THSWANE UNIVERSITY OF TECHNOLOGY

BUSINESS SCHOOL

NAME: Lubabalo Lokwe-208261258

SUBJECT: Business Strategy

COURSE : Master of Business Administration

LECTURER: Prof. Ian Strydom

DATE: 3 October 2009

Table of Contents

INTRODUCTION………………………………………………………………………………..3

1. PESTEL ANALYSIS OF THE INDUSTRY....................................................................................... 3

a) Political...................................................................................................................................................................3
b) Economic...............................................................................................................................................................3
c) Social.......................................................................................................................................................................4
d) Technological..........................................................................................................................................................4
e) Environmental........................................................................................................................................................4
f) Legal........................................................................................................................................................................5

1.2 Porter’s Five forces Analysis………………………………………………………………………………………………………………………………5

1.3 What environmental factors are affecting big pharmaceutical companies?..............................................7

1.4 Which of these is the most important at the present time?.............................................................................8

1.5 Which of the influences you identified are likely to be the main 'drivers for change' in the future of
Pharmaceuticals? Why?........................................................................................................................................9

2.1 Which would you regard as the three most important threats to a big pharmaceutical company and explain
why?..........................................................................................................................................................................................9

2.2 How could you respond to each of those to lessen their impact?...............................................................................9

3. With reference to Exhibits 4.5 and 4.6 answer the following questions:……………………………………………………….10

3.1 Who do pharmaceutical companies serve?..................................................................................................10

3.2 Describe the internal and external aspects of what they are responsible for…………………………………………….........11
Internal Aspects………………………………………………………………………………………………………………………………………………..11
External Aspects.......................................................................................................................................................11

3.3 What would be the practical implications if most Pharmaceuticals ran their business according to each of the
different ethical stances as shown in Exhibit 4.5 ?.......................................................................................................12

3.4 What would be the implications for government, regulators and the medical establishment if most pharmaceutical
companies followed each of these stances…………………………………………………………………………………………………………..12

3.5 How would these actions by Pharmaceuticals, the medical establishment and governments affect citizens, patients
and consumers?..................................................................................................................................................13

4.1 What are the likely implications of the changing business environment on pharmaceutical firms?...............14
5. Conclusion............................................................................................................................................................16
References................................................................................................................................................................17

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Introduction
The global pharmaceutical industry is facing a number of challenges from all fronts of doing
business. These challenges manifest themselves in a number of ways through which these
conglomerates need to a have some form of strategy to manage such. The legislative stringent
regulation that characterises the industry is a very real threat to the survival of the industry. It is
against some of these assumptions that therefore the industry needs to find a way of cleaning
up its act and be seen to be responsible through to community level as well. It is a well known
fact that the cost of manufacturing drugs is high in the industry due to stringent conditions that
are set by governments all over the world to curb run away prices increases. The fact of the is
that medicines are not cheap due to the research and development lead times that can take
any thing up to 12 years of initial research.

1. PESTEL Analysis of the industry

Indeed the pharmaceutical industry is plagued by a number of challenges; these challenges can
be clearly articulated through the use of one of the most commonly used method to ascertain
the next way forward. The use of the PESTEL Method (Political, Economic, Social, Technological
and Legal frameworks/factors), form the basis on which a proper strategic analysis could be
undertaken.

a) Political Challenges

Over the years, the industry has witnessed increased political attention due to the increased
recognition of the economic importance of healthcare as a component of social welfare.
Political interest has also been generated because of the increasing social and financial burden
of healthcare. Examples are the UK’s National Health Service debate and Medicare in the US.
These challenges manifest themselves in the everyday running of the companies.
Pharmaceutical companies find themselves in a position of having to lobby government for
almost anything that they do. The debate between the affordability of medicines and the
company’s right to make justifiable earnings in the light of economic hardships is a case in
point. Pharmaceutical companies have to dig deeper in their understanding of the various
political system in each and every country that they operate in.

b) Economic challenges

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There is an intrinsic link between the political, economic and social factors particularly when it
comes to the pharmaceutical companies. This link is evident in the way in which the global
pharmaceutical companies are being perceived as contributing to the economy of the country
that they operate in. The audited value of the global pharmaceutical market was estimated to
have reached a huge 500 billion dollars by 2004. This in itself is huge growth in global GDP.
Pharmaceutical companies are very susceptible to host country economic sustainability or
stability in the long term due to some unstable economies global pharmaceutical companies
run away from investing in such countries. Pharmaceutical companies want to be seen as
contributing to the economic upliftment of the host country’s economy and thereby
contributing to the social welfare of the population.

c) Social Challenges

It is vital to note that good health is an important social requirement in a country as the health
condition of a country’s pollution affects the levels of human productivity. This poses a high risk
to countries as a dying society can weaken and minimize its economic stature like that recent
various global epidemics like AIDS, SARS etc. It has become one of the cornerstones of the
global pharmaceutical companies that their “corporate social responsibility” initiatives are
yielding the expected returns in terms of ensuring good health. However good health is always
tied to good economic growth where if people are employed in formal sectors they would more
or less live a better life. Thus extending their life expectancy at least three fold, it is therefore in
the best interest of the pharmaceutical companies to ensure that their relations with
government and citizens are seen in the correct light.

d) Technology Challenges

The proliferation of new technologies to new research on the latest trends in the medical
fraternity is of valuable importance. Research indicates that companies who do not innovate in
their chosen markets suffer the consequences of stagnation and becoming irrelevant. In the
pharmaceutical industry innovation is the name of the game, it ensures that companies are
strong and in a sustainable path as evidenced I the new drugs that they bring into the market.
Where the process of innovation cut across streams of business in as far as research and
development is concerned.

e) Environmental Challenges

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With major climate changes occurring due to global warming and with greater environmental
awareness this external factor is becoming a significant issue for firms and the following should
be considered:

 Weather pattern changes

 It is crucial that pharmaceutical companies look at the way in which expired and rejects
drugs are disposed. The efficient and hazardous free recycling and restoration programmes
must be instituted.
 Pressure from Environmentalist and Green organizations

 A move to more green practices

 Procurement of new machinery equipment which consume less fuel and utilization of
alternative energy like solar should be investigated to improve environmental concerns.
Carbon Emission monitoring and compliance issues

 The industry is so complex and highly competitive such that time is so crucial.
Pharmaceuticals are using some fertilizers to speedy certain plants that should be used
because there is pressure to deliver and this result in the land being damaged and future
productivity of same land/soil is compromised .Rare natural raw material and conservation
regulations

f) Legal Challenges

The pharmaceutical industry is a highly regulated and compliance enforcing industry. As a

result there are immense legal, regulatory and compliance overheads which the industry has to
absorb in order for it to do business in any host country. This tends to restrict it’s dynamism but
in recent years, government have begun to request industry proposals on regulatory overheads
to so as not to discourage innovation in the face of mounting global challenges from external
markets. Changing Legislation from a permanent patent to fix period of patent protection to 20
years from filing as a research discovery led to the appearance of generic medicine. This
development has caused decline in profitability of the ethical pharmaceutical. Following
regulatory changes in 1997, pharmaceutical companies were permitted to market directly to US
consumers.

1.2 Porter’s Five forces Analysis

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a)  Threats of entry posed by new or potential competitors

 High barriers to entry; the company needs to put a lot of capital into research and
development, lengthy approval process, marketing before it is able to receive any
returns. 

 The big pharmaceutical companies that were able to build global operations are
benefiting from economies of scale in terms of manufacturing. They are able to access
low-cost supplies, as a result. 

 Challenging regulatory conditions (hurdles to get FDA drug approvals for new products);
industry is highly regulated of which to some extent protects from new competition. The
FDA approvals appear to have slowed during 2007. This could be one measure indicating
that the FDA is taking a more cautious position on new drug approvals. In addition,
legislative changes in the upcoming years may have a negative impact for the industry.

 Pharmaceutical companies benefit from continuation of U.S. employer-based health

coverage. Customers buy medication that was prescribed by the doctors. 

 Patent expirations may lead to an entry of new competitors (generic competitions),

resulting in decreased revenues. High rates of patent expirations are approaching in
2010 through 2012. 

 The ability of a pharmaceutical company to offset loss of revenue from patent

expirations depends on growth in existing products as well as successful execution from
the new product pipeline.

      b)   Degree of rivalry among existing firms

 Mature, consolidating, highly competitive industry (many large pharmaceutical

acquisitions closed in 2007 including AstraZeneca’s $15.6Bn purchase of Medlmmune
Inc. and Schering-Plough’s $15Bn acquisition of Organon BioSciences).

 Strong credit profiles: companies operate off of high margins (high 70%), healthy
balance sheets, and good liquidity

 Industry benefits from strong demand from consumers.

 Weak, small companies usually go out of business if they have no potential effective
drug in future pipeline. Others that have some significant research or valuable assets
will be bought by big and strong pharmaceutical companies. 

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      c)  Bargaining power of suppliers

 Suppliers generally have little room for negotiation. Large pharmaceutical companies
generally enjoy significant buying power. They can dictate the price they want to buy or
take their business elsewhere. 

    d)  Bargaining power of buyers

 Generally consumers have very little bargaining power. Most of the medication is
prescribed by the doctors. Consumers will have to buy the drug at any given price if they
need it. More educated consumers may buy a generic alternative (which have the same
impact but less expensive) if available on the market. 

 Pricing pressure – The U.S. remains one of the few developed markets where drug
manufacturers have significant pricing flexibility, and this is in jeopardy due to increasing
pressures from consumers and legislators to control health care costs. Governments in
other markets are generally the primary customers, and therefore, enjoy substantial
pricing leverage.

 Shareholders continue to pressure the companies for increases in the share repurchase
programs. The companies looking for ways to increase shareholders returns partly
because the industry is approaching maturity and is not growing as rapidly, and because
many companies have a lot of cash on their balance sheet. 

   e)  Closeness of substitute products

 Threat from generic competition.

 Customers can find substitute medicine if the original product has an expired patent.
However, if it is a new product the consumer generally will have no choice for an
alternative.

 Over the few years generic drug manufacturers face excellent opportunities for
utilization and volume trends. Generic companies are increasing focused on establishing
global operations in order to achieve a lower-cost of supplies, thus posing even more
threat to non-generic drug manufacturers. 

1.3 What environmental factor are affecting big pharmaceutical

companies

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 Johnson, Scholes and Whittington (2008:83) describe environmental influences as layers
around an organization consisting of the macro – environment which were analyzed using the
PESTEL framework, the industry /sector supported by Porter’s Five Forces , strategic groups
(organizations with similar strategic characteristics which differ from other organizations) and
market segments (group of customers with similar needs different from other customer
groups).

The environmental factors affecting big pharmaceutical companies are:

The macro – environment factors

 Government regulation and controls on manufacturing and distribution of drugs.

 The issue of economic growth coupled with the recessionary climate which can see
the expansion or shrinkage of economic growth of the pharmaceutical companies

 The challenge that populations are aging rapidly which puts pressure on the
pharmaceutical companies because of their high demand for health care.

 The degree to which customers are knowledgeable and who demand better health care
products through the use available technology e.g. internet.

 Changes to legislation governing the validity of drug patents and how long these
particular patents can be protected for.

Industry / sector factors

 Low threat of entry of competitors because of high research and development costs
associated with drug manufacturing and specialized skills required to enter the
pharmaceutical industry.

 The likely to happen high threat from substitute products (e.g. generic medicines)
when drug patents expire.

 The strong buying power due to dominance of one buyer especially national host
governments.

 The high degree of competitive rivalry between equally sized pharmaceutical

companies which at this point are unlikely to happen as the pharmaceutical companies
vary in size.

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Strategic groups

 Various organizations producing pharmaceuticals, biopharmaceuticals agents and

vaccines and over the counter medicines.

Market segments

 Pharmacists, health conscious consumers (patients), hospitals, governments and

insurance companies.

1.4 Which of these is the most important at the present time?

Political forces

 The current situation is that pharmaceutical companies are being targeted by national
governments to reduce spiraling health care costs to enable the wider population to be
able to afford these drugs.

Legal forces

 Government regulations and controls governing product approval, pricing and

reimbursement and promotion are on the rise through legislation and other binding legal
frameworks.

Technology forces

 The advent of the internet to consumers have given greater access to information and
are therefore likely to be more informed on products supplied by pharmaceutical
companies and demand high quality health care which they are prepared to pay for.
 The current trend in the sphere of available technology to cure certain illness that may
otherwise be incurable has posed a serious challenge.

1.5 Which of the influences you identified are likely to be the main 'drivers
for change' in the future of Pharmaceuticals? Why?

The key drivers for change are political factors that are likely to have a high impact on the
success or failure of companies in the pharmaceutical industry. Government intervention in the
pharmaceutical industry in terms of legislation regarding price fixing, advertising and patent
protection form part of the main drivers for change

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 2.2 Which would you regard as the three most important threats to a big
pharmaceutical company and explain why?

 Patent protection legislation;

 Entry of generic products of competitors; and

 Government power to price containment.

The fact that government has almost an iron grip on the way in which pharmaceutical
companies do business is reason enough to warrant the above assumption. When patents
expire and the generic companies start making these drugs it shows that there is not
enough legislation to protect patents. Pharmaceutical companies need to lobby government
on the protection of these patented trademarks in return for lower prices for the benefit of
the consumer.

2.2 How could you respond to each of those to lessen their impact?

a) For patent protection legislation

As the price of generics are always cheaper because the companies did not have to engage in a
long process of research and development it can be strategic for pharmaceutical companies to
ensure that they reduce the cost of that medicine upon expiry of the patent so that they are
able to compete. It is reasonably expected that within the period of 20 years the company
should have recouped the R & D money thus it is no longer necessary to sell the product with a
high price.

b) Entry of generic competitors

The pharmaceutical companies can acquire small companies that will serve as generic divisions
and in that way they will be able to compete on equal footing with generics companies and will
not lose out market share on these small companies. They must be able to focus on promoting
the added value of the product range with emphasis on product safety and health and total
benefit to the consumer. Promote advantages over generic products like illustrating the place
of manufacturer. Consumer tend to be very brand loyal, build on that loyalty foundation and
start to offer holistic product ranges for the consumer’s family. It will be to their advantage to
also sign Trade Agreements with their Suppliers and buy them up to compliment their current
product offering.

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 c) Government power to price containment

The government as a powerful buyer and regulator is able to dictate terms in terms of price.
The best for a pharmaceutical company might be to concentrate on niche market or unmet
medical attention whereby the company will be a market leader and will be in a better position
to bargain with government. Pharmaceutical companies can also partner government to form
Private Public Partnership whereby cost incurred for Research and Development can be shared
equally.

3. With reference to Exhibits 4.5 and 4.6 answer the following questions:

3.1 Who do pharmaceutical companies serve?

With reference to who the pharmaceutical companies serves it has become a very tricky
situation in that their interests are as diverse as anything that is complicated. Their
constituency of these multinational pharmaceutical companies is made up of various players
who each has their own agenda in a s far as the “food” or value chain is concerned. But the
primary customer is always the shareholders, in the following discussion each is mentioned so
as to give balanced approach to these conflicting relations.

Shareholders
As business entities, pharmaceutical companies’ primary objective is to be profitable.
Shareholders are not in business because they care about dying or sick people, they have made
investments and must get returns. This is the very first customer that they are serving.

Government
Government is seen as a single most important buyer of drugs and is viewed as the most
powerful of them all combined. Typically this buyer literally sustains the industry and the
companies will do anything to make sure that this buyer is satisfied thus they are serve him.

Individuals

Latin America is used in the case study as an example of highly volatile market but had large
number of wealthy consumers who were able to afford branded drugs. Individuals do not buy
in bulk like government and other associations like Managed Care Organizations (MCOs)but do
make sizeable contribution to profitability of the industry thus one can afford to ignore them.

Pressure groups
Medical Aid schemes are also powerful player because if they decide not to approve certain
medications particularly branded ones and force patients to use generics, there is nothing

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pharmaceutical company cannot do much hence they need to serve them and maintain good
relationship with.

Private hospitals
Health facilities that are not owned by government have their own procurement system and
also constitute bigger group and can negotiate though not as big as government but they are a
worthy buyer to serve.

Regulators
Associations like European Medicines Evaluations Agency and Food and Drug Administration
(FDA) are very powerful and impact heavily on profitability of the industry.

Suppliers
Companies that are supplying raw materials, machinery equipment, containers and specially
designed cars are seen as the other obvious contenders.

Distributors
Distributor are the backbone of when a specific drug will reach the shelves of the pharmacies,
they have a critical role to play, pharmaceutical companies must serve the distributors to
ensure that there is good relationship that is based on trust.

Employees
It goes without saying that without employees there is no pharmaceutical industry,
pharmaceutical companies must also serving its employees who are part of stakeholders
because they are also ambassadors of the company. If they are not taken care of, word will go
out and they can also easily sabotage the company.

Community

Government and other structures deal with legal license while the community gives you social
license to operate. If the communities perceive that a particular company is only interested in
profit over the interest of the community and are not even participating in corporate social
responsibility programmes, they can boycott their goods and demonstrate publicly which can
damage a good name of any company. Communities must be served.

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 3.2 Describe the internal and external aspects of what they are responsible
for.

Internal Aspects

 Employee Welfare is seen as important in the discharge of the duties of the pharmaceutical
companies. If they do not take of their own it is then likely that bad publicity may prevail.

 Working conditions will need to be improved in support of the welfare of it employees

 Job Design should be seen as complementing the already mentioned process that could
shield the employee from harm.

 Pharmaceutical companies should at all time protect their intellectual property through the
legal means available to it so as to ensure fair and equitable treatment of internal
employees.

External Aspect

 Environmental issues are of paramount importance to these conglomerates as they are

seen to be not doing enough to curb the pollution of the environment. Dumping illegally of
used and unused medicines provides a platform from where potential diseases can occurs
and thus harming the environment through such practices.

 Products that are clearly marked for consumption with specific instruction on how to ingest
them in the pamphlets provided in this area most companies will allows try to prefer that
the consumer did not use the product according the directions as indicated in the user
instruction pamphlet. Dangers to consumer can destroy a company just from a single bad
product

 Markets and Marketing- This is probably the single most biggest spend of the
pharmaceutical companies as it time to market and ensure that products reach the
intended audiences.

 Suppliers of goods and services to the industry must also come to the party and ensure that
there is responsible supplier management practices on drugs that are hazardous.

 Pharmaceutical companies provides employment to the different sectors of the community

and they must be seen to be uplifting the communities that they operate in.

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 3.3 What would be the practical implications if most Pharmaceuticals ran
their business according to each of the different ethical stances shown in
Exhibit 4.5?

According to McNamara (2008) there are benefits to managing ethics in terms of operating a
business in an ethically accepted way and these are also applicable to the pharmaceutical
industry. The following benefits could be reaped by these pharmaceutical companies if they
adopted the ethical stances

 Pharmaceuticals would be enabled to cultivate strong teamwork and productivity from

their employees.

 Policies adopted by pharmaceuticals (in an effort to adopt ethical standards) would

ensure that they are legal and minimise lawsuits regarding the firm’s products.

 Pharmaceuticals would be enabled to avoid acts of omission and lower fines if they
were found to have made an effort to operate ethically.

 The strong public image of pharmaceuticals would be promoted as people would see
the firms as valuing people more than profit.

3.4 What would be the implications for government, regulators and the
medical establishment if most pharmaceutical companies followed each of
these stances?

Government intervention (through price controls) in the pharmaceutical industry has been
directed at reducing health care costs for citizens whereas the interests of regulators and the
medical establishment have been to ensure that safe drugs are released into market and
unethical marketing practices are not used by pharmaceuticals. The Pharmaceutical companies
would have to cover the cost of establishing and implementing the internal and external
aspects. These costs would normally be written off against operational costs but it is more likely
that the costs would be passed on the consumer through strategic product pricing. This may
lead to government to:

 increase their medical spending and thus to lower barriers to entry of new entrants

If pharmaceuticals adopted the ethical stances as mentioned, the work of government,

regulators and the medical establishments would still continue but the probability of
unreasonably high drug prices, unsafe drugs entering the market and pricing and marketing

14
crimes would be diminished by ethical practices of pharmaceuticals. It could also help to speed
up the de-regulation of the industry to help increase competition

3.5 How would these actions by Pharmaceuticals, the medical

establishment and governments affect citizens, patients and consumers?

 There is always the likelihood that unsafe drugs that might be released into the market
would be reduced. This could lead to consumers being able to afford high quality
healthcare drugs at reasonable prices.
 Unethical behaviour in market practices would be minimized.
 This could lower the cost of medical products for both at private and public facilities
 Thus ensuring lower costs associated with medical product dispensing
 The likely hood that there would be an increase in medical service value as a whole to
the community.
 Improved access to healthier and safer medical products

4.1 What are the likely implications of the changing business environment
on pharmaceutical firms?

A changing business environment means a firm has to review and possibly adopt a new
strategic direction. As the benefits of consolidation are too significant to ignore, so are the risks
of doing nothing. With growth in the global generics pharmaceutical market projected to slow
down and an increasing number of competitors chasing a finite number of opportunities,
pressure on profitability is expected to intensify. Drug discovery companies are experiencing
many important transformations, which have contributed to the uncertainty of their
competitive business environment. The uncertainty is underlined by the abundance of players
within the industry. The changing competitive landscape in the global pharmaceutical industry
requires generics companies to implement strategies to address issues of cost competitiveness
and sources of growth, necessary to build a sustainable competitive position while companies
focusing on branding strategies are to ensure the promotion of added value.

As the pace of consolidation (mergers & acquisitions) continues to pick up, companies need to
decide where they will fit in the consolidation process. Whereas few opportunities remain to
match the scale and scope of the industry leaders, alternative viable strategic options remain

15
including vertical integration and developing a specialty focus into the niche market of offering
specialty products for global epidemics.

Companies continue to be in a relatively strong position following years of growth and the
current environment provides an opportunity for industry participants to consider and make
strategic decisions to position themselves for the future ahead in a global world.

5. Conclusion

In conclusion the pharmaceutical industry is face with a number of challenges that it must
address in a manner that is seen to be equitable. It is a fact that all pharmaceutical companies
want to make as much profit as possible to recoup its research and development costs. These
costs are to be linked to the pricing of the drugs themselves. At the end of the day they argue
that with out factoring in these specific costs they maybe out of business. This in itself
translates to the exorbitant amounts of profit that pharmaceutical companies are perceived to
be gaining from such practices.

The government on the other hand has to be seen to be doing something about the spiralling
cost of health care. Government has a duty as well to protect the patent rights of these
companies through proper legislation that will safeguard these interests. The government has
to ensure that it does not wily nilly enforce unreasonable demands on these companies but
rather it walks the fine line between spiralling health care costs and the profits these
pharmaceutical companies make. This has to be seen in the light of ethcal standards that are
expected of pharmaceutical companies to adhere to.

The internal aspects coupled with the external aspects have to be balanced against what the
community and the wider customers want. It is therefore necessary that pharmaceutical
companies are find a fine balance as to the making of huge profits and taking care of the ailing
people.

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 References

1) Johnson, G., Scholes, K. & Whittington, R. 2008. Exploring Corporate Strategy: Text &
Cases. 8th ed. Harlow: Pearson Education Limited.
2) McNamara, C. 2008. Complete Guide to Ethics Management: An Ethics Toolkit for
Managers. [Online]. Available
from:http://managementhelp.org/ethics/ethxgde.htm#anchor33077 [Accessed: 1
October 2009]
3) http://smib.vuw.ac.nz:8081/www/ANZMAC1998/Cd_rom/Suoniemi161.pdf
4) http://www.gsk.com/policies/GSK-competitiveness-and-investment-criteria.pdf
5) http://cambridge.org/us/catalogue/catalogue.asp?isbn=9780521708883&ss=exc
6) http://en.wikipedia.org/wiki/Globalization#Effects_of_globalization

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