CEO's plan for world-wide sale of his medical device that will make certain types of surgery obselete.
Why Gérard Hascoët took his company international even beforehe had a product to sell
Before some of us have come to terms with the concept of global markets , along comes the global start-up . France-based Technomed went international even before it had a product and at age three does business in 28 countries. An anomaly? Maybe. But some argue that what is an exception today may soon be the rule. -- R. A. M.
Maybe it hadn't been done before, but founder-to-be Gérard Hascoët saw no reason why he shouldn't give it a shot: grab the world in one fell swoop with one fell chunk of seed capital. Set up however many subsidiaries he needed to capture the major markets, cover the rest of the map with a network of company-trained distributors and agents, and do it before the competition caught on. If he had a product he could sell in any country or culture without modification, wasn't it simply a matter of allocating resources?
Yes -- provided he could find enough.
The daring business plan that Hascoët unfolded in 1985 established wholly owned subsidiaries in the United States, Italy, Japan, and West Germany virtually at the same time he launched Technomed International, the parent company, in his native France. The four subsidiaries would deal in the lion's share of the high-tech medical market; the leftovers, from the Urals to La Paz, would be attended by four regional managers out of the parent office. Hascoët was so committed to his one-world, one-market concept that in his design of it, even the support staff at Paris headquarters was to be a multinational mix, from the receptionist on up.
"The advantage of starting international," Hascoët stressed to acquaintances with enough money and patience to hear his schemes out, "is you establish an international spirit from the very beginning. Ours will not simply be a French company made over; it will be a world company." To be everywhere at once, however, would require some $5.5 million. And he was determined to get it all from individuals, rather than institutions, "because I want to have someone capable of signing a check without referring to a committee."
Fifteen Reasons Why Investors Should Have Declined
1. There was no product.
2. No market studies had been performed for the proposed product.
3. One competitor was already in the field with an established product, and two others were about to enter.
4. No one had heard of Technomed International beyond Paris, yet its would-be founder projected sales of million-dollar machines to predictably skeptical doctors and hospitals around the world.
5. Before it could be sold in the United States -- the world's largest market for medical products, at 40% -- each device that Technomed might develop and manufacture would first have to earn approval from the Food and Drug Administration, a lengthy, costly, and possibly unsuccessful process.
6. For the next two largest markets, the product also would have to pass FDA-like scrutiny in Japan and meet rigorous manufacturing standards in West Germany.
7. Hascoët intended to subcontract most of the manufacturing; therefore, costs and schedules would be at the mercy of numerous suppliers in numerous countries with numerous inflation rates.
8. Currency fluctuations would play havoc with revenues.
9. Despite international patents, the machines could be reverse-engineered and duplicated in Taiwan, Singapore, Malaysia, Hong Kong, or even Japan.
10. Somebody else's technology might prove to be better in the end, somebody else's prices lower, somebody else's working capital more plentiful.
11. Attracting good people would be next to impossible; who would leave a good job to take a risk with an unproved chief executive officer?
12. There was no management besides Hascoët himself.
13. Hascoët was trained in electronic engineering, not business.
14. Hascoët saw no need for anyone in the company to be trained in business.
15. The French hadn't shown they were all that good at starting risky businesses, in any event.
One Reason Why They Didn't
In 1985 Hascoët was unmistakably on a mission. At the age of 36, he had just resigned from a 12-year stint in the medical division of Thomson-CGR, a manufacturer and marketer that, Hascoët grew tired of complaining to deaf management ears, "was too much oriented to the French market." The field of diagnostic-imaging systems was expanding rapidly, yet his employer was hardly bothering to pursue it across the border. Not to be denied, Hascoët decided to join the management of an imaginative, farseeing, energetic company that would -- his own.
"When you are not diversified with respect to product," he pleaded with the select group of investors he trusted would view it his way, "you have to be diversified with respect to geography. When one area is not generating sales, another will be. If you stick with one market and there is a recession, you're in big trouble. If you have world coverage, you avoid the fluctuation of markets."
Although the author of this worldwide enterprise had little business experience beyond haggling at the flea market, at least he recognized the folly of starting from scratch with insufficient funds. "Looking for money is not a productive activity when you're starting a business," explained Hascoët, who abhorred the thought of having to seek a loan after the seed capital was used up. "Banks don't anticipate the future; they understand only the past -- the balance sheet. I have to have enough at the beginning so I won't waste my time thinking about it for at least a year.
"True, I need lots," he granted his audience, "but I promise I will not require more than what I've called for in this plan -- $300,000 until the end of June, then $400,000, then a million, and so on." All agreed that Hascoët's aspirations demanded more money than French venturists were used to providing. So the venturists demanded more shares than French entrepreneurs were used to yielding. Six individuals put up most of the capital for 90% of the company; the principal threw in a few hundred thousand dollars of his own for the remaining 10%. Altogether, $5.5 million was pledged, to be disbursed as Hascoët met his business-plan schedules one by one. Technomed Interna-tional was incorporated at the end of 1985 in a cramped office in downtown Paris. Hascoët has yet to go back to the backers for more capital. But he has moved Technomed into two sprawling floors of a new industrial complex on the outskirts of the city.
It so happened that within France's active National Institute of Health and Medical Research (INSERM, something like our own National Institutes of Health), researchers had been pursuing a therapeutic technology that obviates the need for surgery by pulverizing kidney and gallstones from outside the patient's body (see "Say Good-bye to the Operating Room," page 5). The intricate procedure, called lithotripsy (litho being Greek for stone, tripsy for who knows what), was just what the doctor ordered to get Hascoët off the mark. Devoted to pure research, the government-sponsored laboratory was seeking a commercial enterprise to develop its prototype into a marketable product. INSERM licensed Technomed to take over for a pittance in royalties. Hascoët called his machine-to-be the Sonolith and promised his investors he'd have one ready to sell within six months.
Why didn't Thomson or some other big company pick up the same emerging technology from the same labs for the same song and take the same chance on developing the same product? Because, Hascoët understood from his tour of duty in one, big companies don't think that way. "They don't like to subcontract an idea; they want to be the real father." Then they insist on spending huge amounts in R&D defending their portion of the market. But clinging to a market, Hascoët can now afford to scoff, "is like staring at your front wheel while you ride a bicycle; you observe that it is spinning properly, but you have no view of what lies ahead."
Selling the no-scalpel concept to highly skilled surgeons, whose highly billed dexterity was being replaced by computers, wasn't as tricky as Hascoët had initially feared. The winning appeal was that the machine makes everything easier and safer: you get the same professional fees, but all you have to do is push a button. Pretty soon, though, the surgeons will wise up: sure, who needs us if it can be done by technicians? And that argument is hard to counter. "In 10 years," Hascoët admits, "it will be all technicians. In 100 years, with our technology combined with biotechnology, there will be no surgery left."* * *
The United States constitutes the biggest market for Technomed's technologies, but due to rigid FDA regulations, there was no way to access it immediately. That's why Hascoët felt it was important to open several other markets while getting the FDA process under way. Until the FDA grants approval of a medical device, the manufac-turer cannot sell the product to a test site at a profit (the tester is obliged to cough up the rest only after FDA approval). If Hascoët had entered the U.S. market exclusively, there would have been plenty of prestige, but pathetically little cash flow.
Lithotripsy is categorized by the FDA as a technology that is subject to the strictest degree of scrutiny. From the start of clinical trials to the receipt of permission to market the device typically takes at least two years. At first, Hascoët tried to squeeze by on a budget by hiring a specialty firm to steer the project through, but it soon became clear that internal control was needed to speed up the routine and gain on two competitors -- Medstone International and Siemens -- that had edged ahead in the U.S. market. Simply to meet FDA demands, Technomed has spent more than $2 million. Of the U.S. subsidiary's 37 employees, 6 have been exclusively involved in dealing with the FDA. Few companies Technomed's size fund their own regulatory affairs staff, but it has been worth every centime, Hascoët feels, merely to gain the time. And a corporate decision by anyone else to enter the U.S. marketplace, even with the technology now readily available, means the same tough two years before that company becomes a competitor. In Italy, though, there was not even an hour's wait. While it contributes only about 7% of world sales, Italy has no health-hazard strictures whatsoever; buy a lithotripter, rent a storefront, and you're in business. Quick to snatch a first-place share there, Technomed created an Italian subsidiary because "the market had exploded in the past few years, and we wanted to be able to channel our sales most efficiently. You want Italians running an Italian business; French guys running an Italian business will not work."* * *
Because they can't afford to tie up liquidity in currency hedging, small companies are particularly vulnerable to adverse changes in exchange rates. Technomed has yet to face this problem on a wide front, as it insists on receiving French francs everywhere except in countries where it has subsidiaries. In the United States, for example, its only exchange exposure occurs if the dollar drops further against the franc; so far, the dollar has more than held its own, enhancing Technomed's margins.
When Technomed sells in Saudi Arabia, Asia, Latin America, and similar out-of-the-mainstream areas, it does so only via irrevocable and confirmed letters of credit. "We don't want any risk," Hascoët explains of the obvious. Of course, you need a product that's in demand, plus a reliable corporate image, or customers won't be bothered. By the time Hascoët took that staunchly conservative position, Technomed already had both: in mid-1987, it finished its first fiscal year with about $9 million in sales. For FY '88, the company booked sales of $25 million and had a pretax profit of some $7 million. As of the close of its third fiscal year, June 1, 1989, sales were close to $50 million and pretax profits around $14 million.* * *
The goal was to undercut the competitor's machine by half -- something close to $1 million would "enlarge the market," Hascoët felt. He studied the alternatives to manufacturing outside France, even in Asia, but couldn't come up with a better deal than in Lyon, where Technomed began life as a manufacturer in a 1,500-square-foot facility. In this midsouth area some 250 miles from Paris, labor was cheap and plentiful, and space was cheap -- but, as it turned out, not plentiful. With 70 machines crowding the assembly line this year and a third product in the wings with no place to go, the company started construction on its own 70,000-square-foot plant, expandable to 300,000. "This was definitely not on the schedule," says a delighted Hascoët of the one major instance in which he didn't perform within 10% of plan.
Intending to farm out the components and do only the final assembly in Lyon, Hascoët spent a year compiling a global network of subcontractors. Several vendors were contracted with simultaneously to supply the same part at the same price. He then hired an American, Tim Hudson, to institute the system of quality assurance demanded by the FDA. Hudson had been with a division of Johnson & Johnson in Belgium and Paris, where, after three years, he had learned to speak flawless French. Coming to Technomed after that achievement proved "a disappointment," Hudson says; like everyone else in the company, he is required to use only English.
In that universal language of business, Hudson gives expression to the clash of manufacturing cultures. "We Americans tend to get impatient with the southern European influence. Most businesses here close between 12:00 and 2:00. There's an attitude you can push only so far, then you have to back off, or nothing gets done. They insist on four-week vacations, for instance, even though most countries we ship to don't close for a month. When an American gets down to the supervisory level, there's resistance to ideas. It would be a worse problem if the company's future belonged to France. But the future doesn't exist in France. They're looking to the United States and Japan. The people here know they have to support the overseas efforts; otherwise, they won't have jobs."
Eventually, the cost of labor and shipping will inspire Technomed to examine other manufacturing venues. But not yet: shipping a Sonolith from Lyon to Boston costs about $3,000 -- a pittance in relation to a million-dollar sale.* * *
Human body parts may be conveniently universal, but, Hascoët found, human market sectors irksomely aren't. Technomed's Japanese subsidiary, for example, cannot sell directly to the end user, as do its other three, because Japanese business protocol dictates that foreign companies deal through native intermediaries. So Technomed has a local distributor making the sales, while the subsidiary provides engineering and support. "In the States," observes Jerome Lebon, vice-president of international sales, "once you staff your firm with Americans, there's no problem, even if the firm is a subsidiary of a European company. In Japan, however, it's a big problem. The perception of what is national is much stronger. The Japanese government and hospitals have to feel they are supported by Japanese people and Japanese firms, because they are far away from everything and feel we might withdraw someday."
In India, though, it's forbidden by law to deal with a distributor; only hospitals have import licenses. And in Germany a foreign product is not readily accepted from a distributorship; it does better if it comes from German speakers who directly represent the company. Even in Paris, Technomed faced conflict: when local customers sought local attention -- rush delivery of machines, for example -- Hascoët put them off. "I went the opposite way -- speed up delivery time to Japan. It wasn't easy to explain that our priority had to be where our market was, not where our culture was."
Technomed's two French managers in Japan speak Japanese. "Most Japanese have difficulty with English," Lebon notes, "so knowing Japanese is important. Even though a foreigner can never hope to speak perfect Japanese and will be a foreigner for life, if he wants to have friendly commercial relationships, he'd better speak Japanese."
And if language isn't a barrier, subtle restrictions may be. Technomed has had a hard go of it selling machines in Germany, because stringent standards for electrical wiring -- not for therapeutic efficacy -- protect native competitors Dornier and Siemens. "Regulations like those discourage small companies like ours from doing business in some countries," Hudson admits. "It would cost thousands of dollars to pass the safety standards of Denmark and Sweden, for instance, and it's not worth the manpower and expense." Nonetheless, this June, Hascoët threw some manpower and expense into setting up his own department of international regulatory affairs, specifically to control the technical aspects of every product in every country where it is or might be sold.* * *
While holding out for a professional management team, Technomed's tireless founder functioned as VP of just about everything for two years, as well as CEO. It was something of a conundrum: "If you have not yet established an image, you can't find bright managers; without bright managers, you can't establish an image." The first bright manager to cast his lot with Hascoët was Bernard Lacruche, an old buddy from Thomson. Equally disenchanted with anonymity in a large company, Lacruche fortunately proved an easy mark, even at the comfortable age of 53. "Gérard called and asked did I think we could build a commercial lithotripter in three months?" Lacruche relates. "I said, 'Probably not.' 'You can organize the factory, the personnel, and everything,' he proposed. I said, 'OK, then. I'll change my job tomorrow.' " Well, not exactly tomorrow: under French law, he had to give three months' notice.
Lacruche joined Technomed in January 1986 as vice-president for engineering and manufacturing. That he was a chemical engineer and only vaguely familiar with business didn't bother the similarly inclined Hascoët. It was more important to have probity than business skills, Hascoët rationalized, since "we were dealing with surgeons and institutions, who also are unfamiliar with business."
Every three weeks Hascoët would jet to the States to spend a week running the operation from a small office in Manhattan while searching for a U.S. president. He got lucky before he got exhausted. After General Electric acquired divisions of both Johnson & Johnson and Thomson, several veterans of the medical-equipment field were shaken out into the arms of headhunters. One was John Heinrich, who responded to Hascoët's six-month-long pursuit, "Sounds like the opportunity I've been looking for -- running an operation of my own in a small-company environment." On January 1, 1988, Heinrich became president of Technomed International Inc., United States. Now, Hascoët travels much less: to the States maybe seven times a year, Japan two or three times a year, Germany once a week. At the U.S. subsidiary, from which Heinrich goes to Paris once a month, travel now is the largest item in the budget. "They are coming here more than I am going there," says the rejuvenated CEO.
Within two years Technomed boasted a profit, and Hascoët was able to fill the remaining management slots -- more than 20 in all -- with worldly executives. "The key to attracting good people," he has concluded, "is to be profitable as soon as possible." A second key: the stock option. "They understand if they don't get it from you," he has been forced also to conclude, "they can get it from someone else."* * *
What, Me Worry?
Slight and wiry, Gérard Hascoët has the coiled-spring air of a person who doesn't tolerate mistakes gladly, especially if made by himself. In any fast-growth company, however, lurks the possibility that the seemingly healthy entity actually is expanding faster than its structure and is in danger of collapsing from within. Technomed's variation on that theme seems safely to have passed. When recruitment lagged, the work force already in place became so overloaded that departments neglected to trade information not only internally, but with subsidiaries, distributors, even customers. Hascoët now has systematized intracompany communications, adapting a quality-circle approach he picked up overseas. Thus do engineers learn business.
France may be strong in basic research and garlic, but the country itself constitutes a scant 5% of the world market for high-tech medicine. Hascoët's (and his financiers') challenge in 1985, therefore, was not whether to do an instantaneous global rollout, but how. Was there, in fact, a market for lithotripters? What if the machines were too expensive, too clumsy, too unprofitable? What if there was no follow-up demand to enhance a therapy-product line? "Gut feelings were my only market study," Hascoët confesses, the logic being that if you ask consultants to do a market study for you and they are capable of doing it, you have arrived in that market too late.
Hence, the hurry out of the starting gate. "If I do not have the machine ready to treat patients by the end of June 1986," Hascoët had promised his investors, "you can take the rest of the money and run." The venture team barely had a chance to warm up. Less than six months passed between the day he bought Technomed's first screwdriver to the time the complex production model was plugged in at a hospital in Lyon. Close on the heels of Dornier, Technomed became the second commercial enterprise ever to treat a human with the new technique. And Technomed's was half the price. Credit Hascoët's past with his ability to cost out the product accurately, or there would likely be no Sonolith today.
But whereas in 1986 there was only one competitor in the field of noninvasive therapy, Technomed now faces several worldwide, with Siemens, the big bully, among them. As the market for the machines reveals itself globally, more giants, such as G.E. and Toshiba, undoubtedly will contend. Does Technomed care? "We welcome coming up against major players," senior vice-president for marketing and strategy Jean-Luc Boulnois rationalizes. "That's how you gain a market edge cheaply." It's costly for a small company to be first in a market; being slightly behind lets you position your product with features that distinguish it from the competitor's.
As of June 1, 1989, more than 100 Sonoliths had been shipped to 28 different countries, a second therapeutic system had begun selling successfully, and a promising third was in prototype. Technomed International S.A., the parent company, was scheduled to go public this fall on the Bourse in Paris. Should what its founder predicts actually come to pass -- sales of $200 million by 1992 -- the stock will probably do tré s bien, merci.
Hascoët is here to tell us it will. "If after three years you think you can take a rest," he reflects in the language of global business -- which he also is learning fast -- "you make a big mistake."
SAY GOOD-BYE TO THE OPERATING ROOM
How the new technology works
A radical departure in medicine that, like a modern-day witch doctor, works its cures from outside the victim's body promises to do away with conventional surgery. The first application of this noninvasive technology was commercially introduced in 1984. An automated machine fragments a gallstone or kidney stone by aiming shock waves at it, not unlike an invisible jackhammer breaking up a boulder. Virtually riskless (because no anesthesia or incursion of the flesh is involved), the treatment is performed on an outpatient basis and is so safe that it can be done in a medical van.
With remarkable implications to both the health-care industry and the overall economy, the ex-sufferer, bearing no scars, returns to full activity the same day. By contrast, the old technology -- removal of the gallbladder -- commonly leads to infection, has a significant mortality rate, requires an extended recovery period, and at about $10,000 including hospitalization, costs twice as much.
Simply speaking, this is how the microcomputer-driven machine -- called a lithotripter -- operates:
* The stone is located. Technomed's system, called the Sonolith 3000, incorporates real-time ultrasound imaging; other systems may use X rays.
* Precise, three-dimensional aim is taken on the stone by a multiarticulated locating arm.
* For about 45 minutes a series of shock waves is generated, timed to the patient's pulse rate. In Technomed's system, hydraulic waves created by electrical discharge travel through the pool of water in which the patient lies, passing harmlessly through whatever organs may be in the way, and only at the stone itself becoming focused to an intensity to achieve the desired physical effect. Although the patient can feel each pulse of pressure, the sensation is not considered painful.
To reach otherwise hard-to-aim-at areas of the lower urinary tract, an alternate approach has been developed. Technomed's version, marketed as the Pulsolith, aims laser-generated pulses at the offending calculus via an optical fiber. The fiber is introduced into the body by an urethrascope -- but it's still not surgery.
Technomed's third noninvasive therapeutic device is still under development and has not yet begun Food and Drug Administation trials in the United States. It will use microwaves to treat enlarged prostate tissue, a debilitating affliction suffered by about half the male population over 50 years old -- a significant market.