Is the idea of growth in emerging economies fact or fiction? Across industries the answer is “both” as some companies have been somewhat successful and others have been facing challenges gaining a strong foothold in these economies. The medical technology industry is no different and when you add the medical distributors to this mix, it becomes even more complex.
The medical technology market is worth $350M and growing at 5% compound annual growth rate (CAGR) globally. Emerging markets, on the other hand, are showing significant promise with growth in the double digits. Emerging markets present opportunities for profitable growth for medical device companies but they also come with a significant challenge. These markets that are positioned for growth have the least amount of experience – not only the market but also nurturing the medical distributor relationships. Leveraging local medical distributors to establish a local supply chain could be one way to bridge the gap between experience and opportunity.
There are many benefits for medical device companies leveraging local medical distributors in emerging markets. Because of their familiarity with the social and political landscape, local distributors can provide easier market access, manage financial risk, and work with regulatory bodies. Working with local distributors can present some challenges however, including a risk of diluting company brand, minimal transparency into operations, and lack of customer relationships. There is also the challenge of managing relationships in a manner that is consistent with US ethics laws. There can be minimal loyalty across regions because medical distributors sell competing products in different countries/regions. Despite these considerable challenges, medical technology companies really need to consider developing relationships with local medical device distributors.
The medical device distributor model is evolving in emerging markets. The focus is moving from pure distribution to sales and service and from sales and service to solution provider. Local medical device distributors are no longer satisfied with supplying a single company’s products and are now venturing into creating solutions and building their own brand. In capital equipment, for example, a distributor might build a Cath lab instead of supplying diagnostic equipment for an existing lab. Distributors can be successful in these ventures because they understand the customer and needs better than many US company operating in a foreign land. In some countries where government is key to building infrastructure, local distributors can manipulate relationships more effectively than large medical device companies. In the supplies side, the medical technology companies are always up against the nexus between distributors and local manufacturers, who have often reverse engineered technology in absence of strong intellectual property laws and unfavorable taxation. The medical device distributors tend to be fragmented in emerging markets because barriers to entry are low and the competition is very intense with strong focus on incentives to push the products.
In the face of all the above constraints, there is an opportunity that needs new thinking on the market and stakeholder relationships. Medical technology companies may need to think about providing more than just a product and related service support. They should start developing their value proposition in areas of innovative partnerships, decision management and risk management. Let’s review these topics in additional detail.
Innovative partnerships have to be explored beyond the medical device space. Innovative partnerships must include distributors, pharmaceutical companies, healthcare providers, and insurance payers to create an open innovation network and provide cost effective and innovative solutions for emerging markets. Joint ventures where distributors bring market knowledge and medical technology companies bring solution expertise could be an example of an innovative partnership.
Decision management practices have to be stringent. Medical device companies bring years of R&D experience in helping evaluate solution-centric market approaches with a stage-gate model. The expertise the medical device companies bring in processes and capabilities can help in local distributors reduce complexity and optimize their portfolio to better address market needs.
Medical device companies can provide capital to source new solutions which would otherwise not be possible with the financial resources of the local distributor. Medical device companies can not only help distribute the risk of a solution in the local market, but they can also provide risk mitigation strategies for innovative but risky solutions. By utilizing program management skills and applying a venture management approach to solution development medical device companies and distributors can explore new technologies and serendipitously arrive at novel ideas.
The above approaches present an interesting yet challenging path to tapping emerging markets. The key is to consider local distributors as an asset rather than a competitor who is a part of the problem.