MSU CVS Pharmacy Strategies Market & Value Case Study Q&A Discussion answer these questions briefly about the CVS case a. Answer the Four Strategy Ques

MSU CVS Pharmacy Strategies Market & Value Case Study Q&A Discussion answer these questions briefly about the CVS case

a. Answer the Four Strategy Questions for CVS Pharmacy

Four strategy questions are:

What markets does CVS serve?
What Value does CVS provide?
What are CVS resources and capabilities for achieving this Value?
How inimitable is CVS’s strategy?

b. What is the industry that CVS Pharmacy is choosing to enter and what are the Industry Success Factors

c. Where does CVS’s proposed diversification fit on the Diversification Reasons Continuum from Chapter 6 slides?

d. From a., b., and c. what might enable or prevent CVS from achieving its proposed diversification? CVS in 2015: From Neighborhood Pharmacy Provider to Health Care Company
4/12/20, 9:05 PM
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The Pharmacy Industry
The pharmacy industry consists of firms engaged in the distribution of prescription and non-prescription drugs
to consumers, divided into four major segments. Institutional pharmacies dispense drugs for inpatient use in
health care facilities such as hospitals or long-term care facilities. Retail pharmacies fill prescriptions for
individual customers in physical stores. Mail Order and Specialty pharmacies allow patients to access larger
doses (90-day supplies) of regularly used prescriptions or provide drugs and related services for specialized
medication regimes, such as infusion therapies, that can be used outside of hospitals. Finally, the Pharmacy
Services segment provides prescription drug benefit management programs for various government entities (the
federal Medicare program and state-run Medicaid programs), health insurers, and large employers who selfinsure their employees.
Industry Drivers
The industry originated at the turn of the twentieth century as the medical profession saw benefits to separating
the prescribing of medications from the sale and dispensing of those drugs; the split avoided conflicts of interest
in which physicians would prescribe medications financially best for them at the expense of patient health.4
From the end of World War II through about 1990, the number of retail pharmacies in the United States
remained constant at about 55,000 (See Exhibit 1).5 In 1950, more than 90% of all prescriptions were filled by
neighborhood pharmacists, small stores with no more than a few geographically-limited operations. By 1990
that number would decline to 64%. By 2007, concentration in the industry had completely reversed, with 64%
of revenue owned by the top four firms, and 68% garnered by the top 20 firms. The largest players by sales in
2014 were CVS (24%), Walgreens (16%), Express Scripts (12%), Walmart (6%), and Rite Aid (6%).6
CVS
CVS
Stores
Share
Year
Number
1950
55000
1970
55000
100
0.18%
1990
55000
1250
2.27%
1997
43000
3900
9.07%
2002
40234
4122
10.25%
N/A
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CVS in 2015: From Neighborhood Pharmacy Provider to Health Care Company
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2007
42045
6301
14.99%
2012
43338
7508
17.32%
2015 (est)
44638
9466
21.21%
Data sources: Schondelmeyer and Thomas (see note 5), Hoovers online CVS, Forbes
(http://www.forbes.com/2003/09/29/cx_lw_0929mondaymatch.html), Statista
(http://www.statista.com/statistics/241544/cvs-caremark—number-of-stores-since-2005/) 2015 estimate
contains 1,600 Target pharmacies.
Exhibit 1Growth in Retail Pharmacies, 1950–2105
Three interrelated factors drove this radical change in the industry. First, health care in the United States
increasingly relied on pharmacology (drugs) as the solution to health problems. Much of this reliance came
from innovation within the pharmaceutical industry, the major supplier to the pharmacy industry. Major
pharmaceutical companies continued to bring new drugs to market, drugs often aimed at very specialized
diseases. It now cost almost $2.6 billion to bring a new drug to market, more than double the cost a decade
earlier.7 Many of these drugs targeted special maladies with small markets and long treatment regimens. For
example, in 2013 Gilead Sciences gained FDA approval for Solvadi, designed to combat Hepatitis C, at a cost
of $84,000 for a 12-week treatment.8 Medicare expenses for the treatment of Hepatitis C increased 15-fold, to
$4.5 billion, in 2014. In spite of these specialty drugs, the increasing cost of inpatient treatment or professional
services also drove the use of medication as a lower cost alternative.
Second, and related to the first, the increasing sophistication of drugs, coupled with increased demand, resulted
in ever-increasing drug prices. Exhibit 2 details average drug price increases in the United States during the last
45 years. The hyperinflation decade of the 1970s represents the only decade where consumer prices outpaced
prescription drug price increases; since 2006 drug prices had outpaced core inflation by a factor of 4. Drug
pricing increased from 5.5% of total health care spending in 1990 to 15% of private health insurance spending
in 2014.9
Average Annual Increase
Average Annual Inflation
1970–1979
3.60%
8.70%
1980–1989
9.60%
5.00%
1990–1999
10–15%
2.75%
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2000–2004
5–6%
2.43%
2006–2013
9.20%
1.95%
Data sources: 1970–1990, Schondelmeyer and Thomas(see note 5), 1990-1999,
http://content.healthaffairs.org/content/20/5/43.full, 2000-2004: http://www.gao.gov/new.items/d05779.pdf,
2006–2013: http://www.aarp.org/content/dam/aarp/ppi/2014-11/rx-price-watch-report-AARP-ppi-health.pdf
U.S. Average annual inflation: http://www.usinflationcalculator.com/
Exhibit 2Changes in Prescription Drug Prices, 1970–2013
The market for prescription drugs featured two buyers, often with differing objectives. Patients who took the
drugs wanted whatever medication would solve their particular problem. Insurers, private insurance companies,
large employer self-insurance plans, Medicare, and Medicaid providers, looked to find the lowest cost drug with
the highest probability of solving a patient’s medical issues. These third-party payers worked to align their
incentives with patients, usually through the practice of co-pays and deductibles that shared costs with patients.
In 2015, 25% of third-party payers offered only “high deductible” plans where patients incurred greater out of
pocket expenses, nearly double the 13% only three years previously.10 Both buyer groups were becoming more
price sensitive.
Finally, the rise of prescription drug and health care costs in general, and the importance of health care to a full
life, led to high levels of federal and state government regulation of the pharmacy industry. On the supply side,
the FDA regulated pharmaceutical companies, and states all had their own licensing requirements for
professional pharmacists. Since the introduction of Medicare and Medicaid in the 1960s, the federal government
set reimbursement rates for most medical services for those covered by its plans. Private insurers often used
these “shadow prices” to benchmark their own reimbursement rates. In 2003 George W. Bush signed the
Medicare Prescription Drug, Improvement, and Modernization Act (MMA) into law, and created Medicare Part
D. Part D allowed retirees to purchase a private insurance supplement to their Medicare coverage that offset the
cost of prescription drugs. Understanding and managing Part D expenses became an important part of
succeeding as a pharmacy.
Industry Evolution
The pharmacy industry sits in the middle of a value chain that connects patients, third-party payers, and the
larger pharmaceutical companies. By the late 1960s, the pharmacy services segment began to emerge. With
close to 90% of prescriptions still filled by local “mom and pop” pharmacies in small dollar amounts, an
increasing number of prescriptions created an immense paperwork burden on insurers and employers who
covered the costs of prescriptions. Pharmacy benefit management (PBM) companies offloaded this burden from
third-party payers by using sophisticated computing resources and standardizing key elements of the process.
Small pharmacies joined a PBM network and the network handled the tasks of transaction processing.11
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Two decades later, PBMs had grown in size and sophistication. PBMs were an early developer and user of “big
data,” gathering data about what drugs were prescribed, drug interactions, and drug efficacy. As drug prices
continued to rise in the late 1980s and 1990s, PBMs shifted their focus from being efficient providers of
transaction and financial services into organizations focused on controlling drug cost increases. Using their
massive databases about drug safety, interactions, and efficacy, PBMs developed drug formularies or lists that
identified the most effective medications for different ailments. Formularies often recommended a generic drug
instead of a higher priced, name brand drug. PBMs entered the arena of drug plan design and administration as
third-party payers used formularies to control which drugs their plans would cover.
PBMs earned money in one of, or a combination of, three ways. PBMs could arbitrage the negotiated price
spread between suppliers and buyers. For example, CVS might negotiate a 20% discount for a medication, but
pass only 19% on to network members. A PBM might choose to pass on all the discount, but charge a fee, either
on each claim or a fee per member (capitation). PBMs also earned money by keeping volume-based rebates
from pharmaceutical companies as a source of profit. By the end of the 1990s, PBMs had continued to expand
their offerings into efforts to change patient behaviors, such as encouraging the use of generics or lower cost
alternatives, using their massive data volume to help control prescription drug fraud and abuse, and continuing
to refine formularies to create effective disease management protocols.
The rise of the Internet in the late 1990s allowed PBMs to vastly enlarge a new distribution channel: Mail-order
pharmacies. They had been around since the US Veterans Administration offered mail-order prescriptions in the
1950s. With the Internet, patients using drugs to treat chronic, ongoing conditions could receive a 90-day supply
of their medication instead of the traditional 30-day supply through a brick-and-mortar store. Consumers and
insurers saved money through these volume discounts, and PBMs earned money as well. CVS, for example,
operated four mail-order pharmacies to service the entire country. Without the expenses of retail locations and
the need for customer interactions, mail-order pharmacies could fill prescriptions at high volumes and low
costs. A high-volume local pharmacy might fill a thousand prescriptions each day, but a mail-order pharmacy
would fill almost 500,000.12
The PBM industry had become large and fairly concentrated by the mid-2010s. PBMs provided prescription
drug management services for more than 210 million Americans as of 2012.13 Express Scripts held the largest
share at a little more than 28%, CVS had almost 27%, United Health captured 10% of the market, and
Catamaran took a little more than 7%.14 At this scale, PBMs could effectively negotiate with the large
pharmaceutical companies for the best prices for insurers, patients, and pharmacies in their networks.
Current Challenges
With the rise in cost and complexity of specialty drugs, such as Solvadi, many drugs to treat cancer, multiple
sclerosis, and HIV/AIDS, PBMs have turned to creating more specialty pharmacies. These pharmacies focus on
products with high cost (minimum monthly cost of $600, but often approaching $10,000), and high touch
(unique dispensing conditions and storage requirements, 24-hour access to specialists, high levels of patient
interaction and education). Specialty pharmacies allow PBMs to leverage their volume advantages and dispense
medications in a setting that ensures patient compliance and drug efficacy without the high costs of inpatient
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treatment. Specialty drugs represent a small fraction of total prescriptions filled, between 1-4%, but a large
portion of total drug spending, between 25-30%.15 For example, a specialty pharmacy might provide patients
with chemotherapy services and help avoid the costs of inpatient chemo treatments.
Data about drug usage, efficacy, and safety continue to grow; in fact, most pharmacists know more about the
different drugs patients take, and the interactions among them, than the prescribing doctors. A growing business
for pharmacies involves creating collaborative agreements with physicians or other health care providers that
allow pharmacists to perform, and be compensated for, services such as modification of current prescriptions,
ordering lab services, or physical assessments of patients.16 PBMs and member pharmacies also use patient data
to improve medication compliance, or getting people to take their medication as prescribed and in the
recommended dosage. Estimates suggest that one-half of all patients fail to take medications as prescribed,
almost 20% of new prescriptions are never filled, and the total health care cost of noncompliance reaches almost
$300 billion, 13% of all health spending.17
As the Affordable Care Act (also known as Obamacare) rolled out and more people participated in the US
health care system, the pharmacy industry was likely to continue to change in some expected, and unexpected,
ways.
Copyright © 2018, 2016 John Wiley & Sons, Inc. All rights reserved.
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CHAPTER 6
Corporate Strategy
Slide 1
CORPORATE STRATEGY
• Portfolio or “mix” of businesses of a company
• Parallels investment portfolio concept from finance
• Corporate strategy IS NOT business or business
level strategy
• Corporate strategy is about combination of
businesses within a company
• Focuses on owner/stockholder as main
stakeholder—creation of value for owners through
“mix” of businesses
• Diversification
Slide 2
MAKING DIVERSIFICATION WORK
• What businesses should a corporation compete
in?
• How should these businesses be managed to
jointly create more value than if they were
freestanding units?
Slide 3
MAKING DIVERSIFICATION WORK
• Diversification initiatives must create value for
shareholders
–
–
–
–
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
• Diversification should create synergy
Business
1
Business
2
Slide 4
CORPORATE VS. BUSINESS UNIT STRATEGY
Business Unit Strategy- The search for competitive advantage within a single
industry, market, or line of business.
Corporate Strategy- The search for value and competitive advantages through
participation in several different industries and markets.
Vertical Integration- Movement into adjacent markets by a firm along its own
value chain. Movement in the direction of raw materials is backward integration.
Movement in the direction of sales, service, or warranty operations is forward
integration.
Horizontal Diversification- The movement into an adjacent, or unrelated, market
that is not along a firm’s own value chain.
Slide 5
MOVING ALONG THE VALUE CHAIN
• Vertical
Backward
– Backward integration
along supply chain
– Forward integration
along supply chain
Forward
• Horizontal
– Diversification
– Alliances
Same/Related
Industries
Slide 6
SYNERGY
• Related businesses (horizontal relationships)
– Sharing tangible resources
– Sharing intangible resources
• Unrelated businesses (hierarchical relationships)
– Value creation derives from corporate office
– Leveraging support activities
Slide 7
DIVERSIFICATION REASONS
CONTINUUM
Most Power to
Least Power to
Create Value
Create Value
Reducing
Maintaining
Balancing
Sharing
Increasing
Capitalizing
Risk
Growth
Cash
Infrastructure
Market
on Core
Power
Competencies
Flows
Not
Recommended
Recommended
as a Reason
as a Reason
to Diversify
to Diversify
Slide 8
LEVELS OF DIVERSIFICATION
Single Business- A firm earning more than 95 percent of the revenues from a single line of
business.
Dominant Vertical Business- A firm that earns more than 70 percent of its revenue from its
main line of business and the rest from businesses located along
the value chain.
Dominant Business- A firm that earns more than 70 percent of revenue from its main line of
business and the remainder from other lines across different value
chains.
Related-constrained Diversification- A firm that earns less than 70 percent of its revenue
from its main line of business and its other lines of business share product, technological, and
distribution linkages with the main business.
Related-linked Diversification- A firm that operates in related markets, but fewer linkages
exist between the new and existing markets than the elements create
separately.
Unrelated Diversified Firm- Competes in product categories and markets with few, if any,
links between them.
Slide 9
ADDING VALUE
• The critical question
• Deploying and exploiting current resources
• Developing and expanding new resources
Exploit v. Expand
Slide 10
Slide 11
MECHANISMS TO CREATE VALUE
Slack
Similar Business
Models
Synergy
Spreading Capital
Shared Knowledge
Stepping stone
Slide 12
THE SIX S’S
Slack- Unused resource capacity.
• Economy of Scope- Activities where the average cost of producing two
different products is less when delivered together than separately.
• Management Skill- The individual and collective abilities of a firm’s
management team to engage in value-creating activities.
Synergy- Action between different elements of a system that creates more
value together than the elements create separately.
Shared Knowledge- Collective knowledge that can be distributed
throughout the organization to create value.
Slide 13
THE SIX S’S CONTINUED…
Business Model- A method to enable the creation and exchange of value
between companies and their customers.
• Dominant Logic A conceptualization of a business, or a set of rules for
competition, that applies to seemingly unrelated product markets or
industries.
Spreading Capital
• Internal Capital Market- The movement of funds, talent, or knowledge
from unit to unit directed by the leaders of the firm.
Providing Stepping Stones- Works to enhance capabilities through “long
leaps” and “short leaps”, and “short hops”
Slide 14
DESTROYING VALUE THROUGH
DIVERSIFICATION
•
•
•
•
•
•
Hubris
Sunk Cost Fallacy
Imitation
Poor Governance and Incentives
Poor Management
Lack of Resources
Slide 15
2 WAYS TO DIVERSIFY
Go it alone—
Greenfield
Buy your way
in—acquisition
Slide 16
ENTRY MODE
Greenfield
• Existing resources
move from existing to
new business
– Brand
– Customer knowledge
– Technology overlap
• Speed not essential
Acquisition
• Resources don’t
move from existing to
new business
– No brand equity
– New customers
– New technology
• Speed essential
Slide 17
ACQUISITION AND INTEGRATION
• Have real, value-creating reasons for the
acquisition
• Perform Due Diligence
• Determine appropriate acquisition premium
• Integrate the acquisition
Slide 18
Slide 19
ACQUISITION INTEGRATION STRATEGIES
Bury—completely absorb target, also termed
takeover
Build—a new organization, best of breed, often
from merger
Blend—loose coupling, leverage target
Bolt-on—two companies, one owner
Slide 20
GENERAL INTEGRATION STRATEGIES
Slide21
INTEGRATING
BUSINESS UNITS
Slide 22
THE PORTFOLIO APPROACH
• Historical starting point for strategic analysis and
choice in multibusiness firms
• Portfolio techniques focusing on
– “balancing” the flow of cash resources
among various businesses
– while identifying their basic strategic pur…
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