Med—surg companies struggling to understand Internet strategy - medical and surgical supplies

Health Industry Today, Nov, 1999 by John Dalton

Within the med-surg industry, no one questions that the use of the Internet for marketing and sales is here to stay. No doubt about it, everyone says. It has become a given that e-commerce is poised to change the way business is conducted, and indeed the very nature of the sales and marketing game.

Why, then, are people within the industry so resistant to it? "I think there's a lot of (expletive deleted) going around out there as to what is going to happen," says one high-level executive of a prominent mid-western group purchasing organization. "To me, there is the question about what you can actually do with that kind of platform. Can you use it to sell proprietary items? I don't think so. Can you use it to sell commodities? Probably, but that has a tendency to make everything a commodity, and I don't think either manufacturers or distributors want to see that happen." That kind of resistance to the use of the Internet stems not so much from a hidebound rejection of change within the industry but from heartfelt confusion as to how to utilize it. Uncertainty is widespread within GPOs and IDNs, where the role these organizations have played is being threatened by a hospital's or physician's ability to log on and place orders, and within the manufacturing community, where, put simply, executives don't know how to make a profit from the tool. "Look what happens when you try to quantify the role of Internet commerce," says Joe Boystak, managing director of Sutro & Co., Los Angeles, an investment banking firm. "An Internet company can have revenues of just $50 million to $60 million and be capitalized at well over a billion dollars. It is unprecedented." "I've seen figures that say just 5% of companies currently use the Internet for something other than just a Web site, and within that group Internet revenues account for less than 10% of volume," says Sam Greco, president, International Healthcare Investments, Brentwood, Tenn. Those figures represent an as-yet-minimal buy-in by manufacturers of the medium as a sales tool. Analysts projecting out to the year 2005 see Internet-generated revenues approaching as low as 15% and as high as 30-35%. And those figures are the vaguest conjectures of analysts whose accuracy has yet to be vindicated, and who, in truth, will tell you the basis for those statistics are based solely on personal interpretation. Read: Nobody knows, but this is what we think. There also remains the nagging thought within the industry that manufacturers and suppliers alike are missing the boat. Analysts admit that the industry as a whole has been slow to adopt the Internet, and that thus far they have treated it as a neglected stepchild as opposed to brethren. That same GPO executive who, in a simpler world, would prefer not to deal with the Internet at all, is realistic enough, and interested in personal and professional survival enough to know that the future is staring everyone in the face. "It causes a lot of sleepless nights," he sighs. "You get to wondering, 'Are we the barnacles on the whale in this whole process?'" Reality checks An informal poll conducted by Health Industry Today among manufacturers of med-surg devices displayed the level, or more precisely the lack thereof, of knowledge within the industry about how to use the Internet most effectively as a sales and marketing device. Overwhelmingly (more than 80%), said they preferred not to comment or respond because they had not yet formulated their e-commerce strategy, beyond the knowledge that they did indeed have a Web site. "I've thought about it a lot, and to tell you the truth, I'm not comfortable talking about it (company's use of the 'Net as a sales tool) because I don't know the answers," said one executive who preferred to remain nameless, but who nonetheless could easily speak for the rest of his colleagues. "At this moment it is not a sales tool, it is a promotional tool," said a public relations director of a small manufacturer within the booming safety syringe market. "We are moving toward using it for marketing, but I would feel a lot more comfortable talking about it next year after we sit down and formulate our strategy. At this point it is an information site." And from the GPO side came this. "What we should be interested in is not selling widgets through e-commerce, but using the Internet for things like the timely reporting of sales to the manufacturer. That's what killing us, and that's where the future is, and that's where the Internet is going to have its best use." Little wonder that the use of e-commerce is as uncertain as the sales and marketing executives attempting to implement it. Early days In the first flush of Internet marketing, few guidelines have been established for companies looking to forge ahead. Tom Knight, a principal at Sibson & Co., Chicago, is a consultant who has worked with medical device firms such as Dade Diagnostics and BD. He says that the Internet can eliminate a layer of cost to consumers, assuming that you know your customer's needs. "The first step is to determine the buying patterns of your customers, and their priorities," Knight says. "What have their consumption patterns been? From there you can determine what their use patterns have been. And from there, you can simplify the order transaction process while at the same time supplying that customer with information about their own company's purchasing habits." What products to put on the Internet, says Knight, is just one of an increasingly complex list of questions that have managers perplexed. The answers become particularly important in commercial businesses where many managers consider selling over the Internet for consumer products only, or for commercial products that have become a commodity. There are also questions of what happens to traditional sales channels when Internet sales proliferate. Today's current buzzword & disintermediation & connotes a universal concern that intermediaries, meaning any third party inserted between manufacturer and end user, will inevitably go the way of the horse and buggy, doomed by their own inefficiencies and "snail mail" mentality. Then there is how much of a portal and how much access does a company need to provide? How much faster does a company's distribution and delivery system have to work if you take Internet orders? Everybody, says Knight, has done business with Amazon.com., and like it or not, every business will be held to that standard whether it is realistic or not. Ask yourself this Answering a series of preliminary questions, says Knight, can help determine the direction a company should take. 1) What products should we sell, and to which segments, via e-commerce? This the biggest initial step that companies must make at the beginning of its e-commerce strategy & determining which products to sell over the Internet, and who to sell them to. Three imputs make the determination: understanding purchaser preferences, understanding the cost to service each segment via current channels, and an understanding of the cost to service the same segment via e-commerce. 2) How are sales roles redefined with the addition of e-commerce marketing channels? Many companies, says Knight, miss the opportunity to bring additional capability to its sales force. Instead of salespeople cringing at the thought of unemployment, a company should take advantage of the opportunity to free its salespeople from transaction processing and customer service-related follow-up. The key is to redeploy sales resources in ways that create more value for the customer and the firm. Companies should ask themselves what sales activities would provide additional customer value, what activities would enable the firm to justify a higher price for its products, and what skills and capabilities do sellers require to take part in these activities. 3) How should sales coverage models be adjusted for e-commerce? Once decisions have been made about the roles sales people will take in the emerging marketing structure, companies should consider questions such as how many accounts can each seller now cover and which accounts offer the most opportunity for growth? Traditionally, sellers and managers have looked to e-channels as an opportunity to improve the profitability of sales by shrinking the sales force and increasing productivity. However, while productivity gains are almost always a part of the equation, headcount frequently goes up as sales forces find the optimal number and type of each seller. 4) What incentives should we deliver to ensure the success of e-commerce? A complex question. On one hand, companies have to determine how to compensate salespeople for e-commerce sales in which they had a hand as well as for marketing the use of e-commerce to their customers. A company must also decide whether to encourage customers to conduct business over the Internet, and how to make that business cost effective. Seamless purchasing preferred 5) What type of customer experience should a company provide within e-commerce? All good Internet sites create a reason to return. An e-commerce site should allow customers to do business the way they want to do it, while making the practice of conducting business stress-free. That means integrating sales, marketing, finance, product management and manufacturing functions within the site and removing barriers between them to provide a customer with a seamless purchasing environment. In addition to removing barriers, managers must adopt a customer-friendly perspective about Internet marketing that facilitates return site hits. 6) What must a company do to ensure continuing value on its e-commerce site? Faster ordering means faster delivery. Fast delivery requires integration of a company's information systems & order capture and entry, processing, fulfillment, shipping and billing. Delivery is also complicated by the fact that orders and deliveries will now come in greater numbers and smaller increments, making it harder for companies to achieve the same economies of scale they once knew when shipping by freight car. Internet pricing 7) How should e-commerce products be priced? Another tough question. Comparison shopping is easier over the Web, particularly for non-commodity products. Managers have to decide whether discounts are warranted on certain products within certain segments, and must create a price monitoring and modeling system that reviews the competitiveness of their prices and the profitability of the products . 8) What support tools and information are required to manage selling over e-channels? Internet marketing creates added complexity coming from customer re-channeling, pricing modifications and the leveraging of free time caused by new sales roles. Therefore, a variety of variety of support and decision support tools are required. Companies must learn to identify information and decision support system requirements by thinking in terms of "exploitable exceptions" in their dealings with customers. The challenge is to equip sellers and managers with the information and decision support tools necessary to take advantage of opportunities that have gone unnoticed by competitors. 9) Finally, the bottom line. What's the return on e-commerce? Knight contends that e-commerce's potential to affect all functions and units of a business makes calculating a return on investment a difficult proposition. Approximations are possible, he says, and most who have run the numbers agree that the returns are huge. To paraphrase a frequently quoted response to the question, what kind of return on investment did Columbus receive when he sailed to the New World? Knight says there are two keys to managing for a return & listening to your customers, and aggressively managing margins to ensure that the corporation is learning how e-commerce is adding value. The New World order-takers Answers to the above questions, says Knight, need not be perfect from the outset, but they'd better be forthcoming. As everyone in the med-surg business understands, nothing comes without cost or cautions. E-commerce may be a new marketing Mecca but the road to Internet success is not without pitfalls. Attendees at a recent e-commerce information conference were told by Stu Grossman, director of customer satisfaction and quality for Eastman Kodak's Health Imaging Division, that practitioners of e-commerce should expect new and increased competition from any number of sources, an Internet phenomenon called Channel Conflict that creates problems with and the loss of traditional lines of distribution, and intensified price pressure. "In the war between buyer and seller, the buyer has been declared the winner, and Intertnet managers are being forced to contend with it" he says. And then there is the Internet form of Murphy's Law. According to industry pundits, "To err is human, but to really screw up requires a computer." None of which can or should deter Internet commerce. Nobody knows what they're doing, says conventional wisdom, but nobody should avoid doing it. And, as another bit of current knowledge has it, the time to integrate the Internet is now, because your competitors are already hard at it. In order to succeed, you have to "fail fast until something works."