CVS Pharmacy Key External Factors Analysis

Brief Company Description

The Consumer Value Store (CVS) pharmacy is one of the largest publicly owned pharmaceutical stores in United States based in Woonsocket, Rhode Island with the company headquarters in Nashville Tennessee (CVS Pharmacy, 2016). The drug giant was founded in 1963, and it entered into a merger with Caremark in 2007.  The company offers its operations through three major business segments of corporate, pharmacy services and retail/LTC. The pharmacy services management caters for the insurance providers, employers, employee groups, sponsors of health benefits plans, unions and managed care organizations. The corporate segment of the company offers support to the operations of the company through its administrative and management services.

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Brief Analysis of the Pharmaceutical Industry

            The drugs stores and pharmacies industry has experienced a continued growth despite the negative impacts of the regulatory framework initiated by the federal government (Khanna, 2012). For instance, the reimburse rates resulted to changes in the prices of the generic drugs, which led to the grappling of the pharmacies and drug stores industry in the country. However, the next five years will witness an increase in the number of individuals under the health insurance owing to the healthcare reforms introduced by the Obama administration. This will result in the increase in the volumes of sales in pharmaceuticals, thus increase revenue for the players in the industry (Sorenson, Drummond, & Burns, 2013).

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            Moreover, the pharmaceutical and drug stores industry has become multi-faced, with the players selling other products in addition to medicine. The new products that have been added to medicine include confectionery, groceries and cosmetics. In 2010, the CVC pharmacy total sales in drugs and pharmaceuticals accounted for 19% of the market share in the country. In 2011, the company became the second leading drug store in sales, generating about 107 billion dollars in drug sales.

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The Current Conditions in CVS Pharmacy’s Industry

            CVS pharmacy has experienced strong growth since its merger with Caremark in 2007 (Soni, 2015). The acquisition has enabled the company to rival its major competitor the Walgreens and Rite Aid drug store, even in areas such as California that proved difficult to enter. The large number of stores has created a loop and leverage over its customers. The fact that the company stores are available within proximity of five miles to its customers makes it a drug store of many employers and third party payer, who would lose their customers if they were to deal with other drug stores in the country. Moreover, the company has beaten competition of other major players in the market by allowing its customers to fill prescriptions through the online mail services. This has allowed the company to have the highest same-store purchases in the country.

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            The current CVS pharmaceutical industry is facing stiff competition owing to other big pharmaceutical companies such as Walgreens and Rite Aid drug store. Although CVS has managed to counter the competition of Walgreens, its major competitor, the company still lags behind it is services segment. Walgreens has been able to outdo CVS through its effective pharmaceutical benefit management services. According to (Redman, 2015), CVS recorded the biggest loss in 2010, losing $5 billion contracts in its services segment in the industry. The loss was attributed mainly to excellent service by its competitors, poor service and pricing by CVS PBM model.

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            In response, CVS has embarked on rebranding to enable the company achieve its strategic goals and objectives. The company has almost its drug stores located within those of Walgreens and Rite Aid drug store in a bit to attract unhappy customers. The strategy offer a way the company can drive competition and gain new dissatisfied customers from its competitors.

            However, in the long run, the pharmaceutical industry is expected to receive a major boost from the tailwinds. According to (Ortman, Velkoff, & Hogan, 2014) individuals aged 65 and above expected to grow to 65% by 2025 thus expected to offer even favorable conditions.  This population segment are among the highest consumers of the prescription drugs, consuming almost three times the drugs consumed by the younger individuals in the country. Moreover, the healthcare reforms implemented in 2010 will increase population under the medical insurance by over 32 million by 2019. This will increase the CVS customer base under the prescription drugs by over 40 million. Also, the expansion of the industry into the generics will lead to loses of patents among the major branded drugs such as the Lipitor, which will effectively increase the bottom line of major pharmaceuticals such as CVC and its PBM services.

CVS Pharmacy PESTEL Framework

Political

The CVS pharmacy is an active participant in the political causes as a way of enhancing its public policy and influencing any legislation processes that have direct impact on the company bottom line. The federal government has increased its focus on healthcare authorities (Toth, 2010). The healthcare reforms introduced in 2010 has increased focus across the healthcare sector, which major targets being creation of savings through reduction of pricing of prescription drugs, and an increased need for more freedom in drug selection and pharmaceutical services.

Economic

The changes in the economy have had an impact on the consumer purchasing power. Over the past several years, the consumer shopping habits have changed, with some shopping habits producing purchasing impacts on the over the counter (OTC) and prescription drugs. The purchases made by the income earners affect the CVS sales since most of this customer segment purchases their drugs at home. However, the population segment that is health conscious makes their drug purchases from reputed stores. The CVC pharmacy must develop strategies of maintaining its customer base.

Social

The shift in the population demographics has created more opportunities and threats to the company. The increase in the number of elderly offers a huge market opportunity for the company. Moreover, there is an increase in the number of obese individuals among the youth and the elderly. Obesity is associated with many health risks, such as development of other diseases. Consequently these population segments have become more sensitive to information. The company will witness an increase in the number caregivers and patients who seek for information in their online stores. The company must exploit these opportunities to make more sales.

Technology

The increased innovation has placed CVS pharmacy at an advantage, where the company invests and uses latest technology. The use of technology has allowed the company to further its strategic goals and objectives through creation of brand, production of high quality products and thus consequently increasing its profitability. The company has active online platforms, with a well maintained website with excellent customer care that offers services such as induction of customers on how to use its products and introducing them to new products whenever they are available.

Ecological

There has been greater focus on the need for multinational companies to focus their activities in protecting the environment. Consequently, many multinational have developed strategies align their businesses towards promotional of environmental protection (Naughton, 2014). The CVC must incorporate these plans into their corporate social responsibility, marketing plans and product developments. Indeed CVC focus has been on sustainable operations (CVS Health, 2015). The company has tied its growth strategy with focus of creation of operational efficiency and reduction of environmental degradation.

Legal

The U.S market offer many legislative and regulatory restrictions to the operations of CVC pharmacy. There is a growth in the litigation culture in the U.S, which has stretched the legislative boundaries. Many patients are now demanding more control of their healthcare programs. There is need for VCS to focus on quality of its products and formula that are designed for foreign markets.

The Five-Forces Analysis

            In order to analyze the current market situation of the CVS Company, the Five-Forces model will be used. According to Porter, the nature of competition inherent in an industry is determined by five forces. These forces include the potential of entry new market players, rivalry among the market players, potential entry of new substitute products and the bargaining powers of suppliers and consumers (David, 2010, pg. 74).

Market Rivalry

The pharmaceutical industry is very competitive with Walgreens and CVS being the major players in the drug market (Redman, 2015). The other competitor of CVS is Wal-Mart and Rite Aid. However, the major market rival for CVS remains Walgreens, with Rite Aid taking a small market share to pose any threat to CVS. CVS has witnessed remarkable growth in the market over the last five years, and it shows no signs of ceding ground to Walgreens. However, owing to the high market cap of Wal-Mart, which deals also with groceries, the retail market players like Walgreens, Rite Aid, including CVS must set their market prices in accordance to those of Wal-Mart if they are to remain competitive.

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Entry into the Market

The entry into the drug retain market is expensive and would require a substantial investment in terms human capital, real estate and the product inventory. Although the development of internet based prescription reduced cost of entry into the market, the strategy is at its initial stages and its impacts are yet to be felt.

Threat of Substitute Products

The Walgreens, CVS and Rite Aid offer the same products and services in the pharmaceutical industry. However, the threat of consumers leaving CVS to its competitors is very high, leaving the company vulnerable to the consumer preferences and tastes. What create competitive edge among these three companies are the levels of services they offer and the customer convenience.

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Bargaining Power of Consumers

The pharmaceutical industry offers small profit margin in the prescription during than in the general merchandise (Redman, 2015). The consumers will always compare prices of CVS with those of its competitors in the market players and would always settle for the lowest price. Because these companies offer many similar products, it is a question of the store that offers the lowest market price.

Bargaining Powers of Suppliers

The major suppliers of pharmacies in the drug retail are major manufacturers such as Eli Lilly. Suppliers in the market enjoy some bargaining power despite price sensitive market, owing to the fact that their customers such as CVS and Walgreens incur huge costs if they do not do business. However, the supplier bargaining power remains low in the industry.

CVS Strategic Group

            The strategic group refers to companies that offer similar products (Short, Ketchen, Palmer, & Hult, 2006). The CVS strategic group includes Walgreen, Rite Aid and Wal-Mart. However, Walgreens and Wal-Mart remain the major players that offer stiff competition to CVS Company.

Summary of CVS Threats and Opportunities

            The major threats to CVS remain to be the stiff competition in the market from other companies with sizeable market share such as Walgreens and Wal-Mart. In addition, the company incurs huge revenue loss associated with the importation of drugs from Canada. However, the increasingly aging American population offers opportunities for market growth. In addition, the aggressive acquisitions that CVS has undertaken recently have increased its stores, offering more opportunities to reach wider customer base.

How Current CVS Pharmacy’s Strategy Matches the Competitive Conditions

            The CVS Company has embarked on massive rebranding to increase its revenues in the market. The strategy matches the competitive competitions since these rebranding efforts will be directed towards its underperforming Pharmacy Benefit Management, an area where Walgreens enjoys a competitive edge of CVS in the market. Given that CVS has been witnessing continuous growth in retail drug market, offering stiff competition to Walgreens, the company must address its major weaknesses, which are the underperforming services under its PBM. Therefore its strategies match the competitive conditions in the market.

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