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    MGT8002 Strategic Management Assignment Help

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    MGT8002 Strategic Management Assignment Help


    MGT8002 Strategic Management Assignment Help

    Introduction

    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.

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    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 2015/16. From 2017 on, HP has reworked their strategic plan to grow market share. 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, 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 that aims to transform Malaysia into a high-income nation by 2020;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 became more apparent after the amendment to the ASEAN-China Framework Agreement (22 November 2015) enhancing economic cooperation with a free trade agreement with China. 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.12

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    Figure 1: Total Turnover for Australian Pharmaceuticals 

    There are twenty three countries within the Asia Pacific region with China having the largest GDP (US$11,392 billion), Japan second (US$4,730 billion) and Australia third (US$1,257 billion) (2016 ranking). Malaysia is ranked below these countries with a GDP of US$303 billion.13 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 14 and there is a large demand for prescription drugs and increasing.15 Products manufactured in Malaysia can be categorised into four areas including prescription medicines, over-the-counter products, traditional medicines and health/food supplements.16 There are also imported proprietary drugs, generics manufactured locally (such as those by Home Pharmaceuticals) and imported generics.17 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.18 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.19 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 20 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.21 At present, the industry is geographically scattered, has many outdated technologies, has weak international trading competitiveness and lacks patented pharmaceuticals that are developed nationally.23 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.24 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 benefits

    Australia’s pharmaceutical industry by comparison is highly regulated in terms of the pharmaceutical benefits scheme (PBS) with the Australian Government contributing over $9 million dollars to the scheme by 2014/5. As at 30 June 2016, government expenditure on the PBS totalled approximately $7,964.9 million.25 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 sales26 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.27 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 2011-13 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, are responsible for research and development. The three divisional managers comprising Dr Winnie Tan Khoo, Dr Ahmed Kumar and CT Ramgopal, are in charge of 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.

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     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. 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 2016 alone in order to remain competitive. While OTC represents the largest turnover, this is offset by the need for large capital investments just to remain competitive. In comparison to major competitors however, turnover by size is small 28 although PK is excited about the spur in growth expectations in 2018 in some SBUs. The company has tended to carve out small niche products in the past with high margins.

    Mary has advised however that SBU1 and 3 forecasts are mostly based on small increment increases or decreases based on current competitive attacks while SBU 2 is reliant mostly on a 50% split between national and export sales going forward. For instance, future pricing of hearing devices 29 is of some concern for Home products together with increasing competition by some of leading brands such as Sonova, William Demant, Siemens, and GN ReSound in the hearing industry. . The creation of wireless, bluetooth and FM technology are major innovations in the industry driven by an ageing population where 1 in 6 people suffer from hearing impairment and higher in developing countries. Other challenges for Home are common to most businesses such as a social stigma related to hearing loss and rising prices but innovation for PK is the key to hearing aids going forward. He believes that with retailers charging upwards of US$2000 or higher for a unit and newer low-cost firms entering the business from China, Home’s wholesale price will come under threat and he remains uncertain how to position the devices. He notes that an increasing reliance on retail sellers places the spotlight on the quality of current audiologists in Malaysia and the services they provide. The high margins of the past may in fact be very difficult going forward.

    Pharmaceutical exports from Australia

    Apart from SBU2 where growth expectations reflect market development, Mary explained to PK that the forecasts across the SBUs do not take into account retaliatory business strategies by Home or possible diversification strategies going forward to any great extent. Mary admitted that much of the forecast was based on Home sales staff actively engaged in selling the products to suppliers such as medical doctors and retailers and their assessments going forward about how units will trend. For instance, sales staff has advised that many medical doctors, chemist chains and local hospitals are starting to favour global generics administered by some very large pharmaceutical MNEs who have established a manufacturing presence in the country. This feedback has at least placed in PKs mind the attraction of a no-frills national brand. A strong distribution system despite Home’s location has been useful in the past with the company owning all of its trucks and vans. Similarly, people are loyal and dedicated and PK is a popular yet somewhat charismatic individual who is well known in the industry for engaging high profile politicians and lobbying important committees.

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    Figure 2: Forecasted income statement for Home Phamaceuticals (in US$)

    Together with global experiences, distribution costs however have been increasing together with the high cost of technical services and research. Home currently receives no assistance from the current government for research and development nor substantial tax write-offs. PKs best estimates, based on current and forecasted demand, is that market share could fall by 0.5% in Home sales with an increasing heavy reliance on Hearing Devices going forward. He has also been concerned about rising manufacturing costs in technology processes and an over reliance on older technological processes to develop and test new products. The Malaysian pharmaceutical industry’s Ministry of Health oversees the Drug Control Authority with the latter licensing up to 234 pharmaceutical companies. Out of these, there are 167 traditional medicine and 67 modern medicine firms.30 Moreover, there are six major local companies which comprise Home’s major competitors including healthcare groups. They include Pharmaniaga Manufacturing Berhad, Kotra Pharma (M) Sdn Bhd, Hovid Berhad and CCM Duopharma Biotech Sdn Bhd.31As noted earlier, large MNEs are making inroads with companies such as Pfizer, Novartis and Astra Zeneca setting up licensing arrangements with local incorporated companies with more to follow. Interestingly, Pfizer and Novartis are ranked 1 and 2 in the world in terms of revenue with Astra Zeneca ranked 6th.32 Pharmaniaga Berhad is an investment holding company.

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