Pharmaceutical Pricing, Markets and Ebola

October 17, 2014

People love to attack pharmaceutical companies for setting high prices. Dr. Sharon Levine, for example, an executive from Kaiser, recently criticized the $84,000 price of Solvadi, Gilead’s new hepatitis C drug, noting, “It’s an outrageous price.”

The problem is that the reason firms invest in developing new drugs is that there is an opportunity to set a high price and make a lot of money. If pharmaceutical companies can’t generate significant profits, then they won’t invest in R&D.

Pricing is particularly important when it comes to diseases with small patient populations. If you can’t charge a lot, there is no way to justify doing a big clinical trial on a product with only a few potential customers.

When there isn’t an opportunity to make money, companies don’t invest. This is one reason why we don’t have a treatment for Ebola.

Ebola

For many years, Ebola broke out occasionally in just a few small villages in Africa. Scientists knew Ebola was a terrifying disease with the potential to spread quickly. Companies, however, didn’t invest in R&D for Ebola because there wasn’t much of a market. There were only a few customers. More important, companies couldn’t set a high price; most people and governments in Africa simply don’t have the resources to pay a lot for new therapies.

People should be careful about making snap judgments on the price of medical innovations. The easy answers, capping prices or refusing to pay for expensive treatments, will slow down medical research and innovation.

Rebranding India

October 8, 2014

India Prime Minister Narendra Modi recently wrapped up a triumphant visit to the United States

  • He joined Barack Obama for dinner at the While House.
  • More than 18,000 people filled Madison Square Garden to see him speak.
  • He appeared with Jay Z, Beyonce and No Doubt at the Global Citizen Festival.
  • Top executives form PepsiCo, Goldman Sachs, Google, Boeing, BlackRock and others met with him to discuss investments in India.
  • He addressed the United Nations General Assembly.

It is hard to see what else Modi could have done during his visit. The man was everywhere.

 

Modi

 

Modi is a gifted brand builder. He has a compelling story, he understands the power of brands and he appreciates the importance of symbolic gestures.

India needs a leader like Modi because its brand is troubled.

People are quick to group India with other emerging markets. It is, after all, one of the BRICs. Like China, India is an enormous country and presents a remarkable opportunity for growth. There are areas of India where the potential seems to be coming to fruition. The IT sector is a notable success.

The problem is that India also has negative associations for investors, especially manufacturers. The political system is complicated. Securing permits to build is hard. Power is unreliable. The transportation network doesn’t work well. Even getting a visa is difficult.

The result is that India is not a big player in terms of global manufacturing. While labor is inexpensive, companies don’t invest as much as they could. According to an article in The Diplomat, India makes up about 2% of global manufacturing. China, by contrast, accounts for over 22%.

This is a huge problem for India. The population is growing quickly and the country needs direct foreign investment to spark manufacturing investment and provide jobs.

Some of this is reality and some is perception. The perception matters most; companies can overcome logistical challenges but they won’t even try if they think it is a hopeless task. As long as business leaders believe India is a difficult place to invest, they won’t take action.

This is where Modi can have an impact. One of his key messages is that he believes in change and investment. He recently launched a new campaign encouraging the world to “Make in India.” He committed to simplify the regulatory process. It is a compelling story.

Improving business conditions in India won’t be easy. It will take government policies and motivated companies. Modi’s leadership is a critical first step.

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This week I am working with forty brand leaders in the Kellogg on Branding program. It is a terrific group. There are participants from sixteen countries and a remarkable range of industries including hospitality, consumer products, chemicals, financial services, technology, fashion, entertainment and non-profits. The program covers everything from positioning to global branding to brand measurement. The next session is in May, 2015. You can learn about it here: www.kellogg.northwestern.edu/execed/programs/brand.aspx

 

Special thanks to Nidheesh Patel (Kellogg ’16) for his contributions to this post.

Defending Air France

September 30, 2014

Air France, one of the world’s great airlines, is under attack. The recent two-week pilot strike was a financial and customer service disaster. The bigger problem is that Air France appears to be unable to defend its business; new competitors are stealing customers at an alarming pace.

The financial results for Air France – KLM have been terrible. The company lost €814 million in 2009 and things have gotten worse since then, with losses of €1,559 in 2010, €589 in 2011, €1,028 in 2012 and €1,705 in 2013.

Air France

The basic problem is that Air France is facing very tough competition. In Europe, discount carriers such as EasyJet and Ryan Air have become dominant players. Air France – KLM has lost share; people simply aren’t willing to pay more for a short flight. How bad can a fifty minute flight to Düsseldorf be?

On long-haul routes, where business travelers are still willing to pay more, carriers such as Emirates and Qatar are stealing share with a unique, premium product.

This is a classic case of an established, comfortable company failing to react to competitive threats. In the 2000s, the head of Air France believed the discount carriers would stumble so he didn’t see the need to respond. Employees focused on protecting their benefits and wages, even as the company lost money.

So Air France didn’t defend and now the carrier is in trouble.

The company’s most recent strategy has two parts. To compete for travelers in Europe, Air France will expand its discount brand, Transavia. By doing this, Air France – KLM will be able to slow the growth of discount carriers. At the same time, the company will use the Air France brand to compete for international travelers, where service is critical and passengers are willing to pay for quality service.

I’m skeptical of the strategy. Transavia is a late entrant to the discount air market in Europe; it won’t be easy to steal share. And it will be difficult for a premium airline like Air France to run a discount division.

Things aren’t going too well so far. After learning about the new strategy Air France pilots, concerned about potential wage cuts, went on strike and shut down the airline for two weeks. Faced with massive losses and unhappy customers, Air France on Thursday announced that it was scaling back the new plan. On Sunday the pilots agreed to return to work but the labor dispute is still not settled. Look for more employee conflict ahead.

Fighting tough competitors is not easy but in a free market if you can’t push back new entrants you will lose share and struggle. The employees at Air France – KLM can do more work for less money or they can see jobs vanish. The company cut 8,000 workers in the past several years. With current trends, there are more cuts ahead.

The NFL Stumbles

September 22, 2014

The NFL is dealing with a significant brand crisis. How is the league doing at managing it?

To evaluate the situation, I turned to Daniel Diermeier, dean of the Harris School of Public Policy at the University of Chicago and until recently a colleague of mine at the Kellogg School of Management. Daniel studies how companies and brands deal with crisis situations. In his book Reputation Rules, he explained that people look for four things when evaluating organizations: expertise, transparency, empathy and commitment.

Using this framework, we can assess the NFL’s response to date.

 

Expertise: Not Good

The NFL is not doing well in the area of expertise.

The league gave Ray Rice a modest two game penalty for knocking his fiancé unconscious in an elevator and dragging her out into a hotel hallway, then, after TMZ released the video, dramatically increased the penalty. The Minnesota Vikings reinstated running back Adrian Peterson, accused of child-abuse, and then reversed course when sponsors complained. San Francisco 49ers’ Coach Jim Harbaugh continues to play Ray McDonald, who was arrested in August for assaulting his fiancé.

About the only thing everyone can agree on is NFL Commissioner Roger Goddell’s statement at his news conference on Friday, “We have seen all too much of the NFL doing wrong.”

 

Roger Goddell

 

Transparency: Not Good

What did the NFL know about Ray Rice and when did the league know it? How precisely did the NFL decide that a two games suspension was an appropriate penalty? Why did it then change the decision? Why does San Francisco seem to have a different set of standards than others in the league? Who sets the rules in the NFL?

These are all important and unanswered questions.

Commissioner Roger Goddell said on Friday that he had not considered resigning. This simply cannot be true.

The NFL is not doing well on transparency.

 

Empathy: Not Good

Does the NFL really care about player behavior?

The league is definitely worried about viewership and money. Is it really concerned about the example it is settling for children in the country?

Did Roger Goddell deliver a heartfelt apology on Friday? No. Have any of the NFL owners taken the lead on this? No.

 

Commitment: Not Good

Is the league determined to make significant changes? On Friday, Roger Goddell said it was.

The problem is that people don’t seem to believe him. Most commentators think the NFL will simply play on and hope this all fades away.

 

Overall, the NFL is struggling to respond effectively to the crisis.

The team owners need to step up and honestly react to the problem. They don’t need a final answer; they just need to be empathetic and transparent, and demonstrate commitment. A good first move would be asking Goddell to step down.

 

Apple’s Competitive Challenge

September 15, 2014

Last week Apple rolled out a trio of new product platforms: iPhones with larger screens, a watch and a payment system.

The new phones are not dramatic innovations; they build on existing technology and will help Apple keep pace with competitive offerings. The watch and payment systems are bigger innovations. They are both trying to change the rules.

So will the new innovations work?

I suspect this will be a challenge. One issue is that changing behavior is difficult. It is hard to get people to rethink a watch or how to buy things. Another issue, and a bigger problem, is that Apple is fighting some capable, driven competitors.

Apple has always had competition: Microsoft, Motorola, Nokia, Dell and others. The difference is that Apple’s competitors are now more aggressive. Over the past decade, many executives dismissed Apple’s innovations. This was not wise. Competitors won’t make the mistake again; I don’t think there is a company in the world that would dismiss Apple today.

This means that competitors are going to defend; they will attack Apple and respond to the innovations. Financial institutions will push back against Apple’s payment system. Pay Pal is already responding. Technology companies will react to the watch and larger screen iPhones.

It took Samsung just one day to release a series of videos mocking Apple’s new products.

 

 

 

Apple is an innovative company with a track record of success. Apple’s competitors know this. They will react, defend and make life very difficult for Apple in the coming year.

Debating the CVS Tobacco Decision

September 8, 2014

CVS was in the news last week for its decision to drop all tobacco products and rebrand itself CVS Health. The company actually announced the tobacco move earlier this year. Last week it celebrated that it was officially tobacco free.

CVS Health

The company is making a big deal of the tobacco decision, rolling out a fully integrated marketing campaign with advertising, events, social media, PR and in-store activities.

 

CVS Twitter

 

My friend John Barker, head of the dynamic ad agency BARKER, wrote that CVS should be named marketer of the year for its move. He explained his thinking in a recent Facebook post:

 

There’s a saying that goes, “It’s not a principle until it costs you something.” Well, CVS paid plenty today for taking a powerful and courageous stand to align its actions with its brand mission. Their decision to stop selling tobacco products will reportedly cost them around $2 Billion a year.

So how can this be good for business?

The answer lies in the years to come, but from a marketing perspective, by shunning the single most dangerous consumer product in the world, they have put their money where their mouth is in a way few brands ever do. This is no “Warning Label” cosmetic makeover or greenwashing CSR strategy. This is one big business telling another big business to bugger off and die. The momentum and hard-earned authenticity of the decision allows CVS to rightfully claim the high ground as a Healthcare Solutions Provider, not a glorified convenience store nee pharmacy nee small grocery nee copy center. In other words, they have created enormous new “white space” around their brand, allowing the possibility if not the inevitability of extending into urgent care and other vertical plays that will organically drive its other sales. They become the doctor, the pharmacist, and the neighborhood center for all things health-related and/or tangentially associated. It’s kind of like the theory of having a gas station on every corner, except they’re all called CVS.

 

Regular readers of this blog will recall that I was skeptical of the decision when CVS first announced it. Despite John’s thoughtful endorsement of the idea, I’m still not convinced it is a marketing triumph.

CVS is smart to focus on playing a big role in healthcare. I think the company is positioned for success; as people deal with high deductibles, they will look for cheap options and self-treatment. CVS can help with both.

Building the CVS brand is important. The company needs to move from being a pharmacy to being a trusted healthcare provider. This is not a small transition.

I’m not convinced dropping tobacco products is the right thing to focus on for building the CVS brand. It is an expensive move; CVS is losing revenues of $2 billion a year. Tobacco sales probably generate a reasonable gross margin, perhaps 30%. If so, the move has a financial impact of about $600 million a year.

The bigger question: how precisely does dropping tobacco add financial value?

It should be a non-event for people who don’t smoke. It is a slight negative for people who used to buy tobacco products at CVS. It isn’t likely to dramatically boost employee morale or improve retention. People won’t line up to apply for jobs at CVS now that the company doesn’t sell tobacco products.

It certainly won’t have an impact on smoking rates in the country. People aren’t saying today, “Well honey, now that CVS isn’t selling cigarettes it is time for me to kick the old habit.”

The bigger question: is this the best way for CVS to spend $600 million a year?

I suspect not. For that amount of money, CVS could dramatically boost its advertising. It could invest in store design. It could add services that people really do value. It could test different ways of managing in-store clinics. It could fund an enormous public health program.

CVS deserves credit for thinking long-term, focusing on branding and strategically shifting to embrace the potential of healthcare. But the company should invest its resources on things that create meaningful value for customers.

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Starting this week, I will be posting on this blog every Monday. Or at least that will be my goal. You can sign-up to get the weekly updates.

Feel free to send along potential topics. My email is t-calkins@kellogg.northwestern.edu

This week I am heading to Moscow to teach a corporate program. It is certainly an interesting time to be visiting Russia. Next week I will be back in Evanston to teach a corporate program at Kellogg. Fall semester classes begin the week after. Things are getting busy now that summer is behind us.

Rebranding the Tata Nano

August 28, 2014

The Times of India reported this month that Tata will soon phase out the Nano and relaunch the vehicle as the Tata Smart City Car.

The move makes a lot of sense.

The Nano was a bold new product. Tata launched the car in 2009 in India and positioned it for lower-income families. It was, and remains, the cheapest car in the world, with a price of about $2,000. Instead of comparing to other cars, Tata focused the Nano on competing with motorcycles.

Tata made a number of moves to keep costs down. The engine is small; it takes the Nano a full eight seconds to accelerate from 0 to 37 MPH. The car has just one window washer. The trunk only opens inside the car.

Nano

While industry executives anticipated that the Nano would transform the auto industry, the car flopped.

One of the big issues was branding. People quickly understood that Nano was exceptionally cheap. This diminished its appeal; a family with a rising income doesn’t want to buy the cheapest car available. It wants a car they can be proud of and feel good about. And after several high-profile car fires, the Nano developed a reputation for being unreliable.

Nano’s basic proposition just didn’t work. People could buy a motorcycle for less money, or buy a used car for a similar amount. Either way they could get around and feel good about their means of transportation.

When a brand develops negative associations there are only two possible solutions: reposition or replace. Repositioning the Nano would have been a challenge. The brand received enormous attention during its launch. All the attention, however, became a problem when the stories turned negative.

Replacing the Nano makes much more sense. By introducing the Smart City Car, Tata starts fresh. The name alone is a step forward. Nano means tiny, which is not a positive in a car. Everyone wants to be smart.

Deciding to phase out a brand is not easy but sometimes, as in the case of the Nano, it is definitely the best move.

Irrational Optimism and CMOs

August 18, 2014

The Chief Marketing Officer Council is out today with the results of its annual survey of marketing leaders.

I was struck by two figures:

- 81% of marketing leaders believe that share growth is likely and attainable this year.

- 10% of CMOs are worried about their jobs.

 

These figures suggest that marketing executives are an optimistic bunch.

On the market share front, CMOs are clearly being too confident. Share is a zero sum game; if one company goes up, another company goes down. I am quite certain that 81% of companies won’t build share this year.

CMOs are also too optimistic on the career front. Average CMO tenure is increasing but it is the rare CMO that lasts for a decade.

 

One could say this all doesn’t really matter. Optimism is a good thing, isn’t it? Who wants to work with a pessimist?

The problem is that irrational optimism can lead to bad decisions. A confident company might cut back marketing support, aggressively reduce costs or delay product improvements in order to boost profits. Why invest in the business when it is doing well?

Optimistic planning can also lead to bad strategic moves. When a company falls behind a plan, the management team will almost always take action to try to get to the target. Business leaders are rewarded for achieving goals, not missing them. Often this involves funding programs that have a big short-term impact, such as price discounts or sales force incentives, and cutting programs that are less effective in the short run, such as advertising, brand building or product improvements. This combination ultimately weakens the business.

Realistic planning is important.

The CMO study also noted that only two-thirds of CMOs are trusted members of the executive team. Irrational optimism won’t increase this figure.

P&G’s Risky Brand Strategy

August 1, 2014

P&G announced this week that it was dramatically shrinking its brand portfolio. According to an article in the Wall Street Journal, the company will drop almost 100 brands, focusing on just its top 70 to 80. This is a huge strategic move for the company and a significant change. It is also very risky.

On the surface, the strategy makes perfect sense. P&G is keeping brands that make up over 90% of its profit. After the pruning, it will still have dozens of brands. And P&G needs to try something different. In 2009 it had net income of $10.7 billion. Last year it net income of $11.3 billion. This is disappointing growth, so a change is in order.

The problem is that this strategy is more risky than it seems.

The first issue is that focusing on fewer brands assumes that you can hold onto customers as you trim the portfolio. In theory, when you drop a brand of detergent, customers will purchase one of your other brands. In reality, this just isn’t the case. A brand can’t be all things to all people. Some people like Old Spice. I don’t care for its fragrance positioning. If you drop Gillette, I won’t start buying Old Spice. I will buy something else.

The second problem is that having fewer brands opens up opportunities for competitors. Crest can appeal to certain customers but it won’t appeal to everyone. This gives other companies an opportunity to attack P&G by targeting specific customer segments and stealing share. For P&G’s competitors, the new strategy is great news.

Another issue is that getting rid of brands isn’t as simple as it sounds. If you stop using a trademark another company can start using it. P&G can’t get just rid of Era or Cheer. If they stopped using one of the brands a competitor could pick up the trademark at no cost and bring it back to life.

Finally, defending a business and innovating often require new brands. One way to address a competitive threat is to launch a similar brand. A big innovation often warrants a new name. With a narrow portfolio, P&G may not be able to react quickly as conditions change.

P&G CEO A.G. Lafley noted in the WSJ article, “I’m not interested in size at all. I’m interested in whether we are the preferred choice of shoppers.” This is a good thought. The problem is that focusing on fewer and bigger brands assumes that these will be the preferred choices for shoppers all around the world. I fear that won’t be the case.

Will Malaysia Airlines Survive?

July 21, 2014

The Malaysia Airlines crash was a terrible disaster. Rescue teams are sifting through the wreckage today as families grieve.

I suspect the Malaysia Airlines brand won’t survive this latest tragedy. The company is facing two significant problems: financials and branding.

 

Malaysia Airlines

 

The financial issues are substantial. Even before the two disasters, Malaysia Airlines was struggling. The growth of discount carriers in Asia has put pressure on fares. Malaysia has a high cost structure so maintaining margins has been difficult.

Malaysia’s financial issues will now get worse. After the first tragedy people were reluctant to fly on the carrier, forcing fares down. According to a Financial Times article published on Saturday, traffic from China was recently down 60 percent versus year ago. People will now be even more hesitant to fly on Malaysia. The financial situation will rapidly deteriorate further.

The branding problem is even bigger. Brands are associations, the connections people make when they see a name or symbol. The issue is that the Malaysia Airlines brand, after losing two jumbo jets in four months, is now connected firmly with aviation tragedy.

This is a long-term problem because brands matter when choosing an airline. Which company will provide better service and get us there safely? Brands shape our opinions.

Can Malaysia Airlines really compete long-term with a tarnished brand? One aviation analyst quoted in the FT article was skeptical, “It’s just too big a curse.”

This is a terrible situation for the people working at Malaysia Airlines. The airline apparently did nothing wrong last week but it is once again in the headlines. It doesn’t seem fair.

So what happens now?

I suspect Malaysia will go through a major financial restructuring and at some point will emerge with a new brand name and hopefully a fresh set of associations.

This wouldn’t be the first time an airline had to adopt a new brand following a disaster. ValuJet went through a similar experience after a terrible crash in the Florida Everglades in 1996. The following year the carrier merged with AirTran and embraced the new name. The ValuJet brand vanished. Malaysia Airlines will likely do the same.


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