Case Analysis of Ring Medicals

•An average of 2 to 3 units of HCS-100 a month was expected to be sold, yielding total revenues of approximately $150,000 per month at an average gross margin of nearly 50%, whereas till April 1988 only 5 systems had been sold versus a budgeted sales volume of over 30 and revenues totalled about 15% of the targeted annual amount of over $1.

7 million •Scanvest Ring had spent in excess of $700,000 on the HCS-100 effort and its CEO Helge Midttun and other board members were hesitant to invest further in a project that had so far shown lacklustre results •There was disagreement about the most appropriate channels of distribution wherein three fairly distinct schools of thought prevailed Actionable Recommendations.

•HCS-100 should be positioned as “high end” hospital internal communication system for large and medium size hospitals with clear message of the value delivered with ROI calculations •HCS-100 should also be sold through the network of telecommunication distributors such as Introlink but with control on branding and pricing through agreements Analysis is support of Actionable Recommendations •Target Market potential studies indicated nearly 7000 US hospitals spent over $1.

4 billion on telecommunication equipment in 1987 •Of all US hospitals, only 5% had an automated telephone answering system •Under Ring Medical’s current pricing scheme, the roughly 95% of unpenetrated medium and large hospitals represented a market of some $260 million •Internal company estimates projected that at least half of these hospitals will be upgraded to offer an automated TAS service within the next five years •US Hospital and Healthcare Market data oPresent Number: 6,988 hospital sites in US oSize (6 – 99 beds): 3,239 small sites.

oSize (100 – 399 beds): 2,847 medium sites oSize ( over 400 beds): 902 large sites •Market Potential: o% with automated Telephone Answering Systems: Less than 5% penetrated o% to be upgraded: 50% estimated medium and large sites o2,847 + 902 = 3,749 sites with over 100 beds o3,749 sites x $70,000 per site = $262 million o% to be upgraded: 50% estimated = $131 million •Ring Medical had five principal competitors of which only one, AIS focussed exclusively on the hospital market •Ring management estimated 80 AIS installations •HCS-100 had following distinct advantages over AIS.

oHCS-100 was independent of the hospital telephone switch and therefore operational even when the main switch failed whereas AIS system was totally dependent on the PBX oData on incoming and outgoing TAS related calls were tracked separately from other call traffic which meant that a hospital using an AIS system would be forced to charge a flat fee for subscription, while the user of the HCS-100 could opt for a fee based on usage oHCS-100 had advantage over AIS in telephone answering, message storage/ retrieval, and directory •Value delivery calculations:

oIn addition to eliminating a physician’s need for separate answering service, TAS was considered a potential source of hospital revenue, as physicians could be charged for system use oAn average physician spent $100 monthly on an answering machine and for a TAS capable of servicing 65 physicians oCost recovery: $100 x 12 months x 65 physicians = $78,000 oIncremental operating expense incurred by hospital for one full-time equivalent HCS attendant: $35,000 annually oOne time cost of added telephone company supplied hardware and Ring Medical supplied servicing fees: $10,000 oBasic TAS price: $55,000

oValue of Benefit Calculation: ?1st Year: $78,000 – $35,000 – ($10,000 + $55,000) = ($22,000) ? 2nd Year: $78,000 – $35,000 – $22,000 (cost investment remaining from 1st year) = $21,000 oSo the investment is recovered in 2 years and a profit of $21,000 is earned by the hospital Preparation Aid Questions 1. Analyze the positioning options and recommend a positioning strategy for HCS-100? Positioning options available for HCS-100 are:

•To be positioned in medium to large hospital segment as a high end hospital internal communication system •To be positioned in the business market as the high end intercom system Out of the above, it is recommended that HCS-100 be positioned in the hospital segment due to the clear advantages that Ring Medical has since it has only one competitor – AIS which was also weak in terms of the Price and Product Features as compared to HCS-100.

Following analysis explains the opportunity in this segment and the value offered to the customer wherein the hospital is able to recover the cost of capital within two years and make a profit of $21,000 Based on the data collected, the numbers in the recommended segment and the market potential is provided below: •US Hospital and Healthcare Market data oPresent Number: 6,988 hospital sites in US oSize (6 – 99 beds): 3,239 small sites oSize (100 – 399 beds): 2,847 medium sites oSize ( over 400 beds): 902 large sites •Market Potential:

o% with automated Telephone Answering Systems: Less than 5% penetrated o% to be upgraded: 50% estimated medium and large sites o2,847 + 902 = 3,749 sites with over 100 beds o3,749 sites x $70,000 per site = $262 million o% to be upgraded: 50% estimated = $131 million In terms of competition, the analysis is as follows which also shows the distinct advantage that HCS-100 has over the competitive product: •Ring Medical had five principal competitors of which only one, AIS focussed exclusively on the hospital market •Ring management estimated 80 AIS installations.

•HCS-100 had following distinct advantages over AIS oHCS-100 was independent of the hospital telephone switch and therefore operational even when the main switch failed whereas AIS system was totally dependent on the PBX oData on incoming and outgoing TAS related calls were tracked separately from other call traffic which meant that a hospital using an AIS system would be forced to charge a flat fee for subscription, while.

the user of the HCS-100 could opt for a fee based on usage oHCS-100 had advantage over AIS in telephone answering, message storage/ retrieval, and directory The value delivered to the customer in terms of recovery of the cost of investment calculation is shown below: •Value delivery calculations:

oIn addition to eliminating a physician’s need for separate answering service, TAS was considered a potential source of hospital revenue, as physicians could be charged for system use oAn average physician spent $100 monthly on an answering machine and for a TAS capable of servicing 65 physicians oCost recovery: $100 x 12 months x 65 physicians = $78,000 oIncremental operating expense incurred by hospital for one full-time equivalent HCS attendant: $35,000 annually oOne time cost of added telephone company supplied hardware and Ring Medical supplied servicing fees: $10,000 oBasic TAS price: $55,000 oValue of Benefit Calculation:

?1st Year: $78,000 – $35,000 – ($10,000 + $55,000) = ($22,000) ? 2nd Year: $78,000 – $35,000 – $22,000 (cost investment remaining from 1st year) = $21,000 oSo the investment is recovered in 2 years and a profit of $21,000 is earned by the hospital 2. Should the HCS-100 be sold through a direct sales force, manufacturer’s representatives or telecommunication distributors? As far as the other equipments are concerned, approximately 60% of intercom sales in 1987 were made to end-users through five or six manufacturers’ reps under the direction of Peter McLean, Vice President of Internal Communications Division of Ring Group.

Direct Sales earned a gross margin of 50% to 60% Nearly 60 distributors constituted an additional branch of the intercom distribution effort, accounting for about 35% of sales, with a contribution margin of roughly 35% OEMs sold the intercom product under a private label. However, since HCS-100 was a technical innovation that Ring Medical had made and had a distinct competitive advantage in the market, my recommendation would be the following:

Based on the success seen so far, though the direct sales force has been able to sell four out of five systems, the sale made by the manufacturer’s representative has fetched the highest value of $73,000 on a single customer sale. Since the sale of this type requires seasoned players with good network to be able to establish the sales connection, it is advisable that the HCS-100 should be sold by the manufacturer’s representative supported by the technical team like Ed Owens wherever required. 3.

What are the organizational issues at Ring Medicals / Scanvest Ring which may affect the implementation of the proposed marketing plan? Organizational issues at Ring Medicals that may affect the implementation of the proposed marketing plan were the following: •An average of 2 to 3 units of HCS-100 a month was expected to be sold, yielding total revenues of approximately $150,000 per month at an average gross margin of nearly 50%, whereas till April 1988 only 5 systems had been sold versus a budgeted sales volume of over 30 and revenues totalled about 15% of the targeted annual amount of over $1.

7 million •Scanvest Ring had spent in excess of $700,000 on the HCS-100 effort and its CEO Helge Midttun and other board members were hesitant to invest further in a project that had so far shown lacklustre results •There was disagreement regarding the channel through which HCS-100 should be sold as well as the target segment to which HCS-100 should be sold.

While Ed Owens and Forster had different viewpoint from the National Sales Manager, Charlie Witteck since Ed Owens had sold 4 out of 5 machines, Witteck had a different viewpoint due to his experience in the market and he felt that more than one market segment should be targeted wherein the sales through telecommunication distributors should also be persuaded •The budget that Ruggieri was to present to Scanvest clearly indicated that cash generated from Ring Group operations would not sustain operating and other expenses projected for Ring Medical.

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