Question

Walgreens Boots Alliance, Inc.

Walgreens pharmacy began in 1901 as a single store on the South Side of Chicago and grew to become the largest chain of pharmacy retailers in America. Walgreens was an early pioneer of the “self-service” pharmacy and found success by moving quickly to build a vast domestic network of stores after the Second World War. This growth-focused strategy served Walgreens well up until the beginning of the 21st century, by which time it had nearly saturated the U.S. market. By 2014, 75 percent of Americans lived within five miles of a Walgreens. The company was also facing threats to its core business model. Walgreens relies heavily on pharmacy sales, which generally are paid for by someone other than the patient, usually the government or an insurance company. As the government and insurers started to make a more sustained effort to cut costs, Walgreens’s core profit center was at risk. To mitigate these threats, Walgreens looked to enter foreign markets.

Walgreens found an ideal international partner in Alliance Boots. Based in the UK, Alliance Boots had a global footprint with 3,300 stores across 10 countries. A partnership with Alliance Boots had several strategic advantages, allowing Walgreens to gain swift entry into foreign markets as well as complementary assets and expertise. First, it gave Walgreens access to new markets beyond the saturated United States for its retail pharmacies. Second, it provided Walgreens with a new revenue stream in wholesale drugs. Alliance Boots held a vast European distribution network for wholesale drug sales; Walgreens could leverage that network and expertise to build a similar model in the United States. Finally, a merger with Alliance Boots would strengthen Walgreens’s existing business by increasing the company’s market position and therefore bargaining power with drug companies. In light of these advantages, Walgreens moved quickly to partner with and later acquire Alliance Boots and merged both companies in 2014 to become Walgreens Boots Alliance.

Walgreens Boots Alliance, Inc. is now one of the world’s largest drug purchasers, able to negotiate from a strong position with drug companies and other suppliers to realize economies of scale in its current businesses.

The market has thus far responded favorably to the merger. Walgreens Boots Alliance’s stock has more than doubled in value since the first news of the partnership in 2012. However, the company is still struggling to integrate and faces new risks such as currency fluctuation in its new combined position. Yet as the pharmaceutical industry continues to consolidate, Walgreens is in an undoubtedly stronger position to continue to grow in the future thanks to its strategic international acquisition.

24. Why did Walgreens look to expand into foreign markets? (10’)

25. How did Walgreens use its alliance with Boots Alliance to gain sustainable global competitive advantage? (10’)

26. Is it possible that Walgreens employs a licensing or franchising strategy when entering foreign markets? Explain reasons. (10’)

Answer 1

24. The reasons for which Walgreens expended into foreign markets are:

1. During the early days the focus of the company for on growth not on profitability for which they made heavy capital expenditure so that more and more stores could be open. This reduced the profit margin of the company.

2. The core business was pharmacy sales, which was paid by either the government or the insurance company, but at the start of 21st century, both of these started to cut their costs, hence the revenue for Walgreens started falling.

3. Since the risk was not diversified enough, hence the company needed to expand into foreign markets.

25. Benefits of alliance with Alliance Boots were:

1. Alliance Boots had a global footprint with 3300 stores in over 10 countries, which helped Walgreens to enter into new markets and already a set up distribution channel and infrastructure for which they need not invest anything.

2. It provided new revenue stream in wholesale drugs, hence diversifying the product lines.

3. Alliance increased the market value of the company and thus increased the bargaining power of the company.

26. Yes, Walgreens can employ francising and licensing due to the following reasons:

1. This will help to enter into other markets without incurring any setup costs and can gain risk free cashflow through Royalties.

2. Since the company has a proven track record in pharma company, There band name can be used in other coutries to sell products.

3. Under these agrrements the intangible assets of the company like chemical formula of a drug, can also be secured through agreements.