The Global Pharmaceutical industry: swallowing a bitter pill case study - Essay Example

? Business strategy Section A – answer both parts of the question as relevant to the ‘The Global Pharmaceutical industry: swallowing a bitter pill’ case study 1a. How relevant do you think the Five-Forces Framework map is to identify environmental forces affecting the global pharmaceutical industry? Justify your answer The Five Forces Framework of Porter defines the forces that usually affect the performance of firms worldwide. The above framework promotes the idea that all organizations are expected to face at least one of these forces in their daily operations. The approaches used in the literature for explaining the relevance of the Five-Forces Framework are differentiated, as analyzed below. For the pharmaceutical industry, as for other industries, the use of the particular Framework can be valuable for understanding the potentials of a firm to stabilize its performance. According to Ahlstrom and Bruton (2009) the effects of the forces analyzed in the Five-Forces Framework are differentiated in the pharmaceutical industry because of the following reason: the profits of this industry are likely to be continuously increased, a phenomenon which is not common in other industries (Ahlstrom and Bruton 2009, p.131). Reference is also made to the following example: ‘the forces of the Framework that restrain profitability are stronger in other industries compared to the pharmaceutical industry’ (Ahlstrom and Bruton 2009, p.131). These forces would not be indicators of performance for pharmaceutical firms, while for other firms their role would be significant. On the other hand, Hitt et al. (2010) note that firms in the pharmaceutical industry have to face the following problem, which is common in all industries: ‘their suppliers can become competitors’ (Hitt et al. 2010, p.50). It is explained that the above problem has become severe in the pharmaceutical industry where firms that have been participated in the industry just as suppliers have become key industry players, after ‘acquiring distributors or wholesalers’ (Hitt et al. 2010, p.50). The ‘new entrant’ and the ‘substitute products’ parts of the Five-Forces Framework can help firms in the pharmaceutical industry to identify early such trends and develop appropriate measures for securing their position towards their new rivals. At this point the following fact should be highlighted: the Five – Forces Framework is not applicable only on firms operating in industries with specific characteristics; it can be also used for the evaluation of a whole market, as in the case of China (Festel 2005). Indeed, up to the late 1980s the Chinese pharmaceutical industry was quite weak, not being able to support effectively the national economy, nor to respond to the needs of people across the country (Festel 2005). The use of the Five Forces Framework for analyzing the Chinese industry has helped Chinese managers to identify the weakness of the particular market and promotes plans for their elimination. The Five Forces Framework refers to a series of factors that influence the environment of each organization. However, the potentials of an organization to control its factors are not rejected (Frey 2005). In fact, it seems that each firm is able to change the conditions in its environment, more or less; such initiative would result to the enhancement of the organizational performance but only under the term that the organization involved could respond to the demands of such plan (Frey 2005). Particular emphasis should be given on the management of change within the particular organization. If managers are proved to be unable to promote change across their department, then the organization’s plans for influencing its environment would fail. In other words, the Five Forces Framework can support the efforts of an organization to influence its environment, but the success of such initiative would require the high support of the members of the organization, i.e. the employees (Frey 2005). Organizational environment can be changed, using the Five Forces Framework, but it is necessary that, at least, certain of its elements are supportive to such plan. For firms in the pharmaceutical industry similar assumptions can be made. The particular industry offers to its firms a significant advantage, compared to other industries in the global market: academics and researchers worldwide have extensively explored the pharmaceutical industry (Roy 2011). The value of this industry, in terms of its contribution in economies internationally, is possibly a reason for this phenomenon. Moreover, the specific industry is part of a critical sector: the health services sector. Therefore, management decisions in pharmaceutical industry can have significant effects, in the short or the long term, on health (Roy 2011). The use of Five Forces Framework can help the industry’s firms to measure not just their performance but also their ability to keep the quality of their products standardized, an issue that highly concerns people around the world. According to the above, the Five Forces Framework has a critical role in enhancing the performance of firms in the pharmaceutical industry. However, the use of this Framework by the industry’s firm is based on different criteria, compared to firms of other industries. More specifically, firms operating in the pharmaceutical industry are likely to be organized in strategic groups. Hill and Jones (2011) note that two are the major strategic groups of this industry: the first group incorporates firms that highly emphasize on R&D; firms like ‘Pfizer and Eli Lilly’ (Hill and Jones 2011, p.66). These firms focus on the continuous increase of profits, through investing high amounts on the development of new drugs of increased potentials (Hill and Jones 2011). The above strategy is quite risky, as the profit achieved may be lower than initially estimated, a fact that results to financial losses for the organization involved (Hill and Jones 2011). For example, launching a new drug can cost to a firm up to a ‘$800 m in R&D’ (Hill and Jones 2011, p.66), an amount, which is quite high, especially if taking into consideration the market pressures. Indeed, using the Porter’s Five Forces Framework, the risks of the pharmaceutical firms of the above category would be reduced; indeed, through this framework, pharmaceutical firms would be able to estimate the influence of substitute products, meaning especially the generics (Case Study), on their expected profits. In this way, the can decide when they should reduce the investment made on a particular drug. The pharmaceutical firms focusing on the production of generic drugs belong to the second, major, strategic group of the pharmaceutical industry (Hill and Jones 2011). These firms focus on keeping production and operational costs low (Hill and Jones 2011). These firms would use also use the Five Forces Framework for enhancing their performance; the particular framework would help these firms to evaluate their competitors more effectively and to identify early whether there is chance for their suppliers to become competitors, as explained earlier. In fact, it seems that the pressure from suppliers is a major problem for firms in the pharmaceutical industry. Shein (2011) notes that the Five Forces model can help all industry’s firms to check whether there is any threat from their suppliers, since, in the specific industry the transformation of suppliers to competitors is a common phenomenon (Shein 2011, p.37). Also, as noted in the case study, the challenges that firms in the pharmaceutical industry have to face are many; the need for high amounts for supporting appropriate R& D schemes is just an example of the specific problem. For this reason , the industry analysis, using the Five Forces Framework, would be necessary for firms in this industry, as it could help to control their exposure to market risks. 1b. Using a range of case study evidence or other examples evaluate whether these forces differ by industry sector and discuss where you would place the different sectors in the industry life-cycle? As already noted above, the effects of the Five Forces Framework on firms of the pharmaceutical industry are different compared to the framework’s effects on firms of other industries. Apart from the increased level of these firms’ profitability, as highlighted by Ahlstrom and Bruton (2009), in the previous section, there are also other factors that can result to differences among the environment forces developed in industries worldwide. For example, Conklin (2006) notes that firms may not face the same pressures in the context of the international market since industries worldwide tend to have different structures; reference is made not just to the regulations of each country, but also to the power of institutions to intervene in business activities (Conklin 2006). Moreover, Hill and Jones (2007) note that although the Five Forces Framework is quite effective in measuring competition, still it usually fails in presenting the current status of competition in a particular industry. More specifically, under the influence of innovation the competitiveness of organizations in all industries may change, leading to different market structures, in terms of the share of each organization (Hill and Jones 2007). From a similar point of view, Hitt, Ireland and Hoskisson (2010) claim that the Five Forces Framework may not offer an accurate view of an industry’s status, in case that the performance of all industry’s firms has not been reviewed. Indeed, for identifying the level of competition of a particular industry it is necessary to take into consideration the strategic decisions of all industry’s firms, even those of low performance (Hitt, Ireland and Hoskisson 2010, p.62). Differences can be identified in regard to an industry’s performance if it is measured by referring to all organizations and if it is measured by referring only to the industry’s top firms (Hitt, Ireland and Hoskisson 2010). In this context, the findings of research based on Five Forces Framework can be different in accordance with the criteria used for choosing the firms on which the relevant study will be based. Henry (2008) tries to make clear the potential inability of the Five Forces framework to provide accurate findings. In this context, he refers to the following example: in case that the government of a particular state has chosen a contractor for a specific project, the Five Forces framework could not help the contractor to measure the environment of the industry involved if the rules on which governmental decisions are based are not clear in the particular country. The industry sectors the performance of which cannot be accurately evaluated using the Five Forces model could not be particularly benefited through the Industry-life-cycle analysis. In the context of the above analysis, emphasis is given on the differentiation of a sector’s processes and status through the years (Jones 2009); the Porter’s Five Forces model does not serve such target. It helps to evaluate an industry’s competitiveness, in certain cases not accurately, as in its current status. Firms that are interested in understanding the competitiveness of their rivals are unlikely to wait for checking the performance of competitors in the long term. Thus, the industry-life-cycle analysis serves different organizational needs and is based on long –term observations and review of organizational performance. The Five Forces Framework offer, in a quite short period of time, a clear image of rivals’ position and potentials; it is for this reason that the Industry-life-cycle analysis could not be used as an alternative for firms that are not effectively supported through the Porter’s Five Forces framework. Section B – answer 3 questions 1. What type of action would a large company consider if it were trying to increase its innovativeness in a high-technology, very competitive industry? Discuss and justify. The particular company should primarily review its resources, if they are adequate for supporting the particular plan. Also, the side effects of the plan, in terms of the relationship between the firm and its employees, suppliers and shareholders, should be reviewed. If the cost involved is high, then the relevant investment should be made only if it is ensured that the interests of the firm’s stakeholders are not set in risk (OECD 2010). If it is proved that the expected benefits will be significantly higher from the risks involved, then the involvement of the organization in the particular initiative should be decided. At this point, the following issue appears: would the organization be able to support this plan with no external support? Due to the goal of the particular plan, i.e. the increase of innovativeness in regard to a very competitive industry, it would be preferable for the organization to seek for strategic alliances. At the same time, the acquisition of a firm operating in the high-technology sector would help the company to acquire knowledge and infrastructure that are necessary in the specific plan (Mothes 2011). However, the above plan would require important funds, which may not be currently available to the company. In this context, the organization could develop a three-parts plan: a) at the first level, the firm will seek for support in its internal (employees appropriately skilled, appropriate infrastructure), b) if the firm’s internal environment cannot provide adequate support, then, efforts should be made for developing strategic alliances, possibly under the terms of sharing the benefits involved, c) if the firm’s operations are highly profitable and it is expected that the firm will be able to cover all the plan’s costs, then efforts should be made for locating financing from financial institutions that provide such support; in this way, the firm have all benefits of the plan but also all risks. In any case, before taking any initiatives in regard to this plan, the firm’s managers should carefully review the industry’s environment, preferably by using the Porter’s Five Forces model. In this way, any potential case for new entries or substitute products would be identified early, allowing the organization to take appropriate measures for reducing risks. 2. “Good corporate parents constantly search for ways in which they can improve the performance of their businesses”. Critically discuss whether or not it is wise for corporate parents to interfere in the strategies of diversified groups of companies. Corporate parents need to monitor the activity of the group’s members, meaning the organizations that are part of the group. However, the interference of the parent company in the operations of sub-companies should be based on particular criteria. Excessive control should be avoided, since it would lead to the elimination of these companies’ cultural characteristics, which are probably related to these firms’ brand name. Also, the access of corporate parents to information, which is valuable for understanding the market conditions where a sub-company operates, can be limited; as a result, the information acquired in regard to this market will be inaccurate. The sub-company may be more effective in retrieving such information, securing its strategic choices, which can be differentiated from those of the parent company. At the same time, according to Balmer and Greyser (2003) the priorities and the interests of the parent – company can be differentiated from those of its sub-companies. For example, if managers in a sub-company decide to support a particular project for expanding organizational activities locally, the specific decision comes to opposition with the interests of the parent-company, at the level that its profits will be reduced, at least until the investment made on the specific project to be paid-back (Balmer and Greyser 2003). Good and Luchs (1996) note that parent companies often use management practices that are not aligned with the culture of the regions where the sub-companies operate. In this case, sub-companies may not accept the suggestions of parent companies for incorporating specific practices in the case that these suggestions are in opposition with the local culture; in this way, severe conflicts can be developed in the organization’s internal environment. On the other hand, Tenev et al. (2002) claim that parent companies have a strong market position that allow them to take risks, which may not be understood by managers in sub-companies; again, an issue of oppositions within the organization appears. Of course, it cannot be denied that parent companies have the responsibility, in legal and financial terms, of the group’s operations worldwide (Vandamme 1986). From this point of view, they should be allowed to make suggestions and proposals related to their sub-companies operations (Vandamme 1986). Parent companies should also have the right to monitor closely their sub-companies activities; however, their interference in the operations of sub-companies should be carefully planned, taking into consideration the issues developed above. 3. Critically evaluate the proposition that alliance strategy is ethically superior to competitive strategy because it involves cooperation and the mutual creation of value. Alliances are often used in the context of the international market as a tool for increasing firms’ competitiveness. However, their use is not always ethical. In fact, in most cases, alliances ‘seem to be opportunistic’ (Das 2011, p.15). This means that they are used, instead of competitive strategy, for improving a firm’s position towards its rivals and not for increasing the value of particular products/ services. A similar issue is highlighted in the study of Hitt, Ireland and Hoskisson (2010); according to the above researchers, the terms of alliances are not always clear, leaving gaps that can be used for violating business ethics. On the other hand, Yoshino and Rangan (1995) claim that alliances are often used as the best tool for expanding in the global market, when the firms involved, or just one of them, do not have the necessary resources for supporting the entire project. The approaches presented above seem to reflect different views in regard to the nature and the scope of business. As of its priorities, business promotes commerce as based on ethics, i.e. a view that a strategy can be legitimate and valid if it is necessary for a firm to survive cannot be accepted. Neither a view that business strategies should focus on the promotion of commerce worldwide would be considered as acceptable. The above views are aligned with the practices of most states internationally; most countries have developed integrate frameworks for ensuring the use of ethics in business operations. The punishment by the law of those who violate business ethics, as in the case of Enron, proves that for the state also business is primarily related to ethics and then to the economic interests of specific parties. Under these terms, it could be noted that alliances would not be considered as ethical for promoting competitiveness. Rather an appropriate competitive strategy would be chosen; the development of industry analysis using the Five Forces model, as analysed above, could increase the chances for success of the relevant plans. References Balmer, J., and Greyser, S. (2003) Revealing the Corporation: Perspectives on Identity, Image, Reputation, Corporate Branding, and Corporate-level Marketing: an Anthology. London: Routledge. Conklin, D. 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