strategic alliance战略联盟_Eli Lilly

CONTENT

Executive Summary ....................................... 1

uction ................................................. 1

s of Strategic Alliance ........................ 2

3. Main Problems of Strategic Alliance ......... 5

4. Conclusion .................................................. 7

5. References .................................................. 8

Executive Summary

The term of strategic alliance is defined as “a variety of interfirm cooperation agreements,

ranging from shared research to formal joint ventures and minority equity participation”

(Barlett et al 2008; 560). Cullen and Parboteeah (2005; 259) defined international strategic

alliances are “cooperative agreements between two or more firms from different countries

to participate in business activities”. Inkpen (2001) summarised three features of strategic

alliances. Firstly, the two or more partner firms remain “independent subsequent to the

formation of the alliance” (Inkpen 2001; 403). Secondly, alliances are based upon mutual

interdependence, which means one firm is easily influenced by the other (Parkhe 1993).

Finally, one firm is uncertain about the other firm’s action due to the independent positions

of each firm (Powell 1996). There are various reasons/drivers giving rise to the forming of

strategic alliances and a number of problems may be encountered during the process of

alliance management. This report will discuss these drivers and problems with reference to

the pharmaceutical company of Eli Lilly. In the first part of this report, the company of Eli

Lilly will be introduced briefly. Then, drivers of strategic alliances within the company will be

critically discussed followed by an analysis of the main problems encountered in the

alliances.

1. Introduction

Eli Lilly and Company is a global research-based pharmaceutical company with more than

130 years’ history headquartered in Indiana, US. It is conducting clinical research in more

than 50 countries and marketing products in 143 countries with approximately 38,350

global employees (Eli Lilly and Company 2011a). The company’s mission is to “discover,

develop, and commercialize innovative pharmaceutical therapies that enable people to live

longer, healthier, and more active lives” (Eli Lilly and Company 2008). Thanks to higher sales

of Alimta, Cymbalta, Humalog, Zyprexa and Erbitux, the company achieved total revenue of

$21,836 million in the fiscal year of 2009, increased by 7.2 per cent than the fiscal year of

2008, (Datamonitor 2010). At the same fiscal year, its operating profit reached $5,587.3

million (ibid).

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Active innovation, advanced research and successive launch of new pharmaceutical

products are crucial to the operation of Eli Lilly’s operation. As the president and CEO of Eli

Lilly, John Lechleiter, put it “Lilly's number-one priority is increasing the flow of innovative

products that make a real difference for patients. Partnering has been a key element of our

strategy for more than a decade, and successful partnerships are essential for Lilly's ongoing

pursuit of innovation” (Eli Lilly and Company 2008). Senior Vice President of the company,

Gino Santini echoed the importance of the partnership by saying that “dynamic partnerships

are at work across Lilly’s entire value chain…successful alliances brought products like Actos,

Byetta and Cialis to market” (Eli Lilly and Company 2011b).

Eli Lilly’s tradition of strategic alliances with selected partners has played an integral role in

creating innovative products, boosting the company’s growth, and maintains the

competitive advantage in the world market.

2. Drivers of Strategic Alliances

The drivers or motivations of strategic alliances are discussed numerously in alliance

literature (e.g. Campbell 2004; Cullen and Parboteeah 2005; Gulati 1998; Inkpen 2001;

Osborn and Hagedoorn 1997; Porter and Fuller 1986).

There are several general drivers underlying strategic alliances. It is generally agreed that

strategic alliance partners are likely to leverage resources and core competences between

them in order to improve their business performance and specialise in their own

competencies. For instance, nearly 100 years ago, Banting and Macleod discovered insulin

and patented their insulin extract. Then, they devoted all the rights to the University of

Toronto. Alliance partnership with the University of Toronto helped Eli Lilly to produce the

first commercial insulin product in the world (Eli Lilly and Company 2011b;

2011). About 60 years later, human insulin was generated by the biotechnology company,

Genentech. In 1982, Eli Lilly obtained the license from Genentech and launched human

insulin product into the market (The Motley Fool 2011). In both examples, Eli Lilly used its

production capabilities to combine with patent and license of the University of Toronto and

Genentech to bring the insulin products into the market. Hence core competences and

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resources of partners were leveraged to achieve the synergy and benefited to both partners

of alliances as a result. De Wit and Meyer (1998) presented other potential sources of

resource leveraging that may boost the forming of alliances, including bargain power against

customers or suppliers, relations with distributors, marketing resource and finance resource.

Another example is the alliance between Eli Lilly and India-based Piramal Life Sciences. In

this partnership, Lilly gained the improvement of productivity in drug development leading

to an increase in core competence for the company (Eli Lilly and Company 2008).

Spreading and reducing costs is another important driver for many strategic alliances. Lilly’s

partnership with Belgium-based Galapagos to cooperate in the field of osteoporosis with

their complementary expertise. Currently, Galapagos is undertaking 12 osteoporosis drug

discovery programs. Eli Lilly shared the costs and risks in the process of testing and drug

discovery in this partnership (Eli Lilly and Company 2008). Another example is the

Amylin/Lilly Alliance. In 2002, Eli Lilly and Amylin Pharmaceuticals signed a strategic

agreement and formed the alliance dedicated to research on a treatment option for

diabetes. According the agreement, Lilly and Amylin incurred the total development and

commercialization costs equally inside the US. With regard to costs outside the US, the two

companies shared the development costs equally but Lilly had to take the commercialization

costs (Eli Lilly and Company 2011c). As the pharmaceutical research needs a great deal of

investment and Lilly is involved with a number of fields of drug developing, alliance partners

can share and spread the R&D costs and risks for the company and enhance the feasibility of

research as the same time.

To learn knowledge from a partner also can be a general driver of strategic alliances. Kyowa

Hakko Kogyo Co., Ltd is a Tokyo based company with a cancer therapy, an inhibitor of the

mitotic kinesin Eg5. Lilly enjoys exclusive license of the compound and have the rights to

develop and market it in the world market except in Japan (Eli Lilly and Company 2008). In

this alliance, Lilly acquired the access to preclinical program that target on a variety cancers

and the great opportunity to gain knowledge on oncology capabilities and expertise (ibid).

Strategic alliance is a crucial strategy of Eli and Lilly. This strategy enables the company to

participate in numerous fields of pharmaceutical research and market its products all over

the world. Through a wide range of alliances with different research institutions in

difference fields, the company gained a great amount of knowledge and enhanced the

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research capability significantly. Additionally, in order to market its products, the company

also has partnership with many companies from local market. Through cooperation, the

company learned the local market knowledge as well as cultural, political and economic

differences.

In addition to above three drivers, companies may be strategically allied to avoid or counter

competition. Some market can only afford certain number of competitors. Thus, competitor

companies may ally to avoid fierce competition or two or more firms may form strategic

alliances to compete with market leaders. Moreover, strategic alliances may aim at securing

vertical and horizontal links. Vertical alliances can help firms ensure their supply and

increase the efficiency across the value chain while horizontal alliance leads to efficiency in

existing distribution.

In addition to general drivers, there are some more drivers for international strategic

alliances. Strategic alliances can help companies gain location-specific assets. In this way,

companies are likely to overcome cultural, political/legal, competitive and economic barriers.

In 1992, Lilly formed a joint venture with Ranbaxy Laboratories Limited, India, focusing on

marketing Lilly’s products (Barlett et al 2008). The joint venture was established with equal

capital contribution, equity share, board of directors and management committees. With

this joint venture with Indian companies, Lilly obtained the assets in India and successfully

overcame the legal constraints from the Indian government. This is because at that time,

foreign ownership companies are not allowed in pharmaceutical industry in India. Therefore,

Lilly got access to the Indian market by forming joint venture with Ranbaxy to overcome

legal barriers as well as cultural barriers. Furthermore, Lilly can learn certain marketing

knowledge from the Indian company.

Strategic alliance is one of companies’ preferred entry models to expand into overseas

market. Through strategic alliance, companies can spread their assets across borders quickly

and smoothly, which facilitate companies’ geographically diversification. Furthermore,

strategic alliances help companies reduce risks when they step into the foreign markets for

the first time.

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3. Main Problems of Strategic Alliances

In the collaboration process of strategic alliance, differences in national and corporation

cultures may give rise to incompatible operations or conflicting evaluations of the success of

a venture. Elli Lilly had the experience of challenges for operations due to cultural

differences. With reference to the joint venture between Lilly and Ranbaxy, cultural

differences posed managerial and administrative challenges for the business operation. The

first managing director of the joint venture was Andrew Mascarenhas, who shouldered the

responsibility to build up the JV’s team. The first challenge for him was to recruit personal

including sales force, doctors and financial staff and train and covey them the Eli Lilly’s

corporate culture, including the company’s philosophy, values, and ethical code (Docuter,

2011). Moreover, Indian pharmaceutical industry was famous for its high employee

turnover. Thus, a new scheme of human resource management was launched by Andrew to

alleviate the problem of high turnover (Bartlett et al 2008; Docuter 2011). When Andrew

left the office, the JV had made the break-even and started to create profit.

As in the partnering alliance, both sides remain independent positions. Thus, partners may

lose synergy as the relationship evolving. In addition to cultural distinction, a variety of

issues may arise to challenge the operation of alliances. Firstly, partners might value the

importance of the strategic alliance and collaborative arrangement distinctively. As

discussed in the part of drivers, two or more firms can be motivated by any one or a

combination of drivers to form strategic alliances. Therefore, it is possible that alliance

partners view the importance of the strategic alliance differently from the beginning. On the

other hand, as the relationship evolving, two or more sides are not likely to always keep the

same pace. This can be attributed to the changing of external marketing environment or the

changes within the ventures or alliance partnerships. As a result, partners may review the

alliance and re-value the importance of it and differences between partners may occur.

Secondly, the evolving of alliance over time may lead to different objectives for a strategic

alliance as well. Conflicts between strategic objectives can hinder the cooperation between

partners, jeopardize the performance of alliances, and even lead to the collapse of the

strategic alliance. Thirdly, partners may disagree on control issues, or provide insufficient

direction to a venture. This situation erects significant barriers to the collaborative

arrangement and the future performance of the alliance remains doubted. Finally,

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capabilities and contributions from partners are often unequal in alliances and expectations

on the alliance from partners often varied as well. In practice, these pose challenges to

collaborative arrangement considerably.

The company of Eli Lilly is widely credited as a typical example of excellent alliance

management (Futrell et al 2001; Luvison 2009; Sagal and Slowinski 2003; Stach 2006). This

can be attributed to the company’s tradition of alliance with partners and the rich

experience in alliance management. Eli Lilly has Office of Alliance Management (OAM) and

its alliance manager. Towards strategic alliances, the company sticks to its three principles:

(1) alliances should have written policies, (2) the company should have actual process for

forming alliances and support the running of alliances with the company’s resources, (3) the

fundamental elements of one alliance success should be hold consistently in all other

alliances (Luvision 2009). The written policies of alliance often define the objectives, mission,

and operation guidelines for the strategic alliances. Hence, objectives and missions can be

aligned between partners. Moreover, with written policies, control issues can be clearly

defined. However, Neely and Wilson (1992) pointed out that if goals and missions are not

promoted and communicated effectively throughout the organization, these goals and

missions are not effective. In the case of Eli Lilly, the company have devoted significant

efforts to communicate and reinforce its missions and values both inside and outside the

company (Luvision 2009). The latter two principles help the company increase the alliance

capability based on the accumulated collaborative experience.

In 2003, the company developed a three-dimensional fit analysis to examine strategic fit,

cultural fit and operational fit with its partners so that the company can effectively manage

the alliance relationship and the alliance performance (Stach 2006). In terms of strategic fit,

the company concerns strategic alignment between partners, commitment and trust with

partners. Cultural fit pertains to flexibility and knowledge management while operational fit

is related to communication, conflict management, decision-making, leadership and

performance management. These fit analysis method contains objective, motivation,

culture, capability and management assessing for potential partners. Therefore, according

to this three-dimensional fit analysis, the company can evaluate and select right partners for

the company.

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In addition to initial analysis, OAM is responsible for clearly and concisely defining the

drivers of alliances with partners and regularly review them. Furthermore, the company

require both part of alliance have enough passion and focus. This action ensures partners of

Lilly view the same importance on the alliance and supervise the fits of partners over the

time. Therefore, the company has effective control over the alliances and the ability to

monitor the performance of alliances as the collaborative activities processing.

4. Conclusion

With reference to the cases of Eli Lilly and Company, it can be viewed that there are various

drivers of strategic alliances and some problems may be encountered in the strategic

alliances. As one of the world largest pharmaceutical company, Eli Lilly has rich experience

in strategic alliances and alliance management. The company has tried to integrate

resources and core competences in order to increase its own performance and specialise its

core competences. Strategic alliances are also acted as a cost and risk reduction method for

the company with regard to significant investment in pharmaceutical research. In addition,

Lilly gained significant knowledge through strategic alliance. Other reasons for strategic

alliances can be avoiding or countering competition and securing vertical and horizontal

links. International strategic alliances have some more divers. For instance, Eli Lilly formed

the joint venture with Indian Laboratories Ranbaxy to gain local specific assets. In addition,

strategic alliances can help companies achieve geographically diversification and reduce the

risk of exposure in unfamiliar markets.

However, some problems may be encountered during the process of strategic alliances.

Firstly, national and corporation cultural differences often lead to incompatibility in

collaborative arrangement. In the early stage of the joint venture with Ranbaxy, Eli Lilly had

to overcome managerial issues due to cultural differences. Secondly, objectives and

managerial view may differ resulting from independent position in strategic alliances.

Thirdly, both sides may view the importance of alliance. Lilly deals with these two problems

effectively by exploiting advanced alliance management.

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