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Sunrise Medical's Wheelchair Products

Essay by   •  January 1, 2011  •  Essay  •  1,106 Words (5 Pages)  •  3,458 Views

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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 Porter's 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 Medicare's 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 doesn't cost relatively more to switch from one manufacturer's brand to another's. 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 Sunrise's case, its competitor Invacare had gained significant market share in every category other than ultralight (case Exhibit 2), and as low-cost producer, Invacare's 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 Sunrise's sales, it was more of a threat to Invacare, and such a model had no substitutes.

2. Does Sunrise's 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&J's 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, Guardian's sister company. Guardian's slightly lower SG&A

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