Sanofi-Aventis Business Strategy

Question 1

Introduction

According to analysts, the pharmaceutical industry is changing rapidly and undergoing a shift. Sanofi-Aventis are therefore changing its strategy to help transform itself from a Europe/US-centred pharmaceutical company to a global diversified healthcare company. These changes include a change in its products, markets, top management and its capabilities. This essay aims to discuss the environment within which Sanofi-Aventis is operating, identifying the reasons why the company need to change its strategy and how it will achieve this. Harrigan (1980) and D’Aveni (1989) showed that when performance is declining or poor, organisations tend to principally alter their activities. This is the case with Sanofi-Aventis, it is running like a French national treasure and performance is declining in the rapidly changing pharmaceutical industry.

The Strategic Position of Sanofi-Aventis

Porter’s five forces framework (1980) can help to identify the attractiveness of an industry for a firm by drawing attention to the external pressures it may face. Figure 1 shows that buyers in the industry have a low bargaining power. The major consumers of the industry include doctors, hospitals, patients and pharmacists. Buyer power is dependent on factors such as the number of buyers, switching costs and buyer competition threat. The industry has many buyers and the competition usually takes place between them. Thus the power of buyers in terms of the number of buyers is reasonably small. However buyers are able to choose from other similar products. To avoid this problem organisations within the industry usually spend most of their research and development on new patent drugs to keep up competition. The suppliers within the industry have a certain level of power but it is not such a high threat. The suppliers could include providers of raw materials and intermediates, the manufacturing and production plants and labour. The suppliers provide different levels of threat and cannot easily be changed in this industry, even if suppliers refuse to supply. Thus there are high switching costs for companies within this industry. However, the threat from suppliers in this industry is not much bigger than that in other industries. In the pharmaceutical industry, there is a high barrier to entry. This is due to the high costs which are required to enter the industry. There are high R&D costs because the research and development of new drugs is time consuming and costly. There is also heavy regulation of the industry where drugs need to be approved, as well as patent restrictions. Patents are a high barrier for organisations who are trying to enter the market. Organisations already existing within this market have already established a strong brand name with loyal customers and have a large budget to spend on marketing to continuously support their brand. New companies therefore find it difficult to build up a brand name. The main substitutes for products in the pharmaceutical industry are generic brands of medication. The price of brand name medicines is kept competitive with generic brands. However, there is not always a generic medicine available as a substitute due to patents. Other substitutes include methods such as Ayurveda, traditional Chinese medicine, hypnosis, diet-based therapies, chiropractic care and Reiki. In terms of competition, the industry is very competitive. With high R&D cost, strict government regulations and extremely competitive products in the market, companies are constantly trying to release the next best product so that they can stay ahead. Advances in technology are also another factor affecting competition because it opens new avenues for research. Companies are dependent on the long run success of their ideas which puts a lot of pressure on them to find drugs which have high pay-offs. It is common for firms in the industry to merge together to gain competitive strength so that it can take on the leaders of the industry. In this industry the competition is such that only the strongest firms will survive.

By analysing the five forces for this industry, it can help to determine what problems Sanofi-Aventis may incur. The barrier to entry into the industry will be high which works in the favour of Sanofi-Aventis. In terms of buyers and suppliers, these are low. The substitutes are also fairly low until the patents expire between 2009 and 2013. The power of substitutes will then increase along with rivalry and the bargaining power of buyers as buyers will switch to generic drugs. This will result in a reduction of costs of the drugs and profitability. In terms of PESTEL analysis, this legal factor of the patents is a key driver for change because it is enforcing a threat on the company. Companies within this industry have opted for mega-mergers. This could be another threat to the company as these companies have more competitive strength. Sanofi-Aventis need to overcome these problems by differentiating its products and the company itself for the existing markets as well as for new markets. This suggests that a transformation of the company’s strategy is required for them to exist in the changing industry which will align them with the changing environment. The company have already a #1 position in emerging markets, so they have an opportunity to exploit this in order to overcome some of these threats and gain a sustainable competitive advantage.

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The company also need to take into account the other main influences on its strategy. These influences can help determine what threats the company has and how the strategy should be changed so that it can overcome some of these issues. The culture of the company can have a major impact because the company can be confined by that culture making it difficult to change outside the bounds of it. Sanofi-Aventis was being run like a French national treasure. This shows that the company is too rigid and too traditional. Johnson (1992) suggests that changes going on within or without the organisation will affect organisational performance. However, even if managers, as individuals, perceive such changes they may not necessarily acknowledge them as impinging on the strategy or performance of the organisation. Sanofi-Aventis had this problem as the management had acknowledged that the environment was changing but were not changing its strategy greatly to be in line with this. To rise above this issue the company have brought in a non-french manager Christopher A. Viehbacher, which has helped to show analysts and investors that the company will not be run like a French national treasure and that the company have changed their attitude. This suggests that the company will not be based on its past ways of doing things and the lessons learnt from the evolving environment of the organisation, as this has not been successful in the rapidly changing pharmaceutical industry. This shows that Sanofi-Aventis have tried to change its culture so that it avoids the problem of strategic drift resulting from focusing on the existing culture when dealing with the changing environment. This is a change in the company’s power structure. The company have also changed its organisational structure by changing the management team and by creating customer-focused teams. Looking at Johnson’s (1987) cultural web, it can be seen that the company are changing two factors (Appendix 1), which will help Sanofi-Aventis to transform its strategy more easily.

The strategic capabilities of the company provide a view of the internal influences on strategic choices for the future. The competences and resources which are distinctive or superior relative to those of rivals may become the basis for competitive advantage if they are matched appropriately to environmental opportunities (Andrews, 1971; Thompson and Strickland, 1990). In terms of Sanofi-Aventis, the threshold level has changed over time and so the company need to invest in its resource base so that it can stay in this industry and gain a competitive advantage. They have an opportunity to exploit its #1 position in emerging markets, so they are creating new strategic capabilities to achieve this by having a better position in emerging markets, adapting its R&D efforts to new regulatory and economic constraints and making disciplined decisions about how the company should grow and through what activities for example diversifying into vaccines, OTCs and biologics and not to opt in mega-mergers like all the other companies within the industry. Instead they are going ahead with bolt-on acquisitions as this will add more value to the company. This shows that Sanofi-Aventis have acknowledged that for them to survive they need to differentiate itself from other organisations within the industry and this can be achieved by exploiting its opportunities.

The stakeholders play an important role as the strategy of the company needs to take into consideration their interests. Sanofi-Aventis have failed to do this, which has resulted in investors reducing their stake in the company. Sanofi-Aventis need to adapt its strategy so that it takes into consideration the interests of its stakeholders. However the company’s stakeholders are changing as they enter into new partnerships and change its management team. These stakeholders will be focused on the external stakeholders (the customers) and so the company need to fulfil the customers’ needs in order to take into consideration the internal stakeholders’ interests.

The strategic choices and actions Sanofi-Aventis are taking

Sanofi-Aventis are responding to these pressures by making choices about the company’s future. At a corporate level, Sanofi-Aventis are launching new products such as vaccines, OTCs, diabetes drugs and branded generics and offering them to emerging markets as well as existing markets. This in terms of Ansoff’s Matrix (1957) can be seen as diversification at an international level and product development at a national level (Appendix 2). Although the company is providing the existing market with new products such as vaccines to give them a pre-eminent position, major rivals such as Novartis, GSK and Pfizer are closing the gap. Sanofi-Aventis therefore need to continue to focus on the R&D of its products to sustain this position. By producing new drugs, the company are trying to fulfil its external stakeholders’ needs, which in turn takes into consideration the internal stakeholders.

At a business level, Porter (1985) provides a framework of generic strategies and suggests that they are distinct mutually exclusive alternatives. However the idea that the generic strategies are mutually exclusive has been criticized (Hill, 1988; Murray, 1988), and studies have shown that mixed or hybrid strategies may be profitable (Miller & Dess, 1993). By looking at Bowman’s strategy clock (1996), it can be seen that the company are going against Porter and are taking up a hybrid strategy in its existing markets which involves having a low cost base and differentiating its products (Appendix 3). They are trying to develop products that are better than that of its competitors by posing the question ‘why is the drug better than what they’ve already got?’ If this question cannot be answered then the product does not add any extra value for the customer compared to its competitors’ products and the product does not become a part of the company’s product portfolio. In new markets that have fewer economic resources the company are taking up a low frills strategy which involves producing cheap goods with low added value. In terms of Porter’s generic strategies, the choice of taking up a hybrid strategy can be seen as a differentiation strategy as well as a cost leadership strategy (Appendix 4). By differentiating its products, the company are trying to produce goods which its customers will value so that it can overcome the threat that is enforced from the patent expiries. The way in which differentiation is achieved can be seen by Porter’s (1985) value chain (Appendix 5). Value is built on the activities that are a part of creating the product, whilst sometimes reducing costs in these activities. For example, the company are trying to achieve this by restructuring its R&D as it was costly and unproductive and reduce its operating costs. This makes the product unique compared to those of competitors. These value added products can be charged at premium prices to help achieve higher profitability. This will help make up for the loss of revenues from the patent expiries.

The company have chosen to pursue its strategy through organic development, which has also led to the decision of pursuing its strategy through acquisitions. The company are strengthening its capabilities, one of which is the ability to make effective decision which has therefore led to the company taking on acquisitions. The reason behind these choices is because it will allow the company to add value to its products. These are carefully thought out decisions that the company are undertaking so that they have a competitive advantage.

When observing how Sanofi-Aventis are changing its strategy to help it to become a global diversified healthcare company, it can be seen that the strategy is an intended one. This is because Viehbacher entered the company having ideas about how the strategy would be changed. The design lens can be used to explain this strategy because Viehbacher has been in charge of making all the strategic decisions, ‘Dehecq, who had long been considered as the driving force behind Sanofi-Aventis, was conspicuous by his absence at these meets. This led to analysts opining that Viehbacher was in sole charge of strategy’. The change that the company are seeing is a result of implementing the planned strategy that Viehbacher had when he joined the company.

Conclusion

Sanofi-Aventis are under-going a transformational change in a short period of time. They have been able to achieve this by first considering the influences on the company’s strategy such as its environment, its culture, its strategic capabilities and its stakeholders. These create opportunities and threats for the company and so by looking at these the company have been able to make strategic choices to help them to decide which direction to move their strategy towards and the methods by which this is to be done to help them to overcome some of the problems that they are facing.

Question 2

Introduction

In the future, the company needs to create a more sustainable growth. Sanofi-Aventis are changing its strategy to deal with the market pressures and demands while focusing on its main activities and developing strategic capabilities. The company need to utilise its resources and competences in such a way so that it can sustain growth and gain a competitive advantage over other key players in the pharmaceutical industry. Viehbacher was aware of this when he first joined the company and questioned ‘How can we change the model? How can we create more sustainable growth?’ For Viehbacher to be successful in achieving this he had to first identify the resources and competencies the company would need to grow and then decide how these would be developed and utilised efficiently.

The resource-based model states that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities. Peteraf (1993) explains that the resource-based model can help to understand the long-lasting differences in the profitability of the firm, which cannot be attributed to variations in industry conditions. Wernerfelt (1984) states the model shows that the competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal. Barney (1991) suggests that the resources have to be valuable, rare, inimitable and non-substitutable because then the competitors will not be able to mimic the company’s strategy. This can help to explain the heterogeneity or firm-level differences among companies that allow them to sustain competitive advantage. Sanofi-Aventis is in the exploration stage and so during the transformation they are experimenting with new alternatives that will help the company to gain this competitive advantage. One of the major reasons why the company have to do this is because the main resource that they rely on; the patents, are soon to expire. Also in an emerging market the company needs better, more refined resources to compete with.

Johnson et al (2008) suggest that for a company to have strategic capabilities and competitive advantage they need to have the necessary resources and threshold competences, which competitors may have or can easily imitate, as well as unique resources and core competences which are better than the competitors or difficult for the competitors to imitate (appendix 6). Viehbacher became CEO of Sanofi-Aventis in December 2008. The experience of working at GSK for 20 years and the knowledge that he has brought to the company is unique and difficult for competitors to gain. His way of thinking and style of leadership is helping the company to transform itself because it varies from the company’s old leadership which was like a French national treasure. Thus it can be seen that Viehbacher is developing a new culture for the company by changing the power structure. This will allow any new CEO joining the company, if Viehbacher leaves, to be able to continuously align the company’s strategy with the changing environment through incremental change by building on the familiar. The company will also be able to develop dynamic capabilities if the environments changes which is mostly likely to be the case.

The rapid changes in the industry have meant that for Sanofi-Aventis to be a more competitive organisation, a change in the company’s structure is needed. Thus Viehbacher has put a new team in place after joining the company. Only Jean-Francois Dehecq remains chairman and two of the top management team, namely, Marc Cluzel (head of R&D) and Hanspeter Spek (head of pharma operations) continue to hold their positions. Laurence Debroux has been promoted as chief strategic officer (in charge of M&As) and Jean-Pierre Lehner as chief medical officer (in charge of drug safety). Elias Zerhouni has been brought in as scientific advisor, Jerome Contamine as the CFO and Paul Chew as chief medical/science officer. By making this change in structure, Viehbacher is further developing the culture of the organisation. His team together have the knowledge and expertise in different areas, which will allow the company to grow as they will be adding value to the different activities of the company. With a stronger management team, the company’s future can be and will continue to be shaped allowing it to be more customer orientated. However the team will need to bring new ideas to the company in order for this to happen.

The company were the third’s largest pharmaceutical company as of 2009 but it had a costly and unproductive R&D pipeline. The transformation of the company’s strategy entails restructuring the R&D organisation so that it is productive and in sync with patient’s needs. The company are changing to a company that is based on biotech and specialist-driven therapies research. The R&D of the company is a core competence that Viehbacher is creating. It is helping the company to meet the demands of the rapidly changing pharmaceutical environment by shifting its efforts to new regulatory and economic constraints. By moving away from blockbuster drugs, the company can concentrate on medicines that add value for the customers. It is important for Sanofi-Aventis to keep the customers in mind as they will have a major effect on the success of the business. By meeting their needs, the company can create customer loyalty which will provide the company with a steady income. The new approach to R&D is allowing the company to enter into new partnerships to boost its base business. This is an opportunity for the company to try to overcome to some extent the threats that will occur from the patents expiring. These threats include the increase in substitutes and rivalry. If they can achieve this through their new R&D approach, this will help the company to achieve growth in the future.

Viehbacher was quick to note that Sanofi-Aventis was the #1 pharmaceutical company in emerging markets. This is because they have the ability to make efficient and effective decisions, as well as being able to move quick, ‘everybody says they want to go there, but we’re already there. We’re in business while other companies are still trying to find their way from the airport to the hotel.’ This is a core competence that the company has, thus as new markets emerge in the future the company need to uphold this status. This is possible for the company to accomplish if they continue to focus on global public health issues and not the traditional markets that are becoming saturated. They also need to continue to act fast as they have done when moving into emerging markets such as Africa, India and China. The market the company was catering to was diverse, so they are moving towards branded generics, consumer healthcare and vaccines to create the basis for more sustainable growth. Viehbacher pointed out that the company was in a strong financial position generating €4 billion in cash each year. This capital can be used to invest in R&D, which will help the company to grow and strengthen its position in emerging markets as it finds new healthcare businesses and products to diversify into. Using the company’s finance, respectable reputation and ability to expand into emerging markets, it will allow the company to compensate from the patent expiries of its top-selling drugs and make larger capital gains in the future.

Sanofi-Aventis have the ability to make logical decisions with the help of their CEO. For example they have decided not to be part of any mega-mergers as this would sap the organisation’s creativity and productivity. By opting for a mega-merger, the company would not be adding to shareholder value, so Viehbacher felt it was not necessary to do so. The capability to make these decisions has come from Viehbacher’s experience where he has been a part of two mega-mergers in the past. Instead of the mega-mergers Viehbacher has decided to go ahead with bolt-on acquisitions. The five acquisitions the company have taken up has given the company opportunities to tap markets such as the Central and Eastern markets, boost its presences in countries and the OTC business and provided it with a launching pad for the Asia-Pacific region. It has also given a push to its vaccines segment. These acquisitions are helping to fuel its growth in emerging markets whilst reducing its risk profile. In the future, the company need to maintain making disciplined decisions about the acquisitions that it takes on, only investing in those that add value. The company should be able to maintain this because Sanofi-Synthélabo acquired Aventis and both companies had a history of mergers and acquisitions. By taking on acquisitions, the company can also increase its customer base quicker than with mergers because the company can take on more than one acquisition at a time.

Conclusion

Sanofi-Aventis are carefully designing their strategy to allow them to have a competitive advantage. They are creating core competences and resources to aid them to survive and compete in the emerging pharmaceutical market. The resource-based model has facilitated the understanding of how Sanofi-Aventis is able to enter the new market and how it can in the future strengthen its position in this market. It is possible for the company to have sustainable growth and a competitive advantage, but they need to utilise its resources successfully in order to achieve this. However if in the future the needs of the environment change, Sanofi-Aventis will need dynamic capabilities to achieve a competitive advantage. Although Viehbacher is creating resources and core competences when transforming the company’s strategy, these may need to be renewed and recreated because in more dynamic conditions competitive advantage is achieved when there is a capacity for change, learning and innovation.