ESTABLISHMENT OF BUSINESS STRATEGY OF THANH HOA MEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK COMPANY (THEPHACO)

ESTABLISHMENT OF BUSINESS STRATEGY OF THANH HOAMEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK COMPANY THEPHACO Hanoi, August 2011... Structure of the topic CHAPTER 1: THEORETICAL BASIS OF

ESTABLISHMENT OF BUSINESS STRATEGY OF THANH HOA

MEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK

COMPANY (THEPHACO)

Hanoi, August 2011

I Necessity of the topic

II Purpose of research of the topic

III Object, scope and method of research

IV Structure of the topic

CHAPTER 1: THEORETICAL BASIS OF BUSINESS STRATEGY

1.1 Concept of business strategy

1.1.1 Concept of business strategy

1.1.2 Classification of business strategy

1.2 Role of business strategy

1.3 Business strategies in reality

1.4 Process of establishing business strategy

1.4.1 Environmental research

1.4.1.1Analysis of macro environment

1.4.1.2Analysis of micro environment

1.4.2 Analysis inside the enterprise

1.4.2.1Analysis and evaluation of resources:

1.4.2.2Analysis of operation of functional divisions of the Company

1.4.2.3Internal factor evaluation matrix (IFE)

1.4.3 Establishment and selection of strategy

CHAPTER 2: ANALYSIS OF BUSINESS ENVIRONMENT OF THANH HOA MEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK COMPANY

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2.1 General introduction about Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company

2.1.1 Formation and development

2.1.2 Organizational structure of Thephaco

2.1.3 Operation result of Thephaco over the past years

2.1.3.1 Business result and market share

2.1.3.2 Growth

2.2 Analysis of external environment impact on the operation of Thephaco

2.2.1 Analysis of macro environment

2.2.1.1 Political and law factor

2.2.2 Operation environment of the company (micro)

2.2.2.1 Economic characteristics of the industry

2.2.2.2 Pressure from the suppliers

2.2.2.3 Customers

2.2.2.4 Competitors

2.2.2.5 Pressure and threat from potential competitors

2.2.2.6 Substitute products

2.2.3 Competitive image matrix

2.2.4 External factor evaluation matrix (EFE)

2.3 Analysis of internal environment impact on the business activities of Thephaco 2.3.1 Analysis of Management Model

2.3.2 Analysis of human resources

2.3.3 Marketing activities

2.3.4 Financial - accounting analysis

2.3.5 Manufacturing

2.3.6 Technology

2.3.7 Market research and development

2.3.8 Internal factor evaluation matrix (IFE)

CHAPTER 3: ESTABLISHMENT OF BUSINESS STRATEGY OF THANH HOA MEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK COMPANY (THEPHACO) IN THE PERIOD 2011 - 2015

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3.1.1 Determination of position, vision and objective of Thephaco

3.1.2 Basis for objective determination

3.2 Analysis of business strategies

3.2.1 According to SWOT matrix

3.2.2 According to strategic posturing and action evaluation (SPACE)

3.2.3 According to internal - external factor matrix (IE)

3.3 Preliminary selection of strategy schemes

3.4 Quantitative strategic planning matrix (QSPM)

3.5 Follow-up of strategies

3.5.1 Thephaco market development strategy

3.5.2 Product development strategy

3.5.3 Marketing and communication strategy

3.5.4 Human resources management strategy:

3.5.5 Capital source development strategy

3.5.6 Production technology strategy

CONCLUSION

REFERENCES

First of all, our group would like to present our most sincere thanks to the Program Leadership, lecturers of the Center for Educational Technology and Career Development, Postgraduate Faculty - Vietnam National University - Hanoi; USA Griggs University for creating favorable conditions and helping us during the course

as well as completing our Graduation assignment with the assigned research topic to the best result At the same time, we are also thankful to the Leadership and related Departments of Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company for enthusiastically providing necessary figures and creating all favorable conditions for us to do this topic However, due to limited time, shortcomings in the analysis of the topic are inevitable For this very reason, the group 11 does wish to receive contributive ideas from the Lecturers so that our topic is better and applied effectively in the reality of the Company.

We hereby undertake that this topic is our independent research The figures and results included in the Assignment are true and of clear origin.

GROUP OF AUTHORS

LIST OF TABLES - CHARTS

Table 1-1 Phases in the strategy construction process

Chart 1-2 SWOT matrix

Table 1-3 Space matrix

Table 2-1 Management apparatus diagram of Thephaco

Table 2-2 Analysis of financial targets through years

Table 2-3 Competitive image matrix in the field of pharmaceutical products of

ThephacoChart 2-4 External factor evaluation matrix of Thephaco

Chart 2-5 Product distribution market ratio

Chart 2-6 Production capacity of groups of products of Thephaco

Chart 2-7 Internal factor evaluation matrix of Thephaco

Chart 3-1 Objectives for each year in the period 2011 - 2015

Table 3-2 SWOT matrix of Thephaco

Table 3-3 Space matrix of Thephaco

Chart 3-4 Overall shape of Space matrix

Table 3-5 Internal - external factor matrix (IE)

Table 3-6 Strategy proposals in each matrix

Table 3-7 QSPM of pharmaceutical products - Centralized growth strategy group

LIST OF ABBREVIATIONS

In this work, terms are understood as follows:

Thephaco Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company

DN Enterprise

IFE Internal factor evaluation matrix

EFE External factor evaluation matrix

SPACE Strategic posturing and action evaluation matrix

QSPM Quantitative strategic planning matrix

GMP Good Manufacturing Practice

GLP Good Laboratory Practice

GSP Good Storage Practice

GDP Good Distribution Practice

GPP Good Pharmacy Practice

WHO World Health Organization

TRAPHACO TRAPHACO Joint Stock Company

PHARBACO Central Pharmaceutical Joint Stock Company No 1 - PHARBACO

DHG Hau Giang Pharmaceutical Joint Stock Company

I Necessity of the topic

Vietnam has approached the market economy for more than 20 years, a sufficientperiod for the enterprises to adopt management methods of market mechanism Strategymanagement has been regarded as one of the important business philosophies that help theenterprises to gain successes in the long term However, the adoption of this theory muststill be considered with most Vietnamese enterprises

Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company (Thephaco) wasformerly known as Thanh Hoa Pharmaceutical Company, established in 10/4/1961,designed to produce, trade, import and export medicine all over the province and thecountry For many years of formulation and development, with the motto of highlightingproduct quality, Thephaco has invested and built the factory to the standard GMP - WHO,GLP and created confidence in the national market The trademark THEPHACO isincreasingly firm in the pharmaceutical market, some articles have been exported to Russianand Laos

Yet, in the present competitive context, especially the participation of foreigncompanies, Thephaco realizes that it is necessary to prepare necessary resources to adapt to

change and sustainable development With such significance, the topic “Business strategy

in the period 2011 - 2015 of Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company” is selected the group 11 for the graduation assignment of Master of Business

Administration We do hope to receive contributions from the Lecturers in the council andall of classmates so that the strategy is actually persuasive and can be applied into real life

II Purpose of research of the topic

The topic focuses on researching the following issues:

- Basic theories about strategy and strategy management

- Useful analysis models for strategy formation and selection

- Actual performance of strategy of Thephaco

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- Analysis of internal and external environment factors that impact the strategy performance

of the company

- Appropriate solutions to establish development strategy of Thephaco

III Object, scope and method of research

- Object and scope: The thesis focuses on researching present strategy managementactivities for the products of Thephaco and putting forth solutions in the coming time

- Method of research: The thesis uses two main types of information, namely primaryinformation and secondary information Secondary information is collected from varioussources, remarkably reports on operation and marketing supplied by Thephaco Besides,secondary information coming from open sources in the Internet is also used in the report

IV Structure of the topic

Chapter 1: Theoretical basis about business strategy

Chapter 2: Analysis of business environment of Thanh Hoa Medical Materials

Pharmaceutical Joint Stock Company

Chapter 3: Establishment of business development strategy of Thanh Hoa Medical

Materials Pharmaceutical Joint Stock Company in the period 2011 - 2015

CHAPTER 1: THEORETICAL BASIS ABOUT BUSINESS STRATEGY

1.1 Concept of business strategy:

1.1.1 Concept of business strategy:

There are many different definitions of strategy, each of them has many differentpoints depending on the viewpoint of each author

According to traditional viewpoint, “Strategy is the direction and scope of anorganization in the long term: strategy will bring about advantage to the organizationthrough optimal arrangement of resources in a competitive environment in order to meet themarket demand and expectation of the capital contributors”

According to Alfred Chandler (1): “Strategy includes long-term basic objectives of

an organization, concurrently choosing way or process of action, allocating essentialresources to carry out such objectives”

According to Fred R David (2): “Strategy is defined as means to achieve long-term

objectives Business strategy may include geographical development, activitydiversification, ownership, product development, market penetration, cost reduction,liquidation and joint venture”

According to Michael E Porter (3): “Strategy is the art of establishing stable

competitive advantages for defense”

1.1.2 Classification of business strategy:

There are many kinds of strategies used in an organization, yet basically, there arethree applicable levels of strategy:

- Strategy at company level: Putting forth objectives and business activities of the

company, creating basic policies and plans to achieve objectives

- Strategy at business level: Determining business market of the company, dividing

segment and product for each type of market

- Strategy at functional level: Determining solutions and plans for each field of business.

1.2 Role of business strategy:

The management of business strategy will enable the Enterprises:

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- To specify purpose, position to find out proper direction as a basis for all specific actionplans, guideline for all production and business activities of the enterprise.

- To determine opportunity and threat from external environment as well as internal strengthand weakness to promote strengths, minimize weaknesses, grasp opportunities and preventexternal risks

- To select appropriate competitive advantage in the changing business environment, findout how to enhance efficiency of using resources for survival, enhance competitive positionand enable the Enterprise to gain sustainable development

- Business strategy is a stable ground to put forth decisions for the enterprise in accordancewith the market change

1.3 Business strategies in reality:

- Market share consolidation strategy: Consolidating position, enhancing image and

prestige of the Enterprise, expanding scope of production, enhancing labor productivity andfurther penetrating into the market

- Product and service diversification strategy: Diversifying product and orientating

product to the customer’s demand Investing in modern production line to put forth manytypes of products for domestic market and export, especially specialized products

- Distribution network expansion strategy: Diversifying and expanding distribution

channels of the Enterprise, expanding locality to provide the customer with the mostconvenience in transaction, thereby attracting customers and increasing competitiveness

- Concentration strategy: The enterprise concentrates its all resources in order to

achieve growth objective and high efficiency

- Differentiation strategy: Establishing the plan based on the available and typical

strength of the enterprise to achieve the objective

1.4 Process of establishing business strategy:

Establishing of business strategy is the process of determining basic objectives andduties in the business operation of enterprise, the best methods to carry out key objectivesand duties It is possible to summarize phases and activities during the strategyestablishment through the following table:

Steps Content

Step 1 Systemizing information

Step 2 Combining information to put forth collection of feasible business strategiesStep 3 Using all general evaluation information to select the best business strategy for

the enterprise

Table 1-1: Phases in the business establishment process

Strategy formulation is the process of establishing business task, conductinginvestigation and research to determine internal and external limitations, set long-termobjectives and select among substitute strategies It is also possible to call this strategyestablishment phase Accordingly:

Step 1: Collecting data, combining with intuition, analyzing actuality and choosingfeasible substitute strategies by some strategy management techniques such as externalfactor evaluation matrix (EFE) and internal factor evaluation matrix (IFE)

Step 2: By using and arranging the factors collected from the internal and externalenvironment of the enterprise, putting forth feasible business strategies by using some toolssuch as SWOT matrix and SPACE matrix

Step 3: Using information in the phase 1, evaluating the phase 2 objectively to select

a key business strategy through some tools such as QSPM matrix and GREAT matrix

To ensure the highest efficiency in the operation, strategies must decide the strategiesthat will be most beneficial to the company The decisions in the strategy formulation phasewill associate organization with products, markets and technologies in a prolonged time.Long-term competitive advantages are defined in the strategies This is the very importantphase because strategy decisions will exert permanent or better or worse influences on theorganization

1.4.1 Environmental research:

1.4.1.1 Analysis of macro environment

PEST model focuses on researching the factors of external environment impactingthe enterprise Such factors include: Political; Economic; Socio-cultural and Technological

These four factors exert direct influence on the economic sectors These are externalfactors of the enterprises and the industry and must bear its impacts as an objective factor

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Based on such impacts, the enterprises will put forth suitable business policies andoperations

1.4.1.2 Analysis of micro environment

Analysis of industry environment based on the model by Michael Porter with 5impacts on the enterprise or 5 competitive forces is as follows:

 Power of the supplier

 Power of the customer

 Potential competitor

 Threat from substitute products

 Present competitors

External factor evaluation matrix (EFE):

EFE matrix is established orderly in 5 steps:

 Prepare the list of factors with deciding role in the business line traded by the enterprise,including opportunities and challenges

 Evaluate importance of each factor based on the mark scale from 0.0 to 1.0 (increasedimportance) with total marks of factors being 1 This importance is based on thebusiness lines operated by the enterprise

 Give mark from 1 to 4 for each factor with mark showing the enterprise’s response tosuch factor Mark 4 is good response Mark 3 is above average response Mark 2 isaverage response and mark 1 is the least response

 Determine total marks for each factor (by the product of step 1 and step 2)

 Determine total marks in the importance of the enterprise by total marks gained in step3

Total highest mark is 4 and total lowest mark is 1 Average is 2.5 The higher the mark

is, the better the enterprise has response to external factors

Competitive image matrix:

This matrix identifies main competitors of the enterprise This matrix is theexpansion of EFE matrix with degrees of importance of the factors, mark significance of

Competitive image matrix is different from EFE matrix as follows: Some internalfactors with deciding importance are also included for comparison Total evaluation marks

of competitors will be compared with those of the sample enterprises

1.4.2 Analysis inside the enterprise:

Internal environment includes visible and invisible factors, existing in the operationprocesses of the enterprise or organization and directly affecting strategy managementprocess Each enterprise has different internal environment, both strengths and weaknessesand changes with the time

1.4.2.1 Analysis and evaluation of resources:

Resources of an enterprise include: human resources, physical resources andinvisible resources This is the group of factors deciding on the operation ability of theenterprise and on the success or failure in the market; in which the most important resourcesare human In each period, each resource has its own strength and weakness compared withcompetitors in the industry Therefore, senior managers must always have information aboutpresent resources and analysis potential to evaluate strictly and take advantage of theiravailable resources properly in order to create advantage in long-term competition

Physical resources

Physical resources include such factors as production capital, workshop, equipment,goods in stock, information about business environment, etc Each enterprise has their owncharacteristics about private physical resources, including strengths and weaknessescompared with competitors in the industry Therefore, the proper analysis and evaluation ofphysical resources are important basis to help enterprise managers understand potential

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physical resources and limitations to make management decisions in accordance with thereality.

Invisible resources

Apart from the above resources, each enterprise or organization has other resourcesthat the human identifies only through perception They are invisible resources Invisibleresources are shown through many factors and managers at various levels should beequipped with sufficient knowledge to be clearly aware of the presence and know theimportance of this resource

In short, resources of each enterprise are quite diversified Depending oncharacteristics, operation, scope, structure and typicality of these resources in the enterprisehave difference The proper analysis, comparison and evaluation of present and potentialresources in each period will help enterprise managers clearly see their progress during thedevelopment, put forth effective competitive strategies, decide on grasping opportunities,limiting potential threats

1.4.2.2 Analysis of operation of functional divisions of the Company:

Depending on the scope of operation, the allocation of units and functional divisions

of each enterprise is different, in accordance with duties and strategies in each period.Typical functional divisions may include marketing, personnel, finance - accounting,research and development, production

Marketing division:

Marketing is the system of activities related to researching, forecasting andidentifying demands and expectations of target customers and effectively meeting suchdemands compared with competitors in each period or in each market area Clearlyunderstanding marketing activities, the managers will specify duties, functions and things to

do in each period to manage the work effectively

Internal management organization factor:

 Existing organizational structure of the Enterprise

 Prestige of the Enterprise

 Internal control, inspection and auditing system

 Ability to control and prevent business risks of the Enterprise

Personnel division:

Personnel management means activities concerning recruitment, training, utilization,treatment, evaluation and encouragement of loyalty of the labors to the organization.Personnel management plays a very important role that decides on the success or failure ofthe organization Without proper employee utilization and treatment policy, the companycan not attract and maintain good employees in the long term On the other hand, personnelmanagement also contributes to developing organizational cultural values, creating motiveforce to promote the enthusiasm and creativeness of the members in the organization

Finance - accounting division

Finance and accounting function is related to mobilizing and using physicalresources of the enterprise in each period, carrying out economic accounting in all steps inthe operation Concurrently, it is associated closely with the activity of other functionaldivisions, decides on the feasibility and efficiency of many other strategies and policies ofthe enterprise in order to put forth basic grounds for the Management to work out timelypolicies

Research and development division

Research & development plays an important role in discovering and applyingupdated technologies to create competitive advantage in the market, develop new productsahead of competitors, enhance product quality and improve production process to reducecosts

Information system in the enterprise

The information system is designed to collect, classify, analyze, evaluate and timelyprovide valuable data about internal and external factors to managers Data of theinformation system shows information about competitors, shows the opportunities that thecompany can grasp in the order and threats to be prevented or limited during the operation.The information system shows the managers how to respond to the business environmenteffectively As such, internal enterprise analysis will help the enterprise realize theirstrengths and weaknesses in order to identify potential resources as well as existing

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resources to create competitive advantage for the enterprise At the same time, identifyingobstacles in maintaining competitive advantage.

1.4.2.3 Internal factor evaluation matrix (IFE):

The establishment of IFE matrix is carried out in 5 steps:

 Prepare the list of deciding internal factors

 Evaluate degree of importance of each factor based on the mark scale from 0.0

to 1.0 (increased importance degree) with total marks of factors being 1 Thisdegree of importance is based on the importance of such factors for theenterprise, whether this factor is strength or weakness of the enterprise

 Give mark from 1 to 4 to each factor with the mark showing internal

characteristics of the enterprise for such factor Mark 1 is the biggestweakness, mark 2 is the smallest weakness, mark 3 is the smallest strengthand mark 4 is the biggest strength

 Determine total marks of importance for each factor (by the product of marks

gained in step 2 and step 3)

 Determine total marks of importance of the enterprise (by total marks gained

step 4)

Total highest mark is 4 and total lowest mark is 1 Average is 2.5 The mark ofimportance lower than 2.5 shows that the enterprise is weak internally, the mark ofimportance higher than 2.5 shows that the enterprise is strong internally

1.4.3 Establishment and selection of strategy:

Use internal and external factors (IE) to determine present position of the enterprise.This means using total mark of importance of EFE matrix reflected on the vertical axis andIEF matrix reflected on horizontal axis The intersection between EFE matrix and IEFmatrix of the enterprise will show us present position of the enterprise and future strategies

to be used by the enterprise such as “development and construction strategy” (marketpenetration and product development) or “maintenance strategy”, “crop and rejectionstrategy”

Use SWOT matrix to evaluate in order to determine strengths (S), weaknesses (W),opportunities (O) and threats (T) from the impacts of business environment on the enterprise

to work out strategies and solutions in order to bring into full play strength, overcomeweakness, take advantage of opportunity and control threat

Through SWOT matrix, it is possible to plan the following basic strategies:

 SO strategy: Using strengths inside the enterprise to take advantage of and

exploit opportunities coming from external environment

 WO strategy: Taking advantage of opportunities from external environment to

limit weaknesses of the enterprise

 WT strategy: Overcoming internal weaknesses to limit the threats of the

enterprise and external environment

 ST strategy: Taking advantage of and enhancing internal strength of the

enterprise in order to exceed or reduce impact from the threat of externalenvironment

Opportunities

(O) SO strategy: Using strengths to take advantage of opportunities WO strategy:weaknesses by taking advantage of Overcoming

opportunities

Threats (T) ST strategy: Using strengths to

avoid threats WTweaknesses and avoiding threatsstrategy: Minimizing

Table 1-2: SWOT matrix

Strategy selection is an important step of the entire business strategy planningprocess Strategy planners will base on the analysis result from the input phase to chooseoptimal strategies to apply into reality The analysis and selection of strategy are mainlymaking subjective decisions based on objective information in order to determine selectableoperation processes whereby the company can fulfill its responsibility and objective Thereare many methods and tools to support the strategy selection effectively, namely SPACEmatrix and GREAT matrix In which, Space matrix is an effective tool to determine factorsdeciding on strategic position of the organization

Table 1-3: Space matrix.

In short, overall concepts about strategy and strategy management are grounds to establish, select and carry out the strategy These are necessary theoretical grounds to research the actuality of Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company (THEPHACO) and will be analyzed in the next chapters.

CHAPTER II: ANALYSIS OF BUSINESS ENVIRONMENT OF THANH HOA MEDICAL MATERIALS PHARMACEUTICAL JOINT STOCK COMPANY (THEPHACO)

2.1.

2.

2.1 General introduction about Thanh Hoa Medical Materials Pharmaceutical

Joint Stock Company (THEPHACO):

2.1.1 Formation and development:

Name of the enterprise: Thanh Hoa Medical Materials Pharmaceutical Joint Stock CompanyAddress: No 232 - Tran Phu Road - Lam Son Ward - Thanh Hoa City - Thanh Hoa

Province , Website: www.thephaco.com.vn

Tel: 0373 852 286; 0373 757 986; 0373 852 691; Fax: 0373 855 209

Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company is a State-ownedenterprise under the management of the People's Committee of Thanh Hoa province,designed to produce, trade, import and export medicine all over the province and thecountry Thanh Hoa Medical Materials Pharmaceutical Joint Stock Company (Thephaco)was formerly known as Thanh Hoa Pharmaceutical Company, established in 10/4/1961.During the formation and development, the company was separated, merged and renamedfor many times in accordance with operation conditions in each historic time:

- In January 1981, it was merged with the Medicinal Company into “Thanh HoaPharmaceutical Company”

- Decision No 789/UBTH-TC dated 25/6/1992 by the Chairman of the People'sCommittee of Thanh Hoa province, Thanh Hoa Pharmaceutical Company merged withindependent accounting units in the districts to unify distribution and circulation withmain function of trading in medicine, pharmaceutical products and culturing medicine

- Decision No 1053/QD-UBTH dated 11/5/1997 by the Chairman of the People'sCommittee of Thanh Hoa province: Merging Thanh Hoa Medical Equipment andMaterials Company with Thanh Hoa Pharmaceutical Company and renamed: “ThanhHoa Medical Equipment and Materials Pharmaceutical Company” with main functions

of trading in, supplying medicine - medical equipment and materials, chemicals andmedical tools

- Decision No.143/UBTH- DMDN dated 20/1/1998 by the Chairman of the People'sCommittee of Thanh Hoa province on consolidating the Pharmaceutical Factory andThanh Hoa Medical Equipment and Materials Pharmaceutical Company into “ThanhHoa Medical Materials Pharmaceutical Company”

- In particular, on 5/11/2002, based on the decision No 3364/QD-CT by the Chairman ofthe People's Committee of Thanh Hoa province on changing Thanh Hoa MedicalMaterials Pharmaceutical Company into Thanh Hoa Medical Materials PharmaceuticalJoint Stock Company from 01/12/2002

Registered business lines:

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- Producing traditional medicine and modern medicine

- Trading in modern medicine and galenical medicine

- Trading chemicals and medical tools, testing chemicals and cosmetics

- Producing, trading in and repairing medical equipment and materials

- Trading in Vietnamese traditional medicine and Chinese traditional medicine

- Importing and exporting medicine, medicinal materials, medical equipment andmaterials

- Trading in scientific and technical equipment, household materials

- Investing in clinics - medical practice;

- Producing and trading in food medicine, nutrition products

From 2002 up to now, with modern equipment, the company has produced many newmedicine with high value, increasing from 80 to 230 articles throughout the country,product quality achieving class A and become the first unit in the North Vietnam andCentral Vietnam to have pharmaceutical production workshop under GMP and laboratoryunder GLP

The Company has expanded its sales network not only to 27 districts, towns and cities

in the province with 1260 pharmacies and pharmaceutical branches but also to otherprovinces and cities throughout the country

With long history, Thanh Hoa Medical Materials Pharmaceutical Joint Stock Companyhas won many noble prizes: 6 labor medals (first class, second class and third class), 4certificates of merit and 3 emulation flags of the Government; 6 emulation flats of theMinistry of Health and the People's Committee of Thanh Hoa Province The Party Cell hasachieved the title of outstanding Party Cell for many years Trade Union and Ho Chi MinhCommunist Youth Union always achieve excellent emulator title

In particular, in 2007, the company held the ceremony of receiving the Peaceful LaborHero title conferred by the State President This is a very big encouragement for allemployees in the company to bring into full play creativeness in production and businessand lead the company to new heights in the integration into the world economy

2.1.2 Organizational structure of Thephaco

Chart 2-1: Management apparatus diagram of Thephaco 2.1.3 Operation result of Thephaco over the past years:

Through nearly 50 years, the Company has always maintained its tradition, graduallydeveloped, grown year-on-year In 2008, its revenue achieved 641.8 billion VND, in 2009,its revenue achieved 836.5 billion VND, in 2010, its revenue was 866.5 billion VND

Comment: Total pre-tax profit of 2010 was 19,798,806,740 VND, increased by

1,259,418,225 VND compared with that in 2009 This is an encouraging result whereas awide of enterprises in the same industry were badly affected due to financial crisis but theCompany still operated stably and maintained relatively high gross profit In 2010,increased inflation led to the increase in the price of input materials including costs for inputmaterials and labor However, cost increase rate of the Company was still at relative level

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General Shareholder’s Meeting

Management Board General Director

StoreShops Branches

General clinic

compared with the inflation rate in 2010 because Thephaco controlled costs for inputmaterials and labor strictly Besides, the Company has adopted many effective measures atthe same time to reduce production cost, take advantage of materials to avoid waste andoptimize capacity of the equipment, establish appropriate materials inventory plan, thus theincrease in materials price didn’t affect considerably.

The factors impacting operation result in 2010:

 Advantages :

- Obtaining the support from the Government in buying foreign currencies withinter-bank average exchange rate to import materials during the production;

- Export market is stable and on good growth;

- Domestic revenue is increasingly improved because the bidding for pharmaceuticalsupply at hospitals is considered and gradually brings about certain result;

- Success in shifting goods structure with high profitability ratio

- Domestic market of the Company is competed by domestic and foreign enterprises

In order to maintain and develop sales revenue, the Company has promotedmarketing, thus leading to increased selling cost, greatly affecting the operationresult in the first 9 months of 2009

2.1.3.1. Business result and market share

From 2008 to 2010, although most of the domestic enterprises in general andpharmaceutical enterprises in particular had a lot of difficulties due to the world economiccrisis, increased domestic inflation, revenue, profit and annual economic targets of theCompany were still increased, which are shown in the following financial analysis table:

Total taxable income 11,885,543 18,539,388 +56% 19,798,806 +6.8%

Corporate income tax

Post-tax profit 8,609,183 13,921,146 +61.7% 14,904,359 +7.06%

Basic earnings per share

Source: Auditor’s reports in 2008, 2009 and 2010

Table 2-2: Analysis of financial indexes through years

(*) Profit dividend divided from investment in the Clinic.

2.1.3.2. Growth

In 2009:

- Net revenue in 2009 achieved 836.5 billion VND, increasing by 30.33% compared withsame period last year

- Post-tax profit in 2009 achieved 13.9 billion VND, increasing by 61.7% compared with

2008, financial situation of the unit ensured smooth operation

- Pre-tax profit in 2009 achieved 18.5 billion VND, increasing by 55.6% compared withsame period last year

- The Company still maintained its dividend payment at 20%/year

In 2010:

- Net revenue achieved 866.5 billion VND, increasing by over 3.6% compared with 2009

- Pre-tax profit achieved 19.79 billion VND, increasing by 7.83% compared with 2009

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- Post-tax profit achieved 14.9 billion VND, increasing by 7.2% compared with 2009.

- Although in 2010, Vietnam faced with high inflation, domestic enterprises had difficulty

in operation, the Company still maintained its dividend payment at 20%/year

2.2 Analysis of external environment impact on the operation of Thephaco

2.2.1 Analysis of macro environment:

2.2.1.1 Political and legal factor

Representatives of pharmaceutical companies point out inadequacy in theadvertisement cost of the State that made Vietnam pharmaceutical manufacturers “lose right

on home ground” While imported pharmaceutical products receive advertisement cost up to30% of the revenue, domestically manufactured pharmaceutical products receive only 10%

If this level is exceeded, they will be levied For success, product should be popularized.The limitation in advertisement cost makes the customers indifferent to domestic medicine.Under the specific commitments when Vietnam joined WTO, common tax imposed onpharmaceutical products would be only 0% to 5% compared with 0% - 10% in the past.Average tax rate will be 2.5% after 5 years as from the date when Vietnam became a fullmember of WTO (2012) On the other hand, market opening under WTO commitment willpromote commercial presence of foreign companies with stronger potential with famoustrademark and expanded trade rights together with the removal of trade barriers will be verybig challenges for domestic pharmaceutical industry including THEPHACO

Faced by such situation, the Deputy Prime Minister required the Ministry of Health

to establish financial incentive programs for domestic pharmaceutical manufacturers,establish reports on market scope forecast, enhance the use of domestic pharmaceuticalproducts and take advantage of domestically manufactured equipment and materials instead

of “favoring” imported goods at present in order to create motive force for Vietnampharmaceutical manufacturing industry to 2020 These issues will party remove difficultiesfor domestic pharmaceutical enterprises in general and THEPHACO in particular in thecompetition with imported medicine In addition, in the future, the Government and theMinistry of Health will support domestic pharmaceutical enterprises through unobstructedpolicies and mechanism to create the best conditions for “3 parties”: Enterprise - Scientist -

responsibility for establishing closed and quality pharmaceutical product distribution chain,directly serving public healthcare This is an opportunity to develop Vietnam pharmacy,reduce the dependence on the imported materials because according to the statistics, 90% ofmaterials are manufactured in traditional and modern medicine.

2.2.1.2 Socio-cultural factor

In the meeting of the Committee for Social Affairs of the National Assembly in HoChi Minh City, Ms Pham Khanh Phong Lan, Vice Director of Ho Chi Minh CityDepartment of Health pointed out a big issue in the public psychology that forms threat toVietnam Pharmacy, including THEPHACO: Most of the Vietnamese people don’t believe

in domestic medicine They always think that “expensive imported medicine is goodmedicine” whereas pharmaceutical manufacturing technology in Vietnam is advanced,equivalent to the countries in the world Another important factor is that the consumer’sunderstanding about pharmaceutical products remains quite limited They don’t dare to buyand use the pharmaceutical products of the same ingredients but different name or notincluded in the prescription Meanwhile, there is now a situation currently mentioned by thenewspapers, that is, doctors prefer prescribe imported medicine because they receive highercommission In the future, this trend will cause a lot of difficulties to the Pharmacy andTHEPHACO in particular

In the modern life, together with economic development, the people pay moreattention to their health when they are still healthy based on the viewpoint “prevention isbetter than cure” Developed countries tend to favor dietary food other than medicine InVietnam, at present, there are more than 3,000 types of dietary food in the market.Additionally, according to the report by ILO, the rate of female labors increased from50.2% to 51.7% (1980-2009) whereas the rate of female labors involved in paid jobsincreased from 42.8% (1999) to 47.3% (2009) In the future, this rate will continueincreasing The demand for beauty of women is inevitable, thus when the income is stableand increased and the life is busier, to save time for aesthetics and healthcare, prevent thefuture diseases, many women tend to use more dietary food and cosmetic pharmaceuticalproducts This is an opportunity for the companies manufacturing this product meet thecustomer’s demand THEPHACO is also investing a lot in researching and developing

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dietary food and cosmetic pharmaceutical products together with good distribution system,the company can take advantage of this opportunity effectively.

2.2.1.3 Economic factor

The economy achieved faster growth rate and recovery from the end of 2009 Ingeneral, most of the important planning targets had noteworthy improvements According tothe forecast figures of the Ministry of Planning and Investment, economic growth rate (GDPgrowth) for 2010 increased by about 6.5% and was approved by the National Assembly Inthe tendency of global economic recovery and because domestic production is gaininggrowth rate, the Government members share the viewpoint that GDP growth rate in 2010and subsequent years will increase remarkably According to the Executive Committee ofthe Party Central Committee, the following target was set forth: From 2010 to 2015,average GDP growth rate achieves 7 - 7.5%/year; average GDP per capita in 2015 achievesabout 2,000 USD, increasing by 1.7 times compared with 2010; Labor productivity in 2015doubles that in 2010 This enables us to foresee that Vietnam will continue growing to 2015

As such, together with the economic development, the demand for public healthcare willincrease, which impacts the development of pharmaceutical industry as well asTHEPHACO

2.2.1.4 Natural factor

Vietnam is located in the equatorial belt with high temperature and high humidity,which is very favorable for plants to develop with diversified types Plants and mushroomprovide a relatively abundant medicine source for the Pharmacy in the future With fastdevelopment economic of domestic and international economies, especially the industrialdevelopment, the people have discharged into the environment a great quantity of variouswastes such as domestic waste, waste from factories and enterprises, which makes thecontent of toxic gases increase quickly Besides, according to the observation figures of theautomatic air station located at Hanoi University of Construction in 2002: annual averagedust concentration PM10 in Vietnam is 2.5 to 3.5 times higher than the internationalstandard The above situations together with climatic change in the world in the future willbecome threat to the people’s life and health and result in many diseases for respiration,

cardiovascular and digestion and increasingly worsen This is a basis for developingPharmacy in the future.

2.2.1.5 Inhabitant factor

Vietnam has more than 83 million people, ranking 13th in the world This may beadvantage to create many opportunities but give rise to big challenges for the economy,social welfare of the country When the living standard is enhanced, the people always neededucation and health Therefore, medical and healthcare services are also increasedremarkably This is a good condition for the distribution network of THEPHACO Pharmacy

to develop throughout Vietnam In the speech by the Deputy Prime Minister Nguyen ThienNhan, the population including 100 million people of Vietnam and about 500 - 600 hundredmillion people of ASEAN in 2020 will create a potential market for VietnamPharmaceutical industry to develop and move towards export Thephaco, with goodpreparation of resources and distribution network, can take advantage of this opportunity

On the other hand, in Vietnam, the number of old people (over 60 years old - atpresent, about 6.3 million people, occupying 7.5% of the country population) tends toincrease due to increased living conditions and healthcare quality In 2005, average lifeexpectancy of Vietnam was 72 years old According to the experts, the rate of old people atthe end of the forecast period in 2059 is 28.31%, the number of people at retired age will be

28 million In the short term, in the next 10 years, the whole country must ensure socialwelfare for 10 million people aged 60 up with pensions, allowances and healthcare Health

is an important issue and receives special attention from old people Clearly understandingthe market segment in the health of old people will be an opportunity for THEPHACO toresearch and develop necessary and appropriate products, enclosed with the best healthcareservices

2.2.1.6 Technological factor

In the period 2001 - 2009, Vietnam science and technology gained considerablechanges together with establishing the Scientific and technological development fund inorder to support the enterprises in applying research at home, research results expected tobecome products with commercial potential; promote application of scientific research andtechnological development; transfer technology, renovate and enhance technological level

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This is an opportunity for the Pharmacy in applying and renovating manufacturingtechnology Over the past years, with the national economic opening and integrationmechanism, domestic pharmaceutical manufacturing industry has gained breakthroughs Inmanufacturing, many new technologies have been applied (thin coating, drying, deferred-actmedicine) It can be said that this is the turning point for pharmaceutical manufacturers ingeneral and THEPHACO in particular because it is possible to access advancedpharmaceutical manufacturing technologies in the world However, domesticpharmaceutical manufacturing industry still has a lot of difficulties such as limitedinvestment in research and development, disqualified technicians and equipment This is achallenge for Vietnam enterprises because most of the Vietnamese pharmaceuticalmanufacturers have small and medium size, including THEPHACO.

2.2.2 Analysis of internal environment impact on the operation of Thephaco

2.2.2.1 Economic characteristics of the industry

Vietnam Pharmacy has high growth rate In the period 2000 - 2009, the Pharmacyhad average growth rate of 16% and forecast to continue increase Specifically, in 2008,sales revenue of pharmaceutical products achieved 1.426 billion USD, occupying 1.78% ofGDP In which, domestic production value occupied 715 million USD, increasing by 33.8%compared with that in 2007 and meeting 50.3% of the national demand In 2009,pharmaceutical sales revenue reached 1.71 billion USD, increasing by 20% compared withthat in 2008, in which domestic production value occupied 585 million USD, increasing by20% and meeting 50.17% of the national demand According to the forecast by VietnamPharmaceutical Companies Association, in 2010, pharmaceutical sales revenue reachednearly 2.050 billion USD The distribution system of the industry is carried out mainlythrough two distribution channels, namely distribution through treatment system (includingdistribution through hospital, regional general clinic, medical station at communal/wardlevel) and trading system (branches, agents, distributors and pharmacies) Domesticpharmaceutical distribution network is not yet professional Distribution system of Vietnampharmaceutical companies is still overlapped, seizes the market and fails to achieve highefficiency

At present, faked pharmaceutical products occupy a major part in the sales market.According the report by Interpol, in 2008, Vietnam had 406 samples of fakedpharmaceutical products, ranking second among Southeast Asia countries According to theevaluation by WHO, Vietnam Pharmacy is under development Typically, in the period

2000 - 2009, medical spending of the people increased highly, especially spending onpharmaceutical products with 5.11 USD/person/year (2000) to 19.6 USD (2009), occupying1.6% GDP and it was forecasted that in 2010, medical spending would continue increasing

to 24 USD/person/year In fact, in spite of high growth, pharmaceutical spending remainslow compared with the regional countries and quite low compared with average level of theworld, i.e 40 USD/person/year Besides, because most of the pharmaceutical materials areimported from foreign countries with 90%, generally, Vietnam pharmacy is still at average -low development level and scope of the industry remains small

In the future, Vietnam pharmacy still has a lot of potentials for development becauseVietnam is one of the countries with the highest GDP growth rate in the world and averageincome per capita is increased According to the forecast by BMI to 2019, pharmaceuticalmarket may reach 6.1 billion USD and Vietnam population will continue increasing from86.8 million people (2008) to over 100 million people (2019) Increased population andliving standard make the pharmaceutical demand increased Together with the Governmentobjective, that is, by 2010, domestic pharmaceutical products will meet 60% of the people’sdemand and by 2015, it will be 70% This creates many opportunities for developingVietnam Pharmacy in the future After studying economic characteristics of the industry, forclear understanding, we should analyze customers, suppliers and substitute products of thepharmaceutical industry

2.2.2.2 Pressure from the suppliers

Pharmaceutical suppliers include: Pharmaceutical materials suppliers and labor forcesuppliers

In terms of materials for the Pharmaceutical industry: At present, the strength ofpharmaceutical materials suppliers for the industry remains high, thus the pressure fromthese suppliers on the industry is high Although at present, some Pharmaceuticalenterprises have established their own materials, thus they take initiative in part of materials

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for manufacturing, this rate is quite low Most of the materials for pharmaceuticalmanufacturing are imported from Asia countries such as Austria, Italy, Netherlands, Indiaand China in which China and India occupy the most pharmaceutical materials exportproportion into Vietnam with 25% and 21% (2008) respectively With more than 90% of thematerials for pharmaceutical manufacturing imported from foreign countries, thedependence in materials of domestic pharmaceutical manufacturing companies is quite bigand there will be many difficulties when these suppliers increase selling price.

In the pharmaceutical industry, labor force plays an important role because theindustry requires labor force to have high qualifications and actual experience Yet, in thepresent context, human resources with high qualifications remain inconsiderable and fail tomeet the industry demand According to the report by the pharmaceutical industry at the end

of 2009, the rate of pharmacists in Vietnam was only 1.5 pharmacists over 10.000 people

2.2.2.3 Customers:

 Group of indirect customers:

This group of customers includes end consumers at home and abroad They aredivided into two main types of group: group of indirect foreign customers and group ofindirect domestic customers

- Group of indirect foreign customers:

In general, Pharmaceutical export market share of Vietnam is very small, mainly toJapan and Eastern Europe However, according to the forecast by RNCOS organization,pharmaceutical industry growth in the developing countries in the period 2009 - 2012 wouldachieve 12% - 15% while the world growth rate achieves only 6 - 8% and pharmaceuticaldemand of Asia - Pacific, Latin America countries still has potential of strong growth in thecoming time because of crowded population, improved average income per capita.Therefore, pharmaceutical import demand in this region will also increase In the future,scope of this group of customers will have many development potentials

Characteristics of group of indirect foreign customers (Europe countries):

- Requirement on quality and high safety on using the products

With this characteristic, Vietnam Pharmacy in general and THEPHACO in particularmust enhance trademark promotion, enhance supervision on the quality of establishingstrategies to ensure quality in the product’s life.

- Group of indirect domestic customers:

As analyzed above, over the past years, Vietnam has increased expenditure formedical service, especially pharmaceutical products Therefore, it can be seen the group ofindirect domestic customers still has many development potentials

Characteristics of group of indirect domestic customers

- Most of the Vietnamese people don’t believe in domestic pharmaceutical products.They always think that foreign and expensive pharmaceutical products are good

- Most of the people concentrate in rural areas, often have low living standard, thusthey have high demand for cheap pharmaceutical products

- They have the habit of buying pharmaceutical products based on individualexperience or advice of the relatives and druggists (up to 45% of Vietnameseconsumers often buy pharmaceutical products by experience)

- In addition, because the living standard of the people is increased, health issue isalso considered and invested more carefully, thus the people have higher requirement

on the pharmaceutical quality as well as trademark prestige

The group of indirect domestic customers doesn’t cause pressure to the industrybecause pharmaceutical product is one of the necessary goods without substitute productsand price bargain

 Group of direct customers

This is the group of target customers of the Pharmacy The demand for buyingpharmaceutical products depends on the quantity of buying of the group of indirectcustomers Group of direct customers is also divided into two small groups:

- Group 1: Including hospitals and treatment facilities at various levels

- Group 2: Including branches, agents, distributor, pharmacies (such as pharmaceuticalimport and export companies, trading companies and retail points)

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