5-696-041
August 17, 1995
Eli Lily and Company:
The Flexible Facility Decision (1993)
Teaching Note
Synopsis
The case focuses on Eli Lilly's facilities strategy for manufacturing three new chemical
entities1 that the company expects to launch within the next few years. Historically, the company
built specialized plants for each new drug approved for the market. Each plant could manufacture
only the product or specific set of products for which it was designed. In 1993, amidst changes in the
competitive and economic environment confronting pharmaceutical companies, and ensuing
corporate goals to accelerate product development, Lilly was contemplating an alternative strategy to
build a flexible facility that could produce virtually any of its new products.
The chief advantage of the flexible facility strategy would be speed-to-market for new
products. Since it would no longer be necessary to design and build a new facility for each new
product, facilities would be removed from the critical path for product launch. However, flexible
facilities are far more costly to build and operate than traditional specialized plants, and thus any
benefits of flexibility must be weighed against the higher costs—a significant issue in the
pharmaceutical environment of the 1990s. In examining the decision, students must probe the trade-
offs between flexibility and costs, analyze the interaction of facilities strategies and development
processes, and explore different paths for improving both flexibility and costs over time.
Purposes
This case can be used for various purposes in an Operations Strategy course for both M.B.A.
and executive programs. If used in an executive program, less emphasis can be placed on the
quantitative analysis.
1 A new chemical entity (NCE) refers to a therapeutically active chemical ingredient in a novel drug product.
1
, 696-041 Eli Lily and Company: The Flexible Facility Decision (1993)
The case can be taught as part of a two case series, with "Eli Lilly and Company:
Manufacturing Process Technology Strategy—1991," (HBS No. 692-056) taught first. The 1991 case
examines process development strategy. This one focuses on facilities strategies. However, as
discussed below, there is a close relationship between these. An important theme in the case series is
that manufacturing capabilities are a result of both infrastructure (the software—process
development) and structure (the hardware—the facilities). Interestingly, neither case gives an
indication that Eli Lilly made much attempt to integrate these two strategies.
One option is to use both cases as part of a module on technology and facilities strategies. A
second option is to use them in a module on manufacturing strategies in the context of innovation.
For both of these purposes, the instructor should orient the discussion around the interaction
between the facilities strategy and the product development process. Finally, since the case focuses
on a flexible facility, it can also be used in a module on manufacturing flexibility. For this purpose,
the instructor would want to place greater emphasis on the specific nature of the flexibility provided
by the proposed facility and the alternative ways of exploiting it that Lilly might pursue with such a
facility.
Assignment Questions
1. How has the competitive environment in pharmaceuticals been changing over
the past few years? What are the implications for the role of manufacturing
within Eli Lilly?
2. How does each facilities option affect Lilly's cost structure capacity management
and product development capabilities? For what type of products does the
proposed flexible facility provide an efficient (i.e. low cost) manufacturing
capability?
3. What type of flexibility does the "flexible facility" provide? What is the value of
this flexibility to Eli Lilly? How much is Lilly paying for this flexibility?
4. Given Lilly's strategic goals in the 1990s, which option should Steve Mueller
recommend? Are there other options that Lilly should be contemplating? If so,
what are they?
Analysis
I. Competitive Environment
In the early 1990s, Eli Lilly, like most other pharmaceutical companies, finds itself buffeted by
a set of competitive and economic forces that threaten historical levels of profitability and growth.
Less Pricing Flexibility
Drug prices, which historically rose faster than the general rate of inflation, are coming under
increasing pressure due to:
1. Increased buyer bargaining power due to the rapid emergence of large, managed
care networks which buy drugs in high volumes.
2. Intensifying rivalry from both patented therapeutic substitutes and generic drugs.
3. Political pressures and the potential for government mandated price controls on
drugs.
2
August 17, 1995
Eli Lily and Company:
The Flexible Facility Decision (1993)
Teaching Note
Synopsis
The case focuses on Eli Lilly's facilities strategy for manufacturing three new chemical
entities1 that the company expects to launch within the next few years. Historically, the company
built specialized plants for each new drug approved for the market. Each plant could manufacture
only the product or specific set of products for which it was designed. In 1993, amidst changes in the
competitive and economic environment confronting pharmaceutical companies, and ensuing
corporate goals to accelerate product development, Lilly was contemplating an alternative strategy to
build a flexible facility that could produce virtually any of its new products.
The chief advantage of the flexible facility strategy would be speed-to-market for new
products. Since it would no longer be necessary to design and build a new facility for each new
product, facilities would be removed from the critical path for product launch. However, flexible
facilities are far more costly to build and operate than traditional specialized plants, and thus any
benefits of flexibility must be weighed against the higher costs—a significant issue in the
pharmaceutical environment of the 1990s. In examining the decision, students must probe the trade-
offs between flexibility and costs, analyze the interaction of facilities strategies and development
processes, and explore different paths for improving both flexibility and costs over time.
Purposes
This case can be used for various purposes in an Operations Strategy course for both M.B.A.
and executive programs. If used in an executive program, less emphasis can be placed on the
quantitative analysis.
1 A new chemical entity (NCE) refers to a therapeutically active chemical ingredient in a novel drug product.
1
, 696-041 Eli Lily and Company: The Flexible Facility Decision (1993)
The case can be taught as part of a two case series, with "Eli Lilly and Company:
Manufacturing Process Technology Strategy—1991," (HBS No. 692-056) taught first. The 1991 case
examines process development strategy. This one focuses on facilities strategies. However, as
discussed below, there is a close relationship between these. An important theme in the case series is
that manufacturing capabilities are a result of both infrastructure (the software—process
development) and structure (the hardware—the facilities). Interestingly, neither case gives an
indication that Eli Lilly made much attempt to integrate these two strategies.
One option is to use both cases as part of a module on technology and facilities strategies. A
second option is to use them in a module on manufacturing strategies in the context of innovation.
For both of these purposes, the instructor should orient the discussion around the interaction
between the facilities strategy and the product development process. Finally, since the case focuses
on a flexible facility, it can also be used in a module on manufacturing flexibility. For this purpose,
the instructor would want to place greater emphasis on the specific nature of the flexibility provided
by the proposed facility and the alternative ways of exploiting it that Lilly might pursue with such a
facility.
Assignment Questions
1. How has the competitive environment in pharmaceuticals been changing over
the past few years? What are the implications for the role of manufacturing
within Eli Lilly?
2. How does each facilities option affect Lilly's cost structure capacity management
and product development capabilities? For what type of products does the
proposed flexible facility provide an efficient (i.e. low cost) manufacturing
capability?
3. What type of flexibility does the "flexible facility" provide? What is the value of
this flexibility to Eli Lilly? How much is Lilly paying for this flexibility?
4. Given Lilly's strategic goals in the 1990s, which option should Steve Mueller
recommend? Are there other options that Lilly should be contemplating? If so,
what are they?
Analysis
I. Competitive Environment
In the early 1990s, Eli Lilly, like most other pharmaceutical companies, finds itself buffeted by
a set of competitive and economic forces that threaten historical levels of profitability and growth.
Less Pricing Flexibility
Drug prices, which historically rose faster than the general rate of inflation, are coming under
increasing pressure due to:
1. Increased buyer bargaining power due to the rapid emergence of large, managed
care networks which buy drugs in high volumes.
2. Intensifying rivalry from both patented therapeutic substitutes and generic drugs.
3. Political pressures and the potential for government mandated price controls on
drugs.
2
