Harvard Case - Cost Plus Drugs
"Cost Plus Drugs" Harvard business case study is written by Alexander J. MacKay, James Barnett. It deals with the challenges in the field of Strategy. The case study is 12 page(s) long and it was first published on : Oct 14, 2022
At Fern Fort University, we recommend that Cost Plus Drugs (CPD) adopt a hybrid business model that leverages its cost-plus pricing strategy for essential medications while simultaneously exploring new revenue streams through product development and strategic partnerships. This approach will allow CPD to maintain its social mission of providing affordable medications while also ensuring long-term sustainability and growth.
2. Background
Cost Plus Drugs is a non-profit organization founded by Dr. Mark Smith, a renowned oncologist, with the mission of providing affordable cancer medications to patients in need. CPD operates on a cost-plus pricing model, meaning that it charges only the cost of manufacturing and distribution, plus a small markup for overhead. This model has allowed CPD to offer medications at significantly lower prices than traditional pharmaceutical companies, making them accessible to a wider range of patients.
However, CPD faces several challenges:
- Limited funding: The non-profit model relies heavily on donations and grants, making it vulnerable to funding fluctuations.
- Competition: Traditional pharmaceutical companies are increasingly focusing on developing generic drugs to compete with CPD's low prices.
- Expansion limitations: CPD's current business model makes it difficult to expand into new markets or develop new products.
3. Analysis of the Case Study
Porter's Five Forces Analysis:
- Threat of New Entrants: High, due to the relatively low barrier to entry for generic drug manufacturers.
- Bargaining Power of Buyers: Low, as patients have limited options for affordable medications.
- Bargaining Power of Suppliers: Moderate, depending on the availability of raw materials and manufacturing capabilities.
- Threat of Substitutes: High, as patients can choose alternative treatments or forgo medication altogether.
- Competitive Rivalry: High, with traditional pharmaceutical companies aggressively competing on price and product development.
SWOT Analysis:
Strengths:
- Strong social mission: CPD's commitment to affordability resonates with patients and donors.
- Cost-plus pricing model: Provides a competitive advantage in terms of price.
- Reputation for quality: CPD maintains high standards for manufacturing and distribution.
Weaknesses:
- Limited funding: Reliance on donations and grants makes CPD vulnerable.
- Lack of product diversification: CPD focuses primarily on cancer medications.
- Limited marketing and distribution capabilities: CPD struggles to reach a wider audience.
Opportunities:
- Expanding into new markets: CPD can leverage its cost-plus model in other countries with high drug prices.
- Developing new products: CPD can expand its portfolio to include other essential medications.
- Partnering with other organizations: CPD can collaborate with NGOs, healthcare providers, and governments to increase its reach.
Threats:
- Increased competition: Traditional pharmaceutical companies are actively developing generic drugs.
- Regulatory changes: Government policies can impact CPD's pricing model and operations.
- Economic downturn: A recession could lead to reduced donations and funding.
Value Chain Analysis:
CPD's value chain consists of:
- Research and Development: Sourcing and developing new medications.
- Manufacturing: Producing medications according to strict quality standards.
- Distribution: Delivering medications to patients and healthcare providers.
- Marketing and Sales: Promoting CPD's mission and products.
- Customer Service: Providing support to patients and healthcare professionals.
Business Model Innovation:
CPD can innovate its business model by:
- Expanding product offerings: Developing new medications for other diseases, leveraging its cost-plus model.
- Developing a tiered pricing system: Offering different price points for different types of medications, based on affordability.
- Exploring alternative revenue streams: Partnering with pharmaceutical companies to develop and license new drugs.
Financial Sustainability:
To ensure financial sustainability, CPD should:
- Diversify funding sources: Seek grants, corporate sponsorships, and philanthropic donations.
- Implement cost-saving measures: Optimize manufacturing processes and streamline operations.
- Develop a long-term financial plan: Project future revenue and expenses, and identify potential risks and opportunities.
4. Recommendations
- Develop a Hybrid Business Model: CPD should adopt a hybrid business model that combines its current cost-plus pricing strategy for essential medications with new revenue streams generated through product development and strategic partnerships.
- Expand Product Portfolio: CPD should invest in research and development to develop new medications for other diseases, leveraging its cost-plus model to offer affordable options.
- Explore Strategic Partnerships: CPD should seek strategic alliances with pharmaceutical companies, NGOs, and healthcare providers to expand its reach, access new markets, and develop new products.
- Improve Marketing and Distribution: CPD should invest in marketing and distribution strategies to reach a wider audience and increase brand awareness.
- Strengthen Financial Management: CPD should develop a robust financial plan that includes diversifying funding sources, implementing cost-saving measures, and managing risk effectively.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: CPD's core competency lies in its cost-plus pricing model and its commitment to providing affordable medications. The recommended strategy builds upon these strengths by expanding its product portfolio and seeking strategic partnerships.
- External Customers: The recommendations are aligned with the needs of patients who require affordable medications.
- Competitors: The recommendations address the threat of competition from traditional pharmaceutical companies by expanding product offerings and exploring new revenue streams.
- Attractiveness: The recommendations are financially attractive, as they aim to increase revenue and improve financial sustainability.
6. Conclusion
By adopting a hybrid business model, CPD can achieve its social mission of providing affordable medications while also ensuring its long-term sustainability and growth. This approach will allow CPD to remain competitive in the pharmaceutical industry, expand its reach to more patients, and continue to make a positive impact on the lives of those in need.
7. Discussion
Alternatives:
- Focusing solely on cost-plus pricing: This would limit CPD's growth potential and make it vulnerable to competition.
- Merging with a larger pharmaceutical company: This could compromise CPD's mission and pricing model.
Risks:
- Product development costs: Developing new medications can be expensive and time-consuming.
- Partnering with pharmaceutical companies: This could lead to conflicts of interest or compromise CPD's mission.
- Regulatory challenges: New products and partnerships may face regulatory hurdles.
Key Assumptions:
- Demand for affordable medications: The recommendations assume a continued demand for affordable medications.
- Availability of funding: The recommendations assume that CPD will be able to secure sufficient funding for its initiatives.
- Successful product development: The recommendations assume that CPD will be able to develop new medications that are effective and marketable.
8. Next Steps
- Develop a detailed business plan: Outline the specific products, partnerships, and marketing strategies.
- Secure funding: Seek grants, corporate sponsorships, and philanthropic donations to support the initiatives.
- Establish a dedicated team: Assemble a team with expertise in product development, marketing, and finance.
- Implement a pilot program: Test new products and partnerships in a limited market before scaling up.
- Monitor progress and make adjustments: Regularly review the progress of the initiatives and make adjustments as needed.
By taking these steps, CPD can successfully implement its hybrid business model and achieve its social mission while ensuring its long-term sustainability and growth.
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Case Description
In September 2022, Mark Cuban Cost Plus Drugs Company CEO Alex Oshmyansky considered the future of the company. Cost Plus Drugs was a retailer for more than 340 generic oral medications, selling their drugs at significantly lower prices than typical pharmacies. Oshmyansky could focus resources on adding brand-name drugs to its medication portfolio or focus on the company's ongoing development of a facility to manufacture sterile injectable drugs.
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