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Johnson & Johnson (J&J) developed the first working “stent,” a small medical implement that could be used for patients with artery blockages in lieu of open heart surgery. A tiny metal “scaffold” that is inserted into an artery during a balloon angioplasty procedure, the stent significantly cuts down the rates of the artery collapsing after angioplasty and, as a result, reduces the probability of follow-up emergency surgery.This case is based upon media accounts and personal discussions with physicians and other health care professionals. Key resources include Winslow (1998), Tully (2004, May 31), Gurel (2006, July 24), Johannes (2004, September 1), Burton (2004), and Kamp (2010, February 10).
Over 7 years in the late 1980s and early 1990s, J&J invested in the research and development of the stent and compiled the research necessary to gain regulatory approval. The product was an immediate success, quickly building a $1-billion market, even though the stent was too new to be covered by health insurance. Having pioneered the development effort, J&J held a well-deserved 90% of that market in 1996. This product alone accounted for a significant proportion of the consumer-products giant’s operating income. Cleveland Clinic physician Eric Topal described the J&J Palmaz-Schatz stent as “changing cardiology and the treatment of coronary-artery disease forever.” Despite all this success, by the end of 1998, J&J lost all but 8% of its market share.
J&J faced several challenges after introducing the stent to the market. First, the J&J Palmaz-Schatz stent was initially so successful that demand substantially exceeded supply. As a result, one of the company’s initial challenges was making enough stents to meet demand. On top of that, two other initiatives were consuming significant company attention and resources. To facilitate its move into medical devices, J&J had acquired angioplasty balloon-maker Cordis, a merger made particularly challenging by Cordis’s entrepreneurial culture that conflicted with J&J’s top-down culture. In addition, J&J was allocating significant resources to lobbying the insurance industry to obtain insurance coverage for the stent. At introduction, the company had priced the stent at $1,595, a significant new expense for hospitals that was not covered by existing reimbursement levels for angioplasty procedures.
While doctors (and, by extension, their patients) were happy with the stent’s initial performance, hospital administrators had difficulty with its cost. Despite pressure from hospitals for price breaks, J&J stood by its price of $1,595. The company would not give quantity discounts, requiring many hospitals to carry new, significant budget expenses for the stent. Many hospitals felt gouged by J&J, perceived to be a consumer-products firm (the “baby shampoo” company) and a newcomer to the medical implements market. They felt that J&J was holding hospitals hostage by flexing its pricing power.
As J&J focused on building capacity, lobbying the insurance industry, and integrating a new firm with a very different culture, the company was unable to respond to feedback from doctors for improving on the first-generation stent. The original J&J stent came in only one size (about 5/8 of an inch) and was made of relatively inflexible, bare metal. The doctors learned quickly and expressed a very clear need for stents of different sizes and flexibilities to improve ease of use.
J&J had built an honest advantage in pioneering the stent market, but the company also paid the price often paid by a first-mover innovator. The company carried the product through research, development, and regulatory approval, creating both a knowledge base and market opportunity for other fast followers. Paying close attention to market reaction to the one-size, bare-metal J&J stent, competitor Guidant’s subsequent success in this market was built upon J&J’s early research and market development investments and learning: (a) Guidant was able to develop the more flexible stents that physicians were demanding, (b) Guidant and other rivals benefited from both J&J’s groundwork and physicians’ pushing the FDA to speed up the approval process for new stents, and (c) J&J was successful in achieving a $2,600 increase in insurance coverage for angioplasty procedures to cover the cost of a stent exactly one day before Guidant introduced its new stent product on the U.S. market.
J&J’s subsequent dramatic loss of market share resulted from a significant store of resentment that had built up through its holding the line on its $1,595 price point and its inability to adequately address physician concerns about flexibility and ease of use. J&J’s behavior was driven by a solid belief in its pricing (which was later validated by rivals’ entry pricing) and the allocation of resources to other tasks. Doctors and hospitals interpreted the company’s apparent lack of responsiveness to a failure to understand the needs of this new market. While J&J was in some ways a victim of awful luck, ultimately, the customer’s perception of how a firm responds to its circumstances is the real determinant of its market share.
The J&J story is told neither to lament the company’s situation in the stent market (they have since continued to innovate and to effectively compete in this market) nor to focus on a great idea gone awry. It is instead told to illustrate an extreme example of the innovation-imitation cycles that Dickson describes in his model of competitive rationality, as well as the fact that the fastest learner in a market often gets an advantage. In addition, it allows us to consider how the 3-Circle model captures such dynamics.