Corporate Strategy at Cardinal Health1
Mike W. Peng
University of Texas at Dallas
What is behind the corporate strategy that made Cardinal Health a leading player in the health care industry?
Headquartered in Dublin, Ohio (a suburb of Columbus), Cardinal Health is one of the largest and most successful US companies that many of you have probably never heard of. Cardinal Health is an $87 billion company that was ranked number 19 on the Fortune 500 (by sales) in 2007 yes, it was number 19, not a typo for 190.2 Named as a “stealth empire” in a Fortune magazine article, Cardinal Health produces significantly larger revenues than some of the seemingly more visible health care companies on both the pharmaceutical side (such as Pfizer) and the retail side (such as CVS and Walgreens).3 Founded in 1971 and listed since 1983 (NYSE: CAH), Cardinal Health today provides products and services to 90% of all hospitals in the United States. More than 50,000 deliveries are made each day to 40,000 hospitals, pharmacies, and other points of care. If you have any health care needs in the United States, chances are you have been a Cardinal Health customer without even knowing it. The hallmark of Cardinal Health’s corporate strategy is product-related diversification. In 2008, Cardinal Health consists of four main divisions, each of which is a market leader in its respective field: Healthcare Supply Chain Services—Pharmaceuticals: Cardinal Health is one of the nation’s largest drug and medical supply wholesalers and by far the most efficient and profitable one.
Healthcare Supply Chain Services—Pharmaceuticals:
Cardinal Health is one of the nation’s largest drug and medical supply wholesalers and by far the most efficient and profitable one. Every day, itships more than 2.5 million pharmaceutical products through 40,000 deliveries. A full one-third of all pharmaceutical, laboratory, and medical and surgical products used in the United States flows through one of its logistics facilities.
• Healthcare Supply Chain Services—Medical:
It distributes products from more than 2,000 manufacturers to hospitals, surgery centers, laboratories, and physician offices throughout the United States and Canada.
• Clinical Technologies and Services—
Develops, manufactures, and markets machines that are used in hospitals, nursing homes, and other health care centers to safely dispense drugs and medical supplies while automatically managing their inventories. Its products include Oyxis technologies that automate the management of medications and supplies from the pharmacy to the nursing unit, and Alaris infusion technologies for verifying dosages and administering intravenous (IV) medications.
• Medical Products and Technologies Manufactures one-quarter of all consumable and non-consumable medical products used in the United States, ranging from latex gloves to surgical knives. One of every two surgeries performed in the country uses its products.In addition to product-related diversification within the United States, Cardinal Health is also a large multinational enterprise (MNE) with more than 43,000 employees on six continents. Because it has traditionally kept its sight on the US health care industry, at present, only less than 10% of its revenues come from sales out-side the United States. It is not surprising that Cardinal Health believes that there are large and diverse opportunities in the still fragmented $4 trillion health care industry worldwide. Why and how Cardinal Health has formulated and implemented its corporate strategy, driven primarily by product-related diversification in the United States, is the main focus of this case.From Cardinal Foods to Cardinal Health In 1971, the company was founded by the 26-year-old Robert Walter (who earned an MBA from Harvard in the same year) under the name Cardinal Foods, whichhad nothing to do with health care. Walter’s father had been a food broker, so Walter knew a little about the food distribution business. But after ten years or so of peddling ketchup, it occurred to Walter that Cardinal Foods would never be a big fish in the food business.
Walter then put on his MBA hat and did a classic SWOT analysis, scanning various industries.
• The drug distribution industry had 354 small, independently owned distributors, but only three larger, publicly listed firms. In other words, time was ripe for consolidation.
• The drug business was growing faster than the economy, thus presenting more growth opportunities.
• The products, when prescribed by a doctor, cannot be substituted—unlike, say, butter.
Thus, in 1980, Cardinal Foods entered drug distribution by becoming Cardinal Distribution (covering both foods and drugs). Finally, the firm, having already sold off its food wholesale business since 1988, renamed itself Cardinal Health in 1994.In 1983, the firm offered shares to the public. For 15 years, Cardinal Health remained a single-business firm, by doing nothing other than acquiring smaller drug distributors and moving drugs from point A to point B. It bought pharmaceuticals from drug makers such as Pfizer (its biggest supplier) and sold them to the likes of CVS (its largest buyer). Its profit was the tiny take from trucking the drugs from the factory to its warehouse, sorting and repackaging them, and finally delivering them. Although drug distribution is, according to Fortune, “not sexy,” Cardinal Health has become the undisputed leader.Product-related Diversification Until 1995, the single-business strategy with a drug distribution focus worked well for Cardinal Health. However, in 1995, a competitor, FoxMeyer, tried to grab market share by undercutting Cardinal Health. Fearing that drug prices might collapse, Walter started to look for ways to diversify. FoxMeyer went bankrupt in 1996, but by then Cardinal Health’s diversification strategy was under way.
Case Discussion Questions
4. To focus more on international activities, what are the main opportunities and obstacles?
5. Does Cardinal Health need to adjust its organizational structure (currently represented by the four US-focused product divisions) to create a better fit with its more internationally oriented strategy?