An analysis of the pharmaceutical industry
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Published: Mon, 5 Dec 2016
Previous leaders like Gerard Le Fur ran the French pharmaceutical company, Sanofi Aventis in an inflexible manner with strategic decisions being made in adherence to the traditional culture of the firm. However, as the effectiveness of this strategy seems to be declining, a new addition by the name of Viehbacher could be looked at as the changing force in the company as he strives to promote flexibility and adaptability to the ever changing environment through the promotion of international strategies, entering of emerging markets and restructuring of the company’s R&D model which appeared to hinder the firm’s effective responsiveness to the environment.
An analysis of the pharmaceutical industry would have helped SA to discover its current strategic position in relation to its competitors and helps the company to decide how and where to make strategic changes. As explained by Huff (1982), the industry tends to have a large effect on the formulating and restructuring of strategy. Environmental assessment, such as that provided by an analysis of Michael Porter’s (1980) five forces, is used to determine SA’s opportunities and threats and hence directs the company towards strategies potentially available to the firm (appendix).
PESTEL analysis explains how advancing technology force pharmaceutical industry players to adapt rapidly to the evolving environments. Each pharmaceutical company aims at using the latest technology for R&D to benefit from the competitive advantages achieved from being the first to obtain the patent. This emphasises how strong the competitive rivalry is in the industry hence being one of the strongest forces. Mega mergers in the industry were on a rise and these created strong competitors as, two companies merging creates a company which has many opportunities to cut costs and produce a number of drugs.
In addition to this, generics which act as substitutes for the products pose some threat to industry players. Although this substitute power may be low as a result of patent protection, it increases over time as the patent of the product reaches its expiration date. In addition to this the recent promotion of a healthy lifestyle has caused many consumers to opt for herbal alternatives hence posing threats to the revenues of existing companies.
Furthermore the buyer power is another strong force as it was increasing. The buyers in this industry include patients, hospitals and pharmacies. The large number of buyers and the high level of competition between them explains why buyer power is relatively low. However, the pharmaceutical industry does consist of a lot of players and hence, buyers have the ability to choose among many similar undifferentiated products, increasing their power as switching costs are low.
The threat of entry affects the profitability of the industry. Drug R&D is a costly and a time consuming process in terms of clinical time and the need to invest in large financial resources in order to compete, creates a high barrier to entry. In addition to this, the existence of patent rights which protect product know-how are not replicable and are seen as a barrier to entry. Linking this to PESTEL analysis, the patents (legal factors) can be seen as key factors that affect the industry as this is a major form of protection from potential threats.
The weakest forces in the industry are those of supplier power as many pharmaceutical companies had their own manufacturing plants. Furthermore, in terms of PESTEL analysis, the economic factors such as increasing economic growth rates which leads to an increase in demand for healthcare in emerging markets, can be seen to affect the strategy implemented. In addition to this the slowing down of growth in the developing countries has led to saturation in those markets.
This environmental analysis is useful in identifying the opportunities and threats in the environment which will have an impact on the strategy SA implements. In terms of SA, the threats realised were in relation to their patents which were due to expire by the year 2013. Their remaining drugs were at a risk of being substituted by generics and few product launches gave competitors an opportunity to overtake them. In addition to this competitors were becoming stronger as they merged with other companies to create large cost cutting companies which produced large numbers of drugs. Lastly, the increasing buyer power saw the need for a change from the ‘blockbuster model’ to the production of products that satisfied buyers needs in order to differentiate their products from their competitors and increase switching costs. On the other hand, the increasing economic growth in emerging markets provided opportunities for SA to increase their market by fulfilling the unmet needs of the customers in these markets. The industry analysis has verified the need for creating a defendable position in the long run and outperforming its competitors.
Internal Strategic Analysis
Porter’s (1980) Structure Conduct and Performance model emphasises how the firm is seen as a black box whose internal operations are of little interest because the link between them and performance is not important. However, Barney (1991) believes that the firm’s internal operations are important to the performance of the firm. An internal analysis is important when formulating a strategy as factors such as the competencies and resources available, fulfillment of stakeholders interests and internal culture of the firm will affect the choice of strategy available to the firm and the implementation of this strategy.
Within its internal analysis, SA need to analyse its competencies and resources as the strategic capability to address the challenges in the environment depends on these (Johnson et al., 2008). This is because the conception and implementation of strategies employs various firm resources (Wernerfelt, 1984). The industry analysis has emphasised that threshold levels of capabilities (minimum levels required to compete), change as ‘critical success factors’ change or through the activities of competitiors or new entrants. Therefore SA need to reconfigure their capabilities with the change in environment to overcome the threats seen in the industry analysis (above). For example, SA’s R&D model may have worked in the past but in current times as the customer needs change and value is perceived as important, the R&D model needs to adapt to these changes to add value to their drugs.
In order to adapt to the changing environment, SA needed to change the internal culture of the company. This is because the effectiveness of any strategic decision taken will be affected by a company’s internal culture. The changing environment called for a change in SA’s culture as they needed to move out of their traditional mindset to create a culture that could adapt easily to the new environmental conditions. Schein’s (1968) three levels of culture model perhaps explains that the rigid and traditional culture of SA is linked to the deepest level ; the underlying assumptions of the company. Past leaders have attempted to preserve this culture and hence any strategy implemented is based around these past assumptions, a term often referred to as strategic drift. This kind of leadership is what led to the inability to keep pace with its changing environment. To move out of this notion of strategic drift, it was realised that there must be an attempt to change the power structures of the company. Kleiner (2003) states that “one way of changing the culture of an organisation is by changing the dominant group of the organisation, the power structures- the group who really matters.” Sanofi Aventis by bringing in Viehbacher has aimed at changing the main power structure. He in turn has transformed the organisational structure of the company in the form of reorganising the top management team and those involved in R&D in to customer focused teams, in order to change the cultural paradigm of the company (See appendix). Cultural change has its advantages to strategy however, its primary downside is the resistance from within the organisation evident in Sanofi as the chairman remained absent at the newly introduced english press conferences (Johnson, 1992).
Resistance such as this is always anticipated however cannot be ignored as SA needs to take in to account the interests of all the stakeholders when formulating future strategies. Blair (1999) stresses the need to implement strategies that are in line with pursuing the interests of the important stakeholders. SA’s stakeholder map has changed as their customer-base has become more diverse and now includes new market segments. In addition to this the internal stakeholders have also changed as partnerships with other entities, companies and institutions have grown hence the strategy used needs be able to fulfill all their interests. In the past, SA does not seem to have done this asinvestors reduced their stake in the company as their needs had not been met however in fulfilling the customers (external stakeholders) needs and creating profits for shareholders, SA will be fulfilling the investors (internal stakeholders) needs in turn. Therefore, the strategy implemented must be a compromise between all stakeholders.
New strategic direction
SA, in pursuing strategies that fulfill the interests of their stakeholders, in particular their customers, will attempt to develop strategies in line with the needs and wants of different market segments (Kotler, 1976). On a business unit level, using Bowman’s strategy clock (appendix) SA can understand the changing requirements of their current markets and the emerging markets they plan to venture in to and hence understand the choices they need to make about positioning and competitive advantage. On the other hand the current markets SA operated in, saw the need for differentiation as the customers perceived value as important. In addition to this SA aimed at keeping costs low hence opting for a ‘hybrid’ strategy. This option of increasing value while reinvesting in keeping their prices low and minimising costs will increase their market share hence achieving competitive advantages.
The strategy clock allows for the potential to use a mixture of both strategies however Porter’s (1980) generic forces, based on environment analysis, claims that there are only two possible strategies: cost leadership and differentiation, that can be undertaken by a firm in order to achieve competitive advantages (Appendix). He emphasises however, that both cannot be used together in order to be economically successful. Moreover, he stresses that “achieving cost leadership and differentiation are usually inconsistent, because differentiation is usually costly” (Porter, 1985). Critiquing this are authors like Peters and Austin (1985) who argue that “despite pursuing differentiation, most industries seem to offer opportunities to exploit economies of scale or cost reduction opportunities at some point in their value chain”. In addition to this, it is common for firms to have similar minimum-cost structures. Among such firms, those that successfully emphasize both low costs and differentiation will be rewarded by superior economic performance (Hill, 1988). SA’s strategic position is what Porter would have defined as being ‘stuck in the middle’ as, the company attempts to differentiate in terms of the products and markets they serve and at the same time keep costs to a minimum. The industry five forces analysis has led SA to realise that in order to save themselves from competition from generic substitutes and keep up with their competitive rivals in a rapidly changing environment, they need to produce differentiated products of value. This has therefore led SA to move away from the blockbuster model of mass production and focus on business healthcare segments such as vaccines, consumer health, generics and biologics.
Value (and cost) chain analysis is critical when restructuring their production models to either produce goods with increased value or minimise costs. When attempting to add value through differentiation, SA analysed its R&D model and scrapped any projects that were not of value. Furthermore, external partnerships were formed with biotech companies, academic institutions and private companies to provide an alternative source of innovative technology. In addition, these partnerships for example, the one with BiPar allowed them access to drugs which had already been through a number of trials hence reducing lead times and therefore costs. Further analysis of the value chain showed other areas such as marketing and sales(appendix) that could do with a reduction, which led to Viebacher cutting 10% off this activity.
At a corporate level the PESTEL analysis of the strategic environment identifies economic growth in emerging markets as an economic factor affecting SA’s strategy. Therefore, SA opt to use an international strategy in order to fuel profits and take advantage of this growth that international markets had to offer. This also results from saturation in the current markets that SA operate in. Capitalising on the first mover advantages and leadership position that the firm currently possess in emerging markets is an effective strategic direction to follow. SA plan to produce new drugs to new markets such as India and China which is a form of diversification as seen in Ansoff’s (1957) product- market growth matrix (Appendix). In order to outperform their competitors, SA aimed to produce drugs that met the critical success factors of the emerging markets. For example, producing cheaper generic drugs in emerging markets will be valued by customers who have less financial resources. SA dealt with the challenges of entering new emerging markets by opting for bolt on acquisitions of local firms in these markets as a mode of entry. At a national level, SA aimed at producing new goods of value to the existing customers. This form of product development is also described in Ansoff’s matrix (Appendix) as a strategic direction to take.
Viehbacher’s new strategy can be described as an intended (planned) strategy (Mintzberg and Waters, 1985); whereby the strategy, being a set of objectives intend to be achieved through formal control under the vision of a strategic leader (appendix).-PG 400 Viehbacher entered the company with a set of intended strategies in mind and it was his job as the sole leader of strategy in SA to restructure the organisation in order to achieve them. In strategic terms, this is referred to as strategy leadership as design.
An analysis of the environment in which SA was operating showed the increasing strength of their competitors and the increasing threat of generic substitutes as their patents were closing in on their expiration dates. The need to change their strategic direction was critical, at this stage, to remain competitive in the industry. SA needed to analyse internal factors that affected their future strategy in addition to the environment. Viehbacher’s strategy involved the exploitation of their leadership position in emerging markets, in addition to the reorganisation of the R&D model which promoted a customer orientated differentiation strategy while minimising costs. The success of these strategies can be seen by the increase in sales and the 9.8% gain in shares between the years 2008 and 2009.
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