The pharmaceutical industry researches, develops, produces and markets drugs licensed for use as medication. It is a global industry, but the nature of marketing and distribution vary due to state politics. As for profitability, the pharmaceuticals industry occupies 1st place with an average ROIC of 18.4% in 1963-2003 (Grant, R. 2008).
Historically, the industry earns some of the highest profits (appendix c), and correspondingly it essentially enacts a theory of oligopoly, with the domination of ‘Big Pharma’ (roughly 15 international pharmaceutical companies, that are both politically and commercially influential, and with revenues that tend to exceed $3billion).
However, the pharmaceutical industry is arguably one that goes very much against the theory of C. Baden-Fuller and Stopford (appendix E) – this industry is likely to become inherently less profitable than others in the future. Presently though the industry consistently earns high rates of profit. The US 1999-2005 median ROE is 22.3%, making it the 2nd most profitable industry after household and personal products (Grant, R. 2008).
Porter’s 5 Forces
1) The bargaining power of buyers: historically middling to low (important products with little differentiation and substitution due to patents), but recently growing with increased political involvement (HMOs like the NHS in the UK), and the proliferation of substitutes due to patent expiries.
2) Supplier power – the industry commonly develops and produces its products, so supplier power is not really an issue. However, as research and production activities have become more complex ‘Big Pharma’ companies are outsourcing more.
3) Threat of substitutes –low with patents and medium after patent expiry
4) Threat of entry – Generally low, with the ‘Big Pharma’ oligopoly. High barriers to entry due to: capital intensity (extreme R&D sunk costs) and the need for EOS to endure severe risks and patent limitations; there is also considerable product differentiation and brand loyalty from patents (and with this, established access to channels of distribution). However, patent expiry significantly increases the ‘threat’ of entry (and existing firms generally move to produce previously patented products at a competitive price).
5) Industry rivalry – the ‘Big Pharma’ companies are competitive with regard to innovation (the need to gain first mover advantage), but not so much concerning price.
|Political||Increasing political activity and control of the pharmaceutical industry
Widening of health care availability (globally)
B. Obama’s US health reform
Changing geo-political environment (ethics)
|Economic||Not recession proof, but has remained profitable.
The growth of LEDCS has led to an increased demand for medicine.
The development of emerging markets, such as the BRIC countries (Brazil, Russia, India and China) has led to increased R&D outsourcing, and more global activity.
|Social and cultural||Good health is of increasing importance.
Global epidemics (SARS, AIDS, swine flu) has put increased limelight on the industry
Controversy regarding the industry (e.g. the Vioxx affair).
An ageing population has led to specific medical acts (e.g. the US Medicare Part D, 2003 – lower prices). Long term it will lead to increased sales volume (people need more medication as they get older).
|Technological||A continuing trend of scientific and technological advance (biopharmaceuticals, stem cell research)
Technological advances socially, notably the internet and its increased use.
However, the rate of technological innovations in pharmaceuticals is thought to be slowing considerably.
GSK is headquartered in England and employs over 100,000 people in 117 countries. It is the second largest drug manufacturer in the world and the largest in Europe by revenue; this size allows it to invest significantly in R&D. In addition, the expansion in emerging markets is also a key factor to GKS success. In Q3 2009, GSK reported sales of £6.76 billion, a growth of 3% from the same quarter of 2008.
GlaxoSmithKline (GSK) has had a very focused and straightforward strategy over the past years. One of its main strategic priorities according to Stefan Stern (How to rebuild trust, 2009) is to create a feeling of trust with its customers. It accomplishes this by initiatives like selling drugs to developing countries for no profit (The Economist, 2007) and slashing the prices of lots of its principal medicines in emerging markets. Such initiatives demonstrate GSK as promoting a pricing policy that sacrifices immediate profit to gain brand recognition and societal approval. Andrew Witty (CEO) is also aiming to be increasingly flexible regarding the pricing of drugs as an answer to the challenge of developing new ideas for future marketing.
A firm can achieve a higher rate of profit either by supplying a product/service that is differentiated in such a way that the consumer is willing to pay premium price, or a company can supply an identical product/service at a lower price (Grant, R. 2008). GlaxoSmithKline seems to occupy both positions, GSK brands are differentiated and are offered at a low price.
Another very important point of GSK’ s strategy is CEO Witty’ s push from 2008 to ‘reduce risk and diversify, allying GSK with a generics drug maker and halting share buy-backs to give the cash rich group more firepower for acquisitions’ (Richard Milne, 2008). ‘GSK’ s shift into generic drugs reflects and develops a trend during recent years by large pharmaceutical companies to diversify into off-patent medicines’ GSK uses this strategy as a way to ‘market its own “tail” products whose patents are approaching their expiry dates’ (Andrew Jack, 2008).
An additional point to GSK diversification strategy is the effort to reduce reliance on sales of ‘white pills in Western markets’ (John O’ Doherty, 2009) and increase its weight in different markets and types of drugs. Indeed, as more and more of its medicines go off patent, the emerging markets show promise for selling large volumes at lower prices (Gill Plimmer, 2009).
Alongside this, in the past years GSK has also pursued expansion in emerging markets, acquiring a market share in Africa, the Middle East, the Asia Pacific, Latin America and China. In 2008 it struck a deal to pay $210m to ‘acquire the “mature” off-patent drugs business of Bristol-Myers Squibb in Egypt, in a move to strengthen its position in the developing world’ and which would give GSK ‘the largest market position in Egypt at about 9%.’ According to A. Witty, ‘more geographical and product diversity provides greater predictability and “better annuity values”’ (Andrew Jack, 2009).
GSK also gives priority to innovation and to new types of medicine. Jean-Pierre Garnier had ‘overhauled the group’s research and development systems in an effort to boost innovation’ (Andrew Jack, 2007). A. Witty, has continued this policy, in the summer of 2008 GSK announced a $25m collaboration with the Harvard Stem Cell Institute (Financial Times, 2008). Stem Cell is a scientific field that is expected to grow immensely with the change of US administration, and, considering GSK is trying to become less dependent on its current types of medicine, they are a promising way to pull of this strategy.
|Resources and capabilities||Characteristics|
|Tangible resources||Large size|
|Technical and scientific employees|
The company has to deal with patent expiry and the resultant generic substitutions. GSK response undertakes a range of activities, including:
• introducing innovative products into as many markets as possible
• Accelerating the process by which new products are brought to market
• increasing brand share among customers.
Generally there is open competition between firms that are in the same industry, and as time passes, initially peaceful competition develops into fully-fledged strategic rivalry. This is the case observed between GlaxoSmithKline (GSK) and Novartis in the ever-dynamic pharmaceutical industry, where the advent of new diseases encourages the need for constant research for discovering new drugs. Novartis employs several strategies in order to stay ahead of competition.
Their `diversity and inclusion approach’ enhances the business by serving the needs of individuals from different cultural backgrounds, which is necessary considering Novartis being a global organization. However, GSK leads in this area since consumers recognize it as the market leader in healthcare products.
Novartis also ensures open communication and aims to view patients as the center of operations, acknowledging that there is nothing more important than the consumer, and so also the safety of their products (Marn & Rosiello, 1992). GSK on the other hand has a wide range of innovative medicines since it is committed to empowering people to do more and live a better life.
The rivalry in the Pharmaceutical industry is heightened by the ever growing research for new products and the need for intense research; they consequently compete for the best manpower for R&D (Tomlinson, 2008). Novartis is a major player in this field, by looking after the welfare of employees it attracts top expert personnel and ensures the company and their environment motivate employees. With this in mind GSK has taken steps to maintain its competitive edge, giving employees opportunities for personal and professional development, and encouraging their health and well being (as is evident with the Energy for performance programs).
Novartis outsources pharmaceutical research to Institutes of Biomedical Research (NIBR), which are placed globally; with a head office is in Cambridge, Massachusetts. This enables scientists to get the real time data from local areas and helps solve problems in these vicinities with necessary assistance from head office. This is in line with Novartis’ mission to “discover, develop and successfully market innovative products in order to prevent and cure diseases.’’
Novartis strives to make alliances with companies with a common vision of success through mobilizing the best resources and manpower available worldwide. Close collaboration with these companies is crucial for achieving success in the research of new products that benefit consumers. These alliances help Novartis to upgrade and improve in areas where it is deficient. GSK has also not been left behind in this respect, it has collaborated with Harvard stem cell institute (Andrew, 2008) in order to stay abreast with the growing Stem cell scientific field.
Grant, R. 2008: “When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit”.
Though predicting reactions is not easy, possible responses from GSK (strategic interaction) should Novartis makes these changes in its operations include:
GSK has shown that it is taking the sector of corporate social responsibility very seriously, as it is constantly trying to show a good image to the public. Furthermore, it has far to go to lessen its dependence on the “white pills” market in western countries and has given large amounts to new medicines and ways of healing. These are very important steps towards maintaining its position as a leading force in the pharmaceutical industry. GSK has also been quick to grasp market share in the developing countries of Asia and Africa, realizing that they contain vast market potential. GSK has a clearly formulated and precise strategy, and its short and long term goals appear sensible. However, their strategy could be more straightforward regarding how it implements this strategy, and should aim to have more immediate results. For example, it could set higher goals for market penetration in some developing countries.
(Lombard street research)
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