STRATEGIC AUDIT: MERCK & CO.

Merck began in the United States in 1887 as a branch of the German company E. Merck AG of Germany. In its original incarnation, the company was a marketer of drugs produced in German. Merck began drug manufacture in the United States in 1903.

Merck became a public company as a consequence of the entry of the United States into the First World War. At that time, George Merck, grandson of the founder of the German company, owned 20 percent of the equity stock in Merck (United States), while the German parent company owned 80 percent of the equity stock. George Merck retained his 20 percent of the equity stock, but transferred the 80 percent equity interest held by the German parent company to the United States government. Following the end of the First World War, the United States government sold its 80 percent share in the company to the public (Hoover's Inc., History, 2003).

There is an aura of legal impropriety about the transfer of stock that he did not own by George Merck, and the subsequent sales of that stock by the United States government. Those actions, nevertheless, launched Merck as a public company in the United States.

In 2002, Merck recorded $51.8 billion in sales, a level that was 8.5 percent higher than the preceding year. The company's $7.1 billion net profit in 2002 was a 13.7 percent return on sales, and, in dollars, was 1.8 percent higher than profits in the preceding year (Merck & Co., Inc.,

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onsiders strengths, weaknesses, core competencies, and sources of competitive advantage. A SWOT analysis for Merck is presented in Exhibit 1 (located in the Appendix to this study) and the results of a financial ratio analysis are presented in Exhibit 2 (located in the Appendix to this study). Merck has a strong product line in many areas of the pharmaceutical market; however, the firm does not have a strong product line across the board. Merck has an unhealthy dependence on so-called lifestyle drugs (pharmaceuticals designed to aid in weight loss and similar worthy personal goals). These products are referred to as Medco Health products, and they contributed 58 percent of Merck's revenues in 2002 (refer to Exhibit 3 in the Appendix to this paper). As indicated in the SWOT analysis (Exhibit 1 in the Appendix to this paper), Merck's market position is weakened by this situation, and a threat to the company from competitors also is linked to this situation. Merck's financial performance also has weakened over the past five years (refer to Exhibit 2 in the Appendix to this paper). Of particular relevance in the context of financial performance are the deteriorations in both liquidity and profitability at Merck. While the company

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