We’ve Got Rhythm! Medtronic Corporation’s

1 January 2017

Pacemakers were small, battery-powered devices which, when implanted within a patient, helped a malfunctioning heart to beat in a steady, fixed rhythm. Because Medtronic was the first entrant into the pacemaker field and built a strong technological lead, it enjoyed a substantial portion (over 70%) of the market share for cardiac pacing through the 1960s. Building upon Medtronic’s legacy of leadership was not easy, however. In the face of increasing competition, rapid technological change and tightening market and regulatory demands for product quality, Medtronic saw its market share cut by more than half between 1970 and 1986.

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Though it had invested heavily in technology and product development over this period, much of that investment had been unproductive. Many projects failed to produce product designs that could be launched competitively, and the features and functionality of most of the products the company was able to launch, lagged the competition. Several key employees left the company, seeing greater opportunity to develop their new pacemaker product ideas in new start-ups rather than within Medtronic.

These competitors proved much faster than Medtronic at developing new products that advanced the state-of-the-art in pacemaking. Medtronic was also pummeled by two major product recalls related to product quality problems. Observers felt the company would have lost even more of the market during this period, were it not for its strong worldwide salesforce and the lingering legacy of its brand reputation amongst surgeons, the primary customer group. 1 This citation was made by the National Society of Professional Engineers in 1984.

Professor Clayton M. Christensen prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some of the data and names in this case have been disguised to protect the proprietary interests of the company. Copyright © 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School. 1 698-004 We’ve Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business Management changes which were initiated in the late 1980s, however, had sparked a dramatic reversal in the company’s fortunes, and by 1996 the company had regained its position of product and market leadership. By all accounts, it was in front and pulling away from its competitors.

On a pleasant Minneapolis spring afternoon in 1996, several members of the team that managed this turn-around — Steve Mahle, president of the Brady Pacing Business; Mike Stevens, general manager of the Pulse Generator & Programming Systems (PGPS) Division; Bill Murray, general manager of the MicroRel component manufacturing subsidiary; Director of Marketing Paula Skjefte (pronounced Sheftee); and Director of Product Development Technology Don Deyo -gathered to assess the progress they had made since they had taken the helm of the troubled division in the late 1980s.

They were also anxious to understand whether the management structure and the processes, values, and resources they had created to achieve this turn-around, were capable of maintaining the company’s successful momentum in the future. This case recounts their achievements and concerns. Medtronic’s Brady Pacing Business Medtronic’s Brady Business Unit designed and built pacemakers that delivered a rhythm of electrical impulses, to remedy a disorder called Bradycardia, in which the heart’s electrical system does not generate pulses to cause the heart to beat rapidly enough to sustain the body’s normal activity, as described in Appendix 1. Amongst its other businesses, Medtronic also had a Tachy cardia Business Unit, whose products addressed the opposite malfunction — when the heart’s electrical system generated too many beats. Because of the prevalence of Bradycardia relative to other disorders in cardiac patients, the Brady Business Unit historically had delivered most of Medtronic’s revenues, and an even larger share of its profits. Consequently, the health and vitality of the Brady Business strongly affected the corporation’s overall financial performance.

The Brady Business Unit worked hand-in-glove with the component divisions of Medtronic in product development efforts, as shown in Exhibit 1. The Promeon Division, for example, developed new technologies to power pacemakers. In the early years of the industry’s history in particular, battery technology had been a pivotal selling point because the battery could not be replaced: once it was depleted, a new pacemaker had to be implanted.

Another division, MicroRel, designed and fabricated the critical hybrid microelectronic circuits in Medtronic’s pacemakers. Located in T empe, Arizona, it supplied proprietary circuitry to all of Medtronic’s businesses. Work with MicroRel was viewed as a crucial connection in the development of new pacemakers, because of the increasing importance that integrated circuit (IC) technology played within these devices. Perhaps the most critical division for the Brady Business was the Pulse Generators & Programming Systems (PGPS), headed by Mike Stevens.

Unlike the other two component divisions that shared their services and output with other parts of Medtronic, PGPS focused on developing new products for Bradycardia pacing, by translating customer and market-based inputs into product designs, and then worked closely with manufactur ing to produce the final products. This involved design and assembly of the pacemaker as well as the programming unit, which typically sat on a table in the cath lab or operating room where the implantation was performed.

Programming units allowed physicians to tailor the firmware in the pacemaker so that the frequency of the pulses it generated and a number of other attributes of the device matched the needs of each individual patient. The leads which carried electrical impulses from the pulse generator to the wall of the heart were designed by a separate leads group within the Brady Pacing Business Unit, headed by Warren Watson. 2 The term “brady” derives from a Latin root meaning “slow. ” The opposite cardiac pacing disorder, tachycardia, took its name from a Latin root meaning “fast. ” 2 We’ve Got Rhythm!

Medtronic Corporation’s Cardiac Pacemaker Business 698-004 How the Pacemaking Leader Lost Its Rhythm Product development at Medtronic historically had been supervised by its functional managers, who were intimately involved with each development effort during the company’s early years. However, as the company grew, the functional managers became increasingly absorbed by operating responsibilities in their own functional organizations, making coordination across functions, in practice if not intent, a lower priority. The company responded by creating a group of project managers to coordinate the work of various functional groups.

While this helped, most major decisions still had to be passed by the functional managers — “A legacy of how decisions had been made that still lingered in the organization,” according to a long-time employee. The project managers’ job was to try and get decisions to be made by the functional leadership — they only had minor authority to make decisions themselves. “Planning new products is actually a lot more difficult in a business like this than it looks,” reflected another experienced executive. “In some businesses the problem is a lack of great ideas.

But in our situation — with rapidly changing technological possibilities, some darned good competitors and thousands of cardiologists out there with ideas for all kinds of new features, the opposite is true: We’ve always had too many ideas for new products. In our functional organization, without a single, coordinated process or person to articulate a product plan or strategy, development projects just started everywhere. When you had a good idea, you’d mock up something — either a real prototype or something on paper — and carry it around with you.

Then when you’d run into Earl Bakken or another powerful manager in the hall, you’d corner him, pull your idea out of your pocket, and try to get him to support it. If his reaction seemed positive, then you would use that leverage, to get a few friends to help you push it along. At some point you’d go to the engineering manager to get formal resources. “The problem with this system was not that we were working on bad ideas. Most of them were technically sound and made market sense,” commented Don Deyo, an experienced engineer and currently Director of Product Development and Technology. We were trying to do too many things, and no project got the focus and attention needed to get it done right. It was taking too long to get anything to market. We never got good at releasing new products, because you only get good at things you do a lot. Those that we did introduce often followed the lead of competitors. That’s what happens when you continually try to respond to every new idea to come along. ” The problem then fed on itself,” reflected Mike Stevens, general manager. The development people would tell me that they could never get anything to market because marketing kept changing the product description in the middle of the projects. And the marketing people would say that it took so long for engineering to get anything done, that by the time they got around to completing something, the market demands would have changed. When customer requirements evolve faster than you can develop products, it becomes a vicious spiral. ” In environments like that, it is very difficult to plan product families,” Stevens continued. If the company launched a product that subsequently could be modified or extended to create derivative models, it was a stroke of luck. ” Because of the ad hoc way in which new product development projects were conceived, Medtronic’s project pipeline was made up of incongruous development cycles. Projects were separated according to whether they were single or dual-chamber platforms. Each new model had largely its own unique circuitry, components, testing programs, casing, and battery. Due to the high costs of developing all these parts of the pacemaker, project managers battled each other for resources.

Although the company’s reputation and strong salesforce relationships with surgeons kept disaster at bay, the company’s performance suffered as a result of its disabilities in development. Between 1970 and 1986, it was almost always a competitor, not Medtronic, that introduced major new improvements to the market. For example, Cordis introduced the world’s first programmable 3 698-004 We’ve Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business pacemaker in 1972; Medtronic followed in 1980. Cardiac Pacemakers Inc. , a Medtronic spin-off, pioneered the first pacemaker with a long-life lithium battery in 1974.

Even though the technology was available from a third-party supplier, Medtronic did not get its lithium battery-powered product out the door until 1978. Although Medtronic introduced its first dual-chamber pacemaker during this period, it did not follow it with an improved dual chamber device for another eight years. Deyo explained, “We were working on next-generation dual chamber products during all of those eight years. The problem was that just as we’d get ready to announce a new product, a competitor would come out with something better.

So we’d force the funnel open again to allow for this new input, re-scope the project, and try to leap ahead of the competitor. Then just as we’d get ready with the improved version, a competitor would come in ahead of us with an even better product; and so on. ” “I got so that I just didn’t want to answer the phone because I was afraid there would be a salesman on the line wanting to know when we were going to come out with a product that was comparable to something a competitor had introduced,” recalled Paula Skjefte, director of marketing. “I just couldn’t give him an answer. Field product failures compounded the problems caused by Medtronic’s long development cycle. Its Xytron pacemaker line was recalled in 1976 after several units failed following implantation. And a few years later, physicians found that the leads on some pacemakers they had implanted had disintegrated, so that the pacemaker’s output was not getting transmitted to their patients’ hearts. In total, Medtronic was forced to issue four different product advisories to warn that certain models were susceptible to malfunction. The result of these factors was a massive loss of share, from 70% in 1970 to 29% in 1986, as shown in Exhibit 2.

Still, however, due to significant growth in the market, the company continued to report record sales and profits over this period, and for many in the company there was no cause for alarm. “Medtronic was a really nice Minneapolis company,” Don Deyo noted. This reflected in many ways the values of Medtronic’s founder, who had a genuine reverence for every employee’s contributions to the company’s success. “But somehow in the mid-1970s, Deyo noted, “This attitude got out of hand. We dominated the market, and were very profitable. Because there was so little pressure on the business, we lost our intensity and willingness to focus our efforts. A Home Run Saves the Day The company’s decline was arrested in 1986 — more by good fortune than any change in management practice, however. In the early 1980s a project leader, Ken Anderson, championed an idea for a “rate-responsive” pacemaker — a device which could sense when changes in body activity required the heart to beat faster or slower, and stimulated the heart to beat accordingly. Although most cardiologists Anderson spoke to thought the idea was impractical, and despite the indifference of most of Medtronic’s staff, Anderson won the support of the general manager, and the two of them set up a dedicated team to pursue the idea.

Its product, dubbed Activitrax, worked — technologically and in the marketplace. Cardiologists found its single-chamber design easy to implant, and its effect was nearly as good for patients as a dual chamber pacemaker. Patients reported feeling stronger, because it would cause their hearts to beat more rapidly when they were working hard or exercising. And they reported feeling more rested in the morning, because Activitrax paced their hearts to beat more slowly when they were asleep. The dramatic Activitrax therapeutic breakthrough literally saved Medtronic, because no other new platform products were ready for introduction until 1992.

It did not, however, alter the way the company developed products. 4 We’ve Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business 698-004 The Turnaround in Product Development Though Medtronic’s market position was helped by the success of Activitrax and by a serious product recall suffered by a principal competitor, the most dramatic changes in the company’s market position were instigated when Mike Stevens was assigned to be vice president for product development of the PGPS Division in 1987.

Stevens’ career with Medtronic had begun in 1973, when Motorola decided to shut down its hybrid circuit manufacturing operation near Phoenix. Stevens and several other employees of the Motorola facility decided to continue the operation and obtained financing from Medtronic, which had been a major customer. Stevens had watched Medtronic’s struggles in product development from a supplier’s viewpoint. “Though I didn’t have a background in product development, I saw much of Medtronic’s problem as Management 101. We had very strong functional roles.

People were being measured by cost centers, and there was no accountability for the delay or failure of a new product. I felt the basic values and ethics of the company were still really strong. But what needed work were its processes. I felt if we could get those straightened out, then we could bring the Brady business back to its past glory. ” Stevens summarized key elements of his management philosophy as follows: 1. Commitments are sacred. The more responsibility you give to people to control their destiny, the more you can and must hold them accountable.

Create a sense of urgency by contrasting the excitement of bringing new therapy to patients, versus the consequences if your competitors are there first with better solutions. Don’t waste time with excess travel or off-site meetings Are happy employees productive, or are productive employees happy? Stevens believed the latter, whereas Medtronic management had been acting as if the former were true. Do nothing that separates management and employees. Management means responsibility, not status. You only get what you measure. Focus on gaining market share.

Over time, this is the most accurate measure of your success. 2. 3. 4. 5. 6. Managers in the PGPS Division got a taste of Stevens’ belief that commitments are sacred when, shortly after arriving at Medtronic, he held management to the project milestones they had agreed upon at the beginning of fiscal year 1988. Their incentive compensation was tied to these objectives, and 1988 was the first year in memory that management did not receive year-end bonuses that were tied to objectives. Measuring Product Development Performance

Stevens implemented his measurement philosophy by focusing on four measures of product development performance, which corresponded to the achievements he wanted the organization to focus upon. These are described in the following table. 5 698-004 We’ve Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business Focus Speed Measure Cycle time Stevens’ Comments “This is the time required to get a new product into the market. If I measure this, there isn’t much else I need to measure. It forces you to do the other things right in product development, because you can’t make mistakes, and you can’t waste time. “The reason we focus on fully allocated cost, rather than just viewing functional costs or direct product costs, is that it gets you thinking about market share, and the impact that unit volumes can have on your financial success. This is healthy thinking. ” “This translates into market share, pure and simple. ” “In our business, you can’t afford a field failure — because our patients count on us, and doctors can choose to go elsewhere. ” Cost Fully allocated unit product costs Innovativeness Product Quality Product performance relative to competitors Field performance -defects per million

Most people in PGPS welcomed Stevens’ attitude. One commented, “I was just getting started as a project manager, and Mike was a breath of fresh air. His priorities were clear; I knew where he stood. He had a very different management style: very firm, assertive, thoughtful and focused. He was execution-oriented, and really held people accountable. Processes and Practices “This isn’t a story about great management,” Stevens emphasized. “It’s a story about putting into place a set of processes that helped a great team of people be as productive as they could be. ” The processes Stevens instituted had the following features: 1.

Speed “Being fast to market eliminates so many other problems,” commented Steve Mahle, who took over as president of the Brady Pacing Business in 1990. “The slowest part of our process was actually in deciding what needed to be done. We used to spend lots of time debating what we should do. One of Mike’s greatest achievements was in cleaning up the front end. He did this by articulating very clearly what our strategy was, so that there was a well-defined criteria that could guide these decisions. Then he created a process to get those decisions made. ” Exhibit 3 describes the process by which new products were defined.

An assessment of the competitive and customer environment was combined with a technology assessment, to define the business objectives of each new product, and to clarify what the financial and competitive contributions of the new product needed to be. Stevens, who by 1991 had become division general manager, reviewed new product ideas according to their potential for meeting those business objectives. His staff, comprised of the managers of the division’s marketing, research, development, technology, finance, human resources and manufacturing functions, participated in this review with Stevens. . Platform Strategy Since product ideas in the earlier regime had originated in disparate parts of the organization and were approved and funded in independent decisions, it was quite common that products that required significant investments of time and money were not leveraged with derivative products that could extend their life and market reach. The highly successful Activitrax model, for example, did not spawn a single derivative product that offered different features, performance, or price points to the market.

To devise an effective product line architecture built around product platforms, Mahle established a product planning team comprised of himself, Mike Stevens, Paula Skjefte, Don Deyo and Stan Myrum, Vice president and general manager of the business unit’s leads division. This team defined a platform strategy around three key elements. 6 We’ve Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business 698-004 The first element was that the initial platform product had to be designed to accommodate the full range of derivative models from it, without significant redesign. In other words,” Stevens explained, “We designed the highest-performance, most fully featured version of the product at the outset. ” Medtronic then created derivatives by de-featuring and de-rating certain elements of that design, so that it could address other tiers of the market as well. The second element of the platform strategy was enabled by the first. Historically, Medtronic had introduced new pacemaker features on its single-chamber models first, because they were technologically simpler to design and build.

Once the features were accepted and the technology perfected in the single-chamber platform, the features were then moved up-market onto the dual chamber platform. “The effect of this,” Paula Skjefte noted, “Was to force a lot of our lead physicians to continue focusing on single-chamber devices just so they could utilize our newest features. Once we began designing the platform to accommodate the full range of derivative models we planned to spin off from it, we didn’t face the same constraint — it was just as easy to put the most advanced features on the dual chamber model.

This gave us a much clearer progression from basic, simple devices for the low-end of the market to high-performance, fully featured models at the high end. Skjefte continued, “The way we used to play in the low-end of the market was to discount the price of our old model, after we had introduced a new one. This was ironic. Because we were reducing the cost of our products with each generation, we sold our high-cost models at the lowest prices, and our low-cost, newest models at the highest prices. The result was that there was little incentive to maintain a strong presence in lower tiers of the market. Under the new strategy, Medtronic addressed lower price points in its market with the simplest versions of its new lower-cost platforms. Hence, even as Medtronic was assuming a leadership role in features and functionality in higher tiers of the market, it strengthened its position in the low end as well. The third aspect of Medtronic’s platform strategy was to change the way platforms were defined. Formerly, Medtronic had thought of platforms in terms of physical architecture.

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