A Case Analysis

on
General Electric Medical Systems, 2002

Created and presented by:

Rahul Thanugula (055)
Suhani Popli (244)
V Dinesh Kumar (248)
Anamika Chaudhary (255)
Aarya Palsule (284)
Sharad Jape (296)
 GEMS – An Overview
STRENGTHS
General Electric Medical Systems • Well – established
• Sub-division of parent company General Electric corporate brand name
• Leading manufacturer of diagnostic imaging equipment in • Well structured GPC
2002 programme
• Pillars for corporate excellence: Six-Sigma and Globalization • Six Sigma Quality control
initiatives, and competitive culture
• Global Product Company (GPC) concept
OPPORTUNITIES
• Increased focus on medical
Issues for GEMS to consider care in emerging nations
• To remain competitive in the constantly evolving market • Rapid overall development
• Stay abreast with technological advancements in Healthcare IT
• Whether to customize its GPC concept for China • Technological
advancement in the overall
industry
WEAKNESSES
• Challenge to tie up with
Pharma companies
• Primarily an engineering
heritage
THREATS
• Competitors – Siemens,
Philips, Toshiba
• Technology rapidly
becoming obsolete ;
disruptive innovation by
competitors
 Healthcare Systems across the World
Demand Conditions Related & Supporting Industries
Current Expenditure: Market Categorization:
• 45% - Govt. Programs • 70% of Hospitals were private & not for profit with not so good financials
• 33% - Private Insurance(15% had no health insurance)
USA
• 17% - Patients For -Profit MCOs had bargaining power for discounts.
Demographic Projections:
• 20% of population > 65yrs by 2025
Current Expenditure: Market Categorization:
• Universal healthcare by Govt. • Majority hospitals were for-profit owned by doctors
• Workplace-based insurance societies
JAPAN
• Financing by patients
Demographic Projections:
• 27% of population > 65yrs by 2025
Current Expenditure: • Majority hospitals were government-owned & funded with a global budget
FRANCE • 75% - Universal healthcare by Govt. ; 20% - Patients • Most of the Ambulatory care services were privately owned
• Supplemental insurance
• Healthcare industry projected to grow at 13% annually
INDIA • Individuals paid 75% out-of-pocket
• Focus on Chronic diseases from Communicable disease.
• 50% urban & 10% rural population had health Insurance
CHINA
• High demand for medical equipment
 Timeline – Global evolution of GEMS

Jeff Immelt
1990s Three step approach:
Developing Asian a. Major aim - to step up
market acquisitions ; increase size
1988 organization b. 1997 – Began with
Exchanged GE's outside of Japan Global Products Company
Consumer (primarily India and ( GPC) - cutting costs by
Electronics China) shifting manufacturing
1987
business with the and design activities to
Launched medical devices low cost countries
leadership business unit of the c. Invested in developing
development French company Marketing and Sales
Early 1980s program for ,Thomson organizations within key
business leaders,
Joint venture with markets
completed in
Yokogawa Medical 1992
Systems (to build and ACQUISITIONS
sell MRI products in • Objectives – to obtain new product lines, to gain access to new
Japan) markets, to fill gaps in its own product offerings
• Key acquisitions undertaken ranging from $1 mn to $1 bn
 Elements of GEMS’ strategy
Manufacturing - GPC
• Launch of GPC in 1997
• 85% input manufactured in high cost
countries – 80% of overall cost
• GEMS set a goal of having 50% of its direct
material purchases from low cost countries,
shifting 60% facilities there
• Achieved savings of 30% in first year,
expectations of further cost reductions of
10% annually
• “Pitcher-catcher” concept for moving
production facility
Regulatory interface management
• Government involvement ranging from
provider to payer to the regulator
• Two types of strategies
Defense – Level playing field against
domestic competitors
Offense- to influence rules and regulations
in some countries
R&D
• 7% to 9% of sales
• New products within existing platform
– 5 million $ to 10 million $
• New platforms – 3 years to 10 years
• GPC philosophy implemented
• Shift to countries with underutilized
human capital
• Two step transition plan proposed -
Collaboration with pharmaceutical
companies ; return to the business of
selling and servicing equipments
Human Resources
• Focus on competent talent
• Global success mattered – local identity
sacrificed ; international talent sourcing
• Biggest challenges – relocation from
mature to infant segments ; conversion
of talent to ‘GE leaders’
Sales & Marketing
• 60% of overall revenue
• Higher earnings from Service Contracts
• Local expertise required to build
relationships
• Interaction with medical professionals at
multiple levels
• Wholly-owned direct sales organization
model
• Not price-based, but value-added services
• In-house provision of services
• Gold Seal’ programme to market used
equipment – consisted of ‘as-is-where-is’ &
‘refurbishing’ businesses
• Competing against 800 brokers offering low
margins & cheaper quality standards
• Two broad categories – products to raise
efficiency & products that change physician
behavior
 Competitor Analysis
Overall Profit
Worldwide Market
Competitor Revenue Margin Dominant in Markets Strengths
Share Position
(% of revenue)
Majorly Europe and US,
1. Recent growth through acquisitions
Philips Medical Systems $ 5 bn 2 7% presence in Asia with 15%
2. Investments in R&D approx. 8% of sales
Sales
Siemens Medical European Markets 20 % 1. Special access to eastern and developing
$ 4 bn 3 10%
Solutions from Germany, US economies through relations with German regulators
1. Known for reliable products and cost-effective
Toshiba Medical Systems $ 2.3 bn 4 5% Asia reduction
2. 2nd largest market share in Asia
After Sales Services Competition: Multi-vendors and OEM’s increasing market share

Other Pressures to Innovate

Technology or Product Innovation
• GEMS image as an Industry Innovator:
Pioneer and market leader in CT and MRI
technologies
• GEMS philosophy “Best technology would
always win in market place”
Management Innovation
• Reduce the manufacturing cost specifically direct material costs: GPC Philosophy
• Development of suppliers in low cost countries: Pitcher-catcher concept, span performance
measurement
• Customization requirements in new geographies with global expansion strategies : GEMS IT
• Competitors’ entries in Healthcare IT business
 GEMS in China
• Third largest market for medical diagnostics behind US and Japan
• “In China for China” policy to shift low-cost manufacturing facilities across the world to China
• Initially operated through Joint ventures in China (with MoH & State Drug Administration)
• GE acquired 100% stake in two of the ventures and 90% in another
• GEMS dealt with three categories of products in china
• Locally made for local market
• Locally made for export market
• Imported for local market
• Local demand in China is huge ; 10% price reduction can lead up to 50% sales increase

Future Outlook Market for medical equipment

Low End (China, India etc)
• Challenge ahead to operate in various
countries around the world
• Stagnated growth in Japan Mid Tier
• Promising future in Hungary
• Major challenge : to dominate the
Chinese market High End (US and Japan)
• Resource reallocation for “In China for
China” required 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
 Underlying logic behind GPC
Need for material cost reduction ; 80% input cost coming from materials,

Development of well established suppliers’ network in low-cost countries

Making use of underutilized human capital, to avoid creation of potential competitors

To counter competitors in developing markets & leverage potential opportunities

Emphasis on their supply chain rather than manufacturing alone

 Should GPC be altered for China?
Opportunities in China $ millions $/unit
• Growth in the overall healthcare industry Sales 3.564 3300 x 0.9 = 2970
• Need for expansion of low-cost facilities for Total Variable Cost 3.14 2570 x 1.02 = 2621.4
local population
• 4% GDP spend on healthcare Variable Margin 0.424 348.6
• Demographic structure skewed towards the Incremental Fixed Cost 1
aged population
Loss made - 0.576

Outcome
Time required to breakeven = 7 years [= 0.424*(1.13^7)]

Parts exported to China

USA 18
MEXICO 360
Assumptions taken
• Analysis based on only on Patient Monitoring device made in Mexico
ASIA 4 • What-if the device import is shifted to China
W. EUROPE 4 • Price reduced by 10% ; Volume increases by 50%
• Fixed cost = $1 mn ; Variable cost increases by 2% -- stay at these levels
INDIA 122 • 13% growth rate for the healthcare industry (given for India)
 Global Genomics & Global Healthcare-IT
Strategic Opportunity
Genomics
(Related & Supporting Industry)
Healthcare IT
(Demand Conditions, Firm
Strategy, Structure & Rivalry)
Pros
• Scope for first mover advantage
• Periodic revenues from chemical-
reagent sales
• Healthcare IT : CAGR of 125% (Huge
market potential in developed
countries)
• “Firm Strategy, Structure & Rivalry”
– Siemens is the market leader
• Integration with existing GEMS
product
Cons
• Core Competency i.e. Engineering & Technology cannot be leveraged
• Collaboration with pharmaceutical companies would force changes in
business models
• Longer product development time (~10 yrs)
• High failure rate in pharmaceutical support products (>10%)
• Higher operating margins (30% v/s20%)
• Challenge to address demographic changes
• Focus on expanding basic coverage rather than emphasizing high-
technology medicine(India & China)
 Key Recommendations
Leverage GPC in order to lower manufacturing costs

Alter GPC in accordance with ‘In China, for China’ policy

Frame a corporate strategy to enter the markets for Genomics & Healthcare IT
(developed countries to be targeted)
Thank You