Nxstage Strategic Plan

NxStage Company Background Environmental Scan Five Forces & Value Chain Strategic Alternatives Strategic Plan Acquisitions Resource Allocation NxStage is a medical equipment manufacturer specializing in hemodialysis products for use in the home. Their main flagship, NxStage SystemOne, constitute two-thirds of the company's revenues. The product has been on the market for several years, but NxStage has never been able to turn a profit, nor has it been able to develop a viable second major product.

This has created a strategic dilemma for the company as to how best to enhance shareholder value going forward. The external environment is generally challenging, especially in light of regulatory changes that aim to drive down the cost of medical care, not necessarily good for a company like NxStage that has a differentiated product. There is some demand for the product, but also substitution from dialysis clinics, which can be offered at a lower total cost, making them attractive for payers.

In light of the ongoing difficulties generating a profit, NxStage has several strategic alternatives. It can seek international markets, several of which are promising, in an attempt to build revenues, but this is a risky option for a company still unable to make a profit domestically. However despite its struggled, NxStage can still afford to pursue this opportunity. Another alternative is to explore merger and acquisition activity.

In particular, allowing the company to be bought out -- Baxter is a good candidate -- is a good way to extract value for shareholders, while building synergies that will allow NxStage to thrive in the long-term, leveraging Baxter's distribution network and innovation infrastructure. This is the recommendation for NxStage management, to seek a buyer like Baxter, if they cannot improve their market share in dialysis in the next year or so. Company Background NxStage is an innovative company that is competing in the medical equipment industry.

The primary focus for NxStage is home hemodialysis equipment, which leads to the company's motto of "Leading the renal revolution" (NxStage, 2014). The company developed with this technology and was incorporated in 1998. The main product is called NxStage System One, and right now this is the major product for the company. The company also does some in-center business, but feels that its competitive advantage lies with System One, a portable hemodialysis system (Reuters, 2014). As of the 2011 fiscal year, System One represented 66% of the company's sales.

An image of System One can be found in Appendix A. The following is a brief description of the production, from Reuters (2014): "…is a portable electromechanical device containing pumps, control mechanisms, safety sensors and remote data capture functionality; the NxStage Cartridge, which is an integrated treatment cartridge that loads easily into the cycler. The cartridge incorporates a volumetric fluid management system and includes a pre-attached dialyzer, and Premixed Dialysate that is used for hemodialysis applications.

The Company supplies its premixed dialysate in sterile five liter bags or through the use of its PureFlow SL accessory." The company has experienced growing sales in recent years, but has not experienced growing profits. NxStage continues to lose money each year, as increased investments in marketing have not resulted in a marginal increase in sales (MSN Moneycentral, 2014).

The company's mission to be a renal revolutionary affects its strategy, because it feels that it needs to focus on renal, but is hesitant to expend too much energy on in-center solutions, perhaps out of fear of cannibalizing sales of SystemOne. Environmental Scan There are a number of elements to an environmental scan. The first is an examination of the remote, operating and competitive environments. This is followed by an examination of the internal factors (strengths & weaknesses) and external factors (threats & opportunities).

The final stage of the environmental analysis is the five forces analysis, which helps management understand the attractiveness of its industry. There is also the value chain to help understand how the company derives its value. External Environment There are several critical factors in the external environment that affect NxStage. Government regulation has already been mentioned in the context of the ACA, but it is worth mentioning as well that the FDA must approve medical devices, including dialysis equipment.

In order to have access to the home dialysis market, a company must have equipment that has received approval for home use. At present, NxStage has a monopoly on this, and as a result the company has a captive audience for a growing segment of the dialysis market. However, there is risk that the other major manufacturers of dialysis equipment -- Baxter and Fresenius -- might gain approval for their own home dialysis equipment.

This poses a threat to both the market share and profits of NxStage, which has built its business around the concept of market exclusivity. Most of this occurs in the remote environment. As we know from Porter (2008), the more competition there is in a market, the less attractive it is. Market demand is another factor that contributes to the remote environment. Right now, NxStage benefits primarily from the service area of the value chain.

While it is competent in the other areas of the value chain (Mantkelow, 2014), the company has little control over demand. The health of the nation is largely responsible for the total demand conditions that the company faces. This is because it treats renal disease. While there are some people afflicted by renal diseases, most people suffer renal damage through diabetes and other controllable factors.

The result is that if the population gets healthier, and especially if it gets to a point where it has lower instances of hypertension, then NxStage will face reduced demand inherently. It depends on people getting sick for its business, and in this case that illness is largely preventable. In the industry environment, competition is the biggest factor. There are two major manufacturers of dialysis equipment in Baxter and Fresenius. Both sell mainly to the institutional market and have left the home market alone.

They still compete with NxStage, however, especially Fresenius because it operates dialysis clinics that directly compete with home machines. A further industry factor that comes into play with NxStage is that of the payers -- often these are insurance companies or government. While the end user is a consumer, the payer is usually not. Thus, if NxStage can gain more acceptance for its machines with the payers, then it will be able to sell much more of them to the public.

This will require some effort in terms of salesmanship because these stakeholders are notorious tight-fisted, but success will be worth millions of dollars in revenue, especially where the government (Medicare, Medicaid) is concerned. Internal Strengths and Weaknesses NxStage has some good internal strengths that will help it. The first of these is a tight-knit management team (NxStage, 2014). The company benefits from being small in that its management team can work closely together, allowing the company to be more innovative.

This is important because NxStage is competing against much larger companies and innovation is going to be one of the key bases on which is competes. Another internal strength that the company has is that it has a monopoly in the home dialysis market. While this market is not particularly large compared with the total dialysis market, having a monopoly is never a bad thing.

Combined with the ability to innovate, it is reasonable that this company can continue to build on its competencies to ensure that no other company can enter this market. There are some weaknesses as well that will cause trouble for NxStage. The first of these is that the company is not all that big. This is clearly a blessing and a curse, but the company lacks the sort of size that will give it bargaining power with the large insurance companies and government agencies that run this business.

Further, there are issues with respect to exposure, and the company may not have the financial resources to buy the exposure it needs to attract more doctors to its product. Another weakness that the company has is that it lacks representation in the institutional market. This is the largest market for dialysis machines. While the company wishes to forge an identity based on product uniqueness, the reality is that market share = cash flow, and right now the company is lacking in these things.

Having products that allow it to access the lion's share of the market is critical to long-term success. At this point, the weaknesses appear to outweigh the company's strengths. The company has an operating loss, despite gradual income growth, and it is much smaller than its competitors. The ongoing losses -- which were bigger in FY2013 compared with FY2012 -- are a source of problems for the company (MSN Moneycentral, 2014).

The company can take heart that its equity value is rising despite these losses, but that is only because paid-in capital continues to increase. The company has at this point a stable but small, niche business, and there is significant room for improvement on that. Competitive Position At present, NxStage has a relatively weak competitive position. Too small and lacking in distinctiveness to challenge the major players in the institutional market, the company has pursued the home dialysis market, where it is virtually unchallenged.

However, there are structural issues with respect to payers in particular that limit the growth potential of this market. Therefore, it is important for the company to find growth via other means if the size of its market is not going to grow much. With this difficult competitive position, NxStage either needs to expand the size of its own market, or begin to challenge the major players in their institutional market.

The optimal strategy is probably to take advantage of the changes in the regulator environment with the ACA and see if there isn't a case that the company can make with respect to its product saving money in the long run. If it can successfully lobby its case to the regulators and/or insurance companies, NxStage will find there is a much bigger market of payers for its home dialysis system.

However, if this option is not available the company needs to either enter the institutional market or start entering foreign markets in order to grow its business. Five Forces This industry is not particularly attractive. There is a high intensity of rivalry, which increases price competition. Further, the bargaining power of buyers is quite high since they are usually insurance companies or the government. Bargaining power of suppliers is generally low to moderate, but there is a high threat of substitution from dialysis clinics.

Overall the industry is only moderately favorable. Value Chain The value chain for NxStage relies mainly on its ability to deliver service. The company's product is a dialysis machine, and while the design component of this helps the company to gain, the product is not as well differentiated as to negate competition with dialysis clinics. There is no particular value derived from inbound logistics, so it is mainly with outbound logistics and service that the company can earn profit.

This is why it is challenged to earn profit and has yet to do so in its existence. Balanced Scorecard The balanced scorecard aligns a company to a number of different outcome objectives, including financial, customer, internal business and learning & growth (BSI, 2014). The company is at this point trying to solve the financial aspect, because it has yet to turn a profit. Part of this will come from meeting the needs of stakeholders, as noted.

The end users might benefit, but the buyers do not necessarily benefit from the company's operations and that is something that NxStage needs to overcome in order to grow its business. The internal business perspective and learning & growth perspective both seem to be handled fairly well. The problem is that for the level of costs that the company has, it needs more revenue, and its niche presently seems too small. There is room for improvement, perhaps, by focusing on developing excellence in one of the other dimensions.

Strategic Alternatives There are a number of different strategic options available for NxStage. The first option is essentially the do-nothing option. With this option, the company is exposed to the current trends in the business. With an aging population, there are some good things in these trends, but there is a lot to be worried about as well. For example, the company has struggled to turn a profit, and the market is not responsive to additional marketing efforts.

Furthermore, the company still only has one major product, and SystemOne appears to be in a slow growth state. This would be acceptable of the company was comfortably profitable, but it is not. Continuing down the current strategic path will not be sufficient to bring this company to profitability. The second option is to build out the business, perhaps by investing in expansion into international markets.

Canada and Mexico are relatively easy and Brazil has the world's second-largest private health care system (PWC, 2013), so there are some attractive market that NxStage does not currently serve. International expansion addresses a major weakness, but it is risky. The company has not found a way to be profitable in the United States, and foreign markets are perhaps even more challenging. However, there is opportunity to build on the existing manufacturing infrastructure and generate new revenues.

The company may otherwise need to consolidate its operations to match domestic demand, so expanding demand is a better way -- despite its risks -- of pursing balance between expenses and revenues. A third option is to sell the company. A merger or acquisition is something that could be considered as well, if the right one presented itself, but a more likely means of extracting value for shareholders is to sell.

A good candidate has been found in Baxter, a medical equipment supplier who would be complementary for NxStage, helping to build synergies that would generate value from the transaction. Analysis and Recommendations NxStage has a number of strategic objectives that are driving its plan. The company has a unique product and feels that this product, if marketed correctly, can revolutionize the way that renal care is delivered both in the United States and around the world.

The company competes with a number of medical equipment manufacturers, and also competes against companies that run dialysis clinics for the same customer base. This creates a challenging operating environment, but is also creates a lot of opportunities. The key opportunities that underlie this strategic plan are the objectives of delivering strong revenue and market share growth, increasing profits and increasing the brand name of NxStage as a means of building the company for increased sales in the future.

Much of these plans are marketing oriented, but another key element of strategy lies with research and development because the company's positioning is that of a differentiated player in the market (QuickMBA, 2010), and that positioning requires NxStage to continue to be an innovation leader in its field. If companies with more established customer bases catch up technologically, they will probably be an existential threat of NxStage, to innovation leadership is critical to the company's survival going forward, let alone to building market share and increasing revenues.

Strategic Plan The strategic plan features a number of operations. The first part is that most of the company's objectives are related to growth. So it is growth that drives most of what NxStage will do from an operational perspective in the next few years. This growth will come from increased marketing expenditure and greater attention to large clients.

In particular, the company needs to target renal facilities in order to promote the home dialysis solutions, so that those facilities prescribe the home system rather than referring all patients to clinics reflexively. This strategy will be supported by substantial investments in marketing personnel, and through finding new approaches to marketing. The key to the marketing element of the strategy going forward is that NxStage needs to market the benefits of its dialysis equipment, not the features. Features are not what sells medical devices.

There are many benefits to the NxStage dialysis solutions. The most obvious one is that it is much more comfortable to get dialysis in your own home. Most dialysis clinics are rather awful places to spend time, and patients' needs to spend several hours a week in them. Performing dialysis in one's own home is much more attractive.

This is especially true of poor patients who end up having to take taxis or public transportation to clinics -- the NxStage equipment basically pays for itself over the life of the patient in reduced transportation costs. So there are comfort benefits, freedom benefits, independence benefits and financial benefits for people who count every dollar. Marketing to patients will also convince them to pressure their providers for NxStage solutions.

This will act as a complement to marketing to physicians and clinics directly as well, to ensure that they are aware of these benefits, and the benefits that NxStage solutions provide for them. Marketing to insurance companies will along the same lines as well. The key is that NxStage needs to be highly aggressive in marketing. The other key element of strategy is with respect to research & development. The company is a differentiated provider, and innovation is the calling card.

Thus, NxStage needs to continue to plow money into R&D in order to maintain innovation leadership. Its technology is patented at present, but competitors with knowledge of dialysis products can work around those patents to develop their own competing products, and there is risk that in doing so they will leapfrog NxStage technologically, ruining the company's competitive advantage. It is critical, then, that NxStage retain this competitive advantage in order to be able to meet its strategic objectives.

Acquisitions Another element of strategy, one that moves away from operational considerations, is to derive improvements in shareholder value from growing the company. There are basically two types of acquisition, horizontal and vertical. A vertical acquisition means making an acquisition up or down the supply chain. There are some advantages to this. Most supplies that go into the dialysis machines are not that sophisticated so there are only going to be some minimal cost advantages to buying a supplier, unless of course the key technology is owned by a supplier.

If that is the case, gaining control over that technology to keep it out of the hands of competitors would have some value to the company. Alternatively, NxStage could buy a chain of dialysis clinics, but since they are trying to win business away from such clinics this would appear to be the sort of defensive move they would make if Plan A didn't work out. Thus, vertical integration does not seem to make much sense at this time.

Horizontal integration, however, implies the acquisition of complementary businesses (Pearce & Robinson, 2013). The key concept in a horizontal merger or acquisition is synergy. The most basic way of explaining synergy is that the whole is greater than the sum of the parts, or 1+1 =3. There are several ways that synergy can be fostered. Some companies merge because together they can experience scale economies in production or other functions that allow the combined entity to have a lower cost structure and therefore be more competitive (Farrell & Shapiro, n.d.).

In addition, there can be synergies for complementary products. This is something where a combined company can market a bigger suite of products if the company goes in on its marketing with the acquired firm. For NxStage, this might mean a merger with another medical equipment manufacturer. It is worth considering that there are three different roles in such a transaction. There is an equal (as in merger of equals), there is a buyer and there is a seller.

One proposed transaction is with Baxter, which is a major medical equipment supplier. Baxter is a much larger company than is NxStage, with a much broader product range. This option would bring NxStage as the seller within the umbrella of Baxter (the buyer). At present, NxStage is struggling, having recorded a loss last year (MSN Moneycentral, 2014). The stock price is not particularly low relative to historic levels, more like average, so it is not an entirely attractive acquisition but if growth is flatlining there could be merit to selling out.

A sale would certainly give the company access to greater customer contacts and distribution channels, as Baxter has much better sales infrastructure than does NxStage. To compare, NxStage sold $263 million last year and has a market cap of $797 million. Baxter sold $15.26 billion last year and has a market cap of $36 billion. Baxter could acquire NxStage in an all-cash transaction. For NxStage shareholders, such a move would give them immediate value.

The price Baxter would have to pay to acquire NxStage would probably carry with in an acquisition premium of 10-15%, or more if there is a bidding war (Damodaran, no date). A 15% premium would take the offer to near $15 per share, which is higher than the stock has been at any point in the past five years (MSN Moneycentral, 2014).

This would be a difficult deal to turn down, because although NxStage is experiencing some sales growth, it has never made money and sales growth is not especially fast -- it might be nearing the peak potential of its market barring a breakthrough, and is still not profitable. Moreover, the amount of R&D investment required to maintain competitive advantage is going to have to improve over the $19 million the company spent last year.

Thus, given the circumstances surrounding NxStage, in particular its inability to grow fast enough to turn a profit, the company could extract good value for its shareholders by courting a buyer. A company like Baxter could easily fit NxStage into its portfolio of medical devices. Sales of the devices would likely increase substantially given access to Baxter's sales and marketing infrastructure, so there is value in this deal for both parties. This is definitely something that NxStage managers need to consider.

Functional Tactics Setting aside talk of selling out to Baxter or engaging in acquisitions, NxStage needs to focus on the tactics noted above. Sales infrastructure needs to improve, and that will require substantial funding to increase the number of sales reps, and to carefully analyze the existing sales programs to ensure that they are delivering good value to the company. Sales, however, are only part of the problem. The other part is that costs are increasing quickly, and the company cannot turn a profit even with growing sales.

So there is a real need for the company to focus only on the most efficient sales techniques, because it not getting good value for recent increases in sales spending. Deadlines Any good strategy requires that the company has specific targets that can be met. There needs to be a timeframe and quantitative targets against which performance can benchmarked. This is a key element of strategic control. Therefore it is important for the company to set out objectives for the next year, each quarter and also each month as well.

These objectives should increase sales, market share, profit objectives, and on the R&D side the company should seek new product innovations and new patents to strengthen its core products. These should represent improvements over the same time period last year. However, the targets have to be realistic, based not only on past performance but the steps that the company is undertaking this year to alter its strategy. The company needs to ensure that when it sets targets these are realistic.

Increasing sales staff by 10% is not going to result in a 10% increase in sales in the first month -- they'll still be learning how to tie their shoes in the first month. But the increases should show by the sixth month. So the company has to set realistic targets against which performance can be measured, as a means of creating motivation. Task ownership Each task needs owners.

If something needs to be done, then the company needs to ensure that somebody is in charge of that task, and that they will be measured on that task. Task ownership boosts employee engagement and increases motivation (Baribeau, 2012). The first recommendation with respect to task ownership for NxStage is to create the position of Chief Marketing Officer. Given how critical marketing is, and it has underperformed in recent years, it is surprising that nobody in the C-suite has direct accountability for marketing.

A quarter of the company's budget is marketing, and there's no C-suiter in charge. This is completely unacceptable and has to change. If they have to poach somebody from another medical equipment or pharma company, that is fine, but they need an experienced marketing professional to reorganize marketing, energize it, and improve its efficiency. Finding this person will be the responsibility of the CEO, Jeffrey Burbank. The research and innovation objectives will be tasked to Tom Shea, the Senior VP of Manufacturing.