Sunrise Medical27S Wheelchair Products - Case Solution.doc

1. The average return on sales (ROS) in the US wheelchair industry is between 1-2% in 1993. What are the most important structural conditions that make the industry unattractive?Evaluating the industry based on Porters Five Forces framework, the following stand out as the most import conditions making the industry unattractive: Bargaining Power of Customers: About seventy-five percent of wheelchair sales in the US were covered by insurance. Medicare was the primary insurance program, and other insurers often followed Medicares lead. Medicare limited reimbursements, which kept a lid on the price of standard and lightweight standard chairs. More expensive chairs were not fully covered, which could dampen demand for those products. Rivalry among Existing Competitors: The American market for wheelchairs was dominated by three firms Sunrise Medical, Invacare, and Everest & Jennings. With perhaps the exception of some hi-tech power models, wheelchairs are essentially commodity products, so there is little room for differentiation. And since manufacturers set prices to conform to Medicare standards, it doesnt cost relatively more to switch from one manufacturers brand to anothers. This being true, sales and sales growth were more dependent on how competitors got their products through the channel, and profitability was a slave to cost structure. In Sunrises case, its competitor Invacare had gained significant market share in every category other than ultralight (case Exhibit 2), and as low-cost producer, Invacares margins at year-end 1992 were the highest in the business (case Exhibit 3). Threat of Substitutes: It costs essentially nothing to switch from one wheelchair to the next, and while there may be some minor differences between manufacturers chairs, there is no real distinguishing factor. On average, wheelchair users get new chairs every two to five years, and without anyway to lock customers in or build significant brand loyalty, users could easily switch to another chair; for the most part, the chairs cost the same. Threat of New Entry: Barriers to entry in the wheelchair business were not significant. The process was labor intensive, but fully integrated manufacturing only required a $1 million investment in machine tools. Prefabricated parts were available for assemblers, who could enter the market with an investment of just $300,000. Furthermore, no competitor held any significant patents.How are the conditions changing? Medicare: Medicare, the primary insurer, increased its reimbursement levels, extending full coverage for lightweight standard models to $850, up from the old $650 coverage for standard models. This made the space more attractive. Technology: Despite an FDA delay, Quickie was poised to launch a new special-feature power wheelchair that eliminated the need for a manual backup. While this could cannibalize some of Sunrises sales, it was more of a threat to Invacare, and such a model had no substitutes.2. Does Sunrises Quickie division have a competitive advantage in wheelchairs?Quickie does have an advantage in ultralight wheelchairs based on the following: Dominant market share 49% High price Retail prices range from $1100 to $3150 Differentiation Bright colors and used for wheel chair sports, which appeals to a specific niche user. Presumably, this user has a higher willingness to pay.What accounts for the difference in ROS between Quickie, Guardian, Invacare, and Everest & Jennings (E&J)?E&J is hampered by its cost structure. The income analysis shows that E&Js costs are simply not low enough to compete. Invacare has been able to keep costs down namely SG&A; these savings have flowed straight to the bottom line. And because it operates as single entity, the corporate expenses and divisional overlap that result at Sunrise is not an issue. On a divisional basis, Quickie reports high ROS because its overall costs are lower, which flows to net income despite having both higher interest expense and higher taxes than Invacare. The Guardian division, on the other hand, had a cost structure similar to E&J, especially on the COGS line, which was a fully ten percentage points higher than Quickie, Guardians sister company. Guardians slightly lower SG&A doesnt come close to making up the difference, and thus drags returns lower. Thats the accounting of it.Looking at the firms in terms of the Value Chain, it makes sense that Invacare has built a lead in ROS. Invacare is a strong sales and marketing organization which attempts to offer its customers complete service. The company operates with an integrated sales force, thereby improving efficiency and productivity. It has a strong presence in every market segment and distribution channel, so its bundling strategy was more effective despite the fact that almost all dealers carried every manufacturers product line.3. Should Chandler allow Guardian to introduce a lightweight standard wheelchair?Though the two products would compete, I would recommend that Chandler give Guardian the go-ahead. With just a 2% share of the standard wheelchair market and nothing else, Guardian as it is simply is not a player in wheelchairs. Market growth for lightweight standard wheelchairs was forecast to grow 15% yearly, triple the rate of the standard chairs that Guardian was selling. Guardians chair would differ from Quickies model in both design and features, so it is very possible that it would service a different variety of user. Given the growth in the segment, the overall pie is expanding, so Quickie should not be overly worried about market share loss. Chandler has to consider this on a company-wide basis and do the best he can for the entire firm.How will Invacare react?In my opinion, it is likely that Invacare will react by lowering its prices before Guardian launches its product. Invacare is the low-cost producer in this space and has dominant market share. Invacare could see Guardians entry as a threat that needs to be squashed, and lowering its price could send the signal that it can remain both dominant and profitable at a price point lower than what the new entrant, Guardian, can. Whether this is true or not is unimportant; the point is to make the competition think twice. Guardian could be able to deal with this reaction from Invacare if its new product perhaps serves some variety of customers that differs from the average buye