development of a virtual medical product

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Northwell Inc.
When Northwell’s Senior Management and Board first gave Claudia the leadership role in the
development of a virtual medical product and service mall with Medichek, a year and a half ago,
she was delighted. She and Nathan Daniels (V-P Marketing) had uncovered the opportunity,
Medichek was an excellent organization, and it had been clear that this was a venture well worth
embracing. Claudia Leung, CFO of Northwell, had an excellent working relationship with senior
management at Medichek. Since Northwell’s major contribution in the shorter term would be
cash ($7.5 million as of now), she was the ideal candidate for the assignment. The development
of this initiative would increase her entrepreneurial skill set and profile and looked to be a
manageable addition to her portfolio of responsibilities.
Claudia was beginning to wonder if this dream assignment was about to become a nightmare.
The project had run into technical problems, was 4 to 5 months behind schedule, and the Board
and Senior Management at Northwell were frustrated and putting pressure on Claudia to get
things moving. Executives at Medichek were pushing back, in response to their own frustration,
stating that Claudia’s interventions were hindering progress. In addition, she’d been hearing
growing rumblings of concern and unhappiness in the sales and marketing areas, evidenced in
the recent resignation of three staff members and the loss of a good distributor from the midwest U.S.
Northwell’s Senior Management and Board Chair had asked Claudia to recommend a course of
action that would rectify problems with this undertaking. They were expecting this advice to be
tabled within the next two weeks.
History of the Firm
Northwell Medical was founded 25 years ago, as the result of a merger between a Canadian and
US firm. Northern Medical, the Canadian partner, had specialized in durable hospital/medical
products, while Wellness Medical had focused on consumable hospital products. Both had
distributed their products in Canada and the U.S. for a decade prior to the merger, and had
shared marketing and distribution services for five years.
The actual merger announcement was anticipated and welcomed by most shareholders and
managers. There were some initial difficulties as structures, systems, processes, roles, and
reporting relationships were sorted out during the first year. By year three the merger was
viewed by both insiders and outsiders as a success. Market penetration and sales accelerated
while average costs declined (after accounting for one-time restructuring costs). Growth rates
averaged 20% (discounting for inflation) throughout the next fifteen years in what was a fairly
mature market. Northwell made aggressive investments in technology and product development
during this period. Profitability grew at rates 10% above industry norms, with the return on
equity averaging 18% during this period. This growth was partially stimulated by the addition of
new and/or improved products, but it was largely due to Northwell’s spreading reputation for
value, service and support. They won market share from competitors, even though their price
structure was typically 2% to 10% higher.
As consolidation occurred in the hospital and nursing care delivery systems, it was clear that
Northwell was well positioned to solidify its position as a preferred supplier amongst purchasing
† This case was prepared by Professor Anthony Atkinson of the University of Waterloo and
Professor Gene Deszca of Wilfrid Laurier University. Copyright © G. Deszca and A. Atkinson
agents, administrators and hospital user groups. In U.S. industry surveys of hospital suppliers,
Northwell regularly placed in the top 5 for quality, service, support, and overall customer
satisfaction during the two decades that followed.
Northwell Medical produced a wide range of medical products for institutional usage. Products
ranged from consumable patient supplies such as wound dressings, bandages, and disposable
surgical supplies to more durable products (e.g., IV units, walkers, canes). In addition to the
products it produced, Northwell used its sales network to distribute high quality, higher margin
products, sourced largely from European and smaller North American specialty manufacturers.
Ten years ago these accounted for 10% of the products listed, 15% of sales and 6% of the
profits, and by the most recent year end they represented 10% of products listed, 15% of sales
and 25% of profits. These products included hospital beds, wheel chairs, and orthopedic
supports (braces for limbs and neck). The intent was to provide purchasing agents and their
therapeutic committees with one stop shopping for their medical product needs in particular
product categories.
Northwell’s production facilities were located in the US, Canada, and Mexico. The Canadian plant
specialized in products that involve metal fabrication (approximately 20% of total manufactured
products, 25% of sales and 30% of profits in the most recent year end), while the two US plants
manufactured both plastic and fabric related product (40% of manufactured products, 30% of
sales, and 15% of profits). The Mexican plant also produced plastic and fabric related products
(20% of manufactured products listed, 15% of sales, and 10% of profits). In addition, Northwell
sourced manufacturing services for some of its products in the Asia-Pacific area (10% of
manufactured products listed, 10% of sales, 15% of profits).
In North America, Northwell marketed and sold its products primarily through its own sales force.
In addition, a number of medical product distribution companies carried some or all of the
Northwell line. They were prequalified by Northwell and tended to service smaller hospitals and
nursing homes, medical and dental offices, and regional medical product retail supply outlets.
The prequalification checks included financial stability, reputation, and service quality. Those
selected, committed to agreed-to minimum sales volumes. Distributors were not given exclusive
territories, but over the years they had sorted themselves out in ways that meant that most
American markets were well serviced. These independent distributors accounted for 25% of
sales and approximately 30% of the profits. Wholesale prices allowed for dealer margins that
varied from 15% to 30%, depending upon the type of product and the complexity involved in
selling and servicing the product (e.g., in-service hospital staff training in product use).
Over the years certain managers and board members had expressed interest in extending their
activities into foreign markets (Europe and Japan were the ones most frequently mentioned).
However, Northwell had shied away from these opportunities, due to concerns over their ability
to compete and the belief that there were more profitable growth opportunities available in North
America. Throughout the years, at the request of specific European firms they trusted, Northwell
had engaged in the export of a limited range of relatively unique products. For the most recent
year end, these accounted for approximately 5% of sales and 5% of the profits.
Growth and profitability slowed at Northwell nine years ago and flattened thereafter. A year ago,
sales growth was 4%, profitability had fallen to 6% of sales and the return on equity was 6.5%.
Their reputation as a benchmark to be emulated in the medical products sector was now a
memory.
Two notable new product failures about a decade ago had resulted in staff changes and a new
Director of New Product Development. Since Sales and Marketing were seen as the primary
clients of New Product Development, funding responsibility for R&D shifted to Sales and
Marketing eight years ago. The changes succeeded in reducing costs in this area by 33%
through more careful screening and approval processes and tighter budget controls. However,
within two years of the change, most of the output from New Product Development was in the
form of incremental product improvements, and there was limited work underway in the area of
significant product innovations. In an effort to increase their productivity, new product
development personnel restricted their direct field involvement with sales personnel and clients.
The problem/opportunity finding role was delegated to marketing and sales personnel, who were
expected to forwarded project and product suggestions to the Product Development Approval
Team. The Director of New Product Development chaired this committee, with representation
from Sales, Marketing, and Finance/Accounting.
The percentage of sales coming from products introduced in the previous four years declined
from 25% a decade ago to 8% a year ago. Finger pointing had become the order of the day, as
frustration surfaced over the slow pace of innovation. New Product Development staff
complained about a lack of resources, equipment, and bureaucracy, while Sales and Marketing
personnel grumbled that Northwell’s reputation as a problem solver and innovator was being
eroded due to the inability of R&D to deliver the right products at the right time and price.
Profitability was negatively affected during the past eight years by competitive pressures on price
and customer servicing costs. Northwell was still a preferred supplier, but the emergence of
health care cost containment pressures and powerful buying groups had reduced Northwell’s
capacity to command a price premium. More importantly, key competitors caught up with
Northwell in the areas of sales, support, and solutions, but were able to do so in innovative ways
that reduced their sales costs (e.g., call centers, logistical streamlining, and electronically
distributed training support). Sales and servicing costs at Northwell were now approximately
15% higher than their key competitors. However, customers did not perceive significant
differences in the levels of support and responsiveness.
Exhibit 1 summarizes the financial results and performance over the last 4 years.

200
400
600
800
1,000
1,200
1,400
1,600
1,800
Dollars
Year
Northwell Medical
Revenue 1,680 1,500 1,440 1,382
Costofgoodssold 941 840 778 719
Gross margin 739 660 662 664
Selling and administrative costs 569 570 561 553
Profit 170 90 101 111
Most Recent
Year End (YE)
Previous Year
(YE-1) YE-2 YE-3
The Medichek Opportunity
Two years ago Northwell’s Senior Management Team received clear feedback that stockholders
were very dissatisfied with cost containment and market expansion activities. At that time, the
Board replaced the Vice Presidents of Sales and Manufacturing (the President was replaced in a
year earlier). All 3 appointments were from outside the organization – something unheard of in
the past. In addition, the Board instituted performance contracts with members of the Senior
Management Team. These performance contracts required the following improvements to be
achieved within a four year period: sales growth of 30% over levels in the most recent year; a
return on equity of 18%; a return to gross profitability levels that exceeded industry averages by
10%; 15% of sales coming from products introduced in the previous 4 years; and a return of
customer satisfaction levels to those achieved a decade earlier.
Nathan Daniels, the V-P Marketing and Claudia Leung, the CFO, had grown up in the Northwell
and both had the trust and respect of the new CEO and the Board Chair. Both were appointed to
their senior roles three years ago, following the early retirement of their predecessors.
Approximately 2 year ago the CEO gave them joint responsibility for identifying growth
opportunities. Nathan and Claudia had bumped heads in the past over the value of marketing
expenditures, but they recognized the assignment’s importance and decided to set aside past
difficulties. Both possessed a strong interest in emerging information technologies and this
quickly led them to investigate Web-based marketing, distribution, and E-commerce opportunities
for Northwell.
Research conducted three years ago, told Northwell that their primary customers were either
currently able to order and receive information over the Internet or soon would be Internetenabled. Sales personnel reported that an increasing amount of their customer communications
was being conducted over the Internet and that Northwell’s capacities in this area were lagging
behind their key competitors, as they were in other areas of technologically enabled customer
support. Further, many of these primary customers seemed quite interested in exploiting this
technology to enhance efficiency, speed, communications, and the efficacy of training and
development. These interests seemed to fit well with the ideas that Nathan and Claudia were
pursuing.
Shortly after being assigned responsibility for identifying growth opportunities, Nathan and
Claudia decided to meet with the senior management of Medichek. Medichek was an emerging
net-based U.S. firm, specializing in health care. They had been founded eight years ago, were
located in Dallas, were growing very quickly (200+% per year) and had 275 employees.
Medichek’s primary business was the design and management of Web sites for a number of
leading health care organizations (hospitals, nursing homes, pharmaceutical manufacturers and
distributors, medical product manufacturers), including Northwell’s (as of approximately 2 years
ago). In addition, three years ago, Medichek launched a subscription service that provided online access to medical information to health care professionals and researchers. This was an
expensive service to develop and maintain, but subscriber growth over the first 18 months
exceeded Medichek’s expectations by a factor of 2. Medichek had a reputation for innovation,
honesty, responsiveness, quality, candidness, and trustworthiness. They were very selective in
terms of whom they chose to do business with. It was said that Medichek picked its clients and
those who were selected were the lucky ones.
Medichek was 75% owned by the five individuals who had founded the company (all were in
their 30’s and directly involved in the business). They had resisted take-over and IPO
opportunities, preferring to develop and control their own organization. Nathan first met the
Medichek’s owners 3 years ago, when he was looking for a Web-site designer for Northwell.
True to form, it was Medichek who, after careful deliberation, selected Northwell as a client.
While initially “put off” by Medichek’s approach, Nathan and Claudia quickly became fans, and
this enthusiasm extended to other members of senior management. Their work was fairly priced
by industry standards, but more importantly, their strategic approach to site design and
management resulted in customer accolades and industry awards in recent years. Sales and
marketing personnel responded favorably to Northwell’s new website, when it went live,
reporting positive customer reactions to its layout, content, and functionality. Though they still
felt that technology enabled customer support was lagging (e.g., electronic access to technical
training support materials), they viewed this as an important step in the right direction.
Medichek’s owners and employees often commented about how comfortable they felt working
with Northwell. They particularly appreciated Northwell’s commitment to dealing with its clients
in ways that emphasized customer knowledge, value, and informed decision-making. Medichek
officials complained that Northwell’s decision-making sometimes took too long, that Northwell
over-attended to cost rather than value, and that Northwell had difficulty keeping its “fingers out
of the pot” once decisions were made. However, they discounted these frustrations, chalking
them up to Northwell’s concern for quality and competitiveness.
During the development of Nothwell’s website, it became apparent to Claudia and Nathan that
there might be good reason to get closer to Medichek concerning another venture they were
pursuing. Medichek had been exploring the development of a virtual health service mall, for use
by the health care industry. The idea was that professional end users (hospitals, nursing homes,
physicians, pharmacists) could access this site in order to electronically shop for the products
they needed. Products and services supplying firms would be carefully screened to ensure that
they met quality, value and customer service standards. Quotes could be solicited, orders
placed, and payments received electronically. Further, the mall would serve as a primary source
of product information, product warnings and recalls, educational on-line health care forums,
health care news, and distributed web-based training in health care matters (e.g., product use
education).
From the initial meeting on the virtual mall approximately two years ago, Medichek was clear that
it wanted to partner with Northwell in the development of this undertaking. They proposed that
the mall be established as an independent business unit and that Northwell and Medichek own it
equally. Northwell would commit to becoming a prime occupant in the mall and would supply the
needed development funds (estimated at $5 to $10 million). Medichek would develop the
necessary technology platforms, structure the services and pricing arrangements with mall
occupants, structure the entry criteria, and market the mall service. Medichek’s reputation would
prove very helpful here. They estimated that it would take a year to make this project a reality.
Nathan and Claudia were excited by this opportunity. It had the potential to significantly reduce
costs for both customers and suppliers and provide Northwell with opportunity to dramatically
extend its reach into foreign markets. Though quality competitor products would also be listed at
the mall, these were already readily available in the marketplace. More importantly, the mall
would be selective concerning who was allowed to be listed and exhibit. When combined with
the quality of the information, news and other services available, it was anticipated that there
would be a very positive halo cast on firms allowed to market their goods and services at the
site.
When Nathan and Claudia talked to Northwell’s IT group and the CEO about this opportunity,
interest and excitement spread. Sales and marketing personnel also expressed interested, but
were concerned with the implications on existing channels of distribution and customer contact.
This was a company that had built its reputation on its personal relationships with its distributors
and customer (i.e., responsiveness and support), and they were concerned with how things
would be affected by this new venture. Nathan and Claudia asked them to relax and give the
new venture time to develop. They told staff that the new venture would increase the exposure
and reach of Northwell, thereby opening up new opportunities. Channels would not change
overnight, and staff was advised that Northwell would monitor things closely and help employees
adapt and transition into new roles, as needed. They were told that this was new territory for
everyone, so the keys were to be patient and open-minded, communicating information,
questions, and concerns in a timely fashion.
Claudia worked with the Medichek’s CFO to develop the business plan, projections and a Letter of
Understanding during April a year ago. Northwell’s Board was first informed of the possible
opportunity in January a year ago. In May, Northwell’s senior management team recommended
the partnership (as set out in the Letter of Understanding), to its Board. Medichek and Northwell
jointly signed the Letter of Understanding in June a year ago, with the first $2 million installment
of development support issued in June. Northwell’s managers were shocked (pleasantly) by the
speed of the approval process. Primary responsibility for managing the relationship with
Medichek was assigned to Claudia.
During the latter half of the previous year Medichek hired additional staff and proceeded with the
development work. By February of the current year Northwell had advanced $4.5 million in
development support. During this period Northwell had focused on shoring up it internal
operations and improving its profitability. By December of the previous year, products introduced
within the past 4 years had grown to 9% of sales, and growth had increased 12% over previous
year. Profitability had improved to 10% of sales and an 8% return on equity, and customer
satisfaction results had improved marginally. Both the Board and the Senior Management Team
were pleased to see progress, but felt there was still a long way to go. Discussion amongst these
groups clearly indicated that they saw the virtual mall as the initiative with the greatest potential,
as well as the greatest risks.
Personnel in sales and marketing expressed increasing concern over how their functions and
roles would be affected by the new venture and what would be the impact on their customers.
Nathan continued to tell them to relax while they were waiting to see how roles and functions
would need to adapt in the wake of the virtual mall. Though he couldn’t guarantee there would
be no job losses, he truly believed this new venture would open up significant new opportunities
and more meaningful customer relationships for many. In spite of these words of reassurance,
the number of voluntary resignations in these areas rose by 15% and there were rumours that
others were looking as well. Many of these resignations involved individuals viewed as high
performers. In addition, some distributors were also expressing concern and looking for
alternative lines of business to represent, in the event that they became redundant to Northwell.
Human resources advised the executive to slow its recruiting initiatives for departing personnel
until the effects of the new venture were better understood. Nathan and other senior managers
in sales and marketing saw the wisdom in this advice, but they were also concerned about
sending the wrong message to staff, customers and distributors. As a result, recruitment was
slowed, positions were left unfilled for longer than in the past (150 days on average vs 60), and
contract employees were brought in to help, where needed. The consideration of a new call
center was also put on the back burner until the ramifications for Nothwell of the virtual mall
were better understood.
By April the Senior Management Team was placing increasing pressure on Claudia to get the mall
up and running. Marketing of the mall was going extremely well. Product and service suppliers
had been solicited and screened and a critical mass of these organizations was signed and ready
to go (i.e., their initial product information, visual material, and related systems and supports
were developed). The news and related information services and site features had been
developed, staffed and beta tested by those who would be using the mall. Primary customers
were anxiously awaiting access to the new service. However, Medichek reported that the
development of the technological platform and related supports (in particular, the E-commerce
and security components) were proving more difficult than originally anticipated and that the
complete Mall’s formal launch was about 4 months behind schedule.
Claudia began to spend more time monitoring the pace of developments at Medichek. Monthly
visits became weekly. In May she requested bi-weekly reports on progress achieved, funds
expended, and the time allocations of the various project teams. These were very similar to the
reporting Northwell required from its own operations.
Relations with Medichek chilled in response to the increased frequency of site visits and the
request for more detailed reporting. At first they resisted complying with the reporting request,
but after a month of mounting pressure they acquiesced. Medichek’s senior management wrote
that such information would be furnished under duress, because it would serve no useful
purpose, be expensive and time consuming to develop, and divert attention from where it was
most needed.
The resignation of three more capable staff members from the sales and marketing area and the
loss of a valued distributor from the mid-west U.S. in the late spring elevated Nathan’s anxiety
over progress and he wanted to know just how much longer it would be before “Virtual
Northwell” would be fully operational. Nathan continued to believe that it would be unwise to
make major changes in sales and marketing until they really knew how customers would react to
the new channel. He felt that it was difficult to predict, with any degree of certainty, what the
ideal approach to sales and marketing should be, and he preferred to adopt an approach that
reacted to what evolved as a result of the new channel. However, he was also aware of the
need to address employee and distributor uncertainty as quickly as possible, recognizing that the
“be patient until we have a better understanding” strategy was not working well. Since Claudia
was in change of the new venture and since there would be organizational design, budget and
control implications, he wanted Claudia’s advice on how best to handle the matter.
When Medichek reported continuing development problems in July, Senior Management at
Northwell voiced increasing dissatisfaction with the progress to date and asked Claudia to
recommend a course of action that would rectify matters.
Questions for Class Discussion
1. What are the management and strategic issues that Northwell face?
2. What are the opportunities, costs, benefits, and strategic implications of developing the
Internet site?
3. What decision would you make here and how would you implement your choice?

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