CVS Caremark Corporation is one of the largest US prescription drug providers. The company operates a network of 9,600 pharmacies in 50 states of the country (Porter, Ramirez-Vallejo, & Houghtalin, 2016). Despite the size of the company and the scale of its activities, it still does not consider the prospects for expansion beyond the United States and is exclusively a domestic pharmaceutical network. The company’s management chose to develop it through horizontal integration within the United States through the acquisition of other companies with their ready-made networks. The use of this strategy has allowed the company to increase its core capital on the already well-prepared soil. In addition, the organization continues to grow but in terms of product development only. The range of its interest also includes the implementation of various services that allow to improve brand perception and increase customers’ prescription adherence, which is one of the main priorities of the enterprise. Today, the company suffers a relative decline in income and investment performance relative to the industry average, which indicates the need for a strategy adjustment. In addition, the industry itself is in the process of active restructuring and consolidation. Consequently, marketing research and the company’s timely response become relevant.
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External Analysis (Porters Five Forces)
The Power of Buyers is Moderate
A unique feature of the drug market is the fact that the attending physician often influences the final choice of the direct consumer of the medication. Such a fact can be clearly demonstrated by the example of prescription drugs, the purchase of which seems impossible without a prescription. Apart from that, sales of drugs are greatly influenced by the actions of the state, which, in turn, can be aimed at reducing the level of prices or stimulating the production and marketing of a certain type of drugs (for example, generics owing to their affordability to the population).
The Power of Suppliers is Strong
The domestic pharmaceutical industry is characterized by the dominance of a small number of suppliers but with thehigher degree of concentration than in the sphere in which the supplying companies sell their products. For example, McKesson, AmerisourceBergen, and Cardinal Health own 85% of all supplies (Porter et al., 2016). In addition, there is a risk of integrating suppliers into the retail sales of their products at lower prices. However, taking into account the availability of various substitutes, high efficiency of CVS in retail sales, popularity of the company’s brand, it is able to conduct successful negotiations with suppliers and somewhat level their power. The exceptions are when suppliers produce unique products.
The Threat of Substitute Products is Moderate
In view of the fact that the products manufactured within the pharmaceutical industry directly affect the state of people’s health and, as a result, their standard of living, their existence without it is practically inconceivable or, at least, extremely problematic in the present conditions. The pharmaceutical industry also implies the availability of substitute products. In this case, generic drugs, branded generics, biopharmaceuticals, and traditional medical products act as substitutes for the original medications.
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The Threat of New Players is Strong
It is well known that the pharmaceutical industry is distinguished, as a rule, by high levels of profit for its representatives. Such fact entails a large number of companies seeking to become full-fledged players in this market and carry out the production and marketing of their products. However, despite the huge interest in this industry, at the same time, it is characterized by the presence of relatively high entry barriers, thus significantly complicating the emergence of new drug retailers. Among the main barriers are the expenses of time and material costs for the launch of a new drug on the market, the huge costs of research and development, marketing of products, and customer commitment to certain brands.
Competitive Revelry is Strong
The degree of intensity of competition among the players in the market is very high. Namely, there is a small number of competing entities in the market, which are characterized by equally growing sales volumes (Porter et al., 2016). Two-thirds of it falls on three companies, namely Express Scripts, CVS Caremark, and Walgreens (Porter et al., 2016). The growth rate of the market is slow, which entails the intensification of the struggle among the participants for a large share of it.
Strengths. Knowledge and successful use of information about the specific features of the local market in the process of retail sales of products allow the company to carry out targeted marketing at lower costs. The high level of development of the distribution network of products in the domestic market makes the company’s products available and, therefore, increases convenience for customers. Finally, good financial condition enables the organization to acquire companies and brands to expand its presence in other segments. Such method saves time and money on marketing in those segments.
Weaknesses. One of the obvious and most significant weaknesses of the company is the lack of a course for expanding abroad. Focusing solely on the domestic market, the entity faces a lower investment efficiency with a low growth potential of the market size. Another result of this weakness is the missed opportunity for economies of scale by increasing sales abroad. In addition, high dependence on suppliers creates barriers to price competition. As a result, the organization sets a higher price for medicines produced by domestic companies in comparison with those imported from abroad by its competitors.
Opportunities. Among the most attractive opportunities are growing healthcare markets in Asia, Europe, and abroad. The domestic market also has a certain potential due to the larger volume of drugs consumed owing to the aging trends of the nation and the frequency of chronic diseases. State support for the development of healthcare ensures that the general population’s access to health insurance also leads to an increase in drug consumption.
The Threats. Threats for the company in the domestic market are increased competition from Express Scripts and other companies. In addition, the level of competition may become even tougher due to interest in the industry from large employers. Finally, the upward trend in the wages of skilled labor can significantly increase a company’s costs.
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The organization actively exploits marketing tools in order to extract the maximum income that the domestic market can offer it. Its financial position at the end of 2015 can be described as sufficient to invest in further growth. However, the company’s competitors, in particular, Express Scripts, are also actively increasing their financial strength. Therefore, the company’s revenue growth was 2.7% behind the growth of Express Scripts revenue, and it was 15.7% in 2015 (Porter et al., 2016). The company shows an even bigger gap in EBIDTA, which is almost 7% behind the same indicator of Express Scripts and amounts to 17.2% (Porter et al., 2016). Thus, the company should look at the steps of Express Scripts and make the necessary adjustments to its current strategy.
Despite the growing competition, dynamism, and, consequently, market uncertainty, the company maintains its leading position in the domestic market. It has a strong financial position and advanced marketing tools at its disposal. However, the competitors are taking aggressive steps, which are able to undermine CVS’s position in the market and even reduce its market share. Insurers’ preoccupation by cost reductions and growth in demand for generics indicates a transition to the stage of price competition. Thus, as part of a growth strategy, a company should consider a cost leadership strategy. In support of this strategy, CVS may also consider a backward integration strategy.
The backward integration would reduce the power of suppliers. The company would be able to establish independent production and sale of active pharmaceutical elements or specialize initially on their production and subsequent sale at lower prices. In this case, the establishment by the company of joint production of medicines with foreign, in particular, Asian companies would allow it to reduce initial capital investments and risks.
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Finally, the company must apply its information systems and marketing knowledge to find the possibility of retail sales of its products abroad. Therefore, the management can smoothly extend its sales to markets with a smaller cultural and economic gap, in particular, in the Canadian market. It can also find admirers of American-quality goods in European and Australian markets. By placing production in the Eastern markets, the management can fully exploit their enormous size for sales while reducing logistics costs. In this way, the company can use the limited capabilities of the domestic market and, at the same time, remain the leader in the industry. Now, it can significantly expand its influence through access to the global market.