Cvs: the Web Strategy

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Marketing Channels
WRITTEN GROUP CASE ASSIGNMENT

CVS: The Web Strategy

This case is about CVS, one of the biggest drugstore chains in the US. The Harvard case study was made between 1999 and 2001, while CVS was facing the major challenge of acquiring Soma.com and relaunching it as CVS.com, in order to respond to the new trend of web-based drugstores like Drugstore.com and Planet Rx. Our report will summarize the evaluation and analysis of the firm’s existing distribution channel at the time (1999), identify the problems that CVS had to face, and propose solutions to those problems (these solutions will be compared with what CVS actually did between 1999 and 2007). Thus, this audit will be divided into two main parts:

1/ Current state of the channel (1999):
-Structure
-Members
-Allocation of channel functions
-Flows
-Ability to meet target customer segments’ demands for service outputs -Power and conflict characteristics

2/ Recommendations and actual evolution of CVS since 1999:
1/ STATE OF THE CHANNEL IN 1999:
Structure and Members:
Drugstores are very old retail institutions in the United States. It can be tracked to the mid-1700s. Pharmaceutical wholesalers were first integrated backward and forward. In the nineteenth century, pharmacies that were independent of physicians arose. Wholesalers were no longer integrated backward or forward, they were local and there were lots of them. Independent drugstores gave way to chains during the 1980s and 90s. By 1999 chains controlled 69% of the $115 billion in drugstore revenues (CVS was ranked second right after Walgreen). At first the larger chains (CVS, Walgreen, Rite Aid and Eckerd) pursued strategies of regional dominance, which led progressively to a contest for national presence. The market for drugstore products was four times the combined sales of books and CDs. In 1999, the typical chain drugstore was about 9000 square feet, serving homes in a radius of five minutes driving time. The average store had $4.6 million in annual sales, and prescription drugs made up 48% of its revenues. It sold, in addition, a wide range of health, beauty and household goods. The $115 billion market was split evenly between drugs for chronic conditions and those for acute conditions. The use of both chronic and acute prescription drugs was concentrated among older Americans. The functioning of the distribution channel for drugs is quite complicated due to the implication of several members. In the US, the marketing of drugs is regulated by federal and state agencies, with the effect that drugs must be prescribed by licensed physicians and dispensed by licensed retailers. Besides that, the costs of personal and family medical problems were borne mainly by employers as a benefit of employment or a retirement plan, or by trade unions as a benefit of membership. The management of these costs is outsourced by employers to one or more Managed Care Organizations (MCOs). Employers collected fixed monthly payments from employees, added contributions of their own, and used these funds to pay premiums to MCOs to cover the medical costs of families of employees and union members. These MCOs competed for employers business, so they had to reduce aggregate health costs and therefore the premiums charged. To do so, they turned to Pharmacy Benefit Managers (PBMs) in the 90s, to manage drug prescribing and dispensing. By the end of 2000, PBMs would handle 89% of all prescriptions in the United States. MCOs judged the competing PBMs’ performances by how well they controlled drug costs and improved the quality of patient care. PBMs and MCOs became active managers of medical problem-solving by publishing formularies, which were lists of approved drugs on which they had negotiated favorable prices with manufacturers. They often required patients to use lower cost generics instead of branded drugs, or buy chronic medications by direct mail rather than at pharmacies. This rationalization...
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