Medical Device Link.

Originally Published MX May/June 2004

MARKET ANALYSIS

Using a carefully defined set of decision-making tools can help companies evaluate complex market-entry problems.

Berry Braster

Most U.S. medical device companies are entrepreneurial organizations that focus on a single product or product family. The vast majority of such companies are flexible to customer demands, responsive to marketplace needs, and resourceful in getting products to market with very few employees. With their detailed understanding of the marketplace and the technological state of the art in their field, many device companies are also quite good at capturing a market niche for their products.

Sometimes the leaders of such companies also attempt to seize opportunities to penetrate foreign markets that look appealing. Whether a company should expand into new international markets and take on a new business culture is a question that both entices and plagues many entrepreneurs. To resolve this question, medtech executives require some orderly process for deciding when and where to expand their growing enterprise into new markets.

Industry statistics indicate that entrepreneurs are higher risk-takers than the general population. However, company executives must be careful not to make hasty decisions. Medical device companies are often challenged with the decision to go into new regions of the world. To determine the time and place of market entry, however, most would rather wait for a prospective client in a new foreign market to call in an order or request distribution rights. Such a reactive means of market entry can be fraught with risk.

One customer or distributor casting the only vote for entering an unknown international market is hardly a valid basis for making a strategic decision. It is unknown if that customer or distributor is an indicator of greater interest in the region or is merely an anomaly. The repercussions of entering a new geographic market based on a single inquiry must be examined. It may result in an opportunity-driven, profit-generating effort that leads the company to new success levels. But it could just as easily become a loss-generating effort stemming from a poor decision-making process.

This article will examine two common decision-support tools—a scorecard tool and a cost-benefit tool—and will also examine the types of input required to achieve a confident result from the decision-making process. Because of the unknown qualities of foreign markets and their regulatory compliance requirements, the two key inputs necessary for medical device companies are market research and regulatory research. When the business executive controls the decision process and the accumulation of knowledge, many erroneous decisions can be avoided.

Decision-Making Techniques

The outcome of any decision is a direct result of the manner in which it is made. In making a business decision, the executive's goal should be to consider as many factors as possible, while ensuring that the conclusion remains clear.

Executives generally understand that sound business decisions must begin with research. Nevertheless, their practical application of this axiom often leaves a great deal to be desired. Very often, the complicating factor is how to identify the factors that require research. Faced with a diversity of issues, all of which seem important to some aspect of a company's planning for growth, company leaders can become perplexed about what kinds of research will help to produce the best basis for decision making.

The resolution of this difficulty usually lies in creating decision criteria and decision support tools as the first order of business—before allowing researchers to spend time and energy chasing shadows. It is the decision criteria and the decision support tools that will direct the research to the target information required.

Figure 1. Flowchart of decision-making process for evaluating new market opportunities. (click to enlarge)

Decision-making criteria should encompass both hard data (i.e., objective, factual information) as well as subjective responses (see Figure 1). Subjective responses are based on opinions or feelings rather than on facts or evidence, and they are vital to bring out hidden strengths and weaknesses. It will be through the subjective investigation that the business executive will be able to discern whether the decision will strengthen or weaken the company.

It is also through this subjective means that the all-important 'people factor' can be considered, enabling key personnel to be included in the decision-making process. For many decisions affecting a company's growth strategy, the buy-in of key personnel is a critical factor. By involving key personnel and getting their honest input, the business executive will be able to determine whether the company will support the proposed new direction.

By combining a subjective scorecard tool and an objective cost-benefit tool, a company can obtain a complete picture of the potential outcomes related to its decision. The following two sections will examine in detail how to prepare and present both the subjective and objective information in a formally organized manner in order to support better decision making.

Capturing Subjective Information

One method of capturing subjective information for the decision-making process is to use a scorecard that incorporates key questions pertinent to the decision (see Table I). Scorecards are valuable because they enable the decision-making group to consider factors that might otherwise be difficult to quantify. Going beyond objectively known data, such as the financial numbers relating to a business proposal, a scorecard can help company leaders examine the alignment of the proposal with the company's vision and mission, cultural mix, selling capabilities, and other factors.

The scorecard method is itself highly subjective. It requires that the decision-making group determine in advance the categories that should be included, the number of factors that will be considered within each category, and how each factor should be weighted. If the scorecard is to have any influence within the organization, it is essential that the decision-making group put as much thought and preparation into its design as it puts into the scored responses.

In creating a scorecard, the decision-making group should start at the highest level possible. The scorecard should encourage the group to examine whether the business proposal matches the stated direction of the company. More-detailed questions can be devised to determine whether the proposed business opportunity is a good fit with the company's documented corporate vision, mission statement, business plan, and annual goals.

If a company's mission is to be the best supplier in its home state, for instance, suddenly branching out to Australia might not make sense—no matter how large the opportunity. In such a case, the current infrastructure of the company would likely have been designed to support selling, delivering, and servicing products close to home—not across great expanses of land, water, and time zones. The resources, time, and energy required to add this new market could have a detrimental effect on the time and effort required to sustain the company's current market—and could result in the loss of both markets.

To complete the scorecard, the decision-making group should add any other categories and line items that it considers important to the final decision. Wherever possible, these should be aligned with the main objectives of the company.

Analysis of Objective Data

Although the collection of reliable objective data can be a difficult task, executives frequently find the analysis of such data much easier than dealing with subjective information. A typical method of evaluating objective data is the cost-benefit analysis, a technique that is widely used by organizations of all kinds for planning, decision support, program evaluation, proposal evaluation, and other purposes. The term itself has no precise definition beyond the implication that both positive and negative effects are going to be summarized and weighed against one another. The following paragraphs describe some key points that company executives should remember when conducting cost-benefit analyses.

A good cost-benefit analysis for a major business proposal should include a time dimension and other characteristics of a good business case. In order to evaluate a cost-benefit analysis properly, it is necessary to see the timing of expected cash inflows and outflows. Executives should also review the cost and benefit models used to determine what is included in the case and what is not.

Cost-benefit analyses usually represent incremental costs and benefits (that is, only the financial changes due specifically to the proposal under consideration). This is because cost-benefit analysis is usually undertaken for decision-support purposes. The objective, after all, is to understand the net effect of a decision. A very easy mistake for cost-benefit analysts to make, however, is to mix incremental cost-benefit data with total cost-benefit data in the same analysis.

The most useful financial results in a cost-benefit analysis appear in a time-based cash-flow summary. This is the basis for calculating standard financial metrics such as net cash flow, discounted cash flow, internal rate of return, and payback period. For this reason, cost-benefit analyses are usually broader in scope than a return-on-investment analysis, which often implies focus on a single return measure. If the cash-flow statement also shows individual cost and benefit line items, it can serve as an effective tool for risk management and for optimizing returns (see Table II).

Market Research

Market research is a standard requirement for any decision, but gathering data in a different country and sometimes on a different continent creates added complexities (see Table III). The prime objective should be to get information from the source location. This may come from potential distributors, a manufacturer selling a complementary product in the same regional market, or from personal visits. Such research can help a company to determine how its business would be best conducted in the new market, whether by creating a direct sales force for the market, selling through distributors, seeking out alliances with manufacturer's representatives, or even making a product line or the entire company available for acquisition (see sidebar 1).

Regulatory Research

With medical devices, regulatory research is also required. A new regulatory framework for a company will have financial and possibly operational consequences. While complying with such a new framework may result in business improvements and more available markets, company leaders must ensure that they understand and evaluate the risks and returns to the existing business structure, including its projected cash flow.

Companies must not overlook the time required to implement a new regulatory system in order to fulfill requirements. While this time can be used to gather more information on the market and its opportunities, prospective customers and distributors need to realize that the product will not be delivered until regulatory requirements have been met.

For example, selling to Switzerland, a small but relatively wealthy country, requires manufacturers to use four languages for the package label, technical manual, and patient manual. The costs associated with meeting this language requirement may outweigh the possible revenue benefits or conversely open up multiple other markets and exponentially increase the market opportunity.

Figure 2. Routes to regulatory compliance under the European Union's medical device directives. Source: Emergo Group Inc. (Clearwater, FL). (click to enlarge)

A similar example is provided by the regulatory requirements for the marketing of medical devices in the European Union (EU). Medical devices marketed in the EU must be CE marked as an indication that they comply with the essential health and safety requirements for the pertinent medical device directive (see Figure 2). Once a product has been CE marked, however, it will have easy access to the market in Australia as well as the markets of other countries that are in the process of adopting similar regulatory compliance routes.

Such harmonized approaches to device regulation exist to a greater or lesser extent in many of the world's markets, and are due in large measure to the work of the Global Harmonization Task Force (GHTF; see sidebar 2). Although FDA regulations do not follow the voluntary-standards path chosen by the GHTF, most FDA requirements—including those contained in the agency's quality systems regulation—can coexist with the GHTF model.

Knowing these issues before entering a new market can increase a company's awareness of opportunities that may now be available. Such advance knowledge can also eliminate the need for firefighting sessions as the company implements its decision to enter a new regulatory arena.

Making the Decision

Once the company has gathered the essential data and has populated its decision support tools, it can review the full picture and make an informed decision. If the results show a bright and promising picture for a new international market, the company can make an investment into the real work that needs to begin. A project plan outlining all activities with deadlines and assigned responsibilities needs to be drawn up in order to maintain momentum. Internal or external resources can be utilized to complete research requirements and fulfill regulatory obligations.

Using the output from the decision support tools as a management tool is a valuable exercise. Not only will key decision makers have a clearly defined target in view, they will also be able to evaluate the input to the tools. Measuring the projected results versus actual results will point out any tendencies to be overly optimistic or pessimistic. This information will be invaluable in the next decision-making process. As the decision-making process is validated and refined, companies will be able to make future decisions with a higher degree of confidence.

Berry Braster is manager of marketing and communications for Emergo Group Inc. (Clearwater, FL), a consulting firm that provides regulatory affairs and quality assurance services to companies in regulated industry sectors.

Illustration by EyeWire Images

Copyright ©2004 MX