Merck Case

1. The pharmaceutical industry is an oligopoly meaning there are few sellers. In the pharmaceutical industry, there are few large firms that have differentiated products. Oligopolies also have high barriers to entry and some degree of pricing power. In an oligopoly, the competing firms are interdependent. The actions of one competitor influence the behavior of the other competitors which means you must consider the strategic actions of the other competitors. Because of Porter’s Five Forces and the Structure-Conduct-Performance model, I do not think the pharmaceutical industry is not very attractive. The five forces seem too high to be attractive. The threat of entry is high because the industry already has so much competition. It is not easy for firms to enter the pharmaceutical industry. The power of suppliers is also high because they could raise prices as high as they wanted for a period of time until generic drugs came into play and the consumers would have to pay the price asked if they wanted the drug bad enough. The power of buyers is also high because the buyer may demand a higher quality product and they get the higher quality product because that is where the pharmaceutical company gets a big portion of their money. The threat of substitutes is medium to high because even though the pharmaceutical companies are protected from substitution by patents, when pharmaceutical companies’ drug patents run out; generic companies rush in and copy the original drug. This makes the company lose money. Rivalry among existing competitors is pretty high because each pharmaceutical company has to work to get their drug at the forefront of the minds of the consumer by advertising and keeping good standings with consumers.

2. One of Merck’s strengths is that they possess very intelligent scientists and other people working for them that really strengthened their company. Two more strengths of Merck’s are blockbuster drugs and their ability to research. A weakness is that Merck is exposed to the breakdown that exists after one’s product is taken and made generic. This is a weakness that cannot be changed because, by law, generic companies are allowed to do so. Another weakness is their duration of drug development. The duration of drug development takes approximately 12 years, with a cost exceeding $1 billion. It is also estimated that only 250 of the newly discovered compounds make it into the pre-clinical testing phase. And only five of those enter into the three phases of clinical testing. This shows the risk involved in development of a new drug, considering the opportunity cost