EMI and the CT Scanner Essay

In ahead of m 1972 on that point was beneficialish dis symmetricalness among top concern at EMI Ltd, the UKbased music, electronics, and leisure smart set. The subject of the contr solely oversy was the CT digital electronic image scanner, a unfermented medical exam exam examination symptomatic visualize twist that had been upriseed by the conferences Central Research science lab (CRL). At turn out was the decision to inject this refreshing origin, thereby de ex boutly a diversification move that m whatever matte up was necessary if the union was to expect to prosper.Complicating the problem was the fact that this revolutionary immature merchandise would non solely take EMI into the fast-changing and highly competitive medical equipment business, but would to a fault require the go with to express operations in North America, a tradeplace in which it had no prior experience. In March 1972 EMIs board was considering an investment proffer for 6 un itary thousand bingle thousand thousand to manikin CT scanner manufacturing facilities in the linked Kingdom.Development of the CT Scanner familiarity background and historyEMI Ltd traces its origins back to 1898, when the Gramoph one Company was founded to import records and gramophones from the United States. It soon completed its knowledge manufacturing and recording capabilities, and after a 1931 fusion with its study(ip) rival, the Columbia Gramophone Company, emerged as the Electric and Musical Industries, Ltd. EMI Ltd pronto earned a reputation as an aggressive proficient innovator, under coached the automatic record changer, stereophonic records, magnetic recording tape, and the pioneer mercenary televisual sensation system adopted by the BBC in 1937.Beginning in 1939, EMIs R&D capabilities were re rateed by the war ride toward the k at bearledge of fuses, airborne radar, and former(prenominal)(a) sophisticatedelectronic devices. The union emerged from the war with an electronics business, to a greater ex decenniumt much than non ge ared to defenserelated convergences, as well as its traditional enclosetainment businesses. The alteration to peace epoch was specially nasty for the electronics division, and its poor performance led to attempts to pursue upstart industrial and consumer applications. EMI did any(prenominal) exciting pioneering work, and for a spot held hopes of being Britains leading computer social club. Market leadership in major electronics applications remained elusive, however, while the music business boomed. The 1955 acquisition of Capitol Records in the United States, and the subsequent mastery of the Beatles and other recording groups under contract to EMI, put the company in a very strong monetary position as it entered the 1970s. In 1970 the company had earned 21 million forward tax on gross r up to nowue of 215 million, and although extraordinary losses halvedthose profits in 1971, the compa ny was optimistic for a return to previous profit levels in 1972 (see exhibits 10.1 to 10.3 for EMIs financial performance). Around that time, a change in top oversight signaled a change in corporate scheme. behind Read, an accountant by raising and previously gross gross gross gross revenue director for Ford of Great Britain, was ap decimal pointed header executive officer after scarce four yrs in the company. Read recognised the risky, even fickle, nature of the music business, which accounted for ii-thirds of EMIs gross revenue and profits. In an effort to change the companys strategical balance, he began to divert close to of its up rest cash flow into numerous acquisitions and subjective victimisations. To encourage ingrained innovation, Read established a research memory board that was to be use to finance innovative developments out-of-door the companys immediate interests. Among the scratch depicts financed was one proposed by Godfrey Hounsfield, a r esearch scientist in EMIs Central Research Laboratories (CRL). Hounsfields proposal opened up an chance for the company to diversify in the fast-growing medical electronics field. ct scanning the conceptIn simple terms, Hounsfields research proposal was to study the possibility of creating a troikadimensional cast of an object by taking multiple roentgenogram measurements of the object from different angles, then(prenominal) using a computer to reconstruct a picture from the entropy contained in hundreds of overlapping andintersecting roentgenogram slices. The concept became cognize as computerized imagery (CT).Although computerized tomography be a conceptual break by dint of, the technologies it harnessed were quite well known and unders likewised. Essentially, it linked roentgen ray, data dish outing, and cathode ray allow demonstrate technologies in a complex and precise manner. The real development quarrel consisted of integrating the mechanical, electronic, an d radiographic components into an accurate, reliable, and sensitive system. Figure 10.1 peculiarityures a schematic representation of the EMI scanner, illustrating the linkage of the three technologies, as well as the closinguring handling tabular array and X-ray gantry.Progress was rapid, and clinical trials of the CT scanner were under way by late 1970. To capture the image of multiple slices of the brain, the scanner went through a translate-rotate sequence, as exemplifyd in figure 10.2. The X-ray ancestor and sensing element, located on oppo settle sides of the patients head, were mounted on a gantry. aft(prenominal) to each one scan, or translation, had generated an X-ray image comprising 160 data points, the gantry would rotate 1 and another scan would be do.This procedure would pr pillow slip through 180 translations and rotations, storing a center of al roughly 30,000 data points. Since the notice intensity of an X-ray varies with the material through which it passes, the data could be theorise by the computer into a threedimensional image of the object that distinguished bone, tissue, water, fat, and so on. At about the time of the CT clinical trials, keister Powell, at once managing director of Texas Instruments English accessory, joined EMI as skillful director. He soon became convinced that the poor profit cogency of the nonmilitary electronics business was repayable to the diffusion of the companys 2, euchre-person R&D readiness over too many diverse small-volume lines. In his words, EMI was devoted to too many products and dedicated to too few. Because the CT scanner project strengthened on the companys substantial and well-established electronics capability, Powell believed it gave EMI an important opportunity to enter an exciting mod field. He felt that this was exactly the type of effort in which the company should be active to invest several(prenominal) millionpounds.Diagnostic Imaging IndustryDuring the first half of the twentieth century, diagnostic information about internal organs and functions was provided al some exclusively by starchy X-ray examination, but in the 1960shostemostel.comand 1970s, several new imaging techniques emerged. When the CT scanner was announced, three other important technologies existed X-ray, atomic, and ultrasound. EMI management believed its CT scanner would displace live diagnostic imaging equipment in only a few applications, specifically head and brain imaging. roentgenogramIn 1895 Wilhelm Roentgen discovered that rays generated by a cathode ray tube could penetrate solid objects and create an image on film. Over the following(a) 40 to 50 years, X-ray equipment was installed in almost every healthcare facility in the world. patronage its several limitations (primarily due to the fact that compass point was obscured when three-dimensional features were superimposed on a two-dimensional image), X-rays were universally used. In 1966 a Surgeon Generals rep ort estimated that between tercet and one-half of all crucial medical decisions in the United States depended on interpretation of X-ray films. That country alone had frequently than than 80,000 X-ray readinesss in operation, performing almost one hundred fifty million procedures in 1970. The X-ray commercialise was dominated by phoebe bird major global companies. Siemens of tungsten Germany was estimated to deplete 22 share of the world market, N.V. Philips of the Netherlands had 18 partage, and Compagnie Generale de Radiologie (CGE), subsidiary of the cut giant Thomson Brandt, held 16 portion. Although General Electric had an estimated 30 percent of the self-aggrandising US market, its weak position a blanket(a) gave it only 15 percent of the world market. The fifth tumidst company was Picker, with 20 percent of the US market, but less than 12 percent ecumenical.The size of the US market for X-ray equipment was estimated at $350 millionin 1972, with an additional $350 million in X-ray supplies. The United States was thought to represent 35 40% of the world market. Despite the maturity of the product, the X-ray market was growing by almost 10% y weely in dollar terms during the premature 1970s.A conventional X-ray system represented a major capital spending for a infirmary, with the average system equaling more than $100,000 in 1973.In the mid-1960s a nuclear diagnostic imaging procedure was developed. Radioisotopes with a scant(p) radioactive life were projected into the be, detected and monitored on a screen, then recorded on film or stored on a tape. nonetheless in an early stage of development, this technology was used to complement or, in some instances, replace a conventional X-ray diagnosis. Both unchanging and dynamic images could be obtained.Following the pioneering development of this field by thermonuclear-Chicago, which interchange the first nuclear gamma camera in 1962, several other small competitors had entered the fi eld, notably Ohio Nuclear. By the late 1960s larger companies such as Picker were getting involved, and in 1971 GEs aesculapian Systems Division announced plans to enter the nuclear medicine field. As new competitors, large and small, entered the market, ambition became more aggressive. The average nuclear camera and data processing system change for about $75,000. By 1973, shipments of nuclear imaging equipment into the US market were estimated to be over $50 million.Ultrasound had been used in medical diagnosis since the 1950s, and the technology advanced significantly in the early 1970s, permitting reform-defined images. The technique involves transmitting sonic waves and picking up the echoes, which when reborn to electric energycould create images. Air and bone often provide an acoustic barrier, limiting the use of this technique. But because the patient was not subjectto radiation, it was astray used as a diagnostic tool in obstetrics and gynecology.In 1973 the ultraso und market was very small, and only a few small companies were inform in the field. Picker, however, was rumored to be doing research in the area. The cost of the equipment was expected to be less than half that of a nuclear camera and support system, and perhaps a third to a pull out that of an X-ray machine.Because of its size, sophistication, progressiveness, and access to funds, the US medical market clear represented the major opportunity for a new device such as the CT scanner. EMI management was uncertain about the sales potential for their new product, however. As of 1972, there were around 7,000 hospitals in the United States, ranging from tiny rural hospitals with fewer than 10 beds to giant teaching institutions with 1,000 beds or more (see table 10.1).Since the price of the EMI Scanner was expected to be around $400,000, only the largest and financially strongest short-term institutions would be able to afford one. But the company was encourage by the enthusiasm of the physicians who had seen and worked with the scanner. In the opinion of one leading American neurologist, at least 170 machines would be required by major US hospitals. Indeed, he speculated, the time might come when a neurologist would feel ethically compelled to order a CT scan before making a diagnosis. During the 1960s the radiology departments in many hospitals were recognized as important money-making operations. Increasingly, radiologists were able to commission equipment manufacturers to build specially conceptional (often esoteric) X-ray systems and applications. As their budgets expanded, the size of the US X-ray market grew from $50 million in 1958 to $350 million in 1972.Of the 15,000 radiologists in the United States, 60 percent were primarily based in offices and 40 percent in hospitals. Little penetration of private clinics was foreseen for the CT scanner. Apart from these broad statistics,EMI had bittie ability to forecast the potential of the US market for sc anners.EMIs enthronement Decisionconflicting management viewsBy late 1971 it was clear that the clinical trials were successful and EMI management had to decide whether to exploit the investment required to develop the CT scanner business. One group of ranking(prenominal) coachs felt that direct EMI participation was undesirable for three actors. First, EMI lacked medical product experience. In the early 1970s EMI offered only two very small medical products, a patient-monitoring device and an infrared thermography device, which together represented less than 0.5 percent of the companys sales. Second, they argued that the manufacturing process would be quite different from EMIs experience. well-nigh of its electronics work had been in the job shop mode required in producing small outlets of highly specialized defense products on undetermined government contracts. In scanner employment, most of the components were bribed from subcontractors and had to be integrated into a functioning system.Finally, many believed that without a working knowledge of the North American market, where most of the enquire for scanners was expected to be, EMI might find it very backbreaking to build an effective operation from scratch.Among the strongest opponents of EMIs self-development of this new business was one of the scanners earliest sponsors, Dr Broadway, head of the Central Research Laboratory. He emphasised that EMIs potential competitors in the field had considerably greater technological capabilities and resources. As the major proponent, John Powell needed convincing market information to counter the critics. In early 1972 he asked some of the senior managers how many scanners they thought the company would sell in its first 12 months. Their first estimate was five. Powell told them to think once again. They came back with a figure of 12, and were again sent back to reconsider. Finally, with an estimate of 50, Powell felt he could go to squash racquet f or the 6 millioninvestment, since at this sales level he could project handsome profits from year one. He then prepared an course that aloneified the scanners fit with EMIs overall objectives, and draw a basic strategy for the business.Powell argued that self-development of the CT scanner represented just the sort of vehicle EMI had been quest to provide some focus to its development effort. By definition, diversification away from existing product-market areas would move the company into sanely unfamiliar territory, but he firmly believed that the financial and strategic payoffs would be huge. The product offered access to global markets and an introduction into the lucrative medical equipment field. He felt the companys objective should be to achieve a substantial share of the world medical electronics business not only in diagnostic imaging, but unnecessaryively through the extension of its technologies into computerized patient planning and radiation therapy.Powell claim ed that the expertness developed by Hounsfield and his team, duplicated with resistance from patents, would give EMI three or four years, and maybe many more, to establish a solid market position. He argued that investments should be made quick and boldly to maximize the market share of the EMI scanner before competitors entered. former(a) options, such as licensing, would impede the development of the scanner. If the licensees were the major Xray equipment suppliers, they might not promote the scanner aggressively since it would cannibalize their sales of X-ray equipment and consumables. littler companies would lack EMIs sense of commitment and urgency. Besides, licensing would not provide EMI with the major strategic diversification it was seeking. It would be, in Powells words, selling our birthright.the proposed strategyBecause the CT scanner corporate a complex integration of some technologies in which EMI had only limited expertise, Powell proposed that the manufacturing strategy should rely heavily on out of doors sources of those components rather than trying to develop the expertise internally. This approach would not only minimize risk, but would to a fault make it thinkable to implement a manufacturing program rapidly.He proposed the concept of growth various centers of honesty twain inside and outside the company, making each creditworthy for the proceed high select of the subsystem it manufactured. For poser, within the EMI UK presidency a unit called SE Labs, which manufactured instruments and displays, would require the center of excellence for the scanners viewing console and display mark. Pantak, an EMI unit with a capability in X-ray tube assembly, would decease the center of excellence for the X-ray generation and detection subsystem. An outside trafficker with which the company had worked in developing the scanner would be the center of excellence for data processing. Finally, a pertly created division would be responsib le for arrange these subsystem manufacturers, integrating the various components, and assembling the final examination scanner at a company facility in the town of Hayes, not far from the CRL site.Powell emphasized that the low initial investment was possible because most of the components and subsystems were buyd from contractors and vendors. Even internal centers of excellence such as SE Labs and Pantak assembled their subsystems from purchased components. Overall, outside vendors accounted for 7580 percent of the scanners manufacturing cost. Although Powell felt his arrangement greatly minify EMIs risk, the 6hostemostel.commillion investment was a substantial one for the company, representing about half the funds available for capital investment over the coming year. (See exhibit 10.2 for a balance sheet and exhibit 10.3 for a projected funds flow.)The technology strategy was to keep CRL as the companys center of excellence for design and software expertise, and to use the su bstantial profits Powell was projecting from even the earliest sales to detect technological leadership position. Powell would personally head up a team to develop a marketing strategy. Clearly, the United States had to be the main focus of EMIs marketing legal action. Its neuroradiologists were regarded as world leaders and tended to welcome technological innovation. Furthermore, itsinstitutions were more commercial in their outlook than those in other countries and tended to have more available funds. Powell planned to set up a US sales subsidiary as soon as possible, recruiting sales and religious service violence familiar with the North American healthcare market. Given the interest shown to realize in the EMI scanner, he did not think there would be some(prenominal) difficulty in gaining the solicitude and interest of the medical community. Getting the $400,000 orders, however, would be more of a challenge. In simple terms, Powells sales strategy was to get machines int o a few reputable reference hospitals, then build from that base.the decisionIn March 1972 EMIs chief executive, John Read, considered Powells proposal in preparation for a board confluence. Was this the diversification opportunity he had been hoping for? What were the risks? Could they be managed? How? If he decided to back the proposal, what kind of an writ of execution program would be necessary to ensure its eventual success? lineament BThe year 1977 looked like it would be a very good one for EMI medical exam Inc., a North American subsidiary of EMI Ltd. EMIs CT scanner had met with enormous success in the American market. In the three years since the scanners introduction, EMI medical electronics sales had gravid to 42 million. Although this represented only 6 percent of total sales, this new business contributed pretax profits of 12.5 million, almost 20 percent of the corporate total (exhibit 10.4). EMI Medical Inc. was thought to be responsible for about 80 percent of to tal scanner volume. And with an order backlog of more than 300 units, the future tense seemed rosy. Despite this formidable success, senior management in twain the subsidiary and the parent company were concerned about several developments. First, this fast- crop field had attracted more than a dozen new entrants in the past two years, and technological advances were occurring rapidly. At the comparable time, the growing political debate over hospital cost containment often focused on $500,000 CT scanners as an example of questionable hospital spending. Finally, EMI was root system to feel some internal organizational strains.Entry Decisionproduct launchFollowing months of debate among EMIs top management, the decision to go ahead with the EMI Scanner project was cognizant when John Read, the company CEO, gave his support to Dr Powells proposal. In April 1972 a formal press announcement was greeted by a rejoinder that could only be described as overwhelming. EMI was flooded with inquiries from the medical andfinancial communities, and from most of the large diagnostic imaging companies wanting to license the technology, enter into joint ventures, or at least distribute the product. The response was that the company had decided to enter the business this instant itself. Immediately action was implemented to put Dr Powells manufacturing strategy into operation. Manufacturing facilities were developed and render contracts drawn up with the objective of beginning shipments within 12 months.In may, Godfrey Hounsfield, the brilliant EMI scientist who had developed the scanner, was dispatched to the US attach to by a leading English neurologist. The American specialists with whom they spoke substantiate that the scanner had great medical importance. Interest was running high in the medical community.In declination, EMI mounted a display at the annual meeting of the Radiological Society of North America (RSNA). The exhibit was the highlight of the show, and boosted managements confidence to establish a US sales company to penetrate the American medical market. us market entryIn June 1973, with an impressive pile of sales leads and inquiries, a small sales office was established in Reston, Virginia, home of the newly appointed US sales branch manager, Mr Gus Pyber. Earlier that month the first North American head scanner had been installed at the prestigious Mayo Clinic, with a s machine promised to the Massachusetts General Hospital for trials. Interest was high, and the new sales force had little difficulty getting into the offices of leading radiologists and neurologists.By the end of the year, however, Mr Pyber had been fired in a dispute over appropriate disbursement levels, and James Gallagher, a former marketing manager with a major drug company, was hire to replace him. One of Gallaghers first step was to convince the company that the Chicago area was a far better location for the US office. It allowed better servicing o f a discipline market, was a major center for medical electronics companies, and had more convenient linkages with capital of the United Kingdom. This last point was important since all major strategic and policy decisions were being made directly by Dr Powell in London.During 1974, Gallagher concentrated on recruiting and developing his three-man sales force and two-man service organization. The cost of advanceing each salesman on the road was estimated at $50,000, while a servicemans salary and expenses at that time were around $35,000 per year. The output signal rate for the scanner was running at a rate of only three or four machines a month, and Gallagher turn uprb little point in developing a huge sales force to sell a product for which supply was limited, and interest manifestly boundless. In this sellers market the company developed some policies that were new to the patience. Most notably, they required that the customer deposit one-third of the purchase price with the order to guarantee a place in the mathematical product schedule. Sales leads and enquiries were followed up when the sales force could get to them, and the general emplacement of the company seemed to have somewhat of a take it or cede it tone. It was in this period that EMI developed a reputation for arrogance in some parts of the medical profession. Nonetheless, by June 1974 the company had delivered 35 scanners at $390,000 each, and had another 60 orders in hand.Developing Challengescompetitive challengeToward the end of 1974, the first competitive scanners were announced. Unlike the EMI scanner, the new machines were designed to scan the consistence rather than the head. The Acta-Scanner had been developed at Georgetown Universitys Medical meaning and was manufactured by a small Maryland company called digital tuition SciencesCorporation (DISCO). Technologically, it offered little advance over the EMI scanner moreover for one important feature. Its gantry design woul d accommodate a physical structure rather than a head. tour specifications on scan time and image composition were identical to those of the EMI scanner, the $298,000 price tag gave the Acta-Scanner a big advantage, particularly with smaller hospitals and private practitioners.The DeltaScan offered by Ohio Nuclear (ON) represented an even more formidable challenge. This head and bole scanner had 256 256 pixels compared with EMIs 160 160, and promised a 21/2-minute scan rather than the 41/2-minute scan time offered by EMI. ON offered these superior features on a unit priced $5,000 below the EMI scanner at $385,000. Many managers at EMI were surprised by the speed with which these products had appeared, moreover two years after the EMI scanner was exhibited at the RSNA meeting in Chicago, and 18 months after the first machine was installed in the Mayo Clinic. The source of the challenge was also interesting. DISCO was a tiny private company, and ON contributed about 20 percent o f its parent Technicares 1974 sales of $50 million.To some, the biggest surprise was how closely these competitive machines resembled EMIs own scanner. The complex seawall of patents had not provided a very enduring defense. ON tackled the issue directly in its 1975 annual report. After announcing that $882,200 had been spent in Technicares R&D Center to develop DeltaScan, the report stated Patents have not played a significant role in the development of Ohio Nuclears product line, and it is not believed that the validity or invalidity of any patents known to exist is material to its current market position. However, the technologies on which its products are based are sufficiently complex and application of patent faithfulness sufficiently indefinite that this belief is not free from all doubt.The challenge represented by these new competitive products caused EMI to speed up the announcement of the body scanner Dr Hounsfield had been working on. The new CT 5000 model incorporated a second-generation technology in which multiple beams of radiation were shot at multiple detectors, ratherthan the whiz pencil beam and the single detector of the genuine scanner (see exhibit 10.5). This technique allowed the gantry to rotate 10 rather than l after each translation, cutting scan time from 41/2 minutes to 20 seconds. In addition, the multiple-beam emission also permitted a finer image resolution by increasing the number of pixels from 160 160 to 320 320. Priced over $500,000, the CT 5000 received a standing ovation when Hounsfield demonstrated it at the radiological meetings held in Bermuda in May 1975.Despite EMIs re holdion of its leadership position, aggressive competitive activity continued. In March 1975, Pfizer Inc., the $1.5 one million million drug giant, announced it had acquired the manufacturing and marketing rights for the Acta-Scanner.EMI was then operate at an annual production rate of 150 units, and ON had announced plans to double expertness to 12 units per month by early 1976. Pfizers capacity plans were unknown. The most dramatic competitive revelation came at the annual RSNA meeting in December 1975, when six new competitors displayed CT scanners. Although none of the newcomers offered immediate pitch, all were booking orders with pitching dates up to 12months out on the basis of their spec sheets and prototype or model equipment exhibits.Some of the new entrants (Syntex, Artronix, and Neuroscan) were smaller companies, but others (General Electric, Picker, and Varian) were major medical electronics competitors. mayhap most impressive was the General Electric CT/T scanner, which took the sister technology into its third generation (see exhibit 10.6). By using a 30-wide pulsed fan X-ray beam, the GE scanner could avoid the time-consuming translate-rotate sequence of the firstand second-generation scanners. A single continuous 360 sweep could be accurate in 4.8 seconds, and the resulting image was reconstructed by the computer in a 320 320 pixel matrix on a cathode ray tube.The unit was priced at $615,000. Clinical trials were scheduled for January, and shipment of production units was being quoted for mid-1976. The arrival of GE on the horizon signaled the beginning of a new competitive game. With a 300-person sales force and a service network of 1,200, GE clear had marketing muscle. They had reputedly spent $15 million developing their third-generation scanner, and were keep to spend at a rate of $5 million annually to keep ahead technologically. During 1975, one industry source estimated, about 150 new scanners were installed in the US, and more than twice as many orders entered. (Orders were firm, since most were secured with hefty front-end deposits.) Overall, orders were split fairly evenly between brain and body scanners. EMI was thought to have accounted for more than 50 percent of orders taken in 1975, ON for almost 30 percent.Market size and growth dead-on(prenominal) assessment s of market size, growth rate, and competitors shares were difficult to obtain. The following represents a sample of the wide varying forecasts made in late 1975 Wall Street was clearly enamored with the industry prospects (Technicares stock price rose from 5 to 22 in six months) and analysts were predicting an annual market potential of $500 million to $1 billion by 1980. Frost and Sullivan, however, saw a US market of only $120 million by 1980, with ten years of cumulative sales only reaching $1 billion by 1984 (2,500units at $400,000). Some leading radiologists suggested that CT scanners could be modular equipment in all short-term hospitals with 200 beds or more by 1985. Technicares chairperson, Mr R. T. Grimm, forecast a universal market of over $700 million by 1980, of which $400 million would be in the US. Despite the adept limitations of its first-generation product, Pfizer said it expected to sell more than 1,500 units of its Acta-Scanner over the next five years. With in EMI, market forecasts had changed considerably. By late 1975, the estimate of the US market had been boosted to 350 units a year, of which EMI hoped to retain a 50 percent share. Management was sapiently aware of the difficulty of forecasting in such a irritated environment, however. global expansionNew competitors also challenged EMIs positions in markets outside the US. Siemens, the $7 billion West German company, became ONs international distributor. The distribution agreement appeared to be one of short-term convenience for both parties, since Siemens acknowledged that it was developing its own CT scanner. Philips, too, had announced its intention to enter the field.Internationally, EMI had maintained its basic strategy of going direct to the national market rather than working through local anesthetic partners or distributors. Although all European sales had originally been grappled out of the UK office, it quickly became evident that local servicing staffs were required in most countries. Soon separate subsidiaries were established in most continental European countries, typically with a couple of salesmen, and three or fourservicemen. Elsewhere in the world, salesmen were often machine-accessible to EMIs existing music organization in that country (e.g., in South Africa, Australia, and Latin America). In Japan, however, EMI signed a distribution agreement with Toshiba which, in October 1975, submitted the largest single order to date a request for 33 scanners.EMI in 1976 Strategy and Challengesemis situation in 1976By 1976 the CT scanner business was evolving rapidly, but, as the results indicated, EMI had done extremely well financially (exhibit 10.5). In reviewing developments since the US market entry, the following was clear While smaller competitors had challenged EMI somewhat earlier than might have been expected, none of the big diagnostic imaging companies had brought its scanner to market, even four years after the original EMI scanner a nnouncement. While technology was evolving rapidly, the expertise of Hounsfield and his CRL group, and the aggressive reinvestment of much of the early profits in R&D, gave EMI a strong technological position. While market size and growth were highly uncertain, the potential was unquestionably much larger than EMI had forecast in their early plans. In all, EMI was well established, with a strong and growing sales volume and a good technical reputation. The company was unquestionably the industry leader. Nonetheless, in the light of all the developments, the strategic tasks facing EMI in 1976 differed considerably from those of earlier years. The following paragraphs outline the most important challenges and problems facing the company in this period.strategic prioritiesEMIs first sales priority was to protect its existing highly visible and prestigious customer base from competitors. When its second-generation scanner was introduced in mid-1975, EMI promised to upgrade without char ge the first-generation equipment already purchased by its established customers. Although each of these 120 upgrades was estimated to cost EMI $60,000 in components and installation costs, the US sales organization felt that the expense was essential to maintain the confidence and good faith of this important core group of customers. To maintain its leadership image, the US company also expanded its service organization substantially. Beginning in early 1976, new regional and district sales and service offices were opened with the objective of providing customers with the best servicein the industry. A typical annual service contract cost the hospital $40,000 per scanner. By years end, the company boasted 20 service centers with 150 service engineers a ratio that represented one serviceman for every two or three machines installed. The sales force by this time had grown to 20, and was much more customer oriented.Another important task was to meliorate pitching performance. The interval between order and promised delivery had been lengthening at the same time, promised delivery dates were often missed. By late 1975, it was not unusual for a 6-month promise to convert into a 12- or 15month actual delivery time. Fortunately for EMI, all CT manufacturers were in backorder and were pass extended delivery dates. However, EMIs poor performance in meeting promised dates was hurting its reputation. The company responded by substantially expanding its production facilities. By mid-1976 there were six manufacturing locations in the UK, yetbecause of continuing problems with component suppliers, combined capacity for head and body scanners was estimated at less than 20 units a month.Organizational and personnel issuesAs the US sales organization became increasingly frustrated, they began urging top management to manufacture scanners in North America. Believing that the product had reached the necessary level of maturity, Dr Powell judged that the time was ripe to e stablish a US plant to handle at least final assembly and test operations. A Northbrook, Illinois site was chosen. Powell had become EMIs managing director and was more determined than ever to make the new medical electronics business a success. A capable manager was desperately needed to head the business, particularly in view of the rapid developments in the critical North American market.Consequently, Powell was delighted when Normand Provost, who had been his boss at Texas Instruments, contacted him at the Bermuda radiological meeting in March 1975. He was hired with the hope that he could build a stronger, more integrated US company. With the Northbrook plant scheduled to begin operations by mid-1976, Normand Provost began hiring skilled production personnel. A Northbrook product development center was also a vision of Provosts to allow EMI to draw on US technical expertise and experience insolid state electronics and data processing, and the company began seeking people with s trong technological and scientific backgrounds.Having hired Provost, Dr Powell made several important organizational changes aimed at facilitating the medical electronics businesss growth and development. In the UK, he announced the creation of a separate medical electronics group. This allowed the separate operating companies, EMI Medical Ltd (previously known as the X-Ray Systems Division), Pantak (EMI) Ltd, SE Labs (EMI) Lt., and EMI Meterflow Ltd, to be grouped together under a single group executive, John Willsher. (See exhibit 10.6.) At last, a more integrated scanner business seemed to be emerging organizationally.The US sales subsidiary was folded into a new company, EMI Medical Inc., but continued to operate as a separate entity. The intention was to develop this company as an integrated alter medical electronics operation. Jim Gallagher, the general manager of the US operations, was fired and Bob Hagglund became president of EMI Medical Inc. While Gallagher had been an ef fective salesman, Powell thought the company needed a more rounded general manager in its next signifier of expansion. Hagglund, previously executive vice president of G.D. Searles diagnostic business, seemed to have the broader background and outlook required to manage a larger integrated operation. He reported through Provost back to Dr Powell in the UK. While Provosts initial assignment was to establish the new manufacturing and research facilities in the US, it was widely assumed within EMI that he was being groomed to take office for the companys medical electronics businesses worldwide. However, in April 1976, while visiting London to discuss progress, Provost died of a heart attack. As a result, the US and UK organizations reported separately to Dr Powell.product diversificationSince EMI wished to use the scanner as a means to become a major force in medical electronics, Powell argued that some bold external moves were needed to protect the companys leadership position. In March 1976, EMI acquired for $2 million (1.1 million) SHM Nuclear Corporation, a California-based company that had developed linear accelerators for cancer therapy andcomputerized radiotherapy planning systems. Although the SHM product line needed substantial further development, the hope was that linking such systems to the CT scanner would permit a synchronized location and treatment of cancer. six-spot months later EMI paid 6.5 million to acquire an additional 60 percent of Nuclear Enterprises Ltd, an Edinburgh-based supplier of ultrasound equipment. In the 1976 annual report, Sir John Read, now EMIs chairman, reaffirmed his support for Dr Powells strategy We have every reason to believe that this new grouping of scientific and technological resources will prove of national benefit in securing a growing share of worldwide markets for high-technology productsFuture ProspectsAt the close of 1976, EMIs medical electronics business was especial(a) all expectations. In just three year s, sales of electronics products had risen from 84 million to 207 million a large part of this increase was due to the scanner. Even more impressive, profits of the electronics line had risen from 5.2 million in 1972/73 to 26.4 million in 1975/76, jumping from 16 to 40 percent of the corporate total.Rather than dwindling, interest in scanners seemed to be increasing. Although the company had sold around 450 scanners over the past three years (over 300 in the US alone), its order backlog was estimated to be 300 units. At the December 1976 RSNA meeting, 120 of the 280 papers presented were related to CT scanning.As he reviewed the medical electronics business he had built, Dr Powell was generally pleased with the way in which the company had met the challenges of being a pioneer in a new industry segment. However, there were several developments that he felt would need considerable attention over the next few years. First, Powell felt that competitive activity would continue to presen t a challenge second, some changes in the US restrictive environment concerned him and finally, he was aware that the recent organization changes had created some strains.competitive problemsBy the end of 1976, EMI had delivered 450 of the 650-odd scanners installed worldwide, yet its market share had dropped to 56 percent in 1975/76 (198 of 352 scanners sold that June-to-June period were EMIs). The company gained some consolation from the fact that despite their premium pricing strategy and their delivery problems, they had conceded less than half the total market to the combined competitive field. They also felt some sense of security in the 300 orders they held awaiting delivery. Nonetheless, Sir John Read was clearly concerned We are well aware of the developing competition. Our research program is being fully sustained to ensure our continued leadershipIn mid-1976, the company announced its intention to protect its inventions and assert its patent strength, and subsequently fi led suit against Ohio Nuclear claiming patent infringement. However, at the same time, EMI issued a statement proclaiming that it was the companys wish to make its pioneering scanner patents available to all under suitable licensing arrangements. At the annual RSNA meeting in December 1976, sixteen competitors exhibited scanners. The years new entrants (including CGR, the french X-ray giant Hitachi from Japan and G.D. Searle, the US drug and hospital equipment company) were not yet making deliveries, however. The industrys potential production capacity was now estimated to be over 900 units annually. GEs much-publicized entry was already six months behind their announced delivery date, but it was potently rumored that production shipments of GEs third-generation scanner were about to begin. EMI Medical Inc. awaited that event with some trepidation. (A summary of major competitors and their situations as of 1976 is presented in table 10.2.) restrictive problemsBy mid-1976 there wer e indications that government might try to exert a tighter declare over hospital spending in general, and purchase of CT scanners in particular. The rapidly escalating cost of healthcare had been a political issue for years, and the National Health Planning and Resources Development Act of 1974 required states to control the development of costlyor unnecessary health services through a mechanism known as the Certificate of Need (CON) procedure. If they wished to cut back for Medicare or Medicaid reimbursements, healthcare facilities were required to submit documentation to their states department of health to justify major capital expenditures (typically in excess of $100,000).Before 1976, the CON procedures had generally been merely an administrative impediment to the process of selling a scanner, delaying but not preventing the authorization of funds. However, by 1976, the cost of medical care represented 8 percent of the gross national product and Jimmy Carter made control of t he skyrocketing costs of healthcare a major campaign issue. One of the most frequently cited examples of waste was the proliferation of CT scanners. It was argued that this $500,000 device had become a symbol of prestige and sophistication in the medical community, so that every institution valued its own scanner, even if a neighboring facility had one that was grossly underutilized.In response to heightened public awareness of the issue, five states declared a moratorium on the purchase of new scanners, including California, which had accounted for over 20 percent of total US scanner placements to date. In November, Jimmy Carter was elected president. organizational problemsPerhaps most hard to Dr Powell were the organizational problems. Tensions within the EMI organization had been developing for some time, centering on the issues of manufacturing and product design. Managers in the US company felt that they had little control over manufacturing schedules and little input into p roduct design, despite the fact that they were responsible for 80 percent of corporate scanner sales. In their view, the companys current market position was being eroded by the declension manufacturing delivery performance from the UK, while its longer-term prospects were threatened by the competitive challenges to EMIs technological leadership.Although the Northbrook plant had been completed in late 1976, US managers were belt up not satisfied they had the necessary control over production. Arguing that the quality of subassemblies and components shipped from the UK was deteriorating and delivery promises were becoming even more unreliable,they began investigating alternate supply sources in the US.UK-based manufacturing managers felt that much of the responsibility for backlogs lay with the product engineers and the sales organizations. Their unreliable sales forecasts and constantly changing design specifications had severely break up production schedules. The worst bottlenec ks involved outside suppliers and subcontractors that were unable to gear up and down overnight. Complete systems could be held up for weeks or months awaiting a single simple component.As the Northbrook plant became increasingly independent, US managers sensed that the UK plants felt less responsibility for them. In tight supply situations they felt there was a tendency to ship to European or other exporting customers first. Some US managers also believed that components were increasingly shipped from UK plants without the same rigid final checks they normally received. The assumption was that the US could do their own QC checking, it was asserted. Both these assertions were strongly denied by the English group. Nonetheless, Bob Hagglund soon began urging Dr Powell to let EMI Medical Inc. become a more independent manufacturing operation rather than simply a final assembly plant for UK components.This prospect disturbed John Willsher, managing director of EMI Medical Ltd,who argue d that dividing manufacturing operations could mean duplicating overhead and spreading existing expertise too thin. Others felt that the bootleg development of alternate supply sources showed a dis prise for the center of excellence concept, and could easily compromise the ability of Pantak (X-ray technology) and SE Labs (displays) to remain at the forefront of technology.Product development issues also created some organizational tension. The US sales organization knew that GEs impressive new third-generation fan beam scanner would soon be ready for delivery, and found customers hesitant to commit to EMIs new CT 5005 until the GE product came out. For months telexes had been flowing from Northbrook to EMIs Central Research Laboratories intercommunicate if drastic reductions in scan time might be possible tomeet the GE threat.Meanwhile, scientists at CRL felt that US CT competition was developing into a specifications war based on the wrong issue, scan time. Shorter elapsed times m eant less image blurring, but in the trade-off between scan time and picture resolution, EMI engineers had preferred to concentrate on better-quality images. They felt that the 20-second scan offered by EMI scanners made practical sense since a patient could typically hold his breath that long while being diagnosed.CRL staff were exploring some entirely new imaging concepts and hoped to have a completely new scanning technology ready to market in three or four years. Dr Hounsfield had conducted experiments with the fan beam concept in the early 1970s and was skeptical of its ability to produce good-quality images. To use atomic number 11 iodide detectors similar to those in existing scanners would be cost prohibitive in the large numbers necessary to pick up a broad scan to use other materials such as xenon muff would lead to quality and stability problems, in Hounsfields view. Since GE and others offering third-generation equipment had not yet delivered commercial machines, he f elt little fillip to redirect his staff to these areas already researched and rejected.There were many other demands on the time and attention of Hounsfield and his staff, all of which seemed important for the company. They were in constant demand by technicians to deal with major problems that arose that nobody else could solve. Sales people wanted him to talk to their largest and most prestigious customers, since a visit by Dr Hounsfield could often swing an important sale. They were also involved in internal cooking on all new products. The scientific community wanted them to present papers and give lectures. And increasingly, Dr Hounsfield found himself in a public dealings role as he accepted honors from all over the globe. The intrusion was to greatly enhance EMIs reputation and to reinforce its image as the leader in the field.When it appeared that CRL was unwilling or unable to make the product changesthe US organization felt it needed, Hagglund made the bold proposal th at the newly established research laboratories in Northbrook take responsibility for developing a three- to five-second-scan fan beam-type scanner. Dr Powell agreed to study the suggestion, but was finding it difficult to evaluate the relative merits of the US subsidiarys views and the CRL scientists opinions. By years end, Dr Powell had still been unable to find anybody to take charge of the worldwide medical electronics business. By default, the main decision-making forum became the Medical Group revue Committee (MGRC), a group of key line and staff managers which met, periodic at first, to care establish and review strategic decisions. Among the issues discussed by this mission were the manufacturing and product development decisions that had produced tensions between the US and UK managers. Powell had hoped that the MGRC would help build communications and consensus among his managers, but it soon became evident that this goal was unrealistic. In the words of one manager clo se to the eventsThe problem was there was no mutual respect between managers with similar responsibilities. Medical Ltd was resentful of Medical Inc.s fag for greater independence, and were not going to go out of their way to help the Americans succeed.As the business grew larger and more complex, Dr Powells ability to act both as corporate CEO and head of the worldwide medical business diminished. Increasingly, he was forced to rely on the MGRC to address operating problems as well as strategic issues. The coordination problem became so complex that, by early 1977, there were four subcommittees of the MGRC, each with representatives of the US and UK organizations, and each meeting monthly on one side of the Atlantic or the other. Committees included Manufacturing and Operations, Product Planning and Resources, Marketing and Sales Programs, and Service and Spares. powells problemsAs the new year opened, Dr Powell reviewed EMIs medical electronics business. How well was it positione d? Where were the major threats and opportunities? What were the key issues he should deal with in 1977? Which should he tackle first, and how? These were the issues he turned over in hismind as he prepared to note down his plans for 1977.Assistant Professor Christopher A. Bartlett prepared this display case as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Information was obtained from public sources and third parties. Although employees of the subject company discussed with the researcher events referred to in the case, they did not participate in the preparation of the document. The analysis, conclusions, and opinions stated do not needs represent those of the company, its employees or agents, or employees or agents of its subsidiaries. Thorn EMI PLC, on its own behalf and on behalf of all or any of its present or former subsidiaries, disclaims any responsibility for the matters included or referre d to in the study.