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In a highly competitive industry, the health care industry, Fisher Paykel Healthcare had positioned itself as the third company in health care in general and the leader in respiratory care and treatment of obstructive sleep apnea in particular.
Currently, its products are sold in over 120 countries worldwide. The company is committed to work around patient and therapy though innovation, continuous research and development and maintaining close contact with its customers.
In this report, I tried to undertake a strategic analysis of the case “Fisher and Paykel Healthcare: Just add Water” (pp. 446- 468), using the case analysis process discussed in pages 402 – 404. I tried to cover, as much as possible and within the word count limit, the different areas. From the analysis of the environment in general, the industry environment and the completive environment, I highlighted the opportunities and threats. The next step was to perform the internal analysis by examining FPH’s internal resources, both tangible and intangible, identifying its capabilities, its core competencies, the value chain and the weaknesses. Finally, I put everything together in a SWOT analysis, identified the strategies of 2006 and developed new strategies.
The health care environment is highly and mainly affected by the demographic aspect. The growth of the population in general and the ageing population in particular constituted a great potential to the respiratory humidification business. Other aspects, such as technological- through R&D and innovation, socio-cultural- by increasing awareness- had also major effects on the industry’s growth and development. The political, legal and regulatory aspects had also significantly influenced the development of the industry and played major roles in its success.
From the industry environment point of view, the skilled labour, needed for R&D, might become one of major bargaining power of suppliers. As New Zeeland is not growing enough, FPH might face some difficulties to find the needed labour from the local market. Large hospitals and clinics constituted a major bargaining power of buyers who would negotiate a large sales with high quality, greater levels of service and lower prices. While the threat of new entrant and substitute products were very unlikely to happen in the years after 2006, the intensity of rivalry among competitors, particularly FPH, Respironics and ResMed might be enormous.
In 2006, FPH was looking to increase its market share to 80%, after enjoying a leading position in the respiratory humidification installed base with around 60%. However, in the OSA market, FPH was the only one who managed to break through and achieved, in 2006, some 8% share in the OSA market.
The market is highly competitive, with the three main players relying on technology and pricing to maintain, and even to increase, their market shares.
When Daniell surveyed the competitive land scape, in September 2006, he saw a world of opportunity. New applications for humidification were developing all the time and the OSA market had potential to be huge as awareness was growing. The industry had many and large opportunities in the US market as well as in the rest of the world. Emerging countries, such as China and Japan were witnessing considerable growth.
The company’s culture was the most important core competencies of FPH. However, other FPH had other core competencies, such as strength in R&D, innovation and products that provided some competitive advantages over its rivals and helped the company to achieve above-average return. However, some of these core competencies may not stay rare or non-substitutable. FPH should continuously develop new competencies to stay ahead of its rivals, very competitive and increase returns for its shareholders.
One of the major weaknesses might be the location of its manufacturing facilities, which was located in New Zealand. First, New Zealand was not growing enough, therefore, labour in general and skilled labour in particular might become rare and costly. Second, being far from its main markets -North American and Europe, the cost of transportation and important taxes might become high, decreasing the competiveness of the company. Third, maintaining close relations with the customers required to have R&D, manufacturing and services close to them.
Taking advantages of the opportunities and capitalising on its culture, R&D and innovation, FPH’s strategies of 2006 were mainly focusing on increasing the growth and market shares and keep introducing new innovate low-prices products with focus on accessories and consumables.
Finally, the SWOT analysis revealed that there were many and large opportunities in the US market as well as in the rest of the world, particularly in the emerging countries. A business strategy should adopt the continuous efforts to grow in the existing markets as well as explore new markets. This growth could be achieved by relying on its core competencies, such as the culture, R&D and innovation. At the corporate level, and in order to strengthen its positions in the US and the European markets, FPH should consider establishing facilities in other countries such as (a) China, for cheap labour; (b) Ireland for its many advantages, particularly the easy access to the EU market and (c) Mexico, for its cheap labour, easy access to the North American market and the existence of North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.
Table of Contents
Established in 1934, Fisher and Paykel had grown to become an icon of New Zealand. The success of respiratory business led to the creation of a separate medical division in 1977. In 2001, the company was split into two separate companies – Fisher & Paykel Healthcare (FPH) and Fisher & Paykel Appliances (FPA). At its creation, Michael Daniell was appointed as CEO of FPH and assumed his role, through 2006, until now.
The health care environment
The health care industry “The industry” is structured into two major sectors. The first supplies products and equipment to hospital, institutions and outpatient care facilities and the second concentrates on improving the efficiency and accuracy of the medical product though R&D and technological innovations (Hanson et al, 2011, p.448).
Many players are competing in this field, with major US companies such as Bausch & Lomb, Baxter International, Boston Scientific, Guidant, Johnson & Johnson, Medtronic, Stryker and Zimmer Holdings; the British-based Smith & Nephew plc; and German’s Siemens.
The industry is highly affected by the environment’s external factors, such as socio-cultural, economic, technological, legal and demographic (Hanson et al, 2011).
As in 2006, OSA had suffered from the absence of awareness among both the public and health care professionals (Hanson et al, 2011, p.456). It had resulted in more than 90% of the people who suffered from OSA remained undiagnosed and untreated (McClinton as in Hanson et al, 2011, p.456). In attempt to increase the awareness, the two leading companies, Respironics and ResMed, jointly launched a public awareness campaign in 2004, and donated millions for researches, foundations and special interest groups.
R&D and technological innovations were among the strongest competitive advantages of any firm operating in this industry. Innovating new products as well as improvements to existing ones were among the main factors to the growth (Hanson et al, 2011, p.449). Innovation also provided companies with competitive advantages against its rivals. Companies invested, in R& D, around 9 to 11 percent of its annual revenues, compared to a general average of 3 to 4 percent (Hanson et al, 2011, p.449).
Despite its advantages, research and development might also be a burden for small firms as heavy investments are needed to make them rivals and competitors to the existing large manufacturers.
The political aspects have very high impacts on the sector, as the sale, marketing and funding of health and medical products are closely examined and tightly regulated by governments (e.g., FDA and CMS (the Centres for Medicare and Medicaid) in the US). Similarly, Government policies and incentives can also influence company decisions. For example, many companies choose to establish facilities in Ireland due to its favourable tax incentives (IDA, 2012). Regional and trade agreements, such as EU or North American Free Trade Agreement (NAFTA), would also have effects on companies’ strategic decisions.
Governments’ legislative actions as well as third party reimbursements schemes significantly infuence the health care business and the sales of medical products (Hanson et al, 2011, p.449). The ability of patients to obtain sufficient reimbursements was the main factor for the success, for home therapy, of medical devices companies.
Regulatory and Legal aspects
In addition to the approval of the governmental agencies, medical equipment manufacturers needed to convince third-party payers that “their products are safe, efficacious and cost-efficient” (Hanson et al, 2011, p.449). The processes of approval vary significantly between countries. While adequate protocols existed in the US, Japan and European nations, many Latin American had few or no regulatory restrictions (Hanson et al, 2011, p.450). For example, according to the US system, there was no pre-market approval (PMA); the majority of the products were in the pre-market notification category known as 510(k) (Hanson et al, 2011, p.450).
The legal aspects commonly faced medical device companies including product liability and patent litigation. Legal actions, such intellectual rights, can serve to protect businesses. Equally, failure to comply with law and regulations could result in civil and criminal penalties and sanctions. Furthermore, companies could also be subjected to liability from suppliers and customers as well as product recalls.
As the health care industry is mainly based around patients, its business and growth are mostly influenced by the evolution of the demography. The increase in the aging population from one side and the rapid growth of population in developing countries from the other side represented a major opportunity for the health care products. (Appendix 1 presents some more information).
The Industry environment
Bargaining power of suppliers
As The industry was heavily dependent on innovation and clinical research, one of its major suppliers were the community, schools and universities who provided companies with skilled engineers, scientists and physiologists. Rare skilled labour will result in increases in salaries and incentives creating some competitive disadvantages.
Similar to any other industry, companies must deal with a variety of suppliers.
Bargaining power of buyers
The ultimate buyers of The industry’s products are the patients. As, in 2006, home diagnosis was not widely funded, CPAP manufacturers couldn’t enjoy to sell directly to patients. Most companies promoted and marketed their products though hospitals and clinics.
Large hospitals, purchasing a large amount of health care products, constituted a powerful group of buyers who will bargain for higher quality, greater levels of service and lower prices (Hanson et al, 2011, p.54).
Threat of new entrants
The decision to enter a new industry is mainly a function of two factors: barriers to entry and retaliation expected from current industry participants (Hanson et al, 2011, p.51).
Despite the fact that the OSA market was rapidly growing and the industry possessed great potential, there are major barriers for new entrants. New entrants, in order to be competitive, needs amass investment in R&D for innovation and testing of new medical devices. They also needed to establish sales and marketing as well as support and services departments locally and internationally.
Another barrier could be the political, regulatory and legal legislations and frameworks.
Threat of substitute products
OSA was considered one of the most promising markets in the industry. As per 2006, patients didn’t have any other alternative than using health care products. A substitute product, that is a good or service from outside the industry that perform similar or the same functions (Hanson et al, 2011, p.54), may be a new invented drug that treats OSA effectively (Hanson et al, 2011, p.465). However, in 2006, FPH were not aware of any existing or potential new drug. As per Daniell, ‘the good news about the drugs is you get about 10 years warning’ (Hanson et al, 2011, p.465).
Intensity of rivalry among competitors
FPH’s biggest competitors are Respironics and ResMed who were the clear market leaders. With good financial figures – almost twice bigger than FPH (pp. 458-461: Exhibit 4.1), investment in R&D and regular introduction of new products, these two companies represented some real threats to FPH, making The industry intensively competitive.
In a highly competitive industry, FPH was competing in three main areas: respiratory humidification; obstructive sleep apnoea (OSA); and neo-natal. Among many who tried to break into the OSA market, FPH was the only company that achieved some 8% market share. As the market was rapidly growing, the Industry could tolerate other entrants. (Hanson et al, 2011, p.457)
In 2006, Respironics and ResMed were the market leaders, each enjoying a reasonably stable 40% market share. FPH managed to capture an 8% market share, mainly from the other smaller players who shared the remaining 12% (Hanson et al, 2011, p. 457 and Exhibit 6 in p.465).
Strategies, used by these players, were based on technology and pricing (465). However, pricing was similar from one year to the next year, but products were getting better. (Hanson et al, 2011, p.465).
However, in the respiratory humidification business, FPH continued to take share of the installed basic controllers standing at 60% in 2006, with the possibility to be increased to 80% (Hanson et al, 2011, p.453)
Respironics had adopted a strategy focusing on growth through an extensive and refreshing range of products and services (see Appendix 2), while RedMed’s strategies were based on positioning with focuses on innovative products, sales increase, promotional activities and leveraging on the expertise of its Medical Advisory Board (See Appendix 3).
Opportunities and threats
When Daniell surveyed the competitive land scape, in September 2006, he saw a world of opportunity (Hanson et al, 2011, p.446). New applications for humidification were developing all the time and the OSA market had potential to be huge as awareness was growing.
The industry had many and large opportunities as around 29 million had suffered from SDB and OSA, with around 12 million in the US market only. In the longer term, the US market will probably account to only 20% of the potential market with bigger opportunities arising in the rest of the world (Hanson et al, 2011, p.457). Appendix 1 provides some more details regarding economic aspects.
As more than 90% of the people who suffered from OSA were undiagnosed and untreated, the efforts to increase the level of awareness and the increase in number of sleep clinic in the Europe and North America, in the 20 years since 1985 (Hanson et al, 2011, p.454), the business of patient testing had great potential (Hanson et al, 2011, p.456).
The advance in the technology accompanied by abundant investments in R&D would lead to introductions of improved and new higher-margin products. Launching of new products in the areas of (a) non-invasive ventilation; (b) Oxygen therapy; (c) humidity therapy and (d) laparoscopic surgery would give FPH some competitive advantages and real opportunities in consumable as well as new consumers’ segments. “We’ve got opportunity to double the business over whatever time frame it takes, just through those applications (Hanson et al, 2011, p.468)”, Daniell argued.
Changes in the political, legal and regulatory frameworks provided some grounds for opportunities but also for threats. For example, the ability for patient to receive sufficient reimbursements constituted some real opportunities. Change in government policies, incentives as well as new trade agreements could also present some opportunities to some companies and threats to others. Legal aspects also play an important role in creating opportunities through patents’ protections, for example, but could also represent threats in case of civil and criminal penalties and sanctions.
Demographic aspects constituted a major opportunity for the Industry. The ageing population resulted in a yearly growth of 5 to 7 per cent in the respiratory humidification business (Hanson et al, 2011, p.453). The rapid population growth in developing countries and the increase of obesity cases in Western Europe were some reasons behind boosting the market for OSA therapies (Hanson et al, 2011, p.456). Some studies have indicated that Asian populations have a higher rate of OSA than Western populations (Hanson et al, 2011, p.457).
In regards to the respiratory humidification business, FPH had three ways for growth (Hanson et al, 2011, p.453): (1) market was growing between 5 to 7%, due mainly to ageing population; (2) FPH’s share continued to increase and could go from 60 to 80% and (3) increase average per patient from $17 to maybe $30 or $40.
As mentioned earlier, threats could be represented from existing rivals, mainly Respironics and ResMed. However, threats from new entrants or product substitutions are not so high.
The firm’s resources, tangible and intangible
The analysis of internal resources will identify the core competencies of the company leading to its competitive advantages and strategic competitiveness (Hanson et al, 2011, p.73).
Prided itself as a family-style company, FPH always considered that looking after staff was very important. Equally important was the recognition of benefits such as superannuation scheme, the subsidized cafeteria and the onsite medical clinic (Hanson et al, 2011, p.451). With patient or therapy oriented, totally open plan and very informal communication, FPH had created its unique culture constituted the most important internal resource. (See Appendix x for more details about the internal environment of FPH).
Perhaps the most important capabilities that FPH possessed was its unique culture that was oriented around patients and therapy. Other capabilities included its strength in R&D and innovation, placing FPH ahead of its competitors (Hanson et al, 2011, p.452). This had resulted in superior products in (a) respiratory humidification, where FPH enjoyed 60% market share; (b) Obstructive sleep apnoea (OSA); (c) SDB diagnosis and treatment (Hanson et al, 2011, pp.452-454).
In 2006, FPH had also launched a range of new products in the areas of (a) non-invasive ventilation; (b) Oxygen therapy; (c) humidity therapy and (d) laparoscopic surgery. In some products FPH is ahead of its competitors by 3 to 4 years.
FPH is committed to serve its patients though continuous innovations and improvements. In order to achieve these goals, FPH maintained a close contact with the patients and R&D staff spent significant time in hospitals. As product decisions, usually influenced by hospitals, physician, home health care dealers and insurers, these close contacts will definitely create “relationship marketing” (Kotler et al, 2010, p.496) that comfort the customers and give FPH an edge over its rivals.
As manufacturing, assembling and testing were done in the custom-built facilities located in New Zealand, FPH had to comply with strict globally recognized standards making high quality products.
Doubling the facilities, that was accomplished in July 2006, is another capability that FPH acquired to mainly house the growing OSA business.
Core competency analysis
The analysis of core competency helps the firm identify and build its core competencies. Rare, valuable, costly to imitate and non-substitutable capabilities constitute core competencies. These core competencies are considered the sources of the firm’s competitive advantages over its rivals. (Hanson et al, 2011, p.81).
Table 1 indicates that the culture is the most important core competencies of FPH. Though not all innovations are rare, some of them were patented making them rare, non-substitutable and costly or not possibly to imitate. These products provide FPH with sustainable competitive advantages, at least for few years that will help FPH to achieve above-average returns.
Other capabilities yield to temporary competitive advantages or competitive parity. For example, having the manufacturing facilities in New Zealand, away from the main markets (North America and Europe) and with potential problems that may face the supply of skilled labour, might create some competitive disadvantages.
Value chain analysis
The value chain of a firm is divided into primary and support activities. While primary activities are involved in the product’s physical creation, the support activities provide the assistance for the primary activities to take place (Hanson et al, 2011, p.84). Primary activities are composed of service, marketing and sales, outbound logistics, operations and inbound logistics. Support activities include firm infrastructure, human resource management, technological development and procurement. (Hanson et al, 2011, p.84).
Though some information about sales and distribution channels in the US, the facilities, the culture, the products and technological development were provided in the case, detailed information about support and primary activities were not included, making the analysis of value chain very difficult.
In regards to distribution, PFH relied on both direct sales and a network of distributors who were supported by representative offices, to sell its products in more than 90 countries in 2006 (Hanson et al, 2011, p.450). With this internationalization, FPH is not dependent on few markets with a limited number of buyers.
One of the major weaknesses of FPH might be the location of its facilities. Despite its advantages, the location of the manufacturing facilities in New Zealand has many disadvantages. First, as the population in New Zealand was not growing enough, labour might become rare and consequently costly, reducing its competitive advantages. Second, the cost of transport and import tax might become higher than its rivals who have already established manufacturing facilities close to their markets. Third, as FPH’s strategy was to maintain close contact with its customers, it needed to provide qualified resources, increasing its operation costs, especially in large market, such as the US and Europe.
Using the key issues reviewed in the previous sections, a SWOT analysis of FPH was conducted and presented in Table 2.
Table 2. SWOT analysis for FPH
Good financial record
Strong business offering in health care products
Global sales including growth in the US, Europe and some emerging market
Culture positioned around patient and therapy
High quality products
Name equity and good faith of products in its name (Hilzenrath, 2010)
High R&D investment
Excellent innovation history though long-term experience
Maintaining a close contact with their customers
Location of its manufacturing facilities away from the major markets (e.g. the US and Europe)
Additional costs (transport and import taxes)
Maintaining close relationship customers of international markets could be costly
More than 20 million American suffered from SDB problems and 12 million from OSA with more than 90% of SOA group remained undiagnosed and untreated
Increase of awareness
R&D leading to introductions of higher-margin new products
Patented innovative products (ahead of its rivals)
Reform of health care that may result in
Increase in government and third-party reimbursement
Introduction of new products, patents and legislation
Lower prices for consumer
Ageing population & population growth as well some middle-aged men that suffered from OSA
Increase market share in the respiratory humidification business from 60% to 80%
Increase its share in the consumable from 17$ per patient to maybe $30 or $40
Increase average per patient
Move into broader range of respiratory applications.
Both OSA and respiratory business are expected to grow at around 20% yearly in the next 10 years since 2006.
Increase sales in the US market in the short-term
outside the US market (e.g. Europe and emerging markets: China and Japan represented a significant growth opportunities)
From its rivals primarily from Respironics & ResMed
Changes in governments policies
New entrant (low probability)
New drug that treats OSA (low probability with a period of 10 years)
Legal penalties and sanctions
Liability from suppliers and customer and product recalls
OSA market growth rate may decelerate over a 10 year time frame, certainly in North America
Introductions of new products, patents and legislation
Change in government regulation regarding
Introduction of new products and patents
Decrease of government and third-party reimbursement
The main elements of the strategies of 2006 were:
Increase growth and market share in the areas of OSA and respiratory humidification business. In the 10 years after 2006, both will continue to grow at around 20% a year
Increase share in respiratory humidification from 60% to 80%
As the OSA market rate may decelerate in North America, FPH was planning to move into a broader range of respiratory applications (Hanson et al, 2011, p.450)
Continue to increase accessories and consumables sales
Continue to capitalise on its culture that was around the patient and therapy
Continue to capitalise on R&D and close contact with its customers.
At the business level, FPH should continue its current strategy. Relying on its culture and structure, FPH should (a) continue to introduce new innovated low-price products; (b) increase its sales and market share in the OSA and respiratory humidification businesses (c) increase its sales and market shares in the accessories and consumable and (d) explore new markets.
At the corporate level, FPH should consider the option of establishing new facilities in emerging countries, such as (a) China, due to its cheap labor and the growing Chinese market; (b) Ireland, for its incentives corporate taxes, the availability of skills affordable labours and the easy access to Europe; and/or (c) Mexico, due to its cheap labour and its location close to the US market and the benefits of NAFTA (Boyle, 2012, p.256).
Internationally, FPH should increase its sales activities and presences in emerging markets, such as China, Japan and India, which were witnessing considerable growth. As the North American market was expected to decline in the next 10 years after 2006, FPH should also stress on other markets mainly in Europe.
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