Case 3 :Eli Lilly &company Question: To continue generating the returns enjoyed by the industry over the past decade, pharmaceutical companies would be forced to rethink how they identify and exploit opportunities to gain a competitive edge in an increasingly complex market ?
In my opinion if a Pharmaceutical company aims to continue generating the returns and gain competitive edge , should conduct Pharmaceutical Industry Analysis which will help to find out opportunities and then should try to match them with its Strengths and finally achieve to competitive benefits through new strategy formulations, so first I would like to bring a summary of strategic issues which Eli Lilly is face to them, second I will describe Eli Lilli external condition, through industry analysis and porters 5 forces ( to analyze external environment), third I try to bring SWOT analysis and SWOT matrix and finally according to the Opportunities, I try to bring some recommendations for strategy formulation which will place Lilly in a much stronger position to achieve and maintain sustainable competitive advantage in the dynamic competitive international pharmaceutical market.
Summary of Key Strategic Issues which Eli Lilli face to them 1)In Eli Lilli Imbalanced portfolio and lagging international sales was the consequence of its dependence on just a few key products.
This type of a strategy with a focus on neuroscience drugs such Zyprexa was not well suited to the more cost conscious international regions whose their focus was treatment of disease. 2) Other factors that played against Eli Lilli were the regulations in non-US developed countries on pricing and payment programs for pharmaceutical drugs through national health insurance programs. Due to this fact, Lilly wouldn’t have earned as high of a profit margin on its blockbuster drugs, Prozac and Zyprexa, in Europe and Japan as it did in the less price-conscious U. S. market. 3)Eli Lilly’s recent decline in market capitalization was brought through the rapidly changing market conditions, intensifying pressures of competition, rising R&D expenditures and the erosion of prices on leading products. )Eli Lilly also faced to several legislative problems, (a)such 300 lawsuits accusing of failing to stop Robert Courtenty from diluting cancer drugs, (b)patent litigation involving both Prozac and Zyprexa,(c)charges of deceptive marketing for Evista 5)some problems were originate from FDA,( When found quality problems at several of the company’s manufacturing sites) so one of the item which should be under attention of Eli Lilli is FDA policies and rules. 6)Additional issues that seems to have limit the performance were Eli Lilli failure to meet international sales expectations, expiration of key patents, and its poor performance against competitors.
I can say ,this can be attributed to the fact that Lilly act rigid, because centrally controlled operating structure did not fit well with today’s rapidly changing pharmaceutical market environment. Eli Lilli External conditions I will explain external environment of Eli Lilli through two parts ,the industry environment and operating environment ,both of these environmental sectors affect the firm’s operations in competitive situations. Industry Environment Industry Analysis As we know Industry is made up of the entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry. These forces are of the greatest importance to the firm in strategy formulation. Lilly was heavily involved in strategic alliance for the benefits of R&D. Eli
Lilly used this to strengthen its standing in the industry, hoping that it would make up for revenue they stood to lose according to the Prozac patent protection expiration which effect its sales and profitability both in 2001 and 2002 . In pharmaceutical industry : 1)Rivalry among competitors is intense as brand recognition has become increasingly important as an approach to capturing market share. 2) Companies are increasing advertising budgets to promote the therapeutic benefits of their drugs in an effort to differentiate their products from competitors. Many existing pharmaceutical compounds are standardized formulations that vary little in efficacy among manufacturers. The search for a differentiated product that will lead to blockbuster sales is one reason R & D, advertising and sales force budgets have increased in recent years. )Risk is high in the pharmaceutical industry as expenditures for research and development for each drug typically last through a period of 10 to 15 years before a compound makes it to the market. FDA approvals generally take 16 months which is down from 32 months in 1987. It is very unlikely that a compound developed by a pharmaceutical company will ever be used in the retail market. Only 1 in 5000 compounds will eventually be sold and less than one third of all marketed drugs will provide a return to recoup R & D expenditures. The average costs associated with bringing a drug to market is $500 million while the product life of a prescription drug averages 10 years. 4)There are several underlying trends in the world that are contributing to the demand for pharmaceutical drugs.
The aging of the baby boom generation and increasing life expectancy rates are expected to increase the demand for prescription drugs over the next years. 5)The pharmaceutical industry is relatively immune from the effects of economic cycles. Demand for the industry’s product remains constant in up and down economic cycles as market demand is a function of the overall health of the population. However the globalization of the pharmaceutical industry increases the risk associated with foreign investments and exchange rates. Operating Environment The Operating sector of the external environment deals closely with competitors, creditors, customers, labor, and suppliers.
In assessing the competitive position of the firm, the following criteria are usually dealt with: Market share, bread of product line, effectiveness of sales distribution, proprietary and key-account advantages, price competitiveness, advertising promotion effectiveness, location of facility, capacity and productivity, experience, financial position, relative product quality, and R advantages/position. Although mergers would truly aid Lilly in strengthening their market position in all of the factors listed above. Porter’s Five Force in relation to Eli Lilly New Entrants One factor that comes into play with Eli Lilly is the threat of new entries to the pharmaceutical industry.
The threat comes into play through company diversification in mergers, acquisitions and product differentiation. In the case of Eli Lilly, as they continue to shrink, competitors are increasingly growing through acquisitions, mergers, and differentiation of product. New entrants to the industry keeps the game interesting and lively as the competition works to outdo each other. So threat of new entrants is relatively high and Companies which forming alliances are potential rivals. Even if earlier such company was not considered to be a threat, after merging with some research and development company or forming alliance with another pharmaceutical company it would become a rival to Eli Lilly. Buyers Bargaining Power
It tends to be high in pharmaceutical business as main sales are done using whole sales. Institutions that purchase drugs in large quantities are considering the discounts that drug producers are willing to give and therefore are able to influence price. As long as Eli Lilly have competitors with similar products it is obvious that bargaining power of buyers is high for the industry. Buyers with smaller volumes of purchases do not influence price policy, but such buyers are outnumbered by wholesale buyers. It is also important that people purchasing drugs for themselves are usually covered by healthcare insurance and therefore are not interested in pulling price down.
Yet the volumes of sales to such buyers are not significant. Supplier Bargaining Power The supplier groups are usually “dominated by a few companies and is much more concentrated than the industry it sells to giving them bargaining power. ” However, the pharmaceutical industry seems to be its own supplier investing heavily in R&D, which are life blood of the pharmaceutical company. how ever the bargaining power of suppliers It is relatively not high. There exists possibility to switch supplier at low cost and supplier brands are not powerful. There exists a little possibility of forward integration. All of the above makes the bargaining power of supplier low.
In Eli Lilly’s case it is true that the power of suppliers is reversal of the buyer’s power. Substitutes The threat of substitutes is medium. In pharmaceutical , when patents expire on high priced drugs, generic run offs are often at the vanguard to reap the profits of a specific medication marketed at a much lower, reasonable price. This was one of the primary problems Eli Lilly had with the blockbuster drug that accounted for 30% of company profits. Industry Competitors As in any industry, competition is the driving force of creative innovation as it applies to every aspect of the company’s make-up. Competition sets the pace for market conditions, creates barriers to entry, or increase product differentiation.
In the case of Eli Lilly, they had very little product differentiation and depended on a few of their top performing products until the patents expired. Their focus was short term in scope and the competition took full advantage of the situation. And I can say The rivalry is tense in this business. However the competitiveness is rather unique in pharmaceutics. High costs of research and development hold the appearance of new rivals. It is also true that rivals are usually focused on a rather small market of specific medication. so, The competitive rivalry in the business is medium. SWOT Analysis Strengths 1. Success of their anti-depressant Prozac 2.
Many Strategic Alliances 3. Patent protection of company’s products 4. Heavily involved in Alliances to perform research 5. Top 10 contender in the Pharmaceutical Industry 6. Pharmaceutical products are widely distributed in 35 independent wholesale outlets in U. S. 7. It had manufacturing facilities in 26 countries including locations in Australia, South America, China, Middle East, Europe & in U. S. and the company’s products are b selling in approximately160 Countries. Weaknesses 1. Unfavorable exchange rates in overseas sales 2. Decline of sales of anti-infective due to strong competition from generics in the U. S. and overseas Opportunities 1. U. S. arket offering great growth potential 2. Trends of globalization 3. Aging of worldwide population 4. Longer life expectancy 5. Increased demand from Third World nation(developing countries)experiencing rising standards of living Threats 1. Expiration of Prozac patent 2. Emergence of Generic Drugs 3. Lawsuit with Proza and Zyprexa which involved Eli Lilly with patent litigation. 4. Market outside U. S. are less attractive with socialist governments and price controls 5. Face with the charges of deceptive marketing in connection with Evista. 6. 300 lawsuits accusing Elli of failing Robert Courtney from diluting cancer drugs. SWOT Matrix Strength-Opportunity 1.
Use cooperation joint ventures & alliances to lower down costs of R expenditures, increase research capabilities and seize economies of scale, thereby protecting future profits. 2. Offer wide spectrums of products 3. Make research in other therapeutic benefits from a previously marketed drug. 4. Identify and develop treatments for future wide spread sicknesses. Strength-Threat 1. Find innovative ways to extend patent on Prozac through marketing it in other forms. Weakness-Opportunity 1. Consider joint ventures and alliances with generic-producing pharmaceutical to protect earnings from patent losses. 2. Make research on the pricing policy in other markets around the globe to make wise market entry decisions. Weakness-Threat
Find creative ways to extend patent protection and differentiate it from those of competitors by creating a brand name and customer loyalty. Recommendations for Strategy Formulation I think, the following recommendations will place Eli Lilly in a much stronger position to achieve and maintain sustainable competitive advantage in the dynamic, highly competitive international pharmaceutical market. 1. Diversify product lines which will help Eli Lilli to encompass a broader range of pharmaceutical product segments. with Lilly’s current capabilities, resources and market demands, it shouldn’t be too difficult to implement a research study of the internal and external factors to determine which pharmaceutical segments offer the best potential for development.
Eli Lilly should lead a committee to develop criteria for product segment expansion and development establishing cost limitations, sales goals, geographic targets, etc. After it is determined where to focus, a segment manager should be appointed for each segment and assigned the task for each segment. 2. it will be useful for Eli Lilli to make merger acquisition and Research the international market for potential areas of development and possible targets for acquisition is necessary. When the targets are identified, candidates should be carefully “screened” to determine cultural compatibility and the marketable resources it has to add to Lilly’s portfolio. 3. Change organizational culture to build a flexible, learning organization.
It is recommended that Lilly enlist the aid of an outside organizational development consultant to help implement this plan. Also Lilly previously has had a strong leadership position in the neurosciences with its Prozac and Zyprexa products, the company faces numerous market challenges related to changing demographics, intensifying competition, industry consolidation, regulatory pressures and healthcare industry cost constraints. It is recommended that Lilly diversify its product portfolio, cautiously begin acquiring small firms, and work to change its organizational culture to encourage flexibility and organization-wide learning. shiva hashemi
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