Midterm Case Analysis


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Midterm Case Analysis

  1. 1. Paige Rudolph MKT 463 Midterm April 30, 2003 Augustine Medical, Inc. Case Analysis Company Background  In July 1987, Dr. Scott Augustine, an anesthesiologist, founded Augustine Medical, Inc. (AM) in Minnesota. Their goal was to develop and market products for hospital operating rooms and postoperative recovery rooms.  Through experience, he discovered that hospitals needed an innovative approach to warming post-surgery patients. Dr. Augustine developed the Bair Hugger® Patient Warming System.  Company executives were occupied with finalizing the Bair Hugger® Patient Warming System in early 1988.  Original two products: (1) produce and sell patented warming system used to treat hypothermia and postoperative patents, (2) tracheal intubation guide for crisis situations and in the surgical room. Core Competencies  Providing the most innovative and safe way to warm postoperative patients and those with hypothermia. Augustine Medical, Inc.’s products are also more effective, less likely to leak water onto expensive equipment, and easier to operate than other competitors methods of hearing patients. The Hospital Market  Approximately 21 million surgical operations are performed annually in the US.  That’s 84,000 operations per average 8-hour workday.  Approximately 5,500 hospitals have operating rooms and postoperative recovery rooms.  Research commissioned by AM indicated that there are 31,365 postoperative recovery beds and 28,514 operating rooms in hospitals in the US.  60 – 80 percent of all postoperative patients are rendered hypothermic. This is a large portion of hospitals patients whose needs are not being met to the best of their ability.  Given the demand for postoperative recovery room beds, the research firm estimated that hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger® Patient Warming System. The projection said that one system would be sold for every eight postoperative recovery room beds.
  2. 2. Number of Number of Estimated Percentage of Postoperative Beds Hospitals Surgical Operations 0 1,608 0 1-6 3,602 20 7-11 1,281 40 12-17 391 20 18-22 135 10 23-28 47 6 29-33 17 2 >33 17 2 Industry Competing Technologies- Surface Warming Technologies Warmed hospital blankets- Most commonly used treatment for hypothermia in recovery room and other locations. Takes 6-8 warmed blankets in succession on top of the patient. Almost all patients receive at least one application. Its estimated that 50 percent of the postoperative patients require more than just one application.  Safe, simple, and inexpensive  Cools quickly, provides only insulation, regeneration of warmth takes patients own body heat. Water-circulating blankets- Second most popular postoperative hypothermic treatment. Placed under or over the patient.  Hospitals typically place water-circulating blankets either just over the patient or over and under the patient, forming an insulated environment enclosing 85 to 90 percent of the body’s surface area.  Only 15 percent of the body surface is covered by placing just under patient. The water blankets are also heavy, expensive, and can cause burns on pressure points. They are also considered just slightly to moderately effective. Air-circulating blankets and mattresses- Not commonly used in the US. Variations have been tried in the past. Warm air is flowing over the body to transfer head to the patient.  Safe, lightweight, and theoretically more effective than warmed hospital blankets or water-circulating blankets. Thermal drapes- Recently introduced and is gaining acceptance as a preventative measure when used in the operating room. They consist of head covers, blankets, and leggings placed on the uninvolved portions of the patient’s body.  Simple, safe, and inexpensive. Has been shown to reduce heat loss.  Merely insulates patient and does not transfer heat to someone who is already hypothermic. Used when 60% of patient’s body surface can be covered.
  3. 3. Infrared heating lamps- Popular for infant use. When placed a safe distance from body and shone on skin, radiates warmth to patient.  Effective and illuminate patient for observation or therapy.  Modesty prevents widespread use among adults because skin must be exposed. Nurses dislike radiant heat lamps and panels because they tend to heat the entire recovery room and are uncomfortable to work under. Partial warm-water immersion- Used in the past, especially in cases where a patient was deliberately cooled to slow down metabolism. The patient is placed in a bath of warm water and watched carefully.  Transfers the heat very effectively and is really simple.  Inconvenient system setup that requires close monitoring of patient. Water baths must be carefully watched for bacterial growth and are very expensive to purchase and use. Increasing room temperature- Most obvious way to prevent and treat hypothermia, but seldom used.  Simple, relatively inexpensive, and is effective at over 70° F  Warm room temperatures are not acceptable to nurses and surgeons who must work in the environment. Warm temperatures increases risk of infection. Heated and humidified air- Fairly effective internal-warming technique currently being used with intubated patients.  Delivery of heated and humidified air by mask or tent to nonintubated patients is not acceptable in postoperative situations, because mask or tent delivery would interfere with observation and communication and may increase chance of infection. The fact that the patient must be intubated is a disadvantage, since the vast majority of postoperative patients are not intubated. Competing Technologies – Internal Warming Technologies Warmed intravenous (I.V.) fluids- Used in severe hypothermic cases to directly transfer heat to the circulatory system.  Very effective because they introduce warmth directly into the circulatory system.  Requires very close monitoring of the patient’s core temperature and high physician involvement. Drug therapy- Diminishes the sensation of cold and reduces shivering but does not actually increase body temperature.  Convenient and makes the patient more comfortable.  Does not warm patients and in fact slows their recovery from anesthesia and surgery.
  4. 4. Historical Events  October 19, 1987 was Black Monday. This was the largest stock-market crash recorded in Wall Street history since 1929.  Sudden cardiac arrest was a chief public health concern (http://publicsafety.tufts.edu/ems/aed/sca_whtp.pdf).  In 1988 a large AIDS epidemic was taking head since 1982 when it was discovered. AIDS patients are susceptible to disease especially phenomena which can mutate from a common cold. The rise of patients needing treatment will create a need for more blankets to warm the patients.  January 22, 1988, the US accept immigration of 30,000 US-Vietnamese children (http://www.scopesys.com/cgi/anyyear.cgi).  July 17, 1987, ten teens die in Guadalupe River flood (Comfort, Tx).  July 29, 1987, Ben & Jerry's & Jerry Garcia agree on a new flavor Cherry Garcia (not relevant but its one of my favorite flavors). Competition Warmed Hospital Blankets  For treating adult hypothermia, hospitals use their own blankets, which they warm in large heating units.  Numerous manufacturers produce heating units for hospital use.  Cost of laundering six to eight, two-pound hospital blankets averages $0.13 per pound. Laundering and heating costs are absorbed in hospital overhead. Water-Circulating Blankets  Several manufacturers produce water-circulating mattresses and blankets.  Suppliers include Cincinnati Sub-Zero, Gaymar Industires, and Pharmaseal.  Prices of automatic control units (measure both blanket and patient temps) range from $4,850 to $5,295. The average price of a manually controlled unit is about $3000. A discounted rate may be applied for as much as 40% in actual practice.  Average life of water-circulating control units is 15 years.  Reusable blankets range in price from $168 to $375 depending on quality. Disposable blankets list price is $20 to $26. Volume discounts for blankets can reduce the list price by almost 50 percent.  Little differentiation among the products of different firms and water-circulating blanket technology has changed little over the past 20 years. Reflective Thermal Drapes  O.R. Concepts sells a product named Thermadrape. This product is available in adult and pediatric sizes.  Adult head covers list for $0.49 each. Adult drapes list for $2.50 to $3.98, depending on size; leggings are priced at $1.50 each.
  5. 5. Air-Circulating Blankets and Mattresses  There are only two competitors known to provide an air-circulating system similar to the Bair Hugger® Patient Warming System. Neither are sold in US.  Sweetland Bed Warmer and Cast Dryer was in use 25 years ago but is no longer manufactured. It consisted of a heater/blower unit that directed warm air through a hose placed under patient’s blanket.  Hosworth-Climator is English-made, provides a controlled-temperature micro- climate by means of air flow from a mattress. Variety of models available for use in recovery rooms, intensive care units, burn units, general wards, and patient’s homes. Mmodel most suited for recovery rooms is priced at $4,000. Anticipated distribution is expected sometime in 1988. SWOT Analysis Strengths  Patent for the Bair Hugger® Patient Warming System. AM can capture the market with their unique product and hold off replicas from competition with their patent.  The CEO of AM has vast medical knowledge and experience to help take advances in technology further.  By subcontracting their heater/blower unit, AM creates minimal in-house assembly and minimizes their expenses. However, the warming covers will be manufactured using a proprietary machine.  Water free heating alternative to avoid leakage and burns while, weighing less.  Product life averages 15 years. Great life span but not so long a life cycle that repurchasing becomes obsolete.  Disposable blankets eliminate cross-contamination possibility.  Patients do not have to be lifted or rolled to use the Bair Hugger® Patient Warming System. The Bair Hugger® has a self supporting design that allows the blanket to naturally arches over the patients body. Weaknesses  Augustine Medical has no brand recognition. This may make it harder for them to charge a premium price for their unique patented product.  Augustine Medical, Inc. is not an established company. Many established companies, my fathers included, would not buy from companies who are only one or two years old. They usually look for those companies that are established and have been in business for five to ten years.  Heater/blower unit for Bair Hugger® does not have a patent. This leaves AM venerable to copy cat heater/blower units and possible rip off products.
  6. 6. Opportunities  Great networking possibilities at medical trade shows.  The US does not have an established warm-air technology blanket market.  Prevention and treatment options for hypothermia are currently ineffective or somewhat effective.  Perspective customer contacts and contracts at trade shows.  60 – 80 percent of all postoperative patients are rendered hypothermic. This is a large portion of hospitals patients whose needs are not being met to the best of their ability.  21 million surgical operations have operating rooms and postoperative recovery rooms.  5,500 hospitals with operating rooms and recovery, postoperative rooms.  All of the features the Bair Hugger® has is welcome by nurses and patients alike.  Through physician and nurse interviews after a Bair Hugger® demonstration, AM discovered the need for speed in moving patients through Threats  The Climator, an English-made air-circulating blanket with multiple uses, could integrate into the United States market and capture the first mover advantage. If AM could get into the market first, they may be able to position themselves as the premier US supplier of air-circulating blankets.  The Climator could come to the US markets as soon as 1988.  Most hospitals have established methods for hypothermia prevention and treatment.  Hospitals have already incurred the costs of washing, maintaining, and possibly updating their current system. Porter’s Five Forces Bargaining Power of Suppliers Supplier (AM) will be able to charge a premium for their products because they will be the first to integrate the US market with the Bair Hugger®. They can establish a brand name for themselves by pricing above the English product. Bargaining power of customers The customer has leverage with this new product and company. They have to establish themselves as worthy of using in the hospital. This is not a product that has integrated and made waves in the American market. Because of this customers may be price sensitive, which they are. Budgetary constraints are a concern for all departments.
  7. 7. Threat of substitutes There are many substitutes and competing technologies available in this industry. That makes pricing extra important for AM. They must be affordable so they do not loose the low-end market but they must also be careful not to price themselves too low to lose the perception of high quality differentiated products. Threat of new entrants The largest threat is the integration of the Climator. The list price for the Climator is $4,000 so AM must consider the entrance of this product into the US market. The Climator could be seen in the American market as soon as 1988. Hosworth Air Engineering Ltd. Has one of the only similar products out on the market. They could easily cannibalize AM’s sales and take away their market share if they price their product too high and the Climator moves into the market. Augustine Medical, Inc. Product  The Bair Hugger® Patient Warming System is a patented product designed to prevent and treat hypothermia in postoperative patients in a recovery room.  Specifically designed to maintain body temperature of patients recovering from an operation.  The Bair Hugger® consists of a heater/blower unit that is a large, square, boxlike structure that warms, filters, and propels air through a separate plastic cover. A dial controls temperature with one to four settings (located on the top of the unit).  The unit is mounted on wheels for easy transportation while an electric cord wraps around the back for storage.  Twelve warming blankets can be stored in a top loading bin for easy access. The disposable covers are packaged in 18-inch-long tubes. The blanket will cover an average patient from shoulders to ankles when unrolled.  The blanket is made up of a thin plastic layer and a layer of plastic/paper material laminated into full-length channels.  Inflated by a connection at the patients feet, the tubular structure arcs over the patients body creating an individual patient environment.  Warm air exists slits on the inner surface of the blanket, creating a gentle flow of air over the patient.  Average warming time per patient is two hours.  Plastic cover patented in 1986.  No patent protection for the heater/blower unit. ADVANTAGES of Bair Hugger® PWS  System cannot cause burns or leak to damage electrical equipment like water filled blankest.  Warm air makes patient feel warm and stop shivering.
  8. 8. Product Life Cycle  The average life of a water circulating until is 15 years. No specific life cycle was stated for AM. A product life cycle of 15 years was assumed for AM’s product. Target Market  Physicians and nurses working in hospitals.  Hospital facilities with postoperative recovery rooms.  Hospitals with postoperative recovery beds numbering greater than seven.  Hypothermic patients in hospitals and preventative methods for hypothermic treatment. Promotion  Trade shows for the medical industry.  Two week free trial period upon request of AM.  Company literature contains details of the Bair Hugger® Warming System for prospective clients.  Bair Hugger® System will be sold by distributor organizations by calling on hospitals, demonstrating the system, and maintain inventory of the blankets. Buyer Behavior A demonstration of the Bair Hugger® system yielded the following responses from physicians and nurses:  Making the patient more comfortable was a chief concern.  Bair Hugger® would speed recover for postop patients.  Respondents wanted to use product in postoperative recovery rooms.  Had to test before a purchase would be made.  Price-sensitive to alternative methods.  Liked the idea of a free heater/blower and only playing for disposable blankets.  Wanted to run the idea by the actual people who would be dealing with them, i.e. the head nurse (in postoperative recovery rooms) and chief anthesiologist.  Pressure to move patients through operating room and out of postop > before. Efficiency!!!  Budget committee must approve capital expenditures in hospital. Purchases over $1500 were usually reviewed formally. Human Resources  A hospital staff will usually be the ones implementing the blankets in actual operation. Head nurses for the recovery room and the head antehsiologist were usually consulted before the purchase is actually made.
  9. 9. Distribution/Logistics  Company subcontracted out the production of the heater/blower unit.  Company would manufacture warming covers in-house using a proprietary machine. Only requiring minor assembly by the company.  Bair Hugger® Patient Warming System will be sold through medical products distributor organizations in various regions of the country.  Distributor organizations would call hospitals, demonstrate the system, and maintain an inventory of blankets.  Margin paid to the distributors equals 30 percent of the delivered selling price on the heater blower. The price of the blankets would 40 percent of the delivered price. Financing  Upfront capital from initial investors of AM was $500,000. The money was used to further R&D, improve facilities, staff support, and marketing.  Estimates from subcontractors and time-and-motion study on assembly said a heater/blower unit would cost $380.  Materials, manufacturing, and packaging of the plastic disposable blankets was estimated at $0.85 per blanket. Pricing Augustine Medical Inc. should use the penetration pricing strategy to enter into the US market of air-circulating blankets. Penetration pricing involves setting a lower price in order to achieve a large and possibly dominant market share for a new product or service. The penetration strategy is most often used with a business hoping to enter a new market. The penetration pricing strategy can only work if the product is highly elastic. In this case, those surveyed said that demand is price-sensitive because of budget reviews and approval boards. New buyers will be attracted to the Bair Hugger® because of its quality features and low price. Large sales volumes and market shares cause lower costs per unit for Augustine Medical Inc. In the case of penetration pricing, economies of scale and experience lower production costs, which can justify the use of the pricing strategy to gain market share. AM should know that penetration pricing can promote complimentary products. The Bair Hugger® should be priced with a low-mark-up to attract sales and possibly become a loss leader. To make up for the low-mark-up, customers must be sold accessories, which only fit the Bair Hugger® and are sold at higher mark-ups. Before any pricing strategy is put in place, the supplier must be sure that the production and distribution capacities meet the needs of the anticipated amplified demand. Unfortunately, the penetration pricing strategy does not have just advantages. The greatest threat to AM is the possibility of competitors following suit by lowering their prices as well.
  10. 10. These companies that will lower their price will be better off than AM because they have already incurred their start up costs and upfront capital expenditures. When the competition lowers the price, they invalidate any advantage of reduced price. If prices are sufficiently differentiated the impact of the disadvantage may be lessened. Another disadvantage to the penetration pricing is the impact of the reduced price on the image/perceived customer image. This is particularly the case when price is associated with quality. AM cannot set their price too high for fear of entrance in the US market from Climator, but if they set their price too low, they will loose their elitists image and perceived quality. It is recommended that Augustine Medical Inc. price their Bair Hugger® at $4250. This way they enter the market just above the Climator price but still remain lower than the other alternatives while offering many advantages those alternatives do not have. By coming in under the $4,895 price of the Blanketrol 200, the $4,735 for the MTA 4700, the $4,479 Aquamatic, AM can position its product in a more favorable manner than its substitutes. By pricing the Bair Hugger® above the $4,000 Climator, AM can create a perceived quality advantage over the English company’s product. AM needs to establish brand equity for their product to capture the market and avoid customers switching to the Climator if entry into the US market is evident. By coming in with a lower price, Augustine Medical Inc. can address the issue of widespread price discounting within the industry. By traveling to trade shows, AM can establish their brand name, illustrate the great qualities of their product, and make invaluable business contacts and clients. For calculations regarding Augustine Medical Inc. break even analysis, costs, selling price, etc. please see attached hand written sheet.
  11. 11. Break-Even Calculations for Blankets Units Sold at Break-even Point Revenue at Break-even Point Fixed Costs at Break-even Point Variable Costs at Break-even Point Total Costs at Break-even Point Profit/Loss at Break-even Point Fixed Costs 500,000 Variable Costs (includes 30% disct.) 1.19 Selling Price 1.25 Total Costs 10,416,666 Total Variable costs 9,916,666 Average cost per unit 1 # of units needed to sell to break even 8,333,333
  12. 12. Break-even Calculations for Blower/Heater Break-even Point Information Units Sold at Break-even Point Revenue at Break-even Point Variable Costs at Break-even Point Total Costs at Break-even Point Profit/Loss at Break-even Point Fixed Costs 500,000 Variable Costs (includes 40% disct) 494 Selling Price per unit 525 Total costs 8,467,726 Total variable costs 7,967,726 Average cost per unit 525 # of units needed to break-even 16,129