Competitive strategy and industry attractiveness analysis of Sunrise Medical Inc

Sunrise Medical

Market growth in wheelchairs is favorable for a few reasons. The growth in the industry is concentrated in higher-priced segments, with 12-15% each. This means that the relevance of the standard wheelchair is declining, despite that segment remaining the highest volume wheelchair at around 208,000 units or 61.3% by volume and 31.4% of dollar sales. Projecting current growth rates out five years, the industry will looks as follows:

1998 Wheelchair Market

1998 unit share

1998 $ share

Standard

Lightweight

Ultralight

Power

total

Standard wheelchairs are going to lose unit share and are going to decline significantly in dollar share as well. The other three categories are going to increase in importance, so it is important for firms to capture a share of these markets. Right now, the power market is not served by Sunrise, so the company is essentially competing for what will be 38-39% of the total market in five years.

These projections ignore the legal environment, in which the rules governing Medicare are set to change, allowing lightweight wheelchairs to cover lightweight wheelchairs at the lower end of the price range, or partial coverage for more expensive chairs. Both new users and existing users in need of chair replacement are expected to move into the lightweight chairs. They are prescribed only when medically necessary but there is no reason to think such prescriptions will be hard to come by. Firms in the industry therefore have moderate bargaining power over buyers -- they need to keep costs down to make their lightweight wheelchairs attractive to Medicare patients.

Wheelchair manufacturers also have some bargaining power over the dealers as well. The dealer industry is heavily fragmented in relation to the manufacturing industry. Manufacturers are better able to negotiate prices in this situation. However, there are low switching costs and that gives the dealers some advantage. Consumers new to lightweight and ultralight wheelchairs are less likely to the brand-sensitive than consumers who already have a wheelchair in this category. There are 7500 dealers that specialize in lightweight chairs, and a further 2500 that do extensive business in ultralights. Within this market, Quickie focuses on the high volume dealers while Guardian reaches all of them. There is little buying power over the large dealers, who do 20% of the lightweight business. Margins are slim with these dealers.

With no significant patents, competitors can all have roughly the same product. This means that competition in the industry is going to be intense, based on service and price both. An industry with these characteristics can be expected to have slim margins. Compounding the problem, the industry is characterized by low barriers to entry. With the big accounts being critical to success, it is expected that intensity of rivalry among manufacturers for these accounts will be high. Invacare is especially competitive, and with Quickie and Guardian operating in an uncoordinated manner they face an uphill battle against Invacare in all their lines.

The conclusion, therefore, is that the wheelchair industry is generally unattractive. Medicare is going to increase the volume of lightweight chairs sold, but with a cap on the price. The bargaining power of major dealers is high, though that of minor dealers is low. The intensity of competition is moderately high and expected that it could become much higher given the low barriers to entry. Of Porter's five forces, there are none that are strongly in the favor of manufacturers. This means that the industry is a generally challenging one, where only the most competitive firms will be able to leverage their competitive advantages to earn profits.

Q2. Over time, this industry is likely to become less attractive. The bright spot on the distant horizon is the demographic trend of an aging population, but until the baby boomers get old in about 20-30 years, the industry is going to grow at a more moderate pace. However, the industry is going to see a shift towards more lucrative lightweight, ultralight and power chairs, which within five years will be half the unit volume and three-quarters of the revenue in the business. If a firm can capture market share in these segments today, it can ride the growth of these segments to profit in the coming decade or more.

However, for lightweight wheelchairs, there are no significant intellectual property protections. Many firms derive significant value from their patents, because those patents protect them against their competition (Neifeld, 2005). Without significant patents, barriers to entry are significantly lower. This structure is not expected to change over time. There may be some opportunities in the ultralight or power divisions to use patents to limit market entry, but with the Medicare ruling, the lightweight wheelchair category is expected to become rapidly commoditized. It should be noted that in this category, the customers (institutions in particular) prefer to have interchangeable parts, so any company that can make parts for lightweight and standard wheelchairs interchangeable, or interchangeable between companies, will have an advantage.

At present, Invacare operates with the cost leadership strategy, while Quickie operates with a differentiated strategy (MindTools.org, 2012). The Medicare decision is going to increase price sensitivity in the lightweight segment by placing a cap on the price. The result of this is that the industry dynamic may actually shift towards Invacare, a company that would benefit from increased price sensitivity. Economies of scale are important in such an industry -- only the largest of firms will be able to put out a quality product at a Medicare-friendly price point. Thus, it is important to win market share and build strong dealer relationships today, as the industry is expected to be almost double the size by unit volume within five years.

The need for economies of scale points to an industry that will move closer to oligopoly conditions, in which companies react to the moves of their competitors, and it becomes difficult to earn economic profit. Under such conditions, only the best competitors will survive, and the strategy of Sunrise needs to be focused on becoming just such an industry-leading competitor.

In the long run, this industry is very attractive. Growth starting in the late 2000s is going to be impressive, so the opportunity now is in part guided by the need to gain as much market share as possible. It seems amazing to say that the next five years are not going to be the key growth years, but the current group of senior citizens is not the largest in the foreseeable future. Thus, it is important that if Sunrise is serious with its mission statements about being global leaders in its industries, it needs to increase its share of this segment. That it has just a 13% share in lightweights, given the upcoming demographic and regulatory changes, is unacceptable. Sunrise needs to dramatically increase its share today in order to position the company to establish dominant position by the time the industry's growth really accelerates. In the long-run, making the move now is much easier than making the move in fifteen years' time when Invacare might be even stronger as the result of its superior bargaining power.

Q3. Quickie currently markets itself as a differentiated producer, providing a high level of customer service through institutions as a pull-through marketing strategy. This is one core competency of the firm. Quickie also had first-mover advantages in the market, being the company that introduced the lightweight standard wheelchair. This helped it to gain early share in the segment and position itself as an innovator in the segment as well. However, there is doubt as to whether this is the best strategy, with the failure rate of first movers being significantly higher than that of fast followers, the position that Invacare has taken in the lightweight market (Blank, 2010).

There are operational elements within the company that also can be counted as competencies. The internal competition among units drives innovation -- the new product from Guardian is an example of innovation that can only happen with internal competition. The company encourages innovation by rewarding employees who demonstrate innovative traits. That said, these competencies are easily replicable. There may be times when Sunrise gains competitive advantage from them -- Invacare does not appear to be particularly innovative -- but Sunrise cannot gain sustainable competitive advantage from them and Invacare likes to operate as a fast follower when a medical supply product becomes popular. Both the ultralight segment and the Breezy are examples of successful innovations that come from the Sunrise corporate culture.

Guardian, by contrast, competes more directly with Invacare and has established that it has the ability to produce goods at a low cost. Thus, Guardian is a cost leader with a broad product range extending beyond wheelchairs. The strict wheelchair focus may help Quickie to build a stronger reputation, especially when combined with the company's history of innovation and high quality products. A strong brand is a good source of competitive advantage because it is less imitable than other sources, and it can take years of lousy product to damage a brand's reputation.

Quickie's approach does give it superior service, because it focuses on high volume dealers so it can give them the best service. Both Guardian and Invacare have an advantage over Quickie, however, in that they offer broader product lines, simplifying the supply chain for many dealers and allowing the dealers to negotiate lower prices. The Quickie business model is different than that of the other companies in the industry. This is evident in its profit structure. Quickie seeks to have higher margins, and recognizes that this will result in lower sales at times. Both Guardian and Invacare operate with high volume, low margin models that should give them lower margins than Quickie, especially as they have the ability to use wheelchairs as loss leaders to sell higher-margin products in their portfolios. Overall, however, there are few competitive advantages for Quickie, at least that are sustainable. The brand has a great reputation in the industry, which is a critical advantage. However, the other advantages the company has can be replicated by a competitor, especially given that the barriers to entry in this industry are relatively low and the industry is likely to experience high growth, thereby attracting new competition in to the business.

Q4. Chandler should allow Guardian to produce a lightweight standard wheelchair. There are several reasons for this recommendation. The first is that internal competition drives innovation. The new product may fill a market niche that is not currently being filled by Quickie. On principle alone, to maintain the philosophical consistency of the company's internal competition strategy, Chandler needs to allow the new wheelchair.

The new wheelchair also makes sense from a competitive point-of-view. Guardian and Quickie would both produce lightweight standard wheelchairs but they also both compete differently in this segment. Guardian is a low cost producer and competes directly against Invacare for the entire market. Quickie is a differentiated producer and only services some of the dealers. As such, there is little overlap between Quickie and Guardian in this industry. This is not to say that there will not be at least some cannibalization, but the risk of massive cannibalization is very low. More than likely, the rate will be less than 5%.

From the perspective of Sunrise, it is important to choose the option that is most likely to increase the shareholder wealth. Guardian has a tremendous opportunity to build share in a rapidly growing industry, and to tackle key rival Invacare head on. If Guardian's new product is successful -- and it appears that it will be -- Sunrise will have a greater total share of the market than it otherwise would have if it rejects the project, even with a small bit of cannibalization.

Strategically, allowing the Guardian wheelchair to go ahead serves the interests of all three companies. Guardian fills a gap in its line-up, allowing it to better compete against Invacare. Quickie can ignore the low end of the market -- basically the Medicare end -- and focus on the high end. Given that the company already operates with a differentiated strategy, this is probably for the best. If Quickie focuses on its strength and Guardian on its strength, Sunrise will benefit as well, by covering both ends of this growing market.

Furthermore, if the two companies get together to coordinate on some parts, design and marketing, further synergies can be earned. Buying economies of scale improves with the more parts that are common between them. The two companies can sign a deal that allows Quickie have to access to Guardian's network, thereby giving that company more sales than it otherwise would have, even if the customer service element is not as strong. In addition, hospitals and other institutions might be more willing to order from the company if both Quickie and Guardian use some common parts for their chairs that can be held in inventory.

Aside from the risk of cannibalization there is little risk to allowing the project to go ahead. Quickie will sell more wheelchairs in the market next year than this year even with cannibalization, given the rapid growth of this segment and the industry overall. In addition, by establishing a strong, coherent and coordinated marketing position, both companies can benefit and build market share for years to come.

Q5. The industry structure will shift as the result of the new chair. At present, Invacare is the dominant player with 57% of the lightweight standard market. Quickie does not directly compete much against Invacare, and serves 13% of the market. E&J holds 16% and other companies have the remaining 14%. What will happen if Guardian enters this market is that it is likely to win market share away from Invacare. At the low end, it will compete directly and win some of that 57%. Guardian is likely to win some market share points from E&J as well, and maybe a couple from Quickie. With four strong competitors, the "others" category is likely to see its share decrease in the short-run, creating an oligopoly industry.