CASE:B Despite this formidable success, senior management in both the subsidiary and the parent company were

concerned about several developments. First, this fast-growth field had attracted more than a dozen new entrants in the past two years, and technological advances were occurring rapidly.Second, the growing political debate over hospital cost containment often focused on $500,000 CTscanners as an example of questionable hospital spending. Finally, EMI was beginning to feel some internal organizational strains.In 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 U.S. sales branch manager, Gus Pyber.Earlier that month the first North American head scanner had been installed at the prestigious Mayo Clinic, with a second machine promised to the Massachusetts General Hospital for trials. The newsales force had little difficulty getting into the offices of leading radiologists and neurologists. Gallagher concentrated on recruiting and developing his three-person sales force and two-person service organization. The cost of maintaining each salesperson on the road was estimated at $50,000, while a service employees salary and expenses at that time were around $35,000 annually. Scanners were being produced at a rate of only three or four machines a month, and Gallagher saw little point in developing a huge sales force to sell a product with limited supply and unlimited customer interest. Most notably, they required that the customer deposit one-third of the purchase price with the order to guarantee a place in the production schedule. Sales leads and inquiries were fo llowed up when the sales force could get to them, and the general attitude of the company seemed to have a somewhat take-it-or-leave-it tone. It was in this period that EMI developed a reputation for arrogance in some parts of the medical profession. 1974 company delivered 35 scanners and 60 were in hand Competition Toward the end of 1974, the first competitive scanners were announced. Unlike the EMI scanner, the new machines were designed to scan the body rather than the head. Technologically, it offered little advance over the EMI scanner except for one important feature. Its gantry design would accommodate a body rather than a head. Although 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 body scanner had 256 256 pixels1 compared with EMIs 160 160, and promised a 2 1/2 -minute scan rather than the 4 1/2 -minute scan offered by EMI. ON presented these superior features on a unit priced at $385,000$5,000 below the EMI scanner. The challenge represented by these new competitive products caused EMI to speed up the announcement of the body scanner 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, rather than the single pencil beam and the single detector of the original scanner (see Exhibit 3). This technique allowed the gantry to rotate 10 rather than 1 after each translation, cutting scan time from 4 1/2 minutes to 20 seconds. In addition, the multiple-beam emission also permitted a finer image resolution by increasing the number of pixels from 160 x 160 to 320 x 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. Market Size and GrowthWithin EMI, market forecasts had changed considerably. By late 1975 the estimate of the U.S.market had been boosted to 350 units a year, of which EMI hoped to retain a 50% share. International Expansion Internationally, EMI had maintained its basic strategy of going direct to the national market rather than working through local partners or distributors. Although all European sales had originally been handled out of the U.K. office, it quickly became evident that local servicing staffs were generally required. Soon separate subsidiaries were established in most continental European countries, typically with a couple of salespeople and three or four service personnel. Elsewhere in the world, salespeople were often attached to EMIs existing music organization in a particular 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 requestfor 33 scanners. Technology was evolving rapidly, but the expertise of Hounsfield and his CRL group, and the aggressive reinvestment of much of the early profits in R&D had given EMI a strong technological position. And although market size and growth were highly uncertain, the potential was unquestionably much larger than EMI had forecast in its early plans. In all, EMI was well established, with a strong and growing sales volume and a good technical reputation. The company was undoubtedly the industry leader. Strategic priorities: 1.EMIs first sales priority was to protect its highly visible and prestigious customer base from competitors. When its second-generation scanner was introduced in mid-1975, EMI promised to upgrade without charge 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. 2.To maintain its leadership image, the U.S. company also expanded its service organization substantially. Beginning in early 1976 new regional and district sales and service offices were opened, aiming to provide customers with the best service in the industry 3. Another important task was to improve delivery performance. The interval between order and promised delivery had been lengthening; meanwhile, promised delivery dates were often missed. 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 UK. Organizational and Personnel Issues As the U.S. sales organization became increasingly frustrated, it began urging top management to manufacture scanners in North America. Believing that the product had reached the necessary level of maturity, Powell judged that the time was ripe to establish a U.S. plant to handle at least final assembly and test operations. A Northbrook, Illinois, site was chosen. In the United Kingdom, he announced the creation of a separate medical electronics group. The various operating companiesEMI Medical Ltd. (previously known as the X-Ray Systems Division), Pantak (EMI) Ltd., SE Labs (EMI) Ltd., and EMI Meterflow Ltd.could now be grouped under a single executive, John Willsher. The US sales subcidiary 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 diversified medical electronics operation. Product Diversification Since 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, an innovative but somewhat shaky California-based company that had developed linear accelerators for cancer therapy and computerized 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 months later EMI paid 6.5 million to acquire an additional 60% of Nuclear Enterprises Ltd., an Edinburghbased supplier of ultrasound equipment

Future Prospects At the close of 1976 EMIs medical electronics business was exceeding all expectations. In just three years 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 1972-1973 to 26.4 million in 1975-1976, jumping from 16% to 40% 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 United States alone), its order backlog was estimated to be 300 units. At the December 1976 RSNA meeting, 120 of the 280 papers presented There were, however, several developments that promised to require considerable attention over the next few years. First, Powell felt that competitive activity would continue to present a challenge; second, some changes in the U.S. regulatory environment concerned him; and finally, he knew that the recent organization changes had created some strains. Competitive programs: By end of 76 Market Share dropped to 56% for EMI. In December 1976 at the annual RSNA meeting, 16 competitors exhibited scanners. The years new entrants (including CGR, the French X-ray giant; Hitachi from Japan; and G.D. Searle, the U.S. drug and hospital equipment company) were not yet making deliveries, however. The industrys potential production capacity was estimated to be over 900 units annually. GEs much-publicized entry was already six months behind its announced delivery date, but rumors abounded that production shipments of GEs third-generation scanner were about to begin. EMI Medical Inc. anxiously awaited the event. Regulatory ProblemsResponding to heightened public awareness, five states declared a moratorium on the purchase of new scanners, including California, which had accounted for over 20% of total U.S. scanner placements to date. In November Jimmy Carter was elected president Perhaps most troublesome to 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 U.S. company felt that they had little control over manufacturing schedules and little input into product design, even though they were responsible for 80% of corporate scanner sales. In their view, the companys market position was being eroded by theworsening manufacturing delivery performance from the United Kingdom, 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, U.S. managers were still not satisfied that they had the necessary control over production. Arguing that the quality of subassemblies and components shipped from the United Kingdom was deteriorating and delivery promises were becoming even more unreliable, they began investigating alternate supply sources in the United States.U.K.-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 disrupted production schedules. The worst bottlenecks 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 one simple component.As the Northbrook plant became increasingly independent, U.S. managers sensed that the U.K. plants felt less responsibility for them. In tight supply situations they felt there was a tendency to ship to European or other export customers first. Some U.S. managers also believed that components were increasingly shipped from U.K. plants without the rigid final checks they normally received.The assumption was that the U.S. plant could do its own quality control. The English group strongly denied both these assertions.Nonetheless, Bob Hagglund soon began urging Powell to let EMI Medical Inc. become a more independent manufacturing operation rather than simply a final assembly plant for U.K. components.This prospect disturbed John Willsher, managing director of EMI Medical Ltd., who argued that dividing manufacturing operations could mean duplicating overhead and spreading existing expertise too thin.Product development issues also created some organizational tension. The U.S. 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. At years end 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 Review Committee (MGRC), a group of key line and staff managers that met, monthly at first, to help establish and review strategic decisions. Among the issues discussed by this committee were the manufacturing and product development decisions that had produced tensions between the U.S. and U.K. 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 close to the events,The problem was that there was no mutual respect between managers with similar responsibilities. Medical Ltd. was resentful of Medical Inc.s push for greater independence, and were not going to go out of their way to help the Americans succeed. 1. Internal problems The most pressing problems are internal. EMIs manufacturing performance is dire. It cannot satisfy demand,waiting lists are long the risk is that EMI is squandering its first-mover advantage by creating an opportunity for rivals. These manufacturing problems include poor supply chain management, poor quality management. Disagreement between the US and UK subsidiaries. This seems to be less to do with national differences than reflecting the functional orientation of each: the US side is sales and marketing oriented and sees EMI as failing to understand or serve the market. The UK side is technology driven mainly by Houndsfields vision. the leadership and the organizational coordination needed to resolve these differences: (a) The leadership problem. EMIs medical electronics business is run by a committee these committee members represent their own constituencies.Not a leadership form for effectively resolving internal disputes.Real leadership is provided by Powell but he is the CEO of the whole corporation. (b) Organizational structure a mess. If students have difficulty articulating the problems with EMIs organizational structure, I ask them to refer to the organizational chart in Exhibit 4. There are separate US and UK medical electronics subsidiaries each reporting to the corporate HQ.R&D is located in neither but in the corporate R&D lab. Who is the head of EMI Medical worldwide? Basically it is the CEO, Powell, who also has EMIs other divisions (defense, music, and consumer electronics) reporting to him. As we see above, coordination between the different medical businesses is achieved by CEO intervention and through the forum of the medical committee comprising representatives of the different subsidiaries. Yet, medical electronics is clearly a global business major scale economies and little need for national product differentiation.Without a single worldwide medical electronics division it is difficult to see how the various internal conflicts can be successfully resolved. 2. External problems (a) The market. The immediate threat is the introduction of certificate of need licensing. However, even without this there must be concern over the continued growth in the market. Despite the wide disparity of market forecasts, the basic reality is that there are only 3,600 hospitals with more than 100 beds in the US. While the US was only 3540% of the world market for X-ray equipment, it was likely that market penetration elsewhere would develop at a much slower pace. With so many new competitors with a combined capacity of around 900 units annually, it seems that the US market is heading for saturation irrespective of federal government regulation of hospital purchases of CT scanners. (b) Competition. Longer term this seems to be the critical consideration. So far EMI is doing great high margins, strong revenue growth, great cash flow. So long as it was the only supplier of CT scanners, it could prosper despite horrendous internal problems. But the remarkable speed of entry signals the emergence of a new stage in the competitive game. By December 1976, the case notes that there were 16 companies exhibiting CT scanners with combined capacity of around 900 units per year. Again, with a US market potential of less than 4,000, over 500 already installed, and product capacity of 900 units or more it would seem that, unless there is rapid market growth outside of the US, the industry is headed for a period of intense competition. Moreover, several of these competitors looked a real threat to EMI several threaten not just to undercut EMI on price, but also to leapfrog it on technology. 3. The threat from GE Delving a little further into the issue of competition, I ask: Are there any competitors that EMI should be particularly worried about? The obvious answer is GE (because of its huge size and resources and the fact that it has already developed a third-generation, fan-beam scanner. To understand the extent to which EMI is threatened by GEs entry, let us compare the two companies

At the forefront of these issues is the division of responsibility between the US and UK subsidiaries. Northbrook, currently assembling scanners, is seeking to source within the US. Given the limits on the UK production capacity, this may make sense;however, there is some risk that this could lead to differentiation between US-built and

UK-built scanners. Generally, the US (world leader in medical electronics) looks a better manufacturing base for CT scanners. On the development side, the issue is complex the danger is that, if Northbrook is given development responsibility, this will lead to costly duplication. At the organizational level, a worldwide medial electronics division is essential with a capable divisional CEO. Looking beyond the immediate short-term period, the basic issue is whether EMI stays in the business or gets out. The critical issue is whether EMI can compete with GE over the long term. If there are doubts over this then EMI needs to exit, possibly seeking to sell its business to one of the established X-ray companies (possibly Philips or Siemens, or maybe Picker). If EMI is to stay in the business, then the students must articulate what EMI needs to do in order to upgrade its manufacturing, improve its supply chain management, stay abreast of technological development, defends its patents, improve its customer service, and combat regulation in the US. This may involve an alliance or joint venture with an established supplier.In between these two extremes is the possibility that EMI might spin off its medical business; possibly selling significant equity stakes to one or more existing medical electronics companies. Recommendations The key to developing an effective action plan for EMI is to gain some time perspective on the issues. In the short run, EMI is facing a number of acute internal problems with regard to operations, organization, leadership, and development choices. These need to be addressed quickly. Indeed, working on these is essential whatever the longerterm strategy for EMI is. For example, the internal mess needs to be sorted out even if EMI is to sell its medical business. At the forefront of these issues is the division of responsibility between the US and UK subsidiaries. Northbrook, currently assembling scanners, is seeking to source within the US. Given the limits on the UK production capacity, this may make sense; however, there is some risk that this could lead to differentiation between US-built and UK-built scanners. Generally, the US (world leader in medical electronics) looks a better manufacturing base for CT scanners. On the development side, the issue is complex the danger is that, if Northbrook is given development responsibility, this will lead to costly duplication.At the organizational level, a worldwide medial electronics division is essential with a capable divisional CEO.Looking beyond the immediate short-term period, the basic issue is whether EMI stays in the business or gets out. The critical issue is whether EMI can compete with GE over the long term. If there are doubts over this then EMI needs to exit, possibly seeking to sell its business to one of the established X-ray companies (possibly Philips or Siemens, or maybe Picker).If EMI is to stay in the business, then the students must articulate what EMI needs to do in order to upgrade its manufacturing, improve its supply chain management,stay abreast of technological development, defends its patents, improve its customer service, and combat regulation in the US. This may involve an alliance or joint venture with an established supplier.In between these two extremes is the possibility that EMI might spin off its medical business; possibly selling significant equity stakes to one or more existing medical electronics companies