Question 1

How has the healthcare industry changed (pre-1983 to post 1983)?

What are the implications for BD? How has BD managed to build up an
80% market share in this market? Which many competitors bigger than
BD have tried to enter without success?
In 1983 the entire health care industry was affected by the changes that
the U.S government made in how to reimburse hospitals for Medicare
patients (40% of all hospital patient days). So, let's see how the situation
was before and after these changes.
Before 1983
Hospitals had been reimbursed for all costs incurred in serving those
patients.
Hospitals were rewarded for efficiency.
The buyers at the hospitals were specialist, without purchasing skills or
interests in negotiating for prices.
Distributors were making great profits and not paying enough attention
to costs.
After 1983
Under the new system, the payment to a hospital was based on national
and regional costs for each DRG, not on the hospital's costs. Moreover,
the national and regional averages were to be updated, so that if
hospitals improved their cost performance, they would be subject to
stricter DRG-related payment limits.
Hospital admissions fell 4%-the largest drop on record; the average
length of a patient's hospital stay fell 5% to 6.7 days, also the largest
drop ever.
Multihospital chains and buying groups were formed, with the aim of
increasing the hospital's bargaining and purchasing power for
equipment and supplies. In 1985, about 45% of all U.S hospitals were
affiliated with multihospital chains, and it was predicted that 65% would
be so affiliated by 1990

Individual hospitals belong to a number of different buying groups and

often switch from one group to the next.
Distributors are pressed to reduce their costs to balance the lower
margins from lower prices.
A primary objective for BD in both tubes and needles was to maintain a
leading market share. BD planned to combat Terumo through
accelerated new product developments and annual improvements in
product quality, while using its strong market share to become the
lowest-cost procedure in all product segments.
The strategy of BD is to force other competitors to follow to this quality
aggression, anticipating the increase of costs of all the competitors in
the market, which would be easier for BD to handle due to the high
market share that allowed BD to amortize the capital investment.
BD instituted a Z contract, in which prices and orders quantities were
negotiated directly with hospitals but still delivered through distributors.
Often Z contracts prices with large buying groups were 30% to 40%
lower than list price. Under a Z contract, as with other BD contracts,
BD's distributors received a set commission from the company for
stocking, shipping and billing the hospital.
The BD's sales strategy has been to sell from the bottom up; they try to
work with as many of the bench people as possible- that is, the lab
technicians who use blood collection products, who care about the
quality of what they use and not the price, and who will complain to the
administrators if they do not get the product they want.
Question 2
What does BD's channel structure look like? What flows are performed
at which point in the channel? How would you describe the channel's
intensity? How does this intensity level affect end user prices in the
market? Could BD supply hospitals directly?
BD sold its products through 474 independent distributors who fell into
two categories: laboratory products distributor and medical-surgical
products distributors.
In 1985 BD had 55 sales representative organized into territories based

on the number of hospitals beds in a given area. Territories ranged from

10.000 to 20.000 beds and they reported to one of six regional
managers, who in turn reported to William Kozy, the national sales
director.
At BD its 6 largest distributors accounted for more than 65% of division
sales, the 50 largest for 85% and 67 of the division's 474 dealers for
nearly 95% of division sales. BD's largest distributor was American
Scientific Products (ASP), which in 1984 had total sales of 3.45 billion.
ASP was also a distributor for Terumo and Sherwood, 70% of Terumo's
sales went through ASP.
ASP is a division of American Hospital Supply Corporation (AHS), which
manufactured 45% of what they distribute, but their manufactured
products represented 70% of their profits. One AHS vice president said
that he is hoping that before long, they will manufacture 65% of what
they distribute, and by saying this is very clear that AHS is very
dangerous as a future possible competitor.
Other major distributors were CMS, which had 20 warehouse locations
and sold primarily to labs, and Fisher Scientific which had 20 warehouse
locations and sold primarily to medical schools, research centers and
industrial labs.
For Z contracts BD performs the negotiation and promotion flows
through its sales people, who promote the products to lab specialists
and negotiate with purchasing managers and corporations
representatives. Distributors are responsible for physical possession
activities, order and payment flows, they negotiate and promote
products that are not sold through Z contracts. Ownership, financing
and risking flows are performed by BD.
In total BD sold through 6 national distributors, with the remainder of its
distribution network composed of regional chains and small local
distributors. In most market areas 4 or 5 different distributors sold BD
products. This implies lower prices, since end users can shop
everywhere and press distributors drop their prices. Because BD sells
syringes to a very fragmented physicians market, intensive distribution is
important there, because can lead them to consider focusing on
promoting competitive or own products.
By supplying hospitals directly, BD would be less dependent on large
distributors like APS, who might be one of the most serious competitors

in the future. Some BD divisions already sell directly which implies that
the company could disintermediate its distributors. However, the
company should consider the cost of turning its distributors in future
competitors, and that the intensive model of distribution meets certain
needs of the hospital, which might not be met by a unique distributor.
BD should focus in:
Negotiation and promotion
Delivery
Storage of products
Order processing costs
Question 3
How important is the APG contract to BD? What's at stake in winning or
losing the contract? What would be the financial impact of either?
The 500 APG affiliated hospitals bought 80% of their blood collection
and 40% of their needles from BD in 1984, accounting for sales of $ 6
millions fro BD. APG claims that 90% of these hospitals business will be
awarded to the supplier that will win its contracts.
1. If BD wins the contract, according to APG hospitals buy will be
purchased by the company. In order to learn the amount of BD sales
under the APG terms, we should calculate the amount of tubes and
needles this rate represents and the price that APG requires.
Price of tubes x nr of tubes + price of needles x nr of needles = $ 6
million
PrT= $0.08
PrN=$0.075
X nr of tubes sold to APG
Y nr of needles sold to APG
0.08X+0.075Y=6.000.000 (1)
For each needle are needed 2.5 tubes
T nr of tubes BD
N nr of needles BD
So, T/N=2.5 and since 40%N=Y, 80%T=X=> 80%T/40%N=X/Y=> X=5Y
0.08 x 5y + 0.075y=6.000.000
0.4y + 0.075y = 6.000.000

y= 12.600.000 and x =5y= 63.000.000

So, 63.000.000 tubes and 12.600.000 needles are sold from BD to APG
hospitals.
APG wants 90% of the total number that its hospital buys.
So, 90% of 63.000.000 = 56.700.000
90% of 12.600.000 = 11.340.000
So, 56.7 million tubes and 11.340 million needles will be bought from
BD by APG with the right price for each year of the contract. As we
know BD offer 30%-40% reduction in price for Z contracts with large
buying groups and APG is asking for lower price.
Assuming that Kozy agreed for 40% price reductions, the price is still
20% lower than what APG proposed.
Tubes => 0.08 with 40% reduction 0.048 => $ 0.0384
Needles =>0.075 with 40% reduction 0.045 => $ 0.036
The profits for BD
Tubes => 56.700.000 x 0.0384= $ 2.2 million
Needles =>11.340.000 x 0.036= $408.000
So, 2.2/63=3.5% will raise the market share
408.000/12.600.000= 3.2% will raise the market share
Tubes: 80% + 3.5%= 83.5%
Needles: 40% + 3.2% = 43.2%
If BD wins the contract they will grow the market share which was their
primary goal.
If BD looses the contract a great portion of its revenues from these
hospitals could be at stake (less than 90% according to its sales
representatives). In the worst case they will lose 90% of its sales in
tubes or needles.
For tubes: 90% x 63.000.000 = 56.7 million
For needles: 90% x 12.600.000= 11.3 million
Question 4
Consider the aspects of the negotiation (brand, price, distribution) how
important is each to each party explicitly or implicitly involved? Given
your analysis, what should BD do with respect to the 3 aspects of the

negotiation with APG? Discuss the pros and cons and support your
recommendation.
If BD accepts this contract it will loose relationships with its distributors
(they will stop collaborating with BD because the distributors made it
clear that they would stop any collaborations if BD cooperate with APG).
As I mentioned before BD's 6 largest distributors accounted for 65% of
its sales. If they decide not to collaborate with BD, it would have to rely
on smaller, local distributors that might more expensive and less
efficient than the national ones. Also BD would have to consider the cost
of switching distributors and turning the national distributors on the
competitor's side and might be necessary to find alternative distribution
channels in the future, they will have problems with buying groups,
which will want lower prices and the most important is that if BD will
collaborate with APG will not be anymore the dominant player in blood
collection business. The result would be to lose control over prices,
which in the long term could fall below profitable levels.
As we know APG wants the purchased products under the new
agreement to carry its own logo because APG wants:
Reputation and stronger position
Easier control of hospital suppliers
All products will have the same name, no differentiation, so soon the
hospital will not be able to recognize and prefer specific products.
Impact in BD name
BD has a long and successful history in Blood collection products and it
is the pioneer on evacuated tube method
Product quality and the professional prefer them, despite high prices
By accepting APG's proposal to sell all the products under the APG's
logo BD abolishes one of its most important features.
Price
APG wants to achieve the lowest possible price:
To strength its position and attract more hospital to the group

To help hospital gain as much as possible

To raise participation of the affiliated hospitals and become more solid
as a group
Suggestions
Despite the raise in sales BD is better to reject the contract because it
will loose its
1. Brand name (Reinforcing the buying group)
2. relations with its biggest distributors
3. they will face with a decrease in prices which is a risk for the
company (20% discount on minimum Z account prices)
4. they will loose reputation with such low prices (Their philosophy was
that even with high prices they are the preferred because they offer first
of all quality)
APG claims that BD competitors have already accepted its proposals.
However it is doubtful that Sherwood has the capacity to supply such a
large account at low prices, considering that it has only 2% share
market in tubes and 15% in needles and it sells needles 2.5 cent higher
than competition. Terumo on the other hand would be unlikely to risk
relations with APS and CMS, since all its products are sold through
these two distributors.
BD should try to commit distributors, before the ending of the
negotiations with APG, to impose sanctions on the APG contractor.
Distributors can also help BD compensate for potential losses,
promoting BD products at other hospitals, commercial labs and health
care centers, which is the new market that BD should focus.