Escape From Mediocrity: Eckerd's Technology ChallengeBy David F. Carr | Posted 2003-06-01 Email Print
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Twin pillars in the lobby of Eckerd headquarters, relics of a private trade show for its partners and suppliers, proclaim the drug chain's mission to go from "Good to Great."
That's a reference to management guru James C. Collins' book Good to Great: Why Some Companies Make the Leap and Others Don't (Harper Business, 2001), which Eckerd has taken as a challenge to escape from mediocrity.
Eckerd wasn't one of the heroes of the study. Instead, it turned up as the contrasting example to Walgreens' success story. Collins features the two companies as a study in business strategy, noting that both were regional players of about the same size through the 1970s.
"On the surface, the two companies could not have appeared more similar, almost identical," Collins says. "Today, they're not. So it's a really interesting historical comparison to look at how their trajectories became so different."
As of 1980, the two companies both had revenue of about $1.7 billion. But Walgreens was beginning to sharpen its strategy of expanding in densely populated areas where it could place a store on a street corner every few blocks, boosting the convenience it offered to its customers. Eckerd's expansion was more erratic, often based on acquisitions, including an ill-advised detour into videotape rental outlets. By the end of the decade, Walgreens had a $1 billion sales lead over Eckerd. And, today, the market value of Walgreens stock is $32.8 billion, compared with $4.6 billion for all of J.C. Penney, Eckerd's parent company.
One way Walgreens distinguished itself was by focusing its technology investments on the areas in which it was determined to excelpharmacy records-management and store communications.
For example, by creating a centralized system for pharmacy records, Walgreens was able to provide refills and other services equally well from any pharmacy in the country, not just the customer's neighborhood store. In Walgreens' most recently completed financial quarter, prescriptions, which account for 59% of sales, rose 17.8%. On the other hand, Eckerd pharmacy sales in its most recent quarter grew just 1.6%. Eckerd says pharmacy sales account for about 68% of total revenue.
Walgreens' satellite network also bolstered its ambitious store expansion plans. With the technology Walgreens uses, Very Small Aperture Terminal (VSAT) networking, a satellite dish is installed on the roof of each of its 4,000 stores. The dishes send and receive signals off an orbiting network relay, which transmits messages to and from a central data center. Because Walgreens has already invested in a VSAT network operations center and the staff expertise to manage it, connecting additional stores is relatively inexpensive, giving the company a low-cost, effective way to share up-to-date sales data. Walgreens' same-store sales rose 7.7% in its most recent quarter; Eckerd's same-store sales dropped 1.1%.
Walgreens' strategy is to create "the best, most convenient drugstores, with high customer profit per visit," Collins says. The technology came seconda common pattern at companies that break out ahead of the pack, Collins says. "Technology comes late, as an accelerator, not a cause of greatness."
In contrast, Eckerd didn't seem to blaze any trails with its technology, Collins says.
But, Eckerd is working hard to make the jump from good to great. After years of outsourcing technology and growing through acquisitions, which brought, among other things, inconsistent sales reporting, Eckerd is focusing on growth from within and a more hands-on approach to technology. Eckerd has brought technology back in-house, after seven years of outsourcing to IBM, and is pushing ahead with supply chain and pharmacy system improvements.
Eckerd Chief Information Officer Ken Petersen says there are clearly some areas where his firm needs to play catch-up with Walgreensbut not all.
Satellite networking is an example of a Walgreens technology Petersen doesn't want to duplicate. In fact, one of the first big technology initiatives he undertook when he transferred to Eckerd from parent J.C. Penney was to rip out the VSAT network IBM had put in place and to tap into Penney's frame-relay network. Frame relay is a high-speed terrestrial data network used by many big companies.
The change made sense because Penney had already negotiated favorable frame-relay pricing with AT&T and could get even better volume pricing by adding the Eckerd stores, says David Evans, the former J.C. Penney chief information officer, who supported the move. Frame-relay prices have declined about 8% per year since 1998, according to International Data Corp.
Evans says he suspects the only reason Walgreens sticks with VSAT is that it has invested so much time and money that it would be hard to switch now.
"I've always considered satellite kind of a humorous way to do networking because it takes six or seven trips to the satellite just to say, 'I'm here,'" Evans says.