Cardinal Health Strategic Analysis: SWOT and Growth Options

Company and Case Study Background

Cardinal Health is a primarily American healthcare services organization headquartered in Dublin, Ohio. The company provides services and products to hospitals, pharmacies, physician offices, and ambulatory surgery centers. Cardinal distributes a wide range of products including over-the-counter products, pharmaceuticals, radiopharmaceuticals, surgical, medical, and laboratory products. With approximately 31,200 employees, the company reported revenues of $98,502.8 million for its fiscal year ending June 2010 ("Company profile," 2010).

In 1971, company founder Robert Walter borrowed $1.3 million to purchase Cardinal Foods, a wholesale food distributor in Ohio. The company grew into a strong regional food wholesaler. However, the food industry was changing and there were barriers to national expansion for Cardinal. The fragmented pharmaceutical distribution industry, with a high growth rate, showed Walter a new path of opportunity. In 1979, Cardinal began evolving into Cardinal Distribution, with a migration to pharmaceutical distribution. In 1983, the company was renamed Cardinal Health, Inc., went public, and focused all of its attention on the healthcare industry. Within five years, the company had completely exited the food business (Pearce & Robinson, 2004, p. 18-5).

By 2006, Cardinal, McKesson, and AmerisourceBergen controlled 90% of the industry. Unlike their other competitors, Cardinal realized a large portion of their operating income from non-distribution activities. As Pearce and Robinson (2004) note, "Their diversified operating income strands included distributing pharmaceutical dispensing through their Pyxis subsidiary, and providing pharmacy services through outlets like Medicine Shoppe" (p. 18-7). The company competed in four segments: medical-surgical products and services, pharmaceutical distribution and provider sales, automation and information services, and pharmaceutical technologies and services. It was effective in cross-selling and bundling services and products, making the company an indispensable partner to healthcare providers and pharmaceutical companies. In 2006, the company considered reorganizing into two operating units: Health Care Supply Chain and Clinical and Medical Products (p. 18-8).

Cardinal Health had built its value to customers through four operational drivers: "A relentless pursuit of growth, a total focus on customer needs, a continual push toward operational excellence in everything they do, and, finally, recognition that leadership development is critical to Cardinal's future success" (cited in Pearce & Robinson, 2004, p. 18-9). The company also selectively used co-branding to enhance its image and value. Training employees helped align their activities with the company's mission. Through these strategies, Cardinal was able to leverage its unique market knowledge to meet the needs of customers and suppliers.

Cardinal helped hospitals and pharmacies meet the challenges of growing cost pressures while maintaining quality care. These organizations were also challenged by the need to manage increasingly complex patient and financial information. Cardinal's automated ordering and dispensing technology helped reduce loss and theft for hospitals and pharmacies. In addition, Cardinal offered a franchise option to pharmacists that included marketing resources, information systems, and purchasing power. Pharmaceutical manufacturers benefited from Cardinal's ability to design and produce customized packaging for their products. In addition to these values, the company facilitated growth through acquisition, absorbing more than 50 companies since 1980 (Pearce & Robinson, 2004, p. 18-12). Acquiring well-run companies in adjacent markets expanded the company's economic horizons.

In contrast to many companies plagued by rapid growth, high debt, and unfocused strategies, Cardinal Health had grown steadily, maintained a low 16% capital debt level, and adhered to a structured acquisition strategy it had never abandoned. In a growing and changing healthcare industry, Cardinal's services became ever more important. Healthcare distributors are vitally important to the industry as they "assure that products needed to diagnose, prevent, and treat health care ills are distributed to the many locations where they are used" (Pearce & Robinson, 2004, p. 18-2). It is estimated that distributors like Cardinal saved the industry more than $146 billion annually through the maximization of economies of scale (p. 18-3).

Environmental Analysis

One of the largest political factors affecting Cardinal Health was the passage of the Clinton administration's Health Security Act. Enacted in 1993, the Act's price regulation had negative effects on stock prices for pharmaceutical companies and their investment in research and development (Golec, Hegde & Vernon, 2010, p. 239). Price regulation has affected other parts of the world as well; the pharmaceutical market in Taiwan, for example, has been negatively affected by political price controls (Fei-Yuan & Weng-Foung, 2010, p. 218).

Cardinal operates within a dynamic industry. In 2006, healthcare expenditures totaled $2.5 trillion, representing 16.3% of U.S. gross domestic product, and were growing at a rate faster than GDP. The U.S. population aged 65 and over was expected to double in the next 25 years. By 2030, almost one out of five Americans — some 72 million people — would be 65 years or older. This consumer segment spent $610 billion on healthcare, utilized 74% of all pharmaceuticals, represented 65% of hospital bed days, and accounted for 42% of physician visits in 2002 (Pearce & Robinson, 2004, p. 18-1).

According to Pearce and Robinson (2004), the healthcare industry was under increasing pressure to cut costs while improving service and functionality. Labor shortages in the pharmacy and nursing fields added to these challenges. Stringent regulations and significant regulatory oversight limited the industry's freedom to conduct business effectively. In response, many companies adopted new strategies, including partnering with organizations like Cardinal. These strategies were facilitated by state-of-the-art technology. In addition, pharmaceutical companies merged to become global organizations capable of shipping products around the world at substantial cost savings, and new geographic areas beyond the U.S. and Europe emerged as production centers (p. 18-2).

In the late 1990s, the Internet began to threaten Cardinal's position in the distribution step of the supply chain. In response, Cardinal launched a $20 million cardinal.com project in 2000. As Pearce and Robinson (2004) noted, this web-based project was "designed to service the company's entire customer base of health care facilities and physician's offices; cardinal.com was a procurement portal that offered more than 500,000 items for purchase" (p. 18-3). Cardinal was at the forefront of using computerized product control. The company also used the global reach of the Internet to penetrate geographic regions where it previously had very low market presence, resulting in 20% of cardinal.com customers being new customers by 2002 (p. 18-3).

SWOT Analysis

The following summarizes Cardinal Health's internal strengths and weaknesses alongside external opportunities and threats ("SWOT analysis," 2010).

Cardinal Health maintains a robust portfolio of products and services, strategic alliances with manufacturers, economies of scale sufficient to retain market leadership, a history of strategic acquisitions that fuel growth, and a state-of-the-art e-commerce website.

The company has a high dependence on the American market, which creates concentrated risk, and is heavily reliant on a few large customers, exposing the company to significant vulnerability.

Opportunities include the increasing aging population in the United States, a growing generics market that offers potential new revenue streams, and the potential for international expansion as a driver of growth.

Threats include strong competition from Cardinal's two primary competitors, further healthcare reforms that could negatively impact the industry (as Clinton-era regulation did), and continued economic struggles in the United States.

References

Company profile: Cardinal Health, Inc. (2010). Retrieved December 16, 2010, from

Fei-Yuan, H., & Weng-Foung, H. (2010). Price regulation, new entry, and information shock on pharmaceutical market in Taiwan. BMC Health Services Research, 10, 218–225.

Golec, J., Hegde, S., & Vernon, J. (2010). Pharmaceutical R&D spending and threats of price regulation. Journal of Financial & Quantitative Analysis, 45(1), 239–264.

Pearce, J., & Robinson, R. (2004). Strategic Management: Formulation, Implementation, and Control (12th ed.). McGraw-Hill.

SWOT analysis: Cardinal Health, Inc. (2010, September 13). Retrieved December 17, 2010, from