market still projects solid earnings growth from Redmond, Washington.

Even so, Google gets the headlines. I can understand why. For explosive product innovation and for real growth (in 2005 relative to 2004, profits soared 500%, revenues doubled, and stock hit an astronomical 300) you don’t need to go much further than Google, which seems to offer a new direction in search, and in digital advertising technology, every two months. And the fact that over 100 Microsoft scientists and managers have left for Google has got to sting Bill Gates.

So you see, things aren't as simple as they are on a playground. Let’s give Google its due. It’s a great company. It’s annoying the hell out of Microsoft. But kicking Microsoft’s butt? I hardly think so.

Intangible Adidas

So should Nike be running scared now that Adidas has bought Reebok for $3.8 billion in cash? I’m not at all sure. Yes, the new combined $12 billion Adidas-Reebok (“AR” until I know the name of the new company) will have more clout with suppliers (for squeezing lower prices) and with retailers (for better shelf space). Yes, the new AR will lop off $120 million in duplicate costs over the next 3 years. And yes, it’ll combine the global Adidas presence with the U.S. Reebok base. And yes again, the new $12 billion AR will approach the $14 billion Nike in revenues, though it will lag significantly in the important metrics like net income and market cap, the former reflecting profitability and the latter reflecting the market’s appraisal of future earnings.

So to summarize, in terms of tangible assets like size, mass, volume, reach and scale, the new AR is big, big big. But here’s the more important question: How will this merger affect the company’s intangible assets?

Here’s a little lesson for you merger lovers: In today’s marketplace, intangibles trump tangibles. If you want to predict which runner will win a race, do you look for the bulkiest or do you look for the fastest? I’d know where I’d place my bet. Likewise, if you’re going to invest in a company, you’d be wise to tap a company loaded with intangibles like:

• Knowledge: intellectual property, great ideas in the pipeline, cutting edge science and technology, great data bases.
• Talent: top-notch people and the ability to attract and retain the best and brightest of them, and the capacity to attract the partners who are world-class in breakthrough knowledge and innovation.
• Imagination: the organization’s ability to leapfrog over conventional wisdom with creativity and innovation, and to quickly translate that ability into very cool products.
• Speed and agility: the capacity to react, make decisions, spread information, do follow-up, and go to market before any competitor.
• Foresight: the capacity to look ahead, peek around corners, and quickly capitalize on fleeting opportunities.
• Renegade desire: the company-wide hunger to set the agenda of the industry, to set the rules of the game .
• Inspiring Leadership: leaders who can combine bold vision with operational excellence, who can inspire and mobilize their teams to strive for extraordinary goals.

Don’t be surprised that the Brookings Institute’s research has concluded that 80% of the value of the S & P 500 can be attributed to intangible factors. That means it’s intangibles that generate real growth and corporate health.

So the important question for the new AR, especially in the fickle, fashionized world of sports gear, is whether this merger will jack up the new intangibles to a level higher than that of the new tangibles. In other words, will this new company be faster, hungrier, more agile, more innovative, more talented, and more forward looking, than it was before the merger? Will there be more (intangible) breakthroughs like Adidas’ hot-selling $250 chip-embedded “intelligent shoe” as a result of this merger, or will there mainly be more scalable advertising dollars spent for existing lines?

If you answer “both!”, I wonder if you’re being naïve. As companies get bigger and more complex, especially after merger that suddenly hyper-inflates the size of the company, “dis-economies” often enter the picture: more hassles and costs in integrating the companies, more bureaucracy, more risk-aversion, slower response-time, more desire for quick cost-cuts and quicker revenues to justify the costs of the merger, more jockeying for political power, more corporate controls on so-called “messy” innovations. That’s why the scorecard on mergers is pretty miserable; more than 50% are financial disappointments.

I’m not saying that the new AR won’t be successful. I’m simply saying that I’m not impressed when newspaper reporters breathlessly hype up the value of sheer size. If I were Nike, I’d be more worried about a siege of rocket-growth $180 million companies like AND1, which has captured the urban basketball shoe market with a mix of hip-hop music and streetball tours that are so unbelievable that they’re now part of ESPN. At the end of the day, remember that whether you’re Adidas-Reebok, Nike, or AND1, consumers have a ton of choices about their shoes and clothing, and they’ll exercise those choices regardless of boardroom decisions that are too often based on tangible assets.

Going Slower to Go Faster

Remember the “Seinfeld” TV show, where periodically Jerry or George would suggest that the show is about “nothing”, whereas in reality it was about something very entertaining? Well, today’s blog is about “nothing”, but in reality the little point I want to discuss is something very important.

There’s an astute leader I work with--a senior VP of a major U.S. corporation. I want to share with you something elegant and subtle that he did in a meeting a couple days ago. It was a two day strategy session with the top 10 people in the division. Based on prior due diligence, they had come up with a specific set of strategic intents that would define the direction and priorities of the division during the next three years.

Now under the best of circumstances, a comprehensive strategy-development session is a complex, trying experience. In this case, it was doubly so, because the strategic intents that the team developed would demand some major deviations from the strategy the division has subscribed to in the past.

Nevertheless, I thought the team did an exemplary job, and I was looking forward to seeing how the plan would be received during the rollout in next week’s meeting with the next level of 50 upper level managers. Yet, as our meeting began to wind down mid-afternoon, some signs of fraying at the edges began to appear.

The concerns revolved around issues like—Are we very clear about our message? Do we really understand the implications for execution? How will this play out with certain functions and groups? Have we resolved some obvious objections that might emerge next week? Aren’t there some unresolved soft spots?

Here’s what the leader had to sift through. Were these concerns legitimate, or just a last-minute, hyper cautious, let’s-not-make-a-decision-yet sort of risk aversion? And what about the participants who were impatient to move on and start executing? Would it be unwise to dampen their sense of urgency and rain on their enthusiasm? And what about the fact that next week’s meeting site and travel plans for 50 people had already been planned, booked, and confirmed?

And yet, what about this: when you’re talking about something as critical as strategic intent, it’s critical that top management speak with one voice with one passion, and present a clear, coherent, well-thought out, inspiring message. What would be the impact if that didn’t happen next week, and beyond?

Now comes the Seinfeld “nothing”, that’s everything: The leader took a time-out, heard out the concerns of a few of his top managers, conceded their potential validity, and gave the team permission, and protection, to postpone next week’s big, planned meeting if they thought it was best for the division. And after further discussion, they did.

What the leader told me was “Sometimes you have to go slower in order to go fast.” He had to do a delicate balance act in order to maintain velocity without veering to recklessness. On one hand, his own instincts were: we’re okay, we’ve done good preparation, we do have a clear compelling message—let’s go for it. On the other hand, his instincts also told him that he had good staff, and unrolling a plan with less-than-100% understanding and commitment from his top team could open up a Pandora’s Box of hurt. On the third hand (is there such a thing?), his instincts also told him that he couldn’t permit the postponement to be perceived as an excuse for risk aversion and a bureaucratic slowness until some mythically “perfect” plan could be developed—which is one reason next week’s postponed meeting will be a non-negotiable opportunity for the 10 top managers to reconvene, wrap up all loose ends, and plan a follow up with the next level. On the fourth hand (!!), he had to be willing to show the resolve to lead whatever damage-control that might be required from canceling a meeting of this size.

These sorts of challenges aren’t covered in business schools, but any leader knows they pop up regularly. How leaders handle these “nothing” sorts of dilemmas often determine the organization’s fortunes to a greater extent than the kinds of spreadsheet analysis or software that they use. Maybe one gets the wisdom from experience, and if that’s so, then aspiring leaders would be wise to start paying attention to the subtleties of these dilemmas right now.

Audacious Branding

My family and I spent last Saturday cruising around San Francisco. Lovely weather. Music and art in the street. And a Virgin Megastore. It was packed. The joint was jumpin’, and within 10 minutes I knew we didn’t belong. My kids were too young and I was too old (I’m smart enough not to say anything public about my wife’s age). In my defense, I’m not geriatric; this coming weekend my wife and I are going to hear Los Lonely Boys on Saturday night and Hank Williams Jr. on Sunday night—but still, as anybody over, say, 40 would conclude, I didn’t belong.

But it got me thinking about Virgin. What a great brand. Everything Richard Branson touches seems magically cool. How does he do it? I think the key is audacity. Sir Richard (yes, he was knighted by the queen), the head of the Virgin Group, has been known for audacious personal behavior—like jumping out of luggage bins to greet passengers on Virgin Air. But I think the essence of the Virgin brand is audacious strategy and audacious design, which has been the trademark of every Virgin business, from airline to music to cellphones and beyond.

When I say “and beyond”, I sound like Buzz Lightyear, but I mean it literally. Audacity can certainly be applied to Virgin’s new privately funded Virgin Galactic outer space tourism business. This sounds so audacious as to be as to be outright nutty. But consider: Branson’s partner is Burt Rutan, who oversaw the development of SpaceShipOne, which has already traveled twice to the edge of space. Further, Branson is licensing the necessary SpaceShipOne technology from Mojave Aerospace, owned by Microsoft billionaire Paul Allen, who happens to be Rutan’s partner. With private investment coupled with an initial ticket price of $210,000 (for the experience of a grand total of 3 minutes of weightlessness in space), which is collected by potential customers (and believe me, there are plenty of potential customers) two years prior to the first flight, even skeptics are beginning to believe that Branson’s presumed insanity actually has a real (and disciplined) business logic. Given his blockbuster successes in so many other ventures, I would say—here's another winner.

I gotta tell you, it sounds very tightly choreographed, and very sexy. Listen to this promotional blurb:

You may well fly Virgin Atlantic Upper Class into the nearest major city. Possibly we will pick you up in the Virgin Galactic executive jet and shuttle you to the Virgin Galactic space resort, where you will be guided to your luxury accommodation. This will be home during your stay.

Every morning you could be ferried by helicopter to the training base and spaceport where you might undergo six days of medical preparation, G-Tolerance training, talking to space experts about how to get the most from your experience, fly the simulator and in the evenings dine with astronauts and guest speakers.

Two hundred thousand bucks for six days preparing, three minutes in space, and it actually sounds very cool. I’m not ready to take a second mortgage, but it even sounds worth it.

So maybe that’s the secret of the whole Virgin brand: audacity on stage, tough business discipline backstage, premium price for the privilege of being part the theatre production. Seems to work for billionaire Branson. I can think of worse role models.