Walgreens a pressure on profits and thus makes the

Walgreens is a drugstore operating in
all the states of the U.S. The company provides medical services and retails
prescription drugs. Walgreens works in a very competitive environment posed by
other drugstores such as Rite Aid Corporation, CVS health and Wal-Mart stores.
Walgreens provides a pathway for drugs to reach the final consumers. Walgreens
market consists of people aged above 50 years who need a lot of prescription
medication as well as beneficiaries of health insurance schemes. Their market also consists of people suffering
from chronic illnesses who tend to be in need of medications most of the time as
warranted by their conditions. This paper discusses the firm’s external
environment.

In examining the external environment
of a firm, Porter’s five forces provide a good framework within which one can
operate. The ultimate goal of any commercial firm is to excel in profits which
are highly influenced by environment of the industry in which the company
plays. Profit normally consists of the difference between costs and revenue and
thus before any firm joins an industry, it has to ascertain that the external
environment allows it to operate at a point in which costs are below revenue so
as to realize profits. The Porter’s framework outlines five factors in the
external environment that greatly affect profits (Krug, 2013). These forces are: barriers
to entry and exit, the extent of rivalry between the existing companies, the bargaining
power of buyers, the power of suppliers and also the threat of substitutes. When
any of the Porter’s factors are strong in a particular industry, then that
sector repels new entrants. This is so because the force pushes costs up or
shrinks potential revenues hence putting a pressure on profits and thus makes
the industry very attractive to the firms that are already operating in it (Alstyne,
Parker, & Choudary, 2016).

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In terms of rivalry the
pharmaceutical company faces a lot of competition from Wal-Mart, CVS Health and
Rite Aid (Robinson, 2016). These two firms
offer stiff competition as they are quite strong in size, store locations and
financial muscles. For instance, Wal-Mart is the largest retail chain in the
United States but the disadvantage with Wal-Mart is that it sells all kinds of
products and thus does not specialize in health products like Walgreens. The
rivalry is quite fierce as there also a fragmentation of other minor players.

To keep ahead of the competition,
Walgreens has employed several tactics. First, the company’s target market is
to customers who are attracted by convenient and fast service. To this end, the
firm has made its stores very efficient in service delivery (Walgreens).  A customer can even order online and get a
text message once the ordered drugs have been packaged so that if the client
shows up, they just pick up the drugs and leave. Secondly, to enhance
availability and convenience, the chain supplement organic grow with strategic
acquisition thus increasing store locations. For instance, the firm acquired
McKesson Specialty and Drug Fair thus raising its presence significantly (Ceasar, 2012). Additionally, the
company offers additional services within its stores such as photo printing
services and vaccinations thus furthering convenience.

Walgreens also faces rivalry from
global drugstores. To help keep off this competition from taking over the
firm’s territory, Walgreens acquired UK’s Boots Alliance (Ceasar, 2012). The deal increased
the company’s global presence as well as financial muscle. The acquisition also
added several new products into Walgreens portfolio including skincare and
cosmetics. The knowledge of UK market will also go a long way in standing up against
global players such as Wal-Mart.

In pharmaceutical retail industry,
the individual buyers do not high power with regards to pricing. The stems form
the fact that in most cases it is the insurance firm that pays for treatments.
As such, it is the insurers who have a higher power overpricing since they can
refuse to pay when they believe drugs are overcharged. Even these insurance
companies still have limited bargaining power especially with new drugs, more
so ones which have not exhausted their patent protection periods.  However, different retailers charge different
prices and since there are generally no explicit agreements for stocking any
type of drugs with the manufacturers, all are allowed to sell the drugs. As a
result, each retailer has to employ the appropriate pricing point in line with
its strategy (Alstyne et al., 2016).

Customers are relatively
price-sensitive when it comes to drugs but tend to have other preferences such
as convenience and personable service. As such, insurers prefer to pay where
drugs are reasonably priced. Walgreens is fully aware of this power and offers
drugs at discounted prices. In addition to cheaper drugs, their stores are
located very close to residential areas. About 70% of residents in all states
live within a five mile radius of a Walgreens’ store (Robinson,
2016).
This further weakens buyers’ power further since most people are not willing to
walk long distances to just save a few cents or dollars. The personable
shopping experience also helps make customers more loyal and in essence reduce
price sensitivity.

Walgreens’ suppliers consist of
mostly drug manufacturers and distributors. Manufacturers of medical products
tend to have high supplier power since most own patents. These patents tend to
stay in place for several years within which the companies are protected and
charge whatever amount they feel is appropriate. The power is compounded by the
fact that before realizing anew drug to the market, one needs a lot of
government approvals and also has to spend millions if not billions on research
and development. The huge requirements mean that the number of suppliers is low
thus higher power. As such, for the period within which the patent is active,
Walgreens is at the mercy of the suppliers and has no say at all in regards to
pricing (Alstyne et al., 2016). Only quantity
discounts can be realized at this point. However, upon lapse of patents,
Walgreens has increased power has the firm can choose to sell the original drug
or stock generics. The option here gives Walgreens some power and consequently
weakens suppliers’ power.

Threat of substitutes is another
factor that has a bearing on the success of Walgreens. In drugstore business,
the threat of substitutes is medium. It mainly comes from products since most
drugs released to the market are protected by patents that last a couple years.
The protection makes most manufacturers charge high prices due to the
exclusivity accorded by the legal environment as well as to recoup their huge
investments faster. As such, a gap in the market is left since some customers
cannot afford the highly priced medication (Team, 2015). Manufacturers of
counterfeit drugs cease this opportunity to offer substandard products at
discounted prices. Some even manufacture these drugs in China making it very
cheap for them.

Other potential substitutes are
herbal products and alternative medicine. Even though herbal products are not
so widely used in the United States, they are still popular among some people
who do not spend on processed drugs. Alternative medicine involves therapies
such as acupuncture among other traditional approaches to treatment.
Surprisingly, there are those who believe alternative medicine is effective and
in effect takes a considerable size of business away from Walgreens. Lack of
strong scientific evidence against such approaches has worsened the situation,
especially to the lovers of acupuncture (Robinson, 2016). Walgreens can
minimize the threat of substitutes in the market through ways such as
increasing the switching cost of consumers and by being both service and
product oriented.

A new player joining the business may
exert pressure on Walgreens as it may be forced to review its prices or provide
new value propositions to customers. In terms of potential entry into the
market, there exist several barriers to both entry and exit. First, drugstore
business is a heavily government-regulated sector. Anyone who wants to dispense
drugs in the United States for instance, has to seek approval from Foods and
Drugs Agency which in itself entails rigorous vetting. In addition, one has to
comply with competition laws among other regulations. Fulfilling such
regulatory requirements is challenging and takes quite some time and thus
scares away many potential investors. For instance, this year, Walgreens had to
review the Rite Aid acquisition deal to buy only half of the business following
serious scrutiny from regulators (Terlep & Kendall, 2017).

Secondly, the current players have presence
in many locations. For a new player who wants to enter the market and compete
effectively, he would have to lay substantial capital to get on the same level
as Walgreens and Wal-Mart. The capital outlay is in the range of billions of
dollars and success of such a drugstore is not guaranteed. This huge capital
requirement turns away many potential entrants. Again, the existing players
have strong brand names. Walgreens for instance has many repeat customers. It is
estimated that the firm serves about 5.6 million customers daily in the U.S.
Out of these over 60% are repeat customers meaning its customers have strong
connection with the brand (Walgreens). The company has a
good reputation of fast, convenient and personable services among Americans.
Again, the strategy of offering numerous services under one roof such as
vaccinations and photo services has created such strong customer loyalty that
some would never go to another drugstore even if it offered cheaper drugs.

Another entry barrier in the industry
is the learning curve. A new entrant getting into the market would have to
build relationships with suppliers, study customer trends as well as understand
how regulatory and other external factors influence business in different times
of the year. The new entrant would face significant challenge in streamlining
its supply chain (Krug, 2013). Walgreens already
has existing relationships with prominent suppliers and distributors which
saves it a lot of costs. The company recently outsourced its distribution
logistics to AmerisourceBergen (Team, 2015).

Finally, there exists an exit barrier
in drugstore industry. In the event a company wants to leave the sector, it can
be challenging to get a buyer of the chain. This can be particular challenging
because the potential buyers are competitors such as Walgreens and CVS Health
who may also have store locations in the same areas as the drugstore being sold
off (Team, 2015). Buyers other than
current competitors may be discouraged by the existing barriers of entry.

Again on Walgreens’ external
environment, there exist some opportunities in the industry that the firm can
leverage to grow revenues and profits. First, with the enactment of ObamaCare
act, insurance firms cover more people these days. That has opened up new
avenues such as specialty therapy which Walgreens can pursue to broaden its
revenue streams.

Second, there is an opportunity of
screening for Human Immunodeficiency Virus (HIV) at Walgreens clinics (Dugdale,
Zaller, Bratberg, Berk, & Flanigan, 2014). At the moment, the
company already offers vaccinations at its stores and thus would not require
addition of many resources. The only thing the firm may need to do is train the
vaccination staff on counseling and testing of HIV. This would further broaden
its category of service and grow profits.  

Walgreens plays in an environment
characterized by cutthroat rivalry. Its external environment is generally tough
with high supplier power. Luckily for the firm, the industry has several
barriers to entry and exit which dissuades the would-be competitors. However,
the drugstore is currently ranked at number two in the industry in spite of the
various challenges in the sector. The company has aggressively employed smart
strategies to not only grow in revenue and profits but also create a strong
brand name across America and UK. It is currently in the process of acquiring
Rite Aid which will further strengthen global operations and grow its revenues.
The broadening portfolio and financial muscle is increasingly making it easy to
for the firm to edge out rivals.