Custom «Business-Level and Corporate-Level Strategies» Essay Paper

An Executive Leadership Team is the highest ranking decision making management body at Pfizer. It is a collaboration of top leaders in the company that focuses on major strategic, financial, and operational resolutions. In order for new biomedical research opportunities to be optimised, so that new medicines can make it to patients at a faster rate, Pfizer has created two different units of research known as: The PharmaTherapeutics Research and Development group, whose focal point is the finding of small molecules and its associated modalities; and the BioTherapeutics Research and Development Group, which deals with research on larger molecules such as vaccines.

In addition to this, Pfizer has built up a better business operational structure with nine different health care businesses. These are Emerging Markets, Oncology, Specialty Care, Primary Care, Established Products, Consumer Healthcare, Nutrition, Animal Health, and Capsugel. Each business is overseen by an executive who is responsible for results at every stage of development. This ranges from the product development that follows verification of ideas and its availing to patients right up to the conclusion of the life cycle of the product. The businesses are given adequate resources to take up lucrative opportunities for growth and to convey benefits worldwide to those reliant on Pfizer. This assists in rapid capitalization of the Pfizer business development by escalating support for new medicines that do well, creating joint ventures with important clients, having joint promotion and licensing contracts, investing in new technology, which enhances the core product, and acquiring new products and services (Pfizer Inc, 2012)

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Business-level strategy has shown a marked improvement in the last twenty years, but this alone is not enough to cater to the strategic necessities of multi-business companies such as Pfizer. Such companies require that each of their businesses has a strategy, and in addition, they must have a corporate-level strategy. This is designed to provide the justification for keeping all businesses grouped together under the aegis of common ownership and away from investors and shareholders. Various methods exist in corporate portfolios to assess the combination and make-up of business units. The first corporate portfolio developed was the growth-share matrix, also known as the Boston Consulting Group (BCG) matrix. This is a 2-D presentation of positions of business units which are determined by market growth rate and relative market share. It came about as a result of work done by the Boston Consulting Group on experience-curve effects, which showed that variable cost per unit drops by 10-30% every time the accumulated volume of time production experience is doubled. Price levels in any market segment for similar products were discovered to be similar, and therefore, profitability was determined by cost levels. The other pillar of the BCG growth share matrix is the concept of product life cycle, which involves an increase, stabilization, and decline over a period of sales of product.

The relationship between growth-share matrix and corporate strategy is defined by the experience-curve phenomenon. Costs are expected to reduce by a particular defined percentage every time a cumulative number of units manufactured, distributed, and sold doubles. The principles behind experience-curve dictate that as the amount of time during which a task performance occurs doubles, the variable cost is reduced by about 20%. It also dictates that an overall product line outlay declines with time in a manner similar to learning curve performance. The experience curve is not limited and applies to all areas from purchasing to production, marketing, accounting, etc (Segev, 2006).

Business-Level Strategies for Pfizer

The differentiation strategy, as outlined by Porter (1980), is concerned with the development of a unique product or with the creation of a perception that a product is unique in order to make customers willing to pay a premium for it. When a firm is not receiving premium price for its good, it cannot be viewed as a differentiator. Firms that follow the differentiation strategy focus on creation and improvement of resources that encourage customers to respond positively have a reputation for quality and/or innovation. Pfizer fits well into this category because according to the CEO, the increased expense discipline has come about through continuous efforts to make operations more efficient with emphasis on Research & Development. They rely on the patented nature of their products to guarantee them exclusivity in the market. The loss of the expiry of Lipitor’s patent in various markets led to a drop of 9% in revenue. However, Net Reported Income improved by 25% mainly due to the lower expenses and fewer outstanding shares (D’Amelio, 2012).

The low cost strategy is another pillar of business-level strategy that highlights the importance of having the lowest costs possible. Pfizer has adopted this strategy by putting an increased emphasis on efficiency in operations. According to the Smart Money (2012), the Net Profit Margin for Pfizer is 13.8%, which is lower by half for some of its principle competitors. This implies that it may not have the lowest cost position relative to competitors, although it is the largest research based pharmaceutical company in the world (Ahati, 2008). Pfizer’s over-reliance on Lipitor as its differentiator business-level strategy may lead to a significant drop in profits as the threat of generics becomes a reality. Going by their net earnings, according to the Wall Street Journal, of $8739 million, when their nearest competitor is at $6248 million, the strategy seems to be working for them so far.

Corporate Level Strategies for Pfizer

Pfizer’s financial performance can be summarized in the table below:

According to the CEO of Pfizer, the second quarter earnings posted a solid performance in spite of the noteworthy profitability of some products due to loss of exclusivity. This has been brought about because of the operational revenue growth witnessed in emerging markets, which reached 14% most notably in China and Russia, which recorded strong volume growth (Triano, 2012). The permutation of economies of scale, derived from total annual volume, and the experience-curve effect, which is derived from total cumulative volume, can dramatically influence the cost position of Pfizer through reducing the total cost by a certain percentage. The capacity to reduce these costs over a period gives the market share a quantifiable value. This can be then used as a strategic variable, according to the BCG method, under the premise that reduced costs affect market share and profitability in the long term as well as revenue generation are functions of market share (Segev, 2006). Market share is strongly affiliated with profitability, and therefore, the growth of Pfizer in emerging markets implies an expansion of market share, and hence, greater profits in spite of the loss of exclusivity of such products as Lipitor (Pfizer Reports, 2012).

Other corporate level strategies propagated by the CEO include value creation to shareholders by repurchase of shares and an anticipated filing of a registration statement that would facilitate a possible initial public offering of a maximum of 20% ownership in Zoetis, the animal health holding. The Pfizer corporate strategy seems to involve restructuring in order to minimize costs and create a leaner firm while raising fund through sales of subsidiaries and raising IPOs to fund product and/or company acquisition. This would lead to expansion into biologics market, which is a strong strategy going forward in order to maintain its competitive position in the market.

Competitive Environment

According to Ahati (2008), Pfizer’s main competitor in the global research-based pharmaceutical field is Merck and Co., Inc. These two companies have competed for a long time within the U.S. as they market similar drugs and have the largest market share in their field.

The second quarter earnings for Merck and Co. Inc were as in the figure below.

Unlike Pfizer, Merck does not have as a many business subsidies. This is because their focus is on research and development of new products, which they develop from phase zero. Pfizer, on the other hand, purchases small companies with phase three drug research and restructures them in order to achieve the rights to drug development and research. The second quarter Non-GAAP EPS saw a rise of 11% as compared to 2011. This compares favorably with the drop of 9% seen by Pfizer. Worldwide sales were up by 1% with all areas contributing to the growth. Pfizer meanwhile saw profit of 25% through reduced costs and growth of emerging markets rather than product sales. In fact, due to the loss of exclusivity of Lipitor, sales dropped rather than rose. This is contrasted with the double digit growth experienced by Gardasil, Januvia, Victrelis, Isentress, Janumet, and Zostavax from Merck.

Merck’s business level strategy seems to involve a focus on research and development of new drugs; therefore, their strategy is more in line with the core business, which is research and manufacture of pharmaceuticals. They have a wider scope for drug development, and their focus is not as narrow as Pfizer’s. In the long run, this may prove a better strategy, unless Pfizer can widen its portfolio or else adopt a low cost strategy for its business. At the corporate level, Merck is again doing better than Pfizer, with sales from emerging markets achieving 18%, according to their financial reports (2012), due to the diversity of their portfolio.

Fast vs. Slow Cycle Markets

The technological cycle difference between Merck and Pfizer is striking, according to Ahati (2008). Merck’s machinery time cycle is about six and a half years, while Pfizer’s is nine years. This two year difference puts Merck two and a half years ahead of Pfizer in terms of product innovation. In fast cycle markets, this means that Merck still comes out ahead. The pharmaceutical industry is a fast cycle market because there are always ways to improve pharmaceuticals in order to reduce side effects or increase efficiency or efficacy. Thus, Merck comes out ahead. However, should it have been a slow cycle market, then the opposite would be true and Pfizer would be leading.