The growth of McKesson Corporation in the pharmaceutical sector has been phenomenal. The growth and prosperity is associated with the management approach employed at McKesson. This report presents findings from a research on the firm’s strategies and operations. The aim of the research was to understand how McKesson responds to challenges and opportunities in the market.
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This report covers McKesson’s history, an analysis on the firm’s position in the industry using PESTEL and Porters five forces, then the challenges that the firms has to deal with. Finally, the report provides recommendation on the course of action to ensure the firm maintains its competitive edge in the pharmaceutical sector.
History of McKesson
It took McKesson Corporation many years to become one of the largest pharmaceutical firms in the world (International Directory of Company Histories, 1988). John McKesson with the help of other partners pioneered the firm in 1833. The initial setup or company was known as Olcott & McKesson (International Directory of Company Histories, 1988).
Olcott & McKesson had its operations in Manhattan; they operated as wholesale drug suppliers. Daniel Robbins was introduced as a member and in 1953; he was made a partner after the death of Olcott (International Directory of Company Histories, 1988). Eventually, the firm’s name was changed to McKesson & Robbins. There followed many identification changes due to the tough beginning that the firm had.
The firm experienced a tough beginning but the determination and iron will of McKesson steered the company through all challenges into a successful pharmaceutical company in US. The firm experienced uncertain development, which was characterized by change of ownership and brand name. In 1893, the firm was dealt the worst blow when McKesson died but still the heirs of the firm carried on the mantle.
The 20th Century saw the firm grow from strength to strength as new product lines were opened such as food supplements, alcohol and chemical production among others. From 1980s to 1990s, McKesson settled on producing medical product and it divested the unrelated product lines (International Directory of Company Histories, 1988).
McKesson chairperson Harlan whose motto was “any company that doesn’t stick to what it does best is inviting trouble” and that “anybody who doesn’t prepare lives in dreamland” (International Directory of Company Histories, 1988) engineered the decision. During this period, the firm acquired automated healthcare, HBO & Co thus becoming the leading medical suppliers in US.
Currently, McKesson is ranked 14 with over $106.6 billion yearly revenue (International Directory of Company Histories, 1988). McKesson has gone global with branches in Ecuador, Italy, Lebanon Netherland, Taiwan and Thailand (International Directory of Company Histories, 1988).
McKesson Strategic Challenges
Besides its success story, McKesson has some underlying strategic challenges, which inhibit it from exploiting its full potential. The most intriguing challenge is lack of clear framework to cope with complexity of global operations.
Secondly, the firm lacks capability to handle hi-tech human networks. Thirdly, technology in the pharmaceutical industry is always changing and the company has to keep abreast. Fourthly, as the firm spreads its wings, the challenge of meeting international clients’ needs satisfactorily arises.
Looking at the array of challenges, unless something is done to avert the effects of the challenges McKesson will find it difficult to contest in the global market. However, to understand how well McKesson can respond to the challenges, an analysis of the pharmaceutical industry is vital.
A PESTEL analysis comes in handy when looking at the macro factors affecting an organization. PESTEL is an Acronym for Political, Environmental, Social, Technological, and Economic and Legal forces. Therefore, a PESTEL analysis consists in looking into the effects of each of the factors on the operations of an organization.
McKesson being a US based firm, it enjoys a stable political environment based on democratic foundations or principles. However, having internationalized, success is dependent on how the firm negotiates through murky international political waters. For McKesson to enjoy continued prosperity it has to adhere to each specific government in host country’s policy and rules.
Since McKesson is an international firm it is important to evaluate the tax policy assumed by the government, Labor law, trade restrictions and other tariffs. In addition, McKesson has to respond and always prepare to either ride on or guard against negative effects of bilateral political decisions in the international arena.
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Economic factors that affect firms are closely linked to the natures and trends policies adopted by governments. Economical factors, which influence the operations McKesson, include the economic growth rate of nations, interest rates and price fluctuations. Although the US is an economic powerhouse, global economic changes and financial crisis have not spared it and their effects have been devastating.
The other factor that has shaped the operation of the corporation is the fluctuating exchange rates and the tax rates imposed by various countries (Gillespie, 2007, p.12).
Consequently, the management of McKesson is monitoring the changes in the cost of factors of production such as labor and raw materials. Depending on the changes, the Corporation may decide to outsource some raw materials from countries with low cost of production to gain low cost leadership.
McKesson enjoys the benefits of diverse cultural base that makes up the US. The cultural diversity in the uses provides an edge or benefits to the company in its endeavor to appeal to the global market. Bearing in mind that all individuals are susceptible to illness, McKesson boasts of ready market for its product in US and across the boundaries.
The indiscriminating need for pharmaceutical products across cultures and social cohorts enables the corporation to reap steady revenues across various age groups and diverse markets niches. The demand for pharmaceutical products is price inelastic and therefore the firm profit margins are not affected by changes in prices.
In fact, price increase for drugs means that the revenue generated by the company increases, the same is the case when epidemics outbreaks occur because sale volumes increase. Best et al (2005, p.5) stresses the importance of evaluating demographic trends to regulate the firms production levels to gratify the market demand.
Technology is one of the major factors affecting the diversification and the scope of a firm’s prosperity. Embracing the right technology strategically arms the firm with the suitable tools for international competition. McKesson use technology to produce superior qualities compared to those of its competitors.
Williams & Green (1997, p. 165) emphasizes the need for innovation and automation of its production and communication systems. While Best et al (2005, p.9) highlight the need for embracing telecommunication since it is indispensable for any global business. In addition, they emphasized the need for need for devising new product as well as new distribution mechanisms (Best et al, 2005, p.9).
Managing hundreds of chain branches is a cumbersome task, but this problem has been contained by adoption of Management Information System (MIS) which gearshifts the operations of the vast firm.
Furthermore, developing customer touch requires an efficient system, which facilitates a mutual interaction with its customers. McKesson has built an online query and customer desk to serve customers throughout the day (International Directory of Company Histories, 1988).
This technology has also led to changes in advertisement strategies, many firms have resorted to the new media ads that are more influential and have a wider scope.
Modern manufacturing are faced with various environmental regulation imposed by the government pertaining global warming and treatment of waste products. McKesson being a manufacturing firm is obligated to comply with environmental policies to reduce pollution and treatment of waste products (Choucri, 1995, p.221).
As part of corporate social responsibility, McKesson ensures it complies with the international environmental regulations in an attempt to preserve clean and healthy environment.
Failure to adhere to international standards may force the government force the firm to terminate operations (Choucri, 1995, p.221). However, McKesson enjoy less taxation for emission since its operation is associated with less chlorofluorocarbon that is a major cause of global warming.
All corporations are governed by the Corporation Acts, which are designed to control the action of all business organization. Legal factors influence the corporation wage rates, age discrimination and laws controlling child labor (Choucri, 1995, p.224). The operations of McKesson are controlled by changes in laws controlling drug production and sales policies.
Some drugs are prohibited from open shelf sales and therefore new distribution methods are devised such as agency and opening pharmacies. The competition law influences the operation of large corporations from exploiting small firms because of their monopolistic influences (Lamb, 2009, p.89). In addition, all corporations are obliged to act in accordance with consumer laws.
Consumer laws protects consumer from unwarranted acts of the corporation such as hoarding, production of counterfeit products and deceptive descriptions of the commodities (Lamb, 2009, p.89). McKesson management looks into it that all legal factors are held fast to avoid any collision with the government law enforcers.
Current External Environment
McKesson quest to embrace an international image has exposed the firm to a new environment with diverse challenges. However, the universality of its products provides an amble penetration into new market niches. Similarly, epidemics transcend geographical boundaries making it possible for a single drug type to be applicable in many countries.
Nevertheless, spreading out to a wide region exposes the firm to new competitive forces. International environment is an arena for the best players in the sector, such solid competition calls for production of superior products and taking up the modern technology.
Giber (2009, p.175) echoes that the prevailing challenges have forced the management to embark on educating the firms staff to exercise professionalism towards peak performance.
McKesson offers a broad range of services and assistance to enhance realization of customers’ uttermost utility (International Directory of Company Histories, 1988). An in-depth drug knowledge and intense awareness of the hospital practices as well as operation flow present McKesson with a unique tool for international competition.
The nature of the competition has strategically fueled the firm’s ambition to become the best and to streamline operation and management. Currently, the organization has decentralized some operations, for example, marketing and production have been distributed to various countries while activities like finance controls, and technological planning and strategic arrangement are centralized at the headquarters (Giber, 2009, p.174).
Porter’s Five Forces Model
McKesson has adopted a sustainable international strategy, which is aimed at competing effectively in the market with other pharmaceutical players. The sustainability of the firm’s strategy is best understood in the context of Porter’s Five Forces Model.
Threat of New Entrants
The pharmaceutical sector is one of the economic sectors with a high rate of turnover. The stable demand for pharmaceuticals and the emergence of new diseases has attracted many players into the sector. McKesson faces stiff competition from new entrants into the sector both from within the US and international market despite being Multinational Corporation.
Pharmaceutical industries have no barriers of entry or exit. Considering a relative low cost of entrance, potential firms find it easier to construct a drug-producing firm than launching hard mechanical engineering plant.
Most governments have liberalized the pharmaceutical industry so long as firms’ comply with the health standards and international drug standards put in place. In international market, McKesson struggles to overwhelm the locally established brands in their local markets. Although, McKesson boasts of economies of scales in production, many new entrants in the industry enjoy local loyalty.
To surmount the ever-increasing competition, McKesson reacts by staging price wars because it enjoys economies of scale. The other alternative that has favored McKesson is its established brand name thanks to its rich historical background and its ability to develop proprietary competitive advantage (Henry, 2008, p.70).
The power of Buyers
Gillespie (2007, p.11) points out that consumers’ bargaining power is a pivotal tool that acts against the objective of the firm to maximize profits. Consumer bargaining powers’ reduces prices and consequently the profit margins of every firm; existence of large-scale buyers dictates prices because firms rely heaving on their purchases.
However, McKesson pools various categories of customers, large-scale buyers and small-scale consumers. Inability of McKesson to lock-in its customers has adversely affected the firm’s profit margins as customers switch to new drug suppliers. However, the firm’s knowledge Information officers are devising mechanisms to retain customer loyalty by trying to lock-in their customers.
The other way that McKesson is winning customer trust is through investing in research, which has resulted to generation of superior products and better customer relationship. Ireland et al (2007, p.96) suggest that proper differentiation can solve the challenge presented because it makes customers less sensitive to prices and promotes their loyalty.
The Power of Suppliers
Just like the corporations, suppliers’ aims at maximizing profits. To achieve their inherent goals, suppliers bargains for higher prices for their supplies hence reducing the firm’s profit margins. Henry (2008, p.79) portrays the ability of the supplier to switch from one buyer to the other increase their bargaining power forcing buyers to comply with their terms and conditions.
Such a move reduces increases the firms’ production costs hence reducing the profits margin (Gillespie, 2007, p.11). To cope with suppliers pressure McKesson relies with a wide range of supplies thus reducing the power of suppliers. Furthermore, the company’s financial ability has made it possible to engage in mergers both horizontally and vertically.
The other stronghold of McKesson is because it has diversified its scope by opening international braches, which acts as reliable pool for cheap supplies. With all its underlying potential and watertight management system, McKesson has a promising future because it will overcome current challenges.
Competition from existing Firms
The greatest challenge that faces McKesson is stiff completion from established multinationals firms such as Owens & Minor Inc New, Cardinal Health Inc, AmerisourceBergen Corp and other foreign firms such as GlaxoSmithscline Inc (International Directory of Company Histories, 1988). The state of competition is heightened by their financial abilities and in-depth research that they practice.
The other area of rivalry is their ability to adopt the latest state-of-the art for their production and management systems. Mergers and acquisition is also another area of interest to the existing multinationals firms, each firm cherish in diversification in order to diminish risk. On top of this, McKesson is concentrating in development of superior quality and designing a reliable customer service link to enhance brand royalty.
Pharmaceutical industry faces a great deal of challenge from the substitute products. Many people prefer using food supplements at the expense of medicines because of their associated side effects. In developing countries, people prefer using traditional medicines, which comprises of herbs and roots or other locally produced drugs.
High prices of pharmaceutical products discourages many little income earners this compels them to seek for alternative medication services (Floyd, 1997, p.97). However, pharmaceutical sectors have few substitutes therefore this is good news for the McKesson Corporation.
Besides there being few the few substitutes, this is no reason to undermine their impact on shaping the economy; hence, McKesson needs to ensure that it produces some low priced drugs to target the poor and the middle class consumers.
The three generic strategies that McKesson can employ to its advantage are segmentation strategy, differentiation strategy and cost leadership. Wright et al (1990, p.21) suggest that combination of more than one of these strategies is more successful. Nonetheless, they admit that it is more cumbersome to integrate them.
According each firm in an attractive industry often is faced with stiff completion and as a result, there is need to carry out a market research, which is aimed at obtaining requirements of the market. Market segmentation helps the firm to produce consumer tailored products. Apart from meeting the consumer test and preferences the organization stand a better chance of understanding the best method of carrying out market promotion.
McKesson has done market segmentation for its products; a separate distribution channel, to ensure competence, serves each market niche. This criterion has proved to be very successful for the McKesson especially while entering into a new market.
In 2008, McKesson carried out a market survey to analyze the local market condition to determine the potential and ways of satisfying consumer needs (Scott, 2009). A successful market differentiation does not only guarantee smooth entry but also help to discern the logistics most appropriate for the firm.
Stiff competition prevailing in international market has yielded to the price wars. Each firms struggle to assume market leadership by increasing the number of customers and developing the corporation brand name. Besides price being a traditional strategic tool, its relevance in modern business operation is still significant.
However, the applicability of this strategy is increasingly becoming insignificant because of high production costs (Ireland et al, 2007, p.100). McKesson still use price leadership as part of its competitive tool. This has been successful because the firm is able to acquire cheaper raw material by merging or absorbing the Suppliers.
The other factor that has made this possible is the ability to transfer labor from one country to the other. Wage rates in England are six times that of Brazil and ten times the wage rate of India. By mobilizing labor mobility, McKesson ensure low cost leadership and overall command in the pharmaceutical industry.
Wright, et al (1990, p.23) stress the significance of differentiating products especially in segments which are less price-sensitive. The market characterized by distinct customer needs, which are easily satisfied if organizations produce goods that respond directly to the diversity. McKesson has weaved product differentiation as a key grand strategy that delivers its competitive edge.
Differentiation is successful tool because the intellectual property rights such as patents protect it. However, some competitors come up with closely related products, which mean consumers are cheated into purchasing the counterfeit products. It is worth noting that product differentiation is an expensive venture, the high cost and time involved discourages firms from doing it.
Urgent issues to be addressed
Due to the stiff competition facing the McKesson Corporation, the management should be zealous to cope with it. There are many issues hindering realization of its full potential. However, McKesson is obliged to focus on the following issues:
Global market has complicated the operation of the Multinational Corporations such as the McKesson. This being the case, the firm should embrace the multifaceted global challenges and their impeding circumstances. McKesson has no option but to face the challenges in global market head on.
The other intriguing challenge that hinders the smooth expansion of McKesson in global market is the complex political systems presented in foreign countries. Barriers of entry have remained issues that need careful negotiation as well as conforming to the state rules that govern firms. Moreover, it is important McKesson to strike a balance between international bureaucracy and commodity product.
Not only is competition becoming stronger for all corporations, but the scope of the competition is also changing with time. Competition is shaping up every time and firms have no option other than delivering superior products that adds consumer utility. The key success factor for excelling in international markets is knowledge accumulation and operation. For McKesson to assume market leadership it should use information acquired for its advantage. Although, McKesson is doing relatively well internationally, still much is expected to be done in order to cement its place as a Pharmaceutical powerhouse.
Both technology and telecommunication are rapidly restructuring the competition, and influences the conduct and decisions about the operations of the firm. With adequate information system, the McKesson stands a better chance of coping with the ever-emerging challenges.
Designing the Information system should be all-inclusive, covering management, product and competitive strategy. A clearly structured information system harbors a vital success principle for McKesson international.
There are issues that the management at the firm has to consider in order to guarantee a great future. Considering the fast changing environment within which it operates, I recommend that McKesson should be vigilant and relentless in carrying out research to develop not only superior quality products but also add value to consumer service.
The pharmaceuticals industry is technology driven. Technology is dynamic and very important when it comes to shaping up the competition, therefore McKesson should adopt new technology and discard obsolete one.
In line with its internationalization strategy, McKesson should also embrace resource mobility in order to cut down production to augment low cost leadership. Further, the international market is more dynamic.
Therefore, the management should benchmark their strategy to counteract the action by its main competitors in the sector. Moreover, to deal with local players and thus contain stiff competition prevailing in the market, McKesson’s management should embark on strengthening its brand name giving the firm a global outlook.
McKesson Corporation boasts of a rich history in the pharmaceutical industry and is currently ranked 14th in the Fortune list. Regardless of its prestigious position in global market, McKesson should earnestly act in response to the challenges presented by the global scope. The dynamic nature of the technology is worth paying attention to, to avoid losing its command in the market.
Additionally, given the firm serves a global market, the significance of having reliable information system to control the operation of the firm cannot be overlooked. To maintain high levels of success, McKesson must develop organic processes that persistently evolve with the changing realities of the competitive modern. Unless the organization evolves as the world order changes, failure is imminent.
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