Discuss about the Global Business Strategy for Multinational.
It is important for any organisation to analyse the risk of entering and carrying operations in a foreign country before expanding its business over the international market. The analysis of risk and challenges helps to plan strategies that can be used to enter a new market beyond the geographical boundaries of the domestic market (Wrona and Trąpczyński, 2012). Currently, the increased intervention of the government and changing policies in the pharmaceutical industry makes it difficult for any organisation operating in this industry to carry on its business (Hanefeld, 2012). On the other hand, pharmaceutical industry is growing at a high pace across the globe that makes it essential for any domestic business to expand its business in the overseas market.
The paper has been developed to conduct an analysis of risk and challenge of two potential overseas markets namely South Africa and China for Herron Pharmaceuticals Pty Ltd. The study focuses on evaluating four risk factors such as commercial risks, financial risks, country risks and cross-cultural risks to choose the most suitable market for the company to expand its business. Furthermore, a proper justification has been provided on the choice of the best overseas market for the company. The paper also presents the market entry mode or strategy that must be used by the Herron Pharmaceuticals Pty Ltd to begin with its global operations.
Herron Pharmaceuticals Pty Ltd is one of the most famous Australian pharmaceutical products manufacturing companies, was established by Euan and Kaye Murdoch in the year 1972. The pharmaceuticals product manufacturing firm was originally set up from Herron Industries that is owned by Perrigo in the current business scenario (Herron.com.au, 2016). Herron Pharmaceuticals Pty Ltd has featured a vast range of pharmaceutical products that is a lot more comfortable for the target demographics in Australia. The pharmaceutical products such as paracetamol and Ibuprofen combination medical drugs can be identified as the best achievements for the organisation. Largely depending on the Research and Development (R&D) team of the group, Herron Pharmaceuticals Pty Ltd has marketed joint pain relief formulation such as OsetoEze and an entire range of vitamin formulated medicines specifically directed towards kids. Since, the handover of the pharmaceutical corporation to Mr Murdoch in 1982, the organisation has never looked back (Herron.com.au, 2016). At the present scenario, the organisation has been identified as one of the giants of Australian biotech and pharmaceutical industry headquartered in Brisbane, Australia.
As one of the largest manufacturers and distributors of Australian pharmaceutical industry, Herron Pharmaceuticals Pty Ltd deals in medication and treatment for arthritis, cholesterol, prostate insomnia, constipation, acne and other general health issues in the Australian market. The R&D team of the pharmaceutical product manufacturing firm has activity working on new drug patents promoting the healthy life of the target demographics (Perri, Scalera and Mudambi, 2015). Notably, Herron Pharmaceuticals Pty Ltd is a subsidiary of Sigma Pharmaceuticals. Meanwhile, the Australian pharmaceutical firm wants to be globalised to serve the people of other countries as well.
In the case of the globalisation of Herron Pharmaceuticals Pty Ltd, four essential risk factors such as commercial risks, financial risks, country risks and cross-cultural risks of the two identified possible target markets must have been discussed to justify the selection of the right target market. Meanwhile, in the underlying section, a discussion of the identified risks and challenges in South African and China pharmaceuticals market has been drawn.
South Africa is identified as the most crucial market for any pharmaceutical organisation in the African Continent. An analysis of the four identified risks and challenges of the South African context has been briefed herein.
Commercial Risks: South Africa is a potential market for pharmaceutical organisation because of lower number of competitors in the market. It is the largest pharmaceutical market in the African Continent. It can be seen through the statistical reports that the pharmaceutical sale in the year 2015 in South Africa is around $3.4 billion. It is estimated the sales figure will grow up to $3.84 billion by the end of 2020 that will make 1.17 percent of the total GDP of the nation (Overcoming barriers to medicines production through South-South co-operation in Africa, 2013). It can be seen through market research that the current market leaders operating in South African lacks adequate funding which acts as a great opportunity for Herron Pharmaceuticals Pty Ltd to expand its business in South Africa (Ziervogel, Archer van Garderen and Price, 2016). Hence, the absence of high level of competition provides a better opportunity to grow pharmaceutical business in the country.
Currency (Financial) Risks: The variation in the valuation of currency is an important factor that increases the risk of business in the international market. The current market valuation shows that one Australian Dollar is equal to 10.51 South African Rand. Hence, investing $10 million in South African market will provide the business with a valuation of 105.1 million ZAR (Majumdar, 2015). Hence, a fluctuation in the currency value of South Africa will not impact the Australian investment on a high level. In other words, the financial risk reduces due to the high variation of values of currency between the two countries. Australia is on a higher side in term of valuation of currency, which reduces the financial risk for Herron Pharmaceuticals Pty Ltd.
Country Risks: The labour market of South Africa is at its weakest point with 26.7 percent unemployment rate. Hence, the number of unemployment population provides the company with an opportunity to hire employees at low salary scale. On the other hand, the spending of people on healthcare has increased to $28.18 billion which is expected to increase more in the upcoming future. South African can be identified as a potential market in terms of economic prospects (Rodriguez-Monguio and Seoane-Vazquez, 2014). But, considering the political instability in the country, the risk level increases for Herron Pharmaceuticals Pty Ltd because of the chances in changes of political power in the country (Swilling, 2014). It is expected the changes of political power will impact the business policies that may negatively impact the pharmaceutical industry of South Africa.
Cross-Cultural Risks: South Africa is a mixed cultural country that has different official languages spoken by the people belonging to different regions. Hence, the communication gap may be a potential risk for the company. But, the influence of English people over the Africans in major business regions mitigates the level of risk that arises from difference in culture.
An analysis of the four identified risks and challenges of the Chinese context has been briefed herein.
Commercial Risks: Though the Chinese drug market is a massive industry, the generics have expected to dominate the market. According to the data sources, the generic drugs revenue is increasing in a staggered pattern to RMB 614.8 billion since 2007-2015. Moreover, the domestic pharmaceutical firms have relied upon innovation patenting drugs at a significant pace (The next phase: Opportunities in China’s pharmaceuticals market, 2011). Therefore, Herron Pharmaceuticals Pty Ltd may find it tough to compete in the Chinese market. Also, the pricing of generics is significantly low showing the R&D capabilities and government spending to the public. Hence, in near term, there are significant commercial risks attached to marketing pharmaceutical products of Herron Pharmaceuticals Pty Ltd in the China market (Luthans, Doh and Hodgetts, 2012).
Currency (Financial) Risks: Understandably, the structural differences of currency can be one of the major factors in determining prices of drugs in the Chinese market. Apparently, the China pharmaceutical industry is full of domestic drug manufacturers and distributors. As a result of the competitive market scenario, at the initial phase, Herron Pharmaceuticals Pty Ltd may have to suffer massive losses leading to undefined financial risks in near terms if the management selects China as the target market (Jiang, Wang and Yan, 2011). Also, the cost of licensing of pharmaceutical products and distribution will be significantly higher in China leading to further financial challenges.
Country Risks: The National Drug Distribution system and government reforms can be identified as the major country based risks in the Chinese market. As the Chinese pharmaceutical industry is a well-developed market already, there are fewer chances to expand for a new organisation (Yin, 2011). First, of the all, the top three domestic pharmaceutical commerce organisations such as Guangdong Jiuzhoutong Pharmaceutical, Sinopharm Group, and Shanghai Pharmaceutical have occupied 20 percent of market share of the industry showing the tough fight among the competitors in the domestic market (Ahn, 2010). Also, the government drug reforms and health reforms promote generics at the high level that can be considered as one of the negative factors for Herron Pharmaceuticals Pty Ltd operations management in China.
Cross-cultural Risks: Cross-cultural differences among the Australian and Chinese population can be recognised as another vital risk in operations management (Reuvid, 2008). The language, marketing concepts, business standards and etiquette have been somewhat distinct in Australia and China. Hence, Herron Pharmaceuticals Pty Ltd’s management can find it difficult to manage the workforce and executives in the Chinese market.
The above analysis of risk and challenges in both the nations shows that South Africa is a better market for Herron Pharmaceuticals Pty Ltd to expand its business as compared to the Chinese market. South Africa is a developing nation with a higher potential to grow economically. Furthermore, the level of unemployment in the nation provides Herron Pharmaceuticals Pty Ltd with employees at lower price (Buckley and Ghauri, 2015). Hence, the recurring cost of the company reduces, if it decides to expand its business in the African market. Furthermore, the people of South Africa are friendlier to English people because of the presence of English origin people in the country. Hence, Herron Pharmaceuticals Pty Ltd will receive a better welcome from the South African population as compared to the Chinese market.
Considering the economic factors of the South African market for the pharmaceutical industry, it can be seen that South Africa is a growing market for pharmaceutical products. The increasing spending on health and low level of competition provides a better opportunity in the South African market (Anderson, 2010). On the other hand, Chinese people mainly use organic products in more quantity as compared to artificially made medicines. Along with that, South Africa has a well established pharmaceutical manufacturing industry that is supported with foreign investment. Hence, Herron Pharmaceuticals Pty Ltd can easily enter the South African market using joint venture or directly owned subsidiary mode (Review Editor, 2012). The per capita spending of Africans on health products is higher than the Chinese that provides an attractive operating environment in the South African market. Along with that, the level of currency risk is also lower in the case of South African market as compared to the Chinese market that makes South Africa a more suitable market for Herron Pharmaceuticals Pty Ltd to expand its business in the overseas market.
On the basis of South Africa’s social, demographic and economic context, Herron Pharmaceuticals Pty Ltd has selected the pharmaceuticals industry of the country for globalisation perspective. Being one of the developed economies to a certain level, healthcare expenditure and government spending has surged in South Africa (Kyle, 2007). Understandably, Herron Pharmaceuticals Pty Ltd management need to identify the most sustainable entry mode to explore the pharmaceuticals market of the target economy. Based on capitalisation, collaborative entry strategy will be more acceptable than individual effort in order to penetrate the developing pharmaceuticals market in South Africa (Vogel, 2012). By identifying the market opportunities, target demographics profile, healthcare regulations and pharmaceuticals regulations in South Africa, joint ventures with domestic pharmaceutical product manufacturers and distributors operate in South African market can be considered as the best entry mode for Herron Pharmaceuticals Pty Ltd. In this way, Herron Pharmaceuticals Pty Ltd management can have a better understanding of the aggregated market demand of the pharmaceutical products offered to the target demographics (Biggadike, 2009). Meanwhile, such collaborative efforts with the leading pharmaceutical companies operating in the target market can provide significant distribution and marketing channels for Herron Pharmaceuticals Pty Ltd. Evidently, the value chain of the domestic Pharma companies can be utilised by the management to evaluate the untapped potential at the highest standards.
By introducing distinct distribution agreements with leading South African pharmaceutical companies such as Meda Pharma South Africa Pty Ltd, JSE Limited, and Roche Products Pty Ltd, Herron Pharmaceuticals Pty Ltd of Australia can lead to extensive market penetration (Viviers et al., 2014). Moreover, the affirmative business relationship standards with the domestic companies can provide a better market understanding so that low-priced drugs can be distributed within the system. Decisively, the joint venture with domestic companies can be helpful to understand the healthcare reforms, drug regulations, IPR protection laws, tax exemption to the foreign organisation in a better process (Biggadike, 2016). Moreover, Herron Pharmaceuticals Pty Ltd’s R&D team can work according to the demand confront of the target market patenting new drugs effective for the target demographics. The rising healthcare consciousness and improving marketing structure in the target market can be defined according to the standards of the South African market. Herein, the joint venture and certain distribution agreements of drugs with the famous local brands can be effectively utilised by Herron Pharmaceuticals Pty Ltd to minimise the cost of marketing and product distribution (Javalgi and Wright, 2013). Also, the cost of inventory and purchasing system can be controlled in a significant order using the inventory system of the domestic corporations.
Conclusion
The contemporary business scenario of Herron Pharmaceuticals Pty Ltd has promoted the essence of globalisation for significant profitability. The functions and capital structure of the organisation have also supported the decision of the management to spread the business to another foreign market. Through the identification of the existing business environment of the Chinese and South African pharmaceutical industries, it can be said that the South African market will be so much valid for better business regimes of the firm. Moreover, in order explore the business in the target market joint venture entry mode and significant distribution agreements with local pharmaceutical companies will be adequate for improved market penetration. Such decisive decision-making can reduce the cost of management and marketing. Additionally, the joint venture tactics will share the four identified risks so that the risks will be managed in an efficient way. Furthermore, the operational management of Herron Pharmaceuticals Pty Ltd in the target market will be equally supported by the market experience of the domestic firms promoting sustainable business growth model.
References
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