Macroenvironmental factors affect the performance of every business and require companies to alter their strategies in a way that allows overcoming external and internal risks and capture opportunities more effectively. It is valid to say that international pharmaceutical enterprises must strive even harder to adjust to environmental influences because the global pharmaceutical industry is regarded as “one of the most dynamic, volatile, and innovative parts of the global economic environment” (Szmelter 2019, p. 57). The industry is heavily regulated by both national and international authorities (Holland 2016).
Besides, the situation in the pharmaceutical market requires continuous innovation, investment in research and development (R&D), and consideration of everchanging consumer characteristics and buying power (Holland 2016). These are merely a few of the factors and challenges that pharmaceutical companies should take into account in order to remain competitive and profitable on a global scale.
As one of the leaders in the pharmaceutical industry, Sanofi acknowledges the importance of R&D endeavours for the success of its business, and the firm’s orientation towards greater innovation may be viewed as its core strength. However, to understand Sanofi’s ability to grow globally and generate greater revenues, it is essential to evaluate its internal environment against the situation in the external one.
Thus, the analysis of the environmental forces affecting the global pharmaceutical industry will be conducted in the present paper. Both macroenvironmental and microenvironmental factors will be assessed by using the PESTEL and Porter’s Five Forces analysis. The evaluation findings will be applied to the identified Sanofi’s weaknesses and strengths and to provide practical recommendations for the firm’s performance improvement.
PESTEL Analysis
Political Factors
Governmental agencies across the world are actively involved in the activities of the pharma industry and control drugs in such aspects as their price, safety, and effectiveness. However, the regulations are normally government-specific and may vary in different countries. For example, enterprises in the United States enjoy a relatively significant degree of freedom in establishing prices. According to statistical data, drugs sold in the country are “on average two to six times more expensive than they are in other countries, and are a key contributor to the rising healthcare costs” (Wornow 2018, para. 2).
At the same time, drug prices in the United Kingdom and European countries are regulated by the local governments more strictly since they attempt to link prices to potential effects of the drugs (Holland 2016). Due to greater constraints, European pharma companies sometimes have smaller chances to reimburse R&D expenses compared to US enterprises. In this way, the degree of governmental regulation may influence firms’ willingness to undertake risks associated with costly and high-risk research of new compounds and remedies.
The drug approval process is lengthy and complicated in distinct parts of the world. According to Holland (2016), an average period of a new medicine creation is 10-15 years. While the discovery and preclinical testing comprise the lengthiest stage, the market approval of a drug usually takes just a few years (Holland 2016). Market authorisation and additional post-marketing testing are required in all countries.
While in such states as Germany and Sweden, market approval and post-testing are integrated, most countries separate them (Narayanan 2016). For example, in the United Kingdom, drugs are usually evaluated by the National Institute for Clinical Excellence (NICE) that aims to assess the usefulness and overall value of a new drug (Holland 2016). Similarly, the value of authorised medicines in the United States is assessed by multiple stakeholders involved in the healthcare systems and delivery governance (Narayanan 2016). Therefore, market penetration can be substantially delayed, which may affect revenues negatively.
Noteworthily, the trend towards evidence-based medicine and the development of treatment guidelines by such organisations as NICE may create problems in case the drug is not mentioned as a preferred remedy in those documents. Patients and prescribers tend to focus on recommended drugs while ignoring other available options even though they can be effective as well. Conversely, the inclusion of a product in guidelines is advantageous, which emphasises the importance of creating efficient and innovative drugs.
Economic Factors
Changes in the economic environment affect the pharma industry to a large extent. The level of consumer income is of significant importance since it defines their ability to purchase drugs. Considering that consumption of health products and insurance always declines during financial crises, recessions harm the industry since they frequently result in greater pricing constraints and changes in reimbursement programmes (Leopold et al. 2014).
For example, to reduce costs for biologics, the government may introduce a low cost-sharing for biosimilars, which will make this type of drug more affordable and, consequently, more competitive (Cohen 2019). Additionally, economic decline decreases enterprises’ profitability and therefore, usually reduces their spending for R&D (Cohen 2019). Thus, the opportunities to increase competitiveness diminish due to recession.
Another important factor to consider is the exchange rate because it affects imports and exports. A study by Motlagh et al. (2018) revealed that every 1% increase in the exchange rate leads to a 0.17% decline in medicine export in the short term. The findings imply that exchange rates fluctuations may adversely impact the international demand for pharma products and can be associated with revenue losses during import. However, it is possible to say that companies operating in countries with strong currencies are exposed to these risks less.
Social Factors
Any changes in consumers’ health-related behaviours can affect demand for certain medicines. Therefore, individuals’ lifestyles constitute an important category of social factors that impact the pharma sector. One’s lifestyle is shaped under the influence of general culture and economic conditions, as well as personal experiences, interests, and expectations (Aydin & Ünal 2015). A few of the current market trends associated with changes in consumer lifestyles are an increased interest in alternative therapies and medicines, greater health consciousness and overall informational awareness among the users of various drugs (World Health Organization 2019; Holland 2016).
means that the choice of drugs may be defined not only by a person’s economic status and their preferences for quality or drug effects but by their specific interests and perceptions as well. It is worth noting that lifestyles can also either prevent or increase the risk of multiple chronic diseases, including diabetes and hypertension, which are particularly prevalent nowadays (González, Fuentes & Márquez 2017). Thus, the demand for certain drugs is positively correlated with the prevalence of lifestyle-defined health conditions in the population.
The demographics substantially influence the pharma industry as well since many diseases are related to the ageing process. For example, in Japan, the growth in the rate of ageing population was associated with the advancement of the local pharmaceutical industry because, in response to the growing demand for chronic disease therapies, the pharma companies started to increase the output of drugs targeted at older adults’ needs (Shimura 2018). The pharmaceutical firms can use this demographic trend as an opportunity to invest in the development of healthcare solutions for people of advanced age who constitute one of their primary consumer groups.
Lastly, people are becoming increasingly interested in personalised services. According to Das (2017), precision medicine or, in other words, a targeted and holistic approach to therapy is one of the biggest trends in healthcare and pharma industry. As noted to Holland (2016), “personalised healthcare” business model can be used by pharmaceutical enterprises as an innovative method of price management and drug distribution (p. 554). Since it allows to provide costly drugs primarily to those patients whom they may benefit most, personalised healthcare allows maximising the value of medicines. It makes the model both profitable and attentive to consumer interests.
Technological Factors
Innovation and R&D are major sources of competitive advantage in the pharma industry (Holland 2016). Clearly, to conduct high-quality rigorous research and produce new chemical entities, an advanced technological infrastructure is required. It means that the level of a firm’s technological advancement directly affects its overall success. Nowadays, innovations in artificial intelligence, cloud computing, automation, virtual reality, and communication technologies provide pharma enterprises with opportunities to analyse large data sets, increase efficiency, and improve the overall work process not merely in research activities but marketing, e-commerce, production, and other internal operations as well.
Nevertheless, rapidly changing trends and developments in the technology industry create uncertainty (Rosenberg 1996). While the ability to foresee the role of emerging technologies in the pharma industry may result in greater innovation, the failure to adopt new technologies early may lead to substantial losses due to decreased competitiveness and lost market share.
Environmental Factors
As the public concern for environmental deterioration is growing and more attention is drawn to the negative effects of industrial production on ecology and communities, pharma corporations are also pressured to perform sustainability initiatives. Waste management is of particular concern in the industry since the production of antibiotics, steroids, and other potentially harmful substances is linked to substantial health risks, and there is a need to ensure that people who live nearby plants are not exposed to them (Larsson 2014).
At the same time, environmental strategies provide firms across different countries and sphere of performance with competitive advantages by differentiating them from rivals, improving their marketing competence, and producing additional customer values (Ko & Liu 2016; Hamdoun & Zouaoui 2017). Thus, it is essential for pharma enterprises to employ efficient environmental management systems as it allows them to manage their long-term strategic interests.
Legal Factors
The industry is exposed to strict patent and consumer protection laws. The former one is of particular importance for pharma industries because without obtaining a patent on a new drug in whose development a firm invested, it will lose a chance to prevent competitors from producing substitute medicines and may never reimburse the R&D expenses (Holland 2016). Since intellectual property rights contribute to competitive advantages, the players in the industry are in a constant race to establish them (Holland 2016). As for consumer protection laws, they aim to minimise potential harms to individuals purchasing and taking drugs.
Thus, consumer protection laws in almost in every country not only require testing potentially harmful goods thoroughly but also placing adequate instructions and warnings on them (Toit & Eeden 2014). However, if a tested and marketed medicine causes negative side effects, a pharma enterprise that produced it may face legal actions (Toit & Eeden 2014). It is valid to say that if the medicine affects many people adversely, the damage to a company’s reputation may be substantial and financial losses significant.
Porter’s Five Forces
Bargaining Power of Buyers
The bargaining power of buyers in the pharmacy industry usually depends on the type of the drug one wants to purchase and the disease it targets. For example, consumers usually can choose from a great variety of generic drugs produced by distinct firms. At the same time, fewer remedy options are available for such illnesses like cancer and HIV and, thus, patients with those conditions cannot switch their medication easily.
Additionally, a lot of those drugs require prescriptions and, therefore, patients cannot access them as freely as over-the-counter drugs. Moreover, in most countries, except for the United States, the advertising of prescription medicines is illegal (Holland 2016). Thus, patients substantially depend on the information about medicines provided by their practitioners.
The bargaining power of buyers is higher in the states with reimbursement plans that allow reducing the extent of patients’ co-payments. Besides, the governments’ control of the pricing and introduction of pricing limits aimed to control the rising healthcare costs tend to increase the bargaining power of buyers as well. Considering all the factors, the bargaining power of buyers in the industry may be viewed as moderate.
Bargaining Power of Suppliers
The bargaining power of suppliers in the global pharma industry is moderate. When it comes to the supply of Active Pharmaceutical Ingredients (APIs) necessary for drug production, a lot of large manufacturers produce them themselves (Rudner 2019). The vertical integration of API facilities creates a few advantages. Firstly, it allows reducing suppliers’ bargaining power and, secondly, limits rivals’ access to innovative ingredients. However, the global market for the production and supply of APIs is growing and new players appear in the market (Rudner 2019). Additionally, the need for more complex and high-potency ingredients is rising (Rudner 2019).
As a result, enterprises sometimes may benefit from outsourcing the supply of APIs, especially when they lack the necessary innovation. As for the producers of generics, outsourcing often allows them to reduce costs associated with the production of APIs (Mallu et al. 2015). This factor increases the bargaining power of suppliers in the industry. However, drug producers still tend to purchase APIs from multiple suppliers and change them frequently (Mallu et al. 2015). Thus, the bargaining power of suppliers is still not very strong.
Threat of New Entrants
The threat of new entrants is low in the global pharma industry. Substantial capital requirements for the creation of new drugs reduce opportunities for start-ups to emerge. It is valid to say that governmental’ approval regulations decrease the attractiveness of the industry for new entrants as well. Besides, since many medicines are patented, which limits’ profitability opportunities for new pharmaceutical organisations. However, authorities in developing markets, such as India, often refuse to patent certain medications considering a high demand for them and the overall low GDP and local income levels (Beall, Blanchet & Attaran 2017; Penfold 2015).
It means that it may be easier for emerging pharma companies to produce generic versions of highly demanded drugs in developing markets, yet the abovementioned factors still make the industry highly unattractive for new entrants.
Threat of Substitutes
The majority of branded drugs face a substantial threat of substitute. Firstly, considering the rise of the alternative medicine market, consumers increasingly prefer non-pharmacological treatment methods (World Health Organization 2019). Secondly, branded drugs may be substituted by generic and biosimilar medications, and the threat of substitutes is especially high when a patent for an innovation expires and allows manufacturers to produce cheaper versions of a previously patented drug (Holland 2016). As for biosimilars, their approval process is somewhat easier compared to the approval of regular drugs.
For example, the US Food and Drug Administration (FDA) only requires a biosimilar product to be compared to an existing “reference” product (FDA 2017, para. 2). While the trial of a biosimilar should be as rigorous as the clinical research of any medicine, the fact that manufacturers of this type of drugs may utilise the data associated with other already existing drugs may facilitate the evaluation process. In addition, biosimilars can be as safe and efficient as innovative and licensed drugs, which makes them highly competitive.
Competitive Rivalry
The global pharma industry is highly competitive, and the competition may be expected to intensify in the future. The major players are large international corporations and, among them, Pfizer (United States of America) was the most profitable in 2013 (United Nations [UN] 2015). Novartis (Switzerland) and Roche (Switzerland) became the second and the third in the list of leaders by revenue the same year, whereas Sanofi was only the fifth (UN 2015). Together, ten leading pharma enterprises make up around 30% of global sales (Business Research Company [BRC] 2018).
However, large companies now experience greater competitive pressures due to the rising number of generic drug producers in the developing world (UN 2015). While the consumption of generic medicines is still lower than the consumption of branded drugs in such developed countries as France, generics are more popular among consumers in India, China, and Russia (BRC 2018). To compete with generic drug manufacturers and with each other, international pharma companies focus on innovation and differentiation either through the development of new drugs or through mergers and acquisitions (BRC 2018). A significant competitive advantage may be achieved through the creation of a highly effective patented drug.
Sanofi’s SWOT
Recommendations
It is valid to say that the changes in Sanofi’s strategy, namely, the shift towards consumer healthcare business, the focus on external innovation, and the use of an integrated globalised operation model, will allow the corporation to succeed in the long term. At the same time, it may be suggested for the enterprise to explore the possibilities of entering into the emerging markets, investing into R&D associated with complex diseases and personalised healthcare, and innovating through the application of advanced information technologies and collaboration with diverse technology firms. It may be argued that these solutions are among the most promising in terms of organisational growth and competitiveness increase.
Firstly, according to recent statistics, the sales of pharmaceutical products in developing countries has increased twofold in recent years and attained a market share of approximately 20% (Tannoury & Attieh 2017).
The rapid growth rate is primarily due to the rising income level in those states and the expansion of the middle class (Tannoury & Attieh 2017). At the same time, the demand for effective and efficient drugs for both communicable and noncommunicable diseases remains substantially high among the members of the local populations (Tannoury & Attieh 2017). The significant growth rate, which is expected to progress in the future, provides an opportunity for Sanofi to capture a large market share by entering a developing market timely. However, it is essential to remember that those markets may be substantially monopolised and characterised by insufficiently advanced infrastructures and regulatory restrictions.
To reduce risks, the company may choose among a few entry modes, including joint venturing, licensing, and similar distribution agreements. For example, the establishment of a partnership with a local company will create a win-win situation and help Sanofi to benefit from the long-term presence of a partner in the market, as well as its superior understanding of the local business environment (Majumdar 2012). In a similar way, licensing allows expanding the consumer base.
Moreover, it assists in entering new markets quickly and without any substantial financial investments and helps to reduce the pipeline risk through the generation of sales from drugs that are already mature (Agarwal, Dreszer & Mina 2017). Obviously, the choice of the right strategy should be based on a comprehensive analysis of the potential market, as well as Sanofi’s own internal resources and capabilities.
Secondly, R&D of new compounds and drugs will remain a key factor of competitiveness and growth for Sanofi and, therefore, the company should search for various ways to innovate in this regard. For example, better integration of such disruptive technologies as digital analytics and delivery, cognitive analytics, progressive data management systems, automation, and machine learning will provide a chance to reduce operational costs and enhancing data analysis outcomes to a substantial degree (Digital transformation n.d.).
While improving the R&D productivity, IT-associated transformation also produces competitive advantages for businesses though cultural change, increase in internal flexibility, revitalisation of organisational value-chains, and stimulation of talent and skill development (Ismail, Khater & Zaki 2017). It means that technology-enabled change may have a favourable impact on both internal and external stakeholders.
It is valid to note that any advancement in the field of personalised healthcare is impossible without investment in a high-quality technology infrastructure and data analytics system. The exploration of targeted therapies requires an extensive analysis of patient data and the assessment of patient characteristics on the genetic level (The next horizon 2017). It means that besides integrating the latest technologies, Sanofi may benefit through investment in the field of genetic research and biotechnology sector. Like in the case with entering into the new culturally distant market, the company should approach the entry into these segments cautiously in order to reduce risks.
The best ways to do so is through partnerships, acquisitions, and mergers. Collaboration is a preferred method since it fosters the development of new competencies, generation of fresh ideas through interprofessional discussions, and moreover, allow securing financial resources (Lessl & Asadullah 2014). Overall, partnerships with technology firms are in line with Sanofi’s current orientation towards external innovation.
When it comes to the impacts of targeted medicine development on Sanofi’s performance, it should consider that this type of drugs will have much smaller demand than regular branded drugs (Institute of Medicine 2012). Nevertheless, it is noted that “higher efficacy for targeted groups can in fact yield more market share and help minimize the overall reduction in market size” (Institute of Medicine 2012, p. 11). Highly efficient targeted medicine may be regarded as a paramount of value-based healthcare and, therefore, it meets consumer interests to a substantial extent. Additionally, it is particularly beneficial for patients with complex health conditions that are usually hard to cure.
It means that discoveries in the field of biotechnology and personalised healthcare can improve public perception of the firm and will represent Sanofi as a world leader in drug development and healthcare innovation.
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