Merck Case Study

Elevator Pitch:

The model of innovation that was constantly used in the past decade by pharmaceutical companies was proven to be a broken model, as the sustainability of the industry was under question, since the innovative process -from generation of ideas to distribution of the product- happened in-house. Patent expirations, increasing R&D costs of new drug development, declining R&D productivity, growing competition from generic drug manufacturers and rising customer expectations for cheaper and more effective drugs were some of the factors that led to the strategy change. This is exactly what is described in Merck’s case, where the M&A open innovation strategy was chosen as the solution. This represented the possibility to improve the R&D process by reducing costs to face the short lead times that the market required. Even though this strategy has many benefits (risks distribution, resources reduction, increased human capital and skills…), it also represents major challenges that need to be addressed (loss of control and architectural knowledge, management difficulties, IP management, knowledge transfer…). The main task facing Dr.Turner is to address the challenges and to assure the success of the strategy is the corporate culture. It is crucial to integrate top management and R&D efforts, especially because the latter one is the most challenging function for open innovation implementation, particularly because of the NIH syndrome.

1. What are the causes that forced Merck to consider open innovation as an alternative to their past, proven internal R&D model.

First thing that should be mentioned is the competition from Generic companies, which have no R&D expenditures and can just copy the drug formula even without the need of testing it, what tears new drug’s profits apart. Generic companies can enhance their competitiveness with the advent of ANDA, what will decrease even more the time that Pharmaceutical companies have to recover their investments in R&D. In addition, with the rise of internet and big volatility of technical and skilled workers, companies hugely dependent on human capital are increasingly unable to protect their intellectual property, causing the closed-innovation system to break down. This fact is compounded by the ready availability of venture capital to fund risky startups. After couple years of sales shrinkage, diversification for innovation was a key idea in Merck.

2. What are the pros/cons to moving to an open innovation R&D strategy?

As we have discussed during the class, the benefits of open innovation include the ability to better take advantage of innovation and R&D efforts, as ideas can come from multiple sources. Moreover, by adopting open innovation organizations also perceive a cost and resource advantage as they do not necessarily have to develop all of their ideas in-house, additionally those internal ideas that do not fit the business model now can be sold, instead of just abandoned. Open innovation also reduces the risks associated of entering into unknown markets because of the collaboration of expert organizations in that segment. Besides the benefits, there are also potential disadvantages; probably the main one is the potential loss of control. For example, an organization could probably hand over the next major business breakthrough to its competitor. Other disadvantages include the need to transfer knowledge, in order to be successful there must be a mechanism of knowledge transfer and human interaction between the organizations involved. Also, the complexity of managing innovation, in a certain way, increases because of the different parts involved and the need to find ways to fully take advantage of external innovation.

3. There are four basic types of open innovation: M/A (like this case); crowdsourcing; supplier co-development; and customer co-development/lead user. Why would you pick M/A over the other 3?

Some of the reasons of adopting the M&A strategy include access to new markets, broadening the customer base, increasing market share, product line expansion, access to new technologies and skills, reduction of costs, and distribution of risks. Especially in the pharmaceutical industry, the costs of innovation and R&D is very high, as a result, by adopting this strategy, organizations can enlarge the scale, scope, and productivity of R&D. This strategy is generally promoted by the cost factor, for example, in the case, the tight regulations for drugs development were combined with the shorter patents periods, which increased the need to discover new products.

4. When is crowd-sourcing preferred?

Using crowdsourcing brings some genuine advantages to companies looking to complete defined tasks with affordable price. Crowdsourcing is best suited for simple tasks. The main attraction so far has been its fairly lower price, compared to the price for hiring a dedicated professional. Also the best thing with the low price is the high number of people who are ready to work for you anytime. Crowdsourcing exposes a problem to widely diverse individuals with varied skills, experience, and perspectives. And it can operate at a scale that exceeds even that of the biggest and most complex global corporation, bringing in many more individuals to focus on a given challenge. In certain situations, that means we can solve problems more efficiently. Under a model where only one task is to be completed and several workers are available we find crowdsourcing works well when: managers are uncertain about the skills of workers; workers are diverse in their task skills; workers have low default effort levels.

5. When is the lead user approach the