Introduction
Organization is one of the primary functions of management – it is a systematic deliberate action aimed at achievement of certain goals. All organizations differ from each other in various aspects while having similar characteristics. One of the most significant characteristics of the organization is its dependence on external and internal environments. No organization can function in isolation without external reference points. In addition, the external environment is the supply of the company’s resources. The internal environment forms structure and culture of the organization, which, in turn, reflects its mission and values, thus forming the image of the firm. Therefore, the organization is in constant exchange with the environment. As a result, these factors must be the subject of constant attention on the part of the company’s management. The following research focuses on the impact of environmental factors on the pharmaceutical industry in general and Novartis International AG (a public multi-national corporation) in particular.
Analysis
General Environment
Out of the six segments of the general environment, the following two (political/legal and demographic) have the most significant effect on the pharmaceutical industry and, therefore, companies that are engaged in it. The impact of the first segment is primarily connected to procedures of patenting, licensing, and approval of manufactured drugs. In particular, without passing these procedures, the entire industry will be unprofitable as pharmaceutical companies will be unable to enter the market of a particular country or lose the market share they already own. In case of Novartis International AG, it is possible to provide an example of the legal case involving the company and the Indian government that took place in 2013. In particular, the Indian authorities refused to prolong the patent of one of the corporation’s anti-cancer drugs on the grounds that its improved version was not very different from the basic one. The court’s decision means that manufacturers of generics (cheap drugs similar to the patented ones) may continue to sell mentioned anti-cancer medications at low prices in India, which is one of the fastest growing pharmaceutical markets in the world, resulting in a significant profit loss for Novartis International AG. Moreover, the company’s reputation has also suffered since it has tried to receive a patent for making small changes to the existing medicine rather than a genuine invention (Supreme Court of India, 2013).
The demographical segment is also quite significant for the pharmaceutical industry as it defines the demand for medications in general, as well as for particular types of drugs (vaccines, antibiotics, etc.). As a result, the entire industry has to adjust itself in order to meet ever-changing requirements presented by consumers. In case of Novartis International AG, this impact is especially significant due to the fact that the company operated in at least 80 countries, with each of them having its specific needs in terms of medications. The need to satisfy such largely varying demand has resulted in the implementation of a diversified business model by the corporation. In particular, currently Novartis International AG manufactures a wide array of goods, ranging from prescription drugs to vaccines and ophthalmologic products (Novartis, n.d.).
Forces of Competition
The two forces of competition that are the most significant for Novartis International AG include entry of new players on the pharmaceutical market, as well as emergence of substitutes for the corporation’s products. Both of them may potentially decrease the market share owned by the corporation and, therefore, affect its profitability and the ability to maintain its competitiveness on the high level. In the past, Novartis has addressed these threats in the following ways. First of all, the corporation has made significant investments in the research and development of prescription drugs (its core activity), which has allowed it to gain an excellent reputation on this market. As a result, Novartis International AG has become widely known as a powerful manufacturer of the first-class Rx medications on the global market. In turn, such reputation has created significant entry barriers for potential competitors, thus lowering the risk of the emergence of new players, as well as substitute products (Novartis, 2014).
In addition, Novartis International AG has narrowed its scope of activities by selling some of its assets that were not engaged in the pharmaceutical industry. In particular, in 2007 the corporation sold Gerber Products Company (a well-known manufacturer of baby food) to Nestle (Novartis, 2014). Such initiative has allowed reducing the number of markets Novartis International AG was present in. Considering that entry barriers on the market of baby products are lower than on the pharmaceutical one, it is possible to say that the risk of the emergence of new competitors and substitute products has been reduced significantly. Moreover, such approach has allowed the company focusing its efforts on the single product group, improving their quality, and, therefore, competitiveness.
Increasing Competitiveness
In order to address the abovementioned forces of competition in the near future, Novartis International AG may utilize the following strategies. First of all, the company must utilize fundamental solutions to create a competitive advantage. In particular, it is possible to introduce new products that are connected to supportive activities of the firm (vaccines or ophthalmologic goods) that are developed with the use of the newest scientific achievements made by the company. As a result, the number of potential competitors, as well as substitute goods will decrease significantly due to new product lines having unique properties that distinguish them from those of other pharmaceutical companies. As a result, it will be possible to increase the company’s share on secondary markets (Ireland, Hoskisson, Hitt, & Harrison, 2008).
At the same time, it is important to note that the achieved change in market share will have the most significant impact on the business in the short-term perspective. As a result, it is possible to use tools that provide rapid growth of revenue such as transaction prices for the maximum effect. Of course, the basic trajectory of the growth of the company will remain unchanged, namely due to the effect of actions of its competitors. However, the corporation may be able to create entry barriers on secondary markets similar to those on the market of prescription drugs, as well as obtain additional financial resources that will cover its expenditures for development and manufacturing of new products (Ireland et al., 2008).
Threats and Opportunities
Primary threats presented to the corporation by the internal environment include the risk of patent expiration for some of its flagship products (namely Diovan and Femara), as well as the high level of political uncertainty on the global scale (Novartis, 2014). In the first case, mentioned drugs may enter the public domain, i.e. they may be manufactured by any pharmaceutical company without the consent of Novartis International AG, as well as without payment of royalties. In turn, the corporation is at risk of losing a significant share of its profits and losing its position on particular markets, namely those of Brazil, China, and India. In the second case, regulations regarding certification and approval of certain drugs may change, resulting in the emergence of market barriers for the corporation and, therefore, the reduced profitability of some of its products. In order to address these threats, Novartis International AG must implement the strategy of the protection of its intellectual property, namely conduct an audit of its divisions working in different countries and negotiate with the authorities to extend the patent term for products that may require it in the near future in advance. In addition, the company must continue implementation of its current diversification strategy to ensure that it has spare financial resources in case certain segments of the pharmaceutical market will become unprofitable due to political uncertainty (Ireland et al., 2008).
As for opportunities, it is possible to say that the company may move to multiple markets of sclerosis and respiratory drugs provided its research and development base is powerful enough. Moreover, the increasing degree of the environmental pollution has an adverse effect on the global health level, meaning that the demand for drugs used for treatment of both chronic (diabetes) and acute (cancer) conditions will also grow in the following years. In order to exploit these opportunities, Novartis International AG must implement the strategy of development of its research and manufacturing organizations, which involves acquisition of fixed assets (technical re-equipment), as well as implementation of R&D through creation of new equipment specifically adjusted for tasks of the industry. In turn, the company’s research and development base will be powered up, allowing it to create required drugs faster than usual and, therefore entering new markets and satisfying the growing demand before its competitors will do the same (Ireland et al., 2008).
Strengths and Weaknesses
As a multi-national corporation operating in more than 80 countries of the world, Novartis International AG has the following strengths (Novartis, n.d.). First of all, the corporation boasts of having excellent reputation as a developer of the first-class prescription drugs. By taking into account that intake of such medication cannot be conducted without the decision of a physician, it is clear that the quality control for it is also very strict. In turn, such reputation allows the corporation maintaining rather high entry barriers on this market, reducing the number of potential competitors, and lowering the risk of the emergence of new players and products on the market of Rx pharmaceuticals. Moreover, the corporation’s core activity aimed at the development of prescription drugs is supported by development and realization of such products as vaccines, generic drugs, ophthalmologic products, etc. (Novartis, 2014). Such diversified business model contributes to the stability of the corporation, allowing it to survive even in case one of the pharmaceutical market segments loses its profitability. To take advantage of these strengths, the company must increase production of prescription drugs as the lack of competitors in this market provides a perfect opportunity for maximization of profit. Additionally, it must utilize the strategy of the continuous quality improvement in order to achieve similar results in other markets (vaccines, generic drugs, etc.), which will increase its competitiveness and survivability even more (Ireland et al., 2008).
At the same time, Novartis International AG has the following weaknesses. The most significant of them is damage done to its brand name after several lawsuits filed against it. The most scandalous of them is the above mentioned legal case involving the corporation and the government of India. In turn, the corporation’s expansion in the Indian market has been halted. Additionally, the company has suffered the same fate in the U.S., being charged and fined for practicing sexual discrimination against some of its female workers, which has not contributed to its popularity on the American market (Van Voris, 2010). Moreover, the relatively new drug produced by Novartis International AG, Galvus, has failed to position the corporation on the market of medications for diabetics (Novartis, 2014). In addition, despite the company’s diversified business model, it does not have drug formulations developed specifically for children, which is a sign of its incapability to exploit prominent opportunities offered to it by its external environment. To address these weaknesses, Novartis International AG has to revise its current system of values and organizational culture. The primary reason for such initiative is prevention of new legal cases involving the corporation and, therefore, additional damage to the company’s brand name and image (Ireland et al., 2008).
Resources and Capabilities
Being among the largest biotech company in the world, Novartis International AG possesses rather significant resources and capabilities in terms of development and manufacturing of a wide array of drugs. In particular, the company has almost two decades of experience of work in the global pharmaceutical industry, operating in more than 80 countries and several thousand employees working in the field of research and development of new drugs. In particular, Novartis Institutes for Biomedical Research in Cambridge, Massachusetts, employs more than 6,000 specialists in the field of biotech and pharmaceutics. Additionally, the corporation is an owner of an exceptional product portfolio that includes 22 drugs for the treatment of oncologic, hematologic, and rare diseases, which can be used to deal with more than 25 various conditions in different parts of the world. Moreover, the corporation’s internal capabilities are focused on the development of a companion diagnostics to help physicians during the process of decision-making. Finally, core competencies of Novartis International AG are its abilities to make scientific discoveries in the field of pharmaceutics and develop new first-class medications for the treatment of a wide array of physical conditions (Novartis Institutes for Biomedical Research, 2015).
Value Chain
The value chain of Novartis International AG is similar to that of any other pharmaceutical company. It involves the following stages (Novartis, n.d.):
- Definition of a target audience for a new drug;
- Research and development of the drug;
- Preclinical and clinical tests;
- Manufacturing and packaging of the drug;
- Distribution of the final product.
Considering significant research capability of the company, it may add value to its products during initial stages of its value chain. In particular, the company may take efforts to increase efficiency of a drug during the stage of its development or pre-clinical tests. As a result, its value for consumers will increase. Additionally, the company may make changes during the distribution stage by offering more drugs from its product portfolio to a wider array of countries. Given the fact that existing drugs of the company can be used for treatment of at least 25 conditions, their emergence on new markets will also create an additional value for end consumers, especially in case there are no comparable medications on the market (Ireland et al., 2008).
Conclusion
The example of Novartis International AG demonstrates that both internal and external environments shape strategies of the company as well as its business model. In order to survive and maintain a high level of competitiveness, the organization has to define the most significant factors of the general environment, as well as forces of competition and adjust its strategy in accordance with the findings. Additionally, it is imperative to analyze strong and weak points of the company, as well as threats and opportunities presented to it in order to exploit or address them. The example of Novartis International AG clearly shows that even the multi-national company with an exceptional reputation cannot be negligent to the factors of its environment as it risks losing its market share and, therefore, profitability.