EXECUTIVE SUMMARY
Ecton has successfully brought to market a new concept in echocardiograph imaging systems. This concept challenges the conventional use of imaging systems by allowing the machine to move into new areas in the health care industry. You have done this by assembling a strong team focused on development. Now it is time to take the product from the development phase into the market place. However, this market is firmly entrenched with certain biases towards the use of echo machines. In order to successfully move this product into alternative markets, you must convince the customers of its value in these alternative areas. To do so will require similar strengths in marketing, sales and production as you have in engineering. Your original plan called for selling the business once a successful model was produced. By selling to a larger company, you would have access to their skills in sales and marketing and use of their established distribution channels. By arranging an acquisition now you can take advantage of your position as product leader to negotiate the best deal. This would give the original founders and investors the best return on their investment.
ORGANIZATION PROFILE
Ecton Inc. is the leader in the emerging market of compact echocardiograph imaging systems. It was founded with the goal of developing a cardiac ultrasound machine that could be used as a screening and monitoring tool as opposed to being an expensive diagnostic laboratory method. A number of events in the mid-1990’s occurred creating the opportunity for Ecton to challenge the few large entrenched companies in the echocardiography imaging market with a low cost, light weight model. Some of these events were a marked improvement of quality in overall performance of echo machines (as they were referred to in the business) as compared to magnetic resonance imaging (MRI) and the development of contrast echocardiography using “contrast echo agents” which reflect clearer images of blood flow. The echo machines being produced at the time of Ecton’s inception, while moveable, were still quite large and more notably, very expensive costing from $80,000 to almost $300,000. The size and high price meant the machine was usually restricted to “cardio labs”. However, echo machines were beginning to be used outside the traditional cardio lab and for more uses than just diagnosis. While continual improvements were being made to the echo machines, they were being made at the high end of the market and existing manufacturers were not pursuing alternative avenues of application. Ecton recognized the opportunity for a lower cost, portable unit that, while it may not equal the capabilities of existing machines, would perform well enough in alternative settings where screening and monitoring were called for as opposed to just diagnosis. It is this opportunity that Ecton hopes to exploit.
Ecton’s core group of founders, led by President Michael Cannon, is an extremely knowledgeable and experienced group of engineers with extensive experience in the ultrasound business. All five came from the Interspec division of ATL, a leading manufacturer of ultrasound equipment. The type of work they have performed at Ecton can be described as a “destructive technology”[1] as it has introduced a very different package than mainstream customers usually value. Because of this Ecton must try to market their product outside of the traditional echo lab, to alternative sites such as emergency rooms, ICU’s, surgery departments, physician offices and other places that normally could or would not spend the money on a more expensive unit.
With the research and development background of Ecton’s founders, emphasis has been placed on product development. In a very short time, the company has been able to produce a working model capable of excellent image quality in the area of contrast imaging. Other modalities of the machine might perform at a level below that demanded in a traditional echo lab, but at a level high enough to satisfy customers in the alternative markets. However, this technical expertise did not come without a price. Ecton’s core group was not strong in sales, marketing or production. As the unit neared completion, Ecton was facing the question how it was now going convince customers they needed a portable, low priced imaging unit in other areas outside their cardiology units.
CRITICAL ISSUES
Once Ecton developed an imaging unit that performed acceptably in the anticipated market segments they must make a decision on their future. The critical issue they are facing is should they ramp up their marketing and production efforts and attempt to remain independent or should they use the success of their machine to pursue a deal to be acquired by a larger firm. In order to answer this question, Ecton has to evaluate whether they possess the resources and skills necessary to compete with larger companies who already have existing production and distribution channels even though they are dealing with an emerging market product. While the company has a core of talented engineers, there is concern whether they possess the skills in marketing, sales and production.
ALTERNATIVES
1. Remain independent and develop the necessary marketing, sales and production requirements
Strengths
· Remaining independent would allow engineers to focus on development of this particular unit without other distractions.
· Small company size with lower overhead would allow Ecton to pursue the emerging markets larger competitors feel are not as profitable.
· Independence would allow Ecton’s innovative culture to remain intact.
Weaknesses
· Minimal capital has been raised.
· Marketing, sales and production infrastructure is almost non-existent.
· With changes in hospital structures, unsure of the type of customer it should target.
· Only have one product to sell.
· Competing against large entrenched companies.
· Financial structure of Ecton was based on assumption of being acquired.
· Company expertise in mainly in engineering.
2. Pursue being acquired by a larger company.
Strengths
· Integration of Ecton’s imaging unit into an established company would be a more efficient way of distributing the technology to physicians who would use the machine.
· A larger firm could provide the resources and expertise for marketing and production.
· Greater access to additional capital to continue development and enhancement of the unit.
· Would allow the Ecton team of founders and investors to liquidate some of their equity in the company.
· Acquisition would bring in established organizational processes and procedures.
· An established company would allow more open doors due to existing business contacts.
Weaknesses
· Lack of prior marketing and sales might limit leverage in negotiating process.
· Ecton’s innovative culture may be a risk.
· Concerns the product development process may suffer in a larger company.
· The very market Ecton is targeting may be considered too small (and not profitable enough) by larger competitors.
· Time spent focusing on potential acquirers could be used to develop marketing and production capabilities.
RECOMMENDATION
Ecton should proceed with plans on finding an acquisition partner. The major constraint facing Ecton is the lack of the necessary infrastructure in sales, marketing and production. The founders’ original goal was to develop a technology that could be used as a screening and monitoring tool and included the intention of selling the business once the product was developed. Ecton has developed a product that challenges higher priced units in the quality of contrast imaging and provides performance in other areas high enough to satisfy users in alternative markets. This was accomplished by focusing on design and engineering. However, without strong sales, marketing and production resources, the company will not be able to secure these alternative markets. Since the product is nearly completed, Ecton should stay with their original plan. This would allow Ecton to take advantage of the their position as the first to market when negotiating with a potential buyer. By selling the business now, Ecton could avoid the necessity of giving up additional equity to secure additional funding. This would give the original investors (which include the founders) the greatest return on their investment. Michael Cannon has already developed an exit strategy in his Phase III plan. This plan should be followed through. Since Ecton is close to perfecting their product the time is right to make the best deal possible for an acquisition.
ACTION ITEMS
· Continue onsite test of the Ecton imaging system.
· Begin working on product advances and enhancements.
· Identify and make contact with potential acquirers.
· Begin to develop market segments for future sales.
· Evaluate fit with potential acquirers.
· Make contacts for additional financing in the event finding an acquirer takes longer than anticipated.
[1] Joseph Bower and Clayton Christensen, “Disruptive Technologies: Catching the Wave”, Harvard Business Review Jan-Feb 1995, p. 45