Olympus Corporation (TYO:7733)

TOP CONTRIBUTORS

FI 414 Minjie Lin

Olympus Corporation. is a Japanese technology company engaged in the development, manufacture and marketing of equipments and devices for medical, insurance, imaging, information, and other industrial markets. It operates in five business segments: Imaging Systems Business, Life Science Business, Medical Systems Business, Information and Communication Business and Others. The company has subsidiaries located in Asia-Pacific, America, and Europe. As of April 25th, 2011, the company reports a total revenue of ¥883,086 million. ^[1].

Key Facts

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Company Overview

Contents 1 Key Facts 2 Company Overview 3 Business Segments and Product Portfolio Analysis 3.1 Imaging Systems Business 3.2 Information and Communication Business 3.3 Life Sciences Business 3.4 Medical System Business 3.5 Others 4 Internal Analysis 4.1 SWOT 4.2 Financial and Operating Performance 5 Competitive Landscape Analysis 5.1 Porter's Five Forces (Medical Equipment Industry) 5.2 Olympus versus. Competitors 6 Marketing Strategy 6.1 Product 6.2 Price 6.3 Place 6.4 Promotion 7 Supply Chain Management 8 Key Executives 9 Recent Developments 10 References

Olympus is a leading global manufacturer of durable consumer products, such as endoscopes and cameras that apply Opto-Digital technology. The company operates through a wide network of subsidiaries and affiliates companies that are located across the globe. Currently, Olympus has 67 domestic subsidiaries and affiliates, and 114 overseas subsidiaries and affiliates. It identifies its global operation as four geographic regions: Japan, America, Europe, and Asia. In fiscal year 2010, the Japanese region accounted for 52.65% of the total sales, followed by 18.5% from American region, 18% from Europe and 10.85% from Asia. ^[2].Olympus operates through five business segments, which are Imaging Systems Business, Life Science Business, Medical Systems Business, Information and Communication Business and Others. The company's research and development activities accounted for 7% of the company's total sales in fiscal year 2010. Olympus R&D are dedicated to enhance its optical, precision and eletronic technologies. The company's medical systems business accounted for 41.6% of the total R&D expenditure, followed by 15.8% for imaging business segment, 12.6% for life sciences business, and 5.5% for others. ^[2].During the economic downturn, the company reported a significant amount of net loss, however, it continues to establish its global presence. In December 2010, Olympus formed a new company in the US and acquired Stryker Biotech's majority of assets relating to development, manufacture and sale of Osteogenic Protein-1. ^[2].

Business Segments and Product Portfolio Analysis

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The graph above displays the percentage of total sales each segment accounts for. The Medical System Business generates the largest portion of total revenue for the company.

Imaging Systems Business

This segment focuses on manufacturing and marketing digital cameras, film cameras, voice recorders, binoculars and optical components. In addition, the company is also engaged in selling imaging software, film cameras, film SLR cameras, binoculars, and etc.

For fiscal year 2010, the company reported revenue of ¥175,027 million for this segment, a decrease of 22.06% over 2009. ^[2].The operating income of the segment, however was ¥3,314 million during fiscal year 2010, an improvement from the operating loss of ¥5,131 million in 2009.^[2].

Information and Communication Business

This segment was established in 2005 after the acquisition of ITX in 2004. Through this segment, the company provides customers mobile terminals and related products.

For fiscal year 2010, this segment accounted for revenues of ¥189,354 million, an increase of 0.21% over 2009. ^[2].At the same time, the operating income was ¥4,864 million during fiscal year 2010, an huge increase of 436.27% as compared to 2009.^[2].

Life Sciences Business

The segment concentrates on the production of biological microscope, stereo microscope, single-molecule fluorescence detection systems, microscope system equipment and peripherals, and etc.

For fiscal year 2010, the company recorded revenues of ¥80,265 million, a decrease of 32.55% over 2009.^[2]. However, the operating income of the segment was ¥5,620 million during fiscal year 2010, an improvement of 18.06% over 2009. ^[2].

Medical System Business

This segment accounts for the largest portion of the total sales for the company. It is engaged in the development, manufacture and marketing of Endosurgery and Endotherapy products. Olympus offers therapeutic endoscopes and endotherapy accessories, service and repair solutions, and web-based Endoscope information products and also markets Medical treatment peripherals, Veterinary Endoscopes, Endosurgery systems and Endoscopy products of gastroenterology surgery.

For fiscal year 2010, this segment accounted for the largest portion of revenues of ¥350,752 million, a decrease of 8.63% over 2009. ^[2].The operating income of the segment was ¥74,929 million during fiscal year 2010, a decrease of 0.15% as compared to 2009. ^[2].

Others

This segment specializes in manufacturing and selling industrial endoscopes, non-destructive testing devices, printers and bar code scanners and system development. Besides, the company is also engaged in the development and sales of business package software, network infrastructure systems, semiconductor devices, mobile solutions, and etc.

For fiscal year 2010, the company reported revenues of ¥88,333 million, an increase of 35.4% over 2009 for this segment. ^[2].In addition, this segment has operating loss of ¥2,600 million during fiscal year 2010, as compared to an operating loss of ¥13,963 million in 2009.^[2].

Internal Analysis

SWOT

Strength

One of Olympus's strengths is its core competence: Opto-Digital Technology, which is an "integration of the company's advanced optical technologies and the latest digital technologies."^[2]. The company leverages this technology in almost all the products ranging anywhere from digital cameras and endoscopes to microscopes and industrial equipment. Olympus has developed the ”dual super aspherical lens, which achieves the optical performance of several conventional lenses, and the CCD shift image stabilizer to compensate for camera shake and provide clear image quality even at high magnification." ^[2]."These two technologies are combined into one ultra-slender 5x zoom lens unit and produced for use with compact digital cameras." ^[2].The development of such proprietary technologies allows the company to protect in-house knowledge from competitors and generate higher revenue.

Diversification allows a company to reduce risks. Olympus has a very diversified business in terms of presence in a number of industries and markets. The company operates through five business segments: Imaging Systems Business; Medical Systems Business; Life Sciences Business; Information and Communication Business; and Others. The company reported that in 2010 it generated 39.7% of its total revenues from medical systems business, followed by 19.8% from imaging systems business, 9.1% from life science business, 21.4% from information and communication business and 10% from other businesses. ^[2].With these diversified business operations, the company is able to withstand the impact of market volatility in any particular business unit. Furthermore, the company's diversified presence in the world ensures that it remains shielded from macroeconomic risks associated with operational presence in one location. For example, if Olympus had only focused on the Japanese segment only, the continuing economic slump in Japan would have hampered the company's growth, causing a huge slump in its sales. The expansion into other countries can diversify away some risks.

Weakness

The company had declining revenues in the past two years. It reported revenues of ¥883,086 for year 2010, a 9.96% decrease as compared to the revenues of ¥980,803 for year 2009. In addition, the compounded annual growth rate for revenue was -2.52% from 2006 to 2010. A negative growth rate could indicate that the company's lost market share over the past years or there are problems with the company's business operation.

The company was trading at a price/earnings (P/E) ratio of 12.03 at the end of fiscal year 2010. ^[2].This was below the Medical Devices sector average of 22.63. ^[3].This implies that investors are not confident with respect to the outlook of the company's business operation.

Product recalls is damaging not only to the company's reputation, but also to the viability of its business. In October 2010, the company recalled its VISERA OTV-S7V camera head due to mislabeling of endoscopic body-type camera heads as cardiac-type. ^[4]. In August 2010, it called back certain models of its Olympus SD snares and reusable electrosurgical snares due to the inability of the snare wire to be retracted into the snare tube after deployment of the snare.^[4].In March 2010, the company recalled Olympus trocar spikes with model numbers: A5821, A5948, A5949, WA58341L, and WA58343L due to weak weld seams. ^[5].

Opportunity

In recent years, Olympus has undertaken a number of acquisitions to enhance value for their shareholders. Through these acquisitions, the company is intending to enhance Olympus's core growth and expand its business encompassing new technologies, additional products, and wider geographical reach. In July 2010, the company‟s subsidiary Olympus NDT Corporation acquired 100% of shares of the US based Innov-X Systems, Inc, through which it broadened its industrial testing and measurement equipment portfolio. In March 2009, Olympus acquired microscope, imaging and image analysis businesses from Optical Analysis Corporation. ^[6].The company would continue to serve the customers of the optical analysis corporation in the key imaging area. This acquisition will broaden the Olympus's customer base across various states of the US.

Through its recently approved and launched products, Olympus will have an opportunity to increase its market share. It has launched several new products in the major markets through its business segments to broaden its product portfolio and increase its revenues. In fiscal year 2010, the medical systems segment released the E-PL1 in its Olympus Pen series. It also expanded its medical portfolio with the launch of X-Suit NIR. "It is a biliary metallic stent designed to relieve symptoms associated with pancreatic, liver and bile duct cancers."^[7].The product offers exceptional anatomic flexibility and superior radial support. In Europe, North America and Japan, it has "released high definition endoscopic systems incorporating imaging functions using specific light spectra such as Narrow Band Imaging (NBI) aiming to assist physicians for more accurate diagnoses."^[8]. In the fast-cycle markets, successful new product launches would be a key to the company's business growth and profitability.

Threat

Olympus's dependence upon certain suppliers to develop and manufacture certain products and component is a threat to the company. Any interruption in supply of the raw materials and other necessary input would have an adverse impact until a new source of supply is available or an alternative manufacturing process is deployed. This would result in an increase of raw material cost for the company. Therefore, failure to acquire required amount of raw materials and high dependence on sole source supplier could influence the company's ability to produce enough quantities of products, which in turn would have adverse impact on Olympus's business operations.

Technological development and innovation in the market is strongly correlated to a company's product sales. Olympus is highly dependent on its Opto-Digital technology for the development of its digital products. Therefore, in order to satisfy consumers' demands and stay ahead of competitors, the company must continue to design and invest in new technologies and update existing ones. However, this requires significant amount of commitment to its R&D, and if they are not accepted by the market, the sales of the company would be adversely influenced. Meanwhile, competitors will continue to research and may develop innovative technology that make Olympus's products obsolete.

Although Olympus manufactures and sells a wide array of products in diversified fields around the world, it can be observed that the Japan segment, the domestic market for the company accounts for a large portion of its total sales. This might threaten the profitability of its business operation if the economic condition turns sour in Japan. According to the World Bank, overall global GDP contracted 2.9% in 2009, with 1.2% growth rate in the developing economies, which is well below the 5.9% growth rate in 2008. ^[8].Meanwhile, the financial crisis that started in the U.S spread across the globe, causing economic downturn in Europe, Japan, and the US, which are major business segments of Olympus. As the government of Japan has forecast and reported, the GDP growth rate for the country will near zero and turn negative. The economic condition in Japan is further hammered, following the disastrous quake in Japan. The unfavorable condition might hamper the company's operations in the near future.

Financial and Operating Performance

For fiscal year 2010, Olympus reported net sales of ¥8,831 million, a decrease of 10% as compared to 2009. The operating income, however, increased by 73.9% to ¥601 million from 2009 to 2010. Although the economic recovery is in progress, there are still concerns and risks looming on the horizon as more unexpected events are taking place: more countries are bothered by sovereign debts, zero and even negative GDP growth is forecasted for Japan, endless wars in Libya threatening oil supply, and the devastating quake in Japan creating supply problems and currency fluctuation. It is important to break down the company's performance in the following categories to analyze its potential and resilience in this economic turmoil.

Profitability Ratios

Profitability ratios are used to assess a company's ability to generate earnings. As shown in the graph, Olympus had been able to utilize its assets and create prior to 2009. The curves for all ratios were on an upward trend, showing the company's ability to generate positive earnings. However, for the fiscal year 2009, the company had a huge slump and was not able to maintain the same competitive level. Although the gross margin went up a little bit, its operating margin, return on assets, and return on equity went deep down. Noticeably, the ROE went down the most sharply. In that fiscal year, the financial crisis, which started in the U.S spread across the globe. However, as the recovery is in process now, the company is seeing improvement again.

Cost Ratios

The cost ratios are calculated to help understand the costs the company is incurring as a percentage of sales. Contrary to profitability ratios, it is better for companies to keep the cost ratios as low as possible, which means the company is incurring less cost to generate revenue. As shown in the graph, the administrate costs and operating costs of Olympus have similar pattern. During the year of financial crisis, they both skyrocketed and declined back to normal level afterwards. The possible reason for an increase in cost ratios is due to the high cost level, while the sales were stagnant.

Efficiency Ratios

The efficiency ratios help measure a company's effectiveness in various areas of its operations, looking at maximizing its use of resources. A higher asset turnover ratio indicates that a company is capable of utilizing its assets in generating substantial amount of revenue for its shareholders. As shown in the graph, this ratio has been declining over the past few years. This means the company has not been very effective using its assets to improve its revenue. On the other hand, the inventor turnover has also been declining. However, it means that the company is not selling as well as before. It measures how quickly a company is able to sell off its inventory. A low inventory turnover ratio means the company can't sell their products quickly, incurring additional costs of stocking the inventory, which in turn worsen the financial position of the company.

R&D to Sales

R&D to sales ratio is an important measurement for companies that are in Medical Equipment Industry. Companies competing in this industry typically spend millions of dollars on their R&D to develop new technology and products that would enable them to excel their competitors. A lower result would be favorable as it indicates a company's research expenditures are converting into sales revenue, and vice versa. As shown in the graph, Olympus has a quite consistent R&D to sales ratio. Before 2008, the company had a favorable R&D efficiency. However, the efficiency level has been declining since then. Possible reason is that the company is spending more money researching on new technology that might take some time to be fully profitable in terms of generating sales or it might be that the company's research result has not been welcomed.

Patents

When one company develops a new technology, a patent is likely to be applied. Patent is used to prevent others to infringe on the newly-developed technology, allowing the idea to be exclusive, hence a core competency for the company. As discussed above, Olympus has been active in researching and developing new technology and products. The patent graph shows that over the past few years, the number of patents has been increasing for the company, showing its technological advancement. Among the patents, breaking down by regions, Japan and the U.S are combined to be the largest portion. However, as Olympus is expanding its businesses in emerging markets such as China, the number of patents increases along. This can be observed as the graph shows a larger block for China year by year.

Competitive Landscape Analysis

Porter's Five Forces (Medical Equipment Industry)

Threat of New Entrants ---LOW

The global medical devices industry is intensively competitive and highly innovative, and the sales for 2011 is estimated to be more than $300 billion. ^[9].In order to survive the intensive competition, it requires companies to spend millions of dollars on R&D expenditure, with the intent to develop new technology and products. Hence, it provides economic moats for companies already in the industry since the barrier of entry is extremely high. It requires not only a large amount of star-up capital, but also the specialization of technological skills to sustain competitive pressure. Moreover, the regulatory policy enacted to control healthcare costs through prospective reimbursement cuts, provide another economic moat, as the change in policy hurt demand for medical products, hence decreasing the revenues. This makes entrants less likely.

Threat of Substitute Products---LOW

The threat of substitute of products is clearly low since there is no close products to replace the medical devices to examine and cure diseases. If a person is injured, he/she will need the medical facility to perform MRI test. It will be unlikely to use anything else to offer similar functions by the medical devices.

Bargaining Power of Buyers---LOW

The buyer's power should be low because there is no close product to offer the same function as well as the substantial amount of R&D expenditure spent in developing those medical devices. In some emerging markets, for example, Xiamen only has one or two hospitals that have innovative medical device to perform MRI. It is unlikely that buyers can negotiate the products on better terms.

Bargaining Power of Suppliers---MODERATE~~HIGH

The cost of producing a product is high because the high R&D cost. It requires companies within the industry to purchase raw materials that guarantee quality and reliability. With this being said, it is important to select suppliers who will build long-term relationship with the company. Therefore, suppliers have more power in the negotiation terms.

Competitive Rivalry within an Industry---HIGH

As discussed above, the competition is intense within this industry. The stagnant sales in developed countries push companies to fight for market share in emerging markets. Companies have to keep on developing new technologies in order to avoid having their existing products and technologies being obsolete. The recent quake in Japan results in the world's No. 2 medical device sales country dropping down its demand. This further heightens the pressure as companies are fighting for smaller pie.

Olympus versus. Competitors

The table shows a list of competitors for Olympus. These competitors compete with Olympus in one or more of its business segments. Based on the revenue results, Konica, Nikon, and Hoya are technically the main competitors that Olympus should be focusing on. It is important to make a comparison among these companies to discover their strengths and weaknesses.

Konica Minolta Holdings, Inc.

KONICA MINOLTA HOLDINGS, INC. operates five business segments through its subsidiaries and associated companies. The Information Equipment segment manufactures and sells multifunction printers (MFPs), printers and related materials. The Optics segment manufactures and sells optical devices and electronic materials. The Medical & Graphic segment provides machines and materials for medical and printing uses. The Measuring Machine segment offers measuring equipment for industrial and medical uses. The Others segment is engaged in the manufacture and sale of printer heads and textile printers for industrial ink jet printers, the provision of business support and indirect management services, and etc. ^[10].

Nikon Corporation

NIKON CORPORATION mainly engaged in the image business operates four business segments. The image segment provides digital cameras, film cameras and interchangeable lens. The Instruments segment offers microscopes, measuring machines and semiconductor inspection equipment. The Precision Apparatus segment offers semiconductor exposure apparatus and liquid crystal (LC) exposure apparatus.^[11].The Others segment provides LC photomask substrates and telescopes. As of March 31, 2010, the Company had 87 subsidiaries and 10 associated companies. ^[11].

Hoya Corporation

HOYA CORPORATION is a technology company that operates in four segments, namely Information and Communications, Eye Care, Pentax, and Others. Its product portfolio includes a broad scope of products ranging from electro-optics products, contact lenses, digital cameras to development and operating of information systems and contract business.^[12].

Global Reach Comparison

One of Olympus's strengths is the company's strong global presence. The global expansion of the company allows it to remain shielded from macroeconomic risks associated with operational presence in one location. Its competitors Hoya and Nikon also operate in similar regional segments, namely Japan, America, and Europe. However, the annual reports of the companies show that they have different focus in the segments. For Hoya, the Japan and Asia-Pacific segments account for large portion of its total sales; its business in Europe and America combined account for less than 25%. On the contrary, each regional segment for Nikon accounts for similar portion of its total sales. This means Nikon's ability to be competitive in each regional segment. Olympus, similar to Hoya, focuses on its domestic market, but with strong emphasis in the America region. Meanwhile, the company's expanding into emerging markets. Among all, Konica has the strongest global reach. It operates in five regional segments, namely Asia Pacific, Europe, Middle East, Africa, and Americas. The worldwide gateway shows the company's ability to compete on a global stage, gaining market share.

Performance Comparison

R&D to sales ratio is an indicator of a company's ability to utilize its R&D in generating sales revenue. As shown in the graph, most companies have upward trend because they are likely to invest heavily in the R&D to develop new technology and products. Also, it might be due to stagnant sales of the companies during the economic downturn. This can be observed as most companies reach the peak in 2009, when the financial crisis spread across the globe, causing sales slump. However, from 2009 to 2010, most companies see their ratios decrease as their sales are improving again.

Operating margin is an indicator of a company's ability to generate revenue from its operations. Among these companies, Hoya is doing the worst since its operating performance has been declining from 2006 to 2009. However, it is beginning to pick up the pace to improve its operation since 2009. Olympus, Nikon, and Konica had similar path before 2009. They all performed well before the financial crisis and had steep losses during the economic downturn. Olympus's operating margin even went down to approximately -6% in 2009, while Konica and Nikon remained lower, but positive operating margin. After 2009, the scenario has totally changed. Olympus saw a huge increase in its operating margin, while Konica and Nissan continued to have stagnant sales.

Marketing Strategy

Product

Olympus operates in five business segments, namely, Imaging Systems Business, Medical Systems Business, Life Sciences Business, Information and Communication Business, and Others. The company offers a broad scope of products, including digital cameras, voice recorders, mobile terminals, stereo microscopes, bar-code scanners, veterinary endoscopes, and semiconductor devices.

Price

Olympus designs, manufactures, and sells products that employ innovative technology. Hence, its products are considered high end, therefore expensive relative to competitors. For its digital camera product line, it offers a broad scope of products across different pricing points that are cater to customers of different needs. The price ranges from $89 to $1699. ^[13].It is believed throughout the life of the product the initial sticker shock will be well worth it because of the quality and reliability. Overall it is believed the relatively steep upfront cost will more than pay for itself throughout its life because of its reliability, efficiency, and overall customer satisfaction.

Place

Olympus offers a number of ways for its customers to experience or purchase its products. The company has both direct and indirect distribution channels to sell their products to customers. Through direct channel, Olympus has its own stores to get directly in contact with customers. On the other hand, its indirect channels are through a number of retailers and wholesale supermarkets. For the convenience of its customers, Olympus has taken the advantage of technology to cater to the customer's needs. Its official website allows customers to find the information about the location of procurement. Customers will need to input some required data such as location, zip code, country and product, then they will be directed to the stores within the vicinity.

Promotion

Olympus utilizes every possible strategy to promote its products. Starting from its procurement of raw materials, the company stresses the importance of protecting the environment and keeping the earth green. This effectively associates its products with the image of environmental-friendly. On its website, it offers attractive deals for the consumers through huge discount for limited time and discount on second purchase. In addition, Olympus has the "Trade In" program to attract customers. This program allows customers to trade in the old working cameras for cash rebate and use it toward the purchase of new Olympus digital camera.^[14].

Supply Chain Management

As one of the major medical manufacturers, the quality of medical equipment is fundamental to the company as it directly affects people’s lives. To ensure the parts used to manufacture are total safe and reliable, Olympus has a few entrusted suppliers and centralized them in one location. To reinforce the shared commitment to reliability and safety, Olympus invite the suppliers each year to a briefing on the business situation of the Olympus Group. To improve manufacturing practice, Olympus establishes the assessment standards to check suppliers’ performance in terms of quality, price, delivery dates, environmental responsibility and business management. According to the assessments results, Olympus advises suppliers about areas in which improvements are needed. Its supply chain system enables the company to maintain and strengthen mutual partnership relationship.

Key Executives

Recent Developments

March 16, 2011 Olympus Donates Rescue Equipment for Quake Victims of Tohoku^[15].

Feb 24, 2011 Olympus Reports Net Sales of JPY 624 Billion in Nine Months of Fiscal 2011^[16].

Apr 12, 2010: Olympus Establishes New Company in India^[17].

References

1. ↑ "Quarterly Report.net"' Olympus, 4/27/11
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17} "10-K.net"' Olympus, 4/27/11
3. ↑ "industry.net"' Olympus, 4/27/11
4. ↑ ^{4.0 4.1} "FDA.net"' Olympus, 4/27/11
5. ↑ "Recall.net"' Olympus, 4/27/11
6. ↑ "americansegment.net"' Olympus, 4/27/11
7. ↑ "companynes.net"' Olympus, 4/27/11
8. ↑ ^{8.0 8.1} "camera.net"' Olympus, 4/27/11
9. ↑ "medical.net"' Olympus, 4/27/11
10. ↑ "10-KKonica.net"' Konica, 4/27/11
11. ↑ ^{11.0 11.1} "10-KNikon.net"' Nikon, 4/27/11
12. ↑ "10-Khoya.net"' Hoya, 4/27/11
13. ↑ "product.net"' Olympus, 4/27/11
14. ↑ "tradein.net"' Olympus, 4/27/11
15. ↑ "News.net"' Olympus, 4/27/11
16. ↑ "Businessweek.net"' Olympus, 4/27/11
17. ↑ "Global.net"' Olympus, 4/27/11