The industry-focused international strategy prevalence and profile.
| Verfasser | Mascarenhas, Briance |
| Posten | RESEARCH ARTICLE - Report |
Abstract:
* Many firms facing low-cost international competition can reposition into niches. This study examines one such niche: industry-focused international firms, defined as companies that produce, sell, and expand internationally within one industry. Analysis of the global pharmaceutical industry finds a group comprising of about 20% of the firms that pursue this strategy. This strategy is distributed internationally, but not uniformly.
* It is relatively more prevalent among firms based in emerging countries compared to industrialized nations. These firms invest in R&D in order to create deep specialized expertise that they exploit internationally.
Keywords: Strategy * Focus * Niche * International
Introduction
Strategists can deal with increasing international low-cost competition by repositioning their firm into viable niches. They can benefit from learning about tried niches, which would reduce the risk of moving into them. If they had this knowledge, managers could develop the resources needed to be effective in a particular niche. But since the number of types of niches possible is large and their needed resources are not known, managers find it extraordinarily difficult to identify, prepare, and move into them.
Focus is one of the three generic business strategies, together with low-cost and differentiation, articulated by Porter (1980). Firms may focus on different dimensions. We define a focused firm as one that specializes in a function of the value chain, in a narrow set of customers (Porter 1980), on existing markets such as in a defender strategy (Miles and Snow 1978), in limited product variety (Hannan and Freeman 1984), and/or a limited geographic area. Thus focused firms may specialize in one or more of these dimensions while possibly having a broader scope on others.
This study examines industry-focused international firms. These firms produce, sell, and expand internationally within one industry. In their chosen field, they develop know-how that helps them overcome foreign entry barriers. They expand abroad to capture international growth opportunities, international risk diversification, factor cost differences, and greater market power within their niche. At the same time, by restricting their industrial scope, they avoid diversification into other industries where they have little relevant expertise and fewer synergies exist.
Macroeconomic trends suggest a general movement towards greater industry focus, as the fraction of firms that are industrially diversified has declined over time, and towards increased international expansion, as the fraction of firms with international sales has increased over time (Denis et al. 2002).
Strategic group theory suggests that an industry may contain different sets of firms pursuing similar strategies that are separated by mobility barriers (Porter 1980; Mascarenhas and Asker 1989). An industry may conceivably have a strategic group composed of industry-focused international firms.
The industry-focused international strategy may generate higher returns under specific conditions. Research suggests that a firm's market valuation is discounted because of industrial and international diversification due to inefficient internal capital allocation, coordination difficulties, monitoring and agency costs between managers and investors (Denis et al. 2002). However, international diversification may improve market valuation (Doukas and Lang 2003) provided it is based on exploiting intangible assets through internalization (Morck and Yeung 1991). Thus there is a need to examine if and how the industry-focused international strategy is based on intangible assets.
This study of 164 pharmaceutical firms from 24 industrialized and emerging nations finds a group that pursues this strategy comprising about 20% of all firms. The findings suggest that the strategy is commonly and internationally practiced, but not uniformly distributed. This strategy is relatively more prevalent in emerging countries than in industrialized nations. Further, the study finds that the strategy is based on less debt and more equity funding and investing in R&D to develop and exploit deeper, specialized know-how.
Literature Review
Research on focused firms has been gradually emerging over time in various industries including newspapers, brewing, music recording, book publishing (Carroll 1984), offshore drilling (Mascarenhas 1996), wineries (Swaminathan 2001), and venture capital (Norton and Tennenbaum 2002; Echols and Tsai 2005).
Research has begun to clarify the attributes of focused firms and how they compete. Focused firms tend to emphasize exclusivity and reputation for quality (Swaminathan 2001). They may specialize in a stage of the value chain where they seek to excel and build a reputation (Mascarenhas 1996; Norton and Tennenbaum 2002; Echols and Tsai 2005), while outsourcing other activities in which they do not have an edge (Mascarenhas 1997). They maintain close ties to customers in order to better understand and fulfill their special needs (Simon 1992). And they develop personal networks to share and receive information in order to increase specialized expertise and reduce risk (Norton and Tennenbaum 2002; Echols and Tsai 2005). They can have a customer-focus or product-focus (Carroll 1984, 1985; Carroll and Wade 1991; Swaminathan and Carroll 2000; Swaminathan 1995, 2001; Freeman and Hannan 1983; Norton and Tennenbaum 2002; Echols and Tsai 2005).
A review of the literature suggests theoretical gaps and research needs. Research still needs to identify the prevalence of the strategy. If a strategy type is pursued frequently and widely, it suggests that the strategy has been tried, tested, and may be viable.
Research needs to examine the strategy in international contexts. This analysis will help understand the contexts that discourage or encourage the adoption of the strategy. It will also help managers anticipate where this type of competitor is likely to emerge in global competition. International expansion has been posited to require internalization of intangible assets to enhance its profitability (Morck and Yeung 1991), but the nature and development of intangible assets for this strategy is not clear.
Research also needs to examine the attributes of focused firms and relate them to the strategy pursued. Existing research has typically examined a single attribute in isolation without relating it to the strategy. However, some strategies may utilize and combine multiple resources, but evidence has been lacking. Creating sustained value has been posited to require firms to bring in, develop, and coordinate multiple resources (Collis and Montgomery 1995; Teece et al. 1997; Teece and Pisano 1998; Prahalad and Hamel 1990; Marino 1996). The identification of multiple resources would provide insights on how to develop the strategy.
The Pharmaceutical Industry
The pharmaceutical industry produces drugs to improve society's health and well-being. The pharmaceutical industry is a large, knowledge-intensive, global industry. The industry has worldwide annual sales of over $130billion and is composed of over 200 firms based in many countries. The industry's environment may be characterized as fine-grained because of its many players and diverse, varyingly distributed and changing diseases. This environmental granularity and possibility for multiple niches is due to its complexity, presence of generic and proprietary drugs, diverse diseases, many development technologies, and several drug delivery methods. Drug development technologies available, for example, are based on modern western science, traditional eastern medicine, biotechnology, combinatorial chemistry, genomics, and robotics. And drug delivery methods include oral, inhalable, and injectable, with differing time releases. Firms may specialize on one of these dimensions, such as biotechnology (Cockburn 2004).
The industry develops treatments for many diseases with varying geographic and socioeconomic contours, using multiple drug development technologies, for patients with differing income levels, in the face of conflicting government policies towards intellectual property rights and pubic access to health care, and rising research costs and cost containment pressures. Industrialized nations support intellectual property rights and patent protection. In contrast, many developing countries are more concerned with public access to medications and so permit product patents but not process patents in order to encourage development of substitute generic drugs. Pharmaceutical firms are facing increased cost-containment pressures to control drug prices from emerging third-party payers such as insurance companies and national governments. Large pharmaceutical firms face increasing pressure to develop drugs faster and cheaper, so they are resorting to alliances with smaller firms. Policy-makers, such as the Food and Drug Administration, have been streamlining the drug approval process to permit quicker introduction of new drugs and, as they come off patent, of generics. Prices of generic drugs have been declining over time (Without Author 1996). The key decision-makers on prescriptions are shifting from individual doctors to third-party payers such as insurance companies (Twomey and Stafford-Sigg 1997).
The industry's numerous firms differ in their international and industrial scopes, permitting analysis of the international specialist strategy. Some pharmaceutical firms have a domestic scope, such as Mylan Labs, a producer of generic and branded drugs. Other pharmaceutical firms are industrially diversified multinationals, such as Bayer that has activities also in agriculture, coatings and colorants, fibers, and plastics. And still others are focused international firms:
Amgen, a global biotechnology based firm, produces drugs based on advances in cellular and molecular biology. Swiss-based Alcon, spun off from Nestle...
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