Medtronic and Vertical Integration

The entire industry of healthcare is moving toward vertical integration. With cuts on reimbursements for Medicare, independent physicians are facing tightening bottom lines and big corporations are looking to increase revenue streams. Hospital systems are buying up physician’s offices, so it’s no surprise that other areas of the industry are integrating too.

In 2010, Medtronic acquired Cardiocom, a firm that develops patient monitoring systems. This acquisition would be downward vertical integration, as the product is used directly by the end user. The Cardiocom system is an implanted system, constantly monitoring patients’ vital signs and uploading data to the cloud. The data is then aggregated to develop patient statistics and develop patterns about care and outcomes. This example of vertical integration falls in the category of hierarchical governance. Not only does Medtronic now control the sale of products further down the value chain, but also the data accumulated by the products. The value added for Medtronic here is not just an additional revenue stream in the same field, but a way incorporate primary research of patient data to use to improve their R&D efforts.

http://www.forbes.com/sites/theapothecary/2013/08/24/medtronic-is-changing-its-business-will-the-system-let-it/

Also in 2010, Medtronic acquired Invatec, a company that develops cardiovascular medical technologies. Invatec , itself, is a vertically integrated company in that it designs, develops, manufactures and assembles its products. Cardiovascular care is one of Medtronic’s core technologies, so having Invatec on board increases the length of the value chain. This example of vertical integration is opportunism because Medtronic saw the value of being able to control each step in the process of its cardiovascular care unit. Cardio technology is both expensive and lucrative; it will have to endure costs to govern the new addition, but the strategy is that having Invatec as partners is better than having them as rivals.

http://newsroom.medtronic.com/phoenix.zhtml?c=251324&p=irol-newsArticle&ID=1770599&highlight=

The recent Medtronic and Covidien merger is another prominent example of vertical integration lately. Covidien has rare, valuable and costly to imitate technology that Medtronic wants. The Irish based company has resources and capabilities that Medtronic would rather aquire than compete with. While it seems like this business deal is more of a merging of technologies rather than a strengthening of any one core technology, it falls in the category of vertical integration strategies that deal with resource heterogeneity. However, Covidien does produce more medical supplies and support technologies in addition to the highly technical. In addition, Covidien conveniently has the resource of being located in a tax shelter country, which is a unique and hard to imitate resource all on its own.

http://www.covidien.com/

http://www.medtronic.com/

Tacit Collusion and Accusation on Medtronic

Collusion is a tempting strategy. It is like a game of corporate keep away, where companies band together to improve their own conditions in the market, while keeping others out of their potential successes. Over the years, Medtronic has been accused of engaging in this illegal behavior for the sake of profits.

In the last few years, Medtronic has been accused of colluding with several competitors to reduce the competition in the market. In 2012, “Senate Finance Committee Chairman Max Baucus (D-Mont.) and senior member Chuck Grassley (R-Iowa)” accused Medtronic of collusion by falsifying product reviews. They suggested that Medtronic had influence over the physicians that were performing reviews of products and that the physicians were exaggerating side effects of competing products to enhance the attractiveness of Medtronic products. Evidence found that Medtronic paid $210 million in kickbacks to physicians and that several email chains confirming the relationship between Medtronic and the physicians. In 2014, “Stryker Corp. [asserted] anti-trust claims against Medtronic over its sale of some 500 patents for its Kyphon vertebroplasty technology to alleged patent troll Orthophoenix.” This example is of explicit collusion, where one company is in direct communication with another company to corner the market on a product. Also in 2014, Lenox MacLaren Surgical Corporation blamed Medtronic for collusion through recalling Lenox’s product and then charging super competitive prices for the same product, after taking Lenox out of the market. In this case, Medtronic was not held responsible for the accusation, but if it were, they would have been guilty of reducing the competition in the market in order to keep prices high.

http://www.massdevice.com/news/stryker-alleges-medtronic-colluded-with-patent-troll-kyphon-ip

http://www.ca10.uscourts.gov/opinions/11/11-1251.pdf

https://www.ca10.uscourts.gov/opinions/13/13-1307.pdf

http://www.finance.senate.gov/newsroom/chairman/release/?id=b1d112cb-230f-4c2e-ae55-13550074fe86

Medtronic and Flexibility

Chapter 8 introduces the strategy of maintaining flexibility and real options. With real options, the firm has the option to maintain flexibility in future investments by delaying part of the decision until a later date. Using the strategy of real options versus present value often makes investments more attractive due to the extra time a firm has to receive the benefits of a future venture. Medtronic is able to exercise flexibility in a few different ways. With many disparate divisions, Medtronic has opportunities to be flexible with product innovations, research and development, acquisitions and corporate facilities. One example is Medtronic’s acquisitions. The company has strategically bought several small companies that will reduce costs or improve profits, based on the acquisition. Some are hubs of research and development that would allow Medtronic to reap benefits of existing research and develop further projects in future years, one example of real options. Recently, Medtronic’s acquisition of Covidien has become an advantage for the company in many ways. For one, it is a successful firm and buying it out reduces global competition, initially strengthening its standing in the market. Another benefit of the acquisition is the reduction of costs due to using Covidien’s international headquarters’ location as a tax shelter. Inevitably, this decreases Medtronic’s uncertainty about future flows by automatically reducing tax costs. In addition, Medtronic will reap the benefits of future research and innovation from an already successful firm. 

Product Differentiation

Product Differentiation

Medtronic uses a differentiation strategy for its products and services. The company spends millions of dollars annually on research and development to create highly innovative products. About innovation and product development, Medtronic’s annual report states, “Medtronic has traditionally differentiated its products by generating evidence to demonstrate clinical value.” The company uses empirical evidence to create products that serve highly specific medical purposes. Another thing that makes Medtronic products differentiated is the product features. Medtronic’s products are designed with features that affect very specific medical outcomes. It is no surprise that product complexity is another quality that confirms Medtronic’s product differentiation strategy. One of their new products is a sophisticated synthetic heart valve. Their website explains the product like this:  “The CoreValve transcatheter aortic valve (TAVR) platform was designed specifically to meet the clinical needs of patients with severe aortic stenosis at extreme or high risk for surgical valve replacement.” It even features a self-expanding frame.

Porter’s Five Forces

Threat of Entry: Competition would take on additional costs to develop similar products that perform as well and are as reliable as Medtronic’s products.

Threat of Rivalry: Medtronic’s reputation and product satisfaction are so strong, potential rivals would have a difficult time gaining market share because of the highly specialized business that Medtronic has developed.

Threat of Substitutes: There is a high barrier for substitutes, due to the extreme expense and sophistication of products. Unlike other brands with product differentiation, it would be unwise to purchase a substitute heart valve that is less quality or less technologically advanced than Medtronic’s product.

Threat of Suppliers: As the price of raw materials for these specialized parts increases, costs of suppliers may increase. However, Medtronic has the best product in the business, so customers will alleviate the price increase because of the need for the product.

Threat of Buyers: The power of buyers is less for companies with product differentiation strategies because there are fewer (if any alternatives). For these specific medical devices, customers have no alternative besides Medtronic’s devices.  

Sources:

http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/deloitte-review/b885756363998310VgnVCM3000001c56f00aRCRD.htm

http://annualreport.medtronic.com/letter-to-the-shareholders/page3/index.htm

Cost Leadership Strategies

Cost Leadership Criteria

Because of Medtronic’s size, it is able to operate as an economy of scale. As a global operation with high sales, it has an advantage of product volume and specialized machines. With such a high volume of production, employees are able to have more specialized jobs. Therefore, the learning curve for each employee allows them to do their job more efficiently, giving Medtronic an advantage in employee productivity. Medtronic may also have an issue with diseconomies of scales due to the expanse of products and locations. There may be managerial diseconomies due to the complexity of the organization. Medtronic also experiences technological advantages due to the sophistication of the products. No other company develops quite the same products as Medtronic, meaning their machinery has to be sophisticated and specific enough to handle advanced production. In addition, Medtronic also has advantages in policy decisions. It has strategically built several arms of the company specializing in different medical issues; each has a designated portion of the projected revenue for the company. Other positive policy decisions describe company culture and employee benefits, such as volunteer opportunities and matched employee giving. Medtronic employees enjoy working there; employee retention is an advantageous strategy.

Porter’s Five Forces as Related to Cost Leadership

Threat of Entry: Other firms would find it expensive to enter the market because of the size of Medtronic and its volume of production.

Threat of Rivalry: Because Medtronic has cost advantages, their profit margins will be higher than competitors who have higher operating costs.

Threat of Substitutes: There are not many options for substitutes because of the production differentiation advantages Medtronic has. The threat of substitutes is low due to costs of production and technology required to create the medical devices.

Threat of Suppliers: The threat of suppliers is low because of the volume of production. Medtronic has such a high volume that suppliers will want to keep the relationship with such a big client.

Threat of Buyers: The threat of buyers is low. Due to the nature of the medical devices and the customers Medtronic has, buyers are not likely wielding their power by demanding lower prices or higher quality materials.