Disciplined Execution: Schering-Plough's Turnaround

Last week, we staged the scene for Schering-Plough's remarkable turnaround, and we also briefly discussed those aspects of the turnaround plan that align with the concept of "Strategic Focus." This post can be viewed in our blog entry "Corporate Renewal as Turnaround Strategy: Schering-Plough."

In broad terms, Disciplined Execution is the ability to align and mobilize the entire organization behind an organization’s strategic focus. In this context, “alignment” refers both to the organization’s workforce and to its internal structures, processes and systems.

To achieve this goal, the first thing Mr. Hassan (Schering-Plough’s CEO) did was to clean up the wreckage of the past: i.e. to directly face S-P’s compliance and quality problems related to the consent decree, the $500M they owed the government, and their legal problems related to their sales and marketing practices.

Next, he directly faced and straightforwardly dealt with their huge cash shortfall. Based on his own intuition, grounded in his long experience, he decided to cut the share dividend in half. This did not meet with the approval of the Wall Street analysts’ rigid focus on short-term performance, but this maneuver had tremendous wisdom in term of both short and long-term viability. S-P also raised a bond issue to move a pile of commercial paper into a long-term debt – so it would be more manageable. These moves freed up the cash necessary to stop the bleeding and deal with their immediate, pressing problems.

In parallel with Mr. Hassan’s (Schering-Plough’s CEO) strategy for freeing up cash to deal with S-P’s short-term problems (i.e. dealing with the $500M FDA consent decree, the need to upgrade operations to address compliance and quality problems as part of the same consent decree, and the need to deal with legal problems stemming from past sales and marketing practices), he also implemented some organizational changes in the interests of enhancing organizational effectiveness and efficiency.

The most critical of those changes was to create a clear and detailed plan for implementing the “compelling vision” he and his team created (addressed in the previous blog entry). At Schering-Plough (S-P), this plan was known as a “road map” or “Action Agenda.” As part of its development and implementation, Mr. Hassan carried out an intensive communication campaign with all key stakeholders, both inside and outside of the company, to aid in creation of “buy-in” and to help everyone understand both the situation, the game plan for dealing with it, and to gain the time needed to effect the necessary changes to turnaround the company.

He also flattened the hierarchy by eliminating some management layers. This was done to simultaneously reduce overhead, simplify and increase the speed of decision-making, and improve the quality, accuracy and speed of information flow throughout the company.

In the interests of dramatically reducing the cycle time and improving the effectiveness of the new product development and launch process (“molecules to market”), he coupled simplification of the management structure with an emphatic move toward cross-functional, “boundary-less” management processes. He also implemented a significant redesign of the intensely cross-functional new product development process.

Next week we’ll talk about Creative Renewal.

Dean Robb, Ph.D

Corporate Renewal as Turnaround Strategy: Schering-Plough

The Scenario

A couple of weeks ago, I attended a very interesting lecture by Fred Hassan, the CEO and Chairman of Schering-Plough (S-P). His remarks focused on two things: how he turned Schering-Plough around in some very difficult circumstances, and on the principles and practices required to create a sustainable internal capability – or “engine” – of corporate innovation and renewal. In the case of Schering-Plough (SP), both were sorely needed.

When Mr. Hassan took over the reins at Schering-Plough in the spring of 2003, the company was in serious financial difficulty, and faced a host of problems – all of them of their own making.

The patent rights (exclusivity) for their flagship product and chief driver of revenue and growth – Claritin – had recently expired, and competition from less expensive generic replacements was taking giant chunks out of their revenue stream. There was nothing in the pipeline to replace it, either. Market share and sales were also falling in their other major lines of business, like Hepatitis C and Respiratory. The bottom line: ALL of S-P’s major products were severely challenged by increasing, intense competition.

On top of this, historical compliance and quality problems led to an FDA consent decree, requiring an unprecedented and very costly commitment to upgrade both quality and compliance across all major plants. As part of that same decree, the company had to cough up a whopping $500M to the Federal government. S-P was also facing more legal challenges from the Feds in connection with past practices in sales and marketing. Credibility with shareholders, customers and employees was badly damaged.

The result: severe business disruption, steeply falling revenues, major cash bleed, internal performance problems, and lousy employee morale. More-or-less, the company had “lost its way”: i.e. plagued by a host of complex and thorny problems, with no simple or obvious way out of the mess. What to do?

The answer, in a nutshell: corporate renewal as turnaround strategy! I think of it as corporate renewal because Mr. Hassan had to make some deep, transformational changes in the company so it could survive in the short run, let alone in the long run. He had to take a bloated, sluggish, complacent, fragmented bureaucracy and re-invent it as a lean, responsive, innovative, cohesive business. Quite a task. So how’d he do it?

First, a bit of explanation. To our way of thinking here at the Center for Corporate Renewal, we think that sustainable growth depends critically on three core competencies that we call Strategic Focus, Disciplined Execution and Creative Renewal. That is, a self-renewing company must be able to…

Think with STRATEGIC FOCUS: Make sense of a changing environment and gain focus on the next right strategic move
Act with DISCIPLINED EXECUTION: Align and mobilize the entire organization behind this new strategic focus
Lead with CREATIVE RENEWAL: Renew the entrepreneurial spirit, while enabling your organization to continually cycle through stronger and stronger strategy-to-execution phases

That is...
Sustainable Growth = Strategic Focus + Disciplined Execution + Creative Renewal.

I’d like to begin by discussing how Mr. Hassan successfully achieved his business turnaround, and then follow that with how he built internal capability for sustainable innovation and renewal. I’ll describe how he did it in terms of the sustainable growth equation above. And although Mr. Hassan simultaneously launched a wide portfolio of changes that affected all three elements of the sustainable growth equation, it will be perhaps a bit easier to understand them if we discuss them sequentially, following the order of the equation. So, let’s start with Strategic Focus.

Strategic Focus

Strategic Focus is the capacity to continually make sense of a changing environment, and to respond to it appropriately; i.e. to focus on the next right strategic move. This capacity is enhanced by the ability to think about the business at a very high “big picture” level, and to understand, interpret and align all actions within a sophisticated strategic framework. Mr. Hassan appears to have this capacity in spades.

First, Mr. Hassan did NOT follow the advice of Wall Street analysts or activist shareholders, both of whom were preoccupied with short-term problems. Their shared goal was to quickly stabilize the company by restructuring it into a smaller, successful business, but at the expense of sacrificing its drug discovery and primary care capabilities. The unstated goal of this maneuver was to quickly create a financially advantageous environment, so they could exit without losing their shirts. No long-term strategy here, thank you. Just give me my money so I can cut and run. Mr. Hassan resisted this “advice” and chose to sacrifice short-term financial performance for long-term viability and business growth.

Next, to address the internal morale problems and corporate “doldrums” that had the business firmly in their grip, Mr. Hassan and his team developed a compelling vision for the future – one that both employees and senior managers could genuinely believe in, and which would – hopefully – overcome the reign of internal self-doubt and reignite the energy and passion of everyone in the business. You can read that vision at: http://www.schering-plough.com/schering_plough/about/about.jsp. A compelling vision provides a key foundation for both Disciplined Execution and Creative Renewal.

Next week we’ll focus on Disciplined Execution.
Dean Robb, Ph.D.