SIGMA PHARMACEUTICAL LTD

MGTS3301 Assignment
Strategic Analysis
Katie CHAU, Hoi Pui (41958010)

Content

Introduction

External Analysis
General Environment: PESTEL Analysis Industry Environment: Porters Five Force Model 2-3 4-5

Internal Environment Analysis: Activity system analysis

6-8

Interim conclusion: SWOT Analysis

Strategic Issues
Change of Industry Financial crisis Reputation reduction 10 11 12

Suggested strategic actions

Alliance (Business level) Restructuring 13 14

Recommendation References

15-16 17-19

Introduction
Sigma Pharmaceuticals Limited (SIP) used to be the leading pharmaceutical company within Australia. However, it has faced its challenging year in 2010; there was a $3.98 billion net loss on its balance sheet and the bad performance had continued to 2011. After offload its pharmaceutical division to Aspen Pharmacare Holdings Ltd, it is now a full line healthcare wholesaler with the ownership of two well known Australia retail brands, Amcal and Guardian . With the return of Mr. Mark Hooper to take the reins, Sigma is confident to get back the right track and become profitable.

This report is purposed to prepare a critical strategic analysis for Sigma and provide some strategic recommendation for the future.

The repost will first analysis the macro environment by using PESTEL analysis and the Porters Five Forces model. Then the internal environment analysis will be done with Activity System analysis. SWOT analysis will be used to make an interim conclusion of the internal and exte rnal environment. After that, three major issues that Sigma is facing will be interpreted. The report will lastly propose two possible and feasible strategic actions to Sigma, and also, the recommendations on how it can implement them well will be made.

Macro Environment Analysis

General Environment: PESTEL Analysis
1) Political and Legal There is always a very difficult balance area of balancing the cost of drugs and the patient benefit. Under the pressure of dissatisfaction on PBS drugs deferral from the doctors and patient groups, Australia government has adjusted and reformed drugs price. As 70% of a pharmacys business is prescriptions filling, it made Sigma got a great amount of book loss. ( Metherell, 2011; Nine, 2011)

2) Economical There is $49.4 billion of deficits in the current financial year in Australia, which is 3.6% of the GDP. Government forecasted that 2013 will be the soonest year for returning to have a surplus (Business Spectator 2011). With the sustained high interest rate of 4.75%, companies are expected to suffer from further profit downgrades (SMH, 2011). Sigmas financial performance will also be affected.

3) Social Income inequality in Australia is getting more serious. There are over 2.2 million Australians are living in poverty recently (We stender, 2011). Due to the effect from global financial crisis and spate of natural disasters, peoples

economic condition even gets worse. Australian consumer confidence has reached the lowest level in May (Health, 2011). This consumer spending depression may directly affect Sigmas financial performance.

4) Technological The average cost of developing a new medicine in Australia is $1.4 billion (Galacho, 2011). With a high rate of technology change in the p harmaceutical industry, companies are forced to adapt evolve environments. Cost on research and development spending might be increased as well. But due to the PBS avoiding cost shifted to the patients, it will be the wholesalers loss.

5) Environmental There was a flooding in Queensland in the last January, w hich made a minimal flooding at Sigmas warehouse in Toowoomba (News, 2011). The whole Queensland was suffered in this natural disaster. Even Sigmas rivalry, API Ltd, has affected the performance. It is very lucky that there are only a little amount of stock is damaged.

Industry Environment: Porters Five Force Model

Fig.1

1) Threat of New Entrants: There are medium barrier to entry the industry; high cost of research and development on new drugs and patient limitations occurs. As a wholesaler, there is low government restriction on launching a new brand in Australia. With the characteristic of hypercompetitive industry, there are differentiated products and medium-level of switching cost on the customers.

2) Bargaining power of supplier The bargaining power of supplier in the industry is low. Under the government restrictions and the PBS policy, suppliers are not able t o charge an unaffordable price on or lower the quality of the drugs. Some companies like API even have integration between the pharmaceutical and wholesale division.

3) Bargaining power of buyers

There is a low bargaining power of buyers. The price of drugs is fixed and patients are not able to force down price or demand higher quality due to the PBS policy. Another reason is, patients have a compulsory need on the drugs within a treatment, which made them a must buy situation.

4) Threat of substitute product

When the drugs have patents, the threat of substitute product is low; there are near zero products can substitute medicines in taking place to heal people from diseases. It makes the patients switching cost become higher.

5) Rivalry among competitors

Competition occurs within existing firms in the industry is high . While there is differentiated products and diversity of competitors in the industry, rivalry can take many forms of actions to earn the maximum profi t as they can, such as price discounting and customer service improving.

Summary of Sigmas opportunities and threats In conclude of both general and industry environment; PBS reform, increase in deficits and high competition are the main threats while low bargaining power of both suppliers and buyers and substitute goods are its main opportunities.

Internal Environment Analysis: Activity System Analysis

In this section, main resources, capabilities and competencies of Sigma will be analysis base with the activity system analysis. Here is the related figure.

Fig.2

Analysis of Resource
1) Financial According to the annual report of Sigma, there are more than $32 billion of sales revenue in both 2010 and 2011. However, there are $398.3 million of net loss at the peak time in 2010, which is mainly cost by the goodwill impairment of $258.3 million (Sigma annual report 2011). After the sold of pharmaceuticals manufacturing business to the Aspen Healthcare Holding Ltd with gross proceeds of $900 million, they have paid down their debt burden ( Herald 2011), which make their balance sheet more respectable. For rewarding the long suffering holders, 15 cents per share of special dividend is given fully franked.

2) Human After the messy financial performance in 2010, Sigma has recruited the former CFO, Mr Mark Hooper as its new chief executive. He has halved the net loss in a year time to $235 million and clear up all debts. With a stabilised company base under his smart leadership, shareholders confident might recover. Besides, there are good employer relations between Sigma and its highly skilled and belonging sensed employees, which enhance high performance.

3) Reputation Sigma has a strong heritage in community pharmacy with 100 years history. Nevertheless, large goodwill impairment occurs when there is a recession, which is another sign on reputation declining. After the sale of the

pharmaceuticals division, Sigma may needed to rebuild its reputation as a full line wholesaler and retail pharmacy operations by the position in supply chain.

Analysis of Capabilities
1) Marketing Besides the wholesale division , Sigma is vertically integrated to the retail business. They do provide service on advertising, training and signage and product design for Amcal and Guardian, their own retail brands (Nine, 2011).

2) Customer Service Through the wholesale and retail business, Sigma has provided a range of services to the subsidiary pharmacies to enhance its contribution on the communities they serve. Among them, to provide more conveniences to the disable patients, Sigma has cooperated with Patient Care Product for 20 years to sell rehabilitation supplies (Patient Care products, 2011).

Analysis of Competencies
1) On time delivery As a full line wholesaler, on time delivery is one of the critical parts in the business. And Sigma has done it well. With 15 distribution centres located throughout Australia, they offer daily delivery services to more than 4000 retail pharmacies every day. Even if the road closure within the pe riod of the flooding, they rerouted the haulage road immediately to maintain their service efficiency.

2) Dividend reward Instead of ordinary dividend, Sigma has declared a fully franked special dividend with 15 cents per share in 2011, for rewarding the long suffering shareholders stubbornly persists (Boreham, 2011). It can raise the willingness of shareholders to stay and make a positive impact of its brand image.

Summary of Sigmas strengths and weaknesses In conclude with the analysis of resources, capabi lities and competencies, Sigma have strengths of good employer relations, marketing and customer services, while financial crisis is its main weakness.

Interim conclusion: SWOT Analysis

The table shown below is a brief summary of the analysis of Sigmas external and internal environment using the SWOT Analysis. Base on these factors, three strategic issues are summed up. It will be further interpreted and discussed in the following sectio n.

Table 1

Strategic Issues
With the previous analysis, there are quite a lot threats and weakness has been pointed out from Sigmas external and internal environments, but only three main strategic issues will be discussed in this report. They are the change of industry, financial crisis and reputation reduction.

Change of Industry
In January 2011, the pharmaceutical manufacturing division of Sigma has been sold to Aspen with $900 million. With a basis of 99 years of operating experiences in the pharmaceutical industry, it might be an issue for Sigma that changing the business from pharmaceutical industry to retail pharmacy industry. Although they have vertical integration with the retail brands before the sale, which they still have the capability t o survive in the retail pharmacy industry, their target achievement and develop planning have to be redirected.

As pharmaceutical industry has a high barrier of entry while it is just a medium level in the retail pharmacy industry, Sigma is facing more int ense competition. To defence these, Sigma may need to more focus on customer service improving, employees training and maintaining good employer relation; instead of the aspect of research and development on manufacturing drugs.

Financial crisis
Although the proceeds from selling the pharmaceutical division have fully repaid the debts, they still got $235 million of net loss in 2011 (Sigma annual report, 2011). In this case, Sigma is assumed to regain the loss in the future couple years. However, due to t he reform of PBS, Pfizer factor, and poor economy in Australia, it will be an issue for Sigma to back on the track.

While 70% of pharmacys business is filling prescriptions (Nine, 2011), it will decrease revenue when the PBS has been reformed. Mr Hooper s tated that in the average margin of 2 to 3 %, there is around 1.75% will be cut.

Moreover, Pfizer, Sigmas key clients with 10-15 percent of Sigmas volumes, has bypassed Sigmas wholesaling system and deliver directly to chemists. There are another lost o f income on the balance sheet ( Herald, 2011).

In addition, the economy of Australia is poor at the moment. With the baptism of global financial crisis, natural disasters and the sustained high interest rate, the sentiment index has fallen 1.3% and consumer spending willingness has depressed (Health, 2011).

These factors may urge Sigma into big challenge on regaining and sustain the condition of poor financial performance in the coming future.

Reputation reduction
Although the net loss of Sigma has been halv ed to $235 million and all debts repaid in 2011, the market capitalization has halved from $1102 to $524 million and a $258.3 million of goodwill impairment occurs at the mean time (Sigma annual report 2011). Customer confidence on Sigma will be affected, like Black Rock and Orbis, two institutional shareholders, have almost written off their investment form Sigma (Lekakis, 2010). Without the financial support of the shareholders, Sigma will have lack of capital and operation may be affected.

Suggested strategic actions

When companies want to enter new markets and extend company growth, getting internationally is always their choice. However, international expansion is not recommended in any ways in this report since sigma is perplexing with the problem of lack of financial support, even resources and risks can be shared through inter organizational networks. The main reasons are the logistical and distribution costs and complexity on managing multinational firms may rise up because of geographic dispersion. As well as there are unpredictable risks in environmental, political and economic aspects. Instead, the following strategic actions are recommended by this report.

Alliance (Business level)

As Sigma has a big financial issue, except maximizing their pr oductivity, another way is to minimize their cost. Strategic alliances allow firms to form partnership and acquire or share their resources and capabilities they lack in distributing goods, which might achieve a better advantage than the other competitors (Ybarr & Tur, 2011).

However, Sigma must not use the cooperative level strategy while there is a high failure rate that up to 70% of alliances have been unsuccessful in the past (Ybarr & Tur, 2011). They have no ability to take this risk. In contrast, Sigm a can form alliances with other firms within the business level; they can be its customers, suppliers and even their rivals (Doz and Hamel, 1998). Any one type of these alliances can be formed: the complementary, competition reduction, competition response and uncertainty reduction alliance. Alliance can be applied into every single difference level of business, such as marketing, output logistics and customer services, with difference companies. By doing that, Sigma can take advantages of penetrating addi tional markets, preempting competitors and generating more revenue (Contractor and Lorange 1988) It can also be the channels for organizational learning and new technology exchanging (Anand andKhanna, 2000)

Restructuring
Another strategic action that this report has recommended to Sigma is restructuring. With aims of become more narrowly focused and increase the efficiency of company and productivity, organizational is restructured (Ross & Martin 1998). According to Bowman (1999), organizational restructuri ng strategies can be divided into 3 types, the portfolio, organizational and financial restructuring. Sigma can work with these restructuring strategies in order or simultaneously to recover its financial and industry change issue.

Firstly, the portfolio structuring narrates selling off some of the business units or assets to raise more capital and regaining core business perspective. The second restructuring strategy works operationally. Downsizing, redesign and layoffs are always used in this strategy when the company got a change in trust or original design of the company. As Sigma has changed its industry, which is the original design of the company, it is a very suitable way for Sigma to redefine its goal and regain customers confidents. Lastly, financ ial restructuring can be done with changing in the firms capital structure, such as leverage buyouts and equity swaps (Bowman, 1999), which may solve the financial crisis of Sigma directly.

Recommendation
In our recommendation, between the strategic acti ons of forming alliances and restructuring, Sigma should first restructure the company. It is because the company goal and develop direction planning is the premise of a firm to be success of not. Sigma can use start with organizational restructuring, then restructure in portfolio, followed by the financial restructuring. The basic concept is: after having a clear company goal and direction in development planning, draw down some business to regain capital, which make the company have capabilities to do pro jects and make profits.

In the current situation, Sigma is on the process already. It has recruited Mr Hooper to lead the group and redesign to mainly focus on the retailing section. It has sold the pharmaceutical division of the company to Aspen afterwar d with proceeds $900 million. These all are actions of the organizational and portfolio restructuring. So, in next stage, Sigma may start on doing some leverage buyouts and equity swaps with the $900 million after debts repayments to take the financial performance back to the previous level.

After all internal factors have been settled down and being stable, Sigma can start the other recommended action, forming alliances. Nevertheless, they must be very careful in choosing the opponents, risk of opportunis tic behavior

and competencies misrepresenting may cause alliance failure (Deeds and Hill, 1999). So, finding potential firms to form alliance with will be the biggest mission of Sigma in the coming future.

References
Anand, B. & Khanna T. (2000), Do firms learn to create value? The case of alliances., Strategic Management Journal, Vol. 21, pp. 295-315. Boreham. T, (2011), Sigma passed the worst of its woes, The Australian, 28 March, viewed 6 May 2011, <http://www.theaustralian.com.au/business/opinion/sigma -passed-the-worst-o f-its-woes/story-e6frg9lo-1226029330454>

Bowman, E. H., & Singh, H. (1999), When does restructuring improve performance?, California Management Review, pp. 34-54.

Business Spectator (2011), BUDGET 2011: Govt commits to surplus as deficits revised up, Business Spectator, 10 May, viewed 11 May 2011, <http://www.businessspectator.com.au/bs.nsf/Article/BUDGET -2011-Govt-co mmits-to-surplus-as-deficits-re-pd20110510-GQCUM?OpenDocument&src=h p13>
Contractor, F. & Lorange, P. (1988). Why should firms cooperate? The strategy and economics basis for cooperative ventures, Cooperative Strategies in International

Business: Joint Ventures and Technology Transfers Between Firms , New York:
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Deeds, D.L. & Hill, C. (1999), An examination of opportunistic action within research alliances: Evidence from the biotechnology industry, Journal of Business Venturing, Vol.14, No. 2, pp.141 -163. Doz, Y. and Hamel, G. (1998). Alliance Advantage. Boston, MA: Harvard Business School Press. Galacho, O. (2011), Aussie laws killing us - drug makers, Herald Sun, 29 March, viewed 6 May 2011, <http://www.heraldsun.com.au/businessold/aussie -laws-killing-us-drug-maker s/story-e6frfh4f-1226029107009>

Health, M. (2011), Consumer Confidence in Australia Falls to Lowest Level Since June 2010,Bloomberg, 18 May, viewed 19 May 2011, <http://www.bloomberg.com/news/2011-05-18/australia-consumer-confidence -falls.html>

Herald (2011), Sigma cuts losses and shares rocket, Herald Sun, 28 March, viewed 6 May 2011, <http://www.heraldsun.com.au/businessold/sigma -cuts-back-massive-losses/s tory-e6frfh4f-1226029259540>

Lekakis. G, (2011), Aspen takeover offer a risk for Sigma Pharmaceuticals investors, The courier Mail, 24 May 2010, viewed 6 May 2011, <http://www.couriermail.com.au/business/aspen -takeover-offer-a-risk-for-sigm a-pharmaceuticals-investors/story-e6freqmx-1225870778306>

Metherell, M. (2011), Doctors, patients urge action on PBS drug deferral, The Age, 28 April, viewed 6 May 2011, <http://www.theage.com.au/national/doctors -patients-urge-action-on-pbs-drug -deferral-20110427-1dwys.html> News (2011), Sigma says 'only miminal damage' from Queensland floods Read, News, 14 January 2011, viewd 6 May 2011, <http://www.news.com.au/business/breaking -news/sigma-says-only-miminal-d amage-from-queensland-floods/story-e6frfkur-1225987651441> Nine (2011), Sigma to improve focus on retailing, Nine, 4 May, viewed 6 May 2011, <http://news.ninemsn.com.au/article.aspx?id=8244808> Patient Care products, (2011), SIGMA INDEPENDENT LIVING, Patient Care products, 28 September 2010, viewed 6 May 2011, <http://www.sigmahomehealthcare.com.au/index.html >

Ross, J. & Martin L. (1998), The effects of corporate restructurings on the usefulness of the balance sheet , Journal of Financial Statement Analysis, Vol.3, No.2, pp.44-56.

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