Emanuel Baisire

G00397918

Introduction:

Globalization and the need to be competitive in the ever changing market place has

forced many forward looking businesses to either move their production process to

strategic locations or simply widening their supply-chain. Unlike traditional methods of

exporting and green-field foreign direct investment (FDI), many companies have adopted

cross boarder mergers and acquisition (M&As) and strategic alliances as a preferred form

of extending their businesses globally (OECD, 2005). It is argued that many businesses

tend to outsource their production process due to reasons ranging from skilled labor

force, technology and market capture. It has been argued that for companies to continue

growing and increase their profits, they should take advantage of available opportunities

to expand globally. When a company embarks on a strategic decision of going global, it

is always faced with uncertainties of selecting a market entry strategy. Company

executives are often faced with the task of determining which foreign market to enter,

whether to export from the home base or set up a plant in another country, to enter into a

joint-venture or making an acquisition in the foreign market (Hill, 2005). The uncertainty

is minimized by technology and easy flow of information. Company’s entry strategy to a

foreign market is driven by efficient markets, opportunity to recover costs, access human

and physical capital, research and development capabilities, technology and the

availability of capital and financial resources (IMF, 2004).

Overview of the European Union’s Medical Technology Market:

The European Union is a composition of 25 member countries that have come together under

different sets of agreements to share a common political, economical and social policy. Dinan

(2005) has acknowledged that the desire to diffuse long standing rivalry between Germany and

France became a driving force to Europe’s regional integration. After the collapse of the Soviet

Union, the European Union decided to extend its influence to the eastern and Southern boarders

of Europe to incorporate several former communist countries and others into the European Union.

The vision for expansion is attributed to European Union desire to extend its economic and

political influence to the new independent states.The expansion of the EU has created exciting

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opportunities for pharmaceutical companies to expand into new territories and take advantage of

these high growth emerging markets countries like the Czech Republic, Estonia, Hungary, Latvia,

Lithuania, Poland, Slovakia and Slovenia. European Union's (EU's) ongoing efforts to transition

to a single European market continue to present the pharmaceutical and medical technology

industry with unprecedented opportunities and challenges.

The E.U’ expansion to the East and South is estimated at tapping a pharmaceutical and medical

technology market of over U.S. $ 10.8 billion (Pharma Intelligence, 2004). Medical related

companies trying to enter the E.U market faces a lot of challenges. Due to the nature of E.U’s

health system, member countries have different methods of controlling pharmaceutical and

medical technology related costs. E.U control of pharmaceutical and medical technology

companies includes price controls, profit controls, reference pricing, medical technology approval

guidelines and marketing approvals (OECD, 2005). Member countries set medically related sale

prices or sometimes enter a deal with a manufacturer to sale at an agreed price (OECD, 2005).

Member governments indirectly determine medical related product’s price by imposing low

reimbursement prices. Another method commonly used by E.U member countries to control

pharmaceutical companies, involves the use of reference pricing. Reference pricing compares the

sale price of medical equipment to the price of the similar product in other countries (OECD,

2001). The problem with this approach is that it does not take into consideration the difference in

income levels and other factors that can not easily be compared for the purpose of price

determination.

Before determining our entry strategy to the E.U market, it is important to understand how we

can overcome the issue of profit controls for pharmaceutical products in the E.U. Several

member states limit pharmaceutical and medically related company’s profit. Member states

determine how much a medically related firm can make in profits through the sale of a specific

product at a given period of time (Foreign Government Pharmaceutical prices, 2004). In case of

violation, the Company is required to pay back the respective excess profits to the government

(OECD, 2005). E.U member’s medical industry is not influenced by free market forces, rather

each member has its own guidelines and policies as far as medical technology pricing and device

approval is concerned in each country. It is therefore crucial to analyze each entry point in our

strategy to determine which option will minimize our contact with E.U’s regulatory and

bureaucratic market barriers.

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Market Entry Strategy:

The prevailing market conditions for medical technologies and pharmaceutical companies in the

E.U are so complex and need a well thought strategy. The possibility of manufacturing in the

U.S. and export through a wholly owned subsidiary in Europe or entering into a

contractual agreement with an existing distribution system will not be effective. The

problem with the export strategy is that we will not be able to take advantage of the

relatively cheap and skilled human capital in the newer E.U member states. By exporting

bulky medical equipments from the U.S. to the E.U involves high transport costs thus

undermining the firm’s ability to compete with other medical technology producers based

in the European market. The other compelling reason not to export complete medical

equipments to the E.U is its complex tariff and non-tariff barriers imposed on foreign

products entering the European market. As clearly indicated in the over-view of the

European Union, member countries have different guidelines and regulations to manage

importation and sale of foreign medical equipments in the E.U market. These rules and

regulations tend to be time consuming and expensive to handle thus straining the

competitiveness of our firm.

The pursuit of this strategy will increase our vulnerability to local marketing and

distribution partners in the E.U market. According to Hill (2005), the local marketing or

distribution agents usually sell other competitor’s products and the partner may not

commit the needed effort in promoting our products due to differences in sales

commissions and other interests. The source of financing under this initiative will also be

relatively expensive. Since most of our operations will be based in the U.S, our cost of

capital will range between 8-9% compared to the Euro bond market of about 6%. Since

our presence will be limited in the E.U market under the export strategy, financial

institutions in Europe may be reluctant to provide us with favorable loans to finance our

expansion in Europe. The only advantage we may have under the export strategy is the

depreciation of the U.S. dollar against the Euro. The depreciation of the U.S. dollars

would provide us with a competitive edge against medical equipments produced within

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the EURO zone. However, this will be advantageous only if E.U governments did not

determine sale prices of medical equipments and other pharmaceutical products. Given

the nature of E.U’s nationalized health system, member governments are the primary

buyers of medical equipment and pharmaceutical products. In case of no price

intervention by EU member states, a weaker U.S dollar would have made our exports

more competitive and affordable in the EU market.

Due to the pitfall of the above entry strategies in the E.U market for medical equipments,

strategic alliance with a European firm to manufacture medical equipment seem to be the

most effective strategy. According to Hill (2005), strategic alliance refers to competing

firms agreeing to cooperate on specific tasks in order to achieve their respective strategic

goals. Strategic alliances involves a variety of inter-firm linkages that covers joint

research and development (R&D), joint manufacturing, joint marketing and long term

sourcing agreements (OECD, 2001). For the case of the E.U, probable alliance with a

European firm may cover marketing, research and development, distribution and

production agreement. The terms of the agreement will press special attention to

distribution and production costs.

Due to the complexity of the E.U medical technology and pharmaceutical market, it is

evident that we will need a local partner who is familiar with the E.U.’s business and

government environment and who has an established marketing and distributional

channel. By entering an alliance with a European firm we will avoid going through E.U’s

rigorous approval process for foreign manufactured medical equipments. The approval

process of foreign medical equipment in the European Union sometimes takes years

before being approved for the E.U market, thus an alliance with an established E.U firm

will save our product from undergoing such delays. We will also take advantage of the

already established distribution and marketing channels for medical equipments thus

avoiding duplication of resources in the E.U and U.S market. The alliance agreement will

include a clause stating that our European partner will provide us with unlimited access to

its marketing and distribution within the E.U in return we will also guarantee the use of

our distribution channels in the U.S. for differentiated products.

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The strategic alliance with a European firm will help us share costs associated with

setting up a plant in Europe and will spread our risks of developing new medical

equipments. A joint venture with a European firm will ensure that our European partner

will access financial resources from the E.U banking institutions with lower interest rate

compared to the U.S rates. By accessing favorable loans from E.U financial institutions

will reduce our cost of capital. The joint venture will reduce our cost of capital by

accessing favorable loans to be used in the manufacturing process. Med-Tech Inc, will

maintain the core competence of research and development and design of medical

equipments in the United States, and the E.U partner company will be responsible for

manufacturing the equipments and marketing in the entire E.U market. The depreciation

of the U.S. dollar will be an advantage to Med-Tech Inc, if most of our sales are in the

E.U market. The strategic alliance will mean that our revenues will be reflected in the

Euro currency of which when converted to the U.S. dollars show a positive financial gain

to both out our company and shareholders. Therefore, if the U.S .dollar continues to

weaken in relation to the Euro our medical equipments manufactured in the E.U will not

be profitable if exported to the U.S. or any other country because they will appear

expensive. The appreciation of the Euro will be significant to the alliance if most of our

inputs are sourced from non-Euro zones and all our products sold in the Euro-zone.

Another important reason we should form a strategic alliance with a European firm is

that we will consider an alliance as learning process of the European medical equipment

market. The alliance will help us learn European Union’s business and government

environment. The gained skills and market knowledge may be crucial for our future

projects in Europe. After acquiring sufficient knowledge and understanding the

marketing dynamics and the distributional channels of medical technologies in Europe

we may decide to break away from the alliance and undertake the market solely.

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Conclusions:

When firms start developing entry market strategy to foreign markets, there are usually

faced several challenging options. The challenges range deciding whether to manufacture

in the home and export through contractual arrangements with existing distribution

systems, export through a wholly owned subsidiary in another country, enter into a

strategic alliance or setting up a Greenfield. In the analysis, I considered the complexity

of the E.U’s market place for medical equipments and pharmaceutical products, access to

financial resources and the penetration of E.U’s marketing and distribution channels for

medical equipments. Strategic alliance seemed to be the most favorable entry strategy in

the E.U’s pharmaceutical and medical equipment market.

Reference:

Dinan, D. (2005). Ever Closer Union : An Introduction to European Integration, 3rd Ed. Boulder: CO: Lynne Rienner Publishers.

Hill, C. (2005). International Business: Competing in the Global Market Place, 6th Ed. New York: NY: McGraw-Hill/Irwin.

IMF.(2004) Mergers and Acquisitions: Balance of Payment and International Investment Statistics, Paper 4, Washington DC.

Pharmaceutical Research Association and Manufacturer’s Association, Foreign Government Price and Access Control, Federal Registry Notice Submission, FR Doc. 04-12205 (July 1, 2004), P.11.

OECD.(2005). New Patterns of Industrial Globalization: Cross-boarder Mergers and Acquisitions and Strategic Alliances, OECD, Paris.

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