Q1 Using Pestel Analysis, identify what environmental factors are affecting big

pharmaceutical companies strategically?

Introduction

Johnson and Scholes (2002) p10 define strategy as “the direction and scope of an

organisation over the long term, which achieves advantage for the organisation through

its configuration of resources within a changing environment and to fulfil stakeholder

expectations.” The purpose of an environmental scan is to develop a list of diverse

variables from an uncertain and complex world to offer actionable responses and in so

doing allow a structured framework for defensive or offensive actions.

The Pharmaceutical Industry environment is an ethical drugs industry aimed at providing

beneficial products and services for human consumptions as well as chemical

medicaments and biotechnology. The 21st century has brought about changes within the

pharmaceutical industry. The pharmaceutical industry today is highly competitive non-

assembled global industry. To define the non-assembled aspect of the industry is where

manufactures components parts or materials are relied on for example glass, woodwork

and chemicals. It was in the sixties and seventies that the pharmaceutical industry was to

expand rapidly as it was a period referred to as the spending boom. Research and

development (R and D) was also a major investment and trust which was provided for

Universities and education institutions. Pencillin which was the major discovery in the

pharmaceutical industry in the 40’s, which led to research and development in the 50’s

becoming firmly established in the industry the seventies, saw many remarkable changes

within the pharmaceutical industry with tighter regulatory controls being enforced within

the industry. This could be seen in the way generics were to be manufactured, generics

are medicines that are manufactured after patent expiry date by another pharmaceutical

and then usually sold on at a reduced cost. This brought about the branded generic

concept; this offered a slight advantage over ordinary generics products.

The markets for pharmaceuticals products are influenced by trends driven by customers,

technology, distribution channels and the introduction of new competitive offerings.

Advances in technology, tighter regulatory controls, patents expires as well volatile

investor confidence have made the pharmaceutical industry a very though and

competitive environment. Porter suggests that industry selection and analysis is a vital

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component of strategic planning. An industry is “a group of firms producing products that

are close substitutes for one another.” (Johnson and Scholes, 2002, p110)

Political

Pharmaceutical companies must ‘be proactive in scanning and responding to the policy

environment’ and it must adhere to ‘a trend toward Social accountability, corporate

philanthropy, corporate compliance and ethics programs, in order to trade in these

markets (Bennett 1998, Dabson 1991 and Manley 1992 cited in Leclair 2000, p 196).

Increased political attention in the pharmaceutical Industry due to healthcare becoming

increasingly important issue on a global front. Healhtcare has become increasingly

expensive and has been viewed by people as a financial burden foe example the U.K’S

National Health Service debate and the U.S Medicare debate. Regulations on

pharmaceutical companies and general corporate compliance standards are becoming

more stringent around the World. It follows therefore that the corporate compliance and

costs of doing business in third world countries would be much lower than Europe and

the United States. The growth of the pharmaceutical industry especially the U.S is

potential sources of major profits, major markets of Pharmaceutical competitors, lower

political risk and the richest markets.

Economic

Mergers and acquisitions have become common practice in many industries, the

pharmaceutical industry underwent a number of merger’s and acquisitions in the late 20th

early 21st century, Pfizer\Pharmacia, Glaxo- Wellcome \Smith Kleine –Beecham and

Novartis as well as the merger of Sandoz and Ciba Geigy. Majority of pharmaceutical

sales are in Europe, U.S and Japan. The U.S is the fastest growing market. Datamonitor

forecasts suggest that the top 16 pharmaceutical companies for 2001-2007 that sales will

grow a minimum of 5.2% based on their product potential pipeline. (Datamonitor 2001).

Through these acquisitions and new products added through in-house research and

development, pharmaceutical companies now have a comprehensive portfolio of

products. Many pharmaceutical operations are funded through out the sale of its

securities and shares. Convertible into shares, cash flow’s from operations and bank

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borrowings, lease financing, current working capital and sales revenue that fund’s it’s

existing operation’s payment obligation’s.

Social

Corporate social responsibility can be defined “A concept whereby companies integrate

social and environmental concerns in the business operations and in the interaction with

their stakeholders on a voluntary basis”(European Commission 2001) Pharmaceutical

companies are increasingly contributing to the healthcare system. Good health is an

important personal as well as social requirement.

“In the year 2000, health was one of the top twoReasons for people to conduct searches on the Internet, with Yahoo.com/Health,Excite.com/Health and AOL.com/Health the three most visited health-relatedWebsites.”(Johnson et al, 2008,p615)

Pfizer produces the well-known product to control cholesterol called “liptor” which

became the bestseller drug in 2005.This drug is commonly prescribed for diabetics which

has become an increasing epidemic amongst children in particular.

“The biggest sector has been cardiovascular disease, with 5.2 per cent ofWorld audited sales in 2000 and rank 3 in terms of the number of prescriptions, asCardiovascular disease has remained the leading cause of death worldwide.”

A report by World Health organisation (WHO 2005) claims that childhood obesity is at

epidemic level in some countries. Every year 4,000 children are diagnosed with obesity

in Ireland, this is triple the amount that were obese ten years ago. According to Irish

health.com (2006) in to-days Ireland 20% of Irish men and 16% of Irish women are

currently obese. According to the Food Safety Promotion Board Irish adults have a fat

intake of 37% while the recommended allowance is 35%.

The problem is also becoming more widespread amongst younger people, with children

as young as 12 now being diagnosed with adult-onset diabetes, a condition which was

traditionally associated with adults who were overweight One in five Irish children aged

5-12 years is overweight or obese (Irish Universities Nutrition Alliance, 2005; Economic

and Social Research Institute, 2005 cited in Food Safety Promotion Board 2005). The

implications for children are clear.

Consumers are now more informed of products that are on the market that are beneficial

for ones health. Pharmaceutical Companies must ‘be proactive in scanning and

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responding to the policy environment’ and it must adhere to ‘a trend toward Social

accountability, corporate philanthropy, corporate compliance and ethics programs, in

order to trade in these markets Bennett 1998, Dabson 1991 and Manley 1992 (cited in

Leclair 2000, p 196).

Aids which is terminal disease is example of a turning point within the pharmaceutical

Industry as access to modern therapies was not affordable by people in developing

countries, this caused a number of questions to be raised around the topic of “ethics”,

which was nelson helped by Nelson Mandela, as it forced companies like

GlaxosMithKline to negotiate clear principles as well as supplying countries on a no-loss

no-profit basis.

Technological

The pharmaceutical industry has seen many modern advances on the scientific

technology, which requires the key players within the pharmaceutical industry to adapt to

the markets that they participate in. This has required increased investment and spending

on research and development in order to encourage innovation. This requires investors,

which are referred to as stakeholders to finance the innovation in the company.

Stakeholders are individuals or organisations that have an interest in, or some kind of

stake in, the firm’s ongoing activities (McGee et al, 2005). Stakeholders have a number

of attributes the most important of which are interest and power. Interest is how focused

the group is on the current strategic activity of the organisation; interest can be positive or

negative. Power is ‘the ability of individuals or groups to persuade, induce or coerce

others into following in certain courses of action’ (Johnson et al, 2008 p.160). The

pharmaceutical industry is defined not by the product’s but by the technology it

employ’s. Modern technology has increased the pace of the industry in which companies

must implement as well as keep up with these changes to avoid becoming venerable.

Environment

The power of the pharmaceutical compliance enforcing industry has been increased due

to the independence and credibility; customers demand high quality products at an

attractive price. The customers have a low level of involvement of the regulatory

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organisations and the power they hold is based on the maintenance of trust with the

regulatory organisation. These compliance and regulatory overheads are costs, which the

industry has to absorb. This to certain extent may have reduced innovation; however

governments have requested regulatory proposals so as not to deter innovation within the

pharmaceutical industry.

The aging population is a cause for concern since the elder generation consumes four times

as much healthcare per heads as those below 65, companies put an emphasis on research

for drugs of patients over the age of 65. (Johnson et al, 2008, p610). The society has a

high interest in the in healthcare due to the greater demand for the service in the area.

Society has indirect power to influence the government.

Legal

Developing countries differ substantially both in geographic region and levels of

economic development (Gillespie et al 2007). In the U.S and Europe there is higher

growth potential because markets are more competitive. Global trade liberalization has

caused many ‘closed countries’ to open their borders to imports. Cultural distance is

higher for triad organisations (Japan, US and Europe) but lower for regional competitors.

However, political and economic threat is still higher than in the triad (Gillespie et al

2007). Investment from stakeholders is a source of increased innovation. They have a

high interest in making the Company more innovative, efficient and effective. This

interest is seen through creative ideas in research and development such as the

introduction of trials on particular drugs whether it is for alzeimhirs, cancer, diabetes and

aids. The social political environment has an influence on decisions pharmaceutical

companies make as in developing countries increasing pressure has been put on to ethical

manner in providing healthcare and drugs to the less well of. Department heads have high

power due to their ability to influence other stakeholders to adapt to these innovations as

seen with the use of trials. The main regulatory bodies that require extensive clinical

testing are the food and drug administration (‘’FDA’’). This organisation governs product

testing, labelling’ storage, advertising premarket clearance, advertising and promotion

and sales distribution. (Johnson et al, 2008 p.609). For example Irish Medicines Board as

authority over Trinity Biotech in Europe and Canada in which regulates the market of

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introducing their products onto the American market known as premarket notification

(510(k)) and remarket application (“PMA”). These are just two of the many main

regulatory bodies. (Clearance pathway is notifying what exactly the product does and

also how safe it is also to find out if changes can be made to the product to make it more

effective and efficient.)

PMA Approval Pathway this is the device has not received adequate permission so the

company will have to prove the safety and effectiveness of the product). The FDA has

implemented substantial fees for the submission and review of PMA applications (Trinity

Biotech 2008)

Q2 Porters Five forces in the Pharmaceutical industry

Unitizing a five force Analysis what impact would you ext expect from the three

most important threats?

Introduction

In the case of Pharmaceutical companies there are a large number of stakeholders, which

hold varying levels of power and interest. Stakeholders and have the ability to change

they’re level of interest and power depending on the situation; this leads to movement on

the stakeholder grid. According to Freeman and McVea (2001) cited by McGee et al

(2005) the needs and goals of stakeholders are sometimes in conflict with each other but

stakeholder management is a never ending task of balancing and integrating multiple

relationships and multiple objectives.

The promotion of innovation is one of the main objectives of the competition policy. The

competitive concerns are especially important in the technologic-based industries, where

the main factor of growth and economic success is the innovation, as result of the R&D

processes. This is the process of linking a firm’s product or service to the solutions that

customers seek and ensuring that when they think about those needs, the company’s

brand is one of the first that comes to mind. Effective positioning is necessary as today

we live in an over communicated society. Consumers are constantly exposed to hundreds

of marketing messages every day. This may cause confusion in the customers mind so

pharmaceutical companies should ensure that their message is simple, direct and in line

with the customers needs. A company should consider the customer, its competitors and

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the company itself when deciding what position to occupy in the market. (Jobber, D.,

Fahy, J. 2006 p 125.)

There are four criteria for successful positioning are: clarity, consistency, creditability

and Competitiveness.

Clarity: The idea must be perfectly clear, both in terms of the target market and

differential advantage. Pharmecutical companies must ensure their message remains clear

and uncomplicated.

Consistency: As people are bombarded with hundreds of messages daily a consistent

message is required to break through the noise. Customers may become confused when

the different health products out there which will market two completely different

images. Therefore complete accuracy with marketing efforts when targeting the

appropriate markets, ensuring that it is positioned correctly in its customers’ minds.

Creditability: The selected differential advantage must be credible in the minds of the

target customers. This is the area that will affect dramatically. They need to be well

known for being trustworthy as well as playing their role in Corporate Social

Responsibility.

Competitiveness: The chosen differential advantage must give Pharmecutical companies

a competitive edge.

Porters Five Forces in relation to the Pharmaceutical Industry

Bargaining Power Of Suppliers Threat of new entrants

Bargaining power Power suppliers

Threat of substitute ProductOr Service

1 Industry Competition

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Potential Entrants

BuyersSuppliers

Industry Competitors

Rivalry among existing firms

Substitutes

Competition within pharmecutical sector is high .The main competitor’s of

pharmaceutical companies are both in the public and private sector. Competition is based

primarily on product reliability, customer service and price. The competition includes

several large companies such as, but not limited to, Roche, Abbott, Johnson and Johnson,

Pfizer, Bayer and Dade-Behring.Patent’s of products and services offer pharmaceutical

companies an advantage over competing firms. Pharmaceutical business could be

affected by changing market condition’s, which could possible result in the reduction of

institutional customer’s with changes in the healthcare Industry.

In the last decade there has been a number of merger and acquisitions this has forced key

industrial players to revamp their organisational structure, in order overcome huge

barriers in research and development as well as clinical trials to ensure continuity and

profitability. Porter suggests that there are two generic strategies: cost or differentiation.

If a company is to remain competitive they must have a differential advantage over their

competitors. A differential advantage can be created out of any of the company’s

strengths or distinctive competencies relative to the competition. The essential factors in

choosing how to create the advantage are that it must be on the basis of value to the

customer e.g. prices, superior quality and should be using a skill of the company that

competitors will find hard to copy.

In the last century merger and acquisition activity began in the pharmaceutical industry,

this was influenced by the threat of the companies losing their patent expirations and face

competition from generic copies. Evidence indicates that sales can decrease by as much

as 75 percent in the year preceding patent expiration. (American Economist 2006). This

allows pharmaceutical companies to pool advertising, R and D and productivity as well

as reducing costs. An important element of a firm’s international marketing strategy is its

branding policy. Brands are essential in the establishment of a firm’s identity in the

market place in order to develop a solid customer franchised. DTC advertising suggests

that advertising makes the consumer more aware of the brand of dugs that is available

The value of the Pharmaceutical brands Pfizer brand is based on the extent to which it

provides high brand loyalty, awareness, perceived quality and strong associations.

Guarantees market share, revenue and success. Strong brands represent quality as the

organization and the consumer value strong brands. Brand positioning is essential in that

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Companies must realise that customers differ in their needs and preferences. Positioning

a brand correctly may lead to the brand becoming dominant within its market, which

Pfizer has successfully done in the Global market. (Johnson et al, 2008,p617)

Example Pfizer\Phararmacia, it merged with Warner-Lambert in July 2000, it became the

World largest pharmaceutical company. A number of advantages arose from this as it enabled

the company to produce a strong product portfolio as well as investment in R and D,

technology and global sales force expansion .In April 2003 the merger of Pfizer’s Inc. and

Pharmacia Corporation was announced. This new Pfizer allowed the company to have 50%

more control of the market; Pfizer has an estimated 11% control of the market. (Johnson et

al, 2008,pp717-618)

Also in 2000 there was the merger of GlaxoWellcome and SmithKline Beecham, this created

the second largest pharmaceutical company with a global market, this company may be

considered more global than Pfizer in terms of the companies geographical spread as the

company operates higher sales outside the American market .The region that present

competition for GSK is Africa, Asia and Australia as this is the area where Pfizer has

targeted for future growth.

Supplier Power

Supplier Power is Low, Delivery system, which could result in consolidation among,

reference Labourites and in the establishment of multi-hospital alliances, which could

reduce the number of institutional customer’s for drugs.

For long-term success the companies need to be able to develop new products, which are

subject to stringent control. Pharmaceutical companies have limited lifetime and are

thereafter faced with competition from generic products in which they may claim to

certain to certain Pharmaceutical companies patent’s rights and develop their ideas. This

could have a detrimental effect on particular pharmaceutical companies share and

revenues and position in society. Different stakeholders exercise different influence on

organisational purpose and strategy, dependent on the extent of their power at interest

(Johnson et al. 2008 p167). Exports within E.U. are of minor concern to; this matter is

complicated when exporting to countries like China, as it is a risky nation.

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Pharmaceutical companies must consider different elements in different nations, in their

pricing strategy. Certain factors, which have a high influence in one country, have a

lesser influence in another, making it difficult to standardise the price across markets.

Pharmaceutical firms can transfer or license encoded experiences to other firms pricing,

this is where pricing strategies are difficult (Levitt and March 1990, 24 cited in American

Economist, 2006). The Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS), under the WTO seeks minimum 20 years patent protection for

pharmaceutical products.

The different price concepts have led to a wide gap between drug prices in Canada and

the US. “Best-selling cholesterol lowering drug Lipitor was $3.20 per pill in the US in

2003, compared with just $1.89 in Canada”(Johnson et al, 2002,p636)

In previous decades the government was the sole or major bearer of pharmaceutical

products, recent trends indicate a shift in this trend through health insurance companies

like VHI (Voluntary health Insurance) and Quinn Health Insurance in Ireland as well as

the consumer. This is causing pharmaceutical companies to reduce the costs of the

products. It is important that these companies segment the market. Different consumers in

the market have different needs and we can serve them better by segmenting the market

into groups with homogeneous needs.

The following five factors are necessary for successful segmentation; the segment must

be measurable, substantial, accessible, differentiable and actionable. There are four bases

of segmentation for consumer markets:

(1). Demographic Variables: such as age, occupation, family size, religion, education

and social class. (2). Geographic Variables: such as region, city size, market density and

climate. (3). Psychographic Variables: such as personality attributes, motives and

lifestyles. (4). Behavioural Variables: such as volume usage, end user, benefit

expectations, brand loyalty and price sensitivity. Developing countries like India and

China have different healthcare needs than people in the developed world because of the

need to improve health, sanitation and nutrition. This offered pharmaceutical companies

to operate in a Corporate Social responsibility manner.

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Substitutes

In the pharmaceutical Industry there is increased pressure on companies like Pfizer as

there core product Viagara is a high cost which encourages customers to use cheaper

alternatives, not only is Viagara a high cost there is also number of safety issues

surrounding the Viagara drug. This is a cause of concern for Pharmaceutical companies

like Pfizer as imitation of a product can devalue the product as well as leaving it

vulnerable to the market. Viagara is what is referred to as a blockbuster drug, these are

drugs that achieve rapid and deep penetration, and because of their superlative they can

determine the future of the fortunes of individual companies. Blockbusters launched

between 1998-2003 sales are said to be in the region of $2bn in a three and half year

period. (Johnson et al, 2008)

Globalisation is affecting companies everywhere as nearly every country wants a share in

the profits and the pharmaceutical industry as the potential for high return on profits.

China and India are examples as these countries are seeking to develop in regional

markets. Pfizer lack of geographical balance on a global front may present the company

problems in the future as they rely heavily on the U.S market which account accounts for

60% of the company’s sales. Pfizer’s imbalanced geographical presence (the US

accounts for over 60% of Pfizer’s market.

The expiry of patents as well as the risk associated with patents allows competing firms

to gain the rights of other pharmaceutical products, in order to combat this problem, it is

important those companies are highly efficient and cut unnecessary costs internally as

well as externally to enable to operate more efficiently in the global environment. It is

important that big pharmaceutical companies develop a strategy that enables them to

reduce threats and take advantage of the opportunities that arise within the global

markets.

For a long time authorities like the FDA presented obstacles for competing firms wishing

to introduce similar products that other pharmaceutical companies already produced.

However generic drugs in the 1980’s began to enter the market and by 1996 generic

drugs accounted for more than 40% of pharmaceutical prescriptions as well as the

biotechnology industry entering the market. Biotechs have a number of capabilities in

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that in which they can diversity as well as be innovative, there success is evident as in

2005 there were nearly 700 publicly traded biotech’s worldwide with a revenue of $63bn

The success of biotechnology companies in the drug discovery area suggested the

creativity in research and Development worked better in small groups. Branded drugs,

require strong R&D combined with sales and marketing infrastructure. Generic drug

companies focus on supply chain management and manufacturing cost leadership in both

ethical and OTC sectors (Johnson et al, 2008)

Then there are the natural, herbal remedies as well as exercise that are all substitutes for

prescription drugs; however there these do not prevent life threatening illness like cancer

which prescription drugs are still a requirement.

Q3 In one paragraph suggest a plausible hostile scenario would look like for big

pharmaceutical companies?

The baby boomers will be the largest group of people over the age of 65 in American history.

* The Indian middle class is growing in number.

* Businesses outsourcing work overseas is increasing as a strategy to keep costs low.

* Diagnostics equipment is falling in price and increasing in connectivity to the Internet.

Scenario for the Year 2016

America, fiscally burdened by the cost of its massive retired population, begins to outsource some health-care duties to doctors in India.

Telemedicine becomes more widespread, involving the use of remote diagnostic machines, located in American clinics, to take readings and document a patient's symptoms and vital signs.

Much of the mundane work of the primary-care physician is outsourced using the Internet, although tough cases are still referred to American specialists.

Is globalization going to impact the American hospital?

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* Is the U.S. health-care industry investing enough in cutting-edge information technologies? What about other countries?

* Will foreign medical students who come to America stay, or will they return to their home countries to practice?

* How much pressure is the baby boomers' aging going to put on health-care practices? Can organizations minimize the discomfort by planning ahead?

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