Federico Holst and Luca Zirener
Introduction
In the dynamic landscape of today’s business world, where technological innovation and market shifts occur at an accelerating pace, companies are constantly seeking new opportunities for expansion and growth. While some companies pursue organic growth by investing in research and development, this article highlights a different approach: inorganic growth through acquisitions. This method, also commonly used in Private Equity, is characterised by value creation through operational integration and therefore utilisation of synergies. Using Amazon as an example, a particular focus is placed on how to minimise the risks associated with venturing into new and unfamiliar markets. Amazon has conducted a striking market entry into the healthcare space, a sector seemingly far from its core business. By unravelling the intricacies of Amazon’s strategic incursion into healthcare and by illuminating the broader implications of such venture, this case study examines the mechanisms that can drive successful market entries in foreign sectors.
Strategic Moves: Amazon in the Healthcare Sector?
The global healthcare industry, with its enormous complexity and entrenched players, presents a formidable challenge for newcomers, especially those positioned in other industries. In 2018, when Amazon embarked on its healthcare journey, the industry was valued at more than $8tn globally, a figure that speaks volumes about the size of the sector. This mature industry has been and continues to be shaped by a variety of factors – an aging population, technological advancements, and an evolving regulatory landscape.
The timing of Amazon’s decision to enter this highly regulated and competitive sector was strategically sound. Prior to 2018, the company’s involvement in healthcare was peripheral, it primarily consisted in Amazon Web Services’ offerings to healthcare providers as well as a few healthcare-related patents. This underscores the boldness of Amazon’s pivot into a sector that is distinct from its e-commerce and technology roots.
What follows is an analysis of Amazon’s entry process in terms of its timing, rationale, and strategic motivation. It will be illustrated how companies can navigate the complexities of entering new markets, minimising risks while maximising opportunities for growth and innovation. The story of Amazon’s healthcare venture is not just a story of expansion, but a broader lesson in strategic diversification relevant to a wide range of industries, including the ever-evolving field of Private Equity.
Scaling Up: Amazon’s Healthcare Acquisitions
Amazon’s progressive entry into healthcare, characterised by strategic acquisitions and product innovation, marks a pivotal chapter in the company’s history. Internally, the journey began in 2017 with the creation of a secretive health tech lab called 1492, which focused on areas like electronic health records and telemedicine. This initial step, while discreet, set the stage for Amazon’s later forays into the sector.
In a landmark move in January 2018, Amazon publicly announced its entry into healthcare through the formation of Haven Healthcare, a joint venture with JPMorgan Chase and Berkshire Hathaway. Aimed at reducing healthcare costs while improving patient care, the initiative was particularly notable for its ambitious scope, although it was limited from the outset to serving only the employees of the three respective companies. Despite its dissolution in 2021, Haven Healthcare represented Amazon’s first significant stride into the healthcare arena.
Amazon’s acquisition journey in healthcare starts in 2018 with the purchase of PillPack, a full-service pharmacy, for $753mn. This acquisition was a crucial step, blending Amazon’s customer-centric ethos with a healthcare service. In the following year, Amazon introduced Amazon Care, a telehealth service initially established for its employees in Seattle, integrating PillPack’s offerings. The acquisition of API developer Health Navigator later that year further complemented Amazon Care’s services. Despite its initial expansion, Amazon Care was discontinued at the end of 2022.
In November 2020, Amazon Pharmacy was launched in the US, leveraging PillPack’s expertise to provide online pharmacy solutions. The launch of Amazon Pharmacy smartly coincided with the pandemic, offering timely online healthcare services when they were needed most. In another internal development, Amazon introduced Amazon Halo, an AI-powered health and wellness wearable, in 2020. This move underlined Amazon’s intent to solidify its position in the healthcare technology space.
Another major milestone in Amazon’s healthcare venture was its announcement in July 2022 stating that it would acquire One Medical for $3.9bn, a deal that closed in February 2023. This acquisition, Amazon’s third largest, significantly expanded its healthcare portfolio and suddenly made Amazon a major player in the telehealth market. The integration of One Medical into Amazon’s broader ecosystem, including Amazon Prime and Amazon Pharmacy, was the next step to follow.
The first steps: A Learning Process
Amazon’s approach to entering the healthcare sector illustrates a strategic, experimental M&A strategy that reflects a calculated escalation of risk and investment. Starting with smaller, targeted acquisitions, Amazon gradually increased its stakes in the healthcare industry, following the principles of real options theory. This strategy reflects a nuanced understanding of the healthcare market and its intricacies, where Amazon tactically gained insight and experience to reduce uncertainty before making more substantial commitments. Each step, from the early creation of Haven Healthcare to the integration of PillPack to the launch of Amazon Pharmacy, provided the company with critical lessons learned.
In addition, Amazon’s rapid entry into healthcare, particularly at a time when the industry was attracting the attention of other tech giants, demonstrates strategic agility and foresight. By quickly seizing opportunities in this fast-changing environment, Amazon not only established itself as a major player in the healthcare sector, but also reinforced its reputation as an innovative and adaptable company.
Amazon in Healthcare Today: Expanding as a Primary Care Provider
Since completing its $3.9bn acquisition of One Medical, Amazon has made significant progress in integrating the primary care provider into its portfolio of services to become a primary care provider itself. Amazon’s foray into primary care services not only diversifies its portfolio, but also aligns with its long-term goal of establishing a comprehensive, interconnected ecosystem for consumers.
In an effort to make healthcare more accessible to its vast customer base, Amazon recently launched One Medical for Prime. The service, which is available since 8 November 2023, will be offered to Amazon Prime members for an additional $9 per month, an amount significantly lower than the standard One Medical membership fee. The service includes unlimited 24/7 virtual visits and online scheduling for appointments at One Medical’s physical clinics. The integration of One Medical into Amazon’s existing services, such as the Prime subscription, underscores Amazon’s strategy to provide customers with comprehensive healthcare solutions.
Amazon’s Acquisition Strategy: A Blueprint for Market Entry
The strategic move to acquire One Medical not only expanded Amazon’s healthcare portfolio but also demonstrated its ability to successfully enter a new, complex market. Given its track record of disrupting traditional industries, Amazon is expected to explore additional avenues in healthcare, potentially integrating more advanced technologies. This could include expanding its telemedicine offerings, introducing new health-focused products or services, or even exploring collaborations with other healthcare providers and technology companies.
Amazon’s approach to entering and growing in healthcare offers a blueprint for other companies looking to diversify into unfamiliar markets. The company’s ability to apply lessons learned from its early ventures and to adapt its strategy in response to arising challenges and market feedback serves as a valuable case study.
Smart Investing: Amazon’s Playbook as a Guide for Private Equity
Within our exploration of Amazon’s successful venture into healthcare, the value of acquiring in-depth knowledge before making a substantial investment is of particular relevance for the PE industry.
In the domain of Private Equity, funds frequently employ acquisitions to drive rapid, inorganic growth for their portfolio companies. In such scenarios, strategic risk management becomes paramount, to which Amazon’s journey illustrates a skilled approach. By initially engaging in lower-cost activities like forming joint ventures or pursuing smaller acquisitions, Amazon methodically gathered critical insights regarding the healthcare sector, before making more significant, well-calculated investments.
This approach holds profound implications for companies seeking diversification, rapid inorganic growth, or strategic acquisitions in emerging technologies. It underscores the importance of building a foundation of sector-specific knowledge and experience, which can significantly reduce the uncertainties and risks associated with such ambitious ventures.
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