Porter’s Five Forces
The current market is divided between a few powerful competitors that can relatively easily attract customers from one another as the switching costs are low and practical absence of product differentiation contributes to the easy loss of market share. Threat of Mobility
While the new entrants only need a relatively simple GUI and a supplier in order to enter the market, the federal and local regulations will require significant investments prior to any positive cash flow. Again, the differentiation is practically non-existent and the new entrants will have to compete with financially established enterprises capitalizing on competitive advantage. Supplier power
In order to sustain the market share in this highly competitive industry the pharmacies have to establish and maintain strong working relationships with PBMs that have power to divest particular clients from a pharmacy by denying reimbursement privileges to their customers. Buyer Power
It is not hard to obtain the same drugs from different sources so the customer loyalty is virtually non-existent and the pharmacies have to try extremely hard to sustain their consumer base. Threats of substitutes
There are very few alternatives to drugs. The alternatives are practically limited to traditional medicine. Therefore, the threat of substitute is weak. Conclusion: CVS is in a favorable position because it already controls the large share of the market and its brand name is known to the populace. Therefore, it is crucial for the company to protect its market share and pursue the aggressive expansion policy to secure even large customer base.
CVS was able to secure such a large market share in part because of its strong financial base. Since the pharmaceutical industry is not strongly correlated with the market (average beta is 0.2) the slowing economy does not affect much CVS financial performance. The firm employs about 190,000 people and boasts the 20 million strong consumer base with projected growth 3.5 million within the next three years. The firm’s Price-to-Earnings Ratio (P/E) of about 21 is higher than P/Es of its primary competitors. Hence, CVS reported 21 bps increase and the total gain of $68 million in the last year. At the same time, the forward earning on the CVS stock yielded over 9.3% allowing the firm easily meets its dividend obligations. The EPS proves that the stock has been performing well at over 30%. The revenue has been growing at 15.7% per year during the last three years compare to 14.2% revenue growth within the industry. This stock's forward earnings yield of 7.41% is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. This is normal compared with the earnings yields of other stocks in the industry, and is healthy in absolute terms. Finally, most companies in the industry have generated very low returns on assets over the past five years. CVS has posted results that are about average for the industry, though its ROA over the most recent 12 months was very high. Porter’s Generic Strategies
Provided the CVS position in the market, it is clearly pursuing the low-cost leadership strategy. The company offers the same goods or, sometimes, a wider product assortment at the lower prices than its competitors. The firm’s prescription drugs’ sales constituted 68% of total sales, 8% ahead of its major competition Walgreen. This number reflects a strong relationship with PBMs that are attracted by the company’s lower prices than in the industry. However, the element of differentiation is also present such as money back guarantee on beauty products, stores conveniently open 24-hours and exceptional customer service. The company capitalizes on its current broad customer base to provide those services and differentiate itself from a tight competition. Also, traditionally, CVS stores...
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