This paper explains the concepts of servitization and co-opetition, describing the results of a research project investigating the Portuguese and Spanish pharmaceutical industry.

The European Union (EU) pharmaceutical industry had an annual output of € 220 billion in 2012 and is expected to continuously grow until 2017, representing a strategic sector of the European economy (European Commission, 2014). This sector has a crucial economic and social impact, playing an essential role in the provision of medical and health care, particularly due to the R&D investments required for the development of new medication (Frías, 2001). This sector has been involved in a long process of implementation of a differentiation strategy based mainly on the development of new services. In addition to this, emphasis has also been placed in “service-driven global supply chains” and the role of customer relationship management and service relationships as well as the role of intra-firm relationships such as Internal Market Orientation (Lings, 2004; Gounaris 2008; Ruizalba et al. 2014) and inter-firm relationships management (Soares, Soltani and Liao, 2012).

As such, and because the European regulations are still behind in terms of industry standardisation, it is imperative that scholars and managers understand how servitization has contributed towards the development and shaping of the pharmaceutical industry.

Services have been defined as activities or performance provided to satisfy customer needs (Grönroos, 1990). In an increasingly competitive market, customers expect more and whatever was before an order-winner quickly becomes a qualifier affecting the whole industry. Companies need not only to attract customers but more importantly they need to retain them. This can be achieved though the development of long-term relationships adding mutual value through servitization.

Companies have adapted to these demands for added value and increased their product-service offerings, combining products and services to such a degree that sometimes it is impossible to separate them (Baines et al., 2009). Complete bundles and packages of solutions are provided to customers, referred to as product-service systems (PSS). This process is known as servitization.

Servitization and PSS came to research interests propelled by authors such as Neely (2008) and Baines et al. (2009, 2013a b). First suggested by Vandermerwe and Rada (1988), the term servitization is used to refer to the competitive advantage produced through the “process of creating value by adding services to products” (Baines, et al., 2009:547). Vendrell-Herrero, Bustinza and Arias (2014) affirm that servitization has been described as the provision of service as a complement to manufacturing and also commercialization of products generating higher economic margins. In turn, Baines et al. (2013:638) state that “servitization is the process of transforming manufacturers to compete through product-service systems (PSSs) rather than products alone”.

Baines et al., (2013) suggest a categorisation of services that includes base, intermediate and advanced levels. Base services refer to those added that are directly associated to the product offerings. In intermediate services, the supplier can offer more or less complex services, but only when are formally requested by the customer and with the supplier not knowing in detail what is the true nature of the customer business. Whereas, in advanced services, the supplier perfectly understands the nature of the customer’s business and the processes that are embedded in the service offering. The main difference between intermediate and advanced service levels is that in the first the supplier does not get fully involved in the customer business whilst in the second he does (Baines et al., 2009).

Baines et al. (2009:558) refer that the majority of findings come from case studies and summarize the main reasons that lead organisations towards the implementation of servitization. These include financial (e.g. revenue stream and profit margin), strategic (e.g. competitive opportunities and advantage) and marketing drivers (e.g. customer relationships and product differentiation). They identify that the motivations and resulting benefits go beyond profitability. By adding services to their product offerings, companies set themselves apart from their competitors, developing advantages (Gebauer et al., 2006).

It is not possible to discuss servitization without considering the relationships established within and between companies. This is particularly the case in the pharmaceutical distribution, in which wholesalers are organised under the form of cooperatives and private companies. These companies compete and collaborate simultaneously in order to satisfy their customers’ needs and increase their market strength. This is commonly referred to as ‘co-opetition’. First defined by Ray Noorda, CEO of Novell (1993; cited by Nalebuff and Brandenburger, 2002:4), co-opetition refers to situations in which two competing suppliers (of a given buyer) cooperate towards the achievement of common buyer goals (Wu, Choi and Rungtusanatham, 2010).

The pharmaceutical distribution sector in Spain commenced its development between the 1930 and the 1960s, when 24 new distributors were founded. The majority of them were incorporated under the cooperative form integrated by pharmacy owners in specific regions. By the end of the last century, 32 out of the 41 players were still cooperatives while the rest were private companies. Although with some marginal corporate operations in the 80s and 90s, it has been during the new century that numerous corporate movements have occurred, including not only mergers and acquisitions but also different cooperative integrations and federations. The general situation of the Spanish economy facilitated this process because since 1994, the increasing growth rate has been uninterrupted and equal to, or greater than, the average rate of other European countries (Martín-Peña and Díaz Garrido, 2008). All these corporate changes had a significant impact on the market split. In 1995 the top 8 companies had just over 50% of the market share what implies a fairly fragmented market, whereas in 2013 they increased to almost 90%. Figures 1 a) and b) below illustrate these market share changes.

Figure 1 Figure 1 Changing market shares in the Spanish market (p) Private company / (c) Cooperative / (cf) Cooperative federation Source: Ruizalba, Soares and Morales, 2015

Conversely, the pharmaceutical distribution sector in Portugal did not start to flourish until the 1960s-1990s when more than 20 distribution companies were founded. From those 20 newcomers, 5 were cooperatives and the rest were private companies. As opposed to what occurred in Spain, the consolidation process commenced in 1985 and intensified in the nineties with various takeovers by both private companies and cooperatives. Due to that early process of consolidation, the market was relatively concentrated by 2003 already when the top 7 wholesalers had close to 85% of the market share. That decrease in the market fragmentation has continued and in 2013 the seven biggest companies accounted for more than 90% of the market, as shown in figures 2 a) and b).

Figure 2 Figure 2 Changing market shares in the Portuguese market (p) Private company / (c) Cooperative / (cf) Cooperative federation Source: Ruizalba, Soares and Morales, 2015

There are three differences that deserve to be highlighted: (1) The slower development towards a modern configuration of the Portuguese industry; (2) The balanced presence of both private companies and cooperatives in Portugal, where the importance of cooperatives is notably higher; (3) The even higher level of concentration experienced in the Portuguese market due to an earlier period of consolidation.

It is reasonable to believe that in both markets, there are two key reasons behind the consolidation process. Firstly, the direct impact of new legislations introduced as a result of the reductions of public budget dedicated to medication. This in turn affected sales prices and reduced the contribution margins.

Secondly, the reduction of public health spending resulted in additional strains for pharmacies in terms of delays in reimbursements from the government, which impacted to wholesalers as billing periods and stocks increased. Thus, consolidation of the industries was the natural response to the new circumstances. This evolution aimed not only to look for economies of scales and cost reductions but also to enhance the portfolio of services that were offered to pharmacies, which led to the servitization process of this sector. Another important factor that has contributed to the servitization process is that, in both countries, the commercial margin of pharmaceutical distributors is regulated and fixed by the administration (Frías 2001). Since they cannot increase their contribution margins they have to expand and compete through other strategies and the most used has been the development of servitization.

Building upon Baines et al. (2013) categorization of services (into base, intermediate and advanced services) and Baines et al. (2009:558) identification of main motives for servitization implementation, this research aims at comparing the levels and types of services implemented in the Portuguese and Spanish pharmaceutical distributors. The suggested empirical research attempted to address the following questions:

• What is the current provision of services in the Portuguese and Spanish pharmaceutical distribution?

• How can these services be classified according to Baines et al. (2013) levels of service (base, intermediate and advanced)

• What is the relationship between the level of implementation in both countries and the:

a) Percentage of service availability

b) 2008 financial crisis

c) Implementation reasons (loyalty, competitive advantage and profit)

d) Intention to further develop these services e) Levels of co-opetition

In order to investigate this, the data was collected through: (1) interviews, (2) the analysis of company websites and (3) the development of a questionnaire.

Step 1:

Interviews were conducted with six managers of main companies as well as with six academics regarding the categorization of services. The first outcome was a provisional list of services.

Step 2:

In order to further develop this list, all the websites from main distributors in both countries were analysed (more than 50). A selection of the most representative was undertaken, focusing on fifteen companies which enabled the identification of five main service types (added services, IT consulting, other professional services, training and divulgation services and third party services) which were further classified into the three levels of Baines et al. (2013).

Step 3:

A questionnaire was elaborated to understand the degree, reasons and intention for the development and implementation of services. A pre-test was conducted with four managers and two academics and their suggestions were included. The questionnaire included items regarding company type (private or cooperative), number of employees, number of customers, revenues in 2014 and geographical area. Likert scale questions were also included relative to currently offered services (launched before or after 2008, not offered) as well as the impact on: customer’s loyalty, competitive advantage, revenues/profits, intention to further develop those services and the type of relationships developed with other companies (to examine co-opetition - based on Wu, Choi and Rungtusanatham, 2010; Soares, Soltani and Liao, 2012). These questions were repeated for all five categories of services: (1) added services, (2) IT consulting, (3) other professional services, (4) training and divulgation services and (5) third party services.

This questionnaire was distributed online followed in many cases by phone calls, emails and direct requests. A total of 30 distributors in both countries were approached and selected based on their market share and typology (private and cooperatives). The response rate was of 26.6% (8 companies, 4 from Portugal and 4 from Spain). This sample represents 45% of the market share in the pharmaceutical distribution of the Iberian Peninsula, given that the Portuguese market was €2,106m in 2013 (Alliance Healthcare, 2013) and the Spanish market size was €10,034m (Fedifar, 2014).

This paper suggests that co-opetition, strategic factors (customer loyalty, profitability and competitive advantage) and willingness towards development of future services are key variables for the pharmaceutical industry. Key categories of services were also identified.

The concept of servitization has been investigated under different denominations which has enriched the field generating various definitions from several disciplines. Overlapping and even potentially conflicting dimensions and concepts have been considered in these definitions. Although it is clear for the research community what servitization is, for others the literature still lacks a comprehensive and consensual definition that clearly identifies the boundaries of this concept.

Following this, we suggest that a comprehensive definition of servitization should consider most of these elements:

• improvement of processes and capabilities

• competition through the development of product-service system instead of products only

• adoption of a new business model

• creation of mutual value (bi-directionality)

• development of consistent intra and inter-firm channels of communication,

• co-creation of solutions (between servitized and serviting firms)

• mutual learning and collaboration in the design and delivery of services

• generation of new sources of revenue, higher performance, long term relationships and sustainable competitive advantage.

This research could be of interest for managers in different sectors as it explores servitization, broadening the application of such strategy and giving some clues about how its implementation should be done and analysing the motivation behind offered services.

Main contributions can be summarized as follows:

Contribution 1: analysis, discussion and identification of the types of services provided by pharmaceutical distributors (summarized in Table 1). This was the first time that such an analysis was conducted for the Portuguese and Spanish markets.

Contribution 2: application of Baines et al. (2013) three levels of service to the pharmaceutical sector for the first time.

Contribution 3: development of a questionnaire used to conduct an empirical analysis to investigate the offer/availability of services identifying the:

a) percentage of distributors that provide the services

b) services launched before and during the 2008 financial crisis

c) main reasons for the implementation of these services (loyalty, competitive advantage and profit)

d) intention to further develop these services and

e) levels of co-opetition in both markets

A limitation is that, due to the sector concentration and small number of players, it revealed difficult to increase sample size. However, those respondents represent 45% of the distribution market share.

In regards to suggestions for further research, this analysis could also be extended to other EU countries since this is a strategic sector. It is also suggested that future studies consider multi-level analysis including other players such as pharmacy stores (customers) and laboratories (suppliers). This is suggested in order to investigate how they actually implement these services for their servitization strategies and the gaps between levels. Regarding co-opetition, it would also be interesting to investigate which service types have common providers, in which do companies’ co-opete and the reasons behind the higher co-opetition levels.

Practitioners may find interesting the fact that the majority of players value the most the provision of additional services and training and divulgation. More than focused on profits, distributors have stated that these deliver to them both loyalty and competitive advantage.

However, this is not consistent with what the servitization theory has shown.

Although this seems to be the overall perception in the industry, it is here argued that the provision of base services alone will not provide companies with a sustainable competitive advantage in the long term since most of these services can easily be copied by competitors.

The true competitive advantage will come from the development of advanced services that can further improve processes and capabilities which seem to be currently less valued by distributors in their market development intentions. We call the attention to the industry providers to the gaps generated by the lack of advanced service offerings, as it is in fact a source of interesting business opportunities.

To conclude, due to the fact that the main decision is to develop base services in the future (Table 6) an important and thought-provoking question is raised on whether this means that distributors deliberately go “back to basics”? or are not they aware of the implications of this decision?

If they are deliberately focusing base services then they could be investing in low value adding services easily copied, not only by direct competitors but also by players from other industries (e.g., supermarkets, personal care stores, etc), and that could behave in reality as commodities.

Or is it just that they are doing “business as usual” with short term vision in which case they are not fully aware of the risks that this strategy comprises?

Whichever are the answers to these questions, this analysis clearly shows that the majority of distributors not only privilege base services but also indicate higher levels of intention for the development of this basic offering in the future. This demonstrates a cross-market opportunity for the attainment of sustained competitive advantage through the development of advanced services.