YUNNAN BAIYAO

STRATEGIC MANAGEMENT

SUBMITTED BY –

MATHEW FEBIN CHARLES

B2539
QUESTIONS

1. Discuss YB's (Yunnan Baiyao) corporate strategy (diversification, integration

and other growth strategies) and the steps they took towards this.

A series of product creation and product diversification movements were carried out by
Yunnan Baiyao Pharmaceutical Factory. Based on the base of the fifth Kunming
Pharmaceutical Factory workshop, Yunnan Baiyao Pharmaceutical Factory the predecessor
of the current YB, was created. Baiyao has since seen strong growth in its mass production,
research and application.

The five U’s — unified production planning, unified permit number, unified trademark,
unified quality standards and unified sales management helped YB became the sole producer
of Baiyao and the sole proprietor of intellectual property related to Baiyao.

YB took the first step in its corporate strategy during this time by introducing both a new
business structure and streamlined development and branding management. The integration
of the companies also diversified the goods of YB. This process laid the groundwork for the
subsequent product and business aspects of corporate strategies. YB tried to reform a modern
enterprise structure and shift towards a market-oriented economy, and the government
effectively guided the strategic movements made during this time. It was the government that
pushed for a single firm to merge the Baiyao-producing companies and to export Baiyao.

YB created a set of plans called "one core and four growth areas." YB's headquarters, its
group companies and its distribution network were referred to as "one core," which was
exactly what YB had in 2002.

The four growth areas were –

Growth Area 1: The Industrialization of Herbal Resources

Growth Area 2: The Industrialization of Research and Development

Growth Area 3: Vertical Integration into Distribution through the Operation of Chain Stores

Growth Area 4: Internationalization

 2. What do you think were the main drivers or motives of such a diversification
strategy?

The main drivers or motives of such a diversification strategy were –

• At the time, businesses were faced with the fact that either they had to grow larger by
integration and diversification, or they would have to be replaced by competition and
YB was unable to respond to the rapidly evolving market environment because its
resources were devoted to manufacturing and its sales department consisted of just a
dozen employees.
• After a decline in revenue, Wang Minghui became YB's CEO in 1999. He began a
series of restructuring reforms and product and sector diversification strategies.
• The first strategy adopted by YB was that, its diversified share structure, and also
acquired via the distribution channels, Yunnan pharmaceutical trading company and
TianZi Hong pharmaceutical company.
• By acquiring Yunnan Pharmaceutical Trading Co. forward vertical integration into
distribution was accomplished by YB. In the Chinese pharmaceutical industry, these
activities enabled YB to become a diversified and vertically integrated player.
• • YB developed an e-Commerce Co. Ltd. to expand its distribution network
nationally. E-Commerce Co. Ltd. was used by them as a medium for developing its
sales offices as well as for internal entrepreneurship.

3. Were they pursuing different forms of diversification and too much

diversification - Was that beneficial? Or could they have done it differently -
justify.
YB's company with 3M was an enticing choice, not only a chance for domestic product
diversification, but also an opportunity for internal diversification. It has been involved in a
variety of organisational reforms and strategies for product or sector diversification to cope
with the developments in the Chinese pharmaceutical industry and worldwide competition. A
series of product creation and product diversification steps were carried out by Yunnan
Baiyao Pharmaceutical Factory.
Different forms of Baiyao and related items had been generated and mass produced (Baiyo
capsule etc) For some historical reasons, Baiyao was also developed by not only YB, but also
by three other companies in Wenshan, Dali and Lijiang under different trademarks. These
three companies have been merged into a company named Yunnan Baiyao Group Co. to
improve YB (YB). Therefore, YB had the ability to produce Baiyao and had acquired its
intellectual property. Since a variety of other goods were marketed by all the other three
companies, the acquisition of the other three companies also resulted in product
diversification.

The Chinese pharmaceutical industry experienced intense competition, so it was necessary

for businesses to seek diversification or convergence in order to sustain the market and
overcome competition. In 1999, Hongta Group became YB's second largest shareholder and,
as a result, YB diversified its share structure. Also purchased by YB were Yunnan
Pharmaceutical Trading Co. and Tian Zi Hong Pharmaceutical Co. YB could diversify its
offerings into the development of oriented pieces. YB also took another product
diversification measure by selling a haemorrhoid ointment. To broaden this traditional
medicine business, YB had to look for new growth areas; diversification of its products and
markets and vertical integration could help YB extend its life cycle and stabilize its sales.

Therefore, we may conclude that YB's diversification option helped the company to increase
sales and gain more market share.

4. Critically assess the alliance with 3M proposal versus the healthcare product
diversification - should they gos ahead with both or one - Why?

➢ Alliance with 3M

The company 3M offered to YB cooperate in the area of transdermal pharmaceutical

products. This option seems to be very attractive as they could diversify not only at domestic
area but it is also opportunity for international diversification.

Advantages:

• 3M company is a gigantic multinational enterprise with a worldwide presence and its

Drug Delivery Systems Division was a global leader in transdermal drug delivery.
 • More than 80% of the transdermal drug delivery products in the US contain 3M
transdermal components. It could be much easier to enter this market for YB.
• There is also big potential for diversification as the 3M has numerous transdermal
solutions that could overcome customer concerns. And YB could serve customers.
• Next advantage is that YB would spend much less money into R&D and them enter to
market would be still much faster. It’s not easy to enter the market like US with
herbal products because of the regulatory barriers and with 3M could YB gain the
access easily.

Disadvantages:

• There could be a problem with a different behaviour of American customers.

• They are not used to use these types of products.
• The cultural distance is really big.
• YB also doesn’t have any international experiences and they don’t know how to do
international marketing.
• Another challenge is to fight with the gap between levels of economics in China and
US. Their economies are quite different.

➢ Healthcare products diversification

The YB is also considering another option, which is healthcare products diversification and
trying to enter the Chinese market with it.

Advantages:

• YB had the ability to set up a healthcare department to diversify into healthcare

goods. Baiyao toothpaste was one such commodity. This idea came to them on the
basis of two facts: Baiyao powder has also been used by many clients to deal with
their dental bleeding.
• Next advantage is that diversifying into healthcare products could also increase YB’s
economy of scope and scale because the toothpaste would share some value chain
activities with its original products. The extension could bring them greater efficiency
and lower promotion costs.
Disadvantages

• On the other hand, it had certain disadvantages, such as Healthcare products have not
yet shared their current products with distribution networks.
• They also had the potential for heavy rivalry, as multinational corporations, such as
Colgate and Procter & Gamble (P&G), dominated the market and their profit margins
were very low.
• Finally, there was the brand contagion problem. Since toothpaste was not within the
core competence of YB, possible toothpaste failure could harm their credibility.