The ‘Black Box' of Strategy: Competitive Responses to and Performance from Adverse Regulatory Events

Adverse regulatory events represent changes to market or industry status quo, affect normal business operations, and trigger strategic responses by focal and rival firms that shape subsequent performance. Understanding adverse regulatory events is important, given the effects on or responses from customers, regulators, affected focal firms and unaffected rival firms. We examine the effects of an adverse regulatory event (a black box warning) on pharmaceutical firms’ responses via sales visit and promotion strategies and their subsequent performance. Black box warnings are medication-related safety warnings that appear on package inserts of prescription drug products that indicate major drug-related risks. Sales visits and promotion strategies are the efforts by pharmaceutical firms’ sales representatives to market or otherwise promote their pharmaceutical drugs directly to primary care physicians (PCPs). We utilize a combination of publicly-available FDA data on black box warnings, proprietary-level data of pharmaceutical firms’ sales visit and promotion strategies, and proprietary-level data on PCPs’ actual prescriptions (Rx) written. We posit that (1) firms act strategically by changing their sales visit and promotion strategies when they or their rivals face black box warnings; and (2) black box warnings and firms’ responses have direct consequences on performance. Using a variety of econometric models, we find strong support for our hypotheses.