Corporate strategy. Scope, Scale, 5 forces, SWOT, Direction, long term, Competitive advantages, Stakeholders 1. Direction The first key concept of strategy is the direction the company wants to follow. The direction of SmithKline Beecham clearly adjusts in order to cope with the increasing competition in the pharmaceutical industry.
In 1989, SmithKline Beecham was formed out of a merger of SmithKline Beckman and the Beecham Group. Five years later, the Annual Report Chief Executive Leschly wrote: "Through a series of strategic acquisitions and disposals, SB made progress in its transformation from a company made up of four successful, but separate, businesses into a unified organisation focused on human healthcare." To reach SB's philosophy several actions were taken by management: they were the second firm that integrated vertically (with DPS); odds was sold in 1999 because of failed efforts to control distribution channels; oIt divided its operations into four and later in three businesses: SB Pharmaceuticals, SB Healthcare Services and SB Consumer Healthcare. The direction of the management can best be seen as 'vision' because of their philosophy. They have a vision and want to achieve it, no matter what road they take. The figure below represents this approach. 2.
Long term The most eye-catching trait of the current global pharmaceutical industry is that the largest pharmaceutical companies consolidate to become the number one in the industry. For example the merger between Zen eca and Astra, which became AstraZeneca, which is now the world leading pharmaceutical company. These facts were all to the detriment of SmithKline Beecham, which became smaller in comparison with its giant competitors. SB slipped from the 4 th position in rank to the 9 th player in the market in eight years, since 1989. Therefore it focused on a merger strategy and went into merger talks with AHP and later with Glaxo Wellcome. A merger with Glaxo would make the new combination a number one, with around 8% market share.
Currently the merger talks with Glaxo Wellcome seem to be failed, but if the goal is to be a giant, this is the road to become one. 3. Environment (STEP, Porter, SWOT) STEP Socio-cultural factors The demand for medicines changed in the last 20-30 years. There is a clear shift from antibiotics towards more complex drugs for cancer, heart diseases and more. The effectiveness of these drugs is more difficult to test and requires a longer R&D process. A trend of increasing use of drugs is recognised.
Consumers are showing an increasing tendency towards taking responsibility for their own health. Also a rising standard of living in many developed countries is affecting the pharmaceutical industry. Technological The industry adopts in the last decades more and more science based research technology. As a result of new analysing techniques the approval process can be reduced significantly. There is also a change in the distribution structure of drugs. More and more drugs will be bought on the internet in the future.
The computer techniques and especially the simulation techniques are increasing the speed and efficiency of the R&D process. There are also developing big technological breakthroughs in the fields of molecular biology, genetics and biochemistry and bioinformatics. This new techniques will be the start of a new generation of drugs by use of gene techniques and specific proteins. Economic Factors Governments are an important customer for the pharmaceutical industry. Due to economic recessions a lot of governments are forced to cut costs heavily, especially in the healthcare. Use of generics is encouraged and price reductions are forced by the government.
Political / legal factors The length of the approval process will determine the profitable lifetime of a drug. A long approval process will generate a short profitable lifetime due to expiring patents very shortly after approval. Governments are limiting the maximum profits allowed of pharmaceutical companies. This may differ from country to country but the maximum profit has to be high enough in order to give an incentive towards pharmaceutical companies to produce the drugs.
Because the pharmaceutical industry is thinking global, governments are flexible regarding the continuing trend towards consolidation. Reason is that a merger will generate an efficient use of R&D budget which will contribute to human welfare. Regarding the vertical integration the Federal Trade Commission mandated that: othe health maintenance organisations present an open formulary as an option to its managed-care customers; o prevent sharing of prescription pricing policies of competitors. o restrict access to patient records for marketing purposes. Five forces of Porter Potential entrants IT is hard to develop a new drug because the R&D for a new drug requires a lot of time and investments. Due to long approval procedures the pay off of the investment is late.
Regarding the over the counter markets, the growing market volumes and margins are attracting new entrants. However, barriers to entry are high in this market and margin on over the counter drugs are lower than margins on prescription drugs. In order to defend themselves against new entrants pharmaceutical companies are looking for a global presence into the over the counter market. Suppliers In order to reduce cost some pharmaceutical companies moved their operations abroad. Pharmaceutical companies do not have much primary supplies on which they depend heavily. Most elementary ingredients are made by the company self from wide available basic raw materials.
Industry rivalry In the past decades a couple of merger waves occurred. A lot of pharmaceutical companies merged but not only with national companies, also international companies. The pharmaceutical industry environment is nowadays a global market with a couple of very strong players in it. The trends in the healthcare industry are linking early diagnosis and prevention. The company with the best linking will have a competitive advantage. The world pharmaceutical market sales continue to increase.
Buyers In the past the most important buyers were doctors and were informed personally by a salesman of a pharmaceutical company. These days we see a clear shift of prescription drugs towards over the counter drugs. People are more and more practicing self medication due to better education and help of interactive available knowledge. Pharmaceutical companies have to direct their marketing efforts directly to the consumers. Other strategic moves in order to gain the favour of the consumers are the strategic alliances, the so called vertical integration, with health maintenance organisations. This integration will also make more information regarding effectiveness of therapies and the types of patients using specific therapies available.
In despite of the advantages of this vertical integration the regulatory attention from consumer advocacy groups on this topic makes it hard to exploit the advantages. Some vertical integration's are already made undone. Substitutes For a lot of diseases there are more drugs in order to treat the illness. Generic substitution affects profitability heavily in the pharmaceutical industry.
As soon a patent is expired competition will copy the active ingredients and introduce it into the market against low prices as a result of reduced R&D expenditures. SWOT Opportunity Threat increasing use of drugs; o gene technology; oa merger will share knowledge and R&D; shift towards OTC drugs; or ising standard of living; o computer technology for developing and testing; o less legal barriers for merger; othe average age of the population is increasing. o complexity new drugs; cost reduction in healthcare; o limited maximum profit; rules regarding vertical integration; vertical integration. Strength Weakness or elative high entry barriers; operations are relatively independent of suppliers; o benefits of scale due to mergers. low margins OTC market; due to mergers a lot of different cultures in one company; short profitable lifetime of drugs.
4. Resources SB's resources consist of human resources, financial resources and intellectual capital. The human resources of SB are very stable, for they fired only once a number of people, but it is necessary to invest more in Human Resources. Through all the alliances, mergers, partnerships, etc. the culture changes constantly.
SB earned lots of financial resources with several acquisitions and partnerships. The financial resources were mostly spend on R&D and marketing, to increase SB's market share. In the branch of pharmaceutical companies high R&D budgets are required. SB' intellectual capital consists of many patents and a very strong brand name, with which SB was able to transfer the market value. SB several times adapted its company resources to the industrial environment.
A good example are the acquisitions and partnerships with which SB was able to expand its services towards the customers, so that they offer complete healthcare packages and cutting costs for also the customers. Customers were also offered the opportunity of self-diagnosis and self-medication. 5. Advantage (sustainable competitive advantages) The three main competitive advantages of SB are: osuperior information about market conditions; more direct access to customers; oopportunities to meet patient needs with new products.
But we can also distinguish some other competitive advantages like SB was able to offer customers a complete healthcare package by alliances and acquisitions. With their focus on total healthcare and the partnerships SB was active in all four divisions of the pharmacuetical industry; prevention, diagnosis, treatment and cure. Those alliances were also reason for SB to position itself for the clinical laboratory testing market. Now SB was provided with results and to fulfill the customers clients better and exactly on the right time.
With the possible merger with Glaxo, SB will be capable of enlarging their R&D budget and gain more market power, for the potential pay off from the complementary research skills of the two companies, the existing pipelines of 4 promising drugs in the finals stages of development, the outcome of marketing incentives of the merge and their remained independency. 6. Scope and scale Domain SmithKline Beecham was at first oriented at the Human Healthcare and the Animal Healthcare. During the 90's the international pharmaceutical market penetrated fast, with the help of large mergers on vertical and horizontal aspects. Which markets Which target groups human Genome Science (HGS); o vitamins, minerals and supplements; high throughput screening technology (LL Biosystems); ogenomicsobiotech / bioinformatics; o venture capital. governments; o doctors; o hospitals; o pharmacies; consumers.
Which needs to fulfil Which activities oPreventionoDiagnosisoTreatmentoCureDivisions of SB as of 1992 oSB Pharmaceuticals; oSB Consumer Brands; oSB Animal Health; oSB Clinical Laboratories; Divisions of SB as of 1996 oSB Pharmaceuticals oSB Health services oSB Consumer Health Care Economies of scale "Streamlining procedures of regulatory approval in different countries." Scale advantages Trough scale it is possible to reduce cost and gain a bigger margin. Trough mergers and acquisitions it is possible to gain scale and due to synergy create a larger knowledge base and also reduce cost. The cost reduction is mainly due to the fact that sales forces, R&D and marketing departments can be joint. Another advantage of mergers and acquisitions is the globalisation effect. Now companies can sell there products at both sides of the ocean.
Scale disadvantages A disadvantage of scale enlargement is that it will be increasingly difficult to manage. Also there is a big change of a company culture clash. Globalisation Because of the huge R&D cost associated with developing new drugs and the shorter period in witch this investment has to be earn back, it is imperative for companies to aim for globalisation. This is possible in the medicine and OTC market because drugs work the same on everybody. Because rules and regulations and prescription habits differ from country to country there is a possibility for SB to take in to account those rules and regulations when designing drugs for the OTC and prescription market. Because of SB's presence in the global medicine market it is well positioned to introduce it's OTC versions of medicines.
A few companies (3) dominate the healthcare market globally. A few other competitive advantages of globalisation are the larger R&D and marketing budgets. SB also has more market power due to its global presence. OTC products are sold globally by branding the products. Brands become more and more differentiated. The use of new sales channels and other forms of marketing (for instance DB marketing) also give SB a competitive advantage.
Partnerships ProC on Globalisation Manageability Sales channel Job loss Shared knowledge base New technology Partner of choice Forward integration "Vertical integration into managed care has competitive advantages." osuperior information about market conditions; direct access to customers; oopportunities to meet patients needs with new products; o cartel like behaviour "New vertical relationships have led to accusations of abuse of market power." Alliances also create advantages: better network (sales, R&D, distribution etc. ); o partner of choice. Economies of scope Certain types of drug are particular likely to be successful as a OTC drug. As mentioned above rules and regulations and prescription habits differ from country to country so SB must be aware of this when designing an OTC drug. More and more of SB's R&D efforts are geared towards the creation of OTC drugs because they believe this will be there future. Inline with this reasoning is the development of new distribution and sales channels such as internet and mail order.
Also the greater efforts in direct to consumer marketing are a clear sign of this. Synergy A stated above SB has a clear drive to create synergy trough mergers, acquisitions, partnerships and alliances. These actions create the need for business integration and restructuring. This in turn will save cost by streamlining the company's infrastructure (inter) nationally. When a merger or a takeover takes place there is a need for a culture change within the "new" company. Synergy creates job loss.
7. Stakeholders (power, drive, legitimate claim) Smithkline Beecham 'a Stakeholder theory Stakeholders Legitimate claimWillingnessPower Smithkline Beecham Shareholders Suppliers++++ Insurance companies Food & Drug administration++0++ Competitors++0 Pharmacies+0+ Hospitals+0+ Direct customers (OTC) ++0++ Alliances Mergers Joint venture (HGS, Rite Aid) ++++ Government 00++ 8. Organization Smithkline Beecham was formed out of a merger of Smithkline Beckman, an American pharmaceutical firm, and Beecham, a British pharmaceutical firm. It was the first merge in the pharmaceutical industry of two companies and many followed.
Therefore this company ranked fourth on the world pharmaceutical sales ranking and slipped down, when other companies merged as well. The internal reogranisation that followed lead to three integrated businesses, SB Pharmaceuticals, SB Healthcare Services and SB Consumer Healthcare. SB's goals was to globalize the company and sell their products all over the world. Also a good and strong R&D department was one of the reasons SB merged and alliances with more companies to get a good integrated network. It work on its vertical as well as its horizontal integration network. The total pharmaceutical industry went through a change from a prescription to an OTC (over-the-counter) status, that lead to a lot of changes in the formulation of drugs and a lot of research for the R&D department of the company.
Problem statement, solutions and conclusion SB has a relative small market share compared to its competitors. The 10 largest pharmaceutical companies have only a market share of 25% together, whereas the largest one has a share of not more than 4%. One of the problems is also the changing cultures because of the merging companies all with their own culture. This results in a lack of synergy. Another problem is the long approval process, mainly because of the bureaucratic nature of the organisation that approves the medications. The time for the approval is getting shorter, because of new developed techniques of researching the medication.
There is also a short profitable lifetime after the approval period, because of the patent that expires after 20 years. Solution 1 One of the solutions is to change the prescription medication to OTC (over-the-counter) medication. As customers nowadays more easily can find out what kind of disease or problem they have, they know what kind of medication they need and buy these products rather over-the-counter then get a prescription for it. With this information SB might focus more on OTC products, and start a mail-order company for example on the internet or merge with a company, that is working similar to their idea. It is important to use a good marketing strategy to make the sales via the internet known by potential customers. Solution 2 Another solution is to hang on to the idea to merge with Glaxo Wellcome and get a strong and good market share.
Glaxo has one successful product already selling and SB has 4 probably successful products in the pipeline, not selling yet. After the merge with this company, it is important to invest in human resource management to improve the bad synergy between the companies as a result of different internal approaches. Also a result of the merger will be a cost reduction in the development and production of drugs. Solution 3 To invest in its brand awareness is another solution for SB.
Especially in the OTC market margins are low because consumers do not have a special brand preference for their drugs. By invest in communication towards the consumer about advantages of SB drugs over the competition. SB should try to create a reliable and a trustful image so it will receive a premium status. In this case margin will be recovered. SB should use new ways of marketing like database marketing. Conclusions Feasibility Solution 2 is a feasible solution, because the merge conversations already started and will be finished after some issues are clarified.
By an investment in human resource management, there will be a positive culture of the new company, arise from both companies together. SB's strategy of 'designing a winning culture', called Simply Better Way, is regarded as one of the industry models of successfully instilling a culture of change. Economic benefit The value of the merger, what have been the largest in the world in the pharmaceutical industry and would make the combination a number one player in its market. The merger will, combined with investment in HRM, give rise to the benefits of synergy. The merger will also increase economies of scale, which will reduce cost of development and production of drugs. Competitiveness Due to the number one position in the market the new company will be able to shape the future rather than adopt the future.
Also the better and more effective use of the R&D budget will give the new company competitive advantage. So our choice recommendation will be solution two. Visioning and creating future Especially in the pharmaceutical industry there is a lot of uncertainty. However, pharmaceutical companies can anticipate actively towards the market.
So, we can conclude that the basic level of uncertainty is ' Currently unknown, but knowable information', which means that pharmaceutical companies can analyze the market and try to fulfill the found needs of customers. The residual uncertainty that SB is facing can be seen at the level of Alternate futures. In the pharmaceutical branch there are a lot of determining factors, such as R&D capital, amount of people that suffer from a disease, the influence of the government, the patents, etc. , but the two factors that determine the uncertainty mostly are the research results and the medicine price. SB's posture depends on the different area's within the branch.
For SB invests lots of capital in the gen-technology and can be seen as playing a leadership role, its' posture is 'shape the future', but as it also follows the market to fulfill the customers needs by capturing opportunities and being flexible, its posture is 'adapt to the future'. Also can be said that SB never that the position of 'reserve the right to play'.