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FINAL EXAMINATION

P r e p a r e d f o r

Dr. Danie l E . G i lbertU 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 gI 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

LillyCore Competence & Competitive Advantage:

Innovation, research and drug development

Lilly’s 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, Lilly’s mission and values are expressed in the company’s desire to “provide innovative medicines that enable people to live longer, healthier, and more active lives” (Eli Lilly).

The firm’s 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 company’s years of experience, commitment to scientific and managerial excellence as well as its global reach and strategic leveraging has promoted its continued success.

Lilly’s 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).

RanbaxyCore Competence & Competitive Advantage:

Manufacturing and integrated processes

Ranbaxy’s 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 company’s core competency is expressed in its processes. Specifically, Ranbaxy’s chemical synthesis capability enables the company to achieve economies of scale in the manufacture of patented and generic products (p. 234).

The firm’s 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 company’s strategic position and experience in the Indian market (one of the world’s the most competitive and aggressive marketplaces) allows it to compete successfully in other markets (Ranbaxy).

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

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)

Lilly’s 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

Porter’s 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

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

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)

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

SWOT Analysis

Social Process Analysis Country Risk India

SPA– India

Economic Commonality

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 –

world’s 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

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 country’s structures, operational frameworks, and political climate

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.

Culture: India vs. US

Strategic Map: Size/Product Portfolio (India)

India

Aurobindo Pharma

Dr. Reddy

Ranbaxy

Cipla Ltd.

Eli Lilly Ranbaxy

Glenmark Pharmaceuticals

Sun Pharmaceuticals

Pfizer

Novartis AG

GlaxoSmithKline Merck & Co.

CPA - Lilly

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

Strategy Alternatives

Strategy Evaluation

Actionable Steps

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 Ranbaxy’s 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 ELR’s 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 Lilly’s strategic objectives (p. 243).

Sources of Interest – References:

Bajgrowicz, S. (2010). Eli Lilly takes action in the face of an uncertain future. Medill Reports – Chicago. Retrieved from http://news.medill.northwestern.edu/chicago/news.aspx?id=164795

CIA World Fact Book. (2010). India. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

Eli Lilly and Company. (2006) Lilly expands biotech capabilities. Retrieved from http://newsroom.lilly.com/ReleaseDetail.cfm?releaseid=215506

Eli Lilly and Company. (2010). Environmental, Health, and Safety Policy and Guidelines. http://www.ehs.lilly.com/1995/profile2.html

Eli Lilly and Company. (2010). Responsibility. Retrieved from http://www.lilly.com/responsibility/business/valuablemedicines/

Hax, A.C., & Majluf, N.S. (1996). The strategy concept and process: a pragmatic approach. New Jersey: Prentice Hall.

IBEF. Ranbaxy Laboratories Limited. Retrieved from http://ibef.org/download%5Cranbaxy_labs_23oct.pdf International Business Center. (2008) India. Retrieved from http://www.cyborlink.com/besite/india.htm ITIM International. (2009). Geert Hofstede Cultural Dimensions – India. Retrieved from

http://www.geert-hofstede.com/ ITIM International. (2010). Geert Hofstede cultural dimensions – United States versus India. Retrieved from

http://www.geert-hofstede.com/hofstede_dimensions.php?culture1=95&culture2=42#compare Mann, C.J. (1997). Social Process Analysis.Mann, C.J., & Goetz, K. (2006). Borderless business. Westport, CT: Praeger. Ranbaxy Laboratories Limited. (2005). Annual Report 2004. Retrieved from

http://www.ranbaxy.com/investorinformation/annual_pr2004.aspx Ranbaxy Laboratories Limited. (2010) About Us. Retrieved from http://www.ranbaxy.com/aboutus/aboutus.aspx Rank, J. (2010). India. Retrieved from http://www.everyculture.com/Ge-It/India.html Schaan, J.-L., & Kelly, M.J. (2007). Cases in alliance management: building successful alliances. Thousand

Oaks, CA: Sage Publications, Inc.World Business Culture. Business in Indian. Retrieved from

http://www.worldbusinessculture.com/Business-in-India.html