The purpose of this report is to provide an analysis of a company which operates in the global medical devices industry and its employees, in order to assist the Director with the decisions he needs to take regarding the extension of the company’s offshoring operations.
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The report covers four areas. Firstly, an external analysis examines the key factors for the management of people and organizations affecting the global medical devices industry. To identify the key factors and the implications for people and organizations in this industry, a PEST analysis is also conducted.
Secondly, using relevant MPO concepts, a critical analysis of the internal environment of the company under consideration is provided, focusing also on the key implications for the successful future management of the company and its employees.
The impact of offshoring on employees’ motivation and commitment is the third point being discussed, with reference to the company’s desire for further offshoring its operations into other markets. The key implications for the successful future management of the company and its employees are also being examined.
Finally, this report provides the company’s Director with recommendations on whether the company should enter the Chinese market in the near-term through a major offshoring project, or whether it was better to concentrate first on its internal organizational challenges. Based on the previous analysis, the report recommends that before taking the next step in a major offshoring project to China, the company under study, should first tackle the internal organizational issues that might otherwise become more complicated and complex in the future. Details on why and how the company should deal with the internal organizational challenges are provided.
Coloplast A/S is a multinational company which operates in the global medical devices industry and specializes in the manufacturing of ostomy and urology and continence care, as well as breast care, skin health and wound care products. It also provides associated, medical services that aim to contribute to the improvement of the people’s quality of life.
Coloplast was founded in 1957 in Denmark and soon established a strong worldwide presence. In 2005, 97% of the Company’s sales were generated outside Denmark with Europe and the Americas being its largest geographical markets. Coloplast, has a vast number of subsidiaries, and the manufacturing of its products takes place in Denmark, Germany, Hungary, the United States, Costa Rica and China.
In 1999, searching for ways to cut expenditures, and as a result of the increased economic expansion and globalization, the Company decided to undertake a major offshoring project and relocate part of its production to a low-cost area. In 2001, Coloplast’s first offshoring project was implemented in Tatabanya, Hungary. During the relocation process, the Company encountered many internal challenges requiring significant changes to be made in order to exploit the full potential of the foreign production unit. Implementing these organizational changes and dealing with the challenges effectively, would enable the company not only to exploit the full potential of the Hungarian unit but to take the next step in a bigger offshoring project to China.
External environment of the global medical devices industry
Increasingly, organizations have become aware that, in order to survive and prosper, they must constantly evaluate both the internal and external environment in which they operate, so that they obtain a clear picture of the pertinent components surrounding their situation.
The concept of “external environment” is a key consideration for an organization as it comprises of all the forces that exist outside its organizational boundaries but have a considerable effect on its organizational performance. An analysis of the external environment is of pivotal importance because it enables the organization to recognize these forces and identify which of them provide facilitating or inhibiting influences on its survival and growth. However, due to the fact that the organization has little or no influence on these forces it needs to constantly monitor the environmental domain for changes and take appropriate actions to adapt its strategy and behaviour to these external changes.
Figure 1: External factors that influence an organization
In order to recognize and examine the external forces that influence the global medical devices industry, a PESTLE analysis will be developed. Detecting and identifying the broad, long term trends will provide an understanding of the risks associated with the market and will be the basis of determining the medical devices business structure.
The medical devices industry is a sector that political factors have significant implications for its performance. Healthcare reforms, which are any changes of governmental policy that affect healthcare delivery in a given place, influence this industry significantly. Companies operating in this sector depend indirectly on public reimbursement schemes and possible policy changes that concern reductions of reimbursement schemes have a negative impact on their profit margins. Harmonization of healthcare systems also poses a risk factor at the macro level as it affects the profitability by pushing the prices of the medical devices down.
Companies operating in such dynamic and competitive sectors like the medical devices industry, seek to lower their costs by offshoring some of their operations in low-cost regions. Potential benefits of offshoring to low-cost regions include lower wages resulting in increased profitability and lower prices for customers, increased productivity and quality, and increased innovation which can lead to the formation of new markets and thus, create new jobs. In addition, when companies operating in the medical devices industry relocate part of their operations abroad, they improve margins and make available cash for activities like R&D.
Another important factor is the growing share of ageing population in society which is advantageous for the medical devices industry. As the number of elderly people increases, the demand for medical devices and healthcare products increases too. Generally, socio-cultural factors are not considered to be influential for the business of medical devices industry, as most of the developed products are necessary for every patient in spite of their social or cultural backgrounds.
Medical devices industry is highly dependent on technology, as technological advancements continue to increase demand for advanced medical device products. Technological innovation has also enabled companies to uphold their operating margins since new products carry high unit prices. Unit prices are introduced into the marketplace at a higher price since device manufacturers need to recoup their investment in product development for the initial early adopters of new products. In addition, patent-protection can sometimes lead to abnormally higher pricing in some markets (Medical Equipment Industry Report, 2003)  .
The sector of medical devices is characterized by various rules and regulations which ensure that best practices are being deployed and people are being protected from the risks of unsafe technology. An EU regulatory framework has been in place since 1990, with a number of key Directives, supported by a series of amending or implementing Directives (Balcerowicz, 2009)  . Current standards are voluntary and non-binding, and despite the broad range of products covered, these Directives have generally worked well, although some weaknesses could be improved (Balcerowicz, 2009)  . Countries are urged to establish national standards management systems and, where possible, to adopt international standards and to participate in their development and amendment (World Health Organization, 2003)  . Effective national policies have a legislative base and although this is regrettably not always the case, they still serve as a framework of rules for decision-making and guidance (World Health Organization, 2003)  .
Environmental factors affect the medical devices industry to the extent that environment has a direct relationship with health issues. In countries or regions with poor environmental conditions (e.g. heavily industrialized, populated, polluted regions etc.) the need for medical devices and health care products may be higher than in regions with good environmental conditions.
Internal environment and key implications for the successful future management of Coloplast A/S and its employees
In order to improve its capability for meeting the increasing global demand as well as reaching its growth and profit objectives, Coloplast undertook a major offshoring process which concerned relocation of volume production for mature product lines to Hungary. Moving part of the volume production to Hungary would enable the Company to access low-cost resources (e.g. human labour, favourable corporate tax of 16%), take advantage of the economies of scale and increase productivity. Although the relocation enhanced Coloplast’s opportunities to achieve its strategic goals, it generated a number of issues that had to do with the internal environment of the company and also brought serious organizational challenges into focus.
One of the main issues which Coloplast had to deal with was the reconsideration and optimization of its organizational structure. As George & Jones  (2005, p.538) suggested, “organizational structure is the formal system of task reporting relationships that controls, coordinates, and motivates employees so that they cooperate and work together to achieve the organization’s goals”. A correct organizational structure determines how the decision-making is implemented at all levels of the business, allows the effective allocation of responsibilities for all tasks and processes to the employees, facilitates working relationships between different sections of the organization, retains order and command while at the same time promotes flexibility and creativity. Thus, it is imperative for an organization to have an efficient organizational structure in order to accomplish its strategic objectives.
Coloplast, like several other global organizations, had a decentralized organizational structure which means that decision-making power was delegated from higher to lower levels, relatively away from the central authority. In this kind of organizational structure, there is a high degree of autonomy and subordinates are expected to demonstrate initiative and managerial efficiency while in a highly centralized authority structure, only a few powerful individuals or groups retain decision-making power and subordinates are likely to operate within relatively narrow latitudes.
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The optimal degree of centralization of authority depends upon a complex array of interrelated factors (Wexley and Yukl, 1977)  . Generally, maintaining a decentralized structure enables decisions closer to the operational level of work, increases responsiveness to local circumstances (Mullins, 2005)  , promotes managerial efficiency and improves employee satisfaction (the result of giving people greater opportunities to take responsibility for their own actions) (Delta Publishing, 2006)  . However, problems in coordination of individual entities and loss of control may occur.
On the other hand, centralization has the advantages of easier implementation of a common policy, more consistent strategy, improved economies of scale, improved and faster decision making and greater use of specialization (Butler, 2008)  . According to Connors et. al  (2005), centralized structures are more desirable to the extent that “(1) there were good communications with subunits; (2) higher-level managers have access to staff specialists or other information sources which are not readily available to lower-level managers; (3) higher-level managers have the same knowledge of local conditions as do lower-level managers; and (4) decision speed is only a minor consideration”. However, the fact that it encourages the authoritative leadership style, and the fact that its use may limit the response of an organization to an external environment, is the main disadvantage of a highly centralized organizational structure.
Figure 2: Centralized vs. Decentralized Organizational structure
The reason why Coloplast encountered organizational structure issues was the large distance between the new production facilities in Hungary and the other plants located in Denmark. The fact that Coloplast had a decentralized organizational structure worked very well for its Danish production facilities (the distance between them is short and the communication is relatively easy), but when the Hungarian plant was added, major problems occurred in terms of control and communication between the different production units and the management. Decentralization of the production facilities, combined with the lack of fixed procedures and structured interfaces, complicated the tasks of documentation of planning and standardization of production systems. Furthermore, the lack of documentation of the company’s production techniques and equipment operation (due to the fact that the Danish process operators knew how to handle inconsistencies in operation of equipment but this knowledge was not documented in manuals) had serious effects on the operational performance of the Hungarian unit and needed to be tackled.
Another internal organizational issue that Coloplast had to deal with was the effective transfer of knowledge from the Danish to the Hungarian employees. Transferring knowledge regarding the Company’s production systems and techniques to new employees was a very challenging and complex procedure that required great deal of human interaction and a lot of time devoted to training. Nevertheless, it was particularly important for the Company’s management to create avenues for exchanging knowledge, so that it was accessible and useable by everyone in a way that it would positively affect the overall organizational performance.
Although, Coloplast solved the problem of transferring knowledge by sending Danish operators to Tatabanya to train their Hungarian colleagues, it faced a new challenge, which thus threatened the company’s future growth. In particular, the problem was that there were natural differences between the organizational culture of the Danish employees – which had evolved and successfully served the company over time – and the organizational culture of the Hungarian employees. The unsympathetic approach of these differences by the Danish workers combined with the lack of communication (due to the language barrier) created misunderstandings and some underestimation of the Hungarian workers’ skills, despite the fact that they were technically proficient. Due to this challenge, the Danish workers also failed to learn new, useful skills from their Hungarian counterparts.
Coloplast management sought to deal with this organizational challenge – and at the same time prevent conflict from occurring – by creating a forum where all employees could share their opinions and openly discuss their views. This approach was very effective since all employees had the chance to exchange interesting ideas, get to know each other, and hence understand each other better. The management also could become involved with the various issues that employees faced and could therefore formulate solutions to the problems.
Critical analysis of the employees’ motivation and commitment
When Coloplast took the decision to offshore part of the volume production to Hungary, this posed a serious threat to employee motivation and a major challenge for the company’s management, since many employees were not familiar with the consequences of such change. Being aware of this fact and in order to remove the uncertainty among the employees, Coloplast’s management carefully involved them in the process and ensured that all of them had access to a high level of information from the start. Communicating directly and clearly while being honest and open, the management also ensured that it obtained feedback from employees on their opinions and questions for the forthcoming relocation. This was very important in avoiding a negative impact on employee motivation and commitment, which would negatively affect their performance and the overall productivity of the company.
It is widely acknowledged that companies find it hard to adjust to any organizational change due to the fact that many employees become de-motivated and therefore resistant to change. This behaviour of scepticism, hesitation and resistance to adapt to new work conditions is typically based on the fear of increased tasks, demotion or even loss of jobs and often causes tension between management and employees. These tensions, if allowed to continue, usually have as a result decreased company productivity and loss of competitive advantage.
Employees’ attitudes towards change are decisive to whether an organization’s efforts for change are either successful or unsuccessful. “When employees possess a strong, positive attitude towards change, they are likely to behave in focused, persistent, and effortful ways that support and facilitate the change initiative being implemented. However, when employees possess a strong, negative attitude towards change, they are more likely to resist, oppose, scorn, thwart, and attempt to sabotage the change initiative” (Lines, 2005)  . Therefore, it becomes clear that in order to ensure a successful organizational change, a company must focus on the human side of change, by influencing the employees’ behaviour, keeping their motivation and commitment high, giving them the drive to change, and aligning their goals with those of the company.
Motivation has no standard definition. It has been defined as: “the psychological process that gives behaviour purpose and direction” (Kreitner, 1995)  ; “those psychological processes that cause an arousal, direction and persistency of voluntary actions that are goal oriented” (Mitchell, 1982)  ; “a person’s unique set of needs in relation to particular situations. These needs explain what drives a person, what his or her reaction will be to various stimuli, and the strength of behaviour, its consistency and persistency based on conscious decisions” (Winfield et. al., 2004)  . Employees’ motivation is a key concept for any business because it strongly affects the organizational performance and, thus, the survival and success of the business. Understanding what motivates employees and what boosts their morale will not only help their individual goals to be achieved but it will ultimately help the organizational objectives to be accomplished.
Communication plays a vital role in maintaining or even increasing the employees’ motivation. Sharing the decision making and allowing real participation in the problem solving, heightens the employees’ commitment and reinforces their confidence. When it comes to change, effective communication involves gathering important information in relation to the change process and distributing this information to everyone affected. Clear, frequent, honest and timely communication is crucial because it allows the employees to understand how these changes will affect them personally. Furthermore, the development of an efficient feedback system that measures the success of transition not only through the eyes of management, but also through the eyes of employees, is one of the most important components in the motivation cycle.
From the above analysis it is clear that in relation to the impact of offshoring on its employees’ motivation, Coloplast dealt with the challenge appropriately. The management used communication very effectively by providing all the necessary information to its employees, developed an efficient feedback system where they could express their opinions and questions, and generally ensured the involvement of all employees in the change process. Furthermore, it lessened their reasonable concerns over layoffs by offering new positions and additional training to those who were about to be affected by the relocation. This approach, improved the employees’ morale, strengthened their commitment and maintained their motivation at a high level.
The fact that Coloplast approached this challenge effectively, identifying employee motivation and commitment as key factors to the successful implementation of organizational change, will help the company achieve its future plans for growth. Having the view that employee commitment, and thus performance, comes via consistency in communication, motivation and leadership is a strength that will most likely lead to success.
Having analyzed the internal environment of Coloplast and the challenges that the Company had encountered during the relocation to Hungary, it is advised that Coloplast should concentrate first on dealing with its organizational issues before proceeding with the offshoring project to China. Of course, a future move is not ruled out but unless some major changes happen, taking the next step would be very dangerous.
Coloplast should primarily focus on redesigning its organizational structure in a way that it reflects and supports its organizational strategy. As previously discussed, the company’s Denmark-based facilities are characterized by a decentralized, less formal organizational structure while in Hungary the workers learned to work under more standardized procedures and a more centralized structure. By centralizing its organizational structure and maintaining a high level of authority, the company will achieve uniformity and consistency of the organizational procedures and will ensure that the overall control and coordination of its different production units is effective and efficient. In addition, the fact that the senior management will be the only responsible for setting the overall goals of the company will ensure that every production unit is aligned towards the same organizational goals. Coloplast can achieve the coordination and control through building an Information System that would link all its production units together, as well as organizing frequent meetings and webinars between the managers of the different plants and the senior management.
Another challenge that Coloplast has to tackle is the effective knowledge transfer from Denmark to the foreign production units. In the case of the Hungarian unit, Danish employees were sent to Hungary in order to train their colleagues. However, this solution may not be efficient in future offshoring projects because the distance may be an obstacle. A different approach to this issue would be to assign the training of the employees to a local company which specializes in relevant professional training; however, this option would probably be more expensive and not compatible with Coloplast’s philosophy and culture. Documenting all production techniques and equipment operation, standardizing this documentation and translating it into the offshoring countries’ languages would be the first big step towards the solution. Uploading this documentation on the aforementioned Information System (that would link all the production units together), and providing detailed, translated, up-to-date webinars that would explain any operational inconsistencies and special uses, would effectively and permanently solve the knowledge transfer issue.