STRATEGIC ANALYSIS OF RYANAIT THE LOW FARES AIRLINE

Synopsis:

This paper analyzes the competitive environment of the Ryanair the low fares airline

industry from the strategic point of view. Influencing forces, strategic issues of airline

industry and their implication is also analysed at this juncture. The report also

evaluates the use and limitation of the tool which can apply to understand the strategic

issues and their impact on airline industry.

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Table of Contents:

Introduction……………………………………………………………. 1

Core competencies and competitive advantage…………………………1

1. Environmental forces of global pharmaceutical industry………2

1.1 PESTEL framework…………………………………………….2

Political forces…………………………………………………..3

Economical forces………………………………………………3

Social influences……………………………………………….. 3

Technological forces…………………………………………… 4

Environmental forces…………………………………………...4

Legal forces……………………………………………………. 5

1.2 Porters five force model………………………………………... 5

Threat of new entrants…………………………………………...5

Rivalry among existing firms…………………………………....6

Supplier powers………………………………………………….6

Buyers powers…………………………………………………...7

Threat of substitutes products…………………………………...7

2. Implication of changing business environment………………....8

2.1 Changing government policy……………………………………8

2.2 Increased competition…………………………………………...8

2.3 Merger & Acquisition…………………………………………....9

2.4 Innovation………………………………………………………..9

2.5 Ageing population Pressure……………………………………...9

3. Use and limitation of tools………………………………………10

3.1 Use of PESTEL framework……………………………………...10

3.2 Limitation of PESTEL framework………………………………10

3.3 Use of Porters five force model………………………………....10

3.4 Limitation of Porters five force model…………………………..11

Conclusion………………………………………………………………12

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Introduction:

Ryanair is the best known of Europe’s leading an official Low cost Airline.

Biggest airline in Europe and one of the world’s most successful. The

business model based on the hugely successful American low-fares carrier

Southwest Airlines. Ryanair sell low airfares only purpose to make profits from

that. Because they know as Michael O’Leary said if they can’t make profit they

can’t lower their airfares or can’t reward their people or can’t invest in new

aircraft.

Appropriate models critically account for Ryanairs success thus far:

In terms of low marketing costs, their CEO Michael O'Leary gets a lot of free publicity with stunts and being publically agressive against the competition and authorities. They use full page ads to promote themselves offering bargain prices and often attacking the competition. They are sometimes accused of hidden costs but claim that this is false as it is clearly stated on their Internet Sales system. http://www.rapid-business-intelligence-success.com/ryanair-business-strategy.html

http://ivythesis.typepad.com/term_paper_topics/2008/02/ryanair-case-st.html#

www.scribd.com/doc/17599820/ Ryanair -2

http://university-essays.tripod.com/critical_success_factors_csf.html

Critically success factors refer to the limited number of areas in which

satisfactory results ensure successful competitive performance for the

organization. (Rockart and Bullen,

1981). http://university-essays.tripod.com/critical_success_factors_csf.html

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Rockart and Bullen presented five key sources of Critical Success Factors:

the industry, competitive strategy and industry position, environmental factors,

temporal factors, and managerial position.

The Industry: The characteristics of industry define its own critical success factor. In airline

industry needs huge investment for success of this business. Until 1990s it

loses 20 million Irish pound. And it was required more investment on that time

to become as a successful airline. In 1997 Ryanair first floated in Dublin Stock

Exchange, NASDAQ and London Stock Exchange to increase its capital. And

it admitted to the NASDAQ-100 IN 2002.

Competitive Strategy and industry position:Ryanair market strategy is different to survive in the competition and gain a

competitive position in airline market. In order to position itself in the

marketplace it continuously offers lowest fares. To achieve a competitive

position in airline industry it uses a cost reduction strategy. In order to identify

the competitive position of Ryanair, Porters five force model is used below:

Source: www.brs-inc.com

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Threat of new entrants:Porters (1980:7) observed that the threat of new entry into an industry

depends on the barriers to entry that are present, coupled with the reaction

from existing competitors that the entrant can expect. The threat of entry in

airline industry is not high because high amount of capital and investment is

required into this. According to Ryanair balance sheet after end of year 2006

Ryanair assets is 463.43 million Euros. That means new entrants need to

compete with Ryanair – who have very big assets. Risks and challenges are

high on this sector.

Rivalry among existing firms:Competition among existing airline companies is high because of matured

and consolidates industry players. Air Lingus, British airways and EasyJets

are main competitors of Ryanair. European market as healthy with huge

potential, and only incremental growth, even many of the competitors were

losing money. According to case study attractiveness of the budget sector in

Europe is signified by the large number of entrants and rivals, although as

many as 50 have gone bankrupt, been taken over, disappeared or never got

off the ground. But some carriers withdraw them from routes where they

clashed with Ryanair, for example My TravelLite from the Dublin-Birmingham

route, or avoding such route altogether. It’s showing a great leadership of

Ryanair in low fares airline industry.

Suppliers Power:Bargaining power of supplier in airline industry is high. And in 2006 annual

report Ryanair indicated fuel price increased 74 percent on this year. Fuel

price totally depends on world market. Ryanair has no choice in here. Aircraft

suppliers bargaining power is high as well. Because not lots of manufacturer

on this industry.

Buyers’ power:The bargaining power of consumers or buyers in airline industry is high

because lots of airline company on this business.

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Threat of substitute products:Porters (1980:23) observed that substitutes limit the potential returns of an

industry by placing a ceiling on the prices firms in the industry can profitably

charge. The more attractive the price performance alternative offered by

substitutes, the firmer the lid on industry profits. The degree of threat of

substitute product in pharmaceutical industry is medium in term of patent

expiry. Consumer can buy substitute drugs if the prescribed or branded drugs

patent is expired.

In addition, as branded drugs were influenced by many forces, therefore the

pace and aggression of generic attacks on branded products increased

sharply between 2002 and 2005. During this period, the overall market growth

of generics exceeded sharply.

The core competency of generic drug is that it has no cost associated with its

R&D. Consequently, the price of generic is remarkably lower than patented or

branded drug.

Overall, Porters five force framework indicates that the pharmaceutical

industry is highly valued or attractive. The industry has strong market position

with strong financial make up and strong rate of return from invested capital.

Any organization success based on its

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.

Ryanair market strategy was different

How ‘No frills’ strategy meets customer’s expectations and compares

it with competitor’s strategy:

Multiple bases for keeping costs down can provide a basis for a successful ‘no frill’ strategy. (Johnson, p-228) It began with the stated intention of offering low fare, no frill service in order to provide transportation at a lower cost than

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other airlines. http://www.jstor.org/pss/143977 Any service or product for which the non-essential features have been removed to keep the price low.

Ryanair charges for check-in bags, which encourage passengers to travel with fewer bags or nothing. It protects passengers from carry lots of bags in travel time and fears from lost their bags. Other rivals as well charge for hold luggage including Aer Lingas and FlyBE. Eayjet as well charge passengers for any more than one item of hold.

Ryanair typically cut overheads by choosing secondary and regional airports (with lower access charges) and by using one single type of aircraft. End of the day passengers need to pay airport charges with their ticket price. For that passengers are beneficial from Ryanair airport choosing and route policy. But most of these airports are significantly farther from the city centre. For example, Ryanaair use Frankfurt Hahn, 123 kilometers from Frankfurt. If passenger has no idea about this and if they go Frankfurt with Ryanair they will totally disappoint.

In Ryanair passengers need to pay 8 Euro to rent a games and entertainment console. But Sometime passengers don’t need for short time flight and they have an opportunity to saving money on long time flight as well.

As EU regulations if passengers affected by cancellation or delays, they must be offered a refund or rerouting and free care and assistance while waiting for their flights- specifically meals, refreshment and hotel accommodation where in overnight stay is necessary. It expected financial compensation of up to 600 Euro where Ryanair compensation cost 250 Euro. But it was being widely ignored.

In 2006 Ryanair was voted the world’s least favourite airline, with easyjet coming second worst. Ryanair scored badly in comfortable seats, safe/ secure, best amenities (for example snack/food). However it scored well on ‘best fares’. To keep the price as much as possible they need to follow no frill strategy and for that they can’t provide like that facility. But it meets customer’s expectation by providing low fares cost.

Ryanair business strategy is establish itself as a low cost airline leader by increase passenger

traffic with continuous focus on cost-containment and operating efficiencies.

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Low fares are key elements of Ryanair strategy. Food, drink, luggage like this extra services

are not include with this price. For these services customer need to pay extra. And this kind of

policy allows those passengers who do not require baggage, priority boarding or other

premium services to travel for the lowest possible price.

Ryanair’s strategy as well to provide best customer service by puctuality, fewer lost bags and

fewer cancellation than any othe competitor to achieve their goal.

Ryanair believes low operating costs strategy is very important as well to establish them as a

low cost airline leader in Europe

Evaluation of the strategic leadership of Michael O’Leary:

Strategy development strongly associated with a strategic leader. Leadership

is defined by Bush and Glover (2003, p. 8) as a process of influence leading

to the achievement of desired purposes. It involves inspiring and supporting

others towards the achievement of a vision which is based on clear personal

and professional values. By: Davies, Barbara J.; Davies, Brent. School Leadership &

Management, Feb2004, Vol. 24 Issue 1, p29-38, 10p; DOI: 10.1080/1363243042000172804They are individuals whose personality, position or reputation may result in

others willingly deferring to them and seeing strategy development as their

province. They are therefore personally identified with and central to the

strategy of their organisation. (Johnson, p- 402) Early 1990’s Ryanair’s fight for

survive and that time they saw a new management team, led by Michael O’Leary. He

is a man of ability and real experience. Effective leadership does not depend

on a particular set of traits but rather on how well the leader’s traits match the

requirements of the situation. (Stoner, 1995:472) That reason it isolated by

behaviour characteristic.

The Role of a strategic Leader:

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The role of a strategic leader are creating organisational vision, establishing core

values, developing strategies and structures, fostering organisational learning and

serving as a steward for the organisation. Ryanair focus on continue the Low Cost

Leadership in the European airline industry. And according to European low-cost

carrier overview Michael O’Leary established Ryanair as a number one low-cost

airline. Ryanair affirmed that it would continue to offer the lowest fares in every

market. Even Michael O’Leary declared to passengers no fuel surcharge for today,

tomorrow or ever. On this way Michael O’Leary established its core value as a ‘low

fares airline’. Michael O’Leary made policy to using same type of aircraft to keep

staff training and aircraft maintenance costs as low as possible.

Environmental concern about greenhouse gases from carbon now a public and

political agenda worldwide. That reason he started replace Ryanair fleets with new,

more environmentally- friendly aircraft. The new aircraft produced 50 percent less

emission, 45 per cent less fuel burn and 45 per cent lower noise emission per seat.

Also it provide better aircraft service. As a strategic view it was a great success of

Michael O’Leary. On this way he introduced Ryanair as an environment friendly

aircraft and he reduced its operating costs on same time.

Terrorist attacks on airline industry increase the risks and costs on this industry. It

imposed severe security measures at all airports. These measures applied to all

passengers. There was threat that passengers would choose other transport rather than

face the inconvenience and expense of checking in luggage, as well the extra time

spent in airport security queues. In this continue fostering organisational learning

inspired Michael O’Leary introduced Ryanair passenger’s to web-based

check-in to save their time.

Leadership and Strategy Implementation:

Strategic leadership demands the ability to make sound, reasoned decisions

—specifically, consequential decisions with grave implications. Since the aim

of strategy is to link ends, ways, and means, the aim of strategic leadership is

to determine the ends, choose the best ways, and apply the most effective

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means. By: Guillot, W. Michael. Air & Space Power Journal, Winter2003, Vol. 17 Issue 4, p67-75, 9p, 1 Black and White Photograph, 2 Diagrams

According to Michael O’Leary it’s easy to sell low fares but hard to make profits from

their. ‘Air Transport world’ magazine announced in 2006, Ryanair was most

profitable airline in the world. Michael O’Leary established it’s as a profitable

organization.

In any of these circumstances, strategy may be – or may be seen to be – the

deliberate intention of that leader. How such an intention comes about can,

however, be explained in different ways:

● Strategy leadership as design. It could be that the strategic leader has

thought through the strategy analytically. This might be by using the sort of

techniques associated with strategic analysis and evaluation, or it might

simply be that the individual has consciously, systematically and on the basis

of his or her own logic worked through issues the organisation faces and

come to his or her own conclusions.

● Strategy leadership as vision. It could be that a strategic leader determines

or is associated with an overall vision, mission or strategic intent (see section

4.5.2) that motivates others, helps create the shared beliefs within which

people can work together effectively and shapes more detailed strategy

developed by others in an organisation. Some writers see this as the role of

the strategic leader.2

● Strategy leadership as command. The strategy of an organisation might

also be dictated by an individual. This is, perhaps, most evident in owner-

managed small firms, where that individual is in direct control of all aspects of

the business.

Danny Miller and Isabel Le-Breton suggest there are advantages and

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disadvantages here. On the plus side it can mean speed of strategy

adaptation and ‘sharp, innovative, unorthodox strategies that are difficult for

other companies to imitate’. The downside can, however, be ‘hubris,

excessive risk taking, quirky, irrelevant strategies’

Sustainability of Ryanair’s strategy in the future:

Ryanair business strategy is establish itself as a low cost airline leader by

increase passenger traffic with continuous focus on cost-containment and

operating efficiencies.Low fares are key elements of Ryanair strategy. Food,

drink, luggage like this extra services are not include with this price. For these

services customer need to pay extra. And this kind of policy allows those

passengers who do not require baggage, priority boarding or other premium

services to travel for the lowest possible price. Ryanair’s strategy as well to

provide best customer service by puctuality, fewer lost bags and fewer

12

cancellation than any othe competitor to achieve their goal.Ryanair believes

low operating costs strategy is very important as well to establish them as a

low cost airline leader in Europe.

Core competency & Competitive advantage of Pharmaceutical

industry:

According to Prahalad and Hamel (1990) the core competencies arise

from the integration of multiple technologies and the co-ordination of

diverse production skills. They also mentioned that the most powerful

way to prevail in global competition in the 1990s depends on the ability

to exploit core competency (qtd in quickmba website). Core

competencies provide potential access to a wider range of markets,

make a significant contribution to the perceived consumers’ benefits of

the end products and are difficult to imitate for competitors. Research

and development (R&D) and marketing and promotion are the core

competency of global pharmaceutical industry. With respect to core

competency in R&D in the pharmaceutical industry, the technological

areas that leading firms exploited for discovering new drugs, for

example, generic in 1970s and biotechnology in 1980. Competencies in

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marketing and promotion have changed from direct selling to physicians

1950s to blockbuster marketing 1980s, to specialized selling and

handling of regulatory requirements. Consequently, R&D and marketing

and promotion capabilities are underpinning the competitive advantage

of the global pharmaceutical industry. For instance, the key strategic

capabilities of ethical companies are R&D and sales and marketing. On

the other hand, biotech needs to create and defend their intellectual

property in specialised research field, attract funding and make

successful deals as their strategic capability. Direct to consumer

marketing is the key strategic capability demanded by branded OTC

drugs.

1. Environmental forces of global pharmaceutical industry

It is very significant for an organisation to understand and analyse

environmental influences (internal & external) which can affect

organisational strategies and performance. Several framework are exists

to support an environmental analysis of industry. In order to identify the

key external forces, management gurus suggested analysing the PESTEL

framework which categorizes factors into: Political, Economical, Social,

Technological, Environmental and Legal. Johnson, G., Scholes, K &

Whittington, R (2008:65) noted that PESTEL framework is not intended

to provide an exhaustive list, but it gives examples of ways in which

strategies are affected by such influences and some of the ways in which

organisations seek to handle aspects of their environment.

1.1 PESTEL Framework:

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To identify and understand the influence of the macro-environmental

forces on global pharmaceutical industry it is imperative to analyze the

PESTEL framework.

Political forces:

The pharmaceutical industry witnessed increased political attention over

the years due to control rising health care expenditure. For example,

since 1980s on, government around the world focus the pharmaceutical

industry as politically easy target by considering economic significance of

healthcare as a component of social welfare. As a result, Food and Drug

Administration (FDA) and European Medicines Evaluation Agency

(EMEA) have been formed as government regulatory body of

pharmaceutical industry in the USA and European countries respectively.

Economical Factors:

The growth of pharmaceutical industry is aligned with the GDP growth of

a country. Majority of global pharmaceutical sales originate in the USA,

Mexico, the EU, China and Japan. Ten geographic markets contributing

over 80% of the global pharmaceutical sales. The USA is considered the

largest market among ten countries and it has accounted almost 50% of

global sales in 2005. Japan is the second largest market with sales of

$60bn in 2005 though the industry confronted economic recession in the

1990s which caused tax revenue to fall. The European market

contributing approximately 30% of global sales out to 2009 and it makes

up third position for the pharmaceutical.

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Intense Merger and Acquisition (M&A) in the last decade, led the

pharmaceutical industry to think strategically in order to survive in the

global and local market. The rationale behind merger and acquisition

was to tie up a company within strong pipeline and to leverage

investment in technology platform.

Social Forces:

Social responsibility has very strong influence on pharmaceutical

industry. In recent years, the impact of various rising epidemics such as

swine flu, cancer and HIV put pharmaceutical industry in an enormous

pressure. Besides, because of some companies fraudulent and antitrust

violent, the reputation of the pharmaceutical industry damaged entirely.

For instance, over $2bn fines were paid by the USA pharmaceutical

companies between the year 2000 and 2003 in several cases brought by

the USA Justice Department because of their pricing and marketing

crimes. Merck was accused for withdrawn of Vioxx from the market as

they were unable to pick up problems during product development

process and also for their misleading scientific result in relation to Vioxx.

Another considerable condemnation regarding the industry is it is

incapable to fulfil enormous unmet need in developing countries

because of high priced medicine. There was a strong critic in the

National Association of Attorney General meeting 2005 in Chicago

Fairmont Hotel where more than 40 countries staffs and representative

attended. Critics from consumer organisation assailed the high cost of

drugs even as Medicare is rolling out its prescription drug benefit.

Technological influence:

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Scientific and technological development is forcing every industry player

to introduce and adapt new innovations in order to survive in a

competitive business environment.

To compete effectively, industry players should integrate its activities

into global market. Regarding this technology can only integrate firms

into global market. Furthermore, technological advancement is

increasing consumer awareness regarding the risk and benefiting factors

of pharmaceuticals.

Environmental:

Environmental issues in the pharmaceutical industry pose a complex

challenge to industry players and have the potential to considerably

impact its cost. However, environmental issues such as reducing

pollution, ensuring good health and safety are considered as an integral

part of the corporate responsibility for the pharmaceutical industry as a

strategic tool. Therefore, company like Pfizer is committed to protect the

environment, ensure the better health and safety of their colleagues and

communities around the world through innovation and ethical

operation. On the other hand, GlaxoSmithKline makes a considerable

investment in its community and in corporate citizenship programmes

with the aim of enabling people to enjoy better, healthier and more

fulfilling lifestyle. The key corporate responsibility principles of Merck

are to consider high ethical standard operation, access to quality health

care system around the world, making a positive and sustainable impact

on the communities and the societies where they live and work and

meeting the need of employees in fair manner.

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Legal forces:

Legislations for regulating the pharmaceutical industry had dramatic

impact on pharmaceutical growth in different ways in recent years. In

1970s, the thalidomide tragedy led to much tighter regulatory controls

on clinical trials and legislation for fixed period patent protection was

also passed. Moreover, pharmaceutical industry became political target

in order to control rising healthcare expenditures in 1980s by the

governments around the world. Stringent government regulations make

it difficult for the pharmaceutical industry to manufacture and market a

new drug within a short period of time. For instance, FDA in the USA

thoroughly examine all of the data of a new agent in relation of its

purity, stability, safety, efficacy and tolerability which was really a time

consuming process averaged 12.5 months in 2005.

1.2 Porters five force model:

In order to identify the competitive forces and industrial structure of

global pharmaceutical industry, Porters five force model is used below:

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Source: www.brs-inc.com

Threat of new entrants:

Porters (1980:7) observed that the threat of new entry into an industry

depends on the barriers to entry that are present, coupled with the

reaction from existing competitors that the entrant can expect. The

threat of entry in global pharmaceutical industry is very high for the

potential entrants because high amount of capital and investment is

required into its R& D which is lengthy process. Moreover, government

regulatory policies in pharmaceutical industry discourage new entrants

to some extent. For instance, in the USA government agency FDA creates

obstacle for approval of new drugs. In 2005 the agency took 12.5

months for approval of new drug. Besides, new entrants must consider

the legislation for fixed period of patent protection which

creates another hurdle for the potential entrants.

Another challenge for new entrant in pharmaceutical industry is

achieving economies of scale in term of manufacturing facility which

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leading company already achieved through easy access to their low-cost

suppliers.

Rivalry among existing firms:

Competition among existing pharmaceutical firms is high because of

matured and consolidate industry players. For the new competitors it

would be difficult to compete with leading industry players as they

already have strong position in the market for their blockbuster drugs.

Therefore, new and small companies need to concentrate on developing

blockbuster drug in their future pipeline. Moreover, the leading

companies already have established strong financial position in the

market which generates high margin. As a consequence, they are able to

invest huge amount of financial resources for innovation and product

differentiation of new drugs. In addition, companies with consistently

high level of R&D spending and productivity become the industry

players. Differentiation strategies of giant pharmaceutical firms facilitate

them to increase the product life cycle of their drugs and extend their

use to treatment of other diseases. Recent price increase of generic and

branded drug leads manufacturer to enhance their operation efficiency

as to generate profit margin which consequently increased high

competition among the existing firms.

Suppliers Power:

Bargaining power of supplier in pharmaceutical industry is low as leading

players do not provide enough opportunity for negotiating. Leading

firms can source their raw material or necessary elements from low

priced market or location which ultimately pose threats to other

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suppliers whose price are comparatively high. Moreover, the trend

towards the globalisation facilitated the pharmaceutical industry to

relocate their manufacturing in convenient locations which as a result

impaired the supplier power. The countries which have supply side

controls, negotiating price or reimbursement approval can take more

than a year because of low power.

Buyers’ power:

The bargaining power of consumers or buyers in pharmaceutical

industry is low because they have no choice but to buy what doctor

prescribes. According to the case study prescription drugs embrace

about 80% of the global pharmaceutical market and 50% by volume. The

exclusive aspect of pharmaceutical industry is that the end user of

pharmaceutical products is different from the influencer (doctor).

Moreover, recent price increase for generic and branded drug have

reduced consumer bargaining power to some extent.

Threat of substitute products:

Porters (1980:23) observed that substitutes limit the potential returns of

an industry by placing a ceiling on the prices firms in the industry can

profitably charge. The more attractive the price performance alternative

offered by substitutes, the firmer the lid on industry profits. The degree

of threat of substitute product in pharmaceutical industry is medium in

term of patent expiry. Consumer can buy substitute drugs if the

prescribed or branded drugs patent is expired.

In addition, as branded drugs were influenced by many forces, therefore

the pace and aggression of generic attacks on branded products

21

increased sharply between 2002 and 2005. During this period, the

overall market growth of generics exceeded sharply.

The core competency of generic drug is that it has no cost associated

with its R&D. Consequently, the price of generic is remarkably lower

than patented or branded drug.

Overall, Porters five force framework indicates that the pharmaceutical

industry is highly valued or attractive. The industry has strong market

position with strong financial make up and strong rate of return from

invested capital.

2. Implication of the changing business environment

Though PESTEL analysis and Porters five force framework already

provided the picture on implication of the changing business

environment, however it is imperative to identify and analyse such

implication separately. Therefore, the following section identifies and

analyzes the implication of the changing business environment on global

pharmaceutical industry on the basis of findings from PESTEL and Porters

five force model.

2.1 Changing government policy:

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Government policy is considered as one of the major influencing force

for any business. Global pharmaceutical industry is facing increasing

political pressure to reduce price and control cost. During the 1970s, the

legislation for the fixed period patent protection leads the appearance of

generic drug which had dramatic impact on patented drugs because of

its same active ingredients and cheaper price. According to Allegra, due

to patent expiries, patented drugs for the treatment of hey fever lost

84% of US sales within 12 weeks in 2006. As a part of government

regulatory initiative, price control creates another challenge for the

industry in the form of parallel trade.

In addition, where the pharmaceutical industry is subject to a monopoly,

the government is only one powerful purchaser and therefore, the pace

of market penetration of a new drug is very slow.

2.2 Increased Competition:

Global pharmaceutical industry has been changing profoundly due to

intense competition among key industry players. For example, alliances

in form of merger and acquisition over the last two decade changed the

competitive environment of pharmaceutical industry. High level of R&D

spending and innovation of blockbuster drug led company to be industry

leader. Glaxo for instance, became top tier global company by launching

a blockbuster single drug Zantac for the treatment of stomach ulcers.

Therefore, competitive advantage of pharmaceutical industry is being

continually redefined and being forced to overhaul industry structure.

2.3 Merger and acquisition:

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Intense merger and acquisition among leading firms changed the

competitive environment of pharmaceutical industry in the last decade.

The big industry players are generating high revenue and hence are able

to supply extra investment for rapid development through organic

growth, merger, acquisition or licensing strategy. For instance, merger

resulted in the formation of Novartis, Sanofi-Aventis, AstraZeneca and

GlaxoSmithKline when Monsanto and Pharmacia acquired by Pfizer.

Moreover, Pfizer overtook Merck as an organic growth strategy.

Licensing strategy was used by companies which require presence in the

key markets. As a consequence, family owned medium sized European

pharmaceutical companies were forced to consider M&A as a survival

strategy.

2.4 Innovation:

Innovation through high amount of spending on R& D becomes industry

leader over the last two decade. To gain competitive advantage in

emerging and technologically intensive industries, it is best to be a

leader or a follower in innovation (Robert M.Grant, 2008:300).

Therefore, companies that were not good at product development and

research were acquired by innovative company. Innovation becomes the

key strategic tool of pharmaceutical industry because of manufacturing

blockbusters medicines. Furthermore, condemnation regarding unmet

social need in developing countries and high cost of drugs led

pharmaceutical industry to be more innovative.

2.5 Aging population pressure:

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The pressure of ageing population on healthcare system creates another

challenge for the pharmaceutical industry in term of a country’s

economic value. Per capita healthcare spending of a government is

highest among over 65s because the death rate is highest in this age

group. According to the Roche report, today there are about 450 million

people worldwide over the age of 65 (that is the 7% of global

population) and the figure will virtually doubled by 2020. Ageing

populations created an unsustainable environment where

pharmaceutical industry is in intense pressure to reduce the price and to

reduce the long term dependence on pharmaceuticals.

3. Use and limitations of the tools:

3.1 Use of PESTEL Framework:

PESTEL framework is used to identify and analyze the environmental

forces which influence the business from outside. This is a common tool

that can aid organization to formulate strategy by facilitating them

understand the macro-environment in which the organization operate

now and will operate in future. In order to get a big picture of

environment of an organization in which it is operating and the

opportunity and threats that lie within it, PESTEL framework is

considered as useful tool by scholars of strategic management. The

framework can easily identify the political, economical, social,

technological, environmental and legal forces that influence the strategic

position of a company. Therefore, it is imperative to use this tool in

global pharmaceutical industry for understanding risks associated with

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the position, operation and direction of organizations at macro level

perspective.

3.2 Limitations of PESTEL Framework:

PESTEL is a common tool for identifying and analyzing the macro

environmental forces and their influences to a business, however this

tool can not be used to analyze the internal environment forces of

pharmaceutical industry in order to get an overall picture of the firms’

strategic environment. Moreover, the importance of PESTEL factors are

limited if they are only seen as a listing of influence. Identifying and

evaluating the key drivers of change which might have immense impact

to the structure of an industry, sector or market is imperative for the

business. As the key marketers of global pharmaceutical industry are

developed countries such as the USA, Canada, EU, Japan and China,

therefore the PESTEL analysis can majorly identify and analyze the

influencing factors of these key markets which would not be consistent

in case of the developing countries as there is enormous difference

between developed and developing countries business environment.

3.3 Use of Five Force Model:

Porters five force model was developed by Michael Porters (1980) for

analyzing the nature and degree of competition within an industry.

Porters observed that there are five competitive forces which determine

the nature of competition with an industry. All five competitive forces

jointly determine the intensity of industry competition and profitability,

and the strongest force or forces are governing and become crucial from

the point of view of strategy formulation (Porter, 1980:6). It is very

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important to apply this model in global pharmaceutical industry in order

to understand the degree of competition and as well as factors which

influence the strategy formulation and implementation of

pharmaceutical industry.

3.4 Limitation of five force model:

Porters five force model is also criticized because of its several important

limitations. Porters (1980) observed that the framework make it possible

to assess the potential profitability of a particular industry. Rumelt

(1991) argued that although there is some evidence to support this

claim, there is also strong evidence to suggest that company-specific

factors (such as individual competences) are more important to the

profitability of individual businesses than industry factors (Qtd in

Campebll et al, 2007:142). As the model is based on eighties economic

condition therefore, the model is not able to analyze new business

model and the industry dynamics such as technological innovation and

dynamic market entrants from beginning that can change the business

model entirely within drastically. As the pharmaceutical is considered

highly competitive therefore, the nature of competition and industry

structure is persistently transformed by R&D and in such circumstances

the model is not capable to provide the overall picture of the

pharmaceutical industry competition. However, the model can only

provide snapshots of pharmaceutical industry’s competitive picture.

Therefore, it is not advisable to develop a strategy solely on the basis of

Porters model, but to examine it in addition to other strategic

frameworks of SWOT and PEST analysis (Kippenberger, 1998; Haberberg

and Rieple, 2001).

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Conclusion

Global pharmaceutical industry observed rapid development and change

over the past 50 years. Political attention, economic value, social

expectations, technological advancements and globalization has

changed the industry structure and competitive environment. High

amount of R&D spending to develop and commercialise a new drug and

lengthily drug approval process creates an unsustainable situation for

the industry players. Existing companies compete fiercely to established

and retain intellectual property rights, though there is enormous risks

and considerable investment is involved within their operation.

However, companies are increasingly integrated their activity into global

market to achieve competitive advantage over the last two decades.

Regulatory processes also encourage international harmonisation of

pharmaceutical industry in recent years. For example, in Europe EMEA

was established to enable rapid regulatory approvals through centralised

procedure, which grant approvals in all member states simultaneously.

This facilitates the industry to reduce the cost and speedy market

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penetration. In order to achieve competitive advantage, merger and

acquisition by leading players became common scenario in the industry.

In addition, core competencies such as R&D and marketing and

promotion typically facilitating pharmaceutical industry to achieve

competitive advantage. Overall, the industry is highly valued and has a

favourable market position with strong financial make-up and strong

earning growth.

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Bibliography and References:

Johnson, G., Scholes, K., & Whittington, R., (2008). Exploring Corporate Strategy:

Text and Cases. Harlow: Prentice Hall.

Battle of the open bars. Modern Healthcare, 01607480, 2/7/2005, Vol. 35, Issue 6

Porters, M, E., (2004). Competitive Strategy: Techniques for Analyzing Industries and

Competitors. Free Press: New York.

Grant, R, M., (2008). Contemporary Strategy Analysis. John Wiley & Sons, Inc :

Oxford.

Campbell, D., Stonehouse, G., Houston, B., (2007). Business Strategy: An

Introduction. Elsevier Ltd: Oxford.

D. Kesič: Strategic analysis of the world pharmaceutical industry, Management, Vol.

14, 2009, 1, pp. 59-

http://www.alliedacademies.org/Publications/Papers/JIACS%20Vol%2013%20No%203%202007%20p%2065-70.pdf

http://findarticles.com/p/articles/mi_qa5452/is_200705/ai_n21289700/pg_2/http://www.ryanair.com/doc/investor/Strategy.pdf ( STRATEGY) (

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Appendix 1: Porters five force model:

Porters (1980) developed a framework for analysing the nature and extent of

competition within an industry. He argued that there are five competitive forces which

determine the nature of competition within an industry. In order to develop

competitive strategy it is imperative to understand and evaluate each five competitive

forces. The five forces are:

The threat of new entrants to the industry

Rivalry among business in the industry

The threat of substitute products

The power of buyers or customers

The power of suppliers

Threat of new entrants to the industry:

The threat of entry to an industry by new competitors depends upon the height of a

number of entry barriers. Barriers to entry can take a number of forms such as the

capital costs of entry, regulatory and legal constraints, brand loyalty & customer

switching costs, economies of scale available to existing competitors and access to

input and distributor channels.

Rivalry among business in the industry:

Business within an industry is competing with each other in a number of ways.

Competition can take place on either a price or a non-price basis. The intensity of

competition in an industry will depend upon the following ways:

The height of entry barriers and the number and size of the competitors in the

industry.

The maturity of the industry

The degree of brand loyalty of customers

The power of buyers and availability of substitutes

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The threat of substitute products:

Businesses are competing not only by manufacturing one characterized products but

also producing by substitutes as well. Porters (1980) argued that substitutes limit the

potential returns of an industry by placing a ceiling on the prices firms in the industry

can profitably charge. The more attractive the price performance alternative offered

by substitutes, the firmer the lid on industry profits. The extent of the threat from a

particular substitute will depend upon the extent to which the price and performance

of the substitute can match the industry’s product and the willingness of buyers to

switch to the substitute.

The power of buyers:

The extent to which the buyers of a product exert power over an industry depends

upon a number of factors. The more the power that buyers exert, the lower will be the

transaction price. The bargaining power of buyers can be influenced by the following

factors:

The number of customer & the volume of their purchases

The number of businesses supplying the product and their size

Switching costs and the availability of substitutes

The bargaining power of supplies:

Suppliers can exert bargaining power over participants in an industry by threatening

to raise prices or reduce the quality of purchased goods and services. The factors that

can determine the strengths of suppliers are discussed briefly below;

The uniqueness and scarcity of the resource that supplies provide

The cost of switching to another resource

How many other industries have a requirement for the resource

The number and size of the resource suppliers

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Appendix 2: World pharmaceutical market 2000-2005

Year Value in billion $ Growth in %

2000 358

2001 387 8.1

2002 422 9.0

2003 490 16.1

2004 547 11.6

2005 602 10.00

Source: World Review 2005.

Appendix 3: Leading world pharmaceutical markets in 2005

Position Markets Value in billion $

1. USA 248

2. Japan 67

3. Germany 29

4. France 26

5. United Kingdom 17

6. Italy 16

7. Canada 14

8. Spain 12

9. Brazil 9

10. Mexico 8

Source: World Review 2005

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Appendix 4: Leading world pharmaceutical companies in 2005 (originators)

Company Country of origin World market share in %

1. Pfizer USA 7.4

2. Sanofi-Aventis France 5.6

3. GlaxoSmithKline United Kingdom 5.3

4. Novartis Switzerland 4.1

5. AstraZeneca United Kingdom 4.0

6. Johnson&Johnson USA 3.7

7. Merck&Co USA 3.7

8. Roche Switzerland 3.6

9. Wyeth USA 2.5

10. BMS USA 2.5

Source: World Review 2005

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