Every time we hear about a company hitting a stall we want to be optimistic. We want to believe they will turn around their situation and recover their growth. Unfortunately, once a business hits a growth stall (regardless of the cause), it has a less than 7% chance of ever sustaining growth greater than 2%/year.
Merck hit a growth stall about a year ago when one of its products was pulled from the market. Several other products were challenged. The immediate result was a dramatic decline in market capitalization. The company lost about 1/3 of its value in a day – and over about 6 months the company lost half its value. We would love to believe the company will recover its historic growth, so value shoppers begin buying up the stock. But the fact is that Merck has a greater than 70% chance of NEVER recovering that lost market capitalization.
We would love to blame the regulators, personal injury lawyers and even product customers for creating this stumble for Merck. But, regardless of cause, what we do know is that for Merck to recover will require a significant change in its Success Formula. The marketplace has shifted, competition has changed (affecting the profits of all pharmaceutical companies) and Merck must change if it is going to try and regain its lost growth.
But the company is not trying to reinvent its Success Formula. Instead, it is trying to Defend and Extend its old Success Formula with marginal changes and cost cutting. Although the company appointed a new CEO last May, it has not really Disrupted its Lock-in (in response to these market Challenges). It has not created White Space to develop a new Success Formula. It keeps trying to capture the lost growth by doing more, better, faster, cheaper.
Those who have heard me speak over the last year know that I have been a constant pessimist regarding Merck. While it’s stock occasionally gains a point or two, there is no upward trajectory. Why do I remain pessimistic? Because, like 70% of companies that stall, Merck keep trying to "fix" its problems with tweaks. Until the leadership Disrupts and uses White Space to reinvent, it will not address its market-based problems effectively.
I’d love to be optimistic – but there just aren’t any signs that would be prudent.
