Merck and Co Incorporated - Case Study Example

Merck and Co Incorporated This paper undertakes critical strategic analysis about Merck and Co Incorporated, a pharmaceutical company with its headquarters in New Jersey, USA. The pharmaceutical industry has been hit significantly by healthcare bills, interest rate and currency changes, alternatives for social care and technological improvements in the past year. Merck has a major competitor threat from GlaxoSmithKline plc, Novartis AG and Pfizer Inc. However, there are threats from the mergers of groups of suppliers, distributors and other smaller labs. Such mergers could become very significant if capital and research potentials are enhanced to meet the high standards that Merck maintains. Merck's core vision is to provide health for all humans and animals. They do this by promoting research, innovation and ethics. The company is run by a board of directors and executive committee made up of managers of functional units of the company. Merck's strength is in its ability to produce more brands to add up to its range. It is also bracing for a global presence through mergers and acquisition. The qualified staff and management add up to its competence. On the other hand, it has weaknesses relating to lawsuits, merger/acquisition issues, aging management and non-productive research issues. The research recommends the critical examination of the Health Care Act of the Obama administration and align itself appropriately. Also, it is recommended that Merck should proceed with its expansion and draw a balance between localization and globalization. Introduction Merck is a pharmaceutical company that operates according to very high standards in terms of improving lives, achieving scientific excellence and other social standards of integrity like diversity and improvement (Merck Values, 2012). Merck is a leader in innovation and sales of pharmaceutical products throughout the world. This paper undertakes critical strategic analysis of Merck's business environment, competitors and internal strengths. The paper concludes by matching Merck's strengths and weaknesses with the situation in the external and industry environments to produce a strategic recommendation for the company. External Analysis Every business operates in a macro-environment. This is because every business exists in an environment where it takes inputs from the society, processes it and sells the output to the people in the society. In the case of Merck, it takes inputs from the society, processes them to drugs and pharmaceutical products and sells them to customers around the globe. In doing this, there are vital variables in the United States and the World that affects Merck's supply levels, demand and costs and revenue structures. In order to analyze this, effectively, the most widely acclaimed tool is the PEST analysis, which employs the political, economic, social and technological factors that are relevant to a business' operations (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). Political This includes the policies of the government and other authorities that are relevant to an organization. In the case of Merck as a US based pharmaceutical company, there are several indicators and factors that are relevant in its operations. In recent times, the most relevant political factors that provide opportunities and threats to Merck are: 1. Affordable Health Care Act: This is a policy enacted by Congress in November 2009 which expands the scope of health insurance in America. The Act prohibits health insurers from rejecting certain coverage cases based on medical history (CCH Incorporate, 2010). It sets minimum standards for the provision of health benefits by health insurers. Also, it integrates certain elements of anti-trust activities into the health insurance sector. Based on this, there is a higher strain on health insurers in the United States which happens to be the main market of Merck. This implies that health insurers are exposed to greater risks and they are prone to having survival issues and might need to cut down on what they are willing to pay towards their clients' treatments since more and more people are eligible for health insurance in the United States. On the other hand, this provides an opportunity for the expansion of the pharmaceutical market. This is because more people would be eligible for health care and this will mean more people can afford more drugs.- Opportunity 2. The Hatch-Maxman Act: This policy also prevents competition in patenting and controlling generic drugs. Due to this act, there are fewer limits to the right of pharmaceutical companies to protect certain patents that are considered to be generic (Jacobson and Weithemeier, 2010). This is both an opportunity and threat because it will enable Merck to diversify their product line but prevent Merck from benefiting from some of its invented drugs. 3. Harmonization of healthcare in Europe: This has led to the elimination of bottlenecks in the European Union and has made the EU a more attractive market for the sale of pharmaceutical products. On the other hand, there is a threat to sales of drugs in the European Union because they are seeking to stabilize and standardize prices for drugs. This might create a ceiling for Merck in pricing their drugs in the Union.- Threat 4. Elimination of research subsidies by the US government: The systematic reduction of the subsidy given by the US government to pharmaceutical companies has made it quite capital intensive for pharmacies like Merck. This has led to a number of growing research hubs around the world like Turkey and New Zealand where there are subsidies by the government and significant tax holidays for pharmaceutical companies (Keinonen and Takala 2009). This is a threat to the American-centered operations of Merck. 5. New Jersey continues to maintain very high levels of pharmaceutical research subsidies. This is safeguarded by the numerous research institutions and universities that exist in the state. These entities come with great lobbying powers that have allowed the state to maintain high subsidies for pharmacies. This is an opportunity for Merck to maintain its hold on the industry from its headquarters. 6. International standardization has also been adopted by the pharmaceutical industry (Jacobsen and Weithemeier, 2010). Pharmacies are required to use ISO quality requirements for their operations, adhere to global packaging standards as well as end product testing arrangements (Lee and Webb, 2011). This is an opportunity for Merck to enter more partnerships. Economic This includes the economic indicators that are relevant to the operations of a given business in a period of time. In the case of the pharmaceutical industry, some of the most important factors include: 1. The Gross Domestic Product of the United States increased by 1.9% in the 1st Quarter of the year (Bureau of Economic Analysis, 2012). This means that more prosperity has occurred in the country. However, this is on a slower pace. 2. The Interest Rate of the United States announced by the Federal Reserve has been reduced to 0.25%. Although the Standard and Poors’ ratings last year showed that there was going to be a downgrade, the US economy seem to have picked up after austerity measures and relevant arrangements by the Federal Reserve. 3. The Eurozone crises of the first six months of 2012 have led to the strengthening of the US dollar. The crises have caused Greece to consider leaving the Union. A vote in the middle of June will determine whether this will happen or not. Either way, it is apparent that US dollar will continue to appreciate in value, in relation to the Euro. This gives a stronger trading position for pharmaceuticals in the USA and a weaker one for European competitors. Sociological There are some attitudes in societies around the world that have an effect on the demand of medicines and drugs. Mazzacato and Dosi (2012) identify that some new trends over the past year have summed up the changes in the social tastes and preferences of users of pharmaceutical products. They however concede that the change has been gradual, although it has come to light over the past year. They include: 1. Increase in the number of alternative medicines: There has been a widespread increase in the use of alternative medicine like chiropractics and others to provide the health needs of people in the society. This has led to a shortfall in the demand for pharmaceutical products. This is a threat. 2. Increase in the use of a preventive approach to healthcare: More people will prefer to use a preventive approach to solve their problems rather than a curative one. 3. Contemplative Investors: Due to the increase in information and opportunities in investments, investors are much more contemplative and careful about the decisions they take on whether and how to invest. This means that pharmaceutical companies need to find a more convincing approach and a more rewarding method to entice investors. 4. Aging Population: In the 21st Century, the life expectancy of nations around the world has generally increased. This is due to better healthcare and services. This is an opportunity for Merck to expand and produce enough for the markets to meet the demand. 5. Obesity and Healthy Living: There are serious issues with obesity in America. This means that more people have altered their eating habits. This is a threat because there will be less sicknesses that will require Merck to produce drugs to heal them. On the other hand, it is an opportunity because Merck can easily diversify into drugs that support healthy lifestyles. Technological Smith (2011) identifies that in the past year, there have been a lot of transformations in technology that define the trends in the pharmaceutical industry. They include: 1. New therapeutic possibilities make it imperative for pharmaceutical companies to change their means of production to support these new and more popular systems. This is an opportunity for Merck because they can integrate such systems into their operations and activities. 2. The introduction of telemedicine means that the form of diagnosis and the availability of drugs should be connected with automated platforms. This can help Merck to provide its goods easily. 3. Introduction of international technology mainly from India which means there is the need for the harmonization of US pharmacies' systems with that of the international players. 4. Changes in the value chain means that compatibility and other forms of operations should be upgraded for pharmacies Opportunities 1. Healthcare Act provide the opportunity for the expansion of the market. 2. Limitations on the legal rights of patent holders to generic drugs means they can produce more drugs and expand their product portfolio. 3. Harmonization of the European Union produces a new market. 4. New Jersey provides a strong basis for the growth and enhancement of the pharmaceutical operations 5. The growth in the US GDP provides a better market 6. Increase in the value of the US Dollar enhances trade 7. US economy is picking up after a period of austerity. This has led to better opportunities for pharmacies that Merck can take advantage of. 8. Aging population and number of people seeking to avoid obesity provides a larger market. 9. The increase in technology allows Merck to harmonize its operations with health facilities. Threats 1. Healthcare act could lead to restrictions on the market since there is the risk that more health insurance companies will either fold up or get tougher on their policies. 2. The limitations of the rights to patents means they can get less benefit on the drugs they invent. 3. Harmonization of the EU has led to several limitations on European markets which can prevent Merck's drugs from being sold in Europe. 4. The growth in the GDP of the United States is relatively slower than expected. This means they cannot expand their markets as they desire. 5. The increase in the US dollar might make Merck's products expensive in some countries like Greece where the value of the Euro and fall in standard of living is leading to serious financial crises. 6. The increase in alternative medicine and health consciousness limits the markets for Merck's products. 7. The increase in technology is making allowing new competitors from Asia and other parts of the world to enter the markets and compete with Merck. Industrial Analysis The pharmaceutical industry is based on two main things: innovation and commercialization (Bamfield, 2007). As such, any business that wants to survive in the pharmaceutical industry needs to be innovative by conducting research and producing new and effective drugs that provide real value to society. Also, a good pharmaceutical company needs to have strong marketing and promotional systems that will ensure that the highest possible revenues are realized within the relevant framework of constraints. American companies dominate the industry because the United States spends a higher proportion of its Gross Domestic Product on healthcare than any other country on earth (Thompson and Martin, 2005). This ensures that the companies break even locally, remain profitable and can support international operations outside the United States. Porters Five Forces: Competitor Analysis This model indicates that a firm needs to balance various risks of competitors to analyze its position and produce the best possible results. In the case of Merck, the main competitors in this model include: 1. Risk of Entry of Potential Competitors: There are numerous potential competitors both within the United States and outside that can grow and become as powerful as Merck. This might include small companies like Cubist Pharmaceuticals which can easily discover new products and grow to become as strong and as powerful as a big firm like Merck. On the other hand, other small laboratories and university research units can be re-capitalized if they make major discoveries in the field of pharmacy and look attractive to investors. The main barriers that exist include the legal requirements and this can be skipped by an adequately capitalized entity. This is a high risk. 2. Bargaining Power of Buyers: Merck has over sixty key distributors listed on its website. The largest include Medico-Mart Inc, Clint Pharmaceutical Inc and America Source Bergen Corporation. These companies are less of a threat to Merck. This is because they do not have the level of expertise that Merck has at its disposal. However, if they merge, they could form major research and innovative companies that can become competitors to Merck as a leading pharmaceutical company. This is a medium risk. However, it is a consolidating risk because buyer sentiments are growing each day and there is a good chance that it could be significant a decade from now. 3. Threat of Substitute Products: Merck's areas of specialization include Vaccines, Prescription Products, Consumer Products and Animal Health Products. Although it is difficult for any company to manufacture this combination of products, it is fairly easy and straightforward for competitors to produce similar substitutes that can have the same effect for each product line. This is a medium risk. However, there are also alternative medicines which are growing in popularity amongst the immigrant populations of American. 4. Bargaining Power of Suppliers: Merck sources its raw materials from small suppliers that register to do business with them. They include small companies around the United States with little bargaining power because Merck deals with each one separately. Again, they can come together and form research units that can produce the same products that Merck manufactures and sell. However, there are major capital requirements that they might not be able to fulfill. This is a relatively medium risk. 5. Rivalry amongst Established Firms: According to Yahoo Finance (2012) the main competitors of Merck are other key global drug manufacturers that have strong tendencies towards innovation and research. The top three competitors are: GlaxoSmithKline plc, Novartis AG and Pfizer Inc. These companies each have market caps of over $100 billion in an industry where the average business has a market cap of just over $1 billion. They all maintain between 85,000 and 125,000 employees on their payroll. These companies pose a high risk to Merck. There are also other companies like biotech companies that form a secondary competitive tier. They have about half of the assets and employee base of these core companies. They produce less than what they produce but pose a medium risk to Merck because they can mature only in the medium term to meet Merck's position. Conclusion The pharmaceutical industry that Merck thrives in has its dynamics. Merck's main threat is from the companies that operates in its line of business. These businesses compete actively with Merck for the same resources. However, the threat of new alternatives seem to be growing each day. There are also other threats from buyers and suppliers coming together to form entities that can compete with Merck, however, this is quite remote. Strategic Direction of Merck Inc The vision of Merck Inc is to provide health for ALL. This means that they seek to provide services that would bring about health improvements and cures for customers around the globe. The vision is to grow a range of products that would grow and cover a wide range of situations and conditions. Thus, their research potential is left opened to numerous possibilities and ideas. The mission is to use the elements of research and development, and competent staff members to manufacture and make available, important drugs and other pharmaceutical products for people around the world. The mission forms the core guidance for Merck to go into research and attempt to lot in the global markets. In arriving at the vision and mission of Merck, the following values are central to the activities of the company: 1. Improving human and animal lives. 2. Observing high ethical and integrity standards. 3. Attaining the highest standards of research and innovation. 4. Granting universal access to Merck's products. 5. Promoting diversity and teamwork. Merck is run by a Board of Directors and an Executive Committee. The Board is made up of a supervisory team that ensures that all corporate requirements are met. The Executive committee is made up of managers of functional units of the company. The Functional units include: 1. Ethics and Compliance. 2. Manufacturing 3. Animal Health Unit 4. Strategic Planning. 5. Human Resources 6. Consumer Care 7. Finance 8. Research 9. Legal and Compliance 10. Medical 11. Global Affairs and Information & 12. Human Resource Global (Merck Executive Committee, 2012). Internal Strengths and Weaknesses of Merck Inc. Merck's core competency lies in the concentration of unique and competent researchers who have major accomplishments in pharmacy. These researchers have the ability to undertake research and find important cures that are strategically commercialized for the public. The distinctive competence of Merck lies in the ability of the company to produce unique drugs and own the patents which they make available to other manufacturers in return for royalties. Strengths 1. Diverse products and brands that were originally developed by Merck. This includes over 12 major products, 13 pharmaceutical brands and 11 vaccines. 2. Strategic acquisitions and mergers with Schering-Plough. 3. Approval for more products. 4. Strong in-house research facilities and resources. 5. Highly skilled staff. 6. Strong management team Weaknesses 1. Product legal liability issues like the Vioxx liability lawsuit which cost them millions of dollars. 2. Mergers and acquisitions are not very clearcut and have potential cultural issues and challenges in organizational behavior. 3. The management team is aging. There is no manager under the age of 50 4. There are many research projects that are not yielding results, like the research into the AIDS vaccine. Analysis of Strength and Weaknesses The strategic acquisitions comes with the need to be more careful about the legal elements of those arrangements. Also, as more products are approved, there are issues and problems that could potentially come up with reengineering and imitations in other countries. In line with the weaknesses, there are some commendable alternatives that could change the company. In the issue of lawsuits, there could be a strong legal department that would handle due diligence issues before mergers. Also, the aging management team could be averted with a good succession plan. Strategic Recommendations & Implementation In order to counter the threats and also improve the strengths of Merck, the following recommendations are desirable 1. Merck should undertake a thorough evaluation of the effects of the Healthcare Act on the US markets. It should understand how this Act will affect the pharmaceutical industry over the next seven years. Afterwards, all the functional units will need to meet and discuss how to make adjustments to make the optimum use of the opportunities and changes that will come with the reforms. 2. Merck will have to undertake a thorough examination of whether to globalize or localize. This is because the US and European Union economies seem to be inversely related. There is the need for the company to identify how to adjust European operations to meet the volatility that has been exhibited in the EU in recent times. This will set the pace for a policy on the internationalization of their operations around the globe. 3. Merck should also identify new ways of diversifying their operations to include people who seek preventive medicines to enhance a healthy lifestyle. This will mean that they should expand their healthy living unit so that it takes care of people who seek to benefit from medicines that help them to prevent diseases. 4. Merck will need to examine the possibility of providing support for providers of alternative medicine. This can be done through the integration of important units that will manufacture drugs that will be prescribed by practitioners of alternative medicine. 5. Merck needs to enhance its technological capabilities and ensure that there are regular reviews of the technological status at each point in time. This will guarantee that they are never left behind in terms of technology at any point in time. 6. Investor relations will need to be enhanced by the top-level management. Merck will need to spend more time finding outlets to engage the top-level management with potential investors. This will allow them to get more capital and remain at the top of the competition. The implementation of these recommendations should be done through a strategic unit of the company that would be linked to the board of directors and management. They would be charged with management and evaluation of change. The company would also need to make significant monitoring arrangements to ensure that changes are enhanced as recommended. References Bamfield, P. (2007) Research and Development in the Chemical and Pharmaceutical Industry Hoboken, NJ: John Wiley and Sons Publishing. Bureau of Economic Analysis (2012) US Economy [Online] Available at: http://www.bea.gov/newsreleases/glance.htm Retrieved: 14th June, 2012. CCH Incorporated (2010) Law, Explanation and Analysis of the Patient Protection and Affordable Health Care Act Amsterdam: CCH, Wolters Kluwer Business Publishing. Executive Office of the President (2012) Appendix, Budget of the US Government Fiscal Year, 2012 Washington: US Government Publication. Gassmann, O, Reepmeyer, G and Zedtwitz, M. (2008) Leading Pharmaceutical Innovation London: Springer Verlag. Jacobsen, T. M and Wertheimer, A. I. (2010) Modern Pharmaceutical Industry: A Primer New York: Jones and Bartlett Learning. Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall. Keinonon, T. and Takala R. (2009) Product Concept Design: A Review of Conceptual Design of Products Berlin:Birklauser Publishing. Kotter, J. and Schlesinger, L. (1991) Choosing strategies for change, Harvard Business Review, pp.24-29. Lee, D. C. and Webb, M. L. (2011) Pharmaceutical Analysis Hoboken, New Jersey: John Wiley and Sons. Mazzacato, M. and Dosi, G. (2012) Knowledge Accumulation and Industry Revolution: The Case of Pharma Biotech 2nd Edition. Cambridge: Cambridge University Press. Merck Executive Committee (2012) Executive Team [Online] Available at: http://www.merck.com/about/leadership/executive-committee/home.html Retrieved 15th June, 2012. Merck Values (2012) Our Values [Online] Available at: http://www.merck.com/about/our-values/home.html Retrieved: 14th June, 2012. Smith, B. D. (2011) The Future of Pharmacy: Evoluationary Threats and Opportunities New Hampsire: Gower Publishing. Thompson, J. L. and Martin, F. (2005) Strategic Management: Awareness and Change Mason, OH: Cengage. Yahoo Finance (2012) Merck and Co Compared with Competitors [Online] Available at: http://finance.yahoo.com/q/co?s=MRK Retrieved: 14th June, 2012. Read More