Chapter 14: Merger & Acquisition Strategies

M&A is a hotly discussed concept in the business realm. M&A stands for Mergers and Acquisitions and is defined simply as companies either combining through mergers or a larger company acquiring a competitor/niche market innovator (large or small). 

One crucial reason for mergers and acquisitions is for entities to bring about a corporate diversification strategy that will push them further ahead in the market. Of course, these actions must present some tangible output in the form of increased sales or greater foothold in one or more markets. (FedEx acquiring TNT is a prime example of an acquisition gone horribly wrong). 

In the past 2 decades, Medtronic has acquired 60 companies, ranging from Titan Spine to Endonetics! Executives at Medtronic understood that the talent within the confines of the company would take them to a certain level. Beyond that, it was important to identify companies with new contributions to the medical device field. These smaller outfits could have been catering to a small portion of the market, but with an acquisition from Medtronic, the products developed by the smaller companies now will be broadcasted a much larger customer base.

A key aspect of medical device development in the healthcare sector is robotics and the utility in surgery. In Q4 of 2018, Medtronic acquired Mazor Robotics, specializing in robotic spine surgery. This acquisition allows Medtronic an extraordinary competitive edge against players like Stryker in the robotic surgery sector.

Chapter 13: Strategic Alliances

Another vital corporate strategy is the development and sustenance of strategic alliances. Barney defines a strategic alliance as a cooperation between two or more companies or outfits working in cohort toward the conceptualization and commercialization of products/services.

Companies operating individually in the market can certainly do well, however, there comes a point when the innovation meets a road block and output plateaus. The sales and revenue begin to stabilize such that growth is not experienced. During these lull periods, key strategic alliances can really push a company to the forefront of the market. Let's take a look at how Medtronic continues market domination with well-timed strategic alliances. 

In 2014, Medtronic sought to bring a greater presence in the fight against Diabetes. Sanofi is a French multinational biopharmaceutical company. The company is working on both medical and holistic approaches to patients living with diabetes. Medtronic saw an untapped market space in healthcare, and pen was put to paper. Medtronic and Sanofi have created a "global strategic alliance" to manifest a multifaceted approach to diabetes. 

In this day and age, data analytics practically drives many business practices and decision-making. Medtronic saw an opportunity here to use data and improve patient healthcare outcomes. Medtronic and Mercy Hospital entered into a strategic alliance where both parties are involved with the sharing and facilitation of patient data allowing for tangible improvements to Medtronic's medical devices currently produced and used in the field (and for future product lines).

In both cases, the companies work in concert not to benefit one's interests over the other, but to combine manpower with growing technology and continue finding and creating solutions for the millions of patients suffering everyday with illnesses.

Chapter 12: Implementing Corporate Diversification

A key corporate strategy is the ability to implement a corporate diversification, which was discussed in the previous post. 

What entails this implementation you might ask. There are agency costs either benefit or negate the relationship between equity holder and managers. The agency relationship for Medtronic is the external principals with a financial investment into the company and the agents are the managers who carry out the decisions of these external principals. Management control systems and compensation policies are all aspects to the implementation of corporate diversification, but let us briefly look at organizational structure. 

Medtronic has a multidimensional structure, or M-form. There are a board of directors who manage the decision making in the short and long run of the firm. On it sit individuals like the CEO and chairman of the board. The board also contains subcommittees which handle different aspects of the business, like auditing, finance, or compensation. In the hierarchy, board of directors sit atop the mountain surveilling the internal and external environment. 

 MEDTRONIC ORG CHART

 MEDTRONIC BOARD & ADVISORS

Chapter 11: Diversification Strategies

Continuing our discussion of corporate strategies, let us look at diversification strategies. Corporate diversification strategies are actions taken by a firm to increase or expand operations under current business practices. The diversification strategies allow the business to enter different markets all in attempts to continue to gain competitive advantages.

Within diversification strategies, a business can employ a limited corporate diversification strategy whereby the business uses one of two strategies: single-business or dominant-business.

Interestingly enough, Medtronic has products that fall into both categories of diversification strategies. The cardiac and vascular sector of medical devices is Medtronic's bread and butter. On the other hand, Medtronic is a dominant player in the minimally invasive surgical sector and the restorative therapies sector. Now, just because Medtronic is a dominant player in any specific sector does not mean Medtronic does not have much competition. In fact, Medtronic must continue its diversification strategies as the healthcare sector is ever evolving to better meet customer needs. The continued diversification can be achieved through innovation, and creating a deeper patent portfolio.

Chapter 10: Vertical Integration Strategies

We now shift gears from business strategies and look at corporate strategies. The gist of corporate strategies are decisions or behaviors allowing the company to create some sort of competitive advantage using the resources on hand encompassing different markets. 

To open our discussion into corporate strategies, we will delve into vertical integration. Barney defines vertical integration as the quantity of stages in a product's value chain which the company uses. 

Healthcare and technology are continually evolving, so the utilization of these resources for efficient processes is a direct correlation to following through with vertical integration. Medtronic is a key player in many medical device industries, but 5 years ago, Medtronic was fairly weak in the cardiovascular sector. To implement some vertical integration and develop a strong foothold in this sector, Medtronic acquired Covidien for their vascular product groups.

Chapter 9: Tacit Collusion - Cooperation to Reduce Competition

To round out our discussion on business strategies, we will briefly take a look at the concept of collusion, and how it relates to Medtronic's business operations.

Barney defines collusion as the act of any number of firms working in concert to align strategic decisions in order to decrease the competition in the respective industry.

As great a corporation Medtronic is and for as long as they have had the market share, their journey is certainly riddled with issues. In 2012, it was reported that Medtronic worked with physicians to edit and modify reports. The studies misrepresented the risks to patients of products used in spinal fusion surgery. 

In late 2016, Medtronic was charged with price fixing in their China division. Medtronic was imposing minimum resale prices for products being distributed. 

In late 2018, it was reported that the Brazilian regulatory bodies are filing charges against Medtronic for alleged collusion with respect to their heart devices. Specifically, Medtronic was engaging with competitors to price fix heart devices to reduce competition in the South American market.

Chapter 8: Flexibility - Real Options Analysis Under Risk and Uncertainty

Without getting too much into the mathematics in the economics of understanding flexibility, options, and even uncertainty, let's briefly discuss Medtronic's market flexibility.

Over the past decade, innovations into the medical device sector have led to greater financial flexibility for Medtronic. It is important to note that the uncertainty indubitably lies within future business acquisitions and market fluctuations; predictive analytics only so much in terms of economic upside AND downside. 

In times of manufacturing uncertainty, Medtronic had to reshuffle internal efforts. In addition, the customer was effectively left hanging in a key market for Medtronic. This opening allowed for competition to command a key sector of the medical device market. However, Medtronic's continued efforts to push the limits of technology to ensure top shelf products for its customers.

One type of flexibility employed by Medtronic is the option to expand. Medtronic operates in the cardiac space. Medtronic created stents, which allowed them to expand further into the cardiac space with more expansion products like balloons and catheters.

There is inherent risk in ALL endeavors. What makes Medtronic successful is its ability to use previous customer data, manufacturing data, and financial reports to make sound decisions in the now and for the future.

https://www.sec.gov/Archives/edgar/data/64670/000095012310040829/c57838dfan14a.htm

Chapter 7: Product Differentiation

Continuing our previous discussion of business strategies, we move into understanding product differentiation and how Medtronic utilizes this concept in day-to-day operations.

Barney states product differentiation, as the term indicates, is the strategic impetus of an organization to acquire new or further competitive advantage in the market by increasing customer or end-user interest and likelihood of paying for a variety of goods and services.

Product differentiation for Medtronic is paramount to stay in business. Without product differentiation as a business strategy, Medtronic would have little to no stake in the medical device market. The continued innovation and differentiation strategies push the limits of what was once inconceivable. For Medtronic, survival is aided through customer loyalty to the brand. So the question now becomes how does Medtronic maintain brand loyalty? 

Solution: Create more complex customer-centric products which puts Medtronic at the front of the line when physicians are looking for a one stop shop solution to help patients. Furthermore, Medtronic can make sure existing products or products flowing through the pipeline maintain not just a high level of quality but also uniqueness in design and multi-functionality that leads physicians and customers to choose Medtronic over the competition. 

Medtronic released a product touted to revolutionize heart monitoring. The product, Reveal LINQ, compared to competition was a heart monitor with a unique feature: it is extremely small. What patient does not want a small heart monitor that can be inserted into the cardiac system?

https://www.medtronic.com/us-en/patients/treatments-therapies/heart-monitors/our-monitors/reveal-linq-icm.html

Chapter 6: Cost Leadership

In the first few blogs, we delved into the Logic of Strategic Analysis, from firm performance and competitive advantage to understanding and analyzing environmental threats. Now, we are going to shift our focus to Business Strategies. 

To kick off this new knowledge foundation, we will begin with a look at Cost Leadership and how that relates to Medtronic's day to day operations.

A key generic business strategy Medtronic employs in the market is cost leadership. Cost leadership characterizes an organization focused on allocating resources to lowering the pertinent direct and indirect economic costs whereby creating sustained competitive advantage in the market. A key to this cost leadership are these economies of scales, which Barney describes as essentially cost savings yielding from varied scaling in the operations or production side of the business. 

Medtronic is well-versed in acquisition of new technologies, but the magnanimous investment into R&D, clinical testing, and actual optimization of production process allows Medtronic to remain THE dominant player in the market.

https://www.simplysafedividends.com/intelligent-income/posts/116-medtronic-a-well-run-dividend-aristocrat-in-healthcare

Chapter 5: Evaluating Firm Strengths and Weaknesses: The Resource-Based View

As indicated by Barney (2011), distinctive competencies are the actions taken or performed by a company that inevitably sets them apart them from the competitors in the market.

Previously mentioned in a prior post, Medtronic has a uniquely placed competency: patents, and lots of them.

Medtronic possesses an immense value in these patents, and what’s more astonishing is how dynamic this portfolio of patents remains to this day. The ability to acquire patents boils down the Medtronic’s precision approach to forecasting and understanding even the most subtle of trends. The large market capitalization translates to a large treasure chest of money stashed away. These funds allow Medtronic to expand product lines or even develop new ones by garnering key patents without reluctance. Medtronic has effectively removed a barrier to entry in the market by throwing mountains of money into research and development, and supply chain analysis.

Medtronic is fully aware that it will require both external and internal resources to create an environment ripe for patent or competition (new entrants/startup) acquisition. The organization is a leading competitor, so why allow stasis when you can be head honcho in the market? 

(United States Securities and Exchange Commission)

Sources:

1. Barney, J.B. (2011). Gaining and Sustaining Competitive Advantage, 4th ed. Prentice Hall: Pearson.

Chapter 4: Evaluating Environmental Opportunities

An emerging industry, as illustrated by Barney, is a "newly created or newly-recreated" industry created by the advancements in technology or the evolution in customer needs and behaviors (Barney, 2011). 

In the last post, we discussed the environmental threats facing Medtronic. Here, let us briefly discuss how they maintain their market leadership.

Medtronic is a OEM in the medical device industry, with products ranging from trocars to regeneration matrices. The healthcare sectors serviced span from neurological to orthopaedic. Somewhat recently, Medtronic has taken a vested interest in the emerging market of MedTech. As a leader in the medical device industry, with a sizable market capitalization, it is paramount Medtronic not lose its focus on differentiation. As an emerging market, MedTech is an area that allows medical device organizations to really outline the future growth in not just product realization but also commercialization. To take initial steps, Medtronic created a new internal infrastructure 6 years ago that would allow further customer interaction and greater facilitation of data. Continued focus on health systems and the emerging MedTech market showed Medtronic delve into key acquisitions to become a more robust player in the market. 

With the fast-paced nature of healthcare and ever-evolving needs, Medtronic pulled one over on its competitors by actively engaging the end users, aka the patients. This collaborative platform garnered an increase in customer satisfaction, well-intentioned and low-cost marketing, and most of all, better utilization of the emerging MedTech sector to create more patient-centric developments.

In their latest attempts to remain atop the market, while creating further avenues of customer-focused product lines, Medtronic acquired Nutrino, in late 2018. This acquisition will allow Medtronic to use the predictive algorithms to better support physicians in their fight against diabetes. In search of continued differentiation, Medtronic hit the jackpot with respect to physician interest and widespread public applicability.

Sources:

1. Barney, J.B. (2011). Gaining and Sustaining Competitive Advantage, 4th ed. Prentice Hall: Pearson.

Chapter 3: Evaluation of Environmental Threats

Medtronic is in the medical device sector which is a vastly emerging market in healthcare. Being a leader in medical devices, it is only natural Medtronic contend with a myriad of business issues, both internal and external.

Michael Porter is a brilliant economist who coined the Earth-shattering paradigm of 5 forces that are essentially deterministic of the competitiveness, or lack thereof, of the firm in question. We will look at the 5 forces as they relate to Medtronic's ability to maintain such a strong foothold in the market, and how they perform such a feat.

THREAT OF ENTRY

Medtronic is a leader in this field because of continued innovation of products suited a more widespread customer base. In addition, acquisition of technologies to bolster both physician and customer augments the established credibility. Medtronic is not the end all, be all. Individuals at other companies or those recognizing a niche gap in the market can capitalize on this opportunity. This new entrant into the market poses a challenge to Medtronic: New player in the market is primed to seize an valuable, though niche, piece of the market, and potentially offer lower cost solutions and more streamlined lead times.

Solution? Medtronic has to continue it's broad innovation of new products or improvements of legacy products. The expansion of innovation means an increase in R&D funding. Lastly, if Medtronic can establish economies of scale, then issues of new entrants with lower costs will be no longer.

THREAT OF RIVALRY

Yes, Medtronic, is the leader in the industry, but this goes without saying how intensively competitive the market is. There are many players in the market, and this continued sparring only results in decreased profits. 

Solution? Fortunately, a strength of Medtronic is the great innovation, but now to really align themselves in the market separate of rivals, Medtronic needs to embark on opportunities designed to introduce differentiation in the market. Also, it wouldn't hurt if Medtronic other rivals (big or small) work together on certain projects that target specific portions of the market. It is far easier to come together as a unit and tackle an issue rather than have 10 rivals war it out.

THREAT OF SUBSTITUTES 

Medtronic has a multi-faceted portfolio of products in the medical device market. However, the real threat of substitutes presents itself when another group or organization creates a similar product, but markets it is a far more economical cost. Why create new products when you can create a product very similar to something already in practice, but make and sell it for far lower?

Solution? As brash as it sounds, Medtronic may need to find ways to make it more challenging for physicians and customers to switch away from Medtronic products to a substitute product. Additionally, Medtronic is a market leader in creating and distributing products, however, it is time those products leave the organization backed by service. If Medtronic can offer services in conjunction with products, threat of substitutes is neutralized, AND Medtronic creates differentiation.

THREAT OF POWERFUL SUPPLIERS

In reality, Medtronic would be struggling on a daily basis if there were no raw material suppliers. Neither Medtronic nor contract manufacturers could complete jobs in a timely manner, or at low costs. These raw material vendors have to balance their respective market forces in addition to the fluctuating demand from medical device corporations. This means the material vendors essentially have free reign on prices. 

Solution? Supply chain, supply chain, supply chain. Medtronic must streamline the supply chain, from concept to commercialization of the product(s). In an effort to differentiate in the market, Medtronic should seek primary vendors and new types of materials for products.

THREAT OF POWERFUL BUYERS

What can be said about the buyers that isn't already known? Buyers want a medical device from a trusted organization that backs product efficacy with statistical evidence and successfully proven anecdotes. However, just because buyers want the very best products does not mean they will pay top dollar for it. These consumers expect low-cost offerings; this in turn can create customer (brand) loyalty moving forward.

Solution? In addressing the threat of powerful buyers, Medtronic can combine several approaches from other areas. For example, Medtronic needs to continue innovating to keep physicians and customers interested in the company's growth potential. The continued and sustained growth through differentiation will allow for an increase in the number of customer Medtronic serves.

Chapter 2: Firm Performance and Competitive Advantage

Competitive advantage, as explained by Jay Barney, is the ability of a firm (Medtronic for the purposes of this blog) to create more economic value than rivals (including Stryker, Boston Scientific, etc.).

Medtronic, as a leader in the medical device industry, must find avenues to differentiate product lines and forecasting opportunities to differentiate from the competition. Hence, we will briefly discuss the competitive advantages Medtronic possesses in the market.

Medtronic has maintained a high level of competency in the market courtesy of their unique and aggressive growth strategies. The company is ushering in a new wave of value-based healthcare to create a more robust brand name; increased patient satisfaction and longevity of medical device are intensely sought after outcomes for Medtronic. Furthermore, with the how long Medtronic has been a player in the market, they hold a treasure trove of historical data allowing them to make balanced decisions about legacy or new products. 

Another growth area is through the acquisition, but not of companies with products similar to Medtronic. The company seeks to identify leaders, big and small, in diversified markets like robot-assisted surgical equipment, and buy them out further increasing Medtronic's competitive advantage. The product diversification is bolstered through a practice of sustaining high-margin (hip systems) and low-margin products (surgical stents). Essentially, Medtronic has a financial backup when one sector of their portfolio is not bringing in expected profits.

A quintessential key to Medtronic's growth (and continued innovation) rests within the litany of patents the organization holds. The patents are essentially the keys to market dominance as they create barriers to entry for the competitors, even if ephemeral.

Attaining market competitive advantage through continued product diversification.

Blog Intro: It is about to get wild in here

Well hello there friends, foes, frenemies, and professors! My name is Dilip Palanisamy, and this here shindig is my blog on the medical device behemoth Medtronic. I strive to enlighten you to not just Medtronic but the medical device industry as a whole, and its profound impact on the healthcare industry. 

For the record, I have no idea what is about to happen here, so I suggest you keep that seat belt fastened at all times. So, ladies and gentlemen, I have only 1 remaining question to stimulate your intellect for the next 4 months...............

Are you...are you prepared for the divestment and magnanimous jettison of multi-faceted (presumably) business information?

If so, start your engines!

Until next time, 

D-Train