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Strategy 2000

As we begin a new millennium, it is a good time for managers to reevaluate their organizations' strategies. The healthcare industry is comprised of many companies representing a variety of services. Size of revenues, number of physical sites, market sophistication or dominance, geographic areas served and methods of delivery also vary among companies. This "loose oligopoly," combined with the characteristics of an industry that is in a maturity phase (slower growth) of its life cycle, make for an extremely competitive environment.

It is during such a period that changes occur that require strategic reevaluation. Recently, I was asked how to identify these signs of change. This is, of course, a complex issue, and one that could not be fully covered in this column. A good place to start, though, is by reviewing the book Competitive Strategy by Harvard professor Michael Porter, and applying his analytical method to the healthcare industry. After establishing the "signals" of change, I have identified the challenges they raise and suggested possible strategies to meet them.

Signal

Slowing growth, with resulting increased focus on more aggressive competition.

Challenge

To address average profit margins that are about half of what they were only a few years ago.

Strategy

Revisiting the organization's financial strategies and thoroughly analyze cost structures. For instance, healthcare corporations are notorious for carrying outstanding receivables, which could be repaired, by revamping accounts receivables' aging procedures. Operating expenses should be reviewed as well with an eye toward cost reduction or containment. When interest payments are significant, the organization might want to consider refinancing some of its short- and long-term debt.

Signal

An increase in experienced, repeat buyers who are more sophisticated about their purchasing choices.

Challenge

In healthcare, the "purchaser" can take many forms. The addition of a third party as a referring agent complicates the picture further. Doctors, nurses, case managers, social workers, physical and occupational therapists and payers are just a few of the knowledgeable providers who act as referral (and, therefore, indirect income) sources.

Strategy

For companies in a maturing industry, retaining and increasing purchases by existing customers, rather than investing vast resources to gain new ones, might be the better strategy. This would include gathering intelligence concerning what the customer perceives as beneficial and creating competencies around this to enhance value.

Signal

Competition turns towards an emphasis on costs and services.

Challenge

The challenges are fourfold for healthcare:

1) Shrinking reimbursement from insurance and government payers;

2) Regionalized pricing limited by managed care competition;

3) A demand for high-tech services; and

4) The interesting phenomenon of the public's belief that it is wrong for a healthcare company to enjoy high profits.

Strategy

The healthcare organization must invest in the new information technologies. It must also examine its product and service lines and develop a pricing strategy that is both rational and realistic. Healthcare companies will need to reevaluate contractual relationships with payers and suppliers, and eliminate those services where the costs far outweigh the returns for all stakeholders. This is a difficult and sometimes painful process, and often requires an organization to adopt a new way of thinking about its business.

Signal

A staff "topping-out" problem is common in a maturing industry, i.e., when a firm continues to add capacity and personnel despite a decrease in growth.

Challenge

The healthcare industry is simultaneously reaching a phase of maturity but with an unabated need for highly skilled and typically well-paid professionals and clinicians.

Strategy

Leadership needs to have a clear vision of the organization's goals, objectives and direction. It is important to monitor competitors' additions to capacity and personnel. At this juncture, the mature organization will find that the timing and pacing of hiring is critical. It is beyond the point where it can compensate for mistakes with rapid mass layoffs. Streamlining systems, such as information management systems, is also helpful in readjusting staff appropriately.

Signal

Marketing, R&D, distribution and selling--all can fall victim to cost cutting during an industry's maturity phase. This is often a self-protective response to the increase in competition for market share.

Challenge

Not responding in this manner might create added costs in training and personnel.

Strategy

Here is where a reorientation of the organization, with development of new skill sets and an investment in capital resources, becomes necessary. Today's technology firms are a good model--witness e-commerce.

The healthcare industry, specifically, is experiencing a cultural change related to marketing and advertising. It wasn't too long ago that it was considered poor form for providers to advertise their services. A look at any metropolitan newspaper these days shows that concept laid to rest; both hospitals and physicians are promoting their services. Now the Internet is providing the healthcare industry with a new venue in which to promote its services. More and more, the industry is doing so.

Signal

New applications of services are on the decline. Rapid growth of new products and their applications tends to be less evident.

Challenge

The healthcare industry is an exception in that, even though it is in its maturityphase, newproducts continue to appear. The specific challenge for healthcare is finding new product applications.

Strategy

It is critical that the healthcare company continue to design new ways of delivering service that are effective and efficient, e.g., using technology to measure medication compliance. It is just as important that the company invests in R&D, including the collection of outcomes data that support its applications and processes. This is crucial in an era of regionalized pricing and provision of similar services by other firms, as outcomes data will substantiate the organization's own cost-effectiveness and treatment selection, and thus distinguish the company in the eyes of referring parties and payers.

Signal

The maturity phase of many industries is marked by an increase in international competition.

Challenge

Domestic cost-containment pressures are the bane of existence for most healthcare managers. This has forced many firms to look for new "fertile fields."

Strategy

Recently, there has been a call for global standardization of certain clinical practices to help contain costs. This can be accomplished through the new communications technologies; companies are already sharing data on the Net, but will require consensus from clinicians and healthcare organizations regarding implementation. As a second strategy, the healthcare industry is looking outside of the United States to purchase lower-cost products, introduce reputable brand names and pursue growth opportunities; regarding the last, witness the recent involvement of publicly traded healthcare corporations in developing long-term care services in European countries.

Signal

During the transition period, industries might see their profits fall.

Challenge

As already noted, healthcare companies have been recently experiencing a decrease in profits. This is a result of a series of rather complicated circumstances, including uncertainties in reimbursement levels, stock market perceptions and fluctuations and, probably, the slow-to-act nature of many healthcare company managers.

Strategy

In a mature market, cash should be invested in new applications by well-established companies with a reasonable expectation of a relatively fast return on investment. If publicly traded, the company should refocus on improving shareholder value. It is also a good time to review all service/product lines and weigh exit strategies from unprofitable business units or those that no longer represent the company's vision.

Signal

Dealers' margins fall but, paradoxically, they experience a rise in power.

Challenge

If there is a drop-off in the number of dealers, competition among industry firms for the dealers' business increases, thus increasing the dealers' power.

Strategy

Suppliers to the healthcare industry have indeed taken a steep drop in number. This was due in some cases to smaller dealers having difficulty surviving a worsening reimbursement climate. There has also been a flurry of mergers and acquisitions in all areas of the healthcare industry. As a result, it is important for the healthcare manager to review the contractual relationships and alliances that the company has with its vendors, suppliers and manufacturers. This should include an audit exploring how customers perceive the value of these suppliers, as well as innovative ways in which the supplier can provide other, value-added services, such as collaboration with marketing, or education and training of personnel or the sharing of resources to increase the company's technological capabilities. In short, the healthcare company should attempt to utilize the core competencies of its dealers, suppliers and manufacturers to the mutual benefit of all.

Finally, once strategies have been decided upon, the next step is to develop a plan for implementation, including a mechanism for monitoring and quantifying the outcomes of strategic efforts. Involving as many of the stakeholders as possible will be critical to the success of the strategic implementation plan.

Future columns will continue to address the importance of strategy, leadership and vision as they relate to managing change in the healthcare industry. If you have had specific success in these areas, please send your comments to Laura Hyatt, MBA, Hyatt Associates, at 2956 Kelton Avenue, Los Angeles, CA 90064. Be sure to include your name, the name of your organization, address, area code and phone number.

Laura Hyatt, MBA, is president of Hyatt Associates, Los Angeles, California.