The global recession and accompanying economic fallout of the past year have further emphasized the need for Western/multinational pharmaceutical companies (MNCs) to expand and diversify their sales efforts beyond the United States. The large and growing markets of China, India, Brazil, Mexico, Russia, Turkey and other countries offer rising incomes, a burgeoning middle class, improved IP protection, fast-developing infrastructure and increased spending on health care. However, it is not yet clear which emerging markets will truly thrive over the next decade. Pharmaceutical companies should, therefore, formulate flexible strategies that take advantage of individual market opportunities while mitigating risks.
Each emerging market possesses a unique mix of factors that can both drive and inhibit pharmaceutical companies' entry and subsequent growth. Among these are:
· Core health care market characteristics - In addition to threats from geographic-specific diseases, emerging markets are frequently encumbered by a lack of health care basics (e.g., inoculations, prenatal care, pediatrics), which can lead to significant incidence of preventable complications and deaths.
· Demographic variations and cultural mindsets - Emerging markets see significant variability in pharmaceutical usage patterns between urban and rural areas. Additionally, variations in affordability, literacy levels, gender and age also contribute to differing levels of acceptance of Western medicine.
· Basic civic infrastructure - The absence of a good civic infrastructure that includes roads, schools, transport, etc., is an important systemic constraint in some emerging markets. MNCs can risk losing a large untapped consumer base because constituents simply cannot reach the point of sale.
· Health care access - The limited availability of health care professionals and the lack of care delivery sites such as hospitals and nursing homes greatly hinders a patient's access to care in these markets.
· Affordability - Although disposable income levels have been rising in markets such as China and India, factors including income disparities and high out-of-pocket expenses are limiting consumer healthcare expenditures. Without the ability to pay, patients resort to cheaper generics or traditional remedies, or in many cases simply forgo care.
· Intellectual property protection - Inadequate protection for patents often defeats strong brand awareness in emerging markets. Consumers frequently walk away with cheap knock-offs of branded products developed at a fraction of the cost by local companies. Resultant legal action also can produce frustration for MNCs due to lack of judicial awareness and enforcement, particularly in India and Brazil.
· Government practices - Government involvement in the health care system can differ widely within a country. As a result, MNCs are forced to navigate a regulatory maze, as well as significant differences in therapeutic area focus and investment priorities, depending on the region.
· Regulatory challenges - Systemic inefficiencies in emerging markets often plague the implementation of regulations, with continuously changing registration procedures, inconsistent application formats, frequent process changes, and chronically understaffed health ministries contributing to delays in time to market. Regulatory hurdles also take the form of government bias towards local industry in the form of subsidies and funding.
The strategic direction an MNC initially chooses can be influenced greatly by the factors that are most relevant to a particular geography. However, the variability and uncertainty inherent in emerging markets can make forming and committing to one strategy difficult because the assumptions the strategy was built on can rapidly change. We suggest that pharmaceutical companies consider a range of scenarios for each emerging market and study the strategic choices implicit in each scenario. We call this approach Strategic Flexibility.
Using Strategic Flexibility to overcome market constraints
There is no one-size-fits-all approach for Western pharmaceutical companies seeking entry and/or growth in emerging markets. However, by using Strategic Flexibility, an approach that combines scenario-based planning with real options, companies can formulate strategies that can help them effectively exploit market uncertainties for competitive advantage while mitigating strategic risks. The four-step Strategic Flexibility process consists of:
Step 1: Choose a strategic direction and identify trigger points.
MNCs planning to enter or re-enter an emerging market have a pool of strategic choices available to them, ranging across a continuum of investment risk and reward. Choosing the subset of this pool that would yield more favorable results depends on understanding the more important geographic factors, as well as company-specific factors such as the capacity for upfront investment, risk appetite, capabilities like technology and people, operational competencies, knowledge of/experience with the specific market or a comparable emerging market, and which future scenario the company believes is most likely. Trigger points are a set of leading indicators that precede a scenario. When the indicator reaches a predetermined value or state, the trigger point is activated, signaling that a key driver has changed and certain scenarios have become more likely. The company needs to change its set of strategic choices when a trigger point is activated.
Step 2: Formulate core and contingent strategy elements within the strategic direction.
After choosing a strategic direction and establishing trigger points, the next step is to use conventional strategic planning to define the strategy the company would employ to achieve its desired results under each of the competing scenarios.
Comparing the various strategies, executives can see which elements or initiatives appear in all strategies and which occur in only one or two. Those that appear in all scenarios are designated “core elements” and the company can invest in developing these capabilities because they will be valuable under any future scenario. Those that exist in only one or two scenarios are “contingent elements”-while crucial to one strategy, they may be unnecessary or even counterproductive under a different scenario. Note that core and contingent strategies may have synergies across markets, possibly making it more cost-effective to pursue those strategies and/or those markets.
Step 3: Create and manage real options for each contingent strategy element.
Once core and contingent elements have been defined for all of the scenarios, which contingent strategies should an MNC implement? A company cannot possibly invest in developing the capabilities for all of the contingent elements, nor typically will it be able to implement new strategies rapidly enough to change course if the assumptions about the market change. However, a company that strategically applies the concept of real options will invest just enough in various technologies, market segments, relationships or products suggested by alternate scenarios to keep a foot in the door without committing the company to those strategies. In this way, the company will have secured the right but not the obligation to quickly adopt a new direction if conditions change.
Step 4: If triggered, change direction and implement contingent strategy elements.
A company should stick to its chosen strategic direction for an emerging market unless a trigger point is activated indicating that conditions have changed. When this occurs, the company implements the appropriate contingent strategies by exercising the real options underlying those contingent strategies. A change in strategic direction may also mean that one scenario is no longer plausible and the company should abandon options related to that scenario.
New approach for senior management
Anticipating multiple, plausible scenarios, making strategic choices in the face of uncertainty and formulating core and contingent strategy elements is challenging. Such a framework of creating, preserving, and exercising real options requires a new approach on the part of senior management. Yet the results can be well worth the effort. Strategic Flexibility can provide pharmaceutical companies with the confidence they need to select and adapt a strategic path forward to an exciting future in emerging markets.
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