CVS (Consumer Value Store) Health is a health innovation company. The company started its operation in 1963 by opening its flagship retail store. Since then, CVS Health has maintained a strong market performance in the health industry where it operates. The company is committed to creating a better future for healthcare, and it has prioritised excellent customer service as one of the guiding principles that guide its operations. Today, CVS boasts of being the largest pharmacy health care provider in the US with offering that span across the various spectrum of pharmacy care. Its suite of assets or offerings includes retail pharmacy, retail clinics, speciality clinics, infusion services, medical claims editing, long-term care pharmacy, pharmacy benefits management and clinical programs 1 (CVS, 2018). This strategic analysis and planning report analyses CVS Health's internal and external environment, and SWOT analysis then closes with looking at some strategic alternatives that the company can employ to meet its strategic objectives.
Background of the Company
The company opened its first Consumer Value Store (CVS) in Lowell, Massachusetts in 1963 by two brothers Sidney and Stanley Goldstein and their partner Ralph Hoagland 2 (CVS, 1998). In this store, the founders sold beauty and healthcare products. In 1967, the first stores with pharmacy departments were opened in Cumberland and Warwick in Rhode Island. The founders sold the company in 1969 to Melville Corporation. In 1972, the company's annual sales hit $100 million, and in 1978, CVS moves to differentiate itself from its rivals by opening some small beauty and health stores in selected enclosed shopping malls. In 1996, CVS became a publicly traded company, where it started trading on the New York Stock Exchange 3 (CVS, 1998). In 2001, CVS became the very first pharmaceutical company to launch a card royalty loyalty program which it called Extra Care. In the very same year, CVS annual sales both from its online pharmacy website and from its brick and mortar stores exceeded $22 billion (Newsok, 2004).
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Current Situation
According to rankings on the Fortune 500 list, CVS health holds position seven, and it also keeps the 17 th position on the more massive Fortune Global 500 list. Around the same time, its annual revenue stood at $184 billion with a market cap of $81.59 billion 4 (CVS Health, 2018). CVS has over 9600 stores in the US in 49 states. It also runs Minute Clinics retail medical clinics in 1100 locations found around the operating areas. CVS has distinguished itself from its rivals by encouraging healthy behaviour, providing greater access and by lowering the overall cost of healthcare for its customers.
External Analysis
General External Environment
The general external environment is the space where all businesses operate. Most if not all companies are often affected by the conditions of the general business environment 5 (Mercer, 1998). In this section, this report looks at the general external environment in the US where CVS and other companies operate. To understand the general external situation, it is essential to consider the demographical, socio-cultural, political and legal, economic, technological and global impacts on businesses.
Demographic Impacts on businesses
Since businesses exist to serve clients and customers who are people, it is, therefore, essential to look at how the population is expected to change over time. In the US, it is estimated that its population will grow to 400 million with a shift in ethnic groups which will see the US becoming a “minority white” country by 2045 6 (Frey, 2018). Hispanics are also expected to make up a larger share of the US population by 2060. The Southern States of Texas and Florida are likely to register an increase in its people as states like New York are expected to witness shrinkage in their population.
Economic impacts on business
In the US, the economic environment is determined by the Federal Reserve, FED. It is like a central bank which sets interest rates and other conditions for the economy. The FED controls the economic environment using both monetary and fiscal policies. Recently the FED announced that it would increase the interest in the US. This means that cost for credit, the value of home mortgages and cost of doing business will all go high 7 (Conerly, 2018). This is not very good news for businesses operating in this economic environment. Perhaps this measure is meant to bridge the gap created by the budgetary deficits, which if left unchecked can present some uncertainties for the future of the economy. The slow rate at which the GDP is growing has a negative impact on job growth which is most likely going to reduce consumer spending.
Political and Legal Impacts
The Trump administration has allowed the Environmental Protection Agency (EPA) the latitude to create stricter regulations, which could potentially affect certain businesses in a negative way 8 (DiChristopher, 2018). The new regulations also have a way of increasing energy cost, which business conveniently shift back to the consumers in the high prices they charge for consumer goods.
Sociocultural impact
The modern-day workplace is diverse and very dynamic. Women are tearing down the glass ceiling and are ascending to high offices in the corporate world. Parents, both mothers and fathers have the desire to spend more time with their children hence a need for job schedules that meet this need — some desire that their employers provide paid daycare for their children and paid maternal and paternal leaves for those expecting a baby. There is a steady increase in the number of employees who desire to work remotely or from home for some days in the week. Aside from all these, employers must deal with workplace diversity and ensure that they steer clear of breaking the many laws that protect employees from harassment and discrimination.
Technological Impact
Technology impacts how businesses operate in two ways. First, it helps companies to cut the cost of operations by automating some of its functions; however, this means that machines will do jobs which were previously done by human employees. Second, technology enables businesses to break geographical barriers that made it impossible for them to reach certain parts of the globe. Third, technology creates opportunities for employees to work from home or remotely, while at the same time it creates opportunities for online businesses and online workers.
Global impacts
The world is now one big global village. Both the internet and globalisation can be cited as the factors that have led to the bringing together of people from different parts of the globe. Wars and conflict make it impossible and risky for businesses to invest in specific overseas locations. On the flipside, economies that are known to be stable are attractive to companies and investments.
Industrial Environment
Industrial environment is the specific industry in which firms are offering the same services or selling similar or near similar products operate. Firms in a particular sector are all affected by the same factors. According to Porter (2008), there are five fundamental forces which can potentially affect the profitability of any given firm. These include the threat of entrants, bargaining power of buyers, bargaining power of suppliers, threats from rivals and threats of substitute products 9 .
CVS Health operates in the retail health care industry. It is ranked in position three after McKesson Corp. and UnitedHealth Group. This section of the report looks at what is happening in the industry and examines how the rivalry is in this same industry.
The threat of new entrants [Moderate]
New companies coming into the retail healthcare industry are coming in with innovative solutions aimed to woo customers and make them shift their loyalty from their previous retail healthcare service providers to themselves. These new companies can use a strategy such as pricing their offerings lower than the market price thereby giving customers value at a lower cost. CSV has to find ways of countering this failure to which it can quickly lose its market share to the new entrants.
CVS can address this threat by:
Innovating their offerings to keep the old customers happy and draw in new ones.
Investing in research and development which will ensure that they keep improving their offerings.
Embracing economies of scale to cut down on fixed cost of production which would result in lower prices for its products.
Bargaining power of suppliers [Moderate]
High prices can hit businesses operating in industries where suppliers are few or specialised from the suppliers 10 (Porter, 2008). These high prices can potentially reduce the margins for the retailers. The retail healthcare industry is one that does not have so many suppliers, and retailers must be wary of this fact.
CVS can address this threat by:
Experimenting with raw materials from different suppliers to ensure that when one supplier is out of stock, they can always shift to the alternative.
Partnering with suppliers whose businesses depend on CVS.
Building relationships with many different suppliers.
Bargaining power of buyers [Low]
Customers have demanded that they need to be met. A firm that hopes to thrive in the long run must find ways to meet the needs of its customers. It is worth noting that most customers often want to pay the lowest price in exchange for high-quality offerings 11 (Peng, 2009). Does not make sense to the company and as a result, CVS must find a way to address the causes of this threat. One such reason is the size of the customer base: the smaller the customer base, the higher their bargaining power.
CVS can address this by:
Broadening its customer base which will reduce the bargaining power of its customers.
Bringing innovative products to the market. Customers often ask for discounts from existing products, not new ones.
Bringing in new products which will keep the current customers loyal to the company while at the same time attracting new customers.
Threat from Rivals [High]
When the threat from rivals is high, competition will be high which will ultimately bring down prices in the industry and affect the long-term profitability of firms operating in the sector 12 (Porter, 2008). This is the case with CVS Health. It operates in an industry (Retail Healthcare industry) where competition is stiff.
CVS can address this by:
Collaborating and partnering with competitors to increase market size rather than competing for the limited market size.
Increasing its economies of scale so that it can compete better.
Continually differentiating its offerings to gain an edge over its rivals.
Threat of Substitute Products or Services [High]
In any industry where a new product comes in to meet the same need that an old product used to, or it promises better performance, the profitability of the old product will suffer. CVS Health operates in an industry where innovation is the order of the day. For instance, the app developed by Health.inc for Amazon will compete with the pharmacy benefit management service being offered by CVS Health 13 (Melanie, 2018).
CVS can tackle this by:
Increasing the switching cost for its customers
Understanding the core needs of its customers rather than focusing only on purchase behaviour
Diversifying offerings to include a mix of products and services.
The dominant marketing and economic features of the industry include increased improvement and investment in patient portals and customer engagement through social media. A report by Grand View Research, Inc estimates that the Retail Healthcare industry will have grown at a compound annual growth rate (CAGR) of 20.3% by 2025 14 (Grand View Research 2017). As regards the distribution channels, CVS has its distribution channel which ensures that its products reach the final consumer. The offerings by CVS are differentiated in terms of the company offering both products and services. The key drivers of change are technology and innovation. Both of these are at high levels with the firm working hard to bring the latest technological and innovative solutions to the market. There is high speed seen in how technology keeps changing. This means that the cost of healthcare and efficiency will both increase over time.
Competitive Environment
When it comes to considering the competitive landscape in which CVS operates, Walgreens, Walmart and Rite Aid Corporations can be said to be the CVS' top three competitors. These competitors share the top spot both in the retail pharmacy and pharmacy services segments. However, Walgreens tops all the other competitors making it be the undisputed primary competitor to CVS. CVS and Walgreen have near similar strategies which they employ to capture a share of the market. They often strive to capture prime locations close to populated neighbourhoods. The Minute Clinics run by CVS are key in its differentiation in that it allows customers to get both their diagnosis and prescriptions at the same place. Patients value convenience and often gravitate towards providers who afford them convenience. Walgreen has three main goals and strategies that it employs to beat its competitors.: (i) Delivering comprehensive care for its customers, (ii) providing a differentiated experience to its customers; (iii) building strategic partnerships with health insurance companies, physicians and hospital systems. Walgreen's strategic approach entails forming both short-term and long-term partnerships with some of its competitors to explore and increase market size. Other emerging competitors include Walmart and Rite Aid Corporations.
Internal Analysis
Value Chain Analysis is one of the processes used to analyse the internal functions of a company to identify the activities that add value to a firm's final product and then take it a step further to explain these functions to reduce cost 15 (CVS, 2018). CVS has focused its strategy on two main factors- excellent customer service and cost leadership. The company uses a cost leadership strategy in its retail lines while it uses a differentiation strategy for their pharmacy services in which they claim to offer more services than their close competitors. Their Prescription Benefits Management (PBM) system is designed centred on ensuring that customers get to enjoy the convenience and superior customer service (CVS, 2018). The system also makes it possible for CVS to match customer needs and preferences to the inventory produced and stocked by CVS.
CVS’ core competencies can be said to include low market risk, exceptional and expanding size coupled with their ability to offer valuable services to all of their customers through their proprietary PMB services. All of these core competencies are hard for the rivals to copy and as thus CVS apply them across their product lines to ensure that their customers receive value.
The merger between CVS and Caremark, Inc added a network of 64,000 pharmacies to its 7,100 pharmacy stores. This is important because it means that CVS is well positioned to receive discounts from drug manufacturers. Further, since CVS offers a wide range of services at their locations, a visit to any of its stores assures the customer of a one-stop shopping experience. This has a way of reducing the time that a customer takes to find the information, product or service s/he needs thereby increasing the customer’s level of satisfaction which translates into repeat buying behaviour.
Some resources giving CVS competitive advantage or edge against its rivals include its Extra Care loyalty program which some of its competitors have tried to copy but not entirely successfully, its retail beauty section that stocks beauty products for women, and its PBM services. The Minute Clinics amplifies CVS’ competitive advantage by offering its customers cheaper and most convenient solution for addressing their medical conditions instead of having to book an appointment to visit the doctor’s office(CVS Health, 2018) 16 . Patient need not book an appointment. They can walk in and get attended to the right from diagnosis to prescription and purchase of the prescribed drugs all under one roof. CVS uses all of these core resources to gain an edge over its competitors and help them to increase their revenue.
The quality of pill bottle labels and poor prescription labels are some of the issues that CVS has to address because of these work against it, and therefore it can be said that it places the company at a significant disadvantage relative to its competitors. Its closest competitor is Walgreen. It is essential for CVS to be alert of what the competitors are doing so as not to be overtaken in the market. Both CVS and Walgreen serve the same customers and as thus, it is clear that differentiation is the only strategy that the companies can use to stay ahead of the competition. Further, it is commonplace to find closely competing companies trying to copy an approach that happens to be working for their competitors. This is true of CVS and Walgreen. The latter, learning that having a loyalty program is essential, decided to copy what the former was doing and the move seems to be bearing fruit.
SWOT Analysis
This section of the report presents a SWOT analysis for CVS Health which looks at its internal and external review and the factors that can be considered to be its strength, the opportunities it has, the threats it faces and the weaknesses it has. Its SWOT analysis is presented on the table below:
Strengths It is the largest retail pharmaceutical firm in the USA Offers a proprietary Pharmacy Benefit Management through Caremark pharmacy services Its ExtraCare loyalty program pushes OTC sales Has maintained strong financial performance thereby increasing shareholder trust and value | Weaknesses Does not have a strong presence outside the US Lawsuits and controversies over what some refill malpractices led to wastage of money and erosion of brand image. |
Opportunities Aetna’s acquisition will help the company to enter the insurance industry with ease. CVS can grow through collaborations and acquisitions There is a steady growth in the demand for anti-aging drugs. An anticipated increase in demand for prescribed drugs by the ageing population. | Threats Global and local competition by other drug retailers Interventions and regulations by governments High competition from mail-order pharmacies. |
Strategy Formulation
Since competition is building at home, CVS has no option but to come up with innovative ways to stay on top. One such technique is by considering expanding to a foreign market. This strategy has helped many companies to increase their revenue from foreign branches even as revenue from home branches reduce. CVS can consider expanding to Europe. Europe has an expansive market which the company can tap into and generate some income. For ease of entry and the minimising of risks, CVS should consider entering Europe through a joint venture with a pharmaceutical company that is already operating in Europe. This will reduce the barriers to entry and ensure that CVS is not overly exposed in the deal.
Another strategy would be to use cost-cutting strategy by stocking their stores with brand name drugs and their generic versions. Generic versions are often cheaper than brand name drugs. This will increase the variety of products available to customers. Customers will be able to choose medicines according to their economic power. Selling generic drugs usually lead to reduced revenue, but this often leads to high profits because the cost of purchasing these drugs from the manufacturers is lower compared to the cost of buying branded drugs. To drive sales up, awareness for the availability, efficacy and benefit of generic drugs should form the basis of the company's marketing message. Some of the main advantages of generic medicines that should be captured include:
That they are as effective as brand-name drugs
That they are cheaper for the customer
That both CVS and the customers will benefit from the move to dispense generic medications.
Strategic alternatives for CVS
Having seen that the firm's high cost of goods sold is as a result of it focusing on selling branded drugs that have small margins, the recommendation would be to add generic drugs to the list of medications stocked by CVS. Generic drugs are cheaper both to the customer and to the company. The main disadvantage is that some buyers might be unaware of the efficiency of these drugs. Therefore, CVS must invest in creating awareness among its customers.
Another alternative would be to expand to foreign markets especially those found in Europe. Growing to an international market is a risky affair. There are so many factors that can jointly contribute to making it thus. Political, social, cultural, legal, and environmental factors should all be considered when checking whether to invest in a foreign country or not. Entering the new market as a joint venture with a European firm will help address the challenges.
From the strategic analysis above, it can be seen that CVS is doing well in the retail health industry. CVS faces competition from the likes of Walgreen among others. CVS can beat its competition because of its differentiation and cost-cutting strategies. Two more approaches have been proposed to help the company to increase its competitiveness. These include expanding to the foreign market and adding generic drugs to its list of products.
References
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CVS (2018). About. Retrieved from https://cvshealth.com/about.
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DiChristopher, T. (2018). Trump administration reveals greenhouse gas rule for power plants to replace the Obama-era plan. Retrieved from https://www.cnbc.com/2018/08/21/epa-reveals-greenhouse-gas-rule-for-power-plants-to-replace-obama-plan.html
Frey, H. W. (2018). The US will become ‘minority white’ in 2045, Census projects . Retrieved from https://www.brookings.edu/blog/the-avenue/2018/03/14/the-us-will-become-minority-white-in-2045-census-projects/
Grand View Research (2017). U.S. Retail Clinics Market Worth $7.3 Billion By 2025 | CAGR: 20.3%. Retrieved from https://www.grandviewresearch.com/press-release/us-retail-clinics-market-analysis
Melanie, E. (2018). Amazon Makes Inroads Selling Medical Supplies to the Sick . Retrieved from https://www.wsj.com/articles/amazon-makes-inroads-selling-medical-supplies-to-the-sick-1543487401
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Newsok (2004). About CVS. Retrieved from https://newsok.com/article/1898805/about-cvs
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Porter, E. M. (2008). Competitive Strategy: Techniques for Analysing Industries and Competitors. New York City: Simon and Schuster.
1 CVS (2018). About. Retrieved from https://cvshealth.com/about.
2 CVS (1998). CVS Corporation Thanks Stanley P. Goldstein for His Vision and Leadership. Retrieved from http://media.corporate-ir.net/media_files/NYS/cvs/ar_98/thanks.htm
3 Ibid
4 CVS Health (2018). Fortune. Retrieved 2018-11-09.
5 Mercer, D. S. (1998). Marketing strategy: The challenge of the external environment.
6 Frey, H. W. (2018). The US will become ‘minority white’ in 2045, Census projects.
7 Conerly, B. (2018). The Fed Will Keep Pumping Interest Rates Up Even More Than They Say.
8 DiChristopher, T. (2018). Trump administration reveals greenhouse gas rule for power plants to replace Obama-era plan
9 Porter, E. M. (2008). Competitive Strategy: Techniques for Analysing Industries and Competitors.
10 Porter, E. M. (2008). Competitive Strategy: Techniques for Analysing Industries and Competitors.
11 Peng, M. W. (2009). Global strategy. Mason, Ohio: South-Western/Cengage Learning.
12 Porter, E. M. (2008). Competitive Strategy: Techniques for Analysing Industries and Competitors
13 Melanie, E. (2018). Amazon Makes Inroads Selling Medical Supplies to the Sick .
14 Grand View Research (2017). U.S. Retail Clinics Market Worth $7.3 Billion By 2025 | CAGR: 20.3%.
15 CVS Health (2018). Fortune . Retrieved 2018-11-09.
16 Ibid
