Marion Laboratories - Executive Summary
Marion Laboratories - Executive Summary
Marion Laboratories Inc. is a pharmaceutical company with selected segments in the health care and related fields. The strongest issue in this case is to decide whether Marion should keep or sell its subsidiary Kalo Laboratories Inc. to reach their main goal of company “fairly rapid” growth. Marion has to evaluate the risks of maintaining or getting rid of Kalo, considering what they will now have to measure to successfully benefit form future profits and sales.
Marion’s corporate mission is to “achieve a position of market leadership through marketing and distribution of consumable and personal products (…),” to achieve a “long-term profitable growth through management of high risk relative to the external environment,” and to “achieve a professional, performance-oriented working environment that stimulates integrity, entrepreneurial spirit, productivity and social responsibility.” In addition, they set a specific sales goal of $250 million with no time frame that should be attained to satisfy the stockholder expectations.
In 1979, Marion was divided into two separate groups: the pharmaceutical and the health product group. Marion’s subsidiary, Kalo, encountered in the health products group, operates in a “specialty agricultural chemical market” that works on a cyclical environment: “because Kalo did not have a well diversified product line its operations were more cyclical than the overall agricultural sector.” The disadvantage of this cyclical environment is that it brings uncertainty to the future sales and expected growth of the company: “two major factors beyond Kalo’s control made its annual performance extremely unpredictable: the weather and spot prices for commodities.” Other risks that surround this subsidiary are the “strong competition from large chemical companies, governmental regulatory actions and uncertain future product potential.”
Marion’s competitors are unbranded drug companies. Thus, there are two identifiable strategic groups in the agriculture chemical market: large chemical manufacturers including Dow Chemical, DuPont, Stauffer Chemical, Gulf Oil; and “large ethical drug manufacturers” that include Eli Lilly, Pfizer and UpJohn. Economies of scale permits larger companies to produce “large amounts of what might be perceived as a commodity product (…) at a much lower cost per unit than the smaller companies.” Kalo is concentrated in specialized markets with unique product needs. Therefore, its competitors are small specialized companies.
Marion is concentrated on the sales effort, not investing much in research and development. It produces professional and consumer pharmaceutical products, which 80% of its distribution is done through drug wholesalers who resell to hospitals, medical laboratories, reference laboratories and medical/ surgical wholesalers.
Kalo’s sales force is about 30 salesmen that are educated to explain to
their wholesalers and distributors the “advantages, unique qualities and methods of selling Kalo’s products.” Kalo also sells directly to farmers, which are their target market, using “pull advertising to create demand.”
Its good sales and marketing are the company’s competencies while it lacks in the research and development department.
The FDA is a threat to Marion since they demand that they submit test data to prove product quality, safety and efficiency. The lack of research and development investment impairs Marion to effectively accomplish the FDA’s standards. Also, it would take them from seven to ten years to prove that their product is safe and effective. Therefore, Marion’s strategy was to license the “basic compound from other drug manufacturers large enough to afford the basic research needed to discover new drugs.” This was Marion’s opportunity to introduce a new product to the market at a lower cost since they did not allocate sufficient funds to research and development to produce their own product, only to modify the drug. Marion also has to cope with the threat of the unclear FDA’s generic substitution laws that leave them with the uncertainty that their product will be approved. Kalo has high entry and exit barriers because they need high capital investment to compete with the large chemical manufacturers. The power of buyers is low because Kalo’s products are differentiated. The power of the suppliers is low since they are few and concentrated, giving them the opportunity to put to their prices high (premium). Like Marion, Kalo has a centralized management structure. With Kalo, Marion is an unrelated diversified company. Yet, without Kalo, Marion becomes a related diversified company. This is why the active board of directors have to decide what business they are in, if they should keep Kalo or not. All the members of the corporate body are constantly involved in important decision making in regards to expenditure, limitations, new project decisions, etc.