Abbott Laboratories (“Abbott”) began under the entrepreneurial spirit of Dr. Wallace C. Abbott in 1888. As an incorporated entity in 1894, Abbott Alkaloidal Company was a medical publisher and manufacturer that eventually expanded to their first international office in London, England, in 1907. Abbott’s first medicinal breakthrough came in 1916 with their production of the antiseptic, Chlorazene, soldiers wounded in World War I were able to be treated for their injuries. Abbott has gone on to have numerous breakthroughs in the world of modern medicine in areas such as HIV treatment, blood analyzers, diabetes and medical devices such as stents.
Abbott’s primary focus is relatively apparent on their current website which states that they are dedicated to “fulfilling the promise of human potential, in all places, in all aspects and stages of life” and that they “believe that health is a key to that promise.” What started as the research and development of medicinal remedies at the back of Dr. Abbott’s drug store has become a large worldwide pharmaceutical company today that provides numerous places of value to the industry.
- Defining the Industry
According to Dictionary.com, pharmaceuticals can be defined by the British Dictionary as items “of or relating to drugs or pharmacy” (Dictionary.com, 2016). Simply put, pharmaceuticals are the medicines and drugs that can aide human and animals to overcome ailments that vary from simple diseases such as the common cold to terminal illnesses such as cancer.
The pharmaceutical industry plays a major role in the modern medicine that society across the globe has benefited from for several generations. The United States Census Bureau defines the pharmaceutical industry as companies that are involved with the discovery, the development, the production, and the marketing of drugs for use as medications to be used by humans or animals (International Trade Administration – Office of Health and Consumer Goods, July 2010). Pharmaceutical companies such as the subject, Abbott Laboratories, have been around for a number of years; however, the research and discovery of medicines & treatments for ailments has been around for most of known and recorded history. According to the article “Emergence of Pharmaceutical Science and Industry: 1870-1930,” modern pharmaceutical companies (i.e. Merck) got their start as an apothecary shop in the 1800s and dealt with products such as codeine, morphine, and dyes (Chemical & Engineering News, 2005).
According to the International Trade Administration – Office of Health and Consumer Goods Pharmaceutical Industry Profile, the main products that are primarily produced by pharmaceutical companies include drugs that are substances produced for the use in the diagnosis, treatment, and prevention of diseases. Revenues of pharmaceutical companies vary in range and size; however, the highest known revenue sectors of the industry are from drugs that are primarily used in areas such as cancers, respiratory conditions, digestive disorders, diabetes, cholesterol, and high blood pressure, among others (International Trade Administration – Office of Health and Consumer Goods, July 2010).
The United States pharmaceutical industry is a key component of the economy, with over an estimated 1,500 companies in the country in 2007 with an estimated shipped products in the industry valued at over $190 billion (International Trade Administration – Office of Health and Consumer Goods, July 2010). The industry also consists of two types of drugs being shipped; brand name and generic. According to the International Trade Administration, one of the fastest growing segments of the pharmaceutical industry is the generic drug market with the U.S. generic drug market accounting for approximately $34 billion or roughly 41% of global sales (International Trade Administration – Office of Health and Consumer Goods, July 2010).
- Analyzing the Structure of the Industry
The pharmaceutical industry is an enormous industry that spans the entire globe. The industry has become an avenue of collaborative research & development as well as the multi-billion dollar revenue-producing goliath over time with steady competition and growth. Pharmaceutical companies are subject to strict standards and regulations as set forth by country government and international governing bodies. In the United States, the Food & Drug Administration (FDA) regulates the pharmaceutical industry by providing oversight, regulations, and guidelines for the industry to operate and function within.
According to PMLive, with data provided by GlobalData, the largest five pharmaceutical companies in 2014 when measured by total sales are Novartis ($47,101MM), Pfizer ($45,708MM), Roche ($39,120MM), Sanofi ($36,437MM) and Merck & Co. ($36,042MM). Additionally, according to PMLive, the largest five pharmaceutical companies in 2012 when measured by United States revenue only were Pfizer ($19,708MM), Merck & Co. ($17,041MM), Roche ($13,488MM), Amgen ($12,815MM) and Johnson & Johnson ($12,421MM) (PMLive, 2014). With information obtained from Statista, the total worldwide revenue in the pharmaceutical industry tops $1,057B in 2015. It should be noted that of worldwide revenue, the United States pharmaceutical industry accounts for approximately 48.7% of revenues in 2015 (Statista, 2016). Additionally, the United States pharmaceutical industry is anticipated to be relatively stable through 2020; however, will grow at a steady rate of approximately 3% to 4% through that time period (Market Realist, 2016).
The market structure of the pharmaceutical industry appears to be that of an oligopoly. As defined in Chapter 5 of the textbook “Economics of Strategy 7th Edition,” an oligopoly is a market in which actions of each individual firm affect the market as a whole (Besanko 2016). The pharmaceutical industry can be considered an oligopoly given the significant costs that it takes to research, develop, market, and sell drugs. According to Jeffrey Dorfman of Forbes, the current cost to bring a new drug from research to fruition is approximately $1 billion (Forbes.com, 2016). Additionally, the comprehensive requirements and regulations of governing bodies such as the Food and Drug Administration can be quite the hindrance to any new entrant into the market (Forbes.com, 2016). The large firms such as the ones mentioned above, appear willing to risk capital to remain in competition. Furthermore, as these are all rather large, any change that they make, the others will be directly affected by the outcome.
Chapter 5 of the textbook “Economics of Strategy 7th Edition” the identification and measuring of market structure can be represented by the Herfindahl Index. The Herfindahl Index is the overall sum of the market shares, each squared, of all the firms in the market (Besanko, 2016). Using the aforementioned information from PMLive on the United States pharmaceutical industry, we can calculate the Herfindahl Index of the top nine (9) major United States market pharmaceutical companies in the table below:
Using information from Chapter 5 of “Economics of Strategy 7th Edition,” the Herfindahl Index of the top nine (9) major United States market pharmaceutical companies totals 1,045.9, which results in a classification of medium level concentration as the Herfindahl Index calculation is less than the threshold of 1,800 needed for a high level concentration. The above-mentioned firms would be classified as the main primary competitors of our subject firm, Abbott Laboratories.
- Corporate Culture
Abbott Laboratories consists of four major businesses of roughly equal size. These businesses are Nutrition, Diagnostics, Medical Devices, and Pharmaceuticals (Abbott Overview). A Leadership Team and a Board of Directors govern the firm. The Board of Directors serves as a principal to the Leadership Team as the agent. Under the board of directors, there are several committees involved in decision making for the firm. These are the audit committee, the compensation committee, the executive committee, and the nominations & governance committee. The executive committee “exercise[s] all the authority of the board in the management of Abbott, except for matters expressly reserved by law for board action” (Abbott Overview).
Abbott Laboratories is a global company, conducting business in more than 150 countries all over the world. As such, they take special care to make sure their business practices fit the culture of each of their locations (Abbott Overview). When Abbott opens a new location in another country, they send American managers to the new location on a temporary basis to train a new manager who is from that location. This practice assures employees that there is room for them to move within the ranks of the organization. These practices have led to great success in reducing employee turnover in places such as China, where the employee turnover at Abbott is roughly half the national average (Fisher, 2016). Abbott also offers many work/life balances and other family benefits to employees. These benefits include flexible scheduling, telecommuting, and tuition reimbursement (Working Mother, 2014).
When it comes to generating ideas for the company, Abbott uses a state-of-the-art Research and Development facility (R&D, 2008). Abbott began heavily investing in R&D in the 1990s, and in fact, unlike its competitors, it did not acquire any drug companies during the 90s (Encyclopedia). In 2015, about 9% of Abbott’s total operating expenses were devoted to R&D (Abbott Overview). Abbott has historically kept up with technological advances, even recently using 3D printing to develop tools for use in devices that treat vascular disease (3D Printing). Abbott is very proud of its innovations, including those that came with an acquired company such as the MitraClip. The MitraClip was invented by Evalve, which was acquired by Abbott in 2009 (Pioneering).
Abbott Laboratories does not seem to have many coordination or communication issues. The company is growing steadily, with an expected long-term earnings growth of 10.21% (NASDAQ, 2016).
However, like with most companies, Abbott cannot avoid all issues. One example is the recent attempt at acquisition of Alere Inc. Early in 2016, Abbott agreed to purchase Alere for $5.8 billion (GEN, 2016). After the agreement, Alere disclosed that it received a subpoena regarding a foreign corruption investigation (Hufford, 2016). Additionally, Alere is facing a recall of its monitoring devices, which increases Abbott’s desire to cancel the acquisition (Alere Recall, 2016). Alere has sued Abbott to try to force them to go through with the deal. In the lawsuit, Alere claims that Abbott failed to secure anti-trust approvals and other regulatory approvals in a timely manner. Of course, Abbott has declared that the lawsuit is without merit (Hufford, 2016). Abbott was also sued for selling its Similac ® formula under the category of organic, even though it does not meet all of the requirements for organic foods. This lawsuit was dismissed in August of 2016 (Shook, 2016).
Abbott Laboratories also has quite a bit of success that clearly arises from being a well-coordinated organization. The company earnings are growing each year, and they recently launched two new products, a cataract treatment and GMO-free baby food (Jamerson, 2016). In 2016, Abbott was named a leader in the industry for responsible and sustainable business practices by the Dow Jones Sustainability Index (“DJSI”) (Newswire, 2016).
- Five Forces Analysis
The company faces stiff competition from other top pharmaceutical enterprises that use mergers and acquisitions to maintain their market shares. The industry has high fixed and exit costs while rivals produce a broad range of drugs to treat the same illnesses. As a result, the firm faces serious challenges in sales and marketing as it seeks to stay ahead of the competition.
Potential Entrants to the Industry-Low
The development of new drugs requires significant investments, which discourages new companies from venturing into the industry. At the same time, large companies consolidate their position in the industry through mergers and acquisitions to maintain their market shares, which discourages startup businesses away from the sector. Besides, the industry has already developed multiple drugs for known ailments thus limiting the chances of success for new companies because of lack of opportunities to create competitive advantages.
Substitutes and Complement Goods and Services-Low
A majority of businesses in the industry patent their innovations, which prevents rivals from imitating their products. Even though the healthcare industry has a broad range of alternative treatments, consumers have low chances of utilizing them. The availability of over the counter drugs does not have a significant effect on the sale of generics because a considerable number of consumers prefer the generics.
Bargaining Power of Suppliers-High
Manufacturers of active ingredients are critical to the success of firms in the pharmaceutical industry, which gives them a strong bargaining power. Suppliers prowess determine the success of the company’s R&D and current production; therefore, failure to agree to the suppliers’ demands could lead to reduced productivity thus lead to loss of profits. Moreover, the pharmaceutical industry requires significant investments in R&D to create new drugs that cure emerging health conditions. Unfortunately, a majority of suppliers sell their products through contracts, which reduces the chances of changing sources of raw materials in case of emergence of competitive suppliers.
Bargaining Power of Buyers-Moderate
Abbott has a diversified clientele since it focuses on pharmacies. Moreover, the organization uses an efficient marketing strategy by highlighting the different effects of medications to would-be clients. Besides, Abbott embraces product differentiation to highlight the advantages of its drugs on the consumers. Importantly, increases in generic prescriptions augments buying power as consumers have to respect the advice of their physicians.
- The Firm’s “Co-opetition/Value Net”
Since its inception, Abbott Laboratories has grown to become a leading player in the pharmaceutical industry with two product groups. Their diversified medical products include medical devices, established pharmaceuticals, nutritional products, and diagnostic products. However, the company’s business core line is the research-based pharmaceuticals, which has ensured the company’s growth and expansion. The organization is classified under the highly competitive brand pharmaceutical industry (Ho, 2013). The sector depends heavily on firms’ R&D to create innovative medications, which they patent to ward off competition and protect revenue. In practice, patents in the industry last for about 20 years but since companies take a long time to introduce their products to the market, in most cases, the patents last for about 10 years. After the expiry of the patents, generic manufacturers duplicate the drugs and offer them at discounted prices; thus, they erode branded pharmaceuticals’ sales volumes, which reduce their profits. In spite of Abbott dependency on research-based pharmaceuticals for the last 100 years, the company has since shifted its focus to diversified medical products sector. In this regard, Abbott ‘s change of strategy culminated in 2001 spinning off of its research-based pharmaceutical industry to form an independent company; however, it still chose to keep the diversified medical products sector under the Abbott brand (Misra, Shanholt, & Upadrashtra, 2012). The change of strategy for the company seems to have come at a time when large pharmaceutical businesses face uncertain futures because of increased costs of R&D for new medications and governments’ projected regulations to reduce patent periods. As a result, a large number of companies in the industry are unable to generate sufficient revenue to meet production costs.
The decision to shift the company’s focus from research-based drugs to diversified medical products shows the management’s articulacy in running the firm. The industry is highly competitive, which means that failure to produce drugs that meet the needs of clients would affect the company adversely. As a result, the management saw the need to change its focus to less competitive diversified product category because it would guarantee sales in emerging markets. In any case, patients from developing countries are dependent on generic drugs because of their affordability, which means that the firm cannot attain its organizational goals if it over relies on branded drugs. At the same time, the U.S. government’s decision to reduce the time companies can enjoy their patent rights has adversely affected businesses that intend to focus on producing research-based medicine. The skyrocketing costs of R&D to develop innovative drugs require companies to enjoy an extended cushion from rivals to recoup their investments and register profits from innovations (Misra, Shanholt, & Upadrashtra, 2012).
According to Sara Collins of Market Realist, Abbott has an international presence; as such, it generates more than 60% of its revenue from markets outside the United States. The company’s management has realized the importance of emerging markets and developing countries in the pharmaceutical industry; thus, it has shifted its focus from the highly competitive developed world. Further, Collins (2015) notes, “The Company is well-distributed across the world’s largest markets as the revenues generated from 11 of the largest medical technology markets contribute to 64% of the total sales of the company.” The organization has strategically expanded its operations into different parts of the world by considering locally and globally aligned preferences and needs. Consequently, Abbott Laboratories has instituted several manufacturing and R&D facilities in various regions of the globe including a vaccine center in the Netherlands, an optics firm in Malaysia, and nutrition manufacturing plants in the U.S., India, and China. The decline of the developed markets has pushed Abbott Laboratories to focus on the emerging markets. Subsequently, in 2014, the firm recorded a 2.5% growth in emerging markets’ sales in spite of the low healthcare-spending ratio to GDP in these countries (Collins, 2015). However, the firm faces stiff competition from other companies focusing on these economies, which include Johnson & Johnson, Becton Dickinson, and Company and Medtronic.
Over the years, Abbott Laboratories has embraced mergers and acquisitions to expand its operations into foreign markets thus delivering its products closer to the target market while investing in R&D to develop products that meet the specific needs of particular market segments. In 2013, Abbott acquired a Chilean based pharmaceutical company, CFR Pharmaceuticals for nearly $3.4 billion and in December 2014 it bought Veropharm, which was a Russian based pharmaceutical firm for $315 million. Resultantly, the company eased access of its products to consumers in the emerging markets and reduced the time it takes to introduce new medications to these regions. The competitive nature of the industry requires companies to stay ahead of the rivals by adding new effective drugs in markets. In addition to branded firms, Abbott acquired Topera to enable it to venture into the electrophysiology device category and compete with leading U.S. pharmaceutical devices company, Medtronic (Saintvilus, 2015). The acquisitions give the firm a competitive advantage by reducing its risks of overreliance on single products, which could lead to massive failures in cases of development of new drugs by the rivals. Further, Abbott sold its animal health brand, Zoetis to focus on human health and develop products that address clients’ specific needs.
- The Firm’s Strategic Moves that Help Sustain Competitive Advantage
As previously mentioned, Abbott Laboratories is no stranger to mergers and acquisitions. Although they did not acquire any companies in the 1990s, since then they have undergone several strategic moves. In 2014, Abbott agreed to a purchase of their generics business in developed countries by Mylan (Reuters, 2014). This deal would give Abbott a 21% stake in the shares of the company, and would give Mylan a tax break. Abbott indicated that they would sell the shares after a short term (Sagonowsky, 2014). Abbott has recently agreed to purchase St. Jude Medical Inc. for $25 billion. This purchase would be Abbot’s largest acquisition in its history. Hospitals are pushing for lower prices on medical devices, so the makers of these devices, such as St. Jude, are merging with other companies to enjoy economies of scale and scope (Bloomberg, 2016). Abbott does have a medical device division, but it has been argued that Abbott has been recently falling behind in innovation. The acquisition of St. Jude will help Abbot remain competitive in the medical device industry (Bloomberg, 2016). Abbott also planned to merge with Alere in 2016, but that merger is uncertain now that Alere is being scrutinized in a foreign corruption case (Hufford, 2016).
In addition to mergers and acquisitions, Abbott Laboratories has made some strategic entries and exits in the pharmaceuticals market. In 2016, Abbott agreed to purchase Kalo Pharma Internacional S.L., which is the holding company that owns 73% of Chile’s CFR (“Abbott…CFR” 2016). This will expand Abbott’s medical device division into a new geographical market.
Abbott Laboratories is also planning a market exit in 2017. They will be selling their Medical Optics business to Johnson & Johnson. Abbott has decided to focus on its cardiovascular devices and diagnostics. Because Abbott is so small, it has been difficult for Abbott to operate in all the markets where it is active. So, Abbott has decided to downsize by exiting the vision care market and focusing on the market for cardiovascular medical devices. This market exit is not expected to have a negative impact on earnings per share for the company (“Reducing Leverage”, 2016).
- Value Provided to Customers
Abbott Laboratories is one of the largest suppliers of pharmaceutical products and medical devices. The broad range of their product portfolio is developed to help people to live healthy life and provide healthy return of investment to its stakeholders. Based upon this strong product portfolio, Abbott Laboratories is on the path to deliver net growth, excellent profit margins and strong cash flow, all while providing a value to their customers.
- Benefit (related to demand)
The vast product portfolio of Abbott Laboratories includes pharmaceutical products, pediatric nutritionals, adult nutritionals, endovascular, and diagnostic products. Some of the most popular brand name includes Similac, PediaSure, EleCare, and EAS Sports Nutrition, among others. (Abbott U.S., 2016). These product segments can be classified into the following categories such as:
The wide range of the nutrition product portfolio of Abbott Laboratories covers both adult and pediatric nutrition products. These products have been developed with leading science technologies and known for its quality nutrition ingredients. These products have been very successful in emerging markets that have a growing aging population and high birth rates. The popular products include “Ensure” and “Similac”. Abbott Laboratories launched around 38 products in this category in 2015 and contributes more than 50% in total sales (Business Review 2015, 2016).
Abbott Laboratories is one of the global leaders of the development of technologically advanced equipment that can allow for faster decision making and evaluation of medical needs. These products have played a key role in delivering sustainable growth for Abbott Laboratories. For example, the newly improved ABBOTT PRISMnEXT can help to enhance blood screening through atomization (Business Review 2015, 2016).
- Medical Devices
Abbott Laboratories undoubtedly holds a top position in medical devices. These devices have been used for vascular, vision care and diabetic care. The technology developed by Abbott Laboratories helps Doctors to detect the disease more quickly and more accurately. For example, Abbott’s MitraClip is the minimally invasive device which can be used for mitral valve repair (Business Review 2015, 2016).
Over the years, Abbott Laboratories have played a key role in developing high quality pharmaceutical products which has been successful in treating variety of patients. These products have been customized and improved over the years to provide quick recovery from all different types of diseases and ailments. Abbott Laboratories have more than 1500 products in their portfolio and they have the presence in more than 90 countries (Business Review 2015, 2016).
- Costs (related to supply)
Abbott Laboratories reported total sales of $20.4B in 2015, which represents a near 1% growth from 2014 figures. Abbott reports a profit over the past 3 years and has performed exceptionally well despite the challenging environment in the industry. Abbott appears to have maintained steady profit margins. The table below illustrates the consolidated income statement for the years 2013 through 2015 (Financial Reporting, 2016).
The table below illustrates the overall product segment percentage of total revenue for Abbott Laboratories. It should be noted that the Nutritionals segment contributed the majority of Abbott’s revenues. The other top segments were adult nutritionals, diagnostics, and pediatric nutritionals (Segments, 2016).
In 3rd Quarter of 2015, Vascular products generated the highest revenue for Abbott Laboratories. The Diagnostic product unit followed the 2nd number by achieving the 26.56% in terms of profit margin (Segments, 2016).
- Strategic Positioning in this Market
Abbott Laboratories has positioned their company strongly in emerging markets. In fact, these emerging markets have been the source of growth. One of the report estimates that around 60% of the pharmaceutical revenue are reported from the emerging markets. The below shown graph clearly indicate that the emerging markets can play a crucial role in company’s growth (Reynolds, 2014).
The Wall Street Journal reports shows that the company reported around 7.8% growth in total revenue by October 2015. The operational sales growth was led by the following countries: India, Russia, Brazil, China and other emerging markets. This report further concludes the growth in “nutritional segment” was stronger than expected. The company reported overall profit of $580 million dollars and the revenue grew to $5.15 billion dollars (MINAYA, 2015).
- Recommended Strategies
The following strategies are recommended for Abbott Laboratories going forward:
- Review Pricing Strategy in Emerging Market
Abbott Laboratories can review their pricing strategy to maximize growth. Their pricing strategy can be reviewed in such a way so that company can gain the sustainable growth in global market. As previously mentioned, reports show that emerging market can play crucial role in future business growth. For example, Abbott Laboratories generates around 60% of the Pharmaceutical revenue and it is expected to reach $2.8 billion Dollars sales target in emerging markets. It is estimated that this profit can reach up to 75% by end of 2016. As an added benefit, by reviewing the price strategy, Abbott Laboratories can improve their sales growth in US markets as well (Reynolds, 2014).
- Promote business through Partnership
Abbott Laboratories can create partnerships with a sports club or sports brand to promote their products. Abbott Laboratories have a wide range of nutritional products from daily recovery to maximizing strength. If any popular brand or club endorses Abbott Laboratories, then it can help to raise the brand awareness. As a result, market share can be captured. For example, Nike or Adidas are some of the most popular brands in the world. By partnering with these sports industry leaders, they would be able to attract more from the health conscious market segment.
- Review of Marketing and Operational Strategy
Abbott Laboratories operates wide range of products in its portfolio. These products are in the center of their diversified strategy. The company’s strategy is to gain competitive advantage over the competitors through this diversified approach. In order to order to gain larger market share, the company should target their marketing and operational strategy by bundling these various products together. For example, company can bundle their various adult’s nutrition product together to increase the footprint of their product. Also, company can offer nutrition plans to public, which are focused on key issue such as weight loss and living healthy.
In conclusion, Abbott Laboratories should continue to concentrate primarily on the emerging markets as sales in those particular regions have grown in recent years. Abbott has invested significant amounts of capital in developing drugs in the countries where they are sold. Investing in foreign countries cushions the firm from currency fluctuations while it enables the company to build lasting relationships with governments, other companies, and citizens. Abbott appears to be able to remain sustainable for the long-term as a growing aging population will allow the continued development and sale of pharmaceuticals, and other product lines in their portfolio for quite some time to come.