Medical Device Link.

Originally Published MX September/October 2001

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Having the right human capital is the best assurance that an organization's business objectives will be met.

Joseph S. Mullings

When building an organization, company leaders must take into consideration three key elements: the market need for the company's product or service, the infrastructure that must be put into place to support development and marketing of that product or service, and the ability of the company as a whole to execute its business plan.

Without a demonstrable market need, even the best idea for a product is still only an idea. While the discovery of something novel may be at the heart of invention, companies that seek to transform inventions into realizable commercial products require something more. They need a level of leadership diligence to determine how, when, and where an idea can be made marketable, and they need sophisticated planning that will enable their vision to be achieved.

Whatever the nature of a company's invention, nurturing it for commercialization requires a supportive infrastructure. Often, the type and complexity of the invention dictates the type and complexity of the infrastructure that a company requires. The company's intended business plan also influences its development of an infrastructure.

Company business plans usually encompass the short-, mid-, and long-term strategic vision for the future of the organization. This broad vision is often broken down into manageable and achievable milestones by the company's strategic plan, which is typically a 5-year projection that incorporates annual plans to address changes to the market and identify new market opportunities. The strategic plan also considers outside influences that could have an effect on the company or its products, including competitive threats, shifts in the economy, changes to regulation, and advances in technology.

In the medical device industry, this last factor can be especially important, as advances in technology and new product introductions are occurring at an ever-increasing rate. When medical device companies use the typical 5-year time frame for their strategic planning, the elements that comprise the plan are often much more dynamic than in other industries.

With the company's infrastructure designed (though not yet fully in place) and its business plan in hand, the next concern that must occupy company leaders is how to ensure that the company will be able to execute its business plan. In this regard, the staffing of the company occupies a place of key importance.

In concept, the human capital component of the infrastructure must be part of the company's business plan. The organization's attitude toward staffing should embody the same vision as the rest of the business plan and must be in concert with the mission of the company. Just as other elements of the company's vision are spelled out in its business plan, so also should its planning for the recruitment, development, and retention of key personnel. Over time, such a human capital strategy should help the company to establish where it is with respect to core competencies and where it needs to be to establish or maintain a competitive advantage.

In practice, the human capital component is the single element of business planning that most influences the success or failure of a company's business plan. The right human capital, put in the right place at the right time, is the best assurance company leaders can have that the organization's business objectives will be met.

Complex Structures

To build an effective organization, company leaders must examine its intended structure as well as the functions that structure is meant to support. The structure of companies in technology-based industries, for instance, differs greatly from the structure of companies in service or professional industries. Technology-based companies generally have a more complex structure because there are more elements that go into the development and manufacturing of their technologies.

In the broadest sense, the structure of most medical device companies resembles those of technology-based companies with specialties in such fields as semiconductors, software, telecommunications, and so on. In all such companies there is a need for infrastructure to support functional elements such as finance, product engineering, manufacturing, quality, marketing, and sales (see Table I). Where the structure of device companies differs greatly is in how those functional elements operate and interrelate, and the roles they play in a highly regulated environment. Although product engineering is ubiquitous in technology-based companies, for instance, the responsibility of that department to comply with FDA design-control requirements is unique to medical device companies.

The structures of medtech companies typically have more in common with one another than with the structures of companies in other industries, but even among medical device companies there can be significant differences. Some of these are a function of the size and maturity of the company. For example, large, well-established corporations such as Johnson & Johnson (J&J; New Brunswick, NJ) typically have well-defined departments designated to handle each of the company's key functions, including process engineering, quality systems, marketing, distribution, and sales. Among the largest corporations, such a structure may be replicated within each of its operating divisions. The structure of LifeScan (Milpitas, CA), the J&J division for diabetes monitoring technology, may be similar to that of Cordis (Miami), which is its cardiovascular division.

By contrast, a small, emerging technology company such as Novoste Corp. (Norcross, GA) may have a less-rigid and less clearly defined structure. As such companies grow and evolve, however, their structures often change in response to the new demands that are placed on their functional areas. In a start-up medical device company, for instance, the regulatory affairs function typically encompasses regulatory affairs, clinical affairs, and quality systems. As the company evolves, the demands on each of those functions change, making each more critical to the success of the company's business plan. The result is that these functional areas become more clearly delineated, creating separate, well-defined departments within the company.

Dynamism and Evolution

To a large extent, a company's business plan is a formal method of anticipating changes that may affect the company's future performance, and developing strategies to manage change for the company's benefit. Company leaders may not have much influence over external factors that affect their companies, but they can develop strategies that will prepare their companies for the changes brought about with continued growth and eventual market success.

Historically, the major drivers of evolution among medical device manufacturers have been the innovations and technologies created by those companies. The evolution of a typical medtech company begins with the incubation of an idea for an innovative product or technology. With successful development of the idea in its earliest phases, a company can then evolve through rounds of financing and increasing company sophistication toward an initial public offering (IPO) or other exit strategy (see Table II). The typical evolutionary path of a medical device company can be broken down into the following five phases.

• Incubator.
• Start-up.
• Emerging technology.
• Pre-IPO.
• Public.

Incubator companies are commonly devoted to R&D activities and the proof-of-concept testing necessary to demonstrate the feasibility of their key products or technologies. Consequently, such companies typically adopt infrastructure models suited to supporting these activities. A company's human capital at this stage usually consists of a very few individuals with proven and relevant R&D capabilities. It is not uncommon in this early phase of a company's evolution for the CEO and lead technologist to be the same individual.

After demonstrating the feasibility of its concept, the next step in a company's evolution is the start-up phase. A number of changes usually take place during this phase. To continue the company's R&D activities, for instance, the firm must usually recruit staff to establish a formal R&D function. Depending on the complexity of the company's core technology, it may also be necessary to establish other functional units or to outsource certain activities. In some cases, functions outsourced during this phase of a company's evolution can be internalized in a later phase. It is also during the start-up phase that an experienced CEO is typically brought onboard to manage the company and lead it forward.

As a medical device company evolves through the remaining phases of development, the formal structure of the company will also evolve. Each phase of evolution necessitates the development of different competencies to execute functions that may be new, yet are critical to the success of the company. In turn, the structure of the company can be heavily influenced by the need to accomplish such critical activities and functions. To be certain that new activities are carried out, for instance, more-formal departments for these functional areas of responsibility are likely to be established. Similarly, a decision to internalize or outsource certain activities will necessitate corresponding changes in the structure of the company. In every case, a company's need to perform critical functions will dictate its requirements for human capital.

In point of fact, very few medical device manufacturers evolve to the point of becoming publicly held companies. Because of the increased time and costs required to take a company public, most investors currently prefer companies whose business plans call for merger or acquisition at an earlier stage of evolution. There are some significant differences between privately held companies (including those that consider themselves to be in the pre-IPO phase of evolution) and public companies. To take merely the most obvious difference, private companies raise discrete rounds of funding through contacts with a relatively small number of investors who consequently wield considerable influence over the future course of the company, while public companies gain ongoing support from a much larger number of shareholders, many of whom are never known to company management. Such differences impose quite distinct requirements for a company's staffing.

Early in the evolution process, companies can often accomplish many functions by making them the responsibility of one or two individuals. In a start-up company, for instance, manufacturing operations staff may also be responsible for purchasing, shipping, receiving, and other duties. Companies at later stages of the evolutionary process are unlikely to be able to make due without more-formal departmental structures and dedicated staffing.

The evolutionary status of a company is not the only meaningful measure of its structural and staffing requirements. Other influential factors may include company revenues, number of current employees, capitalization, and so on. Companies at the low end of such measures, for instance, are least likely to require significant rethinking of their structure or staffing. By contrast, companies on the high end are more likely to have rapidly advancing functional responsibilities that may require the creation and staffing of clearly defined departments.

The Role of Human Capital

When devising their organization's business plan, company leaders should not stop with describing how, when, and where the firm's key idea can be made marketable. A thorough business plan should also include a human capital strategy that describes how the company will develop and deploy personnel in order to accomplish its business objectives.

To a large extent, the evolving structure of a company will dictate the various roles that must be filled by human capital. Because medical device manufacturing requires company structures that are inherently complex, the dynamics of growth can have wide-ranging effects on human capital requirements. In a start-up company, for example, it is not uncommon to find a single individual responsible for regulatory affairs—including all of the company's various quality functions.

As the company evolves into an emerging-technology company, however, the application of quality systems begins to play an increasingly critical role. It is at this stage that the quality function is often established as a separate department. In fact, the company's quality functions may be further dispersed into distinct units devoted to subareas such as material quality, manufacturing quality, and product quality assurance. At this phase or at another, other functional areas of the company will also reach criticality. When this occurs, functions such as distribution, marketing, or sales will undergo the same type of expansion and reorganization in response to changing human capital requirements.

External influences may also have an impact on the structure of the company. Factors affecting the company's competitive advantage are likely to have the greatest impact. Competitive threats, changes in regulatory requirements, changes in healthcare reimbursement, advances in technology, and similar influences will likely necessitate changes to the company's business plan if they threaten the course the company has set. In such a case, it is imperative that course corrections in the company's business plan reflect any changes in the requirements for human capital. Certain functions may become more critical, thereby increasing the need for additional staffing. At the same time, other functions may become less critical, thereby obviating the need for staff.

Conclusion

The starting point for structuring a medical device company lies in the strategic intent of the organization, which is commonly expressed in the company's business plan. However, both company evolution and external influences can have decisive effects on how a company's structure develops over time. To ensure that the company stays on the path toward executing its business plan, changes in structure should be synchronized with the intended evolution of the company and should be a key element in the company's strategic planning.

Whatever their origins, changes in a company's structure will necessitate changes in its human capital strategy. These changes should also be incorporated into the company's strategic plan, because they have a direct impact on the ability of the company to fulfill its product development objectives. In fact, it is a company's human capital strategy that has the greatest effect on the organization's ability to execute its strategic business plan. With so much riding on this single area, company leaders should ensure that it receives careful attention as part of the company's planning processes.

Joseph S. Mullings is president and CEO of The Mullings Group (Norwalk, CT, and Del Rey Beach, FL), an executive search firm specializing in the pharmaceutical, biotech, and medical device industries.

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