Case study details A 2,600 words case analysis into Home Pharmaceuticals’ capability and resource gaps, discuss five possible strategies and then choose two best strategies (one at business level and the other at corporate level), due 29 January 2015, assess your understanding of Lectures 3, 5 & 6 of the course . References You must use at least 15 difference academic references for each of the two case studies Study module references will be highly valuable in both case studies Theoretical concepts used need to be referred to either the prescribed textbook or the Study Book of this course By academic references, we mean referred journal articles, academic books and government reports Referencing The acceptable style of referencing in the Faculty of Business is the Harvard AGPS style. If you need further information about referencing please refer to the USQ Library website for referencing guide in the Harvard AGPS style. http://www.usq.edu.au/library/help/referencing/harvard.htm Key to success You need to focus on conducting theory-guided analysis in both case studies using the templates provided Relate your discussion to relevant theories or concepts of this course as closely as possible Use journal articles as references to support your arguments throughout your case analysis Focus on conducting in-depth analysis rather than giving straightforward description Discuss/analyse from a strategic management perspective. Home pharmaceuticals (HP) are a pharmaceutical private company1 headquartered in Malaysia and owned by the Osman family. The chairman of the Board is Mr Haji Mohd. B. Osman. Mr Mohammad was a highly respected chemist who began to design new products from the back of his chemist shop in Subang Jaya. From these humble beginnings, he began to sell his products through suppliers to local Doctors and hospitals. This was the forerunner to an innovative culture inherited by the present company. In 1995, Mr Mohammad employed a dynamic CEO, PK Hong Lee (known as PK) who has progressively grown the business. While the Chairman and his daughter, Siti Bt. Osman sit on the Board, they leave all the running of the business to PK. Miss Siti however is increasingly scrutinising Home’s financial returns and is increasingly pressing PK for more profit as her father allows her to play a more prominent role in the business to protect the family’s interests. This comes on the back of Miss Siti’s graduation from an Australian university with an accounting degree. From its early beginnings in 1985, the company has progressively established a culture of research with a largely focused strategy of producing over-the-counter (OTC) drugs. During the last decade however, the company has progressed its research into new products including bio-medical and health food supplements (HFS) including more recently radical innovations in hearing devices (HD). Approximately 80% of its products are locally researched by scientists in Malaysia with some product licenses recently acquired from Australian manufacturers to produce and market OTC drugs and health food supplements. However this is only at an early stage. Earlier growth patterns belie more recent trends of slow growth in OTC; in future years, the company envisages much stronger growth in its new innovations spurred on by capital injections of US$30million in OTC and US$40million in 2014/15. From 2016 on, HP has reworked their strategic plan to grow market share. This is particularly relevant given that the market in the Malaysian region has witnessed slow to medium growth with many large global pharmaceutical companies already establishing strong market presence. The Malaysian market however is expected to continue to grow. While HP relies on a highly innovative approach, this has mostly been within the Malaysian context. While much of the company’s staff is highly trained and skilled, general management staff are not globally experienced. Similarly, while HP has enjoyed much success in OTC, larger competitors are gaining market traction and the industry is highly competitive. Global competitive firms for instance appear to dictate key success factors even though smaller firms such as HP are well entrenched. While staff appears to be loyal and dedicated given the high level of staff buy-in to innovation, there is increasing concern that the company will continue to lose market share unless something can be done. More recently, the local Minister for Health was starting to enforce stricter drug approval procedures following entry into the World Trade Organisation and tighten laws related to intellectual property rights following recent patent infringements between and across Asian countries. Global Pharmaceutical Industry Factors The pharmaceutical industry across countries is technology intensive with research and development activities at the vanguard of most industries. Governments from highly developed countries openly support the national industry given its potential for new innovations and exports and contribution to national health. The industry in generally dominated by OTC medicines and the production of innovative drugs with a worldwide industry growth of 7.5% per annum expected between 2014 and 2019. Central/Eastern Europe is expected to grow by 9.7 per cent, the Americas (7.3%), Middle East and Africa(8.6%), Asia-Pacific (4.9%) and Western Europe (6.8%).2 With a high global growth rate expected, global annual sales of pharmaceuticals is expected to reach US$1,158.5 billion in 2014; given forecasted annual growth at 7.5%, this translates into one of the highest global growth rates for any industry from 2015 through to 2020. A number of global industry attributes define the key success factors (KSFs). These include - but are not limited to - global funding partnerships for research, a high proportion of innovative biotechnology companies, high rates of R & D, strong rates of commercialisation, Government support nationally including funding mechanisms, national pharmaceutical industry strategy groups, capacity to work with industry stakeholders, capacity to develop a strong innovation culture and strong regulatory environment. 3 The global market for drugs is large and growing with half of all sales made by the top 10 global companies. However, across countries, international competition at an industry level is quite pronounced however there appears to be room for low cost generic products and niche high-end quality products. Asia-Pacific Region & National Pharmaceuticals The Malaysian economy in 2014 and beyond reflects many years of economic and political transformation,4 with the country ideally located at the heart of the ASEAN nations that when combined, extend the broader regional population to over 600 million people.5 This is a significant market reach. Major economic sectors appear to be relatively strong such as the banking sector and in recent years, the country has liberalised the education sector with the population becoming more qualified with tertiary graduates. The banking and finance sector in particular have strong credit policies and this comes on the back of a strong domestic economy which contributes up to 60% of GDP. The employment rate is steady at around 3.5% and the country has enjoyed a current account surplus and a low inflation rate of around 2%. This compares favourably with many leading economies in the region such as Australia and Japan. However, Malaysia is heavily dependent on major trading partners because of a relatively small domestic economy in GDP terms resulting in Government debt ballooning to over US$165 billion leaving some economists to ponder that the debt-to-revenue ratio of 250% is similar to that of Italy.6 The country is too dependent on palm oil and gas as an export and this will become more apparent after 2015 when a free trade agreement with China is likely to result in a flood of both cheap and expensive imports. Similarly tax reforms are needed. The government is searching for new industries into the future to carry the load since government revenue has not increased in tandem with GDP.7 Politically the country has a democratically elected government and a vibrant opposition which sends an important signal to global countries wishing to invest in global ventures. Global MNEs increasingly favour strong politically stable domestic environments. Also, businesses are attracted to Malaysia because of the low tax rate (24.5%) and ease of commencing a business with less bureaucracy than new business start-ups in other countries. The latter for instance confirms recent investment reports by the World Bank ranking the country the 12th best in which to do business.8 Similarly, foreign direct investment is a strong sign of a countries political, economic and social outlook and according the World Investment Report of 2013, the country is the third largest recipient of FDI in the ASEAN nations. Malaysia also ranks third largest in GDP of all ten ASEAN countries. Malaysia, notwithstanding its growing reputation, is losing high quality workers to other countries such as Australia and Singapore according to some reports.9 The country has not moved to a high income society reflective of the country’s passion for global investment. That is, the Government has not invested in local high value added businesses to any great extent with most of this growth attributable to MNEs. This has translated into a low wage income model, the abandonment of productivity growth and poor technology know-how industries more generally. This view can be contrasted however by recent reports that suggest the pay-to-productivity ratio is ranked 3rd globally outranking countries such as China, the US and Australia.10 Generally however, high pay-to-productivity ratios could be the result of lower overall wages and salaries, not necessarily higher productivity output per worker, suggesting that socially at least, the standard of living may be lower than close trading partners. Malaysia is a success multi-culturally though in the same way Australia relies on a diversity mix of ethnic backgrounds. This is a strong feature and testimony to country factor conditions and access to a strong pool of workers for global investors. The country also boasts one of the world’s great vibrant cities (Kuala Lumpur). Together with a number of neighbouring cities, Malaysia offers a wide choice of cultural entertainment, fine food restaurants, educational and housing options and is continuing to develop the country’s road network by building a convenient transportation system.11 There are twenty three countries within the Asia Pacific region with China having the largest GDP (US$8,538,400m), Japan second (US$5,960,180m) and Australia third (US$1,564,419m). Malaysia is ranked eight with a GDP of US$304,726m.12 Within the Asia-Pacific region, the three countries of China, Australia and Malaysia are large players in the pharmaceutical industry but for different reasons and broadly represent the region. Out of a population of approximately 28 million in Malaysia, 63.4% is aged between 15 and 64 with a large young population (32.2%) with 4.4% of people aged over 65 years. The population nonetheless is ageing spurring demand for pharmaceuticals; health care in the region is expected to grow at 13 per cent per annum 13 and there is a large demand for prescription drugs and increasing. 14 Products manufactured in Malaysia can be categorised into four areas including prescription medicines, over-the-counter products, traditional medicines and health/food supplements.15 There are also imported proprietary drugs, generics manufactured locally (such as those by Home Pharmaceuticals) and imported generics.16 Proprietary drugs that are increasingly based on new innovations allow local companies to establish a stronger presence in the Malaysian market. Home pharmaceuticals demand schedule and breakdown by product (Figure 1) is represented by one or more of the above areas. According to Hassali et al. (2009), new possibilities are available for national firms including major drug companies searching for outsourcing. Local companies such as Home are capable of producing licensed manufacturing given that many global firms seek to concentrate more on time consuming ‘gene hunting’ R&D methods for discovering new drugs.17 For instance, the current estimates of bringing a new chemical or biological entity to market are around US$1.3 billion generally in large global firms and drug development requires a combination of longer development and approval times, larger and more complex clinical trials and increased expenditures on new technologies.18 Similarly, imported pharmaceuticals for generic products are establishing a foothold in Malaysia and a lack of entry barriers has not helped. For instance, the Malaysian Government have only recently instituted procedures to inspect foreign manufacturing facilities compared with regular inspection of local firms. For its part, the pharmaceutical industry in China is rapidly expanding although much of the industry is fragmented and inefficient 19 when compared to Malaysia and Australia. The industry for instance is extending basic health insurance so that the population has greater access to health products but this is not as advanced for instance as the Australian pharmaceutical benefits scheme which is a government mechanism to provide family access to a range of medicines for all Australians.20 According to Wikipedia, China accounts for only 1.5% of the global drug market yet is predicted to become the world’s third largest prescription drug market going forward.21 Beyond 2014, and given the country’s entry into the World Trade Organisation, China is expected to tighten regulations related to the industry. At present, the industry is geographically scattered, has many outdated technologies, has weak international trading competitiveness and lacks patented pharmaceuticals that are developed nationally.22 Similarly, average annual growth rates of 16.72% point to China as a frontier for future market prospects evidenced by the recent expansion of a global pharmaceutical (Novartis) establishing a stronger R&D centre for drug development. 23 While regulations in China have been tightened, strong prospects have to be balanced however with poor evidence of KSFs generally including differences in the treatment of local versus foreign firms, a lack of government incentives, poor drug approval methods and poor intellectual property rights laws. Australia’s pharmaceutical industry by comparison is highly regulated in terms of the pharmaceutical benefits scheme (PBS) with the Australian Government contributing over $8 billion dollars to the scheme by 2010. As at 30 June 2013, expenditure on the PBS totalled approximately $9 billion.24 The industry consists of mainly bio-medical research and biotechnology firms, originator and generic medicines companies and service related segments including wholesaling and distribution. By 2009-10, the industry employed over 40,000 people with a turnover in excess of $22 billion; while Australia’s population is relatively small to global standards, it consumes over 1% of total global sales25 and is expected to export over $5 billion from 2014 given forward projections. To place the Australian industry in context, the drug market ranks 12th largest by Sales in the world while simultaneously ranking 55th on population. This compares with China for instance with a drug market ranking approximately 8th but with the largest population in the world of 1,360 billion people.26 Much of the success in the Australian industry is its spending on research and development and its investment in bio-technology research intensive industries. Figure 2 graphs total turnover reached in the years 2011-12 with growth patterns expected to increase in the years ahead despite the relatively small Australian market overall. Home Pharmaceuticals & Competitive Trends The current CEO for Home pharmaceuticals is PK Lee while Mary Chua is the chief operating officer. Dr Paul Greenwood, an Australian, together with a team of thirty highly qualified specialist technical and science staff, heads up research and development. The three divisional managers comprising Dr Winnie Tan Khoo, Dr Ahmed Kumar and CT Ramgopal head up OTC, Hearing Devices and the Health Food supplements strategic business units (SBUs) respectively. Each SBU has a separate manufacturing manager, product manager, and approximately 200 workers in the factory. Home has a relatively flat structure with a small SBU staff enabling quick responses to competitive attacks, at least on paper, but this theory is currently being stretched by global firms and generics invading the home market. Marketing and sales up until now has been located with PK in the Head Office along with centralised accounting and computing systems. There is only one major manufacturing facility near Kota Damansara situated in Sungoi Buloh Industrial Park in Kuala Lumpur and this centre facilitates all manufacturing for each division and product distribution. The centralised Head Office is also located here. The company has its own fleet of transport. The manufacturing hub is relatively easy accessed by Damansara-Puchong Expressway however traffic jams often restrict the easy flow of products to suppliers and retailers. The distance travelled between the factory and the airport in recent times has become problematic and PK has been concerned about compromising product-to-market services by air. PK has also been concerned with the lack of global management experience by senior managers as most of these have strong technical backgrounds. While the small marketing team consisting of a brand manager and three product managershave performed well in the local market, PK is unsure how they will respond to much more intense global pressure and the increasing need to manage products strategically. While Figure 1 forecasts indicate reasonably strong growth in future years, specifically 2016, this depends on borrowed capital to inject new innovation and technology. Future market growth is a concern for the company even though they have done well in previous years in growing the company in existing markets. Much of the concern by PK is knowledge of global markets and international strategy. Similarly, he is concerned about the strong capitalisation needs of US$70million in 2014 alone in order to remain competitive. While retained earnings are relatively high, equity will be under pressure in the years ahead. While Home will be relatively profitable in mid-range forecasts into the future (Figure 3), a loss is expected in financial year 2014. Although capital injections will significantly increase new innovations, debt to equity may increase with possible negative return on investments. He is also worried about the Osman family’s response to such large capital injections at a time of increasing competitive pressures. He has also discussed in detail with the marketing team the dynamics between strictly SBU strategies versus corporate strategy priorities going forward.