Becton Dickinson Case

Question 1

How has the healthcare industry changed (pre-1983 to post 1983)? What are the implications for BD? How has BD managed to build up an 80% market share in this market? Which many competitors bigger than BD have tried to enter without success?

In 1983 the entire health care industry was affected by the changes that the U.S government made in how to reimburse hospitals for Medicare patients (40% of all hospital patient days). So, let's see how the situation was before and after these changes.

Before 1983

Hospitals had been reimbursed for all costs incurred in serving those patients.

Hospitals were rewarded for efficiency.

The buyers at the hospitals were specialist, without purchasing skills or interests in negotiating for prices.

Distributors were making great profits and not paying enough attention to costs.

After 1983

Under the new system, the payment to a hospital was based on national and regional costs for each DRG, not on the hospital's costs. Moreover, the national and regional averages were to be updated, so that if hospitals improved their cost performance, they would be subject to stricter DRG-related payment limits.

Hospital admissions fell 4%-the largest drop on record; the average length of a patient's hospital stay fell 5% to 6.7 days, also the largest drop ever.

Multihospital chains and buying groups were formed, with the aim of increasing the hospital's bargaining and purchasing power for equipment and supplies. In 1985, about 45% of all U.S hospitals were affiliated with multihospital chains, and it was predicted that 65% would be so affiliated by 1990

Individual hospitals belong to a number of different buying groups and often switch from one group to the next.

Distributors are pressed to reduce their costs to balance the lower margins from lower prices.

A primary objective for BD in both tubes and needles was to maintain a leading market share. BD planned to combat Terumo through accelerated new product developments and annual improvements in product quality, while using its strong market share to become the lowest-cost procedure in all product segments.

The strategy of BD is to force other competitors to follow to this quality aggression, anticipating the increase of costs of all the competitors in the market, which would be easier for BD to handle due to the high market share that allowed BD to amortize the capital investment.

BD instituted a Z contract, in which prices and orders quantities were negotiated directly with hospitals but still delivered through distributors. Often Z contracts prices with large buying groups were 30% to 40% lower than list price. Under a Z contract, as with other BD contracts, BD's distributors received a set commission from the company for stocking, shipping and billing the hospital.

The BD's sales strategy has been to sell from the bottom up; they try to work with as many of the bench people as possible- that is, the lab technicians who use blood collection products, who care about the quality of what they use and not the price, and who will complain to the administrators if they do not get the product they want.

Question 2

What does BD's channel structure look like? What flows are performed at which point in the channel? How would you describe the channel's intensity? How does this intensity level affect end user prices in the market? Could BD supply hospitals directly?

BD sold its products through 474 independent distributors who fell into two categories: laboratory products distributor and medical-surgical products distributors.

In 1985 BD had 55 sales representative organized into territories based on the number of hospitals beds in a given area. Territories ranged from 10.000 to 20.000 beds and they reported to one of six regional managers, who in turn reported to William Kozy, the national sales director.

At BD its 6 largest distributors accounted for more than 65% of division sales, the 50 largest for 85% and 67 of the division's 474 dealers for nearly 95% of division sales. BD's largest distributor was American Scientific Products (ASP), which in 1984 had total sales of 3.45 billion. ASP was also a distributor for Terumo and Sherwood, 70% of Terumo's sales went through ASP.

ASP is a division of American Hospital Supply Corporation (AHS), which manufactured 45% of what they distribute, but their manufactured products represented 70% of their profits. One AHS vice president said that he is hoping that before long, they will manufacture 65% of what they distribute, and by saying this is very clear that AHS is very dangerous as a future possible competitor.

Other major distributors were CMS, which had 20 warehouse locations and sold primarily to labs, and Fisher Scientific which had 20 warehouse locations and sold primarily to medical schools, research centers and industrial labs.

For Z contracts BD performs the negotiation and promotion flows through its sales people, who promote the products to lab specialists and negotiate with purchasing managers and corporations representatives. Distributors are responsible for physical possession activities, order and payment flows, they negotiate and promote products that are not sold through Z contracts. Ownership, financing and risking flows are performed by BD.

In total BD sold through 6 national distributors, with the remainder of its distribution network composed of regional chains and small local distributors. In most market areas 4 or 5 different distributors sold BD products. This implies lower prices, since end users can shop everywhere and press distributors drop their prices. Because BD sells syringes to a very fragmented physicians market, intensive distribution is important there, because can lead them to consider focusing on promoting competitive or own products.

By supplying hospitals directly, BD would be less dependent on large distributors like APS, who might be one of the most serious competitors in the future. Some BD divisions already sell directly which implies that the company could disintermediate its distributors. However, the company should consider the cost of turning its distributors in future competitors, and that the intensive model of distribution meets certain needs of the hospital, which might not be met by a unique distributor. BD should focus in:

Negotiation