1. The Perfect Incision: Intuitive Surgical’s
Innovative Path to Profitability
Over the last several years, innovation-driven growth and profitability has gained tremendous
popularity as a sustainable business model in both North America and abroad. Using this as
their strategic foundation, large and established companies like Intuitive Surgical have innovated
to profitability and continuously strive to do so while facing numerous internal and external
challenges. Here’s what follows:
 Robotic surgical systems manufacturer Intuitive Surgical has increased in size and
potential over the last few years, albeit with less than stellar 2014 financials
 The medical appliances and equipment industry in the U.S is huge and still growing
 The industry is geographically concentrated and is intensely competitive with high
barriers to entry and numerous competitors
 Intuitive Surgical considers patient, surgeon, and hospital value as the three core pillars
underlying its strategic vision
 Intuitive Surgical looks to continuously innovate, while mitigating the risks and
confronting the challenges that it faces both from its internal and external environments
Intuitive Surgical – An Introduction
Founded in 1995, Intuitive Surgical (ISRG) is an American corporation that specializes in the
manufacturing of robotic surgical systems used mainly in urologic, gynecologic and
cardiothoracic surgery. Since its inception, it has leveraged the rise of technological development
and innovation in the medical appliances industry to a great extent, so much so that it is now a
global technology leader in the increasingly attractive niche of robotic-assisted surgery. A
testament to its growing strength, it has also been named in the ‘Top 100 Most Innovative
Companies’ in the world by Forbes, coming in at #87.
The Nuts-and-Bolts of Intuitive Surgical
Intuitive Surgical has two primary sources of revenue. Firstly, it generates revenue with capital
equipment, mainly through the sale of its flagship product, the Da Vinci Surgical System. This
product is at the heart of Intuitive Surgical’s minimally invasive, robotic-assisted surgery
platform. It provides surgeons with computerized 3-D visualizations of a surgery, while the
surgery is performed using robotic ‘arms’ or manipulators that the surgeon controls, seated in a
central console. It comes with a variety of features including intuitive instrument movements,
improved ergonomic control for the surgeon, and precision ‘EndoWrist’ tech that allows for
greater bend and maneuverability than the human hand. Currently, Intuitive Surgical has
commercialized four generations of the Da Vinci Surgical Systems.
Their second revenue stream comes from the sale of various medical accessories along with
servicing and training required for the use of its main products. This product category includes
accessories like the Da Vinci Single-Site that allows for single-incision surgery, as well as various
EndoWrist Instruments and accessory products that compliment Intuitive Surgical’s main
robotic surgical systems.

2. Last year, Intuitive Surgical’s worldwide procedures grew by 9%, signaling a greater rate of
adoption with hospitals and surgeons. On the flip side, total revenue decreased by 6% and the
total number of Da Vinci Surgical Systems shipped decreased to 431, down from 546 in the
previous year. Although 2014’s financial performance may have been less than stellar, for a
company like Intuitive Surgical this seems to be transitional as the niche within which they are
operating is relatively new, and adoption both domestically and internationally is bound to grow
as the medical appliances and equipment industry begins to thrive off of innovation.
The Medical Appliances & Equipment Industry
Globally, the United States is the biggest player in the medical appliances industry, with a
market size of over $110 billion that is expected to grow to $133 billion by the year 2016. This
enormous figure represents a whopping 38% of the global market for medical equipment and it
is therefore not surprising that the U.S. industry includes over 6,500 companies.
The industry is divided into five main subsectors, including irradiation apparatuses (1), electro-
medical equipment (2), surgical and medical instruments (3), surgical appliances and supplies
(4), and dental equipment and supplies (5).
Irradiation apparatuses include x-ray machines and various other medical imaging instruments.
Electro-medical equipment is comprised of MRI machines, pacemakers, and ultrasonic scanners.
Surgical and medical instruments include blood transfusion devices, needles, and catheters
whereas surgical appliances and supplies are made up of things like orthopedic appliances,
artificial joints, limbs, and surgical kits (wedged between these two subsectors is where Intuitive
Surgical fits in). Finally, dental equipment and supplies encompass tools such as cement,
sterilizers, and drills.
Characteristics & Trends
There are a number of existing characteristics and developing trends in the medical appliances
industry shaping the way companies like Intuitive Surgical strategize for the future. Currently,
the industry is extremely diversified including a range of highly complex products and processes
from a plethora of companies, all ultimately innovating towards more efficient treatment and
diagnosis platforms.
Secondly, the medical equipment industry is unique in a sense that it not only contains firms
that create their own competitive advantages, but firms within the industry rely heavily on
several competitive advantages prevalent in other related industries such as biotechnology,
microelectronics, and telecommunication. Cross-industry collaboration has led to various
advances in things like implantable devices, robotic assistance, and neuro-stimulation.
Thirdly, this is an industry that relies heavily on the research and development capabilities of its
firms but conflictingly also faces medical device taxes and strict government regulations that
push overall costs upwards and sometimes result in lower levels of R&D investment.
In terms of emerging trends, the industry as a whole is becoming more innovation-driven for
future growth where things like robotics, 3D printing, and many forms of automation are
starting to look increasingly attractive. The application of these new technologies is being
coupled with software development to help with things like documentation and record
management as well as the transmission of important patient data to doctors. Also relevant to

3. this innovation-driven trend is the use of mobile platforms and graphical UIs in medical devices
as well as a boost in product development processes.
Furthermore, as the overall population becomes more health conscious, consumers are
demanding more transparency and convenience in overall medical practices coupled with a
greater concern about the security of their medical information.
Intensity of Competition
The industry is comprised mainly of small to medium sized firms, where more than 80% house
less than 50 employees. Geographically, they are concentrated around regions known for
technology and biomedical research and development, including states like California, New York,
Michigan, and Florida. With a low degree of location-based differentiation, competition
intensifies as many of these companies compete for the same hospitals, surgeons, and even
universities (for research purposes).
The industry also holds high barriers to entry, predominately with large capital requirements
needed to gain any kind of a solid footing. Moreover, intellectual property laws including patents
and trademarks make it harder for any new entrant to replicate the competitive advantages of
incumbents and regulatory hurdles with things like FDA approvals and medical excise taxes
compound this difficulty.
Although the medical equipment industry holds over 6,500 firms as previously mentioned,
Intuitive Surgical stands out as one of the larger ones with a market capitalization (market
value) of $19.35 billion. As one of the largest players in the industry, it competes with only a
select group of companies in the niche of robotic surgery equipment and faces further
competition from behemoths like Johnson & Johnson (JNJ) and Olympus Corporation (OCPNY),
who have made explicit statements about entering the robotics niche.
In terms of current competitors, Intuitive Surgical faces Accuray Incorporated (ARAY) and
Medtronic PLC (MDT) as its main competitors with a market capitalization of around $108
billion and $550 million, respectively. They are also facing competition from Titan Medical
(TITXF), Stryker Corporations (SYK), and Think Surgical (private) amongst a few others. Small
and medium-sized firms out of the thousands in the industry do not pose any relevant threat
given their scope and size compared to Intuitive Surgical and its main competitors. Given that
the competitive environment in the industry is fairly high, Intuitive Surgical has been able to
navigate the landscape profitably with its core strategies and product innovations.
Intuitive Surgical’s Strategy
Intuitive Surgical’s business strategy revolves around three core tenants including patient value,
surgeon value, and hospital value.
Patient value entails striving towards greater procedural efficacy with its products, which
correlates directly to how successful a surgery turns out to be. Delivering excellent patient value
through their innovative surgical systems also has a huge influence on adoption rates by
surgeons and hospitals.

4. Surgeon value is delivered through advanced training of the robotic systems they provide. In
essence, Intuitive Surgical seeks to make the robotic system training as easy and as intuitive as
possible for surgeons without compromising innovation.
Hospital value is delivered through the use of the Da Vinci Surgical Systems, whereby costs are
reduced through lower rates of surgical complications and reductions in length of stay, as
patients are discharged faster.
Keeping these core priorities in mind, Intuitive Surgical is looking to roll out more
technologically driven products that enable surgeons to perform even the most complex
procedures through a minimally invasive process. The company wants to develop its product
line in single-incision surgeries and overall convert the multitude of open cavity procedures to
the Da Vinci mechanism. Moreover, as a large corporation it is now looking towards
international markets and investing its capabilities abroad for a greater global market share.
Innovation is the Name of the Game
As a company at the forefront of technological innovation in medical appliances and equipment,
there is no doubt that Intuitive Surgical is looking to maintain this position through continuous
improvements in product and business development.
As it stands, the Da Vinci System offers a unique process of surgical operations in the
healthcare industry. For the surgeon, the value lies in improvements in precision, comfort, and
dexterity. For the patient, the value comes from less pain, less blood loss, quicker recovery, and a
smaller probability of surgical failure.
As Intuitive Surgical continues on with its flagship product, it wants to improve upon open
cavity abdomen surgery and develop further precision in the micro-movements of its robotic
instruments. With the new Xi System launched in April of 2014, the company targeted
improvements in multi-quadrant access to the body along with a greater range of motion for
the robotic arms. Initial demand of the new system seems to be strong, with hospitals and
surgeons in multiple specialties expressing interest.
Also, the American corporation wants to improve predictability through the development of
imaging technologies that provide surgeons with real-time data. It also wants to accelerate
patient recovery by building devices that enter the human body with less tissue impact. Finally,
when it comes to surgeons, Intuitive Surgical is looking to develop efficient training technologies
that reduce learning time and consequently improve the probability that hospitals adopt their
products.
Facing Challenges
Given the size and global importance of the industry, Intuitive Surgical currently faces a number
of challenges and risks in its attempt to disrupt the medical appliances market with unparalleled
innovation.
Firstly, they face the challenge of achieving physician, patient, and hospital acceptance of the Da
Vinci Surgical System. Acceptance of the company’s flagship product is undoubtedly crucial to
their success. Since this is a new, underdeveloped aspect of the medical appliances industry,
there is a high risk of product failure when it comes to market acceptance. This risk of product

5. rejection is further compounded with the training required in learning how to operate the Da
Vinci system.
Moreover, Intuitive Surgical confronts an environment in which competitive treatment options
like conventional open surgery are widely accepted and trusted given their history. Technological
advances in these less expensive conventional methods could render robotic surgery obsolete to
an extent.
Reduction in hospital budgets also reduce the demand for highly expensive capital expenditures
like the Da Vinci Surgical System, and some critics of robotic surgery argue that maintenance
and servicing of these products can increase hospital costs substantially. Cost containment is a
challenge that Intuitive Surgical faces within its organization as well, and it needs to prioritize
pricing and cost-cutting measures while delivering the same value to its customers.
Just like any other company in this industry, Intuitive Surgical also faces challenges posed by
global economic conditions as well as stronger regulatory oversight. Downturns in the economy
may expose the company to challenges in obtaining credit to finance R&D investment and
product development. Stronger governmental regulations coupled with things like a multi-billion
dollar tax as part of healthcare reform legislation severely impede every company’s development,
especially when the industry is becoming more and more innovation-driven.
Lastly, for certain components of its products, Intuitive Surgical has a single supplier and
purchases these components on a short-term purchase order basis as opposed to long-term
supply agreements since it doesn’t like maintaining large amounts of inventory. Any disruptions
to their supplier relations can adversely impact their cost structure and further exacerbate the
cost-cutting problem prevalent in the R&D-intensive company.
Looking Over the Horizon
Glancing at the future of Intuitive Surgical, one can be fairly optimistic about domestic growth
as well as international prospects in emerging markets. As a company at the cusp of disruptive
innovation with robotic surgery, it is hard not to think positively about how far Intuitive
Surgical can go.
Given that the healthcare industry is so massive, Intuitive Surgical should create and leverage
strategic alliances and thrive on innovation through collaboration with companies in different
subsections of the medical equipment industry. It should also develop relationships with leading
surgeons to increase the adoption rate of its products, and tap into the intellectual wealth of the
academic community to expand its developmental capabilities.
With better than expected growth since it started on its path to innovation, as well as
international expansion looming on the horizon, it is hard to see Intuitive Surgical suffering any
major problems in the years ahead. Amongst current competitors, it is one of the biggest in the
medical appliances industry and can leverage this strength going forward. Overall, the industry
as a whole is promising to say the least, and the innovation-led growth that is becoming more
prominent in industries across North America is something that should positively affect the
medical equipment industry and the future of Intuitive Surgical in the years to come.