Scenario Planning: Fostering Long-Term Strategic Thinking

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Best Practice Guidebook

Scenario Planning: Fostering Long-Term Strategic Thinking guidebook summary Firm: Merck & Co., Inc. Industry: Pharmaceutical Headquarters: Whitehouse Station, New Jersey, United States Geographic Footprint: Global Ownership: Public Revenue (2010): $45.987 billion USD Problem: Facing significant changes in the global pharmaceutical industry, Merck’s senior executives need to anticipate how different strategies will hold up against the future state of the U.S. healthcare system.

Business Results: • The scenario-planning exercise helps influence Merck’s long-term strategies, which in turn helps Merck optimize its core business while simultaneously enhancing complementary businesses.

Solution: Merck’s corporate strategy function undertakes a scenario-planning exercise that creates and analyzes multiple situations in which the firm might find itself in the future. The process forces participants to: • Gather internal insights and external expertise to establish plausible scenarios for the future of healthcare • Consider investment implications in the context of each scenario • Integrate scenario-based conclusions into Merck’s strategy planning

Resources Required: • A cross-divisional executive team, including VPs, managing directors, and functional heads • External expertise in scenario-planning methodologies • A year-long commitment to form a scenario-planning team, conduct two scenario-planning meetings, and develop scenario-based deliverables Applicability of Best Practice to Executive Functions: Function CEO Leadership Corporate Strategy

The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Applicability

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Merck uses scenario planning to highlight the importance of long-term strategic thinking Scenario-Planning Overview

Conduct Situational Analysis

Build a CrossDivisional Team

Develop Scenarios

Run Scenario Analysis

Synthesize Results

Integrate Conclusions with Strategic Planning

Objective

Objective

Objective

Objective

Objective

Objective

Select a tool to enhance long-range strategic planning.

Build a scenarioplanning team that provides credibility and objectivity.

Create plausible scenarios that challenge commonly held assumptions about the future.

Prompt C-Level consideration of the scenarios’ implications for Merck’s future.

Compile scenario evaluation data in an actionable format.

Incorporate scenariobased conclusions into corporate strategy.

Key Activities

Key Activities

Key Activities

Key Activities

Key Activities

Key Activities

• Identify requirements for long-term strategy • Identify areas where current approaches could be enhanced • Develop an understanding of the benefits and limitations of scenario planning

• Enlist the participation of a diverse group of senior leaders

• Compile internal and external insights on the industry and environment

• Select an outside scenario-planning vendor as a facilitator

• Identify Critical Uncertainties, which serve as the basis for scenario development • Hold a two-day workshop with key executives to develop scenarios, identify indicators of the future, and assess strategic implications

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• Lead scenarioplanning exercise with senior management to socialize each scenario • Discuss the scenarios’ potential implications for future resource allocation decisions

• Consolidate response data to identify trends among respondents

• Develop alternative strategies designed to address scenario implications

• Issue corporate white paper and video presenting consolidated executive views on the scenarios

• Include strategic choices and investments in updated long-range planning

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Use scenario planning to help prepare for future uncertainties Corporate Strategy selects a scenario-planning exercise to explore long-term opportunities and threats in healthcare Scenario-Planning Selection Process Situation: Shifts in Pharmaceutical Industry Business Model After more than a decade of high revenue growth, Merck, along with the entire pharmaceutical industry, is facing in the late 2000s: • Slowing innovation • Margin compression • Greater competition Given these shifts, Merck needs to assess how to evolve its strategy as a healthcare company. Accordingly, Merck’s Strategy Office decides to examine how the healthcare industry will evolve and what future states may arise by 2018. Specifically, the firm seeks to understand:

Required Solution: New Strategy Planning Tool The Strategy Office must identify a strategy planning tool that will: • Help focus executive management and the organization on a path to continued growth • Scrutinize the assumptions and uncertainties underpinning strategic decisions • Engender new thinking about industry trends and their implications • Embed long-term time horizons in strategic planning

Selected Methodology: Scenario Planning Scenario planning allows Merck’s senior executives to: Understand how healthcare might evolve over the next decade Develop a common vision of possible but uncertain industry futures Examine whether Merck’s current strategies are robust enough to survive alternative future states Evaluate what Merck would do differently if a particular scenario came to fruition Monitor the environment for signs of a particular scenario unfolding

• How its current strategy might perform in diverse future states or a blend of them • How different elements of the business model might fare

Considerations • Scenario planning does not predict the future

• What potential alternative long-term strategies are viable

• Scenarios are not mutually exclusive • Scenarios are often interrelated—some scenarios may overlap, play out differently across geographies, or lead to one another over time

what is scenario planning? Scenario planning is the process through which an organization develops a series of challenging, different—yet plausible—scenarios about the future and explores the risks and opportunities that each scenario offers. The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Assemble a team of cross-divisional leaders and

external experts to provide an inside-outside perspective on future states Corporate Strategy brings together internal stakeholders and an external consultant to ensure scenario planning is credible and objective Scenario-Planning Participants and Roles The Executive Committee The CEO chairs the committee, which is composed of 14 C-Level executives, including the Chief Strategy Officer (CSO). It is responsible for establishing Merck’s strategic priorities. Role: Provide approval for overall scenario planning initiative and participate in a one-day scenarioplanning meeting that considers scenario-based investment implications

PROJECT OWNER

COMPANY EXPERTS

METHODOLOGY EXPERTS

The Strategy Office

Scenario-Planning Executive Team

Scenario-Planning Consultant

The Strategy Office manages all aspects of the project.

This team provides the divisional and functional perspectives throughout the project.

The consultant provides methodological support to and objective external perspectives for the scenarioplanning team.

Composition: Executive Director and four directors who report to the Chief Strategy Officer

Composition: Approximately 60 executives at the VP-level and higher who report in to members of the Executive Committee

Composition: Two to three external consultants

Role: • Establish buy-in across the organization

Role: • Participate in a two-day scenario development meeting and in pre- and post-meeting analyses

Role: • Provide established methodological approach to facilitating scenario-development meeting

• Create a team of key internal stakeholders and select methodology experts • Participate in scenario-planning exercises • Lead exercises around refining scenarios and applying them to corporate strategy

Key Team Member Attributes: • Outspoken, strategic thinkers • Representatives of the key functions and regions across the company

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• Conduct and analyze internal/external interviews and external research as background and validation for scenario development

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Use the company’s Official Future as a baseline for scenario planning The scenario-planning team analyzes internal questionnaire and interview data to articulate Merck’s Official Future, which serves as a departure point for alternative scenario development Establishing Merck’s Official Future An Official Future describes assumptions about how the critical issues faced today will evolve over the coming years. The Official Future should reveal and scrutinize these assumptions—both explicit and implicit—as they inform how companies perceive and make strategic decisions in the present.

Administer Internal Questionnaire

The Strategy Office creates and disseminates an online questionnaire to the 60-person Scenario-Planning Executive Team, which examines internal views on: • The roles of key stakeholders, including patients, payers, and providers • The direction of innovation, R&D productivity, and government regulation • Other industry and company trends

Conduct Internal Interviews

The scenario-planning team interviews the Executive Team; questions include: • What have been the biggest surprises in the pharma and healthcare space over the past 10 years? • What elements of the future through 2018 do you feel very certain about? • What do you feel could be game‑changers through 2018? • What will Merck’s competitive landscape look like? • What capabilities are most important in preparing Merck for the future?

Synthesize Responses

The Strategy Office and team compile the data and assess internal alignment on certainties and uncertainties about the future of healthcare.

The team researches industry publications and other external data for additional background on healthcare and the business environment.

Output: Merck’s Official Future

The Official Future encompasses the critical assumptions that implicitly shape the healthcare future that Merck’s executives will evolve through 2018. These underlying assumptions concern key forces driving healthcare’s future, such as: • Intellectual Property protection will remain steady • Emerging markets will continue to grow faster than developed countries • Regulatory oversight continues • Payers will become more powerful • Pricing pressures will remain constant

• What are some issues that you feel are under-explored at Merck?

The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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best practice guidebook

key takeaway: Uncover critical uncertainties that underpin the assumptions driving the company’s Official Future

The scenario-planning team identifies the most significant uncertainties about the future to frame alternative scenario creation Uncovering Critical Uncertainties Key Framing Question: What Could be Some Alternative Futures? Official Future

Merck’s Official Future is the conventional wisdom about what will happen to the firm and the industry. Merck then challenges the Official Future’s assumptions to discover alternative futures by posing this question: What if—and how could—some or even all of these assumptions about the future turn out differently?

Identify Critical Uncertainties Identify the driving forces behind the Official Future

The scenario-planning team considers internal perspectives, outside research, and in-house experience.

Examples include: Poverty rates, inflation trends, level of government oversight, and advances in technology

Categorize Uncertainties Identify Critical Uncertainties

Identify Relative Certainties

Factors in the environment that are largely beyond our control, cannot be predicted confidently, and would change the outcome of a future scenario E.g., will innovation be driven by new approaches or traditional models?

What is inevitable no matter which scenario comes to pass E.g., regulatory oversight will continue ScenarioPlanning Team

Prioritize Critical Uncertainties Each scenario rests upon a coherent combination of four Critical Uncertainties playing out together in a specific way.

Prioritize the Critical Uncertainties by importance and uncertainty to determine Merck’s Top 15 Critical Uncertainties, which then serve as the basis for scenario development. For example: 1. Will the global economy grow or continue to stall? 2. Will the role of patients become more active or passive?

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Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Formulate and refine scenarios by

creating different combinations of Critical Uncertainties The scenario-planning team facilitates a two-day workshop that explores the implications of different future states Scenario Development Workshop: Scenario Creation Scenario-Planning Consultant Strategy Office

Challenge Assumptions

Scenario-Planning Executive Team

Test Critical Uncertainties

The participants discuss the Official Future, focusing on the: • Most common and divergent assumptions about the future from industry, company, and personal perspectives

Select Scenarios

Participants are divided into four teams responsible for:

Outside panelists provide external perspectives on a range of topics, such as the impact of genomic medicine and globalization on the future of healthcare.

• Evaluating the Critical Uncertainties driving the future of healthcare

• Examines the Critical Uncertainties underlying all four scenarios

• Exploring combinations of Critical Uncertainties to develop four scenarios per group:

• Reaches consensus on which scenario could have the highest impact and is the most plausible

Team A

-- Official Future

Team B

-- Alternative Future -- Unexpected Future

Team C

Team D

-- Free-Form Future

Team C’s Alternative Future Parameters Global Economic Conditions Stalled

Regulatory Oversight

Expected growth Expected decrease Role of Patients

More passive

Each team:

• Incorporates elements of the other scenarios into the final scenario to enhance plausibility 16 Four final scenarios scenarios

Austerity

Fragmentation

Slow macroeconomic growth

Disaggregated global markets

Expected increase

Sources of Innovation

More active Traditional Models

• Selects one scenario to explore in greater depth

New Approaches

Policy-Driven Greater policy-dictated healthcare

Patient-Driven Greater patient-dictated healthcare

Note: These scenarios have been modified for illustrative purposes. The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Explore selected scenarios and assess the implications for current strategies Workshop participants analyze four scenarios to identify warning signs and understand the scenarios’ potential impact Scenario Development Workshop: Scenario Exploration Determine How Scenarios Could Become a Reality

Identify Sign Posts that Would Provide Early Warning

• Describe and summarize the scenario -- Example: Austerity—This is a world with slow macroeconomic growth… • Discuss broader forces that would make this scenario a reality; for example: -- Societal: Poverty increasing -- Technological: Innovation declining -- Economic: Stagnation -- Environmental: Natural resource shortages -- Political: Geopolitical instability

Each team focuses on one of the four scenarios. For example, Team A explores Austerity.

Team A

Team B

Team C

Team D

• Identify early indicators that would signal this scenario is coming to fruition, which would enable Merck to hedge its bets against future risks. For example, indicators for Austerity might include: -- Deepening worldwide economic crisis -- Rationing of healthcare -- Decline in R&D spending -- Higher-than-expected pricing pressures

• Develop a storyline by identifying key events and headlines they would expect to see over time as this scenario unfolds

Compare Strategies With Scenario Risks and Opportunities • Assess how Merck’s strategies would perform in this scenario • Identify key challenges that Merck would face in this scenario -- How could Merck “lose big”? • Identify new opportunities that would emerge in this scenario -- How could Merck “win big”? • Identify any immediate- or short-term actions Merck needs to consider taking to prepare for this scenario

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Understand Scenarios’ Impact on Industry Stakeholders • Identify all relevant healthcare stakeholders in this scenario and the implications for each. For example: -- Patients: Difficulty affording healthcare -- Payers: Price controls dominate -- Providers: Limited options to treat general population • Identify what types of companies might win or lose in this scenario • Assess how this scenario might play out differently across various regions

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Run scenarios to prompt evaluation of corporate strategy and resource allocation decisions

The Strategy Office and Scenario-Planning Executive Team lead the Executive Committee in an all-day scenario-planning exercise that prioritizes investments within the context of each scenario Executive Committee Scenario-Planning Exercise Objective: Provide a new framework for the Executive Committee to tackle long-term strategic issues

Objective: Educate the Executive Committee on the scenarios’ implications

Objective: Promote discussion about the investment implications of each scenario

Activity: Demonstrate the four scenarios’ potential revenue implications

Activity: The facilitators lead the Executive Committee in smallgroup, in-depth discussions on each scenario, addressing their key features and indications the scenarios are starting to occur

Activity: The facilitators lead the Executive Committee in a resource allocation exercise

Projected Revenue by Scenario

Objective: Translate the exercise into strategic discussions Activity: The Executive Committee participants discuss the implications of each scenario as input into strategic planning activities

Resource Allocation In Austerity Scenario: 100 Chips Exercise Illustrative

High Current

Patient-Driven

Policy-Driven Operating Margin (%) Fragmentation Austerity Low Low

Bubble Size = Market Revenue SIze Revenue Growth (%)

High

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Core Business Unit Existing Adjacent Business Units New Businesses/ Whitespace

Current Projected Investment

Investment in Austerity

60 chips*

40 chips

30 chips*

50 chips

10 chips*

10 chips

* Based on the existing investment allocation established in the current Long Range Operating Plan (LROP).

Relative Investment

Each team is given 100 “chips” to allocate across Merck’s industry segments, which represent total investment in Austerity in 2018.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Consolidate scenario-based conclusions to simplify decision-making Corporate Strategy presents consolidated views on the scenarios to the Executive Committee…

…and shares conclusions with the broader executive leadership

Cross-Scenario Investment Conclusions

Post-Scenario Planning Communications

Illustrative AUSTERITY

Scenarios Current Projected Investment Core Business Unit

60%

FRAGMENTATION

PolicyAusterity Fragmentation Driven 40%

45%

50%

PatientDriven

POLICY-DRIVEN PATIENT-DRIVEN

65%

Scenarios White Paper Existing Adjacent Business Units

30%

50%

40%

40%

30%

New Businesses/ Whitespace

10%

10%

15%

10%

5%

Sample conclusion: Increased or preserved investment in existing adjacent business units would be warranted across all four scenarios.

Increase Decrease No change

Corporate Strategy publishes an 80-page white paper outlining the scenario-based conclusions for Merck’s top 300 executives.

Merck Global Scenarios to 2018 Contents Introduction: A Reader’s Guide . . . . . . . .3 The Scenario Set: Derivation and Summary . . 7 Framing the Scenarios: Alternatives to the Official Future . . . . . . . . . . . .8 Scenario Summary Comparison . . . . . .9 Relationships Between the Scenarios . . 12 Austerity: The Narrative . . . . . . . . . . 15 Signs We See . . . . . . . . . . . . . . . 20 Important Trends Today . . . . . . . . . 21 What Would You Add? . . . . . . . . . . 24 Implications for Us . . . . . . . . . . . . 25 Implications for Industry . . . . . . . . . 26

Scenarios Video Corporate Strategy presents a video to Merck’s top executives that portrays the four scenarios as if they had become a reality.

Each video specifically showcases: • The circumstances that led to each scenario • How Merck overcame each scenario’s unique challenges and was successful in that future

Note: See an example of a Scenario Exploration Worksheet from the white paper. The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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key takeaway: Use scenario-based insights to enhance long-term strategic thinking and planning Corporate Strategy uses the four scenarios to help assess the long-term potential of opportunities

Scenario planning equips Corporate Strategy to stretch its thinking about the future

Scenario-Based Opportunity Evaluation

Enhanced Strategic Planning

Estimate Opportunity Associated with Scenario(s) • Drive focus and priority on selected profit pools • Drive alignment on which opportunities to pursue

• Evaluate Merck’s competitive advantage across current and future business areas • Identify new capabilities that are required

Conduct Internal/ External Assessment • Validate assumptions • Drive further confidence in the validity of scenarios

Cultivating a broader understanding of industry uncertainties and environmental pressures and their impact on different futures

Evaluate Merck Capability

Assess Competitor Strengths • Understand the competitive landscape and assess “winners” and “losers” in different scenarios

Scenario planning adds new dimensions to strategic planning by:

Exploring opportunities and threats within and across different scenarios

Gaining a first-mover advantage by anticipating and responding to signs of future change

Providing a new perspective on existing capabilities and their relevance to different scenarios and drawing attention to new capabilities required for future competitiveness

• Determine how to gain competitive advantage in the new environment

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Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Business Results The scenario-planning exercise helped influence Merck’s long-term strategies and optimize its core business, while enhancing complementary businesses Merck’s Long-Term Strategic Focus Scenario planning provides a strong rationale for Merck to continue investing in its core business, in addition to expanding into adjacent and complementary areas.

Emerging markets

Merck Consumer Care

• Burgeoning population and income levels

• Increasing emphasis on wellness

• Building partnerships in key markets to develop local capabilities and strengthen Merck’s presence

• Prioritizing innovation and new product development

Merck Animal Health • Growing global affluence and demand drive greater consumption • Continuing growth in companion animals segment

Strategic Decisions about Tomorrow Being Made Today

Merck Positioning Company for Long-Term, Sustainable Growth Key elements of the Merck’s strategic plan include: •• Executing plans to optimize its core business •• Growing in key markets around the world •• Extending the company’s opportunities in its Animal Health and Consumer Care businesses…. •• Excelling in managing costs to invest in smart growth opportunities that will increase shareholder return. Source: Merck.com, 10 November 2011 .

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Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Key Lessons Learned Profiled Company Perspective • Scenario planning can be a powerful tool to stimulate dialogue among senior executives and galvanize an effort to chart transformational strategies for the future. • Scenario planning is not a forecast of the future and, therefore, should not supplant traditional company approaches to planning. Rather, the power of scenario planning lies in enhancing the strategic discussion. • As with many strategy projects, senior-level (CEO and Chief Strategy Officer) endorsement is critical, as the current organization may resist any questioning of the Official Future or be skeptical of the utility of broad “what if?” exercises. • Over time, strategy groups will learn how to implement scenario-planning exercises, but groups conducting scenario planning for the first time should consider collaborating with outside experts. This added support will help ensure that the project is facilitated effectively and an appropriate endpoint is achieved.

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Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Frequently Asked Questions The following is a summary of the question-and-answer session with Douglas A. Black, General Manager for the Innovative Ventures Unit at Merck & Co., Inc., during the Ask the Thought Leader Webcast conducted on May 22, 2012. To view the archived version of the webcast, please click here

Q

How did Merck decide that scenario planning was the best way to address its needs? Merck’s Strategy Office was searching for new ways to engage executive management in long-term planning. A staff member with experience doing scenario planning championed the idea within the Strategy Office. The Office determined that scenario planning was the right tool for improving its decision-making because it enables executives to reduce uncertainty around the future. The Strategy Office then was able to convince senior leadership to support and sponsor the project.

Q

How did Merck secure its leadership’s engagement in the scenario-planning initiative? Merck’s Strategy Office drove senior leadership’s sponsorship of scenario planning from the project’s inception, and the company’s CEO supported the effort. He wanted the company to start thinking about the broader healthcare industry and believed that scenario planning was a worthwhile tool to explore. The CEO’s sponsorship created support within the Executive Committee (EC), which then identified VP-level executives across the company to participate in the scenario-planning effort. It is critical when selecting project participants at the VP or “support executive” level to choose a mix of visionaries and practical business line operators. Scenario planning benefits from the diverse insights these executives offer (e.g., valuable information about customers, regulators, government officials). Their support is especially important when the executive team begins basing resource allocation decisions off scenarioplanning findings, because the VPs can help foster the change necessary to support the scenario-planning findings.

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Q

What are the key steps in ensuring Merck had an actionable Official Future? To establish an Official Future, Merck looked at all of the major drivers of its business from end to end—from research to supply chain to customer purchasing behavior. Each of these has an assumption that is generally held within the company, the collection of which becomes the Official Future. The Official Future is a baseline on which an organization builds scenarios. An example in Merck’s industry is patent protection. Merck believes, for instance, that innovators who discover and test new drugs will be rewarded with some predictable patent protection. This is part of Merck’s Official Future. The art comes in asking, “Is there any reason to believe that this could change?” or “What if that protection was disrupted in a major way?” If the answers to these questions are “Yes” or “It would have a meaningful impact,” then it becomes an input to a reasonable scenario. Going through this process for all of the key assumptions across the value chain, scenario-planning participants begin to see what would really change the future of their industry and company—which developments the company could manage if they did occur within the current model and those that are very unlikely to happen. This supports the winnowing of scenario possibilities.

Q

Did the Strategy Office incorporate any “black swan” events—extremely unpredictable and high-impact events— in its scenario-planning process? The Strategy Office did not explore black swans in its scenario-planning effort; another organization within Merck (the Risk Management Program) is responsible for identifying and managing black swan events. Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Frequently Asked Questions (Continued)

Q

How did the scenario-planning team ensure it had an external perspective on what was going on in healthcare? As part of the Strategy Office’s pre-work, it interviewed dozens of external stakeholders across the pharmaceutical and healthcare industries—customers, government officials, and industry professionals. Additionally, the Strategy Office brought in a number of “intentional disrupters” into the executive offsite where the scenarios were created— individuals who are contrarian or are actively trying to disrupt established healthcare models.

Q

How does an organization balance having plausible scenarios with those that are more cutting edge? When determining the right balance of scenarios, it is critical that a strategy group know its audience and its tolerance for ambiguity. It is a balancing act. The number of scenarios an organization explores should be directly proportional to the scenarios’ complexity, and indirectly proportional to the organization’s ability to incorporate, absorb, and act on them. The Strategy Office did not want to explore more than six scenarios, and ended up condensing six scenarios into four distinct final scenarios. Too few scenarios can also be problematic, since they can create tunnel vision and/or over-simplify complex problems.

Q

Is there anything the Strategy Office would do differently in hindsight? It would have been beneficial if the Strategy Office had had a better mechanism for translating Merck’s Long-Range Operating Plan (LROP) into what would happen in the scenarios. The Strategy Office could have used this information to show the Executive Committee how Merck’s LROP would change in the context of each scenario.

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Q

How did the Executive Committee react when the Strategy Office presented a potentially challenging outlook for Merck’s future, based on the scenario-planning findings? The EC knew that the industry was not progressing like it had in the past decade, so committee members probably were ready for these potentially challenging findings. It was obvious to them that change was happening; scenario planning simply facilitated a framework for thinking about possible negative futures and how the company might evolve to address them. It is possible that the scenario-planning findings would not have been as well received by a different executive team, but in Merck’s case, the response to the project reflected the executive team’s own concern that a negative future was possible—even probable.

Q

As the scenarios are derived from “critical uncertainties,” how did Merck really determine what was critical and then prioritize the uncertainties? Merck knows its business and knows what drives value. For example, in Merck’s business, patents matter a great deal to the company’s viability as an ongoing entity. Thus, any change in patent laws would be critical. On the other hand, the price of oil would affect Merck’s profits at times, but the price of oil does not affect the company’s strategic future in quite the same way it does the oil or chemical industry. Thus, a company takes these ideas and pressure-tests them to see if a change in an assumption on that variable would really mess up the company’s program, so to speak.

Q

How does Merck monitor the sign posts identified during scenario planning? The Strategy Office provides an annual environmental overview to the Executive Committee, which calls attention to indications that point toward one scenario or another. However, sign posts are chiefly qualitative, and it is more to keep the tool alive than it is gain agreement on actual metrics that indicate one scenario or another. Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Frequently Asked Questions (Continued)

Q

What was the biggest challenge Merck faced during the scenario-planning exercise? There are two challenges worth highlighting. First, Merck announced its merger with Schering-Plough a few weeks after the scenario-planning project began. Executive time and attention becomes extremely limited when trying to complete a merger quickly, and one of the challenges was simply capturing people’s attention. The Executive Committee, however, insisted that the Strategy Office continue the scenario-planning project and participate as originally expected. Second, March 2009 marked the bottom of the financial crisis (at least in terms of the stock market). This uncertainty may have shaded some views, in a negative way, about the company’s prospects for the future. Thus, an organization needs to be on guard for environmental issues that might color people’s opinions in one extreme way or another during a scenarioplanning exercise.

Q

What does Merck consider to be the critical factors in selecting, and then building a relationship with, an external scenario-planning consultant? Selecting the partner is critical. Many organizations will claim they can do scenario planning, but if it is not done with an established methodology, it can become unwieldy and can turn into a “blue-sky” academic exercise. It is also important to establish a clear understanding that the client organization has ownership of the scenario-planning results. The consulting firm should be a partner in the exercise but should play more of a background role. If a company is expected to change its course based on the scenario-planning findings, the change must be generated internally. When something is developed by one’s peers, it tends to gain more traction.

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Q

What was the total commitment in time and employees for this initiative? The Strategy Office began planning the scenario-planning effort in late 2008, initiated the project in earnest in March 2009, and presented its findings to the Executive Committee in October 2009. In total, the project took between eight and nine months. It was the Strategy Office’s first scenario-planning effort; subsequent scenario-planning projects have been much shorter engagements. At the corporate level, an organization should allocate at least six months for the project, from driving sponsorship to the delivery of a final report. However, this duration can vary dramatically depending on how engaged the organization becomes; the more engaged an organization, the longer the project. In terms of the staffing commitment, the Strategy Office committed a few people to full-time support of the initiative for most of the 6 to 9 months. The VP-level participants committed to a two-day offsite and spent approximately 10 additional hours reviewing documents, attending followup meetings, and participating in interviews. The Executive Committee also agreed to a one-day offsite meeting at the end of the project.

Q

During the offsite with the executive management, what was the most effective thing done to drive adoption of the scenarios and the implications? There are a couple of things to note. First, the scenario-planning team made sure there was ample time for open discussion. The team had participants out of their chairs and around small group tables with facilitators. Second, the experience of conducting a resource reallocation exercise brought home the perspective that executive management would be called on to allocate resources differently moving forward. Third, the VPs from the scenario-planning effort attended the meeting to signify that this was not just the Strategy Office’s beliefs, but also that of a substantial number of the executive management’s “lieutenants” who were active in the scenarios’ development and supported change. Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Frequently Asked Questions (Continued)

Q

Q

Has Merck conducted any follow-up scenario-planning exercises?

Can scenario planning be as valuable for a small company as it was for a large company like Merck?

The Strategy Office has not yet conducted a follow-up scenario-planning exercise on the future of healthcare, but the office has done subsequent scenario-planning projects on other topics. The Strategy Office has, however, completed some follow-up reporting to the Executive Committee about the status of key indicators identified in the original scenario-planning effort. More importantly, the Strategy Office has added the scenario-planning methodology to its toolbox, so it can now apply the methodology to other situations and help other organizations within Merck work through long-term issues.

All forward-looking companies can improve their competitive position with some level of scenario planning. A smaller company might even have greater opportunities for translating scenario-planning findings into action than a large company like Merck, since it would require a smaller-scale engagement to carry out such an exercise. In terms of implementing scenario planning, there are many scenarioplanning consulting firms that can help companies with this aspect of the process. Merck benefitted from working with a consulting firm that provided a framework and discipline for its scenario-planning exercise.

For additional information on building a business case for futures planning, developing a futures team, and identifying risks and opportunities from future trends, access the companion webcast on GTM’s Best Practice Guidebook “From Macro to Micro: Translating Mega Trends into Strategy.”

questions? If you have any questions regarding this webcast or the Growth Team Membership™ (GTM), e-mail us at [email protected]. To learn more about GTM visit us at www.gtm.frost.com or on Twitter @Frost_GTM.

The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Supporting Tools & Resources Scenario Exploration Worksheet When assessing the impact of future scenarios, it can be helpful to consider the following questions: Scenario A: Implications for Us 1. How would key players and industry-specific forces evolve and act in this scenario? ______________________________________________________________ ______________________________________________________________ 2. What new market needs and/or customers would emerge in this world? ______________________________________________________________ ______________________________________________________________ 3. Which new or existing competitors are poised to succeed in this world? ______________________________________________________________ ______________________________________________________________ 4. What is important about how this scenario would play out in different regions? ______________________________________________________________ ______________________________________________________________ 5. How will Merck’s current strategy perform in this scenario? ______________________________________________________________ ______________________________________________________________ 6. What are the key challenges for Merck that will emerge in this scenario? ______________________________________________________________ ______________________________________________________________ 7. What are the new opportunities for Merck that will emerge in this scenario? ______________________________________________________________ ______________________________________________________________

GO BACK The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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Supporting Tools & Resources Scenario-Planning Background Reading

Schwartz, Peter, The Art of the Long View: Planning for the Future in an Uncertain World, New York: Doubleday, 1991.

The contents of these pages are copyright © 2011 Frost & Sullivan. All rights reserved.

De Geus, Arie, The Living Company, Boston: Harvard Business School Press, 1997.

Source: Merck & Co., Inc.; Growth Team Membership™ research.

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