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CVS's Decision to Forgo $2 Billion Seems Crazy--But Might Just Work

After all the news filters out about CVS jettisoning cigarettes, that's when the really interesting business decisions will go down.
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CVS, which is America’s second largest drug store chain in overall revenue, just announced that tobacco products will longer be sold in its thousands of stores after October. The announcement delighted the socially conscious crowd as well as numerous advocates for public health and wellness. Skeptics wonder if this is just a clever PR move and cynics doubt that it will reduce cigarette consumption across the country by much.

The decision to ban a controversial product is by no means new in either the private or public sectors. Recall, for instance, former New York City Mayor Michael Bloomberg’s attempted ban on sugary drinks, which wasn't successful whereas his smoking ban spread worldwide.

Each such decision, however, raises a host of thorny issues involving branding, ethics, profitability, consumer freedom, social responsibility, PR and being Big Brother. So, how should companies untangle these issues practically? Use the following five questions as a part of a decision stress test:

1. How does a product ban advance your strategic direction? For CVS, a strong health focus could help expand its Minute Clinics across all of its stores. The company also hopes to broadcast a more healthful message as it makes a greater advance into being a health care provider rather than just a retailer. Making a strategy come alive is a path littered with tough choices--it’s about what you say ‘no’ to as much as 'yes.' If CVS is serious about its strategic migration, it will need to apply a new lens to all of its current product offerings--from high calorie snacks packed with additives to sugar loaded energy drinks.

2. How can a product ban be additive--or at least neutral--to the top and bottom line? Relentless scrutiny from shareholders and a focus on quarterly earnings demands that a strong, credible business case is backing the move. CVS expects that dropping tobacco related products will reduce revenue by $2 billion off a base of $123 billion in overall sales. The company plans to launch an offsetting campaign that offers its customers new products and services to fill the void--including a smoking cessation program. The food chain Subway just announced the elimination of a nasty chemical in the bread used for its sandwiches. This chemical is also used to make yoga mats and shoe rubber. Subway claims this move was already in works before a food blogger launched a viral campaign earlier this week asking Subway to remove the chemical.

3. How is a product ban consistent with your company’s organizational identity? Making tough choices has to start with a clear, grounded sense of who you are as a company. A striking example was Patagonia’s move on Black Friday in 2013 to discourage customers from buying more. It advised customers to “Wear What You Own” by looking look at their closets with a fresh set of eyes. This move was consistent with Patagonia’s values around conservation and recycling, and thus was perceived as authentic. If CVS is serious about rebranding around health and wellness, then this must apply to all products and also its employees. After banning smoking among its employees at work and home, the Cleveland Clinic is now introducing bans on soft drinks and doughnuts on campus.

4. How does a product ban resonate with your company’s brand strategy? A strong corporate brand strategy needs to reflect your organizational identity and so alignment between the two is very important. What beliefs and associations do you want your target customer to have about your brand? How will your strategic moves support (or hurt) those? The Whole Foods brand, for example, is about healthy eating and the company reinforces that via its non-genetically modified organism (GMO) Product Verification Program. This multi-part process works throughout its entire supply chain, so that customers can buy 5,000 non-GMO products with trust. In the same vein, CVS could offer a visual ‘map’ (or app) in each store to nudge customers toward making ‘good, better, and best’ choices.

5. Do your strategic moves align well with future scenarios? Since various forces in the U.S. health care system put more responsibility on the patient, being ahead of the pack in responding to these dynamics may be smart business. What will society expect from responsible companies 10 years from now? Which companies will socially conscious Millennial employees want to work for? Will the media or Wall Street treat CVS better for being ethical and consistent? Which new partners may want to team with CVS now that its commitment to health is even stronger? Thinking through scenarios about how the business and social landscape might change is needed to assure good strategic decisions as well your own leadership position.

The advantages can go far beyond dollars and cents in “paying it forward.” While head of research and development at Merck, Roy Vagelos made an unusual request to the board to develop a cure for river blindness that everyone knew could never earn back its investment. River blindness was mostly found in poor isolated villages in Central and West Africa, afflicting millions of people--most of whom lack the means to pay for new drugs. Merck nonetheless developed the drug at considerable cost, made it available for free in 1987 in many African countries, and thus helped to drastically reduce the harm from this dreaded disease.

Although a questionable financial decision short-term, the move paid off immediately in terms of pride among scientists, attracting top flight talent from academia and Merck’s overall standing in the industry. Years later, when Japan decided to let just one pharmaceutical company into its local market, it chose Merck. A key reason was its leading role in tackling river blindness, knowing all along it would not make a profit on the drug. So, Merck realized high returns in talent, relationship building, and market access over time. Sometimes it is just best to do the right thing.

- Co-authored with Karin Stawarky, Senior Partner at Decision Strategies International

IMAGE: Gallery Stock
Last updated: Feb 6, 2014

PAUL J. H. SCHOEMAKER | Columnist | Research Director, Wharton School

Paul J. H. Schoemaker is the founder of Decision Strategies International. A speaker, professor, and entrepreneur, Schoemaker is research director at the Mack Institute for Innovation Management at Wharton, where he teaches strategic decision making. His latest book is Brilliant Mistakes: Finding Success on the Far Side of Failure.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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