External Environment

Daft defined external environment as the group all the factors that have an indirect or direct, either short-term or long-term impact on the company’s operations in a specific industry or in the overall market.[footnoteRef:1] External environment analysis enables strategists to understand upcoming opportunities and prevalent threats in a specific sector which directly impact specific organization in terms of competitiveness, performance, and brand value. [1: Daft, R.L., & Armstrong, A. (2015). Organization theory and design (3rd ed.). Toronto, ON: Nelson Education. ]

Table 1. External Factor Evaluation (EFE) matrix of Merck

Source: self-made according to EFE guidelines from David text

David text explains how organizations either act defensive to react or adapt aggressively through strategy formulation, giving them the early mover advantage while mitigating possible risks.[footnoteRef:2] External environment can be broadly divided into five categories: economic; socio, cultural, demographic, and natural environment; political, government, and legal; technological; competitive forces.[footnoteRef:3] All aforesaid factors create definite set of opportunities and threats for any business operating posing a significant impact on the business performance. Table 1 above, enlists some of the major opportunities and threats posed against Merck from its external business environment, computed through External Factor Evaluation (EFE) framework. Thus, for Merck to succeed, it should actively analyze the external business environment and adapt accordingly, in order to maintain its leading position in the industry ahead of aggressive competitors. [2: David, F. R., & David, F. R. (2013). Strategic management: Concepts and cases: A competitive advantage approach. Pearson.] [3: David, F. R., & David, F. R. (2013). Strategic management: Concepts and cases: A competitive advantage approach. Pearson.]

By nature, biopharmaceutical sector is highly capital intensive and regulated industries with an aggressive investment towards drug discovery and development. It was estimated about $190 billion was spent by global pharma companies towards R&D alone in 2019 which is expected to spur by 10-20% in next five years. However, increasing cases of anti-microbial resistance (AMR) is posing an immediate threat to all the drug discovery firms globally who are now finding ways to discover antibodies to fight the superbugs caused because of AMR. According to a report by the National Health Institute, the CDC estimated that the cost of antimicrobial resistance is $55 billion every year alone in the United States where $20 billion for health care and about $35 billion is for loss of productivity.[footnoteRef:4] If AMR could cost the US alone an additional spending of $55 billion, its impact across Europe, Asia, Latin America and Oceanian nations is unknown[footnoteRef:5] indicting an immediate emergency. Under such world circumstances, Merck as one of the top biopharma companies in the world has partnered with various health institutes and the WHO in combating the adverse impact due to AMR by conducting partnered research through AMR Action Fund,[footnoteRef:6] thereby indulging in a sustainable competition. [4: Dadgostar P. (2019). Antimicrobial Resistance: Implications and Costs. Infection and drug resistance, 12, 3903–3910. https://doi.org/10.2147/IDR.S234610] [5: Chen, H. H., Stringer, A., Eguale, T., Rao, G. G., & Ozawa, S. (2019). Impact of antibiotic resistance on treatment of pneumococcal disease in Ethiopia: an agent-based modeling simulation. The American Journal of Tropical Medicine and Hygiene, 101(5), 1042-1053.] [6: Merck & Co. (2019, October 1). Working together to create a sustainable market for antibiotics. Retrieved from: https://www.merck.com/stories/working-together-to-create-a-sustainable-market-for-antibiotics/]

As a pioneer in the oncology and developing vaccines, Merck today has its basket full of blockbuster cancer treating drugs such as Keytruda, Gardasil & MMR-II raising tens of billions in annual revenues since 2017. Merck, from time-to-time has involved itself in mergers and acquisitions strengthening its global position by catering to specific needs of various international markets such as Japan, Europe, and China. Some of the preeminent M&As such as acquisition of Sharp & Dohme in 1953, merging with Schering Plough in 2009, selling blockbuster drugs such as Clarinex, Claritin, Vytorin, and Temador for brain tumor led to the unprecedented journey of Merck in both US and international markets. With the recent acquisition of Peloton Therapeutics, Immune Design, and Themis show that Merck is taking a different approach in building its business by converting itself into a pure science-based research organization. Under such strategic imperative, Merck has also announced its new spinoff of its trusted legacy brands, biologics, and women healthcare units into a new company called as Organon & Co., which is expected to complete by 2021.[footnoteRef:7] In addition, since December 2019, world is startled by the newly discovered SARS COV-2 virus causing millions of deaths globally. Merck announced its active developing process of two vaccine candidates for fighting COVID-19 along with an oral antiviral drug[footnoteRef:8] which is expected to set Merck’s market share at par from many of its competitors. With such wider portfolio of research candidates in its pipeline, Merck is all set to compete expecting to secure increased market share. Having said that, its prime competitors such as Pfizer, Johnson & Johnson (JNJ), GlaxoSmithKline (GSK), AbbVie, Abbott, Roche, Sanofi, and Novartis are also globally established organizations actively competing for increased market share, in turn challenging Merck’s quest for developing breakthrough drugs in order to survive and succeed in the fierce competition. [7: Merck & Co. (n.d.). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [8: Merck & Co. (2020). MSD 2019-2020 Corporate Responsibility Report. Retrieved from: https://www.msdresponsibility.com/access-to-health/vaccines/]

Figure 1. API suppliers for US pharma

Data Source: Center for Drug Evaluation and Research, US Food and Drug Administration

Pharma industry serves markets across the globe by procuring raw materials from all the four corners of the world. Developing economies such as India and China are growing to be the top providers of APIs for most of the US pharma companies marketed drugs. As shown by figure 1, most of the API manufacturing facilities are located in the US, Europe, India, and China majorly procuring raw materials from respective economies. Merck operating in more than 125 world countries has major manufacturing setups in China, India and the US procuring solvents, APIs, and intermediate drugs explicitly from India and China. Merck develops, produces, and sells drugs and vaccines to patients both in the US and international markets, thus, mandates all of its suppliers to follow prescribed supplier code of conduct.[footnoteRef:9] Merck’s supplier code of conduct and policies are in line with those of the US FDA mandated US Current Good Manufacturing Practices (CGMPs) ensuring the quality and useability of the procured materials.[footnoteRef:10] Having such norms in place makes Merck to actively seek suppliers who have an ability to abide those rules by providing raw materials efficiently both in terms of quality and quantity. It further restricts firm’s ability to direct raw material suppliers wholly to act according to only one’s interest thus inducing healthy competition in the system. Aspects such as forecasting, producing, accessibility, access, and pricing to resources also govern companies to choose their supplier partners as in case of Merck. [9: Merck & Co. (n.d.). Company Overview: Suppliers. Retrieved from: https://www.merck.com/company-overview/suppliers/] [10: United States Food and Drug Administration. (n.d.). Guidance and Manuals on Pharmaceutical Quality. Retrieved from https://www.fda.gov/drugs/pharmaceutical-quality-resources/guidances-and-manuals-pharmaceutical-quality]

According to their corporate website, Merck commits itself to empower its suppliers mix through diversity and inclusion policies in place. Pharmaceutical supply chain (PSC) is one of the most complex and continuously changing supply chains in the industry because drug usage is quite unpredictable. The National Institutes of Health, US (NIH) data shows that due to lack of optimum target inventory, high Supplychain costs, and inaccuracy in forecasting are some of the major problems that create drug shortages.[footnoteRef:11] Under such circumstances, Merck tries to minimize its costs by procuring major raw materials from Asia followed by the US and Europe. Merck also active in leveraging science to create supply chain solutions where it has digitally transformed its manufacturing facilities by using predictive control monitoring and lab monitoring technologies. With the Restructuring Program since 2016, Merck has invested about $2 billion in transforming its production into a real-time data driven global supply chain. Establishing environment friendly factory setup as well as technologically advanced packing systems are some of the initiatives taken by Merck in order to adapt to increasing demand of drugs due to external changes in the business environment. [11: Moosivand, A., Rajabzadeh Ghatari, A., & Rasekh, H. R. (2019). Supply Chain Challenges in Pharmaceutical Manufacturing Companies: Using Qualitative System Dynamics Methodology. Iranian journal of pharmaceutical research : IJPR, 18(2), 1103–1116. https://doi.org/10.22037/ijpr.2019.2389]

One of the core values of Merck includes ‘respect for its people’ according to their corporate website which portrays Merck’s commitment towards its partners.[footnoteRef:12] Human resources are crucial in the pharma sector as expertise makes a difference in the performance of a specific pharmaceutical organization. Merck is a registered federal lobbyist in the US committing to assist federal government in drafting regulations promoting public health policies and drug discovery processes.[footnoteRef:13] Apart from the science of discovery, Merck is also known worldwide for its drug manual that encloses various medication procedures along with drug usage effects in long-term, known as Merck Manual, widely used medical reference across the globe. Merck’s handbook focuses explicitly on conduct and behavioral policies for every person connected with the company including the executives, employees, suppliers, and other stakeholders. According to the CEO, Ken Frazier, skilled workforce is the prime driver of Merck succeeding in both R&D and manufacturing abilities. Merck is referred as one of the best workplaces to work in the US, voted by worldwide employees as the culturally strong organization, according to their corporate sustainability report, 2019. Merck’s executives insist employees on actively challenging themselves inside the business processes, boosting work ethic and morale for wider development of skills. All in all, aforesaid practices mark Merck’s ability to utilize human resources for attaining an advantage over competitors for effective global market performance. [12: Merck & Co. (n.d.). Company Overview: Mission, Vision & Values. Retrieved from: https://www.merck.com/company-overview/ ] [13: Scutti, S. (2019, January 24). Big Pharma spends record millions on lobbying amid pressure to lower drug prices. CNN. Retrieved from: https://www.cnn.com/2019/01/23/health/phrma-lobbying-costs-bn/index.html]

Merck reported annual revenues of about $40.3 billion, $42.3 billion, and $ 46.9 billion in 2017, 2018 and 2019 years respectively[footnoteRef:14] which show the unlikely impact of foreign currency exchange rates as well as one-time tax liabilities to be fulfilled in both the US and other global locations. Merck along with obstacles from R&D, is also posed with hindrances from federal government for price reduction in the US as well as major global markets such as China, Japan, and Europe. Merck has limited its price increase to less than 10% every year in the US beginning from 2020 after the policy makeover by the Trump administration.[footnoteRef:15] Merck, in order to sustain its global position began formulating strategy by turning itself into a research-based organization by spinning off slow growing units of trusted legacy brands, biosimilars, and women healthcare products into Organon & Co., by first half of 2021. Merck realizes blockbuster revenues from sales of Keytruda, Gardasil, MMR-II, Pneumovax, Clarinex, Emend, and Lynparza.[footnoteRef:16] Nevertheless, with growing generic competition, Merck has secured its place by getting approval for more than 20 drugs along with many combination treatments of Keytruda. It can be noted that Merck is all set to drive away the generic competition by stronger drug portfolio and R&D pipeline by building up counteractive strategies and operating long-term sustainability. [14: Merck & Co. (n.d.). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf] [15: Financial Post. (2020, January 03). Novartis, Merck, and Allergan join those raising U.S. drug prices for 2020. The Financial Post. Retrieved from: https://financialpost.com/pmn/business-pmn/novartis-merck-and-allergan-join-those-raising-u-s-drug-prices-for-2020] [16: Merck & Co. (n.d.). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

By selling drugs and vaccines in more than 140 nations with 280 global locations, Merck absorbs its revenues from all five continents in both human and animal health sectors. Merck’s international revenues rose to more than 50% mainly from 2011 and continues through 2019. Merck had international revenues of about 56.6% in 2019, 56% in 2018, and 56.5% in 2017 with China, Japan, and Europe as major single markets. With 144 external manufacturing facilities globally, 35 corporate alliances, and 98 regional alliances, Merck provides access internationally to its drugs, vaccines, and health services especially in the US. It was estimated that global pharma was $1.25 trillion for 2019 fiscal which is expected to raise with CAGR of 6-8% in next five years of which prescription drug market is forecasted to reach $1.5 trillion. With such growth, Merck is all set to be the leading biopharmaceutical companies for catering growing demand in the coming years acquiring increased market share.

Figure 2. Market forecast for branded drugs[footnoteRef:17] [17: Waters, R. & Urquhart, U. (2019). World Preview 2019, Outlook to 2024. Evaluate Pharma. https://info.evaluate.com/]

Merck over years is known to be a pro in implying technology for boosting its operational performance as well as drug discovery. Merck’s worldwide research and development division known as Merck Research Laboratories, operates and collaborate within some of the leading bio-pharma ecosystems including the San Francisco Bay area, California; Boston/Cambridge, Massachusetts; New Jersey; Pennsylvania and Canada.[footnoteRef:18] Main areas of research by Merck include oncology, vaccines, infectious diseases, cardio-metabolic disorders, neuroscience along with separate division for COVID-19. As part of its restructuring program since 2016, Merck is transforming its manufacturing into digital and interconnected network driven by real-time demand for drugs and vaccines. Merck is also known for its exclusive 3D printing development facilities explicitly working on tissue cultures, cell responses, and designing specific manufacturing models for expedite production. Merck also advances itself by investing in AI, and cloud computing along with data analytics for efficient patient monitoring and clinical trials data and analysis. Merck also has designed Merck Global Health Innovation (GHI) Fund where it invests in change creating firms aimed at extravagant solutions in the healthcare industry. [18: Merck & Co. (n.d.). Research and Products. Retrieved from: https://www.merck.com/research-and-products/]

Operating globally, Merck has significant impact from global economy as a whole as well as individual economies such as the US, China, Japan, and Europe. With the global pandemic since early 2020, alternative spending has come down while expenditure on expedited research for COVID has gone up. Thus, along with inflation and interest rates, foreign exchange fluctuations, GDP, economic cycles of respective nations, pandemic is also affecting Merck’s activity. With its far-fetched product line and vaccines, Merck is still at par in 2020 despite significant backlash in the market due to pandemic. Merck’s investment has been significantly growing over years which accounted for nearly $10 billion in 2019. Data and privacy laws are pivotal to Merck’s operations as they impact Merck’s discovery and patent exclusivity. The EU General Data Protection Regulation, effective since May 25, 2018 along with the California Consumer Act effective as of January 01, 2020 are some of the strongly impacting economic reforms on Merck’s operations.[footnoteRef:19] [19: Merck & Co. (n.d.). Merck & Co 2019 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MRK_2019.pdf]

In addition, with the enactment of TCJA in 2017, Merck reported onetime tax payment of $5.5 billion along with spending $4.5 billion, $1.5 billion, and $4.9 billion, in income taxes for years 2019, 2018 and 2017 respectively towards corresponding fiscal year against the income.[footnoteRef:20] During 2019 and 2018, Merck reported unrealized losses of about $13 million and $26 million respectively in other (income) expense, net due to investment with unfavorable impact of foreign exchange.[footnoteRef:21] Merck also had favorable impact of 11% from foreign exchange on the whole despite 3% decrease from foreign exchange in animal health segment. For developed nations like the US, pharma sector forms the backbone which accounts for 4% of total GDP. Operating in such a sophisticated industry, Merck also has formed alliances for developing focused medicines as well as acquired companies such as Peloton Therapeutics for breast cancer drug development, partnering with Samsung’s Bioepis for biosimilar version of Herceptin against Roche. Thus, Merck with its focused business activity is trying to maximize its gain from all its international operations despite varying economies across the world using cost maximization initiatives. [20: Merck & Co. (n.d.). Merck & Co 2019 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MRK_2019.pdf] [21: Merck & Co. (n.d.). Merck & Co 2019 Annual Review. Retrieved from: https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MRK_2019.pdf]

Daft explained government sector as a component of external environment where political stability, economic performance, intellectual property rights (IPR), human resources policies (HR), foreign investment policy, trade policy and tax reforms, healthcare sector norms, and administrative policy altogether contribute to an organization’s performance. Political instability and inflation are major concerns for Merck while operating in Latin America and African nations with interference from politicians and bureaucrats. Quality standards is another major issue for pharmaceutical companies which imply companies to follow certain specified standards for conducting business in respective nations. IPR laws are essential because infringements are definite threat for drug companies linked to their drug development, marketing and selling rights. Merck, in 2017 was cyberattacked where its global network was disrupted which led to interruption of all its operations globally. Foreign trade and tax regulations are also other attributes under government which have direct impact on Merck such as TCJA, Brexit, and norm change under EMA. In 2018, under an act to stop unusual pricing increase in pharma, President Donald Trump had introduced International Pricing Index (IPI) model to limit rises across the US seizing the increase to less than 10% annually. Japan also mandated biennial price reductions for specific vaccines and drugs in 2020. Hence, Merck seems to continue its pricing and cost maximization efforts by adapting to the definite policy change.

Aspects such as demographics, lifestyle, disease patterns, urbanization, immunity analysis, epidemic history, and disease history are some of the components that provide understanding of kind of drugs needed for development in specific nations. Merck uses this data in conducting and developing novel drugs addressing the diseases whose usage vastly depends on culture towards science and medicines as well as government’s interference in the discovery and approval processes. Market intelligence equips Merck with focused and unprecedented data serving R&D and manufacturing activity. Patient empowerment, changing patient demographics, and increased risk exposure influence Merck’s development procedures which evolve on a periodic basis. Moreover, Merck is also committed to serving global population by working very near to attain UN SDGs by focusing at SDG-3, SDG-5, SDG-6, SDG-7, SDG-8, SDG-12, SDG-13, and SDG-17 by 2030.[footnoteRef:22] Merck is well-known for its Vioxx scandal in which its anti-steroidal drug was causing three to fourfold increased myocardial infections such as heart attack and stroke in patients. Merck has also provided access to medication across Africa for mitigating river blindness along with its blockbuster streptomycin, M-M-R II, and HPV vaccines.[footnoteRef:23] Merck is also in process of developing two mRNA-based vaccines for SARS COVID-19 along with an oral antiviral drug reported by the FDA.[footnoteRef:24] Thus, Merck fosters its business action in line with changing sociocultural attributes attaining maximum advantage for its sustenance. [22: Merck & Co. (n.d.). MSD Corporate Responsibility Report: Sustainable Development Goals (SDGs). Retrieved from: https://www.msdresponsibility.com/reporting/un-sustainable-development-goals/] [23: Merck & Co. (n.d.). Company Overview. Retrieved from: https://www.merck.com/company-overview/history/] [24: Merck & Co. (2020, September 8). Biopharma Leaders Unite to Stand with Science. Retrieved from: https://www.merck.com/news/biopharma-leaders-unite-to-stand-with-science/]

Table 2. Merck’s revenue distribution[footnoteRef:25] [25: Merck & Co. (2020). Merck 2019 Annual Review. Retrieved from: https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf]

Above table shows Merck’s increasing international revenues over years with skyrocketing sales of Lenvima and Keytruda. Merck reported $46.84 billion sales in 2019 of which only 44% was from the US while the rest 56% from foreign markets. Foreign revenues accounted only 30% for Merck during previous decade which saw a significant raise in 2011 through 2019 with China, Japan, and Europe as major outside markets. Global demand is expected to rise specially from the pharmerging markets, as coined by the WHO. IQVIA along with consensus from WHO, characterized pharmerging market as nation with less than $30k GDP/capita and greater than $1 billion absolute prescription drugs market growth potential between 2014 & 2019.[footnoteRef:26] China, Brazil, India, Russia, Mexico, Turkey, Poland, Saudi Arabia, Indonesia, Egypt, Philippines, Pakistan, Vietnam. Bangladesh, Argentina, Algeria, Colombia, South Africa, Chile, Nigeria, and Kazakhstan are termed as pharmerging markets whose growth potential is rapidly increasing.[footnoteRef:27] With oncology and cardiovascular diseases as one of its major areas of focus, Merck is all set to strive in serving raising global demand retaining its top five position in the world biopharmaceutical market. [26: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood.pdf ] [27: Rickwood, S. (2017). Prescription Medicines Trends: An Overview and Perspective on Two Therapy Areas. IQVIA. https://www.who.int/phi/2-SarahRickwood.pdf]

However, in 2018, Trump administration strengthened the regulatory norms under Foreign Investment Risk Review Modernization Act (FIRRMA) which expands the scope of the Committee on Foreign Investment in the United States (CFIUS)’s watch on foreign investments especially creating panic among Chinese investors who withdrew their investments from the US firms.[footnoteRef:28] Following the stringent norms under FIRRMA, investment in the US pharma has come down to 30% or less in 2019 and zero in 2020 following the change in policies as well as hit by pandemic. In order for Merck to continue its growth in global market, Merck should utilize its market intelligence and competitive intelligence teams. As Daft emphasized, any organization irrespective of industry should seek ways to adapt according to its external environment for maximizing growth through definite set of opportunities. Thus, it is mandatory for Merck to actively adapt to the external business atmosphere and change accordingly in order to squeeze maximum opportunity leading to increased competitiveness in the international drug sector. [28: Congressional Research Service. (2020). CFIUS Reform Under FIRRMA. Retrieved from: https://fas.org/sgp/crs/natsec/IF10952.pdf]

As emphasized by David text, any organization attains sustainable competitive advantage by exploiting its internal strengths in adapting to changes in the external business environment.[footnoteRef:29] Internal audit allows strategists to design goals and objectives for the organization through the lens of exploiting its strengths for creating distinctive competencies. David text provided a framework which can be applied to Merck and evaluate its current position in holding effective internal strengths. The Internal Factor Evaluation (IFE) mat