Innovation in the medical device industry contributes significantly to our country's economy and to the quality of healthcare for our citizens. One might say that innovation drives the medical technology world, building on science and entrepreneurship, and tends to be the domain of small companies. However, the path to innovative success is fraught with difficulties and most small, entrepreneurial medical technology companies end up as business failures. A better understanding of innovation and risk management may be helpful to increase the success of the small medical technology company.
Innovation is usually understood as a change in the process for doing something or the application of new inventions and discoveries. There is a distinction here between the concept of invention and the notion of innovation. Invention is the creation of a new product, process, or service from new or existing knowledge. The innovation process describes how science and knowledge becomes product in the market place through two distinct movements. In the first phase of the innovation process, basic research discovers or creates new knowledge which has an application or an invention. In the second phase, innovation results from the commercialization of that invention; that is, taking the invention into the marketplace and generating income. Inventors generally do not profit from their work, yet innovators produce, market, and profit from their innovations.
The challenges in the second phase of the cycle are formidable. The invention-to-innovation process is more frequently driven by customer demand or market pull than the technology itself. In addition, the applied new business concept can result from happenstance or luck as much as deliberate forbearance. The process, invention to market innovation, is cyclic, moving in spirals rather than linear vectors, often over years, perhaps decades. Finally, the key component to a successful innovation is a strong business plan used to commercialize the product. Indeed, without a successful business model, there is not innovation, just invention.
The successful business plan must include a real reading of the market place, valuing the market potential and creating an appropriate marketing plan. Finance, capitalization, and eventually customer demand are dependent on the communications and delivery of the message that a robust marketing process facilitates. This basic concept-a sound marketing plan-is often the least developed in small medical technology companies, which tend to be driven by valuable scientists and technical staff, who may underestimate the need for the business model. Out of three thousand ideas for new products, only one becomes a successful innovation in the market place.
A successful business plan begins with analysis of the company itself, the industry, the customers, and the competition. Each of these areas is critical and interdependent. The entrepreneur of a medical technology company must understand and articulate his or her company's strategy, organization, product, and service, including what unique qualifications the company has to service its target markets. In addition, the analysis must also understand the playing field in which the company will be competing, responding to questions such as what are the target market segments, the sizes of these segments, and the trends in the industry subsector(s). In the medical device industry, this analysis also includes the regulatory perspective: understanding how the FDA and other agencies will regard the invention and its success. Does clinical data support the strategy and help to make the case for approval?
Building on the industry analysis, the customer analysis should demonstrate the unique needs of the target customers and then show how the company's products and services satisfy those needs such that the customer will want and indeed pay for them, once approved. The company must also have a true understanding of the competitive landscape, identifying direct and indirect competitors and their strengths and weaknesses, in order to delineate the company's competitive advantages. How will this medical technology be received in the ever-changing worlds of health care, reimbursement, and patient acceptance?
A successful business plan has viewpoints on marketing, operations, human resources, finance, and risk management. The marketing plan should address the company's image and brand and its promotion and pricing strategy. Operational design focuses on the functions to run the business, including manufacturing, delivery, sales, and quality assurance. The human resources component addresses the "who" of the company; that is, it identifies the key personnel, management, board of directors, advisors, and leaders. The financial plan outlines the revenue. Profitability, costs, and capital, including when and how earnings will be realized. For investors looking for opportunity, especially in the medical technology sector, having a sound financial plan is a key attraction.
Finally, risk management is an inherent component of a successful business plan. Risk management is the analysis of possible loss and the determining, minimizing, and preventing of accidental economic or physical loss in a business. Enterprise risk management is not about eliminating risk, but rather it is about making informed risk choices. This process, analyzing and minimizing risk, helps propel inventions to market, supporting investment and freeing resources for innovation. Risk comes in many areas and can be addressed through a combination of best practices as well as risk transfer through insurance. For instance, products and clinical trial risk issues can be addressed through research design and liability insurance. Capital investment, physical assets, and manufacturing risk are mitigated with appropriate property and transportation insurance. The health and welfare of employees and their relationships with the employer are addressed in human resource policies and benefits, and with insurance products such as workers' compensation, disability, and employment practices. Finally, stakeholder and shareholder risk is often protected with management liability coverage in directors and officers and fiduciary insurance.
Entrepreneurial inventors face daunting circumstances in seeking to become successful innovators. Not only must their science and inventions be well established, they must also have solid business plans and a modicum of luck. The business process with the innovation cycle is built upon appropriate analysis of the industry, customer, competition and market place with strategic plans to address leadership, marketing, finances, operations, and risk. With a sound business plan, inventors can convert their ideas into cash moving their knowledge to innovation. For more information on best practices for business planning and risk management, please visit The Hartford's Technology and Life Science website, www.thehartford.com/info/ technology or contact The Hartford at medtechlifesci@thehartford.com.
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