Janak Patel

Red id: 818559086

Term Project on

Stryker

BA 626 Managerial Economics

Instructor: Dr. Januj Juneja

Department of Finance

College of Business Administration, SDSU

1. Company Background

a. Stryker corporation, headquartered at Kalamazoo, Michigan, U.S.A. (1)

b. Total knee implant (Total Knee Replacement System), part of surgical instrument

is firm’s primary product.

c. The firm’s primary product is a Surgical and Medical Instrument Manufacturing,

SIC code is 3842, and NAISC code is 339112-Surgical and medical

instruments.(2)

2. Market definition

a. Product dimension

The market for high-tech orthopedic knee Implant is rather deep, because there are several close

substitutes for Stryker’s orthopedic implants. Some substitutes come with a different technology

and composition such as Sigma with rotating platform technology and Nexgen with modular

hinge mechanism and Verilast composed from oxidized zirconium.

Some examples are:

Depuy orthopedic- Sigma® Rotating Knee and Sigma Fixed-bearing

Knees

Zimmer- the NexGen® CR High-Flex Femoral Component

Biomet - Oxford® Partial Knee Replacement, The Vanguard® Complete Knee

Smith & Nephew - VERILAST® Total Knee Replacement

B Braun Melsungen AG- The Columbus Total Knee System

Wright Medical Group, Inc.- Total knee replacement system

b. Geographical dimension

In the USA geographical dimension for knee replacement devices are deep as products are

available through widely spread internet based supplier and retail suppliers of medical equipment

c. Customer Segments

Age group born in between 1946 to 1964

On Stryker company site cited, “Expansion is being driven by favorable demographic trends as

the baby-boom generation comes into the prime age for orthopedic and other medical

procedures.” (3)

Hospital and medical professional.

Stryker services are focused on partnering with hospitals and physicians to help deliver proven

quality outcomes and sustainable profitability. (4)

3. Market structure

a. Market Structure

Stryker operates in a monopolistic competition market for its knee replacement product. There

are a significant number of competitors, products are not perfectly homogenous, there are limited

barriers to entry, and non-price competition is very important in the market of this product.

Number of Competitors

There are many competitors including: Depuy Orthopedic , Zimmer, B. Braun, Biomed, Smith

& Nephew, Wright Medical Group which also manufacture and sell the high tech products of

total knee replacement system including implants.

Product Similarity

The products can be differentiated only on basis of different materials used in composition, and

different product design. Products are highly similar in this market.

Barriers to Entry

Barriers to Entry are significant for companies which do not have high capital or prior

experience of an orthopedic products market. Products need high engineering skills and require

high investment for infrastructure and raw materials. Total Knee replacement system

manufacturing requires a very high intellectual human capital which comprise of physician, bio-

technologists and bio-medical engineers. However a firm producing orthopedic products and

have better network across to healthcare industry could very easily start producing knee implant.

Importance of Non-price competition.

Non price competition is very important in the market for the knee implant. Because there are

quite few products with similar attributes competing with each other, each firm hopes to attract

and retain customers’ loyalty by other means than prices. The companies try to acquire market

share by providing great service to customers, education and training for medical professionals

and advertising about their products.

Source: https://www.behance.net/gallery/1764214/Stryker-Orthopaedics-Advertising

4. Market demand

a. Shifters of product demand

Size of population.

As size of population increases more people tend to facilitate with medical treatment which

eventually lead to demand of product.

Advancement in medical technology

Advancement lead to more reliable, cost –effective and secure treatment options which attracts

more people to come for knee replacement surgery.

Awareness about quality of life and increasing life expectancy

As now people’s awareness about diseases and their available options make them more inclined

toward use of it. Now people prefer quality of life inspite of various injuries lead to more

demand of product.

Income

Income plays significant role in consumer’s decisions to go for knee replacement procedures. As

the income of people increase they become freer to spend money over medical treatment.

b. Demand shifter differences across various customer segments

Size of population.

To the 2020, Baby-Boomer generation in US is expected to reach at 53.2 billion, which is

growing continuously and expected to reach 78.9 billion at the end of 2050. (5). It is estimated

that in 2040, more than 500,000 knee and hip replacement surgeries will be performed due to the

influx in aging Baby Boomers.(6) The athletics, golfers, sport persons and gymnastics also

increasing in numbers to undergo knee replacement due to field injuries at younger age. All knee

Implant manufacturer need to pay attention to this kind of data in order to target the most

promising segment of the population in term of number of potential customers. The below graph

showing the number of knee replacement surgeries taken place in US and other countries.

Trend in knee replacement surgery, 2000-09, selected countries

Source: http://www.oecd-ilibrary.org/sites/health_glance-2011-en/04/07/g4-07-

04.html?itemId=/content/chapter/health_glance-2011-35-en&_csp_=dd6d08c620cce62961bb1160598f4ab5

Advancement in medical technology

Advancement in surgical techniques, such as minimally-invasive methods and use of computer-

assisted surgical systems, aim to reduce post-operative pain, shorten recovery time and improve

surgical accuracy. (8) Stryker after acquisition of MAKO claims, “With MAKO’s technology

platform and our innovations in joint reconstruction, we look ahead to simplifying joint

reconstruction procedures and increasing the consistency, reproducibility and precision of joint

surgeries, resulting in an improved patient experience.” Increases in facility attract more people

toward product.

Awareness for quality life and increasing life expectancy

In the United States, the proportion of the population aged >65 years is projected to increase

from 12.4% in 2000 to 19.6% in 2030 (3). The number of persons aged >65 years is expected to

increase from approximately 35 million in 2000 to an estimated 71 million in 2030 (3), and the

number of persons aged >80 years is expected to increase from 9.3 million in 2000 to 19.5

million in 2030. According to Department of Health and Human Services;

Life expectancy in the USA(Photo: Janet Loerke, USA TODAY)

Income

With the increase in busy work schedules and increase in individual’s income, people are

searching for easier and quick way to be stay and fit and hence there is an increase in demand for

knee replacement procedure. The consumer with higher income is moving more towards a

balanced healthy living, increasing their physical fitness, wanting the best for their kids too and

as a result the demand for knee replacement procedure has increased tremendously.

c. Observable variable for each demand shifter

Data about US population can be tracked by United Nations and U.S. Bureau of the Census.

Number of targeted consumers as per geographical location, their life expectancy rate and their

income is very important to adjust sells target for location.

Advancement of technology can be known by journal and article related healthcare treatment.

The United states patent and Trademark Office is viable source of new innovation in procedures

and relate our products to attract more consumers toward product.

5. Market supply

a. Shifters of product supply

Price of input: - The main component in knee implant is metal and alloys

(e.g. Stainless steel, cobalt-chromium alloys, titanium, polyethylene etc.)

which are used in fabrication. Any changes in prices will eventually

decide the quantity to be supplied in market for knee implant.

Technological improvement. It is very critical factor as it might help to

lower down the prices of Implants so more output and thus supply.

Entry or exit of other seller. The more company begin to manufacture

similar knee implants the supply of it would be increased.

b. Changes in supply shifters in the last 3 years and reactions

Input prices.

Input price have changed for implant during last 3 years. Knee implants are made from

mainly metals and alloys. The market price of metal and alloys are very volatile which

reflects in table depicted below.

Source: http://www.steelonthenet.com/steel-prices.html

Technological improvement.

Company believes that an innovation is a key factor in company constant 36 year sales growth.

Company cited, “Previously, the manufacture of custom knee implants was a time-consuming

process that required many days or weeks, depending on the order. The company streamlined

this process by combining ProEngineer’s solid-modeling capabilities with Stratasys’ rapid

prototyping capabilities to produce a wax insert. Starting with a ProEngineer solid model, minor

modifications are performed to tailor the model to the non-standard dimensions of the

custom component.”(9)

Similar impressive improvements were also implemented in the manufacture of femoral

components, titanium hip stems, hip instruments, endo components, bone screws, and tibia

inserts. In all cases, continuous manufacturing process improvement and streamlining have led to

a 10% reduction in the cost of goods sold (COGS) for eight consecutive years at Stryker

Orthopaedic. All process improvements began with the goal of reducing lead times, which

resulted in the improvement of other production process metrics. (9)

6. Production

a. Economies of scale.

Source : Stryker fact sheet ‘14

Stryker manufactures very wide range of products which can be broadly divided into three

segments ; Medical and Surgical, Reconstructive and Neurotechnology and Spine. (10) During

last five years company have succesfully acquired 16 firms to diverse its product portfolios and

services which provides company a tremendous economy of scale. Yahoo finance report claims,

‘ Stryker’s acquisition-driven strategy will enhance its long-term growth prospects by expanding

its existing product offerings across all business segments.”(11)

Stryker Mergers and Acquisitions:

Source: Fact sheet Oct’14, Stryker.

c. Economies of scope.

Stryker enjoys tremendous economies of scope. Company is global leader in medical technology

and consistently delivering exceptional results across a broad-based range of products and

services. Stryker orthopedic manufactures a variety of product under one shelf which provides

competitive edge and tremendous economies of scale to company. “Stryker's acquisition of

Howmedica in December 1998 included the manufacturing facility in Geneva. To improve

efficiency, production of the external fixators was moved to the Selzach Manufacturing site.”(12)

After each acquisition company reshuffle its product manufacturing unit and make it more cost

efficient by decreasing operating cost.

7. Product Elasticity

a. Price Elasticity

Number of available substitute

Knee implant is high technology savvy products. Manufacturing of it requires high capital

investment and strong R&D base. The products need to be passed through highly scrutinized

FDA rules for approval. Available substitute for product is limited and mention them in part 2.a

Time period of adjustment.

A consumer would need long time to adjust to a price change. Product requires lot of research

and development before it comes into market. Many products are patented by company which

are not easily available in short period of time. Therefore, elasticity of demand for knee implant

is elastic with respect to time period for adjustment needed for consumer.

Durability of the product.

Company put emphasis on quality and durability of products. Knee implant is biologic substitute

of human body part. Product is implanted in its position through invasive surgery. So, durability

is highly necessary. Stryker claims for its products,” The durability of knee implants depends on

many things including patient weight and activity level, as well as the implant's bearing surface

technology. Based on laboratory testing, Stryker's Triathlon Knee with X3 technology has

demonstrated a lower wear rate which may result in a longer lasting implant.”(13) So, Stryker

knee implant has an elastic demand with respect to durability.

Percent of the consumer budget.

A cost of Stryker Triathlon X3 knee implant is $2930 and along with implants a kit of surgery

and material cost more than $5000. This is extremely cost sensitive products and products is used

by patients only once in lifetime. Along with it out of total cost of knee replacement surgery

implant and equipment cost is maximum. So, real consumer of product healthcare professionals

and hospitals consider price of implant in their purchase decision. So, it is more elastic as it

comprises a big share of consumer’s budget.

b. Price elasticity of Stryker’s knee implant variation by customer group.

Knee implant is more about necessity than choice for consumers. Knee implant is mainly used

when person is suffering from knee pain due to arthritis or knee injury. Person who is seeking

relief of pain and wanting again active life, will go for knee replacement surgery. Household

consumer is person with more than age of 65 and younger people who is seeking quality of life

in spite of injury. The company main strategy is to strengthen relationship with physician and

medical professional to sell their products. So, demand is elastic in slight change in market price.

However, demand may decrease if price varies a lot from competitor’s product.

c. Pricing power of Stryker co.

Stryker has some control over price as it operates in monopolistic competition market. The brand

equity of “Stryker orthopedic” allows extracting more consumer surplus than a generic brand

would. It is highly differentiated in the mind of healthcare professionals. Company’s strategy to

build strong relationship with physicians, educate students about their products and deliver up-to

date service to their end user make it distinguished from other competitor in market.

8. Antitrust

a. Stryker faces hip injury claims as new FDA recall targets knee products

From 2008 through 2012, more than 20,000 patients nationwide, or 93,000 worldwide, were

implanted with one of the two faulty devices. The patients didn't know the devices were so

problematic; they trusted that the medical device company did all the necessary testing to ensure

the product was safe. What they didn't know was Stryker never did any premarket tests on

humans; the company used a little-known U.S. Food and Drug Administration (FDA) approval

process that allows medical device manufacturers to sidestep human testing and clinical trials.

Source:http://www.orthopediclaw.com/cases-we-are-investigating/stryker-rejuvenate-hip-

replacement-recall/

b. Economic issues involved

The historic recall of Rejuvenate Modular and ABG II modular-neck hip stems because of

defects led to company an economy loss. The company told investors that they expected that the

recall would cost between $190 and $390 million to resolve. The company also suggested that all

patients with implants follow up with their surgeons to have their implant analyzed. A third party

company hired by Stryker, Broadspire Services Inc., is handling all medical claims for removal

and out-of-pocket expenses by the patients. (15)

c. Agreement with action taken

I agree with the actions taken by company itself and FDA to resolve claims, as it is in the interest

of the end consumers. Company also high lightens its commitment toward quality.

Resources:-

(1) http://www.stryker.com/en-us/corporate/AboutUs/index.htm

(2) www.NAISC.com and http://www.siccodes.us/sicresults.asp?siccode=3842

(3)http://www.stryker.co.za/index/st_pag_about-us/uk_pag_about-us-industry.htm

(4) file:///C:/Users/olie1/OneDrive/Fact%20Sheet%20Oct%2014%20(1).pdf

(5) http://www.census.gov/population/international/files/97agewc.pdf

(6)http://www.universityorthopedics.com/what_hurts/knee_surgerical.html#sthash.VDBGFmVx.

dpuf

(7) http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5407a6.htm

(8) http://www.beckersspine.com/lists-and-statistics/item/1027-10-statistics-and-facts-about-

growth-in-joint-replacement

(9) http://www.bmpcoe.org/bestpractices/internal/sho/sho_4.html

(10) http://www.stryker.com/en-us/products/SurgicalEquipment/index.htm

(11) https://finance.yahoo.com/news/stryker-grows-strategic-buyouts-competition-

164002743.html

(12) http://www.osteosynthesis.stryker.com/general/locations.php?vis=pts

(13) http://www.aboutstryker.com/knee/why-stryker/

(14) http://www.hip-replacement.org/stryker/failure.php

(15) http://www.prweb.com/releases/stryker-hip-recall-faq/03/prweb10534731.htm