Sunrise

MEMO

DATE: April 6, 2006

TO: Sunrise Medical Senior Management

FROM: 3919 - Section 004

RE: Evaluating Organizational Structure to Capitalize on Growth

EXECUTIVE SUMMARY

The wheelchair industry will continue to experience considerable growth, averaging 11.5% annually over the next five years. Our current position in the Ultralight segment will help drive growth, but revenues in the Lightweight Standard and the Power & Pediatric segments will grow faster. We will benefit from strengthening our current relationships with Rehab suppliers as that channel becomes the most important distributor of wheelchairs with sales nearly doubling to $314 million in 1998. However, a centralized structure may interfere with our TQM and JIT efforts, affecting our commitment to superior customer service. Therefore, it is recommended that divisions continue making day-to-day operational decisions but require authorization from HQ for major decisions such as new product rollouts. Also, a single sales force selling products across lines will help to strengthen our relationships with Rehab suppliers.

TABLE OF CONTENTS

Section Page #

Sunrise Medical's Decision ............................ 1

The Future of the

Wheelchair Marketplace ................................. 1

Promising Segments ............................... 1

Rehab Suppliers Critical ........................ 2

Internal Structure at

Sunrise Medical .............................................. 3

Evaluating Sunrise's

Organizational Structure ....................... 3

Implementing a New Strategy ........................ 5

Conclusion .................................................... 7

Appendices

A - Total Manufacturers' Sales and

Percentage Change, 1994-1998 (proj.)

B - Percentage of Total Manufacturers' Sales

by Category, 1994-1998 (proj.)

C - Projected Wheelchair Market by Category

and Distribution Channel, 1993-1998 (proj.)

D - Total Sales by Distribution Channel, 1994-1998 (proj.)

E - Sunrise Wheelchair Revenue by Category, 1994-1998 (proj.)

F - Sunrise Revenue Before and

After Implementation, 1994-1998 (proj.)

SUNRISE MEDICAL'S DECISION

The main problem facing Sunrise Medical is one of uncertainty over organizational structure. Our decentralized structure has enabled our divisions to remain completely autonomous. Unfortunately, this structure has led to our current predicament which would pit two of our divisions, Quickie and Guardian, in direct competition with one another. Divisional cannibalization has never been an issue, but it must be addressed immediately. While this is the most pressing question for Sunrise, it also calls into question a host of other issues, such as:

* Are we properly positioned for growth?

* Would a more centralized structure be more appropriate for our company?

* Would a change in organizational structure require an adaptation of our current culture?

Throughout this memo, I will be addressing these questions. First, I will take a look at the wheelchair industry's direction and examine where the most potential for growth lies. Second, I will inspect our internal structure in relation to that of Invacare and determine how a change in structure would affect our corporate culture. Finally, I will make recommendations for how we can resolve this structural uncertainty and position ourselves for growth.

THE FUTURE OF THE WHEELCHAIR MARKETPLACE

Promising Segments

The wheelchair industry will continue to be an extremely lucrative market: overall manufacturers' sales of wheelchairs will reach $685 million in 1998 at a compound average annual growth rate of 11.5%. (see Appendix A) While the Standard category is currently the highest volume segment at 32.7% of total sales, it is also the slowest growing category at a meager 5% projected growth per year. Because of this, by 1998 the Standard category will make up only 24.2% of total industry volume. (see Appendix B) The two fastest growing categories (at a projected 15% per year) are the Lightweight Standard and the Power & Pediatric segments. These two segments will account for 57.3% of total industry volume in 1998. Although we are well positioned in the Power & Pediatric segment with a 24% market share, our weaker position in the Lightweight Standard category may be seen as a cause for concern. However, if we can successfully capture some of Invacare's dominant share of this segment (57%), we can capitalize on this growth potential.

Finally, the Ultralight category, Quickie's specialty with nearly half of total market share, will also experience significant growth, nearly doubling by 1998. (see Appendix C) However, this segment is projected to grow just slightly ahead of total industry growth and therefore will maintain a steady percentage of the total wheelchair volume. Thus, without a significant innovation in this category, our growth will determined mostly by changes in the Ultralight market.

Rehab Suppliers Critical

The most important channel of distribution will be Rehab Suppliers. This channel will achieve an average annual growth rate of 13.4% while HME dealers and Med/Surg distributors will experience growth rates of 10.9% and 7.7% respectively. (see Appendix D) The reason for the greater growth in the Rehab supplier channel is due to their dominant share