Discussion question 1: What are the benefits and costs of Cardinal Health’s product-related diversification strategy? Firstly, Walter started implementing its product-related strategy on time, in 1996, when FoxMeyer went bankrupt. If, the company was not diversified and dependent only on one product division, it might have ended up as FoxMeyer. Also, the drug distribution division has been forced to lower its prices by health care providers, patients, insurance companies and HMOs.
Moreover, related costs are increasing, reducing profit margins of the company. This division is not as profitable as other three divisions, generating less than 50% of the company’s total profits, even though 80% of Cardinal Health’s revenue comes from this division.
On the other hand, other three product divisions are much more profitable and have higher growth rates. Due to its diversification strategy, today, it has very healthy returns on sales and on assets, twice as much as those of its rivals, McKesson and AmeriSourceBergen. Cardinal Health’s product divisions are related, therefore, each division can share its resources and capabilities with the other divisions. For example, all the divisions can benefit from each division’s R&D department.
This would decrease costs in almost all departments including R&D, marketing and distribution, benefitting from economies of scale. In addition, one division’s rare, hard to imitate, valuable and unique resources can also be used for the other divisions. In other words, the diversification strategy enables the company to achieve enhanced competitiveness beyond what can be achieved by operating in more than one product divisions separately – 2+2=5. However, marginal economic benefits declines and marginal bureaucratic costs increase as the company becomes more diversified. Marginal bureaucratic costs (MBC) are always a worry for largely diversified companies such as Cardinal Health.
These costs are associated with e.g. more expensive information system and more headcounts. The company may face structural problems associated with the diversification strategy. As the company gets larger and larger and diversify into different product divisions, the organization structure should be changed to fit the diversification strategy. An inappropriate fit may result in low performance and lead to strategic changes.
Also, internationalization or geographical diversification may lead to problems related to psychic distances. As the company gets more diversified, information flow will be harder due to differences in language, culture, level of education, political systems, foreignness and level of industrial development.
Discussion question 2: What has made Cardinal Health the biggest player in the US health care industry in general and the undisputed profitability leader in the drug distribution business in general? Its product related diversification strategy, through series of successful acquisitions, has made the company the biggest player in the US Health care industry. Diversifying the company into industries with high growth rates and potential profitability enabled the company to outperform its competitors who depends mostly only one product division.
As it is mentioned in the study, the acquisition strategy is in Cardinal Health’s blood and it is extremely good at acquiring firms and integrating them with the parent company. Cardinal Health’s acquisition success can be explained in four aspects. First, the company acquires only market leaders, except a few earlier acquisitions of firms which were acquired and strengthened by the company. Second, cardinal Health also looks for compatibility of potential acquisitions with the parent company’s structure and strategy.
Third, it employs a full time merger integration team, consisting of 4-5 professionals specialized in acquisitions. This team makes sure that acquisitions are safe and sound. In addition, top talents are a vital resource for the organization. Finally, it retains the top talents at its acquired businesses, because these talents have already been successful in the business and have experiences, as leaders of market leading companies.
For example, the acquisition of Intercare was a wonderful fit between Cardinal Health and Intercare. It provided the company with UK and European manufacturing and service capabilities, a large global market and valuable, hard to imitate and unique capabilities in production of pre filled syringes. Intercare’s CEO and top talents stayed with the company.
With the help of Cardinal Health’s merger team, the acquisition was established without any major difficulties. Cardinal Health’s internationalization strategy has also contributed its success at home, by providing additional earnings and resources from overseas. Outsourcing has also contributed its success at home. Some of its products were produced in other countries at lower costs and sold in the US.
By leveraging product relatedness, the company supported its drug distribution business. For example, the company can program its Pyxis PatientStation to be filled with and supported by Cardinal Health produced or distributed products. One product division is used to increase sales in others. All of the benefits stated above, have contributed Cardinal Health’s in the US industry and in the drug distribution business.