It is every small company's nightmare: develop an innovative product for a niche that bigger companies have ignored--and then, just when the profits start flowing, a rich and powerful industry Goliath swoops in and snatches away the market. That's what happened to U.S. Surgical Corp. when Johnson & Johnson targeted its market for minimally-invasive surgical instruments two years ago. U.S. Surgical is still struggling to recover.
But it doesn't have to be that way. Consider tiny Tecnol Medical Products Inc., a Fort Worth-based supplier of medical face masks. Tecnol is going up against not one giant but two: J&J and 3M Co. The scorecard so far: David 1, Goliaths 0.
Back in the early 1980s, Tecnol was earning a tidy living churning out cheap hospital supplies. But the market was crowded, and company founders Vance M. Hubbard and Kirk Brunson went looking for a more profitable product. By 1984, they found their niche: medical face masks.
Face masks were then sold as low-priced commodities, but Tecnol seized on a wave of fear over the transmission of the AIDS virus and other diseases. Tecnol transformed the once ordinary product into a lucrative line of "specialty" masks that shield health-care workers from infection. Now, little-known Tecnol has muscled past J&J and 3M to become the top mask supplier to U.S. hospitals.
The strategy has proved lucrative. Surgical masks now account for 53% of the company's revenues. Half those sales come from specialty masks, which sport gross margins of about 65%, compared with 40% for low-end commodity masks. Since 1989, profits and sales have risen at compound annual rates of 34% and 23%, respectively. Analyst Frederick A. Wise of Bear, Stearns & Co. expects Tecnol's earnings to rise 24%, to $16.9 million, this year, on a 41% increase in sales, to $123 million.
Tecnol's experience is a lesson to other small companies in how to compete against rivals with more resources and more marketing clout. For even as J&J and 3M fight back, Tecnol is strengthening its lead--and so far, it has avoided U.S. Surgical's fate. With 60% of the $71 million U.S. hospital market, Tecnol dwarfs 3M's 21% share and J&J'S 10%.
Choosing the right market is one key to Tecnol's success. "We know how to pick our fights," says Hubbard. When Tecnol began selling masks, J&J and 3M dominated, but since the tiny market represented small change for the giants, they failed to foresee rapidly changing health-care needs. "We found they were asleep at the switch," says Hubbard. Both 3M and J&J declined comment.
STAYING POWER. Tecnol first gained a foothold by modifying ordinary masks, offering various sizes and lightweight masks that made breathing easier. Then it built market share with ever-more sophisticated products. One model now features filters that protect doctors from dangerous micron-sized particles emitted during laser surgery.
Such continual innovation is another key to Tecnol's staying power. After watching the upstart's profits in the lucrative niche soar, J&J and 3M finally woke up. Both have updated their product lines, rolling out new specialty masks over the last three years. But Tecnol's heavy spending on R&D and new-product development has allowed it to keep beating them to market with new products. "Tecnol has truly been the innovator in this category," says John Burks, senior director of strategic relationships for Voluntary Hospitals Association (VHA) Inc., the nation's largest nonprofit health-care network.
SLIPPAGE. Tecnol's manufacturing expertise also helps. Historically, face-mask manufacturing has been labor-intensive because it requires hand-sewing, but Tecnol engineered its own high-speed, automated equipment. The result: Not only can Tecnol manufacture faster than rivals, but it also is the industry's low-cost supplier. That has helped win clients such as VHA and Premier Health Alliance, a 225-hospital alliance based in Westchester, Ill. Last year, Premier dropped a long-standing contract with J&J in favor of a $10 million deal with Tecnol. "Tecnol has a good product, large product depth, and they passed along substantial cost savings over J&J," says Kevin Weeks, director of operating room programs.
But Tecnol can't afford to stand still. Analyst David W. Tice, president of Behind the Numbers Inc., a Dallas stock-research service, warns that growing competition and pressures to trim health-care costs are crimping margins. Tecnol's gross profit margins are still a healthy 48.5%, but that's down from 51.3% a year ago. Tice says Tecnol risks being squeezed much as U.S. Surgical was. "We expect there to be significantly more competitive pressure in coming years," he says. "J&J and 3M have been through many competitive battles before, and they know how to play hardball." Tecnol's stock, which hit a high of 19 in mid-1993, now trades at around 16. Hubbard denies Tecnol is feeling heat from rivals. He blames the margin slippage on recent acquisitions of a lower-margined mask maker and a sports-medicine company.
To keep growth on track, Hubbard is expanding in Europe, while acquisitions have moved Tecnol into hospital-room apparel and orthopedic devices. And it's rapidly developing new products--10 to 12 a year--to stay ahead. Still, Hubbard is keeping one eye over his shoulder. But it's not J&J and 3M that cause him to fret. "The guys I worry about are the small entrepreneurs. Those are the guys out there innovating," he says. Hubbard knows better than anyone what a little innovation can do for a company.
Battling the Big Boys Tiny Tecnol's strategy for beating the industry giants PICKING ITS FIGHTS CAREFULLY Tecnol chose a niche--surgical masks--that's small stuff to big competitors J&J and 3M IMPROVING MANUFACTURING Sophisticated production technology developed in-house makes Tecnol the low-cost competitor ADDING NEW PRODUCTS Spending heavily on R&D, Tecnol brings out a dozen new products a year and leads in innovation BUYING SMALLER RIVALS Aggressive acquisitions help Tecnol to strengthen and expand its product offerings