Strategies for differentiation in medical device industry may2018 zeynep_eraksoy

ISTANBUL BILGI
UNIVERSITY MA
MARKETING
DIFFERENTIATION STRATEGIES FOR
MEDICAL DEVICE INDUSTRY
ZEYNEP GÜNER TABAKOĞLU
Supervisor: NEVA YALMAN
MBA
MAY 2018

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ACKNOWLEDGEMENTS
While I was working at a multinational medical device company as a product
manager with a busy schedule and I was thinking that completing a term project
would be difficult, I realized that I gained knowledge that will also contribute to my
work life. Endless thanks to my dear project instructor Neva Yalman for her
continuous understanding and support despite our not being able to communicate as
often as desired due to my busy work schedule.

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TABLE OF CONTENTS
Page No:
ACKNOWLEDGEMENTS.........................................................................................ii
TABLE OF CONTENTS ...........................................................................................iii
ÖZET ........................................................................................................................... v
ABSTRACT ............................................................................................................... vi
ABBREVIATIONS ...................................................................................................vii
LIST OF FIGURES ..................................................................................................viii
LIST OF TABLES......................................................................................................ix
1. THEORY ................................................................................................................. 3
1.1.Competitive Marketing Strategies ............................................................. 3
1.2. Differentiation Strategies.......................................................................... 3
1.3. Product Differentiation ............................................................................. 4
1.4. Services Differentiation ............................................................................ 6
1.5. Personnel Differentiation.......................................................................... 7
1.6. Channel Differentiation ............................................................................ 8
1.7. Image Differentiation................................................................................ 8
2. MEDICAL DEVICE INDUSTRY OVERVIEW .................................................... 8
2.1 Medical Devices......................................................................................... 9
2.2 Major Actors .............................................................................................. 9
2.3 Market Segmentation for Medtech Companies ....................................... 10
2.4. Medical Device Industry Trends and Value Chain................... 12
2.4.1 Value Chain............................................................................... 12
2.4.2. Trends in the Medical Device Industry.................................... 13
2.4.3 Key Purchasers of Medical Devices ......................................... 14
3. DIFFERENTIATION STRATEGIES IN MEDICAL DEVICE INDUSTRY...... 15
3.1. Differentiation Strategies for Low Barriers to Market Entry.................. 15
3.2. Differentiation Strategies for Intense Price Competition........................ 16
3.2.1. Making Use of Technological Improvements to Generate
Superior Outcomes.................................................................... 17

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3.2.2. Using Solutions/Services to Expand Scope ............................. 19
3.2.3 Introducing New Products to Achieve Greater Scope .............. 20
3.2.4 Achieve Greater Scope within a Specific Therapeutic Area..... 21
3.2.5 Achieve Greater Scope across Numerous Therapeutic Areas... 22
3.2.6 Lowering Healthcare System Costs .......................................... 23
4. CONCLUSION...................................................................................................... 25
REFERENCES .......................................................................................................... 26

v,
ÖZET
Bu çalışmada; sağlık hizmetlerinin öncelikli ve kritik bir bileşini olan ve çok yönlü
etkileyicilerin olduğu tıbbi cihaz pazarındaki yeni trend ve tehditler karşısında en
avantajlı pazarlama stratejisi olarak karşımıza çıkan farklılaşma stratejilerinin neler
olacağı üzerinde durulmuştur. Bu statejiler, o sektörde uluslararası rekabetçi ve
alanda öncü firmaların uygulama örnekleriyle ortaya konmuştur.
Anahtar Kelimeler: Medikal cihaz sektörü, Pazarlama stratejisi, Farklılaşma
stratejisi

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ABSTRACT
The purpose of this study is to analyze the most advantageous differentiation
strategies in the face of new trends and threats in the medical device market which is
impacted by many factors and which represents a crucial component of healthcare
services. These strategies have been described using real-world examples from
leading companies in the sector that are highly competitive in the global medical
device market.
Keywords: Medical device industry, Marketing strategy, Differentiation strategy,

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ABBREVIATIONS
ABT : Abbott Laboratories
B2B : Business to Business
B2C : Business to Customer
BDX : Becton Dickinson
BAX : Baxter
CT : Computer Tomography
ECG : Electrocardiogram
EMEA : Europe, the Middle East, and Africa
EU : European Union
FDA : Food and Drug Administration
GE : General Electric
JNJ : Johnson & Johnson
M&A : Mergers and Acquisitions
MDT : Medtronic
R&D : Research and Development
SMEs : Small to Medium-Sized Enterprises
SYK : Stryker
SW : Software
WHO : World Health Organization
UK : United Kingdom
US : United States

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LIST OF FIGURES
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Figure 3.1 : Medical Device Industry Value Chain.............................................13
Figure 4.1 : The Argus II Retinal Prosthesis System ..........................................13
Figure 4.2 : AliveCor KardiaMobile Product......................................................17
Figure 4.3 : Rob ten Hoedt Elected Chairman Of The Board Of Eucomed and
President EMEA & Canada at Medtronic .................................................................22

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LIST OF TABLES
Page No:
Table 1.1. : Medical Device Industry Margins via % of Sales, 2006-2020 ........... 1
Table 2.1 : Differentiation Variables..................................................................... 3
Table 3.1 : Revenue Growth (2010-2014) of Top Ten Medical Device
Companies.................................................................................................................... 9
Table 3.2 : Global TOP 15 Device Areas in Medical Devices Industry. Numbers
are given in billion U.S. dollars ................................................................................. 12

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INTRODUCTION
The medical device industry is one of the most significant industries in the world
influenced by constantly evolving new technologies and innovation. According to
the WHO, a medical device is defined as “an article, instrument, apparatus or
machine that is used in the prevention, diagnosis or treatment of illness or disease,
or for detecting, measuring, restoring, correcting or modifying the structure or
function of the body for some health purpose.” Medical devices vary from breast
implant to CT scanners and Da-Vinci robotic instruments.
The medical device industry has been very attractive for many years with high
operating margins around 25% and annual revenue growth (approx. 5%). The sector
has shown relative stability for a long time. Consequently, the major actors were
able to complete effectively within certain product segments and have not needed to
employ broad competitive marketing strategies such as differentiation. But the
situation has now changed in a disruptive way. As it can be seen in Table 1,
operating margins are expected to drop by around 8% until 2020 while market
grows will continue and prices will face pressure (A.T Kearney, 2014).
Table 1.1. Medical Device Industry Margins via % of Sales, 2006-2020
Source: GlobalData, Medical eTrack, Medical Equipment Markets Database, Espicom Business
Intelligence, Factiva, A.T. Kearney Analysis
It seems like companies are unlikely to be able to generate a premium margin
simply by marketing clinical advantages and high technologies to a market which is
already well established. Instead, they must consider different strategies such as

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entering new segments, especially new integrated solutions to generate additional
revenues and preserve margins.
The recent Ernst & Young Pulse of the Industry Report made the case that the
commoditization of many medical technology product segments is transforming the
medical device sector. The report noted that for medical technology companies,
“competition is no longer based on historical value drivers—brand, quality and
design—but on a single element, price.” The report’s findings were primarily
driven by feedback from users located in the following main medical device
markets: Germany, US, UK and Spain. The resulting recommendation for medical
device companies was to design differentiating marketing strategies to survive in a
healthcare market which is getting tougher every day.
As a result, old ways of differentiating products are less relevant for customers.
Medical technology companies should differentiate in other ways by highlighting
the mechanisms that set them apart in terms of value and outcomes. Specifically,
medical device companies should adapt their business models to include a number
of differentiation strategies.
In this regard, the aim of this study is to examine changes in the main dynamics of the
medical device market and the differentiation strategies of the leading companies in
the context of these dynamics.
This study is comprised of three main parts. The first part is the introduction
consisting of a brief overview of the theory of competitive strategies and main
marketing tools. The second part is concerned with an introduction to the medical
device industry, market segmentation and an analysis of the value chain and
business models in the medical device industry. Moreover, this section covers key
business trends, changing dynamics such as key influencers and shifts in customer
perceptions. The third section includes examples of differentiation strategies
employed by various companies in the medical device sector.

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1. THEORY
1.1. Competitive Marketing Strategies
Designing a broad competitive strategy is important to gain competitive advantage
through superior customer value. There isn’t only one strategy which is best for all
companies. So a company has to consider the most optimal way in light of its
industry position and goals, resources available and opportunities. Different
strategies may be required for different products/businesses even within a company.
A medical device company can use one marketing strategy for its leading brands in
stable customer markets and a different marketing strategy for its high tech
business/ products.
1.2. Differentiation Strategies
Product differentiation is a prerequisite for product branding. The basis of
differentiation can either be product/service characteristics or attributes such as
images, channels and personnel. .( Kotler., Shalowitz., Stevens ,2008).
Table 2.1 Differentiation Variables
Source: Kotler, P., Shalowitz, J., & Stevens, R. J. (2008). Strategic Marketing for Health Care
Organizations: Building a Customer-Driven Health System. Jossey-Bass.

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1.3. Product Differentiation
The differentiation potential of each physical product is different. Healthcare
products are on one end of the spectrum because they typically show limited
variation examples include crutches and scalpels. But even here there is some scope
for differentiation.
In the case of MYCO Medical, for instance, core product of the company is a simple
scalpel blade with a low price point. But some differentiation can still occur via
superior service from the sales department and service technicians.
At the other extreme are products such as eyeglasses and clinical software which
lend themselves to high degree of differentiation.
Below are the attributes through which product differentiation can occur:
• Form: This one is related to the physical structure, shape or size of the product.
• Features: These are the properties supplementing the basic function of a product.
New features can be detected and selected by marketers after needs are researched
and organizational cost vs customer value for every potential feature is calculated.
For instance duration of action could be a useful feature in the case in a pharma
product with a longer duration being appropriate for blood pressure medication
and the shorter one for a sleeping pill. Other considerations include the number of
customers that would want the feature, the time to be devoted for its introduction
and ease with which it can be copied by competitors. Feature packages or bundles
must also be considered. For example SW modules are often bundled by health
information systems companies in order to reduce packaging and product
development expenses. A decision must be made by each organization regarding
whether to offer a few standard packages at a lower unit price or to provide
feature customization at a higher price.
• Performance quality: Typically companies set four performance levels for most of
their products: Superior, high, average and low. Performance quality indicates the
level of operation for the primary characteristic of a particular product i.e. to what
extent does the claimed performance of the product match its real world
performance. It is not always necessary to design the product to match to highest

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possible performance level; instead products should be design in line with the
performance levels of competitors and to match the demands of the target market.
Performance quality must be managed over time. Higher market share and returns
can result from continuous product improvements. Companies often face negative
outcomes when they lower quality to reduce their cost base.
• Conformance quality: This attribute is a measure of the degree to which there is
identity between manufactured units and promised specifications are consistently
satisfied. It is simpler to assess medical device conformance quality because
frequent checks are conducted based on predetermined parameters and there are
clear consequences when malfunctions occur. The time low conformance quality
becomes problematic is when it leads to buyer disappointment and legal troubles.
• Durability: This attribute can be valuable for certain products and it denotes the
expected useful life of the product under normal or extreme conditions. It is
usually the case that longer lasting medical devices and equipment will be more
attractive to buyers who will be willing to pay premium prices. There are some
caveats however. The price premium must not be too high so as to deter third
party payers from reimbursing the product. It is also crucial for the product not to
become quickly obsolete technologically. Furthermore the user’s life expectancy
should be taken into account when considering product durability. For instance a
high priced, state-of-the art pacemaker with an expected life of twenty years is
likely not necessary for an eighty year old patient.
• Reliability: Products with high reliability make purchasers more willing to pay a
higher price. It indicates the level of probability for a product to function
successfully in a given period of time. Historically reliability is a strong suit of
many healthcare product and service offerings. But some companies’ reputations
were tarnished as a result of malfunction in their internal defibrillators.
• Reparability: This measure indicates the ease with which a product failure or
malfunction can be addressed. The most desirable kind of reparability is the case
when the problem can be solved by the user with no external intervention
necessary saving time and money. It is also possible in some cases to address a
problem by phone when a diagnostic feature exists on the device allowing service

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personnel to provide advice to the user on how to fix the problem.
• Style: How a product feels and looks to the customer are embodied in its style.
One potential advantage of style is its ability to make the product distinct and hard
to emulate by competitors. That being said style does not always correlate
positively with high performance. While functionality tends to be predominant
attribute highlighted by medical device manufacturers, style may also act as an
important differentiator.
• Design: Another powerful attribute for positioning and differentiating
products/service offerings is to use design. All product qualities are integrated in
design. For a company, the ease of manufacturing and distributing is positively
correlated to how well product is designed. For a customer the criteria for a well-
designed product are the following: dispose of after its useful life, use, easy to
open, install, pleasant and repair.( Kotler., Shalowitz., Stevens ,2008).
1.4. Services Differentiation
• Ordering ease: In cases with low potential for differentiating the physical
product incorporating valued services and enhancing service quality can
determine success in the market place. This attribute denotes the ease with which
customers can place orders. For example the ordering process has been
significantly simplified by installing computer terminals in hospital which are
used to transmit orders electronically to Baxter Healthcare.
• Delivery: The attribute of delivery can be evaluated along three dimensions: care,
accuracy and speed. For example digital dictation technology can be used to
process dictated medical records provided by hospitals and send them back in a
digital format within twenty-four hours based on the specific need of the
customer. A company called MedScribe specializes in providing such services.
• Installation: Making a product operational in its intended location of use is what
is referred to as installation. This attributes takes on particular importance for
companies with complex products as a key point of differentiation. If technology
newbies are the target market the ease with which installation is performed can
become a true differentiator. In the case of McKesson Health a team of experts

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specifically trained to provide on-site installation are present to support new
hospital customers during the conversion process of their old health information
systems. These experts all have the ability to see things from the customers
perspective and they all possess relevant hospital experience.
• Customer training: Another key differentiation factor is training provided to a
customers’ employees so that they can use the product in an efficient manner and
in line with its intended. A good example of this would be the extensive training
provided by GE healthcare to its hospital customers in using its MR and CT
equipment.
• Customer consulting: The needs of the customer typically transcend the purchase
of a product. Quite often other products or services must be provided by the seller
or help must be given when a customer problem arises in order to meet overall
customer demands.
• Maintenance and repair: The customer wants a problem to be fixed quickly and
the normal functioning of the product to be restored rapidly. Technical support is
provided by many healthcare SW companies and computer hardware companies
either by phone or e-mail.
Wide range of service offerings of a company can sometimes be the main
differentiating factor coupled with how successful the company is in cross-selling
this wide service offering. The problem is it is easy to emulate most innovation and
service offerings an organization becomes an innovator when the introduction of
service improvements become its norm thus enabling it to amass a sequence of
temporary advantages over its rivals. .( Kotler., Shalowitz., Stevens ,2008).
1.5. Personnel Differentiation
The human talent in an organization whether it be a service provider or product
company can create a significant competitive advantages for that organization. The
two main benefits of a more satisfied work force can be seen in the form of better
service provider to customers and higher productivity to employees. The employees
of leading organizations demonstrate the following attributes .( Kotler., Shalowitz.,
Stevens ,2008).:

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a) Credibility (trustworthiness)
b) Responsiveness (a sense of urgency),
c) Courtesy (consideration and respect)
d) Reliability (accurate and consistent performance)
e) Communication (communicate clearly and desire to understand customers).
f) exhibit competence (knowledge and skill)
1.6. Channel Differentiation
The way the distribution channel is designed along the following three dimensions
can create competitive advantage for an organization, namely channel coverage,
channel expertise, and channel performance. Channel performance usually plays a
key role for drug wholesalers to generate the competitive advantage. In the case of
medical device companies the management and development of effective direct
marketing channels can be the distinguishing factor for success. .( Kotler., Shalowitz.,
Stevens ,2008).
1.7. Image Differentiation
Brand images and company images evoke different responses in buyers. Identity can
be defined as how a company wants its customers to view its products or how its
positions itself in the market. Image, on the other hand, is how a company and its
products are perceived by consumers. When an image is affectively conveyed it
presents the value proposition and character of a product and presents this character
in a distinctive manner projecting not just a mental image but also emotional power.
For a successful projection of image and identity every contact of the customer with
the brand and all communication media conveying the brand must carry the powerful
and consistent massage that incorporates effective slogans, atmosphere, special
events, colors, and symbols. .( Kotler., Shalowitz., Stevens ,2008).
2. MEDICAL DEVICE INDUSTRY OVERVIEW
The medical device industry is one of the largest industries in the healthcare sector,

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supported by innovation and development of new technologies. The past decade has
been characterized by rapid growth in innovative and improved technologies
leading to the development of high-tech medical devices and progress in the
healthcare industry.
2.1 Medical Devices
According to WHO, a medical device is defined as “an article, instrument,
apparatus or machine that is used in the prevention, diagnosis or treatment of illness
or disease, or for detecting, measuring, restoring, correcting or modifying the
structure or function of the body for some health purpose.” Medical devices vary
from breast implant to CT scanners and Da-Vinci robotic instruments.
2.2 Major Actors
The medical device sector players ranked in the top ten based on 2016 sales
revenue are the following: MDT, JNJ, Philips, ABT, Siemens, SYK, Roche, BDX,
GE Healthcare, and Boston Scientific. Medtech companies can be grouped into the
following categories based on their business structure:
a) Conglomerates companies which also have non-healthcare businesses for
example GE and combined drug-device businesses for example JNJ
b) Pure-play medtech companies such as MDT.
Table 3.1 Revenue Growth (2010-2014) of Top Ten Medical Device Companies
Source: Bloomberg Company Fillings, PMCF Analysis

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2.3 Market Segmentation for Medtech Companies
The medical device industry is classified based on the area of clinical usage of the
device. There are around 1,700 particular types of medical devices which are
grouped into 17 medical specialties by FDA.
The medical device companies can be divided into the following categories:
• Diagnostics:
Toshiba, Siemens and GE Healthcare can be found at the most sophisticated end
of the spectrum. These companies tend to manufacture expensive and complex
devices such as nuclear imaging equipment, MRI scanners and CT scanners.
Companies like Bayer can be found at the other end of the spectrum with much
less complex products such as urine dipsticks. Between the two ends of the
spectrum are companies like Beckman Coulter that manufacture blood sample
analysis machines. There are also companies that supply consumable healthcare
products for diagnostic procedures such as the contrast dye supplied by Berlex for
x-rays and catheters produced by Medtronic and Boston Scientific for the study of
the heart and other organs.
• Therapeutics:
There is also a range of complexity that can be found in the therapeutics category
as in the case of the diagnostics category. On the more complex end of the
spectrum are products such as cardiac pacemakers and implantable defibrillators
which can be found in the product portfolios of St. Jude Medical, Medtronic and
Boston Scientific. On the least complex end of the spectrum are products like
urinary catheters which can be found in the product portfolio of C.R. Bard, Inc.
There can be some product overlap between the therapeutic device category and
the pharmaceutical industry, with drug-coated coronary artery stents representing
a clear example.
• Durable medical equipment (DME):
Walkers, hospital beds (found in the product portfolios of Hill-Rom and Stryker)

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and wheelchairs (found in the product portfolios of Invacare and Everest &
Jennings) can be listed as the main examples of DME.
• Prosthetics:
The products in this category are characterized by their ability to restore function
and/or appearance for an individual in the event of a loss from a disease or an
accident. An example of the simplest type of prosthetics is wigs to compensate for
chemotherapy-induced hair loss. At the more complex end of the spectrum are
products such as artificial heart valves, limbs and joints (found in the product
portfolios of Smith & Nephew, Zimmer Holdings and DePuy Orthopedics (a JNJ
subsidiary)).
• Disposables:
Numerous over-the-counter items can be found in this category. Examples include
latex gloves and bandages. There is some overlap between therapeutics and
diagnostics as in the case of syringes and diabetic test strips (both can be found in
Becton Dickinson’s product portfolio). Some companies in the category are
privately held organizations such as Medline Industries, Inc. while many of them
are publicly traded with Johnson & Johnson being the most well-known example.
• Information systems:
There is a wide range companies that can be listed under this category such as
numerous specialty software companies and leading hardware manufacturers.
Among the healthcare software companies are players such as McKesson, Mysys,
Cerner and Epic while household companies such as GE and Microsoft also operate
in this category. The range of products that can be found in this category are
expansive, enterprise-wide systems as well as systems for medication dispensing,
billing and electronic medical records. It is important to note the healthcare support
services and consulting services that enable the smooth functioning of these above-
mentioned systems. Services ranging from sales force management to information
technology can be provided by healthcare consulting companies’ who have deep
expertise in their respective fields.

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Table 3.2 Global TOP 15 Device Areas in Medical Devices Industry. Numbers are given in billion U.S.
dollars
Source: EvaluateMedTech, 2016
2.4. Medical Device Industry Trends and Value Chain
2.4.1 Value Chain
Firms providing differing levels of products and services can be found in the
medical device industry. These products and services establish their degree of
differentiation and their competitive positions in the industry.
Figure 3.1 Medical Device Industry Value Chain (Source: Gereffi, 2013)
Companies select and employ many kinds of strategies based on where they are on
the expansion curve. Whereas for companies which sell innovative and emerging

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products, innovation and R&N are the main elements to achieve value creation
throughout the value chain, companies in the mature segment put high importance
on cost-containment throughout the value-chain. Sales and marketing play a key
role here.
Currently there is a significant transformation occurring in medical device
landscape. In the past, R&N and innovation drove the value chain in the medical
device sector in a conventional manner. But nowadays, main focus of medtech
companies has increasingly become not just introducing high quality and high-tech
products but also delivering high value to patients, to payers, to practitioners by
means of cost effectiveness.
2.4.2. Trends in the Medical Device Industry
An important analysis has been published which was offered by the U.S.
Department of Commerce in 2016. In this analysis they delved into key trends in
medical device industry to help American exporters of medical devices. This report
reflects the perspective of American companies, but it is also useful for non-US
companies, operating globally. The report covers four major trends and regulatory
convergence in particular is quite relevant for this project since it represents one of
the key drivers for the enactment of Medical Device Regulation in EU. The key
developments identified in the report are the followings:
Higher ubiquity of technologies that empower patients and leverage information:
These technologies which are included smartphone applications, connected devices
sensor-bearing instruments and social media platforms are increasingly influencing
purchasing decision because users are demanding them to be integrated with
medical devices.
Regulatory convergence: To foster growth in the medical device industries of
developing markets regulatory approval and risk/quality management standards
must work together while aiming to form standards on a global scale.
Export market mix: Developing countries like Turkey and Brazil whose growth
rates are in the double-digits have become more attractive export markets especially
for U.S. companies compared to develop markets such as Japan and EU. While

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these developed regions are big export markets they have relatively low growth
rates.
Cost efficiency and value focus: It has become imperative to develop integrated
offerings and medtech companies have come to realize this. Such offerings are
necessary to provide value to the customers while preserving efficacy due to cost
control and competition pressures. In particular treatment packages which are all-
inclusive epitomize a prevailing trend of value-based healthcare.
2.4.3 Key Purchasers of Medical Devices
Not only physicians and hospitals but also government institutions and insurance
companies are important stakeholders that impact buying decisions, directly or
indirectly. To an increasing extent physicians prefer working in large health
organizations and other healthcare organizations instead of running their own health
businesses. The dynamics between manufacturer and buyer are being transformed
as a result of this situation.
The number of stakeholders making medical device buying decisions increase
substantially. Because of consolidation of healthcare market which itself is mainly a
result of cost reduction efforts, so many more organizations influence buying
decisions and these include hospital financial organizations, purchasing
organizations, and other similar organizations. The analysis of financial impacts has
a key role in the purchase decision making of these organizations. So power has
clearly shifted to purchasers to the sellers in the industry. It is clear that companies
must devise new business model and new methods if they want to succeed in a
market where payers and patient have gained much more importance. The value of
the products must be substantiated to buyers and health outcomes must be
quantified.
These are minimum conditions for medtech companies to satisfy. On top of this
they must go beyond the traditional elements in their offerings. They must expand
into services and solutions and not just focus on the product; they must deliver care
to patients where the patient is located. Finally they must concentrate on prevention
and remote patient monitoring in addition to treatment.

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Furthermore many product segments are currently facing a new threat, namely
commoditization. The convergence of above mentioned trends have resulted in the
emergence of these additional risks and medtech companies must know developed
strategies to tackle it. Commoditization can be defined as the situation where
products became interchangeable other similar products in the customer’s view
point because they have lost their differentiation.
For manufacturers, this process radically alters the nature of competition in a
business segment. In place of competing based on attributes such as brand, quality
and design, products in a commoditized industry compete on the basis of just one
factor: price. There are three distinct steps in the journey to price competition and
commoditization. These steps can be listed as: (1) customer perception changing
significantly; (2) market entry barriers coming down; and (3) Full-on competition
on the basis of price.
3. DIFFERENTIATION STRATEGIES IN MEDICAL DEVICE INDUSTRY
Differentiation and an improved value proposition have to become main elements
of focus for the marketing of the medical devices by medtech companies to address
varying stakeholder needs. This has become crucial because buyer dynamics has
changed significantly. A hole host of companies including Medtronic, AliveCor,
The Second Sight Medical, Philips Healthcare, Fresenius, Biomet, Zimmer /
Biomed, Danaher /Nobel Biocare, Smith & Nephew are espousing different
strategies and developing new approaches to sustain their market share.
3.1. Differentiation Strategies for Low Barriers to Market Entry
In markets with low entry, there is greater pressure on prices in an industry. For
example in the 1990s, the PC industry experiences accelerated shift as the reverse
engineering of the PC developed by IBM was achieved with ease by competitors
who were able to design functionally equivalent PCs. Because of medical devices’
status as engineered products with a short product cycle, this dynamic is
particularly relevant for medical device companies. Manufacturers from developed
countries that decide to compete on the basis of price will have to operate in a
business with very low margins. It is possible that some players will decide to
employ what is called reverse innovation. This entails the development of less

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expensive no-frills variants of products originally developed for western markets
and in more advanced markets. But there is a new possible challenge that
companies must ready themselves for namely the threats of new entrance with the
ability to sell products even more cheaply. For example medical device industry in
China can be deemed to be in the early stages in its development process. But there
is a strong possibility that they will rise up the learning curve rapidly, be able to
improve product quality that meet global standards set by regulators while also
satisfying the demands of most patients much more inexpensively compared to their
rivals in advanced countries. This approach has already been adapted by Chinese
companies in many industries characterized by their manufacturing and engineering
intensity. It is quite likely that is similar dynamic will be observed in the medtech
industry.
3.2. Differentiation Strategies for Intense Price Competition
According to Ernst & Young, Pulse of the Industry, Medical Technology Report
2014 there are three main approaches to dealing with commoditization when it
occurs in a particular segment of the market.
1. Moving to the part of the market characterized by high price competition to the
aggressive price competition at lower margins: In this scenario maintaining
competitiveness with hinge on reverse innovation methods, amassing scale to drive
benefits related to economies of scale and enhanced bargaining power as well as
partnerships with emerging market companies.
2. Moving to the part of the market characterized by higher value proposition
apply innovation to legacy product offerings or new product introductions:
Companies providing products with high degree of differentiation who wish to
reinforce the high value proposition of their products and justify the premium
pricing associated with them would likely prefer to adapt this approach.
3. Generate brand loyalty: The Company must focus on differentiating its
product/service offering from the competition by devising new methods to build
customer loyalty. Branching out into complementary product categories and
services can be considered examples of these new methods. Competition on new
basis of differentiation becomes necessary as the relevance of all differentiation

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methods diminishes. This is when companies must adopted new strategies. Such
strategies can be placed into four main categories:
1. Making use of technological improvements to generate superior outcomes
2. Using solutions/services to expand scope
3. Introducing new products to achieve greater scope (either across numerous
therapeutic areas or within a specific therapeutic area)
4. Lowering healthcare system costs
3.2.1. Making Use of Technological Improvements to Generate Superior
Outcomes
Nowadays it has become a challenge to achieve new improvements in existing
medical devices that make a big difference in the eyes of customers in a number of
disease’s areas. However some examples exist whereby new innovative products
can achieve the status of the new golden standard in a particular therapeutic area.
The Argus II retinal prosthesis system developed by a medtech company called The
Second Sight Medical Products demonstrates this dynamic quite well. This is a
retinal implants that contain a processing unit with wireless connection along with a
video camera and glasses that can achieve partial restoration of vision to people
who suffered from blindness caused by retinitis pigmentosa, a rare genetic disease.
Figure 4.1 The Argus II retinal prosthesis system
The European approval for this device was gained in 2011 while US FDA approval

18
was granted in February 2013. Argus II, a state-of-art device, represents a major
breakthrough which results in a high price tag. According to Brian Mech, the VP of
business development of the company, it took fourteen years to get Argus II to
market required the investment of 200 million US dollars and “intestinal fortitude”.
The company is now trying to pursue the major stakeholders in the purchasing
decision, namely major US healthcare agencies such as Medicare and Medicaid,
health insurers and European governments to reimburse 100.000 US dollars price
tag of the device. The ministry of health in France granted approval for the
reimbursement of the device. It is also available in the following countries:
Switzerland, Italy, the UK, the Netherlands, Germany, and Saudi Arabia. Second
Sight’s highly specialized technology is a demonstration of innovation as typically
defined in the medical technology industry: a new technological device addressing
a crucial unmet medical disease.
AliveCor is exemplifies the different kind of technological improvement by a
different kind of company. The company which is based in San Francisco
integrated ECG functionality into its newly launch smartphone case to help the
treatment of people suffering from heart disease. Electrical impulses generated by
the patient’s body are converted into ultrasound signals by sensors embedded in the
smartphone case. An application records these signals thereby enabling the
monitoring of the patient in real time. Such ECG data has been gathered by
AliveCor since early 2013 yielding recordings greater than 1 million that are
maintained in a database and more data continuously be collected every month.
This data has been used for the construction of a FDA approved algorithm that is
able to achieve real time detection of atrial fibrillation the most commonly
encountered type of cardiac arrhythmia. Using this algorithm the product developed
by AliveCor is able to not just monitor but it is also able to facilitate intervention
whereby a more critical and expensive healthcare situation such as a stroke suffered
by a patient can be prevented by healthcare providers. Unsurprisingly smaller are
the source of such innovative products and services.

19
Figure 4.2 AliveCor KardiaMobile Product
The President of EMEA & Canada region at Medtronic, Rob points out “Innovation
in medtech will continue to be driven primarily by small to medium-sized
enterprises (SMEs) and start-ups.” This point notwithstanding, such entrepreneurial
ventures are also not completely immune to the challenge of commoditization
affecting bigger medical technology companies. Ten Hoedt also notes “SMEs need
to be extremely careful to remain competitive and to differentiate their products
from those of larger companies”. Said differently, it is important that a solution is
devised by SMEs that is easy to integrate within a larger organization while
satisfying a substantial need felt in the healthcare market.
Figure 4.3 President EMEA & Canada at Medtronic, Rob ten Hoedt Elected
3.2.2. Using Solutions/Services to Expand Scope
A major strategy for healthcare cost reduction has become the idea of bundled

20
payments so trying to “own” more of the bundle has, to an increasing extent,
become an obvious tactic for medical technology companies. For a while, medical
technology companies have offered more services accompanying their products as
an incentive to buyers. Dr. James Rawson, who is the Chair of Radiology at
Georgia Regents Atlanta Medical Center notes that this poses an issue. He argues
that “Many of the services developed by vendors are focused on transactions, rather
than relationships and partnerships,” “The endpoint of the relationship between a
medtech company and a care provider is no longer a sale. The endpoint is an
improved patient outcome. That’s where the industry has to go.” Demonstrating this
argument, in 2012 Philips Healthcare struck an agreement with 300 million US
dollars and lasting for fifteen years with Georgia Regents whereby payments are
made to in return for provision/servicing of the equipment -this includes equipment
from competing companies- as well as any improvements in the care received by
patients. An agreement that is very similar in nature has been struck between
Karolinska University Hospital of Sweden and Philips Healthcare. This agreement
with a term of fourteen years has been secured by Philips in 2014 via a specific
tender conducted across the EU stipulates that Philips is required to make R&D
investments and administer an education program for healthcare providers in
addition to managing key processes for the imaging device such as invoicing,
mounting and upkeep.
It is clear from this example that services that transcend the product have to
maintain a well-defined purpose in order to succeed, such as addressing operational
efficiencies. It is imperative that Medtech companies show willingness for the
management and support of the service and such service should ensure that the
customer will be supported throughout the entire life-cycle of the products.
3.2.3 Introducing New Products to Achieve Greater Scope
Nowadays medtech firms offering an integrated solution for a particular therapeutic
area can generate a competitive advantage due to the major shift focus in the market
from a volume orientation to a value orientation. Two related approaches can be
used by medtech firms in order to deliver extra value to their customers. The first
approaches involves the medtech companies offering a large spectrum of products
which are clinically tested thus enabling healthcare providers to hit key metrics

21
necessary for receiving the reimbursement. The second approach involves medtech
firms possessing an appropriate mix of products and services that address the needs
in a particular therapeutic area involves medtech companies reducing the
complexity encountered in the contracting process by healthcare buyers and
simplifying the overall process.
As indicated by surveys of health care buyers they have such a multitude of new
term priorities that it is very difficult for them to engage in productive conversation
with multiple medtech companies related to the subject of value particularly when a
single budgetary cycle will not prove to be sufficient time for that value to be
actualized.
These healthcare buyers can start to address the problem by forming contractual
relationships with fewer suppliers and striking new contracts related to payments
that feature more favorable pricing terms. The degree to which development,
marketing and regulatory expenses can be distributed across the departments of a
medtech company is a function of how deeply it is involved in a given therapeutic
area. Farther into the future it is possible to perceive how such deep relationships
might change in such a way that a fixed fee is charged for either a simple knee joint
or a more complicated complete knee replacement. For the time being such
innovative contracts are only hypothetical but however it is time for senior
managers to envision how the industry could shift from a model of unit base pricing
to a system of payments covering a bundled products/services offerings in a given
disease area.
3.2.4 Achieve Greater Scope within a Specific Therapeutic Area
How medical device companies are widening their product offering scope is
illustrated by two transactions completed on 2014. The acquisition of Biomet by
Zimmer Holdings is the first transactions and the Medtronic/Covidien megadeal is
the second one.
The Zimmer/Biomet deal valued at 13.4 billion US dollars aims to create a major
player in the orthopedics’ market that can compete effectively against DePuy
Synthes, a JNJ’s subsidiary. This combination of the second largest orthopedic
player with the first largest translates into 8 billion US dollars of revenues for the

22
combined entity. Another notable aspect of the deal is that Zimmer becomes a
musculoskeletal sector leader dominating hip and knee implants product category.
Meanwhile Zimmer will acquire a richer product line in the trauma market aided by
Biomet’s particular strength in sports medicine thus giving the combined company
more heft to compete against JNJ who currently dominates the trauma market after
the Synthes megadeal in 2011.
Further transactional activities expected in field of orthopedics which will be
spurred by Zimmer/Biomet deal and this will involve deals between smaller firms
aiming to gain scale to maintain competitiveness. Other therapeutic areas,
particularly those in which a large number of companies operate, are likely to
witness similar deals.
3.2.5 Achieve Greater Scope across Numerous Therapeutic Areas
If product scope deepening is the primary motivation of the Zimmer/Biomet deal,
this motivation is taken to an even stronger level by the Medtronic/Covidien deal.
Essentially company senior managers contend that given ongoing consolidation in
the market and in order to strengthen their companies’ bargaining position vis-à-vis
healthcare buyers having breadth spanning multiple therapeutic areas has become
necessary on top of having product depth. This approach is given the name “ultra-
scope” by some industry watchers. Time will tell if any beneficial effects are
observed as a result of the Medtronic/Covidien deal related to the way contracts are
agreed with healthcare buyers or whether such a large degree of scale is necessary
to attain greater leverage in negotiations with customers. This open point
notwithstanding, it is clear that the debate surrounding the role played by M&A in
the medical device industry in enabling companies to navigate today’s difficult
healthcare environment, has been changed by the Medtronic/Covidien deal.
Medtronic and Covidien offer product portfolios that complement each other: The
product portfolio of Medtronic includes a spectrum of devices used in diabetes,
neurology, cardiology fields with hospital supplies being the core strength of
Covidien. According to data provided by Medtronic, within the top ten categories
relevant for purchasing decision by hospitals six of them will be occupied by
products offered by the merged company making it one of the top distributors in

23
medtech. When he was interviewed, Omar Ishrak, CEO and Chairman of
Medtronic said after the transaction was announced that “The addition of Covidien
broadens our footprint. The value proposition of Covidien’s technology is primarily
to deliver hospital efficiency; while Medtronic’s chronic disease therapies deliver
value in post-acute settings. When these two are combined, in a world in which
integrated health franchises will be more common, we become a very attractive
partner — we can deliver value in the hospital, in a measurable fashion, and value
that is realized outside the hospital.”
It can be argued that a significant scale generated by the merger of
Medtronic/Covidien has strengthen its hand for negotiations of contract terms and
has made it a more desirable supplier
3.2.6 Lowering Healthcare System Costs
In an environment where the phenomenon of product commoditization has become
an inevitable fact of life, in many medical fields it is also possible for medical
technology companies to adopt a more assertive stance by offering an enhanced
value proposition in the form of better technologies and more engineered products
in order to rid the healthcare system of dispensable cost. Such an outcome can be
realized via two main methods. The first one entails reductions in production cost
which can, for example, be achieved by lowering the intensity of technology and
complexity in a particular device or by cheapening the manufacturing cost of the
product and allowing the customer to benefit from the generated savings. The
second approach relies on removing costs from the system. In this case, the big
priority is not the actual pricing of the medical technology instead the crucial
criteria is whether or not realistic cost reductions are generated by the product such
that the overall healthcare costs can be lessened. Sedasys (developed by Ethicon
division of JNJ) which is the anesthetics delivery system using computer assistance
in order to perform screening for upper gastrointestinal conditions and for colon
cancer has been designed to tackle this very challenge. Even when an
anesthesiologist is not present Sedasys is able to release an anesthetic agent named
propofol as a result of its high degree of automation. Significant cost savings are
expected by JNJ lowering the screening cost for colon cancer to approx. 150 US

24
dollars from an original cost of 600-2000 US dollars. Before a broad roll-out of the
Sedasys is performed and because a deliberate decision has been made by Ethicon
to ensure proper training for physicians with respect to the timing and manner for
using the device, JNJ has chosen to market the device on limited bases.
Substantial R&D, engineering and manufacturing costs have to be borne by
companies when engineering and innovative device as in the case of Sedasys; more
than ten years was needed for the development of this particular device, for
instance. Of course another option for medtech companies is to shift production to
geographies characterized by more favorable unit labor costs or fine tuning
processes in their engineering activities to device less complex products that carry a
lower price tag. Indeed, in China and India such cost-reduction methods are already
manifest, where the demand for more affordable healthcare products by the strongly
growing and nascent middle class in them is spurring global medtech companies
and their local rivals to rush to develop suitable products to meet this need.
President EMEA & Canada at Medtronic, Rob ten Hoedt notes “The fact that the
Chinese Government wants to create a socialized health care system for 1.5 billion
people is the largest opportunity in the world for medtech firms,”
Medtech companies would be wise to capitalize on this reverse product flow
resulting from their efforts to design products targeted at emerging market countries
by engineering cheaper and simpler products to be marketed in advance countries.
This is precisely what is being done by whereby on site technicians are needed to a
much lower degree after the installation of certain knee and hip replacement
devices, thanks to automation system called Syncera company estimates suggests a
50% reduction in implant cost can be achieved using this system. After Syncera
system is introduced to emerging market countries in 2014 a similar pilot project
was launched in the US. The main motivation for using Syncera in the US
according to Olivier Bohuon, Smith & Nephew CEO, was to lower the pricing for
the companies’ orthopedic offerings while not sacrificing profit margins using
marketing with less intensity. The reaction of the market so far seems to be positive
evidenced by contracts being signed for Syncera by customer for a multi-year
duration according to Bohuon. This happened even though Syncera was a relative
newcomer to the market. He noted “If you take a hospital that has 700 implants a
year, over the three-year contract this hospital will enjoy net cash flow benefit of

25
well over US$4 million.”
4 CONCLUSION
Differentiation strategies must also play an important role in medical device
companies’ efforts to tackle the challenge of commoditization. Their branding
messages must transcend slogans specific to a product and also emphasize key
qualities such as partnering skills, reliability and a customer centric focus.
Essentially, such a differentiation strategy that goes beyond the product how
medtech companies will manage to build their brand will be a noteworthy
development to watch in the future. Will medtech companies using their product
and service offerings to hit key care metrics and enable their customers (i.e.
providers of healthcare) increase their patient admission levels and gain market
share? There is no question that when the customers of medtech companies
experience improved financial results with their support, they will be much more
likely to feel loyalty towards specific medtech brands. With respect to new
differentiation strategies a range of alternatives are available to assess and arising
number of competitors to mimic. It is crucial of medtech companies to not just
evaluate the way in which customer buying habits in key markets are shifting but
also to implications of these shifts for their product/service offering. This
evaluation must occur over a sufficiently long period time and irrespective of the
ultimate differentiation strategies adopted. This study provides an outline of the
main successful differentiation strategies and it constitutes a starting point from
which medtech companies must evaluate what subsequent step to take for further
market expansion. For instance, scope expansion strategies via more
products/service offerings would be less of a priority if the company is already
experiencing high success with its existing product line-up. That being said, it must
never be forgotten that satisfying the buyers’ main criteria of lowering overall
healthcare system costs is a necessary precondition and superior product results in
isolation may not be able to sway the customers decision in a favorable direction in
today’s healthcare environment.

26
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