Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

22
Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005 Amanda Langley,* Grahame Fallon and Nada K. Kakabadse Northampton Business School, UK Since the early 1990s the CEE markets have undergone a major transition. This has led to changes in ownership for many indigenous firms as they moved from state to private control. This paper contributes to a gap in existing knowledge by developing understanding of how the realized strategic actions of these firms evolved. In order to contribute to this gap, evolution theory is applied to address the research question: ‘How did the strategic actions of indigenous pharmaceutical firms evolve as the CEE region developed from a planned to a market economy?’ This is achieved through longitudinal mapping of the strategic actions realized by firms, comparison of patterns in temporal strategy development, together with identification of factors that appear to have influenced this strategic change process. Using a qualita- tive research design the paper explores and compares how the realized strategic actions of LEK, Richter, and Pliva evolved from 1992–2005. The findings highlight a range of factors that had the potential to impact upon the stra- tegic process for these firms. The research also shows that although there were some similarities in the strategic actions realized by the firms, in overall terms each firm packaged its realized strategic actions in a unique way. Copyright © 2009 John Wiley & Sons, Ltd. ing resources, opening up a large new eco- nomic region characterized by a capitalist economy, private property, developing free markets, and rapid new enterprise creation. An increasingly attractive climate for business and international investment has consequently been created in the Central and Eastern European region, bolstered by growing international economic integration and by the prospect and realization of European Union (EU) accession (Mercado et al., 2001; Sanfey et al., 2004; Kuznetsov, 2005). The pace and extent of transition has not, however, been consistent throughout Central and Eastern Europe. Some parts of the region Strat. Change 18: 59–80 (2009) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/jsc.839 Strategic Change * Correspondence to: Amanda Langley. Northampton Business School, The University of Northampton, Park Campus, Boughton Green Road, Northampton, NN2 7AL, UK. E-mail: [email protected] Introduction Profound changes have been taking place since the early 1990s in the Central and Eastern European economies, leading to major impacts on the development and strategies of Central and Eastern European firms in all sectors of industry. These changes have been set in train by the transition from the plan to the market as the mechanism for generating and allocat- Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change

Transcript of Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Page 1: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Strategy evolution in Central and Eastern European pharmaceutical fi rms 1992–2005Amanda Langley,* Grahame Fallon and Nada K. KakabadseNorthampton Business School, UK

� Since the early 1990s the CEE markets have undergone a major transition. This has led to changes in ownership for many indigenous fi rms as they moved from state to private control.

� This paper contributes to a gap in existing knowledge by developing understanding of how the realized strategic actions of these fi rms evolved. In order to contribute to this gap, evolution theory is applied to address the research question: ‘How did the strategic actions of indigenous pharmaceutical fi rms evolve as the CEE region developed from a planned to a market economy?’

� This is achieved through longitudinal mapping of the strategic actions realized by fi rms, comparison of patterns in temporal strategy development, together with identifi cation of factors that appear to have infl uenced this strategic change process. Using a qualita-tive research design the paper explores and compares how the realized strategic actions of LEK, Richter, and Pliva evolved from 1992–2005.

� The fi ndings highlight a range of factors that had the potential to impact upon the stra-tegic process for these fi rms. The research also shows that although there were some similarities in the strategic actions realized by the fi rms, in overall terms each fi rm packaged its realized strategic actions in a unique way.

Copyright © 2009 John Wiley & Sons, Ltd.

ing resources, opening up a large new eco-nomic region characterized by a capitalist economy, private property, developing free markets, and rapid new enterprise creation. An increasingly attractive climate for business and international investment has consequently been created in the Central and Eastern European region, bolstered by growing international economic integration and by the prospect and realization of European Union (EU) accession (Mercado et al., 2001; Sanfey et al., 2004; Kuznetsov, 2005).

The pace and extent of transition has not, however, been consistent throughout Central and Eastern Europe. Some parts of the region

Strat. Change 18: 59–80 (2009)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/jsc.839 Strategic Change

* Correspondence to: Amanda Langley. Northampton Business School, The University of Northampton, Park Campus, Boughton Green Road, Northampton, NN2 7AL, UK.E-mail: [email protected]

Introduction

Profound changes have been taking place since the early 1990s in the Central and Eastern European economies, leading to major impacts on the development and strategies of Central and Eastern European fi rms in all sectors of industry. These changes have been set in train by the transition from the plan to the market as the mechanism for generating and allocat-

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change

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60 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

An increasingly attractive climate for business and international investment has consequently been

created in the Central and Eastern European region,

bolstered by growing international economic integration and by the

prospect and realization of European Union (EU)

accession

(specifi cally, the Central European or ‘CEE’ states that achieved EU membership in 2004) have achieved faster and more complete success with the transition process and with contributory elements such as privatization than others (the South Eastern Europe or ‘SEE’ countries and the countries from the former Soviet Union that now form the CIS) (Gros and Suhrcke, 2000; World Bank, 2002, 2004). Progress with transition has also varied within each of these three sub-regions.

As a result, the opportunities and challenges facing internationalizing CEE-based fi rms have differed from country to country within the CEE region, and even within particular sectors such as pharmaceuticals. In order to begin contributing to the limited body of knowledge about how CEE fi rms evolved their strategies, Langley et al. (2007a) explored how the stra-tegic actions of the Slovenian pharmaceutical fi rm LEK evolved during 1992–2002. This paper builds upon their work by extending the period of study to 2005 and, more impor-tantly, comparing the evolution of LEK’s stra-tegic actions with those of two other large pharmaceutical fi rms based in CEE countries. This paper contributes to an existing body of knowledge that is particularly limited with regard to comparing and contrasting the real-ized strategies of major CEE-based pharmaceu-

tical fi rms as their countries went through this major period of transition.

Literature review

Economic transition in Central and Eastern Europe

Transition from the plan to the market economy in Central and Eastern Europe has proved to be highly complex during the period since the early 1990s, requiring the introduc-tion of a sequence of inter-related reform mea-sures by governments throughout the region (EBRD, 1999–2005; Lavigne, 1999; Kuznetsov, 2005).

Transition from the plan to the market economy in

Central and Eastern Europe has proved to be

highly complex during the period since the early

1990s

Differing national conditions in terms of culture, geography, institutions, and historical familiarity with the market economy have all exercised a considerable infl uence on govern-ments’ ability to accomplish speedy and effec-tive transition (Hirschler, 2000; Lehrer, 2003). The reformers’ task proved to be particularly challenging in the early years of transition, owing to governments’ unfamiliarity with the workings and institutions of market-based capitalism, and to the diffi cult economic con-ditions that many inherited from the socialist era (Mercado et al., 2001). The severity of the problems associated with economic adjust-ment differed markedly between the Central and Eastern European countries, however. The CEE8 countries of Central Europe (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia) experienced fewer cultural, historical, and

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institutional barriers to change and were thus the fi rst to, at least partly, complete the transi-tion process. Their eastern and southern neighbors in the CIS, and to a lesser extent the SEE countries, suffered more from ‘path-dependent’ or ‘lock-in effects’ inherited from the period of central planning than others. This led to slower transition and to more severe initial economic adjustment crises (Gros and Suhrcke, 2000; Hirschler, 2000). Political support for reform also varied from country to country, contributing further to dif-ferences in the speed and effectiveness of the transition process (Lavigne, 1999).

Differences still persist today between the quality of the business environment and invest-ment climates in the CEE, SEE, and CIS coun-tries (World Bank, 2002, 2004), conditions in the CEEs being considerably more attractive than those in the other two, more laggard sub-regions (Sanfey et al., 2004). Slovenia and Hungary, for example (both CEE countries), provide relatively attractive conditions for indigenous and foreign businesses. This has been due to the cumulative effects of sustained reforms and large-scale foreign investment infl ows since the early 1990s, supported more recently by the positive effects of EU acces-sion (EBRD, 1999–2005). These conditions are refl ected in the strong positions achieved by both countries (which lie in 39th and 47th places, respectively) in the World Economic Forum’s Global Competitiveness Index for 2007–8. Even so, their taxation regimes, government bureaucracies, labor regulations (in the case of Slovenia), and policy instability (in that of Hungary) still constitute problem-atic factors for those doing business in these two countries (Schwab and Porter, 2007).

Croatia, a leading SEE country and a prime candidate for future EU accession, has also performed relatively well in transition terms, and thus it too offers a relatively attractive business environment for indigenous fi rms and foreign investors alike, although less so than Hungary and Slovenia (EBRD, 1999–2005). These conditions are refl ected by Croatia’s occupation of 57th place in the Global Competitiveness Index for 2007–8.

The Croatian government still needs to manage the

problems caused for businesses by its ineffi cient government bureaucracy,

corruption, and by its taxation regime

The Croatian government still needs to manage the problems caused for businesses by its inef-fi cient government bureaucracy, corruption, and by its taxation regime in particular if it is to match its CEE neighbors in terms of attractiveness to business (Schwab and Porter, 2007).

Industrial restructuring, privatization, and international integration

Industrial restructuring, privatization, and international integration have all exercised a major infl uence on Central and Eastern Euro-pean government policies and on reformers’ ability to achieve successful transition since the early 1990s. The nature and outcomes of these processes have varied from country to country, shaped by government policies and exercising a potentially signifi cant infl uence on indigenous fi rms’ own strategies due to the resultant ‘country of origin’ effects (EBRD, 1999–2005; Hirschler, 2000; Lehrer, 2003).

Most leading countries in the region have undergone two major phases in their restruc-turing during the transition era (Radosevic, 2002; Manea and Pearce, 2004; Radosevic and Rozeik, 2005). Firstly, they have undergone a period of ‘industrial repositioning’, linked to thorough and profound changes in their insti-tutional, political, and economic structures. Ineffi cient and uncompetitive sectors and fi rms have disappeared or at least been radically reformed, as a more appropriate set of indus-tries and fi rms has emerged, related more clearly to existing or potential sources of static comparative advantage. Sustainability has

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62 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

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become the key issue during the second phase of restructuring, during which sectors and fi rms have had to upgrade their competitive compe-tences by creating new forms of dynamic com-parative advantage. These are linked to emerging local capabilities with regard to the develop-ment of know-how, scientifi c and technological expertise (Schwab and Porter, 2007).

Restructuring has been accompanied every-where in the region by the privatization of formerly state-owned enterprises (Simoneti et al., 2002). The nature and economic impact of privatization has varied greatly from country to country however, depending on the manner in which privatization was initially carried out,

Ineffi cient and uncompetitive sectors and fi rms have disappeared or

at least been radically reformed, as a more

appropriate set of industries and fi rms has

emerged

together with the post-privatization owner-ship structures that have since emerged and their evolution over time (Grosfeld and Nivet, 1997; Havrylyshyn and McGettingan, 1999). Hungary, for example, concentrated on direct sales to outside buyers, leading to high levels of privatization revenue for government and strong interest from strategic (including international) investors. Slovenia and Croatia, in contrast, focused mainly on management/employee buyouts (or ‘insider’ privatization), leading to the creation of private-sector fi rms which were more profi table than those remain-ing in state hands (Sanfey et al., 2004). ‘Insider’ privatization had the effect, however, of restricting outsider involvement in privatized fi rms in these two countries, thereby making it more diffi cult for them to bring in new managerial, fi nancial and know-how resources from Western fi rms which could have been

The closer integration of indigenous fi rms with

international markets can also be seen as an

essential element in Central and Eastern European countries’

transition and restructuring processes

used to support faster restructuring (Djankov and Murrell, 2000).

The closer integration of indigenous fi rms with international markets can also be seen as an essential element in Central and Eastern European countries’ transition and restructur-ing processes (Bishop, 2001), providing a clear rationale for the foreign trade and international investment liberalization measures adopted by most governments in the region (Puffer et al., 1998; Hare et al., 1999; Garibaldi et al., 2001; Kuznetsov, 2005). The EU has provided support for such integration by its program of eastern enlargement, beginning with the admission of Hungary and Slovenia along with six other CEE states in January 2004. This fol-lowed a period of bilateral trade liberalization with these new accession countries. It has also helped exporters based in non-member states by reducing import barriers and opening up its markets to most goods originating from the region, whilst the anticipated, future enlarge-ment of the EU to include SEE countries such as Croatia will also provide further opportuni-ties for geographical market development by their indigenous fi rms (Sanfey et al., 2004).

Strategic responses to transition

Indigenous Central and Eastern European fi rms have had to respond to the new competitive pressures created by transition, including increasing competition for established product markets at home and abroad, in order to

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survive and to develop new sources of sustain-able competitive advantage. One strategy fol-lowed by fi rms in some countries and sectors has been to deepen their relationship with consumers, moving from an early focus on enhancing the quality and marketing of their existing products and services, to the market-related development and strengthening of their product ranges. Some fi rms have also shifted away from price competition, under-pinned by low wage costs, to an increasing reliance on differentiated products or services, supported by know-how and skills develop-ment. The replacement of mature and stan-dardized technologies by more distinctive know-how and technological capabilities has provided valuable support for this develop-ment (Papanastassiou and Pearce, 1999; Shah, 2002).

Firms’ scope for ‘know-how’ market-related development has been greater where govern-ments have provided sector-specifi c support for science, education, and training (building on strengths often existing during the com-munist period of central planning, but rarely exploited commercially), creating opportuni-ties for them to build on the resultant advances to upgrade their own products or services (Radosevic, 2002; Shah, 2002; Manea and Pearce, 2004). Their ability to develop as glob-ally competitive players in the pharmaceuti-cals and other similar ‘know-how’-intensive sectors has also been infl uenced by the char-acteristics and outcomes of industrial restruc-turing, together with national foreign trade, inward investment, and privatization policies (Manea and Pearce, 2004).

Many Central and Eastern European fi rms encountered initial diffi culties with interna-tional integration, due to the relatively small size of their national markets, the collapse of their traditional Council for Mutual Economic Assistance (CMEA) markets in the late 1980s, the resultant decline in demand throughout the region, and (later on) from the rise in import competition from established Western fi rms including MNEs (Levitsky, 1996; Small-bone et al., 1999; Radosevic and Yoruk, 2001). Successful integration was also limited in the

Many Central and Eastern European fi rms

encountered initial diffi culties with

international integration, due to the relatively small

size of their national markets

early stages of transition, at least by the diffi -culties that many indigenous fi rms encoun-tered in imitating and adopting foreign know-how and technology, compounded by their lower levels of size, marketing, manage-rial, and technological resources and experi-ence (Tolentino, 1993; Dunning and Narula, 1996).

International integration has nonetheless formed a vital part of a ‘catch-up process’ for leading Central and Eastern European fi rms in a number of sectors, helping them to benefi t from growing international experience, expe-riential learning, and the development of scope and scale economies not available to them in domestic markets alone (Bishop, 2001). Their international development has typically been incremental in character, with export success being dependent on their foreign-market-related history and experience (Johanson and Vahlne, 1977). Many have therefore needed to increase their experience of general export-ing, from the early 1990s onwards, and to enhance their ability to evaluate the opportu-nities and risks involved, before re-orientating their export trade away from neighboring Central and Eastern European markets (closest to themselves in geographical, cultural, and psychic terms) to more distant markets in the West (Johanson and Vahlne, 1977; Mirza, 2000).

Central and Eastern European fi rms may also have the opportunity to develop more quickly, once privatization has taken place, by raising equity and loan fi nance from external sources,

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although the under-development of fi nancial systems may make such fi nance more diffi cult to access than in the West (Hutchinson and Xavier, 2006). Some have also moved away from internally focused or go-it-alone, organic development strategies, towards collaboration with other fi rms, based locally or in the West, making use of product development networks or joint ventures as a means to this end (Bradley, 2002; Johnson and Turner, 2003). Partnership with outside fi rms has enabled some leading Central and Eastern European fi rms to acquire marketing, managerial, and know-how-related assets. Some have also made use of retrenchment, divestment, and licens-ing out strategies, in order to help manage costs and to gain improved levels of access to international markets and business networks (Quelch et al., 1991; Savas, 1992; Witt, 1998). Taken together, these strategies have helped Central and Eastern European fi rms to build stronger foundations for growth and sustain-able competitive advantage, linked to product, know-how, and geographical market develop-ment, and also to economies of scope and scale (Bishop, 2001; Radosevic and Yoruk, 2001; Kuznetsov, 2005).

Western MNEs have, in turn, been keen to enter Central and Eastern Europe, viewing the leading countries in the region as attractive target markets and production locations. This has been due to their potential for rapid market growth, the availability of acquisitions through the privatization process (in the early days of transition), and their initial status as effi cient, low-cost production bases (Manea and Pearce, 2004). Multi-tier branding strategies, mergers and acquisitions, and joint ventures with indig-enous fi rms have all been used as a means to this end (Meyer and Tran, 2006). Many MNEs have more recently upgraded their Central and Eastern European operations, in order to take advantage of their host countries’ growing market orientation and know-how capabili-ties, and to facilitate an increasing contribu-tion by their local subsidiaries and supply chain partners to the strategic development needs of their groups (Papanastassiou and Pearce, 1999; Manea and Pearce, 2004).

EU accession has imposed costs on fi rms based in

new accession states such as Hungary and Slovenia

EU accession has imposed costs on fi rms based in new accession states such as Hungary and Slovenia. For example, pharmaceuticals fi rms have had to adopt EU pharmaceutical leg-islation and to implement related EU standards for public health protection (Mrazek et al., 2004). Within the EU, the European infl uence has also affected decisions relating to areas such as pricing, reimbursement, and has initiated a drive towards European rather than national approval of new drugs reaching safety stan-dards (Kanavos and Mossialos, 1999). For CEE-based fi rms that need to meet EU regulatory standards this has meant that existing drugs have had to be upgraded to meet EU require-ments or withdrawn from Central and Eastern European markets, while fi rms based in the region have also faced major costs of restructur-ing, in order to meet the EU’s Good Manufactur-ing Practice (GMP) requirements.

Moreover, Croatia’s prospective future entry to the European Union is having a similar neg-ative effect on its indigenous pharmaceutical fi rms, in terms of increased costs. Such fi rms can, at present, take advantage of a US-style law, allowing generics to be developed faster in Croatia than anywhere in Western Europe (Anon, 2003). However, changes to the legal system which would have the effect of termi-nating this source of competitive advantage are likely to be imposed on the Croatian government as a condition of future entry to the EU.

Theoretical background and research question

As discussed, the CEE market economy has changed signifi cantly. Alongside this, indige-nous organizations were changing. As both

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organizations and their environments evolve, this suggests that fi rms’ strategies should follow an evolutionary process with different strategic processes required at various times (Langley et al., 2007a). Evolutionary theory underpins the concepts of incremental and emergent strategies (Lynch, 1997; Mintzberg et al., 1998), with the suggestion that fi rms can adapt their strategies in light of changes as they arise. Strategy evolutionists, such as Barnett and Burgelman (1996), proposed that strategy research should focus upon the strat-egies that have been realized and how they evolved, rather than being prescriptive about how strategies should be implemented. This approach would contribute to our understand-ing about what was happening at the fi rm level as the CEE markets underwent the transi-tion process that started in the early 1990s. This therefore leads to the research question for this paper, which is ‘How did the strategic actions of indigenous pharmaceutical fi rms evolve as the CEE region developed from a planned to a market economy?’

The following section outlines the research methodology designed to address this research question.

Research methodology

The qualitative research design is exploratory and based upon the work of Langley et al. (2007b), who developed an innovative method for exploring how realized strategies evolved, based on the work of Pearce and Robinson (1994). This led to the development of a cate-gorization of strategic actions realized by fi rms in the pharmaceutical industry (Table 1).

In their paper, Langley et al. (2007b) explain how threats to reliability were minimized in developing the categorization of pharmaceuti-cal strategic actions that was used to form the basis of the research method. It also explains how each of the categories is mutually exclu-sive with regard to grand strategies and strate-gic actions realized in the pharmaceutical industry. Langley et al. (2007a,c,d) had adapted and developed this categorization into a coding instrument for collecting data from documen-

tary sources and conducting textual analysis in order to explore how realized strategies in the pharmaceutical industry evolved. Nine grand strategies were identifi ed for this purpose, including: network and acquisition-based product development strategy (NABPD); merger and acquisition strategy (M&A); organic concentric diversifi cation strategy (OCD); organic growth strategy (OG); external fi nance-raising strategy (EFR); retrenchment strategy (TR); divestment strategy (D&D); product divestment and licensing out (PD&LO); and joint venture strategy (JV). These categories are listed in Table 2, accompanied by explan-atory defi nitions.

As Langley et al.’s (2007a,c,d) methodology has been established for exploring publicly available textual material on how the strategic actions of pharmaceutical fi rms evolve, we fi nd their methodology most appropriate for our research.

Population selection

Purposive, non-probability sampling (Patton, 2002) has been used in order to select both the countries of origin of the sample fi rms and the fi rms included in the sample. Hungary and Slovenia were chosen to represent the CEE sub-region, whilst Croatia was chosen to rep-resent the SEE countries. A decision was taken to choose one sample fi rm apiece from each of these three countries. It was decided that all should share similar characteristics, being indigenous, large, and formerly state-owned Central and Eastern European fi rms with leading positions in their respective, national pharmaceutical sectors. It was also decided that all of the chosen fi rms should have been privatized in the 1990s, while each would include generic pharmaceutical products as part of their portfolios.

Taking these criteria into account, Gideon Richter was selected to represent Hungary, as it is that country’s largest pharmaceutical pro-ducer (Schroder Investment Management Ltd, 2005). LEK was also included in the sample, because it is one of Slovenia’s two largest pharmaceutical fi rms; LEK was acquired by

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66 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

Tab

le 1

. M

app

ing

of

the

emp

iric

al d

ata:

gra

nd

str

ateg

ies

and

str

ateg

ic a

ctio

ns

Gra

nd

str

ateg

yD

efi n

itio

ns

and

cri

teri

a fo

r in

clu

sio

n/e

xcl

usi

on

Co

op

erat

ive

con

cen

trat

ion

(m

arke

t p

enet

rati

on

)A

ctio

ns

rela

tin

g to

an

ex

isti

ng

pro

du

ct i

n a

n e

xis

tin

g th

erap

euti

c m

arke

t th

at i

nvo

lve

som

e fo

rm o

f co

op

erat

ive

arra

nge

men

t. M

ust

be

focu

sed

up

on

an

ex

isti

ng

do

min

ant

tech

no

logy

(P

earc

e an

d R

ob

inso

n,

1994

).O

rgan

ic c

on

cen

trat

ion

Act

ion

s re

lati

ng

to a

n e

xis

tin

g p

rod

uct

in

an

ex

isti

ng

ther

apeu

tic

mar

ket

that

hav

e b

een

im

ple

men

ted

by

the

fi rm

its

elf.

Mu

st b

e fo

cuse

d u

po

n a

n

exis

tin

g d

om

inan

t te

chn

olo

gy (

Pea

rce

and

Ro

bin

son

, 19

94).

Co

op

erat

ive

mar

ket

dev

elo

pm

ent

Stra

tegi

c ac

tio

ns

rela

tin

g to

en

try

into

a n

ew t

her

apeu

tic

mar

ket

thro

ugh

a c

oo

per

ativ

e ar

ran

gem

ent.

Org

anic

mar

ket

dev

elo

pm

ent

Stra

tegi

c ac

tio

ns

rela

tin

g to

en

try

into

a n

ew t

her

apeu

tic

mar

ket

that

hav

e b

een

im

ple

men

ted

by

the

fi rm

its

elf.

M&

A m

arke

t d

evel

op

men

tSt

rate

gic

acti

on

s re

lati

ng

to e

ntr

y in

to a

new

th

erap

euti

c m

arke

t as

a r

esu

lt o

f m

erge

r an

d a

cqu

isit

ion

act

ivit

y.M

&A

pro

du

ct d

evel

op

men

tA

cqu

isit

ion

rat

her

th

an i

nte

rnal

dev

elo

pm

ent

of

a p

rod

uct

or

pro

cess

usi

ng

tech

no

logy

th

at h

ad b

een

use

d p

revi

ou

sly

by

the

fi rm

.C

oo

per

ativ

e p

rod

uct

dev

elo

pm

ent

(R&

D)

Th

e co

op

erat

ive

dev

elo

pm

ent

of

an e

xis

tin

g p

rod

uct

or

pro

cess

usi

ng

tech

no

logy

th

at h

ad b

een

use

d p

revi

ou

sly

by

the

fi rm

.

Org

anic

pro

du

ct d

evel

op

men

t (R

&D

)T

he

inte

rnal

dev

elo

pm

ent

of

an e

xis

tin

g p

rod

uct

or

pro

cess

usi

ng

tech

no

logy

th

at h

ad b

een

use

d p

revi

ou

sly

by

the

fi rm

.

Co

op

erat

ive

inn

ova

tio

n (

R&

D)

Dev

elo

pm

ent

of

a p

rod

uct

or

pro

cess

, th

rou

gh a

co

op

erat

ive

arra

nge

men

t, r

elat

ing

to a

ch

ange

in

tec

hn

olo

gy f

rom

th

ose

th

at w

ere

alre

ady

use

d

incl

ud

ing

pro

teo

mic

s, g

eno

mic

s, a

nd

gen

e lib

rari

es.

Th

is c

an a

lso

in

clu

de

dev

elo

pm

ent

of

a n

ew c

hem

ical

en

tity

(N

CE)

, an

d d

evel

op

men

t o

f a

clas

s o

f p

rod

uct

th

at t

he

fi rm

had

no

t p

revi

ou

sly

bee

n i

nvo

lved

wit

h (

e.g.

a s

up

er s

tati

n).

Org

anic

in

no

vati

on

(R

&D

)In

tern

al d

evel

op

men

t o

f a

pro

du

ct o

r p

roce

ss r

elat

ing

to a

ch

ange

in

tec

hn

olo

gy f

rom

th

at p

revi

ou

sly

use

d b

y th

e co

mp

any

incl

ud

ing

pro

teo

mic

s,

gen

om

ics,

an

d g

ene

libra

ries

. T

his

can

als

o i

ncl

ud

e d

evel

op

men

t o

f a

new

ch

emic

al e

nti

ty (

NC

E),

and

dev

elo

pm

ent

of

a cl

ass

of

pro

du

ct t

hat

had

n

ot

pre

vio

usl

y ex

iste

d.

Co

op

erat

ive

inn

ova

tio

n

(In

form

atio

n T

ech

no

logy

)A

ctio

ns

that

rel

ate

to i

nfo

rmat

ion

tec

hn

olo

gy,

e-co

mm

erce

, o

r e-

bu

sin

ess

thro

ugh

a c

oo

per

ativ

e ar

ran

gem

ent.

Org

anic

in

no

vati

on

(In

form

atio

n

Tec

hn

olo

gy)

Act

ion

s th

at r

elat

e to

in

form

atio

n t

ech

no

logy

, e-

com

mer

ce,

or

e-b

usi

nes

s th

rou

gh i

nte

rnal

dev

elo

pm

ent.

Ho

rizo

nta

l in

tegr

atio

nM

erge

r o

r ac

qu

isit

ion

in

volv

ing

a fi

rm t

hat

is

bro

adly

sim

ilar

bu

t th

at i

s n

ot

in t

he

sam

e su

pp

ly c

hai

n (

e.g.

a p

har

mac

euti

cal

fi rm

acq

uir

ing

a p

har

mac

euti

cal

fi rm

). T

his

is

focu

sed

up

on

th

e m

erge

r o

r p

arti

al o

r fu

ll ac

qu

isit

ion

of

a b

usi

nes

s.V

erti

cal

inte

grat

ion

Mer

ger

or

acq

uis

itio

n i

nvo

lvin

g a

fi rm

th

at i

s a

cust

om

er o

r su

pp

lier

(e.g

. a

ph

arm

aceu

tica

l fi

rm a

cqu

irin

g a

mar

keti

ng

org

aniz

atio

n).

M&

A c

on

cen

tric

div

ersi

fi ca

tio

nM

erge

r o

r ac

qu

isit

ion

of

a fi

rm t

hat

‘m

ay b

e re

late

d t

o s

om

e d

isti

nct

ive

com

pet

ence

or

asse

t o

f th

e co

re b

usi

nes

s’ (

Min

tzb

erg,

199

1: 7

9) (

e.g.

a

ph

arm

aceu

tica

l fi

rm a

cqu

irin

g a

gen

eric

s b

usi

nes

s).

It d

oes

no

t in

clu

de

a b

usi

nes

s th

at i

s b

road

ly s

imila

r o

r p

art

of

the

sup

ply

ch

ain

.O

rgan

ic c

on

cen

tric

div

ersi

fi ca

tio

nT

he

spin

-off

or

crea

tio

n o

f a

new

bu

sin

ess

wh

ich

mu

st b

e so

lely

ow

ned

by

the

com

pan

y.C

on

glo

mer

ate

div

ersi

fi ca

tio

nM

erge

r an

d a

cqu

isit

ion

act

ivit

y in

volv

ing

a fi

rm t

hat

is

com

ple

tely

un

rela

ted

to

th

e p

har

mac

euti

cal

tech

no

logy

or

hea

lth

care

in

du

stry

an

d t

hat

do

es

no

t fi

t th

e cr

iter

ia f

or

con

cen

tric

div

ersi

fi ca

tio

n.

Tu

rnar

ou

nd

/ret

ren

chm

ent

A s

trat

egy

focu

sin

g u

po

n r

estr

uct

uri

ng,

ass

et a

nd

co

st r

edu

ctio

n b

ut

that

do

es n

ot

incl

ud

e th

e sa

le o

f an

y p

arts

of

the

fi rm

.T

urn

aro

un

d/o

rgan

ic g

row

thC

orp

ora

te e

xp

ansi

on

act

ivit

ies

that

in

clu

de

an i

ncr

ease

in

ass

ets

and

ex

pen

dit

ure

.T

his

do

es n

ot

incl

ud

e th

e ac

qu

isit

ion

or

mer

ger

of

bu

sin

esse

s o

r in

crea

ses

that

are

pro

du

ct-s

pec

ifi c

.D

ives

titu

reT

he

sale

of

com

ple

te b

usi

nes

ses

(i.e

. b

usi

nes

s u

nit

s, s

ub

sid

iari

es,

etc.

) as

go

ing

con

cern

s. T

his

do

es n

ot

incl

ud

e th

e se

llin

g o

ff o

f p

arts

of

the

fi rm

(e

.g.

a p

lan

t o

r a

pro

du

ct l

ine)

. T

his

in

clu

des

a d

emer

ger.

Liq

uid

atio

nT

he

selli

ng

off

of

par

ts o

f a

com

pan

y as

a r

esu

lt o

f th

e ac

tio

ns

of

an a

dm

inis

trat

or.

Th

is i

ncl

ud

es t

he

sale

of

com

ple

te b

usi

nes

ses

(i.e

. b

usi

nes

s u

nit

s, s

ub

sid

iari

es,

spin

-off

s) o

r w

ho

lly o

wn

ed b

usi

nes

ses

as g

oin

g co

nce

rns,

as

wel

l as

p

lan

ts a

nd

pro

du

ct l

ines

.Jo

int

ven

ture

Th

e cr

eati

on

of

a th

ird

‘d

augh

ter’

fi r

m b

y tw

o o

r m

ore

par

tner

fi r

ms.

Exte

rnal

fi n

ance

rai

sin

gSt

rate

gic

acti

on

s th

at f

ocu

s o

n fi

nan

cin

g ar

ran

gem

ents

th

rou

gh e

xte

rnal

org

aniz

atio

ns.

Th

ese

can

in

clu

de

equ

ity

par

tner

ship

s an

d/o

r lic

ensi

ng

agre

emen

ts.

Th

is i

ncl

ud

es a

ny

coo

per

ativ

e ar

ran

gem

ent

wh

ere

the

fi rm

has

had

eq

uit

y p

lace

d i

nto

it

by

the

par

tner

fi r

m.

Th

is d

oes

no

t in

clu

de

the

selli

ng

(liq

uid

atio

n o

r d

ives

tmen

t) o

f as

sets

.

Sou

rce:

Lan

gley

et

al.

(20

07b

: 11

4–11

5),

afte

r P

earc

e an

d R

ob

inso

n (

1994

).

Page 9: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Pharmaceuticals in Central and Eastern Europe 67

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

Table 2. Extract from the coding instrument used for analyzing strategic actions and grand strategies

Grand strategy code

Grand strategy Defi nition of grand strategy

Externally focused strategic actionsNABPD Network and

acquisition-based product development strategy

Refi nement of an existing product or development of a new product or licensing in a product through a cooperative arrangement or the acquisition of a product or product portfolio. This includes the internal development of a product, chemical, new chemical entity (NCE) or process, through a cooperative arrangement. This includes products that are in clinical trials but have not yet been launched. Does not include actions that relate to a merger with another fi rm, or full or partial acquisition of another fi rm.

M&A Merger & acquisition strategy

Merger or acquisition involving a fi rm that is broadly similar but that is not in the same supply chain (e.g. a pharmaceutical fi rm acquiring a pharmaceutical fi rm). This is focused upon the merger or partial or full acquisition of a business.

JV Joint venture The creation of a third ‘daughter’ fi rm by two partner fi rms. Text will refer to either joint venture or jointly owned affi liate company, business, business unit, or spin-off.

EFR External fi nance-raising strategy

This form of strategy focuses upon how pharmaceutical fi rms have raised fi nance through arrangements with external organizations. This category does include cooperative arrangements relating to the external raising of fi nance. This means those that involve the fi rm having equity placed in it by the partner fi rm. Includes any cooperative arrangement where the fi rm has had equity placed into it by the partner fi rm(s). Does not include the selling (liquidation or divestment) of assets.

Internally focused strategic actionsOCD Organic concentric

diversifi cation strategy

Internal generation of a separate business. The spin-off or creation of a new business which must be solely owned.

OG Organic growth strategy

Corporate expansion activities which include an increase in assets and expenditure. This does not include the acquisition or merger of businesses or increases that are product-specifi c.

Retrenchment, divestment, and licensing out-related actionsTR Retrenchment

strategyA strategy focusing upon restructuring, asset, and cost reduction but that does

not include the sale of any parts of the fi rm.

D&D Divestment strategy

The sale or partial sale of complete businesses (i.e. business units, subsidiaries, etc.) as going concerns as a result of actions by the fi rm (i.e. not as a result of a fi rm going into receivership).

PD&LO Product divestment & licensing out

This form of strategy relates to a fi rm entering into or expanding licensing out agreements, the granting of marketing rights to products, or divesting products.

Source: Adapted from Pearce and Robinson (1994) and Langley et al. (2005, 2007b).

the Western fi rm, Novartis in 2002 (Langley et al., 2007a). Finally, Pliva was chosen to represent Croatia, because it is that country’s largest pharmaceutical company, in turnover terms. In 2006 Pliva was also acquired by a Western fi rm, the American company Barr (Urquhart, 2006).

Data collection

A longitudinal approach was adopted with data collected from 1992 to 2005. This is a period that, as discussed, witnessed a signifi -cant period of change in the CEE countries. It was also a period that witnessed increased

Page 10: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

68 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

concentration and globalization in the phar-maceutical industry. The data was collected from published documentary sources. The sampling frame was every ‘companies’ page in Scrip from 1 January 1992 to 31 December 2005 that referred to each of the fi rms in the sample. Scrip is a major pharmaceutical indus-try trade journal that has been used in previ-ous studies focusing upon strategy develop-ment in the pharmaceutical industry (Langley et al., 2005, 2007a–d).

The coding dictionary (previously discussed) was used as the basis for the text and content analysis used to identify the strategic actions realized by the fi rms. The articles that had been retrieved were read to identify if they related to the strategic actions that had been identifi ed in the coding dictionary. If they met these criteria each article was coded as being relevant to the grand strategy. The articles that had been coded were read again to check if they matched any qualifi cation or exclusions for the relevant grand strategy. The geograph-ical location was also recorded for each of the realized strategic actions. The relevant data from the coded articles were then recorded on a spread sheet, as illustrated in Table 3, which shows an extract from the NAPBD strategic actions realized by Pliva during 2003–

2005. In addition to textual material found in Scrip, we also collected textual material from Mergerstat database that provides compre-hensive information on global mergers and acquisitions transactions, including national and cross-border acquisitions. We also col-lected data from relevant text within the Financial Times, the UK’s international business newspaper.

Data analysis

Analysis was underpinned by the perspective that strategy is ‘a sequence of united events which amounts to a coherent pattern of business behaviour’ (Kay, 1993: 9) and ‘a pattern . . . consistency in behaviour over time’ (Mintzberg et al., 1998: 9). Strategic actions are considered to form the relevant grand strategy if they are realized for at least three years in any fi ve-year period (Langley et al., 2007d). If they do not meet this require-ment they are classed as incremental strategic actions.

In order to analyze the timing of the strate-gic actions realized by the three sample fi rms, the data was put into chronological lists which, when suitable, were depicted in tables relating to patterns or sequences of events (Mintzberg

Table 3. Examples of NABPD strategic actions realized by Pliva during 2003–2005

Year Strategic action Firm Product

2003 Acquisition of product ranges Acquired from GlaxoSmithKline Polyfax and Polytrim range of products

2003 Acquisition of intellectual property rights

Acquired from the USA fi rm, Ergo Science

PLD-165

2003 Development and marketing agreement

Dr Reddy’s Laboratories 11 anticancer pharmaceuticals

2003 Development agreement Respiratory division of ML Laboratories, Innovate Biomed

Development of an asthma therapy

2004 Acquisition of exclusive right to market a product

Acquisition from Idevus Pharmaceuticals

Overactive bladder treatment, Sanctura

2005 Agreement Legacy Pharma Four treatments for central nervous system diseases

2005 Supply agreement Pfi zer Three-year agreement for the supply of bulk azithromcin

2005 Funding and marketing agreement

Mayne Pharma Pliva’s biosimilars EPO and G-CSF

2005 Funding and marketing agreement

Barr Laboratories For a biosimilar version of Amgen’s G-CSF, Neupogen

Source: Adapted by the authors from various issues of Scrip.

Page 11: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Pharmaceuticals in Central and Eastern Europe 69

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

and Waters, 1982). This allowed for the iden-tifi cation of linked sequences between strate-gic actions in order to identify patterns that could be classed as realized strategies. These were also used to compare the strategic actions implemented by the fi rms in order to identify temporal patterns in strategy development through the use of pattern matching. This is a method similar to that used by Webb and Pettigrew (1999) when they explored tem-poral patterns in strategy with their study of the insurance industry.

Criteria for ensuring high-quality research

As previously discussed, the research metho-dology is now established with regard to exploring how pharmaceutical fi rms evolve their strategic actions and strategies. Patton (2002) highlighted that with qualitative research, empirical fi ndings should be empha-sized in reporting. Therefore the aim was to emphasize the empirical fi ndings, rather than personal beliefs, in the fi ndings. For this reason, all of the strategic actions identifi ed were tabulated using chronological ordering.

With regard to the validity of the fi ndings, details of the relevant text were recorded for each of the strategic actions identifi ed. Audit

trails were also employed, with each stage of analysis available for review that provides evi-dence of how the analysis was conducted through a series of building blocks. In addi-tion, the categorization of strategic actions means that the approach to coding the data was replicated for each of the sample fi rms.

Results

The results presented in this section relate to the strategic actions realized by each of the fi rms during 1992–2005 (as noted above).

LEK

Established in 1946, LEK is a generic pharma-ceuticals fi rm based in Slovenia. LEK was acquired by the Western fi rm Novartis in 2002. Table 4 summarizes the strategic actions realized by LEK during 1992–2005.

With regard to internally focused strategic actions, LEK’s OG strategic actions were all focused upon CEE countries. The majority of these related to the construction of manufac-turing and R&D facilities, together with the opening of regional offi ces. LEK’s only OCD strategic action related to the establishment of the American fi rm LEK US Inc. Apart from the OG and OCD strategic actions, LEK realized

Table 4. LEK’s strategic actions

= years that strategic actions were not realized= years that strategic actions were realized

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

M&A

NABPD

JV

OCD

OG

D&D

PD&LO

TR

EFR

Page 12: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

70 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

little in terms of further strategic actions until 1999 when it started to combine organic growth with strategic actions that were more externally focused.

These externally focused strategic actions included LEK’s JV and NABPD agreements, which related to marketing, distribution, and other collaboration agreements across differ-ent parts of the world. These included Eastern Europe, the USA, and Western Europe. The JV resulted in the creation of Sanofi -Synthelabo-LEK. M&A strategic actions were only realized in one year (2001), and these related to the acquisition of majority shares in two CEE-based fi rms. LEK’s EFR strategic actions refer to the issuing of shares as part of the privatiza-tion process.

LEK’s only PD&LO strategic action related to a licensing out agreement with Richter. LEK did not make any divestments until 2004, when it divested stakes in two Balkan distribu-tors. LEK did not realize any retrenchment strategic actions.

Gideon richter

The Hungarian pharmaceutical fi rm Richter was established in 1901. The company pro-duces original, generic, and licensed pharma-ceutical products. Table 5 summarizes the

strategic actions realized by Richter during the period studied.

With regard to internally focused strategic action, Richter realized OG strategic actions. These included the expansion of sales forces in countries throughout the CEE markets, opening new premises in countries such as Egypt, con-struction of new manufacturing facilities, and expansion of a research center. Richter did not realize any OCD strategic actions.

Richter realized OG strategic actions. These

included the expansion of sales forces in countries

throughout the CEE markets, opening new

premises in countries such as Egypt, construction of

new manufacturing facilities, and expansion

of a research center

Richter realized externally focused strategic actions through entering into M&A, NABPD,

Table 5. Richter’s strategic actions

= years that strategic actions were not realized= years that strategic actions were realized

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

M&A

NABPD

JV

OCD

OG

D&D

PD&LO

TR

EFR

Page 13: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Pharmaceuticals in Central and Eastern Europe 71

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

and JV agreements. Richter realized M&A stra-tegic actions from 1997 to 2003, and these were focused upon partial and full acquisi-tions, primarily with regard to fi rms in CEE countries. The main exception to the CEE focus of M&A activity was in 1997, when Richter increased its stake in Medimpex to 50%. This covered various geographical areas including the USA and Western Europe. Richter realized NABPD strategic actions that included entering into development, marketing, and/or distribution agreements. At least one market-ing agreement involved another fi rm distribut-ing Richter’s products, for example Barr marketed some of Richter’s products in the USA. Richter formed three joint ventures, two in the Ukraine and the other in Russia. Rich-ter’s PD&LO actions were focused upon the Japanese and US markets. Richter divested marketing rights in the USA to Barr Laborato-ries for its emergency oral contraceptive. Rich-ter’s EFR strategic actions started in 1994 with the beginning of its privatization, and these fi nished in 2004 with the Hungarian privatiza-tion agency selling its 25% stake in the fi rm.

Richter also realized divestment and retrench-ment strategic actions. Richter’s D&D strategic actions related to non-pharmaceutical activi-ties — i.e. the divestment of its cosmetics busi-ness and the divestment of its stake in Dorog

Incinerator. Richter’s realized TR strategic actions in 1993–1994 focused primarily upon cost-cutting activities prior to the start of the privatization process for Richter.

Pliva

Established in 1921, the generics fi rm Pliva also engages with R&D activity for new products. Pliva was acquired in 2006 by the American company Barr. It realized actions between 1992 and 2005 relating to all of the alternative strategies included in this study (see Table 6).

In relation to internally focused strategic actions, Pliva’s OG strategic actions included increasing the size of the sales force in various countries, expanding production capacity, the construction of a research institute, and invest-ment in an Indian development center. Pliva’s OCD strategic actions related to the establish-ment of new companies and offi ces overseas, together with the formation of new sub-sidiaries and divisions.

With regard to externally focused strategic actions, these started in 1993 when Pliva entered into a number of NABPD agreements which included research collaborations, product development agreements, and market-ing agreements. Pliva used NABPD strategic

Table 6. Pliva’s strategic actions

= years that strategic actions were not realized= years that strategic actions were realized

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

M&A

NABPD

JV

OCD

OG

D&D

PD&LO

TR

EFR

Page 14: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

72 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

actions to develop its presence in the USA, for example through the acquisition of rights to market Idevus Pharmaceuticals’ Santura product in the USA. M&A activity started in 1997, when it acquired a 60% stake in the Polish fi rm Polfa Krakow. This was followed in subsequent years by the full and partial acquisition of a number of fi rms throughout Europe and the United States, including the acquisition of the Ameri-can fi rm Sidmark Laboratories in 2002. EFR strategic actions started in 1995, when Pliva received a $20 million loan from the European Bank for Reconstruction and Development. In 1996 the privatization of Pliva was started, with 30% of Pliva’s share capital being made avail-able in a global equity offering. Pliva acquired further funding from loans/banks in 2001/2002 in order to fi nance expansion activities and in 2004 raised a further 75 million Euro through fi xed-rate bonds.

With regard to PD&LO, Pliva entered into two licensing out agreements. In 2005, Pliva divested a number of products including four treatments for central nervous system diseases. D&D strategic actions started in 2000 with divestment of a stake in a yeast/yeast extracts organization, Kavasac. In 2001, Pliva divested its remaining foodstuffs businesses, appearing to want to focus more upon its pharmaceutical activities. Further divestments were made in 2003/2004. Pliva entered into three periods of retrenchment activity which related to reduc-tions in staffi ng levels. Further retrenchment strategic actions included R&D spending being reduced in 2004.

Discussion

All of the fi rms in the sample were chosen because of the similarities that they shared at the beginning of the study, in that they were large, formerly state-owned, Central and Eastern European-based pharmaceutical com-panies.

Table 7 classifi es the strategic actions realized by the three sample fi rms during the period 1992–2005, broken down into ‘strategy’ and ‘incremental strategic actions’ on the basis outlined previously.

The fi ndings indicate that each fi rm packaged its

realized strategic actions in a unique way, both

with regard to the number of grand strategies that it implemented and the way

in which these were combined with

incremental strategic actions

The fi ndings reveal the existence of some similarities in terms of the realization of ‘grand strategies’ and ‘incremental strategic actions’ by the three sample fi rms. All realized grand strategies for NABPD and EFR, while all real-ized only incremental strategic actions for JV and PD&LO. In overall terms, however, the fi ndings indicate that each fi rm packaged its realized strategic actions in a unique way, both with regard to the number of grand strategies that it implemented and the way in which these were combined with incremental strategic actions. In other words, each fi rm responded strategically to economic transition in different ways.

Table 7. Summary of realized grand strategies and strategic actions

LEK Pliva Richter

M&A Incremental Strategy Strategy

NABPD Strategy Strategy Strategy

JV Incremental Incremental Incremental

OCD Incremental Strategy None

OG Strategy Incremental Strategy

D&D Incremental Strategy Incremental

PD&LO Incremental Incremental Incremental

TR None Strategy Incremental

EFR Strategy Strategy Strategy

Page 15: Strategy evolution in Central and Eastern European pharmaceutical firms 1992–2005

Pharmaceuticals in Central and Eastern Europe 73

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

The fi ndings therefore provide no evidence of systematic variation in the strategic behavior of the three sample fi rms associated with the differing degrees of progress towards economic transition attained by their respective countries of origin. Differing country of origin effects (Hirschler, 2000; Lehrer, 2003), associated with the contrasting degrees of progress made towards implementing Western-style market economies by Hungary, Slovenia, and Croatia, do not appear to explain the strategic actions taken by Richter, LEK, and Pliva. As Simoneti et al. (2002) highlight, the region witnessed the privatization of formerly state-owned enter-prises. The empirical data for the fi rms in this sample indicate that EFR strategic actions were used to fi nance the privatization process. For example, it has been argued (by Sanfey et al., 2004) that Slovenia and Croatia focused on ‘insider’ privatization whilst Hungary did not do so, yet all three fi rms realized EFR strategies while independent of foreign ownership. All indeed realized EFR strategic actions in the fi rst half of the 1990s, and whilst LEK fi nished doing so by 1996, both Pliva and Richter continued to do so as late as 2004.

The fi ndings help to develop our under-standing about the different ways in which Central and Eastern European-based pharma-ceutical fi rms realize their strategic actions, together with the reasons for such differences. The strategic behavior of the three sample fi rms can be explored further by examining their temporal patterns of strategy develop-ment, and by seeking to determine whether each was a fi rst or last mover in terms of the various strategies identifi ed. This procedure allows for the identifi cation of periods of diver-gence/convergence in their realized strategic actions, providing more information about how their internally and externally focused, and their retrenchment, divestment, and licensing out-related strategic actions, evolved (Langley et al., 2007b).

Internally focused strategic actions

Looking fi rstly at the internally focused strate-gic actions found from the study, it is interest-

ing to note that all three sample fi rms relied to some extent on organic growth/develop-ment strategic actions during the transition era. Organic growth-related strategies were used for a range of purposes, including the development of R&D facilities, geographical market expansion, and increased production capability. Use was also made of organic strategic actions for the establishment of new manufacturing facilities in cost-effi cient or market access-related locations. As dis-cussed, for those fi rms marketing pharmaceu-tical products in the EU there is a need to meet the EU’s GMP requirements. Organic growth strategic actions helped some of the fi rms in the sample with regard to achieving this. For example, when the Hungarian fi rm Richter constructed new facilities from 2000 onwards it had to ensure that ‘production of both active pharmaceutical ingredients and fi nished products was carried out according to current Good Manufacturing Practice (cGMP) at an early stage of development’ (Gideon Richter Ltd, 2004: 43).

Organic growth-related strategies were used for a

range of purposes, including the development

of R&D facilities, geographical market

expansion, and increased production capability

Pliva followed an OCD strategy in both 1992–1994 and 2001–2003, although in con-trast, LEK only realized OCD-related actions in 1996 while Richter did not realize any OCD strategic actions in any year. Richter was also the last mover with regard to OG strategic actions, although it did realize an OG strategy from 1994–2000, and it again realized relevant strategic actions in 2004–2005. In comparison, LEK and Pliva both realized OG

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strategic actions for a substantial period of time, starting in 1992 and fi nishing in 2005. Pliva’s OG actions were, however, incremen-tal only whilst LEK realized an OG strategy from 1995–2005. It has been suggested in the literature that some CEE-based fi rms have moved away from internally focused strategies towards collaboration with other fi rms (Bradley, 2002; Johnson and Turner, 2003). Yet, as has been highlighted, all of the fi rms in the sample have realized organic growth/organic development strategic actions. Rather than moving away from them, as the next section discusses, they have combined the internal focus with externally focused strate-gic actions.

Externally focused strategic actions

The sample fi rms realized a range of externally focused strategic actions, including M&As, JVs, and NABPDs during their periods of inde-pendence. These strategic actions were linked variously to marketing, distribution, research collaboration, and new product development initiatives undertaken in Central and Eastern Europe, Western Europe, the United States, and further afi eld. These fi ndings fi t with the views put forward by Johnson and Turner (2003) and Bradley (2002) to the effect that Central and Eastern European fi rms may be expected to seek opportunities for external collaboration, where appropriate, in order to maximize their pace of development, rather than relying purely upon organic growth for this purpose.

Both Richter and Pliva continued to develop their M&A strategies over the period from 1997 to 2003, while LEK was the last mover in M&A terms. Interestingly, all three fi rms entered into NABPD agreements much earlier than they began their M&A activity. In com-parison to Pliva and Richter, LEK was again a late mover with regard to NABPD strategy, and its strategic actions in this context covered only a fi ve-year period in total, while for example Richter’s NABPD strategy lasted for 11 years. All three fi rms realized both M&A and NABPD strategic actions in 2001, however,

indicating a degree of convergence in grand strategy terms. All of the fi rms also entered into JVs, with LEK the last mover once again. None, however, realized a joint venture strat-egy and, indeed, the last JVs entered into were in 1999, suggesting that this was not a popular strategy in the later part of the period studied.

Retrenchment, divestment, and licensing out

All three sample fi rms made use of some or all of these strategic actions between 1992 and 2005. These appeared to be linked to cost-cutting and attempts to focus on their core business area (Quelch et al., 1991; Savas, 1992; Witt, 1998). Both Pliva and Richter also started to realize TR strategic actions at around the same time (in 1992 and 1993, respectively), but Pliva alone continued to do so after the mid-1990s (when its TR strategic actions followed a similar pattern to its D&D-related actions). LEK did not realize any retrenchment strategic actions at any point. All of the sample fi rms realized some form of D&D actions, although the patterns identifi ed for Richter and LEK were very different. Richter made no divestments after 1995, whilst LEK did not start any until 2004. Pliva also started its D&D actions later than Richter, but eventually realized a D&D strategy, in comparison to the other two fi rms whose D&D actions were incremental. Finally, all three fi rms started realizing PD&LO strategic actions at around the same time (1997/1998), although LEK only did so for one year (1997) whilst the others were recorded as doing so in three different years.

Key infl uences on realized strategies during the transition era

The fi ndings discussed above indicate that even where the sample fi rms’ strategies have been similar (for example, in the case of EFR strategy), the temporal development of these strategies has been different. For some of the strategic actions, periods of convergence can

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Even where the sample fi rms’ strategies have been similar (for example, in the case of EFR strategy), the temporal development

of these strategies has been different

be seen in the later stages of the transition process. For example, although LEK did not realize any NABPD strategic actions until 1999, from that period onwards all three fi rms were realizing NABPD strategic actions. There was also some convergence of M&A activity in 2001. International integration, including the prospect and realization of EU accession (Mercado et al., 2001; Sanfey et al., 2004; Kuznetsov, 2005), may help to provide some of the reasons for these periods of strategic action convergence as the fi rms have increas-ingly developed formal and/or informal rela-tionships with other fi rms through NABPD and M&A activity.

Economic transition has confronted indigenous,

Central and Eastern European fi rms with a

range of strategic challenges linked to the impacts of transition on

ownership structures

Figure 1 summarizes a number of factors that have had the potential to shape the evolu-tion of realized strategies in the Central and Eastern European pharmaceutical sector during the transition era. These factors may have infl uenced sectoral participants’ strategic actions in the following ways:

� Changes in the Central and Eastern Euro-pean business environment. Economic transition has confronted indigenous, Central and Eastern European fi rms with a range of strategic challenges linked to the impacts of transition on ownership structures, sources

Ownership of the firms and other firm- specific factors

Evolution of CEEpharmaceutical market

Strategic actions of partner pharmaceutical firms

Firm’s strategicchoices

Home government’s approach to privatization of SOEs

Changes in pharmaceutical sector regulation

Consolidation & globalization of the pharmaceutical sector

Evolution of firm’s realized strategic actions

Growing importance of USpharmaceutical market

Changes in the C&E European businessenvironment

International economic integration & home country’s approach to EU accession

Firm’s strategicoutcome

Figure 1. Factors shaping strategic actions realized by CEE-based pharmaceutical fi rms.

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76 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

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of external funding, post-privatization, and conditions in domestic and international markets. Government programs involving domestic healthcare reforms have also radically changed the business environment facing these fi rms in countries such as Slovenia.

� Strategic actions of partner pharmaceuti-cal fi rms. As identifi ed above, all fi rms in the sample entered into NABPD partnerships with other pharmaceutical fi rms. Each co-operative arrangement leads to a process of co-evolution occurring, with each formal and informal partner having the potential to shape how the partner fi rm evolves (Langley et al., 2007c).

� Changes in pharmaceutical sector regula-tion. Strategic responses have also been needed in relation to changes in pharmaceu-tical regulation, linked to EU accession. All Central and Eastern European fi rms in exist-ing or candidate states have had to adopt EU pharmaceutical legislation and to imple-ment related EU standards for public health protection, including the EU’s GMP require-ments, involving the withdrawal or up-grading of existing drugs and substantial concomitant costs (Mrazek et al., 2004). As discussed previously, from 2000 onwards Richter constructed new plants so that they met with GMP requirements.

� Growing importance of USA pharmaceuti-cal market. Walton (2001) highlighted the increasing importance of the US market for pharmaceutical fi rms as it was regarded as the largest market for pharmaceutical sales. All fi rms in the sample realized strategic actions relating to the USA, for example LEK’s establishment of LEK USA Inc.

� Consolidation and globalization of the pharmaceutical industry structure. Con-solidation of the pharmaceutical industry started in the late 1980s, with the formation of organizations such as SmithKline Beecham and Bristol Myers Squibb, and increased pace during the 1990s (Pursche, 1996; Matraves, 1999; Heracleous and Murray, 2001). This was followed by a number of ‘megamergers’ leading to ‘consolidation of

CEE fi rms were starting to follow the overall trend in

the pharmaceutical industry structure of consolidation and

internationalization/globalization

fi rms at the top’ (Matraves, 1999: 188) and the creation of an increasingly globalized industry. The empirical data for fi rms in the sample indicates that during the later periods of the study all of the fi rms were realizing M&A strategic actions, with some of these including cross-border acquisitions. This indicates that CEE fi rms were starting to follow the overall trend in the pharmaceuti-cal industry structure of consolidation and internationalization/globalization. This leads to the following, testable proposition:

Proposition 1. As the international pharmaceutical industry consolidated, pre-viously state-owned CEE pharmaceutical fi rms increasingly followed the merger and acquisition trend.

This proposition could be tested by exploring the number of mergers and acquisitions entered into by CEE-based pharmaceutical fi rms from 1992 to the present day.

� Evolution of Central and Eastern Euro-pean pharmaceutical market. Reform began in the early 1990s with market trends including a large increase in Western imports. Richter (2003), for example, appears to indicate that this led to the fi rm planning a new strategy in 1992, which included ‘the development of a marketing network to regain recently lost Eastern European markets’ (Richter, 2003: 1).

� Ownership of the fi rms and other fi rm-specifi c factors. There are various fi rm-specifi c factors that have the potential to

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shape how the strategies were realized by the fi rms in the example. For example, in 1996 LEK’s Chief Executive, Vojmir, resigned, for what appeared to be ‘personal reasons’, although the press speculated that ‘upheavals . . . highlighted the problems of outside shareholders introducing western-style corporate governance to a formerly communist economy’ (Grimston, 1997: 31). This is further highlighted by the change in LEK’s strategic actions prior to and follow-ing its acquisition by Novartis. In 2001, LEK made its fi rst acquisitions and entered into more NABPD agreements. In the years following the Novartis acquisition LEK appeared to focus more on organic growth, with some D&D activity and only one exter-nally focused NABPD strategic action. This suggests that the change of ownership led to LEK being more internally focused with regard to realized strategic actions rather than the external focus that had preceded the Novartis acquisition. This leads to a second proposition:

Proposition 2. Acquisitions by Western fi rms led to changes in the strategic actions realized by the acquired Central and Eastern European-based fi rms.

This proposition could be tested by com-paring realized strategic actions of a number of indigenous fi rms pre- and post-acquisition by a Western fi rm.

Limitations of the paper

The limitations of the paper are acknowledged. Although published documentary sources have been used in a number of papers explor-ing realized strategies, it is acknowledged that this can make the data subjective. The researchers have minimized this limitation by only including actions that were reported as actually having been implemented rather than those that may potentially happen, an approach suggested and used by Webb and Pettigrew (1999).

Conclusions

There appears to have been no previous research that has compared how the largest Central and Eastern European-based pharma-ceutical fi rms realized their strategies as this geographical area underwent a major period of transition from 1992 to 2005. By applying evolution theory and exploring temporal pat-terns of strategy development, this paper has made a signifi cant contribution to our current understanding about how the strategies of fi rms evolve when a sector, and its indigenous fi rms, are operating within the forces identi-fi ed in Figure 1.

Each of the fi rms packaged their realized grand

strategies in a unique way whilst also having some

similarities with regard to those strategic actions that

formed grand strategies

The paper showed that each of the fi rms packaged their realized grand strategies in a unique way whilst also having some similari-ties with regard to those strategic actions that formed grand strategies. With regard to temporal patterns in strategy development, the uniqueness in patterns of strategy develop-ment was further highlighted. The fi ndings also showed that for some strategic actions, for example NABPD and M&A, there was evi-dence of periods of convergence in the later stages of the transition period. As shown in Figure 1, a number of different factors could have infl uenced how and why the fi rms evolved their strategic actions in different ways as the Central and Eastern European markets went through this transition process.

Future research

Future research could focus upon exploring the fi ndings presented in this paper in order

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78 Amanda Langley, Grahame Fallon and Nada K. Kakabadse

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to develop understanding of the factors that shaped the strategic responses made by the fi rms as they evolved their strategies during this period of change. This is in addition to the propositions presented in this paper being tested.

Acknowledgment

The authors would like to thank the publishers of Scrip for their help with regard to providing access to Scrip in the early stages of the LEK research.

Biographical notes

Amanda Langley is a Senior Lecturer at Northampton Business School. Her research interests include strategic action co-evolution, strategic change in the pharmaceutical indus-try, and the development of qualitative data analysis approaches for understanding strategic dynamics within industries. She has recently had papers published in Strategic Change, Management Decision, and Qualitative Research in Organisations and Management.

Grahame Fallon is a Principal Lecturer in International Business at the University of Northampton as well as Postgraduate Pro-grammes Manager and Deputy Director of the International Research Group in Northampton Business School. His teaching and research interests center around foreign direct invest-ment, economic transition issues, and interna-tional political economy. His previous work has been published in a range of journals, including Regional Studies, European Busi-ness Review, and the Journal of Contempo-rary European Studies.

Nada K. Kakabadse is Professor in Manage-ment and Business Research at the University of Northampton Business School. Current areas of interest focus on the ICT impact on individuals and society, leadership, strategy, boardroom effectiveness, governance, CSR, policy design, and strategic sourcing.

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