Using value innovation to create competitive advantage: Part 2.

A hospital known and respected for its cardiac and orthopedic surgery programs realizes it cannot rely on only two successful programs to continue to be profitable. It decides to expand its surgical service line by offering bariatric surgery.

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A prolonged battle ensues between competing hospitals for these patients. The result is the hospital's new bariatric program gains some patients, but does not realize the profits that were projected.

In my May/June column (The Physician Executive, Vol. 31(3) May/June 2005), I presented this scenario and discussed how hospitals and medical practices often build strategy around trying to match and beat competitors. This approach, however, is not optimal because too often competitors emulate each other with strategies that produce only incremental improvements in cost or quality.

A business's departure from this thinking can be seen in what is called a value curve. (1) A value curve is a graphical depiction of the way a business configures its offerings to customers and the relative value to the consumer.

According to conventional competitive strategy, and industry's value curve follows one basic shape. Competitors try to improve value by offering a little more or a little less, but don't change the shape of the curve. Successful providers have learned that developing unique and differentiated solutions for their patients is the key to changing the shape of a value curve.

Insead professors W. Chan Kim and Renee Mauborgne developed an approach to creating new value by looking across conventionally defined boundaries of business--across substitute industries, strategic groups, buyer groups, complementary product and service offerings, and across the functional/emotional orientation of an industry. (2)

In most industries, competitors converge around a common definition of who is the target customer, when in reality there is a chain of customers who are involved with the decision. These groups or individuals have different definitions of value.

The insurance company may be more concerned with cost of a procedure and follow-up care. Family members may value quality, safety and convenience. But the actual patient, though strongly influenced by these groups, may define value differently.

What are the benefits sought from bariatric surgery? For the patient, the value of bariatric surgery may be seen as life saving and life changing. The surgery is the means to a desired end result--long-term weight loss, improved health, enhanced self-esteem, improved mental health, increased physical attractiveness, and improved lifestyle. Understanding what is driving the behavior is critical to understanding opportunities for value innovation.

Generally health care providers focus on rivals within their industry. But you compete not only with other bariatric surgical centers but also with businesses and other health care providers that offer substitute products and services. It is important to recognize that in making every health care decision, patients consider substitutes.

Understanding why patients select substitutes may lead to important insights into the design of your service offering. What is the array of options available to your prospective patients? While not an exhaustive list, conventional therapies would include fitness facilities, plastic surgery and weight loss plans.

Opportunities for innovation also can be found by looking across strategic groups. A strategic group refers to a group of businesses within an industry that serve a similar strategy. In most industries, the fundamental strategic differences are captured by a small number of strategic groups.

Strategic groups can generally be ranked on two dimensions--price and performance. The key to identifying innovation is to understand what factors determine patients' decisions to trade up or down from one group to another.

Two of the major strategic groups for bariatric surgery are community hospitals and academic medical centers. What differentiates them in the minds of the patient? Reasons for selection of community-based hospitals might include convenience and accessibility, familiarity with the surgeon, a friendly atmosphere and more personalized care.

Factors driving the selection of academic medical centers might include perceptions associated with enhanced reputation, greater medical experience and expertise, and lower risks. Offering the benefits of both strategic groups creates new market space and innovation.

For example, community hospitals are emphasizing their medical expertise and experience to attract patients who might select an academic center. Academic centers are improving the level of service they provide to their patients and families by providing valet parking and full-service restaurants.

Bariatric surgery is not offered in a vacuum. Other products and services affect its value. Value often is hidden in complementary products and services. The key is to define the total solution patients seek when they choose a service.

A simple way is to think about what happens before and after surgery. Prior to surgery, the patient will require medical, psychological, dietary and social work evaluation. During the hospital stay, he or she will require physical and occupational therapy, as well as dietary adjustments. As weight loss progresses, the patient will require nutrition planning, exercise regimens and often plastic and reconstructive surgical procedures.

Competitors in an industry tend to converge not only around an accepted notion of the scope of its product and service offerings, but also on the basis of appeal. Some industries compete principally on performance; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional.

Yet the appeal of most products or service offerings is rarely one or the other. Over time, functionally oriented industries become more functionally oriented and emotionally oriented industries become more emotionally oriented.

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Figure 2 illustrates how the value curve for bariatric surgery might be altered. The value curve is altered in five major ways. Currently, provided a hospital is willing to grant privileges, any surgeon may perform bariatric surgery.

A major value innovation in the industry would be the requirement for mandatory certification for bariatric surgery. This would significantly change current industry standards and increase barriers to entry by those less qualified.

A second innovation is in the delivery of postoperative rehabilitative services. Rather than individual, service-based rehabilitative care, the new value curve utilizes a dedicated team whose sole responsibility is the care and treatment of obese patients. This "lifestyle" team would allow for the delivery of coordinated care and treatment.

A third innovation is the redefinition of bariatric surgery. It takes into consideration that bariatric patients require at least two surgical procedures--gastric bypass and abdominoplasty.

For example, breast reconstruction is considered "non-cosmetic" and thus covered by insurance following a mastectomy. Likewise, by changing the definition of bariatic surgery to include reconstruction, you shift abdominoplasty from a cosmetic procedure to a medically necessary component of care. The patient, as your customer, becomes "locked in" for both procedures.

A related service is providing fitness and exercise facilities. Recognizing that obese patients may have limited experience with proper exercise and physical fitness, and that exercise is a necessary ingredient to long-term recovery and health, providing the patient an environment in which they are comfortable is critical.

Last, but not least, the emphasis in this new value curve is on patient services, not technology per se. While all surgeons are interested in using the latest and best equipment, it is important to recognize that patients are interested in the end result and not necessarily the means to the end.

You can compete head-to-head with other providers by offering similar services focusing primarily on cost efficiencies as the key to profitability. Alternatively, you can break free from the pack by innovating and focusing on delivering superior value to your patients. Value innovation allows you to challenge conventional strategic thinking, and create new value and revenue for your programs.

David P. Tarantino, MD, MBA, is the executive medical director of Shock Trauma Associates, P.A., a 50+ physician, multispecialty practice associated with the University of Maryland School of Medicine. In addition, he is the chief executive officer of The MD Consulting Group, LLC, a health care management consulting firm in Baltimore. He can be reached by phone at 410-328-2036 or by e-mail at [e-mail]

References

1. Kim WC, Mauborgne R. "Value innovation: The strategic logic of high growth." Harvard Business Review. 1997 (January-February); 75(1): 103-112.

2. Kim WC, Mauborgne R. Creating new market space. Harvard Business Review. 1999 (January-February); 27(1): 83-93.

By David Tarantino, MD, MBA