Harvard Case - Novartis Pharma: The Business Unit Model
"Novartis Pharma: The Business Unit Model" Harvard business case study is written by Srikant M. Datar, Carin-Isabel Knoop, Cate Reavis. It deals with the challenges in the field of Accounting. The case study is 21 page(s) long and it was first published on : Jan 23, 2001
At Fern Fort University, we recommend that Novartis Pharma implement a revised business unit model that balances the benefits of decentralization with the need for centralized control and coordination. This model should leverage activity-based costing to improve cost allocation accuracy, foster cross-functional management across business units, and prioritize employee incentives aligned with overall corporate objectives.
2. Background
Novartis Pharma, a global pharmaceutical giant, faced a challenge in 1999: how to manage its diverse portfolio of businesses effectively. The company's existing structure, characterized by a centralized decision-making process, was proving inefficient and hindered innovation. This case study explores the complexities of transitioning to a decentralized business unit model, considering factors such as accounting procedures and policies, cost allocation, performance indicators, and corporate governance.
The main protagonists in this case are the senior management team, tasked with developing and implementing the new business unit model, and the various business units themselves, facing the challenges of adapting to a more autonomous environment.
3. Analysis of the Case Study
The case study highlights several key issues:
- Cost Allocation and Profitability: The existing cost accounting system, based on traditional methods, did not accurately reflect the actual costs incurred by different business units. This led to misallocation of resources and distorted profitability assessments.
- Decision-Making and Control: The centralized structure hampered decision-making speed and responsiveness, particularly in rapidly evolving markets. It also limited the autonomy of business units, hindering their ability to tailor strategies to local needs.
- Incentives and Performance: The lack of clear performance indicators and aligned employee incentives created misalignment between individual and organizational goals. This resulted in suboptimal performance and a lack of accountability.
- Corporate Governance and Risk Management: The decentralized model required robust corporate governance mechanisms to ensure compliance with regulations, mitigate risks, and maintain financial transparency.
To analyze the situation, we can apply the Strategic Framework, considering the following aspects:
- Internal Analysis: Novartis Pharma's strengths included its strong brand, global reach, and extensive research and development capabilities. However, its weaknesses included a rigid organizational structure and inefficient cost allocation practices.
- External Analysis: The pharmaceutical industry was characterized by intense competition, rapid technological advancements, and evolving regulatory landscapes. This presented both opportunities and threats for Novartis Pharma.
- Competitive Advantage: The company needed to develop a competitive advantage based on its core competencies, such as innovation, global reach, and operational efficiency.
- Strategic Goals: The new business unit model should be designed to achieve these goals, including increasing profitability, enhancing efficiency, and fostering innovation.
4. Recommendations
To address the challenges and capitalize on opportunities, Novartis Pharma should implement the following recommendations:
- Adopt Activity-Based Costing (ABC): Implement ABC to accurately allocate costs to business units based on their actual consumption of resources. This will provide a more realistic picture of profitability and facilitate informed decision-making.
- Establish Clear Performance Indicators: Define specific, measurable, achievable, relevant, and time-bound (SMART) performance indicators for each business unit, aligned with overall corporate objectives. This will ensure accountability and drive performance.
- Implement a Balanced Incentive System: Design a compensation structure that rewards employees for achieving both individual and organizational goals. This should include performance-based bonuses, stock options, and other incentives that align with the company's strategic priorities.
- Foster Cross-Functional Management: Encourage collaboration and knowledge sharing between different business units. This can be achieved through cross-functional teams, joint projects, and regular communication channels.
- Strengthen Corporate Governance: Establish clear reporting lines, define roles and responsibilities, and implement robust internal controls to ensure compliance, transparency, and risk management.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The revised business unit model aligns with Novartis Pharma's mission to improve and extend people's lives. It leverages the company's core competencies in research and development, manufacturing, and global reach.
- External Customers and Internal Clients: The model focuses on delivering value to both external customers (patients and healthcare providers) and internal clients (business units). It aims to improve customer satisfaction and enhance internal efficiency.
- Competitors: The model helps Novartis Pharma stay ahead of the competition by fostering innovation, enhancing operational efficiency, and adapting to evolving market conditions.
- Attractiveness ' Quantitative Measures: The adoption of ABC and the implementation of performance-based incentives are expected to lead to improved profitability and increased shareholder value.
6. Conclusion
Implementing a revised business unit model, incorporating activity-based costing, clear performance indicators, and a balanced incentive system, will enable Novartis Pharma to achieve its strategic goals, enhance profitability, and maintain its competitive edge in the global pharmaceutical market.
7. Discussion
Alternative approaches to the business unit model include:
- Centralized Structure: This approach maintains centralized control and decision-making, but it can be slow and inflexible.
- Fully Decentralized Structure: This approach grants significant autonomy to business units, but it can lead to a lack of coordination and inconsistency in corporate strategy.
The recommended approach strikes a balance between these extremes, allowing for greater autonomy while maintaining centralized control and coordination.
Key assumptions of the recommendation include:
- Effective Implementation: The success of the revised model depends on effective communication, training, and support for all stakeholders.
- Employee Commitment: Employees must be committed to the new model and its objectives to ensure its success.
- Market Stability: The model assumes a relatively stable market environment. Significant changes in the industry or regulatory landscape could require adjustments.
8. Next Steps
To implement the revised business unit model, Novartis Pharma should:
- Phase 1 (3-6 months): Conduct a thorough analysis of the current cost structure, identify opportunities for cost reduction, and develop a pilot program for ABC implementation.
- Phase 2 (6-12 months): Implement ABC across all business units, develop and communicate performance indicators, and adjust employee incentive programs.
- Phase 3 (12-18 months): Monitor the performance of the new model, make necessary adjustments, and evaluate the impact on profitability and overall business performance.
By following these steps, Novartis Pharma can successfully transition to a more effective and efficient business unit model, positioning itself for continued growth and success in the global pharmaceutical market.
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Case Description
In June 2000, Novartis reorganized its pharmaceutical business to form global business units in oncology, transplantation, ophthalmology, and mature products. The remaining primary care products continued to be managed within global functions (e.g., R&D and marketing). The new organization created a matrix structure and new roles and responsibilities for heads of business functions, CEOs of new business units, and country managers operating in over 100 countries.
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