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  • Terumo Corporation Interventional Systems Business of Cardiac & Vascular Products Group

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Terumo Corporation Interventional Systems Business of Cardiac & Vascular Products Group

2010 10th Porter Prize Winner Electronic materials
Going against the Global Giants

Industry Background

Interventional treatment of the heart vessel uses an introducer sheath to make an entrance for the catheter, from where a guidewire enters the blood vessel and leads the catheter to the edge of the coronary artery. Physicians take an X-ray of the blood vessel by injecting contrast media to see if there is a problem. If the vessel is narrowing, physicians insert a balloon catheter and force open the constricted portion of the blood vessel. Then, a metal tube called a stent is inserted so that the vessel will not become constricted again.
The market for interventional systems consists of three treatment areas: heart (coronary) vessels, brain (cerebral) vessels, and lower-limb (peripheral) vessels. Also, the interventional market has three segments: entrance, access, and treatment. Product innovation is active in the treatment segment, and products in the treatment segment are more expensive than those in the entrance or access segments.
U.S. giants, namely, Boston Scientific, Johnson & Johnson, Medtronic, and Abbot Laboratories, dominate the market and occupy a global market share of more than 80%. They obtain new technology through the acquisition of research-based venture companies, and quickly sell these new technologies around the world by leveraging their clinical trial capabilities and their global sales force. They have a broad product line in all three treatment areas.
Interventional systems, as medical instruments, must be approved for use by the pharmaceutical jurisprudence. In Japan and several other countries, the price of such systems is determined by law, and there is no difference in price among competitors. In the U.S. and most other countries, the market decides the price.

Executive Summary

Terumo entered this market as a latecomer, but has established itself in the No. 5 position in the cardiology area, with its unique competitive strategy. Although interventional treatment is used in three areas (the coronary, cerebral, and peripheral), Terumo focuses on the coronary area. Its strength is in the entrance and access segments, and it has the No. 1 global market share for guidewires (75%) for access, and a 40% share for introducer sheaths for entrance into the blood vessel (in 2009 by Terumo).
These products, which are Terumo's specialty, are necessities for physicians, but are not a product area for radical product innovations. While U.S. giants focus on the product areas where radical innovations are taking place, Terumo put emphasis on the necessities, competing to refine existing technology for better treatment and application in new areas. Terumo capitalizes on incremental innovation, clearly demonstrating the ease of use for physicians, and fully deploys the advanced techniques of Japanese physicians and the company's technology, such as unique coating technology and precision manufacturing technology.
Terumo leverages its strength in products that constitue necessities to create a new market by popularizing new treatment approaches, and to strengthen its competitiveness in the areas where treatment is very difficult. This not only results in higher sales of these products, which are considered necessities, but also leads to the development of new treatment methods and solutions to existing challenges, as well as contributes to broadened applications of other products used in the treatment. New treatment is possible only when Terumo's products and the physicians' technique function together as a well-coordinated system. This collaboration with physicians makes imitation difficult for competitors.
Terumo entered the intervention market in 1985 with access guidewires. In 1986, it commenced sales of introducer sheaths. Then, in the mid-1990s it introduced products in the treatment segment, such as balloon catheters and treatment guidewires. Currently, it offers a broad product line in the cardiovascular area.

Unique Value Proposition

Terumo's target customers are those physicians who are pursuing improvements in treatment and saving patients' lives, and who are often opinion leaders. In countries where prices are set by the market mechanism, Terumo's guidewires and introducer sheaths are sold at higher prices.
Terumo's value proposition is to offer better treatment and lessen the patient's mental and physical burden. Terumo's products have a superior sliding function and reliable operability. Also, its products enable treatments which previously had to be conducted surgically. Terumo puts a priority on facilitating new techniques, such as Chronic Total Occlusion (CTO) and Transradial Intervention (a technique in which a catheter is inserted from the wrist rather than the thigh--it is a procedure which is less likely to produce internal bleeding and requires less hospitalization, but requires more advanced skills for physicians). TRI was introduced in the 1990s, and now 60% to 70% of coronary intervention is done by TRI. These new techniques require that Terumo's products and the physician's techniques are well coordinated, forming a kind of system. For this reason, Terumo provides training to physicians.
Terumo also enables better medical economics. With these new techniques, physicians can reduce the failure rate, shorten hospital stays for patients, and reduce overall medical expenses. More and more physicians are giving greater consideration to medical economics these days.

Unique Value Chain

Manufacturing
In order for guidewires to assure a consistent tactile feeling and feedback, the wire should be at the center, and the coating should be applied evenly. The sophisticated manufacturing technology required for the production of guidewires makes it difficult for competitors to match the quality of Terumo products.

Marketing and sales
Terumo's sales activities target opinion leaders among physicians, and Terumo aims to develop new techniques in collaboration with them. To help new techniques become widely used, Terumo provides physicians with information and training, overseas as well as in Japan. For example at its Terumo Medical Pranex in Japan, Terumo gives physicians the opportunity to undergo training in new techniques, such as TRI and CTO, and develops relationships with them. In the U.S., Terumo also reaches out to physicians through its website, Transradial University, where physicians can find information on training programs, access videos featuring experienced physicians, and share tips and academic papers. These activities help to spread new techniques from opinion leaders to other physicians, promoting the adaptation of Terumo products beyond TRI treatment, and creating long-term Terumo fans.

Technology development
Coating is one of the core technologies of R&D at Terumo. Hydrophilic coatings and hydrophobic coatings are used for Terumo products across divisions as a source of technology differentiation. In order to support its technological development, Terumo has developed specialized measurement and evaluation equipment and facilities.
Although Terumo places strategic emphasis on in-house technologies, such as coating technology and manufacturing technology, it also uses M&As to acquire unique technology which can create synergies with Terumo's technology. For example, in 2006, Terumo acquired the American company MicroVention for its swelling coat technology. This technology has been incorporated into Terumo's products, and it is being used in treatment areas other than the original treatment area, namely, for the treatment of cerebral aneurysms.
Terumo provides an environment in which the individuals in charge of product development participate in training programs to acquire feedback from professionals who are using Terumo's products. This feedback is then used to make further improvements to those products.

Human resource management
Terumo published "Terumo No Kokoro" (The Heart of Terumo) in 2007 to articulate its corporate philosophy: "Contributing to society through healthcare." Excerpts from this in-house publication include: "The quality of each individual's work creates 'Terumo Quality,'" and "Terumo's customers are patients and everybody who wishes for health." Terumo's associates read this publication and conduct discussions about the contents from time to time.
In Japan, all newly hired associates and others undergo product training at Terumo Medical Pranex, to better understand how Terumo products are used in real healthcare settings.

Fit among Activities

At Terumo, activities are guided by its corporate philosophy, "Contributing to society through healthcare," and are selected and coordinated around the core concept of its strategy, "to provide solutions, not only products."
. (Please refer to Terumo's activity system map, which appears at the end of this report.)

Innovation that Enabled Strategy

  • Product innovations: Developed wire made of nitinol alloy coated with a hydrophilic material when Teflon-coated stainless wires were prevailing.
  • Business model innovations: Terumo positions its own business not as selling medical equipment but as promoting better treatment. This has helped improve the success rate of physicians, enhanced their trust in Terumo's products, and at the end of the day, increased product sales.
  • Innovations in treatment: TRI, CTO
  • Innovations in services: Terumo Medical Pranex

Consistency of Strategy Over Time

Since Terumo entered the intervention market, it segmented the market in its own way and focused on the coronary treatment area, especially the entrance and access segments. Product differentiation has been achieved through the reduction of sliding resistance and enhanced ease of use. The hydrophilic coating technology that facilitated its entrance into the market with guidewires is still used to differentiate treatment guidewires and balloon catheters in the treatment segment.
Terumo's strategy evolved from the entry strategy of a late comer to one for the contender with the fifth largest market share in the global market. However, the uniqueness of its strategy has remained unchanged. While maintaining this consistency, Terumo has enhanced its competitive strategy by expanding the scope of differentiation from product innovation to system-level innovation.

Trade-offs

  • Does not conduct M&As to increase sales. Increases in sales should come from organic growth. It conducts M&As to strengthen its differentiation, for example, to obtain unique technology and/or to realize synergies with Terumo's own technology.
  • Does not integrate acquired companies by dissolving their organization. Rather, Terumo has them keep their existing organizational culture and encourages a gradual integration and aims to maximize synergies in technologies.
  • Does not outsource the core technology and manufacturing function. In this way, Terumo can achieve precision and reliability and respond to customers' requests to continuously improve existing products.
  • Does not use strong incentives to motivate its sales force. Rather, Terumo keeps incentives to a minimum. This way, Terumo can encourage its sales force to sell solutions (systems incorporating both products and know-how), rather than just products.
  • Does not sell its products at low prices for the sake of market share.
  • Does not sacrifice quality for lower price and/or sales volume.

Profitability

Both return on invested capital and return on sales exceed industry average.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2005 2006 2007 2008 2009
29.3%P 20.5%P 26.4%P 30.4%P 27.1%P 29.8%P
Inter quartile range (IQR) = 8.6%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2005 2006 2007 2008 2009
21.5%P 20.3%P 22.7%P 20.9%P 17.9%P 19.5%P
IQR = 10.2%P
Return on sales =Operating income / Net sales

Activity System Map

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