A global pharmaceutical CEO wanted to make a game-changing shift in the direction of the company—until a detailed review of the investment portfolio uncovered important differences in how his management team interpreted the strategy.
The CEO of a global pharmaceutical company had established a vision for the company over the next 15 years. To validate that all potential investments were consistent with the new strategy, the CEO asked for a review of the investment portfolio. He needed a methodology that would allow comparison of vastly different programs and investments.
For each investment, a decision could be made to pursue it, change it, or terminate it. But how could the organization compare research that ranged from established technologies to highly novel immuno-modulating therapies? Or to business opportunities to in-license or acquire new drugs or companies? Or to investments in sales or production capacity?
Discovery and Solution
SDG put a considerable emphasis on understanding the individual perspectives of each member of the board of management. The SDG team spoke to every decision maker individually and created a structure that incorporated their objectives, their understanding of the company’s strategy, and how they wanted to shape the future of the organization. SDG was then able to pinpoint five fundamental objectives that all decision makers recognized as the future value drivers of the company.
SDG assessed how subsets of the portfolio would accomplish these objectives. This uncovered an important distinction in how members of the board interpreted the company’s strategy. Some members bet on innovation guided by science. Others favored innovation based on clear market and patient requirements. For the first time, the CEO and the board of management recognized that while everyone agreed in principle to the high-level “strategy”, they differed significantly in which investments would best achieve those objectives. Consequently, the agreed-to strategy seemed to be operationalized in ways that were not mutually supportive.
By separating the discussion of individual investments from the higher-level discussion of strategic preferences, the different tradeoffs became clear, with profound implications for the direction of the company.
SDG used multi-attribute utility theory (MAUT) to evaluate each potential investment decision against the strategic objectives. In parallel, SDG created a financial model to assess the financial implications consistently across all investments. The MAUT evaluation used the board members’ preferences to define and describe a strategy, while the financial evaluation allowed for a comprehensive profitability analysis.
SDG ranked the investments according to the degree to which they met fundamental objectives while validating the financial implications. Based on this analysis, the board of management could quickly take action on several individual investment decisions, and the future portfolio began to take shape.
Results and Impact
Several important results were achieved. By investigating and surfacing the differences in the board members’ strategic preferences, the CEO could intervene to articulate a common understanding of the corporate strategy and set the direction for future development.
The probabilistic nature of the investments was a major contributor to understanding the financial implications. By taking uncertainty into account, a probabilistic simulation could be modeled and the expected financial impact could be determined—together with probability distributions on performance metrics and value at risk. The calculation of the probability of achieving desired financial targets provided valuable insights to the board.
A holistic view of the investment portfolio with respect to the five fundamental objectives allowed the board of management to easily recognize which investments were in line with the strategy and which were not. Once the corporate strategy was truly clear and the tradeoffs the company was willing to consider were identified, synergistic effects across the organization could be exploited. This would continue to align business activities with strategic decisions across the business units.
In the end, by surfacing and facilitating the difference of opinion on the corporate strategy, SDG enabled the CEO and board of management to make decisions about the portfolio that gave the company its best chance of reaching its strategic and financial goals over the coming decade and a half.