Priceline Pharmacy WIL report PDF

Preview

Summary

Assignment for Strategic Management and Control Systems...

Description

ACCT 2279 Strategic Management Control Systems WIL Report

Priceline Pharmacy – Gisborne

ACCT 2279 Priceline Pharmacy- Gisborne WIL report

Executive Summary The purpose of this report is to analyse and evaluate how management accounting methods can be used to assist managers of Priceline Pharmacy Gisborne in their decision making process. Firstly, after an introduction to the retail pharmaceutical industry, an analysis of Priceline’s competitive environment is discussed using the Porter’s five-force model. Based on the competitive analysis, it was identified that Priceline has a niche market marketing style and adopts a product differentiation competitive strategy. Priceline is focused on the quality of their service and products, instead of trying to provide products at a lower cost. The report then introduces key business activities of Priceline using the value chain method, starting from the purchase of medication/retail products from its suppliers to the after sales care for its customers. The balanced scorecard approach is used to determine if Priceline meets its strategic goals, in terms of the four perspectives - financial, internal and business processes, customers, and learning and growth. Product costing is then discussed using the target costing method for PBS medications and the cost-base costing method is used for non-PBS medications, over-the-counter medications and general retail products. Cost-Volume-Profit (CVP) analysis is used by Priceline to determine the break-even and target profit point. Then, aspects of Priceline budgeting and sustainability is discussed. Finally, the business report will provide some recommendations including improving marketing strategy, financial performance management and introducing a reward program.

1

ACCT 2279 Priceline Pharmacy- Gisborne WIL report

Table of Content Executive summary ..................................................................................................................1 1. Introduction ........................................................................................................................1 Part 1- Industry analysis .....................................................................................................1 2. The overview of the pharmaceutical retail ......................................................................1 3. Competitiveness analysis from Porter’s five forces.........................................................5 3.1 Competitive rivalry...........................................................................................................5 3.2 Bargaining power of customers ........................................................................................6 3.3 Bargaining power of supplies ...........................................................................................6 3.4 Threat of substitutes .........................................................................................................7 3.5 Threat of new entry ..........................................................................................................7 4. Competitive strategy .........................................................................................................7 4.1 Competition base ..............................................................................................................7 4.2 Target market ...................................................................................................................8 5. Business activities ..............................................................................................................9 6. Balanced scorecard .......................................................................................................... 10 6.1 Financial perspective ......................................................................................................10 6.2 Customer perspective .....................................................................................................11 6.3 Internal business processes .............................................................................................11 6.4 Learning and growth.......................................................................................................12 7. Product costing.................................................................................................................14 7.1 PBS Medications Category.............................................................................................14 2

ACCT 2279 Priceline Pharmacy- Gisborne WIL report 7.2 Non-PBS prescription medications & over-the-counter medications ............................16 7.3 General Retail products ..................................................................................................16 8. Cost-volume-profit analysis ............................................................................................17 9. Budgeting technique ........................................................................................................19 10. Sustainability ....................................................................................................................20 11. Recommendations...........................................................................................................20 11.1 Improve Marketing Strategy ......................................................................................20 11.2 Financial Performance Management .........................................................................21 11.3 Implement reward and recognition program..............................................................21 12. Conclusion .......................................................................................................................22

REFERENCE ........................................................................................................................23 APPENDICES .......................................................................................................................24 Evidence 1: email connection ............................................................................................24 Evidence 2: Interview photo ..............................................................................................25

3

ACCT 2279 Priceline Pharmacy- Gisborne WIL report 1. Introduction

Priceline is a retail pharmacy located in the Macedon Range Township of Gisborne. It is 1 of 420 pharmacies that are a part of a franchise system owned by Australian Pharmaceutical Industries (API). Priceline is a small business owned by a husband and wife team, which focus on being the leading health and wellbeing retailer in Gisborne. The purpose of this report is to analyse how management accounting techniques can be used to assist managers of Priceline in their decision-making process. The first section of the report gives an overview of the pharmaceutical retail industry. Followed by an analysis of their competitive environment, using the Porter’s five-force model. Then, the report identifies the competitive strategy of Priceline. In addition, this report will discuss aspects of management accounting, using a balanced scorecard, product costing, cost-volume-profit analysis, budgeting and sustainability. Finally, some recommendations will be given based on the above analysis. 2. The overview of the pharmaceutical retail industry 2.1 The pharmaceutical retail industry The pharmaceutical retail industry is a $15.8 billion industry with over 5,500 retail pharmacies. The major players in the industry include My Chemist Retail Group (20.3%), Sigma Pharmaceuticals Limited (19.8%) and API (10.3%)( IBIS,2016). The industry acts as a distribution channel for prescription and over-the-counter medicines. According to the Department of Health, pharmacies are expected to dispense over 300 million prescriptions in 2016. In the past 50 years, the pharmaceutical retail industry landscape has evolved from small independent community pharmacies of the 1960’s, to sophisticated banner groups and franchise arrangements like Priceline. The industry’s operating landscape has changed significantly over the past few years, with the introduction of discount pharmacies ( Chemist Warehouse) and supermarkets selling products that were once restricted to pharmacy only.

4

ACCT 2279 Priceline Pharmacy- Gisborne WIL report Under current legislations prescription medication are dispensed by qualified pharmacist in pharmacies and hospitals only. Hence, the industry has effectively enjoyed a monopoly over the sale of restricted medication. Changes in the demographic (i.e. increase in aging population and increased in disease prevalence) and healthcare expectations will increase the volume of pharmaceutical medicines consumption over the next five years (IBISWorld 2016). However, ongoing government reforms will dampen the growth of the industry to 0.3%, as the Government looks for ways to reduce the growing costs associated with the PBS (IBISWorld 2016). The changes of remuneration rates under the PBS can negatively influence the revenue earned by pharmacies, to cushion this there has been a recent trend for pharmacies to move to a customer-focused model and to further increase their product range to other non- medicinal items (IBISWorld 2016). 3. Competitiveness analysis from Porter's Five Forces The Porter’s five-force model can be used to explore and analyse the industry in which Priceline operates. 3.1 Competitive rivalry The competitive rivalry determines the degree of competition between pharmacies within the industry. The profit earned by a company can potentially reduce with intense competition. Currently, under the National Health Act (Location Rule) the number of pharmacies in an area is determined by the Australian Community Pharmacy Authority. This effectively reduces internal competition of pharmacies in the Gisborne area. Changes in legislations permitting non-pharmacy outlets to sell some medications (e.g. Panadol), which were previously pharmacy-only medications (IBISWorld 2016) has changed the retail landscape for Priceline. As a result, the industry is faced with increasing competition from supermarkets, health and beauty retailers and other general retailers. However, non-prescription medications like Panadol, account for less than 13% of pharmacy revenue, and the increased competition by non-pharmacy retailers is manageable by Priceline 5

ACCT 2279 Priceline Pharmacy- Gisborne WIL report (IBISWorld 2016). Hence, in the short run, increasing external competitive rivalry cannot change the dominative position of pharmacies in this industry (pharmacies occupy about 69.1% market share of the whole industry) (Marketline 2016). Overall, the competitive rivalry in the pharmaceutical retail industry is medium. 3.2 Bargaining power of Customers The bargaining power of customers can greatly influence how Priceline price their products. The bargaining power of buyers for Priceline is determined by the number of customers it has. The more customers there are, the lower the level of buyer power a business has. Factors that contribute to the bargaining power of customers, include the number of rival pharmacies in the area, switching costs and how informed buyers are of alternative options. According to the Macedon Ranges Township Council there are four pharmacies serving a population of 8,056, which offer similar services and products that are all located within the main town centre. Hence, Priceline’s customers have a fairly high level of bargaining power. However, the end customer bargaining power is low due to the fact that one customer switching from Priceline to another pharmacy will not have a big impact on the business’s operations or its bottom line. 3.3 Bargaining power of suppliers Suppliers can affect the profitability of a business by increasing their prices or reducing the quality of their product. The industry operators source various specialised products directly from pharmaceutical manufacturers or via pharmaceutical wholesalers. According to IBISWorld 2016, both the pharmaceutical product manufacturing industry and pharmaceuticals wholesaling industry are in fierce competition, resulting in lower product price for retailers. As a franchisee, Priceline has access to products at lower prices compared to if it was a stand-alone pharmacy business. The majority of Priceline’s purchase orders and a further 419 orders (number of franchise under API) (API,annual statement) are placed by API, and naturally the sheer volume of the orders placed are large. The discount received from API is large enough to compensate them for selling the products at a lower price to their franchisees. However, the

6

ACCT 2279 Priceline Pharmacy- Gisborne WIL report bargaining power of Priceline’s supplier (API) is high, as Priceline is legally bound by the franchise agreement to purchase medication/retail products from API. 3.4 Threat of substitutes According to MarketLine 2016, the primary substitutes for pharmaceutical products include complementary and alternative medicines such as homeopathy and acupuncture, which are often used in conjunction with conventional medications. Other substitutions for medications include the use of surgical procedures, however the costs and risks associated with them are higher, making them less threatening substitutes. Hence, the threat of substitutes in this industry is assessed to be weak. 3.5 Threat of new entry The barrier for new entrants into the pharmacy retail business is high due to the Sixth Community Pharmacy Agreement between the Commonwealth Government and the Pharmacy Guild of Australia, which is effective until 30 June 2020. The agreement outlines the legal requirements for new entrants into the industry, including restrictions of ownership being limited to approved pharmacists under the National Health Act 1953(Cth), and limitations on the location of pharmacies under the Pharmacy Location Rules (IBISWorld 2016). According to the Department of Health, almost 40% of new pharmacy applications were rejected due to regulations requirements in 2009-2012. Additionally, the operating cost is another barrier for new industry entrants, as operating costs of pharmacies are higher than other retail industries due to professional and regulatory requirements. Hence, the overall threat of new entrants in this industry is medium 4. Competitive strategy 4.1 Competition base Priceline has a for-profit business structure. Hence, to generate a profit Priceline must generate enough sales to offset its operating costs. Priceline cannot compete with other pharmacies retailers in Gisborne, such as Chemist Warehouse in terms of low cost medication or retail 7

ACCT 2279 Priceline Pharmacy- Gisborne WIL report products. This is because costs of medication and retail products are set by their franchisor, API. Under the agreement, even if prices are cheaper at third party suppliers, Priceline is legally obligated to purchase medication or retail products from API ahead of any third party supplier. The owner of Priceline Gisborne only has one retail pharmacy, so their bargaining power with API is relatively low in comparison to API’s operation. Hence, Priceline is a price taker in the industry and cannot compete as a low cost pharmacy. Priceline adopts product differentiation as its competitive strategy by providing high-quality products with exceptional customer service to make it more attractive and unique in its target market. As part of its differentiation marketing strategy, pharmacists at Priceline are encouraged to provide customers with free personal health advice to ensure they receive maximum value out of their purchases. Furthermore, they have a 30-days, no questions asked return policy for retail products, provided that they have a proof of purchase and the product is unopened. 4.2 Target market Priceline has extensively studied the various impacts of its marketing programs, in an effort to increase the number of customer visits into the pharmacy and to grow their customer base. Based on their studies and the demographic, Priceline has chosen to adopt a niche market marketing strategy, targeting the geriatric customers (especially the 45+ age group) and the pediatric group. This marketing strategy is sustainable in the long-term because according to the Australian Institute of Health and Welfare, today’s older generation are living healthier and longer, due to access to quality healthcare. Hence, the geriatric group is the ideal customers for Priceline as they are more likely to be repeat customers requiring more than one medication. However, it should also be noted that even though they’re targeting a niche market, under the PBS regulations and API’s business requirements, Priceline is required to stock medications for all age groups and keep a minimum level of retail stock for the broader market.

8

ACCT 2279 Priceline Pharmacy- Gisborne WIL report 5. Business activities The value chain analysis can be used to analyse Priceline’s business activities. As a retail pharmacy, Priceline’s main business activities is summarised below.

As part of the franchise agreement, Priceline has an obligation to source all medications and retail products from API. Only if the medicine/retail stocks are not available or not in stock at API, then Priceline can source it from a third party supplier. Inventory is managed using Priceline’s internal system POS (Point of sale), and the FRED dispensing system, which is linked to API’s automatic reordering system. To ensure that there is sufficient inventory levels, when medicine/retail products reach a certain level it activates an automatic reorder request for API to fill. National marketing is handled by API as part of the franchise agreement, however all local marketing is handled by Priceline with support from API. The type of customer will determine what kind of store processes Priceline staff will follow. For example, with a PBS medication customer, retail staff will greet and collect the script from the customer for the pharmacist to fill. The pharmacist will then provide personal health

9

ACCT 2279 Priceline Pharmacy- Gisborne WIL report advice to the customer and dispense the medication. With a retail product customer, retail staff will greet and if required, provide assistance to the customer. As previously discussed, Priceline has a service and product differentiation competitive strategy. Priceline values their customers and has a 30-day return policy for products purchased (with the exception of some medications), to ensure that they build on the customer’s relationship with the store and hopefully result in repeat sales. 6. Balanced scorecard The balanced scorecard is used to determine if Priceline are meeting its business objectives and to provide managers with information to make short and long-term decisions. 6.1 Financial perspective Objective

Measure

Improve margins

Amount spent on medicine/retail products ( from year to year)

Expand revenue opportunities

Percentage of income from new products

Reduce medicine/retail product costs

Amount of discount received from suppliers (from year to year)

Priceline tries to improve its profit margins by assessing the total costs of their medicines/ retail products every year. As a means of reducing the costs of their products, they take advantage of any discounts offered by their supplier API. As a measure of their objective to reduce the cost of their products, Priceline would compare the amount of discounts received in the current year, to the amount of discounts received in the previous year. To expand their revenue opportunities, Priceline measures the percentage of their income from new products. The cost of quality is not really something that Priceline worries about. 10

ACCT 2279 Priceline Pharmacy- Gisborne WIL report 6.2 Customer perspective Objective

Measure

Incre...