$2.$ Strategic Groups: Pharmaceuticals

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Strategic Groups: Pharmaceuticals

This activity focuses on strategic groups and mapping $($Learning Objective $3-8).$ Strategic groups differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service. Before completing this activity, familiarize yourself with section $3\mathrm{.}4$ of the text.

Read the following case, then answer the questions that follow.

Minicase

In the pharmaceutical industry, one can identify two strategic groups as mapped out.$(1)$

Strategic Groups and Mobility Barriers in the Pharmaceutical Industry $($see image$)$

A matrix for R and D spending for low and high; against price charged for low and high.The data is as follows:R and D $($low$),$ price charged $($low$)$ shows:Generic group: Mine too $1,$ mine too $2,$ and mine too.R and D $($high$),$ price charged $($high$)$ shows:Generic group: Prizer, Roche, Novartis, Merck.These are separated by mobility barriers.

One strategic group has chosen a positioning strategy based on discovering and developing new blockbuster drugs. This is the so$-$called proprietary group, and includes companies like Pfizer, Roche, Novartis, and Merck. Developing new drugs requires consistently high R&D expenditures, because it takes $1015$ years for a newly$-$discovered molecule to reach the market for drugs. Moreover, drug discovery and development costs have risen drastically, and can reach $$1$ billion. The strategy of focusing on the discovery and development of proprietary drugs also has an extreme risk element to it$,$ because only $1$ out of $10,000$ discovered molecules will make it to the market for pharmaceuticals.$(2)$

The drug discovery and development process can be broken down into distinct sequential stages. The discovery stage can take anywhere between $2$ and $10$ years. In the next stage, which can take up to $4$ years, a lead drug candidate is developed and pre$-$clinical testing is undertaken. A lead candidate then enters phase I of clinical testing, which can take up to two years. In this phase, the lead candidate is administered to $2030$ healthy volunteers and its safety and dosage are evaluated. In phase II$,$ which can take up to two years, the drug is given to $100300$ patient volunteers to check for efficacy and side effects. In phase III, which can take up to three years, the drug is administered to $1,0005,000$ patient volunteers to monitor reactions to long$-$term drug usage. The next stage, FDA review and approval, can take up to two years. This is followed by a two$-$year post$-$marketing testing period.

This implies that the firms in the strategic group focusing on proprietary drugs are pursuing a high$-$risk, high$-$return strategy. The strategy is clearly high risk given the very low odds of discovering and developing new drugs that are also commercially viable$$in other words, that serve a large enough market to recoup its investment $($and to pay for all the other failures along the way$).$ On the other hand, with a high risk comes a potential for high returns. Should a new drug be discovered, firms will patent protect it$,$ and thus be able to reap profits of billions of dollars over many years.

On the other hand, the second strategic group is the so$-$called generic group because their positioning strategy is to focus on the low$-$cost manufacturing and distribution of drugs that have come off patents $($so$-$called $"$me$-$too products"$).$ The strategies of companies in the generic group are characterized by little R&D spending, production efficiencies $($especially in large$-$scale manufacturing$),$ and alternative distribution channels $($such as over$-$the$-$counter$).$ These elements combine to form a low$-$cost$,$ low$-$risk strategy. The strategy is low cost, because the R&D investments required to understand the manufacturing behind patent$-$expired drugs are minimal. But this strategy is also low return because of the lack of differentiation. These firms are unable to charge high prices because their products are effectively commodities.

The companies in the proprietary drug group generally tend to outperform companies in the generic drug group. So why don't we see firms moving from a lower$-$performing strategic group to a higher$-$performing one? The answer is that strategic groups are separated by mobility barriers, or industry$-$specific factors that inhibit movement from one group to another. For example, the pharmaceutical companies in the proprietary drug group have built their strong R&D competence over long periods of time through large R&D investments, but also through R&D alliances and acquisitions.$(3)$ This implies that a company in the generic group cannot easily build the R&D competence necessary to compete in the proprietary group, because not only are high investments necessary, these competencies tend to be bui