Advanced Strategic Managemented

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EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT

6, WATERLOO STREET, KOLKATA – 700069.

Assignment for Advanced StrategicManagement

PGPM 4th semester

SAMRAT BHADRA

PGPM Roll no:

July13-June15/

3STH-050













The Pharmaceutical Industry .

Q1: Drawing on the five forces model, explain why the pharmaceutical industry has histori call y

been a very profi table industry.

Ans:Porter’s Generic Five Forces Model

Buyers Bargaining Power

Buyers bargaining power in the pharmaceutical industry was low because there were only a few goodand well-known companies, who were the sole manufacturers of some prescription medicines. Thesemedicines were protected by patents therefore; no other company was able to manufacture genericdrugs on the same formula. This restricted the buyers of this industry from opting to other companiesand as a result, companies sold their prescription drugs at premium prices. Spending on prescriptiondrugs was increased because

of the increase in older age population. For example, Pfizer was the only company at that time thathad a patent protection for a cholesterol controlling drug and customers were compelled to purchase

that drug because of unavailability of identical generic drugs.

Supplier’s Bargaining Power Supplier’s bargaining power was low because a drug manufacturer needed to have differentcomponents for manufacturing a particular drug. Suppliers were unaware about the exact formulawhich had reduced their power.

Threat of Substitute

Threat of substitute was very low because every big company had protected its prescription drugs by patents and its competitors were unable to produce the same formula to substitute the drugs. This alsoenhanced the degree of competition and made the industry so successful for the leading firms.

Threat of New Entrants

Threat of new entrant was also low because of the high start-up costs and high costs and riskassociated with the manufacturing of new drugs. Out of every 5,000 tested compounds in a laboratory

of a pharmaceutical company, only five of them enter into clinical trials and only one get an approval

from the FDA to make its way to the market.Industry Rivalry

Industry rivalry was moderate because prior to 2002, the industry was dominated by a few drugmanufacturers and one of them was Pfizer. Pfizer was the leading brand and it had generated 55% of

its revenues from just eight drugs.After analyzing different forces of the pharmaceutical industry, it is clear that the industry has beenhistorically profitable because almost all the forces of the industry are low, which have created a very powerful and effective environment for the existing firms.

Q-2: A fter 2002, the prof i tabil ity of the industry, measured by ROIC, started to decli ne. Why do you

think thi s occurred?

Ans:The pharmaceutical industry has been historically a profitable sector. Its rate of return on investedcapital (ROIC) was comparatively high than others like computer hardware industry, grocers,electronic industry & so on. Although it was a lucrative sector, its profitability has been declining oflate. Reasons behind this are given bellow:

➢ Customers have become more conscious about the side effect of medicine, hence they use herbal

drugs: Since there are some side effects in certain medicines, people now a days use herbal drugs that

are said to be free from side effects.

➢ Anti-American, Europe campaign: In 2003 during Iraq war there was a protest in using American

product.



➢ Failure to innovate new drugs: We know it takes almost 10 to 15 years to introduce a new drug,

during these long period parasites create a defense mechanism against older drugs making themineffective so they gradually lose their market.

➢ Unable to match customers’ needs: Now a day’s customers need drugs that take action quickly.

➢ Patent expiration: Market leaders lose their market share as their patent expired.

➢ People have become resistant to those drugs that they have frequently used.

Q-3: What are the prospects for the industry i n the future? What are the opportun iti es? What are

the threats? What must pharmaceutical f irms do to exploi t the opportuni ties & counter the threats?

Ans:

Prospects: With the passage of time pharmaceutical industry is expected to increase its profitability. The reasons behind this are as follows:

➢ Innovating new drugs as people’s average life span, demand for better life is increasing.➢ Increasing research in medical science accelerated the chances of introducing new medicine.

➢ Increasing investment on biomedical research.

Opportunities:

➢ New technology opens the door to introduce new drugs. using new technologies the firms can

minimize the cost and thereby maximize profits.

➢ Drugs for many diseases like Alzheimer, Cancer, heart diseases, & AIDS are not invented yet. The

pharmaceutical companies can invest in medical researches to invent new medicines to cure thesediseases.

➢ Increasing demand for increasing population. with the increasing population the demand for drug

is also increasing. hence the profitability will increase if the firms are able to increase their marketshare.

➢ From past history, it can be said that new diseases can be break out in future like Swine-flue,

Anthrax, etc. offering pharmaceutical company to introduce drugs to check those.

Threats:

➢ Patent risk. After the patents are expired the companies face competition as competitors are now

free to produce the patented drugs.

➢ Pressure from politicians to lower price. Politicians are looking for ways to limit health care costs.

They are inducing the pharmaceutical industry to decrease the price.

➢ Price control on prescribed drugs.

➢ Aggressive competition from generic drug companies faced by proprietary drug companies in their patent & pricing techniques, as a result losing market share to them.

➢ Drugs that harm one organ in perspective of curing another must pull off.

➢ People are considering herbal products more effective than medicine. As people are becoming

more conscious about their health they now prefer natural ways to cure diseases rather than powerfulmedicines.

Exploit opportunities:

➢ Has to invest more in advertising, sales promotion etc. Health campaigns can be created to increase

awareness.

➢ Generating new ideas; killing pain in minutes.

➢ Using new technologies.➢ Introducing drugs for intractable for medical condition.



➢ More investment in R & D will accelerate the invention of new drugs.

Counter threats:

➢ Having new drugs in pipelines. When the patents are expired the company faces intensive

competition. Hence they should be ready to face this competition with new drugs that can be patented

after the old ones are expired.➢ Try to increase the period of patent. Long term patents can eliminate the threats for a long time,

allowing the firms huge time to develop a new drug.

➢ Creating a position on customers mind in a way that they can never thought of switching. The

firms should strive for making loyal customers for its products.

➢ Developing new competitive advantage. With different competitive strategies the firm can hold its

market share for a longer period.

➢ Create awareness through health campaign.

------------------------------------------TH NK YOU

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Advanced Strategic Managemented