A Strategic Management Case Study Shane Theriault, Pierre-Olivier Lachance, Garik Teriault, Sierra Daigle Your Logo

Overview Company Overview Company Timeline New Mission and Vision Existing Mission and Vision New Mission and Vision External Assessment Industry analysis Opportunities and threats CPM Matrix EFE Matrix Internal Assessment Organizational Structure Financial Condition Divisional Analysis Strengths and weaknesses IFE Matrix Strategy Formulation SWOT Matrix Space Matrix IE Matrix Grand Strategy Matrix Matrix Analysis QSPM Matrix Strategic Plan for the Future Objectives Strategies Implementation Issues EPS/EBIT Projected financials Evaluation Balanced Scorecard CVS Caremark 2

Company Timeline Melville had been founded in 1892 by shoe supplier Frank Melville. Melville Corporation was incorporated in1922. First Consumer Value Store (CVS) opens in Lowell, Massachusetts in 1963. The CVS name was used for the first time in 1964 with 17 locations. Throughout the following decades they have purchased many other pharmacies. 1972 - Clinton Drug and Discount stores – 84 locations in Indiana and Midwest. 1977 - New Jersey-based Mack Drug chain – 36 locations in New Jersey. 1990 - Peoples Drug – 490 Locations throughout Mid-Atlantic 1997 – Revco Chains – 2500 locations in Ohio, Mid-Atlantic, and Southeast US. Sales reached $1 billion in 1985 In 1993, formerly traded as MVL on the New York Stock Exchange, the company now trades as CVS. In 1995 and 1996, Melville Corp. sold off the company’s other segments to focus on CVS.

Company Timeline In1999, CVS launched their CVS ProCare Pharmacy for complex drug therapies. In 1999, CVS acquired Soma.com, the first online pharmacy, and renamed it CVS.com. In 2004, CVS purchased 1,268 Eckerd drug stores and Eckerd Health Services, a PBM/mail-order pharmacy business, from J. C. Penney. as CVS. On July 13, 2006, CVS announced that it had entered into a definitive agreement to acquire Minneapolis-based MinuteClinic. On November 1, 2006, CVS announced that it was entering into a purchase agreement with Nashville-based Caremark Rx Inc., a pharmacy benefits manager. The new company is called CVS Caremark Corporation.

Current Vision & Mission Statement Vision statement: We strive to improve the quality of human life. Mission Statement: We provide expert care and innovative solutions in pharmacy and health care that are effective and easy for our customers.

Revised Vision Statement Our purpose is to guide people along the path of better health

Revised Mission Statement At CVS Caremark we strive to improve the every day quality of human life by providing the highest quality pharmaceuticals and consumer products (2) in the United States (3). With the help of our valued employees (9) and advancing technology (4), we will provide the premier shopping experience to all of our customers, ranging from child to adult (1). Our goal is to reward our customers with the best prices and best service possible(7). CVS will continue to grow and improve through investment and expansion opportunities (5) while always maintaining the highest ethical and moral standards (6). Most importantly, we will continue to care and support the communities and the environment (8) that we are a part of.

External Audit

Industry Market Analysis Share of 2011 Prescriptions Revenues Market shares are shown in percent. 2010 2011 % % CVS Caremark Corporations 20.1 20.7 Walgreen Company 16.2 16.5 Rite Aid Corporation 6.2 6.3 Express Scripts, Inc. 5.1 4.8   2010-2011 Prescriptions Revenues (Billions) 2010 2011 CVS Caremark Corporations 55.7 56.6 Walgreen Company 44.9 45.1 Rite Aid Corporation 17.1 17.1 Express Scripts, Inc. 13.2 13.9  

Industry Market Analysis

Opportunities & Threats

Opportunities Organic food industry has rebounded from the recession quickly with growth rates back above 6% in 2011, bringing annual US sales above $26 Billion. 1,0154,000 people will reach the age of 65 in the coming three years 71.7% of Americans report having internet access in their home. Affordable Care Act passed in 2010 will extend medical coverage to over 45 million Americans currently without coverage, starting in 2014. In 2011, patent drugs with annual sales of $12 Billion have expired. Additional patent expirations is expected to increase this number to above $30 Million in the coming year. In 2008, the AAMC projected a shortage of 124 000 full-time equivalent physicians by 2025. Medicare drug spending is expended to increase by 8.5% annually over the next decade.

Threats Unemployment is at 8.5% R&D costs are high, on average between $4 billion to $11 billion per drug. Threat of large distributors such as, Target who already have over 1031 locations, entering the pharmaceutical market increasing competition Walgreens increased prescriptions refills by 5.3% in the last year. Increase demand for environmentally safe products Legalization of drug importation would lead to a national saving of 1.7 billion. Future government policy changes to regulation 48 million American adults did not fill prescription in 2010

EFE External Factor Evaluation Matrix (EFE) Opportunities Weight   External Factor Evaluation Matrix (EFE) Opportunities Weight Rating Weighted Score 1. Organic food industry has rebounded from the recession quickly with growth rates back above 6% in 2011, bringing annual US sales above $26 Billion. 0.04 1 2. 1,0154,000 people will reach the age of 65 in the coming three years 0.09 3 0.27 3. 71.7% of Americans report having internet access in their home. 0.07 0.21 4. Affordable Care Act passed in 2010 will extend medical coverage to over 45 million Americans currently without coverage, starting in 2014. 5. In 2011, patent drugs with annual sales of $12 Billion have expired. Addition patent expirations is expected to increase this number to above $30 Million in the coming year. 2 0.18 6. In 2008, the AAMC projected a shortage of 124 000 full-time equivalent physicians by 2025. 0.08 4 0.32 7. Medicare drug spending is expended to increase by 8.5% annually over the next decade. 0.06 Threats Unemployment is at 8.5% 0.05 0.10 R&D costs become high, on average between $4 billion to $11 billion per drug. 0.30 Threat of large distributors such as, Target who already have over 1031 locations, entering the pharmaceutical market increasing competition Walgreens increased prescriptions refills by 5.3% in the last year. Increase demand for environmentally safe products Legalization of drug importation would lead to a national saving of 1.7 billion. Future government policy changes to regulation 8. 48 million American adults did not fill prescription in 2010 0.15 TOTALS 1.08 2.83

CPM Competitive Profile Matrix (CPM) CVS Walgreen Rite Aide   CVS Walgreen Rite Aide Critical Success Factors Weight Rating Score Advertising 0.13 3 0.39 4 0.52 1 Market Penetration 0.11 0.33 0.44 2 0.22 Customer Service 0.10 0.20 0.30 Store Locations 0.14 0.42 0.56 0.28 Financial Profit 0.09 0.27 0.36 Customer Loyalty 0.40 Market Share 0.08 0.32 0.24 Product Quality 0.05 0.15 Top Management 0.07 0.21 Totals 1.00 3.13 3.67 1.92

Internal Audit

Organizational Structure

Divisional Analysis Netflix recognizes three segments Pharmacy Services Retail Pharmacy Corporate (Please note that this segment is not acknowledged in the book’s case study)

Strengths We operated 657 MinuteClinics in 25 states and the District of Columbia of which 648 were located within CVS/pharmacy stores Our proprietary loyalty card program, ExtraCare ® , has well over 68 million active cardholders, making it one of the largest and most successful retail loyalty card programs in the country CVS carries over 4,400 CVS/pharmacy and proprietary brand products, Strong service assortments including Prescription management systems, Mail pharmacy, Minute clinic, eye care, discounted drugs agreements $48 million in charitable contributions in 2011 cvs.com attracted at least 26 million visitors annually by 2008 21st on the Fortune 500's list of largest corporation in US 4.6 Billion in free cash flow in 2011, a 39% increase over 2010's number

Weaknesses CVS has a smaller Gross Margin with 21.01% compared to its competitors: Rite Aid 26.54%; Walgreens 28.36%; Walmart 25.26% 8+ major legal cases against CVS in the last decade. Near all revenues are derived from the United State Market CVS has a goodwill value of 26458000 Fewer Physical(7,300) locations then next biggest competitor Walgreens who has 8,582 657.8 million prescriptions filled versus 819 millions by Walgreens. CVS Caremark has a American Customer Service Index of 73

IFE

Financial Information

Ratio analysis Growth Rate Percent CVS Caremark Walgreen Rite Aid Net Income (YTD vs YTD) Sales (5-Year Annual Avg.) 95835.2 63147 25534 Net Income (5-Year Annual Avg.) 3285.2 2201.8 (1085) Dividends (5-Year Annual Avg.) Profit Margin Percent Gross Margin 19 28 27 Pre-Tax Margin 5 6 2 Net Profit Margin 3.2 4 5Yr Gross Margin (5-Year Avg.) 20.57 28.4 Liquidity Ratios Debt/Equity Ratio .7 .85 4.42 Current Ratio 1.56 1.52 1.82 Quick Ratio .71 .53 .52

Company Analysis

Space Matrix Possible Strategies: Backward, forward, horizontal integration Market penetration Market development Product development Diversification

Grand Strategy Matrix Possible Strategies: Backward, forward, horizontal integration Market penetration Market development Product development Diversification

SWOT Matrix

Matrix Analysis

Possible Strategies Backward & Forward integration Not feasible Short supply and delivery chain Market penetration SO2 - Increase marketing of Minute Clinics services by 15% (S1, S4, O2, O4, O6, O7) ST1 - Exclusivity contract with Target to install MinuteClinics and prescription pharmacy (S1, S4, O3, O4, O8) Market development WT - Gain locations and expand internationally (W3, W5, W6, T3, T4, T6) Product development SO1 - Increase number of proprietary brand products by 20% (S3, S6, OS3, O5, O7) Diversification WT – Take advantage of increase in environmental conversation. (W2, W7, T5, T7)

QSPM

QSPM

Strategy formulation

Strategy Grow to Win

3 Year Goal Annual Objectives First Year - Increase marketing expense by 50% in 2012 - Acquire Rite Aid Second Year - Increase marketing expense by 25% - Renovate a 1/3rd of Rite Aid Locations to CVS Caremark Third Year - Renovate half of remaining Rite Aid Locations to CVS Caremark

Strategic Fit - Increase in Demand - Supply shortage of Health Care providers - Location is a large Critical success factor - Great Cash flow and financial stability - Close Competing firms

Strategy Costs Marketing Expense: - 2009 = $317 Million - 2011 = $211 Million - 2012 Increase to $316.5 Million - 2013 Increase to $395.5 Million - 2014 Increase to $496.5 Million Estimated Acquisition Cost - $1,000,000,000

Implementation

Foreseeable issues Cost of Acquisition Changes in Government Regulations Anti-trust laws

Projected Financials Assumptions Capital Needed: 1,165 million Stock Price: $40.78 Shares Outstanding: 1,338 million Interest Rate: 5% Tax Rate: 39% Dividends: 647 million (2011 amount)

EPS/EBIT 100% Stock = 28.6 Million additional stocks sold

EPS

Projected Income Statement

Projected Balance Sheet

Projected Ratios

Strategic Evaluation

Balance Score Card

Update New CEO at end of 2011 Order Refill is the most visited area of their Website Revenues increased by 15% in 2012 Market cap increased by 12% Stock price increased to $48 a share Earning per share increased 2.59 in 2011 to 3.03 in 2012 Old CEO – Tom Ryan New Ceo – Larry Merlo

Questions

References CVS Caremark. (2012). 2011 Annual Report. Woonsocket. CVS Caremark. (2013). Company History. Retrieved from CVS Caremark: http://info.cvscaremark.com/about-us/our-purpose/company-history CVS Caremark Corp. (2013). Retrieved from Business Insight: Essentials: http://bi.galegroup.com.ursus-proxy-3.ursus.maine.edu/essentials/company/25141?u=maine_fortkent Gross, D. D. (2014, April 6). CVS Caremark Corporation. Retrieved from nternational Directory of Company Histories: http://bi.galegroup.com.ursus-proxy-3.ursus.maine.edu/essentials/article/GALE|CX1302600043/b1ad641bc1714a5e67e86d926fbacac7?u=maine_fortkent Rite Aid. (2012). 2011 Annual Report. East Pennsboro Township. University of Oregon Investment Group. (2011). CVS Caremark Corporation. Eugene: University of Oregon. Walgreen. (2012). 2011 Annual Report . Chicago.

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