There is a number of small, niche-focused companies in the biomedical industry. Some of them are start-ups and others have grown steadily despite offering a limited range of products and services.
Medtronic competes with, has acquired, and has entered into strategic alliances with many firms that are much smaller than it. Some of these firms, particularly the strategic alliance partners, are making products that are comparable or even superior to those offered by Medtronic. These facts suggest that scale, i.e. large size and heavy R&D spending, may be important factors in the industry but that smaller, less resource-rich organizations can enter and prosper along side their larger rivals.

That said, major players in the industry such as Medtronic, St. Jude and Siemens spend tens or even hundreds of millions of dollars on R&D each year, and the amounts show no sign of decreasing.

There is a number of factors in the industry that act to increase capital requirements. Most, if not all, of Medtronic's products require the approval of government regulators in the country in which they are to be sold and/or manufactured. The principal regulatory body in the U.S. is the Food and Drug Administration (FDA) and its approval process is widely recognized as being lengthy, bureaucratic and slow. Additionally, recalls of defective products, lengthy clinical trials, patent infringement fights, and product liability claims are extremely common and costly.

Furthermore, the rapid pace of change in the industry, particularly the rate of new product introductions, has increased dramatically in the past decade. In 1992, Medtronic's stated goal was to have the shortest time-to-market in the industry, a goal that would require a reduction of its pacing products development cycle from 18 to 12 months. The design cycle time of one of its pacing products has been reduced by 50% in the last decade and Medtronic has managed to turn out four generations of its implantable defibrillator in two years in its efforts to stay ahead of its major rivals.

What one might infer from all of the above is that while barriers and initial capital requirements may be low in this industry - a start-up with a good product can be successful - the need for heavy R&D spending, the lengthy and uncertain product approval process and the rapid pace of innovation create conditions that are likely to push capital requirements upwards over time.

Product innovation

Medtronic thrives on being an innovator. It has pioneered many technologies and product lines, particularly in its flagship, pacing products. Medtronic introduced the first pacemaker in 1957 and was a leader in the introduction of rate-responsive pacing, as well. The company has adopted a policy, similar to that of Intel and other hypercompetitors, of obsoleting its own products at a rapid pace. Says Glen Nelson, Medtronic Vice Chairman: "We have to be prepared to antiquate essentially any of our products with our own developments. If we can produce substantial improvements in a product's performance, then anyone could."

Discussing the reason for Medtronic's unrelenting pace of new product introductions, Dennis Salke, former Vice-President and General Manager of Medtronic's heart valve division said: "For a great big company, they get up scared every morning and that's part of their strength. They've got people in the company who saw market share decline in the 1970s and early 1980s. They felt the trauma and know why it occurred. They weren't ahead in technology. A lot of people at Medtronic have vowed its never going to happen again. The ante to the game in the (bio)medical field is to be there first with a quality product. You can't get left behind." 
Art Collins, Chief Operating Officer at Medtronic, echoed these same sentiments during his testimony to a Senate subcommittee hearing on FDA control of the export of unapproved medical devices. He exclaimed: "The key to the global leadership of Medtronic and the U.S. medical device industry in general can be summarized in one word - innovation. Our strength lies in our ability to develop innovative therapies that meet patient needs, and to deliver those therapies to the market. Today, medical technology advancements are happening at lightning speed compared with the pace just five or ten years ago. And this innovation is occurring throughout the world. To remain competitive, Medtronic and other manufacturers must conduct product development and manufacturing activities in an environment that fosters innovation. If such an environment cannot be found in the United States, we have no choice but to look elsewhere."

Process innovation

Medtronic has as strong concern for process innovation (how it improves production of its products) as it does for product innovation (how it improves its products or invent new ones). Some of the ways in which this has been accomplished are through the following means:

• The use of computer-aided design, manufacturing and engineering systems such as Pro/ENGINEER, which resulted in an 80% reduction in the time required to create and model a complex pacemaker and a 90% reduction in the time required to produce product design variations
• The use of a Cray supercomputer for product development and design - an industry first
• The implementation of process improvement, quality, and just-in-time (JIT) programs designed to eliminate product defects, cut costs, and improve responsiveness to market demand
• The upgrading of marketing processes such as technical support, customer education initiatives and product line expansion and bundling

The lowering of manufacturing costs is a primary motivation for both product and process innovation.

Concern for quality

Medtronic has an extremely high concern for quality. This concern is rooted in the company value system and instantiated in the numerous quality initiatives that continue to be undertaken at the company. The attention to quality can be attributed to a combination of internal and external factors. One of the external factors deals with the FDA approval process. In the biomedical industry, quality and safety are very closely related and the FDA's traditional role is to ensure that only safe, high quality products reach the American consumer. Low quality can result in failure of otherwise useful products failing to be approved, delay of final approval process, and in the worst case, recall of products already on the market. CEO William George has been quoted as saying that the most risky thing his company could do would be to put unsafe (i.e. low quality) products on the market.

Within Medtronic, there has long been recognition that its products are life sustaining. Morale-boosting visits from people who were helped or even saved by the use of Medtronic products are frequent occurrences.

At Medtronic, the concern for quality is manifested by strong adherence to the value system and ongoing efforts to achieve process improvements and new product introductions.The company has kept product quality as a major concern through many process re-designs in such areas as order fulfillment, manufacturing, and new product introduction and development. This has led to the adoption of a "do it right the first time" mindset according to Chief Operating Officer Arthur Collins. He continues, "I think cycle time reduction, if properly managed, enhances overall quality of the product as measured by the customer".

Price level

(Bio)medical technology is expensive. In 1992, Medtronic's smart implantable defibrillators sold for about $20,000 each while "standard" pacemakers were priced from $1,500 to $9000. While prices do decline as the products move through their life cycle, prices have increased with the trend toward miniaturization. Medtronic's Jewel brand of miniature defibrillators was selling for over $53,000 when first introduced in early 1995.

Although the products are expensive, price has not traditionally been of great importance. Price differences among major competitors have been minimal and the key issues have revolved around technology, after sales service, reliability and the total cost of care. Price is rarely, if ever, mentioned as a factor in discussions about Medtronic's products. We are left to conclude that Medtronic's price level compared to that of its competitors is moderate, neither significantly higher nor lower.