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2011

Case Analysis
EMI and the CT scanner
At a glance: In the early 70s there was considerable disagreement among top executives at EMIthe U. K. based music, electronics and leisure company. EMI had recently developed a new technology in the medical imaging field. Executives were deciding whether this business was the right move for the company or not. This paper analyzes the industry and firm environment and subsequently draws a recommendation in respect to the issue at stake.

Juan Perez Strategic Management


Juan Perez 6/7/11 Strategic Management |EMI Case 1 Strategic Management 6/7/2011

Analysis of the Industry and Competitive Developments: To provide valuable recommendations in respect to EMIs future in the medical equipment business, it is initially necessary to gauge the following: (1) condition of the industry, (2) competitive environment, and (3) risks of introducing a novel product in a new market. Subsequently, Porters Essential tests will be applied to determine if the diversification strategy truly creates shareholder value. Entering the medical equipment business will require EMIin order to be competitiveto establish operations in North Americaa market in which they have no prior experience. Therefore, the analysis will be centered in the U.S. Diagnostic Imaging Industry. The U.S. Diagnostic Imaging Industry: This particular industry has demonstrated to have great potential. The size of the x-ray market in the United States grew from $50 million in 1958 to $350 in 1972. The United States thought to represent 35% to 40% of the total world market. Despite the maturity of the product, the x-ray market was growing by almost 10% annually in dollar terms during the early 70s. For this industry is important to denote that its demand increases along with increases in population and life expectancy. It is predictable that with technological advances and modern medicine life expectancy will increase substantially in subsequent years. An aging population will require more sophisticated medical treatments that in turn will require sophisticated diagnostic procedures, such as CT scanning. Hence, this industry has great prospects for the future. Another feature that makes the U.S. industry attractive to EMI is its technological edge. Surgeons and doctors are constantly looking for better technologies and are receptive to new equipments that can improve current health care practices. This indicates that, once the CT scanner is well known among the medical community (after the discontinuity phase), surgeons will switch from the established technology to the CT scanner (See figure 1). This new technology will displace the traditional x-ray imaging especially in brain and head imaging.

Strategic Management |EMI Case

Competitive Environment for the U.S. Diagnostic Imaging Industry: Currently, there are 3 types of diagnostic imaging equipmentNuclear, X-ray and Ultrasound. These technologies have been in the market for decades and are widely utilized in the U.S. However, none of these had the capability of creating three dimensional images, a feature that is critical for finding traumas and tumors in the human brain. If EMI decides to enter the U.S. market the CT scanner will be protected by patent laws, this will allow the company to have a head start from its competition. Another potential benefit is that since EMI will locate its manufacturing plant in The U.K., the technological spillover in the U.S. will be reduced in some measure. Risks: The diversification strategy that EMI is seeking has several risks associated. The first risk is that the technologies associated with the CT scanner were well known and understood. The EMI scanner is the integration of mechanical, electronic and radiography components into an accurate and reliable system. This is not hard for competitors to imitate. Therefore, the patent would the only shield that protects EMI from competitors. Second, once the patent expires, EMI will face intense and direct competition from firms that have vast experience and are specialized in manufacturing medical equipmentmedical products accounted for only 0.5% of EMIs sales in the early 70s. Strategic Management |EMI Case 3

Specialized firms, such as Siemens, N.V. Phillips, Compagnie Generale de Radiologie and Picker, will catch up and develop economies of scale rapidly. Such competitive environment would pose several threats for EMI. To maintain its market position, EMI would have to allocate a large portion of its resources to the medical equipment unit. Said reallocation would imply forgoing investment opportunities in the musical industry, which in turn would change EMIs strategy focus. The third risk is the CT scanners price itself. Although, EMIs invention is superior to traditional X-ray technology, many health care institutions wont be able to afford such a large capital investmentEMI scanner was expected to be around $400,000. Porters Essential Tests: In order to determine if the CT scanner diversification strategy is appropriate for EMI, we will apply Porters essential tests. The attractiveness test: as stated in the first section of this paper, the U.S. diagnostic imaging industry has a large potential. Because of its size, sophistication, progressiveness, and access to fund, The U.S medical market clearly represented the major opportunity for new devices such as the CT scanner. The cost of entry test: there are few barrier of entry for this industry, one of them, EMIs unfamiliarity with the North American market and its distribution networks. However, this can be mitigated, in great extent, by establishing a local sales subsidiary. Better-off test: Even though the CT scanner is a totally new and different product for EMIhorizontal diversificationit has great potential for the firm. The innovativeness and superior features of the CT scanner make it a prospective profit driver, thus it has the potential of creating value for the shareholders. However, EMI needs to be very careful on the timing when launching this new product.

Strategic Management |EMI Case

Recommendation: EMI should start the production of the CT scanner as soon as possible. Investments should be made quickly and boldly to maximize the market share of the EMI scanner before competitors entered. The following implementation plan would be necessary to maximize the profits of EMI in respect to the CT scanner: Implementation Plan: Lead strategy to benefit from first mover advantages such as brand loyalty, market share and ramp up volumes early. The patent will deter competition a couple of years while the CT scanner gains momentum. Establish a partnership with sales subsidiary In the U.S. to take advantage of its knowledge of the local medical equipment market and distribution channels. Conduct focus groups with the most renown and proficient surgeons in the U.S. Once they try the EMI scanner and recognize its superior features, they will spread the voice among the medical community. Other surgeons will follow and thus the demand for the EMI scanner will grow. Cultivate relations with state and federal agencies so they can provide funding to hospitals that dont have the resources to purchase a CT scanner, but yet need one. Once the patent expires, firms producing CT scanners will menace EMIs market position. The best strategic move, at that pointonce the EMI scanner has gained momentumis to sell the business unit, (something similar to the Airborne case) to a firm that specializes entirely in medical equipment. Does not make sense for EMI to deviate its focus from the musical industry to any other.

Strategic Management |EMI Case