Understanding The Impact Of Disruptive Innovation In The Custom Foot Orthoses Market

This author takes a closer look at emerging trends with the manufacturing and marketing of custom foot orthoses, how podiatrists can reposition themselves in the orthotic marketplace, and how that can benefit their practices.

In the 1980s, IBM was in control of the computer industry. The company had captured 70 percent of the mainframe market and 95 percent of that market’s profits. Having adopted an integrated business model in which both operating system software and microprocessing components were produced, IBM was the one-stop shop for computer users. At that time, IBM’s control of the market “high ground” was seemingly unbeatable. So how did companies like Intel and Microsoft compete and beat IBM, effectively removing IBM from this very profitable position?

The answer to this question may actually surprise the reader.¹ Moreover, it may surprise the reader to realize that the same mistakes that have occurred with IBM are now the same type of mistakes that the podiatric medical community is making in regard to custom foot orthoses. However, unlike IBM, there may be attractive options for podiatrists to turn the table on retail over-the-counter (OTC) insole companies, the current major alternative source for insoles.

Accordingly, let us take a closer look at some of the market issues that podiatrists face in regard to custom orthoses and possible ways to not only adapt but pivot and profit with the current conditions of this market.

Custom foot orthotics have been an important element of podiatric practice for decades. While we can categorize custom foot orthoses in several ways, there are two basic reasons why these orthoses are a keystone to the podiatric practice. First, podiatrists have historically been perceived as experts in regard to biomechanical-related foot and ankle care. Second, custom orthosis prescriptions generate millions of dollars annually in the United States, potentially making up a significant portion of practice revenue. Nevertheless, with the shifting that has been occurring in the marketplace, it should be clear that both the identity of podiatric care and the ability to generate income are under threat.

How Disruptive Innovation Can Transform Industries

In order to understand the potential solution space for custom foot orthoses and podiatry, it is paramount to understand the nature of current market conditions, particularly in the context of “disruptive innovation.” Disruptive innovation, a concept championed by Harvard business scholar Clayton Christensen, MBA, DBA, explains how small businesses can eventually grow and take control of markets, even when well-entrenched incumbents with large financial reserves hold the “high ground” (as was the case with IBM).² The context of disruptive innovation relates to podiatric custom foot orthoses in terms of identifying key lessons learned from other industries and applying them to the podiatric practice.

One of the all-time classic models of disruptive innovation is what the mini-steel mill did to the U.S. steel industry in the 1970s.² Prior to the mini-mill, steel was primarily made in integrated mills, which were large, all-in-one facilities. These integrated mills would receive raw materials at one end of the process and eventually produce a broad range of refined products on the other end. Initially, the integrated mills produced steel products ranging from the low-end steel like rebar to high-end materials like structural and sheet steel. 

In the 1970s, mini-mills began to emerge as an alternative way to produce steel and stood as a stark contrast to these traditional, fully-integrated, large corporate steel mills. Mini-mills essentially consisted of relatively small electric furnaces that at the time could only use locally available steel scraps. The big advantage for mini-mills was they could produce steel for roughly 20 percent less than integrated mills. In an industry in which net profits were historically about 3 percent, a 20 percent cost reduction was a huge deal. The downside of this arrangement with mini-mills was that by using poor quality steel scrap, the steel produced was also poor and only suitable for low-end products. With low-end products, mini-mills were forced to sell to customers at the low end of the steel market, which meant rebar products.

As Dr. Christensen states, “As the mini-mills attacked the rebar market, the reaction from the integrated mills was, man, they were happy to get out of rebar, because it was truly a dog-eat-dog commodity, and why would they ever want to defend the least profitable part of their business when, if they focused their assets on angle iron and thicker bar and rod, the margins were so much better? So, as the mini-mills expanded their capacity to make rebar, the integrated mills shut those lines down and, as they chopped off the lowest margin part of the product lines, their gross-margin profitability improved.”³ (See Figure 1.)

At this point in the story, it appears as though the entry of mini-mills into the steel market was a good thing for large, integrated mills. For a time, the mini-mill takeover of the rebar market created a makeshift peace between the two but it didn’t last.

As several mini-mill companies began fighting it out over the low-end rebar market, it quickly became apparent that something had to change. While these companies were fighting a price war, barely surviving, the integrate mills moved up market to where the margins were bigger and they were happy. 

Then came the epiphany for the mini-mills: “Holy cow, if we could make better steel, we could make money again!”³ So, that is what the mini-mills did. They attacked the next higher tier of steel products and began taking market share just as they had done with the rebar market. Again, the integrated mills retreated from these lower tiers because they could not compete with the price (because of their higher cost structure) and because they directed their efforts up market for bigger profits.

Eventually, the incumbents ran out of up market customers. Unable to compete head-to-head because of higher costs, the integrated mills surrendered more and more customers until the once dominant integrated steel mills were forced into bankruptcy (see Figure 2). 

This idea of disruptive innovation and the impact that it can make on industrial giants is not an uncommon event, and occurs in a variety of industries. Similar patterns have emerged in regard to things like traditional encyclopedias and Wikipedia, ground line telephones and cell phones, mainframe computers and PCs, film cameras and digital cameras, etc.¹

Is The Podiatric Custom Foot Orthosis A Dying Art Form?

If it is not apparent that podiatry is experiencing a disruption in regard to the custom foot orthosis, it soon will be. Consider this characterization. Low-end OTC foot insole products have been on the market for a long time and have become a profitable industry. Around the 1960s, thermoplastics began to be popular for customized foot correction among podiatrists and has grown and developed in function and complexity. As these two categories of custom orthotics/insoles have grown over the years, at least two clear tiers of products have emerged: the low-end OTC foot insole, typically available in retail spaces, and the high-end custom custom foot orthoses available from health care professionals like podiatrists. How does disruptive innovation apply here?

Consider for a moment what exactly the OTC insole retailer is doing. Over-the-counter insoles are inexpensive, relatively low-quality products that are locally available as possible solutions to many of the most common foot problems people experience. These options are particularly enticing to customers who need a quick fix, do not want to pay much and are perhaps willing to try something new. Sound familiar? 

How long will it be before the low-end retail companies, having to eke it out in the cut-throat retail industry, operate before saying to themselves, “Holy cow, if we could make better foot insoles, we could make money again!” Well, here is the bad news: it has already begun. Over-the-counter orthosis companies have been moving up-market under such circumstances for years, targeting a slightly higher market tier with improved insoles.⁴ (See Figure 3.) 

How Podiatrists Can Retain Control Of Custom Orthoses

The podiatric profession generally has focused on the high-end custom foot orthosis market and largely surrendered any lower-end services or products to the retail space, similar to how integrated mills responded to mini-mills, more or less surrendering the low end in order to focus on the high end. How do podiatrists prevent themselves from suffering the same fate as integrated mills?

Preserve biomechanics training. Diminished biomechanics training among younger doctors is de-emphasizing the importance of the custom foot orthosis in podiatrists’ arsenal and compromises the identity of podiatrists as foot and ankle experts. One doesn’t have to search far to find articles in the podiatry literature that discuss the diminished emphasis in biomechanics training among younger podiatrists and the departure from custom foot orthoses as an important component of a podiatrist’s offering.^5,6

This deviation could mark a huge problem in terms of completely surrendering the custom foot orthosis to the retail space and with it, a wealth of knowledge generated over of the last several decades. Podiatrists cannot surrender this knowledge to another profession to figure out. That would be like IBM allowing Microsoft to create an operating system like Windows without trying to match it, a business move that cost IBM billions of dollars in missed revenue. 

Don’t outsource the money maker and attack the lower-tier insoles. Podiatrists have been outsourcing one of the things that has made them money: the custom foot orthosis. Typically, when podiatrists are prescribing custom foot orthoses, they capture the deformity in whatever medium they are comfortable with and then send the cast to a third-party lab for manufacturing.

There is the problem. Podiatrists immediately surrender a significant portion of the revenue for that service, a revenue stream that could be greatly enhanced if the podiatrist built custom foot orthoses in house. 

One approach that is attractive for achieving this end is 3D-printing of custom foot orthoses in house. While it should be readily recognized that 3D printing is a developing technology in terms of creating mechanically sound and aesthetically pleasing parts, 3D printing offers something that has never been possible on a broad scale: rapid, cheap, mass customization of products that are locally available in a way that can be iterated.^7–12 Even if a 3D-printed custom orthosis is not quite right, adjusting and printing again is not a big deal. 

The reader may recall that initially mini-mills produced low quality steel, which was not good for much but it didn’t stay that way and the same is going to be said of 3D printing.¹³ Three-dimensional printing of custom foot orthoses in theory would allow podiatrists to attack the custom orthotic market at all quality levels simultaneously (as suggested generally by Pearce and colleagues in a discussion of self-directed sustainable growth via 3D printing technologies).¹⁴ By preserving biomechanics knowledge, podiatrists equipped with 3D printing would be able to turn the tables on the retailers of OTC insoles.

Furthermore, podiatrists could capture a market share much larger than just high-end custom foot orthoses because podiatrists would be able to serve patients not currently served in the podiatric practice.¹⁵ To give perspective to the size of total custom foot orthosis market forecasts for 2020, it is estimated that the orthotic market will reach $3.5 billion and is growing at 5.8 percent annually.¹⁶ This represents a large untapped market segment that would be available for podiatrists to serve with such an approach. 

Decouple custom orthotic pricing from insurance company reimbursement. Currently, the medical device business is directed by third parties (insurance/government groups), which has fueled the non-competitive market nature of medicine. Physician providers have third-party oversight from these entities, which in turn directs the level of customized care that podiatrists can offer to suit the needs of individual patients. As a result, there is diminished transparency that explains the relationship between the costs patients face and the services they receive, a problem that some argue requires more government intervention while others say the problem requires intervention from competitors.^17,18

One of the big challenges for a podiatrist in the current high-end custom foot orthotic market is that the price of the device can be anchored by insurance reimbursement and lab costs. Specifically, this means a podiatrist’s revenue has been dropping for custom foot orthoses because the insurance companies will only reimburse up to a certain dollar amount and lab prices are increasing to cover their costs.

So what is the solution? Podiatrists should create custom foot orthosis products that are not reimbursed through insurance companies. By eliminating the pricing anchor of insurance companies, it allows podiatrists to make partnered decisions with the patient on what specific device would best suit his or her needs. If coupled with the ability to make in-house custom orthotics as mentioned previously, podiatrists would then be in position to create cheaper devices for the patient while still maintaining the ability to generate larger revenues.

In Conclusion

Disruptive innovation is an insightful tool for identifying market behaviors as companies seek to expand. Up to this point, this work has framed the custom orthotic market behavior in terms of the OTC retailers expanding up market. By preserving biomechanics training, moving custom foot orthosis production in house, offering multiple tiers of product types and decoupling custom orthosis price from insurance companies, podiatrists can reverse the current market environment and reposition themselves in terms of expertise and service offerings. What that means is that the podiatric practice instead displaces the selling of OTC insoles at low-end and mid-end insole tiers.

Furthermore, by wrapping this kind of enhanced service into the podiatry practice, podiatrists would be in better position to inform evidence-based therapies and preventive interventions as well as generate greater revenues in the future.¹⁹

Dr. Sessions works at Baylor Scott and White/Texas A&M Health Science Chapter in Temple, Texas.

The author would like to thank Nile Hatch, PhD, an Associate Professor of Entrepreneurship and Strategy at the Marriott School of Business at Brigham Young University, and Joseph DeRose, DPM, the President of MSI Orthotic Laboratories for their insights on the topic.

References

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