Fisher & Paykel Health Care - External Analysis - Essay Example

? Fisher & Paykel Health Care: Just Add Water Executive Summary Fisher & Paykel was established in the year 1934 in New Zealand. Since its incorporation, the company has been growing at a rapid rate and expanding its business in the global markets. The study represents the external analysis of the general environment in which the company is conducting the business. Political, Legal, Socio-cultural and Demographical trends have been evaluated in order to understand the factors that will help the growth of the business. In order to understand the effectiveness of the business, industry analysis has been done which will mark the growth opportunities of the company. Furthermore, competitors and their strategies have been evaluated to acquire an edge over the rivals. To compare the competencies of the company in accordance with the external environment, internal analysis has been conducted. The capabilities and resources have been identified and core competencies of the company have been evaluated. The value chain analysis has been done in order to analyse the primary and support the activities of the firm. Moreover, the strength, weakness, opportunity and threats have been evaluated to analyse the current strategies of the company. Lastly, the company’s future strategies have been identified which is likely to increase the revenue. Table of Contents Executive Summary 2 External Analysis 4 Background and Industry 4 General Environmental Analysis 5 Industry Environment 7 Competitive Environment 8 Internal Analysis 9 Capabilities Identification 9 Core Competency Analysis 10 Value Chain Analysis 11 SWOT Analysis 13 Current Strategies 14 Future Strategies 14 References 16 Bibliography 18 External Analysis Background and Industry In the health care sector, Fisher and Paykel emerged as an idol among the business houses in New Zealand from the time of its incorporation in 1934. The company is famous for making appliances of humidification technology in the global health care industry. It successfully developed a new appliance famously known as Obstructive Sleep Apnoea (OSA) in addition to their intensive care for humidification. In earlier days, the company operated with 50 employees in an open plan environment. However, identifying the need of team-based approach, the company designed a modern building in Auckland which serves as the company’s headquarter and provide sufficient free spaces for employing a large workforce. Initially the company manufactured respiratory humidifier appliances; however, in 1977 a separate medical section was established. Following the success of the medical division in the late 1990s, several investors intended to focus their attention, thereby, reducing the market value of lower-margin appliance businesses. Thus, in the year 2001, Fisher & Paykel was divided into two separate units namely, Fisher & Paykel Healthcare (FPH) and Fisher & Paykel Appliances (FPA) (Hanson, Hitt, Ireland & Hoskisson, 2011). General Environmental Analysis The most crucial factor affecting the healthcare equipment industry was probably the demographic trends. According to an assessment carried out by the United States (US) Census Bureau in 2000, the age group 65 and above represented 12.4% of the total US population. Thus, the expenses made in the healthcare sector by this segment amounted to 40% of their total expenditures. Furthermore, the US Congressional Budget Office (CBO) has estimated that the age group of 65 and above is likely to double in the next 30 years while adults under the age of 65 were expected to rise by 12 percent. World Health Organisation (WHO) forecasted that the global age group of 65 and above which accounted for 390 million in 1997 will rise to 800 million by 2025. China and Japan were considered to be amongst the countries with immense growth opportunities for the medical appliances industry. The estimated data from WHO reveals that the mentioned age group will rise to 200 million with 25 million people in China and Japan respectively (Hanson, Hitt, Ireland & Hoskisson, 2011). In the US, ‘home healthcare products’ were bought by the dealers, hospitals or ‘sleep clinics’, which were then charged from the ‘domestic third party payers’, namely, Medicare, Medicaid and corporate health insurance planners. However, the third party payers at times denied reimbursements if they found the device to be used inappropriately or without using it cost effectively. Thus, ‘managed health care’ trend especially in the long run entails possibility of influencing the purchase of health care products thereby, making it cheaper for the consumers. However, outside the US, government and health insurance companies primarily bear the cost of medical care (Hanson, Hitt, Ireland & Hoskisson, 2011). Technological innovations were considered to be one of the growth strategies for the healthcare industry. Fundamental researches were funded by government agencies such as National Institutes of Health (NIH) and others which partnered with research scientists in America’s leading universities. The government mostly funded basic medical researches and assessment of possible healthcare applications. Thus, the Research & Development (R&D) department of the companies were expected to be affected adversely if the funds from the government stopped pouring in. Companies that manufactured usual hospital supply products spent minimum amount on the researches in comparison to those that developed technologically advanced devices and invested larger amounts. Statistics revealed that the medical industries spent about 9-11% of their annual revenue in comparison to other US manufacturers that spent 3-4% on R&D (Hanson, Hitt, Ireland & Hoskisson, 2011). The regulatory requirements for introducing new medical appliances in the US varied largely from other nations. Various developing nations, especially those in Latin America had limited regulatory restrictions; however, Japan and other western European nations had approval protocols for the introduction of new medial appliances. New product approval in the areas where FPH operated required quite fewer regulatory approvals due to their consideration in the category of ‘pre-market notification’ generally known as 510(k) under the US regulations. In addition, exposure to possible product liability claims was considered another major legal issue experienced by the healthcare industry. Although, product liability insurance encompassed majority of the appliances but the overall coverage for frequently used products were not offered, thereby, making it necessary for numerous companies to bear majority of the risks (Hanson, Hitt, Ireland & Hoskisson, 2011). Industry Environment The health care industry that supplied instruments were divided into two major segments, one supplied healthcare instruments to institutions, hospitals and outpatient care patients and the other focussed on innovating technologies for developing advanced equipments in order to improve the efficiency of patient care (Porter & Teisberg, 2006). Supplier Power – Small manufacturing companies witnessed the challenge of existing powerful sales forces and scale advantages of the multinational giants while competing for entering into agreements with the large hospitals and medical institutions. Numerous companies manufacturing healthcare appliances were present in the global markets which enhanced the competition in receiving the contracts for supplying appliances thereby, reducing the power of the suppliers (Lima, 2006). Buyer Power – The presence of various multinational companies compared to the 65 and above age group population was measured to be quite less. Although, statistics revealed that the population of the targeted age group is comparatively lower in the US, the probability of augmentation is highly expected. Thus, the power of consumers is relatively higher in the current scenario which is likely to decrease in the near future (Lima, 2006). Potential Entrants - Companies other than the ones operating in the US also carried out business functions in this industry due to which success was quite challenging. In spite of the huge number of prevailing manufacturers in healthcare industry, the opportunities were believed to be huge which made several potential companies to extend their business in this particular industry (Hill & Jones, 2009). Substitute Products – The R&D department of various healthcare companies introduced products which created higher profit of margins. However, due to the nature and utilisation of the device, the substitute products are measured to be comparatively less than other industries (Hill & Jones, 2009). Rivalry among Competitors - Major players from the US existed in the market such as Bausch & Lomb, Boston Scientific and Johnson & Johnson among others. Moreover, companies from other nations too existed in a large scale. Thus, the rivalry among the competitors are huge making the companies employ huge amount of capital on the research and development programmes in order to attain competitive edge over their rivals (Hill & Jones, 2009). Competitive Environment The opportunities in healthcare industry are supposed to be increasingly higher due to the rising ageing population throughout the world. Moreover, the changes made in the pattern of third-party reimbursement for healthcare added extra benefit to the companies’ existing in this industry. Statistics provided by large number of surveys confirmed the actuality of healthcare companies investing huge amounts for R&D in order to develop products which produced increased profit margins. In addition, the legal issues pertaining to new healthcare products launch in different nations are changing thereby making it lucrative for the large companies to invest in this particular industry. Thus, the favourable factors increased competition by a large extent in the global market (Niles, 2010). Internal Analysis The annual report of FPH 2006 shows that tangible assets such as cash and marketable securities amounted to NZ $28,554,000. Moreover, the company had an inventory amount of NZ $55,013,000 and property of NZ $128,296,000. Intangible assets such as goodwill amounted to NZ $1,030,000. The total assets of the company accumulated to NZ $267,470,000 in 2006 (Hanson, Hitt, Ireland & Hoskisson, 2011). Thus, it can be stated that the resources of the company were strongly positioned in order to enhance the global presence within the industrial context. Capabilities Identification Of the 1200 FPH employees, 200 engineers and scientists were provided the responsibility of innovating and developing products through effective clinical research. Moreover, sale of OSA related products developed by the research and development team of the company was growing rapidly compared to respiratory humidification and was thus expected to become the leading source of generating revenue for the next following years. The company further generated higher revenues from the sale of accessories and consumables which were manufactured in a unit established for producing replacement products such as filters, tubing and chambers. The company generated 45% of the total revenue in 2001 and 59% in 2006 from the sale of accessories. The new building provided by the company is observed to be an open plan that does not include a single office. It has been designed to share ideas across every employee and to focus on the problems of one patient. Moreover, facilities were abundantly available for each of the particular development team (Hanson, Hitt, Ireland & Hoskisson, 2011). Core Competency Analysis Product Rare Valuable Costly to Imitate Non Substitutable Respiratory Humidification systems Yes Yes Yes Yes Continuous positive airway pressure devices Yes Yes Yes No Delay Timers Yes Yes No Yes Bi-level airflow generators Yes Yes No Yes Variable positive airway pressure systems Yes Yes No No Auto titration devices Yes Yes No No Value Chain Analysis The value chain analysis designed by Porter consists of two distinct activities, namely, the support and primary activities. The support activities are described below: Infrastructure – The Company provides the facility of multiple laboratories and workshops for conducting researches and development of appliances. Furthermore, the new building plan is not designed in a compartmentalised style where the employees were provided with little or hidden places. Moreover, the open plan provided an informal working environment which was gradually accepted by the employees (Recklies, 2001). Human Resource Management – FPH had a workforce of approximately 1200 employees out of which 1000 employees were from New Zealand. Out of these, 200 were responsible for conducting researches aimed for the purpose of innovating medical appliances. In addition, FPH plans to recruit 32 graduates throughout New Zealand especially for its R&D departments in order to support the growing percentage rate per year (Recklies, 2001). Technology Development – The Company maintains close relationships with customers for analysing the various problems experienced by them. The R&D staffs are found to spend considerable amount of time in the hospitals evaluating the techniques of using the products. The conducted evaluations helped the company to generate ideas in order to improve the performances of the devices (Bischoff, 2011). Procurement – Initially, in the year 1939, FPH started manufacturing in New Zealand. Later from 1956 the company started producing medical appliances. However, in 1960, with the association of Dr. Spence, FPH started to focus on the production of humidifier breathing products and later in the year 1971, the first product was launched from Auckland (Bischoff, 2011). The Primary activities of the value chain are described below: Inbound Logistics – FPH initially began manufacturing medical appliances which were used in Intensive Care Units (ICU). Later the company utilised an opportunity for increasing their revenue growth. They set up a unit that manufactured accessories and consumables such as tubing and filters as well (Sekhar, 2009). Operations – FPH earned huge percentage of growth from the sale of replacement items that was produced by the company’s unit. However, the company has been separated into two divisions, one concentrated on the ICU devices and the other on consumable products (Sekhar, 2009). Outbound Logistics – In the US, the company did not sell directly to the customers’ but was learnt to sell or rent out in few instances to the home medical equipment service providers, hospital distributors and dealers. These vendors later resold or rented the medical appliances to the end users. Furthermore, in European and Asia-Pacific countries, the company used dealers and independent distributors to sell its devices (Sekhar, 2009). Marketing and Sales – FPH conducted a survey which identified that 20 million Americans were suffering from sleep disorders. The company therefore designed and initiated promoting campaigns which made the people aware about the symptoms and preventive solutions. The company focussed on both selling and renting out their medical appliances to the dealers and hospitals which in turn resold or re-rented to the patients (Sekhar, 2009). Service – FPH annually invested a huge amount of their revenue in R&D for innovating and developing their medical devices in order to provide patients the highest level of comfort. It further planned to recruit additional employees to be included in the existing R&D teams (Sekhar, 2009). SWOT Analysis Strength –The human resources of FPH can be considered to be one of the greatest strengths of the company. The workforce has well been supported by the culture of innovation which largely prevails in the company. Furthermore, the company’s financial background was strong enough to invest huge capital for developing and innovating medical appliances (Bohm, 2009). Weakness – The existing demographic trend prevailing around the world was a concern for the company. The growth of 65 and above age group was relatively slow in the US compared to other countries. Furthermore, FPH’s products were sold and rented out through middle agents such as dealers and hospitals. Thus, the costs of the products were higher which gave the rivals an opportunity to capture the company’s market share (Bohm, 2009). Opportunities – FPH developed an idea of generating higher profits by the sale of replacement products such as tubing and filters. These products provided the company higher profit margins compared to the medical appliances which were manufactured. Moreover, a survey conducted by WHO revealed that China and Japan were the potential markets where the 65 and above age group population kept growing rapidly (Bohm, 2009). Threats – The 40% market share of Respironics and ResMed made FPH the leader in the market for OSA. Furthermore, the presence of numerous multinational giants in the healthcare industry posed a competitive threat to FPH (Bohm, 2009). Current Strategies The survey conducted by WHO provided the company with information about the growing potential markets around the globe. China and Japan were the countries with comparatively increased population of the concerned age group i.e. 65 years and above. Thus, the company started to expand its market in the Asian and European countries before their rivals intended to enter. Moreover, the increasingly growing awareness of OSA among the public and physician substantiated as well as supported the expansion of the company’s line of products. Furthermore, the increased reimbursement and funding for the OSA products encouraged the production and sale in a large scale (Hanson, Hitt, Ireland & Hoskisson, 2011). Future Strategies FPH introduced a heated humidifier breathing tube for a specific form of ventilation considering the rate of return in the long-run. Moreover, the PVC oxygen masks posed few problems for the patients such as inability to talk and eat while wearing the masks. Therefore, FPH developed an exclusive nasal interface which enabled ‘high-flow oxygen therapy’ comfortably while allowing the patients to talk and eat. In addition the company intends to charge the patients with an average amount of US $17 which is presently noted to be US $40-50 per patient. The reductions in cost will make the company triple the number of patients being treated thereby recording an additional 20% growth annually (Hanson, Hitt, Ireland & Hoskisson, 2011). References Bohm, A. (2009). The SWOT analysis. Munich: GRIN Verlag. Bischoff, A. L. (2011). Porter's value chain and the rea analysis as an accounting information system. Munich: GRIN Verlag. Hanson D., Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2011). Strategic management: Competitiveness and globalisation, 4th edition. United States: Cengage Learning. Hill, C. & Jones, G. (2009). Strategic management theory: An integrated approach. United States: Cengage Learning. Lima, T. (2006). Michael Porter’s five forces model. Retrieved from http://arfuso.weebly.com/uploads/9/9/6/1/996130/porters_5_forces_model.pdf Niles, N. J. (2010). Basics of the U.S. health care system. United States: Jones & Bartlett Learning. Porter, M. E. & Teisberg, E. O. (2006). Redefining health care: Creating value-based competition on results. Boston: Harvard Business Press. Recklies, D. (2001). The value chain. Retrieved from http://www.fao.org/fileadmin/user_upload/fisheries/docs/ValueChain.pdf Sekhar, G. V. S. (2009). Business policy and strategic management. India: I. K. International Pvt. Ltd. Bibliography Chua, K. P. (2006). Overview of the U.S. health care system. Retrieved from http://www.amsa.org/AMSA/Libraries/Committee_Docs/HealthCareSystemOverview.sflb.ashx Centre for Disease Control and Prevention. Health care in America: Trends in utilization. Retrieved from http://www.cdc.gov/nchs/data/misc/healthcare.pdf Henry, A. (2008). Understanding strategic management. United Kingdom: Oxford University Press. Jeffs, C. (2008). Strategic management. United States: SAGE Publications Ltd. Lorat, N. (2009). Market audit and analysis. Munich: GRIN Verlag. Ministry of Economic Affairs. (2012). Medical service & healthcare industry: Analysis & investment opportunities. Retrieved from http://investtaiwan.nat.gov.tw/doc/industry/11Medical_Service&Healthcare_Industry_eng.pdf Read More