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/