Outsourcing Impact on Competitive Strategies in Pharma Industry

Introduction:

In a competitive business environment, companies need to minimize the cost of production so that they can offer products or services at a lower price and can attract customers. Every company has limited resources to meet the business’s operational requirements. For better business operations, companies apply different strategies. Outsourcing is also a strategy that is used if a firm is not able to meet the operational requirement to produce a product. Outsourcing is a strategy used by different companies to reduce production costs by transferring some part of the work to an external supplier rather than producing it internally (Ellram & Billington, 2001). It’s a cost-saving technique if used properly. Sometimes, it is more affordable to purchase a product or semi-product from outside. Outsourcing allows a firm to free up its resources which can be used in more important issues and invest in high return opportunities. Pharmaceutical companies are increasingly outsourcing research activities to academic and private contract research organizations (CROs) as a strategy to stay competitive and flexible in a world of exponentially growing knowledge, increasingly sophisticated technologies and an unstable economic environment. The decision of outsourcing in pharmaceutical companies is a bit hard because, in such companies, a lot of confidentiality is involved. Concerning the decision about either in house production or outsourcing, companies have to be very careful by considering all those factors which can affect the firms’ future growth and competitive position.

Problem Statement

To reduce production or other business operational cost, companies choose outsourcing strategy. But in pharmaceutical companies, it is not simple to decide whether to outsource operations or not. Formulas, patents and other intangibles are the key assets for pharmaceutical companies. Outsourcing of business operations can involve a risk of disclosure of secrets to the competitors. And it can remove the competitive advantage of a certain firm which is looking for outsourcing.

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The third party to whom operations have been outsourced can disclose secrets of the firm to competitors. Also, some government departments have completely lost control over preparation, development, and realization of projects, which consequently results in weak control over increasing costs. To respond to the growing pressure on prices, it was usual for the pharmaceutical industry to correspondingly increase its expenditure on R&D, to boost profitability with the introduction of innovative treatments. Thus, the cost of conducting research and development started doubling every year.

Outsourcing lead to negative effects when used only as a cost-reducing strategy to improve short-term performance. The consequence may be the loss of internal know-how and expertise as well as higher total costs in the long term. Outsourcing research also bears potential risks due to project complexity and loss of flexibility. The industry is facing a lot of challenges due to rising costs accompanied by longer development time of drugs, fewer replacement drugs, changing technology and higher litigation and patent costs.

Questions:

Question 1. What are the factors to consider when deciding on outsourcing?

Factors like timeline, total cost (including licensing/royalty fees, payment schedules, rush charge, location of supplier, intellectual property issues, reputation, methods, and more. Trade-offs are often required between time, quality, and price.

Question 2. What is the relationship between competitive strategy and outsourcing?

This question deals with the strategies than marketers take to gain competitive advantage over other drugs in the market. Does outsourcing leads to a competitive advantage or addition of unnecessary costs. The relationship is influenced by various factors like limited financial budgets and skills to manage reallocation of resources. Added complexity of managing and monitoring an outsourcing process and vendor can easily overshadow the cost reduction of R&D work.

Question 3. What will happen in the long term?

Outsourcing is been advantageous in short term as there are

Literature Review

The history of outsourcing is deeply embedded in the history of the growth of the Modern Business Enterprise, which sprang up in the latter half of the 19th Century. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing.

The study indicated that there is no significant direct relationship between outsourcing and performance but there is a difference in the impact depending on the firm strategies. Firms following cost-based strategies benefited more from outsourcing than firms following differentiation strategies. The results of the study showed that clinical trials were the most area of outsourcing. Clinical trials that were outsourced within the home country were completed faster. However clinical trials that were outsourced to vendors in foreign countries had a decline in the performance. These trials cost more which implies that the country differences may increase the transaction and production costs.

The inconsistent findings in the literature on the offshoring outsourcing performance relationship could be because most of the prior studies were done only with the firm as the unit of analysis and performance was measured as total sales or profits of the firm (Bhala et al. 2006; Gorzig and Andreas, 2002; Gilley and Rasheed, 2000). For instance, Mol et al. (2005) distinguished between global and regional outsourcing and measured the performance effects at the firm level but did not find any significant relationship. The authors recommend the use of better measures of outsourcing performance such as reliability, quality, and innovation. These studies show that further research is required to examine this relationship between performance and offshoring and outsourcing at the project level (Gilley and Rasheed, 2000; Mol et al., 2005).

Muyang Hu studied some hidden costs involved in outsourcing in pharma. With an increase in chronic diseases like cancer, there is pressure on healthcare budgets. It is not possible to provide supervision during the research of some drug leading to misunderstanding between parties and cost increase may occur. This occur because vendors do not have same standards and mission. The hidden cost issue might get more serious when dealing with foreign companies across international boundaries. The hidden costs discussed in the study were related to extensive training required to provide in-depth knowledge and specifications of a particular drug. There are also many government and political regulations that may lead to delays and hence increased costs. This increased cost might reduce or even eliminate the savings by having an offshore outsourcing vendor in some cases. Hence in-house research is needed to control the increasing costs and control. She also stated that in 2010 development costs of new drugs were between $4 billion to $11billion per drug and can be reduced if produced in home country.

A research done by Anu Gummerus on what kind of regulatory tasks are outsourced in the pharmaceutical industry and what are its consequences. She conducted the study through email surveys in various countries like Finland, Germany and Sweden. The survey received 71 responses out of 147 completed surveys. The most outsourced task was related to research and development and was given to Contract Research Organization (CRO) and it was one of the expensive tasks. The CRO has to assure uniform quality of its personnel knowledge and skills. Conclusion of the study was that outsourcing will prevail but the companies should plan the outsourcing carefully and compare possible CROs or it will lead to addition to costs with no result.

Aims and Objectives:

This research aims to identify the impact of outsourcing of production in the pharmaceutical industry. The research will focus on the following points.

• Reduction in production cost of 10% or more by outsourcing business operations
• A company is operating overseas and it is outsourcing its operations, what kind of risks are involved
• The firm has a competitive edge over its competitors, what risk is involved with that core competency.

Justification of the project, significance and practical value

With the increase in competition in the market, companies have to offer better services at reasonable prices. For that purpose, they have to put their best to achieve market share and growth (Chaturvedi, S. 2005). On the other hand, economies or companies have limited resources to meet unlimited desires. To overcome this deficiency, companies have to opt for a different set of innovative strategies, through which they can achieve maximum output with minimum resources.

One company can’t perform a hundred percent in all its business operations. To minimize the cost, they prefer to get services from experts in relevant business activity. The concept of outsourcing is very common nowadays in the business world. Pharmaceutical industries are also using this strategy to minimize their operational costs.

But pharmaceutical industries have confidentiality in their work. Their actual assets are patents and formulas. By sharing this stuff with the third party for production purposes, they can lose market share and competitive position in the market. This study will elaborate on all the impacts of outsourcing on such companies. The pharmaceutical industry is suffering through a challenging period in its evolution with the traditional methods of drug development continuously expanding. Successful pharmaceutical companies have considered the need to leverage resources, and in result, they have come to rely on specialist external sources provider who are expert in certain business activities (Piachaud, B. S. 2002)

Three types of costs are involved in outsourcing or in-house production (Vining, A.1999). Production cost, bargaining cost, and opportunity cost. Production cost is the cost involved in producing the product in house or by third party through outsourcing. Bargaining costs may involve the contractual cost at present and any change in future time due to uneven circumstances.

It also includes the cost of monitoring either the third party is working as per the requirement. Bargaining cost increases when both or either of the party is working for self-interest, not for mutual interest. Opportunity cost is a cost that includes choosing an alternative by sacrificing the other one. So, companies have to be very careful while making decisions regarding outsourcing the business processes by keeping in mind all the issues and risks. This research will try to clarify all the hidden aspects behind this kind of decision making

The outcome of this research will help pharmaceutical companies to make a decision either in house production or outsourcing. This study will consider all those factors which can be important in decision making. Managers can make a clear projection of how much can they save by using this strategy. Companies always try to minimize their expenses and maximize their profit so that they can increase the wealth of shareholders. Though different companies follow different cost-cutting strategies but most of them can be unsuitable for major stakeholders for example employees.

The selection of a good strategy for the company is an important decision by considering the benefit of all stakeholders. All the research questions/objectives as identified in the proposal will be answered based on the data collection, finding, and analysis. This research will benefit in the future to the companies to decide on outsourcing by considering all the factors which will be presented in the study.

References

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