Coloplast A/S is a Denmark-based company that was established in 1957 and currently functions within the global healthcare sector. Coloplast designs, manufactures and markets products and services for five principal segments: ostomy care segment, urology and continence care segments, and wound and skin care segments.
The Company has a strong international presence. It has manufacturing plants in Europe, the United States, Costa Rica and China and supplies its products globally through a huge number of subsidiaries. Europe has historically been Coloplast’s largest market, with over 80% of revenue deriving from this continent, and the United States is its second largest market with 13%. Ostomy and continence care are Coloplast’s largest business segments in terms of revenue, contributing 39.4% and 23.6% respectively in the year 2004, while in terms of operating profit distribution the same segments accounted for 92.5% of total group profits in 2004.
In 1999, Coloplast made the decision to move its mature product lines in Tatabanya, Hungary as part of the Company’s manufacturing strategy to increasingly locate scale production in low-cost areas. This was Coloplast’s first major attempt to relocate part of the volume production somewhere outside Denmark and the Company did not have a template to apply for how to implement this kind of change. Consequently, during the relocation process, the Company needed to address a number of internal challenges and organizational issues that required the devotion of substantial resources and major changes to be made in the mindset of the Danish headquarters. Solving these organizational issues and addressing the internal challenges effectively, would allow the Company to materialize the Hungarian production unit’s full potential and expand its offshoring operations into other, bigger and more demanding markets.
The external environment of the global medical devices industry and the key factors for the management of people and organizations
The analysis of the external environment of the global medical devices industry examines the relevant external factors that impact the medical devices business structure. In order to identify these factors a PESTLE analysis is being conducted.
1.1 Political factors
Healthcare reforms and reductions in public grants represent significant political interventions that have a wide ranging impact on the global medical devices industry. Reimbursement or payment practices in certain countries have also a substantial negative effect on medical devices industry sales prospects. Various countries around the world are dealing with massive costs of healthcare and are addressing these costs by reducing reimbursement rates, establishing price caps, requiring mandatory price reductions, using diagnostic related groups (DRGs), limiting funds available for medical devices, and/or requiring inappropriate information or pricing from the manufacturer (Medical Device Industry Assessment, 2010). Reduction in public grants that is effectuated in several countries, has also a substantial negative effect on the companies’ earnings capacity and results in a restructuring process in the company’s activities in order to improve effectiveness and efficiency.
1.2 Economic factors
The medical device pricing situation has shown incredible strength over the years, although there were many economic uncertainties in the market. In contrast to more competitive markets with many product substitutes and competitors, medical equipment prices tend to be abnormally high. In addition, many industry players are in niche markets that are not large enough to attract other medical equipment companies. This fact enables niche product companies to garner a large market share in a small but growing sector and charge premium prices (Medical Equipment Industry Report, 2003).
1.3 Social Factors
The ageing population of the world is a favourable circumstance for the medical devices industry. Demographics will continue to increase demand for advanced medical device products as the percentage of the ageing population is keep increasing.
Change in the world’s cultural values though, does not seem to have an impact on the companies which function within the medical devices sector as the nature of the products they produce makes them essential to every patient, regardless any social or cultural differences.
1.3 Technological factors
The medical devices industry is highly technology driven, diversified and innovative, capturing a wide range of technological advances for application in the medical field. The broad spectrum of technologies available in this area ranges from electrical engineering/electronics to precision mechanics and optics. Furthermore, technologies from the textile industry, the plastics processing, pharmaceutical and, most recently, from the biotechnology industries are also utilized in developing medical products (German Business Portal, 2010).
1.4 Legal Factors
The medical devices sector is a highly regulated sector of the economy with standards, rules and legislation. Regulatory environments have significant implications for an industry’s overall performance and, accordingly, medical device industries have been promoting regulatory systems that are based on international best practices and sound science. Also, they have been devoting considerable resources toward product approval processes, clinical trials, user fees and plant audits/inspections (Medical Device Industry Assessment, 2010). An increasingly common practice among developing countries is the establishment of national regulatory requirements that are consistent with regulatory systems in developed countries. These national requirements are sometimes established to protect the domestic industry, to earn hard currency for the government, or both (Medical Device Industry Assessment, 2010).
1.5 Environmental factors
Medical devices industry is influenced by the environmental factors as there is a straight linkage between health and environment. Generally, medical devices and healthcare services are more needed in situations where the quality of the environment is deteriorated due to the fact that health problems are more likely to be increased.
2. The internal environment of Coloplast A/S
Having evaluated several potential locations and carried out extensive feasibility studies, Coloplast decided to move part of its production volume to a low-cost area in Tatabanya, Hungary, in order to take advantage of the economies of scale, optimize productivity and increase its efficiency. However, despite the several positive outcomes that this move would deliver to the Company, it also brought major organizational challenges to the surface that required the management’s immediate attention. The critical analysis of Coloplast’s internal environment provides an understanding of the major internal challenges that the Company had encountered during the relocation process, and it shows that Coloplast would need to successfully deal with these challenges in order to exploit the full potential of the Hungarian production unit and develop further offshoring projects.
2.1 Organizational structure
One of the most important challenges that Coloplast had to address during the implementation of its offshoring project in Hungary concerned its organizational structure.
At its most basic, organizational structure is “the way in which work is organized and control exercised” (Salaman, 1979, p.61). It can also be defined as “the way tasks are divided up, how the work flows, how this flow is coordinated and the forces and mechanisms that allow this coordination to occur” (McShane and Travaglione, 2003). In other words, organizational structure determines how decisions are made and executed at all levels of an organization, how tasks are organized, categorized and delegated, how the functions of employees are coordinated and how the various departments interact with one another in order to achieve a particular goal.
Centralization is an organizational structure policy in which decision-making power is consolidated at the top of the organizational hierarchy while in decentralization decision-making is shared across the organization, with managers at various levels being empowered to actually use their first hand knowledge and make key operating decisions relating to their areas of responsibility. Both policies have advantages and disadvantages for an organization and the selection of the right policy depends on each organization’s particular situation.
Therefore, it is crucial for an organization to select the proper type of organizational structure that will support its needs and provide a vehicle to meet its goals and objectives. A successful organizational structure is a key determinant of the survival and growth of the organization, while poor organizational structure can generate various problems, such as poor communication, confusion and lack of innovation that could undermine the overall organizational performance.
Coloplast’s Danish production facilities were characterized by a decentralized, loose and informal organizational structure that proved to be quite successful in a purely Danish context. Each of the Danish-based production units was working relatively autonomous, had its own systems of controlling and managing the production process, its own ways of documenting, analyzing and organizing things, and also had limited vertical relationships. Due to these loose and informal conditions, Coloplast lacked fixed procedures and structured interfaces and a lot of the knowledge regarding the Company’s production techniques and processes was not documented into manuals, but instead it was sitting in the heads of the Danish operators. This fact did not pose a risk for Coloplast as the communication between its Danish production units was relatively easy.
However, with the addition of the Hungarian production unit, Coloplast’s decentralized organizational structure was no longer effective and several issues had occurred. The reason was the large distance between the Hungarian production unit and the other Denmark-based plants. This fact created issues of reduced control and ineffective communication between the management and the Hungarian plant as well as between the various plants.
Other main issues caused by Coloplast’s decentralized structure concerned lack of standardized documentation in operation of equipment and other processes, knowledge sharing problems, and various misunderstandings that could demoralize employees and put the Hungarian project in risk.
2.2 Documentation and knowledge sharing
“Knowledge transfer in organizations is the process through which one unit (e.g., group, department, or division) is affected by the experience of another” (Argote & Ingram, 2000). It can also be defined as the ongoing process of eliciting, encouraging and communicating tactic knowledge from one part of the organization to another (or all other parts of the organization), and ensuring its availability for future users (Liebowitz, 2004). Knowledge transfer is an essential part of an organization’s knowledge management strategy which seeks to build a supportive culture for essential knowledge sharing that leads to organizational growth.
As previously discussed, Coloplast had no documented information regarding its production techniques and equipment operations, and no standardization of its production systems. This became a major problem when the Company decided to relocate part of its production volume to Hungary and transfer the knowledge on production process to the local employees by providing them on-site training. The lack of documentation and standardization made the knowledge transfer very complicated for the Hungarian staff, since a lot of this knowledge was embedded in the minds of the Danish operators, thus it was tacit and very difficult to articulate. What complicated knowledge transfer even more, were the inherent differences in the organizational culture of the Hungarian and Danish employees, and the language barrier that would cause misunderstandings and lack of communication between them.
Hungarian employees were very experienced and of high technical level. Moreover, they were used to working in multinational companies which had more centralized organizational structures, fixed procedures and better structured interfaces than Colplast while they were characterized by a higher percentage in “power distance” and stronger “uncertainty avoidance”. Geert Hofstede (1967-1973) identified “power distance” and “uncertainty avoidance” as two of the five values that are the basis of cultural differences in business and differences in business practice and behaviour, the other three being “Individualism vs. collectivism”, “Masculinity vs. femininity” and “Long vs. short term orientation”.
According to the analysis of Hofstede, in cultures with high levels of power distance like Hungary, people accept the fact that power in institutions and organizations is distributed unequally and is based on formal, hierarchical positions. On the other hand, in cultures with lower levels of power distance (e.g. Denmark), people relate to one another more as equals regardless of formal positions. Subordinates are more comfortable with those in power and demand the right to contribute to and critique the decisions of the management.
Uncertainty avoidance deals with how much members of a society are anxious about the unknown, feel threatened by unstructured and ambiguous situations and as a consequence, attempt to cope with anxiety by minimizing uncertainty. Hofstede suggests that in cultures with strong uncertainty avoidance like Hungary, people prefer explicit rules and formally structured activities, while in cultures with weak uncertainty avoidance like Denmark, people prefer implicit or flexible rules or guidelines and informal activities.
Danish workers did not recognize that these differences derived from fundamental differences between the two nations’ cultures and, based on their own cultural perspective they made biased assumptions about their co-workers abilities, perceiving themselves as being the best and most knowledgeable. This fact threatened the training process as some of them tended to act passively or simplify instructions excessively, underestimating their Hungarian co-workers’ skills and creating some misunderstandings. Furthermore, the lack of common language enhanced the problem of communication and further complicated the knowledge transfer as everything should be translated into Hungarian.
Coloplast identified the challenge and sought to promote knowledge transfer by establishing a common platform of knowledge exchange. Moreover, in order to communicate best practices and also prevent conflict from occurring, Coloplast created a forum where the views and ideas of all employees could be shared and discussed. This was very interesting and effective, since all employees would be able to share their opinions, discuss the various issues that affected them and easily access knowledge and useful information. With the use of this forum, the management would also become aware of the issues affecting its employees and could therefore provide effective solutions to the various problems.
3. Employees’ Motivation and Commitment
Employee motivation is very important in any business for the reason that motivated employees are the key to business survival and success. That is because there is a direct linkage between motivation and job performance. Employees who are motivated will perform better, thus increasing job performance, while employees who are not motivated, will become less productive, less creative and less useful to an organization. This is the reason why many organizations consider employees as their most valuable resource and greatest asset, and aim to constantly invest in their training and job satisfaction.
Motivation, as defined by Mitchell (1982, p.81), represents “those psychological processes that cause the arousal, direction, and persistence of voluntary actions that are goal oriented”. Robbins (1993) also defined motivation as the “willingness to exert high levels of effort toward organizational goals, conditioned by the effort’s ability to satisfy some individual need”. Generally, there are many theories of motivation with most of them agreeing that motivation requires a desire to act, an ability to act, and having an objective (Ramlall, 2004).
Motivation impacts the employees’ commitment in an organization in the sense that employees who are highly motivated feel that they play an important role within the organization and “their work directly contributes to the overall vision” (Colorado Technical University Online, 2006). Thus, it is imperative for an organization’s management to understand what gets employees energized and motivated to do a great job, and how to provide them with the incentives to achieve the organizationally desirable results.
Coloplast’s desire to extend its offshoring operations into other markets was initially considered as a risk to employees’ motivation because of their endemic resistance to change. Employees are usually resistant to any change due to the fact that it creates uncertainty, anxiety and fear of the unknown. These are unavoidable personal psychological consequences for people experiencing change (Christina Butler, 2008), which have to be overcome by implementing appropriate strategies that rebuild employees’ self esteem.
Clear, direct and open communication was the key attribute of Coloplast in avoiding the negative impact of this organizational change on employees’ motivation. By involving employee representatives in the planning process, discussing the consequences of this change honestly, and giving them the chance to evaluate the decision from their point of view, the Company maintained the employees’ commitment and confidence at high levels and made them receptive to change. Coloplast’s management ensured that information in relation to the relocation process was distributed in a way that all employees would understand how this change would affect them, and did not leave any space for misunderstandings that could lead to work stoppages.
Furthermore, Coloplast made the best to ensure that uncertainty was removed among the employees by offering additional training to those whose jobs were affected and by upgrading production workers to more advanced assignments. In addition the Company leveraged voluntary attrition and early retirement in an attempt to mitigate the negative impact on employee motivation which would have negatively affected production. This in turn enabled the employees to cope with the organizational change and maintain their motivation and commitment levels high.
Overall, Coloplast implemented an appropriate strategy in order to deal with the potential de-motivation of its employees. The Company placed great emphasis on communicating this organizational change to its workforce, facilitated the participation and involvement of employee representatives to the planning process and gave additional incentives to those whose job was going to be affected. Coloplast’s approach to this challenge, and the fact that the management acknowledged that the key processes of change implementation depend largely upon employee motivation and commitment, show that the Company has enhanced ability to manage its employees through any future organizational change. Having the Hungarian project as an example of how to manage people, Coloplast would be able to further expand its offshoring operations into other markets successfully.
Based on the analysis of Coloplast’s internal environment it is evident that the Company faced significant organizational challenges during the implementation of its offshoring project to Tatabanya, Hungary. Organizational structure, documentation and standardization, knowledge management and organizational culture issues were the most important challenges that the Company had to tackle in order to materialize the Hungarian unit’s full potential. Before taking the next step in a major offshoring project to China, Coloplast should concentrate on dealing with these organizational challenges as there is a big chance to become major obstacles to the Company’s future plans for growth.
The first challenge Coloplast has to tackle is the reconsideration of its organizational structure. Having a decentralized, loose and informal organizational structure may have worked well for the Company’s Danish production units but as the Company grows and develops production units abroad, communication issues and lack of control and coordination cause problems to the organizational performance; therefore, it is essential for the Company to change into a more centralized structure.
Changing its organizational structure would enable the Company’s management to maintain a high level of central authority and control, while at the same time it would facilitate the better coordination of all production units. Additionally, centralized organizational structure would create a predictable internal environment and would allow the Chinese employees to adapt more easily, as they are used to more centralized, formal and regulatory work conditions (like Hungarians). Furthermore, the fact that there would be only one decision-making centre would ensure that the organizational goals would be common for all the Company’s production facilities and all of them would be aligned toward the same organizational objectives.
Developing an integrated management information system, especially designed for the needs of the Company, would enable Coloplast to coordinate and control all of its production units effectively. This information system could facilitate the various administrative controls to be implemented by the management of the local units and instantly be communicated to the central management in Denmark. Furthermore, guidelines regarding corporate policies and procedures could be immediately transferred to the various production units and all of the facilities would be linked together so that they could have unlimited online communication. Coordination and control could as well be achieved by arranging regular meetings between the central and local managers where problems and recommendations could be discussed in a more direct way.
Another challenge that has to be tackled by Coloplast is the lack of documentation and standardized procedures. Documentation and standardization of the Company’s procedures could make the production process less complicated and much more efficient while it would enable more effective knowledge transfer to the foreign production units. The first step would be to document all the information in relation to the Company’s techniques, equipment operation and operational inconsistencies in a database that would be accessible by all employees and then translate it in the foreign production units’ languages. Standardizing the Company’s production processes would be the second essential step in order to streamline the production globally and increase the Company’s efficiency and productivity. The third step would relate to the development of an effective knowledge transfer system that would assist Coloplast in its efforts for providing the foreign employees with the necessary production knowledge. Due to the large distance between the Company’s future facilities and the headquarters, and the prohibiting costs, the transfer of human resources in order to educate the foreign staff may not be an option; therefore, it is important for Coloplast to create an online knowledge transfer system where all knowledge would be gathered and provided to the employees without the need of human interaction.
The above mentioned steps require substantial time and resources in order to be planned and implemented, but it is almost certain that they can solve Coloplast’s issues in the long term. Overall, Coloplast needs to redefine its organizational culture in order to support its progress and ambitions. The Company needs to understand that the strategic direction it decided to follow and the vision it has for its future, require major changes in its mindset and a truly global line of thinking. However, having the Hungarian project as an example of how to relocate and manage production sites abroad, and making the above improvements, Coloplast can successfully extend its offshoring operations, not only into the Chinese market but anywhere in the world.
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