Q1. What is the underlying logic behind the global product idea?

What are the costs

and the benefits that are expected?
A1. The Global Product Company (GPC) was a concept to concentrate manufacturing
initially and gradually move on to other GEMS’ activities as well to countries that were more
cost effective without compromising on quality. The basic philosophy was that cost cutting
would lead to greater profits.
The GPC led to building of Centers of Excellence (COE). From these COEs 60-96% of the
products were shipped to other locations. The COEs were located such that any product could
be easily shipped to any part of the world thus saving time and cost. The GPC also had the
advantage of a short payback period within 2 years as the plant and equipment could be
sourced locally. The GPC philosophy was also beginning to take effect in the R&D part of
the operations. The low cost countries had a pool of talented but underutilized personnel. The
GPC concept was to enable GEMS to hire such talent for its own benefit as they would be
available at a much lesser cost than similar personnel in a high cost country.
However, the GPC also came with a cost associated. The first, being the shift of an entire
manufacturing facility from a high cost country to a low cost country. This involved included
significant fixe costs. Secondly, in these low cost countries, the development of quality
suppliers was an issue. Since GEMS purchased high value items from its suppliers and not
small products like bolts, nuts, resistors, etc. this was all the more important. Developing
supplier relationship was a long term strategy and required a lot of time and commitment.
Also there were costs related to workforce as old employees had to take a lot of trips to the
new location. Some even lost their jobs. Other costs included inventory, logistics,
documentation and import duty.

Q2. Should the global product philosophy be changed or altered to suit the China
market? Please identify both sides of the argument and take a position explaining the
rationale behind your stand. Does it make economic sense?
A2. China provided a unique market to GEMS. It was one of the lost cost countries where
GEMS COEs were located. At the same time it was the third largest markets for medical
systems worldwide. The challenge was to decide whether products produced in China should
be used for local demand or to continue with the GPC philosophy.
The Chinese market was highly price sensitive. A drop in price of 10% could increase the
demand by 50%. One of the major reasons for this could be that a large portion of the
healthcare in China was not funded by the government and people seeking treatment had to
pay out-of-pocket. Also, hospitals were reputed based on the ownership of high end
equipment. If the GEMS equipment could be made available at a lower price, then the
demand was sure to increase. This could be made possible by the “In China for China”
policy. The policy would enable GEMS to target lower tier of the worldwide market which
accounted for 20% of revenues.
However, the “In China for China” policy does have its drawbacks. First of all, GEMS
already had a market share of more than 40% in China which was greater than its competitors
put together. So the question is whether there was a need to change the already successful
strategy. Secondly, the policy required a continuous allocation of resources away from other
parts of Asia, especially Japan, towards China. Moving away from a major Asian market
would have its implications. The costs involved would be significant. Another issue is the
demographics of China. If we look at exhibit 8, unlike some of the high cost countries, where
the percentage of population over 65 was around 12-15%, China stands at 7%. Higher the
aging population implies the greater demand for diagnostic system. Given the price
sensitivity of the Chinese market, a price cut would stimulate demand in the short but
considering the demographic factors, it is likely that the demand would saturate after a certain
point. Also looking at the economic angle, if we look at exhibit 8:

Demand 800 1200

$/unit Millions $/unit Millions
Sales 3300 2.64 2970 3.564
Total Variable Cost 2570 2.056 2518.6 3.02232
Variable Margin 730 0.584 451.4 0.54168
Incremental Fixed Cost 0 1
Profit 0.584 -0.45832

What has been done is that the price has been reduced by 10% and demand has been
increased by 50%. The incremental fixed have increased by $1million whereas the variable
costs have declined by 2%. It is now seen that even though demand increases significantly,
the company is making a loss of almost half a million. In order to make a profit through the
“In China for China” policy, either the demand should increase by 150% or the reduction in
variable costs should be more significant.
Therefore it does not make economic sense to change the policy for China even though it is a
large market. Instead more time and resources should be dedicated to increase the reach in
territories where healthcare facilities are minimal. This will require convincing the
government to better regulate the used equipment market which will enable GEMS to capture
a larger share of the market and greater margins through its “Gold Seal” program.
Q3. Should GEMS be aggressively pursuing genomics and healthcare-IT related
opportunities in addition to or instead of the China opportunity? What priorities would
you suggest? Explain your reasoning carefully.
A3. As already mentioned, the China opportunity needs to be tackled not by moving away
from the GPC philosophy but by trying to develop the used equipment market. This leaves
GEMS to concentrate on the evolving areas in medical diagnostics and healthcare – the ones
in question being genomics and healthcare IT.
Genomics is a breakthrough sort of an opportunity. On an average such a project would not
happen overnight and will require sufficient time in R&D lasting up to 10 years requiring an
investment of $100 million per year. Alternately, GEMS could go for a multi billion deal
acquisition of some pharma company to get a headstart in the field. Although it seems to
make economical in going for an organic growth as it would cost much less. However,
investing a larger amount right now to acquire a pharma company would reap benefits in the
long run. The opportunity to grab the market earlier than competition is a huge advantage. It
also provided a larger margin in the range of 30%.
Healthcare IT is another upcoming domain in which GEMS already has a strong foothold.
With the world market size estimated to around $6 billion, the sector also boasts of growth
rates in the range of 20%. The penetration in IT is very limited and hence the opportunity is
extremely huge. However, the main issue associated with this is the changeover from the
conventional system to the new one. It usually took 3-5 years for a hospital to adopt the
product. It is also to GEMS advantage that overall the doctors over the globe share similar
mindsets with most requirements being that of vital signs, meds and disease markers. Even
ICUs are similar worldwide. The emerging mobile patient population also is an opportunity
for GEMS. Remote access of their medical data was a value proposition for such patients and
one that GEMS could most definitely exploit.
Therefore GEMS should focus on these upcoming trends in healthcare in addition to the
China opportunity. These have immense potential and by starting earlier GEMS is likely to
reap much better results in the future.