1. K a t h r i n A u z i n g e r - H o t z e l FINAL EXAMINATION P r e p a r e d f o r D r . D a n i e l E . G i l b e r t U n i v e r s i t y o f M a r y l a n d U n i v e r s i t y C o l l e g e S t r a t e g i c I n v e s t m e n t a n d P a r t n e r i n g I M A N 6 1 5 S e c t i o n 9 0 4 0 Eli Lilly in India: Rethinking the Joint Venture Strategy

2. Lilly Core Competence & Competitive Advantage: Innovation, research and drug development Lillys mission is to create and deliver superior health care solutions in order to provide customers around the world with optimal clinical and economic outcomes (Eli Lilly). This requires that the company operate ethically, taking into account health and environmental issues in respect to its global operations as well as local impact. Additionally, Lillys mission and values are expressed in the companys desire to provide innovative medicines that enable people to live longer, healthier, and more active lives (Eli Lilly). The firms core competencies relate to its ability to discover, develop, manufacture and sell a broad line of human health and agricultural products in short its ability to innovate (p. 232). Lilly has five specific core competencies: established markets, oncology, diabetes, emerging markets, and animal health (Bajgrowicz). The companys years of experience, commitment to scientific and managerial excellence as well as its global reach and strategic leveraging has promoted its continued success. Lillys competitive advantage is linked to its ability to innovate. Specifically, the integration of highly sophisticated technologies in combination with an interdisciplinary approach to research and development have created a new model for Lilly that gives the company a competitive advantage in bringing breakthrough medicines to patients in a more efficient, productive, and dependable manner (Eli Lilly).

3. Ranbaxy Core Competence & Competitive Advantage: Manufacturing and integrated processes Ranbaxys mission is to to become a Research-based International Pharmaceutical Company, committed to constantly pushing new frontiers of knowledge in pursuit of new horizons of science (Ranbaxy). This requires visionary management and a serious, research- oriented focus for the future (p. 233) The companys core competency is expressed in its processes. Specifically, Ranbaxys chemical synthesis capability enables the company to achieve economies of scale in the manufacture of patented and generic products (p. 234). The firms competitive advantage is linked to its low costs of capital, employee loyalty, and its solid manufacturing base with a strong backward integration from lab to the market (Ranbaxy). Furthermore, the companys strategic position and experience in the Indian market (one of the worlds the most competitive and aggressive marketplaces) allows it to compete successfully in other markets (Ranbaxy).

4. Central Question And which direction is Eli Lilly (Lilly) to take now that Ranbaxy Laboratories (Ranbaxy) is intending to divest its stake in the joint venture? Key Issues: Both companies have grown and attained their JV goals Ranbaxy became a global player and Lilly gained foothold in India. Evaluate the need for strategic partner partnership vs. wholly owned subsidiary Country risk cultural differences, political and economic risks, constant challenges with government regulations Limitations on pricing small margins -> cash flow constraints JV depends for manufacturing and distribution on Ranbaxy Opportunities changing operating environment, increasing demand, shifts in the industry, cost management

5. Strategic Environment Strategic Context Lilly is re-evaluating its strategy for India and the direction for the JV, with Ranbaxy signaling an intention to sell its stake (p. 229) Lillys product portfolio for India is limited ELR JV depends for manufacturing and distribution on Ranbaxy India: Healthcare expenditures in India are rising; Increasing demand, improving regulatory framework, better infrastructure; WTO membership and resulting change in ownership requirements, trade, IPR/patent protections Industry: Slowdown in growth (price competition, shift in demand, entry of large competitors); Internal consolidation to achieve synergies and economies of scale; Increasing rivalry and fierce competition Strategic Objectives Take advantage of the opportunities present and developing in the Indian market Emphasis on emerging markets (such as India) to manage company growth Maximize returns and achieve long-term sustainability Shape opinions be a driving force in the industry

6. Porters 5 Forces Analysis Barriers to Entry are high: Economies of scale exist High start-up capital requirements as well as investment intensive operation (R&D, clinical trials, etc.) Forward & backward integration Access to distribution Experience/learning curve Strict government policies/controls Proprietary knowledge and patents Brand identity/loyalty relating to patents Threat of Substitution is medium: Substitutes are available generics vs. prescription, parallel trade Some products exist that perform the same or similar function Buyers may face uncertainty and/or inconvenience when switching Existing substitute products (generics) satisfy price, value, and quality expectations Brand loyalty usually exists Bargaining Power of Suppliers is medium/low: Suppliers are diverse and geographically dispersed Some raw materials are basic resources low switching costs, easily available, bulk production Some suppliers provide differentiated inputs (i.e. R&D, APIs) Switching costs depend on input type Bargaining Power of Customers is low: Switching costs depend on drug generic vs. patented Substitutes are available for some drugs Buyers are fragmented with only few influential ones (i.e. government agencies) Product may be a critical input

7. Rivalry within the industry is strong: Industry growth is high and expected to increase Number of competitors/rivals is large and expected to increase Similar products (i.e. generics), performance, quality, and strong images Buyer cost for switching brands depends on drug Rivals are diverse but may collude and cooperate to gain competitive advantage Industry profit potential is high

8. Competitive Structure of the Industry in India The competitive structure of the industry is being redefined due to the threat of new entrants, increasing competition among rivals, consolidation among firms, as well as a shift in focus To maintain presence firms are continuously forced to adapt to a changing environment, as regulations, rules, frameworks and institutions evolve affecting the structure of the industry and the way business is conducted Changes in focus shifting drug development in new directions (chronic therapies), intense price competition, entry of large players have influenced the competitive structure of the Indian industry (p. 242)

9. Trends Growth market: changing social structures, population growth, increased access to medicine, new and evolved markets will lead to market growth Emerging markets: increasing demand for medicines, increases in healthcare spending, new opportunities R&D: will become more complex caused by political, legal, and financial factors Changes in healthcare delivery and focus Regional/global trends: outsourcing of clinical trials availability of medical infrastructure and expertise to provide clinical trial data to support global registrations (p. 243) Competition: will become increasingly fierce as structure of industry evolves and changes

10. SWOT Analysis Strengths Lilly is one of the largest pharmaceutical companies in the world (12th largest) Large, durable organization Commitment to scientific and managerial excellence Global influence spans 151 countries Leading brands and R&D capabilities Ethical marketing & integrity Good stakeholder relationships World-class sales process Expertise in clinical trials Weaknesses Patents infringement vs. expiration Financial risks increasing costs vs. pricing constraints Limited product focus (two groups off- patent drugs & patent drugs with barriers to entry) Dependent on international sales Opportunities Changes in population, markets, and demands Emerging markets low cost labor, new customers, etc. Use world for clinical testing Shape opinion with leaders in the medical field around the world Strong performance of ELR JV Shift in R&D focus (chronic therapies) Positive changes in Indias business environment Threats Ranbaxy is local market leader Competitive structure of the industry is evolving consolidation trend, entry of new & large competitors India weak IP protection/enforcement, new competitors Limitations on pricing small margins - > cash flow constraints Escalating costs (R&D, clinical trials, pricing pressures etc.)

11. Culture Economic Environm ent Social Process Analysis Political System Social Process Analysis Country Risk India

12. SPA India Economic Commonality Distribut ion Resource Base Econ. System Producti on Resources (Foundation): Natural: some natural resources (4th largest coal deposit); farming & industry particularly sciences Human: large labor pool 2nd most populous country, 2/3 of the population between 15 & 64, low labor costs, migration to cities; high rate of poverty Technological: mix of modern and outdated industry and agriculture; infrastructure improvements (problems with electricity, roads, etc.) Production (Organizational): Production Assets: variety of industries some well developed and modern, others outmoded and outdated; large service sector Production Forces: large skilled and unskilled workforce Production Systems: paternalistic management style, hierarchies, risk averse, long term focus Distribution (Significant): Property Claims: growing middle class, high market potential worlds 4th largest importer; large rural population with varying and distinct cultures Exchange Mechanisms: logistics, distribution, banking system etc. developing; many reforms aimed at attracting FDI; poor developing infrastructure; many mom-and-pop stores; penetration of rural areas by large MNEs difficult Demand Preferences: demand is evolving, large income disparities poverty is a significant problem

13. SPA India Political Commonality Legal Order (Foundation): Defense: external relations are stable no significant threats BUT some disagreements with China and Pakistan (work in progress) Domestic Tranquility: domestic relations are relatively stable with some conflicts between castes and Muslims vs. Hindus Legal Base: influenced by the British Judicial System - judicial review of legislative acts; separate personal law codes apply to Christians, Hindus, and Muslims burdensome and complex regulations; accepts compulsory ICJ jurisdiction with reservations; ease of doing business in India is low the country is ranked 133 (out of 183) by the World Bank Group Polity (Organizational): Legislative Consensus: union territories; democratic tradition, several larger opposing parties; elections based on popular vote and electoral college; decentralized system divided into three branches; policy-making processes are transparent with clearly defined responsibilities and procedure Judicial Procedures: complex legal system; law has a national character is a part of local culture and life; Indian judiciary is known for its independence and extensive powers - fairly routinely intervene with executive action; Indian courts are slow due to a shortage in personnel however, existing laws are effective, enforceable, and relatively reliable. Executive Authority: courts are quite efficient in managing the country and enforcing laws Welfare (Significant): Secure Existence: complex and evolving operating environment (legally, politically, & economically); stable; India ranks medium in UN Human Development Index Political Freedom: political freedom exists; people are allowed to vote at age 18; multi- party system reflects the ideological diversity existing in India Significant Engagement: public is involved in determining the future and shaping the countrys structures, operational frameworks, and political climate Social Compact Legal Base Politica l System Policy Process

14. SPA India Cultural Commonality Workforce Mindset (Foundation): Useful Skills: literacy rate is 61%, increase in skilled labor but education remains a privilege and remains in need of improvement/liberalization (literacy rate and general education level are improving); unorganized labor and disenfranchised people remain a problem as well as high levels of poverty Accumulated Knowledge: quality improvements in educational systems; schools are accessible to the general public however, higher education remains largely exclusive and selective; learning through tradition still exists and remains a central part of culture Final Meanings: social morality shaped strong regional and local identities; strong indigenous heritage; caste system influences interaction, daily lives (food, clothing, job, education, etc.) Style (Organizational): Basic Roles: relative gender equality; profound socioeconomic inequalities caste system; family oriented; large/extended families (include neighbors and entire town); Decisional Patterns: high power distance; strong relationships relationship oriented; particularistic society; low uncertainty avoidance flexible rules and structures; Societal Recognition: caste, multi-ethnic/multi-religious; India has many different social groups, which differ in languages and dress, follow different religions as well as eat different foods however, they share many common attributes that unite them Symbols/Sacred Values (Significant): Communication Modes: communitarian, paternalistic, hierarchical; many regional dialects and several major languages (incl. English); no is being avoided Religious Beliefs: mainly Hinduism; life happens in a circular pattern; reality is relative (me versus you, me versus the world); high degree of ambiguity Symbols: destiny, karma, caste system; Respect one another people are alike, flexible beliefs while embracing traditions; meditation (i.e. yoga); ideology: there are many answers, many directions, it is chaotic, diverse, unpredictable, evolving, changing, never static, etc. Sacred Values Workforc e Mindset Culture System Styles of Interacti ng

15. Culture: India vs. US Strategic Map: Size/Product Portfolio (India) India ProductPortfolio: Generic Size: Large Size: Small ProductPortfolio: Innovation AurobindoPharma Dr. Reddy Ranbaxy Cipla Ltd. Eli Lilly Ranbaxy Glenmark Pharmaceuticals Sun Pharmaceuticals Pfizer Novartis AG GlaxoSmithKline Merck & Co.

16. CPA - Lilly Corporate Process Analysis Comm onwea l Admin Corp. Organi zation Polity Marke ting Resou rces Corp. Operat ions Produ ction Identit y Learni ng Corp. Cultur e Style Corporate Operations: Resources: operate in 151 countries; manufacture and distribute through 25 countries; financially stable; fast-growing, stable, company; successful R&D division; Production: integration of highly sophisticated technologies in combination with an interdisciplinary approach to research and development; discover, develop, manufacture and sell drugs Marketing: directly to consumers, doctors, and healthcare agencies; ethical company; integrity; image, trust, quality Corporate Organization: Admin: management ensures strategies and plans are implemented; publicly traded company, governed by processes, systems, and rules Polity: decisions are made centrally, board of directors and management; well-trained, professional managers Commonweal: maximize shareholder wealth, meet quarterly financial goals Corporate Culture: Learning: training, hiring skilled employees, diffuse knowledge throughout global operations, promote internally, JVs and alliances Style: board meetings, press releases; management creates value, maintains quality and high standards to increase company reputation and foster growth; commitment to innovation and growth as well as scientific and managerial excellence; shape opinions close interaction with stakeholders Identity: growth, innovation, financial focus; commitment to scientific and managerial excellence

17. Strategy Alternatives Pro: maintain successful JV; retain access Ranbaxys manufacturing and distribution; well established relationship Con: Ranbaxy may not easily be swayed to continue JV possible result: lack of commitment; companies goals, structures and visions have changed alignment may be difficult/impossible; JV mission and goals have been achieved Strategy A Restructure - renegotiate JV with Ranbaxy Pro: cooperative partner support; potential access to manufacturing and distribution; share risk and burdens Con: difficult to find suitable partner; negotiations take time; Ranbaxy may transfer shares without concern fro company fit; JV purpose/mission? Strategy B Form a new JV - find a new partner Pro: India offers many opportunities; decisions can be made with the interest of Lilly in mind; ELR successful, reputable company in India; revenue to support parent company; integrate technology and knowhow of subsidiary to realize company strategy Con: large financial commitment; country and market risk exposure; lack of manufacturing and distribution channels Strategy C (recommended) Terminate JV establish subsidiary

18. Technological Dimension: Strategy allows Lilly to take advantage of a long-term growth opportunity Purchasing Ranbaxys shares would allow Lilly to maintain a foothold in India ELR is an established reputable entity in the Indian market Market and regulatory changes provide a number of opportunities in India Increasing local demand and low-cost, skilled labor are integral components in Lillys strategy portfolio Organizational Dimension: Lilly will face challenges as it lacks manufacturing and distribution will have to negotiate with Ranbaxy or other entity or develop own capabilities Regulatory environment may represent challenges and uncertainty Cultural differences may undermine the effectiveness and success of subsidiary however, local perception that foreign is better could also aid company success Trust and close relationships need to be fostered with local stakeholders (government, consumers, etc.) Country risk has to be actively managed, as risk solely rests with Lilly Transactional Dimension: Lilly is highly committed to scientific and managerial excellence BUT lacks access to distribution channels and manufacturing capabilities Indias operating environment is evolving uncertainty and opportunity Cultural differences have to be actively managed to function in a mutually beneficial way Long-term growth objectives can be met by taking advantage of comparative advantage (low-cost, skilled labor) and shaping opinions and Strategy Evaluation

19. Actionable Steps ENTER NEGOTIATIONS WITH RANBAXY REGARDING TRANSFER OF SHARES Build on current positive relationship to encourage Ranbaxy to transfer shares of JV to :Lilly Potential concessions and incentives have to be discussed to seal the deal (i.e. purchase of all shares or portions of them at the end of set intervals) EVALUATE ELRS FUTURE Assess need for partner temporary vs. permanent Determine scope of operations (R&D, clinical trials, manufacture & distribution of drugs; generics vs. patents) Evaluate ability to produce and distribute products independently INTEGRATE COMPANY INTO ELI LILLYS VALUE CHAIN Promote good relationships and favorable operating conditions Nurture trust, honesty, and cooperation Establish strong links between subsidiary and headquarters to institute global learning structure OUTSOURCE MANUFACTURING Negotiate with Ranbaxy or other entity outsourcing contract for manufacturing and distribution Contract length, scope, and responsibilities (manufacture, distribution, marketing, etc.) DEVELOP OWN CAPABILITIES VS. FOCUS ON CORE COMPETENCIES Evaluate ability to establish own capabilities (costs vs. benefits of outsourcing manufacture etc.)

20. Conclusion: Actions to be taken The strategy recommended will aid Lilly in retaining its foothold in India, while simultaneously enabling the company to take advantage of recent positive market developments (economic and political). Furthermore, the approach will address key issues and concerns faced by Lilly, while allowing the company to respond to global as well as local industry changes. By choosing to purchase Ranbaxys stake in the venture Lilly will be able to utilize its core competencies to take advantage of the many opportunities present in the Indian market. The company will also be able to meet the international sales targets needed to promote its continued success (p. 240). Finally, this strategy will enable Lilly to use India for clinical testing through ELRs medical infrastructure and expertise in clinical trials. It will allow the company to provide clinical trial data to support global registrations as well as proactively manage costs. Accordingly, returns will be maximized and profitability increased, thus meeting Lillys strategic objectives (p. 243).

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