The case talks about the Healthcare arm of Philips called Philips Medical System (henceforth PMS) and looks at the growth strategy and the performance of PMS in 2005. The case also talks about its competitors: GE Healthcare (henceforth GEH) and Siemens Medical Systems (SMS) and their growth strategy and performance in 2005.
The case starts with highlighting the importance of Diagnostic imaging and related businesses and mentioned subsequently that while Imaging contributes just 30 Billion dollars in 2005, however, it contributes a significant portion (47% of total revenue for PMS, 55% of total revenue for SMS) of their revenue in the same year. These three companies (PMS, GEH and SMS) are remarkable in the sense that they were previously the top electronic companies and had little to do with Health Care.
However, with time they created their own Healthcare business and these three together dominated the Healthcare market just like they dominated the Electronic industry. These three contributed 50 - 60% of the Healthcare market. One of the most notable features is that all the three companies’ main growth strategy was geared towards acquisition. In this context, it is interesting to note that Philips abandoned its country specific strategy and under their new CEO Boonstra embarked on several acquisitions from 1998 – 2001.
These acquisitions made PMS very strong in the medical business and gave it the required competitive advantage. Not all acquisitions were free of hassles; PMS had to face problems after acquiring companies like MedQuist and had to pay huge impairment charge in 2004. Inspite of this, PMS continued their acquisition spree and acquired notable companies like TOMCAT, VISICU, and STENTOR etc. from 2005 to 2008. Post 2005, most of the Philips acquisitions was geared towards Healthcare IT sector (refer to the below annexes).
All this acquisitions gave significant competitive advantage to PMS and as a result PMS was able to augment its revenues. Currently, PMS revenues in 2011 placed them at 6th position in the World up from 8th position in 2008.
GEH is an arm of General Electric (GE), company founded by Thomas Edison in 1878. As part of its growth strategy, GEH also made a series of acquisitions, notable among them is the acquisition of Amersham in Oct 2003, which catapulted GE to one of the leader in the field of Bioscience. GEH specifically emphasized on three major initiatives - Acquisitions, Global Product Company (GPC) and Development of Local marketing and sales.
Under acquisitions, GEH acquired companies that complement their current businesses. Under GPC, GE Healthcare shifted its manufacturing base from high cost to low cost countries such as China. Also, GEH had a very good Service and marketing program though there products was not to that extent innovative with respect to Siemens Medical Systems (SMS). GEH placed a huge emphasis in growing the Service Business.
It was placed 2nd in 2005, just behind SMS which was at the top in Global Healthcare IT market. Siemens Medical Solutions (SMS) was a unit of Siemens AG, headquartered in Germany. Initially, during the 90’s it faced several problems with respect to its price of the product. The Price of the product was deemed to be too high. Hence, SMS did a bit of restructuring by de-integrating and consolidating suppliers and moving production to the low cost location of India and China. Siemens were also very innovative company with respect to Medical Technology like Imaging and Healthcare IT.
While it was 2nd in terms of Annual revenue in 2011, it stands 2nd with respect to profit just after GEH. Putting all the three companies in perspective with respect to AAA triangle (Adaptation, Aggregation and Arbitrage) in the context of Global strategy, it can be seen that Philips embarked on Adaptation process, where they traditionally focused on the local markets (North American markets) and at the same time integrating the markets across different regions, a process called aggregation.
However, PMS lacks significantly in outsourcing activities to low cost destination (Arbitrage). Of late, they have started doing arbitrage but still their main priorities are in Adaptation and aggregation. On the Other hand, companies like GEH and SMS have leveraged outsourcing and are benefitting from Arbitrage. Also, both of them had undergone regional integration and thus had exploited aggregation. However, GEH and SMS significantly lack in adaptation which at present is not their priority.
One question arises at this point is how to know which part of the AAA triangle, the company should exploit? Basically, the company should look into at ratio of each of their advertisement, R&D and Labor intensive features to sales. So, if a company’s advertisement to sales ratio is high, then the company is spending too much on advertisement and hence it can be said that the company need to adapt to the local market (adaptation). Those which had R&D to sales as high will need to have integration on a global scale (Aggregation).
Finally, those which had high Labor intensive to sales ratio will be high on the Arbitrage potential. Thus, by checking these ratios it can be ascertained where a company is placed in the AAA triangle. A company cannot be competent equally in all the three segments at one point of time. However, the big companies like PMS, GEH and SMS have all used any two of the above parameters as part of their global strategy and has been quite successful at this to date. Annexes: PMS acquisition before and after 2005:
Till 2005 | Post 2005 | MARCONI MEDICALS ($1. 1 b ) | WITT BIOMEDICAL CORP (Clinical reporting Systems) - 2006 | ADAC LAB. ( 0. 4 B Euro) | INTERMAGNETICS GENERAL CORP (MRI systems) - 2006 | AGILENT ( $1. 7 b) | VMI – Sistemas Medicos (Diagnostic Imaging – Brazil) - 2007 | MEDQUIST ($1. 3 b) | XIMIS Inc.. (Imaging) - 2007 | ATL ULTRASOUND ( 0. 7 b Euro) | EMERGIN (Health care IT solutions) - 2007 | STENTOR ( Healthcare IT - PACS) | VISICU Inc.. (Clinical IT systems) - 2008 | | TOMCAT Systems Ltd.. (Patient Care) - 2008 |