The Implications on Organizational Set Up - Essay Example

MERGER OF TWO TOP MOST PHARMACEUTICAL COMPANIES: THE IMPLICATIONS ON ORGANIZATIONAL SET UP Part I: Real Life Situation at Sanofi-Aventis resulting from the Merger Pharmaceutical companies across the world have shown a trend towards mergers, acquisitions and takeovers. Almost all the pharmaceuticals existing in business these days have at some point in time opted for either one of the options above. Mergers usually take place to expand a business by pooling resources to achieve better results in terms of profitability. However, mergers have the maximum implications on the organizational set up and due to this on the human resource existing at both the companies that are merging together. This case study refers to a hypothetical situation whereby Sanofi medications and Aventis pharmaceuticals are merging to form Sanofi-Aventis. This is a real case study of a merger between these two companies. Both the companies were multinationals having offices in various parts of the world. However, this case study refers to the change management problems encountered in Pakistan. The change process was first adopted in other countries and implemented as is in Pakistan after their success. During the year 2004, the Group Sanofi-Synthelabo and Aventis merged to create Sanofi-Aventis. Sanofi-Aventis operates within the Pharmaceutical preparations sector. The Group's principal activities are the research, production and distribution of pharmaceuticals. It has operations in more than one hundred countries worldwide on 5 continents. Consolidated sales of 25 billon euros and 4 billion euros Research & Development expenditure based on 2003 reported figures Sanofi and Aventis are both well known pharmaceutical companies. However, with time, their certain geographical operations centers have become non-productive and year after year are unable to deliver the same performance as it used to. There are various factors that made this merger necessary including: Increasing costs of Research and Development Lack of patent and copyright laws in some countries including Pakistan Increase in prices of components Increase in prices of electricity for consumption in manufacturing Increase in sales tax of the medicines Implementation of WTO and under free trade agreements, medicines can be imported easily Increase in price of labour, minimum wage laws THE REASON TO CHANGE Change Objective: - The basic objective was to successfully create the worlds third largest pharmaceutical group. INDUSTRY LEADERSHIP According to the last IMS report Sanofi-Aventis is the 3rd largest company worldwide and number one in Europe. The market share of 5.6% is also amongst the highest in the industry. Research and Development Expenses at Sanofi-Aventis are among the top 3 in the industry. Their growth rate of over 11.4% as reflected by IMS and market share of 4.6% is among the top in the industry. Their sale is approximately 3+ billion The management of both the companies i.e. Aventis and Sanofi realized that this would include a complete change management program to be devised keeping in mind the individual nature of the organizations internal cultures. This change management program had to be devised in such a way as to minimize dissatisfaction and job insecurity in the current human resource employed at both the companies. For this purpose, both the companies decided to opt for planned change. According to Stephen P. Robbins, "planned change, refers to change activities that are intentional and goal oriented" The planned change programs to be implemented at both the organizations were to encompass the following spheres: Changing structure, or in essence redesigning of organizational structure. The critical issue faced was duplication of human resources at similar parallel positions. For these cases the candidate with the better profile including education, technical expertise, years of experience and skills up gradation , would retain the old job designation, responsibilities, whereas the other candidate would be offered a position of the sub-ordinate. Technological aspects: The technology that was being used in both the companies was up to date. After the merger, all technology would belong to the newly formed entity Sanofi-Aventis and will be used. Physical Setting: The physical setting as such will not be changed. However, I cases whereby certain employees are taking over the responsibilities of current employees and there is a shift in job responsibilities, the work stations might be re-located to suit the needs of the new job roles. People: As such there will be no new recruitment or downsizing. DRIVING FORCES AND TRENDS IN THE PHARMACEUTICAL INDUSTRY 1. Economic Growth: Regarding growth the pharma market is growing at an annual average rate of 12.7%. 2.Government Policies There are a number of policies, which guards the operations of pharmaceutical companies in Pakistan. Environmental & safety inspections Price regulating rules Mandatory audit Drugs inspections Laws Regarding Patents 3. Mergers & Acquisitions & Research and Development The merger between Glaxo Wellcome with Smith Kline Beecham, Knoll being bought by Abbott, and Hoechst by Aventis is some recent examples in the industry the mergers have brought about synergies in costs. New molecules can be developed and tested cheaply, pooling of resources have taken place due to which its easy for pharmaceutical companies to survive with such huge R&D costs. The mergers have also given rise to big product portfolios and product diversifications. Although merger of multinational pharmaceutical companies have affected the Pakistani market but it has not given rise to the entry barriers in the industry as the Ministry of Health controls number of products registered. 4.Generics Smaller pharmaceutical companies have gained quite a hold on the pharmaceutical industry of Pakistan. This is because they are able to produce drugs at a much lower price, thus eating at the multinational companies' profits. PART TWO: CHANGE PROCESS AT SANOFI-AVENTIS THEORY VS REALITY A NEW INDUSTRIAL STRATEGY DRIVING GROWTH Vision Driven Change Over 80 sites and more than 26000 employee's world wide, manufacturing 24,000 product references and 2.7 billion packages every year, Sanofi-Aventis is making this exceptional industrial capacity into a key component of its new strategy. Change Process:- Management teams were in place as of June last year and 19 paired Integration Committees began to work on the ground in August. As all this was going on, the organization of Research and Development, the very heart of the Groups business and the fuel for its growth drivers, just took six months to complete. All facilities were running normally and affiliates were fully operational as of 1st January. BACKGROUND: CONDITIONS BEFORE MERGER Looking a few months back in time to before the merger the situation was both simple and sharply contrasted. In a nutshell: Sanofi-synthelabos strategy was already centered on "no small product, no small market" meaning that a major pharmaceutical company is bound to offer the broadest possible range of medicines covering a majority of therapeutic needs. The industrial consequences of this vision were sites producing at full capacity and in some cases, at saturation. Aventis, in the meanwhile, adopted a radically different position, choosing to concentrate on its major products and largest markets. The industrial consequences of that choice were obviously radically different: a number of industrial sites not central to this "core business" logic were working below capacity and some were on the brink of divestment. Today the new industrial strategy developed by Sanofi-Aventis is a natural outcome of this initial highly contrasted, state of affairs, with saturated manufacturing facilities on one hand, and under used capacity on other, an dis making a decisive contribution to the success of the groups stated goal: to be present in every market and in every therapeutic class. BENEFITS OF THE MERGER 1. Facilities at full capacity Not only does the excellent fit between the former Sanofi-synthelabo and Aventis sites allow for optimal production programming, but the large number of facilities guarantees enhanced production security through "multi sourcing, in which the main products are manufactured in two or three different places. 2. Manufacturing where expertise lies As is by now clear, de-localisation is not part of Sanofi-Aventis philosophy "delocalising means not only making expensive investments in a new manufacturing facility, but above all losing expertise. It is the know how more than the size of the wage bill that makes a manufacturing facility really valuable and efficient" (Gilles Lhernould, Senior Vice President, Industrial Affairs) According to the Group, every country has its own specific industrial culture so that to lose the expertise of one country is to deprive the whole enterprise of a part of its experience and ideas. FUNDAMENTAL CHANGE AT SANOFI-AVENTIS The change strategy utilized by Sanofi-Aventis could be termed as a fundamental change strategy. The organization itself and its parts changed. It is a planned change. The sub parts of the organization are committed to it and various action plans were made to implement this change. The characteristics of fundamental change strategy are:- Vision Conscious effort to move to a learning mode Immediate action plan to effect change Vision "To create and sustain value by being recognized as a Pharmaceutical Industry leader" The main reason for this merger was to acquire a greater chunk of market by the merger of the two groups and make a stronger company which would eventually acquire market leadership. From this it can be seen that it was a planned, proactive change which was necessitated by external factors like increasing competition, losing market share due to various reasons and losing in financial strength as compared to stronger American pharmaceutical groups. Conscious effort to move to a learning mode There is a clear commitment in the organizations management to develop and build commitment amongst the employees. There is adequate reinforcement of the vision by encouraging and rewarding behavior of employees, which is in accordance with this vision. For e.g. -Corporate ladder is a section in their internal newsletter to the employees in which the efforts of the employees who have performed well are acknowledged. -They have a champion award for employees who managed to achieve set targets like they have sales champions, warehouse champion award. These are awarded to the top performers and they are sent to Paris to attend champions awards Ceremony. PERSONAL COMMITMENT BY LEADERS The commitment of the leaders could be seen by the Chairman's following extract regarding strong sustainable and profitable growth. " Our business consists of finding innovative medicines and vaccines that offer new therapeutic solutions for patients. Our strategy for achieving this has been consistent for 30 years, and involves strong sustainable and profitable growth. Thanks to the motivation and commitment f our people, we lost no time in getting the Group up to speed, so that we can continue to record strong growth. Our 2004 results speak for themselves. To achieve of sustainable growth we must be able to produce new medicines, and fast from this year, we will be stepping up investment to accelerate the clinical development of compounds. We will consolidate our basic portfolio, on which the growth of our flagship products and new products will be built. And we will strengthen our sales team and improve our industrial facilities in as many countries as possible." -(Chairmans message-Jean Francois Dehecq) Human Resources The goal of Sanofi-Aventis is to involve every employee with its success and its commitment to health care by developing their professional skills and talents, and by helping them build their careers within the Group. A policy based on the recognition and development of skills, which encourages training and mobility both internally and in the Group's international subsidiaries. Human Resources policy is organized around five major missions: Career development and management ; Training and skills development ; Remuneration and social protection ; Employee relations Human Resources information management Enrolling the commitment by key players The values enshrined in Sanofi' helped to lay down the foundations for the new groups approach to employee relations. Since the announcement of the merger, this charter has been extended to the whole of the group. Management Guidelines In order to give concrete, everyday expression to its values, the group is issued a set of "Management Guidelines", showing how the values should impact upon management behaviour. These give examples of behavior expected of managers to illustrate the six group values of audacity, respect, creativity, courage, solidarity, performance. In France four out of five unions representing employees signed a framework agreement at the end of 2004, establishing a single early retirement scheme for the Group. Sanofi-Aventis intends the scheme to facilitate introduction of the new organization without resorting to involuntary redundancies. The scheme, which is entirely voluntary, provides employees taking early retirement with a substitute income until they reach full pension able age. The scheme is funded entirely by Sansofi Aventis , with no call on public funds. . Rewards that Match Learning Behaviour Rewards, like in any other organization are tied to performance appraisal. They are based on the employees' performance across certain criteria. At Aventis-Sanofi, learning behaviour is acknowledged and tested in the performance review and due credit is given to them in their future promotions. Training for Career Development Career development is the product of a real partnership between the individual employee and the employer, training is a guarantee of development , for employee and employer alike. With this in mind Aventis-Sanofi offers its staff not only technical training specific to each business sector but also a range of cross functional programs designed to reinforce Group culture and break down barriers between functions and business areas. Remuneration The objective is to set average levels in each country above the market median and to : Recognize individual and team performance ; Share in success by involving employees in Group performance. Compensation Survey The Compensation/benefit team conducted a cross-industry survey to assess and evaluate current market practices with regards to Sales force retention and development, especially multinational consumer goods and/or services industries. For the entry-level positions, the analyses reveal that Aventis Sanofi are numero- uno in the Pharma market in terms of both salaries and allowances. Workforce The goal of Sanofi-Aventis is to involve every employee with its success and its commitment to health care by developing their professional skills and talents, and by helping them build their careers within the Group. Almost 100,000 men and women worldwide including 33,000 Pharma Associates and 1000+ employees in Pakistan COMMUNICATION In 2004, the Group was committed to ensuring that both individual and institutional shareholders, analysts and journalists, were provided with a regular flow of transparent, comprehensive, and readily accessible information on group strategy and results. Group publications Letter to the shareholders Information online Shareholder hotline Regular information meetings Individual shareholders committee Financial communications calendar Communication with stake holders is carried out through:- Internal magazines tonic and intonic PART III: CRITICAL ANALYSIS OF THE CHANGE MANAGEMENT STRATEGIES EMPLOYED AND HOW THEY CAN BE IMPROVED In this section , we will critically analyze the change management policies(mentioned above) that Sanofi Aventis is following specially to deal with leadership, communication and motivation issues and ways in which these strategies can be improved. Leadership The role of leadership is most crucial in case of rapid changes. The leadership at Sanofi-Aventis will be perceived to be the Chairman's, Managing Director's, and CEO's of both the companies i.e. Sanofi and Aventis. As quoted above, the chairman of Sanofi Aventis is personally involved in the change process "And we will strengthen our sales team and improve our industrial facilities in as many countries as possible." It can be seen that the focus of change at higher levels has a higher emphasis on technology, products and a very small mention of the human resources overall. That mention specifically relates to the sales team and not the rest of the workforce. Recommended Strategy: The current strategy undermines the impact of the Merger on Human resources of the company. However, human resources will be bearing the impact of this change. Sanofi-Aventis is at a risk of losing its valuable employees due to uncertainty. They have good HR policies, Performance Improvement Plans, Compensation and Appraisals; however, in this instance employees need Reassurances. In this instance, the leadership should be taken up at relatively lower levels like the Country Heads and Regional Managers who should make it a point to Re Assure the workforce that Sanofi-Aventis will indeed be better for all of the employees. Redundancy and early retirement schemes should not be mentioned at this stage for at least for 2 years and once the change has been accepted, only then these strategies should be introduced. One thing that is lacking is "career development programs". It is suggested that proper counseling sessions should be scheduled for employees on a quarterly basis and ways should be identified to them through which they can make themselves more up to date and eligible for promotions. For this purpose, they should be sent on trainings. In these sessions, they should also be reassured to remove job insecurity. Motivation: The current motivation strategies of Sanofi-Aventis are primarily based on good compensation. However, there needs to be a reward program on better performance. Recommended Strategy: The motivation level of employees increases when they see what difference they can make in their growth with in the organization as ell as monetary growth. For this matter, cash rewards tied to performance play a crucial role in raising the motivation levels of the employees. Casual Leave Encashment Policy: This is a policy being successfully followed by a few companies. This discourages people of taking casual leaves by rewarding them per say salary on the casual leaves saved out of 15 allotted every year to every employee. Cash Rewards: Cash rewards should be given to ten star performer of every department. In this regard, the lessons learnt by Wells Almshouses merger can be benefited from: Some key lessons "People, not process, made the merger successful - give thought to how you engage with all stakeholders, both internal and external Communication is essential - keep talking even when there is no news Don't underestimate the time merger takes Stick to a single vision - never forget you are merging to benefit your users Get the right support - an independent facilitator and a staff member to co-ordinate the merger"-(www.ncvo-vol.org.uk) Communication The current communication strategy is up to the mark and we see a lot of communication flowing from top to bottom. However, there is a greater reliance on formal communication. The role of communication is most important when changes are taking place in an organization. It is suggested that informal networking should be encouraged. American Health Pro Credit Union (ARHCU) denotes that communication is the core of cohesive culture. In one of their reports, they state "core strength of the credit union is found in the managers' commitment to their "Communication Model". The model starts with an executive team meeting every Friday in which initiatives through out the credit unit are discussed. Consolidated agenda items from these monthly meetings are then brought to monthly leadership team meetings which the executive team and all departments attend." Encouraging Informal Networking: This can be done by having more corporate, annual dinners in which upper management gets a chance to interact with lower level employees. This will increase the communication, remove job insecurity and motivate the employees in a better way. Power Politics: Power Play is an integral part of any organization. In case of mergers, this is most evident "Power plays are uses of power designed to more publicly exert power over another. They most often occur when someone is threatened by turf issues, general or specific insecurity, corporate reorganizations (merger, acquisition, down-sizing). A power play may occur when someone wants to expand their empire and doesn't know healthy ways to gain power." (http://www.itstime.com/oct97.htm) The policy of Aventis -Sanofi like most other organizations has completely overlooked the clash of interests when two organizations merge. A good example would be as follows: The instance of Parallel Positions has been overlooked and it is by far the most critical issue in a merger because if has an impact on the organization from top-to-bottom. In normal circumstances, the power play is as depicted in the following diagram: (http://www.itstime.com/oct97.htm,) However, in a merger the threat to the employees in form of duplication and parallel positions is real and leads to cut throat power play, manipulation and other such practices. Based on ideas put forth by Michael Korda, the author of "Power", a combination of strategies can be used to counter the power play. Strategy: Directing Others: This is possible when you have reward power over the other person and long-term commitment is not desired. The CEO can follow a "Carrot Or Sticks" policy and offer a choice between: Package A: High remuneration and Benefits Package B: High Rank in the Hierarchy. It is an unusual strategy and can be adopted only for the initial years when the change process is settling in. REFERENCES 1. Organizational Behaviour, Stephen P Robbins, Ninth Edition 2. www.accaenture.com, case study Merger of Compaq with Hewlett Packard in Norway 3.www.incourage.com, change management agents 4.http://www.handels.gu.se/epc/archive/00001964/, a case study on the role of EU merger Task Force. 5.http://www.lapiana.org/resources/cases/mergers/06a_2003.html,chambers of commerce of Bloomington & Minneapolis , Merger of Non Profit organizations 6.http://management-case-studies.blogspot.com/2008/03/adidas-reebok-merger-case-study.html, Adidas-Reebok Merger Case Study 7.http://industryweek.blogspot.com/2008/02/daimler-chrysler-merger-case-study.html,Daimler, Chrysler and the Failed Merger 8.http://www.ncvo-vol.org.uk/collaborativeworkingunit/information/index.aspid=2628, city of Wells Almshouses(recommended) 9.http://growthresourcesinc.com/prints/American.pdf, Communication is the foundation to a Successful Merger, Case on American river Healthpro 10.http://growthresourcesinc.com/prints/American, Communication is the Foundation to a successful Merger 11. http://web.cbspress.dk, recommended,Merging Across Borders 12. http://www.itstime.com/oct97.htm, for power polictics very good Read More