China and the Emerging Markets Challenge - Pharmaceutical Executive


China and the Emerging Markets Challenge

Pharmaceutical Executive

Do you know your competitors?

Then there is the matter of the growing strength of local challengers in the Chinese market. While the pharmaceutical market in China was fragmented with a large number of small, relatively weak players, in the future there will be fewer, but more formidable players. Hengrui, for example, which is based in Jiangsu and focuses on oncology therapeutics, went from being ranked 49th in the market in 2000 to being number 10 by 2011. And Shandong-based Qilu, a strong force among the local players, has moved from the 27th slot to number six over that time period. Both companies have a higher percentage of their portfolios with independent pricing status than other local companies. That pricing status, which is a government stamp for quality or technological differentiation, allows those companies to earn higher returns on those products and make commercial gains relative to their competitors.

The impact of such local players is already evident: Multinational pharmaceutical companies are losing ground in China. These global companies have seen their Chinese market share contract from 37 percent in 2000, to just 25 percent by 2010. If left unchecked, these competitive losses could undermine the long-term potential of global players in China.

Future imperative: find a new strategy

The problems facing pharmaceutical firms in China are not an isolated case. The situation reflects a larger trend: both the diversity and unpredictability of business environments faced by multinational corporations has increased in recent years. A BCG analysis of the volatility of market capitalizations and revenue growth shows a steady increase in the complexity and breadth of business environments faced from the 1960s to the present. As a result, companies need to segment the various environments in which they are competing and adapt strategies to match those conditions.

In reality, however, few companies—including pharmaceutical multinationals—are doing this. A 2012 global study by BCG's Strategy Institute published in the Harvard Business Review finds that six out of 10 companies either misperceive the character of their business environment, use the wrong style for their environment, or use strategy formulation practices inconsistent with their intended strategy style. Correcting such missteps is crucial: Companies that match their strategy styles to their competitive environment yielded three-year shareholder returns that were four to eight percentage points higher on average than those who did not.

Zeroing in on the strategy style that suits your environment can be achieved by examining two critical factors. The first is the predictability of that environment—how far in the future one can confidently forecast market dynamics. The other factor is the malleability of the environment—the extent to which you or your competitors can influence those market forces, as opposed to taking them as a given.

Putting those two factors into a matrix reveals four broad strategic styles, each with its own distinct planning practices and each suited to a particular environment. The first is "classical," a style geared toward an environment that is predictable but difficult to change. This is perhaps the most familiar style to pharmaceutical multinationals and relies on classical top down strategic planning. The second is "adaptive," a style that lends itself to a market that is unpredictable but also difficult to influence. "Shaping" strategy, the third style, is a good fit when the environment is unpredictable but where companies have the power to change or mold it. The fourth style, "visionary," works well in markets where there is both a good deal of predictability and companies have the power to change or influence the environment.

Figure 1: Different environments demand different strategic styles. Source: BCG analysis
There are some circumstances where none of these styles will work well, for instance when a significant external event such as a sharp economic downturn threatens a company's viability. In this situation a "survival" strategy is called for, one that requires a company to focus defensively on reducing costs and conserving capital (Figure 1).

What works for China?

Figure 2: Non-weighted average of industry environments within emerging countries. Source: Compustat, BCG analysis, World Bank
With these five strategic styles in mind, the question becomes: "What style fits the world pharmaceutical companies are now confronting in emerging markets like China?" A BCG analysis of global markets finds that a number of key emerging markets including China, India, and Russia all fall squarely into the unpredictable but malleable quadrant, characteristics that call for use of the shaping style of strategy (Figure 2).


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