Business Strategy for Nucleon - Essay Example

Business Strategy for Nucleon Phase I and II Clinical trials: The basis question that arises during this stage is whether Nucleon should consider vertical integration by operating its own pilot plant and investing in its development or whether, in view of the largest financial outlay, it should contract or license out the operations? The extent to which a firm owns its upstream and downstream suppliers and buyers respectively is vertical integration. Two issues that must be considered when deciding whether or not to integrate are cost and control. One important consideration in Phase I and II is that the processes required during the first two phases are so intricate and specialized that there are many problems that could arise and production processes need to be very tightly controlled. Bio technology processes are an art and processes can fail when transferred from one facility to another, largely due to the differences in little things which are minor elements, yet make a huge difference in the output. This favors Nucleon building its own plant which means higher costs and more time, although it also implies greater control. Contracting also involves more time and an estimated expense of about 4 million dollars. Moreover, there is the danger of confidential information about manufacturing leaking out, although it would free Nucleon’s R&D people to focus exclusively on their specialty which is research – this is also the factor that has propelled Nucleon to the top. However, in my view, vertical integration is not favored in this case. The reason is that Phase I and II trials are still an experimental stage of development of the drug and all investments made on the pilot plant could be lost, while also deflecting funds from other research work. Contracting out is not a good option due to loss of confidentiality. However the licensing option offers an excellent situation because it allows risks associated with clinical trials and expenses related to development, marketing and sales of the drug to a third Company, while also protecting Nucleon’s patent on the product. This will allow the Company to focus on its core competencies, i.e, research and development. One of the developments in management theory is the belief that most firms have only a few “core competencies” where they possess exceptional skills and abilities, therefore in order to sustain a competitive advantage in an increasingly cut throat global economy, it is better to hire firms with their own core competencies to perform other tasks that are required as a part of organizational activity.(Prahalad and Hamel, 1990). Therefore, it may be better for Nucleon to allow another Company which specializes in manufacturing to enter into this activity rather than taking it up itself. This also provides an opportunity for the licensee company to enter into the production process at an early stage to familiarize itself with the intricacies of the production process. Nucleon would receive $3 million and a share in royalties from all sales if the product is approved, without incurring any of the financial risks involved. Phase III: Vertical integration is not favored at the pilot stage either. It may be noted that Nucleon has already entered into agreements with another company on marketing, largely because it is difficult for it to sustain a competitive advantage by taking this on itself. Nucleon employees would have to develop new competencies, which could compromise their existing competencies. Secondly, there is a huge financial outlay, which may or may not be recovered in the intensely competitive drug market. It would also result in decreased flexibility for Nucleon in financial outlays for future projects. The fallacy with the advantages of the “make” policy of vertical integration is that it ignores the opportunity costs inherent in sales in the outside market (vertical boundaries). Since the drug market is volatile and subject to fluctuations, it could be more advantageous for Nucleon to enter into a partnership/licensing arrangement with one Company for manufacturing and marketing, which will mitigate its own risks, while allowing it to benefit from its product, with another Company bearing the risks. In fact, Nucleon would be able to receive a $7 million payment and 10% of the partner’s gross sales without investing any capital outlays. It must be admitted that Nucleon’s profits may not be as high as they would be if it integrated vertically and took up manufacturing activity. However, the financial risks are also greater, especially in the volatile drug market. It must also be borne in mind that there are already other Companies that are working on patents for CRP products so any advantage Nucelon has would be minimal at best and its best advantages will be for a short period in the initial stages when its product is still new. In a competitive market, another Company would be faced with the risks and challenges in sustaining that advantage while Nucleon could focus on developing more products. Financial implications and risks: The strategy I have recommended involves minimal risk for the Company, which is still not a fully established large scale concern. There is no capital outlay involved at all, rather Nucleon stands to gain $10 million upfront, which will provide much needed funds to continue pioneering research work and also earn a continuous, though modest stream of income from royalties and sales of its products. When the Company has established itself as a more solid financial concern in a few years time, it could consider integrating into commercial manufacturing on its other products. However, in view of the fact that it is a relatively new Company, it may be a better strategy to focus on its core competencies – i.e, research and development, in order to build and sustain a competitive advantage in the market. There is greater interest in the market in genetic companies and the kind of products that Nucleon is manufacturing, however if the competencies of its research scientists is divided into manufacturing, there may be an impairment of both manufacturing and research activities with the Company suffering an overall negative effect. After ten years: Although I have not recommended vertical integration for this particular product, I do however support the integration strategy for Nucleon on a long term basis. However, I would not recommend that it moves into a fully integrated enterprise, since it will significantly lessen its ability to develop a variety of new products. In today’s global marketplace, creativity and innovation have assumed a great deal of importance and it is important for a Company to have a fresh and novel strategy if it is to succeed in the market place, as identified by Porter (1996: 68). “Competitive strategy is about being different.” (Porter,1996:64). Porter also states that “Strategy is the creation of a unique and valuable position, involving a different set of activities……different from rivals.” (page Porter 1996: 68). Therefore, Nucleon’s strength will be in its research facilities and skills and this should not be compromised. However, the Company can certainly consider branching out into pilot scale manufacturing capabilities, because investments in fixed assets such as buildings, etc can be applied over a period of time in the development of several different products, allowing the Company to earn more income but in a manner that will not be a source of significant financial risks. References: * Porter, M.E. (1996), What is Strategy? Harvard Business Review, Nov-Dec.: 61-78. * Prahalad, C.K. and Hamel, G. (1990). “The core competence of the Corporation” Harvard Business Review (May-June):79-91 * The Vertical Boundaries of the Firm Read More