Do you think that GSK has been treated unfairly?

Read: “GlaxoSmithKline in China (A)”.

Deliverable:

Submit a 7-to-8 page analysis of the issues that responds to the criteria and questions listed below

Additional research is required. Use the data presented in the case study as well as information provided by course readings, videos, simulations and Discussions.

Address these issues and questions:

The CEO of a company based in the USA with subsidiaries in the United Kingdom is contemplating moving some of its operations to China but has read about the GSK bribery scandal in China. The CEO understands that the climate for foreign companies operating in China is not as welcoming as it used to be. The CEO is now asking his manager for international business to assess the GSK case, analyze the issues it presents. In particular the CEO wants to know what lessons his company can learn and how the company can reduce its risks when operating in China. The CEO handed his manager this list of questions:

  • GSK has featured its robust ethics and compliance program, even a “3rd Party Code of Conduct” for suppliers. What went wrong? What are the main external and internal factors that encouraged the GSK bribery scandal in China? Which, in your opinion, are more important? Explain your position.
  • Assess GSK’s response so far. Are the initiatives that GSK has implemented to address the bribery problems sufficient or would you suggest further actions? If you were Mark Reilly what would you have done? Explain.
  • Do you think that GSK has been treated unfairly? Was GSK really at fault or was it just unfortunate to have gotten caught given the perception that companies have to resort to bribing to win contracts? Explain.
  • How can we avoid similar situations and how can we reconcile local expectations of questionable payments with the U. S. Foreign Corrupt Practices Act or the U.K. Bribery Act? What do you recommend? Explain your position.
  • What strategic and operational lessons can we take from your analysis?

Format:

The report is to be double-spaced with 1-inch margins, 10-to-12 point type, posted as a rtf or Word document. Use APA format for citations and references. The cover page and list of references are not part of the page count. The report’s organization is to be:

Introduction: A brief paragraph that states succinctly the key issues raised by the case and that you will address in your report.

Analysis: Respond to the questions/issues raised by the CEO. Justify the answers you provide. Your report should recognize, integrate and cite relevant concepts and ideas from the required readings, videos, simulations, and Discussions.

Conclusions and Lessons Learned – What strategic and operational lessons can the CEO learn from your analysis?

For the exclusive use of K. Abdel Rahim, 2015.

9 -5 1 4 -0 4 9
REV: SEPTEMBER 8, 2015

JOHN A. QUELCH
MARGARET L. RODRIGUE Z

GlaxoSmithKline in China (A)
On June 27, 2013, the Chinese headquarters of GlaxoSmithKline (GSK) in Shanghai was raided by
Chinese investigators. Regional police later announced that four GSK employees were under
investigation for bribing physicians, hospital administrators, and government officials in order to
increase sales of GSK pharmaceuticals. China’s Ministry of Public Security claimed that GSK had
paid over $450 million in bribes to Chinese healthcare practitioners via a network of 700 travel
agencies and middlemen since 2007. At the time of the event, GSK’s wholly owned subsidiary in
China accounted for about 3% of the company’s global sales of nearly $43 billion and employed 7,000
people. GSK’s leadership faced a difficult choice on how to handle the allegations levied by
government agencies in one of its most important markets.

History of GSK
In 1873, Joseph Nathan founded an import-export business in New Zealand that would later
evolve into pharmaceutical giant, GSK. Nathan moved into the healthcare industry in 1904, when he
obtained the rights to the process for drying milk and began to produce baby food. 1 He called the
baby food product “Glaxo” and sold it in New Zealand. He and his sons expanded the sale of Glaxo
to the United Kingdom a year later, and to India and South America after World War I. In 1924, the
company entered into pharmaceuticals with the first commercial vitamin concentrate in the United
Kingdom, a liquid Vitamin D product called Ostelin. 2 The company continued its global growth in
the 1930s, when it built a factory in Italy and established distribution networks in China, Malaysia,
and Greece.3 In 1935, the pharmaceutical department became a subsidiary, Glaxo Laboratories
Limited.4 During World War II, Glaxo expanded its pharmaceutical production to include penicillin
and anesthetics.
In 1947, Glaxo’s parent company dissolved and Glaxo became a public company. 5 In the 1950s,
Glaxo grew through the acquisition of chemical and medical supply subsidiaries. Glaxo established
operations in the United States in 1978 via the acquisition of Meyer Laboratories. 6 In the early 1990s,
Glaxo opened a factory in China. Glaxo merged with rival U.K. pharmaceutical firm, SmithKline
Beecham, in 2000 to become GlaxoSmithKline, then the world’s largest drug manufacturer, which led
shares in the four out of five therapeutic markets (central nervous systems, respiratory, gastrointestinal/metabolic, and anti-infectives). At the time of its creation, GSK had global sales of $22.5
billion and employed over 100,000 people around the globe. 7
________________________________________________________________________________________________________________
Professor John A. Quelch and Research Associate Margaret L. Rodriguez prepared this case. Professor Quelch is the Charles Edward Wilson
Professor of Business Administration at the Harvard Business School and Professor in Health Policy and Management at the Harvard T.H. Chan
School of Public Health. This case was developed from published sources. Funding for the development of this case was provided by Harvard
Business School, and not by the company. 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 © 2013, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, 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.

This document is authorized for use only by Kareem Abdel Rahim in Managing International Business Winter 2016 taught by Ravi Mittal, HE OTHER from December 2015 to June 2016.

For the exclusive use of K. Abdel Rahim, 2015.
514-049

GlaxoSmithKline in China (A)

GSK’s Ethics Policy
All of GSK’s employees received training in the GSK Code of Conduct as part of their induction
into the company, and each year their commitment to the code was recertified. 8 The code of Conduct
stipulated that its employees had to conduct business with “honesty and integrity and in compliance
with all applicable legal and regulatory requirements.”9 The code recognized that GSK operated
under the laws of many different countries and made clear that employees were expected to make
every effort to comply with local laws and norms. The GSK ethics policy required employees located
in every market to demonstrate integrity by:10

Always acting legally and fairly, within the spirit of all laws, regulations and policies

Not offering illegal inducements to anyone

Looking for principles, not loopholes

GSK had a zero-tolerance policy on corrupt practices. The company offered employees a
confidential “Speak Up Integrity” hotline, which could be used to report legal or regulatory breaches,
fraud (including internal control tampering), or any other practice that violated GSK’s Code of
Conduct.11 Senior managers were required to receive training in preventing bribery and corruption at
GSK.12 Managers were responsible for ensuring that their employees received training in ethics and
compliance issues relevant to their job responsibilities.

Health Care in China
China’s Healthcare System
Following the Chinese revolution in 1949, healthcare services were provided to the public by local
communist units (e.g., communes, collective farms, etc.). Life expectancy nearly doubled in the 30
years following the revolution, due mainly to improvements in the sanitation infrastructure and
education regarding basic hygiene. In 1978, China’s “reform and opening up” period of health care
ushered in an era of more modern medical services and hospitals.
In 2013, China did not have a universal healthcare system. Instead, healthcare coverage was
dependent on an individual’s employment. Those who worked for state-owned employers received
inexpensive coverage for themselves and their families, whereas workers in the private sector often
received no coverage at all.13 As a result of legislation by the Chinese government in the 1990s, most
workers who lived in cities were covered by health insurance. 14 Coverage was less complete for
migrant workers (due to location registration issues) and for citizens who lived in rural areas (for
whom basic services in provincial hospitals were covered, but expensive specialists in urban
institutions were not).15 In China, a portion of healthcare expenditures were covered by the
government (around 29% in 2010), while the remainder were paid by individuals out of pocket, or by
social institutions.16

Hospitals in China
In 2011, two-thirds of China’s hospitals were public, and one-third were private.17 Twenty-four
percent of all hospitals were private and for-profit.18 Hospitals employed the majority of China’s 2.3
million doctors, but the salaries they paid were very low. Doctors were banned from taking on
additional jobs to supplement their incomes. 19 Researchers at Peking University estimated that the
salaries of doctors in China would need to double, or even triple, to be equivalent to salaries earned

2
This document is authorized for use only by Kareem Abdel Rahim in Managing International Business Winter 2016 taught by Ravi Mittal, HE OTHER from December 2015 to June 2016.

For the exclusive use of K. Abdel Rahim, 2015.
GlaxoSmithKline in China (A)

514-049

by other professions.20 The Chinese government regulated the prices charged for visits to doctors,
which contributed to their lower pay.21
Hospitals in China earned their revenue from their services: physicians, drugs, laboratory tests,
and other services.22 Hospitals attempted to increase revenue by placing surcharges on drug sales
and encouraging their staff doctors to prescribe them through the use of sales quotas. Between 2009
and 2012, China implemented numerous drug policies with the intent of lowering the prices paid by
consumers.23 Many such policies attempted to regulate the retail prices of pharmaceuticals in China. 24
(See Exhibit 1 for a list of China’s drug policies.) Some of the policies set the retail prices for those
drugs whose costs the Chinese government reimbursed. A cap was also placed on the markup
charged on drugs sold by pharmacies in public hospitals.25 Some experts believed that bribing
hospital staff was common among China’s domestic drug manufacturers. “Domestic companies
actually practice this informal payment approach almost as a common marketing strategy,” said a
researcher at Peking University.26

Traditional Chinese Medicine
Traditional Chinese medicine (TCM) incorporated herbal remedies, acupuncture, massage, and
other measures to treat disease and promote wellness. Herbal medicine was a core tenet of TCM and
used the elements of plants, minerals, and animal products. The elements could be ingested as teas,
tinctures, capsules, or powders. In modern China, TCM and Western healthcare approaches were
used side by side in many hospitals. 27
In 2012, the sales of TCM herbal remedies to consumers were 35.6 billion RMB (or about US$5.5
billion),28 11% more than in 2012.29 Many Chinese consumers believed traditional herbal remedies
had fewer side effects and were healthier than Western pharmaceuticals. In 2012, Infinitus (a Chinese
corporation) held the largest share of China’s market for traditional medicine (over 10% of the value
share).30 Domestic drug manufacturers were well ahead of international companies in developing
and supplying traditional herbal medicines in China, due to their experience with the ingredients
used in TCM and better supply chains for sourcing those ingredients.

China’s Pharmaceuticals
In 2012, China was the third-largest pharmaceutical market in the world, with sales over $69
billion.31,32 It was estimated that the industry would reach $150 billion in sales by 2016. 33 Growth of
the Chinese consumer healthcare industry was expected to continue, as living standards and
disposable incomes increased, and consumers gained greater knowledge of healthcare services. By
2016, China was expected to surpass Japan to become the second-largest drug market in the world,
after the United States.34
In 2012, the Chinese consumer healthcare industry was consolidating, with the top-10 firms
accounting for 28% of the value share for healthcare products sold to consumers. 35 (See Exhibit 2 for
value share of consumer health care by company.) The Chinese pharmaceutical sector grew quickly
after the country joined the World Trade Organization in 2001, because this prompted the entry of
multinational drug companies.36 Many of the world’s top pharmaceutical companies (GSK, Wyeth,
Bayer, and Bristol-Myers Squibb) held portions of China’s market share, although domestic
manufacturers (Amway, Infinitus, and Xian Janssen Pharmaceutical) dominated the top 10.

3
This document is authorized for use only by Kareem Abdel Rahim in Managing International Business Winter 2016 taught by Ravi Mittal, HE OTHER from December 2015 to June 2016.

For the exclusive use of K. Abdel Rahim, 2015.
514-049

GlaxoSmithKline in China (A)

GSK in China
GSK employed 4,000 pharmaceutical salespeople in China in 2012 (with 700 of the employees
hired the prior year).37 GSK’s total employment in China was about 7,000. 38 Abbas Hussain, GSK’s
president international of Europe, Japan, emerging markets, and Asia Pacific (based in London), had
spent 20 years working at Eli Lilly before joining GSK to head the emerging market team in 2008
(under the newly appointed CEO, Andrew Witty). Hussain stressed the importance of accessible
price points for pharmaceuticals and a “bottom-up” approach to design against the needs of
consumers in emerging markets.39 In his role at GSK, he oversaw joint ventures with local consumer
healthcare brands in India and South Africa, as well as the acquisition from Western companies of
branded drugs with expired patents. 40 Mark Reilly managed GSK’s pharmaceutical and vaccines
businesses in China. He began working in China in 2009 as GSK’s general manager of
pharmaceuticals and was appointed senior vice president of GSK’s operations in China in 2012. 41
Both Glaxo and SmithKline Beecham had wholly owned operations in China, established in the
mid-1990s before the merger.42 After forming GSK, the firm’s growth in China was initially spurred
by acquisitions. In 2010, GSK acquired a Chinese drug manufacturer, Nanjing MeiRui Pharma, for
around $70 million.43 MeiRui produced urology and allergy drugs. With the acquisition, GSK
obtained MeiRui’s product portfolio, as well as a manufacturing facility in Jiangsu Province. 44 In
2009, GSK took a 40% stake in a joint venture with a Chinese firm to produce flu vaccines.45 Two
years later, GSK bought out its Chinese partner. The acquisition gave GSK a foothold in the growing
market for vaccines in China.
In 2007, the company laid groundwork for future organic growth by opening a research and
development center in Shanghai, one of only five such centers in the world. 46 In 2013, GSK partnered
with academic institutions and TCM experts in China to integrate TCM knowledge into new drug
development. Zang Jingwu, senior vice president and head of GSK R

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