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Transforming medical technology
businesses to create value with digital
Mitch Beaumont, Prashanth Prasad, Ulrica Sehlstedt, Mandeep Dhillon

Within the healthcare sector, both existing players and newentrants can create significant value with digital products andservices. However, for established “analog-native” medical
technology companies, going digital will require significant
business and operational model changes, which can be daunting.
Nevertheless, executives can proactively manage these changes
and their impact by considering a set of levers that they cancontrol. This article introduces a framework with those levers
that can be used to guide medical
technology companies through theirdigital transformations.
Going digital – a difficult path forestablished medical technology
companies
Recent advances in technology,
along with changes in healthcare
reimbursement models and caredelivery pathways, have created
opportunities for digital products andservices to play an important role in healthcare. The benefits ofdigital, such as lowering costs, increasing patient engagement,
and improving outcomes, have been discussed extensively1. Many
new entrants and start-ups are taking advantage of the opportunityand challenging established healthcare companies, hoping to geta share of an industry that makes up about 10% of the global
economy2. These organizations employ newer, more agile working
models that are better aligned with being digital. Additionally, they
have a further advantage emerging: regulators that have not been
friendly to software products in the past have started to embrace
new iterative development approaches to accommodate thegrowth of digital health3.
1.Succeeding with Digital Health – Winning offerings and digital transformation,
Arthur D. Little, March 2016
2. In the United States, the world’s largest economy, health expenditure isover 17% of GDP. Source: World Bank Data (data.worldbank.org)
3. As an example, see the US FDA’s Digital Health Software Precertification(PreCert) Program at www.fda.gov

There is significant value
to be captured withdigital products andservices in the healthcare
industry. However,existing medical
technology companies
going digital will require
major business andoperational modelchanges. This article
introduces a frameworkand set of levers that canhelp medical technology
executives proactively
manage these changes
and their impact,
therefore guiding theircompanies throughdigital transformation.
.

In contrast, established medical technology companies face a
different picture. Their operational and cultural DNA has been
steeped in rigid company processes that were created to minimize
the risk of non-compliance with regulatory requirements such as
FDA guidance. For many of them, results have been elusive as
going digital has strained their current ways of doing business. In
fact, being successful with digital products and services requires
established companies to rethink their business models and theunderlying operational models. This can be seen with some recent
examples of established medical technology companies that havemanaged to find levels of success.
Rethinking models – Roche Diagnostics and GE
Roche Diagnostics saw insufficient outcomes from diabetes
treatments, and decided a more holistic approach was needed to
manage diabetes. To that end, it adopted an ecosystem approachto connect and offer integrated digital solutions to all stakeholders
involved in the diabetes management cycle, in order to optimize
care processes and improve prevention.
Before the ecosystem was created Roche’s main value proposition
was offering its diabetes management systems such as glucose
meters and insulin pumps. With the ecosystem, Roche could
expand its value proposition for patients and enable “more time inrange”4, leading to fewer hospitalizations. Roche became a partner
to patients, helping them manage their conditions, rather than justbeing a manufacturer of products. Operationally, Roche separated
Roche Diabetes Care into a subsidiary with its own operating model
to facilitate the creation of a world-leading big-data ecosystem fordiabetes management. A new, global hub with the required digitaland IT capabilities was created in Barcelona, and co-promotion
and distribution partnerships were set up with a number ofcomplementary companies, including Medtronic, mySugr
and Senseonics.
4. People with diabetes seek to keep their blood sugar levels within a certain
range to prevent serious health issues

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With this successful digital transformation, Roche went from only
treating sick people in acute care settings to enabling treatment inchronic care and remote settings as well. In addition, it increased
patient engagement to proactively assist with prevention by
improving patient lifestyles.
GE has been a leader in driving digital transformation across its
many businesses. A new division, GE Healthymagination (GEhM),
was created for its healthcare business, with its own innovation
operating model and supporting processes designed to develop
new, disruptive business models in healthcare.
GEhM borrowed from agile methods and employed an innovation
approach of rapid, iterative sets of tasks to identify, define andvalidate opportunities in the digital health space – a stark departurefrom GE’s traditional stage-gate or waterfall processes. This
resulted in the “Healthy Cities” program, which focused on
improving population health for various US cities by engaging local
governments, large providers, and universities. GE set up data
ecosystems and the necessary infrastructure for collecting andmanaging population health data collected from a broad range ofexisting products provided by GE and its partners.
Ultimately, GE successfully created a new value proposition
for various city and municipal governments, a market that GE
Healthcare did not previously serve. In addition, GE was able toextract more value through the increased sales of its products, asthese were required to deliver on the value proposition.
For both of these leading medical technology organizations, we see
a combination of business-model and operating-model change being
used to deliberately alter how each company engages in the market
and the way it works. To help executives be more strategic in
considering a digital transformation, it is possible to create a simple,
yet comprehensive framework for thinking about these typesof changes.

A framework to guide the digital transformation
Based on our experience, and from assessing examples such as
Roche and GE, we have identified two sets of primary levers that
executives can use to impact the changes to their companies’
business and operational models that are necessary to support a
digital business. The specific levers used, and the degree to which
they are “pulled”, will be unique to each company’s environment
and its ultimate goals for digital. Most medical technology
companies, including the examples cited above, will focus moreon two or three levers, with more minor changes in the others
happening.
Business model levers•	Value proposition. Digital products and services can enhanceor shift a medical technology company’s value propositionin the market. For example, it can extend its products toprovide remote-monitoring capabilities that can improve careand reduce costs. Or it can offer tools such as applications
and reminders to increase patient engagement and improveadherence. Typically, a digital business will want to build upon
the company’s existing core value proposition, rather thancreating a completely new one.
• V alue extraction. Most medical technology companies havefocused on selling devices, or generating revenue per unit.
However, monetization of value can take on alternative forms
with digital, such as service-oriented models, e.g., selling
hours of operation for a home health device versus the device
itself, and data-centric models, e.g., selling the data generated
by the devices. These new models may require working withgovernment payers and insurance companies to gain support
for reimbursement.
• M arkets served. Digital can enable a company to shift or
expand the markets it serves to open up new business
opportunities. For example, digitally enabled products andservices can be marketed to caregivers of the elderly or
children who are willing to pay for access to data on activity

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or medication adherence to give them peace of mind.
Alternatively, companies may be able to create new business
relationships with other value-chain players, such as homehealth companies, by providing information that improves theeffectiveness and efficiency of in-home care delivery.
Operating model levers•	Process/methods. Going digital requires new ways ofworking. Software development cycle times are faster, andwill be more effectively enabled by agile methods, which
are fundamentally different from existing linear or phasegate approaches employed by most medical technology
companies5. Robust technology and portfolio management
methods are needed to keep up with the faster pace oftechnology change and ensure R&D resources are invested in
the right areas.
• D elivery network. Becoming digital can create opportunities
for medical technology companies to engage with a broader
ecosystem to develop offers and reach the market. The
complexity and system-like nature of many digital-centric
solutions creates attractive opportunities to engage
development and/or delivery partners.
• C apabilities/footprint. Adding digital elements to a portfolio
will require new capabilities in areas such as application
development, data management and security. In addition,
medical technology companies will require capabilities inareas such as consumer insight and behavioral economics toensure their digital-health solutions meet patient/user needs
and expectations. The organizational footprint should also
be an important consideration to help gain technical talent or
local market knowledge and access.
5. For a discussion on applying agile methods to product development, see “Using agile
approaches for breakthrough product innovation”, Arthur D. Little Prism, Issue 1, 2017.

These levers are depicted in the framework shown in Figure 1,
where a more significant change in each group of levers collectively
creates an overall more significant change along the respective
dimension. Companies can use this visualization to qualitatively
assess the degree of change – and change management – they willneed to make to support a digital strategy and transformation.

Examples:• V alue from data
Value
• O
 utcome-based
extraction models

Markets
served• F ocus on new
therapeutic areas• Consumer healthBusiness model levers• N ew services or
Value
applications
proposition • Enhance existingLargechanges

Making changes to the businessfor digital healthSignificant impact
on organization

Archetype A

Archetype B

Archetype C
Smaller
impact onorganization

Smallchanges

Operating model levers

Processes/
methods

Delivery
network

Examples: • Agile methods • Direct-to• C onsumer
insight

Figure 1: T he levers to guide digital transformation

LargechangesCapabilities/
footprint• Application
consumerdevelopment
channels• Data/content• Co-marketing management

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Each company’s strategy for becoming a digital health player will be
unique to its internal and external situation, and entail some degreeof change to both the business and supporting operational models.
However, these transformations broadly fall into three archetypes,
as described in Figure 2, which are also indicated on the framework
in Figure 1.
ArchetypeObjective

Description

A

Findingcompletely new
sources of value

This model emphasizes changes to how acompany engages with the market. Operatingmodel changes are made to support the new
business-model objectives.
GE’s transformation might fit this archetype best,
given that its business-model changes with the
Healthy Cities program may have been moresignificant than its operating-model changes.

B

Reinventing thebusiness

Medical technology companies pursuing thistransformation strategy are looking to make asignificant and disruptive change to the industry.
A good example is ResMed. (See sidebar.)
ResMed has made significant changes to bothits business model and operational model,
and has become a leading connected-healthcompany versus the traditional medical-devicecompany it once was.

C

Improving how
value is delivered
todayThis approach leverages operating-model
improvements to enable digital products andservices that enhance the current businessmodel but do not significantly change it.
Roche Diagnostics’ strategy emphasizedchanging its operating model in order toenable the data ecosystem, and while it did
shift the value proposition to reduce hospital
readmissions, there was limited change in
how Roche would extract value and themarkets it served.

Figure 2: Three archetypes to drive change

Case Study: Creating a connected healthcare company
ResMed is a producer of medical devices and cloud-based
software applications that diagnose, treat and manage sleep
apnea, chronic obstructive pulmonary disease (COPD) andother chronic diseases, with USD 2.1 billion in revenue. Just as
importantly, ResMed is a global leader in connected care, withmore than 3 million patients remotely monitored every day. Its
path to this position was very deliberate and involved transforming
multiple aspects of its business and operating models.
For Mick Farrell, the CEO of ResMed, the decision to go digital
was not an option. “Digital or die – it is an existential moment,”
he recalled when talking recently with Arthur D. Little about how
the company’s digital journey had started. “If we didn’t embrace{digital}, we could go the way of others – as we’ve seen Netflix
do to Blockbuster and Uber to taxis.” Thus, ResMed became
committed to making the transition to a software-driven medicaldevice company. After detailed modeling exercises to understandthe value equation and investigate possible digital-enabledbusiness models, Farrell and his team discovered “almost every
time we could find value.” They launched their effort by including acommunication capability in every device sold – it was not optional– and soon discovered they were creating increased value for all of
their primary constituents.
For example, ResMed found that it could drive adherence for
CPAP6 therapy devices from 50% (device alone) to 87% when
patients were given a smartphone application, myAir™, which
helped them track their sleep-therapy progress. Each morning
the patient receives a “myAir score”, essentially gamifying sleep.
Increased adherence reduces hospitalizations, which lowers costs
and greatly improves the patient’s quality of life. ResMed also
discovered that its connected devices decreased set-up costs forhome health providers by 59%, a significant value proposition.
6. Continuous Positive Airway Pressure (CPAP) delivers constant airflow to people to address
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By receiving nightly data on user performance (e.g., was the mask
connected properly?) and compliance (e.g., was it used nightly?),
the provider is able to focus its attention on those users that arehaving issues, and reduce unnecessary outreach to patients doing
well with their therapy. This digital capability has enabled ResMed
to create a provider subscription service to access the softwareand data, and effectively changed the basis of competition forsleep-therapy devices.
ResMed also needed to transform its existing operating model
to support the business-model changes. Farrell restructured thecompany to create a vertical business for software and services,which is now 7% of global revenue. A new, centralized healthinformatics function was established that cut across the entire
organization and supported all businesses. ResMed also adopted
agile development approaches to accelerate product-update cycles.
Necessary skills were added by hiring cloud software engineersfrom other industries, in addition to some selective acquisitions.
ResMed is now widely considered a global leader in digital healthand connected care for medical devices. As evidenced above,it made this transformation deliberately and systematically byidentifying, analyzing and pulling many of the available businessmodel and operating-model levers.

How to get started
There is a clear set of initial steps an established, analog-native
medical technology organization should take to get started on adigital transformation. (See Figure 3.) Even if an organization has
jumped into creating digital elements or dabbled in deploying a
digital service, it will pay dividends to go through the steps toensure there is a strategic alignment between what the market
needs and what the company does.
•	
Step 1 – Get a firm understanding of stakeholder needs,
especially latent needs, of patients, users, and other relevant
players, independent of the application of digital. What
experiences do they currently have, and what aspects of
those experiences can be improved? Are there areas where
efficiency or cost need to be addressed? The objective
is not to develop or test solutions at this point, but tounderstand what needs, if addressed, will create value forthe relevant stakeholders. After those needs are understoodand rationalized to create a unique list, each is evaluated todetermine which might be addressed by digital, and whether
they make sense for the company to pursue. This step
culminates in generating ideas to address the prioritizedneeds.
• Step 2 – Develop ideas into solution concepts, often withmultiple ideas brought together into one concept. A concept
here can range from a high-level scenario of a potentiallynew digital service offering to a more specific depiction offunctionality being added to an existing medical device. In
any case, there is a list of certain characteristics for eachpotential solution concept that must be identified, even if
done with a higher degree of certainty, to inform the next
step. At this point it might be necessary to do a prioritizationof concepts. This step is an opportune time to start to seekout partnerships or employ a more open innovation model tohelp make progress and engage expertise notfound internally.

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•	
Step 3 – Evaluate the implications to the business modeland underlying operating models for each prioritized solution
concept. Different concepts can be compared, and theamount of change needed should be considered when
determining the specific strategy to pursue. For example, if aconcept will require significant changes to certain operatingmodel elements, such as existing IT infrastructure or longterm contractual relationships, then there may be a decision
to forego that concept or to push it further out on a roadmap.
Conversely, certain changes, such as a new monetization
model or market-positioning message, might be very easy toeffect and push some concepts forward faster. At this point,
the archetype needed for the transformation will emerge.
•	
Step 4 – Only once the implications for the business modeland operating model are understood can an organization set
its strategy and plan for going digital. Learnings from theimplication assessment will impact the path forward andfacilitate a more innovative way of thinking. For example, if
the effort required to build new capabilities, technologies
or processes appears high, then partnerships or acquisition
might be the best strategy. On the other hand, if the levelof change is significant across the company, then perhaps
the strategy would best be executed by setting up a new
external entity.
1

2

3

Understand needs

Develop solution
concepts

What needs of theintended customers andusers will digitaladdress?

What are potential
solution concepts that
can address thetargeted needs?

Figure 3: Steps to get started

4
Evaluate implication

What changes will be
required to ourbusiness model andoperating model tosuccessfully implement
the solution concepts?

Develop go-forward
strategy and plan

What is the roadmap todevelop and launch
digital products andservices?

Insight for the Executive
There is significant value to be captured with digital products andservices in the healthcare industry. Many new entrants are well
positioned to compete because their models are oriented towards
software development – more so than existing, analog-native
medical technology companies, which are organized to comply
with regulations. For these companies, going digital will requiresignificant business- and operational-model changes. Executives
can proactively manage these changes and their impact as follows:•	Begin by taking the time to understand the needs of yourcustomers or users; avoid making assumptions – talk tothem to learn about their experiences.
•	Carefully screen to determine which needs can actually
be addressed by digital; in addition, screen for those needs
that it makes sense for the company to address.
•	Evaluate solution concepts to identify the business-modeland operational-model changes that will need to occur toimplement digital.
•	With an understanding of the implications to the businessmodel and operating model, set a strategy and develop aplan for going digital.

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Mitch Beaumont
is a Partner in the San Francisco office of Arthur D. Little, anda member of the Technology and Innovation Management
Practice.
Prashanth Prasad
is a Manager in the San Francisco office of Arthur D. Little, and amember of the Technology and Innovation Management Practiceand Healthcare Practice.
Dr Ulrica Sehlstedt
is a Partner in the Stockholm office of Arthur D. Little, leading
the Nordic Healthcare Practice and affiliated with the Strategy &Organization Practice.
Mandeep Dhillon
is a Manager in the London office of Arthur D. Little,
and a member of the Digital Strategy andTransformation Practice.