Porter’s Five Forces Analysis of Walgreens

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Porter’s framework focuses on a business’ core competencies; those assets that tip the competitive balance in a business’ favor and provide advantage over the competition. While on its face, the framework merely determines whether a business or industry is “attractive” or “unattractive,” depending on how they fair in an assessment of each of the five forces. It also provides a useful tool for strategic business planners in helping business to refocus and strengthen areas where a company may have exposure and potential weakness and exploit those areas where they have a competitive strength (Investment Answers, 2010).

This paper will give you a better understanding of where Walgreens stands in the drug store industry. Please refer to Figure 1 for an illustration of Walgreens competitive position in the drug store industry. Drug Store Industry Retail drug stores fall into many different categories. Some are independent drug stores licensed to dispense medication and sell retail goods; others are national or regional chains. Some chain drug stores use the franchise model, allowing individual owners who open their own locations to use corporate branding, distribution channels and marketing methods in exchange for fees.

However, most retail drug stores combine a dedicated pharmacy section with a general retail store, dealing in over-the counter medication, personal care and beauty products, food items and assorted merchandise, ranging from games and toys to electronics and clothing (Hartman). Drug stores dispense prescription medication and over-the counter drugs directly to patients. However, their roles are not just simple distribution. Drug stores dispense medication in specific doses and give valuable advice to patients as well as information on how medication should be stored.

They ensure patients safety by providing drugs that have not expired or been damaged by errors in storage. Walgreens Co. Charles R. Walgreen Sr. of Chicago, Illinois, opened the first Walgreens drug store in 1901. The corporate headquarter is located in Deerfield, Illinois. As of January 31, 2012, the company operates 8,300 stores in all 50 states, the District of Columbia, Puerto Rico, and Guam. Walgreens is the nation’s largest drugstore chain, with fiscal 2012 net sales of $71. 6 billion and net earnings of $2. 1 billion (Walgreens Annual Report, 2012).

The company has 240,000 employees. According to the company’s 2012 annual report, Walgreens was named to Fortune magazine’s World’s Most Admired Companies list for the 19th consecutive year, and was ranked 32nd on the Fortune 500 list of largest U. S. based companies (Walgreens Annual Report, 2012). Walgreens currently has two divisions Walgreens Health Services and Walgreens Health and Wellness. Walgreens also runs several on line stores such as www. Beauty. com (http://Beauty. com), Drugstore. com and www. VisionDirect. com (Walgreens Annual Report, 2012).

Competitive Rivalry: High Walgreen operates across many industries, with its retail pharmacy, Walgreens Health Services and Walgreens Health and Wellness division. Walgreens retail pharmacy industry depends heavily on prescription drug sales for continued revenue but also offers customers basic consumer goods and over the counter drug. The retail pharmacy industry has two 800 pound gorillas: Walgreens and CVS, both companies have over 7,000 pharmacy stores. Both count on prescription drugs for about 65 percent of their revenue. Not far behind the two major players is Wal-Mart.

Wal-Mart is able to provide some generic prescriptions to individuals for a very low cost. Some other competitors are independent drug stores, mail order prescriptions providers and retailers such as grocery stores. Numbers of players have diversified to sell other products easing rivalry in this sector. Walgreens competes by continuing to redefine and revolutionize the drugstore experience. Walgreen is able to give consumes what they want; when they want it, and where they want it at a reasonable price without reducing the quality of the products they sell (Walgreens Annual Report, 2012).

Threat of New Entrants: High Barriers to entry within the sector are not really high, however, as a participant in the drug retail industry, drug retail businesses in a number of countries are subject to government and state laws and regulations that govern the purchase of prescription drugs and related services. The new entrant would also need immense infrastructure. More than 50% of population is within 2 miles of a Walgreens store. This is single-most important strategy that Walgreens has that is the geographic location of its stores.

Walgreens vision is to have a store on every corner of every major intersection. It is on the corner so it is highly accessible. This is not something that mom or pop shop could compete with. It would not be hard to enter through mail-order/online approach; however main players and retail/supplier customer relationships are well-established. In an industry where there is little difference between the main firms, one way to maintain or create an advantage is to temporarily come up with a strategy that differentiates your product from the competition.

That is what Walgreens did when they opened the Take Care Clinics. They have Nurse Practitioners who can prescribe medications that will be filled immediately. However shortly after Walgreens came up with this CVS came up with the Minute Clinics that offered pretty much the same service. Because there is so much rivalry, there is no ability of any of the firms to create collusion strategies. Power of Suppliers: Low Suppliers are experiencing increasing pressure, as brand loyalty is weakened and players display instance of backward integration.

Generic drugs are becoming very common, because they are much more affordable. Large retailers have many suppliers nationally and internationally. Price competition from low cost imitators threatens the profit of brand name manufacturers. Large players sell their own OTC product putting pressure of the suppliers. Walgreens receives inventory from numerous domestic/international suppliers. Loss of any one group should not affect sales. Power of Buyers: Medium Drug retail sector is experiencing increasing consolidation, boosting rivalry. There is large number of potential buyers.

The Government/State assisted plans account for large amount of player’s total revenue. 96% of Walgreen’s prescription sales are covered by third party payors. Nevertheless, no single customer accounts for more than 10% of the company’s net sales (Walgreens Annual Report, 2012) Threat of Substitutes: High According to the Merriam-Webster dictionary substitute is a person or thing that takes the place or function of another (Merriam-Webster Dictionary). Threats of substitutes for drug retail stores come from general merchandise stores and supermarkets.

Such retailers offer the convenience of selling the product in one location, which may appeal the end users. Generic products which imitate the brand products at significantly discounted prices have become more common and accessible. Counterfeit products are easily available. Summary of Five Forces for Walgreens The Drug Store industry is a billion dollar industry and continues to grow. Although the sector offers a high level of competition and low supplier power it continues make Walgreens lot of money.

Walgreens continues to be the number one in the industry and that is because they continue to find ways to stay ahead of their competition. The geographic location of their stores makes it very convenient for the consumers, and that keeps the smaller mom and pop store from opening in areas where Walgreens are located. If mom and pop shops do open they do not service. Walgreens will continue to make acquisition and expand the company as they see fit. Walgreens will not stop until they are the best in the industry.

References: 

  • Plowman, Kenneth D., et al. “Walgreens: A case study in health care issues and conflict resolution.” Journal of Public Relations Research 7.4 (1995): 231-258.
  • Frederick, James. “Walgreens gears for opening of its own Internet pharmacy.” Drug Store News 9.7 (1999): 2.

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