Guidant Corporation

• Established in January 1994

• Created from the spin-off of 5 companies from Medical Devices and Diagnostic Division -> generate value by reducing costs and creating competencies

• Design, produce, and sell medical devices

• Product : pacemakers, defibrillators, catheters, and devices for minimally invasive abdominal surgery

Guidant’s Main Businesses

Business unit

1. Cardiac Rhythm Management (CRM)

2. Vascular Intervention (VI)

3. Minimally Invasive Surgery (MIS)

Sales organizations

4. Western Hemisphere Sales

5. European Operations

6. Pacific Rim Sales

Guidant’s Business Unit

Cardiac Rhythm Management

(CRM)

• President : Jay Rac

• Combination of Cardiac Pacemakers, Inc. and Health Rhythm Technologies

• Product : cardiac pacemakers, defibrillators, and leads

Vascular Intervention (VI)

• President : Ginger Howard

• Combination of Advanced Cardiovascular Systems, Inc. and Devices for Vascular Intervention, Inc.

• Product : catheters

Minimally Invasive Surgery (MIS)

• President : Jay Watkins

• Predecessor : Origin Medsystems

• Product : laparoscopy

GUIDANT’S STRATEGY

Global product innovation

Economic partnerships

with customers worldwide

Organizational excellence

Global Product Innovation

• Family approach to speed product development

• Create common platform to incorporate core features and functions -> adapt derivative products rapidly to enhance technological performance and add new features.

• Platform development takes 2-3 years and involves significant leaps in innovation and technologies.

• Risk : new technologies and advances are subject to careful scrutiny

Economic Partnerships WithCustomers Worldwide

• Build strong relationships with physicians and healthcare administrations

• Develop a direct salesforce in markets (Japan and Europe)

• Reorganize sales function to establish closer relationships with customers, understand better the economics underlying their operations, and gain economic efficiency

Organizational Excellence

• As a culture in which all employees function as owners of Guidant

• Create employee commitment to the new Guidant Corporation (not each of the 5 original medical devices companies)

Core theme to work with for the eight strategic design teams:

Leverage Sales and Distribution

Optimize Global Presence

Build Cost-Effective Administration

Create a Stream of Novel Business and Products

Build Competence to Ensure Speed to Regulatory Approval

Minimize Risk of Regulatory Actions

Leverage Manufacturing Assets

Influence Public Policy Important to Our Business

Shareholder Value

Capital market as the ultimate judge of Guidant’s ability to create shareholder value

To achieve double market value in 1999, there are six specific financial goals:

Consistent value

Create strong reputation

Sales growth greater than competition

Decrease effective tax by 1% per year

Maintain capital expense below depreciation

25% Debt to Equity

Decrease OPEX 2% of sales per year

Improve gross margins

DESIGNING THE SYSTEM

1. Performance Measurement System

drive the innovation and value ceation

2. Belief systems

communicate core company values

3. Risk management system

prevent misbehavior

Performance MeasurementSystem

• Measuring economic value to align incentive system

• Incentive system objective:

1. to align the motivation of employees

with the creation of market value

2. have every person at Guidant benefit from the success of the company

Performance MeasurementSystem

“Economic Value Addes” is

A new indicator to measure the progress towards the creation of shareholder value

Residual income = Net income – CC

= Net income – (AA-ACL)*13,5%

CC = Cost of Capital

AA = Average Assets

AVC = Average Current Liabilities

10% of compensation was contingent upon increases in this residual income measure for Guidant

60% of their compensation linked to stock performance through stock ownership and stock options (as part of the long term compensation)

The incentive structure would facilitate communication, learning and mobility across divisions

Performance MeasurementSystem

Incentive of the business heads (Compensation of the ten senior managers)

Global Guidant’s performance

Performance MeasurementSystem

Bonus Structure Divisional Performance

The bonus was adapted to the changing needs of the division and based on the divisional performance.

The employees’ contribution was invested in a diversified fund

Next, would be necessary to fine-tune the incentive system to reflect unit performance more heavily than corporate performance.

Belief System

• Communicating Core Values

to reduce the potential of undesirable behavior

by distribued a 32-page Code of Conduct among its employees

• Guidant’s mission statement and core values were powerful vehicles to remind people what they were working for (a firm reminder of the foundation upon which economic value must be created)

Belief System

Risk Management System

• Managing risk of the heavily regulated environment and the sanctions from Food and Drug Administration (FDA) to ensure the health-delivery standards was safe

• FDA required:

- detailed information on the characteristic of new medical device products and the manufacturing process

- Guidant to inform the agency of any changes in products, manufacturing process and sales material

Risk Management System

• A new compliance function (Chief Compliance Officer) was created to address this important control issue

• Each of the business units where compliance officers assumed a critical role, the same structure was duplicated

• A corporate audit function also established to document organizational processes, identify best practices across the company, perform process engineering and ensure the internal controls accomplished their objectives.

FUTURE

1995 •Managing the market pressures of the IPO and making Gudant a solid company

1996 •Four managers evaluated whether the system s put in place would shape the appropriate culture to drive Guidant forward as a successful medical devices company

Next •Long term planning (a well excuted planning system required a significant time commitment and possibly an environtment stable enough to look 2-3 years into the future)

Recommendation

• avoid the over stocking and upgrade the devices regularly

• according to the market need, comply with the statutory requirements

• implement the new products through innovations to increase the organizations profitability and decrease the operational cost

• handle the HR through balanced incentive system