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A Strategic Management Case Study on CVS Caremark Corporation By: Carter Vaillancourt, Megan Land, and Emily Michaud UMFK.

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Presentation on theme: "A Strategic Management Case Study on CVS Caremark Corporation By: Carter Vaillancourt, Megan Land, and Emily Michaud UMFK."— Presentation transcript:

1 A Strategic Management Case Study on CVS Caremark Corporation By: Carter Vaillancourt, Megan Land, and Emily Michaud UMFK

2 Company Overview A brief history of CVS Existing Mission and Vision Existing Strategies New Mission and Vision External Assessment Industry Analysis Opportunities and Threats EFE Matrix CPM Matrix Internal Assessment Organizational Structure Strengths and Weaknesses Financial Condition IFE Matrix Strategy Formulation SWOT Matrix Space Matrix Grand Strategy Matrix Matrix Analysis QSPM Matrix Strategic Plan for the Future Objectives Strategies Implementation Projected Financials Evaluation Balanced Scorecard CVS Caremark Update Overview

3 Company Timeline 1960s1970s1980s 1990s  The CVS name was used for the first time in That year, they had 17 retail locations, and 40 stores only five years later  By 1974, CVS had 232 stores and sales of $100 million  The chain had more than 400 stores by Sales reached $1 billion in 1985, partly due to the pharmacies being added to many of CVS's older stores  In 1994, CVS started PharmaCare Management Services.  In 1999, CVS acquired Soma.com, the first online pharmacy, and renamed it CVS.com  In 1994, CVS started PharmaCare Management Services.  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  On November 1, 2006, CVS announced that it was entering into a purchase agreement with Nashville- based Caremark Rx Inc., a pharmacy benefits manager  On August 12, 2008, CVS Pharmacy announced that it would acquire Longs Drugs for $2.9 billion  On November 1, 2006, CVS announced that it was entering into a purchase agreement with Nashville- based Caremark Rx Inc., a pharmacy benefits manager  On August 12, 2008, CVS Pharmacy announced that it would acquire Longs Drugs for $2.9 billion

4 CVS Caremark Segments

5 Figure 11: 2010 CVS Caremark Retail Segment Revenue Break Down 2010 CVS Caremark Retail Segment Revenue Break Down

6

7 Existing Vision Statement We strive to improve the quality of human life.

8 Existing Mission Statement We provide expert care and innovative solutions in pharmacy and health care that are effective and easy for our customers.

9 Existing Strategies Use Minute Clinic locations and Specialty pharmacy division to lower cost while improving the health of those we serve Increase CVS Caremark leadership in and contribution to the areas of pharmacy services and healthcare

10 Proposed Vision Statement CVS Caremark’s vision is to improve the quality of life through convenient and cost efficient offerings.

11 Proposed Mission Statement At CVS Caremark our mission is to provide quality products and services through our pharmaceuticals and consumer products (2). We strive to be the number one provider in the United States (3) by investing not only in our company (5) and technological advances (4) but also in the communities in which we serve (8). Whether our customers are new to this world our are veterans, (1) we know that our company can provide them with the newest and most effective products and services, while promoting the healthy communities in which they live. Through our valued employees (9), CVS is able to provide quality services and quality products (7).

12 External Analysis

13 Operating Expenses as a % of Revenue

14 Gross Margin as a % of Revenue

15 Competitive Analysis

16 U.S Pharmacies 2010

17 Rx Same-Store-Sales Trends

18 Opportunities 1.Universal Health Care and economy recovery, $10 trillion by Imminent introduction of generic brands lowering the cost 3.Over the next five years, roughly $50 billion branded drugs will lose patent protection 4.With healthcare reform slowly coming into effect, 32 million Americans previously without coverage will now have some short sort of coverage. 5.People 65 years of age or older fill more than 25 prescriptions annually on average, 3 times the national average. 6.As baby boomers age, approximately 70 million Americans will turn 65 in the next 20 years 7.It is estimated that by 2014, 8 out of the top 10 drugs in the U.S. will be specialty drugs, where expenditures are expected to rise to $100 billion. 8.Medicare part D market is expected to grow 8.5% annually from 2010 to Global pharmaceutical industry is expected to grow, especially Brazil, India, Russia, and China, which is expected to be the 3 rd largest market in 2011

19 Threats 1.It is estimated that there could be a dearth of 200,000 healthcare professionals and 800,000 nurses by Potential government intervention in health care after election in Imminent introduction of generic brands lowering the margin 4.CVS’ is behind Wal-Mart by nearly $140 billion in market cap. 5.CVS’ additional competitor Walgreens is behind them by a market cap of roughly $10 billion. 6.Walgreens increased the number of prescriptions filled in 2010 by 7.5%, whereas ours decreased. 7. In the next 5 years, 9 out of the top 10 best-selling drugs in the world will go off patent, resulting in an expected loss of sales 8.Extensive regulation has increased the time from drug discovery to approval from 6 years in the 1970s to 13.5 years in the 2000s. 9.Pharmaceutical companies struggle to develop new drugs as R&D costs become high, on average between $4 billion to $11 billion per drug

20 CVSWalmartWalgreen Critical Success factorsWeightsRatingWeighted ScoreRatingWeighted ScoreRatingWeighted Score 0.0 to 1.01 to 4 Advertising Product Quality Price Competitiveness Finanical Position Customer Loyalty Global Expansion Market Share Organization Structure Customer Service Production Capacity Employee Dedication Totals CPM

21 Key External FactorsWeightsRatingWeighted Score 0.0 to 1.01 to 4 Opportunities Universal Health Care and economy recovery, $10 trillion by Imminent introduction of generic brands lowering the cost Over the next five years, roughly $50 billion branded drugs will lose patent protection With healthcare reform slowly coming into effect, 32 million Americans previously without coverage will now have some sort of coverage People 65 years of age or older fill more than 25 prescriptions annually on average, 3 times the national average As baby boomers age, approximately 70 million Americans will turn 65 in the next 20 years It is estimated that by 2014, 8 out of the top 10 drugs in the U.S. will be specialty drugs, where expenditures are expected to rise to $100 billion Medicare part D market is expected to grow 8.5% annually from 2010 to Global pharmaceutical industry is expected to grow, especially Brazil, India, Russia, and China, which is expected to be the 3 rd largest market in Threats 0 It is estimated that there could be a dearth of 200,000 healthcare professionals and 800,000 nurses by Potential government intervention in health care after election in Imminent introduction of generic brands lowering the margin CVS’ is behind Wal-Mart by nearly $140 billion in market cap CVS’ additional competitor Walgreens is behind them by a market cap of roughly $10 billion Walgreens increased the number of prescriptions filed in 2010 by 7.5%, whereas ours decreased In the next 5 years, 9 out of the top 10 best-selling drugs in the world will go off patent, resulting in an expected loss of sales Extensive regulation has increased the time from drug discovery to approval from 6 years in the 1970s to 13.5 years in the 2000s Pharmaceutical companies struggle to develop new drugs as R&D costs become high, on average between $4 billion to $11 billion per drug Totals EFE

22 Internal Analysis

23 Organizational Chart THOMAS M. RYAN Chairman of the Board and Chief Executive Officer LARRY J. MERLO President and Chief Operating Officer TROYEN A. BRENNAN, M.D. Executive Vice President and Chief Medical Officer DAVID M. DENTON Executive Vice President and Chief Financial Officer HELENA B. FOULKES Executive Vice President and Chief Marketing Officer PER G.H. LOFBERG Executive Vice President and President – Caremark Pharmacy Services JONATHA N C. ROBERTS Executive Vice President and Chief Operating Officer – Caremark Pharmacy Services DOUGLA S A. SGARRO Executive Vice President and Chief Legal Officer LISA G. BISACCIA Senior Vice President and Chief Human Resources Officer NANCY R. CHRISTAL Senior Vice President – Investor Relations LAIRD K. DANIELS Senior Vice President – Finance and Controller and Chief Accounting Officer CAROL A. DENALE Senior Vice President and Corporate Treasurer SARA J. FINLEY Senior Vice President and General Counsel STUART M. MCGUIGAN Senior Vice President and Chief Information Officer EVP; President, Caremark Pharmacy Services EVP Internal Operations, Real Estate, Retail Field, Organizations

24 CVS Worth Analysis for 2010 (in millions) Shareholder's equity - Goodwill - Intangibles 2,281 Net Income * 5 17,120 (Stock Price/EPS) * NI 45,726 # of Shares Out * Stock Price 45,822 Four Method Average 27,737 CVS Worth Analysis

25 Income Statement

26 Balance Sheet

27 Balance Sheet Continued

28 Ratio (2010)CVSWalgreensWal-Mart Liquidity Ratios Current Quick Leverage Ratios Debt to total assets Debt to equity Long-term debt to equity Activity Ratios Fixed Assets Turnover Total Assets Turnover Inventory Turnover Profitability Ratios Gross Profit Margin % EBT Margin % Net Profit Margin % Return on total assets % Return on Stockholder's equity % Price-earnings ratio Growth Ratios Sales Growth (5-years)21.11%9.82%7.23% Net Income Growth (5-years Average)22.85%6.04%6.90% Earnings per share Growth (5-year Average)11.42%6.88%8.95% CVS Caremark Financial Ratios

29 Strengths 1.CVS is the largest pharmacy health care provider in the U.S with over 7,100 pharmacies. 2.Gross profit as a percent of net revenues increased 21.0% 3.Operating expenses decreased 1.8% from Employee base of 202,000 employees 5.CVS is recognized as one of the largest pharmacy benefit managers (PBMs) in the US. Registering more than four million customers per day 6. Market cap increased by 5.8% from 44 billion to 47 billion in More than 65% of stores are open around the clock or offer extended hours 8. Has 560 MinuteClinic locations across 26 states, easing health care overcrowding from lack of Primary care providers. 9. Generates more than $11 billion in specialty pharmacy revenue annually

30 Weaknesses 1.Substantial amount of outstanding debt, 11 million 2.Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts 3.Pharmacy services segment is showing less revenue than the retail segment 4.High cost of revenue and operational expenses; 76,156, 14,092 5.Net interest expense increased 1.2% since Pharmacy network claims processed decreased 12.5% in 2010 due to the expiration of a few large client contracts. 7.Income from continuing operations decreased by 7.2% in Net revenues decreased by $2.3 billion in CVS shares returned 7.9% in 2010, trailing the S&P 500 Index of 12.8% return

31 Key Internal FactorsWeightsRatingWeighted Score 0.0 to 1.01, 2, 3 or 4 Internal Strengths 3 or 4 CVS is the largest pharmacy health care provider in the U.S with over 7,100 pharmacies Gross profit as a percent of net revenues increased 21.0% Operating expenses decreased 1.8% from Employee base of 202,000 employees CVS is recognized as one of the largest pharmacy benefit managers (PBMs) in the US. Registering more than four million customers per day Market cap increased by 5.8% from 44 billion to 47 billion in More than 65% of stores are open around the clock or offer extended hours Has 560 MinuteClinic locations across 26 states, easing health care overcrowding from lack of Primary care providers Generates more than $11 billion in specialty pharmacy revenue annually Internal Weaknesses 1 or 2 Substantial amount of outstanding debt, 11 million Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts Pharmacy services segment is showing less revenue than the retail segment High cost of revenue and operational expenses; 76,156, 14, Net interest expense increased 1.2% since Pharmacy network claims processed decreased 12.5% in 2010 due to the expiration of a few large client contracts Income from continuing operations decreased by 7.2% in Net revenues decreased by $2.3 billion in CVS shares returned 7.9% in 2010, trailing the S&P 500 Index of 12.8% return Totals IFE

32 Strategy Formulation

33 Expand to areas such as Latin America and Asia. (S4, S6, O2, O3, O9) Increase number of Minute Clinics in areas where there is a large number of aging population. (S5, S8, S9, O5, O6, O8) Increase number of stores open 24 hours by 20%. (S7, T4, T5, T6) Offer educational programs/training to better prepare our staff to answer customer questions. (S4, S7, T1) Expand to states/areas in the U.S. that we currently do not operate in. (W3, W6, W8, O1, O4) Offer incentives to employees based on customers they get to sign up for loyalty program. (W6, O4, O5, O6) Take advantage of the expiring patents on drugs by developing generics through R&D. (W3, W6, W8, T6, T7, T8, T9) Increase our food segment to increase revenue and better compete with Walmart and Walgreen. (W3, W7, W8, T4, T5) Strengths Threats Opportunities Weaknesses SO ST WT WO

34 FS CS ES IS Conservative Aggressive Competitive Defensive Financial Strength rating is 1 (worst) to 7 (best) 1 Cash Flow4.0 2 Price Earnings Ratio4.0 3 Earnings per Share5.0 4 Working Capital3.0 5 Liquidity2.0 6 Net Income5.0 7 Return on Assets3.0 Industry Strength rating is 1 (worst) to 7 (best) Total 1 Profit Potential5.0 2 Financial Stability6.0 3 Resource Utilization5.0 4 Productivity, capacity utilization5.0 5 Market Entry2.0 6 Growth Potential4.0 7 Extent Leveraged2.0 Environmental Stability IS Total Rate of Inflation Barriers to Enter the Market Competitive Pressure Price Elasticity Demand Variability 6 Price Range of Competing Products Ease of Exit from Market-2.0 Competitive advantage rating is -1 (best) to -7 (worst) ES Total Market Share1.0 2 Product Quality1.0 3 Customer Loyalty2.0 4 Capacity Utilization4.0 5 Technologically Advanced3.0 6 Global Expansion7.0 7 Product Life Cycle5.0 X Coordinate0.86 Y Coordinate0.86 Space Matrix

35 Rapid Market Growth Weak Competitve Position Strong Competitive Position Slow Market Growth Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Quadrant III 1. Retrenchment 2. Related diversification 3. Unrelated diversification 4. Divestiture 5. Liquidation Quadrant IV 1. Related diversification 2. Unrelated diversification 3. Joint ventures Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Related diversification GSM

36 Alternative Strategies IESPACEGRANDBCGCOUNT Forward Integration xx2 Backward Integration xx2 Horizontal Integration xx2 Market Penetration xx2 Market Development xx2 Product Development xx2 Related Diversification xx2 Unrelated Diversification x1 Retrenchment Divestiture Liquidation Matrix Analysis

37 Strategic Evaluation Product Development Increase number of stores open 24 hours by 20%. (Not Enough Need as of 2010) Offer Educational Programs/Trainings to better prepare our staff to answer customer questions. (Most questions of customers require answers from a Pharmacist) Offer incentives to employees based on customers they get to sign up for loyalty program (Causes customers to be prompted with questions on their fast and convenient stop at CVS) Take advantage of the expiring patents on drugs by developing more Generics ( Already in this market strongly) Increase our food segment to increase revenue and better compete with Walmart and Walgreens ( Did not apply to our mission) Market Development Expand into areas such as Latin America and Asia. (Country drugs laws differ)

38 Key factors WeightASTASASTAS External 1 to 4 Opportunities 1. Universal Health Care and economy recovery, $10 trillion by Imminent introduction of generic brands lowering the cost Over the next five years, roughly $50 billion branded drugs will lose patent protection With healthcare reform slowly coming into effect, 32 million Americans previously without coverage will now have some sort of coverage People 65 years of age or older fill more than 25 prescriptions annually on average, 3 times the national average As baby boomers age, approximately 70 million Americans will turn 65 in the next 20 years It is estimated that by 2014, 8 out of the top 10 drugs in the U.S. will be specialty drugs, where expenditures are expected to rise to $100 billion Medicare part D market is expected to grow 8.5% annually from 2010 to Global pharmaceutical industry is expected to grow, especially Brazil, India, Russia, and China, which is expected to be the 3 rd largest market in Threats 1. It is estimated that there could be a dearth of 200,000 healthcare professionals and 800,000 nurses by Potential government intervention in health care after election in Imminent introduction of generic brands lowering the margin CVS’ is behind Wal-Mart by nearly $140 billion in market cap CVS’ additional competitor Walgreens is behind them by a market cap of roughly $10 billion Walgreens increased the number of prescriptions filed in 2010 by 7.5%, whereas ours decreased In the next 5 years, 9 out of the top 10 best-selling drugs in the world will go off patent, resulting in an expected loss of sales Extensive regulation has increased the time from drug discovery to approval from 6 years in the 1970s to 13.5 years in the 2000s Pharmaceutical companies struggle to develop new drugs as R&D costs become high, on average between $4 billion to $11 billion per drug total should be 1.01 QSPM Increase number of MinuteClinics by 100 locations Expand to 4 other states in the U.S. that we do not have established locations

39 Strengths 1. CVS is the largest pharmacy health care provider in the U.S with over 7,100 pharmacies Gross profit as a percent of net revenues increased 21.0% Operating expenses decreased 1.8% from Employee base of 202,000 employees CVS is recognized as one of the largest pharmacy benefit managers (PBMs) in the US. Registering more than four million customers per day Market cap increased by 5.8% from 44 billion to 47 billion in More than 65% of stores are open around the clock or offer extended hours Has 560 MinuteClinic locations across 26 states, easing health care overcrowding from lack of Primary care providers Generates more than $11 billion in specialty pharmacy revenue annually Weaknesses 1. Substantial amount of outstanding debt, 11 million Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts Pharmacy services segment is showing less revenue than the retail segment High cost of revenue and operational expenses; 76,156, 14, Net interest expense increased 1.2% since Pharmacy network claims processed decreased 12.5% in 2010 due to the expiration of a few large client contracts Income from continuing operations decreased by 7.2% in Net revenues decreased by $2.3 billion in CVS shares returned 7.9% in 2010, trailing the S&P 500 Index of 12.8% return Increase number of MinuteClinic s by 100 locations Expand to 4 other states in the U.S. that we do not have established locations QSPM Continued

40 Strategic Fit

41 Primary Care Shortage and Rising Demand Expected shortage of 45,000 Primary Care Physicians (PCP) by 2020 Health Care Reform expected to add 32 Million newly-covered patients by 2014 The percentage of U.S medical School graduates that are choosing Residency Spots in Family Medicine has declined 54% since 1997

42 Primary Care Shortage

43 MinuteClinic Revenue Growth from 2007 to 2010

44 Lower total Healthcare costs for Person who used MinuteClinic MinuteClinic User vs. Non User 2010

45 2010 MinuteClinic Overview Largest Retail Clinic Provider Health Care/Retail Leadership 9 Million Visits since inception 50% of Population Reports for no current physician

46

47 3 Year Goals Year 1: Begin Construction ($11,500,000) Year 2: Open 50 New MinuteClinics ($9,250,000) Year 3: Open 50 New MinuteClinics ($9,250,000)

48 Strategic Implementation

49 Estimated Cost of Additional MinuteClinics $185,000 Salaries/per location/per year $75,000 Building (start up cost) $40,000 Supplies and Equipment _______________________________________ 300,000 per MinuteClinic *100 Locations = 30,000,000 Capital Needed

50 Projected Financial Assumptions Assumptions Capital needed 30,000,000 Cash Used30,000,000 Tax Rate35% Stock Price (Dec. 31, year end)33.52 Dividends Paid $.50 per share 683,500,000

51 Projected Financials-Income Statement Projected Income Statement (in millions) Total Revenue 98,729 96, ,874 15% increase Cost of Revenue 78,349 76,156 88,379 % of total revenue Gross Profit 20,380 20,257 22,495 Operating Expenses Selling, General, and Administrative 13,942 14,092 15,238 8% increase, plus $18.5 mil. In salaries Operating Income or Loss 6,438 6,165 7,257 Total Other Income/Expense EBIT 5,913 5,629 7,257 Interest Expense Income Before Tax 5,913 5,629 7,257 Income Tax Expense 2,205 2,190 2,540 35% tax Minority Interest Same Net Income from Continuing Operations 3,708 3,439 4,720 Loss from Discontinued Operations (12) (15) Same (possible store closings) Net Income 3,696 3,424 4,705 Basic EPS Diluted EPS Basic Average Shares Outstanding 1,434 1,367 Diluted Average Shares Outstanding 1,450 1,377 Dividends Per Share

52 Projected Financials-Balance Sheet (1) Projected Balance Sheet (in millions) ASSETS Current Assets Cash/Cash Equivalents 1,086 1,427 1,397Decrease by $30 mil. For capital needed Short-term Investments 5 4 4Same Net Receivables 5,963 5,436 5,6534% increase Inventory 10,343 10,695 11,76510% increase Other Assets % increase Total Current Assets 17,537 17,706 18,970 Long-term Investments Plant, Property, and Equipment 7,923 8,322 8,7505% increase, plus $11.5 mil. In supplies/building Goodwill 25,680 25,669 26,6574%increase Intangible Assets 10,127 9,784 10,2735% increase Accum. Amortization Other Assets % increase Deferred Long-term Asset Total Assets 61,641 62,169 65,358

53 LIABILITIES Current Liabilities Accounts Payable 6,806 7,096 7,80610% increase Current Portion Long-term Debt 5,494 3,974 2,454same decrease as previous year Other Current Liabilities Total Current Liabilities 12,300 11,070 10,260 Long-term Debt 8,756 8,652 8,548same decrease as previous year Other Liabilities 1,102 1,058 1,16510% increase Deferred Long-term Liability Charges 3,678 3,655 3,630same decrease as previous year Minority Interest Negative Goodwill Total Liabilities 25,836 24,435 23,603 STOCKHOLDERS' EQUITY Misc. Stocks Options Warrants same Redeemable Preferred Stock Preferred Stock Common Stock 16 same Retained Earnings 16,355 19,303 23,324Increase from net income, minus dividends paid Treasury Stock (7,610) (9,030) same Capital Surplus 27,198 27,610 same Other Stockholders' Equity (191) (199) same Total Stockholders' Equity 35,805 37,734 41,755 Total Liabilities and Stockholders' Equity 61,641 62,169 65,358 Projected Balance Sheet (2)

54 Project Financial Ratios CVS's Projected Ratios 2010 v Current Ratio Quick Ratio Debt to Total Assets Debt to Equity Fixed Asset Turnover Total Asset Turnover Inventory Turnover Gross Profit Margin % Return on Stockholders' Equity %

55 Strategic Evaluation

56 Area of ObjectivesMeasure or Target Time ExpectationPrimary Responsibility Customers 1 Brand Identity Industry reports/Market Cap. Higher than competitorsYearly Health Care/Strategy Marketing Officer 2 SatisfactionCustomer satisfaction surveysSemi-Annual Health Care/Strategy Marketing Officer Employees 1 Employee MoralSurveySemi-AnnualChief Human Resources Officer 2 Service Training# of seminarsYearlyChief Operations Officer Operations 1 Patient visitsIncrease by 1 million each yearYearlyChief Operations Officer 2 LocationsIncrease MinuteClinic locations by 1003 YearsChief Operations Officer Business Ethics 1 Ethics Training# of ethics training sessionsYearlyChief Human Resources Officer 2 Patient Awareness "Learn about your medicines"- medicinal informationYearly Health Care/Strategy Marketing Officer Financial 1 RevenuesIncrease by 15% each yearYearlyCFO 2 Ratio AnalysisBetter than competitors/industry Avg.YearlyCFO Balanced Scorecard

57 CVS Caremark Update

58 Current CVS Locations (2013)

59 Stock Performance

60 MinuteClinic Current Locations

61 Update Facts In 2012, -Pharmacist was used 2,000 times. CVS Pharmacy filled 1.3 million prescriptions filled through mail service and 3.7 million retail prescriptions in % Dispensing Accuracy in 2012 for mail service Filled 602,992 prescriptions that were 90-day supplies Order Refill is the most visited area of their Website 60.4% of Mail Service scripts required no intervention, 39.6% required some time of follow up In 2011 Tom Ryan ( CEO ) retired, and new CEO was hired- Larry Merlo

62


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