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Ohmeda Boc

Essay by   •  April 29, 2011  •  Essay  •  2,017 Words (9 Pages)  •  1,737 Views

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Executive Summary

With the transition to exclusively selling medical equipment, Ohmeda must incorporate more direct and specialized selling into its channel mix. Given the aggressive revenue growth targets, the best channeling mix for Ohmeda is 75% direct sales / 25% dealer sales and 75% specialization / 25% geographical. This optimal strategy will allow Ohmeda to increase revenue, meet target customer needs, challenge competition, and capitalize on the strengths of the Ohmeda products.

Business Strategy

Ohmeda's business strategy is to no longer carry medical supplies and gas products, yet to increase equipment sales revenues by an average of 11% each year for 5 years. The current channeling structure consists of 50% Dealers and 50% Direct sales representatives arranged 100% geographically by region (Exhibit 1). This structure is both inefficient and ineffective, and must be adjusted to meet the change in product mix and aggressive sales goals. Deficiencies in the current channel include: overlap of dealer and direct representative sales, a disproportionate number of sales hours spent in rural hospitals, and the inability of sales reps to communicate the specifications of the technologically advanced products to medical specialist decision makers.

Channel Structure

Currently, the dealer and direct sales force are overlapping in their customer sales. Ohmeda's current sales structure is designed for 50% of the revenue to be generated from direct sales and 50% of the revenue to be generated from dealer sales. When the 30% direct/dealer overlap is removed, however, direct sales actually contribute to 72% of the revenue while dealer sales contribute only 28%. In some instances the direct sales representatives are working with dealers in order to reduce the hassle of transporting equipment. Dealers are then able to book the sale, reducing Ohmeda's revenue from an average of 6% below list price to 21% below. This overlap also reduces the efficiency of sales and proves that there is an over supply of generalists. In order for Ohmeda to grow at a rate of 11% annually, Ohmeda will need to prevent the dealer/ direct sales representative overlap to maximize profit.

Geographical Channel

The most efficient geographical channeling strategy is generating 25% of revenue from geographically orientated dealers (Point A to Point E; Exhibit 1). This shift in channeling is necessary because urban and rural hospitals have different demands and require different approaches. Currently, Ohmeda salespeople spend only 47% of their time on urban hospitals, which takes almost 20% more time to sell. Sales reps are also less effective in large hospitals - they spend over 140% more time selling the same machine at a large /urban hospital than at a small / rural hospital. Ohmeda only has 4.8% of the urban market (Exhibit 2). This indicates that they are focusing sales attention and time on the wrong market (rural hospitals). It also indicates that more competition is present in the urban setting. Furthermore, the case indicates that competitors are targeting large teaching hospitals, while Ohmeda has made little attempt in that niche. This is a powerful tactic since medical specialists are now making more capital allocation decisions in hospitals. Medical specialists are more likely to purchase equipment with which they are comfortable. In order to attack competition and increase sales, Ohmeda must focus their attention on large, urban hospitals, which make up 75% of the market.

Specialty Channel

An increase in urban sales requires another channel modification--specialization of the direct sales force. Ohmeda's current strategy calls for 15% of its sales force to specialize (architectural products), whereas increasing specialization to 75%, while less efficient on paper, will be more effective going forward. Ohmeda's lack of specialists is affecting its ability to effectively sell against the competition. The specialists must be concentrated in urban areas, where there is a higher need for more technical anesthesia, respiratory, and critical care equipment. In urban areas, the decision to purchase this high tech equipment is controlled by medical specialists (Exhibit 3). An in-depth understanding of the equipment, technical capabilities, and safety requirements are required for sales personnel to effectively communicate with these decision-makers.

An increase in the specialized, direct sales force will allow Ohmeda to be more competitive. For example, in the anesthesia market, Drager has 35% of the total market including 42% of the urban hospitals and teaching institutions. Drager has quickly emerged as an aggressive competitor due to their structure of 20 exclusive dealers that also service their equipment. Since dealers also service the equipment, they must be well informed if equipment intricacies. Further illustrating the need for sales-force specialization is Ohmeda's main competitor for its CPU-1 ventilator--Seimens. The German company has successfully managed to sell its foreign produced ventilators while Ohmeda has virtually no market penetration of its equivalent product, despite its lower prices. It is evident Seimen's direct, specialized sales force has led the way. Ohmeda claims the growth of demand for ventilators will blossom to 17% over the next three years, making it imperative to move the sales force to a more specialized model in order to capture the increasing need for state-of-the-art ventilators. Likewise, Ohmeda's new incubator sales are floundering. The information quotient for potential buyers is high, and the sales force can't meet this requirement while structured in its current fashion.

The consultants suggested that the sales force be split into anesthesia, critical care, and architecture. Given that architecture is already a specialty, the division between anesthesia and critical looks reasonable, especially considering they have a pretty even revenue breakdown (Exhibit 4).

It still makes sense to continue to support a dealer/generalist population of 25% given the channel breadth. Competition is not as prevalent in the smaller rural hospitals, as witnessed by selling hours required in the 100 to 200 bed hospitals. Generalists are more cost effective in this setting, as the lack of competition reduces the need for sales representatives to have intimate product knowledge. For the smallest urban hospitals, equipment purchases are such a large percentage of their budget that selling hours will always be very high, but given these are potential emerging markets, a sacrifice is warranted.

Technical Requirements

A major

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