International Strategic Management - Roche-Genentech Merger - Case Study Example

CONTENTS Contents Introduction 2 Critical Analysis of the Pharmaceutical Industry 2 1 The macro-environment (PESTLE analysis) 2 1.2 Global extent 4 1.2.1 Porters five forces analysis 4 1.2.2 Yips globalization drivers 5 2 Evaluation of the Genetech acquisition by Roche 6 2.1 Motivation behind the acquisition 6 2.2 International structure & culture 6 2.3 Issues that might arise from the acquisition 8 3 Issues to e addressed when configuring and coordinating research-led MNCs 8 3.1 Porters model of global strategy 8 4 Key strategic issues all major pharmaceutical companies need to address 9 4.1 Porters generic strategies 9 4.2 Ansoff matrix 10 Conclusion 11 References 12 SM301 International Strategic Management The Roche-Genentech Merger: A Case Study 1. Critical Analysis of the Pharmaceutical Industry with respect to: 1.1 The macro-environment (PESTLE analysis) The pharmaceutical industry pertains to the development and delivery of products that have a direct bearing upon the public welfare. It is thus prone to pressures from specific sectors in its macroeconomic environment. Political Medicines are indispensable for curing illnesses and keeping people healthy, and no matter the cost, will be purchased if the need arises. Furthermore, health care programs are always top priority in government’s agenda. Thus, the industry is heavily regulated by the Food and Drug Administration within the country. Worldwide, the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) is the global regulatory body that determines quality, safety, efficacy, and multidisciplinary (e.g. medical terminology) standards pertaining to the pharmaceutical industry. Failure to meet these standards may prevent a firm from marketing its products in other countries. (Social & Environmental Factors, 2009) Economic In 2007, the world pharmaceutical market was valued at $664 billion at ex-factory prices (EFPIA, 2009), with the US accounting for 60% of global sales (The Pharmaceutical Industry, 2008) While the big pharmaceuticals have the market cornered on patented products, the growth of the generic drug segment has capitalized on the lower cost of producing drugs whose patents have already expired. (The Pharmaceutical Industry, 2008) Furthermore, newly emergent market institutions such as health maintenance organizations (HMO) and pharmacy benefit managers (PBM) has expanded the market for pharmaceuticals. Whereas formerly, drug companies targeted prescribing physicians in their marketing efforts, they now also vie for placement in health plan protocols and contracts with HMOs. There has also been a rush in acquisitions of PBMs by drug companies in their efforts to consolidate, both horizontally and vertically. (The Pharmaceutical Industry, 2008) Social By the nature of its product, pharmaceutical research and development has provided much benefit to society in general in terms of lengthening of life expectancy and improving the chances of recovery from illness. There is evidence that on the basis of statistics garnered in Europe, the number of deaths due to cancer has decreased proportionately to the number of cases diagnosed in the European Union (EFPIA, 2009). The same is true for HIV/AIDS and cardiovascular diseases. In these times of emergent new diseases such as the avian flu and the swine flu, it is imperative that pharmaceutical R&D capability be maintained in a stated of critical readiness. Other than these benefits, the industry also employs hundreds of thousands of employees worldwide, in R&D, production and sales. Technological Advances made in technology have impacted in the R&D efforts of pharmaceutical companies. Modern electronic equipment aid laboratory procedures for greater accuracy and faster results. However, with the impact of the financial crisis, the costs of R&D are expected to escalate, and greater assurance will be required that early efforts see commercial viability. Consider also advances in electronic communication. Pharmacists used to fill prescriptions as specified by a doctor. Today, PBMs and pharmacies are linked by computers, and at any time a pharmacist can verify the requirements imposed by the health insurer, the terms of the health plan policy, and when drug stock inventories need replenishment. The drug dispensing records maintained in these computer systems provide information to drug companies to develop new products and services. They also allow patients’ care records with doctors and hospitals to be monitored for widespread clinical trials for certain prescription drugs. This provides vital input to drug companies. (The Pharmaceutical Industry, 2008) Legal The most important concern of pharmaceuticals is the possibility of lawsuits due to adverse side effects caused by their products. Settlements are costly, and chances for a class suit are high. But more than the money, such settlements could destroy the company’s reputation in the international market. Pharmaceutical firms have thus proposed a limit on manufacturer’s liability after FDA has approved a product for distribution. This way, the FDA may be held to shoulder part of the responsibility for faulty medication, and drug companies may mitigate the effects of costly and damaging lawsuits. (Social & Environmental Factors, 2009) . Other legal considerations include the new state and federal legislation, especially on generic substitutes. (The Pharmaceutical Industry, 2008) Environmental Certain ecological issues such as the use of animals for experimental drug testing continually plague the industry. Beyond that, many of the larger drug companies (Pfizer, Johnson and Johnson, Merck, and GlaxoSmithKline are some of them) have adopted "responsible business standards" that also address issues like child labor, workplace conditions, and the "responsible care" of the environment. (Social & Environmental Factors, 2009) 1.2 Global extent Porter’s five forces analysis: Competitive Rivalry Within the industry, there is strong competition among the large drug companies in the race to develop new medications. Only a portion of the early R&D efforts make it to commercial production, and there is strong competition until the issuance of a patent for a particular procedure or medication. Supplier Power As a rule, suppliers do not hold particularly strong bargaining advantage against drug companies, except in formulations where stringent standards as to quality and quantity are a critical concern. Buyer Power Drug companies yield very strong bargaining power over their buyers. For patented drugs, particularly those that were developed in response to new, potentially endemic diseases (e.g. SARS, swine flu) or diseases formerly thought incurable (e.g. cancer, HIV/AIDS), the drug company may even command its price unless government steps in to intervene in the public’s interest. Barriers to Entry The pharmaceutical industry has very high entry as well as exit barriers. The cost of R&D and patent limitations determine the viability of a company’s entry into the industry, and such costs could be exceedingly high. Exit at any time desirable is also difficult, because the sizeable long-term investments involved are not susceptible of immediate liquidation at their true value. Threat of Substitutes Substitutes are of no threat for formulations protected by patents. Where the patent has expired, however, there is moderate to high risk that generic substitutes, with their lower prices, could attract customers away from the branded names. This is particularly true in those jurisdictions whose law protects and encourages generic substitutes. Yip’s globalization drivers Market globalization drivers Since people are prone to the same diseases around the world, the human need for medication is common everywhere. Strict standardization is not only desirable, but mandatory. An intricate system of licensed distribution channels worldwide is in place and continues to become more efficient, with their links to network doctors and hospitals. Cost globalization drivers The cost of R&D being very high, the price of medicines would be prohibitive if it were manufactured and sold only to a few. With more efficient mass production, unit prices would be lower, since the cost of R&D will be distributed over a greater quantity of production. This is coupled with the more efficient method of targeting customers, by accessing them through doctors’ offices, HMOs and PBMs. Government globalization drivers While the FDA wields regulatory powers over pharmaceuticals, it cooperates with the ICH in implementing worldwide quality standards. There is thus no major difference in the quality of medicines produced for local distribution and those for international sale. The medications may pass through borders without further alteration or additional cost. Competitive globalization drivers Because a great volume of pharmaceutical products are the result of high-technology R&D and are duly covered by patents, there are no direct substitutes for patented medications. There are thus no serious competitive threats against these products. In fact, their wide distribution, particularly in countries which have no sustainable R&D capability for health care products, will welcome, even demand, the availability of these products in their areas. From the foregoing, therefore, pharmaceutical industries have excellent prospects for globalization. 2. Evaluation of the Genentech acquisition by Roche 2.1 Motivation behind the acquisition The consolidation of several smaller companies into a few large ones is usually undertaken in preparation for a falling market and contracting demand, to take advantage of lower costs and more efficient operations. It is also a bid to capture a greater part of the market and also to acquire revenue-generating assets – in this case, the patented medications of the acquired company. All of these elements are present in this case. Roche had already been majority owner of Genentech, with a 56% stakeholding in the company over the past decade. During that time, certain synergies were already shared by the two companies in R&D enhancements. The 44%-buyout marks the full merger of the two companies, enabling them to combine and streamline their administrative and marketing functions. The merged company will be able to eliminate duplications and thus enjoy economies of scale, saving on administrative and distribution costs to the tune of $850 million annually (Business Week 2009), and focusing efforts on a consolidated R&D biotechnology area which combines Genentech’s late-stage development and cancer research with Roche’s leadership in early-stage diagnostics, transplantation and virology. 2.2 International structure & culture As to structure, Roche, a Swiss company, has a rigid and hierarchical organization. Lines of authority are clearly drawn, and a “China wall” existed between upper management and rank and file. Authority is centralized. At Genentech, however, demarcation lines are more fluid and easily crossed when the need to innovate requires it. Authority is decentralized and shared. Using Hofstede’s cultural dimensions to examine Genentech’s and Roche’s cultures, the salient points may be summarized as follows: 2.2.1 Low power vs. high power distance In the acquiring company, Roche, the corporate culture is one of high power distance. The strict adherence to the hierarchy implies observance and acceptance of the power structure, since the vertical organization thrives on a system of command and accountability. Genentech, on the other hand, has low power distance. There is an atmosphere of “casual intensity” which encourages creativity and spontaneity that is most suited to scientific inquiry. (Krauskopf, 2008) Genentech, also extended its employees stock option and other benefits, giving employees the status of “stockholders” and thus some exercise of prerogative. 2.2.2 Individualism vs collectivism In Genentech, individualism is prized highly, because of the spirit of innovation and inquiry that is indispensable in research and development. Workers thrive in “an academic campus style culture” where “workers are welcome to wear flip-flops and shorts,” as well as encouraged to communicate feedback to upper management. (Krauskopf, 2008) In Roche, because of the adherence to formal corporate protocol, collective orientation and esprit-de-corps govern the manner employees relate to the organization. 2.2.3 Masculinity vs femininity This dimension is also known as the “quantity vs quality of life” dimension. There is strong adherence to quality in Roche and in Genentech, though the approach is more nurturing in Genentech and more rigid in Roche. It may thus be said that in comparison with one another, Genentech is more feminine and Roche, more masculine. 2.2.4 Uncertainty avoidance There is greater casualness and spontaneity in Genentech, subordinates’ participation in management hews more towards uncertainty and gradual consensus-building. Roche employees, meanwhile, are comfortable towing the corporate line of strict observance to policies and regulations, minimizing uncertainty. 2.2.5 Long term vs short term orientation Both firms are involved in R&D and as a consequence plan into the distant future. Their corporate cultures will tend to reinforce long-term orientation. However, Genentech may be more profoundly geared towards the long-term, with innovation and initiative built into the company’s culture. The long-term commitment to the uncertainties of new ideas and perpetual change is more attainable when the organization’s “lifestyle” embodies flexibility, creativity and exploration.   Roche’s bureaucratic approach is seen by analysts to clash with Genentech’s West-Coast lifestyle, and several of its scientists are expected to exercise their stock options and leave the merged company. There was expectation of a backlash when Roche decided to shut down it San Jose, California laboratory and to move its scientists to New Jersey. If Roche is to maintain the unique productivity of Genentech, it should preserve those aspects of its culture that had been responsible for them. (Klee, 2008) 2.3 Issues that might arise from the acquisition The first legal issue that always arises out of a merger of companies in the same industry is the possibility of the violation of the antitrust laws, promulgated to punish those unethical maneuverings that would subvert healthy competition in a certain industry. The effect of mergers is to lessen the number of sellers in an industry, creating powerful corporations that dictate market prices and limit consumers’ choices. Another important issue is whether or not employees would be absorbed in the new organization. In mergers and acquisitions, duplicate functions are eliminated, and several people will have to be let go. Also, the new policies may not sit well with those who were used to the policies of the former company, for which reason there is expected to be a spate of resignations. It is important for the new company to try to retain those persons whose work has created value for the old company, which, in the first place, made that company a good acquisition. The new Roche should ultimately also consider how the new company is to be run. In the case of the Roche-Genentech acquisition, there is a strong divergence not only in the management style but the system of remuneration and incentives. Were Roche to continue to abide by its own policies, then Genentech talent will depart. But if Roche maintains Genentech’s management style over former Genentech personnel, then it must apply the same company-wide, else its actions would be perceived to be unequitable and inconsistent. It should then deliberately plan which policies to retain and which to modify. 3. Issues to be addressed when configuring and coordinating research led MNCs Porter’s model of global strategy – the value system Under Porter’s model, competitive advantage may be attained based on an organization’s ability to create added value (for the customer) in a product in a manner that excels over its competitors. Such value added may be realized by two ways: (a) by creating cost efficiencies thereby enabling the product to be offered at a lower price, and (b) by building features into the product that are regarded to be of greater value to the customer. When configuring and coordinating a research-led multinational corporation, management will be aware of many possible alternatives to carry out operations, financing, and marketing. Multinationality by itself does not guarantee to MNCs a higher level of strategic opportunity; however, diversity in the markets they serve and the countries from which they source inputs may provide strategic opportunities that are not available to purely domestic firms (Andersen & Foss, 2005). Because of the many combinations of alternative open to it, the MNC is normally faced with high levels of complexity and uncertainty. Many issues thus confront the MNC. Like the Roche-Genentech acquisition, the most important issues will deal with human resource management. The MNC will have to reconcile the corporate culture in the home country with those of each of its subsidiaries located in different countries. Since the implications would affect remuneration, incentives, and other benefits, inequities in personnel policies among each of the foreign subsidiaries and the home country may be perceived as unfair. Just the very differences in pay rates for similar jobs may become an issue. On the other hand, differences in the standard of living and labor legislation in the different host countries may necessitate these very inequities. Other concerns may involve issues in the sustainability of raw materials sourced from third-world countries; illegal labor practices, child labor and sweatshop operations among the subcontractors in other countries; protection of intellectual property rights and piracy issues; and a multitude of other such matters. Thus, if pursuant to cost efficiency strategies the MNC decides to source labor or materials from other countries, or in order to input value feature in the product it decides to tap foreign talents, the MNC must carefully weigh whether the inclusion of these value drivers would be adversely affected by these issues, in such a way that any competitive advantage realized is offset by a material or ethical disadvantage. 4. Key strategic issues all major pharmaceutical companies need to address The Roche-Genentech merger is not contemplated as a diversification strategy, but as a consolidation move to assimilate core competencies. Nevertheless, all pharmaceutical industries will have to contemplate the following key strategic issues: 4.1 Porter’s generic strategies Under Porter’s generic strategies, the pharmaceutical company may consider three strategic alternatives: cost leadership, differentiation, and focus. Were the drug company to pursue cost leadership, it will have to contend with the high costs of research and development, which by its very nature is very difficult to forecast with certainty. Not all R&D efforts end up as commercially viable products. Some researches will go on for years without guarantee of success. Besides, cost leadership is not an appropriate strategy for pharmaceuticals. Patented medications have no competition that may be addressed by price, as their distinctive formulations pertain to the patient’s particular condition, so cost leadership shall not be addressed at any rival. Furthermore, unpatented drugs, or drugs for which the patent has already expired, yield cost leadership to the generic drug suppliers. For the same reason, neither will focus strategy be appropriate, because illnesses develop spontaneously, are of varied natures and apply to all segments of the population. The most appropriate strategy would be differentiation, as medicinal formulations are of unique and specific qualities, for which they are susceptible to patenting. By so differentiating its products, a pharmaceutical company could command the market for that particular drug. 4.2 Ansoff Matrix The Ansoff Matrix requires analysis of market strategy from the product-market growth matrix. Market penetration pertains to products and markets as presently existing. New products applied to present markets require product development, and when applied to new markets call for diversification. Finally, present products pushed in new markets will best be addressed by market development. The pharmaceutical industry thrives on new products. New diseases, some insignificant but a few serious enough to warrant immediate and urgent response, requires cutting-edge readiness and innovative capability. A drug company cannot pick and choose its own directions, because it responds to the incidence of disease. Its tool is discovery and its aim is to bring this discovery as quickly as possible to commercial production without compromising on quality and reliability, or else it suffers from liability suits. Furthermore, those drug companies that seriously undertake R&D have the worldwide market to supply their products. Occasionally, products addressed to one market segment may be rebranded or reintroduced to meet the needs of another segment. For example, aspirin which is usually marketed to pain sufferers has found a new market in the alleviation of the possibility of stroke. This is possible for only a few products, however; on the whole, market remains the same, that is, products are applicable for everyone whose medical condition requires it. Thus, with new products and the international market, the pharmaceutical industry’s best choice of strategy is product development, continuous and unrelenting. Presently, the search is on for cancer and HIV/AIDS cures, among others. Conclusion The Roche acquisition of Genetech has been hailed by many analysts as the right move by both companies (Webb, 2009). The new company enjoys synergies that would enhance its competitiveness in the pharmaceutical industry. It should maintain its global presence, while at the same time explore new product research and development which is the lifeblood of the drug industry. 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