McKesson Makes a Deal: a Case Review
I. Current Situation
McKesson Corporation is one of the leading providers of health care products and services. Their products and services are mostly distributed to pharmacies, both independent and chain as well hospitals and other health care organizations that are located in the United States and Canada. The leading position of McKesson is due to the fact that they are a major wholesale distributor in an industry where the average net profit is estimated to be 2 percent.
However, McKesson has not always concentrated on the pharmaceutical industry. Previous strategies and policies of the company sought to dominate different markets. In the beginning, they are one of the largest liquor distributors in the United States. They also specialty foods, beauty products, bottled water and general merchandise. Since they aimed to lead in different markets, they entered many acquisitions and mergers. This introduced them to the difficulties of the markets that they wished to dominate. They only started making a name in the pharmaceutical industry in the 1980s when they acquired various medical and pharmaceutical companies.
By the 1990s, the company decided to concentrate on furthering their edge on the pharmaceutical industry. This was evident when they sold acquired companies that are not related to health care like Armor All Products and Millbrook Distribution. They also formulated a mission statement that says all about their aspiration inside the pharmaceutical industry.
“[Becoming] the world leader in health care supply management by assisting its consumers in improving patient care while lowering or controlling cost”(Holland, Oliver, Bergevin & Stanley, 2004 )
With this mission statement, McKesson aims to provide high margin generic drugs. This objective resonate their mission of lowering or controlling the costs that they would pass onto their consumers. In order for McKesson to achieve their objective, they must be able to find ways of lowering their production costs so that they will be able to lower the cost that they will pass onto their consumers. One of the policies that they implemented to see this through is by focusing on developing and maintaining technologies. For example, McKesson invested in information technology. This allowed them to create a web-based system that improved the company’s management of inventories and orders by enhancing their speed and accuracy. By lessening the margins for errors, McKesson will also be able to lessen their production cost.
McKesson is still maintaining the business strategy of acquiring and merging. This is highlighted in the case study prepared by Holland, Oliver, Bergevin and Stanley. The case Study presented the scenario where McKesson’s CEO, Mark Pulido, is proposing to Edward Lyle, a member of the Board of Directors, a merger with HBO and Co. It is Lyle’s responsibility to ensure that the merger between McKesson and HBOC will be beneficial to McKesson, if not equally beneficial to both companies, since Lyles is not sure if the merger will be advantageous to the stockholders of the tow companies. With this, Lyle decided that a thorough scrutiny of the proposed merger is in order.
II. External Environment
External factors, more specifically the macro-environment, play an important role in the success of a business. However, companies do not have control over the changes or their effects the business operations. This also presents two sides to these external factors. Since companies cannot control them, they can pose as threats to the companies. On the other hand, changes in the external factors can also open opportunities for the growth of the company.
With this in mind, it can be said that there is a need to analyze external factors in order to ready the company for any changes that might take place. In carrying out an analysis of the external factor, it is being recommended that the PEST analysis or STEP, if the analyst is optimist about the changes in the external factors, be used. This type of analysis looks at four specific factors – political, economic, social and technological.
PEST Analysis
Political
- Stable political situation in the business locations
- Laws support the importance of health care
Economic
-strong and stable economy
-Pharmaceutical industries experiences growth
Social
-people are driven to take care of themselves and their families
-consumers want the bet value that their money can buy
Technological
-continued R&D allows pharmaceutical companies to develop more effective drugs
- technological innovations such as the information system helps in reducing the production cost
Based on the table above that shows the external factors that affect the operations of McKesson, is it more appropriate to use STEP since it is evident that the external forces are in favor of the the company’s desire to advance in the industry.
Task Environment (Industry)
Aside from the external factors abovementioned, a closer look at the pharmaceutical industry will also reveal some trends and factors that will affect the operations and profitability of McKesson. The trends and factors present within the industry can dictate the need to change or maintain the strategies and policies being implemented by McKesson. The need to adapt to the changing environments under which the company operates is crucial if they want to achieve their objectives.
According to Angell (2004), despite being a high-risk business, pharmaceutical companies enjoy higher profits every year compared to other industries in the United States. She added that the top 10 pharmaceutical companies included in the Fortune 500 made more profits than the combined profits of the other 490 companies in the list. This suggests that the pharmaceutical industry is stable and is going strong. This implies that McKesson have greater chances of growing since they decided to focus on the health care industry.
However, in order for McKesson to experience the promise of success within the pharmaceutical industry they must be able to compete and adapt to changes. Innovation is believed to be the key to success in the pharmaceutical industry. In turn, technological innovations can lead to the improvement of prices and services being offered by pharmaceutical companies.
Summary of External Factors
In summary, the factors that affect the operations and profitability of McKesson include the stability and strength of the economy and political situation of the country in which they operate. This is the case since the economic conditions of United States and Canada affects the trends within the pharmaceutical industry where McKesson belongs. In addition, the perception of the market of the importance of the products and services that McKesson offers also allows the company to experience the kind of patronage that they know have. Lastly, the continuing quest of man for knowledge gives the company the ability to adapt to changing times.
III. Analysis of Strategic Factors
Corporate Structure
A well-defined corporate structure allows the members of the business organization to determine key persons who are responsible for ensuring every business activity of the organization. Having specific people posted to keep an eye on things or to carry out the processes needed to complete a task, the company will be sure that the no aspect of the business is left on a corner.
In the case of McKesson, the structure of the organization is well-defined. Everybody knows his or her role within the company. With the recognition of their roles, they also become aware of their responsibilities. This allows the members of the business organization to function as individual while working a team. They work as a team since their end goals are the same, which is to ensure the achievement of the mission of the company.
In addition, the presence of the corporate structure defines the people who are responsible for carrying out decision-making tasks. It is important for decision makers to be identified since they are the players within the organization who are responsible for the implementation of changes that will affect the entire operation of the company. In the case of the proposal to merge with HBOC, the corporate structure proved to be invaluable since Lyle will be able to scrutinize the proposal thoroughly since it is part of his responsibility as a member of the Board of Directors. In turn, Lyle will be able to determine if the merger is in the best interest of McKesson before actually entering into the agreement.
Corporate Culture
According to Schein (1992), corporate culture can be divided into three levels. These three levels can help in subjecting corporate culture to analysis. The first level is artifacts; it pertains to the aspects that are easily distinguished but are also difficult to understand. The second level is espoused values. These espoused values include conscious objectives, strategies and even the philosophies of the organization. Therefore, these espoused values determine the priorities of the business as well as the strategies needed in order to get things done. The last level is the essence or the core. This level is composed of the causal assumptions and values of the organization.
Strong corporate culture is present when the employees of the company are aligned with the values or essence of the organization. When there is strong culture within the organization, its members are compelled to act based on the notion that what they are doing is correct and for the benefit of the whole organization. However, there is also a downside to strong corporate culture. When employees think alike too much, they tend not to challenge the existing organizational way of thinking (“Organizational Culture” 2005). This phenomenon is known as Groupthink. Groupthink needs to be prevented to a certain degree since it proliferation can hinder innovations with the company. When everybody thinks that have the monopoly of truth, then they would not want to let go of that thought. Thus, the introduction of new business models and concepts may prove to be difficult.
In the case of McKesson, it can be stated that the presence of the mission statement helps the members of the business organization to move towards one direction. According to Gillman and White (2001), having a mission statement helps business in two ways. The first one is that these statements help to communicate both internally and externally. Through mission statement, employees will be informed about the beliefs of the company as well as how the values that the company aspects their employees to share with them. Adhering to the mission statement and the objectives of the company motivates the members of McKesson since they have a clear idea of the things they need to accomplish. This also allows the company to forego with business activities that will not contribute to the achievement of their goals and thus save them money. One example of this is McKesson’s move to sale Armor All and Millbrook.
Corporate Resources
Based on the case study prepared by Holland, Oliver, Bergevin and Stanley, McKesson is growing. In terms of revenue, the company has been experiencing growth. This can be attributed to the increase of sales in the past years. For example, in 1996 the revenue of the company was at ,964.8, it increase to 15,710.8 the following. An even more significant increase was experienced in 1998 when the company registered revenues of 20,857.3.
Due to the growth of the company, they are able to redirect some of their capital to research and development. R&D is a significant process in the health care industry. Since the problems that the drug companies wishes to address, diseases and viruses, have the ability to mutate, the technology of the company must be adequate to find newer and newer products that will counter the effects of the disease or viruses on human beings. This implies that businesses in the health care industry must be innovative. One way of achieving this is through continuous studying and researching.
Other technological breakthroughs also affect the operation of the company. One such innovation is the information system. When McKesson started using an information system that allows them to manage their inventory and orders better, they were also able to reduce the cost of production. In turn, this reduction in production cost allowed them to pass their products and services onto the consumers at a lower price and thus fulfilling their mission statement.
Since McKesson depends on innovation (BrainBench, 2004) they must be able to recruit well-skilled employees to do the job. This is truer when it comes to employees that will be in-charge of R&D and IT related tasks. Even the process of recruitment is computerized. For this task McKesson commissioned the help of BrainBench. This move by McKesson saved them resources and time since the time to hire was reduced to 20 hours from 55 hours. It is also the case that due to the time reduction they were able to save 3,000.
Summary of Internal Factors
In summary both the corporate structure and culture of McKesson helps them in ensuring their success in the industry. The corporate structure delineates tasks to ensure smooth operation, while corporate culture makes sure that the individuals within the organizations works as team in achieving the goal. Continued flow of capital and the profitability of the company allow them to continue the programs that they have in order to realize the mission statement of McKesson.
III. Strategic Alternatives and Recommended Strategy
Earlier, it was stated that in order for a company to be successful in their endeavor they must be able to internal and external changes that occurs. Therefore, it is important to determine these changes. Most of the external macro-economic factors have been identified in the PEST analysis. Internal factors were also presented in the previous section. With the two kinds of factors identified, it is important that an analysis be completed using internal factors and external factors. In order for this to be completed, a SWOT analysis must be conducted. SWOT analysis will allow the company to determine their strengths and weakness as well as the opportunities and threats that they need to watch out.
Strengths
The presence of a defined goal can be deemed as one of McKesson’s strengths. This is the case since the presence of the mission statement gives direction to the company. They are able to plan their strategies and policies well since they know what they want to achieve in the end. The mission statement also resulted to the formation of a corporate culture that ensures the achievement of the objectives.
Weaknesses
One of the weaknesses of McKesson is inadequacy of the health care information system that hey provide for their clients. Given the rapid integration of technology such as the use of computers and internet, specially designed software must be able to cater to the needs of the health care community. Most of these softwares aid the health care professionals in organizing their clinical and home data as well as financial and managed care information. Since there is a growing market for these kinds of products and services and McKesson is not able to deliver, their mission of leading the pharmaceutical industry can be jeopardized.
Opportunities
In relation to the weakness mentioned above, it can be deemed that the proposal to merge with HBOC as an opportunity for McKesson. McKesson recognizes their failure to meet the demands of the market for high-quality health care information systems. On the other hand, HBOC is known for their open-architecture system that will allow the customers to enhance their own systems. Merging with HBOC will allow McKesson to complete their line-up of health care products and services. In turn, a complete line up will result to the creation of a total-solution package for the consumers.
Threats
The presence of HBOC as a separate company threatens the objective of McKesson to dominate the health care industry. This is the case since HBOC is offering a product that is not on the product line of McKesson. Even if HBOC challenges only one aspect of McKesson’s Business, the fact that they are able to lead the industry in a specific product offering implies that McKesson will not be able to dominate fully the industry.
IV. Implementation
Based on the various analyses presented above, it is clear that the merger with HBOC will be beneficial for McKesson as a company. Lyles’ main concern about the proposed merger was if HBOC would be able to contribute to the achievement of the McKesson’s objective of leading the health care supply management by assisting customers in improving patient care while lowering or controlling costs. As the analyses have shown, McKesson’s own experiences proved the efficiency of information systems in reducing the costs of production and thus lowering the prices of their products and services. This suggests that if McKesson will be able to provide the same kind of services to their customers they will be able to assist in the improvement of patient care and thus fulfilling one of the sections of their mission statement. Aside from this, HBOC could help in the furthering McKesson’s own information system that could lead to furthering lowering of the production cost.
McKesson is familiar with the ins and outs of merging. They have been practicing this strategy since the 1970s. This means that they have enough experiences to tell whether the proposed merger will aid or hinder them in achieving their goals. However, it must also be recognized that every case varies. Before sealing the merger, McKesson must be assured that the corporate culture as practiced before the merger will be maintained since this is one of the company’s strengths. A well-defined corporate structure must not be lost in the midst of the integration of the two companies.
V. Evaluation and Control
The performance of the company after the merger must be closely monitored. This is the case since after the merger it is inevitable that some changes can occur that would affect the strategies, policies, motivations of the people and over-all operations of the company. These changes can affect the sales of the company and thus the profitability of the business. There are three possible performance ratings after the merger – positive, negative and neutral. A positive rating means that the merger resulted to increased profitability, while negative is the opposite. On the other hand, neutral indicate that McKesson maintained the same level of performance and profitability before and after the merger.
When the rating falls on positive scale, the company must be able to identify the new strengths of the company and harness its. Weaknesses must also be identified so that they will not become liabilities. When the rating falls on the negative scale, the problem must be identified and resolved immediately. In the same way strengths and weaknesses must be identified.
In the case of a neutral rating, the company must evaluate the changes that occurred and their impacts on the operations of the company. Afterwards, the strengths of the newly merged company must be identified and integrated into the operations of McKesson. A neutral rating must be deemed unacceptable in the same way a negative rating is. It must be remembered that the reason behind the merger is to further the growth of the companies and not drive them to stagnation. Therefore, the company must not stop looking for and fixing until growth is experienced.
Credit:ivythesis.typepad.com
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