Organizational Change To Promote Business Efficiency

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ORGANIZATIONAL CHANGE

Organizational Change to Promote Business Efficiency

Kay Wanbaugh

Saint Mary’s University of Minnesota

Schools of Graduate & Professional Programs

Organizational Systems Analysis Paper Part Two

Organizational Change & Development

Organizational Leadership 645

John Merladet

August 24, 2013

The History of Medtronic

In 1949 Earl Bakken, along with his brother-in-law Palmer Hermundslie, started a medical equipment repair shop. Since that time Medtronic has grown to be the world’s largest medial technology company with global connections in over 120 countries. The original Mission Statement that was written in 1960 established an organizational culture that was founded on a vision of contributing to the wellbeing of humanity. Since then Medtronic’s Mission states their goal is to grow in biomedical engineering, create quality reliable products, to make a fair profit, recognize the personal worth of employees, and to maintain good citizenship.

Medtronic’s website explains in detail the company’s proactive approach to corporate citizenship, a collaborative culture of innovation, responsibility in the marketplace, environmental stewardship, and global leadership in addressing chronic disease. According to the website Medtronic’s strategy states, “Our programs and performance across the broad range of corporate citizenship issues demonstrate our values and are central to forging and maintaining strong relationships with stakeholders” (p. 2).

Last year Medtronic reported their medical therapies helped more than 8 million people. Medtronic employs 45,000 people between their World Headquarters, the Cardiac & Vascular Group, and the Restorative Therapies Group. In 2012 Medtronic reported earned revenue of $16 billion, net earnings of $3.6 billion, and R&D investments of $1.5 billion.

Issues Driving The Need For Change

Over the past couple of years the medical device industry as a whole has witnessed a downward trend in profits. One of the reasons being given is the Health Care Reform Device Tax. Insurance companies are now limiting patient back surgery procedures (Snowbeck, 2012, p. 1). According to the Trefis (2013) analysis for Medtronic “healthcare reform which has resulted in an expansion of the publicly insured base has resulted in lower public reimbursements” and “private insurance companies have become more cautious in providing reimbursements, which is expected to affect the demand of medical devices and constrain revenues going forward” (p. 4). Jeff Windau, an analyst with Edward Jones stated, “Pricing and competition have been tough and expenses continue to rise. It doesn’t look like those trends will be changing soon” (Walsh, 2013, p. 1).

At Medtronic sales have maintained strength in the Cardiac & Vascular Group, but have seen a significant decrease in profit in the Spine division of the Restorative Therapies Group. Multiple problems and poor publicity surrounding the company’s Infuse Bone Graft product resulted in the United States Food and Drug Administration issuing a warning concerning the use of the Infuse product in spinal surgeries. Accusations against Medtronic included paying a surgeon to forge signatures (Lawyers and Settlements, 2013, p. 2), lack of reporting possible side effects of the Infuse product (Meier, 2013, p. 2), and paying off authors of early studies of Infuse (Meier, 2013). There have also been lawsuits by former Medtronic employees accusing the company of giving doctors incentives to use the Infuse product (Lawyers and Settlements, 2013, p. 3). According to Fauber (2013) “At the heart of the controversy has been a small group of spine surgeons, many of whom were involved in co-inventing the product, got $210 million in royalties from Medtronic over the years while co-authoring papers that failed to link the product to serious complications” (p. 1).

Medtronic’s spinal market share, which had produced significant financial profits in past years due to Infuse product sales, dropped significantly in response to negative publicity (Trefis, 2013). Also, competitors have recently developed innovative spinal repair products. For example, the usual treatment for spinal injuries has been spinal fusion, which often results in reduced spinal movement and pseudo arthritis. New products produced by competitors include “motion preservation devices” (Trefis, 2013, p. 15).

This year Medtronic was given notice by the United States Food and Drug Administration that three intrathecal drug delivery systems sold by Medtronic to treat chronic pain are Class 1 recalls. Study results of the SynchroMed Implantable Infusion showed an increased risk of drug overdose or underdose, and the possibility of an electrical short that could lead to loss of infusion (Medtronic, 2013).

Medtronic’s Response to Allegations

Negative publicity had a definite impact on Medtronic profits as the sales of Infuse dropped from $624 million to $528 million (Herper, 2013, p. 4). In response Medtronic made a bold decision to become transparent to the public. Medtronic agreed to pay Yale University $2.5 million to oversee a review of all study data, independent of Medtronic’s influence (Meier, 2013, p. 2). According to Herper (2013) “Medtronic gave outside researchers unprecedented access to its internal data, launching a new experiment in corporate transparency” (p. 1). This honest investigation by Medtronic was instrumental in the development of a new 2013 federal disclosure law that mandates “pharmaceutical and medial manufacturers report payments to physicians, hospitals and other health care businesses that are more then $100 a year” (Spencer, 2013, p. 1).

In response to the Class 1 recalls by the United States Food and Drug Administration Medtronic has issued an “Urgent Medical Device Correction notification, which provides physicians with important safety information and patient management recommendations” (Medtronic, 2013). Medtronic is also strongly urging customers to discontinue the use of intrathecal catheters that were manufactured before the design change.

Medtronic’s Current Design Structure

Structural design is often the result of “environmental turbulence” that is made up of the economy, competition, technology, natural environment, and “social-cultural-demographic factors” which is beyond the control of an organization (Amogoh, 2008, p. 8). Medtronic’s current organizational structure resembles a market structure design, which “focuses on the needs of the customer, therefore the organization can quickly sense changes in its market and transfer skills and resources to satisfy the changing needs of this vital stakeholder group” (Jones, 2013, p. 164). Medtronic’s strategy directs the decisions of management to access core competencies, which will give them a competitive advantage in the marketplace (Jones, 2013, p. 12). Business structure requires management to balance external pressures against internal pressures as the structural change design delivers the how-to and answers the whys of strategies implemented (Jones, 2013). As management implements organizational change, often with restructuring and downsizing as a result of a changing external environment, they should control and prune company hierarchy before a crisis forces them into a panic (Jones, 2013, p. 126).

Medtronic Expands Its Resource Base

In 2010 Medtronic acquired Osteotech, a New Jersey based biotechnology company. Sam Owusu-Akyaw, president and CEO of Osteotech stated “We believe Medtronic’s global scale and scope across geographies and functions and its commitment to innovation make them an ideal partner to carry forward our mission” (Medtronic, 2010). With this acquisition Medtronic began to shift resources from the Spinal division to biological products used in musculoskeletal surgeries, building a larger platform in regenerative biologics. Medtronic hoped this merger would expand profitability in fields of sports medicine and neurosurgery.

Also in 2010 Medtronic acquired California based Ardian, a company on the cutting edge of developing medical devices that will lower blood pressure by “using a catheter to deliver radio-frequency waves to shut down overactive nerves near the kidneys” (Timmerman, 2010, p. 1). According to a spokes person at Ardian “the worldwide market for high blood pressure is worth about $30 billion” (Timmerman, 2010, p. 1).

In 2012 Medtronic “initiated a global restructuring program which included a reduction of its workforce, greater profitable investment and withdrawal of its operations from slow growing areas” (Trefis, 2013, p. 3). Omar Ishrak, Medtronic’s chief executive took on the challenge of restructuring the company. Walsh (2013) reported, “Medtronic is taking a $182 million new restructuring charge” (p. 3). The restructure design will reduce company costs by approximately 5% (Sheffield, 2013). Medtronic spokeswoman Cindy Resman told Massdivice (2013) that the new structure will shift resources “from low growth to high growth areas to optimize performance and are a normal course of business for any organization” (p. 2). Resources are being shifted to divisions that were showing more growth, such as the technology departments providing medical devices that treat chronic pain. Job cuts are estimated to save the company up to $225 million per year (Walsh, 2013, p. 1).

Emerging Globalization

There are multiple benefits for a company that invests in global expansion. A company with a global network has access to skills, networks, and knowledge that will give them a competitive edge (Jones, 2013, p. 210). Organizational learning that operates in a global network will improve effectiveness and increase core competencies (Jones, 2013, p. 211). According to Jones (2013) a global expansion strategy is “a plan that involves choosing the best strategy to expand into overseas markets to obtain scarce resources” (p. 212).

Medtronic has experienced an increase of international sales that are mainly coming from China, India, and Brazil. Medtronic’s largest market is still in Europe, but China now accounts for about 40% of their entire emerging-market sales (Colvin, 2012, p. 1). Under Ishrak’s change initiative “Medtronic spent nearly $900 million last year on two merger and acquisition deals in China” (Jie, 2013, p. 2). One of these companies, China Kanghui Holdings, is a medical device maker that has a strong local R&D, inexpensive manufacturing operations, and a “diversified portfolio of orthopedics, spine, and surgical instrumentation products” (Trefis, 2013, p. 2). Medtronic also reported in a May 2013 press release that they had entered into an “innovative partnership with a think tank with China’s National Health and Family Planning Commission, to carry out a series of research projects focusing on building an integrated care pathway for patients with Type 1 diabetes” (Newsroom, 2013, p. 1).

In 2013 Medtronic purchased 19 percent stake in LifeTech Scientific Corp., a public research company based in China (Bailey, 2013). It is reported that the “strategic alliance will allow each company to serve cardiovascular patients and clinicians who previously have been unreachable by either company alone, and to develop a more robust cardiovascular platform” (Baily, 2013, p. 1). Chris Lee, the President of Medtronic Greater China since September 2012, stated opportunities in China give Medtronic the advantage of “being a multinational medical technology company and part of our global objective to bring clinical effectiveness and value around the world” (Newsroom, 2013, p. 1).

Obstacles to Overcome in Global Expansion

Demographic, social, and cultural factors all need to be considered when a company expands globally. As Medtronic merges with Chinese companies and think tank organizations, employees must become knowledgeable on the host country’s political, environmental, ethical practices, and methods of doing business. Along with the benefits of growing globally such as expansion of resources, there is also increased dynamism. Environmental uncertainties influence the challenge of an organization’s ability to predict business directions. Political regulations concerning the medical device industry may change quickly, which means companies that are operating in foreign countries need to stay knowledgeable on current affairs.

A priority for Medtronic will be to merge the business cultures of China and the U.S. companies. Organizational cultures that are merged together will share values and norms that influence employee interactions with each other. Norms are styles of behavior that are typical for a group, and values are the guiding principles that influence desired outcomes (Jones, 2013). Cultures coming together from diverse countries will have differences in “communication styles, different approaches to completing tasks, different attitudes toward conflict, and different decision-making styles” (Jones, 2013, p. 182). Employees that are immersed into the Chinese companies cannot expect business to run in the same style as it is done at home.

Organizational development is a combination of methods that leaders use to increase a company’s environmental adaptability (Jones, 2013). The goal is to change employee beliefs, values, and attitudes in order to help them adapt behaviors and reach individual potential. With organizational change, especially on a global level, companies will be met with resistance to change. Stakeholders resist change for many reasons, all which are normal psychological reactions of human nature. With the prospect of change employees often feel insecure, experience fear of a change of personal status, and have anxiety around the uncertainty of their future. According to Bolognese (2002) employees will “naturally rush to defend the status quo if they feel their security or status are threatened” (p. 1).

Assessing a company’s readiness to change and ability to overcome ambiguity will give management an idea of where change agents need to begin implementing structural change. To promote a readiness to change employees must trust that management will give them training and knowledge to perform new job requirements. Management earns employee trust with honest, transparent, repeated communication about the what, why, where, and how a structural change will be developed. According to Zand (2010) “helping people learn to develop and experience high trust could lead to better decisions, higher motivation, and more effective organizations” (p. 429). Organizational development attempts to blend dynamic behavioral forces and requires a group effort of change makers. According to Weiner (2009) organizations have reached a readiness to change when employees share a psychological state of commitment to implementing change and have a collective confidence to move forward toward the goal (p. 1).

Once the groundwork has been done to reduce resistance to change, the next step is to motivate stakeholders to move in the direction of future goals. Repeated conversations, both face-to-face and in groups, reinforces why change is necessary, what will be changing, and how stakeholders will be affected. New and old perspectives will develop into a new synthesized organizational behavior. Employees are encouraged to learn new skills and their successes are rewarded and celebrated, which in turn empowers and motivates employees to work together in achieving new organizational shared goals. According to Austin and Bartunek (2003) “The more skilled organization leaders are at generating deep personal cognitive change, the more likely it is that the leaders will support or create deep organizational change” (p. 320).

Managing Socialization and Role Orientation