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Case 1 :GlaxoSmithKlines Retaliation Against Cross-Border Sales of Prescription Drugs Question1: what sort of power differential separated GSK from their customers? Answer: “GSK” According to its price differential strategy or price discrimination which is a sort of Monopolistic market power was separated from its customers, this power came from where? GSK had sufficient control over prescriptions drugs to determine significantly the terms on which other individuals shall have access to it and this power make GSK able to alter market price of prescription drugs in America.
Now I want to answer why GSK differential pricing was not successful and made separation between GSK and its American customers? as we know a firm with market power can raise prices without loosing customers ,but GSK was not successful in this case, because of several reasons(which I divide my reasons to, Marketing view, Ethical and social responsibility view and finally legality view : 1-According to the Kotler there is six necessary conditions for differential pricing ,I will discuss this section with describing these 6 necessary condition and how GSK fail about it, as follow: ) The ability to segment the market. 2) The inability of consumers who buy at the lower price to resell product to the higher priced segment. 3) The inability of competitors to undersell the firm in the higher priced segment. 4)The cost of segmenting and policing the market must be less than the extra revenue generated by the differential pricing strategy. 5)The practice must not breed customer resentment. 6)The differential pricing must not be illegal. In the GSK case, the firm used geographical location to segment the market (condition 1).
Consumers paid a different price for the same drug based on where the drug was purchased. GSK justified the use of geographical pricing segmentation based on government price controls (in Canada and Europe) and lower wages (in Canada). Patent protection prevented competitors from underselling GSK’s prices (condition 3). GSK did not incur substantial costs for segmenting the market nor policing the market (the cost of policing was shifted to the FDA as they enforced U. S. laws) (condition 4). As outlined in the answer to the previous question, the differential pricing strategy was not illegal (condition 6).
Under these conditions, the differential pricing strategy utilized by GSK should have worked. However, conditions 2 and 5 posed problems for GSK. Although consumers could not directly sell pharmaceutical drugs to other consumers, the Canadian retailers were able to resell the drugs to U. S. consumers at a lower price than could be obtained by purchasing from U. S. retailers (pharmacies). Access via the Internet made it easy for U. S. consumers to obtain products from the Canadian pharmacies despite geographical location (condition 1).
The availability of price data on the Internet also made consumers more aware of the price differential, thus increasing customer resentment towards the pricing strategy (condition 5). that is why customers came separated from GSK. 2- Actually the GSK action to American old patient was unethical and its social responsibility was under question, that is why the customers came separate from them, I would like to utilize three main method of ethical analysis according to describe concepts of GSK social responsibility regarding to clear customer reactions to the GSK action.
GSK was seen as a large company that was in different to needs of its customers while this stance might be acceptable or tolerable for other companies, it will not acceptable for health care firm because it will assume as an unethical behavior. Three main method of ethical analysis: Utilitarianism. Under utilitarian reasoning, GSK action caused the benefits from higher U. S. price included improving the company’s bottom line and providing a higher return on investment to investors.
Positive financial results were viewed as critical to the ability of the firm to conduct research and development to discover new drugs that would improve the quality of life for many people. Costs of the decision included negative public perceptions of the firm and denial of treatment to economically disadvantaged and uninsured consumers. the decision was ethical because the benefits of new life saving drugs outweighed the costs of denial of treatment to the few. So GSK regarding to its primary stakeholders was social responsible. Rights.
Using the rights method, an action or decision is considered ethical if it respects the rights of the involved persons or groups. Basic human rights such as the right to life, safety, free speech, freedom, to be informed, due process, property and others are protected and respected by ethical decisions and actions. I think the higher U. S. prices as unethical utilizing the rights framework and that it was unethical to price life-saving drugs so high that the people who needed them to live could not afford them. So GSK regarding to give services to its old customers was not socially responsible. Justice.
Consumers compare themselves to peers and believe them to be entitled to certain benefits or outcomes. The discrepancy in price among their comparison group will result in feelings of inequity. For most types of products, consumers will reduce the inequity by complaining or by switching to another competitor. For prescription drugs, it might not be possible for the consumer to switch to another competitor, thus the only option available to them was to complain, either privately or publicly. As I read the case contains many examples of public complaints by U. S. consumers and government officials.
Consumers would most likely perceive themselves as paying a higher cost than the benefit they receive, especially since they paid a higher cost than Canadian consumers who received the same benefit. Furthermore, the U. S. consumers paid a higher cost so that others (consumers around the world) could receive the benefits (life-saving drugs). These consumers would perceive the higher prices in the U. S. as unjust and thus unethical. Firms can increase the perception of price fairness by adding additional product value and benefits, clearly communicating the reasoning behind the firm’s pricing decisions.
It would not be possible to add additional product value or services to pharmaceutical drugs (any attempt to do so would most likely be perceived as unjust). Pharmaceutical firms like GSK have attempted to communicate the reasoning behind the higher prices for U. S. drugs, but consumers have been doubtful of their claims. so GSK was not socially responsible about American customers. 3- GSK action was not legal in American minds ,and this was another reason for their separation from GSK,I will discuss GSK action legality and the arguments about its differential pricing as follow:
Social justice reasoning it is indeed unfair to charge an elderly patient living in Detroit a higher price for the same drug than GSK would charge that same elderly patient if they lived in Canada, just across the bridge. The drugs are most likely produced at the same factory site, so the cost of production would be the same. but GSK resist in its situation and caused American Rage. human rights reasoning These medications are essential for patient survive and that it is unethical for GSK to put different price tags on the value of human lives due to differences in geographic. Marketing reasoning
The Robinson-Patman Act includes two provisions that can be used to defend discriminatory pricing strategies. First, different prices may be used in different locations if the competitive situation demands it. This provision might support GSK’s pricing strategy by demonstrating that GSK must keep the price of the drug low in some countries to meet the equally low price of an equivalent drug. The cost justification provision may provide a stronger justification to oppose GSK’s pricing strategy in that this provision permits differential pricing if the price difference simply represents actual cost savings.
The drugs sold in Germany or Canada most likely do not cost the company any less to produce than those in the United States. Shipping costs between the U. S. and Canada are probably not different. Therefore, GSK’s differential pricing strategy was not justified. social concern perspective pharmaceutical firms could set almost any price for effective drugs (after all, patients need the drugs to live), but should “do what is right” by setting a price for the drug that is lower than it could have been. Law Reasoning
According to the Antitrust legislation acts such as the restraint of trade, price fixing, price discrimination, deceptive practices, misrepresentations in product labeling and other behavior that lessened competition are prohibited. GSK attempt to limit drug shipment to Canadian pharmacies that sold to American consumers was price fixing and GSK’s attempt to keep consumers from re importing drugs purchased in Canada into the U. S. was viewed as behavior that lessened competition and should be stopped through of antitrust laws. Question2: Did GSK damage their public image through their action? Answer:
Yes, GSK damage its public image through 3 reasons: First, Assuming power differential between manufacture and customers (patients need drugs to live and GSK made them)GSK believed customers had little choice ,GSK management think they didn’t need to listen to customers need in order to remain successful, focusing primarily on drugs discovery and development ,they assumed that other drug companies are posed the only threat, so understanding customer, offering them superior value and satisfying needs of customers has never been developed as a core competency for GSK therefore their public images was damaged.
Second, Termination of shipment prescription drugs to Canada which subsequently sold the product through the internet to American customers was another reason to damage their public image. Third, Remained in different to negative public reactions, so this has the potential to negatively affects their competitive position as landscape of American health care. I think all these reasons are more than enough to effect negatively public minds toward GSK . Question3: If so what strategic resources must be committed to repair the resulting damage and restore good public relations to the commerce of GSK?
Answer: To repair this resulting damage to its public image GSK could: 1- Improve its decision making by understanding the importance of effectively managing relation ships with customers. 2- Try to strengthen relationships with American customers by providing them superior value not available from competitors. 3- Enhance its understanding of health care crisis in the United State by stratifying accurately the US market through market segmentation. 4- Improve its competition position by developing an affiliation with customers by creating useful interaction with its American customers. – Understanding the different situation of another product industries and its important for GSK to understand the circumstances in which their customers come to drug market place and how its differs from a consumer model 6- Invest necessary resources to manage their public image 7- Since the FDA had little to enforce the personal importation ,so believed the practice by GSK was acceptable, and GSK should have recognize the ways to compromise with us customers. – GSK could review and analyze its environment(threats, opportunities, weaknesses, strengths) to find out another strategic alternative to repair its image ,regarding to this I would like to mention some of these items and then I will bring GSK strategy according to them and finally some suggestion may GSK could care about to repair its public image : Opportunities for the pharmaceutical industry: 1)Prescription drugs are the fastest growing segment of overall health expenditures in the U. S… )A movement to “evidence- based” medicine may result in the consideration of over-all cost-effectiveness of drug product in policy and coverage decisions. 3)Despite earnings pressure, the branded industry remains profitable and growth should accelerate through 2003 due to the large aging American cohort and the increasing rate of utilization of prescription drug products. 4)In general, despite small pockets of political opposition, the pharmaceutical industry commands substantial political and regulatory influence in the U. S… )The pharmaceutical industry has demonstrated less volatility than the S&P 500 since the beginning of 2001 and remains a “defensive” sector during the current economic softening. Therefore, the industry should have the continued interest of investors, especially when compared to other industries. 6)The drug approval timeline has been attenuated by the Food and Drug Administration (FDA) Threats for the pharmaceutical industry : 1)Revenue and earnings growth for the branded pharmaceutical industry has slowed primarily due to generic competition. )Research and development are crucial to the long-term growth of the branded pharmaceutical industry. However, there has been a slow down in the introduction of new products to the market. 3)Research and development costs are increasing for the industry but generating fewer blockbuster products. 4)Branded pharmaceutical companies rely upon only a few drugs for the majority of their revenues. The top nine U. S. drug manufacturers captured an average of 70% of U. S. drug sales from their top five sellers in 2001. )Patent expirations are now common, allowing for generic penetration into the prescription drug marketplace. Managed care trends accelerate conversion from brand to generic drugs. 6)Branded pharmaceutical drug companies face increasing price pressure due to managed care influences and erosion of the branded market place by release of generic products. 6)Generic manufacturers are becoming more aggressive in the litigation over intellectual property rights. Most companies in the pharmaceutical industry are involved in at least one legal confrontation over patent protection.
From GSK’s perspective, continued industry profitability and growth are very important. A shorter timeline for drug approvals and the political clout of the industry are all very favorable from the industry’s (or firms in the industry) perspective. Other stakeholders such as employees, stockholders and creditors would likewise view the pharmaceutical industry as having good profit potential for the future. Firms in the pharmaceutical industry, including GSK, would likely view the negative factors or threats as more important concerns for the future.
Increased competition, increasing research and development costs, patent expirations, and increased price pressures all are viewed by firms in the industry as critical threats to their future profitability. The case describes several strategies employed by firms to minimize the impact of these threats (such as resubmitting drug applications to the FDA for approvals for expanded uses, aggressive use of litigation to protect intellectual property, increased marketing spending, etc. ) that are indicative of the pharmaceutical firms’ attempts to mitigate these threats.
In my opinion ,GSK could view the negative factors or threats as important concerns for its future as well as another factors which can be its key markets consumers who are the American old patient . GSK strengths: 1)GSK is a large multi-national corporation enjoying economies of scale and scope. 2)GSK enjoys a strong financial position in a top industry. Profit was up 28% in 2002. 3)GSK has 123 projects in early development with 7 new products and 5 line extensions scheduled to be released during the next two years. )GSK’s drug for diabetes, Avandia, is experiencing strong growth in sales and is still relatively young in patent life. 5)GSK has excellent free cash flow of $8. 1 billion. 6)The company has developed 24 collaborative projects with outside companies. 7)GSK began a $6 billion share buy-back program in 2002. 8)A successful quality improvement program has allowed GSK to eliminate inefficiencies and redundancies, resulting in improved profitability. GSK weaknesses: 1)Two products, Paxil (antidepressant) and Augmentin (antibiotic) are at the end of protected patent life.
GSK does not have obviously blockbuster products able to maintain the market share lost when these agents lose patent protection. 2)GSK seems unaware of its’ public image and may have initiated an adversarial relationship with the U. S. market. They may not fully comprehend the power of American consumers to affect operating results. 3)GSK underestimated the resourcefulness of the American consumer and the rapid adaptation to “grass roots” efforts to acquire prescription drugs from Canada over the Internet.
From GSK’s actions, firm viewed weaknesses in its product pipeline as one of the most important strategic factors. The firm’s public statements all emphasized the necessity of continued research and development and the need to utilize pricing strategies that allowed the firm to recapture these high costs so that research could continue to search for new products. The firm could not continue to operate as successfully as it had in the past if new potential blockbuster products were not forthcoming from its research and development labs.
From the firm’s viewpoint, many of the identified strengths would not continue if new products were not forthcoming, thus their reaction to any threats to firm profitability. The possible erosion of the differential pricing strategy the firm had long employed was viewed as a serious threat to the firm’s future viability. So in my opinion , instead of stop shipments and constrain on differential pricing , GSK should have suggest a reasonable period after which the drugs would become less easily available ,then it will be able to develop greater understanding of the market segmentation of Americans who are purchasing prescription drugs . ith this information GSK may will be able to stratify the US market, separating those who truly could not pay from those who can ,but don’t want . in this manner GSK will be able to construct assistance plan with the collaboration of federal government and then may be GSK will be offer deep discount to needy Us citizens, and according to all above mentioned ways GSK can try to improve and cure its damaged public image. shiva hashemi