There aren't many candidates for the title of Britain's greatest post-war corporate success. But Glaxo would certainly figure on everybody's short-list - almost entirely because of the explosive change in its performance from the start of the Eighties. Nothing in Glaxo's earlier record prepared outsiders for the surge in profits and growth. Although it was reasonably well-positioned in the world's most profitable industry, pharmaceuticals, Glaxo seemed like the great majority of large UK manufacturers: lacking in the vision and self-belief required to make the world their oyster.
As the architect of its transformation, Sir Paul Girolami, has observed: 'What was missing through the greater part of Glaxo's history was a global strategy.' Oriented, like its peers, to the narrow British market, Glaxo started its wonderful Eighties with pre-tax profits, at £87 million, that were unchanged from four years previously - even though sales had risen by nearly half. In the next five years, amazingly, sales doubled to £1.4 billion while profits multiplied seven times to £612 million.
Both the rate of expansion and the profitability (55% on net capital employed) were probably without any parallel for a large British company - and the surge continued. By 1993-94 Glaxo was turning over £5.6 billion, on which it made a stunning £1.84 million of profit, a return on sales of a truly remarkable 32%. The key to this magnificent performance was a single product: the drug, ranitidine, marketed under the name Zantac, an extraordinarily effective treatment for ulcers and other gastro-intestinal disorders.
Zantac is a triumph of research and marketing. But Girolami, the chairman from 1985, and before that chief executive from 1980, is neither pharmaceutical expert nor marketing man. An LSE graduate, born in 1926, he qualified as an accountant in 1953 and joined Cooper Brothers when it was just setting up in management consultancy. Girolami was a founder member, becoming a director when the consultancy was turned into a separate company. As a consultant, he worked in many industries and companies (including heavy engineering, oil exploration and textiles).
His first role on joining Glaxo in 1965, however, was as financial controller. That involved introducing electronic data processing and initiating and developing systems for financial and budgetary control, planning and management information which were still current many years later. In 1968, appointed as Glaxo's first financial director, Girolami began to widen his sphere of operation outside finance, getting deeply involved in the crucial defence of Glaxo against a bid from Beecham in 1972.
He also played a key role in developing many of the overseas interests. In the late 1970s, Girolami bought Meyer Laboratories in the US, and turned it into Glaxo, Inc. In what turned out to be a masterly stroke, however, Glaxo entrusted the initial American marketing of Zantac to a joint operation with a rival whose presence in the marketplace was far larger - the US subsidiary of the Swiss giant, Hoffmann La Roche. Zantac could thus be promoted immediately by a sales force matching the US majors in size, at a time when Glaxo, Inc. was still in the early stages of development.
A great strategic shift meant that virtually all of Glaxo's sales would come from pharmaceuticals; if wholesaling is included, the proportion had been only half. Half the sales had been made in the UK, too; in ten years, the ratio fell to 15 per cent. Research spending over the same decade quadrupled. The most vital statistic, though, is that for anti-ulcerants. From contributing nothing to sales, they rose in the Eighties to a stunning 43 per cent.
Girolami emphasises that Glaxo's underlying strengths have long existed: a fundamental commitment to research and development, and also a vague yearning for international expansion. But 'that aspect was very much within blinkers.' When he first joined the group, the blinkers meant that managers saw only the Commonwealth. 'The rest were "foreigners" who you had to treat rather carefully before you ventured - and there was a positive hostility shown towards the States and Japan. However, the germs of internationalism were there, and so was this commitment to technology.'
Girolami's ambition was to inject two or three additional constituents 'which would turn this basic element into a very dynamic force.' The first element follows from deciding (as you must in true internationalism) to tackle all major markets, despite their differences, difficulties and risks; you have to have the self-confidence to do it yourself, not just through agents or exports. That meant 'setting ourselves up as a company taking on local colours and tackling that market as a national. Very difficult, but that's what we did.'
The second element also requires great self-confidence - answering the question, what are we trying to do? What is Glaxo? The management asked, was it milk, or babies, or surgical instruments, or genetics? Or all these? 'We emerged from this rightly or wrongly (and I think very much rightly) saying: no, we want a specific objective, we address all our resources to a high-quality business.' That was pharmaceuticals. Girolami was backing Glaxo's ability to compete in one of the most competitive markets against some of the world's most competitive companies.
The third important element was the organisation of the group around a single purpose. Geographically, Glaxo covers the whole world. 'We've developed by trial and error into a flexible organisation which somehow combines local initiative, local control, good local management with a central leadership and direction.' Girolami thinks it was this combination of two latent forces, research strength and internationalism - with a new strategic direction that gave the group its dynamic impetus.
Zantac, which transformed Glaxo's fortunes, was a result of the first latent force, 'our continuing commitment' to R&D. But Zantac wouldn't have had its sensational effect without the simultaneous act of self-belief in international expansion. 'If we hadn't, before Zantac was taken in, decided to go hell-for-leather into the American market and to tackle the Japanese market and to put all the strength behind the European market, that product would have been a flop.' American companies would have taken out licenses, and Glaxo would have earned only slim royalties.
Billion-dollar products like Zantac aren't given their commercial success 'by just producing a good product in the laboratory.' That's the starting point. 'But many starting points finish where they start. Any good product which makes money doesn't sell itself', a vital principle which nobody at Glaxo was allowed to forget. Girolami's people were told that 'you've got to sell it and sell it hard, because if you don't it won't be sold, however good it is.'
Glaxo had always been 'a very good marketing company.' Its origins, unusually enough, lay in New Zealand, where the original firm made and marketed baby food. The marketing tradition survived all the subsequent expansion and change. Although that didn't make all Glaxo companies equally good in the marketplace, Glaxo has always, Girolami believes, 'produced examples of the very best marketing in this pharmaceutical area. We've known how to market products for a long, long time. The answer is teamwork and a sense of direction and a determination to make the most of what you've got.'
As Girolami has pointed out, there's a national message in that analysis - and the message for other managements is also very clear. 'I don't think we are any different from any other industry really. Though we strive to get a better product, the fact of life is that we are not the only clever people in this world. In fact, there are a hell of a lot of clever people.' While Zantac was a cleverer product than the rival Tagamet from SmithKline (which began the revolution in ulcer treatment, and profited enormously thereby), Glaxo marketed the drug on its traditional formula: 'you tend to rely on the fact that it is only marginally better.'
If that's the case, 'this is where the whole process of marketing comes in. You've got to price it right, you've got to use all the management techniques employed by Glaxo, as by any other successful company, to beat the competition.' In marketing, self-confidence is pivotal, so that belief in the product can be transferred from supplier to customer. With Zantac, Glaxo took a bold (and much-criticised) step. It priced the product significantly above the established leader - an act of faith in the superiority of the product.
The competition in pharmaceuticals, according to Girolami, 'isn't as nakedly in terms of price as in some industries, but price comes into it.' The Zantac strategy was thus doubly bold, and required heavy support from other elements in the marketing mix - 'quality and design and persuasion and teamwork and meeting deliveries.' As Girolami once told Management Today, 'innovation means introducing new products successfully in the marketplace', and for that to happen, a 'flash of imagination' is required.
In the pharmaceutical industry, however, a flash of inspiration is required first: 'scientific discovery is the condition precedent.' The discovery of ranitidine, though, wasn't in the same order of inspired breakthrough as Sir James Black's research, which produced cimetidine (Tagamet). As Dr David Jack, then Glaxo's research director, explained:
'Ranitidine was the result of a simple piece of applied medical chemistry. It's not necessary to shake the earth on its axis to make money in this industry. We simply improved on James Black's product by choosing a substance with a cleaner reaction.'
This 'simple' competitive thrust was only made possible by the expertise which Glaxo had developed in treating bronchial asthma. That all sounds perfectly straightforward. But concentrating on high-quality ethical drugs is necessarily a high risk strategy. As Girolami noted, they are 'sui generis. They don't really have synergy with anything else.' All the eggs thus go in one strategic basket: the company is betting on the ability of its researchers to produce compounds that will provide more effective treatment without intolerable side-effects.
The bets, moreover, are gigantic, and mounting gigantically. In 1975, Glaxo spent only £12 million on research and development. By 1983, the spend had multiplied fivefold. But that £60 million, too, looks tiny compared with what was to come. By 1990, spending had increased another seven times to £420 million: it has doubled since, to 15% of turnover. Nor does this huge amount of money guarantee disproportionate success: as Dr Richard Sykes explained when research director, 'there is no straight correlation between the money spent and the number of products: it's not like sending a man to the moon.'
Girolami and Glaxo's self-belief was ultimately founded on people like Sykes, now chief executive, who took charge of research in 1988, having returned to Glaxo after a long spell with the Squibb Institute for Medical Research at Princeton. 'A good organisation, with good people and good science, attracts more: it's autocatalytic', he told Management Today. That creates what's now called 'intellectual capital.' It's the only kind that truly counts for a pharmaceutical company, according to Girolami: 'the degree of profit is not a function of the capital put in.'
Rather, 'to a peculiarly high degree, profit is a return on people, intelligence, specialized knowledge.' As Zantac demonstrated so spectacularly, the return can be gigantic - for every 1% rise in turnover, Glaxo at the peak was achieving a 2% increase in profit, thanks to its thumping victory in the anti-ulcer wars. Its chief opponent, Henry Wendt, chairman of SmithKline Beecham, blames this victory, and his defeat, on the battle of scientific intellect, not that of the marketeers:
'Though I knew SmithKline could have improved many aspects of the marketing programme for Tagamet, it really lost the advantage to Glaxo in development. Glaxo won regulatory approval for a twice-daily dose of Zantac, in contrast to Tagamet's four-times-a-day dose, and at a lower overall total dose in milligrams. Physicians drew the obvious inference: Zantac appeared to be a more potent and longer-acting agent.'
In addition, the official labelling listed fewer side-effects for Zantac. However, in emphasising that 'Glaxo won the battle in development, long before its product appeared on the market', Wendt ('someone who was deeply involved in the struggle') was shifting the onus from the marketing and general management. It wasn't only that SmithKline 'could have improved many aspects of the marketing programme': generally, Wendt's management had simply crossed the narrow line between self-belief and complacency.
At the launch of Tagamet, the management had boldly taken huge risks, building a Cork factory and a worldwide marketing programme before it could have any certainty of winning big. With the world's first billion-dollar drug under its belt, however, SmithKline reacted too slowly to threat. Apart from the small daily dosage, 'all Zantac's initial comparative advantages', wrote Wendt later, 'have largely disappeared as a result of the continuing clinical development.' But by that time, Zantac was outselling Tagamet two-to-one.
Doing too little, too late is practically a definition of lack of self-belief. It was, alas, a characteristic of Britain in the days of what Girolami has called 'the old classical industrial establishments', which 'were brought up in the time when the markets were there, and they were theirs for the taking. The older generation lacks the element of competitiveness, which is essential today.' However, 'the young people are much better' - and part of Girolami's philosophy was to provide the younger Glaxo managers with the right environment:
'The manager of any business enterprise has to have a clear set of values which guides appropriate business action. He has to know the business, and to understand the direction in which he has to lead it. He has, moreover, to have a profound sense of commitment, loyalty to the enterprise, and a capacity for hard work. Finally, he has to be able to act decisively whenever the occasion demands it - even if, as is so often the case, the elements for rational decision-making are absent.'
This philosophy was reflected at Glaxo by what looks like a looser system than the American model, with its tight controls and dominating financial ratios. Investment, management and product marketing aren't placed in a straitjacket at Glaxo: which, for all that, a rival told Management Today, 'is one of the best-organised in the world.' It takes a powerful and self-confident organisation at the top to allow powerful and self-confident action lower down.
The emphasis, to quote Girolami, has to lie 'on leadership and quality of management rather than central authority and command.' It's 'trust and partnership', not 'bureaucratic control', that allow self-belief to flourish in a company. The logic of this approach is even stronger in an international operation like Glaxo's than in a purely national business - because 'the ability to apply management qualities to two or more different national markets...calls for a style of management which is at least one stage removed from direct control...which demands an ability to combine command with delegation'
In the transformation of Glaxo, the switch to true multinationalism was crucial, especially the decision to become a major player in the great American market for ethical pharmaceuticals. A few other companies had pointed the way - notably Beechams in toiletries, under the leadership of Leslie Lazell (ironically, having merged with SmithKline, Beechams is now the owner of Tagamet). Like Lazell, Girolami saw that to compete with the Americans in your domestic market, you had to match them on their home ground.
'In the pharmaceutical industry I would fear American competition more than any other, because they have a very dynamic, scientific approach to life.' Glaxo's record, though, has amply supported Girolami's belief that 'our managers are as knowledgeable as the Americans.' The latter's different management style ('tough, rough, used to competition') poses a greater challenge than their know-how, but the challenge isn't what matters - its rising to it that counts: 'in the end, we have to measure ourselves against the Americans.'
By any measure, Girolami's company had passed all its tests when he retired as chairman - except for that of achieving an untroubled succession: a messy process of trial and error preceded Sykes' appointment. He faced tough tasks: Glaxo, like all pharmaceutical companies, is now facing a harsher, intrinsically less profitable climate. But the Girolami legacy consists of enormous resources, both tangible and intangible. That doesn't just mean patents and the scientific brainpower that created them. 'It demands a hell of a lot more than brains to run a company. Brains is one element, sometimes not even a necessary element.' What is truly necessary is what, perhaps above all, Girolami brought to the feast: self-belief.
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