kalyan pharma case solution

Marketing Case Analysis – Kalyan Pharma Ltd.

GROUP H:

ARVIND SHARMA

JATIN VIRDI

RAVI CHAND

SIDDHARTH SHAH

SHAILAV PRAKASH

ULLAS ANAND

© Group 8 P a g e | 2

CONTENT

Introduction ...........................................................................................3

Importance of distribution channel ........................................................................................ 3

History of Pharma Industry in India ....................................................................................... 4

DPCO Act .............................................................................................................................. 4

The importance of Distribution in Pharma ............................................................................. 5

Kalyan Pharma ......................................................................................6

Introduction ............................................................................................................................ 6

Evaluation of distribution system ........................................................................................... 6

1. The Initial Strategy ( Pre -1972): ................................................................................ 6

2. Realization of importance of Marketing (1972-1979): ............................................... 7

3. Effects of DPCO (1979): ............................................................................................. 7

4. Introduction of KRD: .................................................................................................. 7

5. Marketing Channel Flows and Strategy ...................................................................... 8

6. Introduction of Distributors(Post 1991) ...................................................................... 9

Indian Pharmaceutical Scenario: .......................................................................................... 10

Future implications ..............................................................................11

Push vs Pull strategy ............................................................................................................ 11

More wholesalers or not? ..................................................................................................... 12

Strategic decisions in terms of cost - The Value-Adds vs. Costs of Different Channels ..... 13

Objective of Any Distribution Channel ............................................................................... 14

IT Adoption .........................................................................................14

The Future of India’s Distribution Systems ........................................15

Conclusion ...........................................................................................16

References: ..........................................................................................17


Introduction

Importance of distribution channel

In the Marketing Mix there are 4 P’s- Product, Price, Promotion and Place.

The Distribution channel helps in the Place aspect of the marketing mix.

Place refers to providing the product at a place which is convenient for consumers to access.

Place is synonymous with distribution. Various strategies such as intensive distribution,

selective distribution, exclusive distribution and franchising can be used by the marketer to

complement the other aspects of the marketing mix.

In the new convention ‘Place’ is replaced by ‘Convenience’. With the rise of Internet and

hybrid models of purchasing, Place is becoming less relevant. Convenience takes into

account the ease of buying the product, finding the product, finding information about the

product, and several other factors.

The need for distribution channel is felt because of following reasons.

Complimenting the other 4 Ps in the marketing.

Because producers cannot reach all their consumers directly.

Multiply reach and provide efficiency to the marketing processes.

Gathering and distributing information (Marketing Research and intelligence

information)

Communication to the consumer regarding product information and offers through

advertising and promotion.

Provide contact, experience, specialization and scale of operation.

The activities which are taken care in the channel are wide and varied but they revolve

around these general tasks:

Ordering

Handling and shipping

Storage

Display

Promotion

Selling

Information feedback


History of Pharma Industry in India

Pharmaceutical industry has been one sector that has been consistently in India. In terms of

capital investment, the industry has seen a growth of almost 1300% between 1962 and

1989.In terms of sales the growth rate posts an impressive figure of 4800% between 1960 and

1988-1989. Initialy the sector was involved in the processing of bulk imported

drugs.However, the second and third five year plan encouraged the development of new

plants resulting in establishment of various new manufacturing units. The third five year plan

kick started an era of growt and development of this sector because of government's policy of

liberalization of licenses andloans and encouragement to local entrepreneurs. Government

also restricted imports and foreign investments during this time.

There are four categories in the industry

Public sector

Foreign sector

Indian (private) sector

Small scale sector

As of 1990, there are a total of 8000 firms out of which 200 are major players constituting

40% of market share.

The pharmaceutical sector is a highly regulated sector with the introduction of DPCO act in

1962.

DPCO Act

The Drugs Price Control Order (DPCO) is an order issued by the Government of India under

Section 3 of the Essential Commodities Act to regulate the prices of drugs. The main

objectives of the DPCO act is ensure availability of essential and life saving, at reasonable

prices.

The various DPCO act since its inception are

DEPCO Act Regulations Financial Implications

DEPCO, 1962 -Manufacturers, Importers, Distributors are required to publish price lists of their products.. - Chemists were required to display lists in their premises.

- Contained the inflation of the drug prices that was expected due to Indo-China war

DEPCO, 1963 - Freezing drug prices as obtained on April 1, 1963. -Require prior approval to increase price before June 30 ,1966 - Price of new drugs to be approved by Government. - Price of loose drug to be regulated too. - Manufactures required to print Retail sale price on the container

- No price control on raw material price impacted long term profitability. - No voluntary price reduction from the manufacturer side.


DEPCO, 1970 - Reduce price of essential drugs which were used in high frequency - Provide incentive to the industry - To develop research facility and expansion in a planned manner. - To provide better entrepreneurship opportunity for Indian personnel for the growth of the Industry. - Curb excessive profit.

- Categorization of bulk drugs into ‘Essentials’ and ‘Other’. - New price for 17 essential drugs were announced - Sales price of other bulk drug were frozen to prevailing rate.

DEPCO, 1979 - Bulk drug divided into three categories - Maximum sales price of selected drug were fixed. - Allowed reasonable return on net worth - Return fixed at 14% post tax on net worth for Category I and II drugs and 12% on Category III drugs.

- The mark-up allowed on Category I and Category II drugs are below breakeven point, hence no incentives to produce such drugs - Delay in government approval of revised price will eat into the profitability - Does not accommodate provision to revise selling price in case of variation in manufacturing

DEPCO, 1987 - Three categories reduced to two. - Category I (Essential drugs) – 27 - Category II (Other drugs) – 139 - Maximum sale price was fixed

- No consideration of actual increases in costs of inputs - Only 50% of the recommended increase on drug prices was given. - Cost updating was not periodical but, manufacturing cost was. So

many companies were opting out of

producing essential drugs

The importance of Distribution in Pharma

India is a geographically diverse country with extreme climates that make careful

climate control for medicine a critical function. (The infra for cold chain is still

developing )

The long channel of distribution and high incidence of brand substitution makes it

mandatory for a company to make all its stock keeping units (SKUs) available at all

levels at all times. (In India, most brands have generic versions of drugs and retailers

can usually obtain higher margins with generics than for branded products. To reduce

risks of substitution, innovator companies must make sure their products are made

available to the stockists and retail shops. )


The companies, which have spent as much as one-third of their revenues toward

financing their supply-chain operations, recognize that the cost of logistics is very

high in India. Taking into consideration the poor infrastructure and extreme

geographic conditions, it is difficult to curtail the cost involved in SCM.

Alternative distribution have faced severe resistance by the lobbies of traders involve

in channel for example Cipla tried to bypass the SCM by providing home service for

its products. It faced strong resistance from traders lobby which stopped stocking

Cipla’s product. Ultimately Cipla had to withdraw the scheme.

Kalyan Pharma

Introduction

This case deals with the distribution network of Kalyan Pharma Limited (KPL). KPL was a

venture started with a capital of around 5lacs in 1905, that manufactured products in five

different categories glass, pesticides and chemicals, pharmaceuticals, veterinary products and

polypropylene fibre. Glass and Pesticides and chemicals have since been made a separate

entity while, some part of pharmaceuticals are being promoted as a separate entity called

megacare since 1988-89.

As of now KPL manufactures 60 different products. Its distribution network consists of 16

KPL regional depots called the KRD’s, 24 branch offices, 40 distributors located in various

states including the 7 sister states, Goa, Kerela etc. , about 2,000 stockists and wholesalers

and have tie ups with around one lac retailers.

Since pre 1972 till 1991 we can say that KPL was constantly trying to find the balance

between its distribution network and its marketing/promotion strategies.

Evaluation of distribution system

The flow of events has to be looked upon in its entirety to have a better understanding of the

company strategy over the years.

1. The Initial Strategy ( Pre -1972):

KPL in the starting did not enter into the distribution system for its products and instead

focussed on marketing. It is safe to assume that pre-1972 KPL might not have sufficient

resources and infrastructure to fully have it s own distributive network. Thus, it chose an

exclusive agent responsible for taking the products from the factories to 30 braches. These

branches further circulated the product in 10,000 wholesale chemists.


2. Realization of importance of Marketing (1972-1979):

a. As the company grew it obviously wanted to have more control over its margins

and distribution channel. Thus it moved away from the exclusive agent and itself

took the responsibility of stocking and movement of the goods.

b. In this phase the company realised the important of marketing thus it opened four

marketing companies across nation to promote the goods to doctors. The company

distribution system now was as below:

CompanyBranch Retailers

c. The flip side of now taking the Distribution system in its own hands was that the

wide network was difficult to control leading to decreasing profits and market

share.

3. Effects of DPCO (1979):

a. DPCO(1979) lead to narrowing of retailers margin from 25% to 15 %.Pharmacist

recommendations about drugs and their alternatives seem to be based on

profitability and on relationships with representatives of various companies.

b. The company thereby decided to stop giving direct supply to the retailers and

introduced wholesalers back into the system. The disadvantage of this was that

wholesalers were neither equipped nor willing to promote the product resulting in

higher book debts and cost of distribution.

4. Introduction of KRD:

a. Shutting of 21 branches & introduction of KRD’s

b. Distribution networks both in rural and urban India.

c. Managers at branch level busy with distribution and collections, thereby

neglecting sales promotion

In any distribution channel we need to focus on two issues:

1. Ensuring the availability of the products at the retail outlets and at the same time,

2. Ensuring that there are no excess stock inventories.

In Indian Pharma we have seen that at the month end the products are pushed from the

distributors to the wholesalers/ stockist. This situation may thus lead to the pile of the

inventories, forcing distributors to discount stock. Further, retailers in anticipation of the

lowest price may defer their purchases in anticipation leading to more losses due to issues of

availability.


DISTRIBUTION CHANNEL PRE 1991:

5. Marketing Channel Flows and Strategy

As we can see in the diagram above its not only the goods that flow through a marketing

channel, it can be title flow, payment flow, Information flow or promotion flow. Physical

flow of the goods is generally governed by the various cost considerations, time to

delivery etc.

Title flow is in the case where the dealers take ownership of the product itself like in case

of franchises. Payment flow is always in the reverse direction and follows a linear path.

Information flow is complex and multiple decisions are made by the intermediaries also.

Promotion flow represents how a company wants to promote its product. As we can see,

post 1991 the distribution channel design of Kalyan Pharma reflects the separation of


“information flow channel” and “physical flow channel” due to which it was able to solve

the problem of overburdening that the managers at its branches used to face.

6. Introduction of Distributors(Post 1991)

Distributors introduced for better service to customers & improving sales

Branches no longer link in the physical flow.

The channel now included 40 distributors in different states.

Bringing in the distributer lead to increase in the customer service. More is the

number of visits by the stockist to retailers the better it is for the entire flow of the

system.

DISTRIBUTION CHANNEL POST-1991:


Indian Pharmaceutical Scenario:

The above diagram shows that as we move from metro’s to the rural areas the sales losses

increases. This being due to less number of stockiest in the rural areas . Thus ,the number of

visits of the stockist to the retailers decreases thereby resulting in losses due to :

Non availability of the product

Excess inventories


Future implications The main motives of Kalyan pharma’s Distribution system are:

Improve customer service Reduce cost of distribution Reduce order processing time Reduce inventory at various levels of distribution

Push vs Pull strategy

Until now, Kalyan Pharma has used only push strategy as they have tried to sell the drugs

mainly through wholesalers and retailers or by targeting physicians. In the contemporary

times, it has to Adopt a “PULL” strategy with direct-to-consumer marketing.

Considering the Indian scenario, the awareness of Indians is increasing at a phenomenal pace

with the influx of mobiles and internet access reaching even the bottom of the pyramid. It is

not long before the Indian consumers will start visiting doctors not just with symptoms of the

medicine but also with drug cure just like their counterparts in the US. Also, considering the

already large Indian market which is growing rapidly, it reflects that there is a much bigger

market to capture and currently there are many untapped opportunities. Hence it makes

perfect sense that Kalyan Pharma go after educating the customer and promoting its products

directly.


Also, looking at the competition, a variety of promotional strategies have been used to

stimulate sales of pharmaceutical drugs. Traditionally, push techniques have been the

predominant means used to encourage physicians to prescribe drugs and thus increase sales.

Recently, the traditional push strategy has been supplemented by a pull strategy. Direct-to-

consumer advertising is increasingly used to encourage consumers to request advertised

drugs from their physicians.

However, due care must be taken in case of implementing pull strategy because customers

(patients) must have proper knowledge of when to use the exact medicine as illness and

severity of illness are at times not classified into categories.

More wholesalers or not?

A manufacturer usually goes for wholesalers because they specialize in

Selling and promoting

Buying and assortment handling

Bulk breaking

Warehousing

Transportation

Financing

Risk bearing

Market information

Management services and counselling

In the current scenario, where outsourcing has become the norm of the day and businesses are

operating at paper-thin margins, a company will go out of the business if it makes cost-

ineffective decisions. Hence it will be a better approach to form an efficient network of

wholesalers and retailers. E.g. Today Cipla’s distribution network in India consists of a field

force of around 5,100 employees and 42 exclusive and dedicated sales depots, as well as

approximately 2,300 stockists and 160,000 chemists. Cipla is currently the No. 2 drug maker

by market share in India.

Marketing channels must not just serve markets, they must also make markets.

If the intermediaries are more efficient than the manufacturer, the prices to consumers should

be lower. If consumers perform some functions themselves, they should enjoy still lower

prices. In general, changes in channel institutions tend to reflect the discovery of more

efficient ways to combine or separate the economic functions that provide assortments of

products to target customers


Strategic decisions in terms of cost - The Value-Adds vs. Costs of

Different Channels

It is imperative for Kalyan Pharma to choose its marketing channels wisely as there are

significant trade-offs related with each link in the channel as depicted by the diagram above.

Currently, they are using retail stores, distributors and their own Salesforce. As Internet is

comparatively a very low-cost channel, it can certainly leverage the power of Internet but not

rely completely on it due to the less value added by it. Moreover, it will bot be wise to go

with the idea of increasing the Salesforce.


Objective of Any Distribution Channel

IT Adoption IT adoption in healthcare has grown drastically. Pharmaceutical companies have

realized the need for integrated solutions in SCM to keep inventories at optimum levels, to improve distribution, to provide for liquidation of stock, and to streamline interconnectivity between manufacturing facilities, warehouses, and CFAs in different states.

The use of software like SAP and SAS, apart from other customized software, is

increasing. Newer technologies such as RFID would help in keeping track of products along the entire chain and would limit counterfeit drugs to enter into the system. However, the adoption of technologies such as radio-frequency identification (RFID) has been slow.


An online order system for Retailers or Premium retailers with significant revenue

(as compared to a normal retailer) can place the order online whose information directly goes to the Finished Goods Store (FGS).

The inventory level can be reduced by supplying goods directly from FGS to the

distributors. The distribution staff at KPL can be utilized to organize the inventory as per distributors at FGS and online IT system implemented will help achieve this task easier and faster. Hence, KRDs can be eliminated from the current Distribution System.

Not only these but also Kalyan Pharma needs to go for IT integrated solutions in

order improve Sales and operations planning process. It also keeps inventories at optimum levels by inventory level control system and inventory turns across the network. It will help to improve the demand accuracy and accordingly improving the distribution system.

The distributor on receiving the goods can directly provide goods to the

retailers thereby, eliminating wholesaler’s margins. KPL’s: medical representatives’ force of 600 can be used to target this segment for online ordering.

Normal retailers can also place orders online; however, they receive their goods still through wholesalers.

The Future of India’s Distribution Systems

Organized Retail - Subiksha Retail, The Medicine Shoppe, Health & Glow, Pills &

Powders, Reliance Wellness

International Competitiveness and Cold-Chain Management Indian pharmaceutical

companies are increasingly seeking opportunities to supply drugs to the world market.

More developed cold-chain management practices will be required to achieve this goal.

This is one of the major challenges faced by the industry if they are to retain product

quality during shipment. Companies like Eli Lilly in India have implemented initiatives

such as having their own vehicles equipped with cold-chain management systems.

Other companies such as World Courier have developed cold-chain management models

to help pharmaceutical companies maintain the cold chain


Conclusion

The important points that are highlighted in this case are

Pharmaceutical is one of the fastest growing sector in India and has been so

for quite some time.

Pharmaceutical industry in India is highly regulated. Hence it is important to

a have a distribution system that can contribute to profitability.

As producers cannot reach all their consumers directly so there is a need to

develop robust and flexible distribution network.

An inefficient distribution system can eat up the profitability of the company

and can also impact sales promotions.

There is a huge potential for Information Technology to contribute in to

developing an efficient distribution system


References: 1. http://aery-group.com/push_pull.htm

2. http://www.medcrunch.net/pull-push-pharma-marketing/

3. http://www.marcleshay.com/2010/08/marketing-strategy-flaws-push-vs-pull-marketing/

4. http://www.thehindu.com/business/companies/cipla-slashes-generic-price-of-bayers-

cancer-drug-nexavar/article3381049.ece

http://aery-group.com/push_pull.htm

http://www.medcrunch.net/pull-push-pharma-marketing/

http://www.marcleshay.com/2010/08/marketing-strategy-flaws-push-vs-pull-marketing/

http://www.thehindu.com/business/companies/cipla-slashes-generic-price-of-bayers-cancer-drug-nexavar/article3381049.ece

http://www.thehindu.com/business/companies/cipla-slashes-generic-price-of-bayers-cancer-drug-nexavar/article3381049.ece

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