What do you do when a company that you admired and cited as an example bites the dust? This is a real peril for management teachers. Unfortunately, this is not a rare occurrence. Many of you would recall that In Search of Excellence was the first global management bestseller. Yet, later studies showed that many of the “excellent” companies that Peters and Waterman had identified in that book were not performing well, and some had even ceased to exist.

But, while a company can hit bad times for a number of reasons, when an iconic company comes under the scanner for ethical transgressions, it really hurts. Arthur Andersen, Enron, and Satyam are at least three companies that let their stakeholders down really badly. While the first two don’t exist anymore, the third endures only because of intervention by the Government of India.

Unfortunately, the rise of Indian business and business professionals has revealed several sordid stories in the past year. First, it was Rajat Gupta, arguably the most successful Indian business professional. And recently, in quick succession, we saw the sagas of Ranbaxy and Phaneesh Murthy.

A sad experience

For me, the Ranbaxy saga has been the most painful because this was a company that I respected and wrote about in my research. I recall the excitement of reading Pankaj Ghemawat’s Harvard Business School case study on Ranbaxy (one of the first Harvard cases on an Indian company) and Bhupesh Bhandari’s The Ranbaxy Story several years ago, and thinking that here was a company that could put India on the global stage with innovative products.

Today, Indian pharmaceutical companies are known globally for their prowess in producing generic drugs. And, Ranbaxy was one of the companies that helped build this reputation. Ranbaxy first attracted the attention of the global pharmaceutical industry thanks to its creation of a relatively simple process to produce a complex new drug molecule invented by Eli Lilly. This led to Lilly first outsourcing production of this drug to Ranbaxy, and later forming a couple of joint ventures.

Under the leadership of Parvinder Singh, Ranbaxy was one of the first Indian companies to embrace the TRIPS agreement and the new patent regime, and to focus resources on the creation of new chemical entities, the holy grail of the pharmaceutical industry. In parallel, the company internationalised aggressively, sometimes even foregoing what appeared to be better opportunities in the domestic market. Singh said this as a strategic move to create a presence that would help Ranbaxy appropriate the value of the blockbuster drugs it hoped to create.

The fall of Ranbaxy is painful, even though it is, strictly speaking, no longer an “Indian” company (controlling interest is now owned by Japanese drug company Daiichi Sankyo). While Rajat Gupta and Phaneesh Murthy got into trouble because of their own personal foibles, Ranbaxy’s problems point to systemic failures that went uncorrected by a predominantly Indian management. Interviews with the whistleblower, whose report led to the levy of a $500 million penalty on the company, point to large-scale fudging of data and the absence of oversight mechanisms to correct such excesses. Instead, according to these reports, the then senior management of the company failed to take corrective action, even when evidence of such practices surfaced.

How such lapses happen

How could this happen, particularly on such a large scale? The reasons for this are surprisingly well known. In his classic piece Why Good Managers make Bad Ethical Choices (Harvard Business Review, July-August 1986), Saul Gellerman pointed to four rationalisations that managers make, which lead to bad decisions. All four are germane to the Ranbaxy case: (1) a belief that the action is not really unethical or immoral (“everyone does it”); (2) a belief that the action is in the best interests of the company (growth, profits, maximising shareholder value, and so one); (3) a belief that the action is unlikely to be detected (possibly the worst assumption); and (4) a belief that because the action helps the company, the organisation will condone and even defend such action (plenty of evidence of this in the reports on the Ranbaxy case!).

Robert Simons completes this picture in his book Levers of Organization Design . Simons argues that performance pressure, temptation and opportunity combine to form a dangerous triad. It is reasonable to believe that as Ranbaxy charted a steep growth trajectory in the early 2000s, managers felt tremendous pressure to meet the high-growth aspirations of the top management. Opportunity presented itself in the form of the growth of the generics market in response to high healthcare costs across the world and Ranbaxy’s reputation as one of the forerunners in this industry. And, temptation was fuelled by the relatively lax oversight of generic pharmaceuticals by the US FDA.

Though Jim Collins is more popular for his books on what makes companies successful ( Built to Last, Good to Great ), I found his How the Mighty Fall in many ways the most perceptive. The first two steps he notes in this book — “hubris born of success” and “undisciplined pursuit of more” — provide the organisational basis for Gellerman’s four rationalisations and the performance pressures and temptation that Simons refers to.

Ranbaxy’s experience clearly points to the need for Indian companies to be careful, both in the goals they set and the controls they put in place to monitor and correct wrongdoing.

Impact of the Ranbaxy case

In recent months, independent evaluation of generic drugs has pointed to large variances in efficacy compared to that of the original molecule. This has already led to calls for more stringent approval processes and testing of generic drugs. Ranbaxy’s transgressions will only amplify these voices. The result will be longer approval cycles, higher testing costs, and, hopefully, safer medicines. So, while the ultimate impact may be better generic drugs, henceforth, it will be difficult to talk with undiluted pride about the innovative capabilities of the Indian generic drug industry.

(Beyond Jugaad is a monthly column. The author is the Professor of corporate strategy and policy at IIM-B and author of From Jugaad to Systematic Innovation: The Challenge for India.)

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