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GfK Healthcare | May 2010 | |
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The Pilgrimage to Omaha and What It Means for the Health Care Industry  Once again this year, as in previous years, I journeyed to spend the weekend at the Berkshire Hathaway shareholders meeting. Far from the average boring stuff of a shareholders meeting, this session, with attendance that has increased an average of 10 percent per year and totaled some 40,000 this year, is half comedy show and half profound wisdom as presented directly by Warren Buffett, the second-richest person in the world, and his sidekick (aka Vice Chairman Charlie Munger), who at 86 is still sharp as the proverbial tack. As I spent the day watching and listening, I pondered the meaning of all that was happening for health care marketers and marketing researchers. In a nutshell, here are a few key principles that I took away. Play for the Long Haul As clearly demonstrated by Warren and Charlie, the gurus of value investing, successful businesses are not developed based on chasing quarterly earnings reports and quick-flip strategies. When Berkshire buys a business, it intends to hold on to it and grow it, being patient along the way. We should all be mindful of this strategy in our approaches to business. Develop a Loyal Following One of the key elements of the Berkshire Hathaway approach to business is to focus on developing a group of like-minded stockholders. Since Warren and Charlie started out investing money for their family and friends, they have grown the business with the same close-knit feeling with which they started. Running a huge corporate empire with a “home office” of 21 people makes sure that everyone stays close to the business, and not requiring operating managers to submit budgets ensures that nobody tries to fool anybody in terms of unrealistic goals. Rather than employing a huge set of accounting rules, or depending on complicated business models developed by a staff of MBAs (who Warren and Charlie view as having caused much of the chaos in the financial marketplace today), Berkshire Hathaway encourages every person to use his or her best judgment and to become intimately familiar with particular businesses rather than having a cursory knowledge of many. More particularly, if something cannot be understood, it should not be invested in. Based on these ideas, and maintaining frugal lifestyles and sound principles, Warren and Charlie have attracted a loyal group of investors who, in most market periods, pay well over $100,000 for a share of Class A stock. These investors stick with the stock through good times and bad, thus taking much of the pressure for short-term performance off the corporation. Search for Predictability Recognizing the risk of such phenomena as the dot-com era, Warren and Charlie have stuck to the basics. Dairy Queen, companies that make such unexciting products as work gloves, boots and house paint, account for the bulk of their portfolio, consistent with the Buffett pronouncement that, even though Bill Gates is a Berkshire Hathaway board member who was sitting in the front row last Saturday, “In business, change is our enemy.” Translated into action, this means that meat-and-potato businesses attract the great majority of the Berkshire Hathaway investment dollar, rather than speculations that may or may not pan out. The Future Warren and Charlie were both very emphatic in emphasizing that rather than a temporary dip in the economy, we should get ready for leaner times for the foreseeable future. Increases in inflation, taxation and other forces will put a much greater strain on our finances, and they advised us to expect significantly lower performance levels from our portfolios. Moreover, they suggested that we start to make those adaptations now – before things really tighten up. But What…? You may be reasonably asking yourself, does all this have to do with health care marketing and marketing research in 2010? The answer is, lots! While I will ask you to re-read my comments above with this question in mind, I’ll give you a few hints. In terms of Play for the Long Haul, for example, we see health care manufacturers in the process of realigning their strategies. As we have pointed out before, many are simply sticking with their old strategies, such as repetitive detailing of physicians about the same old products. While they may be cutting back the size of their field forces, they are trying to save their way out of a disaster. While this may be the right thing to do to generate profits in the short run, in the long run it doesn’t build value and catches up to you. I believe that more insightful companies are following the words of Warren and Charlie, and even more appropriately those of the great Wayne Gretzky, and are heading not where the puck is, but where it is going to be. Thus, although they may realize a shortfall in short-term profit as a result, they are expending the funds necessary to restructure for the future, by doing such unnatural acts as diversification, to ensure that they will optimize profitability in the long run. As to Develop a Loyal Following, I believe that this will become increasingly important. As the world becomes increasingly less product focused, and looks more toward the total design of products and services, corporate loyalty will become increasingly important in the health care arena. When Johnson & Johnson began to run ads a few years ago touting what a great profession nursing is and what great people nurses are, I couldn’t for the life of me understand what they were doing. But as it became clear that nurses were going to play an increasingly important role in health care delivery through settings such as the CVS MinuteClinics, I realized that Johnson & Johnson was actually getting ahead of this power shift, much as its Ortho Pharmaceutical Division had done decades earlier with Ob/Gyns. Developing a loyal following is not the important thing here. Rather, the essential thing is to develop a loyal following among the people who are going to be important, thereby helping to de-commoditize that constituency. Brilliant! And completely legal and ethical to boot! As the adage dictates, the best way to predict the future is to cause it. Thus, in our Search for Predictability, developing a strategy for forcefully imposing our will, in the best interest of both health care and our bottom line, will become increasingly important. But things will not always go our way, so setting up a process of scenario planning and early warning indicators becomes essential in readjusting our strategy when things do not go as planned. The Future, as Warren and Charlie made quite clear, is likely to be less bountiful than the past. Especially in the pharmaceutical industry in the United States, we have been blessed over the course of most of my career by high growth and high profitability, dwarfing the rates of many other industries. While Warren and Charlie made it quite clear that neither Berkshire Hathaway stockholders nor portfolio holders in general should expect the same performance levels in the future, the same can especially be said for those in our field. Several pharmaceutical companies have already disbanded their marketing research departments, with others likely to follow. Meanwhile, those on the agency side have been cutting back on their staffing levels, reducing bonuses, slashing salaries and taking other relatively draconian measures to stay in business. As a group, we need to get over any notion that these measures are temporary, and recognize that any efforts to make people whole (i.e., compensate them as well as they had been paid in the past) will only result in disaster. Though I hate to be the one to say it, I am far from the first to announce that relatively permanent belt-tightening is at hand and that, even in the unlikely event that dollar amounts look the same, the impact of inflation and higher taxes will substantially whittle away our buying power. To close on a brighter note, as Charlie Munger, 86 years of age, said so dryly but aptly at the end of the meeting, “I’m almost dead. You guys go deal with the inflation.” Charlie had it pegged. While life will go on, we are going to have to cut out the fat while preserving as much of the muscle and bone as possible as we move forward into the future. Moreover, this applies not only to our corporate spending, but our personal lifestyles as well. Describing someone as frugal in both the corporate and home environments will increasingly become a kudo rather than a slur. Warren, the second-richest man in the world, still lives quite happily in the house in Omaha that he bought decades ago for $35,000. And driving down the tree-shaded street where he lives, I can see why. While the economic environment has changed substantially over the years, his guiding principles, as reflected above, have not.  Richard B. Vanderveer, Ph.D. CEO, GfK Healthcare   |