STRATEGIC ANALYSIS OF

RYANAIT THE LOW FARES AIRLINE

Synopsis:

This paper analyzes the competitive environment of the Ryanair the low fares airline
industry from the strategic point of view. Influencing forces, strategic issues of airline
industry and their implication is also analysed at this juncture. The report also
evaluates the use and limitation of the tool which can apply to understand the strategic
issues and their impact on airline industry.

1
Table of Contents:

Introduction……………………………………………………………. 1
Core competencies and competitive advantage…………………………1

1. Environmental forces of global pharmaceutical industry………2

1.1 PESTEL framework…………………………………………….2
Political forces…………………………………………………..3
Economical forces………………………………………………3
Social influences……………………………………………….. 3
Technological forces…………………………………………… 4
Environmental forces…………………………………………...4
Legal forces……………………………………………………. 5
1.2 Porters five force model………………………………………... 5
Threat of new entrants…………………………………………...5
Rivalry among existing firms…………………………………....6
Supplier powers………………………………………………….6
Buyers powers…………………………………………………...7
Threat of substitutes products…………………………………...7
2. Implication of changing business environment………………....8
2.1 Changing government policy……………………………………8
2.2 Increased competition…………………………………………...8
2.3 Merger & Acquisition…………………………………………....9
2.4 Innovation………………………………………………………..9
2.5 Ageing population Pressure……………………………………...9
3. Use and limitation of tools………………………………………10
3.1 Use of PESTEL framework……………………………………...10
3.2 Limitation of PESTEL framework………………………………10
3.3 Use of Porters five force model………………………………....10
3.4 Limitation of Porters five force model…………………………..11
Conclusion………………………………………………………………12

2
Introduction:

Ryanair is the best known of Europe’s leading an official Low cost Airline.
Biggest airline in Europe and one of the world’s most successful. The
business model based on the hugely successful American low-fares carrier
Southwest Airlines. Ryanair sell low airfares only purpose to make profits from
that. Because they know as Michael O’Leary said if they can’t make profit they
can’t lower their airfares or can’t reward their people or can’t invest in new
aircraft.

Appropriate models critically account for Ryanairs success thus far:

In terms of low marketing costs, their CEO Michael O'Leary gets a lot of free
publicity with stunts and being publically agressive against the competition and
authorities. They use full page ads to promote themselves offering bargain prices
and often attacking the competition. They are sometimes accused of hidden costs
but claim that this is false as it is clearly stated on their Internet Sales system.
http://www.rapid-business-intelligence-success.com/ryanair-business-
strategy.html

http://ivythesis.typepad.com/term_paper_topics/2008/02/ryanair-case-st.html#
www.scribd.com/doc/17599820/Ryanair-2
http://university-essays.tripod.com/critical_success_factors_csf.html

Critically success factors refer to the limited number of areas in which

satisfactory results ensure successful competitive performance for the
organization. (Rockart and Bullen, 1981). http://university-
essays.tripod.com/critical_success_factors_csf.html

3
Rockart and Bullen presented five key sources of Critical Success Factors:
the industry, competitive strategy and industry position, environmental factors,
temporal factors, and managerial position.

The Industry:
The characteristics of industry define its own critical success factor. In airline
industry needs huge investment for success of this business. Until 1990s it
loses 20 million Irish pound. And it was required more investment on that time
to become as a successful airline. In 1997 Ryanair first floated in Dublin Stock
Exchange, NASDAQ and London Stock Exchange to increase its capital. And
it admitted to the NASDAQ-100 IN 2002.

Competitive Strategy and industry position:

Ryanair market strategy is different to survive in the competition and gain a
competitive position in airline market. In order to position itself in the
marketplace it continuously offers lowest fares. To achieve a competitive
position in airline industry it uses a cost reduction strategy. In order to identify
the competitive position of Ryanair, Porters five force model is used below:

Source: www.brs-inc.com

4
Threat of new entrants:
Porters (1980:7) observed that the threat of new entry into an industry
depends on the barriers to entry that are present, coupled with the reaction
from existing competitors that the entrant can expect. The threat of entry in
airline industry is not high because high amount of capital and investment is
required into this. According to Ryanair balance sheet after end of year 2006
Ryanair assets is 463.43 million Euros. That means new entrants need to
compete with Ryanair – who have very big assets. Risks and challenges are
high on this sector.

Rivalry among existing firms:

Competition among existing airline companies is high because of matured
and consolidates industry players. Air Lingus, British airways and EasyJets
are main competitors of Ryanair. European market as healthy with huge
potential, and only incremental growth, even many of the competitors were
losing money. According to case study attractiveness of the budget sector in
Europe is signified by the large number of entrants and rivals, although as
many as 50 have gone bankrupt, been taken over, disappeared or never got
off the ground. But some carriers withdraw them from routes where they
clashed with Ryanair, for example My TravelLite from the Dublin-Birmingham
route, or avoding such route altogether. It’s showing a great leadership of
Ryanair in low fares airline industry.

Suppliers Power:
Bargaining power of supplier in airline industry is high. And in 2006 annual
report Ryanair indicated fuel price increased 74 percent on this year. Fuel
price totally depends on world market. Ryanair has no choice in here. Aircraft
suppliers bargaining power is high as well. Because not lots of manufacturer
on this industry.

Buyers’ power:
The bargaining power of consumers or buyers in airline industry is high
because lots of airline company on this business.

5
Threat of substitute products:
Porters (1980:23) observed that substitutes limit the potential returns of an
industry by placing a ceiling on the prices firms in the industry can profitably
charge. The more attractive the price performance alternative offered by
substitutes, the firmer the lid on industry profits. The degree of threat of
substitute product in pharmaceutical industry is medium in term of patent
expiry. Consumer can buy substitute drugs if the prescribed or branded drugs
patent is expired.
In addition, as branded drugs were influenced by many forces, therefore the
pace and aggression of generic attacks on branded products increased
sharply between 2002 and 2005. During this period, the overall market growth
of generics exceeded sharply.
The core competency of generic drug is that it has no cost associated with its
R&D. Consequently, the price of generic is remarkably lower than patented or
branded drug.

Overall, Porters five force framework indicates that the pharmaceutical

industry is highly valued or attractive. The industry has strong market position
with strong financial make up and strong rate of return from invested capital.

Any organization success based on its

.

6
Ryanair market strategy was different

How ‘No frills’ strategy meets customer’s expectations and compares

it with competitor’s strategy:

Multiple bases for keeping costs down can provide a basis for a successful
‘no frill’ strategy. (Johnson, p-228) It began with the stated intention of offering
low fare, no frill service in order to provide transportation at a lower cost than
other airlines. http://www.jstor.org/pss/143977 Any service or product for which the non-
essential features have been removed to keep the price low.

7
Ryanair charges for check-in bags, which encourage passengers to travel
with fewer bags or nothing. It protects passengers from carry lots of bags in
travel time and fears from lost their bags. Other rivals as well charge for hold
luggage including Aer Lingas and FlyBE. Eayjet as well charge passengers
for any more than one item of hold.

Ryanair typically cut overheads by choosing secondary and regional airports

(with lower access charges) and by using one single type of aircraft. End of
the day passengers need to pay airport charges with their ticket price. For that
passengers are beneficial from Ryanair airport choosing and route policy. But
most of these airports are significantly farther from the city centre. For
example, Ryanaair use Frankfurt Hahn, 123 kilometers from Frankfurt. If
passenger has no idea about this and if they go Frankfurt with Ryanair they
will totally disappoint.

In Ryanair passengers need to pay 8 Euro to rent a games and entertainment

console. But Sometime passengers don’t need for short time flight and they
have an opportunity to saving money on long time flight as well.

As EU regulations if passengers affected by cancellation or delays, they must

be offered a refund or rerouting and free care and assistance while waiting for
their flights- specifically meals, refreshment and hotel accommodation where
in overnight stay is necessary. It expected financial compensation of up to 600
Euro where Ryanair compensation cost 250 Euro. But it was being widely
ignored.

In 2006 Ryanair was voted the world’s least favourite airline, with easyjet
coming second worst. Ryanair scored badly in comfortable seats, safe/
secure, best amenities (for example snack/food). However it scored well on
‘best fares’. To keep the price as much as possible they need to follow no frill
strategy and for that they can’t provide like that facility. But it meets
customer’s expectation by providing low fares cost.

Ryanair business strategy is establish itself as a low cost airline leader by increase passenger
traffic with continuous focus on cost-containment and operating efficiencies.

Low fares are key elements of Ryanair strategy. Food, drink, luggage like this extra services
are not include with this price. For these services customer need to pay extra. And this kind of

8
policy allows those passengers who do not require baggage, priority boarding or other
premium services to travel for the lowest possible price.

Ryanair’s strategy as well to provide best customer service by puctuality, fewer lost bags and
fewer cancellation than any othe competitor to achieve their goal.
Ryanair believes low operating costs strategy is very important as well to establish them as a
low cost airline leader in Europe

Evaluation of the strategic leadership of Michael O’Leary:

Strategy development strongly associated with a strategic leader. Leadership

is defined by Bush and Glover (2003, p. 8) as a process of influence leading
to the achievement of desired purposes. It involves inspiring and supporting
others towards the achievement of a vision which is based on clear personal
and professional values. By: Davies, Barbara J.; Davies, Brent. School Leadership &
Management, Feb2004, Vol. 24 Issue 1, p29-38, 10p; DOI: 10.1080/1363243042000172804

They are individuals whose personality, position or reputation may result in

others willingly deferring to them and seeing strategy development as their
province. They are therefore personally identified with and central to the
strategy of their organisation. (Johnson, p- 402) Early 1990’s Ryanair’s fight for
survive and that time they saw a new management team, led by Michael O’Leary. He
is a man of ability and real experience. Effective leadership does not depend
on a particular set of traits but rather on how well the leader’s traits match the
requirements of the situation. (Stoner, 1995:472) That reason it isolated by
behaviour characteristic.

The Role of a strategic Leader:

The role of a strategic leader are creating organisational vision, establishing core
values, developing strategies and structures, fostering organisational learning and
serving as a steward for the organisation. Ryanair focus on continue the Low Cost

9
Leadership in the European airline industry. And according to European low-cost
carrier overview Michael O’Leary established Ryanair as a number one low-cost
airline. Ryanair affirmed that it would continue to offer the lowest fares in every
market. Even Michael O’Leary declared to passengers no fuel surcharge for today,
tomorrow or ever. On this way Michael O’Leary established its core value as a ‘low
fares airline’. Michael O’Leary made policy to using same type of aircraft to keep
staff training and aircraft maintenance costs as low as possible.

Environmental concern about greenhouse gases from carbon now a public and
political agenda worldwide. That reason he started replace Ryanair fleets with new,
more environmentally- friendly aircraft. The new aircraft produced 50 percent less
emission, 45 per cent less fuel burn and 45 per cent lower noise emission per seat.
Also it provide better aircraft service. As a strategic view it was a great success of
Michael O’Leary. On this way he introduced Ryanair as an environment friendly
aircraft and he reduced its operating costs on same time.

Terrorist attacks on airline industry increase the risks and costs on this industry. It
imposed severe security measures at all airports. These measures applied to all
passengers. There was threat that passengers would choose other transport rather than
face the inconvenience and expense of checking in luggage, as well the extra time
spent in airport security queues. In this continue fostering organisational learning
inspired Michael O’Leary introduced Ryanair passenger’s to web-based
check-in to save their time.

Leadership and Strategy Implementation:

Strategic leadership demands the ability to make sound, reasoned decisions
—specifically, consequential decisions with grave implications. Since the aim
of strategy is to link ends, ways, and means, the aim of strategic leadership is
to determine the ends, choose the best ways, and apply the most effective
means. By: Guillot, W. Michael. Air & Space Power Journal, Winter2003, Vol. 17 Issue 4,
p67-75, 9p, 1 Black and White Photograph, 2 Diagrams

10
According to Michael O’Leary it’s easy to sell low fares but hard to make profits from
their. ‘Air Transport world’ magazine announced in 2006, Ryanair was most
profitable airline in the world. Michael O’Leary established it’s as a profitable
organization.

In any of these circumstances, strategy may be – or may be seen to be – the

deliberate intention of that leader. How such an intention comes about can,
however, be explained in different ways:
● Strategy leadership as design. It could be that the strategic leader has
thought through the strategy analytically. This might be by using the sort of
techniques associated with strategic analysis and evaluation, or it might
simply be that the individual has consciously, systematically and on the basis
of his or her own logic worked through issues the organisation faces and
come to his or her own conclusions.
● Strategy leadership as vision. It could be that a strategic leader determines
or is associated with an overall vision, mission or strategic intent (see section
4.5.2) that motivates others, helps create the shared beliefs within which
people can work together effectively and shapes more detailed strategy
developed by others in an organisation. Some writers see this as the role of
the strategic leader.2
● Strategy leadership as command. The strategy of an organisation might
also be dictated by an individual. This is, perhaps, most evident in owner-
managed small firms, where that individual is in direct control of all aspects of
the business.
Danny Miller and Isabel Le-Breton suggest there are advantages and
disadvantages here. On the plus side it can mean speed of strategy
adaptation and ‘sharp, innovative, unorthodox strategies that are difficult for
other companies to imitate’. The downside can, however, be ‘hubris,
excessive risk taking, quirky, irrelevant strategies’

11
Sustainability of Ryanair’s strategy in the future:

Ryanair business strategy is establish itself as a low cost airline leader by

increase passenger traffic with continuous focus on cost-containment and
operating efficiencies.Low fares are key elements of Ryanair strategy. Food,
drink, luggage like this extra services are not include with this price. For these
services customer need to pay extra. And this kind of policy allows those
passengers who do not require baggage, priority boarding or other premium
services to travel for the lowest possible price. Ryanair’s strategy as well to
provide best customer service by puctuality, fewer lost bags and fewer
cancellation than any othe competitor to achieve their goal.Ryanair believes
low operating costs strategy is very important as well to establish them as a
low cost airline leader in Europe.

12
Core competency & Competitive advantage of
Pharmaceutical industry:

According to Prahalad and Hamel (1990) the core

competencies arise from the integration of multiple
technologies and the co-ordination of diverse production
skills. They also mentioned that the most powerful way to
prevail in global competition in the 1990s depends on the
ability to exploit core competency (qtd in quickmba
website). Core competencies provide potential access to a
wider range of markets, make a significant contribution to
the perceived consumers’ benefits of the end products
and are difficult to imitate for competitors. Research and
development (R&D) and marketing and promotion are the
core competency of global pharmaceutical industry. With
respect to core competency in R&D in the pharmaceutical
industry, the technological areas that leading firms
exploited for discovering new drugs, for example, generic
in 1970s and biotechnology in 1980. Competencies in
marketing and promotion have changed from direct selling
to physicians 1950s to blockbuster marketing 1980s, to

13
specialized selling and handling of regulatory
requirements. Consequently, R&D and marketing and
promotion capabilities are underpinning the competitive
advantage of the global pharmaceutical industry. For
instance, the key strategic capabilities of ethical
companies are R&D and sales and marketing. On the other
hand, biotech needs to create and defend their intellectual
property in specialised research field, attract funding and
make successful deals as their strategic capability. Direct
to consumer marketing is the key strategic capability
demanded by branded OTC drugs.

1. Environmental forces of global pharmaceutical

industry

It is very significant for an organisation to understand and

analyse environmental influences (internal & external)
which can affect organisational strategies and
performance. Several framework are exists to support an
environmental analysis of industry. In order to identify the
key external forces, management gurus suggested
analysing the PESTEL framework which categorizes factors
into: Political, Economical, Social, Technological,
Environmental and Legal. Johnson, G., Scholes, K &
Whittington, R (2008:65) noted that PESTEL framework is
not intended to provide an exhaustive list, but it gives
examples of ways in which strategies are affected by such

14
influences and some of the ways in which organisations
seek to handle aspects of their environment.

1.1 PESTEL Framework:

To identify and understand the influence of the macro-
environmental forces on global pharmaceutical industry it
is imperative to analyze the PESTEL framework.

Political forces:
The pharmaceutical industry witnessed increased political
attention over the years due to control rising health care
expenditure. For example, since 1980s on, government
around the world focus the pharmaceutical industry as
politically easy target by considering economic
significance of healthcare as a component of social
welfare. As a result, Food and Drug Administration (FDA)
and European Medicines Evaluation Agency (EMEA) have
been formed as government regulatory body of
pharmaceutical industry in the USA and European
countries respectively.

Economical Factors:
The growth of pharmaceutical industry is aligned with the
GDP growth of a country. Majority of global
pharmaceutical sales originate in the USA, Mexico, the EU,
China and Japan. Ten geographic markets contributing

15
over 80% of the global pharmaceutical sales. The USA is
considered the largest market among ten countries and it
has accounted almost 50% of global sales in 2005. Japan
is the second largest market with sales of $60bn in 2005
though the industry confronted economic recession in the
1990s which caused tax revenue to fall. The European
market contributing approximately 30% of global sales out
to 2009 and it makes up third position for the
pharmaceutical.
Intense Merger and Acquisition (M&A) in the last decade,
led the pharmaceutical industry to think strategically in
order to survive in the global and local market. The
rationale behind merger and acquisition was to tie up a
company within strong pipeline and to leverage
investment in technology platform.

Social Forces:
Social responsibility has very strong influence on
pharmaceutical industry. In recent years, the impact of
various rising epidemics such as swine flu, cancer and HIV
put pharmaceutical industry in an enormous pressure.
Besides, because of some companies fraudulent and
antitrust violent, the reputation of the pharmaceutical
industry damaged entirely. For instance, over $2bn fines
were paid by the USA pharmaceutical companies between
the year 2000 and 2003 in several cases brought by the
USA Justice Department because of their pricing and
marketing crimes. Merck was accused for withdrawn of

16
Vioxx from the market as they were unable to pick up
problems during product development process and also
for their misleading scientific result in relation to Vioxx.
Another considerable condemnation regarding the
industry is it is incapable to fulfil enormous unmet need in
developing countries because of high priced medicine.
There was a strong critic in the National Association of
Attorney General meeting 2005 in Chicago Fairmont Hotel
where more than 40 countries staffs and representative
attended. Critics from consumer organisation assailed the
high cost of drugs even as Medicare is rolling out its
prescription drug benefit.

Technological influence:
Scientific and technological development is forcing every
industry player to introduce and adapt new innovations in
order to survive in a competitive business environment.
To compete effectively, industry players should integrate
its activities into global market. Regarding this technology
can only integrate firms into global market. Furthermore,
technological advancement is increasing consumer
awareness regarding the risk and benefiting factors of
pharmaceuticals.

Environmental:
Environmental issues in the pharmaceutical industry pose
a complex challenge to industry players and have the
potential to considerably impact its cost. However,
environmental issues such as reducing pollution, ensuring

17
good health and safety are considered as an integral part
of the corporate responsibility for the pharmaceutical
industry as a strategic tool. Therefore, company like Pfizer
is committed to protect the environment, ensure the
better health and safety of their colleagues and
communities around the world through innovation and
ethical operation. On the other hand, GlaxoSmithKline
makes a considerable investment in its community and in
corporate citizenship programmes with the aim of
enabling people to enjoy better, healthier and more
fulfilling lifestyle. The key corporate responsibility
principles of Merck are to consider high ethical standard
operation, access to quality health care system around the
world, making a positive and sustainable impact on the
communities and the societies where they live and work
and meeting the need of employees in fair manner.

Legal forces:
Legislations for regulating the pharmaceutical industry
had dramatic impact on pharmaceutical growth in
different ways in recent years. In 1970s, the thalidomide
tragedy led to much tighter regulatory controls on clinical
trials and legislation for fixed period patent protection was
also passed. Moreover, pharmaceutical industry became
political target in order to control rising healthcare
expenditures in 1980s by the governments around the

18
world. Stringent government regulations make it difficult
for the pharmaceutical industry to manufacture and
market a new drug within a short period of time. For
instance, FDA in the USA thoroughly examine all of the
data of a new agent in relation of its purity, stability,
safety, efficacy and tolerability which was really a time
consuming process averaged 12.5 months in 2005.

1.2 Porters five force model:

In order to identify the competitive forces and industrial
structure of global pharmaceutical industry, Porters five
force model is used below:

Source: www.brs-inc.com

Threat of new entrants:

Porters (1980:7) observed that the threat of new entry
into an industry depends on the barriers to entry that are

19
present, coupled with the reaction from existing
competitors that the entrant can expect. The threat of
entry in global pharmaceutical industry is very high for the
potential entrants because high amount of capital and
investment is required into its R& D which is lengthy
process. Moreover, government regulatory policies in
pharmaceutical industry discourage new entrants to some
extent. For instance, in the USA government agency FDA
creates obstacle for approval of new drugs. In 2005 the
agency took 12.5 months for approval of new drug.
Besides, new entrants must consider the legislation for
fixed period of patent protection which
creates another hurdle for the potential entrants.
Another challenge for new entrant in pharmaceutical
industry is achieving economies of scale in term of
manufacturing facility which leading company already
achieved through easy access to their low-cost suppliers.

Rivalry among existing firms:

Competition among existing pharmaceutical firms is high
because of matured and consolidate industry players. For
the new competitors it would be difficult to compete with
leading industry players as they already have strong
position in the market for their blockbuster drugs.
Therefore, new and small companies need to concentrate
on developing blockbuster drug in their future pipeline.
Moreover, the leading companies already have established
strong financial position in the market which generates

20
high margin. As a consequence, they are able to invest
huge amount of financial resources for innovation and
product differentiation of new drugs. In addition,
companies with consistently high level of R&D spending
and productivity become the industry players.
Differentiation strategies of giant pharmaceutical firms
facilitate them to increase the product life cycle of their
drugs and extend their use to treatment of other diseases.
Recent price increase of generic and branded drug leads
manufacturer to enhance their operation efficiency as to
generate profit margin which consequently increased high
competition among the existing firms.

Suppliers Power:
Bargaining power of supplier in pharmaceutical industry is
low as leading players do not provide enough opportunity
for negotiating. Leading firms can source their raw
material or necessary elements from low priced market or
location which ultimately pose threats to other suppliers
whose price are comparatively high. Moreover, the trend
towards the globalisation facilitated the pharmaceutical
industry to relocate their manufacturing in convenient
locations which as a result impaired the supplier power.
The countries which have supply side controls, negotiating
price or reimbursement approval can take more than a
year because of low power.

Buyers’ power:

21
The bargaining power of consumers or buyers in
pharmaceutical industry is low because they have no
choice but to buy what doctor prescribes. According to the
case study prescription drugs embrace about 80% of the
global pharmaceutical market and 50% by volume. The
exclusive aspect of pharmaceutical industry is that the
end user of pharmaceutical products is different from the
influencer (doctor). Moreover, recent price increase for
generic and branded drug have reduced consumer
bargaining power to some extent.

Threat of substitute products:

Porters (1980:23) observed that substitutes limit the
potential returns of an industry by placing a ceiling on the
prices firms in the industry can profitably charge. The
more attractive the price performance alternative offered
by substitutes, the firmer the lid on industry profits. The
degree of threat of substitute product in pharmaceutical
industry is medium in term of patent expiry. Consumer
can buy substitute drugs if the prescribed or branded
drugs patent is expired.
In addition, as branded drugs were influenced by many
forces, therefore the pace and aggression of generic
attacks on branded products increased sharply between
2002 and 2005. During this period, the overall market
growth of generics exceeded sharply.
The core competency of generic drug is that it has no cost
associated with its R&D. Consequently, the price of

22
generic is remarkably lower than patented or branded
drug.

Overall, Porters five force framework indicates that the

pharmaceutical industry is highly valued or attractive. The
industry has strong market position with strong financial
make up and strong rate of return from invested capital.

2. Implication of the changing business

environment

Though PESTEL analysis and Porters five force framework

already provided the picture on implication of the
changing business environment, however it is imperative
to identify and analyse such implication separately.
Therefore, the following section identifies and analyzes the
implication of the changing business environment on
global pharmaceutical industry on the basis of findings
from PESTEL and Porters five force model.

2.1 Changing government policy:

Government policy is considered as one of the major
influencing force for any business. Global pharmaceutical
industry is facing increasing political pressure to reduce

23
price and control cost. During the 1970s, the legislation for
the fixed period patent protection leads the appearance of
generic drug which had dramatic impact on patented
drugs because of its same active ingredients and cheaper
price. According to Allegra, due to patent expiries,
patented drugs for the treatment of hey fever lost 84% of
US sales within 12 weeks in 2006. As a part of
government regulatory initiative, price control creates
another challenge for the industry in the form of parallel
trade.
In addition, where the pharmaceutical industry is subject
to a monopoly, the government is only one powerful
purchaser and therefore, the pace of market penetration
of a new drug is very slow.

2.2 Increased Competition:

Global pharmaceutical industry has been changing
profoundly due to intense competition among key industry
players. For example, alliances in form of merger and
acquisition over the last two decade changed the
competitive environment of pharmaceutical industry. High
level of R&D spending and innovation of blockbuster drug
led company to be industry leader. Glaxo for instance,
became top tier global company by launching a
blockbuster single drug Zantac for the treatment of
stomach ulcers. Therefore, competitive advantage of
pharmaceutical industry is being continually redefined and
being forced to overhaul industry structure.

24
2.3 Merger and acquisition:
Intense merger and acquisition among leading firms
changed the competitive environment of pharmaceutical
industry in the last decade. The big industry players are
generating high revenue and hence are able to supply
extra investment for rapid development through organic
growth, merger, acquisition or licensing strategy. For
instance, merger resulted in the formation of Novartis,
Sanofi-Aventis, AstraZeneca and GlaxoSmithKline when
Monsanto and Pharmacia acquired by Pfizer. Moreover,
Pfizer overtook Merck as an organic growth strategy.
Licensing strategy was used by companies which require
presence in the key markets. As a consequence, family
owned medium sized European pharmaceutical companies
were forced to consider M&A as a survival strategy.

2.4 Innovation:
Innovation through high amount of spending on R& D
becomes industry leader over the last two decade. To gain
competitive advantage in emerging and technologically
intensive industries, it is best to be a leader or a follower
in innovation (Robert M.Grant, 2008:300). Therefore,
companies that were not good at product development
and research were acquired by innovative company.
Innovation becomes the key strategic tool of
pharmaceutical industry because of manufacturing

25
blockbusters medicines. Furthermore, condemnation
regarding unmet social need in developing countries and
high cost of drugs led pharmaceutical industry to be more
innovative.

2.5 Aging population pressure:

The pressure of ageing population on healthcare system
creates another challenge for the pharmaceutical industry
in term of a country’s economic value. Per capita
healthcare spending of a government is highest among
over 65s because the death rate is highest in this age
group. According to the Roche report, today there are
about 450 million people worldwide over the age of 65
(that is the 7% of global population) and the figure will
virtually doubled by 2020. Ageing populations created an
unsustainable environment where pharmaceutical industry
is in intense pressure to reduce the price and to reduce
the long term dependence on pharmaceuticals.

3. Use and limitations of the tools:

3.1 Use of PESTEL Framework:

PESTEL framework is used to identify and analyze the
environmental forces which influence the business from
outside. This is a common tool that can aid organization to
formulate strategy by facilitating them understand the
macro-environment in which the organization operate now
and will operate in future. In order to get a big picture of

26
environment of an organization in which it is operating
and the opportunity and threats that lie within it, PESTEL
framework is considered as useful tool by scholars of
strategic management. The framework can easily identify
the political, economical, social, technological,
environmental and legal forces that influence the strategic
position of a company. Therefore, it is imperative to use
this tool in global pharmaceutical industry for
understanding risks associated with the position,
operation and direction of organizations at macro level
perspective.

3.2 Limitations of PESTEL Framework:

PESTEL is a common tool for identifying and analyzing the
macro environmental forces and their influences to a
business, however this tool can not be used to analyze the
internal environment forces of pharmaceutical industry in
order to get an overall picture of the firms’ strategic
environment. Moreover, the importance of PESTEL factors
are limited if they are only seen as a listing of influence.
Identifying and evaluating the key drivers of change which
might have immense impact to the structure of an
industry, sector or market is imperative for the business.
As the key marketers of global pharmaceutical industry
are developed countries such as the USA, Canada, EU,
Japan and China, therefore the PESTEL analysis can
majorly identify and analyze the influencing factors of
these key markets which would not be consistent in case

27
of the developing countries as there is enormous
difference between developed and developing countries
business environment.

3.3 Use of Five Force Model:

Porters five force model was developed by Michael Porters
(1980) for analyzing the nature and degree of competition
within an industry. Porters observed that there are five
competitive forces which determine the nature of
competition with an industry. All five competitive forces
jointly determine the intensity of industry competition and
profitability, and the strongest force or forces are
governing and become crucial from the point of view of
strategy formulation (Porter, 1980:6). It is very important
to apply this model in global pharmaceutical industry in
order to understand the degree of competition and as well
as factors which influence the strategy formulation and
implementation of pharmaceutical industry.

3.4 Limitation of five force model:

Porters five force model is also criticized because of its
several important limitations. Porters (1980) observed that
the framework make it possible to assess the potential
profitability of a particular industry. Rumelt (1991) argued
that although there is some evidence to support this
claim, there is also strong evidence to suggest that
company-specific factors (such as individual competences)
are more important to the profitability of individual

28
businesses than industry factors (Qtd in Campebll et al,
2007:142). As the model is based on eighties economic
condition therefore, the model is not able to analyze new
business model and the industry dynamics such as
technological innovation and dynamic market entrants
from beginning that can change the business model
entirely within drastically. As the pharmaceutical is
considered highly competitive therefore, the nature of
competition and industry structure is persistently
transformed by R&D and in such circumstances the model
is not capable to provide the overall picture of the
pharmaceutical industry competition. However, the model
can only provide snapshots of pharmaceutical industry’s
competitive picture. Therefore, it is not advisable to
develop a strategy solely on the basis of Porters model,
but to examine it in addition to other strategic frameworks
of SWOT and PEST analysis (Kippenberger, 1998;
Haberberg and Rieple, 2001).

Conclusion

29
Global pharmaceutical industry observed rapid
development and change over the past 50 years. Political
attention, economic value, social expectations,
technological advancements and globalization has
changed the industry structure and competitive
environment. High amount of R&D spending to develop
and commercialise a new drug and lengthily drug approval
process creates an unsustainable situation for the industry
players. Existing companies compete fiercely to
established and retain intellectual property rights, though
there is enormous risks and considerable investment is
involved within their operation. However, companies are
increasingly integrated their activity into global market to
achieve competitive advantage over the last two decades.
Regulatory processes also encourage international
harmonisation of pharmaceutical industry in recent years.
For example, in Europe EMEA was established to enable
rapid regulatory approvals through centralised procedure,
which grant approvals in all member states
simultaneously. This facilitates the industry to reduce the
cost and speedy market penetration. In order to achieve
competitive advantage, merger and acquisition by leading
players became common scenario in the industry. In
addition, core competencies such as R&D and marketing
and promotion typically facilitating pharmaceutical
industry to achieve competitive advantage. Overall, the
industry is highly valued and has a favourable market

30
position with strong financial make-up and strong earning
growth.

Bibliography and References:

Johnson, G., Scholes, K., & Whittington, R., (2008). Exploring Corporate Strategy:
Text and Cases. Harlow: Prentice Hall.
Battle of the open bars. Modern Healthcare, 01607480, 2/7/2005, Vol. 35, Issue 6

31
Porters, M, E., (2004). Competitive Strategy: Techniques for Analyzing Industries and
Competitors. Free Press: New York.
Grant, R, M., (2008). Contemporary Strategy Analysis. John Wiley & Sons, Inc :
Oxford.
Campbell, D., Stonehouse, G., Houston, B., (2007). Business Strategy: An
Introduction. Elsevier Ltd: Oxford.
D. Kesič: Strategic analysis of the world pharmaceutical industry, Management, Vol.
14, 2009, 1, pp. 59-

http://www.alliedacademies.org/Publications/Papers/JIACS%20Vol
%2013%20No%203%202007%20p%2065-70.pdf

http://findarticles.com/p/articles/mi_qa5452/is_200705/ai_n21289700/pg_
2/
http://www.ryanair.com/doc/investor/Strategy.pdf ( STRATEGY)
(

Appendix 1: Porters five force model:

Porters (1980) developed a framework for analysing the nature and extent of
competition within an industry. He argued that there are five competitive forces which

32
determine the nature of competition within an industry. In order to develop
competitive strategy it is imperative to understand and evaluate each five competitive
forces. The five forces are:
• The threat of new entrants to the industry
• Rivalry among business in the industry
• The threat of substitute products
• The power of buyers or customers
• The power of suppliers

Threat of new entrants to the industry:

The threat of entry to an industry by new competitors depends upon the height of a
number of entry barriers. Barriers to entry can take a number of forms such as the
capital costs of entry, regulatory and legal constraints, brand loyalty & customer
switching costs, economies of scale available to existing competitors and access to
input and distributor channels.

Rivalry among business in the industry:

Business within an industry is competing with each other in a number of ways.
Competition can take place on either a price or a non-price basis. The intensity of
competition in an industry will depend upon the following ways:
• The height of entry barriers and the number and size of the competitors in the
industry.
• The maturity of the industry
• The degree of brand loyalty of customers
• The power of buyers and availability of substitutes

The threat of substitute products:

Businesses are competing not only by manufacturing one characterized products but
also producing by substitutes as well. Porters (1980) argued that substitutes limit the
potential returns of an industry by placing a ceiling on the prices firms in the industry
can profitably charge. The more attractive the price performance alternative offered

33
by substitutes, the firmer the lid on industry profits. The extent of the threat from a
particular substitute will depend upon the extent to which the price and performance
of the substitute can match the industry’s product and the willingness of buyers to
switch to the substitute.

The power of buyers:

The extent to which the buyers of a product exert power over an industry depends
upon a number of factors. The more the power that buyers exert, the lower will be the
transaction price. The bargaining power of buyers can be influenced by the following
factors:
• The number of customer & the volume of their purchases
• The number of businesses supplying the product and their size
• Switching costs and the availability of substitutes

The bargaining power of supplies:

Suppliers can exert bargaining power over participants in an industry by threatening
to raise prices or reduce the quality of purchased goods and services. The factors that
can determine the strengths of suppliers are discussed briefly below;
• The uniqueness and scarcity of the resource that supplies provide
• The cost of switching to another resource
• How many other industries have a requirement for the resource
• The number and size of the resource suppliers

Appendix 2: World pharmaceutical market 2000-2005

Year Value in billion $ Growth in %
2000 358
2001 387 8.1

34
2002 422 9.0
2003 490 16.1
2004 547 11.6
2005 602 10.00

Source: World Review 2005.

Appendix 3: Leading world pharmaceutical markets in 2005

Position Markets Value in billion $
1. USA 248
2. Japan 67
3. Germany 29
4. France 26
5. United Kingdom 17
6. Italy 16
7. Canada 14
8. Spain 12
9. Brazil 9
10. Mexico 8

Source: World Review 2005

Appendix 4: Leading world pharmaceutical companies in 2005 (originators)

Company Country of origin World market share in %

35
1. Pfizer USA 7.4
2. Sanofi-Aventis France 5.6
3. GlaxoSmithKline United Kingdom 5.3
4. Novartis Switzerland 4.1
5. AstraZeneca United Kingdom 4.0
6. Johnson&Johnson USA 3.7
7. Merck&Co USA 3.7
8. Roche Switzerland 3.6
9. Wyeth USA 2.5
10. BMS USA 2.5

Source: World Review 2005

36