Estrella drugstore

C15-11-003


This case was written by Professor Karla Gamez Prez. It was prepared solely to provide material for class
discussion.

Some of the names have been modified to protect the privacy of the people or institutions envolved.

C.R. Instituto Tecnolgico y de Estudios Superiores de Monterrey, Av. General Ramn Corona No. 2514,
Col. Nuevo Mxico, Zapopan, Jalisco, 45140, Mxico. ITESM prohibits any form of reproduction, storage
or transmittal without its written permission.

Centro Internacional de Casos Revision date: J uly 9, 2008
Tecnolgico de Monterrey Last revision: November 8, 2010




Kaleb Gomez, an independent pharmacist for over 20 years, began a new project with 11
partners in the autumn of 2004. The partners, owners of small independent pharmacies, had
expressed an interest in a new challenge: the construction and administration of a new type
of pharmacy that would not only be innovative for the products it would offer, but also for
its administration and business strategies.

This was how Farmacias Estrella came into being in Len, Guanajuato. Two years after the
business had been created, in October of 2006, it boasted four pharmacies with their own
unique concept. At this time Kaleb, who had been selected by the partners as Director
General, saw that the pharmacies were successful due to the fact that the sales had
increased by 40% in the previous year; furthermore, investment in fixed assests had
doubled in the same period. In addition, the profits had been reinvested in new projects, and
the partners began to question the necessity of reflecting the growth of the business in
dividends. It was furthermore deemed necessary to decide whether or not Kaleb should
continue as director of the business, and it was therefore decided to hold a meeting the
following week with the objective of analyzing the administration and organization of the
pharmacies. In the case that this should not prove satisfactory the partners would consider
the option of naming a new Director.

Kaleb, as well as being a partner, knew that in order to keep his present position he would
need over 50% of the votes of the other partners to be in favor of him continuing in his
current position. He felt uncertain which decision that would be reached by the partners, as
the loss of his position would signify the loss of continuity in the projects and plans that he
had begun; he needed to present an integrated analysis of the strategies that the business
had followed up to this point, and gain the approval of the majority of the partners. The
question therefore was: What should the partners do? Replace Kaleb or allow him to finish
his projects?

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Farmacias Estrella
The partners of various independent pharmacies had observed certain tendencies described
in certain articles which indicated that: Flexible opening hours, good customer service,
low prices and product variety are characteristics that have turned the large supermarket
chains into serious competition for small pharmacies. In addition, the volume in which
these large supermarket chains are able to purchase medicines has exacerbated the
disadvantage faced by small pharmacies, who are also fighting to secure customer loyalty
(Chen, 2004).

In September of 2004 Farmacias Estrella was established as a result of the vision of several
independent pharmaceutical businesses. These were primarily small family businesses who
had previously joined forces in order to buy large volumes of products at better prices and
with better credit facilities. It was from this that the idea of coming together and opening a
pharmacy five times larger than any of them enjoyed at that time, while simultaneously
continuing to run their own small-scale pharmacies, arose.

Farmacias Estrella was made up of 11 partners, all with experience in the field and having
run independent pharmacies for more than 20 years. The concept which the partners
envisioned consisted of one pharmacy which united several concepts: a doctors
consultancy featuring two shifts, morning and evening, late-night opening, sales of grocery
staples, perfumes, and gifts and games.

Despite the initial enthusiasm manifested by the partners who comprised the group, certain
obstacles existed. In Kalebs opinion, the partners were experienced pharmacists but their
experience was empirical and based solely on their business sales; their mistrust of using
information systems as well as new sales and marketing strategies soon manifested itself.
They also defended the idea that maintaining a large inventory was positive for the
organization; with the result that Kaleb found it difficult to convince them to use
innovative strategies.

There was no established mission: the vision was simply to focus on growth and become a
significant player in the pharmaceutical field. The overarching strategy that the
organization had was bulk-purchasing for cost advantage, thus enabling the organization to
offer competitive retail prices.

Organizational structure
The partners had agreed to meet at three-monthly intervals at which a company
development report would be presented: in addition, one of the partners would be put in
charge of the management of the Business and this charge fell to Kaleb Gmez. He was
made completely responsible for the management of the enterprise, as well as its
functioning and development.

The company organizational chart (see Figure 1) showed a Director General designated by
the partners: Kaleb Gmez, who was responsible for overseeing the administration of the
pharmacy, and the hiring and training of personnel. The Director of Logistics and
Development was C.P. Carlos Ramrez, who was in charge of controlling inventories,
purchasing and the range of merchandise. The Finance Director was C.P. J uan Pablo
Snchez, who was in charge of book-keeping and the financial sector of the pharmacies and
finally the Operations Director was C.P. Maria de Lourdes Tejeda, who was in charge of



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customer service and the pharmaceutical services, in addition to shift supervisors and
customer sales staff. This totalled three shift supervisors and six customer sales staff for
each pharmacy. .

Figura 1. Company organization chart for Farmacias Estrella in J uly 2006.



Source: Data supplied by the business.

Market
Farmacias Estrella did not have a defined market segment, due to the fact that the
organization had never undertaken a market study. In the opinin of the Director General,
the principal market was the population which resided in the district of Villas de San J uan,
due to the fact that the four branches of the pharmacy were located in this area. Villas de
San J uan was a district made up of approximately six thousand residencial dwellings. A
secondary market, in the opinion of Kaleb, was the population living in the neighbouring
districts of San J uan de Otates and Sangre de Cristo, among others. An expansion plan for
these neighbourhoods was due to commence in the near future according to information
obtained from the Instituto Municipal de Viviendas de Len (INMUVI as known in
Director General
Logistics Director
Head of
Operations
Heas of Finance
Shift Supervisor

Shift Supervisor

Shift Supervisor
Employee

Employee

Employee Employee

Employee

Employee

Employee

Employee

Employee

Employee




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Spanish)
1
web page. In these three neighbourhoods there were three construction
companies whos plans for the coming year were the following: Pulsa with 3,084 homes
planned, Divsa, with 2,070, and Kekasa with 336
2
. Villas de San J uan was a district built by
IMUVI in conjunction with private concerns and the government, which offered housing to
workers, and those entitled to Instituto del Fondo Nacional de la Vivienda para los
Trabajadores (INFONAVIT) assistance, as well as low-income workers (those earning
from one to three times the minimum wage
3
). It had a population of approximately 25
thousand Leoneses (as those residing in Leon, Guanajuato, are commonly called), located
in 5,490 homes covering an area of approximately 9,000 square metres
4
.

Of the families who lived in Villas de San J uan it was generally men who had formal paid
employment. Those women who did work outside the home undertook part-time
employment in areas such as retail, and factory and domestic work. Families with five or
six members would live in an area of 42 meters square on average. A household would
generally comprise a man and a woman and three or four children, and occasionally other
family members such as: grandparents, uncles/aunts and occasionally the married children
of the couple (inegi.gob.mx, 2007).

The main clients of Farmacias Estrella, in the words of the Director General, are
principally women with children, due to the fact that we offer the most affordable medical
consultations in the area. The most commonly purchased tems are diapers, formula milk,
and medicines made in Mexican laboratorios, Commonly known as generic medicines,
which are priced more affordably than those of internationally-recognized laboratories.
This medicine is sold in the enterprise due to its competitive price and for the profit margin
that it generates.

He continued, The consumers want basic products such as diapers and groceries, but there
are other products on which consumers spend more, such as formula milk, and cigarettes
and soft drinks. Sales usually increase at the beginning of each fortnight, as that is when the
clients receive their salary.

Description of the products
Farmacias Estrella divided its products into sectors according to the following criteria:
reports generated daily, their arrangement in the store (where the product was located), the
supplier from whom they were purchased, and the profit margin that they generated The
sectors were:
- Patent medicines: both Mexican and foreign.
- Generic medicines: medicines produced in Mexican laboratorios which were more
competitively priced than patented medicines and which generated higher profits.
- Perfumes: beauty and personal hygiene products such as: deodorants, shampoo,
toothpaste and dyes, among others.

1
INMUVI Leon Municipal Housing Institute.
2
Information from the internet homepage of the Instituto Municipal de Vivienda de Len, Guanajuato,
Developments/Villas de San J uan section. March. 2007.
3
Minimum daily wage as of October 2006: $47.16. Information from the Internet homepage of the Mexican
Finance Office (sat.gob.mx, 2007).
4
Information from the internet homepage of the Instituto Municipal de Vivienda de Len, Guanajuato,
Developments/Villas de San J uan section. March. 2007.




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- Diapers and formula milk: brands of diapers and formula milk of diverse price
ranges.
- Phonecards: cards for both cell and public phones for both national and
international calls the latter principally for calls to the United States.
- Groceries: from tinned and packaged goods to home cleaning products.
- Games: all imported, of different price ranges.
- Soft drinks and juices.
- Ice-creams.
- Sweets: chewing-gum, chocolates and candies.
- Cigarettes.
- Miscellaneous articles: new items awaiting allocation to a specific sector, or which,
due to their characteristics, (price and profit-margin among others) did not coincide
with any of the aforementioned categories.

Distribution of the merchandise
The products in each sector were warehoused in the following manner: patent medicines,
diapers and assorted perfume articles were purchased from wholesale distributors who
delivered the orders by truck daily. Product orders were sent daily by internet to the
wholesaler between 10:00 am and 12:00 am depending both upon availability of
information and prompotions. Generic medicines, groceries and perfumery articles were
purchased from a local distributor every third day: these were not delivered by the
distributor. Supplies of soft drinks were received every third day from distribution trucks,
and there were both maximum and minimum purchase regulations. For groceries and other
items from brands such as Bimbo, Gamesa, Ricolino, Marinela, and Sabritas as well as
telephone cards, the distributors would deliver the items on a weekly basis subject to both
maximum and minimum purchase regulations. Cigarettes and confectionery products were
purchased weekly in wholesale purchase clubs such as Sams and Costco.

For inventory control a system known as POSS was used at points of sale. The point-of-
sale POSS inventory system was designed to send notification when a product was close to
the maximum or minimum range permitted in the inventory.

Description of the competition
Even though Farmacias Estrella was situated in a relatively new district, there were
important competitors that were fighting to increase their market-share with whom they
were in constant competition. Among the organizations that could be mentioned were three
independent pharmacies which, in the opinion of Kaleb, did not offer an extensive range of
medicines or groceries.

Another rival company was Farmacias de Similares S.A. de C.V. With their slogan The
same but cheaper they were the core part of part of a group of Mexican companies known
as Grupo por un Pas Mejor (Group for a Better Country), which was set up by a public
accountant, Victor Gonzalez Torres. In October of 2006 it was a system of franchises that
based its expansion and growth on attracting investors who were interested in starting a
business and helping the population by offering affordable medicines, which would also
bring significant financial benefits for the investors. By the year 2000, not only could the
group boast 200 pharmacies and 175 franchises in various locations in the Mexican
Republic, but was the only pharmaceutical chain to have at least one outlet in each state at
that time. By October of 2007 there were not only 3,534 outlets in the Mexican Republic



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but also stores in Guatemala, El Salvador, Honduras, Costa Rica, Ecuador, Peru, Chile and
Argentina (farmaciasdesimilares.com, 2007).

Overview of the business
The partners knew that the business did not have an employee manual detailing the
responsibilities of each position, nor had it developed a specific hiring system, nor a
personnel administration system with a salary tabulated according to the position occupied,
nor were there descriptions of each position or an outline of the employee profile required
for each.

Seventy per cent 70% of the company employees had less than six months of service in the
business; Kaleb and his partners considered that the lack of training and experience on the
part of the employees caused problems during the sales and customer service process, as
evidenced by the level of complaints received.

In addition, the partners believed that the high employee turnover not only augmented the
level of client complaints, but in addition, each time new employees were hired
merchandise went missing and there were problems with the inventory. The reason was as
yet undefined, but he believed that it could be due to the inexperience of the new
employees, which signified errors in the sales recorded, or that employees with more
experience took advantage of those recently hired to steal merchandise and blame the
missing items on their colleagues.

The duty of the Director General was specific: to take charge of the administration of the
staff and resources of the pharmacy and have a direct relationship with all of the
employees; the sales staff also had a relationship with the Director of Operations, who
carried out the decisions and objectives that the Director General outlined for the
organization. Kaleb considered that there was inadequate communication between himself
and the Director of Operations, due to the fact that on various occasions the instructions
that were given proved to be inadequate or there were comprehension issues at the time of
message transmission.

The following presents sales information and overall consolidated balances for the years
2005 and 2006.












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Diagramme



Kaleb had some days in which to present a detailed anlisis and convince the partners that the
current organization of the pharmacy was the correct one and, in this way, continue as Director
General of Farmacias Estrella.


Consolidated balances as of 31
st
. December.

2006 2005
Assets

Working Assets
Cash

17,051.00

6,963.00

Clients

15,236.00

18,440.00

Other accounts outstanding

8,488.00

8,979.00

Inventory

12,884.00

12,009.00

Other working assets

2,079.00

1,850.00

Total working assets
55,738.00

48,241.00

Non-working assets
Long-term accounts outstanding

9,567.00

8,324.00

Property, machinery, items in storage

185,714.00

49,942.00

Intangible assets

65,025.00

36,631.00

Total non-working assets

260,306.00

94,897.00

Total assets
316,044.00

143,138.00

Liabilities and owners equity

Working liabilities
Short-term debt

13,514.00

9,788.00

Suppliers

18,541.00

15,771.00

Total working liabilities
32,055.00

25,559.00

Long-term liabilities
Short-term debt

65,029.00

46,609.00

Other liabilities

13,506.00

11,227.00

Total long-term liabilities
78,535.00

57,836.00

Total liabilities
110,590.00

83,395.00

Owners equity
Stocks and shares

3,956.00

3,954.00

Premium on shares

54,893.00

19,056.00

Retained earnings

120,913.00

22,283.00

Net income

25,692.00

14,450.00

Total liabilities
205,454.00

59,743.00

Total liabilities and owners equity

316,044.00

143,138.00




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Sources consulted

Chen, Huberto, Terrizano, Fernando, Maduro, Roberto. Farmacias y supermercados se disputan
la venta de medicinas. Noticias Financieras. Miami: J an 11, 2004. pg. 1

farmaciasdesimilares.com. (2007). Farmacias de Similares. Recuperado el 2008, de
http://www.farmaciasdesimilares.com.mx/historia.html

inegi.gob.mx. (Octubre de 2007). INEGI. Recuperado el 2008, de
http://www.inegi.gob.mx/inegi/default.aspx. Octubre 2007

sat.gob.mx. (octubre de 2007). Secretara de Administracin Tributaria. Recuperado el 2008, de
Asistencia a contribuyentes:
http://www.sat.gob.mx/sitio_internet/asistencia_contribuyente/informacion_frecuente/salarios_m
inimos/. Octubre 2007