Case 4.

2 Lundbeck Korea: Managing an International Growth Engine 245

CASE 4.2 LUNDBECK KOREA: MANAGING AN INTERNATIONAL

GROWTH ENGINE

Michael Roberts wrote this case under the supervision of Professor Paul Beamish solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
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Early in 2005, Michael Andersen, vice president barely three years in the making. In addition,
of Lundbeck – a leading central nervous system while normal and expected in a recently estab-
(CNS) pharmaceutical company in Denmark, lished subsidiary, Lundbeck Korea was still not a
questioned whether he should rethink Lundbeck’s profitable business unit. Since most of the other
reporting structure in Asia. In particular, the Asian countries were part of the Asia division,
Korean subsidiary was experiencing very strong Andersen also had to think about how this would
growth and Andersen wondered whether Lund- affect Lundbeck’s regional and worldwide organ-
beck Korea would achieve its full potential if it izational reporting norms; in particular, he was
remained part of Lundbeck Asia, the regional concerned about the Chinese subsidiary. While
group, or whether it would be better to have the making adjustments to reporting structures was
managers at Lundbeck Korea report directly to a normal part of doing business for Lundbeck,
him in Copenhagen. Andersen had not anticipated that he would be
Korea had proven itself to be a rising star considering this decision so soon for Korea.
among Lundbeck’s overseas subsidiaries, and
the staff in Korea, led by country manager Jin-
The CNS Landscape
Ho Jun (Jun), wanted more independence to chart
their own path. The Korean subsidiary’s perform- However, these markets were fairly stable and
ance had far exceeded what was projected in the generally experienced low single-digit growth.
original business plan. It had grown from one Exhibit 1 is a list of the top pharmaceutical
employee in 2002 to over 50 employees in 2005, markets. The major CNS pharmaceutical markets
and had sales of KRW25 billion (approximately by country were: United States, 59%; Germany,
US$22 million). Given the current success, 5%; Japan, 4%; France, 4%; United Kingdom,
Andersen wondered whether the current reporting 4%; Spain, 3%; Italy, 2%; South Korea, 1.5%.
structure was still appropriate. The bulk of the remaining 19 per cent of the
The decision was not to be taken lightly; while CNS market came from emerging economies such
the Korean division, under the leadership of Jun, as Brazil, China, India, and South Korea. While
was experiencing enormous growth, it was only the market for CNS drugs in these emerging
246 Developing a Transnational Organization

Exhibit 1
Top Pharmaceutical Markets, 2005

Pharmaceutical Market Population

Country Size (billions USD) (millions USD) Lundbeck Functions
United States 270.2 307.2 Sales/Research
Japan 76.2 127.1 —
Germany 43.9 82.3 Sales
France 39.1 64.1 Sales
United Kingdom 31.3 61.1 Sales
Italy 24.3 58.1 Sales/Research
China 20.4 1,338.6 Sales
Canada 16.3 33.5 Sales
India 9.3 1,166.1 Sales
South Korea 7.9 48.5 Sales
Russia 7.9 140.0 Sales
Turkey 7.5 76.8 Sales
... ... ... ...
Denmark 2.6 5.5 Sales/Research/Production

Source: Business Monitor International, “Pharmaceutical Market Statistics: Statistics for 2005,” London,
United Kingdom, 2009.

economies was much smaller, the rate of growth most developed markets, for example the United
in many of these countries was in excess of States, exclusivity began at the time the drug was
15 per cent per year.1 patented; in other markets, for instance South
The global industry for CNS pharmaceuticals Korea, it began when the drug was launched.
was about $93 billion in 2005. CNS diseases are The laws and regulations around granting exclu-
serious and life-threatening and affect the qual- sivity also varied by country, and were often
ity of life of patients as well as of their relatives. heavily influenced by political concerns. Regard-
Over the past 50 years, new pharmaceuticals had less of the region, when the exclusivity periods
revolutionized treatment options, but there run out, the price of a drug drops dramatically.
remained a large unmet need for new and The revenues from Eli Lilly’s anti-depressant drug
innovative therapeutics. Prozac, for example, fell by over 80 per cent
Overall, the industry was marked by intense following the loss of its patent protection at the
competition from both rival branded pharma- end of the 1990s.2 While the decrease in revenues
ceutical firms and generic competitors. In most from this drug could also be attributed to new
markets, branded pharmaceuticals were given a branded pharmaceuticals entering the anti-
number of years of exclusivity – a period in depressant market, the significance of loss of
which no generic version of the drug can be sold. patent protection cannot be overstated.
However, these periods of exclusivity varied Almost 60 per cent of the total market sales in
greatly by country. Patent protection could range the CNS industry came from the nine largest
from no protection to 20 years of exclusivity. In firms (Johnson & Johnson, 11%; Glaxo Smith

1 2
B. Nehru, The CNS Market Outlook to 2012, Business B. Massingham, CNS Market Outlook to 2000, Business
Insights Ltd, London, United Kingdom, 2007, p. 59. Insights Ltd, London, United Kingdom, 2000.
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 247

Kline, or GSK, 9%; Pfizer, 8%; Lilly, 7%; Sanofi- over the next several years because of the large
Aventis, 5%; Novartis, 5%; Astra Zeneca, 5%; influx of generic drugs in selective serotonin
Wyeth, 5%; Forest Labs, 3%). Lundbeck held reuptake inhibitors (SSRIs), the largest class of
2%. In this industry, sales growth was highly anti-depressant drugs. SSRIs, which made up
dependent on the successful introduction of a more than 50 per cent of the anti-depressant
new patented drug, and sales declines were most market segment, were a class of compounds
often a result of a patent expiration. A firm’s typically used in the treatment of depression,
revenue was often disproportionally dominated anxiety disorders, personality disorders, and some
by one blockbuster drug – a drug that dominates cases of insomnia. In particular, sales of Zoloft by
a class of drugs. For example, Johnson & John- Pfizer were expected to decrease by one third
son generated 41 per cent of its revenue from the in 2006 due to the expiration of its patent in the
blockbuster schizophrenia drug Risperdal.3 U.S. market. This left only three products with
Depending on the country, buyers of pharma- patent protection: Effexor by Wyeth, Lexapro by
ceuticals could be national health services, Lundbeck, and Yentreve by Lilly.6 Overall, this
private insurance companies, or individuals. class of drugs was only forecasted to growth by
However, in general, decisions about prescribing 1.5 per cent a year until 2012.
drugs were made by practitioners (i.e. doctors, New growth in the CNS market was driven by
etc.).4 Psychiatrists represented the largest group drugs for Alzheimer’s disease (AD). Over the last
of practitioners in the CNS industry. Since few years, this class of drugs experienced growth
doctors were the ultimate decision makers, the rates upwards of 15 per cent per year.7 The market
buyer had little direct product choice. However, for AD medications was $4 billion in 2005, and
the type of buyer system greatly affected the was expected to see growth of more than 15 per
potential market size and price that could be cent in 2006. Exhibit 2 gives an overview of the
charged for the product. The presence of a AD medication market. The future of AD medica-
national health service that covered prescription tion was in the NMDA receptor antagonist class
drugs, for example, could greatly expand the of drugs, which was expected to grow by over
market, but government pressure could poten- 30 per cent in 2006. The drugs in this class were
tially lower prices per unit. all derivates of memantine. There were three
memantine-based drugs on the market; however,
Key Products they were not in direct competition with each
other as they were a result of shared development
The largest class of drugs in the CNS market was and licensing. Forest Labs marketed Namenda in
comprised of anti-depressants, which represented the United States; Merz sold Axura in Germany;
almost 20 per cent of the total market. Depression and Lundbeck marketed Ebixa in the rest of
is a genuine physical condition and affects Europe. Memantine was an important medication
approximately 10 per cent of the global popula- because it was the only pharmaceutical available
tion.5 “Bad” mood, loss of energy, feelings of for moderate and severe forms of AD. Since most
worthlessness, difficulty concentrating, and even AD patients lived long enough to experience all
thoughts of suicide are just some of the many stages of the disease, memantine filled a crucial
symptoms. role in AD therapy. There were no threats of
The market for anti-depressants was $19 bil- generics to memantine until after 2008. Overall,
lion in 2005 (see Exhibit 2). However, the market this class of drugs was forecasted to grow by 13.1
segment was due to have very poor growth rates per cent a year until 2012.8

3
B. Nehru, op.cit., p. 15.
4
Datamonitor, “Global Pharmaceuticals, Biotechnology &
6 7
Life Sciences: Industry Profile,” New York, 2009. Ibid., p. 53. Ibid., pp. 58–60.
5 8
B. Nehru, op.cit., p. 33. Ibid., pp. 94–98.
248 Developing a Transnational Organization

Exhibit 2
Leading Anti-Depressants and Alzheimer’s Disease Medications in the Global CNS
Market, 2005

Expected
Sales Growth (% per yr.)
(millions Share Patent
Brand Company Generic Class USD) (%) 2006 2012 Expiry
Anti-Depressants
Effexor Wyeth venlafaxine SNRI 3,830 20.1 3.0 -20.4 2007
Lexapro Lundbeck/ escitalopram SSRI 2,455** 12.9 19.0 8.4 2011
Forest
Zoloft Pfizer sertraline SSRI 3,641 19.2 -34.0 -32.6 expired
Wellbutrin GSK bupropion Other 1,605 8.4 22.0 -* -
Yentreve Lilly duloxetine SNRI 684 3.6 95.0 23.9 2013
Seroxat GSK paroxetine SSRI 819 4.3 -13.0 -28.3 expired
Prozac Lilly fluoxetine SSRI 408 2.1 -21.0 -34.7 expired
Remeron Organon mirtazapine Other 351 1.8 -15.0 - -
Others 5,220 27.5 -3.0 -2.7
Total 19,013 100.0 3.5 1.5
Alzheimer’s Medications
Aricept Pfizer donepezil CI 2,215 54.9 13.5 -5.5 2010
Namenda Forest memantine NMDAA 482 11.9 35.7 24.6 2014
Exelon Novartis rivastigmine CI 496 12.3 5.6 -0.9 2012
Reminyl J&J galantamine CI 490 12.1 6.7 -16.7 2008
Ebixa Lundbeck memantine NMDAA 189 4.7 29.7 0.6 2010
Akatinol Lundbeck memantine NMDAA 60 1.5 13.2 -11.5 2008
Axura Merz memantine NMDAA 22 0.5 35.6 7.2 2008
Prometax Novartis rivastigmine CI 25 0.6 5.3 4.0 2012
Other 57 1.4 29.1 98
Total 4,036 100 15.4 13.1

* - is used to indicate that no information is available

** of which Lundbeck is 863
Source: Modified from B. Nehru, The CNS Market Outlook to 2012, Business Insights Ltd, London, United
Kingdom, 2007.

The Asian Market

several years. However, some markets through-
At $97.4 billion in 2005, the pharmaceutical out Asia were vastly different from others. For
market in Asia represented approximately example, the largest market in Asia was Japan,
20 per cent of the global pharmaceutical indus- which accounted for 55 per cent of the entire
try. The Asia pharmaceutical market had a market but only had a growth rate of 2.4 per cent
growth rate of about 6.4 per cent a year which a year. China, on the other hand, accounted for
was forecasted to remain steady for the next 17.5 per cent of the pharmaceutical market, with
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 249

a growth rate in excess of 20 per cent per year. Lundbeck was a research-intensive company,
The other major markets in Asia were South structured to be constantly producing the next
Korea and India, representing 8.3 per cent and generation of drugs. The primary mission of the
8.1 per cent of the market, respectively. Exclud- company was to undertake the tasks of improv-
ing Japan, the other Asian markets grew at an ing the quality of life for persons with a psychi-
average rate of 11.3 per cent per year. The CNS atric or neurological disorder, and to work
market represented nine per cent of the total intensely to find and develop new and improved
pharmaceutical market in Asia for a total of drugs. It employed a total of 1,100 specialists in
$8.7 billion.9 its R&D units, which consumed more than 20 per
The payer systems also varied greatly through- cent of annual revenues.
out Asia. Japan had a combination of govern-
ment insurance and private employer-based Strategic Drivers
insurance. Hong Kong and Singapore had a com-
Lundbeck’s strategy was driven by four principles:
bination of private pay and private insurance
specialization, speed, integration, and results.10
programs. South Korea had a fully government-
Specialization: Unlike many of its competitors,
funded national insurance for pharmaceutical
Lundbeck specialized exclusively in the CNS
prescriptions. China, Thailand, and Malaysia
pharmaceutical area. Moreover, the strategy of
had virtually no group or collective programs
specialization had been extended to include all
and most costs for pharmaceuticals were paid
aspects of its business. Thus, Lundbeck’s goal was
by individuals.
to focus and streamline its key products, simplify
its processes and business procedures, and focus
Lundbeck on long-term growth in the CNS industry. To do
this, Lundbeck focused on marketing and distrib-
Lundbeck was an international CNS pharmaceut-
uting its new and innovative products. Lundbeck
ical company headquartered in Denmark.
tried to balance innovative activities while main-
Founded as a trading company in 1915 by Hans
taining a competitive cost structure.
Lundbeck, the company had evolved into a global
Speed: Lundbeck’s strategy was to use its small
CNS pharmaceutical firm. In 2005, Lundbeck
size as an advantage. The goal was to maintain
earned over $240 million in operating profits
short decision-making processes in order to
from over $1.5 billion in sales. Lundbeck con-
respond quickly to the demands of a highly com-
ducted research on, developed, manufactured,
petitive market. That being said, Lundbeck set up
marketed, sold, and distributed pharmaceuticals
strong control systems to ensure that the com-
for the treatment of neurological disorders,
pany was able to balance its results-focused
including depression, schizophrenia, Alzheimer’s
mindset with exposure to risk and the need to
disease, Parkinson’s disease and insomnia.
maintain ethical business practices. Lundbeck
Lundbeck employed 5,500 people worldwide,
used its small size to flexibly respond to risks at
2,100 of whom were based in Denmark. It manu-
all stages in the value chain. Some of the key
factured its products in Denmark and Italy, and
risks that it identified at the sales and marketing
had research facilities in Denmark and the United
level included generic competition; adherence to
States. Lundbeck’s drugs were registered for sale
ethical sales and marketing practices; and risks
in more than 90 countries, and it had its own
associated with product liability. Its intention
independent sales forces in 55 countries. For
was to structure its organization to control and
Lundbeck’s financial highlights in 2005 (see
respond quickly to any new threat.
Exhibit 3).
Integration: Lundbeck’s goal was to continue
to become a global pharmaceutical firm. In order
9
Datamonitor, “Pharmaceuticals in Asia-Pacific,” New
10
York, New York, 2008, p. 9. Company documents.
250 Developing a Transnational Organization

Exhibit 3
Lundbeck Financial Highlights, 2005

DKK millions USD millions

Revenue 9,070 1,513
Profit from operations 2,174 363
Finance income, net 17 3
Profit before tax 2,156 360
Net profit 1,457 243
0
Cash flows from operating activities 2,074 346
0
Total assets 11,560 1,928
Capital and reserves 7,437 1,240

EBIT margin (%) 24

Return on equity (%) 19.3
Earnings per share (EPS) 6.52 1.1
Earnings per share - diluted (DEPS) 6.5 1.1
Cash flow per share 9.2 1.5

Revenue By Product and Region Product Region Product Region

Europe 4,680 781

Cipralex®/Lexapro® 1,963 327
Ebixa® 933 156
Azilect® 6 1
Other pharmaceuticals 1,777 296

United States 2,618 437

Income from Cipralex®/Lexapro® 2,552 426
Other pharmaceuticals 66 11

International Markets* 1,539 257

Cipralex®/Lexapro® 662 110
Ebixa® 172 29
Azilect® 0 0
Other pharmaceuticals 706 118

Other revenue 232 39

Total group revenue 9,070 1,513

* Asia, Australia, Africa, Americas, Canada, Middle East

* Estimated on the 2005 annual DKK/USD exchange rate of 5.996475
Source: Company documents.
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 251

to achieve that, it sought to continue to develop patent protection in major markets. However,
strong competencies through the entire value Lexapro had proven to be superior to Cipram in
chain of the pharmaceuticals market, from know- controlling many disorders.
ledge and control of research to the development Ebixa was Lundbeck’s memantine drug for the
of new pharmaceuticals, production, marketing treatment of AD. This drug was certain to be a
and sales. However, it did not believe that it had major growth engine for Lundbeck. However, due
to do everything in-house or at home in Den- to licensing agreements with Merz and Forest,
mark. As the firm grew in its global competency, Lundbeck was prohibited from marketing the
it planned to seek new locations and partners for drug in Germany or the United States. Lundbeck
any aspect of the value chain that could offer anticipated that growth in 2006 would be in
better value in terms of quality, price, commod- excess of 25 per cent. Ebixa was forecasted to
ities, and labour. have strong growth until 2010, when it would
Results: Lundbeck intended to provide con- lose patent protection.
tinuous short-term and long-term value to its
shareholders. In 1999, Lundbeck’s shares were
Lundbeck Asia
listed on the Copenhagen Stock Exchange. The
Lundbeck Foundation, which distributed $40 Lundbeck products had been available in many
million to $50 million each year in grants to the Asian countries since the early 1990s. In the past,
scientific community for various types of Lundbeck chose to licence its product for sales
research, owned about 70 per cent of the shares and distribution by local pharmaceutical firms.
in Lundbeck, while the remaining 30 per cent As a result, several of Lundbeck’s key products
were traded on the stock exchange. Lundbeck’s for depression and Alzheimer’s had become well
semi-private ownership by the Lundbeck Foun- known throughout Asia, and had been used as
dation was a long-term strength for the company primary psychiatric medications. Seeing the
because this ownership structure gave the firm importance of Asia for its long-term growth,
greater flexibility than most of its competitors to Lundbeck decided in the late 1990s to set up
re-invest its current profits for long-term wholly owned subsidiaries in each of its markets
growth.11 in Asia and gradually retake its licences. Before
Lundbeck’s leading products were Lexapro and this time, Lundbeck had no standalone subsidiar-
Ebixa. Lexapro represented 57.1 per cent of ies in Asia. So, controlling its own distribution,
Lundbeck’s revenues and Ebixa represented 12.2 sales, and marketing would allow Lundbeck to
per cent. Lexapro was one of the world’s most integrate the Asian markets into the Lundbeck
often prescribed SSRIs for the treatment of strategy of specialization, speed, integration,
depression and anxiety disorders. Lexapro was and results. By the early 2000s, Lundbeck had
launched in 2002 and was marketed globally by established subsidiaries in most Asian markets.
Lundbeck and its partners. Unlike most other The Asian subsidiaries were joined together as
SSRIs on the market, which had lost patent pro- part of a regional group headquartered in Hong
tection or would lose protection over the next Kong, called Lundbeck Asia. In total, Lundbeck
year or two, Lexapro would have patent protec- Asia consisted of eight country subsidiaries:
tion until 2011. Lexapro could expect growth of China, Hong Kong, Indonesia, Malaysia, Paki-
more than 20 per cent per year until 2011, when stan, the Philippines, Singapore, and Thailand.
its sales would drop off dramatically. Lexapro Due to unfavourable market conditions, Lund-
was a next-generation drug launched to replace beck did not initially establish any successful
the drug Cipram (citalopram), which had lost its distribution channels in South Korea.
Lundbeck established a subsidiary in Japan,
but had not been able to generate any sales there.
11
Datamonitor, “H. Lundbeck A/S,” New York, 2009, The complexity of the regulations surrounding
p. 16. exclusivity rights in Japan made it very difficult
252 Developing a Transnational Organization

for Lundbeck to market its drugs in the Japanese that was trying to sell imported medicine could
market. One of the biggest hurdles was that expect to receive very unfair treatment from
Japanese regulators required that the data used regulators, price boards, and practitioners.
in the application documentation for exclusivity
be gathered in Japan. CNS Pharmaceuticals in Korea
The purpose of Lundbeck Asia was to provide
control, support, guidance, and direction for the Even though the market share for treatment
Lundbeck subsidiaries in the region. The manage- of CNS disorders was growing fast, it was still
ment team consisted of regional vice president quite small compared to the rest of the Korean
Asif Rajar, plus a regional product manager, a pharmaceutical market. This was because mental
regional finance officer, and a regional regula- disorders were not given high legitimacy in Asian
tory affairs officer. The management at Lundbeck societies like Korea; thus, there were limited
Asia was tasked with implementing Lundbeck’s resources for treating people who suffered from
strategy in Asia and ensuring that it be executed mental illness. Instead, Korean society gave
appropriately in each country. Since Lundbeck priority and medical resources to physically life-
was just entering these markets, the regional threatening diseases such as cancer and heart
management was also charged with developing disease.
a sense of corporate identity and pride. There were stigmas surrounding mental dis-
orders everywhere in the world, but in South
Korea these were very pronounced. Only a few
The Korean Pharmaceutical Market years earlier, anyone with depression would have
In 2005, the South Korean pharmaceutical tried to conceal it. However, this had begun to
market was the 11th largest in the world (see change in 2005 after the son of a well-known
Exhibit 1). The past 10 years had been revolution- businessman committed suicide and it was
ary for the Korean pharmaceutical market publicly announced that he had suffered from
because the prescription drug market in Korea depression. The situation repeated itself soon
was quite underdeveloped prior to 2001. Without after, when a very popular Korean film actress
a doctor’s prescription, pharmacists were able to committed suicide. These incidents sent shock
dispense any medicine that was legal for sale. waves through society. The Korean people simply
Thus, existing medications were available from could not comprehend how someone with so
pharmacists upon request. However, beginning much success could possibly take their own life.
in 2001, Korea divided pharmaceuticals into However, these unfortunate situations led to a
prescription only and over-the-counter (OTC) greater public discourse on, and improved under-
medication. This caused a surge in the prescrip- standing of, mental illness. As such, Korean soci-
tion drug market. ety had begun to experience greater openness
After the Asian financial meltdown in 1997 around depression during the last five years.
(known in Korea as the IMF crisis – because the In 2001, when the Korean pharmaceutical
Korean government needed to secure large loan market was divided into prescription only and
agreements from the International Monetary over-the-counter (OTC) medication, the govern-
Fund), the Korean government began a process ment insurance policy began to pay for CNS
of opening up markets to foreign multinational prescription medication. The CNS industry began
enterprises (MNEs). Before 2000, any MNE wish- to see market increases of 30 to 40 per cent per
ing to enter the Korean pharmaceutical market year, making CNS medications a nearly three
needed to have a joint venture with a Korean quarters of a billion dollar industry by 2005.12
company. In addition, prior to 2000, it would Growth estimations were projected to continue at
have been very difficult for a pharmaceutical the same pace for the next several years. In an
firm to establish a subsidiary in Korea unless it
was prepared to establish production facilities.
While not an absolute legal requirement, a firm 12
Calculated based on available data.
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 253

established market, such as the United States or of his career working for multi-national pharma-
Western Europe, sales had the potential for grow- ceutical companies. This gave him the global
ing at one or two per cent per year. mindset needed to carry out Lundbeck’s strat-
egies and corporate policies. Jun began working
Lundbeck Korea for the German multinational pharmaceutical
company Bayer in 1990 as a CNS product man-
While many of the big pharmaceutical companies ager. He was quite successful and was promoted
had entered the Korean market, to Lundbeck, to strategic product manager in 1996. In 1999, he
Korea did not seem like a significant market in left Bayer to work at an American MNE, Eli Lilly,
the 1990s. Moreover, Lundbeck had centralized as its product manager of neuroscience and even-
production, and it was not prepared to allow tually as its senior product manager. At Bayer
production outside of Denmark or Italy just to and Lilly, Jun developed a deep and rich know-
enter a very small market. In fact, in 1996, one of ledge of the Korean CNS pharmaceutical market.
Lundbeck’s key drugs, Cipram, was licensed to a Perhaps even more importantly, especially in
Korean firm and registered for sale; however, it Korea, Jun developed a very good network of
was never marketed because of the requirement relationships with the top Korean psychiatrists.
to have the drug manufactured in Korea. He devoted considerable time and effort to ensur-
Lundbeck Korea was established in March ing high-quality relationships with these import-
2002, after Lundbeck could justify the establish- ant opinion leaders. This was not an easy or
ment of a subsidiary based on developments in painless endeavour. In Korea, good relationships
the Korean market. The original plan was to were built up over time, and involved numerous
establish the Korean and Japanese subsidiaries hours eating and socializing during evening
as one unit separate from the rest of Asia. How- social gatherings. To establish the quality of net-
ever, immediately after Lundbeck Korea was work that Jun had achieved, a person must be
established, the executives in Copenhagen chose willing to sacrifice a great deal of family time.
to have the managers in Lundbeck Korea report These social meetings were a very important
to Lundbeck Asia, the regional headquarters. forum for professional discussions and sales
Jin-Ho Jun was hired as the country manager of pitches.
Korea. Jun reported directly to Rajar in Hong
Kong, who reported to Andersen in Copenhagen.
The State of Local Management
Even though Lundbeck was a small actor in the
South Korean market, it quickly established a To Jun’s mind, choosing how much control and
strong reputation. Lundbeck worked primarily supervision to place on local managers was
with the hospitals because Koreans generally pre- always tricky in Korea. Sitting in on meetings
ferred to seek treatment at hospitals rather than as a junior manager, he repeatedly heard the
private clinics. They considered the medical staff Korean managers explain with great frustration
to be more competent at major hospitals and saw to the regional and headquarters managers that
major hospitals as having superior facilities and the non-Korean managers did not understand the
equipment. With a few exceptions, major hos- uniqueness of the Korean market. On the other
pitals were generally part of large university hand, it was difficult for the parent company
systems. managers to trust the Korean managers: the edu-
cational backgrounds, communication skills, and
Jin-Ho Jun global knowledge of the Korean managers were
usually inferior to those of their foreign counter-
Jun had the two essential qualities that Lundbeck parts. While their local knowledge was essential,
needed to help establish its subsidiary in this they did not have the necessary management
unfamiliar market: he had almost fifteen years skills. However, because of foreign managers’
of experience in the CNS market in Korea, which imperfect knowledge of the Korean market, they
made him a local expert; and he had spent most were apt to make strategic miscalculations.
254 Developing a Transnational Organization

In 2005, Jun knew that the Korean pharma- respond quickly to their needs; to reduce risks
ceutical market had become similar to markets in by ensuring that all ethical standards were being
other developed nations. Local knowledge and followed; and to have an understanding of the
skills, while still important, were not quite as strengths and weaknesses of each of his markets.
important as they were 20 years earlier. Mean- Rajar was a very direct communicator and
while, Korean managers’ communication skills, provided very clear guidelines to Jun. His expect-
management skills, and global knowledge needed ations were unambiguous and he was able to
to succeed in an MNE were much more sophisti- illustrate a comprehensible path for Lundbeck
cated than they were 20 years ago. As a conse- Korea that followed the Lundbeck strategy.
quence, Jun believed that Korean subsidiaries Before Jun sent any report or proposal to the
now required less supervision and control. head office, Rajar took the time to review the
reports and provide Jun with feedback and sug-
Asif Rajar gestions. Rajar provided active assistance to Jun
on how to communicate with the management
Being part of Lundbeck Asia had advantages for team in Copenhagen. Because Rajar had exten-
Lundbeck Korea. Asif Rajar helped establish sive experience in management, his guidance
Lundbeck Korea. Located in Hong Kong, he could was indispensible. He was also adept at paying
easily maintain tight control over the Asian attention to the details of local business. Rajar
operation. Rajar had extensive experience with also organized extremely helpful meetings and
Lundbeck throughout Asia, spending many years conferences for the Asian country managers.
with Lundbeck in Thailand, Indonesia and other Rajar facilitated meetings where country man-
Southeast Asian countries. Though he was a agers could share their best practices and discuss
Swiss citizen through marriage, Rajar was origin- ways of developing local programs and handling
ally from Pakistan, giving him a background difficult situations. Through these meetings, the
with both a European and Asian mindset. He Lundbeck Asia managers gained a sense of asso-
was bright and well educated, having achieved ciation and pride in being part of Lundbeck.
his MBA from a top business school in the United Overall, Rajar was a good coach and mentor
States, where he was now often invited to give and was a significant player in the creation and
guest lectures. execution of the business plan for Lundbeck
Rajar was very active in helping the Asian Korea.
country managers run their businesses, and was
enjoying very good success. He involved himself
The First Lundbeck Product in Korea:
in all areas of planning and even took the time to
interview candidates for important staff positions
Cipram
before the country manager hired them. Rajar Lundbeck began by marketing Cipram, the fore-
requested that all decisions be cleared with him, runner of Lexapro, in the newly established
and involved himself quite heavily in the stra- Korean subsidiary in 2002. For the purpose of
tegic plans of the subsidiaries under his control. distributing and marketing Cipram, Lundbeck
As regional vice president, Rajar was focused on entered into a sales alliance with Whanin, a local
implementing Lundbeck’s strategy in Asia. His Korean firm, by establishing a separate business
success was measured on how well he was able unit. Each firm agreed to invest an increasing
to execute that strategy and grow the Asia number of resources into the Cipram business
region. unit each year. However, this business unit was
Rajar’s goals were to launch and market Lund- only established for the marketing of Cipram. If
beck’s newest and most innovative products; to Lundbeck were to launch a different class of
control costs and preserve resources; to create drugs, it would do so on its own or under a
effective communication channels between the separate arrangement.
corporate office and Lundbeck’s customers The launching of Cipram was Lundbeck Kor-
(doctors, regulators, and patients) in order to ea’s first of many successful attempts to debunk
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 255

local myths. Initially, many industry leaders minds. Though, of course, Jun and his staff
doubted the success of Cipram, as it would be needed to provide persuasive evidence, they
the fifth SSRI in the market. Since the other four decided that they would also try to win the
products were well established and better priced, members over with emotional arguments. Jun
there was little chance for the launch of Cipram argued that:
to be successful. However, within three years,
Since Korean society is still a Confucian soci-
Lundbeck was able to capture almost 8.3 per cent
ety, we have a very high regard for elder
of the highly competitive and generic-filled
members of society. So, we met the key people
market with Cipram, thereby making Lundbeck
and told them that this is the only medicine
Korea a major market player. As a comparison,
that can help severe Alzheimer patients. We
the other major anti-depressant medications in
asked them to imagine if their mother, father
the Korean market in 2005 were Seroxat (12 per
or close relative had Alzheimer’s. Would you
cent of market share), Effexor (11 per cent), and
want them to be without medication when
Paxil CR (five per cent). The rest of the market
they entered the severe state? In this way, we
was dominated by generics. This initial success
convinced them that the product was neces-
allowed Jun to gain an upper hand that gave
sary, and since it was the only available prod-
Lundbeck an advantage in future contract nego-
uct on the market, it should have a price equal
tiations with the local partner.
to other Alzheimer medications.

The Launch of Ebixa In the end, they were able to successfully argue
for a substantially greater price for Ebixa. By
Ebixa was the only medication available for the opening up this new market, the Ebixa case dem-
treatment of severe stages of Alzheimer’s. All onstrated to Jun that local expertise played a
other drugs on the market only targeted mild significant role in achieving an unprecedented
and moderate cases. Since most Alzheimer’s success in the industry.
patients would enter the severe stage long before
they died of the disease, Ebixa was an important
The Lexapro Launch: A Conflict of Strategy
medication. In most markets, Lundbeck sold
Ebixa as a new product; and in fact, Ebixa had Lundbeck focused on streamlining its key
been registered many years ago by a Korean products, and on long-term growth in the CNS
pharmaceutical firm, but unfortunately it was industry. This included marketing the new and
poorly promoted in the Korean market. most innovative products. As part of bringing
Since Ebixa had been registered many years Lundbeck Asia into step with the rest of the
earlier, the price set by the government insurance Lundbeck group, Rajar believed that it was
regulator was very low, in fact well below the important that all the subsidiaries kept up to date
current production cost. Jun and his staff com- with Lundbeck’s product offerings. Jun’s position
bined Lundbeck’s competencies with their under- was somewhat different; he believed that Lund-
standing of the local market. The normal way to beck Korea should simply pursue the path that
convince the insurance regulator to increase the maximized revenue in Korea.
price of a drug was to hire a large law firm and These diverging perspectives became apparent
have lawyers present clear and convincing argu- when Lundbeck introduced Lexapro to replace
ments. However, this rarely worked, and so after Cipram. The corporate strategy was to launch a
consultation with an old colleague who was switch-over campaign, which involved convin-
familiar with the politics of medical insurance cing doctors to stop prescribing a particular drug
pricing, Jun chose a different approach. He and switch to that drug’s “next generation” prod-
decided to put Lundbeck’s highly specialized uct. By 2005, Rajar felt that Lundbeck Asia was
knowledge and small size to work by developing ready to participate in this switch-over cam-
personal contacts with members of the regulatory paign. Since Cipram had been launched and pro-
body to win over both their hearts and their moted by local firms for several years in most of
256 Developing a Transnational Organization

the other countries in the Asia region, the brand his switch-over campaign. Since they had only
was well known. been prescribing it for a few years, many Korean
In contrast, Cipram had only just been intro- psychiatrists were still very happy with Cipram.
duced in Korea. Thus, in the Korean market it was The Whanin representatives were upset because
a new drug, which made the Korean situation they saw Cipram as having good margins and
different in two ways. First, Lundbeck Korea consistent sales. They were not interested in
was just beginning to build the brand awareness introducing an entirely new product when they
in Korea; and second, since Cipram had just been were making money on the old one. However, the
launched in Korea, Cipram still had four years in decision was made final. While this may have
which generic copies could not be introduced into been the most visible sign of conflict between
the market. To avoid sending confusing signals to Jun and Rajar, there was a growing number of
doctors, sales reps and other stakeholders, and to issues that Jun felt Lundbeck Asia was not hand-
capture the benefits from the exclusivity period, ling in the best interests of Korea. He felt strongly
Jun proposed a special Korea strategy. He that Korea was quite different from other coun-
believed Lundbeck Korea should continue to sell tries in the region.
Cipram until the brand was fully established and
then introduce Lexapro. Conflict in the Placement of Marketing
Rajar disagreed. He argued that a generic com-
Resources
pany might register a generic version of Lexapro.
If it did, the generic brand would be the original Jun had dedicated an enormous amount of his
and Lexapro would become the generic in the staff’s time and energy on building relationships
Korean market. Jun’s team argued that such a with the country’s top psychiatrists in the CNS
possibility would be highly improbable in Korea industry rather than the more common approach
due to the data that would have to be gathered of marketing to a broader base of practitioners. In
and presented to the regulatory board. Rajar Jun’s opinion, the management of these key
retorted that while it might be improbable, it opinion leaders was quite important. “Korea is a
was not impossible. As long as any possibility very hierarchical society. Also, since we only
remained, he would not allow it. have one culture, we have very strong barriers
Jun, rightly or wrongly, felt that Rajar was to becoming influential and powerful; however,
using the possibility of a generic brand entering once you overcome those barriers you gain
the market as an excuse not to allow Korea to extremely high credibility and power in the
pursue an independent strategy. According to market.” He felt that there was no sense targeting
Jun, what Rajar really seemed to be saying was the lower tier of doctors until he had the support
that Korea was part of Lundbeck and the launch- of the opinion leaders. A positive endorsement
ing of Lexapro was part of the corporate strategy. from these doctors would be more effective than
Lundbeck’s strategy of specialization was to pro- any other marketing campaign.
mote its newest and most innovative drugs. The Rajar was keen to make certain that resources
tension was clear; Rajar, as regional vice presi- were not wasted, costs were controlled and that
dent, was focused on developing a strong Asia marketing and business practices were perceived
market that was integrated into the Lundbeck to be beyond reproach. Thus, Rajar believed that
strategy. Jun, as the country manager of Korea, this type of selective marketing was risky.
wanted to build Lundbeck Korea and maximize A broader marketing approach had worked well
long-term growth and profits in Korea. in the other Asian markets, and Rajar was not
Rajar was the regional boss, and his preference convinced that Korea was much different
was to put Lexapro on the market as soon as because other Asian societies were also quite
possible. Thus, assuming Lexapro passed all gov- hierarchal. Rajar continued to ask Jun how
ernment regulations in a timely manner, it would Lundbeck could justify spending significant
be launched in Korea in early 2006. The result amounts of money to target so few individuals.
would be that Jun would face an uphill battle in Rajar insisted that Jun should use these resources
 Case 4.2 Lundbeck Korea: Managing an International Growth Engine 257

to fund other programs. He wanted Jun to inte- it carefully because it is very important in
grate his approach into the established Lundbeck Korea to match your car with your status –
approach. too low of a car and you will not be respected,
In addition, Rajar felt that the client entertain- too high of a car and you will look arrogant.
ment that occurred in the Korean subsidiary was Since I was young and the country manager of
excessive, and as such a poor business practice. a newly established subsidiary, I felt that
He certainly did not feel that there was a need to I needed to be quite modest. The original boss
spend so much time eating, drinking, and going allowed me enough budget to get a stylish
to karaoke bars with the top doctors. In contrast, midsize car with a 2.5 litre engine. However,
Jun felt that Rajar needed to be more open- I thought that was a little too much for me, so
minded to the Korean situation: I got one with a smaller engine on a three year
lease. Then, in 2005, I had to renew the car.
Rajar didn’t understand the importance of our
So, I proposed to Rajar that I get a car that was
entertainment culture. In Korea, social events
not too high end, but something better than
generally consist of a main meal in a restaur-
I had been driving. I didn’t want anything too
ant, followed by drinking in a bar or pub, and
fancy; however, as an important symbol to
then topped off with a visit to the karaoke bar.
show that our company was growing,
Usually when he was in town, he went home
I believed that I should have a car of above
after dinner. However, this is our culture and
average status. The symbolism is quite import-
he needed to understand it. When he went
ant – my customers really notice this type of
home early, it made a poor impression on the
thing, so it is important for doing business. So,
people with whom I was trying to build rela-
I proposed that I get a full-size sedan. But he
tionships. In Korean culture, togetherness and
thought that was unnecessary and told me
harmony are very important, but I don’t think
that status is not important and that I should
he understood this.
break that type of thinking; however, I cannot
In terms of cultural understanding, Jun recalled change the importance that Koreans place on
giving a doctor a few small gifts with the Lund- symbolism. He wanted me to provide him
beck logo imprinted on them. The doctor every detail on the cars that I was considering
thanked him and told him that the current sales and then insisted I buy a car of similar status
representatives from other foreign companies as the one I had been driving. When I went out
were so restricted by their global ethical regula- to entertain the opinion leaders, they com-
tions that they could not even bring small gifts. mented on my car. This was not good for our
Jun and the doctor agreed that these regulations business. It made it harder for me to gain their
reflected a poor appreciation for the Korean cul- respect. Everyone might think this is a small
ture, where it is expected and customary to thing, but it is not. It really discourages
bring gifts. the local manager and is bad for the
company’s image.

Jun’s Car and its Effect on

Lundbeck’s Image Lundbeck’s Strategy Interpreted by Jun
Jun also recalled a story that to him represented for Korea
the cultural tension that existed with his relation-
Jun believed that he had a very clear understand-
ship with Lundbeck Asia and Rajar. For Jun, this
ing of Lundbeck’s core strategy. Integrating the
was a microcosm of how difficult it was being
uniqueness of Korea with the global beliefs of
controlled by the regional office.
Lundbeck had always been his goal. In every
When I first started as Lundbeck Korea coun- room in the Lundbeck Korea office was a poster
try manager, the person who hired me asked from headquarters that highlighted the strategy
me what kind of car I wanted. I thought about of Lundbeck. Jun’s goal was to find a balance
258 Developing a Transnational Organization

between integrating local expertise with the forward. He believed that Rajar had done a very
overall strategy of Lundbeck. good job implementing Lundbeck’s strategy in
Jun believed that in order to convince the the Asian markets. In fact, under Rajar’s leader-
Korean medical profession and government regu- ship Korea had emerged, in Andersen’s opinion,
lators that Lundbeck’s products were substan- as the market with the most potential. Lundbeck
tially more valuable than the products offered Korea had good protection from generics, a
by the general pharmaceutical firms and the gen- strong government insurance program for reim-
eric producers, the staff would have to mirror the bursement, decent pricing on its products, a
specialization of the company. So, from the large and growing market, and a highly innova-
beginning, all key people in Lundbeck Korea were tive staff. Rajar had done a very good job at
required to have a CNS background. This gave running a tight ship – he focused on control,
Lundbeck instant credibility and allowed it to cost effectiveness, knowledge transfer, and
quickly establish a foundation in the CNS field. instilling ethical business practices, which are
Jun believed that this expertise was the basis for all important roles for a regional manager. How-
Lundbeck Korea’s major achievements. ever, Andersen wondered if Rajar was putting
In respect to speed, he understood that in the too little emphasis on developing new and
Korean market, response times were important. unique opportunities. The question for Andersen
Abandoning the traditional hierarchical organ- was whether Jun would blossom without the
izational structures that were prevalent in Korean controls or whether the lack of guidance would
firms, Lundbeck Korea established a lean organ- hinder his development. In addition, as the goal
ization with straight reporting lines. Jun believed was to integrate all aspects of the value chain,
that this agility in the market was one of Lund- Andersen certainly did not want Korea to be off
beck’s advantages over bigger competitors. It in its own little world.
allowed Lundbeck to hear customer demand In addition, there seemed to be a conflict of
quickly, discuss options immediately, and imple- personalities. In several meetings, Andersen
ment decisions swiftly. had sensed poor chemistry between Jun and
In respect to integration, Lundbeck’s Korean Rajar. He could not exactly put his finger on
partner Whanin had a very different set of com- it, and it was impossible for him to get Jun to
petencies, organizational structure, and business open up about this. Andersen believed that an
philosophy. As such, it would have been very individual’s strengths and weaknesses were
easy for Lundbeck Korea and Whanin to be con- part of the strategic decision process. More-
stantly butting heads. Do they follow the Lund- over, he wondered whether Lundbeck Korea
beck way or the Whanin way? Using a spirit of might blossom under less strict management
integration, Jun chose to avoid this conflict by and at the same time benefit from a direct
having each group focus its energies where it had relationship with the headquarters functions
a competitive advantage. in Copenhagen. Finally, Andersen wanted to
In respect to results, by maintaining focus on find a way to create more focus on Korea in
the results, Lundbeck Korea easily surpassed the headquarters.
business case set for it. Jun argued that Lundbeck Of course, no decision is made in a vacuum.
Korea “have been able to constantly add value The Chinese subsidiary, which had been part of
every year. The key is that we generate better the Lundbeck Asia division for many years,
results and add value in everything we do.” was also growing rapidly. Even though China
Lundbeck Korea focused its energies on projects was in a different position than Korea, would
and activities that generated the most income. the Chinese managers expect the same treat-
ment? And should they receive it? Also,
Andersen had to consider his key person in
The Decision
Asia, Asif Rajar. How would he react to having
The question for Andersen, vice president for one of his fastest growing units taken away
Lundbeck, was how to move Lundbeck Korea from him?
 Case 4.3 Philips versus Matsushita: The Competitive Battle Continues 259

Christopher A. Bartlett
CASE 4.3 PHILIPS VERSUS MATSUSHITA: THE COMPETITIVE BATTLE
CONTINUES

Professor Christopher A. Bartlett prepared the original version of this case, “Philips versus Matsushita: A Portrait of Two Evolving
Companies,” HBS No. 392-156. This version was prepared by the same author and is a continuation of a series of earlier cases by
Professor Bartlett including "Philips versus Matsushita: Preparing for a New Round,” HBS No. 399-102, “Philips and Matsushita: A
New Century, A New Round”, HBS No. 302-049, and “Matsushita Electric Industrial (MEI) in 1987,” HBS No. 388-144. HBS cases
are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This
publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard
Business School.

Throughout their long histories, N.V. Philips (Neth- and manager. By 1900, Philips was the third
erlands) and Matsushita Electric (Japan) had largest light-bulb producer in Europe.
followed very different strategies and emerged with
very different organizational capabilities. Philips
built its success on a worldwide portfolio of respon- Technological Competence and Geographic
sive national organizations while Matsushita based Expansion
its global competitiveness on its centralized, highly
efficient operations in Japan. While larger electrical products companies were
During the first decade of the 21st century, how- racing to diversify, Philips made only light-bulbs.
ever, both companies experienced major chal- This one-product focus and Gerard’s technological
lenges to their historic competitive positions and prowess enabled the company to create significant
organizational models. Implementing yet another innovations. Company policy was to scrap old
round of strategic initiatives and organizational plants and use new machines or factories whenever
restructurings, the CEOs at both companies were advances were made in new production technol-
taking their respective organizations in very differ- ogy. Anton wrote down assets rapidly and set aside
ent directions. At the end of the decade, observers substantial reserves for replacing outdated equip-
wondered how the changes would affect their long- ment. Philips also became a leader in industrial
running competitive battle. research, creating physics and chemistry labs to
address production problems as well as more
abstract scientific ones. The labs developed a tung-
sten metal filament bulb that was a great commer-
Philips: Background
cial success and gave Philips the financial strength
In 1892, Gerard Philips and his father opened a to compete against its giant rivals.
small light-bulb factory in Eindhoven, Holland. Holland’s small size soon forced Philips to look
When their venture almost failed, they recruited aboard for enough volume to mass produce. In
Gerard’s brother, Anton, an excellent salesman 1899, Anton hired the company’s first export