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Key Points of Emphasis for Portfolio Management
While the potential for recession lingers, there’s still time to reassess business performance and innovation investment projections. One industry expert offers suggestions for those in the med-tech industry.
January 10, 2024
8 Min Read
Image Credit: Sviatlana Zyhmantovich via iStock/Getty Images
The current extended economic downturn occurring in the United States and globally continues to produce uncertain market projections. Although 2023 came to a close with the U.S. rate of inflation being down six percentage points from its 9.1% peak, the threat of a recession in 2024 remains real.
Although the medtech industry might seem somewhat “recession proof” regardless, the reality of the situation is that an unreliable sense for the economic future is the standard today. According to Noel Sobelman, partner at Accel Management Group, a US-based consulting company, as demand for products and services potentially slows amid persisting supply chain challenges, pressure on healthcare costs, and a decline in hospital spending med-tech companies need to revisit their innovation investments.
“Now is the time to act fast, make the required strategy changes, and thoughtfully rationalize and rebalance your development portfolio,” said Sobelman, who has 25 years of experience working with industry professionals in the areas of growth strategy, innovation capability building, portfolio management, organizational design, ecosystem development, and digital enablement. One who has also been widely recognized for bringing a practical and applicable approach to companies looking to ignite change, Sobelman will present the information session “Rationalizing the Medtech Development Portfolio in the Face of a Downturn” at MD&M West in Anaheim, CA, on Feb. 7.
The presentation will cover practical tips to “right size” a med-tech development portfolio. Sobelman recently spoke with MD+DI to discuss his session as well as the overall state of the industry. What follows is a Q&A from the conversation:
There seemingly isn't anyone who’s unaffected by the ongoing economic downturn - but what do you see as the most significant unique consequences being experienced by the medtech industry?
Sobelman: “Most companies have made a shift in strategy from growth to productivity. Medtech companies no longer prioritize projects solely on revenue potential or net present value when deciding how to allocate investment. Productivity metrics that look at ‘bang for the buck’ now take center stage. This means tilting the scales in favor of those projects that utilize fewer resources, such as shorter-term initiatives like a product line extension or adding functionality to an existing business model, and, for the time being, throttling back on projects that will take three or more years to produce a return, such as new business models, implementing a new technology, or going after a new market or new market segment. With the longer-term initiatives there is higher uncertainty. You’re dealing with the unknown versus the known, which takes longer to validate that there will be a winning solution. That’s the big difference.”
“It’s not that companies are spending zero on long-term projects, but the portfolio mix has changed. That’s the key point. And until the economy gets better, companies should focus on the more predictable opportunities and projects. It’s all about having more predictable and shorter-term returns while waiting for the good times return.”
What are the most significant signs for today’s medtech companies that there should be changes made to their business strategies given the current economic climate?
Sobelman: “Where you play and how you win with innovation has likely changed. There are market trends or shifts in customers’ buying behaviors that can be identified. Some obvious examples include inflation, which is putting pressure on healthcare costs, a decline in hospital spending, and continued supply chain challenges.”
“A less-obvious example might be if you have a product line that produces a solution for an elective surgery. If there’s pressure on spending, the elective types of procedures or therapies are going to be put on the backburner for the consumer and they will prioritize things that are more necessary. When the coronavirus pandemic hit, many elective surgeries were put on hold because it was uncertain when we would come out of the pandemic. Many device companies that offered products or solutions for elective surgeries took a hit during the pandemic. They learned to shift their strategies in favor of product lines that are more recession-proof.
“The point is that you have to revisit your assumptions about what is happening in the market from time to time. Some things are more predictable than others. When you enter into tough economic conditions, you want to revisit your assumptions, which might trigger some changes in how you allocate your investments for new product development. This dynamic capability has never been more important given the accelerated pace of change in today’s markets.”
What is a good strategy for conducting a reassessment of assumptions?
Sobelman: “I encourage my clients to start with a scenario-based assessment of market conditions. Agree on a time horizon, talk to your largest customers, assess the macro- and micro-economic impact and health of your target markets, and project a best-case and worst-case economic downturn recovery timeline. Determine which market changes will be temporary and which will remain after a recovery. We are not talking about a multiple-week, consensus-building exercise here; we are talking about days. You’ll need to be comfortable making decisions with countless economic unknowns.”
How has the impact of the current economic downturn affected this industry compared to other periods of economic downturn?
Sobelman: “The current economic downturn has put continued pressure on healthcare costs along with a decline in hospital spending and continued supply chain challenges.”
What has been similar and what has been different based on previous times of economic downturn?
Sobelman: “When you combine these conditions today with rapidly changing technology, we find ourselves in an environment with more uncertainty than ever before. One obvious example that is in the hype cycle is artificial intelligence (AI). AI use cases are opening up opportunities for solutions that were not thought of before, especially in areas like diagnostic equipment, for example, radiology. Use cases with validated value impact how you allocate your investments in a portfolio.”
Is technology causing any unique complications and/or benefits when considering the economic downturn and what tends to happen during times like this?
Sobelman: “The pace of change of technology is faster than ever before. You need to revisit your investment allocations and your portfolios today more than you have in the past because market conditions and technological advancements are changing so quickly. It doesn’t cut it anymore to plan your portfolios once per year and then review performance at the end of the year, because markets change throughout the year. There might be a new technology or a change in market trend. You have to be more dynamic than you ever have been before.
What are some trends that you believe will continue or will develop in the near term related to the management of med-tech development portfolios?
Sobelman: “Common symptoms of poorly managed portfolios include:
chronically overloaded development pipelines
resource bottlenecks in functions such as quality, regulatory affairs, and supply chain
a mismatch between growth ambition and development investment
incrementalism or investing in a disproportionate amount of small, safe projects
underfunding exploratory work needed to identify high-potential, longer-term solutions
frequent late-stage surprises and project slips.
“These poor practices are exacerbated during tough times with high market uncertainty.”
As technology continues to evolve at a rapid pace, what are some signs of a well-managed portfolio given the sophistication of devices today?
Sobelman: “A well-managed portfolio brings step-change performance improvement to companies looking to accelerate growth and productivity. Dynamic portfolio management is characterized by continuous, real-time decision-making using up-to-date data that is available for analysis whenever and wherever it is needed. Instead of being captured manually on disconnected spreadsheets, project data from across the organization is captured in a common portfolio management system that integrates a consistent set of strategic portfolio management, resource management, idea management, product line management, and project management reporting and analysis tools.”
“When performing well, portfolio management discipline: 1) insures alignment between strategy and funded projects in the innovation pipeline, 2) optimizes resource loading for priority projects to maximum value creation, 3) explores alternative scenarios to optimize investment within and across opportunity areas, 4) establishes clear project priorities for maximum development throughput, and 5) ensures appropriate balance of projects by innovation type, strategic priority, geography, and risk profile.”
What are some strategies today for keeping portfolios varied and profitable at the same time?
“The most successful portfolios have defined investment targets for each growth horizon, innovation type, product mix, strategic priority, and geography. At its core, portfolio management is about ensuring alignment between strategy and funded projects. This is not a one-time exercise at annual planning time. The pace of change in med-tech markets and rapidly advancing technologies require continuous, real-time decision-making throughout the year.”
What do you suggest when it comes to maintaining the size of one's portfolio? Are you seeing more of a committee approach to portfolio management today?
Sobel: “In global, multi-billion-dollar med-tech companies, some with business units that would make the Fortune 500 list, it is important to distinguish between corporate portfolios (collections of business units), business unit portfolios (collections of new venture initiatives and core business projects), and product lines (platform, brand, or franchise derivatives and line extensions). Each tier in this corporate hierarchy has its own unique governance mechanisms with different decision objectives and decision-makers. When operating at this scale, I advise our clients to manage the portfolio at the level in which project resource allocation decisions are made using a cross-functional leadership model where leaders are not afraid to make the tough decisions or confront short versus long-term tension. It is important to govern with leaders who are closest to the markets that their product lines serve so that they can more readily adapt to changes in customer needs and buying patterns.”
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