Marketing Case Analysis Kalyan Pharma Ltd.

GROUP H:
ARVIND SHARMA JATIN VIRDI RAVI CHAND SIDDHARTH SHAH SHAILAV PRAKASH ULLAS ANAND

CONTENT

Introduction ...........................................................................................3
Importance of distribution channel ........................................................................................ 3 History of Pharma Industry in India ....................................................................................... 4 DPCO Act .............................................................................................................................. 4 The importance of Distribution in Pharma ............................................................................. 5

Kalyan Pharma ......................................................................................6

Introduction ............................................................................................................................ 6 Evaluation of distribution system ........................................................................................... 6 1. 2. 3. 4. 5. 6. The Initial Strategy ( Pre -1972): ................................................................................ 6 Realization of importance of Marketing (1972-1979): ............................................... 7 Effects of DPCO (1979): ............................................................................................. 7 Introduction of KRD: .................................................................................................. 7 Marketing Channel Flows and Strategy ...................................................................... 8 Introduction of Distributors(Post 1991) ...................................................................... 9

Indian Pharmaceutical Scenario: .......................................................................................... 10

Future implications ..............................................................................11

Push vs Pull strategy ............................................................................................................ 11 More wholesalers or not? ..................................................................................................... 12 Strategic decisions in terms of cost - The Value-Adds vs. Costs of Different Channels ..... 13 Objective of Any Distribution Channel ............................................................................... 14

IT Adoption .........................................................................................14 The Future of Indias Distribution Systems ........................................15 Conclusion ...........................................................................................16 References: ..........................................................................................17

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Introduction
Importance of distribution channel
In the Marketing Mix there are 4 Ps- Product, Price, Promotion and Place. The Distribution channel helps in the Place aspect of the marketing mix. Place refers to providing the product at a place which is convenient for consumers to access. Place is synonymous with distribution. Various strategies such as intensive distribution, selective distribution, exclusive distribution and franchising can be used by the marketer to complement the other aspects of the marketing mix. In the new convention Place is replaced by Convenience. With the rise of Internet and hybrid models of purchasing, Place is becoming less relevant. Convenience takes into account the ease of buying the product, finding the product, finding information about the product, and several other factors. The need for distribution channel is felt because of following reasons. Complimenting the other 4 Ps in the marketing. Because producers cannot reach all their consumers directly. Multiply reach and provide efficiency to the marketing processes. Gathering and distributing information (Marketing Research and intelligence information) Communication to the consumer regarding product information and offers through advertising and promotion. Provide contact, experience, specialization and scale of operation. The activities which are taken care in the channel are wide and varied but they revolve around these general tasks: Ordering Handling and shipping Storage Display Promotion Selling Information feedback Group 8 Page |3

History of Pharma Industry in India Pharmaceutical industry has been one sector that has been consistently in India. In terms of capital investment, the industry has seen a growth of almost 1300% between 1962 and 1989.In terms of sales the growth rate posts an impressive figure of 4800% between 1960 and 1988-1989. Initialy the sector was involved in the processing of bulk imported drugs.However, the second and third five year plan encouraged the development of new plants resulting in establishment of various new manufacturing units. The third five year plan kick started an era of growt and development of this sector because of government's policy of liberalization of licenses andloans and encouragement to local entrepreneurs. Government also restricted imports and foreign investments during this time. There are four categories in the industry Public sector Foreign sector Indian (private) sector Small scale sector

As of 1990, there are a total of 8000 firms out of which 200 are major players constituting 40% of market share. The pharmaceutical sector is a highly regulated sector with the introduction of DPCO act in 1962. DPCO Act The Drugs Price Control Order (DPCO) is an order issued by the Government of India under Section 3 of the Essential Commodities Act to regulate the prices of drugs. The main objectives of the DPCO act is ensure availability of essential and life saving, at reasonable prices. The various DPCO act since its inception are
DEPCO Act DEPCO, 1962 Regulations -Manufacturers, Importers, Distributors are required to publish price lists of their products.. - Chemists were required to display lists in their premises. - Freezing drug prices as obtained on April 1, 1963. -Require prior approval to increase price before June 30 ,1966 - Price of new drugs to be approved by Government. - Price of loose drug to be regulated too. - Manufactures required to print Retail sale price on the container Financial Implications - Contained the inflation of the drug prices that was expected due to Indo-China war - No price control on raw material price impacted long term profitability. - No voluntary price reduction from the manufacturer side.

DEPCO, 1963

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DEPCO, 1970

- Reduce price of essential drugs which were used in high frequency - Provide incentive to the industry - To develop research facility and expansion in a planned manner. - To provide better entrepreneurship opportunity for Indian personnel for the growth of the Industry. - Curb excessive profit. - Bulk drug divided into three categories - Maximum sales price of selected drug were fixed. - Allowed reasonable return on net worth - Return fixed at 14% post tax on net worth for Category I and II drugs and 12% on Category III drugs.

- Categorization of bulk drugs into Essentials and Other. - New price for 17 essential drugs were announced - Sales price of other bulk drug were frozen to prevailing rate.

DEPCO, 1979

- The mark-up allowed on Category I and Category II drugs are below breakeven point, hence no incentives to produce such drugs - Delay in government approval of revised price will eat into the profitability - Does not accommodate provision to revise selling price in case of variation in manufacturing

DEPCO, 1987

- Three categories reduced to two. - Category I (Essential drugs) 27 - Category II (Other drugs) 139 - Maximum sale price was fixed

- No consideration of actual increases in costs of inputs - Only 50% of the recommended increase on drug prices was given. - Cost updating was not periodical but, manufacturing cost was. So many companies were opting out of producing essential drugs

The importance of Distribution in Pharma India is a geographically diverse country with extreme climates that make careful climate control for medicine a critical function. (The infra for cold chain is still developing ) The long channel of distribution and high incidence of brand substitution makes it mandatory for a company to make all its stock keeping units (SKUs) available at all levels at all times. (In India, most brands have generic versions of drugs and retailers can usually obtain higher margins with generics than for branded products. To reduce risks of substitution, innovator companies must make sure their products are made available to the stockists and retail shops. )

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The companies, which have spent as much as one-third of their revenues toward financing their supply-chain operations, recognize that the cost of logistics is very high in India. Taking into consideration the poor infrastructure and extreme geographic conditions, it is difficult to curtail the cost involved in SCM. Alternative distribution have faced severe resistance by the lobbies of traders involve in channel for example Cipla tried to bypass the SCM by providing home service for its products. It faced strong resistance from traders lobby which stopped stocking Ciplas product. Ultimately Cipla had to withdraw the scheme.

Kalyan Pharma
Introduction
This case deals with the distribution network of Kalyan Pharma Limited (KPL). KPL was a venture started with a capital of around 5lacs in 1905, that manufactured products in five different categories glass, pesticides and chemicals, pharmaceuticals, veterinary products and polypropylene fibre. Glass and Pesticides and chemicals have since been made a separate entity while, some part of pharmaceuticals are being promoted as a separate entity called megacare since 1988-89. As of now KPL manufactures 60 different products. Its distribution network consists of 16 KPL regional depots called the KRDs, 24 branch offices, 40 distributors located in various states including the 7 sister states, Goa, Kerela etc. , about 2,000 stockists and wholesalers and have tie ups with around one lac retailers.

Since pre 1972 till 1991 we can say that KPL was constantly trying to find the balance between its distribution network and its marketing/promotion strategies.

Evaluation of distribution system

The flow of events has to be looked upon in its entirety to have a better understanding of the company strategy over the years. 1. The Initial Strategy ( Pre -1972): KPL in the starting did not enter into the distribution system for its products and instead focussed on marketing. It is safe to assume that pre-1972 KPL might not have sufficient resources and infrastructure to fully have it s own distributive network. Thus, it chose an exclusive agent responsible for taking the products from the factories to 30 braches. These branches further circulated the product in 10,000 wholesale chemists.

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2.

Realization of importance of Marketing (1972-1979): a. As the company grew it obviously wanted to have more control over its margins and distribution channel. Thus it moved away from the exclusive agent and itself took the responsibility of stocking and movement of the goods. b. In this phase the company realised the important of marketing thus it opened four marketing companies across nation to promote the goods to doctors. The company distribution system now was as below: CompanyBranch Retailers c. The flip side of now taking the Distribution system in its own hands was that the wide network was difficult to control leading to decreasing profits and market share.

3. Effects of DPCO (1979): a. DPCO(1979) lead to narrowing of retailers margin from 25% to 15 %.Pharmacist recommendations about drugs and their alternatives seem to be based on profitability and on relationships with representatives of various companies. b. The company thereby decided to stop giving direct supply to the retailers and introduced wholesalers back into the system. The disadvantage of this was that wholesalers were neither equipped nor willing to promote the product resulting in higher book debts and cost of distribution. 4. Introduction of KRD: a. Shutting of 21 branches & introduction of KRDs b. Distribution networks both in rural and urban India. c. Managers at branch level busy with distribution and collections, thereby neglecting sales promotion

In any distribution channel we need to focus on two issues: 1. Ensuring the availability of the products at the retail outlets and at the same time, 2. Ensuring that there are no excess stock inventories. In Indian Pharma we have seen that at the month end the products are pushed from the distributors to the wholesalers/ stockist. This situation may thus lead to the pile of the inventories, forcing distributors to discount stock. Further, retailers in anticipation of the lowest price may defer their purchases in anticipation leading to more losses due to issues of availability.

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DISTRIBUTION CHANNEL PRE 1991:

5. Marketing Channel Flows and Strategy

As we can see in the diagram above its not only the goods that flow through a marketing channel, it can be title flow, payment flow, Information flow or promotion flow. Physical flow of the goods is generally governed by the various cost considerations, time to delivery etc. Title flow is in the case where the dealers take ownership of the product itself like in case of franchises. Payment flow is always in the reverse direction and follows a linear path. Information flow is complex and multiple decisions are made by the intermediaries also. Promotion flow represents how a company wants to promote its product. As we can see, post 1991 the distribution channel design of Kalyan Pharma reflects the separation of

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information flow channel and physical flow channel due to which it was able to solve the problem of overburdening that the managers at its branches used to face. 6. Introduction of Distributors(Post 1991) Distributors introduced for better service to customers & improving sales Branches no longer link in the physical flow. The channel now included 40 distributors in different states. Bringing in the distributer lead to increase in the customer service. More is the number of visits by the stockist to retailers the better it is for the entire flow of the system.

DISTRIBUTION CHANNEL POST-1991:

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Indian Pharmaceutical Scenario:

The above diagram shows that as we move from metros to the rural areas the sales losses increases. This being due to less number of stockiest in the rural areas . Thus ,the number of visits of the stockist to the retailers decreases thereby resulting in losses due to : Non availability of the product Excess inventories

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Future implications
The main motives of Kalyan pharmas Distribution system are: Improve customer service Reduce cost of distribution Reduce order processing time Reduce inventory at various levels of distribution

Push vs Pull strategy

Until now, Kalyan Pharma has used only push strategy as they have tried to sell the drugs mainly through wholesalers and retailers or by targeting physicians. In the contemporary times, it has to Adopt a PULL strategy with direct-to-consumer marketing. Considering the Indian scenario, the awareness of Indians is increasing at a phenomenal pace with the influx of mobiles and internet access reaching even the bottom of the pyramid. It is not long before the Indian consumers will start visiting doctors not just with symptoms of the medicine but also with drug cure just like their counterparts in the US. Also, considering the already large Indian market which is growing rapidly, it reflects that there is a much bigger market to capture and currently there are many untapped opportunities. Hence it makes perfect sense that Kalyan Pharma go after educating the customer and promoting its products directly.

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Also, looking at the competition, a variety of promotional strategies have been used to stimulate sales of pharmaceutical drugs. Traditionally, push techniques have been the predominant means used to encourage physicians to prescribe drugs and thus increase sales. Recently, the traditional push strategy has been supplemented by a pull strategy. Direct-toconsumer advertising is increasingly used to encourage consumers to request advertised drugs from their physicians. However, due care must be taken in case of implementing pull strategy because customers (patients) must have proper knowledge of when to use the exact medicine as illness and severity of illness are at times not classified into categories.

More wholesalers or not?

A manufacturer usually goes for wholesalers because they specialize in Selling and promoting Buying and assortment handling Bulk breaking Warehousing Transportation Financing Risk bearing Market information Management services and counselling

In the current scenario, where outsourcing has become the norm of the day and businesses are operating at paper-thin margins, a company will go out of the business if it makes costineffective decisions. Hence it will be a better approach to form an efficient network of wholesalers and retailers. E.g. Today Ciplas distribution network in India consists of a field force of around 5,100 employees and 42 exclusive and dedicated sales depots, as well as approximately 2,300 stockists and 160,000 chemists. Cipla is currently the No. 2 drug maker by market share in India. Marketing channels must not just serve markets, they must also make markets. If the intermediaries are more efficient than the manufacturer, the prices to consumers should be lower. If consumers perform some functions themselves, they should enjoy still lower prices. In general, changes in channel institutions tend to reflect the discovery of more efficient ways to combine or separate the economic functions that provide assortments of products to target customers

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Strategic decisions in terms of cost - The Value-Adds vs. Costs of Different Channels

It is imperative for Kalyan Pharma to choose its marketing channels wisely as there are significant trade-offs related with each link in the channel as depicted by the diagram above. Currently, they are using retail stores, distributors and their own Salesforce. As Internet is comparatively a very low-cost channel, it can certainly leverage the power of Internet but not rely completely on it due to the less value added by it. Moreover, it will bot be wise to go with the idea of increasing the Salesforce.

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Objective of Any Distribution Channel

IT Adoption
IT adoption in healthcare has grown drastically. Pharmaceutical companies have realized the need for integrated solutions in SCM to keep inventories at optimum levels, to improve distribution, to provide for liquidation of stock, and to streamline interconnectivity between manufacturing facilities, warehouses, and CFAs in different states. The use of software like SAP and SAS, apart from other customized software, is increasing. Newer technologies such as RFID would help in keeping track of products along the entire chain and would limit counterfeit drugs to enter into the system. However, the adoption of technologies such as radio-frequency identification (RFID) has been slow.

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 An online order system for Retailers or Premium retailers with significant revenue (as compared to a normal retailer) can place the order online whose information directly goes to the Finished Goods Store (FGS). The inventory level can be reduced by supplying goods directly from FGS to the distributors. The distribution staff at KPL can be utilized to organize the inventory as per distributors at FGS and online IT system implemented will help achieve this task easier and faster. Hence, KRDs can be eliminated from the current Distribution System. Not only these but also Kalyan Pharma needs to go for IT integrated solutions in order improve Sales and operations planning process. It also keeps inventories at optimum levels by inventory level control system and inventory turns across the network. It will help to improve the demand accuracy and accordingly improving the distribution system. The distributor on receiving the goods can directly provide goods to the retailers thereby, eliminating wholesalers margins. KPLs: medical representatives force of 600 can be used to target this segment for online ordering. Normal retailers can also place orders online; however, they receive their goods still through wholesalers.

The Future of Indias Distribution Systems

Organized Retail - Subiksha Retail, The Medicine Shoppe, Powders, Reliance Wellness Health & Glow, Pills &

International Competitiveness and Cold-Chain Management Indian pharmaceutical companies are increasingly seeking opportunities to supply drugs to the world market. More developed cold-chain management practices will be required to achieve this goal. This is one of the major challenges faced by the industry if they are to retain product quality during shipment. Companies like Eli Lilly in India have implemented initiatives such as having their own vehicles equipped with cold-chain management systems. Other companies such as World Courier have developed cold-chain management models to help pharmaceutical companies maintain the cold chain

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Conclusion
The important points that are highlighted in this case are Pharmaceutical is one of the fastest growing sector in India and has been so for quite some time. Pharmaceutical industry in India is highly regulated. Hence it is important to a have a distribution system that can contribute to profitability. As producers cannot reach all their consumers directly so there is a need to develop robust and flexible distribution network. An inefficient distribution system can eat up the profitability of the company and can also impact sales promotions. There is a huge potential for Information Technology to contribute in to developing an efficient distribution system

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References:
1. http://aery-group.com/push_pull.htm 2. http://www.medcrunch.net/pull-push-pharma-marketing/ 3. http://www.marcleshay.com/2010/08/marketing-strategy-flaws-push-vs-pull-marketing/ 4. http://www.thehindu.com/business/companies/cipla-slashes-generic-price-of-bayerscancer-drug-nexavar/article3381049.ece

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