Becton to the testing site. These were all

Becton to the testing site. These were all

Becton Dickenson & Company: VACUTAINER® Systems Division (Condensed) Background Company Background Beckton Dickinson is a medical corporation that manufactures medical, diagnostic, and industrial safety products for health care professionals, medical research institutions, industry, and the general public. The corporation was founded in 1897 by Maxwell W. Becton and Fairleigh S. Dickinson.

That year they sold their first product a Lauer-all-glass syringe. In 1904 the company acquired the Philadelphia Surgical Company. It was the first company that specifically built for the production of syringes, thermometers, and hypodermic needles.

In 1947 Joseph Kleiner developed the Evacutainer, a device to draw blood through a needle into a test tube using a vacuum, which evolved to become the Vacutainer Blood Collection System. In the 1950’s BD expanded internationally to Canada, Mexico, France, and Brazil. In 1962 the company went public and in 1970 appeared in the Fortune 500 list. Products Becton Dickinson has 3 business segments: Laboratory, Industrial Safety, and Medical Products.

The Medical Products division was further subdivided into: -needles, syringes, and diabetic products -pharmaceutical systems Vacutainer blood collection systems The blood collection systems division had 3 major product groups. Firstly, venous blood collection systems which consisted of a needle and a vacuum tube for collecting blood from a patient’s veins. These tubes were coated with reagents to preserve integrity of the specimen. Evacuated-tube blood collection was considered superior to the needle-and-syringe method which was outdated. In the U.

S. 1005 of venous blood collection was done with evacuated-tube collection and BD had an 80% market share. BD used the brand name Vacutainer.Secondly, Capillary blood collected systems which consisted of a lancet for pricking the patient’s finger and a tube for collecting blood.

The brand name that BD used was Microtainer. Lastly, Microbiology systems which provide a sterile environment for transferring blood specimens from the collection to the testing site. These were all marketed under the Vacutainer brand name. Facts & Figures In 1984 Becton Dickinson sold $1.

127 billion of goods, with 75% of the sales coming from the U. S. The blood collection division had sales of $90 million in 1984.BD had a market share of 80% in evacuated tubes and 30% in needles.

Industry Background Blood collection products were mostly used in 3 types of institutions: hospitals, commercial laboratories, and nonhospital health care centers. Hospitals were the largest users with 7,000 U. S. hospitals performing 70% of the blood tests. The 1,800 largest hospitals accounted for 50% of the market for medical equipment. Different hospitals had different purchasing processes and these processes determined who BD had to talk to. BD also talked to the bench people, the lab technicians who had to work with their products.

In most hospitals medical supplies accounted for 10% to 15% of the total costs and the logistics of these supplies accounted for an additional 10% to 15%. Blood collection products usually accounted for less than 5% of the total supplies that a hospital purchased. The number of tubes and needles a hospital bought depended on the size of the hospital and could range anywhere from 40 to 1700 cases annually. Another big purchaser of blood collection systems were the commercial lab. In 1985, 700 labs performed 25% of the blood tests in the U. S.

Some larger national labs with 15 to 20 locations purchased their supplies centrally. The purchasing processes in the commercial labs were usually similar to the processes in the hospital. The commercial labs were however more cost conscious as they had to compete with each other on price. The last big purchaser of blood collection systems were nonhospital health care centers. These accounted for 5% of the blood tests that were performed. But market trends indicated that this would increase over the next few years. Market Trends In 1983 the U.

S government changed its method of reimbursing hospitals forMedicare patients. Before 1983 the government reimbursed the hospitals in full but this system did not reward efficiency enough according to some “observers”. Now a new system would be put into place which reimbursed the hospital based on diagnosis-related groups. This system classified the “products” that hospitals provide.

It classified all products into 467 groups and a hospital would be reimbursed a predetermined amount for a patient in that group. This meant that hospitals would not be paid in full but would be paid what the DRG had set as a price.The price was determined by looking at local and regional prices of other hospitals. Legislation forced hospitals to be more efficient and the impact on hospital admissions was dramatic. Admissions fell by 4% and the average length that a patient stayed in the hospital decreased by 5%.

The estimated number of beds in a hospital would fall from 1 million to 650,000 in 5 years. Another result was the cooperation of hospitals into large multihospital buying groups and multihospital chains. These increased the purchasing power of hospitals to reduce the cost of supplies.Multihospital chains consisted mostly of for-profit hospitals that purchased their supplies centrally. Each hospital in a multihospital chain or group submitted their brand preference and in the case of multihospital buying groups was free to reject the centralized purchase if the brand that was bought was not their preferred product.

Hospitals could be in multiple buying groups for different products. Competition There was fierce competition in the blood collection market. The competition revolved around BD, Terumo, and Sherwood Medical Corporation.Terumo is a Japanese company and was a global competitor. In 1984 it achieved a market share of 18% in evacuated tubes and 50% in needles. Sherwood Medical was a U.

S. competitor with a market share of 2% in tubes and 15% in needles. BD increased its price of tubes over the past several years from 6 to 8 cents while maintaining its 80% market share. Terumo increased its share over that period from 10% to 20% while maintaining a price of 6. 5 cents per unit. In needles BD and Terumo both charged 7.

5 cents per unit while Sherwood Medical charged 10 cents per unit.In the past major companies such as Corning Glass, Abbott Labs, and Johnson & Johnson had participated in the market but had then withdrawn. BD believed that these companies might well make a return when new technologies arrived. Marketing & Sales BD’s marketing strategy was focused on maintaining their position as market leader.

They believed they could do this through the strategy of “quality aggression”. This meant that they would combat their competition through development of new products and aggressive pricing by using their position as lowest-cost producer.The blood collection systems were initially sold through the Medical Products sales force but eventually received its own sales force after new innovations widened the product line. In 1985 BD had 55 sales representatives organized into territories ranging from 10,000 to 20,000 hospital beds. Originally the strategy was to focus on the lab technicians whom they called the “bench people”. They focused on them because they had a preference to a brand and would complain to their managers if they did not receive adequate supplies.

Distribution BD sold its products through 474 distributors.These were categorized as either Laboratory products distributors or medical-surgical products distributors. Laboratory products distributors supplied hospitals and commercial labs and were almost forced to supply blood collection systems because these were regularly bought. On the other hand medical-surgical products distributors supplied to physicians and other nonhospital sites. These did not regularly buy blood collections systems so they felt no obligation to supply if the margins weren’t high enough. BD used different distributors for different products.So each division has its own important distributors.

Of the 474 distributors 67 provide 95% of the sales. Their largest distributor is American Scientific Products (ASP) a division of American Hospital Supply Corporation (AHS). ASP has an estimated 40% market share among distributors of products to hospitals and labs. Terumo and Sherwood products were both distributed by ASP. Terumo is very dependent on ASP with 70% of U. S. sales going through ASP.

BD was a very important client of ASP with 10% of sales coming from the blood collection division and 25% coming from all BD products.In total BD has 6 national distributors and the remainder of the distributors are regional. Z-contracts BD instituted Z-contracts. These contracts were negotiated directly with the hospitals in an effort to retain them as clients. Often the prices of the Z-contracts were far below the listed prices if the buying group was large enough. Many hospitals were affiliated with multiple buying groups most of whom had Z-contracts with BD.

This reached the point where Z-contracts encompassed 2. 8 million hospital beds while only 1 million beds were actually in all hospitals combined. Affiliated Purchasing GroupThe Affiliated Purchasing Group (APG) is a group of independent not-for-profit hospitals that decided to centralize their buying of stock so they could exert more power over price and quality. APG was founded in 1975 and had its core the motto: “In unity there is strength”.

However the individual member hospitals were free to purchase supplies outside of the buying group if they did not agree with for example the brand. In 1985 APG grew to 500 hospitals and accounted for more than 10% of all U. S. hospital beds. APG also offered other services to its hospitals especially to administrators.All these services ensured that no talent would be lost from APG hospitals and that hospitals could compare costs between other hospitals so they could see where opportunities were presented. APG also established a private-label program this private-label gave the products that were encompassed the APG logo.

APG also used its own distributors. Some manufacturers that did not agree to these demands were not awarded contracts with APG. On the other hand those who complied with the APG demands could face losing the support of the major distributors.

Problem definitionBecton Dickenson & Company (BD) is a manufacturer of several blood collection products. The APG (Affiliated Purchasing Group) is a large hospital buying group and was interested in purchasing its blood collection products from one company, which was in contrast with the past were it purchased products from several suppliers. APG was interested in BD but also was negotiating with other companies like the Japanese company Terumo. In 1985 APG included more than 500 hospitals and that means more than 10% of all U. S. hospital beds and nearly 2 million annual admissions.

APG has his own distribution system which includes other distributors who have contracts with APG. All the hospitals who were affiliated with APG were utilizing this system to get their products. APG wanted BD to put its private-label on all the products they buy from BD. By not complying with this ‘private label’ wish from APG BD has the risk of losing the contract. The loss would result in BD not being able to supply 500 hospitals and thus losing market share.

To further complicate it for the company APG confirmed that other competitors did agree with this wish. 1982: APG demanded price reductions from BD for needles and tubes.BD opposed the lower prices with the APG headquarters and continued dealing with individual hospitals.

The BD remained to sell its products by visiting individual APG-affiliated hospitals and when necessary lowered the prices. But for that reason the Z-relationships of BD with many accounts in the APG system weakened. 1985: APG comes with the deal that the supplier who signed an agreement with them would receive 90% of the business in these product lines from APG-affiliated hospitals. This time BD management decided to negotiate directly with APG headquarters, otherwise they risked to lose a huge part of their market share.APG demanded very low prices in the new agreement.

They made clear that the other competitors made bids of prices lower than in BDs’ price list, even lower than the prices on other Z-contract accounts. On august 1 of 1985 BD proposed a deal, which was rejected by APG. This was because they had a price which was 20% higher than the competitors’ proposals. The APG gave the BD until 15 august to come with a new proposal. They also added some requirements like that the distribution of all products will be done through distributors affiliated with APG. And also add that all blood collection products must carry the APG logo.When BD will agree with APG about the distribution system, all products will be delivered through APG-affiliated distributors to the member hospitals.

At this time the distributors from the APG system are not favorites of BD. The major part of their products is sold by other distributors like ASP. This can lead to tension in their sensitive relation with other distributors, and maybe they will not be able to continue to work with them. The competitors of BD had already maintained their original prices proposals and had agreed to the APG logo and distribution demands.On the other hand when BD doesn’t accept this agreement with APG it would lead to large losses for BD. BD is therefore forced between a rock and a hard place. SWOT Analysis SWOT Analysis Weaknesses * Dependency on APG * High price * Loss of market share in syringes * Less time efficient sales representatives * Z-contracts – low prices/commissions for distributors Strengths * Market leader * High quality products * Great variety of products * Good network/sales representatives * Great understanding with large distributors * Very efficient at innovating * Z-contracts – large volume Presence at many distributors Threats * Re-entry from large companies in the market * Not being able to get a deal with APG * Shift from cost based reimbursement to DRGs * Formation of ‘multihospitals’ * New products/substitutes * Consolidation of product lines by distributors Opportunities * Share of nonhospital health care centres is rising * New technologies for competitive advantage * Bagging APG-deal large market share * People are getting older-more demand * Expand internationally Internal Strengths:Market leader – BD is the market leader in tubes required for blood collection.

They have 80% market share which is the highest, followed by 18 % of the largest competitor Terumo. High quality products – BD was known to produce high quality products. They also marketed on their high quality, which was successful till the time that the actual lab personnel could significantly influence the purchases of lab equipment. Great variety of products – BD was able to produce and sell a great variety of products. This is a strong point, because it made them able to fulfill more needs of their consumers and give the consumers the possibility to organize their different products (with different colors etc).Good network/sales representatives – BD had around 55 sales representatives which utilized the strategy of influencing ‘bench workers’ to want their high quality products. These bench workers, the people who actually worked with the equipment, would then stimulate the purchase of BD’s products.

Great understanding with large distributors – BD had a good relationship with America’s largest distributor American Scientific Products (ASP) and another major distributor called Curtin-Matheson Scientific (CMS). Especially with ASP BD tried to keep a good relationship by having regular meetings and product training sessions with ASP branches.Very efficient at innovating – BD had great R&D expertise and thus was able to make new technologies and improvements in a relative short amount of time.

This enabled BD to have a competitive advantage regarding the products. They also had the resources to implement other technologies in their products which causes prices to increase. The price of the competitors would increase even more because they did not have the same resources and they had to improve to keep in line with BD. Z-contracts/large volume – Z-contracts ensured the sales of large volumes of products.Presence at many distributors – Many hospitals would prefer products of a brand which was available at different distributors, so that they would not face problems if one distributor would not sell the product any more. BD was sold by many distributors thus reacting on this trend of consumer behavior.

Weaknesses:Dependency on APG – APG was affiliated with a very large amount of hospitals (around 500) which gave them a huge power over Beckton Dickinson. Not being able to deliver products through APG would cause BD to lose a great deal of consumers and thus also market share.High price – BD asked a high price compared to its main competitors and therefore had put itself in a weaker position regarding the fact that many purchases now were done almost solely on the basis of price. Loss of market share in syringes – Due to possible advertising mistakes or a not well focused approach the market share of syringes declined.

This was not because of the price, because the competitors used approximately the same prices. Less time efficient sales representatives – Sales representatives were in the past able to influence bench workers and so stimulate the purchases of BD’s products.In current times they were most of the time engaged with Z-contracts which caused them to have less time for the actual ‘sale talks’. Z-contracts/low prices and commissions for distributors – Due to the use of Z-contracts and the large volumes which accompanied these there were relatively low prices. This caused distributors to get a low commission. External Opportunities:Share of nonhospital health care centers is rising – Due to the shift to DRGs more people started attending nonhospital health care centers.

If BD would try to supply more to segments like this they could make profit.New technologies for competitive advantage – In a market like that of blood collection products there are likely to be innovations. When BD is able to react on such innovations they can make profit out of it. Bagging the APG Deal – If BD is able to make a successful deal with APG they are able to supply to around 500 hospitals. This will bring more market share. People are getting older –While people are getting older there will be an increasing demand for health care. With this increase, the demand for blood collection products will probably also increase.

This is an opportunity for BD to increase the production and marketing. Expand internationally – BD already sold its products to some countries outside of the United States. They could however try to expand this, because there are not many companies which try to do so. By expanding internationally they can increase their profit. Threats:Re-entry from large companies in the industry – Large companies like Johnson & Johnson and Abbott Labs had already participated in the blood collection market, but withdrawn. However due to the eruption of new technologies it is possible that they will re-enter the market.

These companies have got a lot of expertise, resources and personnel to really threaten the position of BD. Not being able to get a deal with APG – When BD is not able to get a deal with APG they will lose a lot of market share. APG is affiliated with around 500 hospitals which then will be supplied by another company than BD. Shift from cost based reimbursement to DRGs – The government decided not to fully reimburse the costs made by hospitals but to use DRGs to determine how much will be reimbursed.

This led to fewer hospital admissions and shorter residence times.This caused hospitals to seriously cut down on medical supplies and be more price conscious. Formation of multihospitals – Another consequence of the usage of DRGs by the government was the formation of multihospitals. These hospitals had a larger buying power but also were more difficult to influence by BD.

New products/substitutes – Like with many other products in a market based on scientific products there is always the threat of new products of substitutes which will render your product as useless of less efficient.Consolidation of product lines by distributors – To cut down on expenses many distributors consolidated their product lines. This meant that they only sold products of one or two suppliers per category. BD now had to make sure to be at least one of those products, or otherwise will not be distributed efficiently. Five-Forces model of the blood collection systems Threat of new Entrants: There is a reasonable threat of new entrants.

The barriers to entry are quite high due to capital requirements.However large corporations like Abbott Labs and Johnson & Johnson have the required capital and only lack the technology to enter which could change in the future. There is hardly any brand loyalty left because of recent changes in the reimbursement system of hospitals which cause a lot of focus on low prices and there are hardly any switching costs which lowers the barriers even further. Threat of substitutes: The threat of substitute products is low because the only substitute product for blood collection is the needle-and-syringe method of extraction.However this is seen as an outdated form of blood collection and is therefore completely absent in the U.

S. market though it still has users in the foreign markets. Bargaining power of suppliers: Virtually non-existent, BD is not dependent on any supplier and manufactures most products itself. Bargaining power of buyers: The bargaining power of buyers has increased drastically with the establishment of multihospital chains and multihospital buying groups. Buyers are hugely price sensitive and buy large volumes of products.

There are hardly any switching costs involved for the buyer to switch to another brand of products. Intensity of Competitive Rivalry: The rivalry in this industry is high with price wars between the different companies. The overall profitability of the blood collection systems is rather low.

The margins have gone down in recent years due to increased bargaining power of the buyers and the increased rivalry in the industry. Analyzing Possible Solutions BD is currently in a difficult position where they have to decide whether they should lower their prices to comply with the APG or continue as they are doing now.BD is standing to lose a lot of business because APG wants to set an example of the blood collection systems. The managers seem to have no particular interest in the quality of the blood system collections but only in the price.

Terumo proposed prices that were 20% lower than BD’s and also agreed with APG’s other demands which included that products would become private label and use only certain distributors. The demand that only certain distributors would be authorized to supply APG could be disastrous for the relationship of BD with the rest of its distribution network.In the past manufacturers that agreed with this demand had been dropped by the large distributors which hurt their business immensely. This leaves BD in between a rock and a hard place. Either they comply and may lose major distributors like ASP or they lose business with APG.

However the risk of ASP severing ties with BD is substantial but not necessarily imminent. ASP wants to do business with BD because they are market leader in the blood collection systems industry and they may also stand to lose business with hospitals who demand the BD brand.Another consideration which BD must take into account is the private label demand. This demand may pose a problem for the marketing department as it might decrease demand from other companies. All these demands make the eventual decision problematic. Either they disappoint their distributors, or they hurt themselves by losing 10% of the total market.

However when APG decides to accept Terumo’s bid Terumo might lose ASP as their distributor and since Terumo sells 70% of its goods through ASP this could also be an opportunity for BD to invade Terumo’s market share by trying to get ASP to drop Terumo as a client.Terumo is than stuck with a contract that has a very low margin but approximately 10% of the market. However they may stand to lose the 20% market share that they currently have if they are dropped by their distributors. Possible Solutions -Don’t pursue the contract and aggressively try to maintain the contracts with current APG-hospitals. The contract will go to Terumo and Terumo may stand to lose the backing of their major distributors. If this happens Terumo’s current market share is vulnerable and BD can aggressively pursue these contracts by outbidding Terumo.BD is able to do this because it has the largest market share and the lowest cost price per unit.

If this solution is successful BD could end up with a 90% market share while Terumo would end up with a 10% market share with a very low profit margin. This however requires an excellent relationship with the distributors that are currently backing Terumo and may involve increasing the gross margin for the distributors to entice them to drop Terumo as a client.Other ways to improve the relationship between BD and the distributor is by promising to increase the gross margins on BD products of other BD divisions.

-Pursue the contract, agree to all demands, and drop the price to the same level as Terumo. This will ensure that BD will get the contract because they have higher quality products. In conjunction with the contract BD should try to remain on the lists of all the distributors that were not included in the contract. This may be possible by increasing the gross margins on BD products or by threatening to withdraw all BD products from the distributor.If all distributors can be convinced to keep BD as a client this may be the best solution however the possibility remains that distributors will drop BD as a client.

If this happens the customers should be enticed to change distributors through lower prices and the promise of higher quality than competitor products. This can be achieved because BD has the lowest cost price per unit and the highest quality. If this solution is accepted the APG contract is secured and at least 10% market share now belongs to BD for the foreseeable future.This solution also has the highest risk attached to it if distributors like ASP decide to drop BD as a client.

-Pursue the contract, drop the price to the competitor’s level, accept the private label demand, and try to convince APG to utilize BD’s distributors. This solution provides the best option for the distributors. In this case the distributors are happy because they are not slighted by BD, BD has a large contract with 500 of the most influential hospitals, and APG has the best quality products for the same price as the competitor’s products.However APG might reject this proposal as they stated they wanted to be supplied through APG affiliated distributors. If this solution is pursued the contract may or may not happen. If the contract is accepted BD has increased its market share and secured the relationship with the distributors. However if the contract is rejected BD has retained the relationship with the distributors and can aggressively pursue to maintain the contracts with hospitals that are currently under the APG-umbrella.

Recommended Problem SolutionWe recommend that BD does not pursue the APG-contract. By not pursuing the contract they keep in good terms with their distributors and can open up an offensive on Terumo who will receive the contract. Terumo’s acceptance of the APG contract sidelines ASP, a distributor that provides 70% of Temuro’s current sales.

If BD is able to convince ASP to drop Temuro as a client or if ASP decides to do this on its own to send a message the market share of Temuro is vulnerable. This gives BD a chance to aggressively pursue Temuro’s customer contracts outside of APG.By lowering its prices to Temuro’s level and promising a quality that is higher which BD is able to do by using its market share to decrease the cost per unit. This strategy of aggressively pursuing every contract outside of APG and trying to maintain the contracts with individual APG hospitals could ensure the growth of market share despite the possible loss of the contract. If this strategy is successful BD’s market share would increase while Terumo would be stuck with a contract with a very low margin. This strategy has the largest pay-off if major distributors like ASP could be convinced to drop Temuro as a client.Achieving this may require some incentives like increasing the gross margin on BD products.

However this may not be necessary because the major distributors will feel slighted by Temuro’s decision to sideline them and this alone could be a powerful incentive for them to show to other manufacturers that they will not tolerate being sidelined. If BD achieves to improve relations with the distributors they may even influence them to act in their favor by convincing them to make an example of Temuro or by promising higher gross margins and lower prices than Temuro.The combination of the superior quality of BD products, higher margins, lower prices, and the feeling of being sidelined by Temuro could be enough to entice the major distributors to solely distribute BD products. Further we believe that BD should try to compete with the other competitors on the needle market as they have been losing market share for the past few years. Our recommended solution can be summarized as follows: Focus on relationship with major distributors, open offensive on Terumo contracts, and increase competition in the needle market. ConclusionThe central problem the management of Beckton & Dickinson was facing was to be able to supply to APG member hospitals. APG was pressuring the company to lower their prices, use APG’s distribution network and sell the products under an APG private label.

Which further complicated the case for BD was that APG confined that BD’s largest competitor Terumo already was prepared to comply with all their wishes. The best way to react on this problem would be according to us; not pursue the APG deal, but to aggressively try to influence the largest distributor ASP to drop Terumo.Terumo now has to use the distribution network of APG which probably will not be well received by the management of ASP.

By exploiting this opportunity, aggressively trying to obtain every contract outside APG and lowering the prices of the higher quality products to the level of Terumo BD will be able to obtain a large market share. Furthermore BD also should try to compete more thoroughly on the needle market to make even more profit. By doing these things BD will be able to be market leader on both the needles and tubes and thus fulfilling its mission statement.