ANALYSIS OF THE PHARMACEUTICAL INDUSTRY: GSK and AstraZeneca

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ANALYSIS OF THE PHARMACEUTICAL INDUSTRY: GSK and AstraZeneca

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Analysis of the pharmaceutical industry

Porter’s five forces model
The model is a depiction of the five fundamental forces that describe the market or industry. The
five forces represent the market conditions and provide a guide for strategic decision making by
providing the organization’s management with facts that can help determine the suitability of the
market (Coers et al 2001). The model was invented by Michael E. Porter of the Harvard Business
School in 1979 as a way of remedying the shortcomings of SWOT analysis. According to porter,
the SWOT analysis approach was quite vague and did not provide a strict framework that could
guide the strategic planners. The five forces can be divided into two categories. The first
category is the horizontal competitive category and the second class is the vertical competitive
category (Russell and Russell 2009). In the first category are three forces, which are: threat of
substitute products, threat of rivals that are common in this industry and the threat of new
entrants. The vertical competitive forces are: the bargaining power of suppliers and that of the
customers. This approach can be applied very well in the pharmaceutical industry, which
arguably the most profitable industry in the world in current times. Below is a diagram of the
porter’s five force model.

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Threat of substitute products

From market economics, substitutes cause elasticity in the price in relation to demand.
This means that where a product has competitors, a small change in the selling price causes a
more than a unitary change in the demand for the product (May 2010). This makes it impossible
for a company to introduce any changes in price or products. A situation arises where the sellers
are buyers are many and homogeneous. This calls for a high degree of differentiation. Operating
in such a market is not economically advisable following the volatility. It could be preferable to
operate in a market with little competition. As a matter of fact, the global pharmaceutical
industry is already established to the extent that no other alternative can come up with products
that can fit within the standards of medicines and drugs produced by the existing firms. With
such firms as GSK and AstraZeneca, the manufacturers of what can be defined as substitutes do

not produce products that can substitute.

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It is important to single out that the only things that can be described as valid and worthy
competitors to the products of the giants in the pharmaceutical industry are drugs that are
generic. Generic drugs are not counterfeit products, as common misconception has it. On the
contrary, they are those drugs produced by companies that do not have patents to produce the
drugs. Apparently, the companies that have patents enjoy the monopoly of producing the drugs
for a maximum 20 years. After the 20 years, the patents expire and other companies are allowed
to continue manufacturing the drugs. Essentially, what this means is the actuality that during the
first 20 years of discovering a drug, the manufacturing company, say GSK does not face any
competition from the generic products. In straightforward terms, substitutes do not exist during
the first 20 years of producing. Other substitutes that exist are the alternative and usually
traditional drugs and remedies. These are common in oriental cultures, especially India and
Chinese cultures. Such drugs and remedies include such options as acupuncture, a concept that is
fast gaining acceptance in the western world as well. Even so, such alternatives do not pose stiff
competition as they have no scientific backing (Pahl and Anne 2009). The threat of substitutes is

rated medium to high.




Threat from rivals that have established in the industry

Apparently, challenging a firm that already has a name in the industry is considerably
difficult. Where the rivals are established, an organization should always endeavor to emerge
with the most effective methods of establishing good will (Ahlstrom and Garry 2010). The
primary difference between an organization that has been in operation for a while and one that is
not well established is the fact that the one that has been around long enough has had the chance

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of creating good will and customer loyalty. The pharmaceutical industry is considerably
competitive especially considering that the number of well-established organizations is very high
(Lindgren and Hans 2003). The level of competition is defined by such big organizations as GSK
and AstraZeneca, companies that have quite significant synergies especially considering that
they have come to be as a result of a series of mergers. Taking GSK as an example, the
organization has a long history of merging. Such merging strengthens the organization in the
sense that the resource base becomes wide and the competitive advantage becomes high. It may
be necessary to point out that the level of rivalry this industry is almost fully attributable to
merging and partnering. Speaking of partnering, companies have continuously engaged in
supplier partnerships, which have ensured stability and business resilience. Research experts
explain that the competitive nature of the pharmaceutical industry is attributable to the potential
for high returns.

Threat of new entrants

The one thing undesirable about new entrants is the actuality that ease of entry is
associated with perfect competition (Roy 2009). Perfect competition is a situation where the
market is characterized by many buyers, many sellers, and identical products. In such a market,
prices go down due to competitions. Noteworthy is the fact that new entrants can be prevented
by such things as copy rights and patents (Böhm 2009). In the pharmaceutical industry,
potentiality of new entrants is extremely low. Infact, the possibility of entry of new entrants is
extremely low, especially considering that the market is densely populated with well established
firms, which have committed a very heavy capital outlay to the industry. It might as well be
worth mentioning that entering the industry is considerably risky as there may be no return on




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investment (ROI), especially if a company fails to create a new drug. The heavy capital
requirement of joining the pharmaceutical industry is a put off for many investors.

Bargaining power of suppliers

Suppliers have a high bargaining power where the material or whichever resources it is
they are supplying is in short supply. During such a time, the people supplying the products are
in near full control of the price fluctuations. Perhaps the only way to tame supplier bargaining
power is through establishing such concepts as supplier partnerships (Hitt et al 2011). The extent
to which the industry is established has led to a number of suppliers. The high population of
suppliers has contributed to low supplier bargaining power. Low supplier bargaining power
means that the suppliers have little impact on the decision making process of the organizations.
However the suppliers in the pharmaceutical industry remain relevant by the fact that such
suppliers supply technology, which is continuously advancing. Advancing technology refers to
the progressive manner in which technological advancements become realized. Suppliers of
specialist knowledge such as the chemists remain substantially relevant as such specialist

knowledge is the core of production.

Bargaining power of customers

Typically, high income is associated with high purchasing power. When the customers
have high bargaining power, they are in a position of determining the prices. Substitutes and
buyer information availability enhance customers’ bargaining power (Jeffs 2008).Considering
that the patents of the organizations remain solely in the hands of the discovering organization, it
is valid to conclude that the manufacturer, or rather the discoverer of a drug has the right to set

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the price of the drug, and to determine how such drug will be distributed. After the expiry of the
patents, the generic manufacturers flood the industry making the customer become a powerful
decision maker and determinant of price and distribution, since the suppliers of the drug increase

in number posing competition – a factor that leads to low prices.

Strategic objectives of the organizations

From the 2012 CEO report on strategy and social responsibility, it is clear that the key
strategic objective is to achieve a high degree of innovation. As a way of pursuing this objective,
GSK has planned to establish a number of research and development centers, through which they
endeavor to achieve 15 new medicines in three years, to serve the world population. The research
and development endeavors have seen GSK spend GBP 3.5 billion into research. The
organization has made the research and development objective a key element of the annual
budget, since the goal is both CSR oriented and business profit motivated.

The second strategic objective of GSK is to have the world population effortlessly access their
drugs. In an attempt to achieve this objective, the organization has supplied pneumococcal
vaccine in Pakistan. The aim of the vaccination program was to ensure that 4.8 million children
accessed drugs and medication in every year. This goal is considerably strategic in the sense that
it will enable the organization to widen its market. By endeavoring to reach new markets, the
organization will secure a niche in the third world, where the competitors have not acquired
bigger shares of the market. Of particular importance to note is the fact that by accessing the new
markets with the outreach program, the organization improves its image – something that can

place the organization a notch higher in the market.

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The third strategic objective of the organization, according to the CEO report is to achieve
clinical transparency. Clinical transparency entails the organization making public some of its
laboratory reports and discoveries. Such publicizing of the experiments is a good idea as it will
help the organization gain public trust. Public trust is an opportunity that many organizations
have endeavored to obtain (Hill and Gareth 2010). The forth strategic objective of the
organization is to enhance partnering with other players in the industry, with an aim of achieving
its goal of reaching 20 million people annually by the year 2020. From the objectives, it is worth

concluding that the organization endeavors to become a market leader.

The strategic objectives of AstraZeneca

Arguably the most established firm in the pharmaceutical industry is dumping scientific
leadership for growth. In the 2012 report, the CEO said that they were archiving scientific
leadership in search of expansion. The first strategic objective of the organization therefore is to
achieve grow. In order to, achieving this goal, the organization will work with other
organizations in business partnerships. The most notable example is the decision by the
organization to work together with Karolinska in creating an integrated translational center. In
such a partnership, it is expected that the organization will grow by complementing its internal

conditions with the strengths of the other partners.

In the report, the CEO indicated that the change in leadership did not change the vision and
mission of the organization. As such, the vision and strategy remained intact. This saw the new

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CEO carry on with the partnering endeavors by courting Modena Therapeutic Corporation to
develop pioneering messenger RNA therapy. This should be one among the biggest discoveries
made by the organization. It is crucial to point out that, along with the partnering efforts comes
the effort to establish strategic research and development innovation. Much like GSK, research

and development is given prominence by the AstraZeneca Corporation.

Differences in the strategic objectives of the two organizations

It is evident that, while GSK seeks market leadership, AstraZeneca seeks to grow. The difference
between these efforts and aims is that as the former attempts to be the controller of the market
conditions through acquiring the biggest market share, the latter focuses on securing a share of

the market and becoming a reputable organization.

The second difference revolves around the fact that GSK emphasizes social responsibility;
AstraZeneca aims at expansion and securing a target market. The organization does not mention
such things as outreach programs to the general public, but emphasizes partnerships with other
organization in search of better competitive advantage and synergy that will place the firm at the

top of the pharmaceutical industry.

The strategic objectives of the organizations are not strictly different. In fact, they have quite a
number of similarities. For instance, both organizations seek expansion, but to a different degree.
Secondly, both organizations emphasize on the need for research and development. Thirdly, both

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organizations emphasize the need for partnering. Partnering is a common practice in the world of

pharmaceuticals (Abraham 2012).

How the CEO messages are likely to affect management decisions

Apparently, managerial decision making is rooted in the objectives of the organization’s strategy.
This is critically important because, essentially, the decisions made by the organization’s
management define the extent to which the long term goals are defined. It may be of essence to
mention that the reports of the CEO provided a road map for the decision making process. This
means that all decisions made should be in line with the long term aims (Haberberg and Alison
2007). For instance, the organization’s decision makers must prioritize corporate social

responsibility.

The CEO messages will likely affect the extent to which an organization defines the target
market. Worth mentioning is the actuality that to achieve growth, an organization must at all
times aim at the new markets (Henry 2008). The organization should lay more emphasis on those
markets that appear lucrative. The corporate social responsibility aspect is likely to affect the
nature of management decision made since the primary aim of shareholder wealth maximization

will have to be compromised in the short term.

When reviewing the annual budget, the organizations may be focusing on different things. For
instance, when focusing on the sales, the AstraZeneca Corporation may be concerned with how
much sales were made overall, and more especially in the new markets. Valuing the sales in the

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new markets will show the rate at which an organization is expanding. Speaking of costs, the
organization may focus on those costs that affect or are related to sales. Costs that are aimed at
achieving higher sales will be given prominence by the decision makers at AstraZeneca. On the
contrary, the GSK will be concerned about the perceived sunken costs dedicated to social
responsibility. Both organizations will focus on all those costs relating to partnering.

Ratio analysis

Ratio analysis is one among the most commonly used financial tools of management.
Ratio analysis relies upon the use of financial figure obtained from the annual results of the
organization. Ratio analysis indicates performance over time. Speaking of comparisons, ratio
analysis can be used to compare the profitability of a firm over time (vertical analysis), or the
performance of a company against the performance of another company in the same industry
(horizontal analysis) (Moyer & Moyer 2012). For the purposes of our case, horizontal analysis is
necessary because as a matter of common knowledge, the two organizations are in the same
industry, and are almost organizations of equal strength. This implies that the organizations
should be compared on the basis of results from the same year. The ratios below compare GSK
to AstraZeneca PLC.

The financial ratio GlaxoSmithKline plc AstraZeneca PLC
Current ratio 13692/13815 =0.99 11718/8553 =1.37
ROE 24.30 32.51
Gearing ratio 436% 70.75%

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Quick ratio (13692-7938)/13815=0.41 (11718 –
2536)/8553 =1.07
Labor intensity 2641/96681 = 0.27 17209/53500 = 0.31

From the foregoing observation, AstraZeneca PLC is performing better than GSK by all
ratios and financial aspects. Before understanding the inferences of the results of the above
financial analysis, it is critical to understand how the figures are arrived at.

The current ratio

The current ratio is the result of the interaction between the current assets and the current
liabilities. The current assets are the assets that are more liquid and not fixed. By liquid, it means
that the assets can be converted to cash more easily, and hence can be used to solve shorter
financial obligations (Lindgren and Han 2003). Essentially therefore, the financial strength and
viability of an organization in the short term is expressed by the current ratio. From the
calculations, both organizations are relatively strong, and cannot easily go into financial distress
– a situation in which an entity cannot honor its short term financial obligation when and as they
fall due. AstraZeneca is considerably more liquid than GSK.

ROE (Return on Equity)

Return on equity is the rate at which an organization rewards the shareholders’ financial
commitment. Net income of an organization expressed as a fraction of the contributions made by

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the shareholders directly to the business. The return on equity is one among the strongest ways of
indicating t the shareholder that their financial commitment was worthwhile. GSK is, again
performing poorly compared to AstraZeneca. The rate at which the organization is rewarding the
shareholders is a little low.

Gearing Ratio

Gearing refers to the extent to which a company is levered, or, in simple terms, the degree to
which an organization employs debt in its capital structure (Khan & Jain 2004). The gearing ratio
calculated from the two organizations indicates that GSK employs debt that is four times the
amount of equity. Leverage is not necessarily a sign of weakness, but can imply riskiness as debt
holders can compromise the sovereignty of the organization (Donaldson 2000). Additionally, the
credit rating of the organization may be low. Essentially therefore, AstraZeneca, which has
equity more than debt has a good credit rating. Even so, it has to bear the disadvantages of too
much equity, such as the payment of many dividends. GSK on the other hand, pays fewer
dividends but more fixed return.

Quick ratio

This is another ratio that concerns itself with liquidity. The disimilarity between this ratio and
current ratio lies in the fact that the quick ratio is concerned about immediate liquidity. This
explains why it excludes stock from the summing up of the current assets.

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Labor intensity

Labor intensity, which is an expression of labor revenue per employee, is an indicator of
management efficiency. Management efficiency in AstraZeneca is far much better that the
efficiency of management in GSK.

GSK balanced scorecard

The balanced scorecard is arguably the most effective management tool, having replaced
the six sigma models which, according to other management gurus have emphasized the reality
that the six sigma model had quite a number of loopholes. Apparently, the balanced scorecard is
a tool that touches on four critical aspects of the organization, which revolve around strategy.
The four primary aspects are, as can be seen in the diagram below, learning and growth
perspectives, financial perspectives, internal business processes and the customer perspective.
The four elements are focused on, with regard to the particular objectives, initiatives, measures
and targets. In looking at the case of GSK, the balanced score card will focus on the above
discussed strategic objectives. The diagram below indicates how a default balanced score card

looks like, and what it entails.

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From the foregoing discussion and comparative studies, the strategic objectives of the
organization are innovation, acquisition of a big market share, partnering, clinical transparency
and winning customer trust.

Among the primary measures that can be taken in relation to a balanced scorecard are such
decisions as cost reduction. Cost mitigation will be an appropriate measure in reducing the
chances of organizational failure. It is critical to note that cost reduction will increase relative
income. Relative income will be high even in the event that an organization undertakes extensive
corporate social responsibility. The main reason why I include this measure is because there is a
likelihood that with the extensive corporate social responsibility program planed by the
organization, there may be unforeseen losses in the dealings of the company. As such, the
organization should be capable of cutting down on costs as a way of taking care of the CSR
costs.

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Cost reduction cuts across all business functions because, as a matter of common knowledge, all
functions and departments of the organization incur costs which are aimed at income generation
(Pahl and Richter. 2009). Cutting down on costs is a measure that touches on all aspects of
business. For instance, cutting down on the costs will impact positively on the financial profile of
the organization. Speaking of the customer perspective, cutting down on costs is a way of
reducing the price of the goods produced. As such, such a measure will help in customer loyalty
and attraction. Additionally, this measure ensures smooth running of internal business processes.

Another measure that I would use in defining the balanced scorecard for GSK is the aspect of
contingent planning. A contingent plan is one that ensures an organization has an alternative in
the event that a current plan does not work. Contingent planning is an integral part of risk
management, and works in such a manner that it ensures business continuity and operational
resilience (Roy 2009). It is significant to understand that an organization that has contingent
plans will secure all business functions. Contingent plans will help the organization maintain
customer loyalty, while ensuring stability in finance and internal business process. In discussing
how the contingency plan operates, it will be important to mention that it is provides the
organization with an option, such that the organization can take risks in venturing into new
markets. New markets are usually associated with risks.

Another primary measure would be proper human resource management aimed at employee
retention. Employee retention refers to an employer ensuring the work force is stable and that
turnover in labor is kept on the low (Russell and Russell 2009). Labor turnover can adversely

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affect the organization since this makes the organization incur heavy expenses in acquisition and
training of new members of staff. Speaking of linking all business functions, employees are the
most effective resources. Employees touch on every part of the organization. For instance, it is a
matter of common knowledge that people are the most important resource in an organization.
They are the factors that comprise a department. Therefore, it goes without much explanation
that the organization’s employees are a link to all departments and functions ranging from
finance to customer relations.

Relating employees to risk is especially straightforward, especially when the risk under
consideration is business risk. Proper human resource management reduces risks associated with
the workforce, such the strikes and go slows (Sadler and James 2003). GSK needs human
resources to achieve all the strategic objectives. For instance, to achieve the big market share it
wants, people must be engaged in extensive marketing and brand promotion. Similarly,
partnering calls for serious negotiations which take human effort. Other measures that GSK
would adopt include such efforts as environmental scanning and price discrimination. These
would be used to enhance such efforts as marketing.

Alternatives to the balanced scorecard

There are various alternatives to the balanced scorecard, which an organization can use in
planning its strategic objectives. The strategic objectives of the organization define the long term
direction of the organization. This means that for anything to qualify as an alternative to the
balanced scorecard, it must focus on the longer term and must employ elements of future

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planning. The first alternative would be Economic Value Added (EVA) approach. The EVA
approach is one that focuses on the economic value that every decision comes with. This
approach has been described as being vague on account that it ignores other aspects of decision
making (Wittmann and Matthias 2008). For instance, the EVA approach does not consider the
human aspect of decisions. The human aspects include such concepts as motivation and
resistance to change. Employees are naturally, likely to resist change in an organization, since
they have fear of the unknown.

Another approach that qualifies as an alternative to the balanced scorecard is the Total Quality
Management (TQM) approach. This approach, which emphasizes zero default and continuous
improvement, is one of the most used approaches in the current world of business (Simerson
2011). It may be important to mention that TQM is an approach that that concerns itself with
constantly meeting and exceeding customer expectations. Customer expectations are usually that
the organization will satisfy their wants in a convenient manner. Doing this and exceeding the
expectations will at all times place the organization above others. In a bid to be a market leader,
GSK can embrace TQM in relation to both services and products.

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