Respironics Inc.: Expanding Success

BUS470, Business Policy & Strategy

Submitted to: Dr. Desmarais

December 11, 2010

Vanessa D’Angelo

Minushe Mustafaraj

Paul Atkinson

Jessica Purington

Cristina Coppola

Rose Barry

TABLE OF CONTENTS

Executive Summary

Macro-Environment

Industry Analysis

I. Industry Drives

II. Five Forces

III. Changes to the Industry Structure & Competitive Environment

IV. Existing Rivals competitive capabilities

Critical Issues the Industry faces

Respironics Inc., Competitive Capabilities

I. Business Strategy

II. Functional area strategies

III. Assessment of Respironics Inc.’s Strategic Performance

IV. Resources

V. Value Chain

VI. Assessment of Respironics Inc.’s Financial Performance & Capabilities

VII. Strategic Issues Respironics Inc. Faces

VIII. Management’s Values

IX. Organizational Culture

Appendices

A. SWOT Matrix

B. Stakeholder Matrix

C. Financial Ratios

D. Financial Trend Graphs

E. Budgets & Schedules associated with recommendations

F. Responses to questions asked during presentation

Executive Summary

Our consulting team completed an analysis of the company: focusing on opportunities

and threats, Respironics competitive capabilities, strengths and weaknesses. The analysis has led

us to suggest the following recommendations. Each recommendation is followed by supporting

persuasive logic regarding the current strategic issues and the steps to expand the overall success

of the company. The following recommendations contain the tools needed to take immediate

action.

We recommend Respironics:

1. Meet with Philips regarding the merger. Depending on the offer given by Philips,

Respironics will either accept or decline. After analyzing Respironics’ financial statements, we

believe it will be in the best interest of shareholders if the offer meets or exceeds $5 Billion. If

Philips does not meet or exceed the figure given, we believe Respironics will prosper as an

independent company. Respironics has strengths to defend against competitors. Respironics has

$260 Million in cash and marketable securities on hand to pursue new market opportunities, the

company also purchases from multiple suppliers. There are opportunities for new industry

possibilities as an independent company.

2. Lobby for change against existing Medicare guidelines. Current Medicare guidelines are

a threat to Respironics’ sales opportunities in the U.S. Respironics has the capital available to

fight this threat by increasing awareness and lobbing for change. We believe the Stardust will

sell successfully in the U.S., as it has in France if Medicare reimbursement policies change.

Respironics will increase awareness by running commercials on daytime television, educating

residents and asking them to petition their political representatives. The commercials will

educate individuals on the reimbursement guidelines that are restricting a market for the Stardust

in the U.S. and would also describe how the Stardust would result in faster diagnosis and

treatment of sleep apnea sufferers. Changing Medicare guidelines will dramatically increase

Respironics domestic sales.

3. Pursue international market potential. After the analysis of Respironics strengths and

weaknesses, the first implementation step is to align the current sales strategy with the overall

business strategy. By opening up more sleep clinics internationally Respironics can retrieve

more research on sleep disorders developing internationally, and with the research the research

and development (R&D) department can continually introduce new and marketable products to

attract new potential customers. Respironics has a broad knowledge of sleep disorders and can

start to further educate other countries. In a year’s time Respironics can control 18% more

market share raising control to 50% and by end of year 5 control the international market share.

4. Pursue the opportunity of an increased number of individuals with sleeping disorders by

utilizing face to face selling. There is a high demand for reliable and portable breathing devices,

created by the aging population. We believe Respironics should pursue this opportunity by

utilizing face to face selling. In face to face selling sales representatives will add value to

customers by highlighting the benefits of Respironics product line. Sales representatives will

target this age demographic by visiting retirement communities, hospitals, distribution facilities

and sleep clinics. Representatives will hold seminars geared towards educating individuals on

the benefits of Respironics breathing devices. The seminars will leave time for representative to

talk to individuals one on one to see how Respironics can meet the needs of this demographic.

5. Implement of strong internal and external quality control measures. Product liability

suits are a threat to Respironics. Implementing extensive training to all employees in every

department will aid in Respironics’ defense against this threat. External measures call for a

switch from Demand Flow Technology (DFT) to the 6 Sigma manufacturing. While DFT is

working, Senior Consulting strongly believes that this set of quality control and manufacturing

management would greatly improve the measures needed to advance in the industry as a top

competitor. 6 Sigma follows a strict zero-defect guideline which greatly improves quality and

reducing the process variation of production. These changes would provide overall

improvements in credibility.

6. Research potential acquisitions to expand their product line. Respironics has capital

available to pursue this opportunity and potentially buyout other companies in order to expand

and grow. The key is finding a company with the best strategic and financial fit for Respironics.

Finding the best strategic fit includes looking at the potential acquisition’s industry and product.

Followed by, analyzing the company’s culture and values. Respironics should identify with the

potential acquisitions corporate values. When looking for potential acquisitions Respironics

should seek companies, who focus on the success and needs of customers, recruit and retain the

best employees, empower workers to make decisions and assure social responsibility. The

desired outcome is to find a company with expertise in product development in order to add

more product lines through potential acquisitions.

Macro-Environment

In 2006, we saw growth in the U.S. economy; unemployment had many major changes.

Deficit was one of the biggest issues facing the U.S. economy. In 2006 the resolution affected

exchange rates, interest rates, inflation and growth for the next few years. Consumers

experienced the increase in debt payments. The debt left less money available for key

household expenditures, and late in the year many families began experiencing loan defaults

and bankruptcies. Inflation in most major countries remained low, and long term interest rates

were low as well. Japan saw relatively good performance by the end of 2006, the result of

strong demand from neighboring China. Although some of the biggest countries of the

European continent were stagnating. In 2006, global equity market returns were strong.

Although the price of oil has risen substantially, oil consuming nations seem to have

absorbed the shock reasonably well. Meanwhile, oil exporting nations are seeing their first

major windfall in a generation. The U.S. still imports vastly more than it exports, and job

growth continues to drop.

A political concern is dealing with the budget deficit, the looming public pension crisis,

the crisis in private pensions, and the issue of immigration and visas. The deficits were

financed largely by overseas investors resulting in higher interest payments out of the U.S.

Treasury. The outflow, in turn, exacerbated an already record high trade deficit fuelled by

America’s large dependence on foreign oil and rising oil prices over the years.

Medicare reimbursement policies restricted a market for Stardust, a portable sleep

diagnostic tool, in the U.S. The policy did not reimburse patients and clinicians for the cost of

the treatment.

Industry Analysis

Industry drivers

Sleep disorder and respiratory diseases were higher in countries across the world than in

the U.S. Some of the sleep diagnostic tools like CPAP were not popular or reimbursement

from Med Care in U.S. As the baby boomer generation got older the need to maintain an

active lifestyle increased the need to use ventilators, which in that period of time had became

more complicated. Ventilators were used on patients when they suffered from respiratory

diseases.

Five Forces

There were many rivals in the industry, and due to increase of the older generation in

the U.S., air pollution and an increase in the smoking population in other countries

Respironics’ individual size is growing. ResMed and Fisher Paykel Healthcare were the main

competitors for Respironics. There was not much differentiation as they contend with similar

products and sell to similar markets. Respironics competed on a product by product basis with

the company’s two rivals, some of which had significantly greater financial and marketing

resources and broader product lines. The rivals believed the principal competitive factors in

all of their markets were product and service performance, and improvement. Efficient

distribution and competitive price were also very important.

There was a high threat of entry into the Respiratory disorder industry. The industry’s

growing rivals had vertical integration, and significant amounts of horizontal integration.

They also were able to use economies of scale in their products. There were high costs and a

significant learning curve associated with entry. Exit barriers were not as high which allowed

companies to compete and switch form one product to the other.

A substitute for diagnosis and treatment of a sleep related disorder was surgery to

relieve airway obstruction, which was increasingly preferred by many patients. If the airway

obstruction was related to anatomical structures that were narrowing the airway, surgical

reshaping of the soft palate and uvula may be performed.

Respironics had bought parts from many different suppliers. DFT system implemented

in 1998 help Respironics to have just on time supply. The DFT implementation set the standard

for continuous improvement and implementation of best practices for the operations

management team at Respironics. Suppliers to the industry provide most parts of their tools. It

is very expensive for a company to switch suppliers so they are unlikely to do so. Many

companies use vertical integration.

Buyers are all over the world. The largest marketplaces are the Sleep and Home

Respiratory Group, the Hospital Group, and the International Group. Each group also has a

complete understanding of their markets. This decentralized business structure helps to ensure

that the Company’s resources are channeled to efficiently meet specific market in sleep

disordered breathing marketplace. They are massive buyers and have constant need of

product. The buyers do not use backward integration. Buyers’ switching costs are low, but

they are unlikely to switch to other.

Existing rivals competitive capabilities analysis

A threat for Respironics was the company’s two major competitors: ResMed and Fisher

Paykel Healthcare. ResMed’s competitive strategies consisted of branding, and the reliance on

clinical literature to tell where the market was headed. ResMed’s innovation and worldwide

distribution prowess gave the company an international competitive advantage. For instance,

in 2006, ResMed sold products in 68 different countries through a combination of wholly

owned subsidiaries and independent distributors. ResMed was poised to gain market share

because of the company’s reliance on clinical literature. For example, through clinical

literature, ResMed created devices for hypertension and diabetes patients, which expanded the

company’s target market. Moreover, 83% of individuals with hypertension who had SDB, and

80% of type two diabetes patients invested in the medical devices.

ResMed posed a major threat for Respironics. Respironics base was bigger in the U.S.,

but outside the U.S. ResMed was twice as big in the sleep business, and the company’s

growth rate was twice Respironics. ResMed’s strategy for increasing sales and market share

were to collect information from clinical literature and expand the market for the medical

devices by introducing new products. The sleep disorder business was growing because of the

increased awareness and improved understanding of sleep disorders. Therefore, ResMed had

the flexibility to make major strategic changes. ResMed was located worldwide, which gave

the company a competitive advantage over Respironics. ResMed had the opportunity to

dominate the industry internationally.

The other major competitive threat for Respironics was Fisher Paykel Healthcare.

Fisher’s competitor strategies involved increasing inventory and putting measures in place to

ensure help with the severe acute respiratory system pandemic (SARS). Fisher Paykel

designed humidifiers for individuals diagnosed with SARS, and the products boosted the

company’s profits by millions. Infant care products also contributed to the increase in profits.

Fisher’s products were sold in more than 90 countries, which put the company at considerable

exchange rate risk. Although Fisher Paykel was global, the company had the smallest revenue

when compared to ResMed and Respironics. Fisher Paykel Healthcare was a concern for

Respironics; however, the company did not pose a major threat. Fisher also faced competition

in the company’s international market because ResMed was worldwide as well.

Key Success Factors

Technology is one of the most important key success factors for the industry. The

medical industry is constantly changing and companies are coming up with new technologies.

Therefore, scientific research and expertise is beneficial to a company seeking to enter the

industry. The only way for companies to keep up with the new advancements is through

research and development.

It is a competitive advantage for a company in the industry to invest in scientific

research and expertise. Product innovation quality is a key success factor for the industry

because research and development are continuously changing. For example, when medical

scientists come out with new developments related to the industry, companies have to alter the

production of the devices in order to satisfy the new findings. In order to compete, companies

in the industry must change the quality of the product.

Internet expertise is a key success factor because the internet offers companies in the

industry a channel of communication. Moreover, there are several different jobs involved in

an individual company within the industry, such as engineers, manufacturers, clinical staff,

quality staff, marketing employees and purchasing agents. The internet is a way for the

stakeholders to communicate efficiently and effectively.

Manufacturing is a key success factor for the industry. Manufacturing flexibility is

important because it is crucial that companies within the industry have several suppliers.

Having several suppliers eliminates an excess amount of inventory, which saves the company

money in the long run. Also, supplier agents are willing to step in quickly because of the

importance of the medical devices. Manufacturing quality is particularly significant for

companies in the industry. Medical devices are produced with precaution because customer’s

lives depend on the quality of the product. Companies are responsible for assuring quality in

the industry by hiring quality assurance inspectors and also customizing test fixtures.

Developing ways to ensure quality is advantageous to the company in the long run, financially

and for the company’s reputation, and also eliminates lawsuits and recalls before the devices

leave the assembly lines.

When focusing on skills within companies in the industry, workforce talent is especially

important. Workforce talent is a key success factor because companies in the industry want to

guarantee the products developed are dependable and safe for customers to use. Training

employees is tremendously important for workers in the industry because people’s lives are

directly reliant on the devices. It is profitable for the workforce to be well-rounded, in which

workers are able to perform numerous job tasks and develop different skills among operators.

Quality control is another key success factor because companies in the industry work to

ensure high quality. Quality is imperative for the industry mainly because people depend on

the devices to survive. Developing trustworthy products with high quality prevents the

company from lawsuits and recalls.

A key success factor important to the industry is image and reputation because

companies in the medical field are dealing with other people’s health. It is important for the

image and reputation of companies in the medical industry to be reliable. Moreover,

companies in the industry want to eliminate recalls as much as possible by increasing quality.

Another key success factor is the access to financial capital, particularly for research

and development. Research and development is an essential aspect in the industry because of

the constant medical changes and advancements. Also, capital is necessary for the ability to

hire skilled workers educated in the medical field to help develop innovative products.

Lastly, patent protection is a growing key success factor. Patent protection is a way for

companies to protect the development of new technologies beneficial to the industry.

Furthermore, a company with a technological development which is protected has an

advantage over competing companies because rivals are unable to use the new development.

Critical issues the industry faces

There are possible surgeries that provide long-term benefits that relieve the side effects

of the sleep and respiratory disorders. However, the surgeries do contain risks, pre and post-

surgery complications may arise. An alternative to these surgeries are certain medical devices

(CPAPS) that have been developed. These are a less invasive and safer way to relieve the

symptoms from sleep and respiratory disorders providing a more comfortable life to patients.

This is a positive issue facing the industry due to the advanced number of people developing

sleep disorders. While it had a negative impact on the patient, there is a need for treatments

which creates a positive influence for the industry.

The advancing technology is a critical issue that the industry faces. Research and

development is an important factor in this advance. There are more enhanced technologies for

the equipment and procedures available for the industry. It is imperative for companies to use

these advancements to improve development of new products or services provided to

customers. The medical industry field is progressive and has the need to be cutting-edge and

elite in the ideas created to improve the health of their market. In the sleep disorder segment,

there needs to be research involved both medically on the disorder and in the products that are

going to help with that particular disorder. Investing in R&D is one way a company can gain

an advantage in the industry over another company that has gathered less information on the

advancing technologies available to market.

The medical industry field is an elite area of production. There are high barriers to enter

because it is a niche market. The companies in the industry need to have progressive products

to offer that are effective for the solution of the medical issue faced by the patient. The rules

and regulations that need to be followed are imperative to abide by due to the nature of the

industry. There are also high costs associated with remaining in the industry. The products

developed are high priced for this niche market which means the cost of production is also

high. A company requires high capital to enter or remain in the industry.

Although the number of potential buyers is increasing, the companies must compete for

potential buyers to obtain revenues in order to remain in business. This can be a challenge for

companies attempting to enter the market or stay in the industry.

Respironics Inc. Competitive Capabilities

Business Strategy

Respironics’ overall business strategy is broad differentiation. This strategy calls for the

development of a product that offers unique attributes. The unique attributes must offer value,

either real or perceived to the buyer.

Functional Area Strategies

Under a differentiation strategy companies should be utilizing face to face selling as a

sales strategy. Respironics sleep area sales representative sell diagnostic equipment and

services over the phone, while hospital group sales representatives sell ventilators to

pulmonologists face to face.

R&D department primarily focused on new products, including major enhancements to

existing ones. This accounted for forty to fifty percent of sales in every two year period.

Respironics invested approximately six percent of annual revenues into research and

development.

The company’s manufacturing and assembly facility used demand flow technology

(DFT) to assemble electromechanical devices. Assembly lines were developed so that

multiple products could travel along them. The implementation of DFT resulted in 400% unit

volume increase and component inventory reduced by 60 to 70 percent. Despite the improved

process for applying adhesive in 1995, Respironics voluntarily recalled several of its products.

In 2006 the company recalled 172 thousand humidifiers that had been in use for three to five

years at a cost of $5 million.

Respironics’ basic organizational structure consists of three groups; each with its own

separate business units: Sleep Group, Home Group, Hospital Group, and International group.

Both the Sleep Group and Hospital Group have their own sales forces. The Sleep group sells

diagnostics equipment and services to sleep clinics, and the Hospital Group visits the ICU of

hospitals, selling breathing devices.

Respironics acquired competitors in the sleep equipment therapy market and respiratory

market. The series of acquisitions has increased Respironics’ product line. For example, the

EverGo, a portable oxygen concentrator, was added to Respironics product line in 2006 in the

acquisition of OxyTec. In 1998 Respironics bought Healthdyne Technologies for $337

million in stock and $38 million in assumed debt. Healthdyne manufactured monitoring

devices for newborns and therapeutic devices for sleep apnea and other respiratory disorders.

Assessment of Respironics strategic performance

Currently, Respironics sales strategy is a weakness. Respironics’ year to year growth

rate in sales is declining, from a 21% increase in 2004, to 20% in 2005 and 15% in 2006. The

company needs to align the sales strategy with the business strategy in order to add value to

customers.

Respironics research and development department continually introduces new

marketable technologies and products to the market. Respironics’ R&D functional area

strategy is strength to the company. However, improvements could be made by following the

lead of competitors. ResMed’s investment into clinical literature has enabled them to expand

the market for CPAP devices. The literature suggested that CPAP devices could help diabetes

patients manage glucose levels.

Respironics quality control measures are an internal weakness. Despite added quality

control training, Respironics voluntarily recalled several of its products in 2006, costing the

company millions of dollars.

Successful acquisitions are strength of Respironics’. Through the process of successful

acquisitions the company has grown and expanded its product line.

Resources

Respironics developed a set of core competencies to support its vision and

organizational structure. The three competencies were: teaming, market foresight and learning

agility. Respironics holds a completive advantage in the industry. The company named

Harvard Medical school professor of sleep medicine, Dr. David P. White as its chief medical

officer. Dr. White wanted to redefine the sleep industry. This competitive advantage put

Respironics a step ahead of competitors.

Value chain

Respironics had reduced costs of carrying inventory by implementing demand flow

technology. This technology meant that employees made products only based on orders

received.

The company purchases from many suppliers. One suppler utilized a kanban system to

deliver printed circuit boards to Respironics’ assembly facility on an as needed basis.

The company has an international group that provides the selling of the devices to Asia,

Pacific, Middle-East and Africa. Domestic sales representatives utilized phoning and face to

face selling.

Assessment of Respironics Inc. Financial performance & capabilities

Respironics started with $13 thousand in capital in 1976 which was raised from angel

investors. Now, Respironics exceeded the $1 billion mark in revenues for the first time, as

well as had $260 million in cash and marketable securities to pursue new market

opportunities. With the financial success Respironics had there was still concern with the

price fluctuation in Respironics’ stock price as well as the steady decline in the domestic sleep

therapy equipment market share. In 1998, Respironics acquired Healthdyne Technologies,

Inc. for $337 million in stock and $38 million in assumed debt. Since 2001, Respironics sales

had grown by at least 15% and net income had risen from $84.4 million in 2005 to $99.9

million, giving Respironics two awards for market leadership, one in the sleep diagnostic

device market and the other in the positive airway pressure devices market.

Respironics invested about 6% of annual revenue in research and development (R&D),

which compared to other competitors was slightly better. Respironics also funded other types

of research activities such as, educational and charitable activities, and invested $1.5 million

in the company’s foundation. Another concern Respironics had was the recall of humidifiers

which cost the company $5 million, and also had to hire a firm to handle the collection

process. In the sleep and respiratory market Respironics was using the sufficient capital of

$260 million to acquire a couple of companies as well as create new products. Mini Mitter

Company was first acquired by Respironics for $10 million in cash, and from the acquisition

Respironics developed ventilator-related products which increased global hospital ventilation

sales up 15% from 2005. OxyTec Medical Corporation (OxyTec) was than acquired by

Respironics for $10.4 million, but there was room for provisions up to $30 million depending

on the operating performance in future years. Respironics also acquired Profile Therapeutics

for approximately $44.6 million to help deliver not only oxygen to patients, but also deliver

the drugs needed for the patients.

Respironics does not rely on being a “highly debt-leveraged firm” and does a good job

with collecting receivables in a short amount of time to turn the cash received into additional

sales. The problem Respironics had was the money used to fund operations was greater than

the money received from the operations; also Respironics does not receive a sufficient

proportion of money from each dollar of sales.

Strategic issues facing Respironics

Respironics strongly presents the company's vision to be the worldwide leader for the

sleep and respiratory markets. The large market creates low barriers to current medical device

companies, and forces a threat upon Respironics. The vision and organizational structures:

teaming, market foresight, and learning agility will assist in the success of the vision.

Furthermore, the addition of a substantial mission statement will further provide information

to current and potential buyers.

Respironics had an opportunity to become a partner with Phillips, a mutual business

interest. However, Respironics wanted to remain an independent company and was not

interested in a business combination or acquisition.

By becoming the manufacturer for Phillips, Respironics will no longer be an

independent company. Changes to the overall business structure would change and success as

an independent company would not be present. If the offer is accepted, Repsironics will rely

on Philips for the manufacturing of the products, while expanding the distribution of the

product line CPAPS and C-Flex Technology.

Respironics needed to assess the Medicare guidelines which threatened the expansion of

sales in the U.S. Stardust was a popular product in France which patients wore on his/her

chests and the device recorded physiological data while the patient slept in his/her own home.

Respironics could not market the product in the U.S. because patients and clinicians could not

get medical reimbursement. Respironics also was competing for the non-ResMed

international market share. Respironics held 32% market share while ResMed held 50%

market share. ResMed’s investment in clinical literature was the reason for the company’s

international dominance.

Respironics had the opportunity to take advantage of an increased number of

individuals with sleep and respiratory disorders because of the aging population. The baby

boomers (born between 1946 and 1964) were eager to maintain active lifestyles. The

increased number of individuals who smoked was another opportunity for Respironics to

supply efficient breathing devices to the respiratory market. The decrease of liability suits was

another strategic issue the company faced. Respironics recalled 172 thousand humidifiers

which cost $5 million. In 1997, Respironics was being sued by ResMed for patent

infringement. Acquiring new potential acquisitions was another strategic issue the company

faced. Potential acquisitions for Respironics must fit strategically and financially. For

financial fit, Respironics calculated net present values to pay back, dilution and accretion.

Management values

Respironics’ board members had concluded Respironics needed a leader with strong

sales and marketing skills as well as strong personal skills who relates to healthcare

professionals, salespeople and customers. Hiring James Liken as CEO and John Miclot as

president of Respironics showed strong and effective management. John Miclot succeeded

James Liken as CEO and now the values were even stronger. Chief Strategic Officer, Craig

Reynolds and Chief Medical Officer, Dr. David P. White made the management values start

to drive Respironics’ organizational culture. Respironics’ management values started from the

top-down and the characteristics of the management is what Respironics needed.

The ability for Miclot to communicate effectively and efficiently with others as well as

have the confidence and decisiveness to deal with strategic issues the company faceed really

had a positive effect throughout the company. The credibility of Dr. David P. White was an

important value which Respironics board members was looking for. Miclot, Reynolds, and

White all had integrity, respect for others, and personal resolve as tools which the 3

implemented throughout Respironics. The most important value each one had was personal

humility, where each one would not think of themselves less but think less of themselves.

Organizational culture

The organizational culture relates specifically to the employees working for the

company. Respironics provided extensive benefits and cared a great deal about how the

employees were being treated within the organization. The need to express the vision to

customers was as highly important for the organization itself as the employees. Happy

employees make for a healthy organization. The more the employees were enthusiastic about

Respironics and what they stand for, the energy will transfer into the production of products

and the outreach to the customers and potential buyers.

With 47 hundred employees at the closing of 2006, Respironics genuinely cared about

the well being of their workers. Respironics reminded the employees to drink enough water,

to take walks outside and to take vitamins to remain healthy. There were many benefits for the

employees including; fitness centers, medical and dental, education reimbursement, stock

options and other critical options for the happiness of their employees. Respironics also

believed in internal entrepreneurship within their functional group areas.

Respironics consisted of three basic function areas. There was the Sleep and Home

Respiratory Group which held a focus on the patient and their area of treatment. There was

also the Hospital Group, which also determined the area of treatment for the patient. The sales

associates associated within these groups focused their marketing towards the sleep clinics,

home care or hospital organizations to sell the products available. There was also the

International Group, which accounted for three regions; Asia and the Pacific, Europe and the

Middle East and Africa and the Americas (which consisted of South America and Canada).

The sales associates within this group sold to approximately twenty-five countries.

Respironics believed in many values along with their vision statement. Some core

values mentioned were; the focus on driving the success of our customers and they believed in

the hiring of the best people, retain the best people and accept no less. Respironics also

believed in the allocation of resources to achieve the objectives of the company while

maximizing the shareholder value and reiterate social responsibility within the organization

and industry.

The continuation of the positive organizational structure within Respironics is a key strength

and opportunity to grow further in the sleep and respiratory disorder industry.

APPENDICES

A. SWOT Matrix

B. Stakeholder Matrix

C. Financial Ratios (see attached Excel document)

D. Financial Trend Graphs (see attached Excel document)

E. Budgets and schedules associated with the recommendations

F. Responses to questions asked during presentation

Opportunities:

Increased knowledge of Sleep Disorder

Selling Respironics to Phillips

Potential Acquisitions

International Potential

Increased number of people with Sleep

Disorders as the average age increases

(Respiratory market increases)

Increased international market (more

people smoke overseas)

Threats:

RESMED’s market share increased

RESMED has two times the annual

growth rate outside of the U.S.

Product liability lawsuits because of

recalls

Medicare guidelines preclude

Strengths:

260 million in cash

Respironics also has securities

Demand flow technology – product only

based on orders received (saves

company money)

Research and development continually

introduces new marketable products and

technologies

Weaknesses:

Not adding value through marketing

Stakeholder matrix

STAKEHOLDERS SPECIFIC

COMPANIES,

GROUPS &

INDVIDUALS

TYPE/ NATURE

OF THE

RELATIONSHIP/

WHAT WE DO

NEEDS HOW WE

SATISFY

THOSE

NEEDS

Customers

Patients with

sleep and

respiratory

disorders

Hospitals

Provide respiratory

system to help with

breathing & sleep

To live

comfortably

To sleep and

breathe

CPAP, Masks,

C-Flex design

Competitors

ResMed

Fisher &

Paykel

Employees

Sleep Group,

Home Group,

International

Group

Reflects the

locations of patient

diagnosis and

treatment.

Selling

respiratory

product line to

various

locations.

At sleep clinic,

home or

hospital.

Provide

systems to

patients

suffering.

Shareholders

Customers in

Industry

Investors

Community

Raise

awareness

Community

relations

Providing goodwill

Simulation

programs to

provide

awareness

Strategic

Alliances

Philips,

Healthdyne,

Consumer

Health Care

Meet with Philips

to discuss potential

future

Maintain

relationships

Financial trend graphs

All three company’s assets are financed more through equity rather than debt.

Respironics strengths are not relying on being a “highly debt leveraged firm.

The graph shows how much debt each company has compared to their assets. A ratio

greater than 1 means a company has more debt than assets. All 3 companies have less debt than

assets. Respironics strength is keeping their long term debt relatively low while having sufficient

amount of assets.

0

0.05

0.1

0.15

0.2

0.25

0.3

2003 2004 2005 2006

Years

Debt to assets ratio

F & P

ResMed

Respironics

0

0.002

0.004

0.006

0.008

0.01

0.012

2003 2004 2005 2006

Years

Long term debt ratio

F & P

ResMed

Respironics

The graph shows all 3 company’s either operate on a cash basis or the extension of credit

and collection of accounts receivable is efficient. Resipronics strength is by maintaining

accounts receivable the company is indirectly extending interest-free loans to their clients.

The graph shows F&P takes the longest to collect their receivables meaning most likely

F&P are selling their product on credit and taking longer to collect money. Where ResMed and

Respironics both collect money in a shorter amount of time. Respironics strength is by taking a

shorter time to collect money owed to them, they can put the cash into use again, by ideally

making more sales.

0

1

2

3

4

5

6

7

2003 2004 2005 2006

Years

Receivables turnover

F & P

ResMed

Respironics

0

20

40

60

80

100

120

140

2003 2004 2005 2006

Day

s

Years

Days' sales in receivables

F & P

ResMed

Respironics

F&P takes longer to collect receivables in 2003 and 2004, and ResMed takes longer to

collect receivables in 2005 and 2006. By not collecting receivables in a short amount of time

like Respironics does, F&P and ResMed cannot turn their receivables into cash as fast.

Respironics strength is turning their receivables into cash faster than their competitors.

The graph shows F&P generates more sales from operations than funding their operation,

while ResMed and Respironics do not do as well. Respironics weakness is they use more money

to fund their operations compared to the sales they make from their operations.

0

20

40

60

80

100

120

140

2003 2004 2005 2006

Day

s

Years

Average collection period

F & P

ResMed

Respironics

0

1

2

3

4

5

6

2003 2004 2005 2006

Turn

ove

r

Years

Net working capital turnover

F & P

ResMed

Respironics

The graph shows how effectively these companies generate net sales from fixed assets.

Respironics strength is effectively generating more net sales from fixed assets than their

competitors.

The graph shows the amount of sales generated for every dollar’s worth of assets for each

company, the higher the turnover the better. Respironics strength is the high amount of sales

they generate from their assets; this also tells us the effectiveness of a company’s pricing strategy

because if a company has a high asset turnover then their profit margin is smaller. Respironics

other strength would be their pricing strategy.

0

0.5

1

1.5

2

2.5

3

3.5

2003 2004 2005 2006

Turn

ove

r

Years

Fixed asset turnover

F & P

ResMed

Respironics

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2003 2004 2005 2006

Turn

ove

r

Years

Total asset turnover

F & P

ResMed

Respironics

The graph shows the proportion of money each company makes from every dollar of

sales. F&P and ResMed have high margins which is good. Respironics weakness is they don’t

receive a good proportion of money from each dollar of sales.

The graph shows how much out of every dollar in sales each company keeps in earnings.

The higher the percentage the better, so F&P and ResMed keep more in earnings from each

dollar of sales. Respironics weakness is for every dollar in sales they keep very little of the dollar

in earnings which indicates they are not a profitable company and does not have good control

over their cost compared to their competitors.

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006

Pe

rce

nt

Years

Operating profit margin

F & P

ResMed

Respironics

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006

Pe

rce

nt

Years

Net profit margin

F & P

ResMed

Respironics

The graph shows how profitable each company is with the money the shareholders

invested. F&P is very profitable from the investments of shareholders over Respironics

and ResMed. Respironics weakness is not generating enough profits from shareholders

investments which make the shareholders very unhappy.

The graph shows how much profit each company gets from the assets they have. F&P

has a great return and gets more money for their assets. Respironics weakness is they are

not getting a sufficient amount of return from their assets.

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006

Pe

rce

nt

Years

Return on equity

F & P

ResMed

Respironics

0

5

10

15

20

25

30

35

2003 2004 2005 2006

Pe

rce

nt

Years

Return on assets

F & P

ResMed

Respironics

The graph shows how much of the company’s profit is allocated to each outstanding

share of common stock. Respironics allocates the most profit to their outstanding shares of

common stock. Respironics strength is showing how profitable they are through their

outstanding shares of common stock.

Respironics, ResMed and F&P all display current ratios above 1. This indicates that all

three companies have good short term financial strength and posses adequate resources to pay

debts over the next twelve months.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003 2004 2005 2006

Years

Earnings per share

F & P

ResMed

Respironics

0

1

2

3

4

5

6

2003 2004 2005 2006

Years

Current Ratio

F & P

ResMed

Respironics

The quick ratio is an indicator of a company’s ability to meet its short- term obligations

with its most liquid assets. Companies with higher quick ratios are in better financial positions.

In 2006 ResMed displays a higher quick ration than Respironics.

The above graph depicts total debt ratios for Respironics and two major competitors. The

total debt ratio indicates what proportion of debt a company has relative to its assets. All three

companies have ratios below 1, indicating that they all have more assets than debt.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2003 2004 2005 2006

Years

Quick or Acid test ratio

F & P

ResMed

Respironics

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

2003 2004 2005 2006

Years

Total Debt Ratio

F & P

ResMed

Respironics

This liquidity ratio can determine if, and how quickly, the company can repay its short

term debt. When looking at 2006 ratios for the three companies, we can conclude that

Respironics will be able to pay its short term debt; however, ResMed displays a stronger cash

ratio. R&P’s ratio is drastically falling, timely payments to obligations is questionable in this

situation.

The above graph shows inventory turnover for the three companies. This ratio displays

how many times a company’s inventory is sold and replaced over a period. This is a strength for

Respironics, the company has turned over inventory 3.812 times.

0

0.5

1

1.5

2

2.5

3

2003 2004 2005 2006

Years

Cash Ratio

F & P

ResMed

Respironics

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2003 2004 2005 2006

Years

Inventory Turnover

F & P

ResMed

Respironics

All three companies display positive net working capital, meaning they are able to pay

off short term liabilities. This graph measures the three companies ability to cover its short term

financial obligations.

This graph represents the number of days an item is held as inventory before it is sold.

The lower the day inventory, the more efficient the company is. Respironics is stronger than

both competitors in this category. Respironics held inventory in 2006 for 95.75 days compared

to ResMed at 184.31 days and F&P at 99.74.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

2003 2004 2005 2006

Years

Net working capital to total assets

F & P

ResMed

Respironics

0

50

100

150

200

250

2003 2004 2005 2006

Day

s

Years

Days' Sales in Inventory

F & P

ResMed

Respironics

All of the companies display positive net working capital. Similar to net working

capital/total current assets, this graph measures the company’s ability to cover financial

obligations. An increasing working capital to assets is usually a positive sign, showing the

company’s liquidity is improving.

This graph assess the company’s financial health by revealing the proportion of money

left over from revenues after accounting for the cost of goods sold. Gross margin serves as the

source for paying additional expenses and future savings. Respironics is weak in this area.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2003 2004 2005 2006

Years

Net working capital/current assets

F & P

ResMed

Respironics

0

10

20

30

40

50

60

70

80

2003 2004 2005 2006

Pe

rce

nt

Years

Gross Profit Margin

F & P

ResMed

Respironics

The Equity multiplier ratio is a way of examining how a company uses debt to finance its

assets. A higher equity multiplier indicates higher financial leverage, which means the company

is relying more on debt to finance assets.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2003 2004 2005 2006

Years

Inventory to net working capital

F & P

ResMed

Respironics

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003 2004 2005 2006

Years

Equity multiplier ratio

F & P

ResMed

Respironics

Responses to questions not answered in the presentation

Why is ResMed growing dominancy and why is Respironics losing market share?

ResMed invests more in clinical research. By investing more in clinical research,

ResMed is able to develop innovative products, and make improvements on the current product

line, specifying specific health problems (diabetes). ResMed focuses on clinical literature,

assisting with the market direction, opening more opportunities of target markets while

expanding Redmeds market size and segments. By using the CPAP technology for other health

issues, ResMed is able to attract more customer and distributors. Furthermore, the clinical

literature is improving the success of ResMed, growing dominance internationally.

Respironics lacks clinical research, not providing certain products to specific health

factors. The overall product line for Respironics focuses strictly on sleep and respiratory devices

(CPAPS, surgical masks, ventilators, and oxygen concentrators). The product line serves

patients suffering only from sleep and respiratory diseases. Respironics lacks R&D

internationally, resulting in a decrease in market share.