Strategic Alliance: Case Study in Competitive Positioning

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Key Information from Articles

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In-class discussion

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Local family-owned Pharma company (LAFAPE) in Lima, Peru. CEO & co-founder is Mr. Fausto. President is his sister, Macarena.

Ms. Marina, MBA intern in 6 mths.

Her assignments in 1-month include:

1. One-month rotational training on company activities & operations.
2. brief meeting with CEO on parameters of her assignment.
3. written report on recommendations + strategy to utilize biz resources.
4. oral presentation on key issues.

Sources of info – 3 references:

(1) literature on international expansion for MNEs.

(2) Peru pharma industry review (market structure + growth trends).

(3) company profile (background, ops, financial perf. & prospects).

Ref 1: Internationalization process in literature

Globalization process – 3 phases:

(1) Domestic phase: focus to develop competitive advantage. Local sources, local customers. Transactions in local currency. Credit quality based on domestic guidelines.

(2) International phase: Foreign sources, foreign buyers. Expanded scope of ops. Risk exposure.

(3) Multinational phase: Physical presence abroad. OLI paradigm.

- OLI paradigm: explain reasons MNEs choose FDI over other modes of entry (eg. Licensing, joint ventures, mgt contracts). FDI decision succeed by 3 factors:

(i) O- owner specific: competitive advantage in home market that can be transferred abroad.

(ii) L- location specific: specific market with attractive characteristics for competitive advantage.

(iii) I- internalization: effective control of information within org. Low cost financing, minimize transaction costs. Political risk. => Strategic alliance (SA): to mitigate FDI risk.

SA = A cooperative arrangement among firms in diff. countries. Diff. forms of arrangements:

(1) cross-border SA (2 firms share ownership, exchange stock)

(2) outsourcing of a biz function (save cost, more effective).

(3) joint marketing & servicing: each partner represent the other in certain markets.

Pros: increase profits & market share. Ease of entry to new market. Sharing of knowledge & risks. Gains from synergy & comp advantage.

Cons: autonomy loss.

Fail reasons: partner incompatibility -> divergence, national cultures/values, individual partner’s goals, lack of coordination or mistrust.

Ref 2: Pharma industry in Peru

Globally: est. $1.6 trillion (2016)

• slow growth in developed markets

Latin American: est. $45 bil (2016)

• industry growth: 10% per annum
• economic growth in LA countries
• increased population of aged abv 65yrs
• national govt provide citizens more access to healthcare

Peru:

• population: 30 mil
• GDP growth: 6.9% (2011)
• Lowest inflation rate in LA
• Market-oriented economic reforms, privatisations
• Urban demand on improved healthcare &pharma

Pharma industry in Peru:

• Expanding, $750 mil (2010)
• Market growth: 17%-20% /year (2011-2016)
• Rural market is potential.

Lima market:

• Sizeable urban population
• Cover 60% of pharma total market
• National total market made up by 3 channels:

• Horizontal sales: include. private clinics + pharmacies, served by distributors. Spot sales= 14,000 (stores or POS)
• Chains: served thru major chains
• Institutional (30%): served by Peruvian state agencies (social security, health ministry). Procurement by pharma comps.

Ref 3: Company profile

Family owned, founded in 2002. Company Name: LABO.

Objective: sell pharma products by own brands & generic

Product brand: DIGEMID.

Target Products: pills, syrups, ointments, creams

2006: FTA signed, Peru becomes regional operational hub. US exporters entering market => company change strategy:

• Invest in a new pharma start-up -> focus on manufacturing LABO products & for other domestic & regional firms => LAFAPE is created. Manufacture LABO’s 85 brands & 40 generic products & for other chains & labs.
• LABO then focus on marketing products to chains.

LAFAPE Operations:

• Org Structure - 3 units: technical, operations & finance. Each headed by a VP.
• Need to hire foreign candidates to benefit from their knowledge of foreign markets.
• Lines of credit with 4 institutions $860,000
• Market size
• Plant Capacity: current 250 products. Max 500.
• Procurement: buy raw materials from foreign sources, mainly China, India, Germany, USA.