Why A 100-year Company Can Continue To Leap
Note: This article is a translation of the article posted in Forbes Japan/100-year Company Strategy Research Institute.
This year, I became a trustee of the 100-Year Corporate Strategy Research Institute, and coincidentally, Terumo Corporation, where I serve as an outside director, celebrated the 100th anniversary of its founding, last year. Not only has Terumo lasted for 100 years, but it has also grown to become a major global medical equipment manufacturer with annual sales of approximately 700 billion yen. So, here in this article, I would like to explore the keys to a 100-year company that makes a great leap forward, using Terumo as a case study.
Terumo was founded in 1921 as a thermometer manufacturer. Amidst the onslaught of the Spanish flu, the import of thermometers into Japan was interrupted by World War I, and it was Terumo that succeeded in producing the long-awaited thermometers domestically.
Although many people still think of Terumo as a thermometer company, Terumo today has a broad lineup of medical devices, ranging from syringes and other medical devices used in daily care to devices used in cardiac surgery, like catheters, and cell therapy. Operating in more than 160 countries around the world with overseas sales accounting for approximately 70% of its total revenue, the company has indisputably become a global medical equipment company. The company is also a major manufacturer of ECMO (extra-corporeal membrane artificial lung), which attracted a lot of attention as the last resort in the treatment of critically ill COVID patients.
Going Beyond User Needs Response
What are Terumo's strengths?
One of its key strengths is their commitment to designing and producing products based on the needs of the gemba (customers in the field). It is in Terumo's DNA to develop products meticulously in response to requests from physicians, have physicians try them out in the medical gemba (field), and make improvements based on their feedback.
However, such an attitude is not limited to Terumo. It is a common trait of many of the long-standing Japanese companies. While this attitude may enable a company to last steadily, it does not necessarily guarantee a leap forward. So why was Terumo able to not only "last" but also "leap"? What does Terumo have that other long-lived companies do not? I believe that it is the company's proactiveness toward solving social issues. Let me introduce Terumo’s two businesses that symbolize this.
The first is the disposable syringe, a product that helped Terumo transform itself from a thermometer maker to a medical device manufacturer in the 1960s. Until then, syringes had been re-used on a usual basis in Japan, thereby posing a risk of infection at any time (and later leading to the spread of the hepatitis B virus - a serious social problem in Japan).
In response, Terumo developed Japan's first disposable syringe to address the social issue of "safety in the medical field”. In order to make the syringe disposable, it was necessary to change the syringe tube from glass to plastic, which involved the technical challenge of creating a sterile solution that could be tolerated by plastic products.
The challenge was not limited to product development. In Japan at the time, there was little awareness of the risk of infection caused by re-usage of syringes, and the need for disposable syringes had not yet been recognized. “When I visited customers, they used to give me an unwelcoming look. The awareness of infection risk was completely different from today," recalls a sales representative at the time, implying how difficult sales activities were initially1.
Despite the great social significance to reduce the risk of infection this initiative provided, it was not initially accepted even by experts and in the field. This illustrates that even if a business is worthy of a social cause, or perhaps because it is so, educating and enlightening customers and users is critical. In fact, Terumo conducted public awareness promotions by placing advertisements in weekly magazines and other media to encourage people to change their mindset and behavior.
Global Expansion through Business That Solves Social Issues
Terumo then later expanded this technology horizontally into various products such as disposable infusion bags, eventually entering into the catheter business. Catheter treatment is a treatment method in which a catheter is passed through a blood vessel to access a lesion, such as a stenosis in a blood vessel of the heart. This is much less burdensome to the patient than general surgery. Initially, catheters were inserted at the base of the thigh, but in the 1990s, a new treatment method (called Trans Radial Intervention, or TRI) was developed in which catheters are inserted at the wrist. The wrist catheter required for this procedure is the second business example where Terumo has made a great leap forward by solving a social problem.
Insertion through the wrist offers many advantages to patients compared to insertion through the thigh. It is easier to stop bleeding, has a lower risk of complications, and requires less postoperative bed rest. While hospitalization for insertion through the thigh typically takes two to three days, the wrist insertion can even be done on a day trip in some circumstances. This can contribute to solving the social problem of rocketing medical expenditure.
However, the blood vessels in the wrist are thinner than those in the thigh, so the catheter product had to be more elaborate, requiring technical capabilities on Terumo side. It also required skills on the user side, and here, too, was user resistance. Physicians had been trained to insert catheters through the thigh and were initially hesitant about this new treatment method.
Terumo not only promoted the benefits of TRI, but also provided education and hands-on training on how to use the product, and as the TRI product became widely available, the procedure was expanded to the United States, Latin America, China, and Southeast Asia. In all of these countries, the rollout was accompanied by education and training for physicians. This was possible because Terumo was convinced of the social significance of the product and the procedure.
Today, wrist catheters remain one of Terumo's main growth drivers, and 60% of cardiac catheterizations worldwide are now performed via the wrist.
Terumo's two business examples are consistent with the "outside-in" approach advocated in the SDG Compass (Corporate Action Guidelines for the SDGs) issued by the United Nations in 2016. However, both businesses started long before the SDGs were established, so one may say that Terumo was not referring to the SDG Compass, but rather was ahead of its time.
The concept of "outside-in" originally emerged in 2010 in “Strategy from the Outside In: Profiting from Customer Value”, co-authored by George S. Day and Christine Moorman. According to them, there are two approaches to building a business. With "inside-out” thinking, the company is internally focused and builds the business based on its own strengths. "Outside-in" thinking, on the other hand, takes the customer as the starting point and builds the business based on the value it can provide to the customer. This approach overlaps with the conventional "product-out" and "market-in" approaches.
In the SDG Compass’s “outside-in” approach, the “outside” refers to society (or more specifically SDGs) rather than markets and customers. Since then, the "outside-in" approach has come to mean "business creation that aims to solve societal issues”.
An "outside-in" approach can not only contribute to solving social issues such as those outlined in the SDGs, but can also sustain the companies themselves and allow them to leapfrog. This is because it creates a blue ocean (a market that has not yet been explored and where there is no competition). The traditional "inside-out" approach of responding to customer needs by competing with players in existing markets can easily lead to a red ocean. The "outside-in" approach, on the other hand, focuses on social issues and creates new markets that do not yet exist by taking on the challenge of solving those issues.
Today, almost all companies have made it their mission to contribute to the SDGs and solve social issues. Unfortunately, however, there are many cases in which companies simply paste the logos of the relevant SDGs goals onto their existing businesses. Of course, there is nothing wrong with operating an existing business as long as it is useful to society. However, it is important to recognize that this is not the approach advocated in the SDGs, and that if the market is crowded with many players, it can put pressure on profitability and jeopardize the sustainability of the company. Masks during the pandemic are a good example. While masks certainly help prevent infection, they are not a business with an "outside-in" approach. And the mask market sure has quickly become a red ocean.
Of course, an "outside-in" approach is not easy to achieve. In order to grasp social needs before other companies in the same industry capture them, it is necessary for a company to have solid corporate purpose and be constantly on the lookout in society. It is also important to build an ecosystem around social issues and collaborate with various sectors, such as academia and NGOs, when developing new markets.
Furthermore, it goes without saying that it is essential to have the technological capabilities to develop products and services that can lead to solutions to social issues. Social problem-solving initiatives based on an "outside-in" approach are not limited to the hands of social entrepreneurs, nor are they the exclusive domain of large corporations. Companies that have been developing and refining their technologies in response to customer needs for a century are the ones best suited to take on this challenge.
1Source: “Terumo Hyakunen No Chōsen” (Terumo’s 100 Years of Challenge) by Terumo Corporation