Cardinal Health Inc. Business Position Analysis
Background and Overview
In 1983, Cardinal Distribution became Cardinal Health Inc. The company has established distinctive competency in integrated healthcare products and services distribution like its predecessor, Cardinal foods who had prosperous food distribution. The development of Cardinal Health from Cardinal foods via Cardinal Distribution is largely due to the vision and strategy of their founder, Robert D. Walter. The Mission and Vision of Cardinal are to help the customers get access to the solution for their healthcare needs, to build a creative partnership with competitors, or customers, and to provide innovative health products or services.
Stated and Implied Objective
- The three major objectives for growth found in this case are internal growth, meaningful acquisitions, and significant partnerships. An example of a stated and specific acquisition is to get Baxter’s Allegiance in 1999, which made Cardinal Health the leading distributor of surgical devices.
- During the past ten years, Cardinal Health’s revenue, operating profits and grew at double-digit rates. However, Cardinal Health’s objective to make a profit was not from what we thought from distribution, but from non-distribution activities, which had higher operative margin. The example is the diversified business’s operating income stream for Cardinal Health
- To maintain a leading position in this dynamic, competitive healthcare industry, Cardinal Health has to be a builder since the job has never been done. One example is that Cardinal has spent a huge amount of investment in the web-based information system in response to impact from disintermediation and e-business.
Stated and Implied Strategies
Forward Integration – The forward integration strategy has played a very important role in the development of Cardinal Health beginning from Cardinal Foods to Cardinal Distribution. This forward integration strategy also has brought large parts of its annual revenues. For example, in 1996, Cardinal made its acquisition to get company Pyxis, which is kind of high-margin service purchase when compared to traditional buying.
Backward Integration – From the beginning, Cardinal company controlled all aspects of products. Essentially, Cardinal leveraged its position to capture more profit through backward integration. For example, upstream, Cardinal Health started to manufacture its own drugs like soft-gel capsules and rapid-dissolving tablets in 1998.
Horizontal integration –The acquisition of well-run companies in adjacent markets has been the strategy of Cardinal. For example, in 1999, the purchase of Baxter’s Allegiance division made Cardinal more attractive to the health provider. Although Cardinal Health’s business is mainly located in the United States, their products and products have also been distributed to many foreign countries.
Retrenchment – Focus is one the most strategies that Cardinal used to maintain its leading position in the industry, so in the late of 1998, Cardinal decided to leave food distribution completely after the rename of Cardinal Healthy.
Diversification – Related Diversification when Cardinal Foods became Cardinal Distribution & Cardinal Health. With the name change, there was a shift of distribution competency in the food industry to the pharmaceutical industry. Cardinal has also gradually built in their value chain position in both directions. Diversification also can be found when Cardinal expand its business to the international market and shifted distribution to upstream drug discovery and downstream consulting and information.
Competitive – In order to survive in this dynamic and super competitive healthcare industry, Cardinal health’s top management must make a decision in response to the trend worldwide to provide low cost while high demanding services. For example, Cardinal Health is considering so-called one-stop-shopping to customers. Cardinal Health also spends a large amount of money to develop web-based information system in response to the pressure from disintermediation and e-business.
The most visible distinctive competency for Cardinal company from Cardinal Foods to Cardinal Health is its distribution logistics. The company has full control to its distribution centers. Managing this kind of inventory is clearly considered a core competency at Cardinal Health.
Another distinctive competency for Cardinal Health is its specialized information system. This web-based cardinal.com can provide an effective, and efficient connection with its customers.
Final but the key distinctive competency for Cardinal is its top management or its founder, Robert Walter. Bob’s Vision to address the health needs in communities plays an integral role in the sustainable development of the Cardinal company from food distribution to healthcare distribution, from local to national to international shift.
Delivering innovative, effective, and community-driven health products and services are Cardinal Health’s core competency.
Current Position: Financial Analysis
Liquidity: The financial ration of liquidity is to measure the company’s ability to pay its current liability as needed. Cardinal Health Inc’s current ratio and quick ratio are continuing dropping when compared to the past five years. The company’s current ratio is about 25% lower when compared to five years ago because the company’s total current liabilities have increased much greater than the increase of the total current assets while inventory is almost no change. The company’s current ratio is a little bit lower than the industry norm 1.40, thus a relatively low ratio suggests the company may not have sufficient current assets to meet current obligations. Cardinal Health Inc’s quick ratio is 0.94 which is higher than industry norm 0.70, which indicates the Cardinal Health Inc could pay current liabilities without relying on the sale of inventory.
Capital Structure: The financial ration of capital structure is to indicate the company’s ability to pay its loan. The trends for Cardinal Health ‘s capital structure ratios are increasing a little bit when compared to five years ago because the total liabilities have a big increase when compared to five years ago, although Cardinal Health ‘s most recent TL/TSE is way below the industry average. This shows that Cardinal Health has been borrowing more money during the past f years. Cardinal Health Inc’s D/E ratio, D/A, and CD/TD ratio (1.75, 0.64, 0.76) are all lower than industry norm (3.10, 0.71, 0.80) respectively, which indicates there is lower risk to present or future creditors.
Performance: The financial ration of performance is to indicate the company’s ability to create profit. The category ratios (net profit, ROE, and ROA) of the performance of Cardinal Health are lower than industry’s average, while gross profit /sales ratio is way below the industry’s average, and SAE is much greater than industry’s average. So, there is a problem for Cardinal Health to make profits or they have an issue with the cost of goods sold most recently.
Activity: The financial ration of activity is to indicate the company’s efficiency to manage its assets. Cardinal Health Inc’s current A/R Turn (Sales/AR) is 19.79, a much higher than industry standard 9.60, and the company’s Inventory Turn is 9.86, which is a little bit higher than the industry norm, 7.60. All the above two ration indicates the company’s efficiency to manage its assets is above the industry standard. Cardinal Health Inc’s current FA Turnover (Sales/NFA) is 31.49, much lower than industry standard, 70.00, which indicates the company didn’t generate sales efficiently on each dollar for net fixed assets. So, Cardinal Health has the issue to make profits per fixed asset dollar, while it is good at the sale of its products.
Limits: For Cardinal Health Inc, the company’s potential amount of debt can be increased is $11437.77 million based on equity, $1693.04 million based on assets.
Cardinal Health Inc’s A/R days and inventory days are both lower than industry A/R days and inventory days which indicates the company is already doing better than the industry norm and cannot improve its operations further based on the industry number.
The healthcare industry is very dynamic with fierce competition. The technology advance, low cost while high-quality service from government and customer also have a huge impact on the healthcare industry. So, the healthcare industry is seeking to outsource their products or service to other countries to lower their labor cost, however, tariff, barrier, and uncertainty of politics also have a lot of pressure to the healthcare industry.
1). Social Factors that Impact Cardinal Health, Inc.
With the innovation of technology, especially internet-based social media change, the society culture has also changed a lot. The trend for the healthcare industry is disintermediation and e-commerce.
2). Technological Factors that Impact Cardinal Health, Inc.
Technology advance is quickly changing every stage for healthcare industry from the manufacturing, quality control, logistics, and customer satisfaction. The good thing for Cardinal Health is they have already built the information system.
3). Economic Factors that Impact Cardinal Health, Inc.
The whole healthcare industry occupies roughly about 16-20% of national GDP in the United States, therefore, the economic growth rate, inflation rate and even consumer confidence index all have an effect on the development of healthcare industry.
4). Environmental Factors that Impact Cardinal Health, Inc.
The major environmental threat for the healthcare industry is disintermediation. In response, Cardinal Health has allocated $25 million for their ambitious cardinal.com project.
5). Political Factors that Impact Cardinal Health, Inc.
Healthcare industry has been influenced more and more by politics. For example, the switch of the presidency can cause a dramatic change in healthcare-related policy.
- Cardinal Health has over 49,000 well-trained and skilled employees working across the world.
- The company has a unique pharmacy health network.
- The company has more than 60,000 stores and outlets for the sale of medical products and pharmaceuticals.
- The company’s top management or CEO has done a great job.
- Cardinal Health’s growth is heavily dependent on acquisitions.
- The company’s gross profit is going down.
- The company’s total liabilities are going up.
- The company needs to spend more money on creating and developing their own products.
- The company needs to improve its e-business and disintermediation.
- The company takes the opportunity to enhance its international markets.
- Baby-boomer is aged – there is an increasing demand for healthcare.
- The company must expand their brand to make the market stronger.
- The global economic downturn could be a threat to healthcare service providers.
- Some strict regulations have been introduced to the healthcare industry in various countries.
- Disintermediation and e-business
- Extensive competition – the company must find a way to lower the cost of the products in order to survive in a very brutal competitive market.
See Appendix for a summary of the SWOT Analysis.
We have identified three key issues that Cardinal Health Inc is currently facing. The first issue is to replace current CEO, Bob Water to maintain an innovative management team that has more experiences on national or international health market. Bob Water has done fantastic work and has a great vision for company development, but considering highly competitive healthcare market, the company needs to organize a new top management. Another issue that we identified is the organization of the Cardinal Health, in which we think the company should further enhance its web-based infrastructure frame. The best is to set another branch for the information system. The last issue identified was the aggressive acquisition, although acquisition has played a key role in the development of the company. Right now, it is more important to focus on the quality and efficiency of the products and services.
• Reject – Unrelated Diversification– The firm should focus on the business in which the company has the distinctive competency, considering the company has already in high debts and lower gross profit, otherwise they will repeat the failure of other company to cause the clash of their stock price. Therefore, we reject this strategy.
• Reject – Competitive Strategy – The firm should focus on lower the cost while providing high-quality products or services, so the key issues are to find ways to improve efficiency and specialty. For the ways to drive out inefficiency in the area of production and services, we reject this strategy.
• Reject – Retrenchment Integration – The firm has already left the food distribution since 1998 after the rename of Cardinal Health, which was a very good strategy. The firm’s current supply chain is high focusing on providing high-quality healthcare products and services. Therefore, we reject this strategy.
• Accept – Backward Integration – This firm should cooperate with other biotech companies to discover new drugs. This strategy will enhance their brand and maintain their distinctive competency. Therefore, we accept this strategy.
• Accept – Forward Integration – This firm should consider distributing their products and services to customers living in a rural area who have issues to get access to high-quality healthcare. Therefore, we accept this strategy.
• Accept – Horizontal Integration – The firm should consider opening a factory or cooperate with India to manufacture products or contract services, which will lower the labor cost. Therefore, we accept this strategy by moving production to India or other Asian countries.
After analyzing the financial situation of last five years for Cardinal Health Inc, we found the company has an issue to create gross profit and has an increased liability, therefore, we suggest the company considering the following two strategies:
Forward Integration – One way to make a profit is to find a new potential area to do business which will have some first-mover advantages. In the rural area of the United States, there are a lot of obstacles to the distribution or delivery of healthcare. We think Cardinal Health can use their distribution and newly built web-based network to help rural area customers to get current innovative healthcare. The company may also get assistance from the government of all levels. The following are the areas that we think the company can do to improve their financial situation:
- Further, enhance e-business in international and emerging markets.
- Accelerate information system architecture.
- Reorganize top management to adapt to vital, dynamic healthcare industry.
- Focus on quality and efficiency instead of unnecessary acquisitions.
Horizontal Integration – Another way for the company to reduce cost and make more profit is to outsource their products or service to other countries like India like other pharmaceutical companies are doing now. India has sufficient skilled labors who also have been well-trained for internet information technology. There are also some policies protection expiring patent protection and no obvious barrier restriction.
- Hunger, J., David, Thomas L. Wheelen. (2011). Essentials of Strategic Management. Boston: Prentice Hall.
- Teagarden, Mary. (2009). Cardinal Health Inc. Harvard Business School: Indiana University Southeast.