Chapter 7 case study: Resource-based and Institutional Perspectives on Strategic Human Resource Management

Additional Case Study

Pfizer and the Resource-based View

The profits made by drug firms rely heavily on a select number of best-selling patented

drugs. Once patent protection on a product has expired, the drug company is open to strong

competition from generic alternatives. Consequently, it is the patents that are the principal

source of economic value and those firms with large numbers of patented drugs typically

have higher revenues than those firms with a smaller number. Without new best-selling

drugs being patented profits would tumble. In 2012 alone at least 19 drugs were scheduled

to lose patent protection, representing a potential $38.5 billion in lost sales. Since the global

financial crisis of 2007/8, executives in the pharmaceutical sector have started to question

whether they should have done more to build for the future during the good years. A report

on the world's 12 largest drug firms published by Deloitte in 2011 revealed that the average

cost of bringing a product to market had risen by more than 25% in twelve months (from

$830m in 2010 to more than $1bn in 2011). The number of late-stage drugs in development

had from 23 to 18 on average, per firm. Ten of the 12 firms had seen a decline in returns

from research and development (R&D).

Pfizer has dominated the pharmaceuticals sector since the 1990s, profiting from drugs such

as Lipitor and Viagra. Its strategy was based on a bigger-is-better approach involving a

strategy of diversification through acquisitions such as: Warner Lambert in 2000 (along with

that firms rights to Lipitor which Pfizer had been co-marketing); Wyeth in 2003 (a $68 billion

deal that bought expertise in several therapeutic areas, including research into Alzheimer's

disease); and, in 2009 King Pharmaceuticals (a manufacturer of pain relief drugs). However,

by 2012 Pfizer was in a situation where it had no immediate successor to Lipitor, the best-

selling drug in history, which had lost patent protection in the autumn of 2011. The

cholesterol-lowering drug had generated $100bn (64.5bn) in sales for Pfizer. In early 2012

the firm announced a decline in profits of 19 per cent in the most recent quarter, largely

because of a drop in the sales of Lipitor. Fitch downgraded the several of the firms credit

ratings shortly before the patent on Lipitor expired. Consequently, Pfizer has decided to

focus on its core pharmaceuticals business and turn itself into a smaller organization. In May

2012, Pfizer announced that it was selling its infant nutrition business to Nestl for $11.85

billion (Nestle was initially interested in bidding between $9bn and $10bn but was forced to

increase its offer to beat off competition from Danone). It is also expected to divest its

profitable animal health business by 2013. At the same time, the company has slashed as

much as 30 per cent of its research budget as part of a plan to focus on only the most

promising areas, like cancer and Alzheimers disease. Pfizer is trying to reinvent itself

through the adoption of a new corporate strategy and new business model. This has been

described as radical by some media commentators although Pfizer is actually following the

path of Bristol-Myers, which in 2009 announced plans to spin off its nutrition company Mead

Johnson in order to focus on acquiring small biotech companies. The company has since

fared well despite the loss of patent protection for Plavix. The HR function in Pfizer has also

had to change in recent years, moving from an overly large to a more streamlined, business-

focused function. In addition, the HR function was short on fresh perspectives and

innovative ideas from other environments, as a result of the companys tradition of promoting

HR talent from within and of importing talent through acquisition rather than targeted hiring

(Ulrich et al., 2009: 182). To help the firm deliver its new business strategy the HR function

needed to become more efficient and results-driven.

The media has reported that a number of sceptics have questioned the firms decision to

shed its most profitable business units. Pfizers nutrition business grew by 15 per cent in

2011 and the animal health business by 17 in the same year. In contrast the riskier

pharmaceutical arm of the firm saw sales actually dip by 1 per cent. Additionally, Pfizer has

suffered some notable flops in recent years; for instance, the failure of an experimental

cholesterol treatment that was seen as a potential successor to Lipitor; and, poor sales of an

inhaled insulin drug that the firm eventually abandoned. So, for some media and business

pundits it seems odd that Pfizer should opt to focus on the more risky business area; and

one which doesnt necessarily have the best track record.

The firm announced that it would use most of the cash from the deals to buy back stock,

even though studies have tended to cast doubt on the efficacy of such moves by large

corporations. According to an article in the

New York Times

, investors appear to be buying

into the companys strategy. It appears that other firms in the same sector are adopting a

similar strategy. The challenge for Pfizer and its competitors is how to remain successful and

sustain operations if the investment in R&D is being cut. The implication is that firms must

find new and more efficient mechanisms for discovering and developing drugs. In 2010

Pfizer announced that it was making plans to reduce its research budget from $9.4 billion in

2010 to between $6.5 billion and $7 billion. As part of this process it closed a research

centre in the UK and moved resources to areas closer to universities in Boston and

Cambridge (UK). In 2011, the firm pulled the plug on 91 projects which were deemed to

have a low probability of success and announced that smaller acquisitions would be used to

fill gaps in their portfolio. In reaching these decisions Pfizer executives analysed each lab

programme for costs, payoff, and risk before deciding to close their UK facility and cut 3,000

more research jobs in New London, Connecticut. The firm will also expand partnerships with

academic institutions (innovation in universities typically needs help from the private sector

to commercialise their research). In 2010, Pfizer created the Centres for Therapeutic

Innovation which provides access to Pfizers best-in-class antibody libraries and

technologies to partners in academia. These strategic research alliances are intended to

share the best science and speed the progress of next generation therapeutics from

laboratory to clinical trials and onto the market. Although Pfizer does not have another

Lipitor, analysts believe several drugs are showing promise.

Activities

1. Critically analyse Pfizers strategy using the Resource Based View (RBV) as your principal

model.

2. In terms of the RBV model what might be the salient resources that enable drug firms to

create and sustain competitive advantage?