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
1.1 General Reform In
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
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,
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
In addition, there are three sets of forces that determine institutional changes in
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
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
1.2 Medical Reform In
On December 9th, 1996
With the entry of
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
Among the top industries of
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
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
In correspondence to
Moreover, observers have pointed out that the domestic pharmaceutical industry will face great challenges after
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
1.4 Reform Impacts on Pharmaceutical Companies
There is an immense future pharmaceutical market in
Moreover, some business analysts predict that
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
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
2.1 The Cultural Differences Between Swiss and
2.2 Different Buyer Behaviour In Swiss And
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
3. Background to
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).
Beijing Novartis Phama Ltd is a Swiss Pharmaceuticals Company to set joint venture in
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
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
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
4.2.1 Research Hypothesis
This study intends to test the following hypothesis:
"The reforms that occurred in
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 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
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?
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