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MedTech innovation and the prisoner’s dilemma

Insights on a solutions-focused model for MedTech

​Return on capital (ROC) performance for health care product manufacturers has been steadily declining. While MedTech companies typically attempt to counter ROC declines with cost-savings initiatives, they may achieve more substantial, long-term value by boosting innovation and shifting toward a business model focused on transformational products and solutions.

Return on capital performance

​A key factor exerting downward pressure on ROC is the shift in purchasing power between MedTech companies and health care providers. Traditionally, MedTech sales have relied on relationships built with physicians and surgeons, in which purchase decisions are based largely on experience and personal preference. That sales model, however, has been changing. Many hospitals and health systems have been hiring procurement experts to streamline supply costs. As a result, physicians and surgeons are becoming less influential in MedTech purchase decisions.

In a market where manufacturers' products may be difficult to differentiate in terms of patient outcomes, and product development efforts have often been focused on incremental features that health care providers desired rather than on addressing unmet needs for patients and hospital systems, many MedTech companies are being pushed to compete on price.

MedTech companies typically attempt to counter ROC declines with cost-savings initiatives. Even though these should be pursued, organizations may achieve more substantial, long-term value by boosting innovation and shifting toward a business model focused on transformational products and solutions that provide added customer value.

This article was published in MedTech Strategist, May 29, 2018.

Our take on MedTech innovation

MedTech companies often face a "prisoner's dilemma" in their battle against ROC decline due to a confluence of three factors:

A prisoner's dilemma exists in MedTech's ROC

  1. Providers are evolving to value-based models at different rates. The transition from a volume- to value-based payment model has been uneven among hospitals and health systems. Many MedTech companies say value—meaning both cost and outcomes—isn't yet influencing purchase decisions. Hospital procurement managers, for example, are still generally rewarded for discounts they negotiate with MedTech companies, rather than the impact a device has on outcomes and total costs of care.
    And many health care providers aren't yet paying close attention to the value that medical technology—especially major innovations—might offer. This can create a prisoner's dilemma for MedTech manufacturers: Those that promote the value of their products in terms of outcomes and total cost of care will compete with companies that continue to use price as the primary differentiator—and price remains the motivation for many procurement managers.
  2. Innovation's impact on ROC may not be clear. Many MedTech organizations are unsure of the impact that investing in innovation will have on their ROC in the short-, medium-, and long-term future. Company leaders often lack visibility into customer and market insights relating to longer-term opportunities—current insight capabilities typically focus on assessing near-term performance—so they may be hesitant to divert significant funds to innovation, given board and shareholder pressure to deliver positive short-term financial results.
  3. Near-term competition can inhibit innovation. With competitors pursuing near-term share growth, the inclination of most incumbents is to double-down on their core business offerings in order to preserve their market share and their established revenue stream. Being the first player to introduce a new solution-focused business model could be considered too risky, as funds are limited and this investment could be at the expense of the core business versus long-term innovation.

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A path forward in innovation in Medtech

Given the urgency reflected in the steady decline in industry ROC, now is likely the time for MedTech companies to consider moving beyond a discrete product mind-set and to invest in a solutions-focused business model that lays out a clearer path to transformational innovation.

MedTech innovation can be classified into three levels of ambition: core, adjacent, and transformational.

The innovation ambition matrix applied to MedTech

  • Core innovation focuses on growing in established markets by finding and building on knowable consumer behaviors.
  • Adjacent innovation focuses on growing by doing something differently—pushing into new markets or extending offerings.
  • Transformational innovation focuses on growing by inventing new things for markets that don't yet exist—moving beyond company walls through disciplined processes and deep customer understanding.

MedTech companies that focus on core innovation via incremental improvements in product features or functions too often slink to the bottom-left of the innovation ambition matrix. They're often left wondering why their innovation pipelines are clogged, their ideas unambitious, and their returns disappointing. To help reverse their ROC's course, organizations can shift investments to adjacent and transformational innovation that creates new value streams and new markets.

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Guiding principles for effective innovation and transformation

Solving the MedTech prisoner's dilemma won't be easy. It involves companies truly understanding their customers and their concept of value; aligning corporate culture and incentives to support a solutions strategy; and investing in innovation with the understanding that this is a long-term competitive play.

MedTech companies are starting to embrace business model diversification, but efforts tend to be more one-off than full strategy shifts. Going forward, companies looking to manage their portfolios for "total innovation" should be guided by the following principles:

  1. Be explicit about innovation ambition, then organize and execute accordingly
  2. Look beyond product innovation to help transform other elements of the business system
  3. Leverage unconventional insights about users to drive innovation throughout the value chain
  4. Invest in market development capabilities to help drive adoption of breakthrough products and solutions
  5. Don't assume innovation is just about creativity; effective innovation also requires discipline

Just as leading computer manufacturers successfully reinvented themselves as solutions companies, a similar strategy could help MedTech companies increase their ROC as well as their value to customers. A proposed path forward is to explore potential cost-saving and outcome-improvement opportunities with innovative hospital partners that are willing to try new ideas.

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Sources for graphics within the PDF

Figure 1 sources:
Capital IQ; Monitor Deloitte Analysis; 1 includes global leading peer-set companies
Note: Generic companies have experienced consolidation in recent years impacting ROC

Figure 3 source:
Nagji, Bansi and Tuff, Geoff, “Managing Your Innovation Portfolio,” Harvard Business Review, May 2012

Figure 5 sources:
1. IBM Website; 2. Compaq Computer Looks Back and Sees the Competition Gaining,” New York Times; 3. IBM Global Services, A Brief History, IBM Website; 4. “He Loves to Win, At IBM He Did.” New York Times; 5. Capital IQ; 6. “Innovation and Business Growth,” Richard Kerr, Harvard University; 7. Deloitte Analysis; Notes: Peer set includes Apple, Compaq, Dell, Digital Equipment Corp, and HP (excludes IBM)

Figure 6 source:
Nagji, Bansi and Tuff, Geoff, “Managing Your Innovation Portfolio,” Harvard Business Review, May 2012

Get in touch

Yakir Siegal
Principal – Monitor Deloitte | Deloitte Consulting LLP
+1 617 306 0505

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