A Simple Guide to Strategy.

It is impossible for the leadership of a long-term care company to sustain growth without a clear vision for its organization and for the direction of the industry. Healthcare industry, and especially post-acute care, providers are theoretically considered to be in the maturity phase (slower growth) of the business life cycle. However, with the advent of information technologies and rapidly changing scientific discoveries and treatments, healthcare providers could also be characterized as being in an emergent (start-up, research and development) phase of the life cycle. In short, healthcare providers are straddling the life cycle fence, and that can make it difficult to select the best strategy.

Aside from new technologies, other critical issues specific to healthcare include the complexity and variety of reimbursement methods. Payments are received from a myriad of sources, from private to third-party payers. Also, unlike most other industries, a substantial portion of healthcare services are reimbursed by both state and federal government payers at fixed rates, changeable only by an act of Congress.

No wonder administrative executives get a headache trying to develop a strategic course for their organizations. Is there a manageable way to approach this?

The answer might reside, at least partly, in simplifying the act of strategy making. In his book Competitive Strategy, Michael E. Porter identifies three basic strategic models that are used as a foundation from which to work: (1) cost leadership, (2) differentiation and (3) focus.

Cost Leadership. Organizations that choose a cost leadership strategy attempt to gain competitive advantage over competitors by reducing costs. This requires aggressive and tight methods of overhead control, such as avoiding aging account receivables and reducing R&D, sales personnel, marketing and advertising. As this becomes the prevailing theme of the organization's entire strategy, care must be taken not to jeopardize quality and service.

A sizable market share is typically required to achieve this cost-dominant position. Once attainPed, however, a cost leadership position can present barriers to entry for other competitors, since they have to expend greater capital to enter the market. What's more, increased market share might allow for economies of scale in purchasing supplies, thus lowering costs even further. This in turn leads to higher margins, which can then be reinvested to expand facilities or purchase new equipment.

Differentiation. This strategy allows an organization to distinguish itself by developing a service or product that is perceived as unique within its industry. Differentiation doesn't suggest that a firm ignore its costs but, rather, that costs are not the primary focus. A post-acute care organization, for example, would emphasize the high quality and high value of its unique services. Unlike cost leadership, differentiation often adds a premium to pricing.

The Cleveland Clinic and the Mayo Clinic are examples of organizations that have differentiated themselves as centers of excellence" and have, as a result, created brand recognition for themselves globally.

Focus. This strategy involves focusing on a particular geographic area, customer group or service line. While cost leadership and differentiation strategies center on achieving their objectives industry-wide, the focus strategy concentrates on serving a specific target, and its functional tactics are developed to meet this goal. The idea is that this organization is better able to serve its narrow target audience than its competitors, which have a broader focus. It might use cost leadership or differentiation, but it concentrates these on its target market.

An example of this strategy is Ballard, a post-acute care provider based near Chicago. Having designed and built a specialized rehabilitation unit focusing on real-world adaptations for patients, Ballard has developed a reputation as a quality rehabilitation provider for the elderly in the Chicago area.

These three basic strategy models won't provide all of the answers to healthcare providers' dilemmas, but they can offer a framework upon which leaders can build their organizations, even during the most difficult of times.

As always, I thank the readers who write in support of this column. Ideas that you feel would be helpful should be addressed to Laura Hyatt at [e-mail]. Be sure to include your name, the name of your organization, address and phone number with area code.

Laura Hyatt, MBA, is president of Hyatt Associates and a member of the Business Faculty at Mount St. Mary's College, Los Angeles, California.