International Strategy and Structure

An Analysis
Dr. Reddys Laboratories Ltd.

International Business Individual Assignment

George Joy

01/12/2014

Contents
Globalization Strategies......................................................................................................................1
Economies of Scale, Learning Effects, Experience Effects and Location Economies.....................2
Entry Decisions....................................................................................................................................3
Analysis:...........................................................................................................................................3
Five force model in US Pharmaceutical Market (Generic Drugs)...............................................5
Porters value chain for Reddys........................................................................................................6
Core Processes..................................................................................................................................6
Supporting Activities.......................................................................................................................7
Organizational Structure for Reddys................................................................................................9
Decision Making..............................................................................................................................9
Architecture...................................................................................................................................10
Bibliography.......................................................................................................................................11

Globalization Strategies
The strategies for pharmaceutical companies are basically dependent upon whether the
company is producing generic drugs or is concentrating on discoveries through R&D. The
pharmaceutical industry generally has low pressures for local responsiveness since the
formulation for drug is well specified and drug can be used in any part of the world.
Reddys focuses on generic drugs as well as discoveries. Generic drug business faces high
cost pressures since the competitors can also formulate the same drug. For Generic drugs
Reddys can follow a Global Standardization Strategy because of the high cost pressures and
low pressure of local responsiveness. Reddys is looking to achieve economies of scale,
learning effects and location economies i.e. their strategic goal is to achieve low cost strategy
on a global scale due to the low margins and high competition.
Reddys holds proprietary rights to manufacture and sell 3 products. Huge fixed cost is
involved in developing innovative drugs through extensive R&D. The company has to decide
the price and hope to sell adequate volumes so that it can make a profit on the amount it spent
in developing the medicine before the patent period comes to an end. The patent period can
vary from 5- 20 years. Since these drugs are protected by patents, the Reddys follows
International Strategy where it has centralized its R&D in India, UK and Netherlands.

Global Standardization
(Generic Drugs)

High

Transnational

Strate
gy
International
(Proprietary Drugs)

Localization

Low

Low

High

Reddys through its acquisitions in US (GSK), UK (Chirotech) and Netherlands (Octoplus)

has horizontally integrated and has grown inorganically. Through its every acquisition
Reddys has added to its product portfolio. By acquiring GSKs manufacturing facility,
Reddys was able to enter penicillin containing anti-bacterial market segment. It equipped
Reddys to better serve their customers through manufacturing facility which previously did
not exist. There by creating value to the customers. (High value- high cost approach). With
their acquisition in Netherlands (Octoplus) Reddys focused on manufacturing improved
injectables. This brought about fewer side effects, increased patient convenience and better
safety balance. The acquisition of Chirotech in UK gave Reddys new capabilities in chiral
technology.

Economies of Scale, Learning Effects, Experience Effects and

Location Economies
Reddys tries to achieve economies of scale in its manufacture of drugs. Economies of Scale
are achieved when the fixed costs can be spread across large volumes of drugs. The huge cost
involved in the R&D of proprietary drugs can only offset by achieving large volumes of sale.
Same is the case in generic drugs, where there is cut throat competition and low margins. In
order to increase its profit growth Reddys has expanded into new markets like USA, UK and
Africa.
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Reddy's path into new drug discovery involved targeting speciality generics products in
western markets to create a foundation for drug discovery. Development of speciality
generics was an important step for the company's growing interest in the development of new
chemical entities. The elements involved in creating a speciality generic, such as innovation
in the laboratory, developing the compound, and sending the sales team to the market, are
also stages in the development of a new specialty drug. Starting with speciality generics
allowed the company to gain experience with those steps before moving on to creating brandnew drugs. Thus the learning effects and experience effects during the development of
generic drugs has benefited DRL during its foray into drug discovery.
Reddys has concentrated its R&D in India, US and Netherlands. High portion of its R&D is
taking place in US where the pharmaceutical industry is highly developed and has the access
to most modern technologies and superior talent. Thus the theory of comparative advantage
comes into play and this enables them to differentiate its product offering from those of its
competitors through location economies.

Entry Decisions
Global regulatory pressure on pharmaceutical industry is building in terms of
Development
Approval
Pricing
Cost Containment
The pressure on relatively smaller firms is aggravated by significantly constricted credit
options. As a result of this most pharmaceutical companies including Reddys are turning to
mergers & acquisitions to expand their markets instead of Greenfield ventures.
Major acquisitions of Reddys are
American Remedies, India
BMS laboratories, London
Betapharm, Germany
Roches bulk drug business, Mexico
GSKs US Penicillin facility
Octoplus, Netherlands
Chirotech, UK

Analysis:
Over the years Reddys has grown inorganically mainly by M&A. Its main criterion in the
acquisition process has been strengthening its product portfolio. They also focus on being
close to the patients, doctors, healthcare providers and business partners where ever they are.
This makes M&A a viable option for them to make entry into markets.
Out of all the acquisitions made by Reddys, not every venture was a success especially the
acquisition of Betapharm, Germany in 2006 was a big failure. Two years after the acquisition,
Reddys was forced to write down nearly half its investment in losses. As a business strategy
the deal made sense since Germany was the second largest market for generic drugs after US,
most patents expired much ahead of US, the margins in Germany were also better and
generics could be branded and detailed to doctors through medical representatives. Where
Reddys went wrong was in the analysis of Political factors in Germany. There were reports
in Germany that the government was about to change regulations to force down the generic
drug prices but still Reddys went on with the acquisition for which they had to pay dearly.
The new regulations which came after the takeover said the generic drugs could be sold only
on a tender basis than as branded products as it was done till then. Most industry experts also
felt Reddys had overpaid for the acquisition. So that was another reason for its failure. This
is a classic example of the failure of a firm in a market even though the market looked
extremely attractive.

Application of Porters Five Forces

Porters 5 forces is a framework to analyse the level of competition and the attractiveness of
an industry. Reddys is present in several markets, one of them is US market.

Five force model in US Pharmaceutical Market (Generic

Drugs)
Power of Suppliers
1. Presence of lots
of players in the
supply market.
2. Low Supplier
switching costs
3. High ability for
vertical
integration
Overall: Low
Threat of New Entrants
1. High Entry
Barrier due to
R&D Costs
2. Tight
Government
Regulation
Overall: LOW

Industry Competition
1. Cut throat rivalry
exist
2. Huge amounts
spent on ads and
promotions for
competitive
advantage
Overall: HIGH

Power of Buyers
1. Hospitals buy in
bulk and force
firms to keep
prices in check
2. Regular
customers have
no bargaining
power.
3. Buyer Price
Sensitivity is low
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Overall:
Medium

Threat of Substitutes
1. One Industry
where
substitutes
not possible
Overall: Very
LOW

Overall the Five Forces analysis gives

Threat of new entrants : Low

Industry competition: High
Bargaining power of buyers : Medium
Bargaining Power of suppliers: Low
Threat of substitutes : Very Low

So since the industry competition is the only force which gives a high and all other factors
give low/medium, US market seems an attractive one for Reddys but they might have to look
closely at the strategies followed by the main competitors like GlaxoSmithKline and Pfizer.

Porters value chain for Reddys

Information
Systems
Manage
R&D

Develop
Products

Infrastructu
re
Logistics
Manage
Supply
Chains

Manufact
ure
Products

HR
Perform
Marketing
& Sales

Perform
After
Sales
Service

The 6 core processes are the ones which create most value for Reddys in the pharmaceutical
market.

Core Processes
Research & Development
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The process which create most value for a pharma firm

Innovation imperative rather than a choice
Huge costs involved in R&D
Only Indian company to have significant R&D being undertaken overseas
Spent 9.4% of their revenues on R&D
Goes through several steps like discovery, screening, preclinical test, phase1,
phase2 and phase 3 of human trials during which regulatory approval process
begin

Production

Reddys has 24 manufacturing facilities, majority located in India

Firmly focussed on scaling up its manufacturing facilities to keep pace with its

R&D initiatives.
Reddys new Operating Philosophy, features new generation shop floor
management practices like closed transfer systems, simplified, gowning, state-of-

the-art equipment.
Less manual labour and more error-free

Marketing, Sales & Customer Service

A product category where even slightest misappropriation of information could

lead to fatalities.
Marketing and promotion material has information in unambiguous and precise

manner.
Advertisement important for creating Brand awareness amidst tight competition
Sales representative undergo in-depth training
They also do promotional activities like PremOTE which is an initiative for

diagnosis of cancer and Roshini an initiative for Diabetes diagnosis.

Provides superior customer service through their in-house Medical Affairs Team
that addresses queries from sales representatives and Doctors.

Supporting Activities
Information Systems

Reddys assesses distributors inventory and sales data on a daily basis, allowing

them to react instantly to shortages in the system.

By establishing a synchronized supply chain and integrating our systems sales,
supply chain and IT they have become true partners to distributors,

understanding their stock needs, refilling their warehouse and seldom leaving
patients without medicines.
Logistics and HR

Reddys focuses on shifting vendors near the plant site,

Transportation charges are minimal and has direct control over the suppliers.
They have increased their sea shipments by 50% in FY14 thus reducing expenses.
Reddys have a work force of 19,000 worldwide of which 2800 are in India.
Launched their global recognition platform Well Done to reward employees and
to foster culture of appreciation in FY 2014.

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Organizational Structure for Reddys

Decision Making
Dr. Reddys have divided the company into 5 business divisions, namely Global Generics,
Active Pharmaceutical Ingredients. Custom Pharmaceutical Services, Biologics, Proprietary
drugs. At Reddys the strategic direction and growth plans are decided by the Board of
Directors which involves 8 independent directors and 2 other directors who own 25% of
business. The decisions taken by the directors are then passed on to the management team. So
the long term vision is decided by the board of directors. The management team largely looks
at the tactical and operational issues of the firm. No decisions are taken without every
director agreeing to it.
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Architecture
Reddys follow a Worldwide Product Division Structure in which each division is selfcontained with full responsibility for its value creation. The advantage with this structure is
that it facilitates the transfer of core competencies within a divisions worldwide operations
and the simultaneous worldwide introduction of new products. The disadvantage could be the
limited power of area/country manager since they are under product division managers. Each
of the business divisions in Reddys has a head who reports to the Managing Director & COO
who then reports to the CEO. The company also has heads for each of its regions which it
operates. Each of the region like North America, Rome, Russia, Japan South Africa, Italy,
India, China, and UK have their respective heads. Since in all these regions Reddys sell their
generic drugs, all the regional heads report to the Generic business division head. The
decision making system at Reddys is highly centralized with a Business Development Team
involving the higher management decides which partnerships to pursue. Even though
centralized, it has a flat organizational structure without much of middle management which
allows Reddys to speed up their decision making.
The Global HR who directly reports to the COO has a Go/No Go power in Mergers &
Acquisitions. He is the one who decides whether cultural aspects of the acquired firm is in
sync with that of Reddys. Once an acquisition takes place, Reddys has a head for each of the
alliances who reports directly to the Vice Chairman/CEO.

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Bibliography
1. Hill & Jain, International Business
2. Dr. Reddys Laboratories Annual Report,
http://www.drreddys.com/investors/pdf/annualreport2014.pdf
3. Economic Times, http://articles.economictimes.indiatimes.com/2012-0514/news/31701111_1_indian-market-market-growth-global-markets
4. Business Standard, http://www.business-standard.com/article/companies/dr-reddy-slab-to-move-away-from-generics-113073001157_1.html
5. Official website, http://www.drreddys.com/
6. Mckinsey,
http://www.mckinsey.com/client_service/pharmaceuticals_and_medical_products/p
eople/~/media/mckinsey/dotcom/client_service/operations/pdfs/outlook_on_pharma
_operations.ashx
7. Focus Interview, http://www.drreddys.com/media/pdf/Focus_Interview2.pdf

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