Tuesday, June 08, 2010

CVS and the Risks of Vertical Integration

Yesterday, Walgreen's announced that it no longer plans to participate in drug benefit plans offered by CVS Caremark. They apparently are still miffed by what they suspect is inappropriate steering of Caremark drug benefit plan customers to CVS retail stores.

While it is unclear who is right in this dispute, one thing does remain quite clear. The episode highlights the risks of vertical integration. CVS Caremark is both a competitor to Walgreen's, but also a historical partner in that consumers used Caremark drug benefit plans at Walgreen's retail stores in the past. As a firm vertically integrates, it inevitably finds itself competing with its customers and other partners. That often raises apparent conflict of interest concerns, and it can be damaging to the business. Of course, the question remains: Which firm will suffer more from this dispute?

2 comments:

彥君彥君 said...

Well done!............................................................

Zekarias said...

Professor Michale,

Do you think CVS might need to consider spinning off its benefits business to avoid such a conflict and a drag on its business or do you think if it stick to its position, it may well win this battle?

How about for Walgreens? Would you think it then make sense to integrate vertically (note Walgreens has also a benefits business) and expand that business? Or it would make sense to spin off the business? How about considering going international? Will that be an option to grow the business?