Account not only for the country's magnitude but also its regional discrepancies: define target areas and commercialization modes (e.g., self distribution vs. distribution partner) to improve product commercialization.
The expansion of Western pharmas' reach into China's emerging urban and rural areas provides huge growth potential as previously untapped markets are starting to develop. In this context, market segmentation is essential. Corporations must consider factors ranging from income differentials and spending habits to product preferences across China's regions. As one interviewee asserts, the correlation between provincial GDP and health care growth is the most reliable indicator in defining an appropriate coverage area due to China's federalist structure and provincial funding of the health care system. To account for such regional discrepancies, differential pricing strategies across the country's regions, as considered by Pfizer (BMI, 2010a), might be a successful strategic approach.
It might also be worthwhile to launch pilot projects to assess potential implications and feasibility of an expansion after a thorough segmentation process. Since it may be challenging to attract sufficient sales representatives in some remote areas, firms may consider sales co-operations as a viable alternative. For larger cities, in contrast, the establishment of single-product-line teams can contribute to augment promotional efficacy.
Adapt traditional Western product portfolios to China's socioeconomic and regulatory environment: integrate larger shares of branded generics and OTC products to further attract consumers also from the TCM segment.
Chinese consumers' purchase behavior is characterized by a preference for foreign brands and a tendency to switch products easily if another offering's value is relatively, perceived superior (McKinsey, 2010). Given that doctors and patients gradually embrace the Western evidence-driven medical paradigm as an alternative to TCM and acknowledge Western medicines' effectiveness in treating specific symptoms (BMI, 2010a; Wang & Rockoff, 2010
), Western pharmas are well advised to capitalize on these cognitive and brand reputation–related advantages. This is particularly crucial as price competition with Chinese competitors does not seem feasible—neither in the TCM nor in the generics segment.
In conjunction with the common practice of self-medication (OTC drugs) in China, an initial entry in lower-tier areas with branded OTC products offers a promising expansion strategy. In this respect, advertising campaigns can support capitalizing on the perceived value offering of Western medicine and attracting patients from the vast TCM and domestic generics segments. Here, an inclusion of Chinese patients in clinical trials can be worthwhile since word-of-mouth is among the most significant referrals for Chinese consumers (McKinsey, 2010).
Anticipate changing factor market advantages with regard to sourcing and production: China as a global sourcing location and as a strategic sales market.
Several indicators, such as increasing wage levels or the appreciation of the Chinese yuan, suggest diminishing sourcing cost advantages for MNCs in China compared to other countries in Asia. While an abrupt and intense relocation of operations appears rather unlikely, managers need to constantly monitor the country's factor market advantages as they affect China's attractiveness as a sourcing location.
The interviewees state that the choice of strategy will largely depend on the future expansion of the domestic pharmaceutical market: an increase of domestic consumption and further commercial opportunities would make production migration less reasonable. Clearly, governmental efforts to improve health care infrastructure in urban and rural areas as well as to consolidate distribution networks (SCIO, 2009a) may foster such a market expansion. Consequently, executives need to consider China not only as a global sourcing location but also as a profitable future commercial market in their decisions of which value chain operations to conduct in China over the next decades.
Consider further upscaling of R&D and increased collaboration with Chinese contract service providers according to improvements of the IPR enforcement.
EUCCC's (2010a) “Business Confidence Survey 2010” demonstrates that while 66% of respondents perceive formal IPR protection in China as sufficient, only 22% assert that enforcement is effective and adequate. This affirms the perception that the future development of Western pharmas' R&D will largely depend on how the Chinese authorities will align IPR enforcement with the formal regulatory framework.
Western pharmas must also consider the potential risk of current Chinese collaborators maturing to direct competitors in the future. As an example, the high-speed rail industry demonstrates how quickly Chinese firms can acquire sophisticated capabilities from cooperation with Western firms and subsequently compete with their former partners (Anderlini, 2010
). Thus, Western pharmas are advised to refrain from outsourcing core activities such as IP-sensitive formulation development or final product manufacturing.
Participate in China's transition process by communicating value propositions: induce governmentally facilitated access to innovative medicines and prevent potential measures of protectionism.
The current regulatory environment compiles an inconsistent institutional environment for Western pharmas in China. On the one hand, China is committed to becoming an innovation-oriented country by 2020, which sustains R&D investments. On the other hand, commercialization of original research drugs is challenged through further prospective price cuts, authorities' preference for generics, and long time lags between NRDL reconfigurations. Despite increasing income levels, the affordability of innovative medicine will strongly depend on governmental health care support.
At the same time, interviewees expect fortified protectionist measures. One interviewee stated that “lately, there is a trend at the SFDA which creates regulatory barriers for foreign companies.” Linking to China's openness context, BMI (2010a) identifies the emergence of a “China-for-China trend” (p. 5), in which governmental entities promote domestic corporations at the expense of foreign competitors. Since Chinese firms dominate the industry but no “national champion” exists so far, the debate is of particular interest. It is questionable whether the Chinese government “will allow a significant proportion of … [the country's growing pharmaceutical sales] to be generated by Western firms” (BMI, 2010a, p. 64).
In line with Seo and Creed (2002
), it is recommended for firms to actively contribute to the current process of institutional change: Western pharmas need to consider effective communication of their value propositions to governmental entities, key opinion leaders, and patients. Consequently, Western pharmas may be able to impact the future design of the NRDL and thereby potentially prevent protectionist measures, which will ultimately affect Western pharmas' success in China.