Strategy Project
POLITICAL 3
ECONOMIC 4
SOCIAL 4
TECHNOLOGICAL 5
ENVIRONMENTAL 5
LEGAL 6
1.2. PORTER’S FIVE FORCES 6
Threat of New Entrants: LOW 6
Bargaining Power of Suppliers: LOW 6
Power of Buyers: HIGH 6
Threat of Substitutes: HIGH 7
Rivalry of Competitors: HIGH 7
1.3. KEY DRIVERS OF CHANGE AND CRITICAL SUCCESS FACTORS 8
II. INTERNAL STRATEGIC ANALYSIS OF ABBOTT LABORATORIES 11
2.1. ORGANIZATIONAL SYSTEM 13
2.1.1. ORGANIZATIONAL STRUCTURE 13
2.1.2. ORGANIZATIONAL CULTURE 14
2.1.3. ORGANIZATIONAL PROCESSES 15
2.2. BUSINESS SYSTEM 15
2.2.1. PRODUCT AND SERVICE OFFERINGS 15
2.2.2. VALUE CHAIN 17
2.2.3. RESOURCE BASE (VRINE MODEL) 17
SWOT Analysis 18
III. STRATEGIC FINANCIAL ANALYSIS 18
3.1. FINANCIAL ANALYSIS OF ABBOTT AND ITS COMPETITORS 18
3.1.1. OPERATING PROFIT MARGIN 19
3.1.2. NET PROFIT MARGIN 19
3.1.3. EARNINGS PER SHARE 20
3.1.4. ASSET TURNOVER 21
3.1.5. RETURN ON ASSETS (ROA) 21
3.1.6. RETURN ON EQUITY (ROE) 22
3.2. RECOMMENDATIONS FOR INVESTORS 23
http://www.qfinance.com/sector-profiles/healthcare-and-pharmaceuticals
Today the pharmaceutical industry is globally dominated by American, Western Europe and Japanese multinationals, where the top seven pharmaceutical markets are US, France, Germany, Japan, Italy, Switzerland and the UK; accounting the 77% of the world sales.
I. MACRO-ENVIRONMENTAL ANALYSIS OF THE PHARMACEUTICAL INDUSTRY
The global pharmaceuticals market reached the value of $733,104.8 million in 2010, and it is forecasted to grow to $981,050.8 million in 2015; which means an increase of 33.8% (Datamonitor, 2010. p.2).
1.1.PESTEL ANALYSIS
POLITICAL
- Governments and parties restrictions: Governments of many developed economies around the world started revising prices in order to reduce the growth in public healthcare spending, and favoring the prescription and distribution of generic drugs to reduce the deficit in the public healthcare system (Datamonitor, 2008, p. 8). These restrictions have favored the generic sector creating huge opportunities.
- Rising costs of new product development: Today $230 million VS $54 million in 1975.
ECONOMIC
- Economic recession affecting US and Europe: Companies need to decrease costs and change the way of doing business, becoming more global.
- Developed economies are decreasing their significance in the industry: 85% in 2006 VS 70% in 2010. On the other hand, Brazil, India, Russia and China still represent just the 16% of the pharmaceutical global market despite their potential.
- Some companies are being merged by bigger ones: Wyeth by Pfizer, Schering-Plough by Merck and Genentech by Roche are some examples.
- (http://www.eulerhermes.es/es/informes-y-noticias/noticias-grupo-2011-03-04-135601.html)
SOCIAL
- Rapidly aging population in developed countries: In 2000 50% of US people was over 35.5 years old; by 2050 21.6% is expected to be over 65 years old. Older people need to spend more in healthcare, therefore, pharmaceuticals are benefiting from this factor (http://www.qfinance.com/sector-profiles/healthcare-and-pharmaceuticals).
- Increase in healthcare costs is causing generic drugs policies (R. Jackson, N. Howe, and K. Nakashim, 2011).
- Reduction in labor: In the last 4 years pharmaceutical companies have cut off 18% of their job vacancies.
TECHNOLOGICAL
- New Chemical Entities development to face the international competitiveness across the three-triad economies (America, Western Europe and Japan).
- Increase on R&D spending doesn’t give results because of the harder conditions imposed by the authorities (Yeoh, 1994).
- Adapt to the healthcare system the modern IT systems has been proved to be very difficult and expensive, i.e. In the UK the electronic patient record system have cost about 12 billion pound, and will take 9 years more than expected (http://www.qfinance.com/sector-profiles/healthcare-and-pharmaceuticals).
ENVIRONMENTAL
- New diseases appearing: From 1940 to 2004, 335 new infections appeared. (http://www.elmundo.es/elmundosalud/2008/02/20/biociencia/1203530578.html)
- Contamination restrictions: In the 1990s new regulations affected the pharmaceutical industry due to the world market forces and activists protests. Therefore, leading firms are introducing pollution prevention and clean manufacturing practices; avoiding this way a harder government regulation (Sood, de Vries, Gutierres,. Lakdawalla and Goldman 2008).
LEGAL
- Structural reforms due to the economic recession to increase productivity and employment, as for example take protectionist measures.
- Patents protecting star products of the main pharmaceutical companies are about to expire and it gets harder for firms to develop new products or to improve them. In 2012 the drugs that represented the 20% of the incomes in the biggest pharmaceutics have become generics, and new products find it hard to compensate the incomes decrease, which could rise the 41% of the total incomes (Chen, Varghese, and Prescott; 2012).
1.2. PORTER’S FIVE FORCES
Threat of New Entrants: LOW
- Huge amounts needed to produce products (R&D) (Datamonitor, 2010 p.16);
- Many rules and government regulations (Datamonitor, 2010 p.13);
- Sureness about the success of products.
Bargaining Power of Suppliers: LOW
- Need to be chemical industries;
- Difficult to stay in the market because of the low loyalty when increasing prices;
- Brand image and service and product quality are not considered;
- Firms tend to purchase from numerous suppliers (Datamonitor, 2010 p.17).
Power of Buyers: HIGH
- Mainly governments and monophony companies;
- High power of consumers because of low brand loyalty (Datamonitor, 2010 p.13).
Threat of Substitutes: HIGH
- Generics demand has increased because of the lower costs (Chen, Varghese, and Prescott; 2012);
- Import drugs with cheaper prices from China or India.
Rivalry of Competitors: HIGH
- Patents means an advantage;
- Companies going global with worldwide launches;
- Short product life (Yeoh, 1994).
After analyzing Porter´s Five Forces, it can be seen that nowadays Pharmaceutical Industry is a non-attractive sector as entry barriers are getting higher in the same way as buyer power, the number of substitutes, especially with the new generics policy; and the competitors rivalry. Thus the situation is getting harder; as mention above in the PESTEL analysis, the number of pharmaceuticals is getting lower instead of higher in the last years, as it is very difficult for new entrants to get into the industry and bigger companies are merging smaller ones.
Anyway, Abbott is performing well as the company has improved its rank situation in two positions since 2011, being positioned as the 6th strongest company in 2012. This improvement situation is related to their product diversification that makes the company less vulnerable to the substitutes, competitors and buyers power.
1.3. KEY DRIVERS OF CHANGE AND CRITICAL SUCCESS FACTORS
Based on the provided analysis of macro-environment (PESTEL) and Porter’s Five Forces, the key drivers of change and critical success factors can be identified as following:
As it can be seen in the analysis above, the global pharmaceutical industry is in an accelerated state of transition.
Global healthcare spending levels have never been higher. Yet pharmaceutical firms face a growing and daunting array of competitive, regulatory, price and operational challenges. The industry has been facing disappointing business and share price performance. There are growing threats to intellectual property protection and a general demonization of pharmaceutical firms by some mainstream media, politicians and influencers. Major changes to business models are needed, including more consolidation to gain greater economies of scale, better and more efficient ways to bring new drugs to market. Excelling at the core business of pharmaceuticals is more critical than ever. Also, outsourcing plays an increasingly important role in defining next-generation pharmaceutical business and operating models.
II. INTERNAL STRATEGIC ANALYSIS OF ABBOTT LABORATORIES
According to Fortune Magazine, Abbott Laboratories was ranked the most admired company in pharmaceutical industry in 2010, as well as one the most desirable places for scientists to work (The Scientist Magazine). Abbott Laboratories was established in 1888 by Dr. Wallace C. Abbott in Chicago, Illinois. In 1890 the company was incorporated as Abbott Alkoloidal Company and changed its name to Abbott Laboratories in 1915. Abbott listed itself in the Chicago Stock exchange in 1929 and has been a publically traded company. The company currently employs over 91,000 people and reported revenues of 38.85 billion USD in 2011. It is currently present in over 130 countries in the world. Abbott has a diversified portfolio which included medical products, diagnostics, nutrition, prevention of diseases and palliative care.
The first major innovation by Abbott in the world in Pharmaceuticals was the invention of the “dosimetric granules”. During the 2 world wars Abbott played a crucial role by being the sole manufacturer of procaine and anaesthetic for the Allies and in the Second World War by manufacturing the antibiotic penicillin which was produced by only 4 other companies on the side of the Allies. Depakote, one of Abbotts key products was approved by the FDA in 1983. Another key product developed by Abbott in 1985 was the world’s first diagnostic test for HIV and AIDS. Some of the other drugs invented/discovered by Abbott include Pentothal, which also features on WHO’s “essential drug list”.
2.1. ORGANIZATIONAL SYSTEM
2.1.1. ORGANIZATIONAL STRUCTURE
Abbott Laboratories has synergy in its operations, controlling both lines of the business and has hierarchical structure.
Source: http://www.theofficialboard.com/org-chart/abbott-laboratories#
The company’s portfolio is divided into core several business areas (Abbott Laboratories, 2013):
- Diagnostics;
- Diabetes Care;
- Molecular;
- Nutrition;
- Vascular;
- Animal Health.
In terms of their business structure, Abbott Laboratories first started to operate on three-category products basis, which are: Pharmaceutical, Hospital and Nutrition divisions. However, when beginning to expand, the company implemented strategy by adopting International Division Structure. Later on, the diagnostic division had been added to the structure of the company. The main problem with this type of structure is that all the divisions are quite disconnected, first because of separation of foreign and domestic divisions, and secondly due to lack of communication between those.
