GlaxoSmithKline plc in China - Essay Example

? Ethical issues faced by MNC in the international business arena of the of the Number Introduction GlaxoSmithKline plc, established in 1935, is a British multinational corporation which is headquartered in Brentford, United Kingdom. Working along with its subsidiaries, the company is mainly engaged in developing, manufacturing, and production of pharmaceutical products, over-the-counter medicines and health related consumer products all over the world (Yahoo finance, “GlaxoSmithKline plc (GSK)”). The company ranks 46th among the 500 companies listed in the fortune 500 list of global companies in terms of the highest market capitalization (Financial times, “FT Global 500 2013”). Its operations are spread over 99 cities across 39 major countries all around the world. This suggests the company’s significant global presence. With the onset of globalization, expanding operations in a foreign country has become a primary strategy followed by companies in order to explore foreign country markets and consequently gain competitive advantage. GSK is no exception as they follow the same strategy in order to lay a solid foundation for the company to make business via expanding into foreign markets. Formulation or rather implementation of such strategies, alongside accruing benefits for the company, sometimes raises concerns for the company as well. One such problem that will be described in this particular essay is the ethical issue that has proven to be a cause of concern for GlaxoSmithKline while operating in the foreign market. Recently the company has been associated with certain ethical lapses while it was operating in China. The company was accused of carrying out unethical practices in order to beat the competition in the market and maximize value for the company. The following sections will involve a thorough analysis of the scenario that prevails in the host country and the ethical issues were faced by the company while it was carrying out its international operations. Following that, three alternative strategies to eliminate such practices will be explained and based upon that a recommendation will be suggested regarding the best strategy to be adopted by the company. Business environment in China China, being an emerging economy, offers a lot of market opportunities for investment to foreign companies. The country offers access to a large market thereby providing considerable savings in labor costs. This highlights the country’s huge potential for economic growth. However, having said that, precautionary measures must be taken as a huge difference in the political and cultural environment prevails in China that might prove to be risky thereby posing uncertainties for foreign investors (Fogel, “Business environment in china: Economic, political, and cultural factors”). Economic environment China has been known to be the most favorable destination for foreign direct investment in the recent past. The country has shown a very stable economic growth which has lured top companies from all over world into investing in China. 450 out of the Worlds fortune 500 companies invest in China. Foreign direct investment accounts for 4.1% of national tax revenue, 58% of foreign trade and 27% of the value assed production. China has a huge deposit of foreign exchange reserve which helps it conduct trade related to import and export smoothly. The country joined the World trade organization in 2001 which resulted in a rapid growth in the country’s imports and exports thereby witnessing foreign direct investment of $60 billion annually in 2006. The foreign exchange reserve of China exceeded $1 trillion for the first time in the year 2006 and thereafter in 2008 the foreign exchange reserve of China totaled to $1.9 trillion (China Foreign Exchange Reserves, “US State Administration”). China is mainly engaged in the industrial exports of manufactured goods, garments, electronics and textiles. As far as China’s infrastructure is concerned, it has suffered from inadequate communication, transportation and energy resources. The country has been thriving to build a world class infrastructure since 1980. Other concerns that can be associated with China’s infrastructure are the growing corruption within the government and deterioration of the environment. Political environment China is a socialist state under the people’s democratic dictatorship. The country is led by the working class and the ideals are based on the coalition of peasants and workers. The government constitutes of the people’s congress system and the political party system which operates in accordance with the multi party cooperation and political consultation. This combination of political system works under the leadership of the Communist party of China. In the recent past the Chinese government has been associated with its heavy involvement in corruption. The government has been alleged to be involved in many acts of bribery with domestic based as well as foreign multinational companies in the recent past consequently hampering the reputation of the company. One such example is the case of GlaxoSmithKline ad its involvement in such act with the Chinese government. This essay will involve the analysis of the various aspects of such ethical lapses. According to a report published by the China political risk management, the country is considered particularly hazardous as far as political risk is concerned. The risks are associated with expropriation, confiscation, contract refutation and currency inconvertibility. Some of the many potential problems highlighted in the report are rampant inflation and currency devaluation. However, in the recent past this scenario seems to be improving which is evident from the growing rate of foreign direct investment in the country as a result of strict regulations imposed within the political system. Pharmaceutical industry in China Researchers have concluded that the pharmaceutical industry has witnessed an unprecedented level of growth over the past few years and that the Chinese pharmaceutical industry is poised for a giant leap. The country is shifting itself into a new era. The country has been following a model of high voltage growth over the last three decades. This model is undergoing a radical shift. The country’s new yardsticks upon which the growth prospect depends are resource sustainability and socioeconomic environment. The shift in the new growth model can be explained by the developments that the country intends to make in technology and innovation. China is slowly shifting its focus from the export oriented business towards a more integrated development of the country’s economy by relaxing the regulations imposed in terms allowing foreign countries to invest in the Chinese economy and therefore strengthen it. China stands at the edge of a building a modern society comprising of an increasingly affluent and growing population. Alongside the growth in the population, the demand for better services and quality of life is also increasing. Thus, it makes the government realize the immediate need for a systematic overhaul of the economic, social and financial structure in order to build a more balanced and structured society. One of the primary components of this new model that has witnessed a tremendous growth and has a huge potential as far as strengthening the country’s economy is concerned is the pharmaceutical value chain (Giniat et al, “China’s pharmaceutical industry-poised for the giant leap”). China initiated an aggressive healthcare reform plan in the year 2009 with an underlying idea of bringing all its citizens under basic medical coverage. These reforms of enhancing the health care support system influenced companies like GlaxoSmithKline to invest in the Chinese economy working alongside with its Chinese subsidiary companies. This was allowed with a view that foreign countries which are established will bring along their expertise and developments in the field of pharmaceuticals and will help the government to achieve the excellence that it aims to in this particular field. Moreover, this reform not only benefits the host country government but also helps the foreign companies to gain easy access into the host country market. The government’s underlying strategy is to restructure and integrate its drug distribution division thereby centralizing the pharmaceutical production and sales division. This will help the company to increase its sales by reducing its medicine prices and serve a wider customer base. However, recent events that took place in the pharmaceutical industry in China reflect a completely contradictory scenario to what the government was expecting to achieve. This forms the basis for evaluating the topic of issue for the purpose of fulfillment of this essay. GlaxoSmithKline in China – ethical issues faced The ethical issue under concern in this particular section is the company’s involvement in the act of bribery with the Chinese government and officials belonging from the pharmaceutical industry which led to the company facing severe consequences. The increase in the demand and supply for bribes is the reason that can be attributed towards the heavy predominance of bribery in today’s world. However, this practice has become apparently unstoppable and needs to be controlled at the earliest. This is the reason why many countries have taken initiatives to control and eliminate the system of bribery and corruption. However, this can only be achieved once the reason and the source behind this act are identified. Similar situation has been noticed during the GlaxoSmithKline scandal that took place in China. According to a report published by Reuters, GSK's drug sales fell by 61% in China in late 2013. This was primarily because of a bribery scandal that hampered its reputation and reduced its capability to sell its products in the country (Hirschler, “Bribery scandal slashes GlaxoSmithKline's Chinese drug sales”). The company’s reputation was at stake and its management team in China was left in a complete dismay by the allegations that were put forward by the Chinese police in July this year that it illegally transferred up to 3 billion Yuan ($490 million) to travel agencies in order to facilitate bribes to doctors and officials. The company was accused of using grants to promote drug products illegally. There were quality control issues as well which led to other ethical lapses within the organization. GSK offered bribes to doctors in return for promises to prescribe drugs manufactured by the company. These ethical lapses were observed because the company had an underlying objective of accruing huge profits but in the process they compromised with the quality of products manufactured thereby putting human life in jeopardy. Having done a thorough research of the ethical issues faced by GSK it can be said that there is a clear ethical issue of disjunction between the growing health needs of public and profitability of the pharmaceutical companies. GSK has suffered a severe damage from the scandal. This is primarily because of the rejections that the company faced from Doctors when they refused to accept proposals from GSK’s sales representatives regarding prescribing drugs manufactured by the company. It can be said that the bribery scandal that took place in China will increase the compliance costs of GSK and henceforth will result in a significant reduction in the company's revenue stream from China. The immoral practices conducted by GSK itself proved to be a critical factor in the failure of the Chinese health care reforms. This was one area where the Chinese Government significantly underfunded and overlooked in the light of making an economic modernization. This depleted the reforms made by the Government in the health sector and a host of bad practices came into being in the Chinese economy which was the starting point of the GSK scandal. The bad practices included extensive behind-the-door payments to doctors made by GSK to lure the doctors into prescribing products developed by the company. It also gave rise to an illegal system of payment termed as the "red envelope" or hongbao in Chinese where payments were made by families directly to doctors in order to be treated on priority basis. This practice weakened the Chinese health care reforms and was the trigger point of the GSK scandal. In the onset of the GSK scandal, it will eventually be a letdown for the Chinese health care reforms; however, this event was necessary as it will prompt the government to take proper initiatives to ensure the stability of the Chinese health care reforms which serves as a medical insurance provider to most of the Chinese population (Shobert, “Why Glaxo’s China scandal needed to happen”). The ethical issues faced by GSK because of its involvement in bribery and corruption have significantly hampered the growth prospects of the company. The above ethical lapses that were witnessed suggests that there is a absolute lack of transparency between the company and the public in general which is one of the most crucial factors that contributes towards the success of a company (Kassirer 1-2). The management has to formulate and implement certain strategies which will be directed towards eliminating such ethical issues and practices that are being carried out within the company resulting the company's downfall. GSK-SWOT analysis Sir Andrew Witty, Chief Executive officer of GSK, has stated that pharmaceutical industry in today's world is very dynamic and complex in nature. The companies that belong in this industry face various sorts of unprecedented challenges. The management officials of these companies are always under the pressure exerted by healthcare providers, regulatory issues and patent expiries. Factors like these have resulted in lower growth and high risk factors that GSK was exposed to (GSK, "Annual Report 2011"). A detailed SWOT analysis will help us gain an in depth knowledge of the company’s businesses and operations (Market research, "GlaxoSmithKline plc (GSK) - Financial and Strategic SWOT Analysis Review"). In accordance with that, a relation will be drawn with the ethical issues that the company has faced recently. Thereafter, with the help of the outcome drawn from this analysis, alternative strategies can be formulated in order to eliminate occurrences of future ethical issues that might deteriorate the company's performance. Strength The primary strength that can be associated with GSK's business is that it operates in a highly regulated international as well as domestic environment. The top quality products manufactured by the company are protected by patents prevents any sorts of competition in terms of moving in and stealing sales. Thus, the company is able to generate enormous stream of high-margin cash flows (Yahoo finance, "A SWOT Analysis Of AstraZeneca Plc And GlaxoSmithKline plc"). Ranking amongst the top 5 largest pharmaceutical companies, its significant worldwide presence has helped the company to serve a huge customer base. The company has strength of over 97000 employees directed towards achieving a common objective and that is to bring about significant reforms in the healthcare system all over the world. The company's underlying strength has been their strong focus in the research and development division as well as in exploring new markets. The company has reported consistent strong sales over the last few years until recently when it reported a sharp decline in sales because of its involvement in a bribery scandal in China. The company has a good marketing infrastructure and a strong management team that has been able to effectively implement and execute strategic priorities, life cycle management strategies and business fundamentals. Weakness GSK has reported an expected modest growth of 7.7% in its earnings per share from its business in the year 2014 (Yahoo finance, "A SWOT Analysis Of AstraZeneca Plc And GlaxoSmithKline plc"). This estimate might be because of the fact that recently the company has been associated with controversies related to drug safety issues and side effects which has severely hampered the company's image in the global market. In addition to that, patents of a number of bulk-buster products developed by the company have expired. The company’s weakness also lies in the existence of certain officials who are directly or indirectly associated with unethical practices being carried within the organization. This is the evidence of a bad organizational culture that prevails within the company and has proven to be detrimental to the success of the company. Opportunities Due to a growth in the economy of the emerging markets, more and more people are being lifted to the middle class. Thus, it opens a whole new market filled with potential customers for GSK. It can be said, if GSK can be successful in restarting its operations, it can ensure a steady growth in its earnings at least for the next decade or so. Moreover, the company's expansion into the antibodies and biologics segment will also enhance their opportunities of maximizing value for the company. The changes in laws that are being made are completely supportive towards health care and thus this will provide prospective opportunities to GSK in order develop their business thereby setting a new benchmark in the field of pharmaceuticals. The company's potential to expand in emerging markets is can also be identified as an opportunity. The company has very strong cash and assets position which is very good position to be in considering the huge expansion plans of the company. The company also has effective strategic agreements with pharmaceutical companies all over the world which will help to stimulate its research. Threats In July this year, shocking news came into light when GSK revealed to the market that some of the company officials were involved in unethical practices that included bribing doctors in China in order to influence them into prescribing medicines manufactured by the company. Because of this fact, the company reported a severe disruption in its business operations. Following this event, the company's sales slumped by 61% which deteriorated the company's financial performance significantly. Alongside that the bribery scandal smudged the reputation of the company in the international market following the company might face an obstruction while building trust relationships whenever they plan to expand into another country. Other threats that the company is exposed to are the risk of designing products which might be unsuccessful, stringent regulatory environment in foreign countries where the company already exists or is planning to expand to. Alternative Strategies to consider for the issue Strategy 1: Examining the ethical climate Organizations are always composed of cultures and GSK is no exception to this case. GSK has a well developed organizational culture. However, recent events that occurred have contradicted the above statement. Keeping that in mind, the company needs to monitor the culture that prevails within the organization very closely. They need to prepare a checklist having questions such as what are the norms of behavior. What is valued within the organization the most? They should emphasize on the fact that whether the employees are being rewarded for succeeding by any means and at any cost? What pressures does the employee face which influences them to commit misconduct? What are the situations that prevail within the organization forcing good people to make bad decisions? GSK should try their level best to obtain the answers to these questions as this well help them to assess the ethical environment that exists within the company thereby helping the management to initiate necessary actions. Pros and Cons This strategy will prove to be advantageous for the company in a sense that GSK will be able to do an in depth assessment of the company's ethical lapses and thereafter formulate necessary strategies. However, this process is time taking and might be inefficient as the company has to talk to each and every employees and management officials in order to be able to do a correct assessment of the scenario. Strategy 2: Build a self sustaining robust ethical structure The management has to formulate a strict code of conduct and has to ensure that this code is being followed by each and every official involved within the organization (Rossouw 5-9). In order to achieve this transparency, an effective communication has to be established between the management and the employees. GSK should set up a committee comprising of independent non executive directors who would be responsible for monitoring the fact that all systems are in place in the organization and that all the employees and management officials are complying with the code of ethics. Pros and Cons The pros associated with this strategy are that an effective monitoring can be done with the help of an independent committee. A strict framework can be formulated which will ensure that further ethical lapses does not occur. However, on the flip side strict regulations being imposed might obstruct certain operations and dissatisfy employees. Strategy 3: Incorporate ethical conducts into corporate systems GSK needs to define their position as an ethical business conducting company. They should convey their employees and customers with a written pledge explaining their core values and beliefs. They need to justify what they define as being right, fair and good. The company needs to design training programs in order to train their employees regarding ethical responsibilities (Tuan 547-560). They need to provide guidance and support to the employees. In addition to that, GSK will have to implement robust systems that will measure the effectiveness of the ethical initiatives taken by the company (Ethics, "Ten things you can do to avoid being the next Enron"). Pros and cons This strategy is highly efficient as it will ensure a through training of the employees regarding the ethical responsibilities that they need to take. Moreover, the company will also be able to foster trust upon their employees as well their customers which will prove to be beneficial. On the flip side, this training program comes with certain cost that the company needs to bear. Recommendation Having done a thorough analysis of the above strategies, strategy 3 seems to be more appropriate as the company will be able to impart quality knowledge among the employees regarding the ethical responsibilities that they need to undertake. Alongside that the company can also convey its core values and beliefs to both its customers and employees thereby building a trust relationship with them which is right now crucial factor considering the smudged reputation of the company due to the events that occurred in the recent past. Implementation and Conclusion In order to implement the strategy, the company needs to establish an effective communication system between the management and the employees in order to be able to convey its objectives clearly. Thereby proper training programs should be designed and every employee must be encouraged to participate in the training programs. GSK management also needs to monitor the performance of the employees in those training programs and how they are responding. The management should also evaluate the post training performance and response of the employees in order to assess the effectiveness of the training program. They also need to monitor the employees who are and who are not complying with the ethical conduct. Strict steps should be taken against non complying employees. If all these steps are followed properly, then the company will surely be able to reduce the chances of ethical lapses occurring within the company. Works cited Ethics. "Ten things you can do to avoid being the next Enron." Ethics Resource Center, 2012. Web, 16 November, 2013. Financial times, “FT Global 500 2013” The Financial Times Ltd 2013, 2013. Web, 16 November, 2013. Fogel, Georgine K. " Business environment in china: Economic, political, and cultural factors." Lawrence Technological University, 2010. Web, 16 November, 2013. Giniat, Ed, Peter Fung, Andrew Weir and Norbert Meyring. “China’s pharmaceutical industry-poised for the giant leap.” KPMG, KPMG Advisory, July 2011. Web. 15 November, 2013. GSK. "Annual Report 2011." GSK, GSK, December, 2011. Web. 16 November, 2013. Hirschler, Ben. “Bribery scandal slashes GlaxoSmithKline's Chinese drug sales.” Reuters, Thomson Reuters, October 23, 2013. Web. 15 November, 2013. Holland, Tom. “Nothing uniquely Chinese about Glaxo bribery case.” SCMP, South China Morning Post Publishers Ltd, August 1, 2013. 15 November, 2013. Kassirer, Jerome. P. Pharmaceutical ethics? Open Medicine 1.1 (2007): 58-59. Print. Market research. "GlaxoSmithKline plc (GSK) - Financial and Strategic SWOT Analysis Review." Market research, April, 9 2013. Web, 16 November, 2013. Rossouw, Deon. The ethics of corporate governance: Crucial distinctions for global comparisons. International journal of Law and Management 51.1 (2009): 5-9. Print. Shobert, Benjamin. “Why Glaxo’s China scandal needed to happen.” CNBC, CNBC LLC, July 30, 2013. Web. 15 November, 2013. Tuan, Luu Trong. Corporate social responsibility, ethics, and corporate governance. Social responsibility journal 8.4 (2012): 547-560: Print. Yahoo finance. "A SWOT Analysis of AstraZeneca Plc And GlaxoSmithKline plc." Yahoo November 14, 2013. Web, 16 November, 2013. Yahoo finance. “GlaxoSmithKline plc (GSK).” Yahoo, 2013. Web, 16 November, 2013. Read More