Integrative Case 3.1:
Corporate Strategy at Cardinal Health
Discussion question 1: What are the benefits and costs of Cardinal Health’s product-related diversification strategy? Firstly, Walter started implementing its product-related strategy on time, in 1996, when FoxMeyer went bankrupt. If, the company was not diversified and dependent only on one product division, it might have ended up as FoxMeyer. Also, the drug distribution division has been forced to lower its prices by health care providers, patients, insurance companies and HMOs. Moreover, related costs are increasing, reducing profit margins of the company. This division is not as profitable as other three divisions, generating less than 50% of the company’s total profits, even though 80% of Cardinal Health’s revenue comes from this division. On the other hand, other three product divisions are much more profitable and have higher growth rates. Due to its diversification strategy, today, it has very healthy returns on sales and on assets, twice as much as those of its rivals, McKesson and AmeriSourceBergen. Cardinal Health’s product divisions are related, therefore, each division can share its resources and capabilities with the other divisions. For example, all the divisions can benefit from each division’s R&D department. This would decrease costs in almost all departments including R&D, marketing and distribution, benefitting from economies of scale. In addition, one division’s rare, hard to imitate, valuable and unique resources can also be used for the other divisions. In other words, the diversification strategy enables the company to achieve enhanced competitiveness beyond what can be achieved by operating in more than one product divisions separately - 2+2=5. However, marginal economic benefits declines and marginal bureaucratic costs increase as the company becomes more diversified. Marginal bureaucratic costs (MBC) are always a worry for largely diversified companies such as Cardinal...
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