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.

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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

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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-businessstrategy.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://universityessays.tripod.com/critical_success_factors_csf.html

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and managerial position. NASDAQ and London Stock Exchange to increase its capital. To achieve a competitive position in airline industry it uses a cost reduction strategy.com 4 . Competitive Strategy and industry position: Ryanair market strategy is different to survive in the competition and gain a competitive position in airline market. And it admitted to the NASDAQ-100 IN 2002. competitive strategy and industry position. And it was required more investment on that time to become as a successful airline. Until 1990s it loses 20 million Irish pound.Rockart and Bullen presented five key sources of Critical Success Factors: the industry. In order to identify the competitive position of Ryanair.brs-inc. environmental factors. temporal factors. In airline industry needs huge investment for success of this business. The Industry: The characteristics of industry define its own critical success factor. In 1997 Ryanair first floated in Dublin Stock Exchange. Porters five force model is used below: Source: www. In order to position itself in the marketplace it continuously offers lowest fares.

British airways and EasyJets are main competitors of Ryanair. been taken over. And in 2006 annual report Ryanair indicated fuel price increased 74 percent on this year. European market as healthy with huge potential. That means new entrants need to compete with Ryanair – who have very big assets. Suppliers Power: Bargaining power of supplier in airline industry is high. According to Ryanair balance sheet after end of year 2006 Ryanair assets is 463. Risks and challenges are high on this sector.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. Ryanair has no choice in here. Air Lingus. although as many as 50 have gone bankrupt. Because not lots of manufacturer on this industry. or avoding such route altogether. disappeared or never got off the ground. The threat of entry in airline industry is not high because high amount of capital and investment is required into this. But some carriers withdraw them from routes where they clashed with Ryanair. for example My TravelLite from the Dublin-Birmingham route. and only incremental growth. 5 . Buyers’ power: The bargaining power of consumers or buyers in airline industry is high because lots of airline company on this business. Aircraft suppliers bargaining power is high as well. It’s showing a great leadership of Ryanair in low fares airline industry. Fuel price totally depends on world market. According to case study attractiveness of the budget sector in Europe is signified by the large number of entrants and rivals. even many of the competitors were losing money.43 million Euros. Rivalry among existing firms: Competition among existing airline companies is high because of matured and consolidates industry players.

therefore the pace and aggression of generic attacks on branded products increased sharply between 2002 and 2005. Any organization success based on its . Porters five force framework indicates that the pharmaceutical industry is highly valued or attractive. the firmer the lid on industry profits. Consumer can buy substitute drugs if the prescribed or branded drugs patent is expired. The industry has strong market position with strong financial make up and strong rate of return from invested capital. the price of generic is remarkably lower than patented or branded drug. The degree of threat of substitute product in pharmaceutical industry is medium in term of patent expiry. Overall. In addition. The core competency of generic drug is that it has no cost associated with its R&D. the overall market growth of generics exceeded sharply. as branded drugs were influenced by many forces. Consequently. During this period. The more attractive the price performance alternative offered by substitutes.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. 6 .

7 . http://www. (Johnson.org/pss/143977 Any service or product for which the nonessential features have been removed to keep the price low.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. 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.jstor.

specifically meals. For that passengers are beneficial from Ryanair airport choosing and route policy. Ryanaair use Frankfurt Hahn. But it was being widely ignored. 123 kilometers from Frankfurt. refreshment and hotel accommodation where in overnight stay is necessary. they must be offered a refund or rerouting and free care and assistance while waiting for their flights. Eayjet as well charge passengers for any more than one item of hold. safe/ secure. drink.Ryanair charges for check-in bags. 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. In 2006 Ryanair was voted the world’s least favourite airline. luggage like this extra services are not include with this price. Other rivals as well charge for hold luggage including Aer Lingas and FlyBE. However it scored well on ‘best fares’. And this kind of 8 . For example. As EU regulations if passengers affected by cancellation or delays. Food. Low fares are key elements of Ryanair strategy. best amenities (for example snack/food). But Sometime passengers don’t need for short time flight and they have an opportunity to saving money on long time flight as well. with easyjet coming second worst. In Ryanair passengers need to pay 8 Euro to rent a games and entertainment console. Ryanair typically cut overheads by choosing secondary and regional airports (with lower access charges) and by using one single type of aircraft. It expected financial compensation of up to 600 Euro where Ryanair compensation cost 250 Euro. But it meets customer’s expectation by providing low fares cost. Ryanair scored badly in comfortable seats. But most of these airports are significantly farther from the city centre. For these services customer need to pay extra. If passenger has no idea about this and if they go Frankfurt with Ryanair they will totally disappoint. which encourage passengers to travel with fewer bags or nothing. 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. End of the day passengers need to pay airport charges with their ticket price. It protects passengers from carry lots of bags in travel time and fears from lost their bags.

Leadership is defined by Bush and Glover (2003. fewer lost bags and fewer cancellation than any othe competitor to achieve their goal. Brent. position or reputation may result in others willingly deferring to them and seeing strategy development as their province. developing strategies and structures. School Leadership & Management. p29-38. Davies. DOI: 10. led by Michael O’Leary. 24 Issue 1.policy allows those passengers who do not require baggage. p. 1995:472) That reason it isolated by behaviour characteristic. (Stoner. 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. p. He is a man of ability and real experience. The Role of a strategic Leader: The role of a strategic leader are creating organisational vision.1080/1363243042000172804 They are individuals whose personality. Vol. (Johnson. 8) as a process of influence leading to the achievement of desired purposes. establishing core values. They are therefore personally identified with and central to the strategy of their organisation. 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. Feb2004. Barbara J. By: Davies.402) Early 1990’s Ryanair’s fight for survive and that time they saw a new management team. priority boarding or other premium services to travel for the lowest possible price.. 10p. It involves inspiring and supporting others towards the achievement of a vision which is based on clear personal and professional values. Ryanair’s strategy as well to provide best customer service by puctuality. fostering organisational learning and serving as a steward for the organisation. Ryanair focus on continue the Low Cost 9 .

reasoned decisions —specifically. Leadership and Strategy Implementation: Strategic leadership demands the ability to make sound. the aim of strategic leadership is to determine the ends. 2 Diagrams 10 . 45 per cent less fuel burn and 45 per cent lower noise emission per seat. and apply the most effective means. Also it provide better aircraft service. Winter2003. By: Guillot. Michael. 17 Issue 4. Michael O’Leary made policy to using same type of aircraft to keep staff training and aircraft maintenance costs as low as possible.friendly aircraft. In this continue fostering organisational learning inspired Michael O’Leary introduced Ryanair passenger’s to web-based check-in to save their time. On this way Michael O’Leary established its core value as a ‘low fares airline’. Air & Space Power Journal. These measures applied to all passengers. as well the extra time spent in airport security queues. That reason he started replace Ryanair fleets with new. Terrorist attacks on airline industry increase the risks and costs on this industry.Leadership in the European airline industry. p67-75. Since the aim of strategy is to link ends. And according to European low-cost carrier overview Michael O’Leary established Ryanair as a number one low-cost airline. choose the best ways. There was threat that passengers would choose other transport rather than face the inconvenience and expense of checking in luggage. Even Michael O’Leary declared to passengers no fuel surcharge for today. Vol. On this way he introduced Ryanair as an environment friendly aircraft and he reduced its operating costs on same time. ways. 9p. It imposed severe security measures at all airports. more environmentally. tomorrow or ever. consequential decisions with grave implications. W. As a strategic view it was a great success of Michael O’Leary. Ryanair affirmed that it would continue to offer the lowest fares in every market. Environmental concern about greenhouse gases from carbon now a public and political agenda worldwide. 1 Black and White Photograph. The new aircraft produced 50 percent less emission. and means.

Ryanair was most profitable airline in the world. quirky. Michael O’Leary established it’s as a profitable organization. or it might simply be that the individual has consciously. irrelevant strategies’ 11 . This might be by using the sort of techniques associated with strategic analysis and evaluation. be ‘hubris. helps create the shared beliefs within which people can work together effectively and shapes more detailed strategy developed by others in an organisation.2 ● Strategy leadership as command. however.2) that motivates others.According to Michael O’Leary it’s easy to sell low fares but hard to make profits from their. It could be that the strategic leader has thought through the strategy analytically.5. unorthodox strategies that are difficult for other companies to imitate’. It could be that a strategic leader determines or is associated with an overall vision. mission or strategic intent (see section 4. however. perhaps. How such an intention comes about can. In any of these circumstances. ‘Air Transport world’ magazine announced in 2006. 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. Danny Miller and Isabel Le-Breton suggest there are advantages and disadvantages here. excessive risk taking. ● Strategy leadership as vision. The downside can. This is. be explained in different ways: ● Strategy leadership as design. On the plus side it can mean speed of strategy adaptation and ‘sharp. most evident in ownermanaged small firms. Some writers see this as the role of the strategic leader. The strategy of an organisation might also be dictated by an individual. innovative. strategy may be – or may be seen to be – the deliberate intention of that leader. where that individual is in direct control of all aspects of the business.

Low fares are key elements of Ryanair strategy. And this kind of policy allows those passengers who do not require baggage.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. 12 . fewer lost bags and fewer cancellation than any othe competitor to achieve their goal. drink.Ryanair believes low operating costs strategy is very important as well to establish them as a low cost airline leader in Europe. For these services customer need to pay extra. Food. Ryanair’s strategy as well to provide best customer service by puctuality. luggage like this extra services are not include with this price. priority boarding or other premium services to travel for the lowest possible price.

Research and development (R&D) and marketing and promotion are the core competency of global pharmaceutical industry. 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. generic in 1970s and biotechnology in 1980. 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 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. With respect to core competency in R&D in the pharmaceutical industry. to 13 . the technological areas that leading firms exploited for discovering new drugs. Competencies in marketing and promotion have changed from direct selling to physicians 1950s to blockbuster marketing 1980s. for example.

Direct to consumer marketing is the key strategic capability demanded by branded OTC drugs. 1. On the other hand. Environmental and Legal. R (2008:65) noted that PESTEL framework is not intended to provide an exhaustive list. For instance. R&D and marketing and promotion capabilities are underpinning the competitive advantage of the global pharmaceutical industry.. In order to identify the key into: external Political. but it gives examples of ways in which strategies are affected by such 14 . the key strategic capabilities of ethical companies are R&D and sales and marketing. Technological. Several framework are exists to support an environmental analysis of industry. Scholes. Social. 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.specialized selling and handling of regulatory requirements. attract funding and make successful deals as their strategic capability. G. Johnson. K & Whittington. biotech needs to create and defend their intellectual property in specialised research field. Consequently. management gurus suggested analysing the PESTEL framework which categorizes factors Economical. forces.

the EU. Majority of global pharmaceutical sales originate in the USA. As a result. Food and Drug Administration (FDA) and European Medicines Evaluation Agency (EMEA) have been formed as government in the regulatory USA and body of pharmaceutical industry European countries respectively. 1. China and Japan. Political forces: The pharmaceutical industry witnessed increased political attention over the years due to control rising health care expenditure.1 PESTEL Framework: To identify and understand the influence of the macroenvironmental forces on global pharmaceutical industry it is imperative to analyze the PESTEL framework. 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. Mexico. Ten geographic markets contributing 15 . Economical Factors: The growth of pharmaceutical industry is aligned with the GDP growth of a country.influences and some of the ways in which organisations seek to handle aspects of their environment.

For instance. Social Forces: Social responsibility has very strong influence on pharmaceutical industry. Besides. cancer and HIV put pharmaceutical industry in an enormous pressure. In recent years. the impact of various rising epidemics such as swine flu. The European market contributing approximately 30% of global sales out to 2009 and it makes up third position for the pharmaceutical. The rationale behind merger and acquisition was to tie up a company within strong pipeline and to leverage investment in technology platform. because of some companies fraudulent and antitrust violent. 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. led the pharmaceutical industry to think strategically in order to survive in the global and local market. Merck was accused for withdrawn of 16 . 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.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. the reputation of the pharmaceutical industry damaged entirely. Intense Merger and Acquisition (M&A) in the last decade.

ensuring 17 . Environmental: Environmental issues in the pharmaceutical industry pose a complex challenge to industry players and have the potential to considerably impact its cost. environmental issues such as reducing pollution. Regarding this technology can only integrate firms into global market. However. 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.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. Furthermore. Another considerable condemnation regarding the industry is it is incapable to fulfil enormous unmet need in developing countries because of high priced medicine. To compete effectively. 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. technological advancement is increasing consumer awareness regarding the risk and benefiting factors of pharmaceuticals. Critics from consumer organisation assailed the high cost of drugs even as Medicare is rolling out its prescription drug benefit. industry players should integrate its activities into global market.

On the other hand. Legal forces: Legislations for regulating the pharmaceutical industry had dramatic impact on pharmaceutical growth in different ways in recent years. programmes key with the aim of enabling people to enjoy better. In 1970s. healthier and more The corporate responsibility principles of Merck are to consider high ethical standard operation. pharmaceutical industry became political target in order to control rising healthcare expenditures in 1980s by the governments around the 18 . the thalidomide tragedy led to much tighter regulatory controls on clinical trials and legislation for fixed period patent protection was also passed. access to quality health care system around the world. Therefore.good health and safety are considered as an integral part of the corporate responsibility for the pharmaceutical industry as a strategic tool. Moreover. GlaxoSmithKline makes a considerable investment in its community and in corporate fulfilling citizenship lifestyle. ensure the better health and safety of their colleagues and communities around the world through innovation and ethical operation. 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. company like Pfizer is committed to protect the environment.

2 Porters five force model: In order to identify the competitive forces and industrial structure of global pharmaceutical industry.world.5 months in 2005. Stringent government regulations make it difficult for the pharmaceutical industry to manufacture and market a new drug within a short period of time. Porters five force model is used below: Source: www. 1. safety.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 . stability.brs-inc. efficacy and tolerability which was really a time consuming process averaged 12. For instance. FDA in the USA thoroughly examine all of the data of a new agent in relation of its purity.

coupled with the reaction from existing competitors that the entrant can expect. in the USA government agency FDA creates obstacle for approval of new drugs. Rivalry among existing firms: Competition among existing pharmaceutical firms is high because of matured and consolidate industry players. Moreover. Therefore. government regulatory policies in pharmaceutical industry discourage new entrants to some extent. 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. In 2005 the agency took 12. For instance.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.present. the leading companies already have established strong financial position in the market which generates 20 . 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. 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. new and small companies need to concentrate on developing blockbuster drug in their future pipeline.

As a consequence. Suppliers Power: Bargaining power of supplier in pharmaceutical industry is low as leading players do not provide enough opportunity for negotiating.high margin. The countries which have supply side controls. companies with consistently high level of R&D spending productivity become industry 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. Buyers’ power: 21 . In addition. the trend towards the globalisation facilitated the pharmaceutical industry to relocate their manufacturing in convenient locations which as a result impaired the supplier power. Moreover. 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. negotiating price or reimbursement approval can take more than a year because of low power. players. 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. they are able to invest huge amount of financial resources for innovation and product and differentiation of new the drugs.

Consumer can buy substitute drugs if the prescribed or branded drugs patent is expired. According to the case study prescription drugs embrace about 80% of the global pharmaceutical market and 50% by volume. In addition. therefore the pace and aggression of generic attacks on branded products increased sharply between 2002 and 2005. 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. Moreover. the price of 22 . the firmer the lid on industry profits.The bargaining power of consumers or buyers in pharmaceutical industry is low because they have no choice but to buy what doctor prescribes. Consequently. recent price increase for generic and branded drug have reduced consumer bargaining power to some extent. The core competency of generic drug is that it has no cost associated with its R&D. as branded drugs were influenced by many forces. The more attractive the price performance alternative offered by substitutes. The exclusive aspect of pharmaceutical industry is that the end user of pharmaceutical products is different from the influencer (doctor). the overall market growth of generics exceeded sharply. The degree of threat of substitute product in pharmaceutical industry is medium in term of patent expiry. During this period.

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. 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. The industry has strong market position with strong financial make up and strong rate of return from invested capital. Global pharmaceutical industry is facing increasing political pressure to reduce 23 .1 Changing government policy: Government policy is considered as one of the major influencing force for any business. Overall. however it is imperative to identify and analyse such implication separately. 2. Therefore.generic is remarkably lower than patented or branded drug. Porters five force framework indicates that the pharmaceutical industry is highly valued or attractive. 2.

competitive advantage of pharmaceutical industry is being continually redefined and being forced to overhaul industry structure. Therefore. price control creates another challenge for the industry in the form of parallel trade. patented drugs for the treatment of hey fever lost 84% of US sales within 12 weeks in 2006. 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. alliances in form of merger and acquisition over the last two decade changed the competitive environment of pharmaceutical industry. During the 1970s. where the pharmaceutical industry is subject to a monopoly. High level of R&D spending and innovation of blockbuster drug led company to be industry leader. became top tier global company by launching a blockbuster single drug Zantac for the treatment of stomach ulcers.price and control cost. In addition. 2. due to patent expiries. According to Allegra. For example.2 Increased Competition: Global pharmaceutical industry has been changing profoundly due to intense competition among key industry players. As a part of government regulatory initiative. 24 . the government is only one powerful purchaser and therefore. Glaxo for instance. the pace of market penetration of a new drug is very slow.

2. it is best to be a leader or a follower in innovation (Robert M. acquisition or licensing strategy. merger resulted in the formation of Novartis.3 Merger and acquisition: Intense merger and acquisition among leading firms changed the competitive environment of pharmaceutical industry in the last decade. Therefore.4 Innovation: Innovation through high amount of spending on R& D becomes industry leader over the last two decade. For instance.Grant. companies that were not good at product development and research were acquired by innovative company. Pfizer overtook Merck as an organic growth strategy. Innovation becomes the key because strategic of tool of pharmaceutical industry manufacturing 25 . Moreover. AstraZeneca and GlaxoSmithKline when Monsanto and Pharmacia acquired by Pfizer. merger. The big industry players are generating high revenue and hence are able to supply extra investment for rapid development through organic growth. Sanofi-Aventis. 2. Licensing strategy was used by companies which require presence in the key markets. To gain competitive advantage in emerging and technologically intensive industries. 2008:300). As a consequence. family owned medium sized European pharmaceutical companies were forced to consider M&A as a survival strategy.

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 2020.5 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. condemnation regarding unmet social need in developing countries and high cost of drugs led pharmaceutical industry to be more innovative. 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. 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.blockbusters medicines.1 Use of PESTEL Framework: PESTEL framework is used to identify and analyze the environmental forces which influence the business from outside. In order to get a big picture of 26 . Per capita healthcare spending of a government is highest among over 65s because the death rate is highest in this age group. Use and limitations of the tools: 3. According to the Roche report. Furthermore. 2. 3.

The framework can easily identify the political. 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. 3. Japan and China. Identifying and evaluating the key drivers of change which might have immense impact to the structure of an industry. PESTEL framework is considered as useful tool by scholars of strategic management. As the key marketers of global pharmaceutical industry are developed countries such as the USA. Moreover. social.2 Limitations of PESTEL Framework: PESTEL is a common tool for identifying and analyzing the macro environmental forces and their influences to a business. operation and direction of organizations at macro level 27 . environmental and legal forces that influence the strategic position of a company.environment of an organization in which it is operating and the opportunity and threats that lie within it. it is imperative to use this tool in global risks pharmaceutical associated with industry the for understanding perspective. Canada. economical. the importance of PESTEL factors are limited if they are only seen as a listing of influence. therefore the PESTEL analysis can majorly identify and analyze the influencing factors of these key markets which would not be consistent in case position. technological. EU. Therefore. sector or market is imperative for the business.

4 Limitation of five force model: Porters five force model is also criticized because of its several important limitations. All five competitive forces jointly determine the intensity of industry competition and profitability. 3. and the strongest force or forces are governing and become crucial from the point of view of strategy formulation (Porter. Rumelt (1991) argued that although there is some evidence to support this claim. Porters observed that there are five competitive forces which determine the nature of competition with an industry. 3. 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.of the developing countries as there is enormous difference between developed and developing countries business environment. 1980:6).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. there is also strong evidence to suggest that company-specific factors (such as individual competences) are more important to the profitability of individual 28 . Porters (1980) observed that the framework make it possible to assess the potential profitability of a particular industry.

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. 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. but to examine it in addition to other strategic frameworks of SWOT and PEST analysis (Kippenberger. Therefore. However. Conclusion 29 . As the pharmaceutical is considered highly competitive therefore. 2001). 2007:142). the model can only provide snapshots of pharmaceutical industry’s competitive picture.businesses than industry factors (Qtd in Campebll et al. 1998. Haberberg and Rieple. it is not advisable to develop a strategy solely on the basis of Porters model. As the model is based on eighties economic condition therefore.

core competencies such as R&D and marketing and promotion typically facilitating pharmaceutical industry to achieve competitive advantage. Political social and and expectations. 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.Global attention. though there is enormous risks and considerable investment is involved within their operation. In addition. merger and acquisition by leading players became common scenario in the industry. However. has competitive technological changed advancements globalization structure environment. which grant approvals in all member states simultaneously. In order to achieve competitive advantage. Regulatory processes also encourage international harmonisation of pharmaceutical industry in recent years. companies are increasingly integrated their activity into global market to achieve competitive advantage over the last two decades. For example. Existing companies compete fiercely to established and retain intellectual property rights. the industry is highly valued and has a favourable market 30 . observed rapid development and change over the past 50 years. Overall. in Europe EMEA was established to enable rapid regulatory approvals through centralised procedure. This facilitates the industry to reduce the cost and speedy market penetration. pharmaceutical economic the industry industry value.

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He argued that there are five competitive forces which 32 . Stonehouse.org/Publications/Papers/JIACS%20Vol %2013%20No%203%202007%20p%2065-70.. Vol.pdf ( STRATEGY) ( Appendix 1: Porters five force model: Porters (1980) developed a framework for analysing the nature and extent of competition within an industry.Porters.pdf http://findarticles. 1. Houston. pp. (2004). Grant.com/p/articles/mi_qa5452/is_200705/ai_n21289700/pg_ 2/ http://www.. Competitive Strategy: Techniques for Analyzing Industries and Competitors.ryanair. Inc : Oxford. R. M. 2009. Elsevier Ltd: Oxford. Contemporary Strategy Analysis. D. Free Press: New York.com/doc/investor/Strategy. 59- http://www. Management. Campbell. G.. (2008). Kesič: Strategic analysis of the world pharmaceutical industry. John Wiley & Sons. B. M..alliedacademies. 14.. (2007). E. Business Strategy: An Introduction. D.

regulatory and legal constraints. 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 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. 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. Rivalry among business in the industry: Business within an industry is competing with each other in a number of ways.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. brand loyalty & customer switching costs. Competition can take place on either a price or a non-price basis. economies of scale available to existing competitors and access to input and distributor channels. 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. The more attractive the price performance alternative offered 33 .

by substitutes. 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 lower will be the transaction price.1 Growth in % 34 . The more the power that buyers exert. The factors that can determine the strengths of suppliers are discussed briefly below. 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 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 2000 2001 Value in billion $ 358 387 8. the firmer the lid on industry profits. 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.

4. Markets USA Japan Germany France United Kingdom Italy Canada Spain Brazil Mexico Value in billion $ 248 67 29 26 17 16 14 12 9 8 Source: World Review 2005 Appendix 4: Leading world pharmaceutical companies in 2005 (originators) Company Country of origin World market share in % 35 . 7. 5. 10. 9. 3.6 10.1 11. 6.2002 2003 2004 2005 422 490 547 602 9. 8. Appendix 3: Leading world pharmaceutical markets in 2005 Position 1. 2.00 Source: World Review 2005.0 16.

4 5. BMS USA France United Kingdom Switzerland United Kingdom USA USA Switzerland USA USA 7.7 3. Sanofi-Aventis 3.3 4. Wyeth 10.1. Novartis 5.5 Source: World Review 2005 36 . AstraZeneca 6. GlaxoSmithKline 4.0 3. Merck&Co 8.6 5.6 2.7 3. Johnson&Johnson 7.5 2.1 4. Pfizer 2. Roche 9.

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