Viskaton Case study analysis for Marketing PDF

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Viskaton Case study analysis for Marketing. We are discussing it in class for short cycle analysis and long cycle analysis....

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Harvard Business School

9-596-087 Rev. February 1, 1999

“Well Gary, what do you think?,” asked Bernard Walsh former CEO of Vistakon and current Company group chairman of Vistakon’s parent company Johnson & Johnson (J&J). Bernie Walsh had been president of Vistakon from 1987 to 1993. During his tenure, Vistakon had grown from a specialty manufacturer with $20 million in annual sales to a market leader in the contact lens industry with over $250 million in annual sales. Gary Kunkle had succeeded Walsh in 1993 and the two were meeting in early 1995 to review the performance of 1 Day Acuvue contact lenses in the western regional rollout. The world’s first daily disposable contact lens, 1 Day Acuvue was designed to be worn for one day and then discarded. A national launch decision needed to be made, but based on the test market and the western regional results, there were lingering concerns regarding product positioning, pricing, promotion, advertising and trade support. Vistakon was an autonomous and highly entrepreneurial division in J&J’s renowned decentralized organization, and Gary Kunkle knew the decision was his to make. However, he also knew that J&J expected product excellence and market success. As Kunkle considered his options, he recalled a remark made by Walsh, We need to be careful that we don’t allow our past success to undermine our future growth. Big companies tend to be too cautious. Now that Vistakon has a major existing business to protect, it runs the risk of becoming overly analytical and moving too slowly.

The Eye Care Industry Approximately 146 million people in the United States required corrective lenses, with the number of lens wearers increasing slowly with the aging of the overall U.S. population. The need for corrective lenses created a market of approximately $15 billion in 1992. That expenditure consisted of an estimated $3.5 billion in fees for comprehensive eye examinations and $11.5 billion for optical supplies, exclusive of over-the-counter reading glasses and non-prescriptive sunglasses. The need for eye care arose from three major types of vision deficiencies. Nearsightedness, or myopia, and farsightedness, or hyperopia, were caused by deformities in the eye which made it difficult to focus incoming light waves upon the retina, the part of the eye responsible for sight. Vision correction refocused the light waves properly upon the retina, and was produced in “powers,” which measured the degree of magnification inherent in the vision correction. The third common condition, astigmatism, occurred when light rays met in two places in the eye, producing blurred, misshapen Professor Alvin J. Silk, Doctoral Candidate Bruce Issacson and Research Associate Marie Bell prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1

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Vistakon: 1 Day Acuvue Disposable Contact Lenses

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Vistakon: 1 Day Acuvue Disposable Contact Lenses

There were three types of vision correction options: spectacles (eyeglasses), contact lenses and corrective surgery. The latter option, using laser surgery to permanently correct vision deficiencies, was not widely available in the mid 1990s due to its recent FDA approval and high cost. Spectacles were the traditional and most common form of vision correction with 80% of the U.S. vision corrected population choosing that option. The remaining 20% of the population wore contact lenses. Eyeglass wearers purchased new spectacles about every 3-5 years and on average paid $110$150 per pair. Additionally, eyeglass wearers often had various optional treatments applied to their lenses, such as scratch resistant, ultra-violet light, and anti-reflection coatings. A contact lens was a plastic “eyeglass” (about the size of a person’s little fingernail), worn directly on the eye. The contact lens floated on a thin layer of tears on the surface of the cornea, the clear part of the eyeball in front of the iris. Contact lenses were made of either hard, rigid plastic or soft, flexible plastic. Standard hard lenses, which were introduced in the 1950s, were the least expensive form of contact lenses. Soft contact lenses, made from a porous, liquid-absorbing plastic, were generally more comfortable to wear than hard contact lenses. However, some vision deficiencies could not be addressed with soft lenses. Contact lens wearers tended to be in the 26-39 age group, and were younger than their spectacle wearing counterparts (Exhibit 1). Contact lenses were purchased primarily because consumers perceived they improved the wearer’s appearance. Participation in sports where glasses could be broken and the desire for better overall vision without glasses frames, were also important reasons for contact lens purchase. According to a study of 36,500 U.S. households, 87% of those who wore eyeglasses had never used contact lenses; 13% were “dropouts,” people who had previously worn contacts but had stopped. Of the contact lens population, 73% wore soft contact lenses, 6% wore hard contact lenses, and 21% wore other types of lenses including rigid gas permeable lenses. Over 80% of contact lenses wearers wore their lenses full-time (five or more times per week). Approximately 19% (3.9 million) of the entire soft contact lens market were part-time wearers who wore their lenses less than five days per week. There were many reasons that spectacle wearers never tried contact lenses. Approximately 20% of this population had eye conditions which prevented them from wearing contacts. The other common reasons cited for never trying contacts were cost (25%), procrastination (12%), and fear of contacts lenses (10%).

Soft Contact Lenses Soft contact lenses were prescribed either for daily wear or extended wear. Daily wear contacts were worn during the day and taken out for cleaning at night. By contrast, extended wear contacts were worn constantly for a one week period before removal. The maximum extended wear period approved by the Food and Drug Administration (FDA) was one week. Both extended wear and daily wear contact lenses were prescribed in one of three different “modalities” or replacement schedules: 1.

Eye care professionals (ECPs) recommended the replacement of conventional contact lenses every 9-18 months. The original soft contact lenses were conventional daily wear lenses that were taken out at night for cleaning, and once a week were subjected to a more extensive cleaning to reduce enzymes that built up on the inside of the lens. In 1981, the Food and Drug Administration (FDA) approved conventional lenses for extended wear. Conventional extended wear lenses were worn for one week before removal for cleaning. After being removed and cleaned they were re-inserted. Although ECPs recommended that conventional lenses be replaced after 9-18 months, many patients wore their lenses until they became unusable due to discomfort or a tear in

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images. Cylindrical lenses corrected for this condition. Eye care patients commonly required different powers for each eye irrespective of the reason for vision correction.

Vistakon: 1 Day Acuvue Disposable Contact Lenses

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the lens. While some patients wore their lenses for 9-24 months, the average patient replaced their lenses every 18 months. Conventional contact lenses sold for about $80 per pair. The conventional lens wearer also spent approximately $150 per year on cleaning and storage materials for the lenses. 2.

Frequent replacement lenses were replaced every one to six months. approximately $90-120 for a year’s supply.

3.

Disposable lenses were replaced after one to two weeks, before extensive cleaning became necessary. Disposable daily wear lenses like Vistakon’s Surevue product were taken out at night for cleaning. Disposable extended wear lenses, like Acuvue, were worn continuously for the entire wear schedule and then discarded. Annual costs patients incurred for different eyecare options are compared in Table B presented below in connection with the discussion of 1 Day Acuvue.

Exhibit 2 summarizes the penetration levels for different vision correction products in the U.S. as of 1994. Conventional contact lenses dominated the market; 63% of soft lens wearers used conventional lenses, 16% of the market used lenses on a frequent replacement schedule, while disposable lenses represented 21% of the soft contact lens market. A conventional contact lens wearer’s adherence to the prescribed cleaning and replacement schedule, referred to as compliance, was an ongoing issue in the industry. When prescribing and fitting contact lenses, ECPs stressed the importance of cleaning procedures and lens replacement. Patients often did not strictly follow the advice of their ECPs, particularly when the lenses felt comfortable to the patient and looked clean to the untrained eye. However, looks could be deceiving. Without the intensive weekly cleaning, protein deposits built up on the lenses, resulting in a variety of conditions including red eyes, ulcers, and a relatively common condition called giant papillary conjunctivitis. These problems made the lenses feel dry and uncomfortable in the patient’s eyes, prompting a visit to an ECP, who often recommended suspending use of contact lenses for a period of time. Indeed, industry research indicated that approximately 25% of those who discontinued wearing contacts did so due to eye allergies and infection, while another 25% did so due to discomfort while wearing the lenses. Other reasons given for patient defection from conventional contact lenses included: glasses were easier to wear (20%), a need for bifocals (10%), a loss or tear in the contact lens (5%), and cost of lenses (5%). Disposable lenses were relatively new to the industry and adoption of them encouraged patients to visit ECPs more frequently. Traditionally, after doctors prescribed contacts, their patients did not return until there was a health problem or until the lenses were damaged or lost. With disposable contacts, the patient visited ECPs more frequently for eye exams or to pick up more lenses. On average, conventional soft contact lenses were purchased every 18 months, while users of disposables purchased a supply every three months. ECPs recommended visits every three months for patients wearing disposable lenses. However, adherence to recommended replacement schedules remained an issue, as ECPs were concerned that patients tried to “extend” the life of their disposable contacts and reduce expenses by wearing them longer than recommended. Since their introduction, disposable lenses had gained an increasing share of the “new fits” of contact lenses prescribed by ECPs. Exhibit 3 shows the trends in market share for various types of soft lenses.

The Purchase Process A consumer’s first step in buying eye wear was to visit an ECP who would prescribe the type of vision correction required. There were three major types of ECPs working in the vision correction field: ophthalmologists, optometrists, and opticians. Only ophthalmogists and optometrists were licensed to determine a patient's prescription with opticians licensed to fit and make glasses and dispense contact lenses. See Exhibit 4 for a more detailed description of the ECPs roles in the 3

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They sold for

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Vistakon: 1 Day Acuvue Disposable Contact Lenses

To buy contact lenses, a patient first visited an optometrist or ophthalmologist, who checked the health of the patient’s eyes and determined whether a prescription was needed. The cost of the eye exam varied from $45 to $60. Typically, eye care prescriptions were considered to have expired after one year. Unless patients perceived a problem with their sight, however, they typically did not renew their prescriptions unless reminded by their ECP to return for another examination. The decision to try contact lenses was usually made by the patient. However, the selection of the actual contact lens was a joint decision made by the patient and the ECP. Based on the shape of the eye and the expected wearing frequency, the ECP made a technical recommendation. The patient then weighed other factors such as cost and comfort in making a final decision. However, according to ECPs, patients accepted their recommendation more than one-third of the time. Next, the patient was “fitted” by an optician or optometrist. Due to the unique shape of each person’s eye, contact lenses were made in specific sizes and curvatures, and were more or less comfortable for patients, depending on how well they corresponded to the shape and size of the eye. During the fitting the ECP ensured that the contact lenses were comfortable and taught the patient to place the lens in the eye. In ophthalmologist practices, the ophthalmologist performed the eye exam, but often the patient was passed to an optician for fitting. In optometrist practices, the optometrist usually conducted both the exam and the fitting. After the fitting, the ECP recommended follow-up visits to ensure that the lenses remained comfortable over time. The fee for fitting varied greatly, but was generally $25-50. Sometimes, the exam and fitting charges were combined into a single fee. Fitting fees were often waived for existing patients who were switching to a new contact lens. Over half of eyecare patients paid the full cost of eye examinations, while 20% had insurance that paid the full cost of the examination. The most common type of insurance was Medicare, which paid for the services of an optometrist or ophthalmologist to diagnose or rule out eye disease. Insurance coverage for eye wear was even lower, with three-quarters of patients having no insurance coverage. Exhibit 5 indicates the extent of insurance coverage for patients of different types of ECPs. Once a patient had a prescription for eye wear, he/she could have that prescription filled either at the prescriber’s office or at a variety of retail outlets. Exhibit 6 shows the shares of the overall ophthalmic market held by various types of retail channels in 1991. Soon after the introduction of disposable lenses, an additional channel developed. Prior to the introduction of disposables, most patients were unaware of their eye care prescription. However, with the advent of disposables, patients became familiar with their prescriptions and often sought out the lowest possible price. A discounted channel of mail order houses developed selling discounted brand-name lenses which were delivered directly to the patient’s home. Despite the discounted lens price available at mail order houses, patients faced incremental charges for shipping, handling and membership fees through this channel. Some ECPs believed that mail order houses not only cannibalized their revenue from the sale of replacement contacts, but also contributed to poor eye care. Sensitive to health issues, many lens manufacturers sought to exclude their products from these outlets, as mail order houses did not check the accuracy of prescriptions or ensure that customers received regular eye check-ups.

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delivery of eye care. Many private optometry or ophthalmology practices employed opticians to make and sell eyeglasses. Similar to other medical offices, most practices also had receptionists who would greet patients, answer telephones, send reminders to patients, and schedule appointments. Receptionists were usually the first person a caller spoke with upon contacting the office, and were often asked about available products and services.

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Vistakon

In 1993, Vistakon was a high profile business in J&J’s professional segment. The development and highly successful launch of disposable contact lenses had catapulted Vistakon from a specialty manufacturer to a market leader in the contact lens industry, with sales growing from $20 million in 1987 to $290 million in 1993. (See Exhibit 8 for Vistakon’s sales history.) Concurrent with increased sales, Vistakon actively managed cost, increasing its gross profit from less than 60% in 1989 to over 75% in 1993. Marketing costs and distribution costs, initially 65%-70% of sales, were more than halved over the same period. Funding for research and development a major ingredient in Vistakon’s success, remaining constant at 9%-10% of sales. J&J played an important role in Vistakon’s success. Its decentralized organization structure provided an entrepreneurial environment in which to make decisions. At J&J, “corporate managers question company presidents but rarely does an executive in the Tower veto people on the ground.”1 Vistakon was able to make quick, effective decisions as its products rolled out, without waiting for corporate approval from headquarters. “Yet, because Vistakon was supported by capital-rich J&J, it could count on the resources needed to attack a mature market with a little-tried and costly product.”2 Industry analysts estimated that J&J had invested at least $75 million in Acuvue, including buying and developing propriety technology, building the plant, and absorbing operating losses until the business became profitable in 1991. Vistakon was an exemplary model of a business unit’s success in J&J’s decentralized structure. In 1983, Vistakon was a $13 million producer of specialty contact lenses for people with astigmatism. The president of Vistakon at that time received a call from another J&J subsidiary, Janssen Pharmaceutical based in Denmark, regarding a Copenhagen ophthalmologist who had devised a method of manufacturing contact lenses inexpensively. Vistakon quickly secured the rights to the technology, assembled a management team to oversee its further development, and began perfecting the manufacturing and packaging processes. Over the next four years, Vistakon developed a unique proprietary manufacturing process called “stabilized soft molding” that produced the Acuvue lens. The stabilized soft molding allowed the contact lens material to be kept in a wet state throughout the entire production process. In traditional cast molding, the hydration process expanded the contact lens by 50-70%, grossly magnifying any imperfection; Vistakon’s soft molding process expanded the lens only minimally. The revolutionary process assured a reproducible lens with improved optics and superior comfort to the patient. More importantly, the reliability of the process gave Vistakon the capability to manufacture large volumes of lenses at a cost that an industry observer estimated at $0.50 per lens3, making a $2.50 price per lens to ECPs feasible. In 1987, Acuvue became the first disposable extended wear contact lens to be approved by the Food and Drug Administration. Patients wore the lenses for a recommended period of one week, then threw them away, and inserted another pair.

1 Joseph Web...