The Development of Methodology for Assessing Competiveness of the Pharmacies in Kazan, Russia

Azaliya Zaripova

AUBG Fall 2013

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Introduction

The transition of a Russian command economy to a free market economy in 1991changed the structure of pharmacies. First of all, some pharmacies became private. Other firms were left under the state control and continued operating at a break-even level. Second, a rapid growth of the pharmaceutical industry in Russia and its availability for the imports from western and eastern companies intensified competition among many producers. Today, an increasing amount of pharmacies is the main reason of increased competition in the Russian pharmaceutical industry. Moreover, an assortment of products has expanded. In 1990s, the new non-traditional types of products became available for customers, such as dietary supplements and homeopathic remedies. A variety of products in pharmacies has increased three times due to an introduction of products-substitutes by different producers. In order to gain a substantial market share and make a profit, pharmacies’ managements invent new marketing and business strategies. (36i6, Medical Portal) To sustain competitive advantage in the industry, a pharmacy has to concentrate on high quality products, provide its customers with clear information about its products, and efficiently manage a sale system. The main reason of company’s inefficient operations is the lack of information about market values of the industry. High volumes of production are not the measure of competitive advantage anymore; other indicators should be created in order to evaluate the company’s competitive advantage. The research of the pharmaceutical industry in Russia is important for investigating the influence of unstable economy on firms’ activities and developing a methodology for complex evaluation of pharmacies’ operations. The aim of this paper is to analyze the pharmaceutical industry in Russia and evaluate competitiveness of pharmacies in the conditions of unstable economy. The main focus is the development of methodology in order to assess the effectiveness of private pharmacies and their organizational strategies. The developed model is oriented on the
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forecasting of trends, which will affect competitiveness of firms in the pharmaceutical market in near future. The model is also an advising tool for managers of pharmacies for effective distribution of economic costs and rational strategic decisions. II. Russian Pharmaceutical Market

Russia is the 11th largest pharmaceutical market in the world. Even though the growth in the market has decrease, still overall market volume in 2007 increased by 16% and amounted to $14.3 billion in terms of retail prices. The growth of the market is due to the increasing standard of living of Russians and increases in prices for drugs in the market. Two major segments exist in the Russian pharmaceutical market: commercial and state-owned. The difference between these two segments is that the commercial segment excludes medical drug sales under the Federal Reimbursement program (FRP), while the state-owned segment includes drug sales under the FRP program. The biggest segment of the Russian pharmaceutical market is the commercial segment. Thanks to efficient operations of the pharmacies and M&A’s activities, the performance of the Russian pharmaceutical industry has improved. (DSM Group 2008, 5-8) The Russian pharmaceutical market is characterized by the existence of many players in the market, among which the biggest pharmacy chains are 36.6, Rigla, and Pharmakor. The key players in the market are pharmacy chains, distributors, and pharmaceutical distributors. The biggest share is attained by distributers, amounted to 91% in 2007. The important relationships are established with the international distribution companies, among which the most influential ones are SIA, Protek, and ROSTA. (DSM Group 2008, 13-17) The Russian pharmaceutical market is import-oriented. Due to its high growth rates and favorable government policies (which are going to be discussed later on) Russia attracts many pharmaceutical manufacturers from abroad. Examples of such companies are Novartis, Bayer, and Pfizer. As it is discovered, Russians prefer foreign manufacturers and 80% of consumed drugs are manufactured abroad. The most popular drugs in Russia are Arbidol, Complivit, Penthalgin, Flukostat, Kodelak, and Fosfogliv. (DSM Group 2008, 5-13)
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The government has also an important role in the Russian pharmaceutical market. The most recent government legislature is the introduction of the On Fundamentals of Protection of Public Health in the Russian Federation, on January 1st 2012. The aim of this legislation is to make changes in the decision-making of pharmacies in the 82 regions, which have to create treatment protocols and define Essential Drug Lists (EDL). Also, under the legislation the interaction between the pharmaceutical industry and healthcare professionals is going to be restricted. The law aims to control over the promotion and prescription of drugs and emphasize the importance of R&D of local drugs. (Cegedim Relationship Management 2012, 3-4) III. Model Development

Pharmacies in Russia compete on a price and non-price basis. Price competition is characterized by distinguishing one producer from another on the basis of a low price. More widespread, however, is non-price competition among pharmacies. McConnell and Brue define non-price competition as “a marketing strategy in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship”. (Brue and McConnel 2002, 43) Some features of non-price competition are quality, design, and additional services, which allow a producer to establish a price-premium for its products. An advantage of one pharmacy over its rivals can be divided into internal and external advantages. An internal competitive advantage is concerned with cost minimization and effective management of the company. It consists of four groups: material and technical basis, inventory, labor force, and financial sources. External competitive advantage features are the diversity of pharmaceuticals, price level and discounts, variety and quality of offered services, location of the pharmacy, ethical behavior of personnel, working hours of the pharmacy, and interior and convenience in the store. (Mnushko and Safonova 2002, 6-8) For pharmacies, competitiveness can be defined as a set of described above features, which allow companies to compete with each other in the market at certain point of time. Competitiveness of any pharmaceutical enterprise is

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determined primarily by the ability of the company to fully adapt to current economic situation in the market and maximize its economic profit. In order to analyze competitive advantages of pharmacies, several methods have already been discovered. These approaches include the analysis of strengths and weaknesses of a pharmacy, a structural analysis, a functional approach, and ranking of pharmacies. (Drugova, Biteryakova and Tilman 2010, 155-157) During the research, the following twelve indices, which are considered to be determinant for competitive advantage, of pharmaceutical activities have been chosen: 1) Location of a pharmacy; 2) An assortment of products; 3) Speed and quality of customer service; 4) Psychological atmosphere in a pharmacy; 5) Drug prescriptions by a physician; 6) Social services offered by a pharmacy; 7) Own branded pharmaceutical products; 8) Sales system; 9) Consumer services; 10) Convenient organization of a shop floor in a pharmacy; 11) Presence of marketing programs for stimulating demand; 12) Frequency of advertising. Weighting coefficients for each of the factors have been distributed depending on customers’ preferences; hence, evaluation of weighting coefficients was conducted using the questionnaire method among customers. In 2010, a survey among customers was conducted in Kazan, Russia, during which the following conditions have been discovered: 1. The total number of participants is 100 people.
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2. Customers are representatives of different age groups, professions, and categories. 3. Twelve factors, represented above, have been established based on the preferences of the surveyed pharmaceutical customers. Every customer is offered to pass the survey, in which he/she is supposed to rank all twelve features, placing 1 for the most valuable competitive factor and 12 for the least valuable competitive factor. All of the respondents have been divided into three age groups: 18-30 years old, 30-40 years old, and above 40 years old. All of the results have been collected and represented in the following table: № 1 2 3 4 5 6 7 8 9 10 11 12 Factor of competitive advantage Location of a pharmacy An assortment of products Speed and quality of customer service Psychological atmosphere in a pharmacy Drug prescriptions by a physician Social services offered by a pharmacy Own branded pharmaceutical products Sales system Consumer services Convenient organization of a shop floor in a pharmacy Presence of marketing programs for stimulating demand Frequency of advertising Cust. 1 2 4 5 6 1 9 10 3 7 8 11 12 Cust. 2 1 6 2 3 9 11 12 4 5 7 8 10 … 3 1 12 10 8 9 11 2 4 5 6 7 Cust. 100 12 1 3 5 7 2 4 6 8 9 10 11

All of the ranks are summed up and the factor, which earns a minimum amount, is considered the most valuable one; the factor, which earns a maximum amount, is considered the least valuable one. The interesting results have been discovered. Only for respondents above 40 years old, “Drug prescriptions by a physician” factor has been included in 5 most valuable features. The “Frequency of advertising” factor has been finally ranked 12th (the least important factor of competitive advantage). Regardless of respondents’ age, three most valuable factors of competitive advantage have been defined: “Location of a pharmacy”, “An assortment of products”, and “Speed and quality of
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customer service”. The least valuable factors turned out to be “Social services offered by a pharmacy”, “Sales system”, and “Frequency of advertising”. Based on the results of the research and the survey, several tips can be given to pharmacies: do not invest in expensive advertisements and the variety of social services. It is recommended to expand the network of a certain pharmacy, enlarge an assortment of offered products, and establish a rational pricing in response to price sensitivity of customers. The summary of the weighting coefficients for each factor is represented in the following table: № 1 2 3 4 5 6 7 8 9 10 11 12 Factor of competitive advantage Location of a pharmacy An assortment of products Speed and quality of customer service Psychological atmosphere in a pharmacy Drug prescriptions by a physician Social services offered by a pharmacy Own branded pharmaceutical products Sales system Consumer services Convenient organization of a shop floor in a pharmacy Presence of marketing programs for stimulating demand Frequency of advertising 12 11 10 9 8 7 6 5 4 3 2 1 Weighting Coefficient

A formula for index of competitiveness has been created. The index can be calculated using the following formula:
∑ ∑

,
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where N is the amount of customers, participated in the survey; Aij is evaluation of i-th respondent on j-th factor of competitive advantage; Rj is the ranking of j-th factor of competitive advantage. (Mnushko and Safonova 2002, 6-8)

Depending on K range, the following ratings of competitive advantage can be used to assess competitiveness of any pharmacy (Mnushko and Safonova 2002, 6-8): K range 0-80 81-160 161-240 241-320 321-390 Rating of competitiveness Very low competitive advantage Low Average High Very high

Finally, the official document for evaluation of competitiveness of Russian pharmacies has been prepared in Russia and tested among pharmacies in Kazan, Russia. Four largest pharmacy chains of the town were chosen: 36.6, Rivjera, Kazanskije Apteki (Kazan Pharmacies), and Melodija Zdorovija (A Healthy Song).

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In order to evaluate competitiveness of each of the pharmacies, another survey has been conducted. 86 respondents of age 21-60, different genders, and social statuses are explained about conditions and aims of the survey. Based on the survey, 36.6 has been defined as the pharmacy with a very high competitive advantage, Rivjera – a high competitive advantage, Kazanskije Apteki – a high competitive advantage, and Melodija Zdorovija –an average competitive advantage. The calculations for each of the pharmacies are following: 36.6: 4.7*12+5*11+4*10+3.8*9+5*8+4.5*7+3*6+4.9*5+3.7*4+5*3+4.2*2+2*1 = 339.8 Rivjera: 4.2*12+3.8*11+3*10+2*9+4.7*8+3*7+3.4*6+3.8*5+2.4*4+0*3+3.6*2+0*1 = 255 Kazanskije Apteki: 4*12+4.7*11+3*10+4.2*9+4*8+3*7+2*6+5*5+3.2*4+0*3+4.5*2+1*1=280.3 Melodija Zdorovija: 2.7*12+4.5*11+4.7*10+2*9+2.4*8+1*7+2*6+3*5+0*4+0*3+4*2+0*1= 208.1 IV. Conclusion

The Russian pharmaceutical industry is one of the fastest growing in the world. (DSM Group 2008, 1) The amount of pharmacies increases every month. In order to sustain competitive advantage, pharmacies discontinue competing on a price basis only. They revise their business and marketing strategies in order to create other means for competitive advantage. To demonstrate which factors are valued by customers, the certain features have been proposed for the survey. Based on the results of conducted surveys, the model for assessing competitiveness of pharmacies has been created and tested in Kazan, Russia.

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References 1. 36 i 6, Medical Portal. http://www.36i6.net/pharmacy.html 2. Brue, Stanley L. and McConnell, Campbell R. 2002. “Chapter 3: Nature and Function of Product Market.” Economics-Principles, Problems and Policies:43. 3. Cegedim Relationship Management. 2012. “Russia 2012: The Pharmaceutical Market & New Legislation – Building for Growth in a Fast Changing Marketplace.” Analytical Report: 2-12. 4. Drugova, Z.K., Biteryakova, A.M. and Tilman, M.P. 2010. “Evaluation of Approaches to Management of a Pharmaceutical Organization.”Bjulleten Sibirskoj Medicini: Ekonomika i Upravlenije v Zdravoohraneniji (A bulletin of Siberian Medicine:Economics in Management and Health Care) 3: 155-162 5. DSM Group. 2008. “Russian Pharmaceutical Market: Overview and Key Trends.” Analytical Report: 3-22. 6. Mnushko, Zoja N. and Safonova, Natalia N. 2002. “Izuchenije Konkurentosposobnosti Apteki” (“Investigation of Competitveness of a Pharmacy”). Provizor (Pharmacist) 7: 68.

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