Smith & Nephew is a global company that markets, manufactures and develops medical devices within three sectors: These are orthopaedics, endoscopy and advanced wound management.
Smith & Nephew concentrate on the development of products that combine tangible benefits to patients and clinicians with favourable health care economics. This is then underpinned by a unique range of education and training programmes designed specifically for healthcare professionals and a world-class highly skilled sales force delivering service excellence.
3.0 What are the Drivers for Change?
The drivers for change are the issues that Smith & Nephew need to address to deal with their external environment. An analysis must therefore be used to illustrate the varying forces. The first would be the PEST (LE) model adapted from Grant (2002). See Appendices I.
The PEST analysis assesses the future impact of influences, and one can draw the following conclusions: The marketplace is highly dynamic and competitive and there are many forces, which have an impact on Smith & Nephew. By addressing such issues with high levels of investment (5% of their annual turnover), and focusing on product innovation, it will become more viable to overcome difficulties in the marketplace. As this is a research-based marketplace, investment in such areas provides a distinct competitive advantage.
4.0 Critical Success Factors:
The analysis of any industry must obviously stretch beyond the framework of Porter's Five Forces model. The success factors of any industry recognise that competition is a battle for competitive advantage. The purpose therefore is to identify the potential for competitive advantage within this industry in terms of the factors that determine a firm's ability to survive and prosper - these are its critical success factors (Grant, 1998).
For Smith & Nephew, two questions must be asked in order to review its success factors:
1) What do our customers want?
2) What does the firm need to do to survive competition?
To answer the former, one must review the customer base. The customers are not only patients, and hospitals who pay for the products and service, but also employees, stockholders and other stakeholders who have an interest in the company. One must view customers as the basis for the existence of the company and as the underlying source of profit rather than just a source of bargaining power.
Smith and Nephew therefore must identify the needs of their customer, and establish why they choose their product over another, i.e. the basis for their decision.
This leads on to the second question, which requires the firm to examine the basis of competition in the industry. It must be decided how intense the competition is, what the main dimensions of competition are and how can Smith & Nephew obtain a superior competitive position?
Their critical success factors include: their strong and loyal customer base, and the relationship that they maintain with their suppliers. They have massive resources, with high levels of turnover and investment. Substitutes are few as the range of products is new and innovative, and not easily copied.
5.0 Competitive Position and Strategy:
To identify Smith & Nephew's competitive position, one must use various theories and analysis. These are done for several reasons: (Grant, 2002)
- To forecast future strategies and decisions.
- To predict likely reactions to a firms strategic initiatives
- To determine how behaviour can be influenced to make it more favourable.
This needs to be understood in order to aid one's own competitive moves and strategy.
One of the main models used in competitor analysis is the Five Forces Model by Michael Porter of the Harvard Business School. See Appendices I.
There are five major companies that provide competition to Smith & nephew according to www.ibisworld.com. These are:
Agfa-Gevaert Ltd, Becton Deickinson Ltd, Ge Medical System Australia Ltd,
Medical Applications Ltd, and Paris Miki Aus Ltd.
When reviewing the competitive position of Smith & Nephew, they must be positioned against their perceived competitors, and how well they differentiate their offering (Brassington & Pettitt, 2001). For example, a review of their products offered (and how they are differentiated), and their financial performance over the last few years will provide an indication of their current position.
In comparison to Agfa, there is a large amount of differentiation among the products, for example, Agfa work largely on films (camera) & processors, hardcopy systems and computed radiology. The latter links in with their competition to Smith & Nephew: they provide x-ray equipment for endoscopy and for orthopaedics (www.agfa.com). However, Smith & Nephew provide a more detailed website, with information on products - this is due to the more focused product range. (www.smwmd.com)
6.0 Financial Comparison between Smith & Nephew and Agfa:
Diagram 1 (Smith & Nephew)
Above one can see that the company has had a steady few years, maintaining turnover levels of over ï¿½1,000 million. According to their annual report (www.smith-nephew.com), turnover in 2001 was ï¿½1081.7 million, with an operating profit of ï¿½174.6 million. Dividends per share are also at a rate of ï¿½4.65, increasing from ï¿½4.50 the previous year (which was their 5 year low point). These are strong figures indicating a high market share level and strong competitive position. To illustrate their strength further the following figures were published:
- There was an underlying sales growth of 14%
- Acquisition added another 4% to sales growth
- Pre-goodwill amortisation earning per share up 15%
- Orthopaedics underlying growth at market leading 20%
- Outlook remains positive
In comparison, Agfa shows a high Gross Profit level of 1972 Euros, which calculates to ï¿½1,338.90. Agfa though, is not as strong through their stocks, with each dividend per share being at a level of ï¿½. 50 in 2002, which is an increase from ï¿½0.23 the year before (www.agfa.com - consolidated income reports).
As one can see from the analysis, and in accordance with the company website (www.smith-nephew.com), Smith & Nephew operate with the following strategy.
Company strategy is to be first choice for patients, suppliers, customers and employees. Smith & Nephew are looking for sustainable product development, so that they move in a positive direction providing a better quality of life for everyone involved. This is all done through a division of their strategy into several sectors. These are: Environmental management, Performance Measurement, Product Innovation, Social recognition, Economic performance and through Health & Safety. The company is strong in the marketplace and performs well financially. They are a market leader, and with reference to Appendices I, it becomes clear how their current strategy illustrates that.
7.0 Future Strategy and Recommendations:
When deciding on a future strategy, one must identify the resources and capabilities of Smith & Nephew to the opportunities that arise in the external environment (Bonge, 1972). According to Grant (2002), Smith & nephew must invest in what is currently strong, (sales and product portfolio), and then choose another area of investment.
Smith & Nephew has just undergone massive restructuring, with their focus now on advanced medical devices in the higher growth sectors. Their investment has been in two main growth drivers: strong and experienced sales teams, and an expanding portfolio of innovative products.
Smith & Nephew's strategy is for future growth through product development in its existing core business and expansion into the rapidly growing market for less invasive therapies. It is believed that the orthopaedic market will continue to grow according to demographic data: this is largely attributable to the 'over 65' age group - joint replacement, and orthopaedic therapies are more common in this sector. Therefore a higher investment and development of superior quality products shall exploit the growing demand for the orthopaedic sector.
More technology developments, especially in biotechnology would be an excellent way of more effective testing for disease. This seems a logical move for Smith & Nephew, considering the threat of biological and chemical warfare on the horizon.
Over the next 3-5 year period, it is also a recommendation for Smith & Nephew to initiate a strategic alliance. This is briefly mentioned in the annual report from their website, arguing that it may be beneficial to pursue strategic alliances or acquisitions in order to complement its existing business. See Appendices III (Advantages and Disadvantages are listed). These types of transactions involve numerous risks, including successfully integrating acquired businesses - any of which could have a detrimental affect of the Smith & Nephew's results.
Such a move would benefit Smith & Nephew - there would be a pooling and sharing of information allowing innovation and ideas to be spread and developed at a greater speed. Costs decrease too, as resources are united: this can allow for even greater investment into research over this future period. Through the above, Smith & Nephew are giving them a distinct advantage over their competition.
8.0 Justification of Strategy:
The main issue to deal with now is how this will give Smith & Nephew a competitive advantage. Grant (2002, p.227) defines a competitive advantage as 'when two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit'.
8.1 Suitability: Smith & Nephew must decide whether the strategy they implicate is a good idea. By exploiting the demographic status of the growing elderly population, they can build on the strong market share they have and increase their treatment levels and product sales. They avoid the threat of losing any investment, as there will be a guaranteed demand for their services.
Many opportunities arise from the prospect of an acquisition or alliance, namely the sharing of resources, increased power and minimised costs. This will benefit such a large company, as they already possess an experienced sales team and a quality product portfolio. There are risks too, such as a possible lack of control. These are underlined in Appendices III.
8.2 Acceptability: The fore mentioned strategy should provide Smith & Nephew with strong financial returns. It is expected that turnover should grow to above the ï¿½1150m mark - this would be a result of the concentration on the 'over 65' sector. The only worry of any alliance would be the sharing of ideas, should the alliance fail. Years of experience may be lost.
There may be the possibility that economic factors can affect an alliance, for example if the other party were to face legal costs or penalties, then the brand of Smith & Nephew would also be attributed to this. This could affect relationships with customers, suppliers and loyalty to the brand.
8.3 Feasibility: The strategy is viable on several levels. Smith & Nephew have a strong brand that is a market leader in their field. Resources are high, with strong profit levels and a fine dividend per share ratio (as mentioned under financial comparison). According to the annual report, Smith & Nephew's customers reflect the wide range of distribution channels to over 90 countries worldwide - the largest single entity being the National Health Service in the United Kingdom (representing 4% of the Groups worldwide total sales).
Any alliance would add to this strong foundation, and increase resources even further to satisfy customer's needs. Such a strong base indicates that the strategy can be implemented with high performance level results.
One can also look at the role of the corporate parent. This is an aid for Smith & Nephew to help focus on their goals and keep in line with their mission and strategy. This will be useful over the next few years with their new strategy. Through benchmarking, whether it be financially against competitors or themselves, or through the product research and innovation, it becomes feasible to see the success of the strategy.
What are the implications to Smith & Nephew?
The company is working with their resources and by using the future strategy are aiming to work towards a sustainable business. The aim of any company is to move towards sustainable product development (See Diagram below).
By working through product differentiation, Smith & Nephew offer distinct advantages to the healthcare profession in general, not just to those directly involved with them. By continuing their work based on their stronghold of the market and by attributing strategic theory to their product development over the next few years, the future looks bright for Smith & Nephew.