Smith and Nephew in the Health Care Industry

James Foreman-Peck, Smith and Nephew in the Health Care Industry. Aldershott, England: Edward Elgar, 1995. xiii + 269 pp. Illustrations, bibliography, index. $71.95 (cloth). ISBN: 1-85898-085-2.

Reviewed for EH.Net by Marvin Fischbaum, Department of Economics, Indiana State University.

Though essentially an authorized company history, and one where the company holds the copyright, this book written by an economic historian of some distinction, rises above its genre. Foreman-Peck places the development of Smith & Nephew and its antecedent firms firmly within the context of time and place. Both through details and through pace, Foreman-Peck succeeds in demonstrating business evolution from “personal capitalism” in Victorian England, where being in Hull as opposed to Birmingham as opposed to Lancashire really mattered, to late twentieth century professionalized management of a multi-national enterprise. As chronology advances, the pace quickens, and emphasis shifts from personal connections, social standing, and leisure interests, to research endeavors, management techniques, efficiency, markets, …and lawsuits.

The company studied, Smith and Nephew, plc., is something of an odd duck; it resembles a smaller, British, version of Johnson and Johnson. For much of its history the firm depended on five major product groups: 1.) bandages for surgical use, 2.) plaster of paris and coverings for casts, 3.) bandages for home use, 4.) sanitary napkins and tampons, and 5.) face cream. Smith and Nephew became the market leader in these product groups at home, and enjoyed some success elsewhere in the Commonwealth, particularly in ex-colonies of settlement. None of these products required a major research effort, and any requisite technology was acquired for the most part through merger and licensure. Starting in the 1980’s the firm purchased several technologically complex health related businesses in the U.S, expanded research capability in Britain, exited non-medical textile production, and made itself over into a multinational, rapidly evolving, high growth enterprise.

Foreman-Peck carefully chronicles Smith and Nephew, and antecedent British firms, especially Southalls. T.J. Smith differentiated his pharmacy from dozens of others in Hull, and entered the national market, when he discovered, aided possibly by his city’s standing as the principal port for trade with Scandinavia, that Norwegian cod liver oil tasted less obnoxious, and was less expensive than that brought in from Newfoundland. When the nephew, H.N. Smith entered the business in 1896, staff numbered three. Employees rose to 54 by 1914, and 1500 by 1918. The nephew, having worked in Lancashire, shifted the business to surgical dressings, and World War I proved a bonanza. Southalls in Birmingham evolved in a similar fashion. Southalls was founded somewhat earlier; 1820, as opposed to 1856. Situated in a larger city, Southalls became a substantial enterprise. It followed Smith and Nephew into Norwegian cod liver oil, but gained advantage through backward integration, employing a factory in Norway. Southalls, too, switched emphasis to health related textile products. Its breakthrough product was the first commercial version of sanitary napkins. In the interwar period, and through the acquisition of Southalls in 1958, the increasingly professional management at Smith and Nephew, is contrasted to the persistence of family control at Southalls.

The author attempts much more, however, than a simple corporate chronology. Critical decisions are identified and evaluated. Management techniques are compared and contrasted with prevalent practice and with best contemporary practice in Britain and globally.

Some bits provide brilliant insight. With simple but plausible back of the envelope calculations, Foreman-Peck demonstrates a huge social saving from a not very glamorous innovation that utilized few resources. Varicose ulcers, a fairly common condition, had been treated with hospital bed rest- -typically requiring a stay of one year. A Smith and Nephew innovation, the application of an elasticized bandage lined with plaster, enabled patients to be on their feet and back at work in two weeks. Peck-Foreman calculates the social saving to be 1.67% of 1931 British national income! The health economics literature is replete with examples of “flat of the curve” treatment–cases where expensive, technologically sophisticated procedures yield little or no measurable benefit. This counter-example may be suggestive of new directions for research.

Other forays from the central theme do not come off as well. Two chapters are devoted to the evolution of health care and health care markets from 1850. While Foreman-Peck demonstrates a fine command of the literature, he necessarily must limit the narration to a highly abbreviated, almost shorthand, summary. Moreover, the summary does not tie in well to the central narrative, as Smith and Nephew operated on and beyond the periphery of core health care endeavors.

In the years following World War II, Smith and Nephew invested heavily in the Lancashire textile industry. Investment to assure quality for specialty cloths with medical applications might have been justified, but the firm expanded capacity to produce cloth used for sanitary napkins, and even to produce denim. Foreman-Peck presents a detailed but somewhat strained justification of that decision. He notes that modernization investments quickly brought productivity levels up to those of best practice as found in the United States and Japan. He fails to note that in textiles productivity differences are swamped by pay rate differences, and that the American industry, even with its best practice, was in trouble. The author notes that returns from textile operations were lower than other branches in the company, but adds that intracompany pricing made those returns somewhat arbitrary. If prices were set low, profits were understated. Intrafirm prices could have just as easily been set too high to consciously or sub-consciously cover a mistake.

Smith and Nephew has achieved considerable success since World War II, and especially since 1980. This book explains the roots of success very well, and provides some insight into occasional failures.

Marvin Fischbaum Department of Economics Indiana State University

?