Title : General Electric Medical Systems Members: Almitra Karnik, Giuseppina Muzzi Kyle McLean Nicholas Jensen Vivek Durairaj Date : 20 July, 2010Executive Summary ‘This report focuses on the issues faced by GEMS in 2002 in light of new acquisitions, future trends in medicine and technology and a surge in the economy of China. These key issues highlight the need to modify the current GPC model in order to enable geographic specialization ‘to meet the needs of the Chinese market. The key issues also address the need to split the current GEMS-IT modality into a service sector and a healthcare-IT sector to create a management structure that allows healthcare-IT to outpace current competitors and new entrepreneurial entrants. In order to maximize profits in the wake of increased differentiation in national markets, we recommend GEMS pursue a GEMS-China entity, separate from the GPC structure, restructure GEMS-IT into a healthcare-IT and a services sector, and finally to pursue a partnership opportunity with a pharmaceutical company in the field of genomics. Implementation will involve cross-functional knowledge transfer between GEMS-China ‘managers and current COE managers to harness and develop local applications that are consistent with GEMS core values of excellence. Also joint venture opportunities with pharmaceutical companies must be explore to help leverage GEMS opportunities in new imaging applications and gain a customer base in this market.Problems Statement / Key Issues Before Jeff Immelt left his position as CEO of General Electric Medical Systems (GEMS) in November 2000 to replace Jack Welch as CEO of the corporate parent General Electric (GE), GEMS had ended 1999 on a positive note with substantial revenue and earings growth. During Immelt’s tenure, GEMS had built a formidable worldwide presence using the Global Product Company (GPC) model which stressed cost cutting by placing specialized ‘manufacturing facilities in the most cost effective regions. Immelt’s replacement, Joe Hogan, had been left with the responsibility of keeping GEMS at the top of its market. Now, in 2002, Hogan was faced with multiple key challenges to achieve the goals which GE had set for GEMS; annual growth at arate of 20% and an increase in return on capital to 35%. Hogan must decide how to advance the GPC model to be more responsive to increased differentiation in national markets, such as China, or alter the GPC model by instituting the Lf) 4 proposed “In China for China’ strategy. With this issue at the forefront Hogan is left with the responsibility of how to adapt GEMS management structure to capitalize on this opportunity. GEMS core competencies stem from a strong knowledge base in engineering and physics, but to (2~* keep up with today's advances in medicine, a shift to biochemistry and IT knowledge base would be necessary. Hogan must decide how to structure these new businesses to grow into the next market leaders. Supporting Argument. pet ed 7 wy , 4 During Immelt’s tenure, GEMS acquired nearly 100 businesses, most of them outside of the US and by 2002; more than 50% of revenues came from outside the US, GEMS was Ip eyorganized in a multi dimensional structure with three groups: poles, functions and geography, with globally coordinated businesses segments and nationally differentiated functionalities, such as local sales and marketing (Exhibit 1A). Immelt had created the GPC concept to cut costs by moving first manufacturing, then design and engineering activities to low-cost countries. Each product was to be built in one or two Centers of Excellence (COE) and 60-70% of the products ‘made in COEs were exported. While organizational symmetry has worked well in developed countries, GEMS may need to establish an asymmetrical organizational structure in developing countric s to advance in these marketplaces By 2002 China had become the third largest market for medical diagnostics and had the largest demand for low-end medical diagnostic produets. With the US, Japan and Europe in recession and China’s economy growing rapidly, focus on China would be important in reaching GEMS’ financial goals. If domestic production could increase demand for low-end products in China, Hogan has to decide whether to move away from the GPC concept and adopt a separate policy for China which would include moving manufacturing activities from low-cost countries to China. The new policy would increase national differentiation and put an emphasis on geographic management of China. With product development, manufacturing, sales, and marketing functions emphasized specifically for China, the “In China for China” policy would be entirely unique from the GPC concept currently in place. Genomics is widely considered the future of the healthcare industry. All of the major trends in healtheare are moving toward the use of personalized treatments, much of which includes developing drugs and treatments for specific individuals. These types of innovations must be supported by significant advancements in diagnostic imaging equipment. Specifically. GEMS must make significant investments into new imaging technology such as NuclearMedicine (NM) Imaging in order to stay on the cutting edge of these technological innovations. Developing these equipments would require expertise in biomedical sciences and require collaboration with pharmaceutical companies. In order to advance in this business, GEMS must attain new expertise in bio sciences and expand upon its engineering knowledge base. Healthcare-IT is a fast growing market, achieving 20% annual growth in the US. Since IT began booming in the 1990s the industry has maintained an entrepreneurial atmosphere, even following the dotcom bust. Despite 80% of the healthcare-IT market being controlled by the three major players; GEMS, Siemens and Philips, the barriers to entry are low. GEMS-IT was formed in 2000 and its main focus was in healthcare-IT. ‘The current organization structure might be good for established businesses but in order to compete with new entrepreneurial companies in healthcare-IT GEMS must alter its business model. Potential Strategies We present the following list of potential strategies for GEMS to consider (a complete list with analysis can be found in Exbibit 2): 1) Implement “In China for China” policy for low-end products: GEMS would have to move some manufacturing infrastructure from other low-cost countries to China and tailor a business model, unique from GPC concept, to address the specific needs of the developing Chinese market. 2) Expand refurbishment business into ChitGEMS already has a “Gold Seal” program and can implement a similar program in China for refurbished equipment. Strategic marketing and cooperation with local government officials can be employed to negate the old notion of “dumping” and create new opportunities for GEMS in China. 3) Separate GEMS-IT into two distinct business entities, IT Services sector and Healthcare- IT sector, and aggressively pursue Healtheare-IT growth opportunities: Healthcare-IT can operate as separate business entity, allowing GEMS to focus aggressively on healthcare IT and gain a competitive advantage in this high growth market. As healtheare-IT depends on infrastructure, common standards and a healthy healthcare system GEMS would focus its efforts mainly on developed countries which have the infrastructure in place to support growth in this field. 4) Joint venture with a pharmaceutical company to pursue advanced diagnostic imaging applications in Genomics: GEMS will partner with a pharmaceutical company in order to aid in the development of ‘treatments that can be offered to patients that will be diagnosed using newly developed imaging ‘equipment, Recommendation ‘The strategies listed above represent the opportunities GEMS has to achieve the growth figures GE has set for the division. Our recommendation does not come without risks but if implemented properly it would put GEMS in a position to grow for years to come. Werecommend Hogan implement the following three strategies to take advantage of the growth opportunities in developing markets and new technologies to achieve the financial goals set for GEMS by GE and keep GEMS at the forefront of the worldwide healthcare industry. We recommend a break from the GPC model in favor of the “In China for China” strategy by making GEMS-China as separate corporate entity. GEMS-China would differ greatly from the COE network in management and function. ‘These changes would increase the autonomy and authority of the geographic management in China to develop and manufacture innovative low-end products that would meet the needs of this developing nation GEM! ina would be managed by a local manager who is in tune with the needs of the Chinese market and with decentralized authority for this branch, To facilitate leaning between COES and the new branch, cross teams would be developed to assist GEMS-China in applying GEMS core competencies in this new market. With support from the GEMS division and the flexibility to adapt to the needs of the local market GEMS-China will be in a position to facilitate relationships with local suppliers, hospitals, universities and government agencies to ensure appropriately developed products that will be accepted in the market. The vision of GEMS- China would be no different than that of the COEs, in that creating the best medical device products at the lowest cost, and thus most efficient manner, will be at the forefront, however, the methods of achieving this will be differentiated from the COEs. In the current strategy, even though GEMS-IT is focused towards healthcare-IT, it is broadly based incorporating a services sector and healthcare-IT. As the barrier of entry is low in healtheare-IT, GEMS might have to compete with the new entrepreneurial companies that are very flexible. We suggest healthcare-IT to be structured as a separate business entity, allowingGEMS to focus aggressively on healthcare-IT and gain a competitive advantage. As healthcare- IT depends on infrastructure, common standards and the healtheare system present in the individual countries, we also recommend GEMS to focus mainly towards the developed countries that have the needed infrastructure in place. In Genomies, we suggest GEMS-IT to set up joint ventures with pharmaceutical companies to create new technologies in diagnostic imaging. GEMS have the manufacturers? expertise of engineering and physics while the pharmaceutical companies have the expertise in the biomedical sciences. If GEMS were to develop their own expertise in biomedical s ences, it would not only take a lot of capital but also take a lot of time, which might result in GEMS losing a competitive edge. It would also put a lot of strain on their current human resources and would require them to acquire new employees with the needed skills in biomedical sciences. Until the regulatory environment is more conducive in China, we do not recommend GEMS to pursue the refurbishment business aggressively, rather we suggest GEMS 10 work with the authorities towards making the laws more favorable for GEMS to pursue this opportunity in the future. We also recommend GEMS to keep the “Gold seal” program and maintain the current strategy for the refurbishment business in the countries other than China. Implementation As shown in Exhibit 1B, GEMS-China would be organized separate from the current GPC approach. GEMS-China would structure as a separate business segment with a geographic manager who reports directly to Hogan. In contrast to GPC, this strategy would focus on customization and national differentiation with respect to China. The geographic manager forGEMS-China would have the authority to male decisions regardi all the functional elements of the businesses. GEMS-China would be structured to around two groups ~ businesses and functions (See Exhibit 4); Fach business within GEMS-China would have a business manager ‘who would report to the geographic manager and the functional managers would report to the business manager (See Exhibit 5), Cross-teams would be created to facilitate the exchange of tacit knowledge between the COEs and GEMS-China. The cross teams would consist of the funetional managers of GEMS-China and the existing functional managers in GEMS under the GPC approach. A new business called GEMS-healthcare IT would be created to focus solely on healthcare IT. GEMS-healthcare IT would have a business head who reports directly to Hogan, ‘The GPC strategy would be followed for GEMS-healthcare IT by creating subsidiaries in the low cost countries to utilize the specific countries’ comparative advantages. GEMS strategy for growth in the genomics sector will depend on the potential acquisition targets. The present value of the cost to develop this technology internally is $310 million. Therefore, if GEMS cannot find a suitable strategic acquisition target for less than $310 million it should chose an organic development strategy based on investment in R&D (see Exhibit C). GEMS must also be careful to structure its arrangements with pharmaceutical companies in such way that will facilitate collaboration but limits the exposure of imaging equipment to a long regulatory approval process.Exhibit-1A. Differentiated Organization showing the dimensions of Function and Geography Function Geography _| Export High | Research /'| Sales Product Development / US, Europe Japan, India Global Manufacturing Coordination a Marketing x aa China i High National Differentiation pp Low High Exhibit-1B Proposed organization structure for “In China For China Policy” GEMS-China Businesses Functions High Research Global CT.Xray, MR,NM,PET |/ Ultra Sound Product Coordination N Development | Manufacturing \ Marketing Low \ Sales Low High low National Differentiation 10Exhibit 2 - Pro and Con for Each Potential Action Plan 1, Break GPC program and adopt “In China for China” strategy for low-end products Pro > China is a highly nationalistic country and GE managers believe domestically produced products will have greater demand - China is already the third-largest market for medical diagnostics worldwide and there is enormous growth potential here now and in the near future - GEMS can design and customize products according to the local needs in China through the gained knowledge brought on by talented Chinese locals and strong geographic management and be better positioned to capture more of the market = Incremental fixed costs for moving facil space was already available sto China would be low because physical ~ Local production would avoid duties and tariffs and utilizing cheaper local labor could prove to be a substantial cost savings in the long run ~ Decreased transportation costs - To pursue the “In China for China” strategy GEMS would have to break from the GPC. concept. This might result in decreased quality due to lack of readily available skilled labor and reduced cost cutting efficiency = Development of suppliers is a challenge, resulting in more inefficiencies and increased stress on GEMS management to assist in the development of capable suppliers >)” GEMS has experienced the highest profits from developed nations where reimbursement rates are higher and China does not fit into this category ~ Inthe past GEMS had experienced problems with joint venture partners acting unethically causing GE to acquire 100% ownership of these partners + To continue growth into the Chinese market GEMS would have to commit a lot of resources into working with the Chinese government regulators to facilitate better business practices uu2. Expand into personalized medicine and personalized diagnostics Pro e g This is widely regarded as the future of medicine and developing these methods of medicine would keep GEMS on the cutting edge of medical developments Imaging equipment had traditionally been a very profitable segment of G development could lead to greater profitability S, so further GEMS has been an innovator in medical imaging since the 1940s Estimates within GEMS envisioned potential revenues in the order of $100 million per year only 5 to 10 years out GEMS is currently strong in engineering and physics but biomedical sciences expertise is needed to develop new technology, such as PET scanning Currently there are high failure rates at each step of the development of diagnostic imaging and genetic therapies have not kept pace with the advancement in genetic diagnosing, leaving application problems Partnership with pharmaceutical companies would be necessary but joint technological development could complicate and delay the regulatory approval process Achieving succes in these fields would be categorized as a “significant breakthrough and these types of developments, through R&D projects, might take 10 years or more 3. Further Develop Healthcare IT Division Pro Current IT market is approximately $3 billion in size in the US and growing at 20% per year, with worldwide growth being even bigger Healthcare IT systems could play an influential role in disease management programs for patients in the near future Development of electronic patient records could greatly enhance hospital IT systems 2re} 3 High costs associated with converting GEMS-IT people from newly acquired companies into doing business the “GE Way” and into GE “leaders” Siemens and Philips have been developing IT platforms and competi be strong ion in this field will 4. Grow Refurbishment Business Pro - ASI billion global market and growing at a rate of 15% per year = Currently more demand than GEMS can satisfy with its current capa ~ GEMS is on the verge of acquiring a large refurbisher of non-GEMS products potentially expanding GEMS opportunities immensely ~ Competition consists typically of broker / dealer types who do not possess the brand name GEMS carries or the operational excellence standards Con = Competition consists typically of broker / dealers who tend to have very low overhead expenses and can offer cheaper price Exhibit C (In millions) 2002 2003 200420052006 200720082009 2010012 100 100 100100 100 100 = 100-100-0000 130 1.69 2m tas an 433 627, ats 1060 13.79 76923077 Sum of cash flows = 59171598 45516614 5.01278 26932907 20.7176211 1593663 1225895 9.42996 7.253815 309,15 ‘+The model assumes that the cost of R&D willbe $100 milion year for 10 years ‘The model also assumes thatthe cst of capital wllbe 30%, This isan average of GEMS curent tun on capital and its target return on capital BExhibit D ~ Cross Teams GPC cross team GEMS-China team Functional Functional managers Mestings | Managers from the Functional fq >| from functional group of Workshops | group of GEMS- GPC strategy GEMS-China Exhibit E Hierarchical Structure - GEMS China 14