Developing business strategies for Hau Giang Pharmaceutical Joint Stock Company (2012-2015)= Xây dựng chiến lược kinh doanh cho công ty cổ phần dược Hậu Giang giai đoạn 2012-2015

To construct TOWS Matrix and propose suitable business strategy for DHG to take full advantages of strengths, opportunities and eliminate weaknesses, threats of the company in order to c

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Quy Anh Tuan

DEVELOPING BUSINESS STRATEGIES FOR HAU GIANG PHARMACEUTICAL JOINT STOCK

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Quy Anh Tuan

DEVELOPING BUSINESS STRATEGIES FOR HAU GIANG PHARMACEUTICAL JOINT STOCK

COMPANY (2012-2015)

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Vu Anh Dung

Hanoi - 2011

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT v

TABLE OF CONTENTS viii

LIST OF TABLES xi

LIST OF FIGURES xii

LIST OF ABBREVIATIONS xiii

CHAPTER 1: INTRODUCTION 1

1.1 Necessity of the thesis 1

1.2 Research aim and objectives 3

1.3 Research questions 4

1.4 Research methodology 4

1.5 Scope of the research 5

1.6 Significance of the research 6

1.7 Suggestions for future research 7

1.8 Thesis structure 7

CHAPTER 2: LITERATURE REVIEW 9

2.1 Strategy overview 9

2.1.1 Strategy definition 9

2.1.2 Hierarchy and types of strategy 11

2.2 Strategic management process 16

2.3 External scanning: macro environment and industry environment analysis 17

2.3.1 Macro environmental analysis: P.E.S.T.E.L Model 17

2.3.2 Industry environment analysis 18

2.3.3 Synthesis of external factors – External Factors Analysis Summary

(EFAS) 23

2.4 Internal scanning: organization analysis 25

2.4.1 Resource-based view of the firm 25

2.4.2 Value chain of the firm 26

2.4.3 Synthesis of internal factors – Internal Factors Analysis Summary (IFAS) 28

2.5 Strategy formulation 29

2.6 Strategy implementation 30

2.6.1 Management issues 30

2.6.2 Tactical issues 34

2.7 Strategy evaluation and control 35

2.8 Chapter review 37

CHAPTER 3: ANALYSIS ON VIETNAM PHARMACEUTICAL MARKET 39

3.1 Overview of Vietnam pharmaceutical market 39

3.2 Notable characteristics of Vietnam pharmaceutical market 42

3.3 Forecasts on Vietnam pharmaceutical market in 2012 – 2015 50

3.3.1 Development prospects of Vietnam pharmaceutical market 50

3.3.2 Prescription drug market forecast 51

3.3.3 OTC drug market forecast 51

3.3.4 Patented Drug Market Forecast 52

3.3.5 Generic drug market forecast 53

3.3.6 Pharmaceutical Trade forecast 54

3.4 Synthesis of External Factors – EFAS (External Factors Analysis Summary) 55

3.5 Chapter review 58

CHAPTER 4: ANALYSIS ON DHG PHARMACEUTICAL COMPANY62

4.1 Overview of DHG pharmaceutical company 62

4.1.1 Establishment and development of DHG 62

4.1.2 Scope of business and major products of DHG 64

4.1.3 Vision, mission and core values of DHG 65

4.1.4 Organizational structure of DHG 66

4.1.5 Business performance of DHG 67

4.3 Internal analysis for DHG 69

4.3.1 Value chain analysis of DHG 70

4.3.2 Distinctive competencies of DHG 75

4.4 Competitive position of DHG 77

4.5 Synthesis of internal factors – IFAS (Internal Factors Analysis Summary) 87

4.6 Chapter review 91

CHAPTER 5: STRATEGY DEVELOPMENT FOR DHG IN 2012 – 2015 93 5.1 Orientations and objectives of DHG in 2012-2015 93

5.2 Strategy development for DHG 94

5.2.1 International experience on strategy development 94

5.2.2 TOWS Matrix of DHG 95

5.2.3 Strategy development of DHG in 2012 - 2015 97

5.3 Recommendations for implementing and controlling DHG’s strategies 105

CONCLUSION 107

REFERENCES 109

LIST OF TABLES

Table 2.1: Ten schools of strategic thought 10

Table 2.2: Types of strategy 12

Table 2.3: External Factors Analysis Summary (EFAS): Maytag Example 24

Table 2.4: Internal Factors Analysis Summary (IFAS): Maytag as Example 28 Table 2.5: TOWS Matrix 29

Table 2.6: Corporate Governance Mechanisms 33

Table 3.1: Vietnam Pharmaceutical Industry SWOT 40

Table 3.2: Revenues and Profits of listed Vietnamese Pharmaceutical Companies in 2009 47

Table 3.3: Synthesis of External Factors – EFAS of DHG 56

Table 4.1: Milestones of DHG 63

Table 4.2: Evaluation of DHG’s Competencies 76

Table 4.3: Listed Vietnamese Pharmaceutical Companies 78

Table 4.4: Classification of listed pharmaceutical companies in Vietnam 82

Table 4.5: Weighted Competitive Strengths Assessment of DHG, Imexpharm, Domesco, Vien Dong Pharma 87

Table 4.6: Synthesis of Internal Factors – IFAS of DHG 88

Table 5.1: TOWS Matrix of DHG 96

LIST OF FIGURES

Figure 2.1: Corporate Strategies 14

Figure 2.2: The Five Generic Competitive Strategies 15

Figure 2.3: Strategic Management Model 17

Figure 2.4: Porter’s Five Forces Model 18

Figure 2.5: Strategic Group in the Pharmaceutical Industry 22

Figure 2.6: Firm’s Value Chain 27

Figure 2.7: Why Do Control System Fail 36

Figure 3.1: Vietnam Pharmaceutical Market Share 39

Figure 3.2: Vietnam pharmaceutical market’s value and growth rate 43

Figure 3.3: Prescription Drug Market Forecast 51

Figure 3.4: OTC Medicine Market Forecast 52

Figure 3.5: Patented Drug Market Forecast 53

Figure 3.6: Generic Drug Market Forecast 53

Figure 3.7: Pharmaceutical Trade Forecast 55

Figure 4.1: DHG’s Major Products 64

Figure 4.2: Organizational Structure of DHG 66

Figure 4.3: Net Sale and Profit after Tax of DHG 67

Figure 4.4: Growth Rates of DHG 68

Figure 4.5: Profitability Ratios of DHG 69

Figure 4.6: Chain value of DHG 70

Figure 4.7: DHG Distribution System 73

LIST OF ABBREVIATIONS

BMI Business Monitor International

DAV Drug Admistration of Vietnam

EFAS External Factors Analysis Summary GDP Good Distribution Practice

GLP Good Laboratory Practice

GPP Good Pharmacy Practice

GSP Good Storage Practice

WHO World Health Organization

R&D Research & Developement

RBV Resource-based view of the firm

CHAPTER 1: INTRODUCTION

1.1 Necessity of the thesis

Vietnam's pharmaceutical industry is in a period of substantial growths According to the Drug Administration of Vietnam (DAV), the total value of drugs utilized in Vietnam in 2009 was estimated to be approximately 1.7 billion dollars, an increase of 19 percent against 20081 Total medication spending per capita in 2009 reached 19.8 dollars, raising 3.3 and 13.7 dollars with respect to the years 2008 and 20012 DAV also explicitly indicated that Vietnam pharmaceutical market would continue to grow at a rapid annual rate

of 25 percent, reaching a 2-billion-dollar value in 2012 The figure is subject

to continuous increase over the subsequent years3

Being regarded as the leading company in the industry, Hau Giang pharmaceutical (DHG) is well known for being voted in 14 consecutive years

by consumers as Vietnamese high quality product Additionally, it ranked first

in terms of sales volume among all local pharmacies and was third in revenues after two foreign firms in the Vietnamese market (DHG, 2009) Delivering a speech at the summation operations ceremony in 2009, the company's representatives emphasized that business strategy was one key element to its success in recent years4

However, challenges that DHG is facing in the coming years are likely

to be fierce, not only from competitions of strong domestic pharmaceutical companies but also from competitions of foreign pharmaceutical companies

Many leading multinational pharmaceutical companies have established their representative offices and have been operating in Vietnam since long time ago such as Pfizer (USA), Bristol Mayer Squipp (USA), Jasen Cilag (subsidiary company of Johnson & Johnson, USA), Stada (Germany), Bayer (Germany), Boehringer (Germany), Sanofi-Anventis (France), GlaxoSmithKline - GSK (UK), Gedeon Richer (Hungary), Roche (Swiss), United Pharma (Phillipines)

Many international pharmaceutical companies have begun to expand their operations in Vietnam market through investing on building their own factories or outsourcing domestic pharmaceutical companies to manufacture their drugs In November 2010, Acitivis, the fifth largest generic drug manufacturer, held a press conference to introduce cooperation opportunity between it and other Vietnamese pharmaceutical companies and express its ambition to penetrate Vietnam’s drug sector through cooperation with them5

In December 2010, GSK signed cooperation contract to appoint SaviPharm to manufacture drugs for GSK in Vietnam market6

Together with commitments of Vietnam to WTO, foreign pharmaceutical companies will have the rights to open branches in Vietnam and directly import pharmaceuticals After 5 years since joining WTO7, Vietnam will also have to reduce tax of imported pharmaceutical to 2.5%

http://www.thesaigontimes.vn/Home/kinhdoanh/thuongmai/45031/SaViPharm-cung-ung-thuoc-cho-7

“Vietnam pharmaceutical market increases 25%”, op cit 31/5/2010 SaigonTimes Online

Consequently, from 2012 onwards, the challenges to Vietnamese pharmaceutical companies in general and DHG in particular will become fiercer and fiercer In this context, it is absolutely vital to develop suitable business strategies for DHG over the next period 2012-2015

1.2 Research aim and objectives

The aim of this thesis is to propose suitable business strategies, which fit between internal resource and external enviroments, in order to create sustainable competitive advantage for DHG in the period of 2012-2015

To realize this aim, the thesis recognizes the key following objectives:

1 To summarize specific characteristics of Vietnam phamarceutical market (size, growth rate, market segment, medicine spending, market shares of drug companies) and forecasts on future development of the market in 2012-2015 To identify Strategic groups and Key Success Factors of the market To carefully evaluate the market with P.E.S.T.E.L Model and Porter’s Five Forces Model

To identify opportunities and threats that DHG will confront with to construct EFAS Matrix (External Factors Analysis Summary) for DHG

2 To introduce and analyze business performance of DHG in recent years in comparison with its major competitors To carefully analyze DHG with Value chain and Resource-based view, core competencies To identify strengths, weaknesses of DHG in order to construct IFAS (Internal Factors Analysis Summary) Matrix for DHG

3 To construct TOWS Matrix and propose suitable business strategy for DHG to take full advantages of strengths, opportunities and eliminate weaknesses, threats of the company in order to create sustainable competitive advantages for DHG

4 To give recommendation to implement the proposed business strategy

1.3 Research questions

In order to propose suitable business strategies for DHG in 2012-2015, the thesis is going to find answers for the following research questions:

1 Major research question:

 Which business strategies will be suitable for DHG in 2012-2015? What should be done to successfully implement the proposed strategies?

2 Minor research questions:

 What are some external factors affecting DHG? What are the effects

of these factors on DHG? Opportunities and threats that DHG will confront with in the period?

 What are internal factors affecting DHG? What are the impacts of these factors on DHG? Strengths and weaknesses that DHG will confront with in the period?

 What are the competitions in Vietnam pharmaceutical industry like

at the present and in the future? In order to succeed in the industry, what factors should be taken into consideration?

1.4 Research methodology

There are three ways to classify research in term of perspectives (Kumar, 2005):

 Application of the research (pure or applied research)

 Objectives in undertaking the research (descriptive, correlation,

explanatory or exploratory research)

 Inquiry mode employed (qualitative or quantitative research)

These classifications are not mutually exclusive since one research can be a combination of several types of researches

The thesis researches theory on strategy and strategic management in order to apply them to develop business strategy for DHG in 2012-2015 (applied research) In the process of developing strategy for DHG, the thesis describes, analyzes Vietnam pharmaceutical industry as well as DHG and its competitors in the industry

Case study method was utilized (in qualitative research method) in the thesis The case of DHG was researched in comparison with major competitors of DHG (Vietnamese pharmaceutical companies which were listed and produced generic drugs) Data used in the thesis were taken from both reliable secondary data of prestigious market research (Business Monitor International – BMI) and state agency of drugs and healthcare (Drugs Administration of Vietnam – DAV, Ministry of Health) as well as from audited financial reports of listed Vietnamese pharmaceutical companies Future forecasts of Vietnam pharmaceutical industry are extracted from Vietnam Pharmaceuticals and Healthcare Report which was conducted by BMI and published in the fourth quarter of 2010 Analysis used in the thesis was gathered from the self-evaluation of the author on the current situation of the industry, combined with knowledge generated from the interviews with numerous experts in the field

1.5 Scope of the research

The thesis strives to propose business strategies for DHG during the years 2012-2015, and it involves analyzing two crucial time frames For instance, statistics and information gathered over the years 2007-2011 are used to achieve better understanding of recent activities of Vietnam pharmaceutical industry, and predictions for the subsequent years (2012-

2015) helps the company to determine what steps need to be taken to create and remain its competitive advantages in the industry

The thesis focuses on:

1 Studying macro environment and pharmaceutical industry environment with P.E.S.T.E.L and Porter’s Five Forces Model Studying Strategic groups and Key Success Factors (KSF) in Vietnam pharmaceutical industry

2 Studying and analyzing different aspects of DHG such as: business orientations, business result, value chain as well as operational activities Summarizing strengths, weaknesses of DHG

3 Proposing suitable business strategies for DHG in 2012-2015 Proposing activities and solutions for the implementation of its strategies

1.6 Significance of the research

The thesis has both theoretical and realistic significances, and it could

be useful for a number of target audience such as (1) leaders and strategy planning managers of pharmaceutical companies, (2) researchers of strategic management such as professors and students in university and research institutes

The thesis reviews theories on strategy and strategic management, and utilizing contemporary strategies such as resource-based view of the firm, core competencies, distinctive competencies, sustainable competitive advantages and so on to provide readers with the most up-to-date knowledge

Business Monitor International - an international and prestigious market research Combining them with the information generated from the interviews with experts in the industry, the thesis has also indicated Strategic Groups in the industry and Key Success Factors of pharmaceutical companies in Vietnam

The thesis provides deep analyses and detailed comparison on pharmaceutical companies who are rivals of DHG The suggestions of strategy and strategy implementation for DHG proposed by the thesis could

be a good source of references to pharmaceutical companies that are operating

in Vietnam

1.7 Suggestions for future research

Future researches could focus on the following research directions: (1) strategy adjustments of multinational drugs companies in Vietnam in comparison with the global strategy of their parents companies, (2) strategy development and implementation in 100-percent-state-owned drug companies, (3) Research and development model of new medicines for Vietnamese drug companies

1.8 Thesis structure

The thesis has 5 chapters, namely:

Chapter 1: Introduction This chapter gives introductory information about

the thesis including necessity of the thesis, aims and objectives of the research, research question, research methodology, significances and scopes

of research

Chapter 2: Literature review This chapter reviews relevant literature of

strategy and strategic management such as internal and external environment analysis, strategy development, strategy implementation, strategy evaluation

Chapter 3: Analysis on Vietnam pharmaceutical market This chapter

describes overview of Vietnam pharmaceutical market and its notable characteristics as well as market forecasts in 2012-2015

Chapter 4: Analysis on DHG pharmaceutical company This chapter

introduces the establishment and development, products, and business performances of DHG This chapter also gives assessments of internal and external environment of DHG to identify and evaluate strengths, weaknesses, opportunities, and threats of DHG

Chapter 5: Strategy development for DHG in 2012-2015 This chapter

develops business strategies and recommendations for strategy implementation for DHG from the year 2012 to 2015

CHAPTER 2: LITERATURE REVIEW

This chapter reviews the literature of strategy and strategic management Firstly, various definitions and schools of thought of strategy are summarized Next, hierarchy and types of strategy are presented Finally, strategic management process and specific implementation method in the process such as internal and external scanning, strategy formulation, strategy

implementation and strategy control, are pointed out

2.1 Strategy overview

2.1.1 Strategy definition

Hunger and Wheelen (2000) define strategy as “a master plan stating how the corporation will achieve its mission and objectives It maximizes competitive advantage and minimizes competitive disadvantage.” (p.8)

According to Thompson, Strickland and Gamble (2005), an organization’s strategy “consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, grow the business, conduct operations, and achieve targeted objectives” (p.3)

From above definitions, it is easily seen that strategy consists of the following elements: (1) Objectives of the company, (2) Plans and activities of the company, and (3) Resources and competitive position of the company

In other words, strategy helps company to answer the following questions?

1 Where is it current standing?

2 What is the direction for success of the company?

3 How will it get there?

There are many schools of thought on strategy depending on

approaches In the book “Strategy Safari: A Guided Tour through the Wilds of Strategic Management” published in 1998, Mintzberg, Ahlstrand, and

Lampel summarized 10 schools of thought on strategy Main content of them

is introduced in Table 2.1

However, strategy is not only application one school of thought, it is the combination of many ones Mintzberg thoughts that strategy planners could be able to choose suitable strategy to their companies if they know the characteristics of these schools of thought (Niven, 2002)

Table 2.1: Ten schools of strategic thought Design School: Proposes a model of strategy making that seeks to attain a

fit between internal capabilities and external possibilities Probably the most influential school of thought and home of the SWOT (strengths, weaknesses, opportunities, and threats) technique

Planning School: Formal procedure, formal training, formal analysis, and

lots of numbers are the hallmark of this approach The simple informal steps of the design school become an elaborated sequence of steps Produce each component part as specified, assemble them according to the blueprint, and strategy will result

Positioning School: Suggests that only a few key strategies (positions in

the economic marketplace) are desirable Much of Michael Porter's work can be mapped to this school

Entrepreneurial School: Strategy formation results from the insights of a

single leader, and stresses intuition, judgment, wisdom, experience, and insight The "vision" of the leader supplies the guiding principles of the strategy

Cognitive School: Strategy formation is a cognitive process that takes

place in the mind of the strategist Strategies emerge as the strategist filters the maps, concepts, and schemas shaping their thinking

Learning School: Strategies emerge as people (acting individually or

collectively) come to learn about a situation as well as their organization's capability of dealing with it

Power School: This school stresses strategy formation as an overt process

of influence, emphasizing the use of power and politics to negotiate strategies favorable to particular interests

Cultural School: Social interaction, based on the belief and understanding

shared by the members of an organization, lead to the development of strategy

Environmental School: Presenting itself to the organization as a set of

general forces, the environment is the central actor in the strategy making process The organization must respond to the factors or be "selected out"

Configuration School: Strategies arise from periods when an organization

adopts a structure to match to a particular context that give rise to certain behaviors

Source: Niven (2002, p 91)

2.1.2 Hierarchy and types of strategy

There are many ways to classify strategies (see Table 2.1) When a

company changes its purpose, operating area, competitive position in industry, its strategy will be changed accordingly

Table 2.2: Types of strategy

1 Strategy level  Corporate strategy

6 Stage of the industry  Strategy in emerging industry

 Strategy in high-velocity market

 Strategy s in maturing industry

 Strategy in stagnant or declining industry

Source: Adapted from Hunger et al (2000), Hitt et al (1999), Thompson et

al (1998), Porter (1980)

Business strategies are often classified according to different levels of a company’s structure Hunger et al (2000), Hitt et al (1999), and Thompson

et al (1998) have reached a consensus that a diversified corporation has three levels of strategy: (1) corporate strategy, (2) business strategy, and (3) functional strategy

Corporate strategy is the overall strategy of the whole corporation, answering the questions “What kinds of business should the corporation participate in?” and "How should the corporation build the synergy of each individual company as a whole?" Business strategy or competitive strategy is strategy for strategic business unit of the corporation, answering the question

“How should the company compete in the industry?” Functional strategy is strategy of specialized departments which implement business and corporate strategy

According to Hunger et al (2000), in corporate strategy, there are groups of strategies that are kept in accordance with the development stage of the company such as growth strategies, stability strategies, and rechenment

strategies (See Figure 2.1.) Growth strategy is used when the corporation

wants to grow It can grow by concentration strategy or diversification strategy Stability strategy is used when the corporation wants to grow slowly Rechenment strategy is used when the corporation is in difficult time

Figure 2.1: Corporate Strategies

Source: Hunger et al (2000, p 82)

In business strategy level, there are 3 generic strategies suggested by M Porter in his book Competitive strategies (1980): (1) Cost leadership strategy (2) Differentiation strategy (3) Focus strategy

Criteria to classify 3 generic strategies are (1) price of the product, (2) differentiation of the product, and (3) market range

In a broad market range, competitive strategy will have 2 generic strategies: (1) Cost leadership strategy, and (2) Differentiation strategy A company which follows cost leadership strategy will produce cheaper products than its competitors’ ones A company following differentiation strategy will provide unique products, which allows it to sell them in higher

price to its competitors In a narrow market range, focus strategies are cost leadership strategy and differentiation strategy (focused cost leadership strategy or focused differentiation strategy)

Thompson and Strickland (2005) proposed Best-cost provider strategy in business/competitive strategy It is the combination of low-cost provider strategy and differentiation strategy in both broad market and narrow market

Figure 2.2 summaries five generic competitive strategies

Figure 2.2: The Five Generic Competitive Strategies

Source: Thompson et al (2005, p 116)

Functional strategies (e.g marketing strategy, HR strategy, finance strategy, operation strategy…) are strategies that support corporate strategy and business strategy

In this thesis, corporate strategies and competitive strategies, proposed

by Hunger et al (2000) and Thompson et al (2005) and illustrated in Figure 2.1 and Figure 2.3, are used to analyze and develop strategy for DHG

2.2 Strategic management process

According to Gluck, Kaufman, and Waleck, the development history of strategic management are as follows (Hunger et al., 2000, p.3):

Phase 1 Basic financial planning: seeking better operational control

by trying to meet budgets

Phase 2 Forecast-based planning: seeking more effective planning

for growth by trying to predict the future beyond the next year

Phase 3 Externally oriented planning (strategic planning): seeking

increased responsiveness to markets and competition by trying to think strategically

Phase 4 Strategic management: seeking a competitive advantage and

successful future by managing all resources effectively

Besides the planning as in phase 3, implementation, evaluation and control phases should also be taken into consideration

Strategic management is the process of consecutive steps According to Hitt et al (1999), strategic management process as a process of two major groups of activities:

1 Identifying strategic inputs: the first step is conducting internal and

external analyses, then identifying the strategic intent and strategic mission of the company

2 Implementing strategic actions: includes strategy formulation and

strategy implementation

Similarly, Thompson (2005) proposed 5 steps in crafting and executing a company’s strategy: (1) develop strategic vision, (2) establish objectives, (3)

develop strategies to realize vision and objectives, (4) implement strategies, and (5) measure, evaluation and adjust strategies when needed

Byars, Rue and Zaira (1996) divided strategic management process into

4 steps: (1) Environmental scanning (2) strategy formulation, (3) strategy

implementation, and (4) strategy evaluation and control (See Figure 2.3)

Figure 2.3: Strategic Management Model

Source: Byars et al (1996, p.6)

In this thesis, strategic management process model proposed by Byars

et al (1996) (see Figure 2.3) is used because of its generality

2.3 External scanning: macro environment and industry environment analysis

2.3.1 Macro environmental analysis: P.E.S.T.E.L Model

Macro environment consists of factors that are out of control of the companies in short term, and have impacts on an industry and companies within the industry (Byar et al., 1996) Understanding the factors of macro environment will help company to develop suitable strategies

P.E.S.T.E.L Model indicates major factors of macro environment

which the company need to pay close attention to: (1) Political force, (2)

Economic force, (3) Social force, (4) Technological force, (5) Environmental

force, and (6) Legal force

2.3.2 Industry environment analysis

Industry is group of companies producing products and services to satisfy similar needs of customers (Byars et al., 1996)

When comparing industry environment to general environment, it has more direct influences on the operations of the companies Porter (1980) developed Five Forces Model to summarize factors affecting the intensity of industry competition and industry’s profit potential They are listed as (1) potential entrants, (2) suppliers, (3) buyers, (4) substitute products or services,

and (5) industry competitors (See Figure 2.5)

Figure 2.4: Porter’s Five Forces Model

1 Potential entrants: When new entrants enter into an industry, these

companies will threaten existing companies in the industry The threat of new entrants depends heavily on entry barriers and reactions of existing competitors in the industry Entry barriers are obstacles that raise difficulties

to the participations of a company in the industry, for example:

2 Suppliers: suppliers can increase prices, increase or reduce the quality of

input material for producing products of the company A supplier or group of suppliers has high bargaining power when:

 There are a few companies selling the products while a lot of companies are in need of purchasing

 The products of the suppliers have dramatic impacts on the success

of the company buying the products

 The company buying the products is not an important client of the suppliers

 Suppliers can integrate forward and directly compete with the companies buying the products

3 Buyers: the buyers can request for price decreases, quality enhancement, or

faster delivery time of the products of the company in their industry A buyer

or group of buyers has high bargaining power when:

 The buyer purchases a large number of products from the seller

 The buyer can integrate backward to produce products that are similar to the sellers

 The products of the seller are easily substituted because they are normal products that can be provided by a lot of other sellers

 Switching cost is low

4 Substitute products or services: substitute products are different kinds of

products but they can satisfy similar needs of another product (for example tea and coffee) When customers do not satisfy with the current product, they can change to use substitute products Substitute products have strong influence when:

 Substitute products have lower price or higher quality than that of the product

 Switching cost to use substitute products is low

The price of a substitute product is reference for ceiling price of the existing products in the industry (Porter, 1980)

5 Industry competitors: In the industry, the competitors compete with

others for market share and customers of other rivals Due to the interdependence of competitors, when a company decides to take an action, the other companies have reactions accordingly The competition level of existing industry competitors depends on several factors:

 Number of competitors: when the number of competitors in an

industry is small and they have similar resources, each company will adjust strategies according to action taken by another

 Rate of industry growth: When the industry is in a slow-growth

period, competitors will have fierce competition to struggle to get a

small number of customers As a result, the profit of the industry will be decreased

 Amount of fixed costs: When the fixed costs are high, companies

in the industry will try to increase the number of products for the purpose of selling to reduce the amount of fixed cost per unit This leads to an increase of competition

 Height of exit barriers: exit barriers prevent companies from

leaving the industry even though the profit of the industry is not attractive anymore The higher the exit barriers, the fiercer the competition in the industry

2.3.2.2 Strategic groups

A strategic group is “a group of firms in an industry following the same

or similar strategy along the [same] strategic dimensions” (Porter, 1980, p.129)

Strategic dimensions may be price, quality, distribution networks, and promotion of the products Companies belong to different strategic groups when different strategic dimensions are chosen In the same strategic group, the competition level of the companies within this group will be higher than that of the companies that are outside of the group In addition, they have similar strategies that target similar customer segments

Dividing companies in an industry into strategic groups can help the managers (Byars et al., 1996) in the following way:

 Having an overall view on the main strategies used by companies

in the industry and therefore being able to identify strategic options (strategies in each strategic group)

 Identifying direct competitors (companies in the same strategic group)

 Identifying potential competitors (competitors in strategic groups next to the strategic group that it belongs to)

Strategic group in an industry can be identified by putting competitors

in a diagram with 2 axes of two strategic dimensions Figure 2.5 illustrates

strategic group in England pharmaceutical market with two strategic dimensions: (1) Prices, and (2) R& D spending With two strategic dimensions, there are 2 strategic groups in the pharmaceutical industry:

 Proprietary drugs strategic group: group of companies producing

patented drugs, including Merck, Pfizer, Eli Lilly They have high R&D spending and price, and they follow strategy of high investment – high return pattern They invest on R&D to develop new medicines

 Generic drugs strategic group: group of companies producing generic

drugs, including Forest Lab, Mylan Labs, Watson They have low R&D spending and price Their strategies are to produce low cost medicines developed by strategic group of proprietary drugs that are no longer patented due to the expiration of the patent protection time

Figure 2.5: Strategic Group in the Pharmaceutical Industry

Source: Hill et al (2009)

2.3.2.3 Key success factors (KSF)

Key success factors (KSF) of an industry are factors that have major affection on the chances of success of the companies in the industry (Byar et al., 1996; Thompson et al., 2005) KSFs can be altered due to the change of industry life cycle (Byars, 1996) Companies should develop their strategies

to have strengths in all of the KSFs of the industry, with one or two factors being stronger than other competitors (Thompson et al., 2005)

In order to identify KSFs, the company should analyze two factors: (Byars et al., 1996):

 Analyzing customers: answering 3 main questions: “Who are

our customers?“, “What do they want?”, “Criteria used by customers to choose among our company and other competitors?”

 Analyzing competitors: company should be aware of the factors

that contribute to the success of the leading companies in an industry It is also vital to understand that being a mere imitation

of the leading companies does not necessarily ensure the success

of the company

Popular KSFs in many industries are (1) technology-related factors, (2) manufacturing-related factors, (3) distribution-related factors, (4) marketing-related factors, (5) skills and capabilities (Thompson et al., 2005)

2.3.3 Synthesis of external factors – External Factors Analysis Summary

(EFAS)

The main objective of external environment analysis is identifying opportunities and threats Opportunities are factors of external environment that may help a company to obtain competitive advantage Threats are factors

of external environment that may hinder a company to obtain competitive

advantage However, there are a lot of opportunities and threats that company has, and it is not easy for the company to analyses all of its opportunities and threats External Factors Analysis Summary (EFAS) is a summarizing table

of important factors that define the opportunities and threats of an external environment In addition, the EFAS provides more profound vision on the impacts of these factors since it applies the weighted method to analyze opportunities and threats

It is important to remember to design an EFAS that (1) only selecting the most important factors, (2) The sum of the Weights is 1.0 (3) Rating in 1-

5 scales, with 5 being most affected (4) Weighted Score = Weight* Rating

An example of EFAS is illustrated in Table 2.2

Table 2.3: External Factors Analysis Summary (EFAS): Maytag

Example

Source: Wheelen et al (2000, p.55)

2.4 Internal scanning: organization analysis

Analyzing only external environment to identify opportunities and threats does not ensure an automatic competitive advantage of the company It also has to look into itself to identify internal strategic factors – strengths and weaknesses that will be deployed by the company in order to take full advantage of the opportunities and eliminate the threats of external environment

2.4.1 Resource-based view of the firm

Resource-based view of the firm (RBV) is one of the most important frame works to understand strategic management (Barney, Wright and Ketchen, 2001) The framework states that the business results of a company are depended on the resources of that company (Hitt et al., 2000) Framework RBV combines both internal and external analysis of a company on the industry environment and competitive environment (Collis and Montgomery, 1995)

RBV considers companies as collections of assets and capabilities, which are both visible and invisible, and there are not 2 same companies (Collis and Montgomery, 1995) Resources of a company can be either tangible (for example, factories and equipments) or intangible (for example, technology know-how and brand) Tangible resources have 4 forms: (1) financial resources, (2) physical resources, (3) human resources, and (4) organizational resources Intangible resources have 3 forms: (1) technological resources, (2) Resources for innovation, and (3) Reputation (Hitt et al., 2000)

Resources can create 3 levels of competencies of a company, which are described below in the order of importance (Byar et al., 1996; Hitt et al., 2000; Thompson et al., 2005):

 Capabilities: abilities that a company can perform

 Core competencies: important capabilities that a company can

perform

 Distinctive competencies: important capabilities that a company

can perform and are very hard to be imitated by others

Capabilities may lead to competitive advantages if they are distinctive competencies Companies that have valuable resources and capabilities will have more competitive positions If competitors try to keep up with a company that has such distinctive competencies, the competitive advantage of the company will be decreased Barney (1995) proposed 4 criteria that company should use to evaluate to its resources and competencies to consider whether they can create sustainable competitive advantages:

1 Question of value: can the resources and capabilities enable a

company to take full advantage of opportunities and eliminate threats of external environment?

2 Question of rareness: the resources are value but what will

happen to the competitive advantage of the company if there are many competitors possessing such resources

3 Question of immutability: can the competitors imitate resources

and capabilities that are valuable and rare?

4 Question of organization: is the company well organized to fully

exploit potential competitive advantage of the resources and

capabilities?

2.4.2 Value chain of the firm

A company’s value chain consists of activities that are interdependent, which creates value for customers (Porter, 1985) There are two groups of

activities (See Figure 2.6):

 Primary activities: activities that directly create value of

customer, including inbound logistics, operations, outbound

logistics, marketing & sales, and service

 Support activities: activities that support the effectiveness of the

primary activities, including firm infrastructure, human resource management, technology development, procurement

Analyzing value chain helps company to follow low-cost strategy (by optimizing the cost of activities) or differentiation strategy (by identifying activities that makes the product more different than competitors)

Figure 2.6: Firm’s Value Chain

Source: Porter (1985, p.39)

The firm’s value chain suggests that a company should (1) identify its primary and support activities, (2) focus on its resources to well perform its primary activities In reality, each company has different views on activities that it performs For instance, medicine distribution companies consider R&D

as a support activity while drug makers consider R&D as a primary activity

2.4.3 Synthesis of internal factors – Internal Factors Analysis Summary (IFAS)

The main objective of internal scanning is to identify strengths and weaknesses of the company Strengths are factors within the company that help it to obtain competitive advantages Weaknesses are factors within the company that hinder it to obtain competitive advantages However, there are

a lot of strengths and weaknesses of the company, and it will be difficult to analyze all strengths and weaknesses of it Internal Factors Analysis Summary (IFAS) is summary table of important factors of strengths and weaknesses of the company Moreover, IFAS will illustrate more clearly the impacts of the factors sine it use weights to analyze strengths and weaknesses

It is important to remember when creating IFAS: (1) only select the most important internal factors, (2) The sum of the Weights is1.0 (3) Rating

in 1-5 scale, with 5 is the most influenced, (4) Weighted Score = Weight*

Rating An example of IFAS is illustrated in Table 2.3

Table 2.4: Internal Factors Analysis Summary (IFAS): Maytag as

Example

Source: Wheelen et al (2000, p.73)

2.5 Strategy formulation

To form strategies, the company need to consolidate main internal factors (from IFAS) and external factors (from EFAS) to construct TOWS Matrix (which is the combination of external opportunities, threats with internal strengths, weaknesses

4 groups of strategy are constructed from strengths, weaknesses, opportunities and threats: (1) SO strategies, (2) ST strategies, (3) WO

strategies, and (4) WT strategies (See Table 2.4)

Table 2.5: TOWS Matrix Strengths (S)

List 5-10 internal strengths here

Weaknesses (W)

List 5-10 internal weaknesses here

Generate strategies here

that use strengths to

List 5-10 external

threats here

ST Strategies

Generate strategies here

that use strengths to avoid opportunities

TOWS Matrix is a qualitative method for developing strategy and it is used in this thesis Two quantitative methods for developing strategy are (1) Strategic Position and Action Evaluation (SPACE) Matrix9, (2) The Quantitative Strategic Planning Matrix (QSPM)10 These quantitative methods are very complicated, using numerous criteria to rate a company and develop suitable strategy for that company

2.6 Strategy implementation

To successfully compete, the company needs to implement the proposed strategy through management issues and tactical issues (Byar et al., 1996)

3 questions that need to be considered when implementing the strategies:

 Who will implement the strategy?

 What will need to be implemented?

 How to implement the strategy?

Laetitia Radder and Lynette Louw (1998) The SPACE Matrix: A Tool for Calibrating Competition

Long Range Planning, Vol.31, No.4, pp 549 to 559

10

David Fred (1986) The Strategic Planning Matrix – A Quantitative Approach Long Range Planning,

Vol.19, No.5, p.102

Structure

Structure was defined by Henry Mintzberg as “the sum total of the ways in which the organization divides its labor into distinct tasks and then achieves coordination between them” (Byars et al., 1996)

In a research on big companies in America such as DuPont, General Motors, Sears, and Standard Oil, Alfred Chandler found out that a change in strategy would lead to a change in structure According to Chandler, structure

is changed accordingly due to the fact that the old structures were no longer suitable with the new strategy (Hunger, 2000)

Chandler also proposed a sequence of new strategy and structure of a company, which are listed as follows (Hunger, 2000): (1) New strategy is created, (2) New problems of old structure are raised, (3) Economic performance is decreased, (4) New and suitable structure is created , and (5) Profit is recovered at the old level

There are 5 types of organization structures: (Byars et al., 1996):

1 Functional organizational structure

2 Geographic organizational structure

3 Divisional organizational structure

4 Strategic business units

5 Matrix organizational structures

The managers of a company need to use suitable organizational structure that fits the strategy of the company

Culture

Culture is defined as common values, beliefs, behaviors of a company Each company has its own culture that differentiates it among other

companies In a company that has a strong culture, all staffs are likely to develop a sense of agreement in shared values, thoughts and behaviors

Culture is considered as an intangible asset of the company It can support or hinder the development and implementation of the strategy of the company The managers of the company should consider culture-related matters of the company when developing strategy to make sure that its culture will support the implementation of the strategy

Leadership

Leaders play an important role in the success or failure of the company They are people who directly develop and implement strategies of the company

According to Hitt et al (1999), an effective leader should implement these key tasks:

 Identifying the direction for the company

 Creating, exploiting, and sustaining core competencies of the company

 Developing people

 Creating and sustaining effective culture

 Paying attention to ethical practices

 Establishing effective internal control system

Corporate governance

Corporate governance consists of processes, procedures, and policies that affect the execution and control of a company It deals with the relationship among stakeholders of the company and the ways in which the company is governed Stakeholders of a company include: shareholders, customers, board of management, executive officers, staffs and suppliers …