THSWANE UNIVERSITY OF TECHNOLOGY

BUSINESS SCHOOL

NAME: Lubabalo Lokwe-208261258

SUBJECT: Business Strategy

COURSE : Master of Business Administration

LECTURER: Prof. Ian Strydom

DATE: 3 October 2009

Table of Contents

INTRODUCTION………………………………………………………………………………..3

1. PESTEL ANALYSIS OF THE INDUSTRY....................................................................................... 3a) Political................................................................................................................................................................3b) Economic............................................................................................................................................................3c) Social....................................................................................................................................................................4d) Technological.......................................................................................................................................................4e) Environmental.....................................................................................................................................................4f) Legal.....................................................................................................................................................................5

1.2 Porter’s Five forces Analysis………………………………………………………………………………………………………………………………5

1.3 What environmental factors are affecting big pharmaceutical companies?..............................................7

1.4 Which of these is the most important at the present time?.............................................................................8

1.5 Which of the influences you identified are likely to be the main 'drivers for change' in the future of Pharmaceuticals? Why?........................................................................................................................................9

2.1 Which would you regard as the three most important threats to a big pharmaceutical company and explain why?..........................................................................................................................................................................................9

2.2 How could you respond to each of those to lessen their impact?...............................................................................9

3. With reference to Exhibits 4.5 and 4.6 answer the following questions:……………………………………………………….10

3.1 Who do pharmaceutical companies serve?..................................................................................................10

3.2 Describe the internal and external aspects of what they are responsible for…………………………………………….........11Internal Aspects………………………………………………………………………………………………………………………………………………..11External Aspects....................................................................................................................................................11

3.3 What would be the practical implications if most Pharmaceuticals ran their business according to each of the different ethical stances as shown in Exhibit 4.5 ?.......................................................................................................12

3.4 What would be the implications for government, regulators and the medical establishment if most pharmaceutical companies followed each of these stances…………………………………………………………………………………………………………..12

3.5 How would these actions by Pharmaceuticals, the medical establishment and governments affect citizens, patients and consumers?..................................................................................................................................................13

4.1 What are the likely implications of the changing business environment on pharmaceutical firms?...............145. Conclusion.........................................................................................................................................................16References.............................................................................................................................................................17

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IntroductionThe global pharmaceutical industry is facing a number of challenges from all fronts of doing business. These challenges manifest themselves in a number of ways through which these conglomerates need to a have some form of strategy to manage such. The legislative stringent regulation that characterises the industry is a very real threat to the survival of the industry. It is against some of these assumptions that therefore the industry needs to find a way of cleaning up its act and be seen to be responsible through to community level as well. It is a well known fact that the cost of manufacturing drugs is high in the industry due to stringent conditions that are set by governments all over the world to curb run away prices increases. The fact of the is that medicines are not cheap due to the research and development lead times that can take any thing up to 12 years of initial research.

1. PESTEL Analysis of the industry

Indeed the pharmaceutical industry is plagued by a number of challenges; these challenges can be clearly articulated through the use of one of the most commonly used method to ascertain the next way forward. The use of the PESTEL Method (Political, Economic, Social, Technological and Legal frameworks/factors), form the basis on which a proper strategic analysis could be undertaken.

a) Political Challenges

Over the years, the industry has witnessed increased political attention due to the increased recognition of the economic importance of healthcare as a component of social welfare. Political interest has also been generated because of the increasing social and financial burden of healthcare. Examples are the UK’s National Health Service debate and Medicare in the US. These challenges manifest themselves in the everyday running of the companies. Pharmaceutical companies find themselves in a position of having to lobby government for almost anything that they do. The debate between the affordability of medicines and the company’s right to make justifiable earnings in the light of economic hardships is a case in point. Pharmaceutical companies have to dig deeper in their understanding of the various political system in each and every country that they operate in.

b) Economic challenges

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There is an intrinsic link between the political, economic and social factors particularly when it comes to the pharmaceutical companies. This link is evident in the way in which the global pharmaceutical companies are being perceived as contributing to the economy of the country that they operate in. The audited value of the global pharmaceutical market was estimated to have reached a huge 500 billion dollars by 2004. This in itself is huge growth in global GDP. Pharmaceutical companies are very susceptible to host country economic sustainability or stability in the long term due to some unstable economies global pharmaceutical companies run away from investing in such countries. Pharmaceutical companies want to be seen as contributing to the economic upliftment of the host country’s economy and thereby contributing to the social welfare of the population.

c) Social Challenges

It is vital to note that good health is an important social requirement in a country as the health condition of a country’s pollution affects the levels of human productivity. This poses a high risk to countries as a dying society can weaken and minimize its economic stature like that recent various global epidemics like AIDS, SARS etc. It has become one of the cornerstones of the global pharmaceutical companies that their “corporate social responsibility” initiatives are yielding the expected returns in terms of ensuring good health. However good health is always tied to good economic growth where if people are employed in formal sectors they would more or less live a better life. Thus extending their life expectancy at least three fold, it is therefore in the best interest of the pharmaceutical companies to ensure that their relations with government and citizens are seen in the correct light.

d) Technology Challenges

The proliferation of new technologies to new research on the latest trends in the medical fraternity is of valuable importance. Research indicates that companies who do not innovate in their chosen markets suffer the consequences of stagnation and becoming irrelevant. In the pharmaceutical industry innovation is the name of the game, it ensures that companies are strong and in a sustainable path as evidenced I the new drugs that they bring into the market. Where the process of innovation cut across streams of business in as far as research and development is concerned.

e) Environmental Challenges

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With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms and the following should be considered:

Weather pattern changes

It is crucial that pharmaceutical companies look at the way in which expired and rejects drugs are disposed. The efficient and hazardous free recycling and restoration programmes must be instituted.

Pressure from Environmentalist and Green organizations

A move to more green practices

Procurement of new machinery equipment which consume less fuel and utilization of alternative energy like solar should be investigated to improve environmental concerns. Carbon Emission monitoring and compliance issues

The industry is so complex and highly competitive such that time is so crucial. Pharmaceuticals are using some fertilizers to speedy certain plants that should be used because there is pressure to deliver and this result in the land being damaged and future productivity of same land/soil is compromised .Rare natural raw material and conservation regulations

f) Legal Challenges

The pharmaceutical industry is a highly regulated and compliance enforcing industry. As a result there are immense legal, regulatory and compliance overheads which the industry has to absorb in order for it to do business in any host country. This tends to restrict it’s dynamism but in recent years, government have begun to request industry proposals on regulatory overheads to so as not to discourage innovation in the face of mounting global challenges from external markets. Changing Legislation from a permanent patent to fix period of patent protection to 20 years from filing as a research discovery led to the appearance of generic medicine. This development has caused decline in profitability of the ethical pharmaceutical. Following regulatory changes in 1997, pharmaceutical companies were permitted to market directly to US consumers.

1.2 Porter’s Five forces Analysis

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a) Threats of entry posed by new or potential competitors

High barriers to entry; the company needs to put a lot of capital into research and development, lengthy approval process, marketing before it is able to receive any returns.

The big pharmaceutical companies that were able to build global operations are benefiting from economies of scale in terms of manufacturing. They are able to access low-cost supplies, as a result.

Challenging regulatory conditions (hurdles to get FDA drug approvals for new products); industry is highly regulated of which to some extent protects from new competition. The FDA approvals appear to have slowed during 2007. This could be one measure indicating that the FDA is taking a more cautious position on new drug approvals. In addition, legislative changes in the upcoming years may have a negative impact for the industry.

Pharmaceutical companies benefit from continuation of U.S. employer-based health coverage. Customers buy medication that was prescribed by the doctors.

Patent expirations may lead to an entry of new competitors (generic competitions), resulting in decreased revenues. High rates of patent expirations are approaching in 2010 through 2012.

The ability of a pharmaceutical company to offset loss of revenue from patent expirations depends on growth in existing products as well as successful execution from the new product pipeline.

b) Degree of rivalry among existing firms

Mature, consolidating, highly competitive industry (many large pharmaceutical acquisitions closed in 2007 including AstraZeneca’s $15.6Bn purchase of Medlmmune Inc. and Schering-Plough’s $15Bn acquisition of Organon BioSciences).

Strong credit profiles: companies operate off of high margins (high 70%), healthy balance sheets, and good liquidity

Industry benefits from strong demand from consumers.

Weak, small companies usually go out of business if they have no potential effective drug in future pipeline. Others that have some significant research or valuable assets will be bought by big and strong pharmaceutical companies.

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c) Bargaining power of suppliers

Suppliers generally have little room for negotiation. Large pharmaceutical companies generally enjoy significant buying power. They can dictate the price they want to buy or take their business elsewhere.

d) Bargaining power of buyers

Generally consumers have very little bargaining power. Most of the medication is prescribed by the doctors. Consumers will have to buy the drug at any given price if they need it. More educated consumers may buy a generic alternative (which have the same impact but less expensive) if available on the market.

Pricing pressure – The U.S. remains one of the few developed markets where drug manufacturers have significant pricing flexibility, and this is in jeopardy due to increasing pressures from consumers and legislators to control health care costs. Governments in other markets are generally the primary customers, and therefore, enjoy substantial pricing leverage.

Shareholders continue to pressure the companies for increases in the share repurchase programs. The companies looking for ways to increase shareholders returns partly because the industry is approaching maturity and is not growing as rapidly, and because many companies have a lot of cash on their balance sheet.

e) Closeness of substitute products

Threat from generic competition.

Customers can find substitute medicine if the original product has an expired patent. However, if it is a new product the consumer generally will have no choice for an alternative.

Over the few years generic drug manufacturers face excellent opportunities for utilization and volume trends. Generic companies are increasing focused on establishing global operations in order to achieve a lower-cost of supplies, thus posing even more threat to non-generic drug manufacturers.

1.3 What environmental factor are affecting big pharmaceutical companies

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Johnson, Scholes and Whittington (2008:83) describe environmental influences as layers around an organization consisting of the macro – environment which were analyzed using the PESTEL framework, the industry /sector supported by Porter’s Five Forces , strategic groups (organizations with similar strategic characteristics which differ from other organizations) and market segments (group of customers with similar needs different from other customer groups).

The environmental factors affecting big pharmaceutical companies are:

The macro – environment factors

Government regulation and controls on manufacturing and distribution of drugs.

The issue of economic growth coupled with the recessionary climate which can see the expansion or shrinkage of economic growth of the pharmaceutical companies

The challenge that populations are aging rapidly which puts pressure on the pharmaceutical companies because of their high demand for health care.

The degree to which customers are knowledgeable and who demand better health care products through the use available technology e.g. internet.

Changes to legislation governing the validity of drug patents and how long these particular patents can be protected for.

Industry / sector factors

Low threat of entry of competitors because of high research and development costs associated with drug manufacturing and specialized skills required to enter the pharmaceutical industry.

The likely to happen high threat from substitute products (e.g. generic medicines) when drug patents expire.

The strong buying power due to dominance of one buyer especially national host governments.

The high degree of competitive rivalry between equally sized pharmaceutical companies which at this point are unlikely to happen as the pharmaceutical companies vary in size.

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Strategic groups

Various organizations producing pharmaceuticals, biopharmaceuticals agents and vaccines and over the counter medicines.

Market segments

Pharmacists, health conscious consumers (patients), hospitals, governments and insurance companies.

1.4 Which of these is the most important at the present time?

Political forces

The current situation is that pharmaceutical companies are being targeted by national governments to reduce spiraling health care costs to enable the wider population to be able to afford these drugs.

Legal forces

Government regulations and controls governing product approval, pricing and reimbursement and promotion are on the rise through legislation and other binding legal frameworks.

Technology forces

The advent of the internet to consumers have given greater access to information and are therefore likely to be more informed on products supplied by pharmaceutical companies and demand high quality health care which they are prepared to pay for.

The current trend in the sphere of available technology to cure certain illness that may otherwise be incurable has posed a serious challenge.

1.5 Which of the influences you identified are likely to be the main 'drivers for change' in the future of Pharmaceuticals? Why?

The key drivers for change are political factors that are likely to have a high impact on the success or failure of companies in the pharmaceutical industry. Government intervention in the pharmaceutical industry in terms of legislation regarding price fixing, advertising and patent protection form part of the main drivers for change

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2.2 Which would you regard as the three most important threats to a big pharmaceutical company and explain why?

Patent protection legislation;

Entry of generic products of competitors; and

Government power to price containment.

The fact that government has almost an iron grip on the way in which pharmaceutical companies do business is reason enough to warrant the above assumption. When patents expire and the generic companies start making these drugs it shows that there is not enough legislation to protect patents. Pharmaceutical companies need to lobby government on the protection of these patented trademarks in return for lower prices for the benefit of the consumer.

2.2 How could you respond to each of those to lessen their impact?

a) For patent protection legislation

As the price of generics are always cheaper because the companies did not have to engage in a long process of research and development it can be strategic for pharmaceutical companies to ensure that they reduce the cost of that medicine upon expiry of the patent so that they are able to compete. It is reasonably expected that within the period of 20 years the company should have recouped the R & D money thus it is no longer necessary to sell the product with a high price.

b) Entry of generic competitors

The pharmaceutical companies can acquire small companies that will serve as generic divisions and in that way they will be able to compete on equal footing with generics companies and will not lose out market share on these small companies. They must be able to focus on promoting the added value of the product range with emphasis on product safety and health and total benefit to the consumer. Promote advantages over generic products like illustrating the place of manufacturer. Consumer tend to be very brand loyal, build on that loyalty foundation and start to offer holistic product ranges for the consumer’s family. It will be to their advantage to also sign Trade Agreements with their Suppliers and buy them up to compliment their current product offering.

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c) Government power to price containment

The government as a powerful buyer and regulator is able to dictate terms in terms of price. The best for a pharmaceutical company might be to concentrate on niche market or unmet medical attention whereby the company will be a market leader and will be in a better position to bargain with government. Pharmaceutical companies can also partner government to form Private Public Partnership whereby cost incurred for Research and Development can be shared equally.

3. With reference to Exhibits 4.5 and 4.6 answer the following questions:

3.1 Who do pharmaceutical companies serve?

With reference to who the pharmaceutical companies serves it has become a very tricky situation in that their interests are as diverse as anything that is complicated. Their constituency of these multinational pharmaceutical companies is made up of various players who each has their own agenda in a s far as the “food” or value chain is concerned. But the primary customer is always the shareholders, in the following discussion each is mentioned so as to give balanced approach to these conflicting relations.

Shareholders As business entities, pharmaceutical companies’ primary objective is to be profitable. Shareholders are not in business because they care about dying or sick people, they have made investments and must get returns. This is the very first customer that they are serving.

GovernmentGovernment is seen as a single most important buyer of drugs and is viewed as the most powerful of them all combined. Typically this buyer literally sustains the industry and the companies will do anything to make sure that this buyer is satisfied thus they are serve him.

Individuals

Latin America is used in the case study as an example of highly volatile market but had large number of wealthy consumers who were able to afford branded drugs. Individuals do not buy in bulk like government and other associations like Managed Care Organizations (MCOs)but do make sizeable contribution to profitability of the industry thus one can afford to ignore them.

Pressure groups Medical Aid schemes are also powerful player because if they decide not to approve certain medications particularly branded ones and force patients to use generics, there is nothing

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pharmaceutical company cannot do much hence they need to serve them and maintain good relationship with.

Private hospitals Health facilities that are not owned by government have their own procurement system and also constitute bigger group and can negotiate though not as big as government but they are a worthy buyer to serve.

Regulators Associations like European Medicines Evaluations Agency and Food and Drug Administration (FDA) are very powerful and impact heavily on profitability of the industry.

Suppliers Companies that are supplying raw materials, machinery equipment, containers and specially designed cars are seen as the other obvious contenders.

Distributors Distributor are the backbone of when a specific drug will reach the shelves of the pharmacies, they have a critical role to play, pharmaceutical companies must serve the distributors to ensure that there is good relationship that is based on trust.

Employees It goes without saying that without employees there is no pharmaceutical industry, pharmaceutical companies must also serving its employees who are part of stakeholders because they are also ambassadors of the company. If they are not taken care of, word will go out and they can also easily sabotage the company.

Community

Government and other structures deal with legal license while the community gives you social license to operate. If the communities perceive that a particular company is only interested in profit over the interest of the community and are not even participating in corporate social responsibility programmes, they can boycott their goods and demonstrate publicly which can damage a good name of any company. Communities must be served.

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3.2 Describe the internal and external aspects of what they are responsible for.

Internal Aspects

Employee Welfare is seen as important in the discharge of the duties of the pharmaceutical companies. If they do not take of their own it is then likely that bad publicity may prevail.

Working conditions will need to be improved in support of the welfare of it employees

Job Design should be seen as complementing the already mentioned process that could shield the employee from harm.

Pharmaceutical companies should at all time protect their intellectual property through the legal means available to it so as to ensure fair and equitable treatment of internal employees.

External Aspect

Environmental issues are of paramount importance to these conglomerates as they are seen to be not doing enough to curb the pollution of the environment. Dumping illegally of used and unused medicines provides a platform from where potential diseases can occurs and thus harming the environment through such practices.

Products that are clearly marked for consumption with specific instruction on how to ingest them in the pamphlets provided in this area most companies will allows try to prefer that the consumer did not use the product according the directions as indicated in the user instruction pamphlet. Dangers to consumer can destroy a company just from a single bad product

Markets and Marketing- This is probably the single most biggest spend of the pharmaceutical companies as it time to market and ensure that products reach the intended audiences.

Suppliers of goods and services to the industry must also come to the party and ensure that there is responsible supplier management practices on drugs that are hazardous.

Pharmaceutical companies provides employment to the different sectors of the community and they must be seen to be uplifting the communities that they operate in.

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3.3 What would be the practical implications if most Pharmaceuticals ran their business according to each of the different ethical stances shown in Exhibit 4.5?

According to McNamara (2008) there are benefits to managing ethics in terms of operating a business in an ethically accepted way and these are also applicable to the pharmaceutical industry. The following benefits could be reaped by these pharmaceutical companies if they adopted the ethical stances

Pharmaceuticals would be enabled to cultivate strong teamwork and productivity from their employees.

Policies adopted by pharmaceuticals (in an effort to adopt ethical standards) would ensure that they are legal and minimise lawsuits regarding the firm’s products.

Pharmaceuticals would be enabled to avoid acts of omission and lower fines if they were found to have made an effort to operate ethically.

The strong public image of pharmaceuticals would be promoted as people would see the firms as valuing people more than profit.

3.4 What would be the implications for government, regulators and the medical establishment if most pharmaceutical companies followed each of these stances?

Government intervention (through price controls) in the pharmaceutical industry has been directed at reducing health care costs for citizens whereas the interests of regulators and the medical establishment have been to ensure that safe drugs are released into market and unethical marketing practices are not used by pharmaceuticals. The Pharmaceutical companies would have to cover the cost of establishing and implementing the internal and external aspects. These costs would normally be written off against operational costs but it is more likely that the costs would be passed on the consumer through strategic product pricing. This may lead to government to:

increase their medical spending and thus to lower barriers to entry of new entrants

If pharmaceuticals adopted the ethical stances as mentioned, the work of government, regulators and the medical establishments would still continue but the probability of unreasonably high drug prices, unsafe drugs entering the market and pricing and marketing

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crimes would be diminished by ethical practices of pharmaceuticals. It could also help to speed up the de-regulation of the industry to help increase competition

3.5 How would these actions by Pharmaceuticals, the medical establishment and governments affect citizens, patients and consumers?

There is always the likelihood that unsafe drugs that might be released into the market would be reduced. This could lead to consumers being able to afford high quality healthcare drugs at reasonable prices.

Unethical behaviour in market practices would be minimized. This could lower the cost of medical products for both at private and public facilities

Thus ensuring lower costs associated with medical product dispensing

The likely hood that there would be an increase in medical service value as a whole to

the community.

Improved access to healthier and safer medical products

4.1 What are the likely implications of the changing business environment on pharmaceutical firms?

A changing business environment means a firm has to review and possibly adopt a new strategic direction. As the benefits of consolidation are too significant to ignore, so are the risks of doing nothing. With growth in the global generics pharmaceutical market projected to slow down and an increasing number of competitors chasing a finite number of opportunities, pressure on profitability is expected to intensify. Drug discovery companies are experiencing many important transformations, which have contributed to the uncertainty of their competitive business environment. The uncertainty is underlined by the abundance of players within the industry. The changing competitive landscape in the global pharmaceutical industry requires generics companies to implement strategies to address issues of cost competitiveness and sources of growth, necessary to build a sustainable competitive position while companies focusing on branding strategies are to ensure the promotion of added value.

As the pace of consolidation (mergers & acquisitions) continues to pick up, companies need to decide where they will fit in the consolidation process. Whereas few opportunities remain to match the scale and scope of the industry leaders, alternative viable strategic options remain

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including vertical integration and developing a specialty focus into the niche market of offering specialty products for global epidemics.

Companies continue to be in a relatively strong position following years of growth and the current environment provides an opportunity for industry participants to consider and make strategic decisions to position themselves for the future ahead in a global world.

5. Conclusion

In conclusion the pharmaceutical industry is face with a number of challenges that it must address in a manner that is seen to be equitable. It is a fact that all pharmaceutical companies want to make as much profit as possible to recoup its research and development costs. These costs are to be linked to the pricing of the drugs themselves. At the end of the day they argue that with out factoring in these specific costs they maybe out of business. This in itself translates to the exorbitant amounts of profit that pharmaceutical companies are perceived to be gaining from such practices.

The government on the other hand has to be seen to be doing something about the spiralling cost of health care. Government has a duty as well to protect the patent rights of these companies through proper legislation that will safeguard these interests. The government has to ensure that it does not wily nilly enforce unreasonable demands on these companies but rather it walks the fine line between spiralling health care costs and the profits these pharmaceutical companies make. This has to be seen in the light of ethcal standards that are expected of pharmaceutical companies to adhere to.

The internal aspects coupled with the external aspects have to be balanced against what the community and the wider customers want. It is therefore necessary that pharmaceutical companies are find a fine balance as to the making of huge profits and taking care of the ailing people.

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References

1) Johnson, G., Scholes, K. & Whittington, R. 2008. Exploring Corporate Strategy: Text & Cases. 8th ed. Harlow: Pearson Education Limited.

2) McNamara, C. 2008. Complete Guide to Ethics Management: An Ethics Toolkit for Managers. [Online]. Available from:http://managementhelp.org/ethics/ethxgde.htm#anchor33077 [Accessed: 1 October 2009]

3) http://smib.vuw.ac.nz:8081/www/ANZMAC1998/Cd_rom/Suoniemi161.pdf 4) http://www.gsk.com/policies/GSK-competitiveness-and-investment-criteria.pdf 5) http://cambridge.org/us/catalogue/catalogue.asp?isbn=9780521708883&ss=exc 6) http://en.wikipedia.org/wiki/Globalization#Effects_of_globalization

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