Using appropriate theory, critically analyse the macro environmental factors that have influenced the development of the global pharmaceutical industry during the period covered by the case The macro environment “consists of broad environmental factors that impact to a greater or lesser extent on almost all organisations” (Johnson, Whittington, Scholes pg50). The macro environments looks at the behaviour of the whole economy and focuses on unemployment, economic growth and inflation. The macro environment can also be referred to as the PEST framework: political, economic, social and technological. The contents of the above four categories will affect the strategy an organisation will adopt. In this essay, the factors which influenced the development of the pharmaceutical industry during the period covered by the case, will be critically analysed.
Patents in a strategic context are used by organisations to ensure their new ideas and products are protected against copycats. “Owning a patent gives you the right to stop someone else from making, using or selling your invention without your permission” (Entrepreneur Media Inc). Patents are essential for large scale firms such as the pharmaceutical industry as they rely on them to not only secure income from inventions but to also block new entrants creating generic medicines at a lower cost with the same ingredients.
Companies are becoming increasing aware of the competitive advantage a well developed and strong portfolio of patents can offer However, when legislation was introduced that put a time limit on the patent of 20 years, it placed pressure on the industry to speed up the development process which led them to narrow their areas of focus and move towards a network-based approach. To do this, organisations will have to change their business model to ensure their products do not become overshadowed by this new entrant. The availability of substitute products can place a ceiling on prices for a companies products which in turn will decrease profit levels and will cause the company to amend their strategy.
Filing and maintaining a patent is costly and subject to procedural legislation. It can take up to 12 months for the product to be tested by the FDA. This takes up a substantial amount of resources and time making it harder for the company to recover their costs. To overcome this problem, “companies must show that the benefits of new branded drugs are clinically desirable and quantifiable and that they perform better than any existing drugs” (Johnson, Scholes pg118).
The pharmaceutical industry is a monopsony industry and therefore the government is the major purchaser of any drug. “A multinational corporation might be especially concerned with government relations and understanding the policies of local governments” (Johnson, Scholes pg101). The amount of money a government decides to spend in any given financial year will have a direct impact on the growth of the economy and an organisation must adjust their strategy to ensure they are keeping up to date with outside forces. If governments decided to cut their expenditure on health care, it will have both socially and economic implications. Therefore, “improved segmentation, targeting and positioning of customer solutions need to be effectively communicated and delivered” (R. Nat Natarajan pg2-3).
Government spending will increase the demand for generic medicines and as a result the patented drugs would need to secure higher prices for innovation. The pharmaceutical industry is constantly relied on to produce medicines and “deliver bigger profit margins from constantly diminishing budgets” (R. Nat Natarajan pg4). Many organisations believe a laissez-faire approach should be adopted by the government where no interference by them occurs and the market regulates itself.
Government price controls created a phenomenon called parallel trade. Parallel trade can be defined as “the importing of cheaper equivalent goods from a low priced market and selling them in a higher priced market for a cheaper price allowing the profit to be pocketed” (Johnson, Whittington, Scholes pg549). Parallel imports generally occur when there is low or no transportation costs involved. The importers have no intellectual property rights to distribute these goods and therefore “manufacturers see profits dented and governmental price and reimbursement regulations are the primary cause” (Kanavos, Holmes pgVII). To overcome these problems organisations will have to outsource cheaper distribution channels and adjust their strategy to stay on top of the competition. In a commodity market, where products or services are not differentiated, there is little to stop customers switching between companies.
Ageing population can be “distinguished by a growing number and proportion of older people and a growing number and proportion of very old people” (Anthea Tinker). This causes “pressure on healthcare systems since over 65’s consume four times as much healthcare” (Johnson, Whittington, Scholes 2011 pg549). Demographics define the mass market and are a key factor to take into consideration when a strategy is formed.
As life expectancy is on the rise due to increased living standards and improved medicines, the need and dependency for effective healthcare systems has increased. The ageing population effects the economics environment as the cost of treating the ageing population has increased. From a strategic standpoint, an organisation must develop new ideas as a rapid rate In conclusion the development of the pharmaceutical industry has been heavily affected by a vast amount of macro economic factors which affect the strategy of an organisation. The future of the pharmaceutical industry is depended on how the organisation approaches the factors with an effective strategy which takes into considerations the ever growing list of macro factors.
Journals: Adam Murray, (2011) “Maximizing an economic recession through strategic organizational repositioning”, Bottom Line: Managing Library Finances, The, Vol. 24 Iss: 1, pp.13 – 23 Anthea Tinker. (2002). The social implications of an ageing population. Mechanisms of ageing and development. 123 (7), 729-735.