Northwell Inc.
When Northwell’s Senior Management and Board first gave Claudia the leadership role in the
development of a virtual medical product and service mall with Medichek, a year and a half ago,
she was delighted. She and Nathan Daniels (V-P Marketing) had uncovered the opportunity,
Medichek was an excellent organization, and it had been clear that this was a venture well worth
embracing. Claudia Leung, CFO of Northwell, had an excellent working relationship with senior
management at Medichek. Since Northwell’s major contribution in the shorter term would be
cash ($7.5 million as of now), she was the ideal candidate for the assignment. The development
of this initiative would increase her entrepreneurial skill set and profile and looked to be a
manageable addition to her portfolio of responsibilities.
Claudia was beginning to wonder if this dream assignment was about to become a nightmare.
The project had run into technical problems, was 4 to 5 months behind schedule, and the Board
and Senior Management at Northwell were frustrated and putting pressure on Claudia to get
History of the Firm
Northwell Medical was founded 25 years ago, as the result of a merger between a Canadian and
US firm. Northern Medical, the Canadian partner, had specialized in durable hospital/medical
products, while Wellness Medical had focused on consumable hospital products. Both had
distributed their products in Canada and the U.S. for a decade prior to the merger, and had
shared marketing and distribution services for five years.
The actual merger announcement was anticipated and welcomed by most shareholders and
managers. There were some initial difficulties as structures, systems, processes, roles, and
reporting relationships were sorted out during the first year. By year three the merger was
viewed by both insiders and outsiders as a success. Market penetration and sales accelerated
while average costs declined (after accounting for one-time restructuring costs). Growth rates
agents, administrators and hospital user groups. In U.S. industry surveys of hospital suppliers,
Northwell regularly placed in the top 5 for quality, service, support, and overall customer
satisfaction during the two decades that followed.
Northwell Medical produced a wide range of medical products for institutional usage. Products
ranged from consumable patient supplies such as wound dressings, bandages, and disposable
surgical supplies to more durable products (e.g., IV units, walkers, canes). In addition to the
products it produced, Northwell used its sales network to distribute high quality, higher margin
Northwell’s production facilities were located in the US, Canada, and Mexico. The Canadian plant
specialized in products that involve metal fabrication (approximately 20% of total manufactured
products, 25% of sales and 30% of profits in the most recent year end), while the two US plants
manufactured both plastic and fabric related product (40% of manufactured products, 30% of
sales, and 15% of profits). The Mexican plant also produced plastic and fabric related products
(20% of manufactured products listed, 15% of sales, and 10% of profits). In addition, Northwell
sourced manufacturing services for some of its products in the Asia-Pacific area (10% of
manufactured products listed, 10% of sales, 15% of profits).
Over the years certain managers and board members had expressed interest in extending their
activities into foreign markets (Europe and Japan were the ones most frequently mentioned).
However, Northwell had shied away from these opportunities, due to concerns over their ability
to compete and the belief that there were more profitable growth opportunities available in North
America. Throughout the years, at the request of specific European firms they trusted, Northwell
had engaged in the export of a limited range of relatively unique products. For the most recent
year end, these accounted for approximately 5% of sales and 5% of the profits.
Marketing eight years ago. The changes succeeded in reducing costs in this area by 33%
through more careful screening and approval processes and tighter budget controls. However,
within two years of the change, most of the output from New Product Development was in the
form of incremental product improvements, and there was limited work underway in the area of
significant product innovations. In an effort to increase their productivity, new product
development personnel restricted their direct field involvement with sales personnel and clients.
The problem/opportunity finding role was delegated to marketing and sales personnel, who were
expected to forwarded project and product suggestions to the Product Development Approval
Team. The Director of New Product Development chaired this committee, with representation
from Sales, Marketing, and Finance/Accounting.
Exhibit 1 summarizes the financial results and performance over the last 4 years.
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Dollars
Northwell Medical
The Medichek Opportunity
Two years ago Northwell’s Senior Management Team received clear feedback that stockholders
were very dissatisfied with cost containment and market expansion activities. At that time, the
Board replaced the Vice Presidents of Sales and Manufacturing (the President was replaced in a
year earlier). All 3 appointments were from outside the organization – something unheard of in
the past. In addition, the Board instituted performance contracts with members of the Senior
Management Team. These performance contracts required the following improvements to be
achieved within a four year period: sales growth of 30% over levels in the most recent year; a
return on equity of 18%; a return to gross profitability levels that exceeded industry averages by
10%; 15% of sales coming from products introduced in the previous 4 years; and a return of
customer satisfaction levels to those achieved a decade earlier.
Shortly after being assigned responsibility for identifying growth opportunities, Nathan and
Claudia decided to meet with the senior management of Medichek. Medichek was an emerging
net-based U.S. firm, specializing in health care. They had been founded eight years ago, were
located in Dallas, were growing very quickly (200+% per year) and had 275 employees.
Medichek’s primary business was the design and management of Web sites for a number of
leading health care organizations (hospitals, nursing homes, pharmaceutical manufacturers and
distributors, medical product manufacturers), including Northwell’s (as of approximately 2 years
ago). In addition, three years ago, Medichek launched a subscription service that provided on-
While initially “put off” by Medichek’s approach, Nathan and Claudia quickly became fans, and
this enthusiasm extended to other members of senior management. Their work was fairly priced
by industry standards, but more importantly, their strategic approach to site design and
management resulted in customer accolades and industry awards in recent years. Sales and
marketing personnel responded favorably to Northwell’s new website, when it went live,
reporting positive customer reactions to its layout, content, and functionality. Though they still
felt that technology enabled customer support was lagging (e.g., electronic access to technical
training support materials), they viewed this as an important step in the right direction.
From the initial meeting on the virtual mall approximately two years ago, Medichek was clear that
it wanted to partner with Northwell in the development of this undertaking. They proposed that
the mall be established as an independent business unit and that Northwell and Medichek own it
equally. Northwell would commit to becoming a prime occupant in the mall and would supply the
needed development funds (estimated at $5 to $10 million). Medichek would develop the
necessary technology platforms, structure the services and pricing arrangements with mall
occupants, structure the entry criteria, and market the mall service. Medichek’s reputation would
prove very helpful here. They estimated that it would take a year to make this project a reality.
Nathan and Claudia were excited by this opportunity. It had the potential to significantly reduce
costs for both customers and suppliers and provide Northwell with opportunity to dramatically
extend its reach into foreign markets. Though quality competitor products would also be listed at
the mall, these were already readily available in the marketplace. More importantly, the mall
would be selective concerning who was allowed to be listed and exhibit. When combined with
new venture time to develop. They told staff that the new venture would increase the exposure
and reach of Northwell, thereby opening up new opportunities. Channels would not change
overnight, and staff was advised that Northwell would monitor things closely and help employees
adapt and transition into new roles, as needed. They were told that this was new territory for
everyone, so the keys were to be patient and open-minded, communicating information,
questions, and concerns in a timely fashion.
Claudia worked with the Medichek’s CFO to develop the business plan, projections and a Letter of
Understanding during April a year ago. Northwell’s Board was first informed of the possible
opportunity in January a year ago. In May, Northwell’s senior management team recommended
the partnership (as set out in the Letter of Understanding), to its Board. Medichek and Northwell
jointly signed the Letter of Understanding in June a year ago, with the first $2 million installment
of development support issued in June. Northwell’s managers were shocked (pleasantly) by the
speed of the approval process. Primary responsibility for managing the relationship with
Medichek was assigned to Claudia.
During the latter half of the previous year Medichek hired additional staff and proceeded with the
development work. By February of the current year Northwell had advanced $4.5 million in
development support. During this period Northwell had focused on shoring up it internal
operations and improving its profitability. By December of the previous year, products introduced
Personnel in sales and marketing expressed increasing concern over how their functions and
roles would be affected by the new venture and what would be the impact on their customers.
Nathan continued to tell them to relax while they were waiting to see how roles and functions
would need to adapt in the wake of the virtual mall. Though he couldn’t guarantee there would
be no job losses, he truly believed this new venture would open up significant new opportunities
and more meaningful customer relationships for many. In spite of these words of reassurance,
the number of voluntary resignations in these areas rose by 15% and there were rumours that
others were looking as well. Many of these resignations involved individuals viewed as high
performers. In addition, some distributors were also expressing concern and looking for
alternative lines of business to represent, in the event that they became redundant to Northwell.
were anxiously awaiting access to the new service. However, Medichek reported that the
development of the technological platform and related supports (in particular, the E-commerce
and security components) were proving more difficult than originally anticipated and that the
complete Mall’s formal launch was about 4 months behind schedule.
Claudia began to spend more time monitoring the pace of developments at Medichek. Monthly
visits became weekly. In May she requested bi-weekly reports on progress achieved, funds
expended, and the time allocations of the various project teams. These were very similar to the
reporting Northwell required from its own operations.
When Medichek reported continuing development problems in July, Senior Management at
Northwell voiced increasing dissatisfaction with the progress to date and asked Claudia to
recommend a course of action that would rectify matters.
Questions for Class Discussion
1. What are the management and strategic issues that Northwell face?
2. What are the opportunities, costs, benefits, and strategic implications of developing the
Internet site?
3. What decision would you make here and how would you implement your choice?