Paige Rudolph by fjwuxn


									                                                                               Paige Rudolph
                                                                             MKT 463 Midterm
                                                                               April 30, 2003

                           Augustine Medical, Inc. Case Analysis

Company Background

    In July 1987, Dr. Scott Augustine, an anesthesiologist, founded Augustine Medical, Inc.
     (AM) in Minnesota. Their goal was to develop and market products for hospital
     operating rooms and postoperative recovery rooms.
    Through experience, he discovered that hospitals needed an innovative approach to
     warming post-surgery patients. Dr. Augustine developed the Bair Hugger® Patient
     Warming System.
    Company executives were occupied with finalizing the Bair Hugger® Patient Warming
     System in early 1988.
    Original two products: (1) produce and sell patented warming system used to treat
     hypothermia and postoperative patents, (2) tracheal intubation guide for crisis situations
     and in the surgical room.

Core Competencies

    Providing the most innovative and safe way to warm postoperative patients and those
     with hypothermia. Augustine Medical, Inc.’s products are also more effective, less likely
     to leak water onto expensive equipment, and easier to operate than other competitors
     methods of hearing patients.

The Hospital Market

  Approximately 21 million surgical operations are performed annually in the US.
  That’s 84,000 operations per average 8-hour workday.
  Approximately 5,500 hospitals have operating rooms and postoperative recovery rooms.
  Research commissioned by AM indicated that there are 31,365 postoperative recovery beds
   and 28,514 operating rooms in hospitals in the US.
  60 – 80 percent of all postoperative patients are rendered hypothermic. This is a large
   portion of hospitals patients whose needs are not being met to the best of their ability.
  Given the demand for postoperative recovery room beds, the research firm estimated that
   hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger®
   Patient Warming System. The projection said that one system would be sold for every
   eight postoperative recovery room beds.
        Number of                 Number of               Estimated Percentage of
    Postoperative Beds            Hospitals                 Surgical Operations
               0                     1,608                               0
              1-6                    3,602                              20
             7-11                    1,281                              40
            12-17                     391                               20
            18-22                     135                               10
            23-28                      47                                6
            29-33                      17                                2
             >33                       17                                2


   Competing Technologies- Surface Warming Technologies
     Warmed hospital blankets- Most commonly used treatment for hypothermia in recovery
     room and other locations. Takes 6-8 warmed blankets in succession on top of the patient.
     Almost all patients receive at least one application. Its estimated that 50 percent of the
     postoperative patients require more than just one application.
            Safe, simple, and inexpensive
            Cools quickly, provides only insulation, regeneration of warmth takes patients
                own body heat.

       Water-circulating blankets- Second most popular postoperative hypothermic treatment.
       Placed under or over the patient.
               Hospitals typically place water-circulating blankets either just over the patient
                 or over and under the patient, forming an insulated environment enclosing 85
                 to 90 percent of the body’s surface area.
             Only 15 percent of the body surface is covered by placing just under patient.
                The water blankets are also heavy, expensive, and can cause burns on pressure
                points. They are also considered just slightly to moderately effective.

       Air-circulating blankets and mattresses- Not commonly used in the US. Variations have
       been tried in the past. Warm air is flowing over the body to transfer head to the patient.
              Safe, lightweight, and theoretically more effective than warmed hospital
                 blankets or water-circulating blankets.

       Thermal drapes- Recently introduced and is gaining acceptance as a preventative
       measure when used in the operating room. They consist of head covers, blankets, and
       leggings placed on the uninvolved portions of the patient’s body.
              Simple, safe, and inexpensive. Has been shown to reduce heat loss.
              Merely insulates patient and does not transfer heat to someone who is already
                hypothermic. Used when 60% of patient’s body surface can be covered.
       Infrared heating lamps- Popular for infant use. When placed a safe distance from body
       and shone on skin, radiates warmth to patient.
              Effective and illuminate patient for observation or therapy.
              Modesty prevents widespread use among adults because skin must be exposed.
                 Nurses dislike radiant heat lamps and panels because they tend to heat the
                 entire recovery room and are uncomfortable to work under.

       Partial warm-water immersion- Used in the past, especially in cases where a patient was
       deliberately cooled to slow down metabolism. The patient is placed in a bath of warm
       water and watched carefully.
              Transfers the heat very effectively and is really simple.
              Inconvenient system setup that requires close monitoring of patient. Water
                 baths must be carefully watched for bacterial growth and are very expensive to
                 purchase and use.

      Increasing room temperature- Most obvious way to prevent and treat hypothermia, but
      seldom used.
             Simple, relatively inexpensive, and is effective at over 70° F
             Warm room temperatures are not acceptable to nurses and surgeons who must
                work in the environment. Warm temperatures increases risk of infection.

      Heated and humidified air- Fairly effective internal-warming technique currently being
      used with intubated patients.
             Delivery of heated and humidified air by mask or tent to nonintubated patients
                is not acceptable in postoperative situations, because mask or tent delivery
                would interfere with observation and communication and may increase chance
                of infection. The fact that the patient must be intubated is a disadvantage, since
                the vast majority of postoperative patients are not intubated.

Competing Technologies – Internal Warming Technologies
      Warmed intravenous (I.V.) fluids- Used in severe hypothermic cases to directly transfer
      heat to the circulatory system.
               Very effective because they introduce warmth directly into the circulatory
               Requires very close monitoring of the patient’s core temperature and high
                  physician involvement.

      Drug therapy- Diminishes the sensation of cold and reduces shivering but does not
      actually increase body temperature.
               Convenient and makes the patient more comfortable.
               Does not warm patients and in fact slows their recovery from anesthesia and
Historical Events

  October 19, 1987 was Black Monday. This was the largest stock-market crash recorded in
   Wall Street history since 1929.
  Sudden cardiac arrest was a chief public health concern
  In 1988 a large AIDS epidemic was taking head since 1982 when it was discovered. AIDS
   patients are susceptible to disease especially phenomena which can mutate from a common
   cold. The rise of patients needing treatment will create a need for more blankets to warm
   the patients.
  January 22, 1988, the US accept immigration of 30,000 US-Vietnamese children
  July 17, 1987, ten teens die in Guadalupe River flood (Comfort, Tx).
  July 29, 1987, Ben & Jerry's & Jerry Garcia agree on a new flavor Cherry Garcia (not
   relevant but its one of my favorite flavors).


   Warmed Hospital Blankets

        For treating adult hypothermia, hospitals use their own blankets, which they warm in
         large heating units.
        Numerous manufacturers produce heating units for hospital use.
        Cost of laundering six to eight, two-pound hospital blankets averages $0.13 per
         pound. Laundering and heating costs are absorbed in hospital overhead.
   Water-Circulating Blankets

         Several manufacturers produce water-circulating mattresses and blankets.
         Suppliers include Cincinnati Sub-Zero, Gaymar Industires, and Pharmaseal.
         Prices of automatic control units (measure both blanket and patient temps) range
          from $4,850 to $5,295. The average price of a manually controlled unit is about
          $3000. A discounted rate may be applied for as much as 40% in actual practice.
         Average life of water-circulating control units is 15 years.
         Reusable blankets range in price from $168 to $375 depending on quality.
          Disposable blankets list price is $20 to $26. Volume discounts for blankets can
          reduce the list price by almost 50 percent.
         Little differentiation among the products of different firms and water-circulating
          blanket technology has changed little over the past 20 years.
   Reflective Thermal Drapes

         O.R. Concepts sells a product named Thermadrape. This product is available in adult
          and pediatric sizes.
         Adult head covers list for $0.49 each. Adult drapes list for $2.50 to $3.98, depending
          on size; leggings are priced at $1.50 each.
   Air-Circulating Blankets and Mattresses

        There are only two competitors known to provide an air-circulating system similar to
         the Bair Hugger® Patient Warming System. Neither are sold in US.
        Sweetland Bed Warmer and Cast Dryer was in use 25 years ago but is no longer
         manufactured. It consisted of a heater/blower unit that directed warm air through a
         hose placed under patient’s blanket.
        Hosworth-Climator is English-made, provides a controlled-temperature micro-
         climate by means of air flow from a mattress. Variety of models available for use in
         recovery rooms, intensive care units, burn units, general wards, and patient’s homes.
         Mmodel most suited for recovery rooms is priced at $4,000. Anticipated distribution
         is expected sometime in 1988.

                                      SWOT Analysis


    Patent for the Bair Hugger® Patient Warming System. AM can capture the market with
     their unique product and hold off replicas from competition with their patent.
    The CEO of AM has vast medical knowledge and experience to help take advances in
     technology further.
    By subcontracting their heater/blower unit, AM creates minimal in-house assembly and
     minimizes their expenses. However, the warming covers will be manufactured using a
     proprietary machine.
    Water free heating alternative to avoid leakage and burns while, weighing less.
    Product life averages 15 years. Great life span but not so long a life cycle that
     repurchasing becomes obsolete.
    Disposable blankets eliminate cross-contamination possibility.
    Patients do not have to be lifted or rolled to use the Bair Hugger® Patient Warming
     System. The Bair Hugger® has a self supporting design that allows the blanket to
     naturally arches over the patients body.


    Augustine Medical has no brand recognition. This may make it harder for them to charge
     a premium price for their unique patented product.
    Augustine Medical, Inc. is not an established company. Many established companies, my
     fathers included, would not buy from companies who are only one or two years old.
     They usually look for those companies that are established and have been in business for
     five to ten years.
    Heater/blower unit for Bair Hugger® does not have a patent. This leaves AM venerable
     to copy cat heater/blower units and possible rip off products.

    Great networking possibilities at medical trade shows.
    The US does not have an established warm-air technology blanket market.
    Prevention and treatment options for hypothermia are currently ineffective or somewhat
    Perspective customer contacts and contracts at trade shows.
    60 – 80 percent of all postoperative patients are rendered hypothermic. This is a large
     portion of hospitals patients whose needs are not being met to the best of their ability.
    21 million surgical operations have operating rooms and postoperative recovery rooms.
    5,500 hospitals with operating rooms and recovery, postoperative rooms.
    All of the features the Bair Hugger® has is welcome by nurses and patients alike.
    Through physician and nurse interviews after a Bair Hugger® demonstration, AM
     discovered the need for speed in moving patients through


    The Climator, an English-made air-circulating blanket with multiple uses, could integrate
     into the United States market and capture the first mover advantage. If AM could get
     into the market first, they may be able to position themselves as the premier US supplier
     of air-circulating blankets.
    The Climator could come to the US markets as soon as 1988.
    Most hospitals have established methods for hypothermia prevention and treatment.
    Hospitals have already incurred the costs of washing, maintaining, and possibly updating
     their current system.

                                      Porter’s Five Forces

  Bargaining Power of Suppliers
      Supplier (AM) will be able to charge a
      premium for their products because they
      will be the first to integrate the US market
      with the Bair Hugger®. They can
      establish a brand name for themselves by
      pricing above the English product.

  Bargaining power of customers
      The customer has leverage with this new
      product and company. They have to
      establish themselves as worthy of using in
      the hospital. This is not a product that has
      integrated and made waves in the
      American market. Because of this customers may be price sensitive, which they are.
      Budgetary constraints are a concern for all departments.
 Threat of substitutes
     There are many substitutes and competing technologies available in this industry. That
     makes pricing extra important for AM. They must be affordable so they do not loose the
     low-end market but they must also be careful not to price themselves too low to lose the
     perception of high quality differentiated products.

 Threat of new entrants
      The largest threat is the integration of the Climator. The list price for the Climator is
  $4,000 so AM must consider the entrance of this product into the US market. The Climator
  could be seen in the American market as soon as 1988. Hosworth Air Engineering Ltd. Has
  one of the only similar products out on the market. They could easily cannibalize AM’s sales
  and take away their market share if they price their product too high and the Climator moves
  into the market.

Augustine Medical, Inc. Product

    The Bair Hugger® Patient Warming System is a patented product designed to prevent
     and treat hypothermia in postoperative patients in a recovery room.
    Specifically designed to maintain body temperature of patients recovering from an
    The Bair Hugger® consists of a heater/blower unit that is a large, square, boxlike
     structure that warms, filters, and propels air through a separate plastic cover. A dial
     controls temperature with one to four settings (located on the top of the unit).
    The unit is mounted on wheels for easy transportation while an electric cord wraps
     around the back for storage.
    Twelve warming blankets can be stored in a top loading bin for easy access. The
     disposable covers are packaged in 18-inch-long tubes. The blanket will cover an average
     patient from shoulders to ankles when unrolled.
    The blanket is made up of a thin plastic layer and a layer of plastic/paper material
     laminated into full-length channels.
    Inflated by a connection at the patients feet, the tubular structure arcs over the patients
     body creating an individual patient environment.
    Warm air exists slits on the inner surface of the blanket, creating a gentle flow of air over
     the patient.
    Average warming time per patient is two hours.
    Plastic cover patented in 1986.
    No patent protection for the heater/blower unit.

   ADVANTAGES of Bair Hugger® PWS
    System cannot cause burns or leak to damage electrical equipment like water filled
    Warm air makes patient feel warm and stop shivering.
Product Life Cycle

    The average life of a water circulating until is 15 years. No specific life cycle was stated
     for AM. A product life cycle of 15 years was assumed for AM’s product.

Target Market

      Physicians and nurses working in hospitals.
      Hospital facilities with postoperative recovery rooms.
      Hospitals with postoperative recovery beds numbering greater than seven.
      Hypothermic patients in hospitals and preventative methods for hypothermic treatment.


    Trade shows for the medical industry.
    Two week free trial period upon request of AM.
    Company literature contains details of the Bair Hugger® Warming System for
     prospective clients.
    Bair Hugger® System will be sold by distributor organizations by calling on hospitals,
     demonstrating the system, and maintain inventory of the blankets.

Buyer Behavior
A demonstration of the Bair Hugger® system yielded the following responses from physicians
and nurses:

    Making the patient more comfortable was a chief concern.
    Bair Hugger® would speed recover for postop patients.
    Respondents wanted to use product in postoperative recovery rooms.
    Had to test before a purchase would be made.
    Price-sensitive to alternative methods.
    Liked the idea of a free heater/blower and only playing for disposable blankets.
    Wanted to run the idea by the actual people who would be dealing with them, i.e. the
     head nurse (in postoperative recovery rooms) and chief anthesiologist.
    Pressure to move patients through operating room and out of postop > before.
    Budget committee must approve capital expenditures in hospital. Purchases over $1500
     were usually reviewed formally.

Human Resources

    A hospital staff will usually be the ones implementing the blankets in actual operation.
     Head nurses for the recovery room and the head antehsiologist were usually consulted
     before the purchase is actually made.

      Company subcontracted out the production of the heater/blower unit.
      Company would manufacture warming covers in-house using a proprietary machine.
       Only requiring minor assembly by the company.
      Bair Hugger® Patient Warming System will be sold through medical products
       distributor organizations in various regions of the country.
      Distributor organizations would call hospitals, demonstrate the system, and maintain an
       inventory of blankets.
      Margin paid to the distributors equals 30 percent of the delivered selling price on the
       heater blower. The price of the blankets would 40 percent of the delivered price.


    Upfront capital from initial investors of AM was $500,000. The money was used to
     further R&D, improve facilities, staff support, and marketing.
    Estimates from subcontractors and time-and-motion study on assembly said a
     heater/blower unit would cost $380.
    Materials, manufacturing, and packaging of the plastic disposable blankets was estimated
     at $0.85 per blanket.


Augustine Medical Inc. should use the penetration pricing strategy to enter into the US market of
air-circulating blankets. Penetration pricing involves setting a lower price in order to achieve a
large and possibly dominant market share for a new product or service. The penetration strategy
is most often used with a business hoping to enter a new market.

The penetration pricing strategy can only work if the product is highly elastic. In this case, those
surveyed said that demand is price-sensitive because of budget reviews and approval boards.
New buyers will be attracted to the Bair Hugger® because of its quality features and low price.

Large sales volumes and market shares cause lower costs per unit for Augustine Medical Inc. In
the case of penetration pricing, economies of scale and experience lower production costs, which
can justify the use of the pricing strategy to gain market share.

AM should know that penetration pricing can promote complimentary products. The Bair
Hugger® should be priced with a low-mark-up to attract sales and possibly become a loss leader.
To make up for the low-mark-up, customers must be sold accessories, which only fit the Bair
Hugger® and are sold at higher mark-ups.

Before any pricing strategy is put in place, the supplier must be sure that the production and
distribution capacities meet the needs of the anticipated amplified demand. Unfortunately, the
penetration pricing strategy does not have just advantages. The greatest threat to AM is the
possibility of competitors following suit by lowering their prices as well.
These companies that will lower their price will be better off than AM because they have already
incurred their start up costs and upfront capital expenditures. When the competition lowers the
price, they invalidate any advantage of reduced price. If prices are sufficiently differentiated the
impact of the disadvantage may be lessened.
Another disadvantage to the penetration pricing is the impact of the reduced price on the
image/perceived customer image. This is particularly the case when price is associated with
quality. AM cannot set their price too high for fear of entrance in the US market from Climator,
but if they set their price too low, they will loose their elitists image and perceived quality.

It is recommended that Augustine Medical Inc. price their Bair Hugger® at $4250. This way
they enter the market just above the Climator price but still remain lower than the other
alternatives while offering many advantages those alternatives do not have. By coming in under
the $4,895 price of the Blanketrol 200, the $4,735 for the MTA 4700, the $4,479 Aquamatic,
AM can position its product in a more favorable manner than its substitutes.

By pricing the Bair Hugger® above the $4,000 Climator, AM can create a perceived quality
advantage over the English company’s product. AM needs to establish brand equity for their
product to capture the market and avoid customers switching to the Climator if entry into the US
market is evident.

By coming in with a lower price, Augustine Medical Inc. can address the issue of widespread
price discounting within the industry. By traveling to trade shows, AM can establish their brand
name, illustrate the great qualities of their product, and make invaluable business contacts and

For calculations regarding Augustine Medical Inc. break even analysis, costs, selling price, etc.
please see attached hand written sheet.
Break-Even Calculations for Blankets

                  Units Sold at Break-even Point            588235.30

                  Revenue at Break-even Point               735294.12

                  Fixed Costs at Break-even Point           500000

                  Variable Costs at Break-even Point        235294.12

                  Total Costs at Break-even Point           735294.12

                  Profit/Loss at Break-even Point           1.16

                  Fixed Costs                                500,000
                  Variable Costs (includes 30% disct.)         1.19
                  Selling Price                                1.25
                  Total Costs                               10,416,666
                  Total Variable costs                      9,916,666
                  Average cost per unit                            1
                  # of units needed to sell to break even   8,333,333
Break-even Calculations for Blower/Heater

                             Break-even Point Information

                   Units Sold at Break-even Point        1315.80

                   Revenue at Break-even Point           656578.95

                   Variable Costs at Break-even Point    156578.95

                   Total Costs at Break-even Point       656578.95

                   Profit/Loss at Break-even Point       0

                   Fixed Costs                               500,000
                   Variable Costs (includes 40% disct)        494
                   Selling Price per unit                     525
                   Total costs                           8,467,726
                   Total variable costs                  7,967,726
                   Average cost per unit                      525
                   # of units needed to break-even           16,129

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