JUNE 16, 2023
CORPORATE STRATEGY, ORGANIZATION, AND CULTURE
ORGANIZATIONAL ANALYSIS
Character Count:
PART I: 10.977
PART II: 11.857
STUDENT NO.: S161935
ORGANIZATIONAL ANALYSIS 2023
Exam Name: BJURO2503E
Student No.: S161935
Exam Name: BJURO2503E
Merck & Co., Inc.: Corporate Strategy, Organization, and Culture
Organizational Analysis
Table of Contents
Introduction ............................................................................................................................... 2
Part I – Introduction & Summary ....................................................................................... 2
1.1
Merck & Co. Company Overview ..................................................................................... 2
1.2
Organizational Structure.................................................................................................. 2
1.3
External Environmental Change ....................................................................................... 3
1.4
Internal Environmental Change ....................................................................................... 4
Part II – Questions ............................................................................................................. 5
2.1 Q1: Challenges before 1997 ................................................................................................. 5
2.1.1
Internal Challenges ...................................................................................................... 6
2.1.2
External Challenges...................................................................................................... 7
2.2
Q2 – Resistant to Change and the Evolving Industry ........................................................ 7
2.2.1
Integration and utilization of Merck's strengths and opportunities .............................. 7
2.2.2
Challenges from the Evolving Industry ......................................................................... 8
2.3
2.3.1
2.4
Q3 – Gilmartin’s Restructuring ......................................................................................... 8
Benefits and Drawbacks............................................................................................... 8
Q4 – Organizational Strategy, Culture, and Change after 1997 ......................................... 9
Part III - Appendix............................................................................................................ 10
Exhibit 1: SWOT Analysis .......................................................................................................... 10
Exhibit 2: Managerial Tools/ Strategies and Their Respective Benefits and Drawbacks ............. 10
Exhibit 3: The Restructuring of the Senior Management Team .................................................. 11
Exhibit 4: Interplay between organizational design, strategy, and culture after 1997. ............... 11
Exhibit 5: The Internal and External Challenges That Faced Merck Prior to 1997 ....................... 12
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Student No.: S161935
Exam Name: BJURO2503E
Introduction
This paper aims to conduct a comprehensive organizational analysis of Merck & Co., focusing on
various aspects that shape its operations, strategies, culture, and structure. By providing a categorized
summary of the case and examining the organization's structure, leadership, culture, and strategic
approaches, this paper seeks to gain insights into the key factors that have contributed to its success and
the internal and external challenges they have faced and will face in the future. Through this analysis,
we can understand how Merck & Co. copes with internal and external challenges, allocates its resources
and capabilities and aligns its strategies with industry trends and demands, and societal needs.
Additionally, this analysis will delve into Merck's strategic choices, such as its focus on R&D
and sales and marketing and explore how these strategies have positioned Merck to seize opportunities,
overcome challenges, and maintain a competitive edge in a rapidly evolving pharmaceutical landscape.
Part I – Introduction & Summary
1.1
Merck & Co. Company Overview
Merck & Co., a prominent pharmaceutical company founded in 1891, is renowned for its commitment
to R&D and has been at the forefront of delivering vital medicines and vaccines for over a century. In
1998, Merck was widely recognized as a premier company in its industry. With sales of $23.6 billion
in 1997, including $13 billion from pharmaceuticals and vaccines, Merck ranked among the top 100
companies on the Fortune 500 list. The company competed in 15 categories and offered approximately
100 different products globally at the time, primarily within oncology, vaccines, and infectious
diseases.1 This analysis focuses on the organization's trajectory during the 1990s, a period marked by
the leadership of Roy Vagelos, followed by Ray Gilmartin. As the pharmaceutical environment
continues to evolve, Merck faced various challenging forces to make changes within the organization.
1.2
Organizational Structure
Merck operates in a multidivisional structure which, if suitable for the organization, effectively manages
a complex range of value-creation activities by allowing the different divisions to operate independently
with their own set of support functions. The organization exhibited both high horizontal and vertical
differentiation, reflecting the complexity of its products and the need for specialized expertise and
management systems. At the senior management level, the management committee (MC) comprised of
eleven members, including the CEO, CFO, legal advisor, managers from the Merck Research
Laboratories (MRL), vaccine managers, HR manager, representatives from Medco and AgVet, as well
as three regional managers overseeing the American, European, and Merck Intercontinental regions.
This one-tier management structure facilitated streamlined communication and decision-making,
1
https://www.merck.com/research/
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enabling the organization to address complex challenges more efficiently and be better suited for
contingencies and challenges emerging from changes in the environment.
1.3
External Environmental Change
The external environment within the pharmaceutical industry has been subject to significant
evolutionary and revolutionary changes over the 20th century. Prior to 1990, the global pharmaceutical
industry experienced rapid growth, high profits, and significant innovation which affected Merck to
have what in this case is referred to as the “Golden Age”. The industry was highly profitable in the
U.S., although the economic returns (i.e., returns adjusted to recognize R&D as an asset) were in line
with the industry's cost of capital. Many pharmaceutical companies competed in more than 20
therapeutic categories, with no single company controlling more than 5%-6% of industry sales. Giants
like Merck, Bristol-Myers Squibb, and Glaxo dominated their respective categories without competing
on price.
However, in the early 1990s, the industry faced new challenges amid a revolutionary change in
the environment. In the period 1991 to 1993, sales and earnings growth slowed down, leading to a
decline in stock valuations and a plummeting pharmaceutical market capitalization of -35%. Several
companies, including Merck and Pfizer, announced workforce reductions. The declining sales and
earnings were fuelled by managed care organizations (MCOs) and their ability to influence drug prices
by limiting the number of drugs offered to patients and gaining significant bargaining power over the
pharmaceutical industry. From 1980 to 1993 MCO coverage for the insured U.S. population rose from
5% to 80%, similarly, in 1960 only 4% of prescription drug sales were funded by third-party payers, by
1995 MCOs by themselves accounted for 75% of drug purchases.
Furthermore, a change in regulatory forces posed a threat to pharmaceutical manufacturers,
with generics' market share increasing due to the Waxman-Hatch Act of 1984, which simplified the
generic drug approval process and paved the way for new competition and challenges within the
external environment of the pharmaceutical industry. Generics’ share of the U.S. prescription drug
market rose from 19% to 36% from 1984 to 1993 as generics typically priced at a 30% to 90% discount
to brand-name drugs. Further regulatory forces pressured the pharmaceutical industry after President
Bill Clinton took office in 1992. The Clinton administration and Congress criticized the industry for
high-profit margins and their perceived contribution to rising healthcare costs. Clinton's review of the
healthcare system recommended federal controls, including price controls on prescription drugs.
As a result of the fundamental changes within the pharmaceutical environment, pharmaceutical
firms recognized the need to become more competitive and reduce costs, particularly in research and
development (R&D). To control costs, companies sought external technology through licensing
agreements, R&D contracts, joint ventures, and collaborations. This led to a significant increase in
strategic alliances and M&As within the industry.
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1.4
Internal Environmental Change
To tackle challenges arising from the changing external environment, the CEO of Merck & Co.,
Vagelos, took the initiative to implement company-wide programs known as the "New Reality" aimed
to establish a fresh corporate culture that would equip the organization to confront the emerging external
challenges. Vagelos delineated seven key areas of focus for Merck, which included, counteracting
declining margins through increased volume, expediting the development of new pharmaceuticals,
enhancing communication channels for decision-makers, improving operational efficiency, sustaining
pricing power, striving to be a low-cost producer, and managing workforce size effectively.
Furthermore, Vagelos stressed the importance of avoiding the fate suffered by other successful
companies that failed to adapt to external shocks. Motivating the organization proved to be a challenge,
primarily due to the unresolved issue of Vagelos naming Richard Markham as chairman and CEO, only
to have him abruptly resign after 7 months. The question of who would lead the “New Reality” cast a
long shadow of disarray over Merck, leading to significant morale issues and a perception that Merck
was veering off its intended path. In a strategic and decisive move, Merck made an announcement in
July 1993 regarding the acquisition of Medco Containment Services, the largest pharmaceutical benefits
manager in the U.S. The decision to acquire Medco was driven by Merck's desire to shape and exert
influence on the MCO revolution in the pharmaceutical industry. The unexpected nature of the
acquisition surprised many within Merck and generated internal controversy as it contradicted Merck’s
core value of being focused on the patient and not on the profits.
However, in June 1994, Merck's board made the decision to recruit an external figure, Ray
Gilmartin, to assume the role of CEO. Gilmartin inherited a company renowned for its exceptional
scientific advancements and high ethical standards. Traditionally, decision-making at Merck had been
largely influenced by senior R&D scientists at MRL, with strong backing from Vagelos. However, there
was a prevailing sentiment that effective communication between these two parties was lacking,
resulting in decision-making challenges. While functional expertise had been the cornerstone of Merck's
success, it impeded efficient and cross-functional cost-effective decision-making processes. These
functional barriers hindered the company's agility in responding promptly to the profound changes in
the external environment. Furthermore, there was a prevalent belief among many individuals that
Merck, despite its long-standing success, had developed a sense of arrogance, complacency, conflict
avoidance, and excessive bureaucracy. A significant amount of time was being devoted to management
meetings and their preparations, diverting attention from more productive endeavours. Recognizing the
prevailing power dynamics of buyers and suppliers in the pharmaceutical industry, Gilmartin foresaw
the continued favor of MCOs. He identified this trend as an inevitable opportunity for Merck and aimed
to position the company to cater to the evolving needs of this dominant group of healthcare payers.
Additionally, Gilmartin emphasized the anticipated increase in competition, leading to price and
earnings pressures.
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In response to the criticism surrounding Merck's overall strategy, Gilmartin took swift action.
It was widely perceived that the strategy lacked clarity and specificity, rendering it indistinguishable
from any other company's approach. There was also confusion regarding the future role of R&D, which
had traditionally been Merck's competitive advantage. The acquisition of Medco was met with
skepticism among employees as there was a lack of understanding within Merck's workforce, which
fuelled mistrust towards Medco's divisions. Employees expressed apprehension about having their
history and culture imposed upon them by the newly acquired entity.
In September 1994, Gilmartin instigated a restructuring of Merck's top leadership team. The
previous two-tier structure was abolished, and a single Management Committee (MC) was established
to streamline the reporting process within the upper management hierarchy. Recognizing the need to
adapt to the volatile external environment, there was a collective understanding that Merck had to
dismantle its functional barriers and address the global coordination challenges it faced. In response,
two new business initiatives were introduced: the PACE process and the Worldwide Business Strategy
Team process (WBST). PACE aimed to enhance decision-making efficiency, effectiveness, and
timeliness in product development by providing specific strategies and plans through cross-functional
project teams aligned with broader corporate objectives. WBST sought to develop synchronized
worldwide franchise strategies for Merck's products, involving representatives from all functional
divisions.
Further initiatives were launched in March 1995 called the "Organizational Fitness" profile.
The results highlighted challenges such as function-oriented planning, compensation model
incompatibilities, and bureaucratic culture. The lack of cross-functional decision-making processes was
evident, particularly in integrating vaccine needs. Trust and communication issues within the
management team were identified, along with doubts about the integration of new coordination
initiatives. The organizational culture made the employees feel overworked, and there was criticism of
the HR department. As a result, the MC decided to address nine areas: strategy development, planning
process improvement, efficient MC development, clarification of PACE and WBST, leadership
development, productivity and work-life balance, employee communication, Merck-Medco
understanding, and cultural issues.
Part II – Questions
2.1 Q1: Challenges before 1997
Before 1997, Merck encountered various challenges related to its structure, strategy, and culture. A
SWOT analysis is conducted to assess the organization's strengths, weaknesses, opportunities, and
threats (as shown in Exhibit 1). The focus is primarily on identifying the harmful aspects, such as
internally originated weaknesses and externally originated threats. The different internal and external
challenges are shown in Exhibit 5.
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2.1.1
Internal Challenges
Organizational Structural Challenges
The organizational structure and functional barriers within the company pose internal challenges,
leading to difficulties in decision-making for managers and limited adaptability for employees to the
increasingly demanding environment. To better comprehend the hindrances to effective decisionmaking and reduced flexibility caused by functional barriers at Merck & Co., we can refer to Max
Weber's principles of optimizing bureaucracies. Out of the 6 principles the third principle holds, in this
case, relevance as many employees lack a clear understanding of their roles and authority, which is
evident in the unclear allocation of authority for resource allocation.
Organizational Design and Change Challenges
The organization faces internal challenges in design and change, including coordinating global
divisions, aligning top management with employees, and establishing harmony within the MC.
Communication issues emerge due to the organization's complexity, leading to coordination and
cooperation issues. The principles of Peter Senge's organizational learning theory highlight the
importance of a shared vision, which seems to be lacking in Merck & Co.'s divisions.
Furthermore, Merck & Co. confront challenges related to the integration and optimal utilization
of the PACE-process, WBST, and the Medco acquisition, building a better understanding for employees
and managers. To address the integration challenge, the organization must establish effective methods
for capturing and sharing knowledge concerning the PACE-process, WBST, and the Medco acquisition.
This approach aligns with the concept of organizational learning as advocated by Peter Senge and other
scholars. By continuously leveraging collective knowledge and experience regarding these initiatives,
employees can drive the organization to fully exploit their strengths and opportunities seen in the SWOT
analysis in Exhibit 1, and utilize the new initiatives and acquisition of Medco.
Organizational Cultural Challenges
Merck & Co. also face further internal challenges concerning an inadequate work-life balance and an
organizational culture that fosters ineffectiveness for both employees and managers. The ineffective
culture at Merck & Co., characterized by a lack of work-life balance and a discouragement of
challenging existing operational methods, aligns with the concept of an inert culture proposed by John
Kotter and James Heskett. An inert culture hampers adaptability to the changing and demanding
environment. Thus, Merck & Co. should strive to promote a more adaptive culture that values
innovation and encourages and rewards experimentation.
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2.1.2
External Challenges
The rise of MCOs and the resulting price pressure represent an external challenge affecting Merck &
Co., its distributors, care organizations (MCOs), and customers. This force stems from the specific
environment and the increased buying power and bargaining capabilities of MCOs, leading to
downward pressure on prices. The theory of resource dependence sheds light on the importance of
managing relationships with external stakeholders such as MCO. Merck & Co. should explore
alternative strategies for managing their resource dependence, such as negotiating with MCOs,
exploring alternative distribution channels, or venturing into new markets to reduce their reliance on
MCOs.
Patent expirations and increased competition from generics pose an external challenge for Merck
& Co. This challenge involves various stakeholders, including managers, generic suppliers, and the
government. To address it, Merck should embrace change and foster innovation to diversify their
product offerings. Implementing Kurt Lewin's three-step change process can guide this transformation.
The first step is to "unfreeze" the current state by raising awareness of the changing competitive
landscape and the importance of expanding their product line.
2.2 Q2 – Resistant to Change and the Evolving Industry
2.2.1
Integration and utilization of Merck's strengths and opportunities
To achieve a successful integration of the mentioned initiatives, organizational learning must be
prioritized across multiple levels: individual, group, organizational, and inter-organizational, as
outlined by Peter Senge. Managers should facilitate discussions on the advantages and drawbacks of
implementing a knowledge management system using the codification approach, aiming to foster
knowledge sharing and collaboration between different teams, as well as between Medco and Merck &
Co. Additionally, establishing relevant training and development programs can cultivate a learning
culture and enhance employees' competences, specifically in relation to integration efforts. Recognizing
and rewarding active participation in these programs can further encourage employee engagement. By
thoroughly examining the benefits and limitations of these strategies, managers can make well-informed
decisions regarding their pursuit. Implementing such a system offers several benefits, such as improved
organizational knowledge sharing that fosters collaboration and innovation. It also enables better
decision-making by providing easy access to a wealth of information for internal stakeholders involved
in the integration process. Furthermore, effective integration and communication are promoted,
enhancing collaboration and coordination among teams. The system also facilitates a smoother
transition for new employees, preventing knowledge and experience loss. However, implementing a
new knowledge system demands significant resources in terms of time and capital due to its complexity
and a strategy to cope with resistance to change, also seen in Exhibit 2.
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2.2.2 Challenges from the Evolving Industry
The challenge posed by the potential threat of generic substitutes and the management's potential
responses can be addressed by considering the concepts of resource dependency and transaction cost
theory. Resource dependency theory suggests that organizations should strive to gain control over their
resources and reduce dependence on other organizations and a limited product line. On the other hand,
transaction cost theory aims to minimize the costs associated with exchanging resources in the external
environment, leading to a more cost-efficient organization that can better withstand threats.
One strategy to reduce costs is to establish strategic alliances and partnerships. Through
collaboration with other firms or research institutions, Merck & Co. can leverage their expertise and
minimize expenses associated with the development of new drugs. This approach offers several
benefits, including access to a wider range of competencies and resources, as well as the ability to share
risks with partners in addressing the challenge posed by generic substitute suppliers. However,
drawbacks may include a potential loss of control and the need to address integration challenges when
working with different organizations.
Another viable strategy is to diversify its product line by venturing into new therapeutic areas.
This approach reduces reliance on patents and internal innovation within the organization. By
expanding their product offerings, Merck & Co. can reach a broader customer base. However, it is
important to consider the associated costs of new research and development, as well as the need to
navigate the regulatory landscape and ensure compliance.
2.3 Q3 – Gilmartin’s Restructuring
In September 1994, Merck underwent a restructuring led by Raymond Gilmartin. The restructuring
eliminated the two-tier management structure and introduced a single Management Committee (MC),
including key executives such as the CFO, general counsel, division heads, and regional business heads.
The restructuring is seen in Exhibit 3. The goal was to strengthen Merck's focus on its core business as
a research-based pharmaceutical and vaccine company. To achieve this, strategic decisions were made,
including exiting the generic drugs market and divesting specialty chemicals businesses, Medco
Behavioral Care, and the crop protection business. Merck also chose to remain independent and
prioritize internal research and development for growth, maximizing sales through effective product
promotion and utilizing the Medco acquisition.
2.3.1
Benefits and Drawbacks
Benefits of the Restructuring
Restructuring Merck's senior management team under Gilmartin's leadership brought significant
benefits. It streamlined decision-making, increased efficiency, and improved response times to market
changes. The organizational structure was flattened, fostering a culture of teamwork and empowerment.
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This enhanced agility and enabled quicker decisions. The emphasis on continuous learning boosted
employee growth and productivity.
Strategic decisions focused on core business and prioritized research and development,
positioning Merck for long-term growth. The company's commitment to internal R&D programs
allowed it to leverage strengths and maintain control over its growth trajectory. Promoting existing
products and launching new ones aimed to maximize sales growth and solidify its position among toptier healthcare companies.
Drawbacks of the restructuring
The restructuring brings a drawback of concentrated power at the top, potentially limiting input and
hindering innovation. Maintaining feedback channels is crucial for inclusivity. During the transition,
employees may need time to adjust, leading to a temporary productivity decline. Effective change
management and clear communication are vital for a smooth transition.
Overall, while the restructuring of Merck's senior management team under Gilmartin's leadership
brought numerous benefits in terms of streamlined decision-making, a flatter organizational structure,
and strategic positioning, it is important to address potential drawbacks such as power concentration
and the need for effective change management.
2.4 Q4 – Organizational Strategy, Culture, and Change after 1997
Merck & Co. demonstrated a strong interplay between strategy, culture, and design since 1997, resulting
in significant growth, successful product launches, and a strong market presence. The interplay between
the three elements is shown in Exhibit 4. The R&D-focused strategy was well-received by employees,
fostering optimism and clear direction. Improved communication and personnel exchange enhanced the
relationship with Medco subsidiary. Leadership development and new principles strengthened the
organizational culture. Challenges remained in integrating cross-functional processes and incorporating
WBSTs. More work was needed to enhance marketing capabilities and improve communication
between departments. The conflict-avoidant culture raised concerns about effective communication
during tough times, highlighting the need for openness. Despite concerns, progress was recognized in
reducing arrogance and learning from mistakes. In conclusion, the interplay between Merck's
organizational strategy, organizational culture, and organizational design was largely positive, with
notable achievements in research, leadership development, and employee communication. However,
challenges remained in integrating cross-functional processes, enhancing marketing capabilities, and
transforming the culture to encourage open dialogue and confront conflicts.
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Part III - Appendix
External origin
Internal origin
Exhibit 1: SWOT Analysis
Helpful
Harmful
Strengths
Weaknesses
•
Strong R&D
•
Dependence on Patents
•
Brand reputation
•
Limited product diversification
•
Strong pipeline
•
Organizational complexity
•
Focus on leadership and workforce
•
Bureaucratic structure
excellence.
•
conflict avoidance culture
Opportunities
Threats
•
Market placement (Brand reputation)
•
Intense Competition
•
Global presence
•
Patent Expirations and generics
•
New Market trend of M&As
•
Regulatory and Pricing Pressures
Exhibit 2: Managerial Tools/ Strategies and Their Respective Benefits and Drawbacks
Challenge
Integration and
Utilization
Strengths and
Opportunities
The Evolving
Industry
Managerial Tool/
Strategy
Develop a knowledge
management system
and establishing
training programs.
Diversify and expand
product portfolio and
utilize strategic
alliances and
partnerships.
Benefits
Drawbacks
Improved information sharing
with better decision-making by a
better understanding of the need
for change.
Requires time and
resources for
implementation and
ongoing maintenance.
Better integration,
communication, and therefore
better alignment of practices
Resistance for change.
Employee interruption
Giving up more control.
Access to more competences and
resources.
Less dependency on patents and
A bigger customer segment
Potential integration
problems.
Costs of R&D and more
compliance requirements.
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Exhibit 3: The Restructuring of the Senior Management Team
Exhibit 4: Interplay between organizational design, strategy, and culture after 1997.
o
o
o
o
Clear direction and R&D focus drove growth
and product success.
Strategy well-received by employees,
fostering optimism.
Improved relationship with subsidiary
through communication and personnel
exchange.
Leadership development strengthened
organizational culture.
Organizational
Culture
Organizational
Design
o
o
o
o
o
Clear direction and R&D focus drove growth and
product success.
o Strategy well-received by employees,
fostering optimism.
o Improved relationship with subsidiary
through communication and personnel
exchange.
o Leadership development strengthened
organizational culture.
Organizational
Strategy
Clear direction and R&D focus drove growth and
product success.
Strategy well-received by employees, fostering
optimism.
Improved relationship with subsidiary through
communication and personnel exchange.
Leadership development strengthened
organizational culture.
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Exhibit 5: The Internal and External Challenges That Faced Merck Prior to 1997
Internal Challenges
Force
Concept
How?
Managers and workforce
Specific environment
Max Weber: The Principles of
bureaucracy
Illustrates how the functional barriers hinders decisionmaking and the organization's flexibility.
Coordination of the global
business division
Managers and workforce
Specific environment
Peter Senge: Organizational
Learning
By promoting the establishment of a learning organization.
Alignment of topmanagement and the
employees
Managers and workforce
Specific environment
Peter Senge: Organizational
Learning
By promoting the establishment of a learning organization.
Alignment inside topmanagement
Managers
Specific environment
Peter Senge: Organizational
Learning
By promoting the establishment of a learning organization.
Inadequate work-life-balance
Managers and workforce
Specific environment
John Kotter and James Heskett:
Inert and adaptive culture
The case suggests the presence of an inert culture. Describes
the drawbacks relevant to the challenge.
Integration and utilization of
PACE, WBST and MEDCO.
Managers and workforce
Specific environment
Organizational Learning
For effective integrations Merck & Co. should promote
organizational learning.
Design
Bureaucratic and functional
structure
Culture
Stakeholders
Change
Structure
Challenges
External Challenges
Care-organizations and the price
pressure
Merck & Co.,
Competitors, Distributors,
Customers
Dependency on patents and growing Managers, Competitors,
generics substitutes
Suppliers, Government
General environment
Resource dependency theory
Merck & Co. becomes more dependent on the MCO’s.
Managing such dependencies can be described through
dependency theory.
General environment
Kurt Lewin: The three-step
model for change
To address the challenge, Merck & Co. should implement
change. This can be described through Kurt Lewin's threestep model.
Student No.: S161935
Exam Name: BJURO2503E
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