The Medical Device market provides a great illustration of the challenges of developing products in today’s markets. Historically, the 828 medical device makers in the U.S. have generated above average growth and margins thanks to innovative products and consistently rising prices. But as the saying goes “…the times, they are a changing.”
The bottom lines of medical device makers are under pressure from factors such as the new 2.3% medical device tax or the advent of competitive bidding for Medicare contracts or the ongoing consolidation of the customer base. The traditional innovation-driven business model is under duress and makers are questioning whether they can sustain current levels of R&D spending. At a minimum they must get more bang for their R&D buck – the question is how?
One thing is clear — device makers are excellent at improving the performance of existing products. Yet many of those high performing products miss their financial targets because customers refused to pay for performance improvements that didn’t improve their own bottom line.
Creating high performing products that don’t create value is a common “value leak” in the development process. A value leak occurs any time a development decision is made that fails to optimize the value created for the customer against the cost of development and manufacture.
The development process can leak value is a variety of ways. A common value leak occurs when new products are launched with only a single version. Increasingly fragmented markets require multiple versions of a product to satisfy customers with varying needs and price sensitivities. A one-size fits all approach to development leads products that are over-priced to price sensitive customers and don’t meet the needs of high value customers.
Value also leaks when prices for new products are set without a quantified estimate of customer value. There are only two possible outcomes when prices are not aligned with value. If the price is high relative to value then sales volume will suffer. If price is low relative to value, then the company leaves money on the table.
Value can leak from the development process in the form of excess costs as well. Developing a new feature requires a substantial investment in time and capital. Those investments are lost whenever they are made in a non-value added feature. Prioritizing features based on value and cost leads to more efficient capital allocation and improved ROI on development investments.
Each of these value leaks act as an invisible drag on company performance that only becomes evident when new products miss their financial targets. Well-intentioned managers typically address the problem by adjusting prices. But this is like putting Band-Aid on a gunshot wound – it’s too little, too late. The real solution requires sealing the value leaks upstream before the products hit the market.
The benefits of sealing the value leaks in your development process are immense. That’s why it’s worth asking…”is your development process leaking value?”