Operations strategy and a customer approval process

Operations strategy

and

a customer approval process

for Company X

E.C. Jansen

August 2009

Faculty of Economics and Business Msc. Technology Management

Management Summary

This report is the result of a research into the operations strategy and the assessment of potential customers performed at Company. Company X has the ambition to increase its revenue with 50% in 2009, gain 20% market share in the next 5-10 years, and become self-sufficient in the near future. In order to reach these goals Company X had as its strategy to attain as many customers as possible. Unfortunately this strategy also led to a number of unprofitable customers.

The aim of this report has been twofold: to develop an operations strategy to determine which customers are appropriate for Company X and how they should be approached, and to design a customer approval process within this strategy. Therefore the following two research questions have been answered:

1. What should the operations strategy that reconciles Company X’s operations

resources with the market requirements look like?

2. What should the customer approval process look like in order to attain only profitable

customers that comply with Company X’s operations strategy?

Both the operations strategy and the approval process are designed as means to reach Company X’s goals. Hereby the customer approval process more specifically addresses the issue of unprofitable customers by assessing the expected profitability of a distributor before accepting him as customer.

To answer research question 1 the market perspective has been analyzed first to determine which customers are of interest to Company X and what their needs are. Next, Company X operations resources perspective was analyzed. Finally both perspectives were reconciled to come to an operations strategy. Hereby the market perspective was dominant which means that the operations resources should be adapted to the market requirements as much as possible.

Company X is recommended to follow an operations strategy whereby the focus is on hospitals with a cat lab and distributors that specialize in Company X products, or also sell complementary products and that expect to gain 20% market share in their region within 5 years. These customers are preferably located in Europe (West and East) followed by the Middle East and then Latin America. North America is less interesting due to regulatory requirements and in Africa there is a very small market for PCI products which is not expected to grow1_.

To compete, Company X should focus on delivering the performance objectives the market requires. The most important ones are: quality of products, quality of service, and

flexibility. In regard to quality of products especially clinical based evidence and opinion

leader support are important, for flexibility especially the rate of new product introductions and providing a range of different products are important. To meet these requirements Company X’s core capabilities of innovativeness and pro-active approach

towards customers should be maintained and enhanced. Hereby a differentiation strategy 1 _{Asia-Pacific is left out of this report because it falls under the responsibility of Company X BBB and not}

is appropriate to emphasize the importance of competing on high quality, innovative products and high quality services. As a smaller firm with limited resources, Company X can especially gain market competitiveness by building relations with customers and offering high services.

Within the differentiation strategy the implementation of agility from the customer decoupling point is recommended in order to meet idiosyncratic customer needs. By doing so, differentiation can take place in both products and services, and the process up till the decoupling point can stay lean.

To answer research question 2 a new customer approval process has been designed. Hereby distributors that fit within the operations strategy can be assessed to determine their expected profitability before they are approved. To assess a distributor a distributor dossier has to be made to calculate all costs-to-serve, expected returns, and incorporate risk. The distributor dossier should contain: a sales plan from the potential distributor, a

support plan to maximize the distributor’s sales, credit terms based on creditworthiness

and expected returns, regulatory affairs requirements to serve the distributor, and

operations requirements to serve the distributor. Based on this dossier a review board

consisting of the vice president of sales, the sales director, the finance director, the supply chain director and the operations director should make a decision to approve or deny the distributor.

Table of contents

Part 1: Operations Strategy__________________________________________19 Chapter 3: Market Perspective________________________________________20

3.1 Customer needs analysis__________________________________________________20 3.2 Competitor analysis _____________________________________________________34 3.3 Market position__________________________________________________________40 3.4 Performance objectives___________________________________________________40

Chapter 4: Operations Resources Perspective___________________________44

4.1 Resources analysis_______________________________________________________44 4.2 Processes analysis________________________________________________________48 4.3 Capabilities ____________________________________________________________50 4.4 Operations strategy decisions ______________________________________________51

Chapter 5: Operations Strategy_______________________________________54

5.1 Approach towards Company X’s operations strategy __________________________54 5.2 Operations strategy for Company X ________________________________________54 5.3 Conclusion______________________________________________________________58

Part 2: Customer Approval Process____________________________________59 Chapter 6: Customer Approval Process________________________________59

6.1 Requirements for the distributor approval process____________________________60 6.2 Distributor approval process_______________________________________________60 6.3 Evaluation data__________________________________________________________65 6.4 Conclusion______________________________________________________________66

Chapter 7: Conclusion and Discussion_________________________________68

7.1 Conclusion______________________________________________________________68 7.2 Discussion______________________________________________________________69

Chapter 1:

Introduction

This chapter provides a short introduction to Company X. For a better understanding of Company X’s products, section 1.2 discusses the product portfolio.

1.1 Company X

Company X is a worldwide company that designs, develops, manufactures and markets innovative medical devices for the treatment of cardiovascular diseases. Business at Company X is conducted under the corporate mission statement which is formulated as:

The urgent delivery of medical technology to patients of the world.

In addition to this mission statement a quality policy is present which is very important since the medical devices market requires high quality standards. For Company X this means that activities at all facilities are governed by their rigorous, global quality manual. Herein the corporate and quality management system concentrates on:

 Understanding, meeting and exceeding customer’s requirements.  Incorporating advanced technology into products and services.

 Developing, manufacturing and distributing products in compliance with the

prevailing regulatory requirements.

The current form of Company X is the result of the acquisition of Z by its long standing partner. Due to this combination Company X is represented throughout the world with corporate head quarters in BBB. Company X also has a research and development facility in DDD and manufacturing facilities in CCC, and AAA. In table 1-1 the different sites and their functions are listed.

Table 1-1: Locations of Company X (Van Banning, 2009)

Figure 1-1: Map of Asia-Pacific (www.ecdl.org)

In the market for cardiovascular products Company X is a small player with great ambitions. The four large players – Cordis, Boston Scientific, Abbot and Medtronics - currently have 95% market share, however, Company X is aiming to gain 20% market share within the next 5-10 years (Ten Have, 2008). Company X also aims to attain a revenue growth of 15% in 2009 and become self-sufficient as soon as possible. Based on these goals this thesis focuses on how growth can be attained while Company X becomes self-sufficient and profitable. Since the research is conducted at AAA, also known as ‘´X ´, the focus of the research is on the X area. In the rest of the thesis the facility in AAA will be indicated by the term Company X, the other facilities will be indicated by the name of their location.

1.2 Product portfolio

The products of Company X are designed to cure coronary artery diseases (CAD)2_{; they}

help to open clogged arteries. The products can be divided into four product groups: Bio-engineered stents, bare metal stents, balloons and guiding catheters. Stents are permanent implants that stay in the body after surgery. Balloons and guiding catheters are removed after the procedure and often support the placement of a stent. Each product group is subdivided into product families, which are standard products that on their turn are subdivided in various versions that differ in size (length and diameter). Table 1-2 shows which products and product families there are and their percentages of sales. To get an understanding of Company X’s products the rest of this section is devoted to short product descriptions.

Table 1-2: Product portfolio and sales percentages of Company X (AAA) in 2008 (excl. December) (Van Banning, 2009)

The Bio-engineered stent is the most innovative product of Company X. It is designed to accelerate the natural healing process after the stent has been placed by capturing a patient’s endothelial cells using an antibody coating. The Bio-engineered stent is the first of its kind; earlier stents are bare metal stents or drug eluting stents (DES) that elute a drug to block cell proliferation. Following Garcia and Calantone (2002) the Bio-engineered stent can be defined as a really new innovation on macro level because the product is new to the industry and it causes technological discontinuities, but no marketing discontinuities (no new market place has to evolve).

The Bare metal stents are represented by the Blazer and the R stent. The Blazer is a cobalt chromium stent that minimizes the development of restenosis as a result of nickel and molybdenum allergy. It has a dual helix design to provide conformability and radial strength without comprising on its flexibility. The R stent was the first stent to use the unique patented dual helix design. This design provides it with omni-directional flexibility and high radial strength. Both the Blazer and the R stent are designed so that side branch access for bifurcation stenting is possible.

The Bio-engineered stent, Blazer and R stent are the core products of Company X and are responsible for most of the revenue. The DES that other medical companies sell is the largest competitor for the stents of Company X. This stent decreases the chance that restenosis occurs, however, at the moment the DES has had some bad publicity since it appears that the healing process is obstructed by the drug and there seems to be an increased chance that stent thrombosis occurs. The DES has been seen as the solution to CAD, but due to the disappointing results the market has become more careful in accepting a new solution such as the Bio-engineered stent. The fact that Bio-engineered stent has not had a (very expensive) clinical trial in the USA yet to get it approved by the Food and drug administration (FDA) can make customers reluctant to buy it. Next to this, physicians often have a strong focus on preventing stent thrombosis and restenosis whereas the Bio-engineered stent only prevents stent thrombosis and focuses on the healing process.

Company X also produces high quality balloons from which the Stent x is the most popular as it is responsible for x% of the total number of sales. Currently the number of balloons Company X sells is increasing. For the treatment of CAD a balloon is inserted into a vessel and inflated at the clogged location in order to unblock the vessel. Hereafter the balloon is deflated and removed. If a stent is placed, balloons around which the stent is assembled are used to place the stent. Compared to the stents balloons are generally seen as more commodity type products.

The final products Company X sells are two different guiding catheters which only account for a small part of the total sales. Guiding catheters are used to provide a pathway through which other medical devices, such as balloons and stents, can be inserted into the body. In Appendix 2 the procedure for the treatment of CAD with the use of guiding catheters, balloons and sometimes a stent is described in more detail.

Chapter 2:

Methodology

This chapter will first discuss the objective of this research in section 2.1. From the research objective the research structure and research questions will be derived. In section 2.3 the conceptual model for research question one is presented and sub questions are discussed. Research question two is dealt with in section 2.4. Section 2.5 will describe the sources and techniques used during the research.

2.1 Research objective

As discussed earlier, Company X is a young company with the ambition to increase its revenues with 15% in 2009 and to gain 20% of market share within the next 5-10 years. Despite these ambitions, Company X has not been profitable yet. Its aim has been to break-even3 _{by the end of 2009, but due to the financial crisis and the resulting difficulty}

to acquire credit, Company X now aims to become self-sufficient as soon as possible. In order to reach the growth goal Company X has had as its strategy to attain as many customers as possible. Within this strategy the sales people were free to decide which hospitals and distributors they would contact in order to gain more market share. This strategy has lead to growth for the company, but also to a number of customers that are unprofitable. At times, for example, distributors were contracted which required high investments from Company X but whom had to be laid off due to unsatisfactory results. With the current financial situation the pressure to solve this problem has risen. It is no longer possible to obtain credit for sales that do not generate profits.

As a result of this Company X wants to develop a new customer approval process. The aim of this process is to only approve those customers that will be profitable. Profitability here means that the costs made for a customer are more than covered by the revenues the customer generates. Consequently all possible costs and revenues should be taken into account, including such costs as the registration of products in a new country.

Designing a customer approval process that only focuses on calculating the profitability of the customer after he has been approached is quite limited. For Company X it would be interesting to broaden the focus and to incorporate the strategic choices made to determine which customers should be approached. By using this method most of the customers that are not appropriate for Company X can be filtered out beforehand which saves time and effort.

Formulating a strategy as a basis for the choice of customers is important since it provides a charter for the customer approval process. Next to this is the formulation of a strategy essential for any organization (Porter, 1980, 1996). As Collis and Rukstad (2008) state, those companies with a clear strategy are often the most successful ones in their industry. By defining the appropriate strategy, efforts can be focused on following this strategy in order to reach the set objectives and achieve sustainable competitive advantage (Porter, 1996; Collis and Rukstad, 2008). Hereby well based choices and trade-offs are essential (Collis and Rukstad, 2008). For example; if Company X wants to

3 _{Company X considers the break-even point the moment when the company can pay its own daily costs (is}

compete by offering low prices the production process (including services) should have a focus on efficiency, streamlined operations and standardization (Traecy and Wiersma, 1994), this means, however, that the organization will not be able to accommodate idiosyncratic customer needs. For the customer approval process this means that there may be profitable customers that value low prices and profitable customers that value high services to fulfill their specific needs. However, for Company X to pursue both types of customers would mean that two different operations models are necessary. Both from an efficiency and a profitability point of view this is not desirable; it would divide the company in two and requires a lot of additional resources. In order to achieve Company X’s goals these kinds of decisions have to be incorporated into the formulation of the strategy.

Following De Leeuw (2002), strategy can be formulated by using two approaches; the outside in approach and the inside out approach. The first approach starts with a focus on the market; stakeholders (among which customers and competitors) and their requirements are analyzed. Based on the analysis a decision is made about the market position the company would like to have. Then the organization itself is analyzed and decisions are made about the steps to be taken in order to reach the desired position. The inside out approach works, as the name indicates, in the other direction. Here the resources of the company are first determined and based on this the main strengths are stipulated. These strengths or core competencies form the basis for a future vision and the strategy the company wants to pursue.

The request from Company X to design a customer approval process that helps to determine which customers should be accepted indicates that Company X wants their customers to be compatible with their organization without having to change too much themselves. This indicates an inside out approach. Nevertheless, for Company X to attain growth and profitable customers it is necessary to know what the market requirements are. Based on these it might be necessary to make adjustments in order to meet the requirements. This indicates an outside in approach. Since both approaches appear to be important for Company X a combination of them is appropriate for this research. This is in agreement with Slack and Lewis (2002) who state that using both the inside out and the outside in approach is the correct way to define strategy.

As Slack and Lewis (2002) indicate, operations is the part of the organization where the both approaches, or perspectives, come together. Therefore they use the term operations strategy for the reconciliation of the requirements of the market and the company’s resource based competencies. This definition will also be used in the rest of this thesis. From the above the following research objective can be derived:

To develop an operations strategy that reconciles Company X’s operations resources with the requirements of the market and to design a customer approval process based on this strategy that only approves profitable customers.

and a customer approval process that contribute to Company X’s goals of growth and being self-sufficient.

In the following sections the research structure and questions that need to be answered in order to reach the research objective will be discussed.

2.2 Research structure and Research questions

As De Leeuw (2002) states, a model can illustrate the method used to reach the research objective. This model (figure 2-1) shows the research structure for this thesis. Based on the combination of the firm’s operations resources and the market requirements the operations strategy can be defined. After the definition of the strategy the customer approval process will be developed in the second part of this thesis. The approval process is developed independently but should be in line with the operations strategy.

Market requirements Operations resources Operations strategy Customer approval process

Research Part One Research Part Two

Figure 2-1: Research structure

Based on the research structure it is seen that this research contains two parts. For each of these parts a research question can be stated. The first research question is:

1. What should the operations strategy that reconciles Company X’s operations resources with the market requirements look like?

This first research question will lead to an operations strategy that indicates how Company X can attain growth. It aims to find a match between Company X’s operations resources and the requirements of the market. The strategy will provide insight into attractive customer segments and into how Company X can use its resources to attract these customers. As previously seen in section 2.1, focused efforts based on an appropriate strategy are necessary to reach set goals and achieve sustainable competitive advantage (Porter, 1996; Collis and Rukstad, 2008). With the operations strategy determined the next step is to develop a customer approval process that indicates which steps are necessary to approve a customer.

2. What should the customer approval process look like in order to attain only profitable customers that comply with Company X’s operations strategy?

Here the process to decide whether a new customer is approved will be designed. The steps to be taken before a customer can be approved are based on the operations strategy and on the information Company X requires for an approval.

In the following section the sub questions used to answer research question one will be discussed. This is done by formulating a conceptual model from which sub questions are derived. Then research question two is discussed and related sub questions are stated. The sub questions show the steps that need to be taken in order to answer the research questions. The sources and techniques used to answer each sub question will be discussed in section 2.5.

2.3 Conceptual model and Research question one

1. What should the operations strategy that reconciles Company X’s operations resources with the market requirements look like?

In order to answer research question one the elements that are part of an operations strategy have to be analyzed. For this reason a conceptual model is used that shows the relevant elements and their relation. The choice for the conceptual model will be discussed in sub section 2.3.1. Based on the conceptual model the sub questions that need to be answered to develop an operations strategy will be defined.

2.3.1 Conceptual model

Several models can be used to come to a strategy. Many of those only analyze one of the two perspectives (market or operations resources) to come to a strategy. For the analysis of the market perspective, for example, two well known models are Porter’s five forces model (Porter, 1980) and the PEST model (McGee, Thomas and Wilson, 2005). For the analysis of the resource perspective the Resource-based view (RBV) from Hamel and Pralahad (1994) is often used. However, as seen earlier, for Company X it is important to analyze both the resources perspective and the market perspective to come to a strategy. Therefore a model that incorporates both approaches (perspectives) is appropriate.

As described by De Leeuw (2002), a model frequently used for this goal is the SWOT-model. For the inside out analysis, which is based on the company’s resources, the company’s Strengths and Weaknesses are determined. The outside in approach towards strategy is done by analyzing the Opportunities and the Threats from the market. The two perspectives are brought together by exploiting the opportunities by using the firm’s strengths while neutralizing external threads and eliminating weaknesses.

describes in more detail the elements that need to be analyzed to come to an operations strategy. Slack and Lewis’ (2002) model also bases its approach to the resource perspective on the Resource-based view. This approach is strongly focused on the strengths or competencies of the company and by doing so it underlines that competitive advantages should come from the resources of the organization. By building difficult-to-imitate resources a company puts a focus on being innovative and moving forward as opposed to protecting their competitive advantage by trying to control the market (Slack and Lewis, 2002). Not only is this approach currently seen as the dominant view (Slack and Lewis, 2002), it is also more appropriate for Company X since it is an innovative and small company with, due to its size, few possibilities to control the cardiovascular market.

Figure 2-2 shows the model of Slack and Lewis (2002) that will be used as a conceptual model in this thesis. The model will be explained in the subsequent paragraphs where the sub questions are stated.

Figure 2-2: Conceptual model - Operations strategy (Slack and Lewis, 2002)

2.3.2 Sub questions

Based on the conceptual model sub questions to answer research question one can be stated. The model shows the market perspective on the right and the operations resources perspective on the left side. Since traditionally the starting point for strategy analysis has been the market perspective, this part will first be dealt with.

Market perspective

From the model it can be seen that the market position of the firm is influenced by two elements. The first of these two is customer needs. In order to analyze the customer needs it is necessary to decide who Company X’s customers are. This is done by using market segmentation and deciding which segment to target based on the attractiveness of the

Market Positioning Competitors’ Actions Performance Objectives Customer Needs Required

performance Understandingmarkets

Decision Areas Tangible and Intangible Resources Operations Processes Strategic decisions Operations Capabilities Understanding resources and processes Operations resources

segments (Slack and Lewis, 2002; Anderson and Narus, 2004). Based on this the first sub question can be stated:

1.1 Which market segment should Company X target and what are the needs of the

customers in this segment?

The second element influencing the market position is competitors’ actions. A company will also decide on its market position based on how it believes advantage can be achieved over its competitors. Therefore information on who Company X’s competitors are and what they are doing is necessary. The competitors that should be monitored are those delivering a product that customers consider an alternative (Anderson and Narus, 2004). From this the following sub question can be derived:

1.2 Who are the competitors of Company X and how do they conduct business in the

marketplace?

The firm’s preferred market position can be determined based on the first two sub questions. It is important to use both elements to decide on a market position. If for example a market segment seems to be very attractive, it could be that many competitors are also operating in the same segment which makes it less attractive. From this the third sub question is derived:

1.3 What should be Company X’s market position?

As figure 2-2 shows the performance objectives need to be determined. Performance objectives are the aspects of operations performance that satisfy the market requirements; they indicate how the organization should compete. For the definition of the performance objectives Slack and Lewis (2002) define five main performance objectives: Quality,

speed, dependability, flexibility and costs. Within these main objectives several

competitive factors can be defined which should lead to market competitiveness when they are combined. However, before combining them their relative importance should be defined. For the determination of relative importance of the competitive factors it is useful to divide them between what Slack and Lewis (2002) call ‘order-winners’, ‘qualifiers’ and ‘less important factors’. Order-winners are those factors that customers regard as key reasons to purchase a product. Qualifiers are those factors that should at least be present in order for a customer to consider purchasing a product. Less important

factors are less important to customers, but can be very important to the firm. During the

determination of the relative importance of the performance objectives two aspects of influence, namely ‘importance to customers’ and ‘performance against competitors’, should be regarded (Slack and Lewis, 2002). If, for example, a firm performs very good on competitive factors that are important to customers, but a competitor performs better the customer will select the competitor’s product.

The fourth sub question is:

1.4 Based on the market analysis, what are Company X’s performance objectives and

It is important to realize that if a firm has different customer groups different priorities for the performance objectives can be required.

Operations resources perspective

The right side of the conceptual model has been dealt with so attention will now be on the left side of the model: The resource perspective. Here the resources of the company are analyzed and used to come to operations strategy decisions. From the Resource-based view it can be seen that for analyzing resources also the intangible resources and both the formal and informal processes of the company have to be taken into account. This is therefore reflected in the sub questions.

The first sub question for the left side of the conceptual model looks into the company’s tangible or intangible resources. The value of intangible resources is often difficult to assess, nevertheless, it is important to state the intangible resources since they can have significant influence on a firm’s success (Slack and Lewis, 2002). Examples of intangible resources are brand names or knowledge and skills regarding production processes.

The analysis of resources can incorporate all resources of the firm, however, it is more interesting to look at the resources that are relevant for the operations strategy. For Company X this means that resources that are somehow relevant for its growth and becoming self-sufficient should be analyzed. The fifth sub question is stated as follows: 1.5 What are Company X’s tangible and intangible operations resources?

Next to resources, operations processes should also be analyzed using the inside out approach. As seen from the Resource-based view, processes include both the formal and the informal processes. By mapping the processes of Company X it becomes clear how resources are used and how they influence the effectiveness of the firm. This is relevant since two companies that have the same tangible resources can have different levels of success due to different processes and intangible resources.

1.6 How do Company X’s formal and informal operations processes look like?

When the resources and processes are known, the next step is to analyze the distinctive operations capabilities of Company X. Distinctive capacities or competencies are two terms that according to some authors are useful complements (Anderson and Narus, 2004), but often these terms are used interchangeably. For the purpose of this research one definition will be used for both terms. Distinctive capabilities are the unique aspects through which the firm competes (Slack and Lewis, 2002), they deliver a sustainable competitive advantage because the underlying strategic resource are scarce, difficult to imitate or substitute, or cannot be moved out of the company. As indicated in the conceptual model, capabilities are formed by combinations of resources and processes. In this research only the distinctive capabilities will be dealt with and therefore they will be indicated by the term capabilities. Based on this the sub question can be stated as follows:

1.7 Based on Company X’s operations resources and processes, what are the operations

The final step for the left side of the conceptual model is to come to operations strategy

decisions grouped into decision areas. The decision areas Slack and Lewis (2002) use are

those relating to: Capacity, supply networks (including purchasing and logistics), process

technology (for the production of products and services), and development and organization. These groups will be used to answer the following sub question:

1.8 Based on the internal analysis, which operations strategy decisions should Company

X make?

When both sides are analyzed, the final step is to bring the two perspectives together and answer the first research question. From what has been described in the sub questions, it becomes clear that it is possible that the two perspectives do not fit together. If this is the case the two perspectives have to be reconciled and choices should be made to come to an operations strategy. Therefore an operations strategy matrix will be used. This matrix illustrates the importance of the decision areas and the performance objectives, and the relations between.

Hereby it is often seen that one of the two perspectives is dominant and the other perspective has to be adapted to fit with the dominant perspective. This means that either the performance objectives have to be changed to fit the strategy decisions, or the strategy decisions have to be changed to fit the performance objectives.

Both perspectives can also put constraints on the strategy. For example, the market may require something which the firm can not deliver with its current resources. Therefore trade-offs are likely to be necessary within designing the strategy. For example, if the firm invests more in designing new products, fewer resources are left to optimize the current manufacturing process to lower costs. The trade-offs are made based on the importance of either option for the success of the company and the risk involved. Further discussion on how the perspectives are reconciled for Company X can be found in chapter 5 once both perspectives have been analyzed.

2.4 Research question two

As stated above research question two is:

2. What should the customer approval process look like in order to attain only profitable customers that comply with Company X’s operations strategy?

If the customer approval process is considered as a black box (De Leeuw, 2002) the input would consist of potential customers and the output would consist of approved and denied customers. Figure 2-3 illustrates this.

Customer approval process Potential customers Approved customers Denied customers

Figure 2-3: Customer approval process as a black box

In order to design a customer approval process the black box has to be opened and the steps to transform the input into the output have to be defined. Hereby it should first be indicated whether the customer fits within the operations strategy, then all relevant information to measure the potential customer’s expected profitability has to be collected and evaluated. Based on this information, a final decision could be made.

2.4.1 Sub questions

In the past Company X has always relied on the expertise of their sales force to determine whether a customer could be approved. However, it appeared that even the experienced sales force made mistakes and that some customers did not live up to the expectations. Therefore it is important for this thesis to design a more structured and reliable approval process that delivers a complete picture of the consequences and expected profitability of a customer.

The first sub question for research question two is focused on the phase before the design of the customer approval process. It is meant to determine the requirements for a customer approval process. Therefore the first sub question is:

2.1 What are the requirements for the customer approval process?

Once the requirements to the customer approval process are known, the design process can begin. Each process step should be discussed and it needs to be determined who should be involved to fulfill the step.

2.2 Which steps have to be taken in order to decide whether a customer will be a

profitable customer that fits within Company X’s strategy?

2.3 Who should be involved in order to fulfill each step?

customers. The results from the future evaluations can also be used to improve the customer approval process so that profitability can be predicted even better. The last sub question therefore is:

2.4 Which data are necessary to evaluate approved customers later on?

When this final sub question is answered the customer approval process has been designed.

It should be noted that both the operations strategy and the customer approval process are designed as a means to improve Company X’s performance. Further research will be necessary to measure whether performance has indeed improved due to the operations strategy and the customer approval process as designed in this report.

The research and the sub questions have now been discussed. The method to reach the research objective has been made clear. However, for each sub question or step towards the final result specific sources and research techniques will be necessary. In the next section the sources and research techniques used to answer the questions will be determined.

2.5 Sources and research techniques

In order to determine the sources and research techniques that should be used to answer the sub questions, it is useful to determine what kind of research this is. First of all, from the research objective it can be derived that this research is a design focused business

problem-solving (BPS) research (Van Aken, Berends and Van der Bij, 2007). Typically

for such a research is its aim to improve the performance of a business system, department or company on one or more criteria, by the design of a specific solution. Company X wants to improve its performance by designing an operations strategy and a customer approval process. Hereby the solution is not an end in itself, but a means expected to improve performance. An important element of a design focused BPS research is that it is theory based (Van Aken et al., 2007). Therefore, literature search will frequently be used as a research technique for this thesis.

Since this research is performed at a single company, it can also be defined as a singular case study. Typical for a singular case study is that the results have a low external validity since the results of a single case study are difficult to generalise (Verschuren and Doorewaard, 2007). Fortunately, the low external validity is not a large drawback for this research because it aims to provide Company X with advice. An advantage of performing a singular case study is that, when the goal is to change an existing situation, it provides the opportunity to obtain an integral view of the research objective (Verschuren and Doorewaard, 2007).

 Literature: The conceptual model (figure 2-2) that is used to structure the analyses for Company X’s operations strategy is derived from scientific literature. Throughout the research both scientific and professional literature are used to further structure the analyses. Professional literature on interventional cardiology is also used to provide (partial) answers to sub questions, especially to those regarding the market (sub questions 1.1 and 1.2).

 Persons: For all sub questions qualitative interviews were conducted with experts within Company X. The interviews provided answers to research questions, and also clarification of information found in literature and other documents. Next to interviews, observations of persons and the processes they perform were made. Through observations a deeper understanding of the operations resources perspective of Company X could be gained (sub questions 1.5-1.8). Observations combined with interviews and literature search were also used to design a customer approval process (research question 2).

 Documents: Company X has documents that describe almost all procedures. Content analysis of these documents provided support for the analysis of the resource perspective and the development of a customer approval process (sub questions 1.5-2.4). Documents regarding products, Company X’s market, and competitors were used for the analyses of the market perspective (sub questions 1.1-1.4).

One research technique has been used throughout research for all sources: The snowball principle. This technique uses new findings as a basis to continue the research (Verschuren and Doorewaard, 2007). By doing so it is possible to include important elements that were not known at the beginning of the research. For example, references from useful literature can be traced back and comments made during interviews can provide new insights that influence the next step of the research.

With the research objective, research questions, and sources and research techniques stated, the research design has been provided. The rest of this thesis will comprise analyses which ultimately lead to the answers of research questions one and two. The theory used for this research will be presented in chapters 3, 4, 5, and 6 where it is directly applied to provide the analyses.

Part 1: Operations Strategy

In this part of the thesis the operations strategy for Company X is designed. Here fore Slack and Lewis’ (2002) model (figure 2-2) is used. Chapter 3 will elaborate on the market perspective, chapter 4 on the operations resources perspective and in chapter 5 the two perspectives will be reconciled to come to an operations strategy.

Chapter 3:

Market Perspective

Being market oriented forms the basis for creating superior value for your customers and thus for gaining a competitive advantage (Slater and Narver 1994). In this chapter the market perspective is analyzed for Company X to determine how they should orientate on their market. First the customers are discussed in section 3.1 and then the competitors in section 3.2. Based on this, the intended market position for Company X is determined in section 3.3. Section 3.4 elaborates on the performance objectives that are necessary for Company X to compete.

During the market analysis a conclusion of Slater and Narver (1994) has been kept in mind; market conditions can change. Staying sufficiently flexible and perceptive of changes in the market is important for a company’s success. For the analysis of the market perspective this means that potential customers and competitors need to be taken into account (Anderson and Narus, 2004; Channon, 2005). Also, determining one’s market position and analyzing the market is an ongoing process that does not stop with this research.

3.1 Customer needs analysis

To be successful in the market a company should have a clear sense of what the customer wants (Schilling, 2008). In this section the customer needs are analyzed and since there are different segments that have different needs, market segmentation will be performed. From the segmentation the interesting market segments for Company X can be identified. Interesting segments are those where Company X can gain value and where value is experienced by the customers (McGee, Thomas and Wilson, 2005). How is determined which segments are valuable will be discussed in more detail in sections 3.1.1 and 3.1.2. Since Company X is an international company the countries within the X region also need to be segmented. For this research it means that customer needs will be aggregated up to the country level first (Steenkamp and Ter Hofstede, 2002). When the countries are divided into segments the individual-specific disaggregated information of customers will be used for further segmentation on customer level (Steenkamp and Ter Hofstede, 2002). This two-stage segmentation makes it possible to select interesting geographic segments first and then identify cross-national segments based on the different needs of customers within these geographic segments (Steenkamp and Ter Hofstede, 2002).

have to be chosen so that judgments about the attractiveness of the segments can be made (McGee et al., 2005; Anderson and Narus, 2004). This research uses bases such as legal requirements, market size and expertise in the field of PCIs.

In the next section segmentation will first be performed on country level. Segmentation on customer level will be performed in section 3.1.2.

3.1.1 Country level segmentation

As indicated in the previous section the countries in the X area will first be segmented. The bases on which this will be done are:

1. Size and potential of the PCI market4

2. Regulatory affairs 3. Geographic location

The bases are listed in order of importance and for each of the bases this section will explain why it has been chosen. In the following sections countries are segmented with the use of these bases. Here will also be explained how the bases are measured and operationalized (i.e. PCI market size).

The first base indicates how large the current PCI market is and in which regions there is

potential for a large PCI market. This gives an indication of the amount of products that could be sold. Also, countries with high market potential can be very interesting for Company X. By entering the market early brand preferences can be developed from the physicians’ training experiences, product familiarity, establishment of routines, and product satisfaction (Burns et al., 2002). When the market grows, these preferences will lead to increased sales since physicians are often reluctant to change supplier. Countries that have a small PCI market and low potential are likely to have a population where few people have CAD or where people can not pay for such expensive procedures.

The second base is regulatory affairs. For each country different legal requirements are

important in order to sell medical devices. Registration of products can be a lengthy and costly process, but without the registration no products can be sold. Also, when the registration is finished, this has to be done again for each new product and in most countries the registrations have to be renewed every couple of years. Once the products have been registered compliance to legal requirements, such as country specific labeling, can increase the product costs.

The third base is geographic location. This base is added since, as Steenkamp and Ter

Hofstede (2002) say, targeting geographically dispersed customer segments is not always cost efficient from a logistics perspective. Also, as Company X has discovered in the past, it is complicated to start in a new country and provide (sales) support if the country is far away and therefore difficult to reach.

Many other factors, such as average hospital size, number of interventional cardiologists, profit margins etc., could also be integrated in order to perform market segmentation on country level. However, this research is limited in time and resources, which makes it

4

Percutaneous coronary intervention (PCI) market: Refers to the market for procedures to widen narrowed

difficult to gather all this information. The segmentation bases used provide a good insight on which factors are interesting for Company X and the results can be used for managerial decision making. For future research it could be interesting to further investigate the market and use more segmentation bases.

After the segmentation on all three bases the segments will be combined in section 3.2.4. They will be listed from most to least interesting to Company X whereby the segmentation based on size and potential of the PCI market is assigned the highest weight followed by regulatory affairs and then geographic location. It should be noted that the latter two bases can put a significant constraint on the attractiveness of a segment.

Size and potential of the PCI market

The first basis on which countries in the X area will be segmented is composed of two parts. First the size of the PCI market will be discussed and then the potential of the PCI market.

Worldwide the PCI market is approximately a $6.5 billion market (MDISCC survey, 2008). Following the 2008 MDISCC survey5_{, complemented with market information}

from Company X’s President of Sales, a reliable indication of the current division of the PCI market can be shown in figure 3-1. Hereby the relative sizes of the different markets are illustrated.

Figure 3-1: Division of the PCI market

From this chart it is clear that North America (especially the USA) currently forms the largest market for PCIs. Asia-Pacific (especially Japan) forms the second largest market, but this region will not be regarded in this research since it is not part of the X area. Europe is the third largest market with a market size of approximately 20%. The other geographic regions come far behind with around 1-5% market size.

5 _{The MDISCC survey (2008) is a market research in which most companies of the PCI market participate.}

By solely looking at market size both Europe and North America can be indicated as the most interesting markets. However, the potential of a market can also indicate how interesting a segment is for Company X. As indicated in the introduction of this chapter; markets can change and it is important to not only focus on current market conditions (Slater and Narver, 1994).

The determination of the market potential of different countries is based on country income level. The number of PCIs required in the world is expected to grow and as Rankin (2004) states, CAD is estimated to be the single leading public health problem for the world by 2020. However, this growth will mainly be seen in developed countries where CAD is, and will be, a large issue (Rankin, 2004). In developing countries less CAD will occur and expensive PCI procedures will not be performed often. For this reason country income level can indicate growth of the PCI market and thereby the market potential of the local PCI market.

In general countries can be divided into developed and developing countries based on their income. The World Bank (web.worldbank.org) has listed all country income levels and has indicated that the low and middle income countries can be referred to as developing countries. On the map below (figure 3-2) the countries from which the World Bank has data are represented by a color according to their income level.

Figure 3-2: Countries divided according to income levels

2.8% and 3%. According to the MDCISC report (2008) most companies expect higher growth rates in other regions of the world.

Both Latin America (including the Caribbean) and East Europe (with Russia) form potentially interesting segments for Company X. Here most countries have an upper middle income and the regions are recommended as growth markets. Russia and Brazil are part of the BRIC countries which, following Goldman Sachs’ theory, will be the countries that by 2050 will move past the current economic powers (www.goldmansachs.com). Currently Company X is active in most East European countries and positive results are already seen. Especially Russia shows promising results for the future. The fact that Latin America and East Europe currently have a small PCI market also indicates that there is a large growth potential for the future (following that CAD is or will be a large public health issue in these countries since they are developed countries).

In the Middle-East all different income levels are present. Hereby it is indicated that some nations in this region, such as Saudi Arabia, are interesting for Company X while others, such as Yemen, are not.

Africa, where most countries have a lower middle or low income, is the least interesting segment for Company X.

In conclusion it is possible to state which regions form interesting segments for Company X. Hereby market size is weighted heavier than market potential since it is not certain that a market will live up to its potential. If the segments are ordered from most to least interesting for Company X, North America comes first followed by Europe (West and East), Latin America comes next since it has a lot of potential followed by the Middle-East which has some interesting countries based on market potential (figure 3-2). Africa is the least interesting segment for Company X since there is hardly any market for PCIs and the market potential is low.

Regulatory affairs

Legislation with regard to medical devices differs per country. Appendix 3 gives two examples of the documents the ministry of health of a country can require for the registration of products.

In order to segment countries based on their legal requirements, this research makes use of a division also used at Company X. In this division certain documents or procedures that contribute to the difficulty of compliance with legal requirements are used as bases. The difficulty to comply is measured by the amount of time and money needed.

The countries have been segmented based on information from Company X’s regulatory affairs department and several articles and websites indicating the necessary documents and procedures for registering medical devices.

CE Mark Notarization Apostil Legalization &

FSC

Translation FDA approval

Easy to comply with legal requirements (in time and money )

DIfficult to comply with legal requirements (in time and money )

Austria Bahrain Belguim Bulgaria Chile Croatia Cyprus Czech Denmark Finland France Germany Greece Hungary Iceland Iraq Ireland Israel Italy Latvia Lebanon Portugal Poland Russia

• Belarus Turkey• Norway

Argentina Brazil Costa Rica Colombia Egypt Iran Jordan Kuwait Romania Syria Ukraine Venezuela Serbia • Mexico • Suriname • Cuba • Belize • Uruguay • Panama • United States • Canada • Greenland Libya Lithuania Malta Netherlands Palestine Saudi Arabia Slovakia Slovenia South Africa Spain Sweden Switzerland Tunisia UK Yemen • United Arab Emirates • Qatar • Oman • Mauritius • Gabon • Botswana

CE mark Getting a CE mark is part of the product development process, without it no medical device product can be sold (in the EU). The CE mark is based on the rules of different EU countries.

Notarization A notarization is requested for documents when the country where the product is being registered demands it.

Apostil An apostil is the same as a notarization , except that next to the notaris the courthouse has to legalize the documents too.

Translation Some countries want some documents (i.e. the labels or information for use) to be translated into their language.

FSC Free Sales Certificate; this document proves that the products can also sold legally in the country where they are produced. The FSC has to be signed by several institutes among which the Ministry of Health , Ministry of Foreign affairs and Embassy Services.

Legalization Documents that need to be legalized first need to be approved by the chamber of commerce and then by the Embassy services and then by either the Ministry of Health or the Embassy of the country in question.

FDA Food and Drug Administration; this is the legal entity that states to which terms a products has to comply in order to be sold in the United States. Some other countries require a FDA approval too. Countries that specifically require FDA approval do not require a CE mark as well.

Clarification of terms

Figure 3-3: Segmentation based on legal requirements

From figure 3-3 can be derived that all European countries require a CE mark. In West Europe only Portugal and Norway have additional demands. In East Europe Poland, Russia, Belarus, Romania, Ukraine and Serbia require extra documents and procedures. In the Middle-East all countries require the CE mark and the countries that have more legal requirements almost all fall in the category of difficult to register since they require a FSC and legalized documents.

As discussed earlier; Africa as a whole is not an interesting continent for Company X. However there are some countries with upper middle income. From these countries Company X has not registered products in Mauritius, Gabon and Botswana. Information about the level of difficulty to register in these countries is hard to locate, but experience learns that countries in the same area usually have similar legal requirements. This would mean that, since most of the currently registered African countries only required a CE mark, registering in Mauritius, Gabon and Botswana is easy.

usually required (Flood, 2000). Chile forms an exception since it only requires CE approval. It has to be noted that in Latin America Brazil, Argentina and Mexico are very strict which makes complying with legal requirements more difficult than in the other Latin American countries (Flood, 2000, Brolin, 2008 and www.ita.doc.gov).

The most interesting segment for Company X according to section 3.2.1 is North America. However, based on regulatory requirements North America can be defined as very difficult because FDA approval is required. The FDA approval is not based on the CE mark and to get it many requirements have to be fulfilled among which (very expensive and lengthy) clinical studies proving the effectiveness of the product (www.fda.gov). The USA has the most stringent requirements followed by Canada and Greenland. The difficulty to comply with legal requirements forms a large entry barrier for Company X to register in North America.

To this segmentation one addition has to be made. The registration in a country has to be renewed every couple of years and Company X has to go through the registration process each time a new product has to be registered or if they start to do business with another distributor or via a direct sales force. This means that registering stays a timely and costly process even after it has been done once, however there are learning effects. Company X has indicated that already registered countries are easier than new countries since is it clear how the process works and which documents and procedures are necessary. Figure 3-4 illustrates in which countries Company X has already registered products.

Figure 3-4: Countries in which Company X has registered products

Based on the previous analysis on the difficulty to comply with legal requirements from countries, West Europe forms the most interesting segment for Company X followed by Africa, the Middle East and East Europe. It is difficult to register products in Latin America, but not as difficult as in North America which is the least interesting segment for Company X based on their legal requirements.

Geographic location

As stated in section 3.2, the geographic location has influence on the ease of doing business with a country. All sales of Company X are directed from the X location in the Netherlands. Each continent forms a segment and the segments are ordered from most to least interesting for Company X. This ranking is based on the proximity to the Company X X headquarters in the Netherlands and the presence of (direct) sales forces nearby or in the region. The proximity of the US Company X office also influences how interesting a region is. The segments from most to least interesting to Company X based on geographic location are:

1. Europe

In West and East Europe currently most sales of Company X are done and a sales force is already established.

2. Middle East

3. North America

In North America there is an office of Company X which makes it easier to

provide logistic and sales support, also in Canada some products are already being sold for studies.

4. Africa

The sales manager Middle East and Mediterranean provides sales support to North Africa and North Africa is relatively close to the Company X X head office. For the rest of Africa no direct sales force is allocated.

5. Latin America

Latin America (including the Caribbean) does not have a direct sales force and is located far from any Company X office.

Conclusion country level segmentation

The country level segmentation divided countries on different bases and also ordered them from most to least interesting for Company X. In most of the analyses the countries have been discussed in the context of their continent since countries in the same region often represented similarities. In table 3-1 the continents are listed from most to least interesting to Company X according to the segmentation on the three bases.

Size and potential of PCI market Regulatory affairs Geographic location 1 North America West Europe West Europe

2 West & East Europe Africa & Middle East & East Europe

East Europe

3 Latin America Middle East

4 Middle East Latin America North America

5 Africa North America Africa

6 Latin America

Table 3-1: Ordering the segments

from the potential and focus its attention to the already registered countries in this continent, except for Colombia.

Table 3-2 shows the segments from most to least interesting to Company X after integrating the three bases. The country level segmentation has indicated in which regions Company X should pursue its goal of growth and becoming self-sufficient. In the following section the market analysis continues by segmenting on customer level to determine which customer segments are interesting to Company X. Table 3-2: Most to least interesting segments

3.1.2 Customer level segmentation

The segmentation on customer level will now be discussed; this is the second stage of international segmentation according to Steenkamp and Ter Hofstede (2002). The first base on which customers will be segmented is: Type of customer. Company X divides their customers into distributors and hospitals. Hereby the distributors sell the products further to their customers; the hospitals. Hospitals sell the products to their cardiovascular patients. Hereby it is usually the interventional cardiologist, who is sometimes influenced by the hospital’s purchase department, who decides which catheter, stent or balloon is used for the patient. Currently this is slowly changing as patients become more educated. According to Burns and Wharton school colleagues (2002) distributors in the health care industry are often viewed more as partners than as customers. However, for Company X this is not the case. Company X tries to build relations with all their customers, but views both hospitals as distributors truly as customers and therefore they will be dealt with as such in this research.

The segmentation of the customers into distributors and hospitals leaves out one potentially important customer group: The group purchasing organizations (GPOs). In the health care industry GPOs can be powerful intermediaries that influence both their suppliers, such as Company X, and their customers, the hospitals (Burns et al., 2002). By pooling the resources of the hospitals leverage can be exerted.

Figure 3-5: Customers of Company X

Each of the three identified groups will now be discussed and segmented further if necessary. Hereby it will directly be indicated how important the segments are for Company X. For the important segments the needs of the customers in these segments are analyzed. These needs can be indicated by performance objectives which have to be satisfied in order to fulfill market requirements. Slack and Lewis (2002) indicate that performance objectives can be determined in terms of five main objectives (quality,

speed, dependability, flexibility, and costs) which each represent a cluster of competitive

factors that fulfil customer needs. However, Slack and Lewis (2002) also state that it is sometimes more useful to choose slightly different headings. For medical device companies service is indicated as an important element to be competitive (Burns et al.,

2002), therefore the main objective quality will be divided into ‘quality of service’ and ‘quality of products’.

For the customer level segmentation many more bases than mentioned in the following sections can be used, but as discussed in the country level segmentation this is outside the scope of this research. For future analysis of the market it would be interesting to use additional bases.

Group purchasing organizations

Company X currently deals with GPOs in both the UK and Germany. The influence of these GPOs is quite small for the PCI market and as Company X’s sales representatives indicate, the physicians performing the procedure still decide which products from which medical device producers are bought. This means that for Company X the needs of the GPOs are subordinate or similar to the needs of the hospitals. GPOs are not an important segment for Company X now, however, they could become more powerful and therefore Company X should be aware of this development.

Hospitals

The first segmentation base to be used is whether hospitals have a catheterization laboratory (cat lab). All hospitals that have a cat lab are interesting for Company X. Having a cat lab is expensive and for the hospital to gain a profit from it, a minimal amount of PCIs will be performed. For this reason it is generally assumed that a hospital with a cat lab will purchase enough medical devices for angioplasty.

An especially interesting segment for Company X form hospitals where opinion leaders from the field of interventional cardiology work. If opinion leaders are positive about a product this has a great influence on the sales of the product (Schilling, 2008). Especially for the release of a new product the support of an opinion leader is very useful (Schilling, 2008). Other cardiologists in general trust and follow the key opinion leaders and therefore these are of great value to PCI companies.

The needs of hospitals are largely determined by physicians. As Burns et al. (2002) indicate, physicians have strong preference levels for advanced medical products and are the principal decision makers in the choice of manufacturer and product. Since stents, balloons and guiding catheters are advanced products, cardiologists are the main decision makers in regard to purchasing them.