Managing change in a large organization

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COMPANY BACKGROUND: GlaxoSmithKline (GSK) is among the top 20 FT Global 500 companies and among the top 5 pharmaceutical companies in the world. GSK develops, manufactures and markets pharmaceuticals, vaccines, over-the-counter (OTC) medicines and health-related consumer products (Datamonitor, 2005). The company primarily operates in 116 countries and its marketing is done in over 125 countries. It is headquartered in Brentford, UK and employees about 100,000 people (GSK, 2004).

GSK's history goes as far back as 1859 when Beecham opened the world's first factory built solely for making medicines at St Helens in England. Since that time the group has passed through many phases, but the turning point came during the merger of Glaxo Wellcome and SmithKline Beecham in 2000, it had also seen a merger of Glaxo and Wellcome in 1995 (Glaxo, 1998). There was a major impact on the culture, structure, stakeholders and strategy of the company due to this merger.

Innovation is at the heart of GSK's aims and the company promotes this through its unique culture. The objective of the company as described by its Annual Report 2004 is to become the undisputable leader in the pharmaceutical and consumer health industry (Glaxo, 2004).

CHANGE SITUATION: The merger of 2000 can be seen as the proper use of 'sigmoid curve' (Handy, 1994), as the company started a new curve before the first one declined. Both the legacy companies had the time, resources and energy to get the second curve through its initial floundering before the first curve declines. But it was the experience and management capabilities of both the companies that lead them through a successful change management program.

During the process of change management the company emphasized upon creativity and innovation (Emerald, 2004), it realized that without these the company was at risk from the highly competitive pharmaceutical industry with an increase in generic manufacturers. Thus with many patent expiries due soon and with empty pipelines, the start of new curve was an issue.

Considering these external stimuli the CEO of the company Jean-Pierre Garnier tried to reconcile the concepts of being big and think small by dividing the R&D department into seven " centers of excellence for drug discovery " (hereafter CEDD) (Financial Times: April 2, 2001). This change was based on the success of biotechnology companies, where independent small teams were working.

The change situation of the R&D department during the post-integration period at GSK can be seen as transformational as it fulfills the five key indicators of transforming change given by Ashburner et al. (1996: p. 6). The announced change influenced the culture prevailing at the department, changed the interaction of operations and R&D department, formed new leaders within each CEDDs, changed roles of individuals and teams. Furthermore, in this change the management role was proactive therefore GSK being the center of R&D can be seen as in the planned transformational stage, during the post integration period of the merger. The external environment in which the company was operating at the time of the merger can be analyzed in detail by using the PESTEL analysis.

PESTEL ANALYSIS:

Politics

There has been widespread investigation into the likely impact of liberation of international trade by World Trade Organization (WTO) for China. In the early 2005 China announced the end of some of the remaining quota systems prevailing on different segments. This has facilitated the process of globalization for ethical drug manufacturers like GSK and also opened up a market of 1.29 billion people.

There are growing concerns of parallel trading in the Europe and its effects on the revenues of the pharmaceutical companies. With the accession of the ten Eastern European and Baltic states to the EU in 2004, large distribution companies with pan-European operations have emerged as distributors and have started to source products from the lowest point of supply in Europe through the medium of parallel imports.

Econimical

t has been estimated that in 2004 the global pharmaceutical market was worth £ 275 billion, with projections showing an annual global sales growth of 6% over the following five years (Datamonitor, 2005). Drawing upon Pollack (2005), it can be stated that the majority of the sales in the industry originate from the 'Triad' countries i.e. US, EU and Japan.

The health of economy is a vital influence on the extent of discretionary buying and how much is spent on necessity purchases. The trends in personal disposable income has seen steady rise of 14% in the period of 2002-2005 (HM Treasury, 2005). This growth has been assisted by low unemployment, low inflation and falling interest rates for much of the period. The following graph and the table of figures have been made with the help of data taken from ONS (2005).

Year

PDI

Consumer

expenditure

Savings

ratio

Interest

 

£bn

£bn

%

%

2002

703

649

5.3

4

2003

721

664

5.5

3.7

2004

752

697

6.6

4.4

2005 (est)

777

720

6.9

4.4

2006 (fore)

801

742

6.9

4.5

(Source: ONS-2005)

The UK business cycle (HM Treasury, 2005) shows that the current cycle started in the early 1999; peaked in 2001 and then saw its lowest point in 2003. It can also be inferred from the cycle diagram provided below that long term government economic policies and stable inflation rates have made these cycles less pronounced then before. This is good news for all the businesses in UK as these cycles have less impact on them now then before. The diagram of the UK business cycle adopted from HM Treasury Report 2005 is provided as follows:

(Source: HM Treasury Report 2005)

The health of economy is a vital influence on the extent of discretionary buying and how much is spent on necessity purchases. The trends in personal disposable income has seen steady rise of 14% in the period of 2002-2005 (HM Treasury, 2005). This growth has been assisted by low unemployment, low inflation and falling interest rates for much of the period. The following graph and the table of figures have been made with the help of data taken from ONS (2005).

Social:

National Health Service (NHS) has projected that healthcare spending growth will remain fairly constant till 2014, growing at the rate of 7% every year (NHS, 2005). This table growth in the healthcare spending can be seen has an opportunity for ethical drug manufacturers like GSK.

The number of people aged 65 and older has more than tripled since 1950s to reach 420 million worldwide. The UK Census and National institute on Aging have predicted that by 2030, one in every 5 UK citizens will be aged 65 or above. This prediction is based on the analysis showing that the fastest growth between 2002 and 2005 is among those aged 55-64, representing the Baby Boom generation (Herald, 2005).

Technological:

Soaring energy costs are driving the price of packaging materials. Chemical companies across the globe have been forced to increase the price of polyethylene. This is the material that is used in the manufacturing of plastic sheets and PET that are used in medical packaging.

Environmental:

There has been a growing concern on the issue of animal testing for the research-based pharmaceuticals. The companies have been using animals to test new molecules and their reactions before introducing them into clinical trials for humans. The pressure from the animal right activists has increased in the last couple of months on the companies.

Legislation:

In 1984 the Drug Price Competition and Patent Term Restoration Act (also known as Hatch-Waxman Act) created an abbreviated approval process for generic prescription drugs in the US and the results were felt throughout the globe. The sales of generic drugs have increased dramatically since then. Today, the generic versions of all the top selling drugs are available soon after their patent expires.

In addition to the early entry of the generic products the prices of research-based pharmaceutical companies is faced by price controls imposed by governments and health care providers around the globe. The existence of price control has limited the revenues that the research-based companies can make from their patented products.

There are stringent government regulations that govern the entry to pharmaceutical industry. The licensing requirements, clinical trials regulations, product efficacy and safety regulations have contributed to strengthen the entry barriers for new entrants in the research-based and OTC segments of the pharmaceutical industry. It has been estimated that out of 5000 - 10000 molecules that are screened in the labs only one makes it to the market due to these government regulations (Debra & Sivakumar, 2004).

Thus it can be concluded that the increasing costs, stringent laws, increasing generic competition and decreasing innovation are the prime reasons for the post merger integration changes in the R&D department by the management of GSK. This has been coupled by the core competency of strong R&D departments in terms of performance and optimized results of the two legacy companies.

THE CHANGE PROCESS: GSK uses European Foundation for Quality Management (Excellence Model) to measure its performance (Simmons, 2003). The model has been used by the companies to gauge their performance in different aspects of change management. This framework provides a benchmark against the best practice not only in the industry but also across different industries. Therefore for the purpose of this report the model can be used to show how the under consideration change has affected the components of the model and furthermore, using it as the basis of this change management audit report. The impact of change on the organization and in particular on the R&D department is considered to be of competitive advantage for GlaxoSmithKline and can be represented on EFQM by using arrows in the following way:

This shows that the change process has an effect on leadership, people, resources and process, which will also impact on the results of customers and therefore key performance indicators. Leadership style used in each CEDD and the overall leadership style during this change has been under pressure so that it is aligned with enhancing creativity (Financial Times, 2005). The leadership styles needed to be changed from autocratic and task oriented towards democratic and people oriented. It can be concluded from the press articles about the change that scientists believed that the department was having a 'power' culture (Handy, 1999) before the changes towards CEDDs. But as the department was divided into a grid like structure with different teams interacting within each other the resulting culture was a 'task' culture (Handy, 1999).

The motivation of the people was very low due to many changes occurring in a very short duration of time. Employees first saw the merger of Galxo and Wellcome in 1995 and then of GlaxoSmithKline in 2000. Scientists working at the R&D development have reported that these mergers were constraining forces in their work as they had budgeting issues during the pre-merger, due diligence and post-merger periods. Their motivation levels became very low after the announcement for the change into CEDDs (Financial Times, 2003). They had an impression that they were being treated like sales department by raising competition within themselves (Financial Times, Oct 24, 2002). This drop in the motivation of the employees can be seen as what is known as 'Denial Stage' in the Kubler-Ross Transition model. This model along with the emotional states of the undergoing staff is illustrated as follows:

Therefore according to this curve, GSK needed an approach that allows a smooth transition from denial to acceptance in a short time frame. The processes at GSK also needed to be changed to cater for this new CEDDs based R&D department as there could be possible knowledge management issues among the centers and also they had to fight for their budgeting needs. These issues in the enablers' part of the EFQM would lead to the GSK's unsatisfied employees and customers that in the long term will project in weak pipeline which is one of the key performance indicator for GSK.

Although the action taken by the management to create the CEDDs can be seen as an abrupt one, but it took the path of 'Organizational Development' to ingrain this change into the culture of the organization.

CHANGE AND ORGANIZATIONAL DEVELOPMENT THEORY:

In order to harness the improvements from this change, GSK needed to use the organizational developmental theories to manage the smooth transitional period. The change from one R&D department to seven independent team oriented CEDDs, can be represented in the following diagram:

This structural change according to Handy (1993) can only be possible if it is supported by a cultural change i.e. a transformation of the culture from role to task culture. Thus the company was faced with yet another problem of changing the culture of the department in order to make the CEDDs work effectively. The nature of this task required slow transformation (Gibb, 1998), as corporate culture is complex and intangible.

There has been a great diversity among the definitions of corporate culture, but the most popular is that it is a mix of values, beliefs, assumptions and the history of the company combined together (Andrew, 1995). There are many tools that show this intangible characteristic of an organization on a map. One of the most admired one is the " Gottarna Cultural Map " (Handy, 1993 & Chorn, 2004). According to this map the culture of an organization can be shown as I (Integration), D (Development), A (Administration) and P (Performance) logics or some combination of this. Thus the cultural change at GSK can be represented on the following axis:

The pre and post merger positions of GSK culture has been mentioned in the above cultural map. It shows that before the change in the R&D department the prevailing culture can be seen as a 'Power Culture' and it was more oriented towards the development (D) side. Therefore the department was lacking a competitive environment. The change in the structure of the department can be seen as a strategic change in the culture towards the performance (P) side, which keeps an eye on the competition and uses creativity and innovation under the limits of practicality.

THE PROCESS OF CULTURAL CHANGE: The challenge was to motivate people and have contingency plans for this cultural change at GSK's R&D department. But what exactly does management work on to change a department's culture? Should management be focused on strategy, building teams, empowering people, introduce tools and processes or restructure? (Atkinson, 2005) The possibilities are infinite in an organization; the difficult part is deciding which interventions are likely to have the most impact. The answers are different for every organization.

GSK has adopted a four step approach towards the initiation of cultural change. This change process has been slightly modified from the force field analysis proposed by (Lewin 1951) to fit the change situation of GSK. The steps that were undertaken by the company can be summarized in the form of following diagram:

These four steps cover the following four points:

Make sure that the R&D department and people understand the pressure of change - why do we need to change?

Develop and share a clear vision about where the organization and department is headed - where are we going?

Put in place the individual, departmental and organizational capabilities for change - what do we need to make the change?

Have a plan of action that outlines what has to be done to get it all started - what do we have to do tomorrow when we come to work?

BUILD PRESSURE FOR CHANGE:

The pressure of change is essential for the effectiveness of a change program (Chorn, 2004 & Atkinson, 1996). Therefore, in order to take the initiative of cultural change at GSK a sense of urgency was created to divide the R&D department into 7 CEDDs. Without it, the initiative seems to sink and other priorities take precedence and organizational behavior does not change.

The re-alignment and change program of GSK's R&D department into CEDDs has arisen after the analysis of the company's position and the competitive environment. It can be seen that for a very long period of time the company was unable to produce any new block-buster molecule and its patents were expiring one after the other, making it hard to compete with generic manufacturers (Chemist, 2005). Management and staff need to realize that they face threats and opportunities; this often creates sense of urgency.

A number of organizations have faced major shifts in their operating environment, such as deregulations or new competitor entering the market. Industry deregulations, for example, in utilities, banking and air travel have been a major driver of change in many organizations worldwide. It can be observed that these changes often create a sense of urgency.

In order to define the problem and thus create a sense of urgency a stakeholder mapping was done by the company. The company defined the core and peripheral stakeholders for this change and grouped them together to create a strategy for each group. The definition of these groups helped the company in brining about the change successfully.

ESTABLISH A CLEAR, SHARED VISION: This is similar to the second step of the forced field analysis (Lewis, 1951). If there is no clear, shared vision the change begins quickly but then dies out because people do not know what they are aiming for (Atkinson, 2005). Therefore it is the responsibility of the leader to not just communicate this vision but also make employees see the practical example of it. In the case of GSK, though the CEO Jean-Pierre Garnier communicated the vision of competitiveness and innovation with practicality to its managers but they were unable to communicate this message across their employees. The managers were actually resistant towards the change as it makes their jobs insecure.

In order to make a list of pushing forces (Lewis, 1951), the company identified the possible impacts on each of its stakeholders and devised a strategy to tackle these impacts smoothly. The stakeholders and the impacts considered by the company can be summarized with the help of following table:

Key Stakeholders

Impacts

Scientists

Financial &Territorial

Shareholders

Financial

Doctors &Consumers

Social

Distributors

Financial

Regulators

Social &Environmental

Pressure Groups

Social &Environmental

Furthermore, the relationship of GSK with its key stakeholders was used to substantiate the strategy that was adopted for each group of stakeholders. This can be summarized by using Power/ Interest Grid for stakeholder prioritization. The aim of each strategy can be seen with the help of this depiction:

Therefore the company used a clear and shared vision that acted as a compass that provides ongoing direction to the change journey. Drawing upon Chorn (2004) the vision needs to be clear and widely shared throughout the organization. In the case of GSK who wants to be more performance oriented, must ensure that this vision is widely held and understood. Thus the actual behavior and attitude required by the scientists must be spelled out in explicit ways.

The mission statement of GSK according to its latest annual report is to become the undisputable leader in the pharmaceutical and consumer health industry (Glaxo, 2004). This was the new mission statement in 2000 after the merger of the companies. This statement really captures the spirit and intentions of the organization. But critics suggest that the mission statements usually are not effective in mobilizing support for the change.

ENSURE THAT THE DEPARTMENT HAS THE CAPACITY FOR CHANGE:

It was established by the senior management of the company that if the department and the people do not have the necessary capacity for the change then this change will create anxiety and frustration. It was realized that people were though momentarily in the denial phase they still want to change but do not have wherewithal to do so.

In order to access the attitudes of the stakeholders and their power towards the change, they can be scored using the Ruchelman's 'Prince' System (1985) as follows:

Stakeholder

Issue position (-3 to +3)

 

Power (1 to 3)

 

Salience (1 to 3)

 

Total support by stakeholder

Scientists

-2

x

2

x

3

=

-12

Shareholders

+2

x

2

x

2

=

+8

Doctors &Consumers

+1

x

1

x

1

=

+1

Distributors

0

x

2

x

1

=

(2)

Regulators

+1

x

3

x

1

=

+3

Pressure Groups

+2

x

1

x

1

=

+2

The calculations can be seen as:

Score of all the stakeholders supporting the issue = 14

Absolute values of stakeholders opposing the issue = 12

Scores of stakeholders with zero issue position = 2

Total units of support (for and against) in the system = 28

Units of support in favour of the issue = 14 + (assumed) half of 2 = 15.

Proportional support = 15/28 = 54%

The result shows a support of more than 50% for the change therefore the strategies undertaken by the company for each stakeholder were valid and provided the capacity for change undertaken by the company.

Providing the capacity to change in an organization must be achieved at both the individual and group level. As the new system of CEDDs would have autonomous teams therefore to emphasis at the group level is very important. For individuals, we need to recognize the 'ladder' that produces results (Atkinson, 2005) i.e.:

This shows that the desired results should be clearly understood before it can be specified what behaviors are required. Once the behaviors are identified, the change process can address the development of the required competencies.

At the departmental level, it needs to create the appropriate capabilities for the department to change. This means two things:

Ensure that the designed culture is appropriate for the department's structure. In particular to make changes in:

Autonomy/ Job design to allow scientists to do what needs to be done

Control to inspect and control the appropriate behaviors

Performance Rewards to expect and reward the appropriate behaviors

Structure to reflect the outcome needed to achieve

Allow the department and CEDDs some slack during the 'changeover' period. Generally it is difficult to maintain the same levels of efficiency when making changes to one's routine.

DETERMINE ACTIONABLE FIRST STEPS: GSK has provided explicit guidelines for people to make the important first steps. It is obvious from the literature (Andrew, 1995) that the effectiveness of the change program depends upon the first steps taken. If these steps are taken positively by the employees they can be the first signs of success. Drawing upon Chorn (2004) that change attempts can fail because no one knows where to start. Having articulated a vision, it is needed to break down the vision into its separate parts. SMART: specific, measurable, achievable, rational and time bound objectives need to be setup. Then listing the actions needed to bring about these objectives should be done. Finally setting performance measures needs to be taken care of. This stepwise approach ensures that milestones are reached in time and the transformation takes place in a time bound framework.

CONSTRAINTS: The transformation of the R&D department from a single unit towards seven smaller, independent CEDDs and the cultural change that will accompany it can be seen as people oriented and also as ignoring the task needs. As the teams will be working independently and there would be a competition between the teams therefore the state that can establish with over emphasis on teams can be illustrated with the help of John Adair's circles (Handy, 1993) bellow:

Therefore in order to keep the team focused on the task, the equilibrium between team, task and individual needs should be catered. This can be done by having a democratic leadership style within each CEDDs. As the needs for creativity is high, confidence in individual scientists is also high and the value system adopted due to the change in culture is also supportive to innovation therefore the leadership style that best suits to overcome this constraint is flexible and democratic.

EVALUATION: The content, context and process (Pettigrew 1985) of the change in the R&D department of GSK during the post integration period of its merger can be evaluated by analyzing the Effectiveness, Efficiency, Accessibility, Appropriateness and Economy of this change.

The performance of the R&D department can be gauged by a comparative analysis of the company's pipeline, operation efficiency and costs before and after these changes. Drawing upon the statement of the then appointed CEO Jean-Pierre Garnier who announced the basic objective of the division of R&D department into CEDDs was to increase the productivity of the department as the company had an empty pipeline at the time of merger (Emerald, 2004). As the discovery of the molecules is a lengthy process therefore after 4 years of these changes the results started to pour in. In 2005, GSK has been estimated to have one of the largest and most promising pipelines in the industry, with 140 projects in clinical developments, including 88 new chemical entities, 32 product line extensions and 20 vaccines (Datamonitor, 2005). This shows the effectiveness and efficiency of the change under consideration.

The company has one of the deepest reported early stage pipelines in the industry, supported by extensive in-licensing activity and probability suggest that this will generate a healthy outflow in the mid to long-term. This has managed to balance its product portfolio over the last 4-5 years due to the process of drug discovery adopted due to the change. Currently, none of the therapeutic groups accounts for more than 22% of the company's revenue (GSK, 2004). Therefore the accessibility and appropriateness of the changes can be seen as success.

The company has a strong focus on its R&D department and it has invested heavily in R&D, despite the fallen company sales from 2002-2005 (GSK, 2004). According to Datamonitor (2005) the R&D at GSK is forecasted to generate less than 5% of the total revenue in 2007, highlighting the weak economy of the change under consideration. The company has spent an estimated £ 2.1 billion in the changes in the R&D department over the years (GSK, 2004). Even though in 2004 the company witnessed the lowest turnover since 2001, the company's R&D spending has outstripped sales growth. Between 2001 and 2004, GSK's spending on R&D increased by 3.8%. Although this continuing investment of the company in R&D is vital for the long term revenue and to create sustainable competitive advantage for the company but the change has proven uneconomical for the company over the last 4 years.

CONCLUSION: In order to sum it up, it can be concluded that the content, context and process adopted by GSK under the light of external market changes during the post merger integration of the company can be seen as a good practice in the change management arena. The PESTEL analysis shows that the need for change anticipated by the management was needed at that time and the evaluation strengthens this argument. The process adopted by the company can also be seen as one of the best practices to be used for benchmarking in the industry because the cultural aspects were spotted and dealt with during the change. Therefore in light of the discussion provided with the help of relevant theories the change management at GSK of division of R&D department into CEDDs can be used as benchmark for good practice for others in and across the industry.

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