The Five Competitive Forces That Shape Strategy - Assignment Example

?Question one: For this task, the pharmaceutical company that we shall look at is the second largest pharmaceutical company in the world and the largest in Europe, GlaxoSmithKline (GSK). In the 2010 financial year GSK annual turnover was ?28.4 billion. The company is headquartered in England and has a staff of over 100,000 people in a total of 117 countries globally. GSK has a broad products base that could be categorised into three major tracts: consumer health products, vaccines and prescription medicines. The company is dominant in the vaccines market where it has roughly ? of the global vaccines market share (Anon, 2011). PESTEL Analysis The PESTEL framework of analysis looks at six external forces – Political, Economic, Social, Technological, Environmental and Legal – that affect the company at its present state or that have the potential to affect industry competitiveness in future. For the pharmaceutical industry we have identified that Political, Economic, Social and Technological factors have the potential greater impact on the industry than the remaining two therefore we shall focus on this four in our following discussion. It takes 10-15 years on average for an experimental drug to travel from lab to patients (Holland, 2011) and this is largely due to stringent government regulations. This long lead time is just a tip of the political iceberg that plays a very big role in the pharmaceutical industry. Beginning 2009, the U.S. Federal Drug Administration tightened regulations so that pharmaceutical companies will now have to adjust to stricter standards and stronger enforcement (Anon, 2011). In addition to this, most governments continue to pressure GSK and the other big pharma to increase access to medication either by lowering the cost of drugs or by removing their patent protection to allow for manufacture of generics. The latter ask is highly unlikely to be accepted by GSK and its peers whereas the former could be achieved if the pharmaceutical companies are guaranteed of bigger sales volumes. One important political move that should have a big impact in this industry is the passing of President Obama’s US healthcare reform into law on March 23, 2010. This bill is good news for the big pharmaceutical companies because it is expected to expand health insurance coverage to more than 30 million uninsured Americans (Trager, 2010), especially considering that America is still the largest pharmaceutical market in the world. Other than this significant increase in market size, the new healthcare law also protects original drug manufacturers, such as GSK, from competition from generic alternatives on biologics through a 12 year exclusivity period. Biologics are currently viewed as one of the potential huge products for pharmaceuticals, especially given that they contributed US $80 billion in 2008 with favourable projected goals of up to three times that of small molecules (Holland, 2011). Closely following political factors in significance for the pharmaceutical industry is the economic factors. There are positives as well as negatives for GSK and its peers to ponder over with regards to economics. The first negative that quickly comes to mind is the global economic squeeze of 2008 that has somewhat persisted to the present day, especially in the EU. According to Holland (2011) the pharmaceutical market growth is strongly aligned with GDP growth therefore the low GDP growth in the current key markets of US, Japan and Europe is a cause for concern. The immediate consumer behaviour will be to opt for the more affordable generic drugs at the expense of the original drugs that have cost GSK and its peers billions of dollars in investment from research, to production to marketing. Talking about generics, most of the blockbuster drugs patents that enriched big pharma have / are coming to an end in 2011 and 2012. This growth of generics and loss of patent protection for best-selling drugs at the same window period has the potential of turning cash-cows for GSK and its peers into dogs, if we were to use the Boston Consulting Group Matrix to evaluate this phenomenon. Nevertheless, it is not all doom and gloom for the pharmaceutical industry on the economic front. According to Holland (2011) the following countries that have relatively high GDP growth rates – Brazil, Russia, India, China, Mexico, South Korea and Turkey are predicted to contribute almost half of market growth from 2009 to 2013. She adds that these economies will overtake the EU by 2013 in terms of pharmaceutical market size. For global companies such as GlaxoSmithKline (GSK) this is an opportunity that they cannot afford to ignore. Of all the external factors, probably social factors are the one to offer the greatest hope in resuscitating the pharmaceutical industry to its erstwhile profitability highs. The first social phenomenon is the ageing population in the key markets of US, Europe and Japan. According to Holland (2011) over-65s consume four times as much healthcare per head as younger people. This translates to increased demand for drugs. The challenge here though is that governments have opted to intercede on the grounds that senior citizens healthcare bills will become too costly for whoever is footing the bill – which in most of Europe, that practices socialized healthcare, it is the government that foots the bill). However, the today’s eating habits and other non-physically active social behaviour have led to a rise in lifestyle diseases such as type 2 diabetes, obesity, asthma, Chronic Obstructive Pulmonary Disease and so on. A rise in these diseases implies a rise in demand for drugs to bring them under control. Technology has been at the heart of the pharmaceutical industry from its inception and shall continue to remain so. Even though Holland (2011) informs us that R&D productivity is in decline and drug development times are lengthening, technology has been able to open new fronts for drug companies to diversify their product base. Technology continues to open doors to new products such as biologics or vaccines, support new business models such as personalised healthcare, and diversification into medical devices, veterinary products and nutraceuticals. Increased research –due to better technology – into areas such as stem cells and human genome are also bound to increase pharmaceutical offerings in future. Five forces analysis Understanding the competitive forces and their underlying causes reveals the roots of an industry’s current profitability and provides a framework for anticipating and influencing profitability in the future (Porter, 2008). These five forces are supplier power, buyer power, industry rivalry, threat of entry and threat of substitutes. We shall look at them in that order in the following discussion. Supplier power is probably the weakest of Porter’s five forces in the pharmaceutical industry. There are numerous suppliers of the raw materials needed to manufacture drugs from both the developed and the emerging economies of India and China. This means that these chemical suppliers have no leverage against the drug manufacturers who could easily move to other suppliers. For the global giants such as GSK, supplier power is virtually non-existent. At some point, probably in the 1980s and early 1990s the big pharma such as GSK had overwhelming power of buyers on what to charge for their products. However, with the ageing populations, governments increasingly became the largest buyers of pharmaceutical products in the key markets of US, Europe and Japan. This meant that the market became a monopsony. Using their monopoly, governments instituted several methods to control pharmaceutical spending from both the supply-side and the demand-side. With President Obama’s new healthcare law, government influence as a buyer has increased in the industry’s largest market. Even though, big pharma continue to benefit from the increased use of Over-the-Counter (OTC) drugs and rise in lifestyle diseases, governments and government agencies still influence these demand-side controls. This means that in today’s pharmaceutical industry buyer power is strong. Industry rivalry is high especially at the global level where the big players consolidated to the extent that the top 10 big pharmaceutical companies held 43% of the market as of 2008 (Holland, 2011). This trend of consolidation through mergers and acquisitions between 2006 and 2008, coupled with the dying blockbuster drug business model, and falling consumer disposable incomes in key markets has meant that industry players seek more innovative ways to maintain their market share. To make matters worse R&D productivity is in decline and drug development times have lengthened and generic drug companies have continues to grow in strength. This means that big pharma have to remain competitive in an increasingly competitive market. With some of the big pharma such as GSK venturing into generics business, the question of industry competitiveness being high becomes less questionable. The pharmaceutical industry is characterised by heavy expenditure on R&D – that is not guaranteed of success, expensive clinical trials and lengthy government approval processes. On average it took 10-15 years for an experimental drug to travel from lab to patients. Additionally, the pharmaceutical company would have to spend heavily on sales and marketing to drive its approved products to success. However, in the 1980s, small biotech companies backed by venture capital begun to exploit the myriad of opportunities created by molecular biology and genetic engineering (Holland, 2011) which posed a big threat to the incumbents. This influx of cash lowered the barrier to entry. But that is in the past especially after the global credit squeeze of 2008 and rarity of biotech IPOs which caused access to venture and debt financing to dry up. Currently with very few venture capitalists willing to invest in the industry the sole avenue of entry threat to the pharmaceutical industry is gone and the barriers to entry have gone back high to where they used to be pre-1980s. Threat of substitutes has been kept high mainly by the emergence of generics. Currently, the top 10 generics companies account for nearly half the global market and therefore they have the cash flow to keep them in competition with the global original drug makers such as GSK. This source of threat has become more significant with the impending expiry of blockbuster-drug patents in 2011 and 2012. On a smaller scale the new fad of healthy living that encourages nutrition, exercise and herbal remedies could also be looked at as a substitute threat. A summary of both PESTEL and five forces analysis reveals that it faces a tough time. Low GDPs and increased government regulations in key markets are challenges that need innovative ways to tackle. Seeking market growth in the emerging economies is an obvious strategy that should be pursued. On the other hand, strong buyers, intense rivalry and strong substitutes will also need to be addressed through strategy. In the next section we shall critically analyse GlaxoSmithKline’s strategic capability to face these challenges. Question two: Table 1: GSK strengths vs. weaknesses Strengths Weaknesses Almost double the number of drugs in late stage development as its closest competitor, Pfizer (Anon, 2011). From Appendix 1, it is evident that despite having high sales GSK has significantly lower earnings than rivals with lower revenues. It has roughly ? of the global vaccines market share (Anon, 2011). Active in branded-generics (Holland, 2011) Strategic alliance to commercialise Dr Reddy’s portfolio of generics (Holland, 2011) GSK has core competencies in the manufacture of vaccines and has also actively engaged in branded-generics. Vaccines have higher development success rates and lower risk of generic entry than conventional medicines and offer blockbuster sales potential. This is a potential long-term cash cow for GSK over its competitors. On the other hand, having strong base in generics protects GSK’s margins from the threat of generic substitutes since it will also be generating revenue from successful generics. Moreover as Holland (2011) posits success seems most probable for generics offering the reassurance of known brand and reliable manufacturer, an area that GSK has perfected. The main challenge though is for GSK to be more efficient in turning its revenue to profits probably by re-examining its cost structure and bring its costs under control. The ability to turn revenue to profit will affect investor confidence and as such may affect its ability to raise investment capital when the need arises. References Anon (2011). GlaxoSmithKline (GSK). [Online]. 13 December 2011. Wikinvest. Available from: http://www.wikinvest.com/wiki/GlaxoSmithKline_(GSK). [Accessed: 13 December 2011]. Holland, S. (2011). The global pharmaceutical industry: swallowing a bitter pill. In: Exploring Strategy: Text & Cases. Harlow: Prentice Hall. Porter, M.E. (2008). The Five competitive forces that shape strategy. Harvard Business Review Online. R0801E. p.pp. 1-18. Trager, R. (2010). Big pharma scores in US healthcare reform. [Online]. 25 March 2010. RSC: Advancing the Chemical Sciences. Available from: http://www.rsc.org/chemistryworld/News/2010/March/25031003.asp. [Accessed: 13 December 2011].  Appendix 1: Pharmaceutical Industry Financial Analysis Read More