The Cvs Web Strategy: an Evaluation of the Challenges and Advantages
THE CVS WEB STRATEGY: INTEGRATION OF AN ONLINE PHARMACY THE CVS WEB STRATEGY: AN EVALUATION OF THE CHALLENGES AND ADVANTAGES OF INTEGRATING AN ONLINE PHARMACY By Leah Bouk Wingate University 1 THE CVS WEB STRATEGY ABSTRACT This paper discusses the considerations surrounding CVS Pharmacy’s initiative to become a part of the virtual drugstore industry. Specifically, the organizational structure, fundamental design of the autonomous innovation, and strategic positioning of CVS. com were considered in evaluating the drug store’s ability to react to the disruptive technology.
This paper serves to evaluate the effective initiatives, problems, and possible solutions to the considerations outlined above. As a result of this analysis, one can deduce that acquiring the web company Soma. com, instead of creating its own online component, was a successful strategy for the autonomous innovation. Shortfalls include not executing a strategy to circumvent the MerckMedco mail order dilemma. Ultimately, a recommendation is that CVS. com differentiate itself by personalizing customer home pages and by fostering relationships with prescribing healthcare providers. THE CVS WEB STRATEGY TABLE OF CONTENTS Abstract……………………………………………………………………………. 2 Introduction……………………………………………………………………….. 4 Landscape…………………………………………………………………………5 Organizational Structure……………………………………………. ……………. 6 Autonomous Innovation…………………………………………………………… 8 Strategic Positioning………………………………………………………………. 9 Summary………………………………………………………………………….. 10 References…………………………………………………………………………11 3 THE CVS WEB STRATEGY THE CVS WEB STRATEGY: AN EVALUATION OF THE INTEGRATION OF AN ONLINE PHARMACY INTRODUCTION
Strict regulation throughout the healthcare and pharmaceutical industries arguably slows the advancement in technological innovation, especially when compared to the computer and automobile industries. Therefore, innovation in a multiproduct, integrated and hierarchical organization, like CVS Pharmacy, can be slow moving or non-existent. Nevertheless, the healthcare industry is a money-making giant and companies like CVS, which was rated number 47 on CNN’s Most Profitable Companies in 2011, help justify this point (cnn. oney. com). This paper discusses the considerations surrounding CVS Pharmacy’s initiative to cope with the disruptive technology created by the virtual drugstore industry. Specifically, I will discuss the organizational structure by virtue of the autonomous innovation and the strategic positioning of CVS. com. This paper serves to evaluate the effective initiatives, problems and possible solutions to the issues surrounding the onboarding of CVS. com. 4 THE CVS WEB STRATEGY LANDSCAPE
It is important to understand the complexity of the healthcare and pharmaceutical industry at the time the CVS drugstore chain was exploring the idea of acquiring an online option for its customers in 1999. The process of diagnosing, prescribing, dispensing and delivery was, and still is, extremely regulated. As an example, only licensed physicians have the capability to prescribe medications and only licensed retailers are able to dispense them. In addition, Pharmacy Benefit Managers (PBMs) have already monopolized the management of drug prescribing and dispensing by1999.
PBMs put together formularies, through negotiations with the pharmaceutical companies, the retail pharmacies and the employers’ Managed Care Organization (MCO), that mandated which drug could be prescribed for a certain disease. Furthermore, many PBMs require that all 30 day supply prescriptions for chronic diseases be dispensed through mail order and many of the PBMs acquire their own distribution centers to provide this service. Thus, the Managed Care Organizations, physicians, retail pharmacies and the patient all rely on PBMs to ensure the lowest cost and best care for all involved (Reinke, 2009).
Like PBMs, retail pharmacies also enjoy the market power they generate. The paper CVS: The Web Strategy describes the impact of the retail pharmacy by relating that two thirds of all prescriptions filled at retail were filled by drugstores in 1999, which made up a 100 billion dollar market In 1998, CVS was second to Walgreen bringing in 15. 2 billion dollars (CVS: The Web Strategy, 2001, p. 11). 5 THE CVS WEB STRATEGY “Pure-play” online drugstores and non-prescription health care sites made their debut in the first quarter of 1999 and CVS followed suit by purchasing Soma. om to leverage a “clicks and mortar” operation that would combine a physical presence with a web presence. ORGANIZATIONAL STRUCTURE Although it may seem atypical of a multi-product, integrated, hierarchical firm to look externally for innovation, the relationship was a win-win for both CVS pharmacy and the virtual firm Soma. com. This idea is revealed in the essay CVS: The Web Strategy, which states, “CVS hoped to offer CVS. com the benefits of its buying power, advertising strength, brand name and access to 280 million prescriptions, while retaining the entrepreneurial spirit of the organization” (CVS: The Web Strategy, 2001, p. ). After thorough examination of both options, CVS decided to acquire the start-up company, since it would be quick to implement (only 3 to 4 months), it would bring intangible assets, and it shared the culture and views of CVS. The intangible tacit knowledge that Soma. com would bring to CVS included experienced employees with mail order prescription backgrounds and an understanding of the west coast market, since CVS stores were concentrated in the northeast and Soma. com’s headquarters were on the west coast.
This national coverage provided for a larger scope that the online store would be able to take advantage of. Moreover, CVS was able to acquire 100% ownership of soma. com, which would allow for vertical integration within CVS. Merging with CVS made sense to soma. com as well. The virtual company was able to benefit from the economies of scale, as the cost of the web division could be spread across increasing units of production or in serving CVS’s growing customer base. Teece describes the benefit of an alliance between virtual and competent manufactures by saying that “if [virtual 6 THE CVS WEB STRATEGY irms] do indeed establish a strong alliance with a competent manufacturer, they may also have the capacity to be first to market, despite the absence of the requisite internal capabilities” (Teece, 2009, p. 59). Both soma. com and the PBMs, with which CVS works to get reimbursed for medications, would benefit from becoming a part, or affiliated with, CVS due to the company’s strong branding. John M. Gallaugher iterates this point in saying that “a firm’s brand is the symbolic embodiment of all the information connected with a product or service, and a strong brand can also be an exceptionally powerful resource for competitive advantage. Adding a website component will also enhance an already prominent brand. “Tech can play a critical role in rapidly and cost-effectively strengthening a brand” (Gallaugher, 2008, p. 6). While there were many advantages for CVS in acquiring Soma. com, CVS experienced the disadvantages of not owning the complementary asset, Merck-Medco, who refused to reimburse CVS. com for 30 day supply prescriptions. The issue surrounded the fact that MerckMedco already provided a mail order delivery for 30 day supply prescriptions and was not going to relinquish this opportunity to CVS. com.
As previously outlined, PBMs were an integral complementary asset to the prescription drug industry in 1999 and served a large majority of CVS’s customers. Teece reveals that “when the services of complementary assets are required for new technology to yield value to the consumer, they can play an important role in the competitive advantage equation” (Teece, 2009, p25). Furthermore, Teece relates that “competitive advantage can be gained or lost on how expertly the strategy for gaining access is executed” (Teece, 2009, p25). Further research reveals that in shortly after CVS. om was launched, Merck-Medco and CVS formed an alliance so that CVS customers could purchase their prescriptions on the Merck-Medco site (Conlin, 1999). 7 THE CVS WEB STRATEGY AUTONOMOUS INNOVATION Since CVS was a highly integrated company, incorporating the online pharmacy throughout the rest of the company, or systemic innovation, would be extremely costly and might discourage further innovation. This is what happened to General Motors when the automobile industry switched from drum brakes to disc brakes. Because GM had invested a great deal of time and money to produce drum brakes, it was slow to move towards producing disc brakes.
GM’s competitors, however, who outsourced and relied on outside relationships were forced to make the switch and gained a better position in the industry (Teece, 2003, p. 192). Thus, CVS was smart to opt for an autonomous organizational approach by creating a separate website team managed by Soma. com. This team could react to the changing environment quickly and make recommendations against initiatives that would be time consuming and costly, as they did when the Vice President of Marketing for CVS, Helena Foulkes, argued that all products sold in stores should be available for purchase on the website.
Foulkes was focused on learning about the customer through their online activities. Large, integrated companies also tend to focus on customers for innovation, which is not always the best angle. The paper, CVS: The Web Strategy, reveals that the CVS merchandising department spent a lot of time and energy on the internal and external benchmarks, relying on customer activities when making decisions about marketing, promotion, pricing and merchandising. They would then send this codified information to the CVS. com online team (CVS: The Web Strategy, 2011, p. ). Clayton Christenson, an expert in the field of technological innovation, discusses the problem that arises when too much emphasis is placed on the customer. Christenson relates that “the highest-performing companies…have well developed systems for killing ideas that their customers don’t want. As a result, these companies find it very 8 THE CVS WEB STRATEGY difficult to invest adequate resources in disruptive technologies—lower-margin opportunities that their customers don’t want—until their customers want them” (Christensen, 1997). STRATEGIC POSITIONING
As previously outlined, the initiative to integrate an online pharmacy was not a new concept to the industry. Therefore, it was important that CVS. com respond to the disruptive technology by differentiating itself from the other online drugstores. CVS. com would offer online patient counseling through a virtual pharmacist, which was available 24 hours a day 7 days a week. Tom Pigott, founder of Soma. com relates about the significance of providing this service, “we had pharmacists, which created an inherent barrier to entry. Anyone can start a vitamin shop, all you need are a ebsite and a supplier” (CVS: The Web Strategy, 2011, p. 6). Another feature of CVS. com that set it apart was the “clicks and mortar” delivery options. This term refers to an operation that combines a physical presence with a web presence. Helena Foulkes describes a personal testimony of the convenience of the “clicks and mortar” operation. “For someone like me who works and has children and doesn’t think about getting to a store till 11’o clock at night, it would be extremely convenient to hop online and place an order and pick up that much-needed prescription on the way home” (CVS: The Web Strategy, 2011, p. ). Despite the attempts of CVS. com to differentiate from other online pharmacies, the company’s myopic views were a source of several missed opportunities to leverage competitive advantage. First, CVS. com should have better integrated the Xtra! Frequent Shopper Program, in which customers gained points that turned in rewards, so that consumers could benefit from prescriptions ordered online. Second, CVS. com could have created a more personalized home 9 THE CVS WEB STRATEGY age that, not only stored a customer’s order history, but provided information about side effects and related diseases when a customer entered a prescription. The secure personal homepage could potentially even keep track of doctor’s appointments for the customer, creating a reminder that would be emailed to the customer a day before the visit. The more data CVS. com could capture about their customers, the stronger the switching cost would be. Switching costs exist when consumers incur an expense, money or time, to move from one product or service to another (Gallaugher, 2008, p. ). Thomas Reinke reveals this concept in a peer reviewed journal explaining the reason why companies do not want to switch to other PBMs, “employers are reluctant to switch vendors because of the work and cost involved and-more importantly-because of the hassle it creates for employees in learning the rules and procedures of a new company” (Reinke, 2009, p. 5). Thus, the more capabilities the customer has on one website, the more data they will enter and the least likely they will be willing to switch to another pharmacy.
Finally, competitive advantage could be gained by marketing to physicians who use electronic prescription relay. CVS. com could create an interface just for physicians, easier to use than other systems and with added capabilities, such as pop-up restrictions from a patient’s insurance company or current promotions at the point a prescription was entered. Again, if physicians found this service useful, they would not want to learn a new system, sustaining the competitive advantage of CVS. com. SUMMARY
The issues surrounding the quest of CVS to successfully respond to the disruptive technology in a way that would create a sustainable competitive advantage in the drug store industry are examined. By evaluating the organizational structure of CVS. com, one can deduce 10 THE CVS WEB STRATEGY that fully acquiring the web company Soma. com, instead of creating its own online component, was a successful strategy in autonomous innovation that would benefit the company in the long run. In contrast, not executing a strategy to circumvent the Merck-Medco mail order dilemma may have contributed to CVS. com’s slow start in September of 1999.
Because the PBM will likely not agree to be acquired by CVS, the best solution to this problem is to form an alliance with Merck-Medco, especially considering the market power of both CVS and Merck-Medco. Ultimately, in order to sustain a competitive advantage against companies who offer similar services, CVS. com must differentiate itself by capitalizing on the ability to personalize customer home pages and by fostering relationships with prescribing healthcare providers. 11 THE CVS WEB STRATEGY REFERENCES Christensen, C. M. (1997). The innovator’s dilemma: when new technologies cause great firms to fail.
Boston, Mass. : Harvard Business School Press. Conlin, R. (1999, October 6). CVS To Fill Online Orders For Merck-Medco. E-Commerce Times: E-Business Means Business. Retrieved June 12, 2012, from http://www. ecommercetimes. com/story/1380. html Fortune 500 2011: Top Performers – Most Profitable Companies: Profits. (n. d. ). CNNMoney Business, financial and personal finance news. Retrieved June 12, 2012, from http://money. cnn. com/magazines/fortune/fortune500/2011/performers/companies/profits/ Reinke, T. (2009, October). Large PBMs Transform Old Business Models. Managed Care, 1-4.
Shah, A. (1999). CVS: The Web Strategy. Harvard Business School Publishing, 1(1), 1-17. Retrieved June 5, 2012, from the Harvard Business School Publishing database. Teece, D. J. , & Chesbrough, H. W. (2003). When is Virtual Virtuous? Organizing for Innovation. Essays in technology management and policy (pp. 189-197). River Edge: World Scientific Publishing Co. Teece, D. J. (2009). Governance Modes and Technological Innovation. Managing intellectual capital: organizational, strategic, and policy dimensions (p. 64). Oxford: Oxford University Press. (Original work published 2000) 12