Case study: Walgreens

The story
Walgreens is one of the US’s biggest retailers, with nearly 8,000 pharmacies and a history stretching back to 1901. It developed a powerful position through operational excellence and wise selection of real estate for its outlets.

The challenge
The competitive context for Walgreens began to change in the early 2000s. First, mass merchandisers such as Walmart started undercutting the company’s prices on generic drugs – historically a major profit centre.

Second, employers began to mandate that employees in their health insurance plans fill their prescriptions via mail order to cut costs.

Third, a major competitor, CVS, merged with one of the largest managers of pharmacy benefit plans to provide a more comprehensive offering to consumers, employers and health insurers. As a result, some customers were worried that health insurers would stop reimbursing prescriptions filled at Walgreens.

The strategy
After almost three decades at Walgreens, Greg Wasson became the president of the company in 2007 and chief executive in 2009. Moving with the legitimacy of someone with deep roots in the institution, he tried to quickly reposition Walgreens as an indispensable partner to employers and insurers.

First, the company acquired the two biggest workplace health clinic businesses and established itself as the clear market leader in that industry. As part of this process, it used its retail locations to serve employees outside of working hours and to help care for their dependants. This cemented relationships with employers who otherwise might have asked employees to get their prescriptions filled by mail order.

At the same time, the company developed new ways to leverage its convenient locations to serve health insurers. For example, in-depth, multisession counselling by pharmacists was offered to people with chronic diseases.

It also rolled out walk-in clinics in hundreds of its stores to aid customers with minor ailments at a much lower cost than physicians or emergency rooms offered.

Far from steering consumers away from Walgreens, insurers began incentivising people to use the company’s services.

The results
The new businesses have derived big competitive advantages from the core pharmacy business, while simultaneously protecting that business from key threats.

Company revenue and operating income have grown over the past four years, even while the recession weakened merchandise sales at the front of the stores. Walgreens has become the in-house supplier of healthcare services at hundreds of large companies and has developed into a partner to major health insurers in counselling their most costly members.

It has also expanded its share of prescriptions and developed new revenue streams from services such as counselling.

The lessons
A company facing competitors with asymmetric advantages needs to find ways to change the game. The seemingly vulnerable core business may contain hidden assets – such as underused pharmacists, long opening hours and convenient locations – that could boost new offerings.

By stepping outside of how its industry has traditionally defined itself, a company can evaluate the broad range of challenges faced by important customers or business partners, and it can leverage hidden assets to meet these needs in ways that few others can.
- Financial Times, 10 Aug 2011