Heart & Soul

Dec. 21, 2004
Driven by its mission and flourishing under the leadership of CEO Bill George, Medtronic, the world leader in implantable heart-pacing devices, has been transformed into a medical-device powerhouse.

At one of Medtronic Inc.s Christmas holiday programs, patients and doctors walked onto the stage to tell how the company's technology had renewed their lives. One young man, who once suffered from extreme rigidity and needed to use a wheelchair, said his symptoms had been alleviated by a small implanted drug pump that delivered medication directly to his spinal cord.

The scene touched all the Medtronic employees in attendance, and was not lost on Bill George, at the time the new president and COO. Though the drug-pump business was losing money and on the verge of closing, after seeing the impact the device had on the mans life, George ramped up spending to fund more clinical trials and eventually relaunched the product with a multimillion-dollar marketing/information program. Since then the business has grown by 60% per year to $37 million, and the technology has become a platform from which new therapies will spring.

Such is the commitment of George to the mission of the company -- to restore people to a full life first and think about shareholder value second. In fact $2.4 billion Minneapolis-based Medtronic does both. It is the worlds leading manufacturer of implantable cardiac-rhythm management devices (pacemakers for hearts that beat too slowly and defibrillators for hearts that beat too fast). And it has quadrupled earnings since 1991 and recorded an average compounded annual growth rate of about 36% per year for 12 years. Medtronic dominates its major markets and has been transformed from a pacemaker manufacturer to a diversified medical-device company. Now the company is poised for another growth spurt, entering a number of new and exciting therapy fields that resulted from leveraging core competencies.

"Medtronic is the quintessential investor company," says David Lothson, investment analyst-medical devices at PaineWebber Inc., New York. "Many companies in the medical-device industry are extraordinarily good at applying technologies once the market is defined, but Medtronic is a true pioneering company that develops new market applications and, generally speaking, is in the vanguard position in the industry. A lot of Bill Georges success in particular comes from making big strategic bets and getting the company to execute successfully to take advantage of the opportunities."

George's long-term vision, aggressive R&D strategy, team-building organizational approach, and nurturing of an egalitarian culture dedicated to the company mission are models for any CEO with a desire to leave a legacy of sustained growth.

Setting the Stage

President of the Space & Aviation Systems Business at Honeywell Inc. before joining Medtronic in 1989, George became CEO in 1991 and shortly thereafter placed one of those strategic bets. After long negotiations, Medtronic settled patent-infringement suits with Siemens AG, which was prepared to pay $300 million upfront. Rather than take the offer and declare a healthy one-time shot to the bottom line, George decided to receive the benefits in the form of royalties, which will end up totaling about $450 million paid into the 21st century. The key, however, was the application of the funds to leap into uncharted territory of new applications.

"At the time we were spending 8% to 9% of our revenues on R&D, resources that were really stretched to meet the needs of the core business," says George. "We used those royalty funds to raise our R&D percentage up to 11% where weve maintained it since that time. We did it not to fund the core businesses, but instead we funded a series of about 12 new ventures."

George and company made up a list of unmet medical needs and challenged the teams to address those needs by exploiting Medtronic strengths in biomaterials, device/tissue interface, microelectronics, electrical stimulation and sensing, and implantable power sources. Resulting from these efforts are devices and therapies approved or in trials to treat tremor associated with Parkinsons disease, incontinence, congestive heart failure, cerebral palsy, epilepsy, amyotrophic lateral sclerosis (ALS or Lou Gehrigs disease), Alzheimers disease, and Huntingtons disease. These opportunities have billions of dollars of upside potential according to PaineWebbers Lothson, not to mention the impact on human suffering.

In addition to resourceful investment, George has worked hard to wipe out a not-invented-here syndrome that troubled the company in the 1980s when its technical leadership in pacing faltered, and its worldwide market share dropped from 80% to almost 30%. When George joined the company, he knew very little about medical devices, but spent his first six months in operating rooms and in front of patients to learn the business.

After this experience, George sensed the company was too inward-looking, "[Medtronic] engineers talking to engineers," as he puts it. "You need to be out interacting with the physicians, to see the narrow difference between life and death, to appreciate how fine the line is for quality and performance of our products." So George has encouraged his engineering staff to interact more with physicians, patients, and hospital personnel.

"It is extremely difficult to change a culture," says George. "So I tried to build on what already existed, to enhance it, and to make the company more outward-looking."

Even when Medtronic had technology brewing in the laboratories, it took too long to manifest itself in commercial products. So George led an initiative that has shortened the time from concept to product launch -- from 48 months to 15 months. In addition to simply tightening timetables, George instituted a multigenerational strategy for new-product development, introducing rhythm-management product families in waves to keep Medtronic ahead of its competitors.

"We now run about five generations of products in R&D at any one given time, all lined up from the conceptual stage to being launched," he says. "Stacking products like that has given us a tremendous competitive edge. So now we don't just come up with one product and watch the competition try to come out with something better." Currently about 70% of Medtronics revenues come from products introduced in the last 12 months.

According to PaineWebber, Medtronic's worldwide share of the pacing business has increased from 30% in 1985 to more than 50% last year and is still climbing. As Medtronic has increased share in the pacing business, its contribution as a percentage of Medtronic sales has decreased from 80% in 1985 to 47% in 1997, according to PaineWebber analysis. Significantly increasing market share in the company's largest business while reducing its percentage contribution is exactly the scenario desired in George's strategy of diversification.

To fill in technology and business gaps, Medtronic is pursuing acquisitions, minority investments, licensing arrangements, and joint ventures. Medtronic is partnering with biotech companies such as Amgen Inc. and Regeneron Pharmaceuticals Inc. to create new formulations for implantable drug-pump applications. In addition to cardiac-rhythm management products, the company now competes in cardiac-surgery equipment, including heart valves; interventional cardiovascular devices, including catheters for angioplasty; and neurological devices for treating pain and movement disorders.

Small Packages

To convert its new ideas into life-restoring commercial products -- in fact to solve almost any challenge at Medtronic -- the company relies on small, highly focused teams at the business or corporate level.

"I think what's significant is that we're willing to . . . take these teams off-line, out of the mainstream organization that has very tight deadlines in turning out products that are needed in the market this year," says George. "When we see success, we reincorporate the idea into a specific business."

Another initiative, the Quest Program, funds individuals with up to $50,000 to pursue ideas outside their basic responsibility. Medtronic typically supports six to eight such programs a year, investing about $150,000 annually.

"The principle operating here is that you should organize your company to parallel your customers method of organizing," notes George. "When I was in the defense industry, there was a huge hierarchy in the organization, going all the way up to the Secretary of Defense. We tended to pair people off in a hierarchical sense at the different levels. While there is a pecking order among physicians, there is no hierarchy, and so we have tried to organize ourselves into small, outward-looking, nonhierarchical groups, where the people on the front lines are empowered to bring ideas to reality and every physician has the opportunity to make significant contributions to our creative process."

Mike James, vice president-marketing for Medtronics pacemaker business, likens the beginnings of team activities to small dots and credits George with creating the risk-taking culture that gives the dots a chance to grow.

"With all the pressure on short-term performance, it takes a real discipline to look at your asset mix to be sure you have a sufficient amount focused on the future," says James. "But Bill has established a culture that allows the dots to survive, because they are pretty fragile when they are little. Bill doesn't know about all of them, but the culture gives the middle managers the confidence to let those little dots live for a while to see if they are going to flourish or not. Bill encourages us to take those risks. There are many examples of risk-taking rewarded and failures not ending with beheadings. I think that's the litmus test."

To spread his thoughts, values, and direction across the company, George uses company-wide e-mail and he is known as a prolific communicator.

"He is not one who rules by edict and passes something down to the next level and expects it to get spread," says John Osgood, managing director of the medical-device practice at BT Alex. Brown Inc., an investment-banking firm in Boston. "This goes back to his belief that the only way to get the organization moving in the same direction and in concert and to share the same values is to communicate those personally up and down the organization."

In addition to keeping employees informed on company goals and performance, his communications are often "personal, suggesting what we should be thankful for and presenting us with challenges," says COO Art Collins. For instance, around Thanksgiving 1996, as his wife was successfully battling breast cancer, George sent an e-mail to all employees, updating his wife's condition. His words reveal a tenderness not often exhibited by someone in the high-profile role of CEO.

"This experience has transformed both of us in many ways," he says. "It has helped us live more in the moment, to know ultimately we have nothing to fear, and to recognize at a deeper level that healing is not just about surgery, but depends upon healing of the whole person -- body, mind, heart, and spirit."

To craft the egalitarian culture he deems essential to success in a high-tech business, George has stripped the company of executive perks and promotes employee equality.

"I think to be successful in this environment you've got to treat all ideas as equally worthy, regardless of their source. And so you have to honor the engineer, the salesperson, and the production person who has a creative idea. The only way you can do that is to build a nonhierarchical organization. How do you avoid the hierarchy? I think you take away the symbols of success associated with hierarchy. So we have no airplanes, no company cars, no reserved parking places, no executive dining room, and no company-paid club memberships."

To ease the tensions of his position as CEO, George uses several stress-release mechanisms including transcendental meditation, which he practices for 20 minutes twice a day. He also jogs and has coached soccer for 13 years. He is an avid hiker, going out into the hinterlands with friends and family for extended periods to places like Tanzania, Norway, and the Swiss Alps, where often he is completely out of touch.

"I think its good to get away," says George. "We have very competent people, and I always have believed in a team at the top. All executive members participate in every major decision. Its not like I'm leaving the company alone. I'm not a one-person band around here."

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