Leveraging Dynamic Capabilities: A Case Study on Walgreens

The pharmaceutical industry along with the broader healthcare space is in turmoil; prescription drugs along with the general cost of healthcare continue to increase (Franki, 2019), new market entrants are seeking to disrupt the market (Zacks Equity Research, 2019), and finally as a new election year approaches the market remains bearish based on the uncertainties with the regulations (La Monica, 2019). In this environment it is no surprise the Walgreens is one of the worst performing stocks in the NASDAQ. The suggestion for Walgreens is to invest into developing new dynamic capabilities, such as the merger of with a managed healthcare company, that can lead to superior consumer value, (March, 1991) resulting in rebuilding trust with the consumers, and better market orientation (Day, The Capabilities of Market-Driven Organizations, 1994) by meeting the needs of the consumer.

Introduction

The pharmaceutical industry is in turmoil; the cost of generic drugs has fallen considerably over the past three years (DeBenedette, 2019) while prescription drugs have increased (Franki, 2019), and government backed healthcare plans have steadily lowered their reimbursement rates (Bannow, 2017). Adding further fuel to the fire, companies like Amazon have partnered with Berkshire Hathaway and JP Morgan Chase to launch a new health care initiative aimed at lowering costs for their employees (Zacks Equity Research, 2019). All of this is bound to intensify as the US heads into an election year, and the possibility of a new regulatory environment has investors pulling out, waiting on the sidelines (La Monica, 2019).

Walgreens specifically has seen the short end of the stick, with its market cap plummeting over 15% while the broader index rose over 20% (Langreth, 2020). Further, at the expense of Walgreens, retailers like Walmart have improved their bottom line using competitive pricing strategies (Zacks Equity Research, 2019). Government agencies have also put Walgreens on notice for its questionable practices; the DEA fined Walgreens for over distributing the control substance oxycodone to several municipalities in Florida (Leger, 2012), further several state governments along with the FDA have investigated Walgreens practices of selling tobacco and e-cigarettes to young adults leading the company to eventually ban all sales of such products in its stores (Bomey, 2019), finally the state of New York reached a settlement with Walgreens to the tune of $500,000 over misleading advertising of shelf pricing verses scanned pricing leading to consumers being overcharged (Heath, 2016).

The aim of this paper is to analyze the market and the situation Walgreens finds itself in and to discuss what measures Walgreens can take at a strategic and operational level to turn things around. The paper will recommend the merger of Walgreens with a managed healthcare company to develop the necessary capabilities required to provide new opportunities that rebuild trust with the consumers and promote both the ease of use and convenience of the services/products offered at Walgreens. Finally, under this setting the paper will list further opportunities for Walgreens to pivot their brand to engage with more customers, ultimately improving their bottom line and market perception.

Theoretical Framework

In the case of Walgreens, it can be argued that consumers have reached information parity (Grewal, Roggeveena, & & Nordfält, 2016). With direct access to pricing information within the geographic boundaries, consumers are able to determine the best deals for convenience and shopping goods (Copeland, 1923). Greater value needs to be developed in order to secure consumers especially in the pharmaceutical space, were consumers are rightfully questioning the value add from traditional pharmacies as non-traditional retailers are disrupting the market (Zacks Equity Research, 2019). In order to secure this value, Walgreens needs to understand their current capabilities (Day, 1994) and the gap that exists preventing them from achieving this, from there an analysis can be made to identify the characteristics to improve the purchase funnel.

The capabilities that enabled Walgreens to gain a competitive advantage (Woodruff, 1997), was its massive footprint of retail stores within the US and their products essentially serving consumers from the cradle to the grave. All firms seek to develop a competitive advantage through market orientation (Day, The Capabilities of Market-Driven Organizations, 1994); in the case of Walgreens this was done in two ways. The first approach by Walgreens was to increase its assets of retail stores through acquisitions of competing pharmacies; the purchase of Duane Reade (Business Wire, 2010) and Rite Aid (Mattioli, Siconolfi, & Cimilluca, 2015) enabled Walgreens to grow to over 9000 locations (Walgreens, 2019). This presence has reinforced the notion of convenience through availability and facilitated integrated marketing through the physical store fronts (Batra, 2016). The second approach led Walgreens to develop its capabilities on the complete coverage of goods needed by the consumer throughout their lifespan, a feat that is not easily replicable, thus, supporting the notion of being a distinct capability (Day, The Capabilities of Market-Driven Organizations, 1994). A sample of the typical products found in Walgreens include, but not limited to; diapers, baby food, small toys for children, photo production services, pharmaceutical services, seasonal decorations, hair products, beauty products, vitamins, over-the-counter remedies, wheel chairs, walking sticks, reading glasses, flowers. The vast array of products can be seen as an ease of use in that the consumer can find an item based in any point of life, they are currently in. This vastness also promotes Walgreens ’ exposure to increased touch-points in the customer journeys; Walgreens provides services in addition to having its own private label brands (Binder, 2019) which represents brand-owned touch points that can be marketed through loyalty/discount cards, and social touch points where it’s common for working individuals to make “snack runs”, or other convenience items, that are brought back to the workplace further reinforcing the image of Walgreens (Lemon & Verhoef, 2016).

While Walgreens has demonstrated their current capabilities provide convenience through availability and ease of use promoting customer journeys, they cannot continue on exploiting their current capabilities but rather should invest in exploring new dynamic capabilities that can provide superior consumer value (March, 1991). The current capabilities of Walgreens can be characterized as being resource-based (Day, Closing the Marketing Capabilities Gap, 2011), in that the competitive advantage is mainly found due to the fact that it is difficult to have as many locations coupled with the variety of products. Walgreens needs develop adaptive marketing capabilities in order to provide superior consumer value by being able to; better understanding the market conditions and sensing/responding to the needs of the consumer. Thus, a gap of capabilities exists; from the inside-out orientation (where Walgreens’ decisions are based on its own internal prospective) resource-based position to the outside-in (where the market drive the prospective) adaptive marketing position (Day, Closing the Marketing Capabilities Gap, 2011).

By understanding the gap Walgreens experiences, an analysis can be made to identify the characteristics needed to improve the purchase funnel, once the adaptive capabilities are developed. The consumer decision towards a purchase can be simplified into four stages Awareness, Interest, Decision, Action that represent a funnel leading to satisfied consumer. Since Walgreens is the second largest retail pharmacy in the US (Trefis Team Contributor, 2015) with over 9000 locations (Walgreens, 2019), awareness is a concern that does not need to be examined further. On the other hand, while interest is something that has played well with Walgreens (Binder, Walgreens’ CMO: Today’s Loyalty Currency Is Trust, 2018), especially in the sense of trust (Binder, Walgreens Trusts in New(ish) Tagline, 2017), this can be improved given the relatively recent bad press of oxycodone (Leger, 2012), e-cigarettes (Bomey, 2019), and shelf pricing (Heath, 2016). Of those who made the decision in purchasing an item carried at Walgreens, they’re able to find better convenience through online retailers (Kumar & Mathias, 2018). And finally, those who would take the action to purchase can find better value at other retailers like Walmart (Zacks Equity Research, 2019).

Analysis

While Walgreens has ventured out with partnerships with Microsoft (Bresnick, 2019), Google (Miller, 2018), and IBM (Johnsen, 2017), nothing significant has materialized; it can be noted that these partnerships were more of inside-out orientation (Day, Closing the Marketing Capabilities Gap, 2011) that provided indirect value to the consumer. The type of capabilities that are needed focus more sensing the needs of the consumer and better understanding the conditions of market; with the latter the recommendation is to partner or acquire a managed healthcare provider, based on this new capabilities can be developed to reinforce a new funnel that will provide superior value to achieve the former.

There are several options for partnerships with a managed healthcare provider that are open to Walgreens. The first option would be to partner with Cigna, who acquired Express Scripts in 2018 (Minemyer, 2018); Walgreens has had a limited partnership with Express Scripts through the years (Walgreens Boots Alliance, 2018) and as a result Walgreens would be able to realize synergies relatively quickly in a partnership with Cigna. The second option for partnership would be with Health Care Service Corporation (HCSC), HCSC is the four largest health insurance company in the US with a major footprint in the Midwest and licenses out its Blue Cross and Blue Shield brand across five states (Fitch, 2015); in addition to new dynamic capabilities this partnership would offer, Walgreens could also benefit from a corporate resource restructuring by leveraging HCSC offices as both headquarters are near one another. The finial option, and recommended the most, would be an acquisition of Humana. Walgreens and Humana have a successful joint venture in limited markets to provide special clinics for the elderly in select Walgreens locations (Japsen, 2019); further Humana had tried twice before to merge with Aetna (Mathews & Kendall, 2017), who is now owned by CVS (O’Donnell & Humer, 2017), Walgreens main competitor. The acquisition of Humana, the best-case scenario, or a partnership with either Cigna or HCSC would enable Walgreens to gain the resources required to close the gap and reorient itself to develop more adaptive marketing capabilities that provide superior consumer value.

With a healthcare provider Walgreens can exploit its infrastructure capability, of over 9000 locations (Walgreens, 2019), to develop urgent care clinics leading to new opportunities that are adaptive to the market, an outside-in approach. This would be a similar approach to the program with Humana though scaled to all segments of the population not just seniors (Japsen, 2019). The approach would enable Walgreens to explore and better respond to the market, mainly addressing the increased cost of healthcare (Zacks Equity Research, 2019), by creating in-network clinics, that are cheaper then emergency room visits, to service non-life-threatening issues. By keeping these clinics as in network, the cost would accrue to one’s in network deductible, which is often priced as the lowest risk category for the insurer, and thus be more likely to be covered for the insured. Further, these clinics can also provide substance abuse counseling, responding to another major concern in healthcare industry with the prescription drug epidemic. The concept of in-network clinics also responds to the needs of the consumer to have lower healthcare expenses and greater availability to various non-life-threatening healthcare services including substance abuse counseling.

These capabilities can be realized through an examination of the AIDA funnel (Batra, 2016), in particular focusing on the elements of trust, convenience, and ease of use. Trust can be gained with the consumer by promoting these clinics as a way to lower the overall costs of healthcare. Further given Walgreens participation in the substance abuse crises in the US (Leger, 2012), a mea cupla can be offered by providing free substance abuse counseling along with general health awareness campaigns, which could be communicated through traditional PR form a combination of commercials, interviews with news outlets, as well as social media creating an integrated marketing approach (Batra, 2016). Convenience can be seen with the national roll-out of these clinics across the entire 9000 plus (Walgreens, 2019) retail locations, essentially creating urgent care clinics on every street, in some areas; this too could be communicated through an integrated marketing approach with the Walgreens app providing both availability indications and reminders for more routine healthcare needs. And finally, ease of use could be realized in several ways; first by ensuring limited wait times at clinics, second by integrating with the claims processing system of the managed healthcare provider — visits to the clinic from consumers with the partnered health plan could be adjudicated in real-time removing the need to file a claim and wait several weeks for reimbursement, and third creating a direct link to the pharmacy benefit management (PBM) system — prescriptions for the clinic could be filled immediately. Once this is accomplished Walgreens can pivot their brand to further engage with customers by re-branding themselves into a more healthy/sustainable company by removing unhealthy snacks, etc.

Summary

Walgreens needs to invest into developing new dynamic capabilities to provide better value to its consumers and improve its response to a changing market and industry. This can be accomplished through the following:

· Walgreens should pursue a merger with Humana which would close its capabilities gap.

· Walgreens could leverage their massive retail footprint and its new capabilities to create in-network urgent care clinics.

· These clinics can promote trust (lowered health care costs, free substance abuse counseling), convenience (availability), and ease of use (potential real-time claims adjudication) leading to superior consumer value.

· Using integrated marketing approaches by leveraging traditional media (PR releases and interviews with news outlets), social media (health awareness campaigns), Walgreens mobile app (waiting times at clinics as well as reminders for routine healthcare) and website new interactions can advocate a better consumer journey for healthcare.

· Following up with the removal of tobacco and e-cigarettes by removing unhealthy snacks, frozen meals, etc and promoting a more healthy/sustainable image.

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