Glaxo Smith Kline's Business Strategy - Case Study Example

Glaxo Smith Kline (GSK) - Case Study. Introduction Business strategy is defined as the "totality of management decisions" (Bennett 1999, p. 3), that "integrates an organisation's major goals, policies, and action sequences into a cohesive whole." (Mintzberg et al. 1999, p. 5). Mintzberg et al. extend their definition of a "well formulated strategy" to include the marshalling and allocation of resources "into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment and contingent moves by intelligent opponents" (Mintzberg et al. 1999, p. 5). According to Johnson et al. strategy is "the direction and scope", "over the long term", and, which "achieves advantage for the organisation through its configuration of resources within changing environment and to fulfil stakeholder expectations." (Johnson et al. 2004, p. 10). The objectives of business strategy derived from the definitions may be summarised as follows: Long-term perspective towards achieving organisational goals through action sequences and determined policies. Appraisal of strengths (internal competences), weaknesses (shortcomings), opportunities (changes in the environment) and threats (contingent moves by intelligent opponents). Fulfilling stakeholder expectations. Two of the four elements of a strategy, internal competencies and shortcomings are within the organization and can be controlled by it, if properly appraised. The other two, changes in the environment and intelligent moves by competitors are external forces, and require adoption or modification of action sequences and determined policies to achieve organisational goals and fulfilling stakeholder expectations. I. How GSK managed its strategic challenges and strategic changes Glaxo Smith Kline (GSK), one of the largest companies operating in the "technically innovative" and highly competitive "global market" pharmaceutical industry. (Lynch 2006, p. 191). In the pharmaceutical industry, obsolescence is a constant challenge and companies are required to constantly replenish old drugs, which means that the research and development 'pipeline' should be kept flowing. The development of a single new drug is estimated to cost up to $ 500 million and takes several years. However once developed a new drug has patent protection which means the company that developed the drug can have exclusive marketing rights for a period of (generally) ten years from the time the patent is registered. The drugs are marketed to customers - as doctors, hospitals and government health agencies through large sales forces. Companies employ several thousand specialist sales personnel in North America alone. All these operations require large financial outlays. Therefore organisational size does matter as revenue generation normally corresponds to size. According to Michael Porter, five external forces impact businesses. They are industry competitors, potential new entrants, substitutes, suppliers and buyers. (Porter 2004, p. 4) He offers three generic strategies to meet the challenges of these forces: cost leadership, differentiation and focus (Porter 2004, p. 35). While questioning some of the premises on which Porter based his theory, in a provocatively titled box, "Bye, Mr. Porter", (Whittington 2001, p. 67), Whittington proposes three strategies for companies to achieve growth: they are innovation, diversification and internationalisation. (Whittington 2001, p. 73). As we have seen innovation is an intrinsic factor that is necessary for survival in the pharmaceutical industry, diversification implies diversification, integration and takeovers. During the nineties many pharmaceutical companies have taken the 'mergers and acquisitions' route to augment their competitiveness and enhance financial outcomes such as revenue generation and profitability by: Increasing and consolidating organizational size for Achieving economies of scale and reducing costs Complementing/extending ranges of products and services Replenishing the research 'pipeline" Extending geographical reach (globalisation or internationalisation) Entering newer business areas The rationale of large companies increasing their size is not always supported by results. Thus after the merger of Hoechst (Germany) with Rhone-Poulenc (France), the combined entity, Aventis reported a meagre 13% increase in annual profits between 1999 and 2000. The company's profitability was one of the lowest, although typical for the industry but achieved as much cost saving as possible. On the other hand, Pfizer-Warner-Lambert reported 27% increase in annual profits between 1998 and 1999, whereas GSK reported 29% increase in 2001 over the preceding year's combined profits of Glaxo Wellcome and Smith Kline Beecham, which merged to form GSK. While appreciating that Pfizer's increase in profits resulted from the successful introduction of a new product, analysts are sceptical about GSK's sustained revenue growth. (Johnson & Scholes 2004, p. 956). The following table summarises the ethical drug sales (in $ million) of top six drug companies post mergers in 1998: Company Total Sales US Sales Rank European Sales Rank GSK 21,227 9,504 2 5028 2 Pfizer (with Warner Lambert) 17,834 11,435 1 3,170 6 Aventis 15,172 12 5,526 1 Merck 12,840 6,076 4 1,864 10 Astra Zeneca 11,876 5,519 5 3,422 3 Bristol-Meyers Squibb 10,368 8,393 3 2,926 5 Adopted from Johnson & Scholes 2004, p. 957 The components of GSK, Glaxo Wellcome and Smith Kline Beecham have evolved over the years resulting from a series of mergers since their inceptions in late eighteenth century. The combined entity had a turnover of m 46,450 in 2006, of which 50% was from the UK. (GSK website). Yet in the 80s and 90s Glaxo, as it was then known, had to rely on a single blockbuster anti-ulcer drug Zantac that accounted for 44% of its sales and 50 % of its profits. The company then faced two threats; one Zantac was about to run its patent course by 1997 and two Astra launched another and more powerful anti-ulcer drug, Prilosec. As it would take years to develop new drugs to be of any immediate use to meet the challenges, Glaxo acquired Wellcome for US$ 13.5 billion, which brought in a range of new drugs, which included anti-AIDS and other antiviral drugs. Glaxo also purchased the US company Affymax which had a whole range of genetic products with a lot of future potential. The merger of the companies resulted in rationalising with saving of 3000 jobs in production, 2600 jobs in sales and marketing and 1860 jobs in R&D with resulting cost savings of US$ 1 billion, while on the negative side, Wellcome's top selling drug Zovirax was about to runt out of its patent course by 1997. Ironically for the American company, Smith Kline, the introduction of Zantac upstaged its blockbuster anti-ulcer drug Tagamet. Smith Kline then merged with another British company Beecham and the new entity that emerged as Smith Kline Beecham invested heavily through the 1980s to develop a number of drugs in the therapeutic categories of antibiotics, ante-depressants, anti-diabetics and vaccines. As some of its drugs are directly sold to the consumers, the company had a higher profitability than many others in the industry. A merger of the two companies would have been ideal in that it would have augmented its resources, complemented their product ranges, reduced costs by bringing down redundant staff, but a move in 1998 fell through because of cultural incompatibilities between the two companies and on the question of management controls. The final merger of the two companies in 2000 after some senior managers retired, helped the combined entity to plough in US$ 4 billion into R&D in 2002 and save US$ 750 million in annual costs - more than envisaged and deploy 7500 sales personnel in North America. The company has a strong presence in Europe accounting for 49% of its turnover, the USA 30% and the remaining 21% from the rest of the world. The company has presence in several therapeutic segments with respiratory accounting for 27% of its turnover, central nervous system 20% and anti-viral 14%. The company faced two challenges as it entered the new millennium: many products running out of paten life and drying up of the research pipeline. As drugs have to go through various phases of stringent controls and tests it would be several years before a new drug emerges for sale. The first task the new chief executive who took over in 2000 was to pursue a vigorous programme for augmenting the company's research facilities. He brought in Tachi Yamada as the research director and set up seven autonomous multidisciplinary centres of excellence for drug delivery (CEDD) in Europe and the USA with not more than 300 scientists in each and with fewer layers in the hierarchy for faster decision-making. As the company saw its turnover on the rise over the years the results from the R&D units is encouraging with a number of drugs in the pipeline. II. What are the useful lessons if any companies outside pharmaceutical industry sector can draw from the strategies used in this, the pharmaceutical industry The pharmaceutical industry operates in a "technically innovative" and highly competitive "global market". Both these features it shares with other mass consumption, high technology industries such as information technology and telecommunications. It has certain unique features, prominent among them being that it is one of the most regulated industries; and that the products are (generally) not sold directly to the consumer. But it also shares certain features with many others including the high-technology industries mentioned above. They are innovation, diversification and internalisation to meet challenges in the market place. GSK has demonstrated that investing in R&D (innovation) pays rich dividends. Its mainstay in 1980s and 1990s was a single innovative product that delivered 45% of its sales and 50% of its profits. The American company Smith Kline with its Tagamet earlier enjoyed this market. But obsolescence caught up with both the products - with Zantac upstaging Tagamet and Prilosec upsetting Zantac's apple cart - and the companies suffered. Therefore the two companies saw synergies in a merger. The combined entity was able to make substantial investments in research. GSK's R&D budget in 2002 was US$ 4 billion. Glaxo's earlier acquisition of Wellcome and Affymax the US company involved in genetic research was both to add synergies and with a vision for the future. The genetic products if successful would be truly revolutionary. One of the lessons that can be learned from the GSK merger is the compatibility of cultures. In 1998, both Glaxo Wellcome, the British pharmaceutical giant and the American mid-sized company Smith Kline had similar needs to merge and both were aware of the synergies that such a merger could create. Yet they were unable to merge because of cultural incompatibilities. The style of negotiation itself was a contentious issue. The differences were so stark that it was said, during negotiations, the two teams did not even have lunch together. The second stumbling block was to decide the roles that senior managers would play in the merged company. Each new merger in the pharmaceutical industry intensified the pressure on others to consolidate. In spite of this, the negotiations between the two companies were stalled and they could not strike middle ground till some senior managers retired. According to Ireland et al. there are six components of strategic leadership that help organisations navigate the choppy waters of the twenty-first century businesses: they are determining the firm's purpose or vision, exploiting and maintaining core competencies, developing human capital, sustaining an effective organisational culture, emphasizing ethical practices and establishing balanced organisational controls. (Ireland et al. 2005). Even after merger the company faced the two main challenges. The company made heavy investments in R&D. On the other hand profits dwindled because of products going out of patent and facing generic challenge and the 'pipeline' was drying up. This called for leadership with vision, which the company has fortunately had. The new CEO who took over in 2000 reorganised the R&D by creating a new vibrant research wing. A large organisation would have been slow and bureaucratic. He observed that in contrast the small bioengineering firms have been more successful. He therefore created the autonomous centres of excellence drug discovery (CEDD). To overcome bureaucratic inertia of large firms, each of these multi-disciplinary teams was restricted in size not to exceed 300 members, autonomous and had its own budgets and finance directors. Therefore they were able to take decisions that would take other companies two years, in six months. This revamping of the R&D department is likely to pay dividends in the future as all new drugs would have to undergo rigorous test for several years and even then there could be some failures. Finally, although GSK is strong in large pharmaceutical markets like Europe and the USA and in certain therapeutic segments, the company's total market share is just 7%. This might have a lesson for other industries in that size or market share alone may not be the criteria to determine success, but profitability and their presence in large markets is. III. Levitt's assertions about the reasons for increased internationalisation In his famous article "The globalisation of markets" (cited in Lynch 2006, p. 179) Theodore Levitt argues for an international approach to businesses. According to Levitt, the process of globalisation would outweigh the difference in culture, language and taste. He bases his arguments on the following premises: Price competition is more important and persuasive for customers. It is possible to change national tastes if prices are low enough. Globalisation will emerge from a standardization of products and services. Tariffs and quotas will not protect national industries against international attack. Major economies of scale are possible and will lead to international price competition. Global branding is possible and meaningful to customers. (Cited in Lynch 2006, p. 179) In many industries including pharmaceuticals, businesses are becoming global. However it is necessary to seek similarities between customers of various nationalities when a business seeks to reach across cultures. In his classic 1960 article, "Marketing Myopia", Levitt argued that companies should focus on serving the customer rather than on delivering a product based on distinctive competence. What Levitt was advocating was that businesses should constantly innovate and adapt to changing customer preferences not only in the products they offer but in the marketing practices as well (cited in Ghemawat, 2002). He continues in a similar vein, when he argues about businesses becoming international. Some of Levitt's arguments are unexceptionable. For e.g., no one disputes that, under certain conditions (see differentiation strategy, which is very relevant to the pharmaceutical industry, discussed below), "price competition is more important and persuasive to customers" or "major economies of scale are possible and will lead to international price competition" or "global branding is possible and meaningful to customers" or "globalisation will emerge from a standardization of products and services". At the same time it may be too simplistic to argue "it is possible to change national tastes if prices are low enough" or "tariffs and quotas will not protect national industries against international attack." As an example, we may quote Wal-Mart's aggressive selling tactics being counterproductive in countries like Germany, in spite of aggressive pricing or the low fare airlines not being able to make much headway in countries like Germany and Belgium where rail travel is indirectly subsidized by the government in the form of building infrastructure facilities. Differentiation strategy: In his differentiation strategy, Porter argues that if a company can develop a product or service that offers unique attributes valued by customers and perceived by customers to be better than or different from the products of the competition. The additional perceived value allows the company to charge a premium for the product or service, the additional price setting off the extra costs incurred in adding unique value to the product or service. Companies that seek to use the differentiation strategy have the following inherent strengths: Access to high technology and research Highly skilled and creative product development team. A strong sales team capable of communicating the product's uniqueness to the customer. An organizational reputation for quality and innovation. (Porter 2004, p. 35). While there may be numerous advantages in operating internationally, it is necessary to stay focused on customer preferences. Kotler describes a study by the Stanford researchers Collins and Porras, which they published under the title Built to Last. The researchers identified two companies each in eighteen industries and designated one as a 'visionary company' and the other as a 'comparison company'. Visionary companies (e.g. General Electric, Hewlett-Packard and Boeing) were the recognised industry leaders: they set ambitious goals, communicated the goals clearly to their employees and most important they had a higher purpose other than making money. They outperformed the comparison companies (e.g. Westinghouse, Texas Instruments and McDonnell Douglas) by a wide margin. The visionary companies had three common features. First, they held a distinctive set of values from which they did not deviate. IBM's values included respect for the individual, customer satisfaction and continuous quality improvement. Johnson & Johnson believes that its first responsibility is to its customers, its second to its employees, its third to its community and its fourth to its stockholders. The second common feature these companies had was they expressed their purpose in enlightened terms. Thus Xerox wants to improve office productivity, Monsanto wants to end hunger in the world. According to the researchers the core purpose of a company should not be confused with its business objectives or product list. The third common feature of the industry leaders is that they have developed a vision for the future and worked to implement it. Thus IBM is now working to establish leadership as a network-centric company and not simply as a leading software manufacturer. (Kotler 2004, p. 69) IV. Report about skills and experience gained from the case study The study of GSK has valuable lessons for the student of strategic management: They are: Business strategy has a long-term perspective. Some of the initiatives undertaken by GSK such as restructuring its research and development activities have yet to show positive results as in 2005 when Lynch prepared the case study. But the CEO was optimistic about the results. Strategy aims at achieving organisational goals, by marshalling resources and scanning the environment to deliver value to stakeholders. GSK found that the triumph of its blockbuster drug Zantac, which upstaged SKF's Tagamet is not permanent. The launch of Prilosec by Astra was a potential threat. Strategy should focus on internal and external factors with a view to foresee outcomes - in short develop a vision. It is not about reacting after the event. Development of strategy may take many forms but mergers and acquisitions are aimed at increasing size, of outlays, facilities and extending geographical reach. Glaxo-Wellcome's sales force was inadequate to cover the USA the largest pharmaceutical market in the world. With the merger and formation of GSK the company could deploy several thousand specialist sales persons in the US. The strategy also enlarged the company's product range into many therapeutic areas. Business strategy calls for constant innovation. Yesterday's successful formulae may no longer be valid. GSK is hopeful of launching truly revolutionary drugs in the field of genetics after the acquisition of the US company, Affymax. Bibliographic References: Bennett, Roger. (1999). Corporate Strategy (Second Edition). Harlow. Financial Times Prentice Hall - Pearson Education Limited GSK History Accessed April 17, 2007 from: http://www.gsk.com/about/history.htm. Ghemawat, Pankaj. (2002). How Business Strategy Tamed the "Invisible Hand." Harvard Business School. Working Knowledge for Business Leaders. July 22, 2002. Retrieved April 17, 2007 from: http://hbswk.hbs.edu/cgi-bin/ Ireland, R. Duane, and Hitt, Michael A. (2005). Achieving and maintaining strategic competitiveness in the 21st century: The role of strategic leadership. Academy of Management Executive. Nov 2005. Vol. 19 Issue 4. pp 63-77. Retrieved April 18 2007 from: http://search.epnet.com/login.aspxdirect=true&db=buh&an=19417908 Johnson, Gerry & Scholes, Kevan. (2004). Exploring Corporate Strategy (Sixth Edition). New Delhi. Prentice Hall Of India Private Limited. Kotler, Philip. (2004). Marketing Management. (Eleventh Edition) New Delhi. Pearson Education (Singapore) Pte. Ltd., Indian Branch. Lynch, Richard, (2006). Corporate Strategy (Fourth Edition) London. Financial Times Prentice Hall. Mintzberg, Henry., Quinn, James Brian & Ghoshal, Sumantra. (1999). The Strategy Process (Revised European Edition). Harlow. Financial Times Prentice Hall - Pearson Education Limited Porter, Michael E., (2004) Competitive Strategy - Techniques for Analyzing Industries and Competitors. New York. Free Press, A Division of Simon & Schuster, Inc. Whittington, Richard. (2001). What is strategy - and does it matter (Second Edition). London. Thomson. Read More