J BUSN RES 113

1991:23:113-126

Pharmaceutical Marketing Practices in the

Third World

N. Craig Smith
John A. Quelch
Harvard University

Major criticisms of pharmaceutical marketing are summarized and industry re-

sponses identified. Analysis of this industry case study highlights ethical issues in
marketing and the broader problem of harnessing enterprise to ensure quality of
life and public good. A social control of business model is presented and the limits
of corporate social responsibility delineated.

Introduction
As part of the Harvard Business School ethics in marketing project, a case study
was developed on pharmaceutical marketing (Smith and Quelch, 1989a) together
with a supporting note on pharmaceutical marketing practices in the Third World
(Smith and Quelch, 1989b). Widespread concern about pharmaceutical marketing
prompted this case development topic, though the authors’ intention was not to
single the industry out for specialization, not least because of the benefits provided
by drugs. The focus was on learning from past experience so as to identify im-
provements in marketing practice, which have application beyond the pharma-
ceutical industry. The note on pharmaceutical marketing was developed from the
principal secondary sources and primary sources, including interviews with phar-
maceutical industry executives and discussions with some of their critics. In this
article, we first present the principal criticisms of pharmaceutical marketing. We
then analyze these criticisms in order to develop recommendations for pharma-
ceutical marketing practice and use the industry to illustrate the requirement for
social control of business and the limits of corporate social responsibility.

Criticisms of Pharmaceutical Marketing

In proportion to its size, the pharmaceutical industry received more criticisms for
its practices in the Third World and, indeed, the developed world, than most other
industries. This was at least partially due to the nature of its business, so closely
involved with life and death. Ironically, the industry’s success in healing made it

Address correspondence to John A. Quelch, Harvard Business School, Soldiers Field Road, Boston, MA 02163.

Journal of Business Research 23, 113-126 (1991) 0148-2963/91/$3.50

0 1991 Elsevier Science Publishing Co., Inc.
655 Avenue of the Americas, New York, NY 10010
114 J BUSN RES
1991:23:113-126
N. C. Smith and J. A. Quelch

all the more subject to public scrutiny.
in the Third World readily focused on
wrote of pharmaceutical companies:
in their willingness to settle for much
p. 246). Their promotional practices
concern about the lack of medication
and the testing of drugs.
A broader concern about corporate practices
pharmaceutical corporations. As Braithwaite
“The moral failure of the transnationals lies
lower standards abroad than at home” (1984,
received most criticism, but there was also
in the Third World, drug profits, dumping,

Promotion in the Third World

Pharmaceutical companies were criticized for their promotional practices in the

developed world. Criticisms focused on: the role of pharmaceutical sales repre-
sentatives (or “detailers”) and their attempts to influence prescribing habits of
doctors; gifts and expenses-paid trips to conventions provided to doctors; mislead-
ing or incomplete promotional materials, which, for example, did not always give
prices or adverse effects of drugs; the supply of branded pharmaceuticals rather
than generics; and the associated costs of these activities. Similar, though frequently
stronger charges, were also made against pharmaceutical companies for their pro-
motional practices in the Third World. Of great concern was the promotion of
drugs for a wider range of indications in the Third World than the developed world
and with less disclosure of contraindications and side effects. Concern was also
expressed about the availability of drugs in the Third World not available in the
developed world; of variations in dosage, with higher doses often prescribed in the
Third World; and the promotion of drugs as over-the-counter (OTC) products in
the Third World that were only available on prescription in the developed world.
A leading and ultimately influential critic of the pharmaceutical industry was
Milton Silverman, a biochemist and pharmacologist at the University of California
School of Medicine, San Francisco. His Drugging of the Americas (1976) docu-
mented “how multinational drug companies say one thing about their products to
physicians in the United States, and another thing to physicians in Latin America.”
He was highly critical:

When the so-called morals of the marketplace are applied to drugs that can be in-
valuable when used properly, the result is not only the prostitution of science. .
physicians and pharmacists are uninformed or misinformed. . . patients are needlessly
harmed (1976, p. xi).

He suggested that companies were “lying” when they claimed in their standard
defense that they were not breaking any laws. Moreover, he questioned the phar-
maceutical industry’s arguments against regulation in the United States and the
claim that the industry recognized its social responsibilities and would live up to
them, law or no law. His finding of a “double standard of drug advertising” was
indicative of corporate practices in the absence of laws or their enforcement. De-
tailed evidence was provided to support this finding. Silverman added that the
practices he described were not limited to Latin America. His book was dedicated
to the memory of people who had died from drugs prescribed for the treatment
of minor ailments, including chloramphenicol, an antibiotic with the possible fatal
side effect of aplastic anemia (bone marrow failure). Silverman contrasted the more
limited indications for the drug in the United States with those given for Latin
 J BUSN RES 11.5
Third World Pharmaceutical Marketing 1991:23:113-126

America. He also listed contraindications and side effects. Parke Davis, for ex-
ample, gave no contraindications or adverse reactions (such as aplastic anemia)
for their product Chloromycetin in Central America and Argentina, although a
long list of both was provided in the United States.
Tables were provided by Silverman for most of the major drug categories,
showing similar findings. These disparities between the information provided in-
volved most of the large pharmaceutical companies: Squibb, Boehringer, Schering,
Searle, Johnson and Johnson, Wyeth, Merck, Upjohn, Smith Kline & French,
and Eli Lilly. With Ciba-Geigy, for example, nonsteroid arthritics Butazolidin
(phenylbutazone) and Tanderil (oxyphenbutazone) were listed, as was Tegretol
(carbamazebine), an anticonvulsant for epilepsy and neuralgia, and a Geigy anti-
depressant, Tofranil (imipramine). Tables for these products showed more indi-
cations for use in Latin America and less contraindications, warnings, and adverse
reactions. For Tegretol, only the Physicians’ Desk Reference in the United States
warned “since this drug is not a simple analgesic, it should not be used for the
relief of trivial aches and pains.” Deaths from aplastic anemia had been reported
following treatment with Tegretol, but this possible adverse reaction was only given
in the United States materials.
A second study by Silverman et al. (1982) compared the information provided
to physicians in 27 countries in Latin America, Central Africa, and Asia, together
with the United States and the United Kingdom. Again, the promotion to Third
World doctors was found to be marked by exaggerated claims of efficacy and a
glossing over of hazards. Interviews conducted with pharmacologists and clinical
authorities in the Third World countries brought forth criticism of promotional
practices, including the promotion of so-called “luxury products,” such as sex tonics
and other vitamin combinations. The respondents had stressed the need for more
basic requirements; scarce health funds could not be wasted when there were
inadequate supplies for the control of diseases such as malaria, let alone food
shortages.
Further studies confirmed Silverman’s work, which also caught the attention of
the World Health Organization (WHO) and concerned public interest groups, such
as War on Want, the International Organization of Consumers Unions and its
international information center, Health Action International. In 1981 and 1982,
Social Audit, a United Kingdom public interest group, received support from these
groups to lobby G.D. Searle over its marketing of Lomotil (diphenoxylate/atro-
pine), an antidiarrheal. Social Audit produced an anti-advertisement for Lomotil
that was widely distributed. The leaflet highlighted the potential dangers of Lomotil
in the treatment of children, its questionable usefulness and, hence, economic
waste. Lomotil was contraindicated for children under 2 in the United States, but
recommended for infants 3 months old in Hong Kong, Thailand, and the Philip-
pines. A further, and not uncommon concern, was the free availability of Lomotil
over the counter. Searle promised, in response, to revise its prescribing instructions
(Medawar and Freese, 1982).

Lack of Medication in the Third World

Silverman and others identified a problem of inappropriate medication. However,

for many people in the Third World the problem was an absence of medication.
116 .IBUSN RES
N. C. Smith and J. A. Quelch
1991:23:113-126

In 1979, the International Year of the Child, an address by Senator Kennedy

included the observation that over 2i/2 million children would die that year from
communicable diseases, such as measles and polio, because they wouldn’t have
access to vaccines. This was in stark contrast to the problems of overmedication
in some developed countries, identified by Ivan Illich (1975) in Medical Nemesis,
where people were too ready to view themselves as patients and, as a consequence,
subject to unnecessary and expensive treatment which, of itself, could have harmful
consequences. Moreover, while basic medicines were unavailable in parts of the
Third World, the focus in Western medicine was on keeping people alive longer.
This emphasis was reflected in R&D expenditures by pharmaceutical companies.
Figures on drug consumption were also shown to be highly correlated with per
capita income. Critics charged that ability to pay, rather than need, determined
drug research and availability. With the Wellcome Foundation as a notable ex-
ception, R&D expenditures were far higher on drugsAeemed as less necessary-
for the developed world, than R&D on tropical diseases.

Drug Profits

The shortage of medicines in the Third World added weight to the more general
criticism that drug companies made substantial profits out of sickness, as high prices
were blamed. More radical critics questioned the appropriateness of private en-
terprise involvement in health care, though they could not point to Eastern Bloc
pharmaceutical development and production as representing a better approach.
Others sought evidence of inadequate competition, but with no one company having
more than 5% world market share, this was difficult to establish. It could be shown,
however, that the uniquely international character of the industry created barriers
to entry, with no new drug companies emerging among long-established leaders in
the industry. There were also concentrations by product; reaching a readily iden-
tified global market segment with a patent-protected product could be highly prof-
itable, as Glaxo found with Zantac and Hoffman-La Roche with Valium Diazepam.
Simple comparisons between the cost of chemical ingredients and drug prices
suggested blatant profiteering. However, this ignored substantial R&D costs. Ciba-
Geigy estimated that of 10,000 preparations synthesized and tested, only one would
become a drug sold, some 12 years later, in the marketplace. The risks and costs
associated with R&D provided the rationale for patent protection. But there was
only limited evidence of these factors causing financial difficulty; drug profits re-
mained high and critics charged that too much R&D was on “me-too” products.
ICI and Dow Chemical, for example, generated the highest level of earnings from
their pharmaceutical activities in 1981 (ICI: 24% of profit, at 22.1% margin), though
they made up less than 6% of the sales of either company (Tucker, 1984). The
industry cited the absence of financial difficulty as proof that the system worked.
Not surprisingly, therefore, pharmaceutical companies opposed price control ef-
forts, including the use of generic lists.
Studies suggested that doctors preferred brand names. Generic names could be
a mouthful and difficult to remember, so doctors chose to behave as consumers,
and brand names acted as a guarantee of quality. Pharmacists were also resistant
to substitute a generic equivalent for a prescribed brand as it increased their liability
in the event of an adverse reaction. Attempts by Third World countries, such as
 J BUSN RES
Third World Pharmaceutical Marketing 1991:23:113-126
117

India, Pakistan, and Sri Lanka, to control drug costs by generic sourcing and local
manufacture had limited success. Doctors were uncertain about quality and generic
substitution gave little incentive to the large pharmaceutical companies to research
tropical diseases if they were to be denied the profits from such endeavors. Ciba-
Geigy withdrew from Pakistan in 1973, apparently in protest at generic substitution.
This project failed, allegedly due to pressure from the pharmaceutical companies.
Sri Lanka was more successful. Although there were quality problems, the United
Nations Industrial Development Organization reported a 65% savings in Sri Lan-
ka’s drug bill for 1974. An equivalent to Roche’s patented Diazepam, for example,
had been sourced at 4% of the original price (Braithwaite, 1984, pp. 270-274).
Differential pricing was also criticized. The 1967 U.S. Congress Select Com-
mittee on the pharmaceutical industry cited Schering’s Meticorten (100 x 5 mg
tablets), listed at $17.90 in the United States, $22.70 in Canada, $12.26 in Mexico,
$5.30 in Brazil, and $4.37 in Switzerland. While on average 15% of a country’s
health expenditure was on drugs, the figure was estimated by the World Bank in
1980 to be 25% for a typical Third World country, some sources put it higher still.
However, this was at least partly explained by the lower salaries for health workers
in those countries. The proportion of health spending taken up by drugs in the
developed world was declining.

Dumping

Consumer organizations, suspicious of pharmaceutical companies, would often ask

whether a drug available in the Third World was also available in the developed
world. Dumping was the fear. Dowie, writing in 1979 in Mother Jones, identified
Upjohn’s Depo-Provera and A.H. Robins’ Dalkon Shield as 2 examples. Depo-
Provera, an injectable drug preventing conception in women for 3 to 6 months,
was not even approved for human testing in the United States, but was available
without prescription in Central America. The Dalkon Shield IUD had been recalled
after the death of at least 17 women users in the United States, but was then
subsequently provided to Third World countries through the United States gov-
ernment’s Office of Population. However, under Chapter 8 of the U.S. Food,
Drug, and Cosmetic Act of 1938 (and subsequent amendments), pharmaceutical
companies could not export drugs not approved for marketing within the United
States. (A 1986 amendment relaxed this regulation for exports of drugs for tropical
diseases.) Dowie identified a range of dumping strategies used to avoid prohibitive
regulations, including: the name change; dumping the whole factory; the formula
change-a minor change to avoid detection by scanning devices; the skip-ex-
porting via countries with little regulation (e.g., Guatemala) to those that insist
drugs are approved for use in the country of origin; and the ingredient dump-
exporting ingredients separately to a recombining facility.
Braithwaite (1984, pp. 259-260) confirmed this list. He also identified a double
standard of manufacturing quality, where large pharmaceutical companies granted
licenses to manufacture to Third World companies with questionable quality stan-
dards. He suggested that the most common form of dumping was of products whose
shelf life had expired-possibly exported immediately prior to expiry. Quality
problems resulting from these and other practices, such as smuggling, could readily
be blamed on counterfeiters.
 J BUSN RES
118 1991:23:113-126
N. C. Smith and J. A. Quelch

Testing of Drugs in the Third World

The testing of pharmaceutical products could entail substantial risks and so pre-
clinical development involved extensive testing on animals. This, of itself, was not
above controversy in the West. Human testing in clinical trials was also contro-
versial, particularly with new drugs for killer diseases. There was debate, for ex-
ample, about whether there should be a randomly assigned control group receiving
a placebo, which would be scientifically desirable, when testing a drug for a fatal
disease such as AIDS. Did those receiving the placebo not have a right to the best
treatment available?
Testing new products on humans was governed by the Helsinki Declaration,
published by the World Medical Association in 1964, which took over from the
Nuremberg Code, developed at the end of World War II. Both guidelines required
voluntary, informed consent of drug trial participants. The Food and Drug Admin-
istration refused to grant licenses to new drugs if these and other conditions were
not met during testing. However, critics charged that informed consent was not
always evident in the testing of new drugs in the Third World, which were often
regarded as having risks too high for testing in developed countries.
In Poor Health, Rich Profits, a review of drug companies in the Third World,
Heller (1977) suggested the most “flagrant” abuse was in the development of
contraceptives. The first oral contraceptives were given large-scale clinical trials in
1953 in Puerto Rico, by G.D. Searle. Subsequent tests took place in Haiti and
Mexico and, when first tested in the United States, on women of low-income groups,
84% were of Mexican extraction. Other methods of contraception were also first
tested in Third World countries. Heller (and others) concluded different valuations
on human life figured alongside practical considerations such as the reduced pos-
sibility of legal action in the event of side effects and the costs of testing in developed
countries.

Pharmaceutical Industry Responses to Criticisms

The pharmaceutical industry had some difficulty understanding the charges leveled
against it. There was also surprise. The Thalidomide disaster in the early 1960s
had caused outrage and prompted more stringent regulation of the industry, spe-
cifically in testing requirements prior to the registration and approval of new drugs.
However, this disaster could be viewed as an aberration. But by the mid-late 1970s
it was apparent that the industry itself was under attack. This was despite clear
evidence of the benefits of drugs. Chain, the Nobel Prize-winning biochemist, had
said drugs were “one of the greatest blessings-perhaps the greatest blessing-f
our time.”
It was in the laboratories of the dye producers for the textile industries that the
discovery was made of “magic bullet” drugs. Paul Ehrlich, working in the Hoechst
laboratories in 1907, came up with salvarsan, which attacked the spirochete that
caused syphilis. Unlike most drugs at that time, it attacked the causes of disease
without harming the patient, rather than ameliorating the symptoms. Ehrlich coined
the term “Chemotherapy” to describe his approach, prior to which drugs were
often little more than quack medicine, with some exceptions such as morphine
(isolated from opium in 1817) and aspirin (discovered in the mid-19th century and
 J BUSN RES 119
Third World Pharmaceutical Marketing 19!91:23:113-126

available as an analgesic from the 1890s). The chemotherapeutic revolution brought

rapid progress against disease. With the discovery of penicillin (by Fleming in 1928)
and later antibiotics, the prevention or cure of killer diseases became possible;
polio, malaria, typhoid, tuberculosis, cholera, diphtheria, pneumonia, and influ-
enza could be eradicated. The importance of the benefits provided by drugs was
such that the pharmaceutical industry could claim that everybody was a customer
at some time in life. This was yet another reason for industry claims to uniqueness,
that this was, as an OECD report put it, “an industry like no other” (Tucker,
1984).
Nonetheless, the industry was the outcome and a part of private enterprise. It
was therefore also subject to normal commercial pressures and used commercial
methods such as advertising and personal selling. Sales representatives, as well as
selling, were required to provide information, fulfilling a useful role in this capacity;
advertising likewise, the industry would explain. It was argued that gifts and con-
ventions in exotic locations did not influence prescribing practice by doctors. More
recent cost-containment pressures were seen as misguided when directed against
pharmaceutical companies. The industry argued that drugs were the most cost-
effective therapy, that increased availability would lower costs, and that the best
way to contain costs was through drug development. It was emphasized that drugs
represented only about lo-1.5% of health care costs, with around 5-8% going to
drug producers. Hence, the social responsibility of pharmaceuticals was more in-
novation, and that of the authorities was the provision of the right regulatory
frameworks and not to unduly delay drug introductions (which could take as long
as 8 years in countries such as Germany).
The industry had been secretive; this was changing. There was increasing open-
ness about the risks associated with drug use and an effort to provide more infor-
mation to patients as part of a broader effort to involve patients in decisions about
their health care. It had come to be recognized that risk assessment had a subjective
element: an unacceptable risk to one patient might be deemed acceptable by an-
other patient who might be less willing to tolerate pain or inconvenience. Phar-
maceutical companies were also becoming involved in public policy discussions
about the trade-offs to be made in using expensive, high-technology products (drugs
or equipment).
The Third World situation was more complex, but industry critics did not always
appreciate this, the pharmaceutical companies argued. Much illness could only be
eradicated with the provision of adequate sanitation, clean water, and food. The
success of the developed world in fighting disease in the early 20th century was
due as much to the provision of these basic requirements and access to fresh air
and sunshine, as it was to drugs. Moreover, given these basics, many areas of the
Third World still did not have primary health care; in some of these countries,
70% of the population had never seen a doctor or a hospital. Distribution difficulties
presented further obstacles to improve health care and, with the shortage of health
care facilities, provided the incentive for OTC supply, as ready access to drugs was
deemed preferable to no access at all. The industry also cited, in its defense,
difficulties in controlling subsidiary operations in remote locations, the requirement
to obey local laws, and pressures to serve the interests of the minority elite found
in some Third World countries. It felt unfairly targeted for problems that were not
and could not be its responsibility. With increased world tension, defense spending
 J BUSN RES
120 1991:23:113-126
N. C. Smith and J. A. Quelch

had risen and health spending decreased, yet the World Health Organization had
set the goal of “Health for All by the Year 2000.” It seemed as if many of the
industry’s critics were really asking fundamental questions about capitalism.
The International Federation of Pharmaceutical Manufacturers Associations
(IFPMA) code of pharmaceutical marketing practice was developed in 1981, and
is summarized in the “Appendix.” A supplementary statement added in March
1982 indicates that “information given in Third World countries should be con-
sonant with what is being done in the companies’ markets in the developed world”-
which was a clear response to Silverman’s work. The Third World countries them-
selves had also taken measures to build production facilities and centralized buying.
The WHO in 1977 had, with UN support, developed an essential drug list (225
drugs) to support these and other initiatives. Efforts were also being made to
harmonize regulations governing drug testing and approval. By 1986, Silverman et
al., reporting a third study of drug promotion in the Third World, were able to
confirm improvements:

Many of the pharmaceutical firms
their claims in the Third World to
and far more willingness to disclose
standard in doing promotion have
There is, however, evident need
domestic companies.
were found to be showing more restraint in limiting
those which can be supported by scientific evidence,
serious hazards. The companies discarding a double
apparently not suffered any significant loss of profits.
for further improvement by both multinational and

The mid-late 1980s were witnessing a shift in approach by pharmaceutical com-

panies. The low profile of the industry was, with fewer pharmaceutical break-
throughs and greater expressions of public concern about drug risks, giving way
to more openness. There were efforts to make practices more uniform, drug use
more controlled, and to communicate drug risks to the public, including a more
complete understanding of risk. There was, for example, misunderstanding about
the coexistence of old and new drugs for the same treatment, often assumed to be
the result of poor practice. Yet there was a trade-off to be made by the patient
under these circumstances: the new drug might offer greater efficacy, but there
was more knowledge of the old drug. A drug’s development did not stop with its
market launch. Postmarketing surveillance, a continual monitoring throughout a
drug’s useful life, was intended to identify undesirable side effects that could emerge
under the widely differing conditions of drug use by many different people. It could
also identify additional uses for a drug. However, more openness entailed ac-
knowledgement of the role of post-marketing surveillance and the problems in
claiming drug safety: that there may always be the possibility of a new combination
of factors coming together in the use of a drug, with undesirable side effects.
Information exchange efforts were increased to try and ensure, for example, that
awareness of new contraindications or side effects was rapidly communicated to
Third World operations.

Discussion

This industry case study provides evidence of poor practice and misconduct which,
following criticism, led to some improvements. Yet pharmaceutical companies still
face significant challenges in addressing concerns about their marketing practices
Third World Pharmaceutical Marketing J BUSN RES 121
1991:23:113-126

in the Third World, particularly given the complexity of the industry and the
uncertainty about who is ultimately responsible for health care. The case highlights
some of the major ethical issues in marketing, such as product safety and misleading
advertising, illustrating the ethical dimensions of marketing decision making. If
only because of the consequences of doing otherwise, as examples above confirm,
an ethical and effective marketing manager must exhibit respect and concern for
the welfare of those affected by his or her decisions. This is more than the “good
ethics is good business” argument, there is a moral imperative governing all human
behavior, including that of managers.

Further Recommendations for Improvements in Marketing Practice

Additional measures could be taken by pharmaceutical companies, beyond those
given above. Promotional practices could be further improved by pharmaceutical
companies having centralized monitoring and control functions to ensure consistent
standards globally. This would present political problems in some organizations,
especially the more decentralized, though they would surely not be insurmountable.
The aim would be to provide sufficient information for informed choice by phy-
sicians; including prices, as well as full details on side effects and contraindications.
The industry’s self-regulation efforts could also be made more exacting, not just
in the terms but also the enforcement of the IFPMA code. It currently has no
teeth, with “embarrassment” the main penalty for offenders. This would also help
provide competitors a level playing field for competitors, ensuring that social re-
sponsibility does not entail a competitive disadvantage. The trend of increased
OTC supply may demand a separate code or new provisions to deal specifically
with issues raised by marketing directly to the consumer.
As for the availability of medication issues, continued openness on risks should
be encouraged together with public education efforts; for example, supporting
materials for physicians to provide to patients. More Third World initiatives, par-
ticularly in distribution and R&D, should also be encouraged. On product testing,
informed consent may not be enough. Unlike the testing of contraceptives example,
it would seem more appropriate if new products were tested on the target market.
More generally, closer control and monitoring of subsidiaries and greater co-
operation with the UN/WHO and similar agencies, would seem to be in order.
Finally, in comparing the Third World with the developed world, the apparent
gross inequities may even dictate acceptance and legitimation of the need to sub-
sidize Third World activities. Such a position would be in recognition of a “special
case” status of Third World markets and greater social responsibility requirements
of companies operating therein. This is further discussed below.
Many, more specific suggestions could be made, according to the issue at hand.
Broader issues remain, however, for which there are no easy answers:

l The provision of information versus persuasive communication;

l Innovation versus social control. The industry is an outcome and part of private
enterprise--does this mean that innovation and competition, vital though they
would seem to be, are inevitably on occasion in conflict with the public interest?
l Who is ultimately responsible for health care? Should pharmaceutical com-
122 J BUSN RES
N. C. Smith and J. A. Quelch
1991:23:113-126

panies merely act to serve their own interests, or do they have a far broader
responsibility for health care?
l Are the changes adequate and permanent? Why did they come about? Would
they have occurred without the criticisms of marketing practice?

The Social Control of Business

The case study illustrates the requirement for social control of business, on ob-
servation that extends beyond the pharmaceutical industry. Yet this control must
not come at the expense of diminished innovation. The problem is one of harnessing
enterprise to ensure public good. As the issues raised indicate, the profit incentive
alone is insufficient; social control of business is required to give direction and set
parameters. The forms of social control of business can be summarized in a simple
model, based on an understanding of power (Smith, 1990, pp. 87-95). Table 1
gives the model, incorporating pharmaceutical industry examples and the weak-
nesses of each form of control.

The Limits of Corporate Social Responsibility

How much can and should a firm or industry do to alleviate social problems in
fulfilling its obligations to society? Very little, is the classic, Friedmanite response
to this question. As Friedman explains:

There is one and only one social responsibility of business-to use its resources and
engage in activities designed to increase its profits so long as it stays within the rules
of the game, which is to say, engages in open and free competition, without deception
or fraud (1962, p. 133).

Friedman’s arguments against social responsibility beyond profit maximization are

more sophisticated than his critics allow, and tend to be ignored. They are worth
reviewing. In essence, he identifies 6 problems in social responsibility beyond profit
maximization:

1. Spending someone else’s money.

-The costs of social actions are involuntarily borne by shareholders, cus-
tomers, or others.
2. Competing claims-the role of profit.
-Other claims involve the deliberate sacrifice of profits or at least muddy
decision making.
3. Competitive disadvantage.
-Social actions have a price.
4. Competence.
-How are firms to know what their social responsibilities are? Do firms have
the skills to deal with social issues?
5. FairnessAommation by business.
-Do we want corporations playing God?
6. Legitimacy-the role of government.
Table 1. Social Control of Business: A Simple Model (Smith, 1990, p. 88)
Type of Power Examples
Form of Control (Exerted by Society) Weaknesses (Discussed in the Article)

Legislation (government intervention) * Coercive l Overloaded l FDA regulations

* Force l Limited effectiveness * Criminal charges in Thalidomide case

l Condign l Threat to market system

Market forces * Remunerative l Insufficient l Profits from successful products, e.g.,

Zantac (Glaxo)
l Inducement
* Consumer boycotts of “irresponsible”
. Compensatory
firms, e.g., Lomotil, following anti-
advertisement

Moral obligation (including deliberate l Normative l “Unfair”/elitist l IFPMA code

self-regulation efforts)
l Manipulation l Inadequate l Voluntary disclosure of drug risks

* Conditioned
 J BUSN RES
124 1991:23:113-126
N. C. Smith and J. A. Quelch

The counterarguments to the Friedman position outweigh the above, though

these are important considerations. The case itself presents compelling evidence
of the inadequacy of unfettered profit maximization. The main counterarguments
are:
1. Inaccuracy of (Friedman’s) competitive model of capitalism. Markets just
don’t work in the way neoclassic economists would wish.
2. Managerial discretion in practice.
3. Extent of corporate power.
4. The “moral minimum”-where you have to draw the line.
5. Relationship between enlightened self-interest and long-term profitability.
Accepting social responsibility beyond profit maximization presents problems in
identifying what and how much is socially responsible. Ethicists identify 3 levels
of duties to which people and, hence, managers in organizations, are obligated: 1)
avoid causing harm, 2) prevent harm, 3) do good. Negative duties are stronger
than positive duties. It seems reasonable to expect businesses not to cause harm
and to make efforts to prevent harm, insofar as that is within their control. More
wide-ranging efforts to prevent harm and efforts to do good are less justifiably
advocated. Four criteria have been identified that can be helpful (Simon et al.,
1972, p. 22). There is an obligation to act when these conditions are present: 1)
critical need, 2) proximity, 3) capability, and 4) last resort.
Because of the danger of assuming someone else will act when others are present,
or because one is trying to find out who is the last resort, or because of the possibility
of pluralistic ignorance (not acting because no one else is and the situation therefore
seeming less serious), there may be a situation in which no one acts at all. This
suggests that the criterion of last resort is less useful, and there should be a pre-
sumption in favor of taking action when the first 3 criteria are present. These
criteria and their usefulness are readily understood in the context of “The Parable
of the Sadhu” (McCoy, 1983) in which a group on a climbing expedition have
difficulty choosing between reaching the summit, realizing important personal goals,
and possibly failing in this quest by stopping to help a holy man (the Sadhu), whose
life is in danger. The criteria are clearly also useful in determining responsibilities
in pharmaceutical marketing in the Third World.
Within the above framework, 4 positions delineate the limits of corporate social
responsibility (Smith, 1990, pp. 56-60).
1. Profit maximization and social irresponsibility.
-Firms may do good through profit maximization (Adam Smith’s “invisible
hand”) but may also cause harm, would not act to prevent it, and are only
doing good as a result of serving their self-interest.
2. Profit maximization tempered by the “moral minimum” operating through
self-regulation.
-This is avoiding causing harm. Most firms/managers are at this position.
3. Profit as a necessary but not sufficient goal, with affirmative action extending
beyond self-regulation.
-Some firms/managers make efforts to not only avoid causing harm, but
also prevent harm and possibly do good. Johnson & Johnson is the classic
example.
4. Profit as a necessary but not sufficient goal, with social responsibility ex-
 J BUSN RES 125
Third World Pharmaceutical Marketing 1991:23:113-126

tending beyond self-regulation and affirmative action to include the cham-

pioning of political and moral causes unrelated to the corporation’s business
activities, perhaps even including gifts of charity but only as long as profit-
ability permits.
-Gifts of charity here refers to genuine philanthropy rather than that which
is primarily PR-driven. Few firms reach this position of actively doing good
as well as not causing and preventing harm (which many would argue is
not a bad thing because of the fairness and legitimacy concerns identified
by Friedman). Many firms do not have sufficient resources for the cham-
pioning of political and moral causes. Classic examples of firms at this
position are Ben and Jerry’s and the Body Shop.
The pharmaceutical industry case study refers to many firms at positions 1 and
2, the inadequacy of which is apparent, particularly within the Third World context.
Where are pharmaceutical companies today? Where should they be? We would
argue they should at least be at position 3. We conclude with 2 important questions
to consider if position 4 is advocated: Should pharmaceutical companies aim to
achieve more than break even in their Third World operations? Would efforts to
“do good,” social actions way beyond the corporation’s conventionally defined
business activities, be fair (whose values would be imposed?) and legitimate?

Appendix: IFPMA Code of Pharmaceutical Marketing Practice 1981

Summary of Main Principles (Tucker, 1984, p. 154)
1. Information on drugs to be:
a. Accurate, fair and objective;
b. Based on an up-to-date evaluation of all available scientific evidence;
c. Communicated consistently with regard to safety, contraindications, side
effects, and toxic hazards.
2. Promotional material to be:
a. Withheld until required approval for marketing of the drug is obtained;
b. Based on substantial scientific evidence (cf. (1)b) and have clearance by
medical authorities or pharmacists;
c. Couched in terms that avoid ambiguity, exaggeration of claims, and
unqualified use of the word “safe”;
d. Inclusive of information on the active ingredients of the products, at least
one approved indication for use, dosage, and method of use, and a
(succinct) statement on side effects, precautions, and contraindications;
e. Limited in frequency and volume of mailing so as not to be offensive to
health care professionals.
3. Medical representatives (detailers) to be adequately trained and sufficiently
knowledgeable to present drug information accurately and responsibly.
4. Symposia, congresses, etc., to be principally focused on scientific objectives.
Entertainment and other hospitality to be consistent with those objectives.

Notes
1. The code included a clause saying that samples may be supplied to the medical
profession, but did not specify limits to this practice.
126 J BUSN RES
N. C. Smith and J. A. Quelch
1991:23:113-126

2. It is pointed out that the clauses on information are not intended to restrict
the flow of progress reports to the scientific community, to the public, and to
stockholders in the company.

References

Braithwaite, John, Corporate Crime in the Pharmaceutical Industry, Routledge and Kegan
Paul London. 1984.
Chase, Marilyn, Patient’s Death in AIDS Test Fuels a Debate, Wall Street Journal (June
28, 1989.
Chetley, Andrew, Not Good Enough for Us but Fit for Them-An Examination of the
Chemical and Pharmaceutical Export Trades. Journal of Consumer Policy 9 (1986):1X-
180.
Friedman, Milton, Capitalism and Freedom. University of Chicago Press, Chicago. 1962.
Heller, Tom, Poor Health, Rich Profits, Spokesman Books, Nottingham. 1977.
Illich, Ivan, Medical Nemesis Calder and Boyars, 1975.
Leisinger, Klaus M., Sound Ethical Practices Make Good Business Sense. CZBA-GEIGY
Journal, 3 1988.
McCoy, Bower H., The Parable of the Sadhu, Harvard Business Review 61 (September-
October 1983):103-108.
Medawar, Charles and Freese, Barbara, Drug Diplomacy Social Audit, London. 1982.
Sethi, S. Prakash, Promises of the Good Life Richard D. Irwin, Homewood. 1979.
Silverman, Milton, The Drugging of the Americas, University of California Press, Berkeley.
1976.
Silverman, Milton, Lee, Philip R., and Lydecker, Mia, The Drugging of the Third World,
International Journal of Health Services, 12 (4) 1982.
Silverman, Milton, Lee, Philip R., and Lydecker, Mia, Drug Promotion: The Third World
Revisited, International Journal of Health Services 16 (4) 1986.
Simon, John G., Powers, Charles W., and Gunnemann, Jon P., The Ethical Investor:
Universities and Corporate Responsibility, Yale University Press, New Haven. 1972.
Smith, N. Craig, Morality and the Market: Consumer Pressure for Corporate Accountability,
Routledge, London and New York. 1990.
Smith, N. Craig, and Quelch, John A., CIBA-GEIGY Pharmaceuticals: Pharma Interna-
tional (A), Harvard Business School Case Services #9-589-108 (1989a).
Smith, N. Craig, and Quelch, John A. Note on Pharmaceutical Marketing Practices in the
Third World, Harvard Business School Case Services #9-589-039 (1989b).
Smith, Wendy K., and Tedlow, Richard S., James Burke: A Career in American Business
(A), (B), Harvard Business School Case Services #9-389-177 and 9-390-030 (1989).
Stearns, Beverly, RAD-AR: Homing in on Risk, CIBY-GEIGY Journal, 2 (1987).
Tucker, David, The World Health Market, Euromonitor, London. (1984).