Case Study: Merck and LCD Tech.

Presentation based on case study as presented by Budde et al. in “Value Creation”

presentation by M.S. Miller

Background

As of February 2003, the chemical industry was responsible for 20% of the all industry-overlapping R&D transfers

In Germany, common for company investment toward R&D ~ 8% of its revenue

Industry-overlapping tech. transfer

Product: Liquid crystals / liquid crystals displays

• 2 key benefits

– Can modulate polarized light

– Can act as optical switches (change orientation within electric field responsively from applied voltage)

• These confer the various advantages of LCD displays applications (TVs, etc)

Year in context: 2004-2005

• mobile phone boom increases use of LC consumption for displays

• Cost of LCDs has fallen, thereby cutting costs for LCD TVs

• Independent research predicts a sharp increase in demand – 2004 -9 mil LCD TVs sold globally

– Projections suggest that by 2009, 50 mil per annum

– Additional estimates included $ 30 Billion in flat TV tech R&D from top 5 or 6 global Mfg.s

Success in Specialty Chemicals Industry

• Specialty chemicals typically succeed only when driven by companies at the cutting edge of a tech wave – HOWEVER: developers must be able to create value from their

investments in innovation, which requires both the • scientific research to develop the chemicals in the first place, and also • a business-focused mindset to ensure their longevity in the market.

• Merck's success has been attributed to five factors – Staying power – Active patent strategy – Customer-focued approach, built on expertise in production +

application technologies – Timing of related globalization, and diversification – “The best intellects”

(e.g. hiring strategy, organizational culture devoted to learning)

Staying Power

• Organizational values: – high quality products

– commitment to contributing to safety, health, and protection of the environment

– production encompasses environmentally compatible manufacturing processes

– [safe, healthy, compatible] working and living conditions for employees

– [safe, healthy, compatible] conditions for region in which the company operates

Staying Power

• Other success factors – Flexibility of team

– Esprit de corps between various disciplines

– Positive attitude toward market trends

– **Recognition of innovative technology and its potential to surpass limits and revolutionize

– Belief in innovation, and vision to see beyond obstacles…. Stemming from: • years of experience in research

• Willingness + ability to directly engate with customers

Staying Power

• Worth mention

– Merck accomplished in line overlap

• LC division - market leader, annual turnover ~ EUR 580 mil

• LCD and display - predicted growth average of 30% per annum (projected over 4 years)

• LC and LCD market: PC monitors, notebooks, cell phones, flatscreen TVs

• Other products boosting market share: Indium tin oxide (ITO) coated glass & Color Filters produced for application in color super twisted nematic (STN) displays

Active Patent Strategy

• To deliver sustained value creation, an innovation strategy must factor in effective IP protection.

• Aggressive patenting strategty for LCs, starting mid 1980s

• Net of patents covering single LC compounds and LC mixtures

• Inventions filed so that cross-license agreements made possible, and applied for thorough patent coverage, giving customers long term priotection against imitation products

Active Patent Strategy

• Remained dedicated to the related field of Display and Application Tech., resulting in further inventions in the area (thus, even more patents)

– Example:

• a basic patent for all matrix-driven twisted nematic (TN) displays

• Licensed worldwide in the 1990s

Active Patent Strategy

• Regularly re-aligned patent portfolio following divestments and acquisitions – 1985 - acquired large patent package from Brown Boveri & Cie

(including one with broad coverage of LCs) • Provided access to some important compound classes, and substantial

licensing income

– 1995 - Merck abandons ferroelectric LCs, and sells patents to Hoechst – 1996 - acquired large patent package from Hoffmann-La Roche

• Provided access to an important compound type -- with which the underlying strategic goal of dominating the TN & STN market segment could be realized.

… and so the story goes. As of this publication, Merck has accomplished > 2500 patents in the LC/LCD portfolio (roughly+100 more per annum)

Customer-focus, Expertise on Production + Application

• Innovate rapidly! – Staying Power + Intellectual Property = Not quite enough!

– Also need:

• [In-house R&D] ∝ [Industry-wide Tech. Progress]

•

• Is R&D going in the right direction? – Customers drive the focus of industry

– Maintain close relationships with your market.

– Gather feedback, assess needs, prioritize, and orient new technology

Customer-focus, Expertise on Production + Application

• How do customer demands influence new innovation? Examples…

– LCD TVs - initially incompatible for use as PC monitors (LCDs switch too slowly)

• Innovate: superfluorinated liquid crystals for multidomain vertical alignment (MVA)

• Boosted mass-production ability, weight, resolution, switching rate, and viewing angle of nearly 180o

Customer-focus, Expertise on Production + Application

• Value Statement = Customer Benefits

– Ex: customer-driven innovation: advancements in LCD monitor technology throughout the 1990s

– 2002 saw the arrivval of LCD televisions

Customer-focus, Expertise on Production + Application

• Keeping up with customer needs //// maximizing quality improvement

• Develop products that maximize performance. Close cooperation with customers offers a simple and reliable assessment of the final product's quality.

• Improve the productivity of product development by identifying the product's Critical Quality Attributes (CQAs), i.e. measurable product characteristics that dictate its performance.

• Furthermore, once process understanding has been achieved, a customer in need of a custom material having specific requirements can simply communicate the requirements, and the correct mixture can be prepared… with no need for costly trial-and-error experimentation.

Note: re. Customer-focus, Expertise on Production + Application

Process Understanding refers to the identification and of all inputs during the steps of product formation that have demonstrated some degree of influence on the variance of a particular CQA in the final product. The variance of a given CQA is equal to the sum variances for each of the inputs upon which the CQA is dependent. Process Understanding maximizes quality and reduces the time and cost required for development; this is because the input parameters which exhibit no influence on CQAs need not be experimentally determined, and the total number of experiments required to optimize quality is reduced exponentially (speaking generally, reduced by a factor of 2m, where m represents the number of input parameters having no influence on CQA).

Timing is Everything: Internationalization and

Diversification • Cooperation with customers: easier when

close

– Thus, timing of Merck’s expansion of production into East Asia was key

– This helped ‘stayability’ as well

The Best Intellects

• Devotion to continuous learning “Learning is like swimming against the tide. It forever drives you back if you stop.” Drawing on talent, experience, and enthusiasm in employees

• interdisciplinary teams with high flexibility and creativity • Teams who think and act with a business focus • Cross-cultural Management Development centers • International Mgmt. Training • Learning by projects, speakers, self-reflection • European Partnership MBA • Merck University (program for top management) • 2005: formed the Liquid Crystal Training School

Summary • Liquid crystals:

initially debated, initially mocked as “überflüssig” [superfluous] crystals; eventually accepted as 4th state of aggregation

• 5 key factors are attributed to Merck’s success story with LCs

• Chemical industry innovations share their benefits in an industry-overlapping manner, fertilizing outside technology and innovation

“’Luck, perseverance, and ignorance’ are, according to a Japanese

proverb, the basic conditions for a successful scientist’s existence.”