The Business Growth of the Bulgarian Subsidiary - Essay Example

Running head: Effectiveness of strategy at Subsidiary level Effectiveness of strategy at Subsidiary level s Abstract: The contents of the paper comprise the case study of ACTAVIS BULGARIA EAD Sofia's strategy development and implementation. It is elaborated in the paper that strategy is not a simple concept; instead, it pertains to various economic, social, legal forces. Business organisations can only be successful by following a strategy, which is feasible according to the business environment. The paper mainly aimed at discussing the importance of strategy at subsidiary level. How strategy analysis will enhance the productivity of an organisation is also discussed. Introduction: Strategic management is the way of finding gaps in the current performance of the organisation and to design, formulate and implement new steps in order to fill these gaps and to align the organisational functions with the pre settled objectives. It is the method of aligning all the activities being undertaken in the organisation such as management, marketing, research and development and Computer information system in a prescribed way to achieve the goals of the organisation. Venkatraman and Ramanujam (1986) stated while stressing the process of strategic management, "performance improvement is at the heart of strategic management" (p. 801) There are many stages involved in the process of the strategic management. These steps are divided in to three broad categories: 1) Strategy formulation 2) Strategy implementation 3) Strategy evaluation The first step namely the strategy formulation involves the development of the business mission, evaluation of the opportunities and threats faced by the business organisation in the business, by using tools such as SWOT analysis, examining the strengths and weaknesses of the business, determining the long term objectives of the business and designing the new strategies to eke in the process of achieving the new targets. It also include the processes to determine the investment direction, the business markets to be addressed, extension of the operations of the business, limitations faced by the business in order to undertake the business activities. Strategy formulation also helps the business in deciding about the matters to be addressed on priority basis. There is not any organisation in the world which has unlimited resources. Therefore the business organisations need to evaluate which projects are important and need investment. The future of a business organisation is very much effected by the strategic decision of the management of the organisation. With the globalisation of the economy the concept of Multinational Enterprises is prevailing all over the world. An MNE is a differentiated network of internationally dispersed units, which are simultaneously embedded in two business contexts: the internal MNE and the external (host country) environment. Thus, the roles and/or strategies of subsidiaries are both shaped by and affecting these two contexts. A subsidiary has a dual role to play: it interacts with the rest of the MNE internally and with local partners externally. Firstly, while subsidiaries can benefit from knowledge flows from the rest of the MNE, they can also do so from the local partners in the host country, to enhance their level of competence and hence contribute to the overall competitive advantage of the MNE. Secondly, subsidiaries may also help or hurt their local partners during their external interactions in the host country business environment. It has been argued that the state of the economy of the host country has significant implications for the operation of the subsidiaries, and consequently for its strategy (Hunt and Morgan, 1995). Because of this the main macroeconomic concepts relating to the determination of economic activity, and related issues such as the inflation rate and the exchange rate, have been discussed in some detail. The various factors affecting the company should identify the likely impact of economic conditions on company operations; these include the effects on sales and revenues, competitive conditions and input costs (Hamermesh and Silk, 1979). In the volatile business environment of the 21st century the most important requirement of today's business is constant changing and updating with the external conditions. Change can be referred to as Internal, External, and business process re-engineering and transformation programs. The external change includes the changes in market, technology, and competitive environment, global and political environment etc. Internal changes involve the actions, which the organisation has to take in order to put up with the external changes. These include the business restructuring and the transformation programs. The well-planned strategy to undertake change combine all of the above elements in the suitable ratio to undertake the process effectively and in timely manners. On the other hand an unplanned change introduction can worsen the things rather than improving. Therefore it is important for the leaders and mangers to undertake the change activities in a strategic way to reap the fruit of change introduction in the organisation. A change project undertaken without a suitable strategy can increase the operating cost of the business without improving the operations and performance of the business. The impact of changes in economic activity on the sales of a product depends on the responsiveness of the demand for that product to changes in GNP. If competitors have not carried out analyses of GNP trends and elasticity, the company may have an advantage by being the first to take defensive action in the face of a potentially decreasing market, or by being the first to take the initiative to take advantage of a predicted increase in market size. However, if competitors do have the same kind of information at their disposal, will they not react in the same way as our company Changes in overall economic activity can affect sales, by the effect on purchasing power, and costs, by the effect on wage rates and investment costs; but potentially the greatest impact results from the competitive actions, which the changes trigger off. The real threat from ignoring changes in the economy as a whole lies in the fact that competitors who do analyse these events are likely to take pre-emptive action, leading to a loss in competitive position from which it is likely to be difficult to recover. Environmental Threat and Opportunity Profile: While it is clearly important to understand the main factors which affect the national and international economy, the range of variables is so large that it is necessary to develop a method of systemising how changes in the economic environment might relate to the company's strategy. One method of approaching this is to draw up a profile of how changes in the environment are likely to present threats and opportunities. A full environmental profile would include factors specific to the market in which the company operates, therefore at this stage only the factors relating to the economy, as a whole will be incorporated. In business environment it is necessary to use all the tools at the disposal of management to identify potentially important factors. There is no single prescribed approach, but the following framework is quite comprehensive. 1. Use the PEST approach as a checklist. 2. Apply macroeconomic ideas to economy wide influences. 3. Consider international factors both in terms of exchange rates and international competitive influences. 4. Use the environmental scanning approach to think beyond the immediate situation. 5. Put together some scenarios to help put factors into context. Build a profile of opportunities and threats. In order to plan a strategy for a subsidiary it is important to understand different pressures faced by the company at local levels. Pressures for local responsiveness Differences in consumer tastes & preferences Differences in infrastructure & traditional practices Differences in distribution channels Host Governments demand Introduction to Company: ACTAVIS BULGARIA EAD Sofia is the Bulgarian branch of the international generic pharmaceutical company Actavis Group hf. Headquartered in Iceland the Group operates in 28 countries with more than 7,000 employees. Actavis is one of the leading European providers of generic pharmaceuticals, with turnover and EBITDA in 2004 of EUR 452 million and EUR 115 million, respectively. It develops manufactures and distributes generics under its own brand name and acts as an outsourcing partner for other major pharmaceutical companies. The Bulgarian chapter of Actavis's history started in 1999 with the privatisation of three state owned pharmaceutical factories located in the cities of Dupnitca, Razgrad and Troyan. In the five-year period to 2004 all of them have been completely renovated in order to comply with the European GMP (Good Manufacturing Practice) Standards. Currently Actavis operates in the country split into two divisions - Operations and Sales & Marketing. Actavis Operations is a holding company responsible for the management of the three factories providing first class generic products, mainly for the Bulgarian, Russian, Ukrainian and CIS markets. The Sales & Marketing division is represented in the country by Actavis Bulgaria EAD, a company registered under the Bulgarian law. It employs about 200 people and operates three warehouses in the country. Actavis Bulgaria EAD is mainly focused on marketing the Group's products as first class generics on the Bulgarian market, which is the third biggest market for the company's own brand revenues world-wide. Research is a fact finding activity (Dominowski, 1980). The aim of primary research is to make known something previously unknown to human beings and to advance human knowledge by making it more certain or better fitting; the aim is discovery (Elias, 1986). Kerlinger (1970) uses more technical language to define it as the systematic, controlled, empirical and critical investigation of hypothetical propositions about presumed relations among natural phenomena. The research philosophy depends on the way we think about the development of knowledge and this thinking affects the way we do search (Saunders 2000). Whilst undertaking the research, a clear understanding of research philosophy is essential. Easterby-Smith et al (1997) identify three reasons why the exploration of philosophy may be significant with particular reference to research methodology: Firstly, it can help the researcher to refine and specify the research methods to be used in a study, that is, to clarify the overall research strategy to be used. This would include the type of evidence gathered and its origin, the way in which such evidence is interpreted, and how it helps to answer the research questions posed. Secondly, knowledge of research philosophy will enable and assist the researcher to evaluate different methodologies and methods and avoid inappropriate use and unnecessary work by identifying the limitations of particular approaches at an early stage. Thirdly, it may help the researcher to be creative and innovative in either selection or adaptation of methods that were previously outside his or her experience. Two views about the research process dominate the literature: positivism and phenomenology which have an important part to play in business and management research (Saunders, 2000). Positivism is founded on the belief that study of human behaviour should be conducted in the same way that as studies conducted in the natural sciences. On the other hand phenomenology is concerned with the understanding human behaviour from the participant's own frame of reference (Hussey and Collis, 2003). Positivistic paradigm Phenomenological paradigm Tends to produce quantitative data Tends to produce qualitative data Uses large samples Uses small samples Concerned with hypothesis testing Concerned with generating theories Data is highly specific and precise Data is rich and subjective The location is artificial The location is natural Reliability is high Reliability is low Validity is low Validity is high Generalises from sample to population Generalises from one setting to another Figure 1: Features of the two main paradigms (Hussey and Collis, 2003) As the research philosophy depends fundamentally on the research question (Saunders 2000), the phenomenological philosophy has been chosen in this paper. This choice originates from that researcher's topic/question that aimed to investigate how sufficient is information provided in annual reports for shareholders in order to make their investing decision. In this specific research, -related to the question- the author will collect data and develop a theory as a result of data analyses rather than developing a theory and test it afterwards. 6-2- Qualitative versus Quantitative primary research TECHNIQUES Qualitative techniques stand in contrast to quantitative techniques, the main difference being that quantitative techniques involve numerical data whereas qualitative techniques involve more abstract information. Data collected using qualitative techniques do not generally lend themselves to statistical analysis whereas quantitative techniques do (Veal, 1997). A mixed methodological approach will be used in this research, because mixing methods enables the insufficiencies of both qualitative and quantitative methodologies research design to be overcome and can assist with data collection and data analysis (Jennings, 2001). Documentation review is an excellent way of evaluating the industry by taking a review of the research done in the past. Lot of useful information can be obtained through this method. For the effective implementation of the documentation major objectives of the research should be identified. Research plan should be developed very carefully keeping in view the main objectives of the research. Sequence of process should be such, that the a large amount of information can be possible to obtain in a very short time span, written notes should be taken and finally written notes on the documentation review are verified. Agenda should have, review of the agenda, review of the goal of the agenda, review of the ground rules and wrap-up etc. Documentation review normally comprise of the important information from documents of similar nature relating to the field of research, so documents should be selected from the set of documents having useful information regarding the research topic. They should be selected from variety of sources such as journal article, newspaper reviews, experts interviews, information available at Internet. In the review each document should be referenced properly and the key addressed points should be summarised. In the present study, the method of case study is adopted. In this process, we focus on the case of Actavis's Bulgarian subsidiary. The strategy of the company and the effects of the economic, social and legal factors of the host countries have been analysed. Reasons of choosing the method: Case studies give a clear picture of industry's outlook. To evaluate the effectiveness of the strengths and weaknesses of the industry the evaluator develops case studies on the failure or successes of the programme. The case studies are used to organise a wide range of information, and the contents are analysed and with patterns of the data and further analysis are done with the cross comparison with other case. Organising data: the data is organised in a chronological order, on the firms, which were unable to get the desired results of their business plans. Developing a narrative: a readable story from firm's perspective should be developed such that the narration includes key information on the analysis of strategy at subsidiary level. Cross comparison: cross comparison of the information with other similar cases can be performed in order to understand the effectiveness of strategy formulation at subsidiary level for the MNEs. By doing that the study could improve its strengths and overcome the weaknesses of the recommendation presented. Others weaknesses of the paper includes: Another limitation might be lack of time. The researcher followed a hybrid approach in data collection, which included documentation review including books and web sites. Collecting data through these methods, analysing and demonstrating them is time consuming and the researcher did not have much time. There were challenges in convincing to gain access to the relevant information required within the companies I intended to research. Confidentiality has been a barrier before researchers. It is required to reassure the firm that all data and information collected will be treated in the strictest confidence. Results and Findings: This section states the findings, which were acquired by undertaking an analysis of the strategy of Actavis Bulgaria. In order to fully understand the strategy it was also important to understand the pharmaceutical market trends in Bulgaria. Market Trends: Bulgaria is regarded as a suitable destination for the producers of low-priced generics as the cost of production in the country is considerably low. The pharmaceutical market of the country is growing 15-20% annually which make her a lucrative market. The dental services provided in the country are much cheaper as compare to other European countries, which makes it a suitable destination for Dental tourism. Most of the local pharma countries are merged with the foreign players; still there are opportunities to undertake acquisition with some of the companies in order to gain a foothold or to sustain in the Bulgarian market. The country is also an opportunity provider for the repackaging and re-labelling of pharmaceuticals/medical devices. Bulgaria was one of the first countries in Europe and the world to institutionalise drug regulation and control. Quantitative Analysis of Bulgaria as Pharmaceutical Destination: 36.5 doctors per 10,000 people in Bulgaria; 4,300 pharmacies countrywide; Approximately 6,500 certified dentists; About 4,000 dental offices and 500 dental labs throughout the country; Approximately 1,200 patients per dentist; Estimated growth rate of the dentistry market in Bulgaria for the 2004-2008 period is approximately 20%per annum. (Bulgaria Investment Guide, 2007) As we have read in the literature review that in order to plan a strategy for a subsidiary it is important to understand different pressures faced by the company at local levels. Pressures for local responsiveness Differences in consumer tastes & preferences Differences in infrastructure & traditional practices Differences in distribution channels Host-Government demands In order to undertake the analysis of Actavis Bulgaria we have discussed below how the above mentioned four pressures have effected the strategy of Actavis Bulgaria a subsidiary of Actavis Group. As the company follows the strategy of vertical integration on the Bulgarian market, it followed the trend of undertaking the acquisitions and acquired one of the successful distribution companies in Bulgaria, Higia. The acquisition was aimed at taking the advantage of the Actavis' strong portfolio and Higia's strategically important foothold. The merger will help in the strengthening the distribution channels of Actavis in Bulgaria by providing the company with direct access to the customers. The acquisition will also prove to be a strong platform for the company for future growth. Actavis Bulgaria doesn't distribute its products directly to the hospitals and the pharmacies. Wholesalers are the end users and customers of the country. The company undertakes market sales through its dealers and distributors. The company keeps on improving its logistics and warehouse capacities. "The value added by the distributing companies to the overall commercial activities of Actavis AD (Bulgaria) is defined both by the key position of our major partners in the whole pharmacy supply chain and by the ever improving logistics and warehouse capacities of the leading national distributing companies." (Actavis, 2004) The company sees its whole sale customers as the key to its success. Through the companies like Commercial League, Sanita Trading, Kaliman etc, the company has developed strong vertical integration within the distribution channel. (Actavis, 2004) With the expansion of global generic pharmaceuticals industry, scale, geographic reach, extended product range and low-cost manufacturing are becoming the key factors of success. The acquisition of PLIVA will provide Actavis with all the four mentioned crucial factors, which will make the company the third largest generic Pharmaceuticals Company at global level. The group will be provided by the benefits of efficient infrastructure, low cost manufacturing facilities and advanced supply chain. Through the acquisition the company will be able to explore the key US, European and Asian markets and a robust portfolio covering the entire spectrum of generic and bio-generic pharmaceutical products. Actavis will seek a stock listing in Zagreb to encourage ongoing support from the investment community in Croatia. (Actavis announces improved preliminary proposal to Pliva, 2006) Health care system differences between countries require pharmaceutical firms to change operating procedures. While taking the advantage of the opportunities provided to the Actavis subsidiaries the company also faced some dents on its growth due to the drugs reimbursement rules in Bulgaria. " The group bought the Dupnitsa, Troyan and Razgrad factories of local drug major Balkanpharma in 1999, turned in a net profit of 34 million Euro in the first half of 2004, up 9.2% over the year-ago period. The business growth of the Bulgarian subsidiary was slowed by the belated changes that the government made to the rules for the reimbursement of drugs, said Actavis managing director for Bulgaria Kristjan Sverrisson. According to official data, the three Actavis subsidiaries in Bulgaria posted combined sales of 90 million Euro in the first three quarters of 2003." (Dnevnik, 2004). Hence from the above discussion and findings it is clear that the companies face a whole different combination of strengths, weaknesses, opportunities and threats at national levels in host countries for subsidiaries. It is important for the MNEs to undertake the analysis of these factors and formulate the strategy while keeping in view the requirements of the business environment in order to successfully compete in market. References: Actavis announces improved preliminary proposal to Pliva, (2006). Available at http://www.actavis.bg/en/News/Pliva+improved+proposal.htm Bulgaria Investment Guide, (2007). InvestBulgaria Agency, available at www.investbg.government.bg Dnevik the news@8, (2004). Tardy changes to drug reimbursement rules dent Actavis Bulgaria growth, available at http://news.dnevnik.bg/y=2004&m=8&d=25 Dominowski, R, L, 1980. Research Methods. Prentice-Hall Easterby-Smith M., Thorpe R. & Lowe A., 1997, Management Research: an Introduction, London, Sage Publications. Elias, R. (1986). The politics of victimisation: Victims, victimology and human rights. New York: Oxford University Press. Hussey R., Collis J., Business Research, 2nd Ed. 2003, Palgrave Macmillan Hamermesh, R.G. and Silk, S.B. (1979). "How to Compete in Stagnant Industries". Harvard Business Review, September- October 1979, pp. 161-168. Jennings, N. R., (2001). An agent-based approach for building complex software systems. Communications of the ACM, 44 (4) 35-41. Keane, S. 1977. Examining the Problems of Understandability. Accountancy, June, 88 (1006): 82-84 Kerlinger, F, N, 1970. Foundations of behavioural research. New York: Holt, Rinehart and Winston. Saunders M, Lewis P, & Thornhill A, 2000. Research Methods for Business Students, 2nd Ed. Pearson Education Limited. Veal, A, J, 1997. Research Methods for Leisure and Tourism: A Practical Guide. Chatham, Kent, Pearson Education Limited. Read More