Innovations in product are not transmitted throughout the organization. This means that there are production synergies between the different Coloplast facilities that are not presently exploited.
The company can mitigate the impact of health care reform therefore by improving its product processes. Their industry is beginning to shift from cash cow status to one characterized by tight margins and high volumes. Coloplast must become a low-cost producer, to use Michael Porter's terminology (Porter, 1980). This is going to force Coloplast to shift its core competencies.
The current core competencies for Coloplast are its experience and knowledge of its own products, its customer-focused product innovation, its value-added services and its extensive knowledge of the health-care systems in which it operates (Brown, et al.). These competencies are more congruent with an organization that is engaged in a differentiation strategy. This was an allowable mindset when Coloplast was able to leverage its knowledge of Europe's health care markets to gain healthy margins for its products. Now that those margins are under threat, the company must undergo a strategic shift. This means becoming exceptionally good at mass production.
To do this, the company needs to focus immediately on making improvements to its internal communications and enculturation processes. The firm right now is more of a collective of facilities than it is a cohesive unit working towards a unified goal. They have got away with this because of their dominant position in relatively protected markets. However, the new realities of the medical supply industry demand that they improve internally. This step is necessary simply to maintain their successful position in Europe, much less make the move to becoming a global firm.
Coloplast needs to redefine itself, first and foremost. The changes in the industry must be understood by management and communicated throughout the organization. Essentially, Coloplast is facing challenges and risk factors on a scope that the company has really not seen before. Thus, they must ensure that stakeholders throughout the organization understand the current situation, how it has changed, and how those changes are going to affect Coloplast going forward. The Hungarian experience has been positive for the company, but the risks the face are going to demand that they repeat this experience in order to enjoy continued success.
Coloplast is going to have to open up more markets. The European market is relatively saturated, with the strong growth prospects deriving strictly from the aging population. The rest of the world, however, is generally less saturated. Growth prospects outside of Europe are much stronger, at 197% by 2012 compared to 84% inside Europe (Nielsen, p.4). Although Coloplast has a strong market position mainly in Europe, the growth potential outside of Europe will allow Coloplast to do two things. First, it will allow the company to increase sales volumes to such a degree as to achieve its 2012 objective. Second, it will allow them to build out capacity in non-EU markets. A presence in Mexico, India or China would give them low production costs and access to large markets. Many markets are beginning to see upgrades to the health care systems. In the case of the U.S., Coloplast could potentially leverage the distribution network it already has as a result of its purchase of Sterling.
Coloplast's main risk factors all boil down to the high level of government regulation in their industry. The company has little control over the regulation itself, but it does have control over its response. Changing demographic factors are combining with the increased regulation and increased cost pressures to mark a dramatic shift in the business environment. The best way for Coloplast to mitigate these risks is to make the shift in its business model to match the changing environment. This means developing better internal communications, establishing a unified corporate culture, outlining not only the company's objectives for the future but how those objectives will be achieved, and implementing better coordination of production processes. This will allow them to make the shift to being a low-cost, high volume, global producer.
Novartis is the #3 pharmaceutical company in the world (Homes, et al.). It has leveraged strengths in cardiovascular and hematology to enjoy considerable success. In recent years, however, Novartis has struggled somewhat. The company has significant exposure to patent expiry, which weighed on earnings in 2008. Novartis is also exposed to the U.S. dollar, which weighed on 2009 sales. The company's earnings rebounded strongly despite the exchange rate exposure (Greil, 2009). This contrasts with the underwhelming performance of its main competitors, Glaxo and Pfizer (Homes, et al.)
As with most pharmaceutical companies, Novartis engages extensively in strategic alliances. This despite the fact that main driver of value in the pharmaceutical industry is intellectual property. There are several benefits, however, to strategic alliances in this industry. Among them are cost sharing, risk mitigation, greater access to top research talent, technology acquisition, new market access and new product development (Bowen & Purrington, p. 8). Novartis is engaged in around 400 strategic alliances, approximately 100 with industry partners and the remaining 300 with academic institutions.
For the most part, strategic alliances in the pharmaceutical industry are with respect to developing new products, although there have been instances where groups came together for other reasons, such as to improve production processes (Bowen & Purrington, p.10). Although there are general trends with respect to the risks and rewards of strategic alliances, it should be noted that each alliance is unique. The parties establish the terms, costs and objectives of the alliance and these are typically formalized in contract (Brockstedt & Carr, 2005).
The cost of developing new drugs is substantial. It is a research and technology driven business, where talent and equipment are expensive. Further, the time frame to bring a new product to market is measured in years. Thus, the cost of developing any one product is substantial. Thus, it is often beneficial to split the costs, and thereby the risks, with other firms.
In some cases, it is the access to talent that drives the formation of a strategic alliance. This is often the case in academic partnerships. Novartis has the money, while universities often have top talent in need of money. The strategic alliance in this case is a pragmatic matter where the two parties bring different resources to the alliance. According to Novartis executives, "most of the science we build on and translate into medicine is generated at universities" (Bowen & Purrington, p. 9).
Alliances with corporations often take a similar shape. Novartis' largest such alliance, for example, essentially consists of Novartis financing the research of another firm, and then entering into a commercialization arrangement. Novartis gains access to technology and research talent; the other firm gains the capital needed to conduct its research and a means by which to bring the finished product to market.
Each strategic alliance must be carefully weighed with respect to costs and benefits. One potential cost is that the research may not yield a marketable product. For the company that is putting up the money (as Novartis generally does), this will result in a loss of that money. The other company, having received the money, faces a lower cost if the product does not reach market. Another cost for Novartis is that while it may retain marketing rights to a product it may not own the intellectual property outright. The deal must be carefully structured, therefore, to protect each firm's interest with respect to IP.
There are many benefits to such alliances, however. The partners are able to leverage their respective strengths in order to complete an expensive, time-consuming project. If either partner when alone, they may not have been able to pursue the project. The use of partnerships also has the benefit of giving firms access to more projects. Not every project reaches market, so it is important for pharmaceutical firms to become involved in as many projects as possible in order to smooth their revenue streams. Firms that are involved in relatively few projects will tend to have more volatile revenue and profit streams. Another potential benefit is that alliances strengthen inter-company relationships. This allows for further diffusion of information and technology, as groups of partners can converge on projects once opportunities to do so are identified (Brockstedt & Carr, 2005).
There are, however, several risks involved in setting out strategic partnerships. One risk is that the company could lose valuable intellectual property. In some instances, talent employed by a partner could bring the intellectual property to a competitor. The more partners and people that are involved in a project, the greater this risk. Another risk is that partners may be unable to fulfill their obligations, either due to key talent defection, organizational incompetence or even bankruptcy.
The rewards, however, are significant. By gaining access to wide range of talent and projects, pharmaceutical companies increase the change that they will be involved in a successful project. Additionally, they are allowing themselves to be focused on their own core…