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Leading the headlines on the affordable Medicare debate, Wal-Mart has been speeding up its roll-out of $4 generic drugs disrupting pharmacies across the country. Consumers whose prescriptions are on the list of 331 drugs are now eligible to buy them for less than the cost of a Medicare co-pay at the worlds largest retailer (Target has also pledged to match Wal-Marts every move).

Historically, Wal-Mart has built its business by disrupting its industry leaving mom and pop retailers in its wake as it introduces low prices to communities across America. This recent price-cut not only benefits non-insured Americans, ever desperate to keep their rising medical costs low, but also insurers who have to shoulder less of their subscribers prescription drug costs. This low-end disruption is built on Wal-Marts strong suit: its ability to lower prices and make more products available to Americans who would otherwise be unable to afford them.Critics argue Wal-Marts recent $4 generic drug plan is nothing more than a superb high-level marketing blitz with no substance; they highlight that the promotion applies to older generics that amount to only 10% of a traditional pharmacys generic inventory.

Meanwhile, CVS and Walgreens, the nations largest pharmacy chains, are built on the premise that consumers want friendly local pharmacists in convenient locations. Over 90% of their pharmacy revenue is from insured patients and they choose not to compete withthe low cash prices offered by warehouse stores and large retailers such as Wal-Mart and Target.

CVS recently has made moves to sustain its core business by purchasing Caremark, a leading Pharmacy Benefits Manager (PBM), and developing ProCare, a specialty pharmacy for patients with difficult-to-treat conditions. With Caremark, CVS will now promote its convenience stores to insured consumers over Caremarks mail-order. Its specialty pharmacy, ProCare, with over forty locations nationwide, caters to Americans whose needs are underserved by the traditional pharmacy. These patients seek hard-to-find expensive drugs and over-the-counter supplements as well as specialized education for very serious medical conditions.

While Wal-Mart is serving nonconsumers by publicly forging a low-price path, CVS is moving to sustain its core business by developing convenient and specialized offerings to meet the underserved needs of the insured. Both firms may prove to be successful as there likely exists both a sizeable market of uninsured consumers who can not afford generic drugs and a group of underserved insured patients who need advanced care and improved convenience from their pharmacy.

See "CVS, Caremark Unite to Create a Giant", Wall Street Journal, November 2, 2006 and
"Wal-Mart's generics price push fails to panic its competitors", Drug Store News, October 9, 2006

Amazon.coms recent forays into Internet services have puzzled many analysts and investors. There is great concern that the company is spending way too much time, effort, and money so far removed from and potentially at the expense of its core retail operations. Amazon spent a decade, and billions of dollars, building its e-commerce platform to the point where it reached massive success. So why, Wall Street wants to know, is Amazon so intent on moving beyond retail?

The answer, we believe, is that Jeff Bezos understands that the key to sustained success is business model innovation. Amazon has deftly moved into new categories and new markets with flexibility and creativity. They consistently look for ways to leverage core capabilities and monetize excess capacity to create potentially disruptive businesses. Undoubtedly, Amazon must be sure to keep its core retailing operation healthy and should not over-commit to new ventures before they prove profitable, but investors should take comfort in the fact that Bezos has an uncanny knack for this most elusive of innovation disciplines.

Consider Amazons corporate evolution: as soon as it established itself as a leading online book seller it began leveraging the platform and infrastructure it built to move into new categories, and in a matter of years became a full-fledged online department store and the webs premiere retailer. Amazon has also leveraged its online real estate and customer base, establishing itself as a broker of transactions and leaser of web space to other retailers. These profitable initiatives have generated synergies that fortify Amazons core business selling other merchants books, for example, vastly expands Amazons catalog, making the site ever more of a one-stop shop while contributing to the overall growth of the business.

Now, Amazon is further unbundling its finely-honed core capabilities and leveraging its world-class core assets. A recent Business Week article describes their latest initiatives a series of calculated moves intended to transform latent capacity and aptitude into profit centers that strengthen the overall business and plant seeds that might grow into disruptive blockbusters. Notice how each initiative solves an important Job to be Done, in comparison to market alternatives:

Elastic Compute Cloud: Amazon leases computing horsepower over the web; the equivalent of one server costs about 10 cents an hour. Computing-hungry startups can make expensive capital equipment investments by buying their own servers or can lease the processing power they need when they need it at a very low cost leasing a full year of power equivalent to one server would cost just $876.

Simple Storage Service: Amazon leases digital storage at 15 cents per gigabyte per month. Buy backup drives or zap it over to Amazon for a buck eighty a gig a year.

Amazon Mechanical Turk: Amazon matches up online temp workers with companies that need menial tasks done. There are some menial, frustrating tasks that any bozo on the street can do easily but that computers just cant do right; when these tasks present themselves companies can either hire interns, tie up their low-level employees with mindless work, or, in some cases, simply leave loose ends untied. Now they can have Amazon connect them with an online temp painlessly, rapidly and at a miniscule cost.

Fulfillment by Amazon: End-to-end e-commerce operations and logistics. Companies can operate their own e-commerce operations and frequent eBay sellers can buy new shelving units for their garage and wait in line at the post office everydayor they can outsource part or all of the process to the worlds most efficient e-commerce logistician. Amazon warehouses merchandise and handles orders, payments, and shipping.

Will all or any of these new ventures grow into blockbuster businesses? That remains to be seen. At the very least Amazon is laying groundwork for a role in the digital future and casting its bets in the hopes of landing something substantial. This aggressively forward-thinking corporate mindset is exemplary, as it generates multiple revenue streams, unlocks new growth opportunities, and could lead to the transformation of markets; it may well transform earths biggest retailer into the premiere web services company.

See: "Jeff Bezos' Risky Bet," Business Week, November 13, 2006