The Strategic Development of HIKMA Pharmaceuticals - Case Study Example

Strategic Management: Case Study Introduction This case study will use John Kay’s 1993 distinctive capabilities framework and the PESTEL analytical model to evaluate critically the strategic development of HIKMA Pharmaceuticals, with a specific focus on its expansion strategy. The case study will be structured as follows: the first section will analyse the present strategic issues, justification and evaluation of the choice of analytical models. While the second section will apply Kay’s framework and the PESTEL model to analyse HIKMA’s expansion strategy, the third section will provide recommendations and the conclusion to the case study analysis and evaluation. Part 1: Strategic issues and Analytical Models Hikma is an international pharmaceuticals group that is well known for the delivery of high quality and cost-effective products (Hikma Pharmaceuticals plc, n.d); the group develops, manufactures, and markets a vast range of branded and non-branded generics and in-licensed pharmaceutical products. Rapid shifts have occurred in the global pharmaceutical markets (Munich, 2013), thereby necessitating the expansion of the Hikma’s global markets reach; this calls for the increased focus of the group’s sales and marketing activities on increasing the group’s market presence around the globe. Nevertheless, Hikma’s expansion into global markets has to be accompanied both by the advancement of the group’s manufacturing capabilities and product portfolio, as a response to the increased diversification of Hikma’s market segments. Hikma’s strategic alliances and acquisitions in the pharmaceuticals industry have the capacity to increase the group’s strategic capabilities and profits remarkably; growth opportunities also exist in the US injectable market (ABC Investments, 2009). Hikma is presently engaged in price wars on its generic products, due to the emergence of many rival pharmaceutical companies that are offering low-prices on their products, thereby imposing a downwards pressure on the group’s pricing. Nevertheless, the company has great potential for revenue generation particularly in developing countries and anticipates that the expiry of the patents for leading pharma companies and increasing demand for cost-effective products in healthcare will determine the future generic market growth (McKinsey & Company, 2012). Evaluating Choice of Analytical Models John Kay’s 1993 distinctive capabilities framework is an effective tool for evaluating corporations’ strategic resources (See Appendix 1). This framework basically argues that the creation and exploitation of distinctive capabilities is every firm’s primary source of competitive advantage (Kay, 2009); Kay recognizes 3 major types of distinctive capabilities namely corporate architecture, innovation and reputation. These three capabilities are characteristic and unique to every corporation, particularly because they are difficult to establish and maintain; additionally, these capabilities are difficult to codify and/or duplicate/emulate and cannot simply be purchased off the shelf. The external environment in which Hikma operates will be analysed and evaluated through the PESTEL analytical tool; the PESTEL analysis is particularly effective in evaluating the market growth and/or decline, thus, the position, potential and direction of business in the longer-term future (See Appendix 2; Ward, n.d). The PESTEL technique is advantageous because it aids in the evaluation of the external macro-environment of the business, that is, the political, economic, socio-cultural and technological environment within which organizations operate. Consequently, the PESTEL model will not only help Hikma to reduce the impact of potential threats, but it will also enable the group to think strategically, and to recognize and exploit new opportunities (Shaw, 2011). On the downside, the PESTEL analysis must be conducted regularly to be effective and succumbing to “paralysis by analysis” (gathering too much information) while using this tool often inhibits decision making within organizations. Part 2: Critical analysis of expansion strategy As explained by Kay’s distinctive capabilities framework, an organizations capability can only be unique if it arises from qualities that are missing in other organizations; the three distinctive capabilities in Kay’s framework, architecture, innovation and reputation, are the sources of every organization’s strategic competitive advantage. Kay describes architecture in terms of the internal/external relationships of an organization; that is, the arrangement of relationships within the firm, or the relationship between a firm and its dealers, retailers and/or consumers. The architecture of a firm’s internal/external relationships allows it to facilitate the transmission of product and market definite data within the firm and outwardly to reach outside participants including customers and dealers. Hikma has established elaborate relationships with its dealers and customers across its global markets thereby guaranteeing high quality products through quality manufacturing processes (Hikma Pharmaceuticals plc, n.d). Innovation refers to the exploitation of advances to fulfil newer or existing market needs and/or requirements; since successful innovation often attracts imitation within the same industry, it is necessary for organizations to build strategies to promote the secrecy of their key innovation. This highlights the critical significance of patents in contemporary competitive innovative organizations, which seek to promote and guarantee the integrity and legitimacy of corporations’ innovative ideas. Radical shifts have occurred in the contemporary global pharmaceuticals market due to strategic alliances, mergers and acquisitions of large pharmaceutical corporations, thereby prompting other pharmaceuticals to respond by re-examining their strategies. Hikma pharmaceuticals acquired its first generic pharmaceutical company in the 90s, thereby expanding into the US market; similarly, establishment of an injectable pharmaceutical operation in Portugal enabled it to expand to the European market. Mergers and acquisitions have enabled Hikma to benefit immensely from experts and drug design researchers in a vast range of areas thereby enlarging its productivity while significantly diminishing its research and development budget. Kay describes reputation as a tool that organizations use in building trust and confidence in their brand name; precisely, reputation describes the way in which both the internal and external stakeholders regard the brand in relation to its unique features. Given that an organization’s reputation is important in enhancing its sustainability, reputation inevitably influences every organization’s strategy to establish and maintain external perceptions. Hikma is well-known for its huge investment in high quality manufacturing facilities (Haloub & Anchor n.d); the significant increase in the Hikma’s profitability reflects the group’s continuous efforts to enhance its operational competence while reducing production costs. Eventually, Hikma’s quality manufacturing results to a reduction in the procurement costs and to an increase in the manufacturing flexibility; this enables the pharmaceutical significant control over the quality of its brand products. Consequently, Hikma has marketed itself as a multinational pharmaceutical corporation that delivers nothing short of high quality and cost-effective care products across healthcare sectors all over the world. This has enabled the group to position itself at the top of the echelon as a reputable corporation, recognized all over the world for its quality; consequently, the group has leveraged on its brand equity and reputation to increase its market presence around the world. Initially, Hikma highly relied on the sale of generics; however, the group has expanded its product portfolio significantly, with the aim of lessening its dependence on the generics business. Hikma has increasingly diversified its product portfolio by obtaining licenses from research companies like Japan’s Fujisawa Company, presently known as Astellas Pharma, which permitted the group to promote Anti-infective drugs such as Suprax and immunosuppressant drugs like Protopic. The group continues to expand its product offerings through internal new-product development initiatives and via research and development activities; the group is basing its product portfolio on both geographical and therapeutic categories (Haloub & Anchor, n.d). Presently, the group offers products in three major categories namely the branded, injectable and generics; under each of these major classes, the products are also grouped according to their therapeutic use. As a multinational pharmaceutical company, Hikma is subject to the numerous forces affecting all pharmaceutical companies of its stature in the global pharmaceutical market and/or industry (Floyd, 2008). The PESTEL framework outlines the environmental determinants of the macro business environment including the political, economic, social, technological, environmental and legal factors; the PESTEL analytical tool forms the basis for a comprehensive evaluation of Hikma’s organizational strategies. The political factors include all the policies or political pressure that could potentially influence an organization’s decisions and actions; many changes ranging from modest demonstrations to full-scale uprising have characterized governments and business environments in some of the MENA countries thereby affecting Hikma’s strategy. Precisely, the political unrest in the pharmaceutical markets in MENA, precisely the Arab Spring, between 2011 and 2013 made the region politically unstable and extremely vulnerable to negative change. Nevertheless, the national and/or global economy influences consumer behaviours and business strategies in significant ways; the region’s pharmaceutical markets have grown significantly due to the positive demographics of a young and fast rising population. Furthermore, the region’s favourable economy underpinned by the rising GDP per capita has led to increasing life expectancy, thus the establishment of a sizeable elderly population. The increased economic development coupled by the lifestyle changes in the region have led to the rising incidences of protracted illnesses such as diabetes; Hikma is well-positioned to take advantage of the progressively fast-growing and highly lucrative pharmaceutical markets in MENA countries (Haloub & Anchor, n.d). Hikma’s geographical expansion ambition has received a great boost after it was listed in the London Stock Exchange; this not only increased the demand for the group’s shares, but also improved its liquidity, thereby expediting acquisitions, and improving access to capital and workforce motivation. The socio-cultural factors including shifts in norms, values, and culture of societies, could also significantly affect the internal and external business operations, organizational decision making and consumer behaviour. For instance, Hikma’s geographical expansion goals have been tapered by the diverse needs and expectations across its various markets; consequently, Hikma acts locally in different global markets by establishing local manufacturing facilities in different countries to cater for regional needs. Moreover, Hikma has focused on the establishment of a skilled and experienced workforce to guarantee value for its customers; Hikma’s people investment through improved salaries and employee benefits is also the group’s key source of differentiation. Advancements in technology often influence organizations’ internal and external strategies, as well as consumer behaviours in the pharmaceutical industry (Floyd, 2008); in Hikma’s case, technological advancements have inevitably affected the group’s operation strategy across global pharmaceutical markets. The group has taken advantage of its successful partnerships to manufacture, launch and distribute new products across its varied markets, to cater for the increasing demand for varied therapeutic categories such as cardiovascular and diabetes products, among others. Hikma’s continued investment in research and development is a reflection of the group’s efforts to develop new and innovative drugs required in its varied markets; the group’s strategic partnership with the India-based Unimark pharmaceutical has greatly enhanced the group’s research and development capabilities, thereby quickening the lead times of submitting new products. Increasing environmental consciousness and expectations often influence the manner in which organizations package, move and even manufacture their products (MCE, 2012); this inevitable affects organizations’ internal and external operation strategies. Hikma has managed to realize greater geographical expansion through global approvals from highly reputable global agencies such as the American Food and Drug Administration (US-FDA) and the Medicine and Healthcare products Regulatory Agency (UK-MHRA) (Haloub & Anchor, n.d). Nevertheless, research and development is critical to the longer-term survival of multinational corporations, especially because it leads to the development of novel and cutting-edge products that are needed in the global therapeutic market. Hikma is also expanding its focus on research and development by dedicating some of its manufacturing costs in enhancing the existing formulations and potions, to meet the emerging needs in the global pharmaceutical market environments. The legal provisions and requirements in different countries or regional markets often influence the manner in which organizations organize their operations and overall businesses across the world. Hikma’s global expansion ambition is significantly affected by the numerous government regulations across different countries in the world; for instance, some countries’ regulations are unfavourable for foreign pharmaceuticals. Global pharmaceutical markets are thoroughly regulated in that pharmaceutical companies have to register and gain approval from the health authorities in all the countries in which they operate. Legal requirements for registration have compelled Hikma pharmaceuticals to adopt all the quality-manufacturing procedures; for instance, Hikma’s penetration into the US market has been because of its compliance with FDA regulations. All Hikma molecules, resources, manufacturing processes and clinical bioavailability tests must be FDA-approved for its products to be accepted in the US market. Over the years, the group has strived to obtain approval for all manufacturers with the aim of guaranteeing the highest quality its manufacturing processes, to reach the threshold required in penetrating the US market. Part 3: Recommendations and Conclusion Hikma pharmaceuticals can take numerous strategic options to increase their business in the global pharmaceuticals market; firstly, Hikma needs to take advantage of the opportunity presented in form of the group’s strong drug pipeline because of acquisitions, particularly in newer therapeutic areas such as oncology. Hikma should also consider increasing its production presence in developing countries rather than excessively relying on operations in the US, where it faces stiff competition and regulatory issues. The group is likely to gain more by increasing its focus in the low-cost developing countries, particularly because of the increase in the favourable demographics such as the young and older populations in those countries. Furthermore, to counterbalance the downward pricing pressures it faces in the generics business, as a result of the entry of competitors, the group can leverage the opportunity presented by the expiry of patents for major pharmaceutical companies to increase its growth in the generics business. Hikma should also take advantage of the opportunity presented in the need for injectables in the US pharmaceutical company; given that Hikma’s manufacturing facilities are FDA-approved, the group should pay more attention to expanding its investment in injectables in the US pharmaceuticals market. Presently, Hikma is the second largest generic injectables supplier based on volume in the US; the entry of competition in injectables clearly indicates that the future of the global pharmaceuticals is in injectables. Conclusion Overall, Hikma pharmaceuticals have experienced massive growth in its various global markets, thereby becoming a leading multinational pharmaceutical despite the emerging competition and sporadic turbulences characterizing its market environments. Nevertheless, the future of the group, especially in MENA countries, is largely uncertain, due to the rise in price wars with rival pharmaceutical companies and volatility of those markets due to political instability. The group can leverage on its research and development to generate higher turnover in its various global markets by constantly differentiating itself from competition, to remain relevant in the highly competitive global pharmaceutical business. In that context, Hikma is faced with the daunting challenge of acting locally in its diversified markets while at the same time developing a highly skilled and experienced workforce that will be committed to its core values and results oriented culture. Hekma must seek to establish successful partnerships across the globe, both with the aim of penetrating global markets and investing in the manufacturing of more innovative and generic pharmaceuticals. Establishing successful partnerships will enable Hikma to access not only new products, but also new technologies that promise to significantly advance and expand Hikma’s business. References ABC Investments,( 2009). Hikma Pharmaceuticals (HIK): Equity Research Report Initiation of Coverage. [pdf] Jordan: ABC Investments. Floyd, D., 2008. The Changing Dynamics of the global pharmaceutical industry: Assessing the key factors driving the growth of the pharmaceutical industry. [pdf] University of Lincoln Business School. Haloub, R., & Anchor, J., (n.d). Hikma Pharmaceuticals: An Emerging Markets Multinational. Case Study. Hikma Pharmaceuticals plc, (n.d). Hikmas strategy. Hikma. Retrieved from http://www.hikma.com/investors/hikma-at-a-glance/hikmas-strategy.aspx Kay, J., (2009). The Structure of Strategy. Business Strategy Review 1993. John Kay. Retrieved from http://www.johnkay.com/1993/06/01/the-structure-of-strategy-business-strategy-review-1993 MCE, (2012). New Opportunities & Strategies in the Pharmaceutical Industry. The Executive Issue. No. 38. McKinsey & Company, (2012). Unlocking pharma growth: Helping Indian pharma reach its full potential. [pdf]. New York City, NY: McKinsey & Company. Munich, 2013. Global Pharmaceutical Industry is in a Strategic Crisis – Business models must be adjusted. Roland Berger. Retrieved from http://www.rolandberger.com/press_releases/513-press_archive2013_sc_content/Pharmaceutical_industry_in_a_strategic_crisis.html Shaw, A., (2011). A PESTLE Analysis for the Pharmaceutical Industry. Strategic-planet. Retrieved from http://www.strategic-planet.com/2011/01/a-pestle-analysis-for-the-pharmaceutical-industry/ Ward, D. (n.d). An Overview of Strategy Development Models and the Ward-Rivani Model. Retrieved from http://128.118.178.162/eps/get/papers/0506/0506002.pdf Appendices Appendix 1: Kay’s 1993 Distinctive Capabilities Framework Adopted from: http://image.slidesharecdn.com/20130425dos-2-141006134815-conversion-gate02/95/20130425-do-s-2-25-638.jpg?cb=1412621481 Appendix 2: PESTEL Analysis of the global Pharmaceutical Industry Adopted from: http://www.strategic-planet.com/wp-content/uploads/2011/01/Pestle.png Read More