Category Disruption of “retail and healthcare”

Posted by Allan Steinmetz on 6 December 2017

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This past Sunday CVS Health agreed to acquire Aetna for over $69 billion.  Wow! The new company, combining one of the country’s biggest pharmacies with one of its largest health insurers, will create a world where patients will get the “human touch,” they said. Fewer people will fall through the cracks, they promised, and getting high-quality, low-cost medical care will be as close as your corner drugstore.

In my opinion, this is brilliant - an example of smart, innovative management, finance and strategy people thinking outside the box. The news made me take a double take. Why would a major drugstore chain take on the morass of a crazy healthcare system? It’s a vertical merger—meaning CVS and Aetna don’t compete on much, so it’s about synergies from integration rather than getting rid of a competitor. Why would Aetna agree to this deal? To shake things up and reinvent themselves.

Leadership in this case has disrupted a business category of “retail and healthcare” with one brush where there wasn’t even a prevalent threat from competition. CVS and Aetna independently, were facing challenges with stagnant low growth and productivity, regulatory challenges and competition. However, together they are reinventing how healthcare happens! The only possible threat really was Amazon and only if they would decide to get into the pharmaceutical mail-order business.

In my opinion, it all started with having a clear sense of vision and purpose when CVS reinvented its business strategy from simply being a “retail pharmacy” to “health care company”. Overnight CVS went from an “on shelves pharmaceutical retailer” to a “reinvented category health services provider”. They stopped selling products that were incongruous to their brand positioning such as cigarettes, despite generating significant revenue.

They are being a “self-disruptive”. It is no different from what IBM did in the 80s when it went from being a successful “mainframe computer” company, to a “personal computing” company in the 90’s and eventually to an e-commerce company in 2000. Everything about IBM changed. They redefined the scope of their business which opened new opportunities for their future. They realigned their focus and investments. They reallocated resources to redefine their core business. CVS is doing the same thing here through their acquisition of Aetna. Smart move.

The combined company will redefine the healthcare experience from shopping for prescriptions, clinic healthcare visits to healthcare insurance and benefits. CVS Health’s 9,700 pharmacies and 1,000 Minute Clinics could evolve to become even more focused on the delivery of actual medical care. Acquiring Aetna adds new services and powerful data informatics components to its enterprise. If they get the technology and cross functional communications and data mining right, they could have a huge impact on the customer experience. The key word here, is getting it right.

While I believe this strategy is brilliant for CVS Health and Aetna, I also believe it could become the demise for Walgreens Boots Alliance with brands being sold off and dismantled. It seems there are many competing factors that are taking away attention from Walgreens Boots Alliance’s core business and now they need to content with this new competitive CVS Health threat. For starters, the Rite Aid acquisition further complicates their internal organization and integration - it is taking too long and seems extremely complicated with selling off stores and the like. Their Boots beauty strategy which they are importing from the UK, in my opinion, is not appealing to US millennials or consumers in general. Walgreens is not a department store or SEPHORA.  Their tagline “the corner of happy and healthy” is not in sync with their new beauty strategy and isn’t executed very well in their advertising (having wacky senior citizens with florescent colored hair addressing Medicaid just doesn’t work). Walgreen management defections and Boot’s leadership import takeover from the UK is causing operational execution problems. Also, they are still “hemorrhaging” from the Theranos blood testing relationship. And lastly, major mass retailers are putting more emphasis on pharmacy (Walmart & Target) and discounting which will increase their competition and additionally, they lost a lot of customer goodwill when they had the Express Scripts contract dispute. And now CVS is changing the entire category ballgame. If I were at Walgreens, I’d be worried.

This disruptive transformation and business category busting at CVS/Aetna is going to require a new way of thinking about their business going forward.

  • For this deal to be successful they will have to instill a sense of cultural innovation and creativity among the employees of both organizations. The deal demands that everyone, throughout the organization, start thinking out of the box, creatively and innovatively from the get-go.
  • Old way of thinking needs to be abandoned. The old ways and methods will not help them through this transition.
  • The combined organization needs clarity of purpose, a new vision and culture that is embraced by all without exception.  Employees who are in opposition to this merger should be dismissed. Focus on employees who are champions and advocates of this transformative move.
  • The employees of the combined organization require a narrative that justifies the move among their peers, colleagues and friends outside the office.
  • The combined CVS Health and Aetna organization is going to require both external and internal rebranding. Exactly, what will be the customer promises that will be made and how will you and deliver on those promises through improved customer experience? CVS will need to get their employees to become believers and understand what this disruptive strategy/positioning means in their lives and the way they perform their jobs

I am a big fan of disruptive innovation and creativity. I also have been a big fan of CVS ever since they adopted their “health” purpose and mission and incorporated it into their brand identity. It is not a company that rests on its laurels but is constantly thinking of improving themselves and the customer experience. Aetna has been a client of ours in the past and they too, are innovative, reinventing themselves and constantly thinking of ways to improve their employee and customer experience. Both organizations have outstanding forward thinking CMO’s and transformation management personnel. I’m confident that this “new disruptive category of CVS Health/Aetna” will be successful. It will take some time but I am confident they will make it happen and reshape how all of us experience “health and healthcare”.

What do you think?