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.
Wednesday, October 22, 2014
Wednesday, October 8, 2014
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:
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.
Monday, September 29, 2014
Medtronic's VRIO Assessment
Value: Do Medtronic’s
resources and capabilities enable the firm to respond to environmental threats
or opportunities?
Medtronic has a variety of successful product lines based
all over the world. It has exceptional resources in the financial, physical,
human and organizational categories. Financially, it has continually grown its
resources. In Medtronic’s most recent annual report, it shows that the stock
price has increased continually since 2009. Physically, it has acquired
numerous smaller firms, acquiring all of their research and product lines. In
addition, Medtronic has several regional offices all over the world. Its human
resources create the innovation and technology that has made them so successful.
Medtronic’s website says it has an “innovative culture where passionate people
are encouraged and flourish. If your job search ends at Medtronic, you'll find
yourself collaborating with some of the brightest minds in the healthcare
industry.” From an organization standpoint, Medtronic is doing well not only
coming up with the technology but capitalizing on it. Its growing stock success
can attest to that.
Rarity: How many
competing firms already possess particular valuable resources and capabilities?
According to MorningStar, there are 25 other firms in the
same industry as Medtronic. The top several firms are serious competitors, some
with interests in similar markets as Medtronic. Medtronic is not the only firm
in the business, so it does not have rarity as a competitive advantage.
However, even in the top competitors, there is only one who is directly in
Medtronic’s range. Abbott Laboratories and Medtronic have similar numbers
across the board. Is it the only firm in the business? No. Does it have more
resources and capabilities than the vast majority of competitors? Absolutely.
Imitability: Do firms
without a resource or capability face a cost disadvantage in obtaining it
compared to firms that already possess it?
Firms that do not already possess Medtronic’s research and
development and trade secrets of their products would have to spend lots of
money to create a rival product. Last year alone, Medtronic’s research and
development budget was $1.5 billion. Medtronic has bought up smaller companies
and high performing firms around the world. If another firm wanted to buy their
way into the market, they would have to beat Medtronic to the deal. The medical
device industry, in general, requires high capital investment. New firms face a
high barrier to entry and difficulty imitating Medtronic’s products.
Organization: Is a
firm organized to exploit the full competitive potential of its resources and
capabilities?
In addition to developing great technology, Medtronic has a
lot of other organizational advantages. First, Medtronic develops its leaders.
The company values innovative thinking and encourages leadership development
for the ultimate benefit of the company and the development of its technology.
Medtronic also has its businesses organized into three main departments that
have subdepartments—these groups work together, making the best use of
knowledge and resources. Their locations are divided by the best places for
manufacturing, research, and other departments to be. Most recently, Medtronic
has attempted to avoid millions of dollars in corporate taxation by moving its
headquarters to a newly acquired company in Ireland. The company is using all
of its resources, expertise and capabilities to fully exploit its
profitability.
Monday, September 22, 2014
Evaluating Environmental Opportunities and Neutralizing Threats
Evaluating Opportunities:
Medtronic is the largest medical technology company,
operating in 140 countries. It has seven different business divisions, all
located in different places. For Medtronic to have become so successful, it has
had to make strategic business decisions and adapt to the market, as well as
neutralize threats in order to keep competition low. Based on the products and
services Medtronic offers, the company is classified as a member of emerging
industries in a global market.
Emerging Industries:
Medtronic employs a technological leadership strategy in emerging industries
because it is always introducing new, innovative products into the market. With
a company based on ever-improving technology, Medtronic and the medical
technology industry can be classified as emerging, although it has been around
for more than 60 years. In addition to consistently adding new technology,
Medtronic is adding markets, and successfully. Last year alone, 13% of the
company’s total revenue came from emerging markets, where the demand for these
technologically advanced products is growing rapidly.
Global Market
Opportunities: Medtronic utilizes a global strategy. Rather than changing strategies for other
countries, Medtronic can focus on the same technology and advancements because
the product it sells does not change based on cultural preferences. Medical
technology is the same for people all over the world. In the FY14 annual
report, CEO Omar Ishrak discusses the acquisition of Covidien and the resulting
growth of their global strategy. This acquisition means existing research and
development and know-how and increases shareholder’s revenues.
Neutralizing Threats:
Threat of Entry:
Medtronic is in a position in the industry where it has erected barriers to
entry. With its large workforce and global strategy, it has exploited economies
of scale by acquiring and merging with other companies to become the largest
medical technology company. Its products are highly differentiated and its
research and development teams are constantly releasing new technology. In
addition to these barriers, it has also been able to reduce costs independent
of scale by moving its business office to Ireland to take advantage of a tax
shelter. This one act has saved Medtronic millions of dollars each year.
Threat of Rivalry:
Medtronic also competes with firms in the industry on dimensions other than
price. Its products are differentiated with advanced technology beyond that of
its competitors. In addition, the company’s products and services are
diversified, thriving with seven divisions that are all focused on different
types of medical technology. From Cardiac Rhythm and Heart Failure Management
to Diabetes Care, Medtronic has a division for multiple, unrelated yet common
health problem. Regardless of a competitor’s success in one market, Medtronic
still dominates the industry with types and performance of several
technologies.
Sources:
Medtronic FY 14 Annual Report:
Medtronic Investor Page:
Sunday, September 21, 2014
Medtronic and Porter’s 5 Forces Model
The Threat of Entry:
Medtronic is one of the world’s leading companies that provides medical technology devices. Its products are technologically advanced and require extensive research and development. The threat of entry for a new company in this industry is high. Medtronic has the advantage of economies of scale because its strategy is acquisitions and mergers. Recently, Medtronic has acquired several smaller firms and released several new products, including an “implantable cardiac monitor, or ICM…The device is roughly one-third the size of a triple A battery -- about 80% smaller than comparable ICMs.” This product launched in February and has achieved 4% growth in the company division in its first quarter. This is one example of the advantage of product differentiation that would be a low threat of entry. Medtronic can use its brand recognition and reputation for high quality products to ensure trust with customers for new products, like this heart monitor.
Medtronic is one of the world’s leading companies that provides medical technology devices. Its products are technologically advanced and require extensive research and development. The threat of entry for a new company in this industry is high. Medtronic has the advantage of economies of scale because its strategy is acquisitions and mergers. Recently, Medtronic has acquired several smaller firms and released several new products, including an “implantable cardiac monitor, or ICM…The device is roughly one-third the size of a triple A battery -- about 80% smaller than comparable ICMs.” This product launched in February and has achieved 4% growth in the company division in its first quarter. This is one example of the advantage of product differentiation that would be a low threat of entry. Medtronic can use its brand recognition and reputation for high quality products to ensure trust with customers for new products, like this heart monitor.
Threat of Rivalry:
Medtronic’s main competitors are Abbott Laboratories, Stryker Corp, St Jude Medical Inc and market share leader, Johnson & Johnson. These companies are acquiring companies worldwide, making the market smaller. Industry growth is strong and product differentiation is high. Based on the attributes of the threat of rivalry, the threat of rivalry for Medtronic is moderate.
Medtronic’s main competitors are Abbott Laboratories, Stryker Corp, St Jude Medical Inc and market share leader, Johnson & Johnson. These companies are acquiring companies worldwide, making the market smaller. Industry growth is strong and product differentiation is high. Based on the attributes of the threat of rivalry, the threat of rivalry for Medtronic is moderate.
The Threat of Substitutes:
The threat of substitutes is moderate for Medtronic. The company’s devices are expensive and not ubiquitous throughout the health care industry. While hospitals all over the world use Medtronic’s technology, some are forced to make the best diagnosis with what they have. These doctors use older methods to treat patients for a less accurate and less expensive visit.
Threat of Suppliers:
The medical technology business is dominated by a few firms that sell highly differentiated products. Suppliers are not very threated by substitutes. Based on this assessment, the threat of suppliers is moderate to high.
Threat of Buyers:
In the industry of medical technology, the threat of buyers is low. With the aging Boomer population and a culture that does not value proactive, healthy living, the need for medical devices for a variety of ailments grows every day. Products and services provided by Medtronic affect and improve the quality of life for people. For anyone who can afford such care, this expense would be priceless to the patient. The number of buyers is high and the products are differentiated. Buyers are earning significant products by way of life and mobility improvement.
Sources:
Sunday, September 7, 2014
Competitive Advantage and Firm Performance
Medtronic’s website claims that it is “the world’s largest
medical technology company, offering an unprecedented breadth and depth of
innovative therapies to fulfill our Mission of alleviating pain, restoring
health, and extending life.” In 2013 alone, more than 10 million people received
medical therapies. Medtronic’s products care for “cardiac and vascular
diseases, diabetes, and neurological and musculoskeletal conditions.” Medtronic
is in the right business, as Forbes has claimed that health technology
companies are one of the fastest growing fields. With increased technology, an
aging Baby Boomer’s population, and more of a concern about remaining healthy
longer, Medtronic’s products are highly sought after.
Medtronic’s competitive advantage is that it is one of the
few companies in the world that is so diversified in the business of health technology.
Its divisions create products and treatments for a wide array of ailments. In
addition to their traditional projects, Medtronic has announced new research
trials for devices helping with Parkinson’s disease, patients with heart
failure and a device for those with vision loss. They are in the business of
improving quality of life, something everyone experiencing pain is in the
market for. For most who can afford it, the economic benefit of reduced pain or
health issues, the economic value far outweighs the cost. Because the firm is health
technology based and competition on its scale is limited, the competitive
advantage is sustained.
As far as firm performance, the data speaks Medtronic’s
praise. Not only is Medtronic 173 on the 2014 Fortune 500 list, but it is doing
well in the NYSE, averaging between $52.00-$64.00 a share. Recently, its value
neared its 52 week high. In the midst of several acquisitions and mergers, as
well as its decision to seek a tax shelter in Ireland, Medtronic has made the business
news frequently, and its increase in stock price shows an increased value in
light of these decisions. The tax shelter example is clear way that Medtronic
has cut down on economic costs.
Sources:
http://www.medtronic.com/about-us/company-profile/medical-technology.htm?loc=MDTHomeRefresh_B_InPage_SubNav_Company_Line2_3
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