Kathrin Auzinger-Hotzel FINAL EXAMINATION Prepared for Dr. Daniel E. Gilbert University of Maryland University College Strategic Investment and Partnering IMAN615 Section 9040 Eli Lilly in India: Rethinking the Joint Venture Strategy
Transcript
1. K a t h r i n A u z i n g e r - H o t z e l FINAL
EXAMINATION P r e p a r e d f o r D r . D a n i e l E . G i l b e r
t U n i v e r s i t y o f M a r y l a n d U n i v e r s i t y C o l
l e g e S t r a t e g i c I n v e s t m e n t a n d P a r t n e r i
n g I M A N 6 1 5 S e c t i o n 9 0 4 0 Eli Lilly in India:
Rethinking the Joint Venture Strategy
2. Lilly Core Competence & Competitive Advantage:
Innovation, research and drug development Lillys mission is to
create and deliver superior health care solutions in order to
provide customers around the world with optimal clinical and
economic outcomes (Eli Lilly). This requires that the company
operate ethically, taking into account health and environmental
issues in respect to its global operations as well as local impact.
Additionally, Lillys mission and values are expressed in the
companys desire to provide innovative medicines that enable people
to live longer, healthier, and more active lives (Eli Lilly). The
firms core competencies relate to its ability to discover, develop,
manufacture and sell a broad line of human health and agricultural
products in short its ability to innovate (p. 232). Lilly has five
specific core competencies: established markets, oncology,
diabetes, emerging markets, and animal health (Bajgrowicz). The
companys years of experience, commitment to scientific and
managerial excellence as well as its global reach and strategic
leveraging has promoted its continued success. Lillys competitive
advantage is linked to its ability to innovate. Specifically, the
integration of highly sophisticated technologies in combination
with an interdisciplinary approach to research and development have
created a new model for Lilly that gives the company a competitive
advantage in bringing breakthrough medicines to patients in a more
efficient, productive, and dependable manner (Eli Lilly).
3. Ranbaxy Core Competence & Competitive Advantage:
Manufacturing and integrated processes Ranbaxys mission is to to
become a Research-based International Pharmaceutical Company,
committed to constantly pushing new frontiers of knowledge in
pursuit of new horizons of science (Ranbaxy). This requires
visionary management and a serious, research- oriented focus for
the future (p. 233) The companys core competency is expressed in
its processes. Specifically, Ranbaxys chemical synthesis capability
enables the company to achieve economies of scale in the
manufacture of patented and generic products (p. 234). The firms
competitive advantage is linked to its low costs of capital,
employee loyalty, and its solid manufacturing base with a strong
backward integration from lab to the market (Ranbaxy). Furthermore,
the companys strategic position and experience in the Indian market
(one of the worlds the most competitive and aggressive
marketplaces) allows it to compete successfully in other markets
(Ranbaxy).
4. Central Question And which direction is Eli Lilly (Lilly) to
take now that Ranbaxy Laboratories (Ranbaxy) is intending to divest
its stake in the joint venture? Key Issues: Both companies have
grown and attained their JV goals Ranbaxy became a global player
and Lilly gained foothold in India. Evaluate the need for strategic
partner partnership vs. wholly owned subsidiary Country risk
cultural differences, political and economic risks, constant
challenges with government regulations Limitations on pricing small
margins -> cash flow constraints JV depends for manufacturing
and distribution on Ranbaxy Opportunities changing operating
environment, increasing demand, shifts in the industry, cost
management
5. Strategic Environment Strategic Context Lilly is
re-evaluating its strategy for India and the direction for the JV,
with Ranbaxy signaling an intention to sell its stake (p. 229)
Lillys product portfolio for India is limited ELR JV depends for
manufacturing and distribution on Ranbaxy India: Healthcare
expenditures in India are rising; Increasing demand, improving
regulatory framework, better infrastructure; WTO membership and
resulting change in ownership requirements, trade, IPR/patent
protections Industry: Slowdown in growth (price competition, shift
in demand, entry of large competitors); Internal consolidation to
achieve synergies and economies of scale; Increasing rivalry and
fierce competition Strategic Objectives Take advantage of the
opportunities present and developing in the Indian market Emphasis
on emerging markets (such as India) to manage company growth
Maximize returns and achieve long-term sustainability Shape
opinions be a driving force in the industry
6. Porters 5 Forces Analysis Barriers to Entry are high:
Economies of scale exist High start-up capital requirements as well
as investment intensive operation (R&D, clinical trials, etc.)
Forward & backward integration Access to distribution
Experience/learning curve Strict government policies/controls
Proprietary knowledge and patents Brand identity/loyalty relating
to patents Threat of Substitution is medium: Substitutes are
available generics vs. prescription, parallel trade Some products
exist that perform the same or similar function Buyers may face
uncertainty and/or inconvenience when switching Existing substitute
products (generics) satisfy price, value, and quality expectations
Brand loyalty usually exists Bargaining Power of Suppliers is
medium/low: Suppliers are diverse and geographically dispersed Some
raw materials are basic resources low switching costs, easily
available, bulk production Some suppliers provide differentiated
inputs (i.e. R&D, APIs) Switching costs depend on input type
Bargaining Power of Customers is low: Switching costs depend on
drug generic vs. patented Substitutes are available for some drugs
Buyers are fragmented with only few influential ones (i.e.
government agencies) Product may be a critical input
7. Rivalry within the industry is strong: Industry growth is
high and expected to increase Number of competitors/rivals is large
and expected to increase Similar products (i.e. generics),
performance, quality, and strong images Buyer cost for switching
brands depends on drug Rivals are diverse but may collude and
cooperate to gain competitive advantage Industry profit potential
is high
8. Competitive Structure of the Industry in India The
competitive structure of the industry is being redefined due to the
threat of new entrants, increasing competition among rivals,
consolidation among firms, as well as a shift in focus To maintain
presence firms are continuously forced to adapt to a changing
environment, as regulations, rules, frameworks and institutions
evolve affecting the structure of the industry and the way business
is conducted Changes in focus shifting drug development in new
directions (chronic therapies), intense price competition, entry of
large players have influenced the competitive structure of the
Indian industry (p. 242)
9. Trends Growth market: changing social structures, population
growth, increased access to medicine, new and evolved markets will
lead to market growth Emerging markets: increasing demand for
medicines, increases in healthcare spending, new opportunities
R&D: will become more complex caused by political, legal, and
financial factors Changes in healthcare delivery and focus
Regional/global trends: outsourcing of clinical trials availability
of medical infrastructure and expertise to provide clinical trial
data to support global registrations (p. 243) Competition: will
become increasingly fierce as structure of industry evolves and
changes
10. SWOT Analysis Strengths Lilly is one of the largest
pharmaceutical companies in the world (12th largest) Large, durable
organization Commitment to scientific and managerial excellence
Global influence spans 151 countries Leading brands and R&D
capabilities Ethical marketing & integrity Good stakeholder
relationships World-class sales process Expertise in clinical
trials Weaknesses Patents infringement vs. expiration Financial
risks increasing costs vs. pricing constraints Limited product
focus (two groups off- patent drugs & patent drugs with
barriers to entry) Dependent on international sales Opportunities
Changes in population, markets, and demands Emerging markets low
cost labor, new customers, etc. Use world for clinical testing
Shape opinion with leaders in the medical field around the world
Strong performance of ELR JV Shift in R&D focus (chronic
therapies) Positive changes in Indias business environment Threats
Ranbaxy is local market leader Competitive structure of the
industry is evolving consolidation trend, entry of new & large
competitors India weak IP protection/enforcement, new competitors
Limitations on pricing small margins - > cash flow constraints
Escalating costs (R&D, clinical trials, pricing pressures
etc.)
11. Culture Economic Environm ent Social Process Analysis
Political System Social Process Analysis Country Risk India
12. SPA India Economic Commonality Distribut ion Resource Base
Econ. System Producti on Resources (Foundation): Natural: some
natural resources (4th largest coal deposit); farming &
industry particularly sciences Human: large labor pool 2nd most
populous country, 2/3 of the population between 15 & 64, low
labor costs, migration to cities; high rate of poverty
Technological: mix of modern and outdated industry and agriculture;
infrastructure improvements (problems with electricity, roads,
etc.) Production (Organizational): Production Assets: variety of
industries some well developed and modern, others outmoded and
outdated; large service sector Production Forces: large skilled and
unskilled workforce Production Systems: paternalistic management
style, hierarchies, risk averse, long term focus Distribution
(Significant): Property Claims: growing middle class, high market
potential worlds 4th largest importer; large rural population with
varying and distinct cultures Exchange Mechanisms: logistics,
distribution, banking system etc. developing; many reforms aimed at
attracting FDI; poor developing infrastructure; many mom-and-pop
stores; penetration of rural areas by large MNEs difficult Demand
Preferences: demand is evolving, large income disparities poverty
is a significant problem
13. SPA India Political Commonality Legal Order (Foundation):
Defense: external relations are stable no significant threats BUT
some disagreements with China and Pakistan (work in progress)
Domestic Tranquility: domestic relations are relatively stable with
some conflicts between castes and Muslims vs. Hindus Legal Base:
influenced by the British Judicial System - judicial review of
legislative acts; separate personal law codes apply to Christians,
Hindus, and Muslims burdensome and complex regulations; accepts
compulsory ICJ jurisdiction with reservations; ease of doing
business in India is low the country is ranked 133 (out of 183) by
the World Bank Group Polity (Organizational): Legislative
Consensus: union territories; democratic tradition, several larger
opposing parties; elections based on popular vote and electoral
college; decentralized system divided into three branches;
policy-making processes are transparent with clearly defined
responsibilities and procedure Judicial Procedures: complex legal
system; law has a national character is a part of local culture and
life; Indian judiciary is known for its independence and extensive
powers - fairly routinely intervene with executive action; Indian
courts are slow due to a shortage in personnel however, existing
laws are effective, enforceable, and relatively reliable. Executive
Authority: courts are quite efficient in managing the country and
enforcing laws Welfare (Significant): Secure Existence: complex and
evolving operating environment (legally, politically, &
economically); stable; India ranks medium in UN Human Development
Index Political Freedom: political freedom exists; people are
allowed to vote at age 18; multi- party system reflects the
ideological diversity existing in India Significant Engagement:
public is involved in determining the future and shaping the
countrys structures, operational frameworks, and political climate
Social Compact Legal Base Politica l System Policy Process
14. SPA India Cultural Commonality Workforce Mindset
(Foundation): Useful Skills: literacy rate is 61%, increase in
skilled labor but education remains a privilege and remains in need
of improvement/liberalization (literacy rate and general education
level are improving); unorganized labor and disenfranchised people
remain a problem as well as high levels of poverty Accumulated
Knowledge: quality improvements in educational systems; schools are
accessible to the general public however, higher education remains
largely exclusive and selective; learning through tradition still
exists and remains a central part of culture Final Meanings: social
morality shaped strong regional and local identities; strong
indigenous heritage; caste system influences interaction, daily
lives (food, clothing, job, education, etc.) Style
(Organizational): Basic Roles: relative gender equality; profound
socioeconomic inequalities caste system; family oriented;
large/extended families (include neighbors and entire town);
Decisional Patterns: high power distance; strong relationships
relationship oriented; particularistic society; low uncertainty
avoidance flexible rules and structures; Societal Recognition:
caste, multi-ethnic/multi-religious; India has many different
social groups, which differ in languages and dress, follow
different religions as well as eat different foods however, they
share many common attributes that unite them Symbols/Sacred Values
(Significant): Communication Modes: communitarian, paternalistic,
hierarchical; many regional dialects and several major languages
(incl. English); no is being avoided Religious Beliefs: mainly
Hinduism; life happens in a circular pattern; reality is relative
(me versus you, me versus the world); high degree of ambiguity
Symbols: destiny, karma, caste system; Respect one another people
are alike, flexible beliefs while embracing traditions; meditation
(i.e. yoga); ideology: there are many answers, many directions, it
is chaotic, diverse, unpredictable, evolving, changing, never
static, etc. Sacred Values Workforc e Mindset Culture System Styles
of Interacti ng
15. Culture: India vs. US Strategic Map: Size/Product Portfolio
(India) India ProductPortfolio: Generic Size: Large Size: Small
ProductPortfolio: Innovation AurobindoPharma Dr. Reddy Ranbaxy
Cipla Ltd. Eli Lilly Ranbaxy Glenmark Pharmaceuticals Sun
Pharmaceuticals Pfizer Novartis AG GlaxoSmithKline Merck &
Co.
16. CPA - Lilly Corporate Process Analysis Comm onwea l Admin
Corp. Organi zation Polity Marke ting Resou rces Corp. Operat ions
Produ ction Identit y Learni ng Corp. Cultur e Style Corporate
Operations: Resources: operate in 151 countries; manufacture and
distribute through 25 countries; financially stable; fast-growing,
stable, company; successful R&D division; Production:
integration of highly sophisticated technologies in combination
with an interdisciplinary approach to research and development;
discover, develop, manufacture and sell drugs Marketing: directly
to consumers, doctors, and healthcare agencies; ethical company;
integrity; image, trust, quality Corporate Organization: Admin:
management ensures strategies and plans are implemented; publicly
traded company, governed by processes, systems, and rules Polity:
decisions are made centrally, board of directors and management;
well-trained, professional managers Commonweal: maximize
shareholder wealth, meet quarterly financial goals Corporate
Culture: Learning: training, hiring skilled employees, diffuse
knowledge throughout global operations, promote internally, JVs and
alliances Style: board meetings, press releases; management creates
value, maintains quality and high standards to increase company
reputation and foster growth; commitment to innovation and growth
as well as scientific and managerial excellence; shape opinions
close interaction with stakeholders Identity: growth, innovation,
financial focus; commitment to scientific and managerial
excellence
17. Strategy Alternatives Pro: maintain successful JV; retain
access Ranbaxys manufacturing and distribution; well established
relationship Con: Ranbaxy may not easily be swayed to continue JV
possible result: lack of commitment; companies goals, structures
and visions have changed alignment may be difficult/impossible; JV
mission and goals have been achieved Strategy A Restructure -
renegotiate JV with Ranbaxy Pro: cooperative partner support;
potential access to manufacturing and distribution; share risk and
burdens Con: difficult to find suitable partner; negotiations take
time; Ranbaxy may transfer shares without concern fro company fit;
JV purpose/mission? Strategy B Form a new JV - find a new partner
Pro: India offers many opportunities; decisions can be made with
the interest of Lilly in mind; ELR successful, reputable company in
India; revenue to support parent company; integrate technology and
knowhow of subsidiary to realize company strategy Con: large
financial commitment; country and market risk exposure; lack of
manufacturing and distribution channels Strategy C (recommended)
Terminate JV establish subsidiary
18. Technological Dimension: Strategy allows Lilly to take
advantage of a long-term growth opportunity Purchasing Ranbaxys
shares would allow Lilly to maintain a foothold in India ELR is an
established reputable entity in the Indian market Market and
regulatory changes provide a number of opportunities in India
Increasing local demand and low-cost, skilled labor are integral
components in Lillys strategy portfolio Organizational Dimension:
Lilly will face challenges as it lacks manufacturing and
distribution will have to negotiate with Ranbaxy or other entity or
develop own capabilities Regulatory environment may represent
challenges and uncertainty Cultural differences may undermine the
effectiveness and success of subsidiary however, local perception
that foreign is better could also aid company success Trust and
close relationships need to be fostered with local stakeholders
(government, consumers, etc.) Country risk has to be actively
managed, as risk solely rests with Lilly Transactional Dimension:
Lilly is highly committed to scientific and managerial excellence
BUT lacks access to distribution channels and manufacturing
capabilities Indias operating environment is evolving uncertainty
and opportunity Cultural differences have to be actively managed to
function in a mutually beneficial way Long-term growth objectives
can be met by taking advantage of comparative advantage (low-cost,
skilled labor) and shaping opinions and Strategy Evaluation
19. Actionable Steps ENTER NEGOTIATIONS WITH RANBAXY REGARDING
TRANSFER OF SHARES Build on current positive relationship to
encourage Ranbaxy to transfer shares of JV to :Lilly Potential
concessions and incentives have to be discussed to seal the deal
(i.e. purchase of all shares or portions of them at the end of set
intervals) EVALUATE ELRS FUTURE Assess need for partner temporary
vs. permanent Determine scope of operations (R&D, clinical
trials, manufacture & distribution of drugs; generics vs.
patents) Evaluate ability to produce and distribute products
independently INTEGRATE COMPANY INTO ELI LILLYS VALUE CHAIN Promote
good relationships and favorable operating conditions Nurture
trust, honesty, and cooperation Establish strong links between
subsidiary and headquarters to institute global learning structure
OUTSOURCE MANUFACTURING Negotiate with Ranbaxy or other entity
outsourcing contract for manufacturing and distribution Contract
length, scope, and responsibilities (manufacture, distribution,
marketing, etc.) DEVELOP OWN CAPABILITIES VS. FOCUS ON CORE
COMPETENCIES Evaluate ability to establish own capabilities (costs
vs. benefits of outsourcing manufacture etc.)
20. Conclusion: Actions to be taken The strategy recommended
will aid Lilly in retaining its foothold in India, while
simultaneously enabling the company to take advantage of recent
positive market developments (economic and political). Furthermore,
the approach will address key issues and concerns faced by Lilly,
while allowing the company to respond to global as well as local
industry changes. By choosing to purchase Ranbaxys stake in the
venture Lilly will be able to utilize its core competencies to take
advantage of the many opportunities present in the Indian market.
The company will also be able to meet the international sales
targets needed to promote its continued success (p. 240). Finally,
this strategy will enable Lilly to use India for clinical testing
through ELRs medical infrastructure and expertise in clinical
trials. It will allow the company to provide clinical trial data to
support global registrations as well as proactively manage costs.
Accordingly, returns will be maximized and profitability increased,
thus meeting Lillys strategic objectives (p. 243).
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