Mng00723 | Business | Risks Assessment Answers
Case Scenario:
AUSMED, an Australian pharma company manufacturing drugs, has grown fast in the last 10 years. It currently employs 60 staff and has an annual turnover of approximately AUD 30 million. However, growth has recently stalled, and AUSMED is now considering South Africa and China to expand its business, and enter the global marketplace for the first time. As an Operations Manager at AUSMED, prepare a report (2500 words) for the company’s executive summarising the risks and opportunities in each of these two countries, recommend the best destination country, and an appropriate entry mode for the chosen country.
For this assessment task, you are expected to demonstrate your understanding of the following:
• How to assess country potential through an analysis of risks and opportunities. Risks that should be emphasised (but not limited to) in particular are those relevant to pharmaceutical businesses such as legal aspects, government regulations and financial/currency risks. Opportunities may include (but not limited to) market size, economic growth and trade agreements between the 2 countries.
• How to identify the best market entry strategy based on the business type and host country business environment (this includes but not limited to the level of economic integration between home and host country, the political and legal environment of the host country). The recommended strategy must be well justified based on all the factors (e.g., organisational goals and objectives, resource requirement, degree of control required, risks in the target market, etc.) to consider when deciding entry strategy.
Answer:
Introduction
AUSMED’s local market capitalization has surpassed expectations thus resulting into stalled local growth. The stagnation of the local growth calls for the need to expand regionally and internationally by capturing new market niches in the global markets. To do so then, AUSMED needs to create an international influence and thus start operating on an international scale. This aspect is a globalization approach will enable the pharmaceutical company to expand the current market base locally and abroad and provide an opportunity to continue searching for new virgin markets thereafter.
Expansion of the markets into international markets is not only a means of ensuring growth of the pharma company but also advantageous when it comes to reducing operational costs by spreading overhead costs when operating in countries whose currencies are deflated compared to the Australian dollar (Azuayi, 2016), for this reason, therefore, China or South Africa will provide a better option. The foreseen market expansion is an internationalization approach that will redefine the future of AUSMED in capturing global space and increase operational efficiency, equity turnover and ensuring constant growth worldwide.
However, capturing and entering international markets is not a free ride and will likely come with a lot of bottlenecks that the pharma company must be able to whether away as it considers the entry strategies into the new markets. These challenges range from economic, political, social, religious among other parameters.
Risks and opportunities
China
Government regulations risk
China has a very vibrant economy on the business front and is poised to overtake the likes of economic giants such as the US in a couple of years (Herdly, 2018). With a large land mass and the ever increasing populations in China, this offers a good opportunity for foreign company entry into the ever-increasing markets and readily available cheap labor. AUSMED could surely capitalize on this aspect. However, as Herdly (2018) rightly identifies, Chinese market entry for foreign companies is not that simple considering many imposed regulations to govern foreign company operations in Chinese soil. Severe restrictions or many regulations for instance in the health sector in China could prove stringent for AUSMED and the like-minded companies in setting base in China.
The Ministry of Health (MOH) and State Food and Drug Administration departments in China play important roles in enforcing regulations yet still, these organs are represented in the provincial levels in implementing the regulations. With such levels of regulations, AUSMED will have to maneuver its ways down to identify which body will be responsible for overseeing their entry into a locality of choice in China. China also has very strict Environment Impact Assessment Laws that pharmaceutical companies like AUSMED seeking to set base in China must conform to, failure to which would be subjected to harsh legal frameworks therein (ZHU, WU & CHANG, 2005).
Quality Control Risks
Chinese regulations on quality control are very stringent for foreign companies entering businesses in China. This is after the 2008 poisoned milk scandal as stipulated by Huang (2018). Foreign companies must be able to conform with quality requirements as per the Food Safety Law of 2009 which prohibits any use of unauthorized additives on food and any pharmaceutical product. AUSMED must there work around these regulations regarding quality of the pharmaceutical products it seeks to produce into China. Any alteration or tampering with pharmaceutical products may be harmful to the user and contravenes these quality laws hence may hurt the reputation of AUSMED leading to legal actions.
Pricing strategy risk
AUSMED being a foreign company must come up with appropriate pricing strategies for its products that best suit the locals. A public outcry on overpricing could prove detrimental to the image of the company. Overpricing could also likely lead to counterfeiting of the products which on the other hand would also hurt the image of the company in the cases of quality risks. There is also a possibility of pharmaceuticals being bought by cartels and resold abroad again under new company names.
Theft of intellectual property
China is largely known for its innovativeness. The population increase which is good considering hiring labor could also be dangerous to daunting the progress of AUSMED. If AUSMED sets base in China, there is a high possibility of hiring Chinese labor force. If in case such employees would learn the formulation of various drugs during production, they could use the same formulation to produce a competitive brand in the market leading to theft of the intellectual property rights which is likely to push AUSMED out of business (Haq, 2015).
Legal risks
According to US-Chana Business Council (2018), Chinese legal frameworks make it difficult for foreign companies to operate in China especially in line with legal processes companies are subjected to. Ranging from licensing to getting approvals to operate in China has been very daunting to various companies. Further, these hurdles are not only on regulations but much more rooted at the government level and disintegrated to provincial and municipal levels adding up to many other regulations (Jones and Daniels, 2018).
Opportunities in China
Despite having the outline risks above, China also presents good market opportunities for emerging foreign companies such as AUSMED. According to (Ni et al., 2017), China has weak research and development structures in pharmaceutical sector coupled with homogeneity in pharmaceutical products all of which are great barriers to the development of need-satisfying products of the local populous. This is a niche to be captured by AUSMED and stamp its reputation in a foreign land by putting in place adequate research and development in its production in order to produce need specific pharmaceutical products that can compete favorably in the foreign market.
Secondly, the large population in China is a wonderful opportunity both for sale of the AUSMED products and for cheap labor during production and general operations. Demographic differences in Chinese provinces, for instance, different per capita income, population, literacy levels, spending habits and general lifestyles provide a huge opportunity to the choice of location which offers the best entry perspective (Haq, 2015).
Thirdly, the demographic differences such as spending characteristics, and lifestyle in a developing nation such as China gives a worthier opportunity for AUSMED to clinch as it opens up untapped markets where the working population will require a variety of drugs and other pharmaceutical products. This will result to increase in sale volume hence the company will realize higher profits over and above the costs of operations (Haq, 2015).
Haq (2015) also asserts that entry into new markets, for instance, AUSMED's entry into Chinese market will come with reputational and impact recognition in the global markets if say for instance AUSMED company was to comply with quality issues and produce best quality pharma products in the foreign market. This will earn the company reputation both in local, regional and international markets hence ensuring high sales output, profits, and eventual further expansion.
Lastly, new market entry is a means of portfolio diversification (vanRossum, 2018). AUSMED's move into the foreign market such as China will diversify its operations making it more flexible and efficient in identifying risks and ways to abate them. It will also enable the company to eliminate overreliance in local markets which as has been rightfully identified is tolled.
South Africa
Government regulations
Compared to China, South Africa is equally very keen on regulations of any pharma company seeking to enter the market. (Butler, 2016) identifies that pharmaceutical companies in South Africa operate under strict compliance with regulations which balances the interest of patent holders vis-à-vis the targeted populations. Butler (2016) further identifies that South Africa is constantly battling heavy disease burden hence reliant on medical aids which in turn hurt the pharmaceutical sector distribution channels. The failure of the South African government to agree to the harmonization of registration of medicines in Africa through the African Medicines Registration Harmonization Initiative (AMRHI) has continued to hurt medicine registration by multinational companies (Narsai et al, 2012), this is a likely risk of entry for new pharma companies such as AUSMED.
Intellectual property risks
The South African move through the Department of Trade and Industry to reform the National policy on intellectual property rights of 2013 puts new pharma companies at risk of battling it out with generic drug producers as the reform will harmonize operations eliminating monopolies in the sector. In so doing, this move will hurt multinational companies such as AUSMED since the market could probably flood with generic drugs resulting in lowered costs of medicines (Butler, 2016).
Pricing Risk
South Africa’s overreliance on medical aid puts multinational pharmaceutical companies at the risk of low pricing of their products in order to compete favorably with other local producers. Inadequacy in regulations curbing the reliance on aid medicine and generic medicine producers (Bangalee and Suleman, 2018) is a great disadvantage to emerging foreign companies such as AUSMED.
Financial risks
Due to inadequate financial policies protecting multinational and foreign companies in South Africa, pharma companies seeking to base in South Africa run the risk of over taxation. This will limit the freedoms of such firms to structure optimization approach of their taxes leading to heavy losses due to taxations. In addition to this, there is growing interest of the public on the taxes that are paid by foreign entities (Dwyer et al., 2018). Hence tax evasion would warrant legal actions.
Opportunities in South Africa
South Africa and Africa in general still consist of the active and cheap labor force. It is a good opportunity for AUSMED to clinch. Considering also the strength of the Australian dollar against the South African rand, more labor will be bought per unit capital hence making operations cheap as compared to local markets.
The inadequacy of pharmaceutical innovations in South Africa due to the low level of research and development also poses a good opportunity for AUSMED to capture. AUSMED reputation on production and marketing of pharma products would be unmatched by the local companies.
Iwuoha (2018) identifies that Africa's proneness to diseases could be a billion-dollar opportunity for pharmaceutical companies to capture. South Africa is among countries in Africa that grapple with the ills of different diseases. Malaria and HIV form the better part of the diseases that people suffer from alongside chronic diseases such as cancer. This offers a better opportunity for companies like AUSMED to move in and capture such markets.
South Africa is an expanding economy embracing urbanization. Most people in the urban centers fight various diseases hence would require quality health care and pharma products (Iwuoha, 2018). Most quality health care facilities in South Africa are established in the urban centers. These establishments require the supply of pharma products that are constant and adequate. AUSMED could take this opportunity and be a reputable manufacturer and supplier of these highly demanded commodities.
AUSMED’s option
Given the slim chances of further growth of AUSMED in the local market, there is a dire need for gradual internationalization of their business for ease of portfolio diversification, capturing new market niches while maintaining a good reputation in the field of pharmaceuticals. Both China and South Africa offer prime markets for AUSMED’s products. After careful analysis of the risks and opportunities involved in both countries, South Africa proves to be a viable option for AUSMED’s entry.
Weighing upon the risks involved in either county, China has very strict government regulations which are also devolved hence is likely to give AUSMED difficult times in getting cleared to finally set base. Despite South Africa having government regulations as well, these regulations are not as strict as they are in China considering also that South Africa is disease prone, low levels of invention and innovation in the medical sector and overreliance on medical aid. AUSMED also stands a chance of getting cheap labor per unit capital invested based on high vibrant population adversely affected by unemployment. The strength of the Australian dollar against South African Rand also poses opportunities for the company's production.
AUSMED’s entry option into South Africa.
Gradual entry into foreign markets is a prerequisite for multinational companies like AUSMED. According to Anon (no-date), there are a number of entry strategies into foreign markets by companies seeking to expand their businesses internationally. AUSMED must employ a gradual means of foreign market entry starting with market testing through the establishment of partners in South Africa. Wach (2018) asserts that partnering offers a better opportunity for co-marketing of pharma products at the initial stages and become more sophisticated in approach, for instance, engaging in co-production in the foreign market.
After establishing of trade partners in South Africa, AUSMED should also consider direct exportation of pharmaceutical products into South Africa through the trade partners established. Delaney (2018) identifies that direct exportation would enable a company to eliminate overreliance on middlemen who inflate marketing costs bringing operational costs to higher levels. It will also enable AUSMED to interact directly with its clients and understand their needs efficiently and create products that satisfy these needs. After the establishment of clients whom AUSMED could sufficiently meet their needs in the foreign market and also establish partners who can enable AUSMED to sufficiently enter the market without middlemen interference, licensing should be the next option. Despite licensing of pharmaceuticals having challenges in South Africa, licensing is a sure way of a foreign company setting base in a foreign land (Hyatt, 2016). AUSMED could establish a better approach such as subsidiary licensing in which it chooses to either acquire marketing or production licensing which will enable it to operate as a stakeholder in the pharmaceutical sector (Pamela, 2018).
Conclusion
In conclusion, therefore, it is a feasible approach to consider market expansion from a local perspective to international borders in order for AUSMED to be able to balance its production against sales. The tolled growth in the local market is limiting the chances of AUSMED's expansion into a more vibrant reputational organization recognized internationally. Despite the many risks involved in this international expansion, there are more advantages as well aligned to AUSMED's direction worth taking. For example, there is a need to take part in the elimination of chronic diseases that ever strike South Africa through their production of need specific pharmaceuticals. South Africa also presents a better chance for cheap labor, readily available and a stable market for medicines.
References
Anon, Market Entry Strategies. Tradestart. Available at: https://www.tradestart.ca/market-entry-strategies [Accessed August 28, 2018].
Azuayi, R. (2016). Internationalization Strategies for Global Companies: A Case Study of Arla Foods, Denmark. Journal of Accounting & Marketing, 05(04). doi:10.4172/2168-9601.1000191
Bangalee, V. and Suleman, F. (2018). Is there transparency in the pricing of medicines in the South African private sector? South African Medical Journal, [online] 108(2), p.82. Available at: https://www.scielo.org.za/pdf/samj/v108n2/06.pdf [Accessed 26 Aug. 2018].
Butler, S. (2018). Regulatory burdens on SA’s pharmaceutical industry. [online] Pharmacos.co.za. Available at: https://www.pharmacos.co.za/pharmaceuticals/1860-progression-and-future-prospects-within-the-south-african-pharmaceutical-industry [Accessed 26 Aug. 2018].
Delaney, L., (2018) Should My Company Export Products Directly to Its Customers? The Balance Small Business. Available at: https://www.thebalancesmb.com/direct-exporting-advantages-and-disadvantages-1953310 [Accessed August 28, 2018]
Dwyer, K., Solutions, S., Levine, S. and Kerr, M. (2018). 6 Critical Risks Facing the Pharmaceutical Industry. [online] Risk & Insurance. Available at: https://riskandinsurance.com/6-critical-risks-facing-pharmaceuticals/ [Accessed 31 Aug. 2018].
Haq, S. (2018). Risks for Pharmaceutical Companies Expanding into Emerging Markets. Pharmaceutical Compliance Monitor (online). Available at https://www.pharmacompliancemonitor.com/risks-pharmaceutical-companies-expanding-emerging-markets/8478/ [Accessed 26th August 26, 2018]
Herdly, M. (2018). Chinese Market Entry | B2B International. B2B International. [online]. Available at https://www.b2binternational.com/publications/china-market-entry/ [Accessed 26th August 2018]
Huang, Y. (2018). The 2008 Milk Scandal Revisited. [online] Forbes.com. Available at: https://www.forbes.com/sites/yanzhonghuang/2014/07/16/the-2008-milk-scandal-revisited/#7c7b80594105 [Accessed 26 Aug. 2018].
Hyatt, P., (2016). Have a great product or service? Licensing could be the right market entry strategy for you. Trade Ready. Available at: https://www.tradeready.ca/2016/topics/market-entry-strategies/have-a-great-product-or-service-licensing-could-be-the-right-market-entry-strategy-for-you/ [Accessed August 28, 2018].
Iwuoha, J.P., 2017. Meet the Multi-Billion Dollar Opportunity to Fight Diseases in Africa. Smallstarter Africa. Available at: https://www.smallstarter.com/browse-ideas/how-to-start-a-drug-and-medicine-business-in-africa/ [Accessed August 27, 2018].
Jones, K. and Daniels, F. (2018). Pharma in China – Compliance Challenges and Options. [online] Pharmaceutical Compliance Monitor. Available at: https://www.pharmacompliancemonitor.com/pharma-china-compliance-challenges-options/6697/ [Accessed 26 Aug. 2018].
Narsai, K., Williams, A., & Mantel-Teeuwisse, A. K. (2012). Impact of regulatory requirements on medicine registration in African countries – perceptions and experiences of pharmaceutical companies in South Africa. Southern Med Review, 5(1), 31–37.
Ni, J., Zhao, J., Ung, C., Hu, Y., Hu, H. and Wang, Y. (2017). Obstacles and opportunities in Chinese pharmaceutical innovation. Globalization and Health, [online] 13(1). Available at: https://globalizationandhealth.biomedcentral.com/articles/10.1186/s12992-017-0244-6#Sec2 [Accessed 26 Aug. 2018].
Ni, J., Zhao, J., Ung, C., Hu, Y., Hu, H., & Wang, Y. (2017). Obstacles and opportunities in Chinese pharmaceutical innovation. Globalization and Health, 13(1). doi:10.1186/s12992-017-0244-6
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vanRossum, J. (2018). 5Benefits of International Expansion [online] Bizjournals.com. Available at: https://www.bizjournals.com/bizjournals/how-to/growth-strategies/2017/12/5-benefits-of-international-expansion.html [Accessed 26 Aug. 2018].
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ZHU, T., WU, J., & CHANG, I. (2005). REQUIREMENTS FOR STRATEGIC ENVIRONMENTAL ASSESSMENT IN CHINA. Journal of Environmental Assessment Policy and Management, 07(01), 81-97. doi:10.1142/s1464333205001906
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