July 17, 2008

Research Proposal Sample on The Pharmaceutical Industry In China

1. Introduction

This chapter shall be discussing the background of the study. It shall be divided into four subtopics. The first part shall discuss the general restructuring on China. The second part shall be covering the medical reform in the said country. On the other hand, the third part shall be describing the pharmaceutical industry of China. The last part shall identify the impacts of these reforms on the pharmaceutical companies.

1.1 General Reform In China

China has done remarkably well since the beginning of the economic reform movement in 1978. (Wu, 1996) Between 1979 and 1995, China's GDP grew at an average annual rate of 9.5 percent. China's exports grew even faster and China now ranks among the world's top 10 exporting economies. The economic boom is very much due to the market-oriented reforms and opening up to the outside world. In the meantime, China also faces a series of knotty problems. Amongst them, significant inflationary pressure and the prevalence of corruption is the most vexatious. The spectacular achievements of China's economic reform and development owes to an unusual strategy of reform, namely, "reforming and growing out of the established system" or an incremental strategy for short.

Initially, the reform measures were oriented towards delegating decision-making power and relinquishing benefits to lower levels in the state sector. (Wu, 1996) As in the former Soviet Union and the Central European countries, these "gradualism" measures did not work in China. Since late 1980, the focus of China's reform had shifted from the urban state sector to rural areas. Pioneering this effort was the introduction of the "household contract system." Within two years, household farming replaced the People's Commune. Since then, China tried a new and unusual reform strategy. Three aspects characterized the spirit of that strategy such as encouraging the development of non-state economy; integrating the domestic market with international market through opening policy; and pioneering reforms in coastal areas and promoting the development of the interior regions.

In addition, this new strategy proved to be correct and effective. From the point of view of the entire economy, however, the "incremental reform" is a tactical arrangement. (Wu, 1996) Moreover, reform in the state sector has been lagging behind. These results in consequences such as the exacerbation of state enterprises financial conditions; the persistent pressure of inflation; widespread corruption and rent-seeking activities; and the widening gap between the rich and the poor. In addition, the severe inflation in 1988 and political unrest in 1989 slowed the pace of reform. Confronted with such a situation, Deng Xiaoping advocated a new upsurge in the reform drive in 1992. In November 1993, China concluded a new reform strategy of "overall advance with focal breakthrough" and started to "storm the heavily fortified positions." Moreover, the "focal breakthrough" refers to the expected progress in the reform of the state sector, while "overall advance" refers to the building of a market system as a whole. Likewise, a new wave of economic reform has been launched and gives priority to the state sector. These include the building of a new taxation system suitable for a market economy; reforming the banking system; changing the state-owned enterprises into independent corporations; and reorganizing the social security system.

Moreover, the Chinese Government undertook a more recent economic reform. After fifteen years of negotiations, on November 10, 2001 at the World Trade Organization (WTO) Ministerial Conference in Doha, Qatar, WTO members formally approved the accession package for the People's Republic of China (China). China became a full member, the WTO's 143rd, on December 11, 2001.

China's entry into the WTO will make China's door even more open. Both foreign investment and foreign trade are expected to increase. (Chow, 2000) Foreign firms will begin to penetrate China's financial and telecommunication sectors. Trade will increase in both directions and Chinese tariffs will be lowered and Chinese goods will have better access to world markets open to members of the WTO. Using foreign competition to stimulate the domestic economy is a major objective in seeking to join WTO, as explicitly stated by Premier Zhu Rongji. The Chinese government is well aware of the economic and social-political costs and benefits of joining WTO. While it is pursuing institutional reforms in state-owned enterprises and the banking and financial sectors, it is aware that the reforms and the accompanying globalisation of the Chinese economy have to proceed in an appropriate speed. If foreign competition enters China too rapidly, adjustments by Chinese producers and enterprises may be too severe to be socially desirable. The harmful effects of foreign competition are monitored by putting into practice gradually the reduction of import tariffs and the admission of foreign competition in the financial and communication sectors.

In addition, there are three sets of forces that determine institutional changes in China. (Chow, 2000) These are the role of the government, incentives generated in the market sectors and inertia inherent in economic institutions. In the last twenty years the government has guided the changes in economic institutions. In the future the government will remain active, especially in the following areas. First, science/technology and education for the betterment of the economy was stated to be the main theme of his tenure when Premier Zhu Rongji responded to a question raised during his first press conference in March 1998. Second, the building of infrastructure, in connection with the plan for Western development in particular, will be of top priority. Other areas of serious government attention include the improvement of technology in agriculture, environment protection, social welfare system, health care and housing reform. There will be plenty of opportunities for foreign investors to invest in all these areas. Secondly, concerning the market forces we can expect that private enterprises, joint ventures and foreign owned enterprises, under a better legal system and in an improved economic environment with China a member of WTO, will contribute positively to growth in the next two decades. These enterprises will play the role of township and village enterprises in serving as the most dynamic sector of the economy. They also will provide competition to the state and collective enterprises, making them more efficient. Thirdly, inertia will prevent economic institutions from changing rapidly. Institutional inertia comes from lack of information, lack of knowledge, social and political pressure affecting economic decisions and simply persistence of customs and habits. Inertia explains the difficulties encountered in reforming the state enterprises and the banking system. One most important problem common to both institutions is the lack of well-trained managers and staff. The second element of inertia is the tendency to retain the old ways of doing things. In many state-enterprises that have been changed to share-holding companies, the shareholders still elect the same governing people to the new board of directors and there is no change in management. One can explain this partly by political and social pressure, another element of inertia I have just mentioned. Therefore we cannot expect that Chinese state enterprises and banks can be changed to modern institutions in a few years simply by enacting new laws. The reform of these institutions will be a slow and gradual process as it has been in the past, but continued progress there will likely be.

Moreover, WTO membership will eliminate the acrimonious annual trade review that U.S. Congress holds. In addition, it will deny other countries the ability to discriminate against China on trade matters. (Chow, 2000) WTO membership will allow China to be heard in the international economic arena and to enjoy the privileges, like having access to the WTO mechanism for trade disputes. There will be a shot in the arm for Chinese goods with free access to world markets. The main beneficiary will be those industries in which China has competitive advantages, like textile, home appliances, bicycles and motorcycles, food, and toys. Likewise, there will be restructuring in the economy and many jobs will be created in those industries that have the ability to capitalize on the opportunities to export to the world markets. China will be forced to upgrade its economy to international standards and eliminate unacceptable practices. These include respect for intellectual property, free access to markets, non-discriminatory and unfair practices, and respect for the rule of law. In addition, one main beneficiary is Hong Kong, which traditionally serves as a conduit between China and the rest of the world. The China boom will enable Hong Kong to sustain and increase its economic role. Chinese consumers will enjoy the fruits of a capitalist economy, with more choice of goods and services. In addition, prices will be lower and customer service will improve with more competition.

Nonetheless, in the proliferation of open markets, many state-owned enterprises that were used to the centrally planned economic system would be eliminated. (Chow, 2000) They are struggling with archaic machinery and old production methods, shoddy products, disregard for customers, heavy debt, and a stubborn, undisciplined, old workforce. They will be unable to survive with open competition. Chinese farmers, who lack modern farming techniques, machinery, and economy of scale, will be overwhelmed by foreign agricultural produce. A high tariff wall currently protects them. Furthermore, enormous labour restructuring will happen that is unprecedented in the modern world. Labour will migrate from rural to urban centres to seek job opportunities. Many millions of employees in the lower skill categories, including a high proportion of older people, will be jobless without skill retraining. At the same time, there will be shortage of people needed to fill New Economy positions, like IT, telecommunication, law, finance, foreign trade, biotechnology, etc. Many industries will be affected. One of the biggest industries to suffer in China will be the car industry. It is protected by high tariffs and lacks the economy of scale to be competitive. It will be attacked by imports at cheaper prices and better quality. Under WTO rules, tariffs will eventually be eliminated, and there will be no requirement for export quota and transfer of technology for local production. China will be under pressure to develop its own technology. Likewise, WTO membership will require changes in the structure of China's economy, in the relationship between government and industry, and in government structures, procedures, legal and regulatory frameworks. These changes will take some time. However, the benefits for China will be substantial. China's export industries will obtain secure and predictable access to foreign markets, generating further jobs and economic growth. Liberalized investment rules, a more transparent regulatory framework, and better export market access will attract foreign investors, and the technology and jobs they bring. Greater competition within China will improve economic efficiency and productivity in the long run.

1.2 Medical Reform In China

On December 9th, 1996 China held its first national conference on health in Beijing. At that event President Jiang Zemin and Premier Li Peng lauded the accomplishments of China's health care system of the last 40 years boasting that China had lowered its infant mortality rate from 200 to 31 deaths per 1000 live births and raised life expectancy from 35 years to 70 years. (Wong and Gabriel, 1998) President Jiang Zemin emphasized the importance of the country's health in relation to its economic and socialist development and urged the people to create a competent health care workforce. Premier Li Peng advocated government leadership in shaping the nation's health care system and advocated reform as the country's impetus for health care development. These were not new themes for China's leadership. Indeed, one of the most notable achievements of the Maoist era (from 1949 to 1976) was the dramatic improvement in access to health care for China's citizens, particularly those living in the rural areas and the urban poor. Health care provision was greatly decentralized and diffused throughout the countryside and city neighbourhoods during the Maoist era. The rapid economic growth that epitomized the first stage of the post-1949 Chinese society can be, in part, attributed to the decision of the Chinese government to "democratise" health care, with "barefoot doctors" and health clinics widely available to segments of the Chinese population that had never had such access before.

China is the most populous nation in the world with a population of approximately 1.25 billion people. (Wong and Gabriel, 1998) The population is distributed over 22 provinces, 5 autonomous regions and 3 metropolitan municipalities under the central government. The provinces, which possess a high degree of fiscal independence, are themselves divided into 2182 counties (averaging 400,000 residents), 47,000 townships (averaging 18,000 residents) and 740,000 villages (averaging 1000 residents). The urban population has grown substantially since the 1960's. From 1960 to 1992 the urban population climbed from 19% to 28%, and is expected to increase further to 35% by the year 2000.

With the entry of China to the World Trade organization, it also entails a number of changes in the health industry of China. First, the World Trade Organization (WTO) entry will speed up the ongoing restructuring of China's pharmaceutical industry and its health care reform. Second, regulatory changes stemming from WTO accession will lower tariffs on imported drugs and bring welcome market opening in some areas. Tariff on imported medicine are to drop from the current average of 14 percent to between 5.5 to 6.5 percent by 2003. Moreover, other changes will be less predictable. For instance, private insurers will be allowed to offer services after WTO entry. This complements an existing trend where individuals are being made responsible for a portion of their healthcare costs. This is likely to depress demand for healthcare in the short term, as people bear the true price of their healthcare. Private insurance could counteract this, as it will focus on higher quality services and drugs.

Moreover, the State Council in 1998 formulated the new healthcare policy for employees working in cities and towns, and thus kicked off the reform to the medical insurance mechanism. The objective of the reform is to provide a remedy to the existing ailing medical insurance system. It includes three principles: wider coverage and lower state/employer contribution; shared contribution by state/employer and employee; separation of drug from medical service.

The reform will impact mainly five aspects of the pharmaceutical companies: Financial, Supply chain, End user, Reimbursement and Marketing. The reform is to aim at reducing medical expenses, particularly drug fee. The state very possibly will impose price limit to drugs. Chances of Novartis will be forced to cut the price for some existing products, which are the biggest contributors to the sales and bottom line of the company. Also, the price reduction incurred by the reform will bring huge pressure on the financial control of Novartis. Elizabeth Barnes said that Without doubt, a financial objective will be a key objective and this will influence the type of pricing strategies used. (Barnes and McClelland, 1997) Moreover, Kotler and Armstrong (1997) also said Marketers need to know the laws affecting price and make sure that their pricing policies are defensible. Soon other players in the supply chain will feel the impact. Every member of the supply chain will be under tremendous stress in terms of stock management, account receivable and cost management, etc. to protect the shareholder value, operation margin and cash flow.

The level at which the price of a product is set has to be a careful balance between the cost of production and the price that wholesalers, retailers and consumers are prepared to pay (Barnes and McClelland, 1997). Price will become a sensitive issue after the implementation of the new healthcare reform. Competition among wholesales and retailers will be intensified. Their margin will fall significantly and this will lead to consolidation in distribution. This trend will lead to the rise of powerful super-wholesalers, which will have bigger national coverage, deeper penetration into retailers and better services. Also, the trend of wholesales consolidation, hospital alliances and retail chain stone operation will result in a smaller voice of Novartis in the supply chain. The end user-patients also will be motivated to control their medical expenses, and will have higher awareness of health and drugs. In reimbursement aspect, due to this reform, each province or municipality will only develop one catalogue. There won't be city-specific catalogue any longer. The good part about it is that pharmaceutical companies will be able to focus resources in their marketing efforts. However, the barrier of entry will be higher. Competition among pharmaceutical companies will be increased, and winning the support of government officials and the recognition of the review committee has been more critical than ever. Therefore, product entry into the catalogues is the key to the survival and future growth of pharmaceutical companies. The biggest involvement in a foreign market comes through direct investment ? the development of foreign-based assembly or manufacturing facilities. Generally, a firm develops a deeper relationship with government, customers, local suppliers, and distributors, allowing it to better adapt its products to the local market. Finally, the firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. (Kotler and Armstrong, 1997, p544)

Due to the reform, the marketing strategy of Novartis has to be changed to adapt the situation. Managers, of course, need to evaluate the situation, since in certain circumstances the best policy is to keep still, to merge into the background. (Barnes and McClelland, 1997)

 

1.3 The Pharmaceutical Industry In China

Among the top industries of China is the pharmaceutical industry. In an article by Li (2000), he stated that the industry is growing at a relatively high rate. He asserted that the total production of China's pharmaceutical industry valued 113.79 billion Yuan in the first half of 2000, 22.3% higher than that of the same period 1999. This included industrial value-added of 28.025 billion Yuan, up 24.5% and 5 percentage points higher in year-on-year growth rate. In contrast, the national average growth in industrial value added was 13.3%. Furthermore, if divided by ownership types, enterprises in all sectors reported positive growth except for some collectively owned ones. The state-owed and state-controlled enterprises turned out a total value-added of 10.117 billion Yuan, up 5.5%; share-holding companies, 8.183 billion Yuan, up 110%; overseas-funded companies, 5.885 billion Yuan, up 0.94%; and collectively owned and private ones, 3.027 billion Yuan, down by 6%.

In addition, Li (2000) as well stated that the pharmaceutical industry's sales volume is climbing up steadily. He posited that the total sales of pharmaceutical products in the country topped 73.18 billion in the first half of 2000, 14.2% higher than that of the same period in 1999. If divided by types, one can see that the growth in sales of medicine and Chinese patent medicines is higher than average, reaching 16.4% and 17.1%, respectively. Of the 31 regions at provincial levels in the country, 26 reported positive year-on-year growth in the pharmaceutical product sales in the period, where the companies accounted for 83.87% of the total recorded. Similarly, 19 out of the 26 regions posted growth rates above the national average. The coastal area contributed greatly to the total growth and the regions of Shanghai, Guangdong, Jiangsu, Shandong and Beijing accounted for 54.4% of the total sales. Likewise, the period from January to June in 2000 also saw noticeable growth in external trade of pharmaceutical products. The total turnover in period of January to May reached 2.472 billion US dollars, up 14.8%. The total exports valued 1.485 billion dollars, up 14.5%; imports, 987 million dollars, up 15.1%.

Furthermore, the industry also displays an apparent improvement in production and sales. (Li, 2000) In fact, 92.7% of the country's pharmaceutical products were marketed in the first half of 2000, 2.7 percentage points higher than in 1999.

On the other hand, it is also apparent that the profit of pharmaceutical enterprises is on the rise. (Li, 2000) The sales revenue of the pharmaceutical enterprises in the country reached 61.82 billion Yuan in the Jan.-May period on 2000, up 20.3%, which include profit of 4.148 billion Yuan, up 23.5%, rocketing based on the growth achieved in 1999. Enterprises in East China reported a total profit of 2.877 billion Yuan, up 32.8%, and the regions of Tianjin, Beijing, Jiangsu and Shandong reported growth rates of over 30%.

In correspondence to China's accession to the WTO, the pharmaceutical sector as well experienced its effects in terms of restriction and competition. The newly implemented Pharmaceuticals Control Law has brought about a long-sought transformation of China's medicine industry. (Lao, 2001) The revised law went into effect on December after two-and-half-year deliberation since the amendment to the Pharmaceuticals Control Law was officially launched in October 1998. It was perfectly timed to bring the domestic pharmaceutical industry in line with WTO rules. Moreover, the economic and social changes following China's WTO entry have brought about many new demands for the pharmaceutical sector. Therefore, the Chinese government has performed 'major surgery' on the former Pharmaceuticals Control Law. In the said law, the number of provisions nearly doubles the amount in the original law; only two provisions remained unchanged.

Moreover, observers have pointed out that the domestic pharmaceutical industry will face great challenges after China's WTO accession. (Lao, 2001) It is necessary to keep the administration of high-quality medicine in line with the international standards if domestic pharmaceutical enterprises are to participate equally in global competition with their foreign counterparts. Statistics show that China had about 3,700 medicine producers in 1990, but the figure shot up to over 7,500 in 1998, and only 87 enterprises or workshops gained Good Manufacturing Practice (GMP) certification. Moreover, with the implementation of the new law, some 6,300 domestic pharmaceutical enterprises will be required to abide by GMP standards before the end of 2004.

Meanwhile, the new law will treat foreign medicine equally with domestic brands by stopping the practice of examining the imported medicine of each group and shifting the focus to market supervision. (Lao, 2001) Furthermore, the amended law has simplified the administrative approval procedures and established the regulations over the imported medicine's examination and registration, which both meet the demands of China's WTO entry. In addition, the influence of the new law on China's medicine industry has been felt since it was passed by the Ninth National People's Congress Standing Committee last February of 2001. The new law stipulates that the medicine sales should follow international conventions and meet China's needs. The establishment of medicine chain stores has become a common practice throughout the country.

 

1.4 Reform Impacts on Pharmaceutical Companies

 

There is an immense future pharmaceutical market in China. (Fan, 2001) In 1994, the pharmaceutical product market is a sizable US$9 billion, while the average consumption of medicine per head is $7, which is only 1.6% of that in Japan, 2.2% of France and 2.3% of the United States. There has been a sharp increase in imports of pharmaceutical products. In 1995, the import of $700 million of such products together with others that have been smuggled in accounts for 22% of China's domestic pharmaceutical market. In Beijing, imports take up 41% of the total market while joint venture produced products take up another 18%. China's pharmaceutical products have been priced too high due to a system where "the medical facilities are fed financially by sales of pharmaceutical products." Seventy percent of the finances of China's hospitals are generated from sales income from medicines. Sales staff at the medical facilities aims for high commissions from more sales, which in turn encourage hospitals to turn to unnecessary, excessive use of expensive imported products in order to gain higher profits. In 1996, China had 1500 joint-venture pharmaceutical factories, after a $4.5 billion investment. With China's WTO entry, import tariff on pharmaceutical products will be reduced to 5.5% to 6.5%. There will also be more strictly enforced protection measures in intellectual property rights, and more severe compensation penalties for copy medicines, each of these copy products will yield about $400 million to $1 billion in penalty fees per year. That will force manufacturers to cease production of some of those products and reduce export volume. Production of high-end medical equipment will also be severely affected by imports.

Moreover, some business analysts predict that China will become the world's largest pharmaceutical market by 2020. But the country is still assessing the impact of joining the WTO on its domestic market. (Xun, 2002) China's pharmaceutical industry has grown by an average of 17.5 per cent per year since 1978, when economic reforms were followed by a series of policy changes, including the introduction of a national Essential Drugs List. In 2000, the production of pharmaceutical raw materials reached 240,000 tons, the second highest in the world after the US. The industry's total output was $28 billion, accounting for 5.7 per cent of world market share. $3.8 billion worth of pharmaceuticals were exported.

Furthermore, China's WTO entry influences its pharmaceutical industry in two aspects: customs duty and intellectual property rights. (Jiahe, 2002) The WTO entry does not have too many drug patent protection clauses. In other word, China's medicinal patent issue is already in keeping with the world. Moreover, China's duty and non-duty barrier for pharmaceutical industry is very weak. After WTO entry, the average duty rate for medicine and reagents will reduce from the present nine percent to 4.2 percent. (Jiahe, 2002) The price of medicine and preparations will go down only four percent. This will have little influence on market prices for imported medicine and reagents.

The negative impact is expected to be relatively minor on those, which mainly manufacture penicillin and Vitamin C, as most of their products are made for export and WTO membership will facilitate their overseas market expansion. (Xun, 2002) However, publicly listed companies mainly oriented towards to domestic market will face competition from imports and reduced opportunities to manufacture generic drugs under the new regime.

Under WTO membership, multinational pharmaceutical companies will be able to acquire a large share of the Chinese pharmaceutical market. (Xun, 2002) They may be able to gain control over distribution networks and not have to rely on the existing complex and costly system. An open market will give them a better chance of having their products included on China's provincial and municipal lists of drugs that are subject to state reimbursement.

At present, China's pharmaceutical industry has more than 1,000 foreign-funded enterprises. (Jiahe, 2002) The top ten pharmaceutical companies in the world including Squibb, Glaxo, Pfizer and Merck Kgaa, have made investment in China. Foreign drugs have settled in China in form of joint venture and wholly owned ventures. At present, drugs produced by joint ventures and imported from overseas occupy China's market. In 2000, drugs produced by joint ventures accounted for 30 percent of the market in China, and imported drugs for 23 percent. This shows that Chinese enterprises have adapted themselves to the competition with foreign enterprises in advance. The WTO entry will not cause too much trouble to China's pharmaceutical enterprises.

 

2. Literature Review of Buyer Behaviour

This portion of the study shall discuss the data collected from secondary sources such as journals, articles and other literature that would establish the effects of the reforms in China with respect to the buying behaviour on China and Switzerland.

 

2.1 The Cultural Differences Between Swiss and China

 

 

2.2 Different Buyer Behaviour In Swiss And China

 

 

2.3 Price Strategy

In order to specify the effects of the healthcare reforms of the Chinese government to the marketing strategies of Beijing Novartis, the study will be focusing on the buying behavior of the consumers as well as the product pricing of the company. Korhonen (1999) provided several basic pricing theories and their assumptions. Among these include the cost-derived pricing, competition-based pricing, and value-based pricing theories. In Cost-Derived Pricing, as it's name implies, cost is the major factor that determines the price of a product. Hence the price of a product is found by the cost of production and a profit margin. In Competition-Based Pricing, the importance is given to the prices of similar products on the market. On the other hand, the Value-Based pricing approach focuses on customers by the way they perceive the value of a product.

Perner (2000) on the other hand refuted the common view of the concept of the word price as synonymous to a monetary amount. However, this measure leaves out an important piece of information on what exactly is taken in return of that monetary unit. One could only be certain that consumers often tend to respond strongly to price increases, and particularly when certain thresholds are reached. Thus, a more complete definition of price is provided as:

Resources given up Price = _____________________ Resources received

In the above formula price is defined as the percentage one acquires from the resources received and given up. Moreover, the numerator is usually stated in financial terms and the denominator is stated in terms of some other quantity. Moreover, price can be used in several ways to attract customers. (Perner, 2001) The first is through

quality signaling. In this method, some manufacturers and retailers use price as a signal of quality. The other method is by value positioning. In this method, certain brands and retailers position themselves as providing value--that is, reasonable quality at a low cost.

On another study by Perner (2001) provided importance of consumer behavior in marketing strategies. According to the study, consumer behavior is the study of individuals, groups, or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society. Behavior occurs either for the individual, or in the context of a group or an organization. Moreover, consumer behavior involves the use and disposal of products as well as the study of how they are purchased. Product use is often of great interest to the marketer, because this may influence how a product is best positioned or how we can encourage increased consumption. He added that consumer behavior involves services and ideas as well as tangible products.

Kotler (1980) on the other hand provided several factors that would influence the consuming behavior of buyers. Among these factors include the cultural, social, and personal factors. Among the cultural aspects include the culture-values, perceptions, and preferences that are the most fundamental determinant of a person's wants and behavior; subcultures-nationalities, religions, racial groups, geographical regions; and the social class-hierarchically ordered divisions in a society; members share similar values, interests and behavior.

On the other hand, social factors that affect the buying behavior of the consumers of a product includes the reference groups-all groups that have an influence on attitudes or behavior; the family, which is the most influential primary reference group; and the roles and statuses, which Kotler defined as the activities a person is expected to perform and the status associated with each. (Kotler, 1980)

And lastly, Kotler (1980) stated that the personal factors include variables such as the age and life-cycle stage-people buy different goods over their lifetime. Another is the occupation and economic circumstances of the consumer as well as his/her lifestyle. The latter is defined as the pattern of living as expressed by activities, interests, opinions. Moreover, another personal factor is the personality and self-concept-personality characteristics that influence buying behavior of the consumers. The psychological factors such as the motivation of the consumer to purchase a need; the perception of the consumer towards a product; learning as related to the experiences of the consumer, and their beliefs and attitudes based on the thoughts and favorable, or otherwise, evaluations of a person towards a certain merchandise.

In consideration of the above review, the study would be using the above theories on examining the effects of the healthcare reforms of the People's Republic of China to the marketing strategies of Beijing Novartis Pharma Ltd. It will use the theories of Perner and Kotler to measure both of the marketing strategies of Novartis particularly on its pricing and its consumer's buying behavior.

 

2.4 Summary

 

 

3. Background to Beijing Novartis And The Chinese Healthcare Reform

The 1990s mark the first decade in which companies around the world must start to think globally. Time and distance are shrinking rapidly with the advent of faster communication, transportation, and financial flows. Products developed in one country are finding enthusiastic acceptance in other countries (Kotler and Armstrong, 1997).

Nowadays China is the most potential market for the foreign investors since China was accepted as a member of WTO. However, the foreign investors should be aware that the understanding the public policy implications of a particular marketing activity is not a simple matter. As Kotler and Armstrong (1997) pointed out that marketing decisions are strongly affected by developments in the political environment. Nations vary greatly in their political-legal environments. He also identified four political-legal factors should be considered in deciding whether to do business in a given country, and one of them is government bureaucracy. The host government runs an efficient system or reform and this will direct influence the corporate strategies of foreign companies.

Beijing Novartis Phama Ltd is a Swiss Pharmaceuticals Company to set joint venture in China in 1984. Novartis has its target products to good selling in China and also has many potential marketing opportunities in every region in China. Meldrum and Mcdonald (1995) pointed out that a major concern for any producing organization is how it can best make its products be available to the market place. In China, there are no private physicians, almost no private hospitals and clinics. The majority consumption of an ethical medicine is from state owned hospitals. Every hospital has its own pharmacy. According to government reimbursement policy, ethical medicine in reimbursement list can be reimbursed. However, there is a condition, only the ethical medicine prescribed by hospital doctors and bought in hospital pharmacies can be reimbursed. So that it is critical for any ethical medicine to get into hospital list. Hospital is the battle of competition. The tradition sales practice of a Chinese local pharmaceutics company is to sell its products to distributors without its own hospital sales team. They do less academic and professional promotion. Every organization needs to audit the environment(s) in which it operates, and for this will require a sophisticated research activity. (Barnes and McClelland, 1997)

 

4. Research Objectives and Methodology

This chapter shall be discussing the objectives and methods of research. Likewise, this portion shall also be furnishing the copy of the guide questions for the semi-structured interview.

 

4.1 Objectives of the research

The study intends to assess the impact of the reforms in the Chinese market to the pharmaceutical companies, with particular reference to Beijing Novartis. Specifically, the study intends to answer the following questions:

 

1. What are the objective and principles of the reforms in China?

2. What is the current marketing situation for Pharmaceutical Company after the new healthcare reform?

3. How does the pharmaceutical company adapt to the reforms in China?

4. How would the pharmaceutical industry innovatively maximize the benefits of the reform?

 

4.2 Methodology And Methods

 

There are three kinds of research methods, correlational, experimental and descriptive. (Walliman and Baiche, 2001) The correlational kind of research method is used due to ethical problems with experiments. Moreover, it is also used due to practical problems with experiments. Moreover, inferring causality from correlation not actually impossible, but very difficult. This mode of study is widely applicable, cheap, and usually ethical. Nonetheless, there exist some "third variable" issues and measurement problems. The correlational research refers to studies in which the purpose is to discover relationships between variables through the use of correlational statistics (r). The square of a correlation coefficient yields the explained variance (r-squared). A correlational relationship between two variables is occasionally the result of an outside source, so we have to be careful and remember that correlation does not necessarily tell us about cause and effect. If a strong relationship is found between two variables, using an experimental approach can test causality.

On the other hand, the experimental method is the only method that can be used to establish cause-and-effect relationships. (Creswell, 1994) That is, it is the only one that can be used to explain the bases of behavior and mental processes. In this method, the subjects are split into two (or more) groups. One group, called the experimental group gets the treatment that the researcher believes will cause something to happen (this treatment is formally called the independent variable). The experimental and control groups are compared on some variable that is presumed to reflect the effects of the treatment, or outcome. This is formally referred to as the dependent variable.

And lastly, the descriptive research method uses observation and surveys. In this method, it is possible that the study would be cheap and quick. It could also suggest unanticipated hypotheses. Nonetheless, it would be very hard to rule out alternative explanations and especially infer causations. Thus, this study will use the descriptive approach. This descriptive type of research will utilize observations in the study. To illustrate the descriptive type of research, Creswell (1994) will guide the researcher when he stated: Descriptive method of research is to gather information about the present existing condition. The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.

The research described in this document is based solely on qualitative research methods. This permits a flexible and iterative approach. During data gathering the choice and design of methods are constantly modified, based on ongoing analysis. This allows investigation of important new issues and questions as they arise, and allows the investigators to drop unproductive areas of research from the original research plan.

This study basically intends to identify the effects of the reforms in the Chinese Market, specifically in the pharmaceutical sector. Furthermore, the study intends to specify the effects of the said reforms on the buying behavior of the Chinese people as well as the price of the pharmaceutical products.

The primary source of data will come from a semi-structured interview as well as from published articles from social science journals, theses and related studies on strategic planning and those concerning the educational institutions.

            For this research design, the researcher will gather data, collate published studies from different local and foreign universities and articles from social science journals; and make a content analysis of the collected documentary and verbal material. Afterwards, the researcher will summarize all the information, make a conclusion based on the null hypotheses posited and provide insightful recommendations on the dealing with the pharmaceutical sector of China.

 

4.2.1 Research Hypothesis

This study intends to test the following hypothesis:

"The reforms that occurred in China has incurred a significant impact on the buying behaviour of the people and marketing of the pharmaceutical industry in the country."

 

4.2.2 Data Requirement

Little sense can be made of a huge collection of data; therefore an essential part of research is the analysis of the data. This data must be carried out in relation to the research problem. (Walliman and Baiche, 2001) Because research is not a linear process, the only way to help us to judge the type of and amount of data is to decide on the methods, which we will use to analyse them to obtain a feel for the data, establish reliability and to understand how the results are interpreted.

Qualitative data are based on meanings expressed through words. It results in the collection of non-standardized data, which requires classification, and is analysed through the use of conceptualisation. (Sounders et al, 1997) In this research, I also need to get some qualitative data through a number of the process of qualitative analysis, including document and interim summaries, self-memos, etc.

Thus, the dependent variable is the variable of primary interest to the researcher. The researcher's goal is to understand and describe the dependent variable, or explain its variability, or predict it. Through the analysis of the dependent variable, it is possible to find answers or solutions to the problem. (Sekaran, 2000) Furthermore, an independent variable is one that influences the dependent variable in either a positive or a negative way. As a result the researcher will use a systematic explanatory and exploratory research and focus on those dependent variables. The relationships of the variables will be designed in detail, based on the understanding the independent variables of the educational institutions.

 

4.2.3 Secondary Data Collections

The features of quantitative data are: based meanings derived from numbers; collection results in numerical and standardized data; analysis conducted through the use of diagrams and statistics. (Walliman and Baiche, 2001) Although the researcher would also find respective interpretations on the information collected from the primary data, the researcher also realizes the to create her own explanation in order to answer her statement of the problem.

The researcher intends to use the following resources:

· From China government and industrial journals and reports for marketing development and changing trend.

· From the company archives for marketing, sales and financial records in 3 years, I will analyse the marketing quantification, market share and growth, products price, etc.

· From the company website to find the data that in 3 years about the quantitative objective of the company, then compare the data and to get the result which aspects in marketing situation had become better or still have problems after the New Healthcare Reform.

 

All these data will be collected and analysed based on relevant corporate strategies and marketing strategies. Attentions will also be paid on the reliability, validity and the goodness of the data.

 

4.2.4 Semi-structured Interview

a. What is the main thrust of your company? What kind the pharmaceutical products that the company sells?

b. What is the primary market targeted by the products?

c. How long has the company been established?

d. In the course of the company's existence, has it been affected by the reforms made by the Chinese government particularly in its healthcare sector?

e. What are the particular effects of the reforms on healthcare on the company?

f. How did the company adjusted on the restrictions and freedoms provided by the reform?

g. Did these adjustments affect the sales of the company's product? What do you think was the factors that contributed to the reaction of the buyers?

h. How did the company address this situation?

i. What are your reactions regarding the recent inclusion of China in the World Trade organization?

j. How would this inclusion to global trade affect the pharmaceutical industry?

k. How did the reforms provided by the WTO on trading affect the company?

l. What are the measures that the company undertook to adapt on the reforms? Did these adjustments compromise the sales of the company's products?

m. What are the reactions of the company's primary market on these adjustments?

n. What are the measures taken by the company to attend to this situation?

 

Sources:

Chow, Gregory. (2000) China's Economic Reform and Policies at the Beginning of the 21st Century. Perspective, Volume 2, No. 1.

 

Elizabeth Barnes & Bob McClelland, (1997) Marketing, An Active Learning Approach. Blackwell Business Publishing

 

Fan, Yang. (2001) Analysis and Strategic Study of Advantages/Disadvantages of China's Entry into the WTO in Various Industries. Bulletin of the Chinese Academy of Social Sciences, Chinese Academy of Social Sciences.

 

Jiahe, Wang. (2002) The internal and external environments facing the domestic pharmaceutical industry. Hong Kong Trade Development Council.

 

Korhonen, Jessica. (1999) Utilising Pricing Theory as a basis for the Financing of a New Web-Service. Swedish School of Economics and Business Administration.

 

Kotler, Philip & Gary Armstrong, (1997) Marketing, An introduction. Fourth Edition, Pitman Publishing.

 

Kotler, Philip. (1980) Marketing management: analysis, planning, and control. Englewood Cliffs, N.J. : Prentice-Hall.

 

Lao, John. (2001) China Incorporates Pharmacy into WTO Rules. People's Daily. Available: http://english.peopledaily.com.cn/200112/08/eng20011208_86194.shtml. [Accessed 03/31/03]

 

Li, Jun. (2000) An Analysis on Current Pharmaceutical Industry in China. Investment in China (Monthly Report), No. 7.

 

Mike Meldrum and Malcolm McDonald, (1995) Key Marketing Concepts, Macmilian Business Publishing

 

Perner, Lars. (2000) Pricing. Anderson Graduate School of Management University of California, Riverside.

 

Perner, Lars. (2001) Consumer Behavior and Marketing Strategies. Consumer Psychologist Newsletter, Volume 1, Issue 1.

 

Wong, Brian and Satyananda Gabriel. (1998) The influence of Economic Liberalization on Urban Healthcare Access in the People's Republic of China. Nanjing University, Nanjing, China.

 

Wu, Jinglian. (1996) The Trends Of China's Economic Reform. The Chinese Academy of Social Sciences and the Development Research Center of the State Council, People's Republic of China.

 

Xun, Gong. (2002) China: The challenges of joining the WTO. Economic Science Press. Ministry of Finance in Beijing.


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