International Strategy and Structure An Analysis Dr. Reddy’s Laboratories Ltd.
International Business – Individual Assignment George Joy
01/12/2014
Contents Globalization Strategies......................................................................................................................1 Economies of Scale, Learning Effects, Experience Effects and Location Economies.....................2 Entry Decisions....................................................................................................................................3 Analysis:...........................................................................................................................................3 Five force model in US Pharmaceutical Market (Generic Drugs)...............................................5 Porter’s value chain for Reddy’s........................................................................................................6 Core Processes..................................................................................................................................6 Supporting Activities.......................................................................................................................7 Organizational Structure for Reddy’s................................................................................................9 Decision Making..............................................................................................................................9 Architecture...................................................................................................................................10 Bibliography.......................................................................................................................................11
Globalization Strategies The strategies for pharmaceutical companies are basically dependent upon whether the company is producing generic drugs or is concentrating on discoveries through R&D. The pharmaceutical industry generally has low pressures for local responsiveness since the formulation for drug is well specified and drug can be used in any part of the world. Reddy’s focuses on generic drugs as well as discoveries. Generic drug business faces high cost pressures since the competitors can also formulate the same drug. For Generic drugs Reddy’s can follow a Global Standardization Strategy because of the high cost pressures and low pressure of local responsiveness. Reddy’s is looking to achieve economies of scale, learning effects and location economies i.e. their strategic goal is to achieve low cost strategy on a global scale due to the low margins and high competition. Reddy’s holds proprietary rights to manufacture and sell 3 products. Huge fixed cost is involved in developing innovative drugs through extensive R&D. The company has to decide the price and hope to sell adequate volumes so that it can make a profit on the amount it spent in developing the medicine before the patent period comes to an end. The patent period can vary from 5- 20 years. Since these drugs are protected by patents, the Reddy’s follows International Strategy where it has centralized its R&D in India, UK and Netherlands.
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Global Standardization (Generic Drugs)
High
Transnational
Strate gy International (Proprietary Drugs)
Localization
Low
Low
High
Reddy’s through its acquisitions in US (GSK), UK (Chirotech) and Netherlands (Octoplus) has horizontally integrated and has grown inorganically. Through its every acquisition Reddy’s has added to its product portfolio. By acquiring GSK’s manufacturing facility, Reddy’s was able to enter penicillin containing anti-bacterial market segment. It equipped Reddy’s to better serve their customers through manufacturing facility which previously did not exist. There by creating value to the customers. (High value- high cost approach). With their acquisition in Netherlands (Octoplus) Reddy’s focused on manufacturing improved injectables. This brought about fewer side effects, increased patient convenience and better safety balance. The acquisition of Chirotech in UK gave Reddy’s new capabilities in chiral technology.
Economies of Scale, Learning Effects, Experience Effects and Location Economies Reddy’s tries to achieve economies of scale in its manufacture of drugs. Economies of Scale are achieved when the fixed costs can be spread across large volumes of drugs. The huge cost involved in the R&D of proprietary drugs can only offset by achieving large volumes of sale. Same is the case in generic drugs, where there is cut throat competition and low margins. In order to increase its profit growth Reddy’s has expanded into new markets like USA, UK and Africa. 4
Reddy's path into new drug discovery involved targeting speciality generics products in western markets to create a foundation for drug discovery. Development of speciality generics was an important step for the company's growing interest in the development of new chemical entities. The elements involved in creating a speciality generic, such as innovation in the laboratory, developing the compound, and sending the sales team to the market, are also stages in the development of a new specialty drug. Starting with speciality generics allowed the company to gain experience with those steps before moving on to creating brandnew drugs. Thus the learning effects and experience effects during the development of generic drugs has benefited DRL during its foray into drug discovery. Reddy’s has concentrated its R&D in India, US and Netherlands. High portion of its R&D is taking place in US where the pharmaceutical industry is highly developed and has the access to most modern technologies and superior talent. Thus the theory of comparative advantage comes into play and this enables them to differentiate its product offering from those of its competitors through location economies.
Entry Decisions Global regulatory pressure on pharmaceutical industry is building in terms of Development Approval Pricing Cost Containment The pressure on relatively smaller firms is aggravated by significantly constricted credit options. As a result of this most pharmaceutical companies including Reddy’s are turning to mergers & acquisitions to expand their markets instead of Greenfield ventures. Major acquisitions of Reddy’s are American Remedies, India BMS laboratories, London Betapharm, Germany Roche’s bulk drug business, Mexico GSK’s US Penicillin facility Octoplus, Netherlands Chirotech, UK
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Analysis: Over the years Reddy’s has grown inorganically mainly by M&A. Its main criterion in the acquisition process has been strengthening its product portfolio. They also focus on being close to the patients, doctors, healthcare providers and business partners where ever they are. This makes M&A a viable option for them to make entry into markets. Out of all the acquisitions made by Reddy’s, not every venture was a success especially the acquisition of Betapharm, Germany in 2006 was a big failure. Two years after the acquisition, Reddy’s was forced to write down nearly half its investment in losses. As a business strategy the deal made sense since Germany was the second largest market for generic drugs after US, most patents expired much ahead of US, the margins in Germany were also better and generics could be branded and detailed to doctors through medical representatives. Where Reddy’s went wrong was in the analysis of Political factors in Germany. There were reports in Germany that the government was about to change regulations to force down the generic drug prices but still Reddy’s went on with the acquisition for which they had to pay dearly. The new regulations which came after the takeover said the generic drugs could be sold only on a tender basis than as branded products as it was done till then. Most industry experts also felt Reddy’s had overpaid for the acquisition. So that was another reason for its failure. This is a classic example of the failure of a firm in a market even though the market looked extremely attractive.
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Application of Porter’s Five Forces Porter’s 5 forces is a framework to analyse the level of competition and the attractiveness of an industry. Reddy’s is present in several markets, one of them is US market.
Five force model in US Pharmaceutical Market (Generic Drugs) Power of Suppliers 1. Presence of lots of players in the supply market. 2. Low Supplier switching costs 3. High ability for vertical integration Overall: Low Threat of New Entrants 1. High Entry Barrier due to R&D Costs 2. Tight Government Regulation Overall: LOW
Industry Competition 1. Cut throat rivalry exist 2. Huge amounts spent on ads and promotions for competitive advantage Overall: HIGH
Power of Buyers 1. Hospitals buy in bulk and force firms to keep prices in check 2. Regular customers have no bargaining power. 3. Buyer Price Sensitivity is low 7 Overall: Medium
Threat of Substitutes 1. One Industry where substitutes not possible Overall: Very LOW
Overall the Five Forces analysis gives
Threat of new entrants : Low Industry competition: High Bargaining power of buyers : Medium Bargaining Power of suppliers: Low Threat of substitutes : Very Low
So since the industry competition is the only force which gives a high and all other factors give low/medium, US market seems an attractive one for Reddy’s but they might have to look closely at the strategies followed by the main competitors like GlaxoSmithKline and Pfizer.
Porter’s value chain for Reddy’s
Information Systems Manage R&D
Develop Products
Infrastructu re Logistics Manage Supply Chains
Manufact ure Products
HR Perform Marketing & Sales
Perform After Sales Service
The 6 core processes are the ones which create most value for Reddy’s in the pharmaceutical market.
Core Processes Research & Development 8
The process which create most value for a pharma firm Innovation imperative rather than a choice Huge costs involved in R&D Only Indian company to have significant R&D being undertaken overseas Spent 9.4% of their revenues on R&D Goes through several steps like discovery, screening, preclinical test, phase1, phase2 and phase 3 of human trials during which regulatory approval process begin
Production
Reddy’s has 24 manufacturing facilities, majority located in India Firmly focussed on scaling up its manufacturing facilities to keep pace with its
R&D initiatives. Reddy’s new Operating Philosophy, features new generation shop floor management practices like closed transfer systems, simplified, gowning, state-of-
the-art equipment. Less manual labour and more error-free
Marketing, Sales & Customer Service
A product category where even slightest misappropriation of information could
lead to fatalities. Marketing and promotion material has information in unambiguous and precise
manner. Advertisement important for creating Brand awareness amidst tight competition Sales representative undergo in-depth training They also do promotional activities like PremOTE which is an initiative for
diagnosis of cancer and Roshini an initiative for Diabetes diagnosis. Provides superior customer service through their in-house Medical Affairs Team that addresses queries from sales representatives and Doctors.
Supporting Activities Information Systems
Reddy’s assesses distributors’ inventory and sales data on a daily basis, allowing
them to react instantly to shortages in the system. By establishing a synchronized supply chain and integrating our systems – sales, supply chain and IT – they have become true partners to distributors,
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understanding their stock needs, refilling their warehouse and seldom leaving patients without medicines. Logistics and HR
Reddy’s focuses on shifting vendors near the plant site, Transportation charges are minimal and has direct control over the suppliers. They have increased their sea shipments by 50% in FY14 thus reducing expenses. Reddy’s have a work force of 19,000 worldwide of which 2800 are in India. Launched their global recognition platform ‘Well Done’ to reward employees and to foster culture of appreciation in FY 2014.
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Organizational Structure for Reddy’s
Decision Making Dr. Reddy’s have divided the company into 5 business divisions, namely Global Generics, Active Pharmaceutical Ingredients. Custom Pharmaceutical Services, Biologics, Proprietary drugs. At Reddy’s the strategic direction and growth plans are decided by the Board of Directors which involves 8 independent directors and 2 other directors who own 25% of business. The decisions taken by the directors are then passed on to the management team. So the long term vision is decided by the board of directors. The management team largely looks at the tactical and operational issues of the firm. No decisions are taken without every director agreeing to it. 11
Architecture Reddy’s follow a Worldwide Product Division Structure in which each division is selfcontained with full responsibility for its value creation. The advantage with this structure is that it facilitates the transfer of core competencies within a division’s worldwide operations and the simultaneous worldwide introduction of new products. The disadvantage could be the limited power of area/country manager since they are under product division managers. Each of the business divisions in Reddy’s has a head who reports to the Managing Director & COO who then reports to the CEO. The company also has heads for each of its regions which it operates. Each of the region like North America, Rome, Russia, Japan South Africa, Italy, India, China, and UK have their respective heads. Since in all these regions Reddy’s sell their generic drugs, all the regional heads report to the Generic business division head. The decision making system at Reddy’s is highly centralized with a Business Development Team involving the higher management decides which partnerships to pursue. Even though centralized, it has a flat organizational structure without much of middle management which allows Reddy’s to speed up their decision making. The Global HR who directly reports to the COO has a Go/No Go power in Mergers & Acquisitions. He is the one who decides whether cultural aspects of the acquired firm is in sync with that of Reddy’s. Once an acquisition takes place, Reddy’s has a head for each of the alliances who reports directly to the Vice Chairman/CEO.
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Bibliography 1. Hill & Jain, International Business 2. Dr. Reddy’s Laboratories Annual Report, http://www.drreddys.com/investors/pdf/annualreport2014.pdf 3. Economic Times, http://articles.economictimes.indiatimes.com/2012-0514/news/31701111_1_indian-market-market-growth-global-markets 4. Business Standard, http://www.business-standard.com/article/companies/dr-reddy-slab-to-move-away-from-generics-113073001157_1.html 5. Official website, http://www.drreddys.com/ 6. Mckinsey, http://www.mckinsey.com/client_service/pharmaceuticals_and_medical_products/p eople/~/media/mckinsey/dotcom/client_service/operations/pdfs/outlook_on_pharma _operations.ashx 7. Focus Interview, http://www.drreddys.com/media/pdf/Focus_Interview2.pdf
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