Organizational Change to Promote Business Efficiency



Organizational Change to Promote Business Efficiency

Kay Wanbaugh

Saint Mary’s University of Minnesota

Schools of Graduate & Professional Programs

Organizational Systems Analysis Paper Part Two

Organizational Change & Development

Organizational Leadership 645

John Merladet

August 24, 2013

The History of Medtronic

In 1949 Earl Bakken, along with his brother-in-law Palmer Hermundslie, started a medical equipment repair shop. Since that time Medtronic has grown to be the world’s largest medial technology company with global connections in over 120 countries. The original Mission Statement that was written in 1960 established an organizational culture that was founded on a vision of contributing to the wellbeing of humanity. Since then Medtronic’s Mission states their goal is to grow in biomedical engineering, create quality reliable products, to make a fair profit, recognize the personal worth of employees, and to maintain good citizenship.

Medtronic’s website explains in detail the company’s proactive approach to corporate citizenship, a collaborative culture of innovation, responsibility in the marketplace, environmental stewardship, and global leadership in addressing chronic disease. According to the website Medtronic’s strategy states, “Our programs and performance across the broad range of corporate citizenship issues demonstrate our values and are central to forging and maintaining strong relationships with stakeholders” (p. 2).

Last year Medtronic reported their medical therapies helped more than 8 million people. Medtronic employs 45,000 people between their World Headquarters, the Cardiac & Vascular Group, and the Restorative Therapies Group. In 2012 Medtronic reported earned revenue of $16 billion, net earnings of $3.6 billion, and R&D investments of $1.5 billion.

Issues Driving The Need For Change

Over the past couple of years the medical device industry as a whole has witnessed a downward trend in profits. One of the reasons being given is the Health Care Reform Device Tax. Insurance companies are now limiting patient back surgery procedures (Snowbeck, 2012, p. 1). According to the Trefis (2013) analysis for Medtronic “healthcare reform which has resulted in an expansion of the publicly insured base has resulted in lower public reimbursements” and “private insurance companies have become more cautious in providing reimbursements, which is expected to affect the demand of medical devices and constrain revenues going forward” (p. 4). Jeff Windau, an analyst with Edward Jones stated, “Pricing and competition have been tough and expenses continue to rise. It doesn’t look like those trends will be changing soon” (Walsh, 2013, p. 1).

At Medtronic sales have maintained strength in the Cardiac & Vascular Group, but have seen a significant decrease in profit in the Spine division of the Restorative Therapies Group. Multiple problems and poor publicity surrounding the company’s Infuse Bone Graft product resulted in the United States Food and Drug Administration issuing a warning concerning the use of the Infuse product in spinal surgeries. Accusations against Medtronic included paying a surgeon to forge signatures (Lawyers and Settlements, 2013, p. 2), lack of reporting possible side effects of the Infuse product (Meier, 2013, p. 2), and paying off authors of early studies of Infuse (Meier, 2013). There have also been lawsuits by former Medtronic employees accusing the company of giving doctors incentives to use the Infuse product (Lawyers and Settlements, 2013, p. 3). According to Fauber (2013) “At the heart of the controversy has been a small group of spine surgeons, many of whom were involved in co-inventing the product, got $210 million in royalties from Medtronic over the years while co-authoring papers that failed to link the product to serious complications” (p. 1).

Medtronic’s spinal market share, which had produced significant financial profits in past years due to Infuse product sales, dropped significantly in response to negative publicity (Trefis, 2013). Also, competitors have recently developed innovative spinal repair products. For example, the usual treatment for spinal injuries has been spinal fusion, which often results in reduced spinal movement and pseudo arthritis. New products produced by competitors include “motion preservation devices” (Trefis, 2013, p. 15).

This year Medtronic was given notice by the United States Food and Drug Administration that three intrathecal drug delivery systems sold by Medtronic to treat chronic pain are Class 1 recalls. Study results of the SynchroMed Implantable Infusion showed an increased risk of drug overdose or underdose, and the possibility of an electrical short that could lead to loss of infusion (Medtronic, 2013).

Medtronic’s Response to Allegations

Negative publicity had a definite impact on Medtronic profits as the sales of Infuse dropped from $624 million to $528 million (Herper, 2013, p. 4). In response Medtronic made a bold decision to become transparent to the public. Medtronic agreed to pay Yale University $2.5 million to oversee a review of all study data, independent of Medtronic’s influence (Meier, 2013, p. 2). According to Herper (2013) “Medtronic gave outside researchers unprecedented access to its internal data, launching a new experiment in corporate transparency” (p. 1). This honest investigation by Medtronic was instrumental in the development of a new 2013 federal disclosure law that mandates “pharmaceutical and medial manufacturers report payments to physicians, hospitals and other health care businesses that are more then $100 a year” (Spencer, 2013, p. 1).

In response to the Class 1 recalls by the United States Food and Drug Administration Medtronic has issued an “Urgent Medical Device Correction notification, which provides physicians with important safety information and patient management recommendations” (Medtronic, 2013). Medtronic is also strongly urging customers to discontinue the use of intrathecal catheters that were manufactured before the design change.

Medtronic’s Current Design Structure

Structural design is often the result of “environmental turbulence” that is made up of the economy, competition, technology, natural environment, and “social-cultural-demographic factors” which is beyond the control of an organization (Amogoh, 2008, p. 8). Medtronic’s current organizational structure resembles a market structure design, which “focuses on the needs of the customer, therefore the organization can quickly sense changes in its market and transfer skills and resources to satisfy the changing needs of this vital stakeholder group” (Jones, 2013, p. 164). Medtronic’s strategy directs the decisions of management to access core competencies, which will give them a competitive advantage in the marketplace (Jones, 2013, p. 12). Business structure requires management to balance external pressures against internal pressures as the structural change design delivers the how-to and answers the whys of strategies implemented (Jones, 2013). As management implements organizational change, often with restructuring and downsizing as a result of a changing external environment, they should control and prune company hierarchy before a crisis forces them into a panic (Jones, 2013, p. 126).

Medtronic Expands Its Resource Base

In 2010 Medtronic acquired Osteotech, a New Jersey based biotechnology company. Sam Owusu-Akyaw, president and CEO of Osteotech stated “We believe Medtronic’s global scale and scope across geographies and functions and its commitment to innovation make them an ideal partner to carry forward our mission” (Medtronic, 2010). With this acquisition Medtronic began to shift resources from the Spinal division to biological products used in musculoskeletal surgeries, building a larger platform in regenerative biologics. Medtronic hoped this merger would expand profitability in fields of sports medicine and neurosurgery.

Also in 2010 Medtronic acquired California based Ardian, a company on the cutting edge of developing medical devices that will lower blood pressure by “using a catheter to deliver radio-frequency waves to shut down overactive nerves near the kidneys” (Timmerman, 2010, p. 1). According to a spokes person at Ardian “the worldwide market for high blood pressure is worth about $30 billion” (Timmerman, 2010, p. 1).

In 2012 Medtronic “initiated a global restructuring program which included a reduction of its workforce, greater profitable investment and withdrawal of its operations from slow growing areas” (Trefis, 2013, p. 3). Omar Ishrak, Medtronic’s chief executive took on the challenge of restructuring the company. Walsh (2013) reported, “Medtronic is taking a $182 million new restructuring charge” (p. 3). The restructure design will reduce company costs by approximately 5% (Sheffield, 2013). Medtronic spokeswoman Cindy Resman told Massdivice (2013) that the new structure will shift resources “from low growth to high growth areas to optimize performance and are a normal course of business for any organization” (p. 2). Resources are being shifted to divisions that were showing more growth, such as the technology departments providing medical devices that treat chronic pain. Job cuts are estimated to save the company up to $225 million per year (Walsh, 2013, p. 1).

Emerging Globalization

There are multiple benefits for a company that invests in global expansion. A company with a global network has access to skills, networks, and knowledge that will give them a competitive edge (Jones, 2013, p. 210). Organizational learning that operates in a global network will improve effectiveness and increase core competencies (Jones, 2013, p. 211). According to Jones (2013) a global expansion strategy is “a plan that involves choosing the best strategy to expand into overseas markets to obtain scarce resources” (p. 212).

Medtronic has experienced an increase of international sales that are mainly coming from China, India, and Brazil. Medtronic’s largest market is still in Europe, but China now accounts for about 40% of their entire emerging-market sales (Colvin, 2012, p. 1). Under Ishrak’s change initiative “Medtronic spent nearly $900 million last year on two merger and acquisition deals in China” (Jie, 2013, p. 2). One of these companies, China Kanghui Holdings, is a medical device maker that has a strong local R&D, inexpensive manufacturing operations, and a “diversified portfolio of orthopedics, spine, and surgical instrumentation products” (Trefis, 2013, p. 2). Medtronic also reported in a May 2013 press release that they had entered into an “innovative partnership with a think tank with China’s National Health and Family Planning Commission, to carry out a series of research projects focusing on building an integrated care pathway for patients with Type 1 diabetes” (Newsroom, 2013, p. 1).

In 2013 Medtronic purchased 19 percent stake in LifeTech Scientific Corp., a public research company based in China (Bailey, 2013). It is reported that the “strategic alliance will allow each company to serve cardiovascular patients and clinicians who previously have been unreachable by either company alone, and to develop a more robust cardiovascular platform” (Baily, 2013, p. 1). Chris Lee, the President of Medtronic Greater China since September 2012, stated opportunities in China give Medtronic the advantage of “being a multinational medical technology company and part of our global objective to bring clinical effectiveness and value around the world” (Newsroom, 2013, p. 1).

Obstacles to Overcome in Global Expansion

Demographic, social, and cultural factors all need to be considered when a company expands globally. As Medtronic merges with Chinese companies and think tank organizations, employees must become knowledgeable on the host country’s political, environmental, ethical practices, and methods of doing business. Along with the benefits of growing globally such as expansion of resources, there is also increased dynamism. Environmental uncertainties influence the challenge of an organization’s ability to predict business directions. Political regulations concerning the medical device industry may change quickly, which means companies that are operating in foreign countries need to stay knowledgeable on current affairs.

A priority for Medtronic will be to merge the business cultures of China and the U.S. companies. Organizational cultures that are merged together will share values and norms that influence employee interactions with each other. Norms are styles of behavior that are typical for a group, and values are the guiding principles that influence desired outcomes (Jones, 2013). Cultures coming together from diverse countries will have differences in “communication styles, different approaches to completing tasks, different attitudes toward conflict, and different decision-making styles” (Jones, 2013, p. 182). Employees that are immersed into the Chinese companies cannot expect business to run in the same style as it is done at home.

Organizational development is a combination of methods that leaders use to increase a company’s environmental adaptability (Jones, 2013). The goal is to change employee beliefs, values, and attitudes in order to help them adapt behaviors and reach individual potential. With organizational change, especially on a global level, companies will be met with resistance to change. Stakeholders resist change for many reasons, all which are normal psychological reactions of human nature. With the prospect of change employees often feel insecure, experience fear of a change of personal status, and have anxiety around the uncertainty of their future. According to Bolognese (2002) employees will “naturally rush to defend the status quo if they feel their security or status are threatened” (p. 1).

Assessing a company’s readiness to change and ability to overcome ambiguity will give management an idea of where change agents need to begin implementing structural change. To promote a readiness to change employees must trust that management will give them training and knowledge to perform new job requirements. Management earns employee trust with honest, transparent, repeated communication about the what, why, where, and how a structural change will be developed. According to Zand (2010) “helping people learn to develop and experience high trust could lead to better decisions, higher motivation, and more effective organizations” (p. 429). Organizational development attempts to blend dynamic behavioral forces and requires a group effort of change makers. According to Weiner (2009) organizations have reached a readiness to change when employees share a psychological state of commitment to implementing change and have a collective confidence to move forward toward the goal (p. 1).

Once the groundwork has been done to reduce resistance to change, the next step is to motivate stakeholders to move in the direction of future goals. Repeated conversations, both face-to-face and in groups, reinforces why change is necessary, what will be changing, and how stakeholders will be affected. New and old perspectives will develop into a new synthesized organizational behavior. Employees are encouraged to learn new skills and their successes are rewarded and celebrated, which in turn empowers and motivates employees to work together in achieving new organizational shared goals. According to Austin and Bartunek (2003) “The more skilled organization leaders are at generating deep personal cognitive change, the more likely it is that the leaders will support or create deep organizational change” (p. 320).

Managing Socialization and Role Orientation

Because Medtronic’s success depends on the creation of new products, marketing, and cost effective manufacturing, it is imperative that employees from the different countries come to share the vision and mission of Medtronic. This is a process that will be “strengthened and changed over time by the people who control and lead it” (Jones, 2013, p. 190). Business culture empowers employees by giving them a common business language. This is an important piece of the change process that must be considered in a diverse global culture, as words delivered “will be interpreted differently by different individuals” (Austin & Bartunek, 2003, p. 320). According to Hofstede it is difficult for some cultures to cope with unanticipated events, while others look forward to ambiguity and change (Steers, Sanchez-Runde, & Nardo, 2010, p. 412). The global divisions in China will have their own cultures, “but the corporate culture can overcome differences in divisional orientation” (Jones, 2013, p. 229). As new employees are brought in, they will be “socialized to the innovative culture and learn the corporate language from their interactions with other employees” (Jones, 2013, p. 229). This socialization, which is an extremely important part of organizational structure, will develop a supportive culture that promotes creativity, motivation, and productivity. When employees from different business cultures come together in relationships that share a vision, they “become the glue that hold the change process together” (Van Oosten, 1990, p. 716).

Organizational learning that is sensitive to subcultures will be more likely to head off misunderstandings and communication failures. Common cultural themes that leaders should familiarize themselves with are power distribution, social relationships, environmental relationships, and time/work patterns (Steers et al., 2010, p. 418). For example, Asian managers prefer paternalistic leadership style verses individualistic styles found in the United States. Steers et al. (2010) wrote “A leader who listens carefully to his or her subordinates is more valued in the U.S. than in China” (p. 415). Leaders that emulate the ethical values and orientations that were established in Medtronic’s mission statement will demonstrate common cultural assumptions that stakeholders will be socialized to adopt. Culturally diverse stakeholders need to feel safe in an environment of mutual trust. According to Schein (2003) cross-cultural dialoge will promote shared mental models where employees will learn a common business language. When cross-cultural dialoge is successful a group will “reach a higher level of consciousness and creativity through the gradual creation of a shared set of meanings and a ‘common’ thinking process” (Schein, 2003, p. 30).

Organizational Strategy

Global expansion strategy is designed to enable a company to “expand into overseas markets to obtain scarce resources and develop core competences” (Jones, 2013, p. 212). Expanding in China will benefit Medtronic in many ways. First, in looking at China’s demographics, by 2010 almost 14% were over 60 years old and nearly 1 in 10 were over the age of 65 yrs (Wang, 2012). Today China has180 million people over the age of 60 yrs. According to Wang (2012) in less than 30 years the population over 65 years of age will rise from 9% to 25%. The result of an older population will influence an area of emerging change in China’s health care industry. The aging population will benefit from innovative implant devices that are produced by Medtronic. Also, Medtronic’s acquisition of China Kanghui Holdings will allow less expensive costs of the manufacturing devices that will be utilized by China’s population, as well as globally. According to Ishrak, “the primary M&A focus in China is to get low-cost access customizing for the unique needs of Chinese patients” and that these mergers and acquisitions “can be used as an export base out of China into other emerging markets” (Jie, 2013, p. 2).

According to Jones (2013) a business environment “is the set of forces in the changing global environment that affect the way an organization operates and its ability to gain access to scarce resources” (p. 86). China Kanghui Holdings have a strong R&D division that when combined with Medtronic’s innovative resources will increase efficiency and productivity. Jones (2013) wrote organizations that “set up their global operating network to gain access to knowledge” would improve core competencies (p. 211).

Implementing Theory and Strategy

According to Jones (2013) an organization should design a structural change that will “create a culture that reinforces and builds on the strategy it pursues and the structure it adopts” (p. 229). The complexity theory focuses on diversity in internal, environmental, micro-level, and macro-level factors that affect emergent business behavior. Complex systems work best in organizational environments that “operate near a threshold of instability [and] tend to exhibit creativity and produce new and innovative behaviors at the level of the whole system (Amagoh, 2008, p. 6). According to Amagoh (2008) innovation and learning happen in a non-linear complex structure where the units are always learning from their interactions and evolving to adapt to dynamism. Efficiency and performance are improved as adaptive behaviors respond to environmental diversity “where there is enough stability to sustain existence and enough turbulence for creativity to overcome inertia (Amagoh, 2008, p. 7). Environmental dynamism is difficult to predict as it is constantly influenced by social-cultural-demographic, and political externalities. The complexity theory guides cultural behavior and “allows organizational leaders to engage in a learning process with the complex system they are facing (Amagoh, 2008, p. 9).

According to Jones (2013) a company that is embracing a global strategy will locate its value chain activities to locations that will increase quality and efficiency. Employee resources can transfer between global divisions and the corporate headquarters. An American company such as Medtronic that merges with companies in China will benefit from accessing both lower manufacturing costs of products, as well as attaining innovative advances by combining R&D resources. By partnering with companies in China that already have low cost manufacturing resources, Medtronic is applying the resource dependence theory that reduces dependence on other companies for the supply of needed resources (Jones, 2013). By managing transactions in the business environment, Medtronic will insure availability of scarce resources, thereby increasing its ability to predict the influence of environmental externalities.

Methods to Measure Successful Change

An organizational change process must be continuously measured and audited. Stakeholders that are given an opportunity to question the change process, anonymously if they prefer, will provide Medtronic with a picture of what is and is not working. Surveys that evaluate employee input on productivity and employee satisfaction will notice patterns of behavior. If negative patterns are observed, Medtronic will benefit from adjusting strategies to avoid a hurdle of resistance growing to a point where it hinders, or even derails, a goal. According to Beer, Eisenstat, and Spector (1990) successful corporations renew themselves continually as competitive forces change. Medtronic can implement further education and training to employees, which will motivate and empower them in their skills. By obtaining quantitative and qualitative information from surveys and personal observation, successful companies will not only see what is going right in the change process, they also can focus “on what not to do and what to stop doing” (Collins, 2001, p. 11).

Final Recommendation for Structural Change

Medtronic is moving forward in organizational development. By embracing strengths from different change theories, Medtronic’s organizational structure design will put forward a successful plan that will unite global cultures and give stakeholders a common business language. Cultures will work together in a learning environment that will evolve into a new culture that is anchored in Medtronic’s mission statement. According to Beer el al. (1990) “the purpose of change is to create an asset that did not exist before—a learning organization capable of adapting to a changing competitive environment” (p. 9). Planning teams should be formed to regularly obtain employee survey data that will monitor stakeholder trends. Trends will then be embraced as learning opportunities, which will be met with continued education and organizational behavior modification. Stakeholders will be motivated and empowered to collaborate in teamwork to increase efficiency and productivity. Employees are revitalized when they become convinced that their contribution makes a difference in an organizational change (Beer et al., 1990).

According to Van Oosten (2006) “And organization’s story is constantly evolving and is always co-authored” (p. 714). Leaders and change agents that promote repetitive honest and transparent communication can implement appreciative inquiry into their organizational development plan. Appreciative inquiry is a collaborative search for the positive resource in the people that make up an organization and challenges leaders and change agents to “be skilled at reading, knowing and understanding the organization as an evolving construction” (Van Oosten, 2006, p. 714).

Medtronic is optimistic about its organizational structural change. The company is re-routing resources globally where there is the most opportunity for growth and profit. In a May 2013 Medtronic news release, Ishrak stated the company continues to be a leader in the global technology market, “and we are making meaningful progress in globalizing our strategies and operations as well as strengthening our clinical and economic value propositions for our customers and partners” (p. 1). According to Medtronic’s website they have implemented a new Global Inclusion group that integrates diversity into the corporate systems. Medtronic has a Global Human Resources Leadership Team that focuses on change management that includes equipping the organization with tools to lead and sustain change. As Medtronic utilizes employee surveys and internal audits they will note trends in employee productivity and satisfaction. Organizational learning will be promoted and stakeholder successes will be celebrated. By applying the business structures and strategies discussed in this analysis Medtronic’s organizational change philosophy will be one of flexibility, innovation, efficiency, and productivity. Global business cultures will merge to anchor in Medtronic’s mission of corporate citizenship, a collaboration of innovation, responsibility in the marketplace, environmental stewardship, and global leadership in addressing chronic disease.

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