Case Study:
AstraZeneca Sources R&D, Manufacturing, and IT
British-Swedish company AstraZeneca (astrazeneca.com/) is one of the world’s leading biopharmaceutical companies. The company focuses on the discovery, development, and commercialization of prescription medicines for six health care areas. AstraZeneca explains its forward-looking business strategy as follows: Each year, at the beginning of our business planning cycle, we assess the challenges and opportunities presented by the market, stress test our short and long-term planning assumptions, and critically assess our strengths and weaknesses as an organisation. We do so to assure ourselves that, whatever our past successes, the strategic path we are following is the right one for the future. Foreseeing a Threat to Its Business In 2007, management forecasted that the company was going to lose 38 per cent of its revenues over the next five years because patents on its key drug were expiring. Once the patents had expired, competitors could legally produce and sell drugs that AstraZeneca had developed, cutting into their sales and profit. To counter that threat, management launched a radically new business strategy and began major restructuring. David Smith, executive vice-president of operations, was responsible for restructuring to cut costs and improve profitability before the patents expired. Restructuring from Tightly-Bound to Loosely-Coupled Smith, who previously worked for cosmetics group Este’ e Lauder and clothing group Timberland, wanted to follow the restructuring model set years ago in the fashion, electronics, and auto industries. Those industries had shifted away from the traditional tightly-bound model of a vertically integrated company. Vertically integrated companies control every part of their business from research and development (R&D) to manufacturing and logistics. Smith shifted AstraZeneca from a vertically integrated biopharmaceutical company to a loosely-coupled organizational model connected by outsourced arrangements and relationships. Looking to AstraZeneca’s new strategy, Smith explained that: We would own the IP [intellectual property], the research, branding and the quality and safety issues . . . but [everything else] would be outsourced. The idea is to take out as many stages as you can.
Because of its new business strategy, by 2014 AstraZeneca would have completed its shift toward outsourcing R&D, the manufacturing of active pharmaceutical ingredients, and the IT function. Outsourcing relationships would take several years to complete largely because of complex regulatory hurdles. R&D and Manufacturing Outsourcing— Radical Changes The R&D function is the heart of any pharmaceutical company. R&D leads to the discovery of breakthrough drugs that could generate huge profits. So when AstraZeneca cut 7,600 R&D jobs worldwide in 2010, it triggered one of the biggest shake-ups in the industry’s history. Jobs were cut because of management’s plan to outsource drug manufacturing activities within ten years. Most of AstraZeneca’s R&D work was offshored to pharma emerging markets, such as China. According to Smith: Manufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brand-building. . . . There are lots of people and organizations that can manufacture better than we can. . . . We are going to go through a model of outsourcing the back-end . . . we don’t see manufacturing as core. Later, the company planned to strip out and outsource more sophisticated manufacturing and supply-chain operations, and logistics activities. These transformations are especially radical because the pharmaceutical industry had been among the most conservative global industries in its attitude towards manufacturing and the supply chain. IT Outsourcing Arrangements with Multiple Vendors AstraZeneca depends on its IT capabilities as much as it depends on its R&D—both are crucial. Outsourcing also became a major IT strategy, which was achieved by creating outsourcing relationships with several vendors. Infosys (infosys.com/) manages AstraZeneca’s manufacturing, supply chain, finance, and human resources applications. Cognizant (cognizant.com/) runs the centralized data storage. And IBM (ibm.com/) hosts the e-mail and office infrastructure. In 2007, AstraZeneca had signed a seven-year global outsourcing agreement with IBM. Under the deal, IBM provides a single global technical infrastructure for AstraZeneca covering 60 countries. The contract includes server hosting and storage for scientific, network and communications, commercial and supply chain operations. The former infrastructure was limited to major operations in the U.S., U.K., and Sweden. AstraZeneca retains control of its overall IT strategy and development and support of its application systems. With these outsourcing relationships, AstraZeneca has a single infrastructure linking all functions, regions, and markets. Richard Williams, CIO of AstraZeneca, said the outsourcing deal enables the company to provide greater value to the business by providing a consistent infrastructure across all its global sites. The consistent infrastructure enables it to roll out new technologies, reporting systems, and apps more quickly and efficiently. Williams added: “In allowing IBM greater autonomy on methods of delivery, the agreement will result in cost efficiencies when compared with running in-house systems.” (2007).
Q1. What will AstraZeneca look like in 2014 after its restructuring and outsourcing strategies have been completed? That is, which functions will be performed by the company and which ones won’t be?
Q2. What new types of management skills will be necessary?
Q3. Do you think that this organizational model is the model of the future?
Q4. IT offshoring is a very controversial issue because it shifts jobs to other countries. At the same time, it has the potential to decrease the organization’s costs significantly. Whether offshoring is good or bad for the people of affected countries is an issue of constant controversy. What are the benefits to AstraZeneca of using offshoring as part of its business and IT strategy?
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.