Merck Case Study

22 September 2016

Merck Case Study

1. What does the structure of the pharmaceutical industry look like (according to Porter’s five forces)? Is it an attractive industry? Why or why not?

The pharmaceutical industry is always evolving and there continues to be extensive amounts of money being put into research and development to either make a better product or produce a new groundbreaking one. Pharmaceutical companies play a key role in the economy because of the amount of money that is poured into economies of scale such as manufacturing, R&D, marketing, and sales. The industry is approaching the trillion dollar mark and accounts for roughly 3-4 percent of all economic output in the United States. Pharmaceuticals strive on innovation and the case states the industry is in a upheaval and specifically mentions the recent merger between Merck and Schering-Plough. The former competitors joined forces in 2009 because they intended to broaden their medical portfolio base and expand further into international markets. Other companies have been doing the same, acquiring and merging, to make sure they have the resources and money to compete in the highly competitive industry. Now that the basics of the industry have been covered, related to Merck specifically, it is important to analyze it through Porter’s 5 forces.

1. Power of Suppliers:

Suppliers have little power in this industry. Large companies have significant power leaving the suppliers with little room for negotiation.  

1. Power of Buyers

Purchasing in large volumes has an effect because the purchaser can seek low prices because of their significant leverage while individual customers have no bargaining power.

1. Threat of Substitutes

Patents play a major role in the industry. Developing a product that is effective and continually striving for innovation allow companies to have their product on the market while other companies cannot. When this patent expires, the generic companies enter with a lower cost product.

1. Threat of New Entrants

There are rarely new entrants in the pharmaceutical industry. The barriers are extremely high and overcoming the financial resources needed is a tough task alone. Additionally, patents protecting products as well as the 12 year development process with extraordinary manufacturing capabilities already in place make it so the players in this industry are set.

1. Competitive Rivalry

The rivalry in the industry is highly competitive which is why there is so much money in pharmaceuticals. Companies are working to be the most innovative and mergers and acquisitions have taken place in order to ensure that certain players are always one step ahead.

 2. Can Merck gain and sustain a competitive advantage in the pharmaceutical industry? Why or why not? (Support answer with specific examples of capabilities, resources or activities).

It does not appear that Merck has potential to achieve a competitive advantage in the pharmaceutical industry. Their merger with SP was a sign they were trying to move forward, but a string of SP products failed shortly after the merger which brought attention away from the potential they were striving for. The company prides itself in putting more money to R&D than any other company and complementing that with hiring the best candidates for positions means Merck should be putting new drugs on the market quicker and more efficiently than everyone else. The merger with SP brought setbacks to the company because employees were not interested in the developments and strides another company had made and therefore disregarded them which ultimately led to slowed growth. “Merck has the lowest percentage of new approved drugs based on externally derived technology and the rankings indicate they have fallen from 3rd to 6th in terms of total number of R&D projects.” How could a company possible gain a competitive advantage if they cannot create drugs from external technology, and they are not even in the top 5 in an area in which they spend more time and money than any other company in the industry? According to the graphs at the end of the case, Their net income has declined every year since 2009 and they are mediocre in terms of size, sales, and financial data compared to the rest of the industry.

3. Analyze Merck’s innovation strategy? Does it need to be fixed? Why or why not?

Merck is one of the most successful companies of the pharmaceutical industry, facing a tough peril with various threats in its success path. Primarily being a R&D company doing in-house innovation by employing the best talent in the industry, Merck’s CEO now intends to go beyond the traditional closed R&D mindset, and move into an open source innovation.

Merck’s current innovation strategy is a closed innovation strategy. The core value of Merck has been to invest heavily in R&D, employ superstar scientists and making billions of dollars through introducing blockbuster drugs into the market and protect them via patents.