Becton Dickinson and Company:

VACUTAINER Systems Division

Group No. 4
F 18040 Nikita Sydney
F 18070 Benitto Nijenth J.
F 18077 Daphne Thresa D.
F 18081 Hitesh Jagdish Singh
F 18085 Joe Sundar Kishore J.
F 18097 Meenakshi Murugappan
F 18098 Merwin Michael J.
 Company Background

Manufacturer of Medical, Diagnostic and Industrial safety Products

CUSTOMERS: Health Care Professionals, Medical Research Institutions, Industry

and the General Public

3 BUSINESS SEGMENTS: Laboratory, Industrial Safety and Medical Products

DIVISIONS OF MEDICAL PRODUCTS: (1) Needles, Syringes, (2) Pharmaceutical

Systems and (3) VACUTAINER blood collection systems.

Net sales: $1.127 billion Net income: $ 63Million

An Overview of BDVS

★ Formed as a Business Unit in 1980

★ Consisted of 3 main products:
○ Venous Blood Collection Tubes and needles
sold under the VACUTAINER name (70% of sales -
63 mn).
○ Capillary blood collection tubes and lancets sold
under the MICROTAINER name.
○ Microbiology tubes and specimen collector systems.
Company Background (continued)

KEY STRENGTHS: Strong Reputation and Brand Identification, Ability to

hold down production costs and thereby prices, and continuing
commitment to quality.

CORE STRATEGIES: Substantial Improvements in R&D and the

Development of New Technologies ⇒ Development and Introduction of New
Products.
An Overview of BDVS (continued)

★ 1984 sales were $90 Million ( Venous Blood Sys- 63Mn.)

★ Each Product Group accounted for 33% of Operating Income.

★ Pioneer in Converting market to Evacuated Tubes.

★ Estimated 80% Market Share in U.S.

Decision Making Unit
➔ BDVS
◆ William Kozy - National Sales Director
◆ Hank Smith - VP (Marketing and Sale).
◆ Alfred Battaglia - President of BDVS.
◆ Ed Mehl - Contracts Administration Manager

➔ APG
◆ James Wilson, VP, (Materials Management)
Industry Background
Blood Collection Products - Hospitals, Commercial Laboratory and Non-hospital
health care centres

HOSPITALS

● Blood Collection Tubes - standing weekly order.

● DMU - Hospital’s chief lab technician, Materials Manager - price sensitive
● Bench people - quality over price | Vacutainer best-known brand
Competition -Tubes

Market share Market share Pricing over the 7

Prior to 1984 (1984) years
(Per unit)

BDVS 80 % 80% From 6 to 8 cents

SHERWOOD 2% 2% Not given

TERUMO 10% 18% 6.5 cents

Competition - Needles

Market share Market share Pricing

Prior to 1984 (1984)
(Per unit)

BDVS 40% 30% 7.5 cents

SHERWOOD 15% 15% 10 cents

TERUMO 25% 50% 7.5 cents

Critical Benefit:

vs

QUALITY PRICING
BDVS Marketing and promotion

Independent sales force for VACUTAINER. - 55 sales reps.

Sales territories based on number of beds. (10000 - 20000 beds per rep).

Sales strategy - Bottom up approach. Focusing on end user of the product. Eg: lab
technician, individual physician, etc.

In 1984-85, sales based incentive to improve needle sales, resulted in 66000 new
beds.
Distribution
Two categories- (474 - Independent distributors).

1.) Laboratory product distributors.

Hospital labs and commercial labs.

2.) Medical -Surgical products distributors.

Physician offices and non Hospital sites.

Distribution
Key factors.

- Most BDVS sales happens through distributors.

- Distributors are becoming manufacturers. ( ASP - Prime vendor program).
- BDVS focused on intensive distribution
- Relationship between local distributor and lab.
- DRG regulations imposed higher carrying cost. So higher availability is required.
- Few distributors facilitating more sales.(65% by 6 distributors, 85% by 50
distributors.)
- ASP - 40% of BDVS sales vs 70% of Terumo's sales.
Changing Buying Behaviour
Previously: Now:

1. Customer was the pathologist,lab manager 1. Buying influence moved out of the lab.
i.e. someone who worked in the lab. Professional purchase people were the
2. Customer focussed on quality diagnostic customers.
tests which can be done as fast as possible 2. Customers focussed on lower costs.
3. Customers were technically strong. They 3. Distinction between manufacturers and
didn’t like the purchase part of the job. distributors became blurry. Distributors
4. Business done with a representative they started manufacturing facilities too.
liked and trusted. 4. Distributors had to lower costs. So they tied
5. In this environment, distributors flourished. up with one-two vendors only in exchange
for lower prices from these vendors.
5. Bargaining down the price with the leverage
of volume.
BDVS Response
1. Institution of Z contracts
2. Prices could go as low as 30-40% lower for large buying groups
3. Distributors receive set commission for stocking, shipping and billing the
hospital
4. Z contracts became widely used. By 1985, most venous and almost 20% of
capillary and microbiology products sold through Z contracts
Affiliated Purchasing Group
Key Issue
BD’s failure to recognize APG as a credible authority for hospitals, avoiding direct
communication and facilitated sales through individual hospitals.

Terumo formed a national purchasing agreement with APG.

Collaborating on APG’s terms meant lowering BDVS’s prices(almost 17% lower than
current price), losing the brand name (which would be replaced by APG’s label), not
able to sell through non APG distributors.

90% of the business of APG hospitals would go to the vendor with the lowest price.
Negotiation

1982 - APG approached BDVS and it resisted direct communication.

Showcase of authority by APG

1985 - 1st meeting - Claimed 90% of business already with the vendor of right price.

2nd meeting - Showcased price details of every item, member and supplier.

3rd meeting - Well prepared estimated prices for different products.

Negotiation
4th meeting- Bidding from competition. Low price demand because of high volume
involved.

5the meeting- Proposal from Kozy and Smith.

20% higher price than competitors. 90 days sanction time or 5% increase in price.

APG rejected the proposal demanding, a national purchase agreement, with APG
logo as a private label product.

( Information to current distributors).

Verification of APG’s Claim:
No.of. Hospitals under APG - 500

No.of Beds under APG - 100000 ( Tube & needle ratio - 2.5:1)

Average of 200 beds per hospital. So average of 500 tube cases and
200 needle cases are consumed in these hospitals. (1000 per case).

BDVS total sales under APG hospitals - 6 million

Total market under APG- ( No.of.hospitals) ×( No.of.tubes per hosp)×

(price per tube) + ( No.of.hospitals) ×( No.of.needles per hosp)× (price
per needle) = 25 million.

Total market under risk - 19/25 = around 75% and not 90%
 APG vs BDVS:
❏ APG has grown year by year. ( 500 hospitals & 100000 beds strong).
❏ APG has alternatives such as Terumo, Sherwood and other competitors of BDVS
❏ Change in market dynamics towards low price high volume negotiations favoured APG.
❏ For BDV, they still are the market leaders (80%) with high brand recognition and deeper
distribution network.
❏ But Distributors started becoming manufacturers and making prime vendor contracts
posed a threat to BDV.
❏ Few large distributors held majority of the supply.
❏ BDV proved its strength by capturing 66000 new beds.
❏ AGS list of distributors does not include most of the BDVS’.
Our Recommendations
Total BDVS Vaccutainer sales - 63Mn out of which APG-6Mn ( less than10%).

Parallely BD Try negotiating with them to sell not only syringes, needles and tubes
but all the other product produced by BD and for a slight increase in prices

Irrespective whether they agree or not they should accept the offer, because 90% of
APG's sales would be BD's products therefore it will weaken the competition and that
is the easier way to reach hospital and commercial segment which are highly price
sensitive.

Focus in R&D (indicated in the case) and develop their products to cater to non
hospital medical needs, which they can cover with their present distributor.