Is reverse integration and product portfolio diversification a sustainable competitive advantage

for Abbott Labs

Abbott started all the way back in 1888, when physician and drug store owner Dr. Wallace C.
Abbott started making his own scientifically formulated medications with the goal of improving
patient care. The company has paid 371 consecutive quarterly dividends, without interruption.
That is a 92-year streak of consistent dividends. The rich history and solid returns garners
attention to assess the key assets or capabilities that Abbott has been utilizing to have such a
competitive advantage. This article lays down the current situation of pharmaceutical sector
and will assess Abbott both historical and contemporary perspective.

Stochastic era for Pharmaceutical industry

A breakthrough molecule in a pharmas pipeline can bring hope and assure financial results to
patients and shareholders, respectively.

be a blessing to both patients and shareholders

In the last decade or so many pharma companies have launched proprietary drugs that are
bringing hope to patients and providing assured financial results to its shareholders.

The expectation from pharma companies has always been to discover and launch blockbuster
drugs through creating completmentary marketing and operational proficiencies
But the blockbuster drug era has come to an end, where the looming patent cliff will erode the
profits generated through exclusivity and introduction of generics would create an alternatives.
However, there is a still plenty of unmet needs that are still need to accomplish.
In addition pharma companies still go through regulatory challenges
Employers pushing back on the prescription drug costs
The risk to award ratio is declining
Declining P/E valuation
Can pharma companies survive or grow in the present condition
Some companies have expanded to into different therapeutics or to different sectors altogether
(diagnostics, biosimilars or wellness).
Most of the companies have invested in the small biotech companies and some of them have
also expired in a hope to bring a next blockbuster drug in house without taking risks to create
one by itself.
Pharma companies in the history of any industry type have the most divergent strategies right
now, which itself has brought diminishing homogeneity.
The unsual state of change would for the first time in the legacy of pharma companies has
created a mask of uncertainity that even companies dont know which direction they are
heading
To survive and perhaps thrive in this unpredictable future, pharmaceutical companies
need to make some bets about the way the future of the industry will unfold

HENCE - strategic bets, which mesh with the companies key capabilities systems the things
each company does with distinction that provide its competitive advantage.

The pharma companies has went through both deterministic or stochastic approaches to design
strategy
For examples in IBM case study they went from developing or selling giant main frames with
PC computer changing everything. Some companies could not see the next wave of upcoming
industry change and some such as IBM were able to put the bets on the right horse ie.
Consulting services.

After years of steady and predictable growth, the pharmaceutical industry is entering a
stochastic period of its own.

Abbott created its own niche pharmaceuticals and biologics be controlled by abbvie and
abbott taking the lead on medical devices or services and nutrition and wellness

Bets designed to position the company for success in one or more specific business scenarios,
that are either aligned with the companys existing key capabilities systems or that include a
plan for developing or acquiring other capabilities that will be needed for success.

This is still the common mind-set in the industry, and the underlying assumption that
business units should be managed separately, and their individual profits maximized makes
perfect sense in a deterministic environment. But in a stochastic environment, in which no
company can know how the future will evolve, we believe this stand-alone pieces-of-a-portfolio
approach is insufficient to position a company to adapt successfully. However, if these
businesses are not linked with the core pharmaceutical business, they wont help the company
prepare, or reposition itself, for the future. In such cases, it may make sense to split the
successful independent business from the core pharmaceutical operation to realize the created
value, as Abbott recently decided to do, splitting its drugs and medical products businesses into
separate publicly traded companies.

The hypothesis might be that disease management will gradually have less to do with
prescription drugs and physician oversight, instead becoming more the responsibility of the
patient. the company may want to have a consumer healthcare business not necessarily for
the stand-alone profits the business can generate, but in the belief that a consumer healthcare
unit will become an essential partner with pharmaceuticals in a changing disease-management
landscape.
Another scenario might be that diagnostics will be among the essential pieces of the
pharmaceutical tool kit in the future, a way of identifying patients who can be helped by
particular drugs. Collaboration between different business units is essential such as followed by
J&J.
In other words, the bets should leverage the companys capabilities system, made up of the
three to six activities that truly differentiate the company and allow it to compete effectively
both in the market position it has staked out and with the products and services in its portfolio.
In our experience, companies that exhibit a high degree of coherence in these three elements
(their capabilities system, market positioning, and product/service portfolio)

world-class system for communicating with doctors, for example, would want to make sure that
its strategic bets take advantage of that capability. (as it might if the strategic bet were a
nutrition line optimized for the needs of cancer patients). If a strategic bet suggests that new
capabilities will be needed, they should be developed or acquired in such a way that the
companys overall capability system remains coherent.

First option is innovation The company would rapidly develop and launch many new types of
snacks and foods, packaged in new and interesting ways, offering leading-edge nutrition and
convenience.
Under the second option, the company would get closer to its customers, producing the food
people ask for. It could incorporate ideas gathered online into its offerings and provide busy
working families with customizable, convenient, and well-balanced meals.

The third option would involve transforming the dynamics of the relevant food sectors by
competing more aggressively. The company would become a category leader by investing in
new process technology, rightsizing operations to push costs down, and completing key
acquisitions.
But among these three strategies which one gives Abbott the greatest strength. Ofcourse,
combination of different rightly executed strategies leads to sustainable growth, but theres
always one or 2 key differentiator that makes that company a business leader.

A sustainable competitive advantage not only better-than-even chance of success in both a

short term and in a predictable long term.
For every business player even with correct strategies may fail but with time through
collections of failed decisions may lead to a winner at the end
A company earns a winning ending through aligning its unique assets and capabilities with that
of the need of the market through discipline and at the same time taking risks.
Capabilities-driven strategy with clear coherence between heterogeneous set of key steps that
are also inimitable at the same time.

A key differentiation for a company is transient, in regards to dynamic macro factors such as
regulations/policies or new entrants with advance technology. As key competitors either mimic
or surpass a businesss proficiencies, the importance of key decisions becomes more important.
As traditional indigenous companies in developing nations are becoming more global and
efficient, this has created threats for companies such as Abbott.
But expecting an abrupt change especially in a organization with heritage is tough. The culture,
brand perception, outreach and operational processes cant be changed easil or quickly
But companies such as Abbott has able to gradually and thoroughly changed its identity with
time to continue with competitive advantage. Nonetheless, it has been proven in business
world that companies with lot of pride accepting or executing a change has either been sluggish
or completely ignored.
Although this stickiness can be a problem but quite often it can also work as a blessing. The rich
repertoire of capabilities or assents with an excellent corporate culture can distinguish a firm.
The corporate identity attracts not just right customers but also suppliers, investors and
employees. Abbotts unwavering capacity of not so much influenced by the trends (buying new
small biotechs or merging with bigger ones) rather creating capabilities-driven strategies with a
coherence between different business offerings.

Enhancement due to reverse integration

1) Abbotts position The amount of data available has been sky rocketing. The economic
stability of 70s with dawn of globalization. The companies who analyzed various critical
factors such as markets, the needs and capabilities but quite often the elaborate plans d
ono correlate with real-world performance. The development and reliability of learning
curves enhanced companys standing in the market. Company were able to realize and
experiment with the operational efficiencies with decreased cost and increased
production. The utilization of such learning curves to realize what they should today in
order to realize the importance of one of its division among others and thus enhancing
the competitive advantage.
2) Execution Operational efficiencies. Due to conducive labor laws, stringent labor laws,
ever changing macro factors has been creating hurdles for every company out there,
 however, few companies are still able to prosper but other tend to die. Key problems
were the financial objectives and market share as strategic objectives are crippling the
businesses. The guarantee associated with every key step was shrinking the risk taking
behaviors of many firms. Operational excellence became the basic tenet of the industry.
Porter pointed out that operational excellence could guarantee competitive advantage
for only a limited time. Porter argued for picking industries or markets where either
overall conditions were favorable where most companies were relatively weak,
suppliers had relatively little clout, and aspiring entrants were few or where a
company could differentiate itself.

3) Adaptation - have varied enormously in their industries, approaches, and philosophies,

but they all share a willingness to experiment with new ideas and directions, discard
those that wont work, and adjust their efforts to meet new challenges. A multitude of
products and services that all have different capability needs and different market
positions cannot possibly be brought into sync.
4) Core Competencies - These were the bedrock skills and technological capabilities (such
as new forms of hardware, software, systems, biotechnology, and financial engineering)
that allowed companies to compete in distinctive ways. Companies that focused on
these, and used them to develop a long-range strategic intent, would claim the right
to win. However, in practice, the concentration strategy often becomes a way of holding
on to old approaches, even when they become outdated. Many companies
5) Strategy the way of life capabilities-driven approach

Abbott in historical context

Top level leadership
When George Cain became CEO, abbott was at the bottom quartile of the industry. Abbott
enjoyed a lot of cash influx due to its successful drug which was erythromycin.
I realized Abbotts problem of mediocricity which was essentially nepotism. He gradually build
the board and the executive team. He was the son of previous Abbotts president. The company
outperformed its peer from the span of 1974 to 2000.
In comparison to its then competitor Upjohn has similar family members controlling the
company. The CEO of Upjohn never had a resolve of that of Cain, Upjohn then fell 89 percent
behind Abbott over the next twenty-one years.
These two companies were similar in terms of profitability, revenue and product portfolio. Bulk
of there business was pharmceuticals, but only one of them realized what it is best at.
In 1960s abbott realized that it cant be top pharma company, as other pharma companies such
as Pfizer or Merck built research engines which was not in comparison to Abbotts.
Even though Abbotts history was built on pharmaceuticals but being a pharma company was
not more an option anymore. But Abbott realized that they can be best patient healthcare
company through developing cost effective healthcare products. Abbott based its bet through
developing diagnostics and patient nutrition.
On the contrary, Upjohn never realized the reality and still at that time rivaled with Merck. Even
though it failed to match Merck, it diversified in the areas that were not its core strengths.
Abbott became best in the world through creating cost effective healthcare products.
Even though abbotts revenue was majority came from pharmaceuticals, it realize it cant beat
its rivals such as Merck.
Abbott strength also comes from the focus on Responsible Accounting which as first introduced
by Abbotts finance officer Mr. Semler. wherein every item of cost, income, and investment
would be clearly identified with a single individual responsible for that item. Where every
manager was responsible for his or her business units return of investment

Abbott reduced its administrative costs as a percentage of sales to

the lowest in the industry (by a significant margin) and at the same time
became a new product innovation machine like 3M, deriving up to 65 percent
of revenues from new products introduced in the previous four years.

Abbott instilled the entrepreneur's zeal for opportunistic

flexibility.
Culture of discipline

Realization of what not to do pulling back financial help from pharmaceuticals to nutrition
and diagnostics.

Technology pioneer - Pioneered application of computer technology to increase economic

denominator of profit per employee.
There was no single step that makes Abbott what it is today rather its a blend of innovative-
risky strategic bets that shape what Abbott is today. Nonetheless, there are still highly
differentiating standards that define Abbott as a differentiator thus creating a sustainable
competitive advantage.

Abbotts Blue plans

One particularly elegant method for doing so came from
Abbott Laboratories, using a mechanism it called the Blue Plans. Each
year, Abbott would tell Wall Street analysts that it expected to grow earnings
a specified amount-say, 15 percent. At the same time, it would set
an internal goal of a much higher growth rate-say, 25 percent, or even 30
percent. Meanwhile, it kept a rank-ordered list of proposed entrepreneurial
projects that had not yet been funded-the Blue Plans. Toward the
end of the year, Abbott would pick a number that exceeded analyst expectations
but that fell short of its actual growth. It would then take the differi
ence between the "make the analysts happy" growth and the actual
growth and channel those funds into the Blue Plans. It was a brilliant
mechanism for managing short-term pressures while systematically investing
in the future.
Abbotts business model is broken up into four operating segments. These are:
Nutrition (34% of total sales)
Medical Devices (25% of total sales)
Diagnostics (23% of total sales)
Pharmaceuticals (18% of total sales)

Within its international business, Abbott has placed particular focus on emerging markets. This
is a good strategy, since health care spending and economic growth in under-developed regions
is likely to exceed that in developed markets like the U.S. and Europe.

In addition to its geographic focus, the other major growth catalyst for Abbott is its product
focus. Abbott has positioned its product portfolio specifically to capitalize on the aging global
population. Abbotts nutrition business is its largest operating segment, and for good reason.

Brand portfolio and diversification are the two key segments for Abbotts to have a competitive
advantage
The company was still profitable during recession
Less reliability on the blockbuster drugs as compared to other pharma companies in the
industry

Why Abbott is crushing it in Asia

Getting its third of its revenue from Asia.
As any Western manager whos helped run an Asian business unit can attest, one of the big
challenges is that workers tend not to stick around long. About 40% of Chinese employees stay
in one job for less than two years, according to a Hay Group study. In India, annual turnover of
50% or more is not unusual. So its a real competitive advantage that Abbotts turnover in China
is under 20%, or about half the average for the country. In India, its even lower, at about 15%.
1) Put local managers in charge Sending Americans to run operations sends a signal,
unintentional or not, that locals cant get promoted to management jobs. So the best
people leave. To prevent that, Abbott sends American managers to Asia, not as expat
bosses, but as consultants on short assignments with a definite end date. Abbott also
offers the same career-development opportunities to Chinese and Indian managers that
American up-and-comers get, including coaching, training, special projects, and frequent
contact with top executives
2) Tailor management training to each culture we explained what competencies we
needed to develop and what success would look like, But we want people to be able
to focus on the content, and not have to struggle with the language at the same time.
3) Teach senior managers how to be mentors - everyone is surprised, at first, that senior
managers take an interest in their career aspirations,