GlaxoSmithKline Company Overview and Need for Strategy - Essay Example

School: BUSINESS PERFORMANCE AND STRATEGY OF GLAXOSMITHKLINE PLC Lecturer: Contents Company overview and needfor strategy 3 Current strategy of the company 6 Strategy explained by external environment 8 Strategy explained by resources 13 Criteria for assessing possible outcome of strategy 16 Company based criteria 16 Country based criteria 17 Global based 19 Conclusion and recommendation 20 References 21 List of Figures Figure 1: Global pharmaceutical market share by value, 2013 3 Figure 2: Bowmans strategy clock 6 Figure 3: Global pharmaceutical market value forecast from 2013 to 2018 11 List of Tables Table 1: Key competitor comparison of GSK since 2005 4 Table 2: Key financials of GSK since 2009 16 Company overview and need for strategy GlaxoSmithKline (GSK) plc is a British multinational company operating within the larger global pharmaceutical industry. The company’s area of specialty has over the years focused on biologics, pharmaceuticals, vaccines and consumer healthcare products (Barton, 2004). Both in the domestic British pharmaceutical market and the global market, GSK is considered a major competitor and company with a lot of corporate reputation. The evidence of this has been showed in the company’s market share in the global pharmaceutical industry. Latest statistics from Market Line (2014) shows that on a global perspective, GSK plc holds 4th place by way of market share. Details of the global market share by percentage are given in the figure below. Figure 1: Global pharmaceutical market share by value, 2013 Source: Market Line (2014) In terms of revenue measure, GSK’s global rating as of the end of midyear 2014 was given as 6th largest pharmaceutical company (Palmer, 2014). This was accounted for with average annual revenue of £25.602 billion. The company’s operating income for 2014 was given as £7.771 billion, of which £5.237 billion was realised as net income (Palmer, 2014). The major need for a competitive strategy at GSK can largely be said to be based on an ever increasing global competitiveness which has always made the company a 4th force in terms of market share and market capital. This situation is better exemplified in the table below which shows the direct competitor comparison of GSK since 2005. Table 1: Key competitor comparison of GSK since 2005 Source: Yahoo Finance (2014) For the past ten years, GSK has strived to either maintain its market position or improve on it. This need is what has informed the use of a peculiar strategy that seeks to make the company competitive and set it apart from its major competitors. An important area of the strategy has been the need for the company to become economically sustainable. This is because the extent to which the company can competitively participate in the global pharmaceutical industry is largely dependent on its capital force (Flyvbjerg, 2003). In the following section of the paper, what has gone into the company’s strategy in the past 10 years and how the strategy can be explained by theories of positioning and resources are analysed. Current strategy of the company Based on theory, GSK’s current strategy can be said to have been selected based on the application of Bowman’s strategy clock. This is because the strategy clock outlines 8 major competitive positions that may be used by companies in gaining competitive advantage (Barton, 2004). On the whole, the competitive positions can be said to be largely focused on pricing, segmentation and value creation. The chart below gives the features of the Bowman’s strategy clock. Figure 2: Bowmans strategy clock Source: Bowman-Larsen and Wiggen (2004) From the clock, it can be noted that GSK has in the past 10 years been using the focus differentiation strategic positioning. With this strategy, the company tries to combine the focus strategic option within differentiation strategic option (Hill and Gareth, 2012). By implication, segmentation and value addition becomes the main attention areas for the company. This is because with the focus strategic positioning, the company identifies a unique market niche which is less exploited within the pharmaceutical industry and focuses marketing attention on this market niche (Chacarbagh, 1999). In the differentiation strategic positioning also, the company seeks to set itself apart from major competitors by giving customers service and products that can be considered as value addition (Blum-Kusterer and Hussain, 2001). A number of justifications can be given to reasons the company did not seem to focus on strategies that are typically price oriented or value oriented. In terms of pricing, it would be noted that even though the pharmaceutical industry operates a perfect market structure where prices are determined at the manufacturer level, there is a convention where most industry leaders and competitors charge relatively same price for the same kinds of drugs that are manufactured (McGivern and Fischer, 2012). The only few exceptions are seen when a company has the sole manufacturing rights to a drug that the company determines its own price. This is however not very common in the industry as most drugs are jointly manufactured by other competitors (Veleva et al., 2013). The company has therefore refused to used price oriented strategies knowing that there is very little it can do by way of cost leadership which requires it to charge prices lower than what is accepted at the industry level. Secondly, there are very strict national and international standards that guide the manufacturing of pharmaceutical products (Grimond, 2013). Because of these regulations and standards, it is very difficult for any global competitor to manufacture products that can be said to be of lower value. This therefore makes it difficult to exclusively use differentiation strategy. Strategy explained by external environment The focus differentiation strategy used by GSK plc can be explained by the company’s external environment. In this, Porter’s five forces can be employed to make meaning to why and how the development of strategy has come about in the last 10 years. The first force considered in Porter’s five forces that explain the strategy from the external environment of GSK plc is bargaining power of buyers. Bargaining power of buyers describes a situation where buyers have the power to force producers to reduce prices of products for the purchasing advantage of buyers but to the disadvantage of producers (Hill and Gareth, 2012). As far as the pharmaceutical industry is concerned, it can be said that GSK plc has a very minimal threat from bargaining power of buyers. This is because as it has been explained already, most market leaders who are considered credible to buy from use relatively same price for the same products. Buyers therefore have very little manipulation over the prices of products. This explains reason the company did not focus its strategy around pricing of products. But where there is universality with pricing, it is important that the company uses other customer focused strategies that ensures that buyers select the company over its competitors. Such customer focused strategies will give buyers reasons to buy from GSK plc even though they will be buying the same thing at the same cost from other competitors (Chacarbagh, 1999). There is also the bargaining power of suppliers, which explains the extent to which suppliers gain advantage over producers by way of determining prices of raw materials, logistics and supply in general (Flyvbjerg, 2003). Meanwhile, as the prices of supplies go up, cost of production is directly affected, leading to higher prices of products. Within the pharmaceutical industry, there are several factors that have been noted to influence bargaining power of suppliers. One of this is a situation where there are fewer suppliers serving more companies (Porter, Argyres and McGahan, 2012). Another is the source of suppliers, whether the company uses local sourcing of supplies or outsourcing of supplies (Passemard, 2000). In the case of GSK plc, it would be noted that in order for the company to maintain its quality standards and meet quality requirements, it relies on some of the world’s most acclaimed suppliers of pharmaceutical raw materials, most of who are from India and Denmark (Ravenscraft and Long, 2012). As a result of this, the company has mostly suffered from high bargaining power of suppliers. This means that the company’s cost of production has often gone up even though it does not have the luxury of charging extra prices. The figure above shows that the situation of having to produce at higher cost due to bargaining power of suppliers has affected the company’s total liabilities in the past 5 years. Threat of new entrants is another force that explains the strategy selected and used by GSK plc. Aumann (2006) explained threat of new entrant as a situation where the market structure of an industry is such that it is openly available to new entrants whose presence pose high level of competitive force to existing companies. The threat of entrants of particular markets and industries have been said to be higher where there is a perfect market structure being operated in the market (Arrow, 2009). Meanwhile, this is the exact situation with the UK pharmaceutical industry as well as the global pharmaceutical industry. In a study by Market Line (2014), the global pharmaceutical industry was projected to grow very steadily into the future due to the activities of new entrants. The forecasted industry growth from 2013 to 2018 has been given in the graph below. Figure 3: Global pharmaceutical market value forecast from 2013 to 2018 Source: Market Line (2014) As the activities of new entrants are to contribute to overall increase in market value and growth, it is expected that GSK plc will have a strategy that ensures that the company does not loss its current market value to the new entrants. There is also the threat of substitute products. Over the past 10 years, increasing advocacy for the use of alternative health solutions has greatly affected the pharmaceutical industry. This is because there has been a rapid switch from the use of chemical drug based medicine to alternative medicine such as non-medicinal therapy and herbs (Haugh, 2003). Meanwhile, when there are such alternatives and substitutes that buyers can easily lay hands on, the treat of substitute products become intense for the main industry providers, causing them to lose out on their market share to the alternative providers (Blum-Kusterer and Hussain, 2001). This was another external environmental situation that affected the need for GSK plc to devise a strategy that ensures that not only does the company maintain its market share and market capital but that it is able to expand on it. This account for the use of focus differentiation positioning as both focus strategic option and differentiation strategic option ensures that the company identifies new segments who will contribute to the company’s market expansion program (Arrow, 2009). There is also the force of intensity of competitive rivalry. This force explains the extent to which the industry in which GSK plc operates in poses competitive advantage towards the direction of competitors. In this situation, two major trends can be explained for the case of GSK plc. The first has to do with intensity of domestic competitive rivalry, where GSK plc can be said to be a market leader in the UK pharmaceutical market (Market Line, 2014). The company however faces close competition from other domestic competitors, some of which are international companies operating in the UK. The second situation is the competitiveness of international rivalry, where the competition can be said to be stiffer for GSK plc than it is for the company domestically (Richards, Brogden and Brogden, 2005). The strategy developed by GSK can therefore be said to be one that was specifically focused on the need to gaining global competitiveness by starting with a local dominance. It is for this situation that the company seeks to identify several untapped local market segments and use global differentiation on this market niche in what has been described as the ‘glocal’ strategy (Bowman-Larsen and Wiggen, 2004). Strategy explained by resources Apart from the external environment of GSK plc explaining the strategy of the company, it is also possible to use the issue of resources of the company to explain its strategy. Here, the theory of resource based view (RBV) is employed. To apply the RBV, it is important to first identify the company’s potential key resources (Aragon-Correa and Sharma, 2013). Here, a case can be made with the GSK’s major resource being the pharmaceutical products it produces. It would however be acknowledged that the company is also engaged in vaccines and consumer healthcare products. But the company’s major focus of revenue generation over the years has been dominated towards the pharmaceutical products (McGivern and Fischer, 2012). From 2005 to date, the company’s established product portfolio has included prescription medicine, vaccines and consumer healthcare (GSK, 2014). Tehse are further divided into two broad resources to make the application of RSV easier. The resource divisions are ViiV Healthcare which develops HIV/AIDS medicine and Stiefel, which focuses on dermatology (GSK, 2014). The first area of RBV has focused on the question of whether the company’s resources can be considered as valuable (Aragon-Correa and Sharma, 2013). From the context of GSK plc, value of resource can be explained to mean a situation where the company’s two divisional resources help it to either outperform its competitors or minimise its weakness (Clulow, Gerstman and Barry, 2003). In this regaed, it can be said that both ViiV Healthcare resource and Stiefel resources have a lot of value that are directly linked to the focus differentiation as a value-creating strategy. The reason this is said is that there continues to be minimal exploration of HIV/AIDS medicines whiles the search for dermatological drugs continues to go up (Ravenscraft and Long, 2012). At the same time, but HIV/AIDS medicines and dermatological drugs have a market base with which it is very easy to build a focus market niche to make the focus differentiation strategy usable. GSK plc therefore creates value by taking advantage of areas of pharmacology which are relatively less utilised. As a result of this, GSK plc gains competitive advantage because consumers who fall within the identified focus of ViiV Healthcare resource and Stiefel resources always have one provider to select and that is GSK plc. Next, the RBV asks the question of whether the resources are rare. Here, the rareness of the two resources can be said to be minimal. This is because there are some few global competitors such as Merck & Co Inc. and AstraZeneca plc who are into similar areas of resources and production. when the ViiV Healthcare resources for example is used as a reference point, it would be noted that there continues to be a number of companies that shy aware from HIV/AIDS medicine due to complains of a minimal market size and high cost of production, especially the cost of research (Grimond, 2013). This has become a reason the ViiV Healthcare resource has not been largely explored on the overall pharmaceutical market. In the light of this, GSK plc understands that until it is able to focus on specific target group which is HIV/AIDS patients, it would not succeed with the ViiV Healthcare resource. This is a reason behind the focus differentiation strategy. Another question the RBV is the case of imitation, where the resource is expected to be in-imitable. From this perspective, not much can be said for the advantage of GSK plc. This is because both ViiV Healthcare resource and Stiefel resources can easily be imitated in their raw forms. The reason this is the case is that Clulow, Gerstman and Barry (2003) explained that it is when one company controls a valuable resource that it can be a source of competitive advantage through the question of imitation. However, both resources can be imitated. It is based on the understanding of the company of this fact that it seeks to protect itself from imitation through the use of differentiation. This is because when differentiation is used as part of the focus differentiation strategy, the company gains the opportunity of adding additional value that goes beyond regulations and production standards. Some of these values include excellent customer service and enhanced packaging of products. With such differentiation, even when the company’s lines of valuable resources are imitated, customers would still choose GSK plc over other competitors so as to get the additional value added through differentiation (Aumann, 2006). Criteria for assessing possible outcome of strategy Going into the future where the global pharmaceutical industry has been projected to grow in terms of market value, it is important to investigate the extent to which the focus differentiation strategy can be considered to succeed and why. This is what the second section of the paper seeks to do as it tries to identify key indicators and criteria that can be used to assess the possible outcome of the strategy based on past performance, industry trend and economic trend. In this regard, three major criteria are set which are company based criteria, country based criteria, and global based criteria. Company based criteria From a company perspective, the assessment of the success of the strategy into the next five years can be judged based on the company’s financial performance in the last five years based on the selected strategy. To do this, the table below is used to depict an a company based financial performance of the company from 2009 to 2013 Table 2: Key financials of GSK since 2009 £ million 2009 2010 2011 2012 2013 Revenues 27,985.148 28,002.33 25,932.32 24,323.55 24,546.5 Net income (loss) 5,456.299 1,664.55 5,134.7 4,865.4 5,266.7 Total assets 42,323.4 41,456.7 39,567.9 39,855.5 40,164.9 Total liabilities 31,532 31,965.5 31,642.7 35,445.8 34,242.9 Source: GSK Financial statement (2014) From table 2, major challenges with the success of the strategy can be identified. This is because even though the company has continues to maintain a reputable global and domestic position in the pharmaceutical industry, there is a company based problem where the company has not maintained a steady growth with its revenue and income since adopting the focus differentiation strategy. On the whole the company’s revenue trend has been undulating in the last first years with significant growth recorded from 2009 to 2010. There was however a decline for two year running in 2011 and 2012. But into 2013, the revenue started appreciating again. Once this has happened regardless of the justifications given to the strategy in the first section of the paper, the implication for the strategy at the company level is that the company is yet to gain the full potential of the strategy. Should this not be checked, the strategy cannot help the company to succeed in the future. Country based criteria As far as the country based criteria is concerned, the assessment of the strategy’s success can be determined based on a PEST analysis of UK. This PEST analysis will give indication to major political, economic, social and technological indicators of growth for the pharmaceutical industry in UK. Political Economic Strict policies and regulations guiding the pharmaceutical industry A fast track legal system that settles labour issues involving the pharmaceutical industry Several international relations that makes cross-country investment possible for the pharmaceutical industry Stable inflation rate in the last 10 years, making the prices of pharmaceutical products very stable Relatively low interest rate compared to the European Union zone, minimising credit risk for pharmaceutical companies Low currency volatility which reduces currency risk for pharmaceutical companies Social Technological A well educated and informed pharmaceutical buyer population High employment rate which makes consumers have good economic value to afford drugs High number of risk behaviours and professions which create a market niche for ViiV Healthcare resource and Stiefel resources Advanced technological infrastructure which aids in sophisticated resource and manufacturing. Advanced technological infrastructure which aids in the adaptation and use of electronic commerce. Increased users of social media, which is a platform for new media advertisement Adopted from Deresky (2010) From the PEST analysis above, it would be noted that there is a very favourable country based indicators for the expansion and growth of GSK plc based on the focus differentiation strategy. This is because there is a ready market that can be focused on. At the same time, this market is well informed and so will look for value added products through differentiation. What is more, the company has a technological means to produce according to the demands of the market; whiles the market has the economic position to make customers afford the products. Global based From a global perspective, a lot of positive cases can be made for the utilisation of the focus differentiation strategy. The first of this has to do with the increasing trend of cross-border penetration by pharmaceutical companies, particularly those from UK (Haugh, 2003). Because of this situation, the company will not be forced to limit its strategy to only the UK market. Instead, there is the opportunity of expanding the ViiV Healthcare resource and Stiefel resources to other international markets through focus differentiation. For example the African market where there is high prevalence rate for HIV/AIDS serves as an important international destination for GSK plc (Veleva et al., 2013). At the same time, the Indian market has been noted to have a very high demand for dermatological products (Richards, Brogden and Brogden, 2005). This is also an opportunity for the company to penetrate the Asian market with its focus differentiation strategy. Conclusion and recommendation The report has been helpful in identifying and critiquing the strategy used by GSK plc within the UK domestic pharmaceutical industry and the overall global pharmaceutical industry. The reason identified to the use of a strategy was noted to be the fact that the company needs to part of a projected growth for the global pharmaceutical industry from now till 2018. In the line of this, the company has used the focus differentiation strategy in ensuring that it identifies a less utilised segment of the market where it can create its own market niche for growth and expansion. Whiles doing this, the company adds differentiation to ensure that even when its resources with which it competes are imitated it can set itself apart in terms of quality and value addition. Whiles assessing the ability of the strategy to succeed, it was noted that at the country and global levels, there are several opportunities for growth. Unfortunately, note same claim can be made for the company based criteria. Based on this, it is recommended that the company revisits the use of components of price oriented strategies such as hybrid strategy positioning which combines focus, differentiation and cost leadership. To do this, the company will not have to compete or create competitive advantage by reducing prices but giving pricing and payment incentives to its customers. This will be an approach to ensure that it is able to capture customers who for some reasons would prefer a price related strategies. References Aragon-Correa, J.A. and Sharma, S. (2013). A Contingent Resource-Based View of Proactive Corporate Environmental Strategy. Academy of Management Review, Vol. 28 No. 1, 71-88 Arrow, K. J. (2009), "Toward a theory of price adjustmentStanford: Stanford University Press. Aumann R. J. (2006). 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