Case Study: Biocon India Group
Read the case study of Biocon India group and;
1. Apply several theoretical models and their potential for developing strategy and supporting strategic decisions.
2. Critically analyze theoretical developments in strategy.
3. Critically evaluate the strategy-making process in an increasingly volatile and turbulent environment in multinational organizations.
4. Appreciate the significance and difficulties in formulating and implementing a strategy.
The biopharmaceutical industry has always been a competitive sector in the global market. As a result of the rapidly increasing global competition in the biopharmaceutical industry, companies are adopting and implementing several strategic models to remain sustainably competitive. As identified by Johnson et al. (2014), these adopted management strategies are placing the pharmaceutical industry to expand to biopharmaceutical, generic drugs, animal health, and focus more on consumer health. Basically, the companies are using these strategies for diversification based on innovation and high margin (Johnson et al, 2014: 557). It is upon this background that this paper attempts to produce analyses such as Porter’s five forces and BCG Matrix to locate the future strategic option of Biocon India Group. The researcher will gain a holistic overview of Biocon’s current strategic position and advise the group CEO on the advantages and disadvantages of the company seeking to grow in 2030 through internal development and acquisitions.
Biocon India Group is an Indian biopharmaceutical company located in Bangalore, India. The company focuses on custom research, biopharmaceuticals, and clinical research. In addition, Biocon has five subsidiaries: Biocon Biopharmaceuticals, Syngene, AxiCorp, Clinigene, and NeoBiocon. Biocon India Group Company provides products and solutions to their customers and partners located in over 50 countries. In fact, Biocon is the largest biotechnology firm in India. In fact, as of 2008, the company was named 7th fastest growing and largest pharmaceutical company in the world based on the number of the workforce.
Porter’s Five Forces
Any organizational strategy a researcher adopts needs to critically understand the external and internal environment the company might be operating under. The two widely adopted strategic tools that can help in investigating the internal and external business environment are PESTLE Analysis and Porter’s Five Force Analysis. However, PESTLE Analysis helps the company to develop and understand vital issues within their macro-environment that might influence the organization. Nevertheless, while understanding the internal environment is paramount for developing organizational strategies, it only provides a half picture. The researcher needs to have an overall picture and understanding of the organization’s competitors and their impact on the organization. Therefore, in order to understand the external environment one needs to carry out Porter’s Five Forces Analysis.
Michael E. Porter of Harvard Business School developed a strategic model named as Porter’s Five Forces in 1970. Michael identified five core forces that determined the competitive nature of a market or of an industry on a long-term basis. The analysis becomes popular to be described as Porter’s Five Forces Analysis as it helped organizations to determine and analyze their sector in a manner that it takes the activities of the competitor into account (Johnson, Scholes and Whittington, 2008). In short, Porter’s framework establishes five forces that threaten organizational existence and profit. The origin of Porter’s Five Forces in the external atmosphere is the business economic approach.
According to Slater and Olson (2002), the idea of the Five Forces is that the attractiveness of a certain industry or market as well as its entire profitability, can be described by the market structures. In turn, the market or industrial structure affects the company’s strategic behavior, e.g. market or industrial success largely depends on their competitive strategy. Therefore, the company’s success is indirectly dependent upon the structures of the market. Thus, according to Porter, the awareness of the external forces can enable an organization to position itself in its sector that is less vulnerable to attack (Porter 1979, p. 137). Nevertheless, it is essential to mention that Porter’s Five Forces influence certain industries differently (Mohapatra, 2012). In addition, Mohapatra (2012) continues and states that “individual forces, as well as their shared influence, can change the government policies, environmental conditions and macroeconomic change” (p, 274). According to Wall et al. (2010, p. 241), the core elements of Porter’s five forces include:
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Threat of New Entrant
In this regard, Porter identified several possible barriers that might influence a business when venturing a new market; the presence of product differentiation, huge capital requirements, the economics of scale, cost advantage, legislative interventions, and access to distribution channels.
Threat of Substitute Products
The threat of substitute products can affect the competitive nature of business. Indeed, a new process or product has the potential to make the existing product absolute. This risk can be minimized through product differentiations as well as reducing the cost of production by shifting to new low-cost locations.
Bargaining Power of Suppliers
In most cases, suppliers have the power to influence the company’s profit by increasing the prices of the raw materials. In addition, suppliers can as well influence the quality of the products. However, suppliers are only considered to influence the industry when they are few in the market and substitute raw material exists.
Bargaining Powers of Buyers
Porter identified several determinants of the buyer’s bargaining powers, such as size and concentration of buyers, the cost of switching between suppliers and the importance of standardization of products. Porter’s states that a company needs to treat buyers as rival; however, based on experience and performance, they can be supportive of the growth of the company.
Rivalry among Existing Firms
Existing companies can cause rivalry. However, it depends on the company’s focus in the market and their market share, the degree of product differentiation, growth rate, and the exits barriers. Indeed, rivalry among firms can be mitigated by the necessary policies such as service level, pricing, product innovation, and promotion.
Five Forces Analysis: Biocon India Group-Industry Analysis
Threat of New Entrants
The biopharmaceutical industry globally and in India has a high entry barrier. This is because new companies entering the sector need to have huge capital to invest in research and development, acquire patents for their products, gain cost advantage due to economies of scale, and government regulations are, in many cases, extreme due to the nature of the business. In this view, Biocon India Group’s high capital requirements mean that the firm will spend a lot of money to compete and venture into other markets in India and other parts of the world. Indeed, high capital requirements affect Biocon India Group positively.
For example, advanced technologies are a barrier to entry as new competitors must invest a huge amount of money and develop those technologies before competing. In addition, when the learning curve is extremely high, new entrants or competitors must spend significant money and time analyzing the market before commencing their operations. Indeed, a high learning curve often affects the profit of Biocon India Group when venturing into a new market or product. Finding: Threat of new entrant-low.
Threat of Substitute Products
In the pharmaceutical industry, the cost of switching to a substitute product is low, and there are limited numbers of substitutes from similar companies. In this sense, a limited number of substitutes mean that clients cannot switch easily to other goods or services of similar price where they still receive the same kind of benefits. Therefore, for Biocon India Group, the switch costs are high, and they affect the company positively. Finding: Threat of substitute –High.
Bargaining Power of Buyers
When customers require customized products from Biocon India Group, they influence the company’s pricing decision. In the global market, public health services are controlled by the Ministry of Health; thus, the government determines where to buy drugs. In such as cash, the government, through the Ministry of Health, has powers to influence the pricing decisions. Therefore, Biocon will face high bargaining power from buyers across the globe.
Findings: Bargaining power buyers is high
Bargaining Power of Suppliers
According to Kasapi and Mihiotis (2011), a large number of biopharmaceutical firms manufacture their products from their own companies. Therefore, the suppliers have no power to influence Biocon to modify or change their prices. Finding: Bargaining power of suppliers-low.
Rivalry among Existing Firms
The core reasons behind the intense competition in the biopharmaceutical industry are a large amount of revenue associated with the industry, the extent of transparency, and the level of advert expenses. Biocon India Group has strong competitors such as CPA Health Products Ltd, Novo Nordisk, Nuziveedu Seed Limited, Reliance Life Sciences, Fortis Clinical Research, GlaxoSmithKline Pharmaceutical Ltd, and Ankur Seeds, among others. Finding: Rivalry among the existing companies is very high.
Thus, from Porter’s analysis, it is evidence that Biocon India Group operates in an oligopolistic market where the competition is high and the prices are largely controlled by both local and international biopharmaceutical companies. The bargaining powers of buyers and that of suppliers are high and low, respectively, and the threat of substitutes is high.
BCG matrix is a framework developed by Boston Consulting Group to evaluate or determine a company’s brand portfolio’s strategic position and potential (Johnson et al., 2014). The matrix is a corporate planning tool that helps classify the company brands or portfolio into four groups based on industrial attractiveness or growth rate and competitive position or relative market share. The two dimensions in the BCG matrix show likely profitable brands of the company portfolio based on the cash required to promote and support that particular unit and cash generated by it. Indeed, the primary goal of the analysis is to help the management to understand the brands that the company should put more focus on investing in and which one needs to be divested. The BCG matrix contains four quadrants (as indicated in Appendix 2) that the company’s brands should be classified:
Dogs- Products classified under the dogs’ category have low market share compared to rivals, and they operate in slowly growing markets. In particular, products in this category are not worth investing in as they do generate low or sometimes negative returns. However, this is not always the case as some brands in the dog category might become profitable after a long period. Moreover, they might as well provide synergies for other products or act as a defense to offset rival moves. For that reason, conducting a deeper analysis of each company’s SBU or brand is essential to ensure they value in the initial investment. In this situation, the strategic choices that the company has are divestiture, retrenchment or liquidation (Johnson et al 2014).
Cash Cows- Cash cows are the categories of the most profitable products or brands that need to be ‘milked’ to offer as much revenue as possible. In fact, the cash gained through “cows” needs to be invested in stars to offer support for their future expansion and growth (Johnson et al 2014). However, cash cows are only found in multinational companies or large organizations that can innovate new processes or products, which are likely to turn into new stars. Some of the strategic choices needed for cash cow brands are diversification, product development, retrenchment, and divestiture.
Stars- In most cases, stars function in a high-growth sector and high market share. In fact, starts are classified as both cash generators and cash users. This means that they are the core units where a company should invest its cash in because the firm expects to start to turn into a cash cow and thus generate cash flows (Johnson et al 2014). However, not all stars have the potential to turn into cash cows, especially in rapidly changing industries, where new innovative processes or products can be offset by new technological developments, and thus a start rather than becoming a cash cow it turns to be a dog. The strategies needed for the star include vertical and horizontal integration, market development, market penetration, and product development.
Question Marks- Question Marks are the company products and services that demand much attention and consideration. In fact, their market share is low even though they are operating in rapidly growing markets and utilizing a huge amount of the company’s resources and incurring losses. However, question marks brands have the potential to increase its market share and transform into a star, which would turn into cash cows. The strategic choices required for question marks include market development, divestiture, market penetration, and product development (Johnson et al 2014).
BCG Matrix for Biocon India Group
Small Molecules products are reported to have strong revenue growth of 24%, which is approximately $6 million, led by the transaction in India, Europe, and NAFTA countries for immunosuppressants, statins, and other small molecule specialty products. The products have indicated the highest increase in revenue within the Biocon portfolio in 2017 (+24% compared to 2016). Moreover, it has a relatively high market share of 30%. The patient right for the biopharmaceutical products will not expire until 2020, and Biocon acquired Final Approval for the US FDA for generic rosuvastatin Calcium Tablet, so it will maintain a cash cow position in the coming years.
Biologics: the biologics segment that entails Biosimilars and Novels such as rh-insulin, monoclonal antibodies, insulin analogs, and recombinant proteins indicated a 61% growth. Biocon with its partner Mylan acquired good regulatory progress within its insulin analogs and biosimilar globally. Nevertheless, as the revenue is solid in many parts of the world, and the market high is expected to increase and relatively low growth, the biologics segment can be considered a cash cow.
Branded Formulation: the branded formulation segment, which most sales in UAE and India, reported $1.8m in the first quarter of 2017. However, the business was affected by the discontinuance of in-licensed Abraxane. This segment focuses more on critical specialty brands and therapies. Moreover, about 16 of Biocon’s brands are category leaders and are among the top three in India. In fact, top 10 oncology brands in India are said to have a market share of 22%. According to IMS (2016), Biocon’s key brands in branded formulation continue to gain attraction in UAE with a growing share of the company recording of 60% growth. Therefore, further solid revenue can still be generated, but until then, it can be considered as brand in the cash cow category with some strong features of a star in UAE as there is a prospect of growth in the emerging markets that will strongly contribute to the increase in revenue.
Research Service: the Biocon Research services operated at one of its subsidiaries, Syngene, reported revenue growth of approximately 17%, a result of broad-based growth within its R&D centers and Discovery Services Verticals. Since it is still generating over $ 8 million of revenue in the first quarter of 2017, it can be considered as a star with a slow tendency to transform a cash cow.
Advantages and Disadvantages of Business Growth through Internal development and Acquisitions
Business expansions have several benefits as well as drawbacks. However, there are two major ways businesses can expand into the global market. One is through internal development, where businesses develop and implement a number of strategies such as lock-in and sustainable business strategy, interactive strategies, international strategies and corporate strategies (product development and market development). Secondly, a business such as Biocon India Group can expand through acquisition.
Internal Development or Organic Growth
Internal or organic growth is the most sustainable and reliable means for an organization’s growth. These organic growth strategies depend on elements such as growing customer base, hiring more experienced workers, developing new products through internal R&D or opening new businesses in new locations.
Lock-in and sustainable business strategy
Biocon India Group can be able to become competitive by developing competitive advantages strategies that rival businesses cannot match. One of the strategies Biocon India can implement is the Lock-in position (Johnson et al, 2014). In regards to the pharmaceutical industry, Biocon can achieve a lock-in position by ensuring that they control complementary generic drugs and establishing proprietary industry standards.
Internal Corporate Strategy
Other internal development options that Biocon India Group can implement include product development or improvement such as consumer health care products and market development like expanding to new geographic markets. In this view, through product development, Biocon can invest or venture into the new product line through their R&D department to enter new markets in America. Corporate strategies also include developing cost-cutting programs. According to the BCG matrix of Biocon India Group, some products generate low revenues. The company needs to cut down some of these programs either through downsizing, space consolidations, or discarding products (Johnson et al, 2014). However, they might as well establish efficiency-enhancing programs such as reorganizations of the business units, systems upgrades or relocations.
Advantages of internal development
When the CEO of Biocon India Group expands the business through effective planning and strong management, she will know all aspects of the business. Indeed, the internal growth allows the company to move quickly and take advantage of changes within the marketplaces, as well as gain the experience of achieving the company’s vision. In addition, the CEO will have the choice of expanding the business at a rate that is comfortable for the organization. Instead of partnership, merging with another organization, or buying one, it is more profitable to sell one of the business subsidiaries when it is mature (Johnson et al, 2014).
Disadvantages of Internal Growth
One of the core drawbacks of acquisition is that Biocon India Group will have limited resources left for expanding or growing other subsidiaries across the globe. In addition, it is also possible that the company finds out that the market might not allow for further growth beyond a certain level (Johnson et al, 2014), and therefore, it will invest in new technologies and labor, but the market will not be sufficient to offer revenue returns to the company. Moreover, the company’s growth can be frustrated by rival companies or competition, causing the company to close down one unit due to limited market opportunities. Therefore, it might not be a good idea for Biocon to grow through internal growth as it might take long before achieving its key goal of selling its products to the global market. Therefore, the best strategy for growth in other foreign markets is through external business growth such as an acquisition.
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For international and diversification strategy, another option for Biocon to expand its market includes acquisition. The acquisition is the process where one organization takes over another company (Johnson et al, 2014). The CEO of Biocon India Group should understand that expansion by acquisition is a cheaper, quicker, and by far less risky plan than the internal growth methods. Moreover, the acquisition provides other myriads of advantages, such as instant economies of scale and easier financing. We can’t forget to mention that acquisition offers a competitive advantage also that range allows the company to have an instant market penetration even in locations where Biocon feels weak. In addition, by using acquisition, Biocon will be able to eliminate competitors in various markets (Johnson et al, 2014).
Advantages of Acquisition
One of the benefits of the acquisition is that it allows the company that has been acquired to expand its assets, market, and income in a short period (Johnson et al, 2014). In addition, by acquiring other pharmaceutical companies in India and expanding markets such as Mexico and Brazil, Biocon will have a stronger line of credit due to the combined value of the two companies. Another benefit of the acquisition is that Biocon India Group will benefit from added expertise from employees from the acquired company.
Disadvantages of Acquisition Growth
One major disadvantage is the increase in the cost of production as Biocon will have to increase its management capabilities. The will also suddenly acquire more workers and assets to supervise, utilize and dispose of the business will definitely need change. It is also possible that the objectives of the acquired company might overshadow the vision Biocon India Group had when they started the business. In addition, as the biopharmaceutical business is wide and broad, Biocon can likely enter a marketplace where they lack expertise, leading to losses.
In conclusion, the analysis of BCG matrix shows that the company operates as a star, and in that case, Biocon India Group needs to embed both internal and external growth to expand its market locally and internationally. In addition, to expand and gain market share and adapt its strategy within the changing global market of the pharmaceutical sector, Biocon India Group needs to invest in R&D to develop new products for the expanding markets in South America and Africa. Lastly, the company needs to hire highly skilled employees ready to develop more products that can compete with the best renowned pharmaceutical companies in the world, such as GlaxoSmithKline and Pfizer.
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