Blackmores - A Strategic Analysis (Part 4)

Distinctive Resources/Capabilities Analysis

It is Blackmores’ less recognisable distinctive resources and capabilities that mould the organization into an “industry leader in Australia for more than 70 years.” (Blackmores, 2006). The more significant resources and capabilities that can be identified which provide Blackmores with a sustainable competitive advantage are as follows:

1. Guaranteed quality
   
2. Thriving internal culture, expertly trained staff and industry savvy CEO.
   
3. Purchasing power and extensive product range.
   
4. Research and Development of existing and new products.
   
5. Reputation, brand image and awareness.

(i) Guaranteed quality

It is Blackmores’ primary policy to ensure high quality products, with “ingredients sourced from around the world.” (Blackmores, 2006) Marcus Blackmore, following in his father’s legacy has demonstrated that he has “not been interested in pursuing growth at the expense of quality or control.” (Quinlivan, 2006) This uncompromising effort to be a firm recognised for quality healthcare products was rewarded in 2003, when Pan Pharmaceuticals was closed down. Blackmores never did business with Pan Pharmaceuticals, as Blackmores’ “extremely capable audit team” (Quinlivan, 2006) did not recognise Pan’s products as superior in quality or control. This unflinching standard of quality has filtered through into Blackmores’ reputation as a whole.

(ii) Thriving internal culture, expertly trained staff and industry savvy CEO.

Blackmores has a company culture that has built great relationships amongst both employees and senior management. It is a culture in which effort and quality is recognised with both tangible and intangible rewards, Blackmores recently awarded “50 free shares to all permanent staff.” (ASX, 2006) In addition, the firm lives by the philosophy that “it’s impossible to be an effective organization without satisfied and engaged staff.” (Blackmores, 2006) Furthermore, empowering staff and allowing them to work in teams, has provided Blackmores with a further distinctive capability, “At Blackmores, very little gets done without teamwork and staff taking ownership of projects.” The firm’s expertly trained staff, working together, ‘keep the wheel in motion.’

Training and development of a highly skilled labour force is imperative to Blackmores’ mission. Blackmores is committed to employing “high quality staff… [often] qualified health experts.” Blackmores provides the community with trusted information by not only training their own staff, but by “educating [their] retailers [ensuring that their] consumers are provided with superior information on the Blackmores product.” (Blackmores, 2006)

Finally, it may be argued that it is Blackmores CEO, Marcus Blackmore that is the firm’s most valuable distinctive resource. It is he and his father, Maurice who “had ideas about health way ahead of his time,” (Blackmores, 2006) that have provided the firm with the tacit knowledge of not only how to run this complex organization as a business, but also an unparalleled understanding and passion for complimentary healthcare. It is Marcus’ strong political ties that enable him to spend up to 2 days a week lobbying the government for legislative reform, “we’ve moved over the past six months from a largely confrontational approach to industry to one of collaboration and consultation.” (Quinlivan, 2006) “Blackmores and the CHC (complimentary healthcare council) are currently working to oppose the proposed increase in TGA fees and charges and to have GST removed from complimentary medicines.” (ASX, 2006)

(iii) Purchasing power and extensive range.

With an exceptionally large market share within Australia, and growing market share in the Asian markets, Blackmores continues to grow its leadership strength in buying power. This unique bargaining power enables the brand to maintain its superior standard of quality, while becoming more cost effective.

Blackmores produces products servicing in excess of 20 different matters of health, ranging from weight loss and muscular pain to infections. This extensive range of products allows Blackmores to extend its brand equity into the various nooks and crannies of the industry.

(iv) Research and Development Capabilities

Blackmores is an undisputed leader in complementary healthcare research and development. It continues to refine its seasoned products and develop new ones. Blackmores’ joint venture with a research team at the Southern Cross University places it at the forefront of research and development. The recent appointment of a research manager provides the firm with a further distinctive resource and substantial tacit knowledge not available to competing firms. This innovation has been one of the key factors providing Blackmores with a sustainable competitive advantage.

(v) Reputation, brand image and awareness.

Brand image and reputation is critical to a firm’s success within the complementary healthcare industry. Particularly after the Pan Pharmaceutical debacle, there has been a heightened awareness of the need for quality when it comes to medicines and supplements.

Market research has established that “Blackmores is the most trusted natural healthcare brand in the market place.” (Blackmores, 2006) This brand equity has been established over decades and is extremely difficult for competitors to replicate. It forms perhaps the most important distinctive resource for the firm, and is the result of decades of hard work and is the result of the combination of its unique corporate culture, first-class operations, research and development capabilities, and all the other distinctive attributes of the firm.

In a market that demands the highest quality, Blackmores’ brand gives it a strong, sustainable competitive advantage over its competitors.

CONCLUSION

Strategic summary

The external market is favourable for Blackmores’ industry, with many growth markets in the Asia-Pacific region. The aging population of baby boomers will also contribute greatly to the demand of complimentary pharmaceutical products.

The company has a strong brand reputation and an established market position in the industry, with strong links to industry suppliers and distributors. Its capabilities in research and development give it valuable intellectual capital and tacit knowledge that is hard for other firms to replicate.

Implications for future strategy

Blackmores has a bright future ahead of it. If it can continue to execute the strategies it has been pursuing and continue to strengthen its branding and relationships with suppliers and retailers, it can expect to see its share price continue to grow as it rides the Asian economic boom.

Blackmores - A Strategic Analysis (Part 3)

INTERNAL ANALYSIS

Value Chain Analysis: Primary Activities

Inbound Logistics

• Extensive supplier checks means that Blackmores only receives the highest quality materials from its suppliers.
• All warehouse employees are given extensive training to ensure the most efficient use of human resources possible.

Operations

• Blackmores is moving its headquarters to a central location at Warriewood in order to more efficiently handle its operations.
• “Everything we do in our Operations area is dedicated to delivering a quality product.” (Blackmores, 2006)

Outbound Logistics/Distribution Channels

• Blackmores has various distribution arrangements depending in the country it is operating in. For instance, it has an extensive distribution network in New Zealand, with 1700 distribution outlets. In Hong Kong, however, it only distributes through one pharmacy chain store, as competition is highly intense in that market.

Marketing and Sales

• Great reputation for quality.
• Blackmores has the highest brand awareness in its category and is the most trusted. (Blackmores 2006 annual report)
• Effective use of TV commercials to support the debut of new product lines, including Blackmores expansion into the arthritis segment with its Glucosamine product in 05/06.
• Changes in the Therapeutic Advertising Code have allowed Blackmores to use health professionals in its advertising.
• Use of the popular Blackmores website to actively communicate with consumers, including 164,000 active subscribers.

Services

• Blackmores is committed to becoming a source of information regarding health issues:
• Effective use of the Blackmores website to communicate with its customers. The website won the Hitwise Top Site in the Health and Pharmaceutical category, and has 164,000 active subscribers who receive a fortnightly newsletter of health news.
• Blackmores Naturopathic Advisory Service fielded 55,000 calls over the past year, providing alternative health information to consumers and professionals.

Value Chain: Support Activities

General Administration

• Stable leadership over 30 years: Marcus Blackmore retains a 31% stake in the company.
• Strong commitment to core values which are reflected in all aspects of Blackmores’ business. These core values are: Trust, Leadership, Superior Performance, A More Natural Approach to Health
• Ability to successfully lobby for regulatory reforms.
• Strong professional ties with other healthcare professional bodies such as the Pharmacy Guild of Australia, the Pharmaceutical Society of Australia, and the National Pharmacy Students Association.
• Extremely strong commitment to quality at all costs creates a culture equally obsessed with quality.
• Strong commitment to social responsibility, with substantial donations to charity and a focus on environmental sustainability, provides an ethical culture and helps enhance the brand image.

HR Management

• Places great importance on recruiting, training, and retaining high quality staff, and this is reflected in the fact that Blackmores one of 12 Hewitt Best Employers awards for 05/06. This helps Blackmores in attracting new employees, important as the company expands its business into Asia.
• Blackmores has a profit share arrangement where 10% of its Australian profit is shared between all permanent staff, and recently it gave each of its employees 50 shares in the company to reflect the value it places upon them.
• Training provided for Blackmores employees through the Senior Consultant Training course is recognised and in some cases interchangeable with the Pharmacy Guild’s National Training Course.

Technology Development, R & D

• Blackmores sends large contingents of staff to the main pharmaceutical and healthcare trade conventions around the world in order to stay in touch with the latest trends in healthcare.
• Blackmores regularly funds research into new alternative healthcares, a recent example being a study into the immune benefits of the milk protein lactoferrin, which culminated in a new Blackmores’ product, Immunodefence.
• Blackmores has relationships with several universities around Australia to ensure it stays on top of the latest research relevant to the industry. One of these universities, Southern Cross University, is the base for the Blackmores Research Centre, and the combined effect of all this research is to help Blackmores regularly produce new products.

Procurement

• Focus on procuring from quality suppliers over cheaper ones has meant Blackmores has a greater reputation for quality than many competitors, and allowed it to dominate in the wake of the Pan Pharmaceuticals collapse of 2003.
• Extremely strong commitment to only procuring quality materials from suppliers:
• Use of quality control teams to ensure that suppliers are of the highest quality.
• Extensive product testing.
• Regulatory compliance.

Blackmores - A Strategic Analysis (Part 2)

Porter’s Five Forces Analysis

The intensity of rivalry among competitors in the industry:

• The industry structure is mainly that of monopolistic competition, with multiple firms competing for the consumer’s dollar. In the supermarket, 4-6 brands can be found selling relatively homogenous products.
  
• The high industry growth should help offset battle for market share, as competitors don’t need to steal one another’s customers. Market growth is increasing due to recent pushes towards complementary healthcare, for instance the work of the Complementary Healthcare Association lobbying the government and surveys undertaken by industry help to spread awareness of complementary healthcare among the aging baby-boomer population.
  
• The impact of regulatory bodies. E.g. if the Therapeutics Goods Administration tightens quality constraints, may erode profit margins of smaller firms, lead to push for economies of scale
  
• There are low switching costs between brands for consumers, though the Pan Pharmaceuticals debacle highlighted the importance of strong brand equity to maintain customer patronage. Also, if the healthcare products are viewed as commodities, buyers will focus upon price and service as their differentiators.
  

One of the biggest competitors to Blackmores continues to be lower priced alternative complementary medicines. Bio-Organics and Herron are two brands that are competing directly with Blackmores and given their lower price products are sharing much of the market share with Blackmores. Additionally, there are added incentives to purchase Guardian products, such as Guardian loyalty cards. These factors help to boost Guardian owned products. Therefore, a possible improvement in the future for Blackmores is to introduce a loyalty scheme that will help retain their customers.

The bargaining power of buyers:

• Bargaining power of buyers is moderate to weak.
  
• Many buyers mostly accounting for a small proportion of total sales. The complementary healthcare industry utilizes 3 major distribution channels - Chemists, grocery stores and healthcare stores to access a wide range of consumers who generally all purchase relatively low volumes (ASMI, 2006).
  
• Blackmores has sought to differentiate its product via a quality focus and some competitors have a cost-focus. This Differentiation strategy helps to develop brand loyalty and is aimed at nullifying the impact of higher prices on consumer demand.
  
• No real threat of backward integration – given the diversity of customers.
  
• The customers are end-users, so there are no resale issues
  
• The absence of any real switching costs favorably influences buyer power, as it allows dissatisfied customers to change readily within the healthcare brands. Again, the focus on brand image and service helps to offset this lack of switching costs.
  
• The retail stores and distributors, however, have some bargaining power because they are able to influence the amount of shelf space given to Blackmores. However, Blackmores has a good working relationship with distributors and has a good share of shelf space amongst retail outlets.

The bargaining power of suppliers

• Generally quite weak, as there are many supplier companies selling relatively homogenous raw materials and commodity products – price, quality and service are the only real differentiators.
  
• That said, suppliers don’t need to contend with substitute products, except for advances made in specific healthcare products.
  
• The industry is a very important customer of the supplier group (Industry worth more than $1billion). It is a growth industry that suppliers would want to remain on good terms with.
  
• Supplier products are vital to the industry’s business, which gives them some power over the industry. However the push for quality and the high number of suppliers means it is difficult for them to utilize this as leverage.
  
• No real switching costs between suppliers, only real logistical issues. So again industry has the power to shop between suppliers.
  
• Suppliers do not pose much of a threat of forward integration – they manage a diverse portfolio of clients so it is unlikely to be cost effective to develop them within the niche healthcare industry. Furthermore, it would be difficult produce the diverse raw-inputs that are necessary to manufacture healthcare products.
  

Threat of Substitute Products

• Synthetic medicines prescribed by professional doctors act as a substitute for the natural medication that Blackmores sells. However, the trend suggests a growingacceptance of natural healthcare products, such as those produced byBlackmores.
  
• Within the Asian markets that it is competing in, Blackmores will face intense competition from companies selling traditional Chinese medicines (e.g. Eu Yan Sang). Blackmores will have to work around cultural preferences for these products in countries like Taiwan, Hong Kong and Singapore.

Threat from Potential Entrants into the Industry

• No major legal barriers to enter the market
  
• Few secrets to manufacturing of health supplements
  
• Main barriers to entry are the existing supplier/buyer relationships, and the brand name and reputation of Blackmores.
  
• Threat of entry by global multi-level marketing firms (e.g. Amway, Nu Skin, Unicity) which often sell nutraceutical supplements
  
• Another threat that could possibly undermine the success of Blackmores in Australia is the potential arrival of an international company with intact infrastructure taking over local businesses in Australia. Already there is an abundance of companies competing for a segment in the complementary pharmaceutical industry and therefore separating oneself from the rest is an issue Blackmores must attend to.

Blackmores - A Strategic Analysis (Part 1)

INTRODUCTION

Company Background

• Founded in the 1930s by Australia’s pioneering naturopath, Maurice Blackmores.
  
• Goal of the company is to shift the focus of the health system away from treating diseases to one that encourages people to accept responsibility for their own wellbeing
  
• It is a customer-focused company inspiring people to take control of, and invest in, their health and wellbeing. They are “leaders in developing and marketing products and services that deliver a more natural approach to health, based on our expertise in vitamins, minerals, herbs and other nutrients.”

Industry Definition

• Blackmores’ industry is defined as the complementary pharmaceutical industry.
  
• This includes complementary pharmaceutical products, nutritional and health supplements.
  
• Companies in this industry are mainly involved with the purchase of raw materials and the conversion of these raw materials into natural medication products which are then distributed through retail stores, pharmacies and chemists.
  
• More established companies like Blackmores also have a strong sales service where qualified naturopaths and health experts provide advice to customers, in addition to established research & development capabilities to develop newer and better complementary healthcare products.

EXTERNAL ANALYSIS

The Macro-Environment

Demographic and Sociocultural Trends

The ageing population of baby boomers in Australia is perhaps the most significant trend driving growth in the complementary pharmaceutical industry. These baby boomers form a large section of the population, and have had the highest median household incomes of any generation. They are increasingly leaning towards non-prescribed medicine to be the greatest form of treatment for their various physical ailments, as well as natural healthcare supplements to be a source of health and wellbeing. This demographic trend will continue to set the consumer agenda for the years ahead, and especially so in the healthcare industry.

Changing health environments on a national level has meant that people are tending to accept over-the-counter (OTC) products more regularly compared to prescribed medicine. Not only is it sometimes cheaper to purchase OTC products but the feedback from several complementary pharmaceutical companies has demonstrated consumers are more than happy with their results.

Growing acceptance of alternative medicine has dominated mainly the muscle/joint segment of the products produced by Blackmores. More and more people are seeking alternative medicines to combat their muscle/joint soreness, and Joint Formula with Glucosamine and Chondroitin (60 Tabs) continues to be one of their best sellers.

Global Economic Trends

In terms of the global arena there is no doubt that Blackmores is looking to further establish itself in the rapidly growing economies of Asia, which present many growth markets and opportunities for the company. In particular, Blackmores has found the Malaysian and Thai markets to be two of the greatest assets to the company. It has already been in Thailand since 1997, and Blackmores’ products are located in over 1,000 stores throughout Thailand.

Blackmores’ greatest form of overseas expansion lies in Thailand. The company has also made in-roads into Singapore, Hong Kong, Malaysia, Indonesia and New Zealand. However Thailand continues to be the best of the international entities. “The Blackmores business in Thailand has experienced an average growth rate of 20% over the past six years whilst the growth rate in the comparable sub-category is 10%” Further welcome news for Blackmores is that overseas it is not only the expatriates that are purchasing their products but also locals. It is this segment that the company is looking to pursue.

Regulatory Climate & Technological Environment

Regulators were previously quite adversarial towards the complementary healthcare industry. Marcus Blackmore has been actively lobbying for better regulatory conditions. The company also engages in extensive research and development activities. These regulatory and technological factors are discussed in more detail in the analysis of the firm’s internal environment.