Environmental and Strategic Analysis of Novartis

Company Background

Novartis is one of the renowned pharmaceutical companies operating in the global market. The company’s headquarters are in Switzerland. Novartis was established in 1996 following a merger between two Swiss companies, Sandoz and Ciba-Geigy. Prior to the merger, Ciba-Geigy was operating in the pharmaceutical industry while Sandoz concentrated more on the sale of chemicals. After the merger, however, Novartis expanded in the European, American and other markets rapidly. By 2015, it was one of the leading pharmaceutical companies in the global market. This report contains an analysis of the external and internal environments of Novartis using different frameworks.

Novartis Global Analysis

Novartis PESTEL Analysis

PESTEL Analysis framework is one of the models used in the analysis of external environments of organizations (Oxford University Press, 2011). The aspects of the external environment analyzed using the PESTEL framework are political, legal, natural environmental, technological, economic and social factors, as applied in the case of Novartis below.

• Political Factors:

A notable aspect of the markets where Novartis operates, including Europe, China, India and America, is that they have political stability. During the recent years however, Novartis and other firms in the pharmaceutical industry have been experiencing political pressure compelling them to reduce prices for their drug products. Thus, the political factors have a moderate impact on Novartis.

• Economic Factors:

The economies of most of the markets where Novartis operates, such Western Europe and North America, are highly connected. In case of the emergence of an economic crisis, the company’s operations may be adversely affected. The operations of the company are supported by regional and bilateral trade agreements that reduce trade restrictions. Thus, the economic factors have a moderate effect.

• Legal Factors:

Legal factors have a major impact on the firms operating in the pharmaceutical industry. Novartis needs to adhere to consumer laws, health and safety laws and employment laws established in the different regions where it operates. In addition, the company is required to adhere to additional regulations established in the target markets. In the US, for instance, the company is required to adhere strictly to the regulations established by the Food and Drugs Administration (FDA). Despite this, the laws and regulations are beneficial to well established companies such as Novartis since they help to minimize industry entry and to increase consumer confidence with drugs. Thus, the legal factors have a moderate effect.

• Environmental factors/Issues:

One of the environmental issues associated with pharmaceutical companies is that some of the residues they release can lead to environmental pollution if they are not disposed well. The residues may not have a major effect on the environment, but it is essential to avoid pollution as much as possible. Thus, the environmental factors have a moderate impact on the company.

• Technological Factors :

Biotechnology has been improving due to continuous innovation facilitated by research and development, with contributions from Novartis and other firms in the same industry. Although the investment in the research and development is costly for the companies, it has been facilitating the development of quality drugs. Advancement in technologies such as the social media provides an opportunity for Novartis and other pharmaceutical companies to market themselves. In this regard, the technological factors are also moderate in their effect to Novartis.

• Social Factors:

The relevant social factors include demographics, health issues, aging trends and culture change. In most European countries and America, the population has been aging, implying that the demand for drugs has been increasing. The trend is expected to continue in the future. Also, the insurance kits available in such countries support the purchase of drugs. Novartis’ target markets such as China and India have a high population, implying that the demand for its drugs is also high. Thus, the social factors are favorable to the company.

Novartis Industry analysis

Competitive Forces

In order to determine the nature of competitiveness in an industry, it is essential to answer several competitive forces questions. For instance, there is a need to answer the question; how easy is it for new firms to enter the industry? The Porter’s Five Forces model is the most suitable framework in answering the questions regarding competitive forces (Kotler & Keller, 2011). The model analyzes five factors that influence the attractiveness of an industry, namely threat from substitutes, nature of competitive rivalry, power of suppliers, threat of new entrants and power of buyers, as applied in the case of Novartis below.

• Nature of Competitive Rivalry

The global pharmaceutical industry comprises of many firms. Some of them, such as Roche, Merck & Co. and Pfizer, are well established in the markets where Novartis operates. The ability to compete is highly influenced by the level of inattentiveness. Thus, competitive rivalry in the industry is high.

• Power of Suppliers

Novartis and other firms in the pharmaceutical industry rely on technologies and chemicals, among other inputs. The inputs used in the industry are available from many suppliers. As such, the suppliers have low ability to influence the pharmaceutical companies. In this regard, the power of the competitors is low.

• Power of Buyers

The buyers have low bargaining power for drugs that are patented. Firms usually dictate prices for the patented drugs. After the patents expire, generic drugs emerge, leading to reduction of prices and increase in the bargaining power of the buyers. Thus, buyers’ bargaining power in the industry is medium.

• Threat of New Entrants

The pharmaceutical companies operate under strict laws and regulations and their drugs are tested before approval. The risk of the drugs being rejected is high and can lead to the loss of a lot of money if not approved. Also, the firms need to invest significantly in research and development. Due to such issues, the threat of new entrants is low.

• Threat from substitutes

When a drug is patented, it does not have close substitutes. The alternatives can be other types of drugs and treatments available but not similar. Despite this, a lot of substitutes in the form of generic drugs emerge after the patent expires. In this regard, the threat of substitute to a drug can be medium or low, depending on whether or not it is patented.

Novartis Business Analysis

Value Chain analysis

Value chain analysis is a model that helps to determine an organizations activities that add value to products and/or activities. The analysis helps to determine the activities that are most valuable. Also, application of the model helps to determine the activities that a firm should improve in order to enhance or achieve competitive advantage (Baines, Fill and Page, 2012). The value chain model analyzes internal activities, namely inbound logistics, outbound logistics, operations, marketing and sales and services, and supportive activities, namely human resource management, technology, technology and firm infrastructure (Baines, Fill and Page, 2012). The activities are presented in the diagram below:

Value Chain Analysis Model

The value chain of Novartis is represented by the image below:

Value Chain at Novartis

• Raw Materials

Novartis derives competitive advantage through the procurement and acquisition of raw materials from suppliers that the company has developed strategic alliances with. In some cases, however, the company acquires raw materials from third party suppliers that adhere to its safety, labor and ethical standards.

• Manufacturing

Novartis derives competitive advantage through the production of 20 categories of drugs, some of which are rarely manufactured by the competitors. Among others, the categories of drugs manufactured by the company are meant to address diabetes, oncology, pain, mental health, viral hepatitis, respiratory agents, HIV/Aids complications and ulcers. Also, the company manufactures the drugs in different regions, hence reducing transport and distribution costs. Importantly, Novartis derives its competitiveness from being innovative in the production of new drugs.

• Warehousing

Each of the production facilities in the different regions where Novartis operates has a warehouse adjacent to it. The warehouses facilitate the storage of raw materials and finished products in the company before distribution. The warehousing helps to enhance efficiency in the production and distribution processes. Due to the efficiency in the distribution, the company is able to satisfy its customers.

• Distribution

The distribution process for the drugs manufactured by Novartis also enhances its competitive advantage. The company has developed strong networks with different segments of consumers, the most remarkable being retailers, pharmacies, hospitals and clinics. The company’s manufacturing and distribution networks are presented in the diagram below:

The Manufacturing and Distribution channels of Novartis

Thus, Novartis can enhance its competitive advantage through improving the processes for acquiring raw materials, manufacturing, warehousing and distribution of its products.

Business Model Canvas

A business model canvas is a layout of what a firm does and how it does it or plans to do. The layout describes an organization’s key resources, activities and stakeholders that can facilitate or facilitate profit earning and success. The canvas can also include in organization’s value positions and channels for distribution of products (Kotler & Armstrong, 2012). The figure below presents the business model canvas for Novartis.

Source: R&P Research (2017).

The key activities of Novartis include manufacturing and distribution of pharmaceutical drugs and other products and engagement in surgical activities. The key partners of the company are suppliers and customers. The company has strong close relationship with the customers. Novartis mainly sells its products through physical stores. The key resources of the company include its manufacturing facilities, financial resources, human resources and inventories.

Strategy Map

A strategy map is a visual representation of what a firm intends to do in order to improve its performance. The diagram acts as a quick representation of a firm’s objectives.

Novartis Internal Analysis

VRIO Analysis

VRIO is an acronym for value, rareness, immutability and organization. The purpose of the model is to evaluate a firm’s financial, material, non-material and human resources. The analysis helps to determine a firm’s weaknesses and competitive advantages (Kotler & Armstrong, 2012). The application of the model is represented in the following diagram:

Applying to Novartis;

• The organization’s financial resources are valuable and support its existence. Also, its financial performance is rare but not difficult to imitate. As such, the financial resources of the organization provide it with temporary competitive advantage.
• The drugs and other products that the company sells are valuable. Some of them are rarely offered by other pharmaceuticals and thus, they can be regarded as being rare. This implies that Novartis has temporary competitive advantage.
• The human resources of Novartis are valuable but are neither rare nor difficult to imitate. Thus, the competitiveness of the company with regard to human resources is equal to that of most competitors.
• Last, the non-material resources of Novartis, such as patents, are valuable, but are not rare or difficult to imitate. Thus, they have a similar effect with the human resources.

Summary/Conclusion

Overall, the global analysis of the market in which Novartis operates indicates that except social factors, the rest of the factors contained in the PESTEL model have a moderate impact on the company. The social factors have a favorable effect. Regarding industry’s competitive forces, the threat of new entrants and power of suppliers are low, competitive rivalry is high, power of buyers is medium and the treat of substitutes can be medium or low. The business analysis of the company indicates that it has an opportunity for improvement through targeting the key activities. The internal analysis indicates that some of the company’s resources equip it with temporary competitiveness while others have the same impact as in other pharmaceutical firms. Despite having a strong competitive position in the global market, the analysis suggests that the company should focus on utilizing the available opportunities and continue investing in research and development in order to reap from innovativeness and to remain competitive in the long-term.

References;

• Baines, P., Fill, C. and Page, K. (2012). Essentials of Marketing. Oxford: Oxford University Press
• Kotler, P. & Armstrong, G. (2012). Principles of marketing (14th ed.). Boston: Pearson Prentice Hall.
• Kotler P. & Keller K. (2011).  Marketing Management, (14Th Ed.) London: Prentice Hall
• Oxford University Press (2011). PESTEL analysis of the macro-environment. Oxford: Oxford University Press
• R&P Research (2017). How Novartis Makes Money? Understanding Novartis Business Model. Retrieved from https://revenuesandprofits.com/how-novartis-makes-money-understanding-novartis-business-model/