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9-406-102 APRIL 6, 2006

BORIS GROYSBERG INGRID VARGAS

Finance Leadership in Novartis Consumer Health Businesses Functional competence is a requirement, but not a differentiator. Leadership capability is the accelerator. — S. Bolan In early 2005, Simeon Bolan, Novartis Consumer Health Finance Head, was thinking about how to allocate and develop the best finance talent for the various Consumer Health (CH) businesses around the world. Novartis’ CH Business Units such as Animal Health, Over the Counter, Infant and Baby, CIBA Vision, and Medical Nutrition, often had relatively small individual country operations, but still had to meet the high financial reporting, planning and analysis standards of a global multinational. Some businesses were so small, that a single finance person had to assume responsibilities that would be handled by a multi-person team in a larger business. Bolan realized that it was sometimes difficult to recruit and retain world class finance talent to the smaller country businesses, but he also knew that CH had high-performing finance heads in many of the businesses below the top tier country markets. He considered three of his rising CFOs, who were performing at high levels in vastly different environments (see Exhibit 1). Remi Escurel, CFO for Animal Health in Australia New Zealand and Regional CFO for Asia Pacific, juggled a demanding dual role. In Australia, Animal Health was a market leader, but dependence on climate sensitive products made for uneven performance. Tanya Ferretto served as both finance head and general manager for Animal Health in Japan, where the business was a niche player struggling for survival. Jaime Maturana filled the BPA (Business, Planning and Analysis) role for Over the Counter in Venezuela, a fast growing business in a very volatile political and economic country environment. All three had tremendous pressures in terms of managing time and limited resources, but the particular circumstances of each business made for some very specific challenges. As Bolan considered the different roles filled by the three finance heads, he wondered whether a particular person to fit the circumstances was needed, or could a good CFO adjust to any conditions? What characteristics did the three finance heads have in common? Did they have skills that were particularly suited to their environments? Would Tanya be an effective CFO in Venezuela? Could Jaime be successful in Australia? In sum, what qualities and skills made for a good finance head? ________________________________________________________________________________________________________________ Professor Boris Groysberg and Senior Researcher Ingrid Vargas, Global Research Group, prepared the original version of this case, “Finance Leadership in Novartis Consumer Health Businesses (Customer Version).” This version was prepared by Professor Boris Groysberg and Senior Researcher Ingrid Vargas, Global Research Group. Irina Tarsis, Global Research Group, helped to disguise certain details in this case for purposes of confidentiality. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Novartis Animal Health Australia & New Zealand: Remi Escurel Animal Health Australia & New Zealand Novartis Animal Health (AH) sold products to improve the health and welfare of both pets and food-producing animals in almost 40 countries. The product range covered pharmaceuticals for parasite control and various pet health conditions, as well as insecticides for farm fly and pest control. Australia and New Zealand (ANZ) represented about 6% of global sales. The AH ANZ unit counted 72 staff members in its Australia offices, not including a Research & Development facility that was controlled and funded by Basel. Exhibit 2 contains the unit’s organizational chart. AH ANZ sales exceeded $42 million in 2004, as shown in the summary financials in Exhibit 3. The majority of sales (about 60%) came from the farm animal business (FAB) comprised largely of veterinary chemicals for the treatment of livestock animals, mainly sheep and cattle. About 35% of sales were in the companion animal business (CAB) for household pets, where the largest selling products were treatments for fleas and heartworm. A small percentage of sales came from Hygiene products for pest control. No product manufacturing was done locally, but for some products, active ingredients were imported and formulation and packaging for the local market was done by a third party in Australia. All registration and some clinical trials were done locally, but usually international product research provided free of charge by Novartis Basel was used. Novartis AH was third in the market, with a 15% share. Sales in the FAB product range could vary widely year to year depending on commodity prices influencing levels of livestock held, and especially on climatic conditions affecting degrees of parasite infestation. For example, one of the best selling products, accounting for as much as one third of annual sales, was for the prevention of blowflies. With a poor market environment for sheep and wool producers since 1990, the national flock had declined from about 175 million to 100 million sheep, dramatically reducing the market for blowfly products. Blowfly product sales were also highly sensitive to climatic conditions. Since blowflies, which laid eggs on the backs of sheep in moist areas of the wool, proliferated in humid weather, a drought could mean the difference between positive or negative top line growth for the year.

The Role of the Finance Head for AH ANZ Remi Escurel earned her degree as a Chartered Accountant in her native Philippines before moving to Australia in 1992. She studied to qualify as a Chartered Accountant of Australia and worked three years in a U.S. company in Sydney before joining Novartis in 2000, initially as the group tax manager for corporate in Australia, and then as BPA (Business, Planning and Analysis) for Pharma in Australia. In 2003, AH recruited Remi into the CFO position for ANZ. It was unusual to go from Pharma into a smaller unit, admitted Remi, “but the CFO role sounded quite challenging, and I really wanted to make use of my skills.” In 2003, just six months after Remi joined AH, the global Business Unit created four regional offices, with the Asia Pacific HQ based in Australia. The General Manager (GM) for AH ANZ was promoted to regional head, and Remi was made regional CFO, a position she assumed in October 2003, along with her continued responsibilities as the ANZ finance head. While working the dual role, Remi was also studying part time for an MBA, and hoped to earn the degree in 2005. Remi led the nine-person Finance and IT group, and initially did all the budgeting and planning herself. When she added the regional CFO role, her time commitment in ANZ dropped to about 20% 2 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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and she hired a BPA to take over many of her former duties. In 2004, Remi had four direct reports including a BPA and an FRA staffer working combined ANZ and regional responsibilities. Soon after Remi joined AH ANZ, the unit had to prepare for an internal audit. The unit’s 1999 audit had been unsatisfactory, and the staff was very apprehensive about the impending visit. “I came in and told them not to worry and that we would work together to earn a ‘good’ [the highest audit rating],” recalled Remi. “I was extremely positive. I said we could make it work. AH had the processes in place, but they needed to be fine-tuned,” said Remi. “The people in AH ANZ are very good. They want to be compliant. They want to do the right things, and that makes my job as CFO here much easier.” Remi was amazed at the team effort that surrounded preparation for the audit. “We got all the departments involved. The entire management team met every week to make sure that all issues were addressed and that everyone was on the same page with the whole process. There was constant communication, which is fantastic—unheard of in some units.” Through that experience Remi developed bonds of trust with the rest of team, and she has worked to continue to foster open communications. As part of the increased emphasis on control, the GM, John Adams, required that the CFO sign off on all customer deals that went beyond normal terms. “It’s a policing function,” admitted Adams, “but we’ve also found that it encourages people in marketing or sales to come to finance to discuss a potential deal beforehand, and to ask for the CFO’s input on whether it is the right thing to do, and giving the CFO an opportunity to challenge whether the deal is being offered for the right reasons,” he continued. “That has been very, very helpful to us. We’ve avoided some pitfalls, and also we’ve done some better deals.” Another part of Remi’s job was to make sure that AH ANZ was getting its fair share of resources and not being burdened with unreasonable costs. The GM appreciated Remi’s strength as a negotiator. “I’ve always thought of Remi as someone I’d like to have on my team when we’re going to negotiate a good deal for ourselves, especially with internal negotiations because we get a lot of pressure from corporate colleagues to accept initiatives or particular charges,” said Adams. “Remi is very good at pushing back in a positive, constructive way.”

The Role of the AH Asia Pacific Regional CFO As CFO for the regional headquarters, Remi coordinated financial operations in 10 countries, with direct oversight for six sub-regions. Exhibit 4 contains the regional organization chart. Since she doubled as the CFO for ANZ, just five sub-region CFOs reported to Remi. Four focus countries— Australia, China, Thailand, and Japan—accounted for over 80% of revenue. In 2004, Remi traveled with the Regional Head to several AH sites in Asia to review the business models. Remi also maintained regular contact with the regional CFOs for the other Novartis Business Units to discuss things like human resources and shared services, and leverage best practices for the regional markets. In an average day, Remi would get about 60 new emails, most from the finance people throughout Asia asking questions, seeking advice, or reporting figures. She also fielded frequent requests for information from HQ in Basel. New finance heads in any of the sub-regions received a coaching telephone call from Remi at least once per month to discuss their issues or concerns. Remi tracked all of the finance people in the units, down to the lowest level, noting their talents, mobility level, language skills, and preferences, and looked for opportunities to expose them to other countries, either in a short term assignment or long term role. “Finance people generally tend to sit at their desks, and I want to change that,” said Remi. “They should be able to grow through exposure to other countries. They can bring good ideas, or get new ideas from the country they go to.”

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As regional CFO, Remi worked very closely with Regional Head Dennis Marnon. “Literally ten times a day I walk downstairs to talk with her,” said Marnon. “It’s a very frequent interaction. I think the key thing is that we have mutual trust and mutual respect. We have an excellent relationship.” Marnon emphasized the importance of Remi’s role. “Finance and IT is a very, very important support function for helping me to manage the countries. Beyond the traditional finance role, Remi acts as a sounding board for me,” he said. “My expectation of finance is not just adding up the numbers, but also helping me to understand what’s behind the numbers.” A finance head should also have a good understanding of the business to “be an early warning system for me,” he added.

Remi’s Challenges Compliance The increased emphasis on compliance had put a lot of pressure on smaller units throughout the region that did not always have the necessary resources to meet higher requirements. Remi noted that the Asia Pacific audit team was very tough and it is almost impossible for AH businesses to get the highest rating. “The internal audit is a bit hard at times because they tend to benchmark you against Pharma. They have high expectations and they overlook the fact that you are small, and they often don’t understand your business.” Remi was working to establish “a culture where people are complying at all times. At the moment it’s very reactive,” in response to an audit, she explained. Units were in the habit of doing “last minute fixes.” She was trying to put a stop to common the practice of bringing in extra people to help put things in order just before an audit. “Every unit should be responsible for its accounts and ready for an audit at any time.” As the finance head of a newly-created regional HQ, Remi initially had to clean up some practices that had gone unchecked in the past. About two months into her new role, an internal audit of AH in The Philippines uncovered some unusual sales figures, and upon further investigation it was discovered that distributors’ warehouses held an average of 17 months of AH inventory. Remi recommended new policies disallowing returns in the Philippines, and requiring all countries to have third-party stock-takes at distributor warehouses.

Accurate forecasting For the CFO for ANZ, sales forecasting was a big challenge, in part because of their dependence on unpredictable climatic conditions. “CAB is relatively easy to forecast, but the FAB poses a challenge in terms of inventory because you forecast a certain amount and then if there is a drought, you hardly sell anything. But if there is a fantastic blowfly season, you may not have enough products, so how do you manage that?” Also, the biggest selling season was at the start of the Australian summer in October through December. “We have to wait until the last quarter to know whether we are going to make our target,” noted Remi. Inaccurate forecasting often had an impact on costs because much of the spending would be committed well in advance. If at the end of the year it turned out to be a slow sales season, it would be too late to cut costs on things like advertising and promotion. To improve inventory forecasting for ANZ, Remi initiated a workshop for operations, marketing and finance people to examine the implications of inaccurate forecasting. “It is basically educating them about how overstocking and understocking affects the bottom line and hurts the whole business and in turn their incentive bonus,” explained Remi. Forecasting accuracy was also a big concern for Remi in her role as regional CFO. Because many countries were having difficulty with forecasting, the second tier finance people across the region were going for training in 2005. “It’s usually the person below the CFO who collects all the numbers from the different departments, so I want them to see how it really works,” said Remi. Her plan was 4 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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to have the group review past actuals versus forecasts to determine exactly where the process had gone wrong.

Expanding the role of Finance Remi made it a point to learn about all aspects of the AH business and to be in constant communication with the rest of the ANZ team. Adams counted this as one of the most valuable things that Remi brought to her role. “Remi has a good business sense. She understands and cares about the commercial side of the business,” he said. “She is not just a financial accountant.” Remi had noted that in many AH units in the region, the finance head had limited interaction with the rest of the team. “Some of them don’t have good communication with the CEO, or with sales, or with marketing, or tech ops,” said Remi. “They should all be partners, because otherwise, on your own, you can struggle and think you’re complying, but you could be caught by surprise.” She continued: One of my priorities is to make sure that all my finance people in all the countries become active members of the management team. I want every finance person to have a good understanding of the business and therefore interaction with the other parts of the business is essential. And it’s a two-way street in that it helps the other departments say, “OK, the finance person knows what’s going on,” and therefore they trust and respect Finance more and are more willing to share information and seek advice. In Australia, Remi had speakers from the different departments present at the monthly finance and IT meeting. She planned to have all of the finance people in the region go out in the field with the sales reps to learn about what they do. Another idea was to have finance people do product trainings “so they feel that they are part of one organization, and not functioning in silos,” said Remi.

Remi’s Approach “I think I have a very structured approach to solving problems,” said Remi. “When I fix a problem, I go behind it and look at what’s driving it and how to correct the underlying causes.” Marnon described Remi as being very dedicated and committed. “Remi is an extremely driven person. She’s very diligent. She’s very task oriented. She’s technically good and knows her stuff.” “I try to empower people to make decisions,” said Remi. “I coach them and then I try not to get involved in the day-to-day things,” she added. “I’m happy to get my hands dirty if I have to. But generally, I would like to spend more time looking at the bigger picture and how to do things better.” Remi’s focus areas for improving her management skills were to spend more time on coaching and developing organizational talent, and to “create a compelling vision for the team and wherever possible to jointly develop targets and work plans,” she said. Relationship building and communication were very important to Remi. “Remi’s a good listener—she’s very helpful,” commented Adams: She doesn’t work in a closed door environment. She will actually encourage people to talk to her about particular issues. For example, if some of the brand managers want to go and talk to Remi, they will go in and she’ll sit down and listen to them and offer advice, offer solutions. The good thing is that people won’t hide things. The worst situation is when people are scared to say something because thy think they won’t be heard or get into trouble. Remi set the tone for open communications. “I think that’s extremely important, because unless you have that buy-in from the departments, there are a lot of things you just cannot find out,” said 5 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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Remi. “It’s impossible to know every transaction that is going throughout the company without them proactively telling you. If it’s too late, it’s done, and then I don’t want to be reactive. I want to be proactive. “ Above all, Remi was a big believer in planning. “On top of the day-to-day operations, such as emails and information requests, I set aside an hour or two each day to sit back and think about the big picture and to plan. What are my priorities? What do I need to drive? How do I want to spend my time?”

Novartis Animal Health Japan: Tanya Ferretto Animal Health Japan Estimated at $635 million, Japan was one of the world’s largest animal health markets, on par with the United Kingdom and Germany. Novartis AH, however, was only a niche player in the Japanese market, with less than a 2% share. AH Japan had only recently entered into the largest farm animal segments, pig vaccine and antibiotics. The unit competed in only very narrow segments of the companion animal market. The largest CAB sector, heartworm treatments for dogs, was closed to Novartis in Japan because Milbemycin, a key compound involved, was owned and manufactured by a Japanese firm that had a non-competition agreement with Novartis for Japan. Milbemycin products, including top brands Interceptor and Sentinel, accounted for over 30% of AH global sales. In 2004, 27 people staffed AH Japan’s Tokyo-based operation, as shown in the organizational chart in Exhibit 5. The unit had sales of about $13 million, approximately 53% in CAB, 40% in FAB and 8% active substance sales to third parties. The largest selling product, Neporex (fly control), accounted for 30% of total sales. Two popular CAB products, Fortekor (cardio/renal) and Solostep (filaria diagnosis) each made up another 16% of sales. Exhibit 6 contains summary financials for the unit. Until 1999, AH was integrated with Novartis Agro and had sales of about $18 million, based largely on the CAB business which was channeled through a local animal health company. The majority of AH’s CAB sales were to this local firm, and there was only a very limited internal CAB sales force in the unit. Forty percent of the units’ sales revenue came from a single product, Program, a flea treatment for dogs. Expecting future growth to be in the companion animal market and to eliminate shared margins with the local firm, the newly independent AH took CAB in-house. However, due to competition from new technologies, retail sales of Program declined dramatically world-wide. In Japan, Program sales dropped by 60% between 2000 and 2003. Given the limited CAB portfolio, the decline of Program had a major impact on the business. Since 2001, AH had been considering a return from the full-fledged sales and marketing organization to the pre-2000 trading model. With about 8000 veterinary clinics and over 20 major wholesalers in Japan, direct marketing of CAB products had been a huge challenge. After the first year the business decided to work with just 10 wholesalers, making it easier to manage, but also reducing coverage. The FAB market was more concentrated and did not involve heavy marketing, so could be managed with just two or three sales representatives.

The Role of the AH Japan Finance Head After completing a degree in Finance and Accounting at a university in Switzerland, German-born Tanya Ferretto joined Novartis AH in 1997 in a project management role at the global HQ in Basel. A 6 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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year later she joined International Control as one of two people overseeing AH financial operations around the world, where she was responsible for the European countries, Brazil, Japan and Australia. In July 1999, Tanya went to AH in Japan to build up finance and IT operations for the unit as it was preparing to separate from Novartis Agro. She and the British GM were the only two non-Japanese among the staff of the new AH organization. As head of finance and IT, Tanya was tasked with creating independent financial systems for the unit by July 2000. “My job description at first was probably just a big headline: put your house in order. If there had been an official job description, it would have changed every month.” Her first priority was getting the accounting straight and internal controls in place. Tanya did not read Japanese and could not even read the bills, so she immediately hired a Japanese accountant. She brought a second accountant on within the first year who also helped manage the systems implementation. The accountants handed day to day FRA duties while Tanya was responsible for reporting to HQ and for business planning and analysis. Tanya’s first major project back in 1999-2000 was to set up an independent ERP system for AH Japan, including the network and servers. The system inherited from Agro was completely antiquated. “They were working on Excel sheets and trying to import and reconcile. The staff worked until midnight and then went back into the office at 7:00am. They probably loved it as well, but it was so inefficient and error prone.” There was a lot riding on her getting it done on time, because at the cut-off date, Agro would become a separate company and not be available to provide any services to AH. “The biggest challenge when I came was really getting this operation on solid ground. You don’t dream about acquisitions, or nicely formatted management reports, if you don’t have your base right.” The next hurdle was to prepare for an internal audit of finance, sales and marketing in 2001. Tanya worked on developing Standard Operating Procedures, documenting them, and making sure that they were understood. “When you’re starting from nothing, you have to think conceptually. And at the time there was no Consumer Health structure yet, and no one to ask how to do things. So it was very much sitting in a country and having to decide what you should do and what makes sense and is reasonable. Internal networks to other finance heads or former auditors helped a lot, but it was you who had to take the initiative.” Tanya believed the success of this audit played an important part in earning the confidence of the unit’s Japanese staff. Tanya had worked closely with the GM, acting as a partner to devise strategies for growing sales. When the GM was preparing to leave Japan in 2001, AH hired a Japanese manager from Gillette, initially as head of CAB, but with the intention of training a successor to head the business. The new CAB head became GM six months later, but the unit’s Japanese employees did not take well to the rapid promotion of an outsider. This contributed to the second GM’s departure within a year. Noting the staff’s respect for Tanya and in acknowledgement of her contributions to the business, AH global management offered Tanya the GM position. Having been in Japan for three years by then, Tanya agreed at first to only to an interim appointment. To make time for the GM duties, Tanya delegated some of her finance responsibilities to other members of her team. “I used to do all of the reporting myself, because I was very much into making sure that the base is right,” but in 2002 the unit’s accountants took on the FRA reporting tasks and Tanya focused on BPA responsibilities. Two and a half years later, in late 2004, Tanya was still serving as both CFO and GM of AH Japan.

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Tanya’s Challenges Growth strategies Long before becoming GM, Tanya worked at devising strategies to help the AH business grow. One initiative that Tanya was closely involved with was the effort to introduce Program into the over the counter (OTC) market. Around the time that Program began its steep sales decline, Novartis OTC was trying to enter the Japanese market. Registration of traditional OTC products was taking longer than expected, and OTC approached Japan AH with the idea of launching Program on the OTC market. As a veterinary product, Program was already registered for OTC sales in Japan. Following extensive market studies, Consumer Health approved the plan. AH supplied the product, while OTC did the marketing and coordinated distribution through a Japanese joint venture partner. Tanya played a lead role in the supply agreement negotiations, getting OTC to sign-off on a deal that gave AH a 75% margin on the transfer price. Program OTC launched in February 2001, and had over $10 million in sales by the end of the year. As a result of the deal, in 2001 AH Japan had the best profit margin of any AH business. In 2002, problems with the joint venture partner ended the Program OTC experiment. Though Program sales through the OTC channel had been four times greater than the previous year’s sales to veterinarians, the results had not met the expectations of all parties. In 2004, Tanya was lobbying to relaunch Program OTC with a new joint venture partner.

Accessing information When Tanya became GM, she wanted to design a turn-around plan for the unit. Realizing she could not “fly blind,” she started by colleting information. “How can you manage a sales force if you don’t really know what they are doing sales-wise to vets,” she noted. The unit had data about direct sales to wholesalers, but no reliable information about sales trends at the level of veterinarians or farms. There was also insufficient information to track the performance of particular account managers and sales reps. Tanya brought in a consultant to help create a sales database that would allow the unit to produce meaningful reports for the sales reps and also served as a customer relationship system keeping track on all transactions with a particular customer and allowing Tanya to identify where opportunities lay. “I realized the knowledge was in the field and that I needed access to that knowledge,” she said. But when she tried to get more information from the sales reps, she met with resistance. “If you bring transparency into something you get insights. People do not always appreciate it when you can suddenly ask very intelligent questions from your desk.” To Tanya, Japanese culture seemed particularly resistant to change. She had to continuously struggle not to lose ground: Changing something in Japan takes a lot of time and a lot of energy. I sometimes feel like I’m the battery of the organization, and I get drained of energy every day, recharge at night, and then come back the next morning to do it all again. It’s like constantly swimming against the current, or walking up a sand dune—if you stop for a moment, you slide down again. “The culture with the sales people was that information is power, and if I share my information I lose my power,” explained Tanya. “It was a struggle to get them to understand that if we both have better information we can work together to find solutions to support the business.” She slowly won the sales people over by using their data to providing them with reports and information that proved useful to them.

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Tanya’s Approach Tanya had a clear image of the role of finance in providing building blocks for a business: When I started at AH Japan, making the targets was on my mind, but it was not the first thing. First you have to build the base of the pyramid, which is to get the accounting right— everything having to do with FRA. Then comes BPA. And once I have my fundamentals right, I can give the organization and management team transparency, and cost center reporting, and show them where they make their profit, and with which products. I can show them which sales reps are outperforming and which have room for improvement. I can look at the territories and show them geographic patterns. Tanya felt she could have been even more successful had she learned more Japanese. “Although I could speak and understand casual conversations, my Japanese was too basic to communicate efficiently in the office. Communication is key to leading people, and without fluent language skills my ability to communicate effectively was hindered.” “For me the most important characteristics of a good CFO are integrity, competence and being a business partner to the CEO,” said Tanya. “You have to be business driven, but you have to know the boundaries of the company ethics and legal frameworks you are operating in.” Tanya also believed that finance people had a role in providing structure and promoting rational thinking: Finance should provide the rational base in any decision making process—be it to support R&D in deciding which project to develop or to help Marketing to decide on an advertising campaign. And it is not just about “Input/Output measures,” but more about asking the right questions to prompt colleagues in different functions to question their assumptions in a more structured way. This was essential for me in Japan, where the custom was for a lot of the decisions to be based on gut feeling, or “because we have always done it this way.” It was my task to introduce the concept of “what gets measured gets done” into the company. The special challenge was to combine the “logical” approach with local requirements.

Novartis OTC Venezuela: Jaime Maturana OTC Venezuela Novartis’ Over the Counter (OTC) Business Unit produced and marketed self-medication products such as topical analgesics, athlete’s foot treatments and nasal decongestants. It was the fifthlargest selling self-medication firm globally, and held strong positions in Europe (number 2) and North America (number 7). In Latin America, Novartis OTC sales reached about $120 million in 2004, with double digit annual growth each year since 1999. After climbing four ranks in five years, in 2004 Novartis OTC unit ranked 10th in Latin America, with a 3% share of the $3.9 billion regional market. Novartis considered Venezuela to be both an emerging and a high-risk market. Widespread opposition from the business community to President Hugo Chavez’s leftist government made for an unstable political and economic environment. In power since 1999, Chavez survived a 2002 coup attempt, a paralyzing two-month strike in 2002-2003, and a popular referendum to recall his election in 2004. Venezuela’s oil industry, accounting for nearly 75% of exports and 50% of government revenue, sustained the economy with the help of high international oil prices. In an effort to stall 9 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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rampant capital flight and inflation, in February 2003 the government fixed the exchange rate, established maximum prices for basic goods and services (including some OTC products), and placed strict limits on access to foreign currencies. Businesses that needed dollars to pay for imported goods (such as Novartis), had to submit pre-invoices to a newly created government agency well in advance. Approvals could be postponed or denied for technicalities, delaying payments to overseas suppliers. Despite the complex environment, Venezuela’s OTC market looked promising, expanding by about 15% in 2004 to reach nearly $240 million. Novartis OTC Venezuela had sales of about $7 million in 2004, a nearly 40% increase over 2003 revenues. Exhibit 7 contains summary financial data for the unit. Its largest selling product, accounting for more than 40% of sales, was Parcel, a headache medication. Lamisil (for Athlete’s foot) and Voltaren (for body aches) together made up another 30% of sales. Nearly 95% of sales went through OTCs top ten customers (wholesalers, retail chains, and large pharmacies). Before Novartis went to the business unit model, OTC and Infant & Baby (I&B) had formed a single business in Venezuela, sharing a GM and sales, marketing and finance teams. When OTC separated from I&B, most of these functions were duplicated in the new unit, with the exception of Financial Reporting and Accounting, Information Technology (IT) and Human Resources (HR), which were provided as shared services by the much larger I&B business. In 2004, OTC Venezuela had 26 people on staff, including a 19-person sales division and a 3-person finance team. Exhibit 8 shows the unit’s organizational chart.

The Role of the OTC Venezuela Finance Head Jaime Maturana was an experienced finance manager before joining Novartis OTC in 2002. He had studied in the United States, earning a civil engineering degree and a Masters in International Business, and then returned to Venezuela, spending ten years with Unisys and five years with Sony Music as a finance and operations director. In both companies, Jaime had supervised a team of professionals including logistics, accounting, HR and IT managers. But the music industry in Venezuela was suffering from widespread piracy, and Sony had downsized, leaving Jaime out of work. After several months of unemployment, Jaime realized he would not be able to find a job at his former level, and would have to work his way up again in a new industry. When Jaime joined OTC Venezuela in August 2002, the unit had just separated from Infant & Baby. OTC was then a relatively small business with annual sales of about $4.5 million, nearly 66% attributable to the sale of Parcel. As OTC BPA, initially the sole finance position in the unit, Jaime was responsible for budgeting, planning and forecasting. He worked with the marketing, sales and regulatory affairs heads to plan four to six new product introductions each year. He also coordinated logistics for OTC products coming form Novartis Pharma plants in several countries in North and South America, and negotiated transfer prices for these products. New to the industry and to Novartis, Jaime took some time to learn the business. Even though Jaime had the support of a shared services FRA, he needed to check the figures and understand them for accurate budgeting and forecasting, so he spent weeks going through textbooks to brush up on accounting. “I don’t consider myself to be a finance expert,” said Jaime. “When I have a technical question, I ask a guru or look it up.” Jaime quickly learned how things were done in Novartis. “Combining this new understanding with my previous experiences,” he said, “I began to identify opportunities for me to contribute more.” One area that Jaime saw he could add value was in inventory planning and logistics. Those functions were initially handled by I&B through shared services. Jaime felt that the business was 10 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

Finance Leadership and Novartis Consumer Health Businesses

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small enough that it would make sense to combine logistics with finance since the two were so closely related. “Invoicing depends on distribution, distribution depends on having adequate inventory levels, and that depends on budgeting and forecasting,” he explained. Jaime took over inventory planning, order placing, and the associated follow-up. “This way I knew exactly what was coming in, when it was coming and when it was going to impact the balance sheet, allowing for much better control,” noted Jaime. “Having the whole activity within OTC has been a blessing in terms of securing the right levels of inventories and constant flow of product into the country, without which we could not have grown sales as we have.”

Jaime’s Challenges Improving efficiency Lowering costs was a priority for the unit. Jaime observed that coordinating collections was very time consuming for the OTC GM and the Sales Manager. “They would sit down regularly to go over every invoice with the shared services person and try to understand exactly what was happening with each one of the accounts. I recommended that this activity could be handed much better internally if we had our own collections person who could directly communicate with the customer.” Jaime successfully made the business case to the GM and HQ for hiring someone to handle collections. The new person reviewed credit limits, tracked payments, sent clients clear account statements, followed up with phone calls, and promptly addressed all questions. Jaime believed that a finance person should visit clients and develop personal relationships with them. “If you show an understanding for the customers’ needs, they learn to appreciate your work and to see you as a partner rather than just a supplier.” With the new policies in place, OTC Venezuela reduced days sales outstanding (DSO) from an average of 70 days in 2002, to 45 days in 2003, and down to 35 days in 2004.

Volatile environment Venezuela’s chaotic business environment often thwarted the best planning efforts. Just five months into the job, Jaime came up against an anti-government strike that brought commerce to a stand-still for nearly two months. Ports were blocked, public transportation was halted, gasoline shortages prevented deliveries, and many businesses shut down. Retail sales plummeted during the strike, but once it was over, pent up demand coupled with inventory shortages presented opportunities for those who could get their goods to the market first. Most local manufacturers had shut down production during the strike, so the question was which of the multinationals could import the fastest. But the government restrictions on obtaining hard currencies, imposed soon after the strike ended, made it nearly impossible to pay for imports. Jaime and his GM appealed to HQ for a line of credit, but Novartis considered Venezuela too risky. Instead of relying on new shipments, the entire unit worked together to stretch the available inventory by repackaging into the smaller boxes that were most in demand. Once a system was established, OTC was able to plan ahead and meet requirements to obtain government-approved dollars for import purchases. Eventually Jaime hired a full-time purchase and import assistant just to handle the new bureaucratic procedures. Having logistics operations fully integrated with finance allowed for greater accuracy and efficiency, maximizing the approval rate from the government. Despite the strike and bureaucratic obstacles, OTC Venezuela exceeded its 2003 sales target, selling 17.2% more product units than the previous year.

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Jaime’s Approach Jaime believed the key to success in any business was communication and working as a team. When he joined OTC, he made it a point to regularly interact with the sales, marketing, and regulatory affairs managers. He would stop by their offices frequently, visit clients with them, and ask their advice. “I wanted them to regard Finance as a partner,” Jaime explained. “You have to do this in a way that isn’t imposing, but that allows people to see you as a supporter of their activities, and as a resource for constructive suggestions.” The sales manager remarked that in every place he had worked previously, “the finance person was always cut from the same cloth—totally focused on numbers and accounting details. But not Jaime,” he continued: Sometimes it seemed like Jaime was the Sales person and I was the Finance person. He would put himself in my shoes, just as I try to understand things from the finance perspective. Rather than blocking us, he would propose new ideas and solutions. It’s marvelous when a finance person can give an idea for a promotion, because sometimes I am so overwhelmed that I overlook certain possibilities. Jaime facilitated sales rather than making them more difficult. “The finance head should examine existing processes and find ways to make them more efficient, and less of a burden on the rest of the organization,” said Jaime. “I envision the role of Finance as a service organization that has to provide efficient services to both internal and external customers.” To be an even more effective CFO, “I would like to spend more time understanding the complexities of the markets associated with my business unit,” said Jaime. “For example, I need to know more about the stock in trade, market demand, and how our sales affect these.” This would be true in any country, he added. “But a finance person in a chaotic environment like Venezuela needs to be very proactive. He has to be very organized. He has to know how to prioritize—how to determine which matters are relevant, and which matters are not that relevant.”

Conclusion “Leadership is about setting the right priorities, putting the right people in the right jobs and creating the environment for allowing them to achieve their objectives,” believed Bolan. This was as true for him as it was for any Novartis CFO. As CH CFO, Bolan sought the best possible talent for finance leadership positions and strove to create development experiences to build self-confidence and help bring finance heads as close as possible to their full potential. Exhibit 9 lists the Novartis Leadership Standards. Bolan reflected on the challenges and accomplishments of the three finance heads. What was it about Remi, Tanya and Jaime that made them so successful? Was there an easily identifiable skill or attribute that could be targeted when recruiting new CFOs? Could the talents of a good finance head be developed through training? Could high performing CFOs be moved from one country or region to another with good results? Would there be any value in transferring good finance people across business units? How should Novartis CH help Finance heads develop their full leadership potential?

12 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

Finance Leadership and Novartis Consumer Health Businesses

Exhibit 1

Comparative Country Indicators for 2003

Population (millions) Gross Domestic Product (GDP) (US$ bil) GDP per capita ($) GDP growth (annual %) Consumer price inflation (annual %) Real interest rate (%)

Source:

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Australia

Japan

Venezuela

19.9 518.4 26,049 2.4 2.8 4.6

127.2 4,326.4 34,012 2.7 -0.3 4.4

25.5 84.8 3,325 -9.2 31.1 -8.7

Adapted from the World Bank, World Development Indicators.

Exhibit 2

Animal Health Australasia Organizational Chart Managing Director Human Resources Officer

Research

Head of Farm Animal Business Brand Management (2)

Brand Management

Product Management

Associate Brand Management

Marketing Coordinator

Source:

Head of Companion Animal Business

Sales & Marketing Coordinator

Regional Sales Manager (South) & Sales Reps (6)

Regional Sales Manager (South) & Sales Reps (6)

Regional Sales Manager (North) & Sales Reps (7)

Regional Sales Manager (North) & Sales Reps (7)

Head of Technical Services

Head of Technical Operations

Regulatory Affairs

Logistics (2)

Technical Services Veterinarians (3)

Customer Service CAO (3) CAL (3) Manufacturing

Development Warehouse (2) Stock Control

Remi Escurel Head of Finance & IT Regional BPA & Projects

FRA (5)

IT

Office Administration

Adapted from company document.

13 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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Finance Leadership and Novartis Consumer Health Businesses

Exhibit 3

Animal Health Australia/ New Zealand Summary Financials

US$ 000

2000

Income Statement Total sales COGS Gross profit Total function costs EBIT Balance sheet Long term assets Current assets Total assets Equity Long term liabilities Current liabilities Total equity & liabilities

Source:

2001

36,980 25,731 11,247 12,978 1,375 0 7,680 25,168 32,848 1,386 11,302 20,161 32,848

2002

27,681 18,368 9,314 8,015 1,601 0 4,398 15,106 19,503 62 12,609 6,832 19,503

2003

26,712 17,101 9,611 8,534 1,532 0 5,198 16,264 21,462 671 15,746 5,045 21,462

2004

31,887 19,324 12,563 9,110 3,374 0 5,692 15,621 21,313 2,445 14,198 4,671 21,313

35,045 22,710 12,335 10,794 1,436 0 6,190 20,015 26,205 2,993 18,238 4,974 26,205

Adopted from company documents. Local currency conversions to U.S. dollars made by casewriter based on the Interbank exchange rate for December 31st of each year.

Exhibit 4

Animal Health Asia Pacific Region Organizational Chart

Head of Business Support & Projects

Head of Asia-Pacific Region

Remi Escurel

Head of Finance & IT Head of HR & Customer Exc.

Head of Aqua

ANZ

South East Asia

Japan

Greater China

South Asia

Australia (111)

Thailand (52)

Japan (34)

China (184)

India (44)

New Zealand (9)

Indonesia (9.8)

Taiwan (13)

Bangladesh (45)

Philippines

Philippines (26)

Singapore (4)

Source:

Adapted from company document.

14 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

Finance Leadership and Novartis Consumer Health Businesses

Exhibit 5

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Animal Health Japan Organizational Chart Tanya Ferretto General Manager

Marketing Support

Tanya Ferretto Head of Finance, IT & Operations

Logistics and Customer Service

Head of Companion Animal Business

Head of Registration & Development

QC and Registration

Sales Team Leader

Accountants (2) BPA & Marketing Support

Office Manager

Category Manager

Head of Farm Animal Business

Professional Service

Key Account Managers (4)

Sales Representatives (8)

Development Manager

IT and Logistics

Source: Adapted from company document.

Exhibit 6

Animal Health Japan Summary Financials

US$ 000

2000

Income Statement Total sales COGS Gross profit Total function costs EBIT Balance sheet Long term assets Current assets Total assets Equity Long term liabilities Current liabilities Total equity & liabilities

Source:

2001

2002

2003

2004

15,020 7,197 7,824 6,284 1,428

16,998 10,048 6,950 6,181 489

11,212 7,295 3,917 5,564 -1,879

10,423 5,901 4,522 5,256 -734

10,763 5,887 4,876 5,398 -513

1,063 9,085 10,148 5,531 651 3,967 10,148

704 5,944 6,648 3,666 1,495 1,488 6,648

1,698 7,361 9,059 3,445 4,340 1,275 9,059

1,957 6,035 7,992 2,506 3,617 1,868 7,992

2,366 5,566 7,931 2,479 4,683 770 7,931

Adopted from company documents. Local currency conversions to U.S. dollars made by casewriter based on the Interbank exchange rate for December 31st of each year.

15 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

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Finance Leadership and Novartis Consumer Health Businesses

Exhibit 7

OTC Venezuela Summary Financials

US$ 000

2000

2001

2002

2003

2004

Income Statement Total salesa COGS Gross profit Total function costs EBIT

6,641 2,464 4,177 1,860 2,013

7,745 1,706 6,039 3,114 2,889

5,322 1,583 3,739 3,027 612

4,168 2,077 2,091 1,710 331

6,031 1,793 4,239 2,605 1,615

Balance Sheetb Long term assets Current assets Total assets

0 2,058 2,058

0 3,298 3,298

29 2,372 2,397

13 1,550 1,562

28 2,079 2,107

Source:

Adopted from company documents. Figures provided in U.S. dollars.

a

Sales figure declines in 2002 and 2003 were due to Venezuelan currency devaluations. Product unit sales increased every year.

b

Balance sheet information omits liabilities which were tied in with the legal entity that included Infant and Baby Venezuela.

Exhibit 8

OTC Venezuela Organizational Chart

General Manager

Sales Manager

Sales Assistant

Key Account Managers (4)

Sales Representatives (13) Source:

Product Manager

Jaime Maturana BPA

Product Assistant

Credit/Collect Sup.

Regulatory Affairs Manger

Purchase & Import Chief

Adapted from company document.

16 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.

Finance Leadership and Novartis Consumer Health Businesses

Exhibit 9

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The Novartis Leadership Standards

1. Sets Clear Direction and Aligns Team and Others around Common Objectives • • •

Creates and Executes a Clear and Compelling Vision Understands Organizational Culture and Dynamics Communicates Effectively

2. Energizes the Team • • • • •

Displays Team Leadership Demonstrates Optimism and a Can Do Attitude Influences and Motivates Others Possesses Interpersonal Understanding Builds Relationships

3. Displays Passion for the 3 Cs (Consumer, Customer, Competition) • • •

Understands Customer and Consumer Needs and Trends Meets or Exceeds Customer and Consumer Needs Leverages Business Understanding

4. Exercises Good Judgment and Drives Change for Competitive Advantage • •

Takes Entrepreneurial Risks Challenges Conventional Thinking

5. Drives for Superior Results and Has Passion to Win • • • •

Achievement Oriented Takes Initiative Accountable for Performance Demonstrates Drive for Quality and Order

6. Builds the Talent Pipeline • • • •

Identifies and Recruits Talent Provides Feedback and Coaching Develops Others Develops Self

7. Inspires Continuous Improvement and Breakthrough Thinking • • •

Creates New Concepts Adapts Easily Encourages New Ideas

8. Displays Analytical and Conceptual Thinking • • •

Thinks Analytically Simplifies Complex Ideas and Situations Seeks Information

Source: Company document.

17 This document is authorized for use only in Liliana Patricia Martínez Quimbaya's Maestría en Finanzas at Universidad del Rosario from May 2020 to Jun 2020.