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Competitive strategies for the changing world of blood banking.

Competitive strategies for the changing world of blood banking

The blood banking industry is facing perhaps its most serious challenge ever, as unprecedented competitive pressures put the squeeze on blood centers throughout the country. Skyrocketing health costs have triggered farreaching cost containment initiatives. The resulting environment has made price an overriding concern to consumers of hospital products and services, including blood.

Competition of any kind is a new phenomenon for most blood centers, and many are ill-prepared to respond. In the past, blood centers have been hospital-based or regional operations with well-defined turf and a virtual monopoly over their base of hospital customers. Suddenly, hospital administrators are demanding lower prices for blood products and services, and blood centers are raiding other territories by offering lower prices to hospitals outside their normal jurisdictions.1, 2

As if these internal threats weren't enough, the appearance of artificial or genetically produced blood substitutes further complicates the marketplace for blood banking.3 The red cell substitute Fluosol-DA, discovered by the Japanese, is undergoing clinical trials on humans. It is useful in cases where a patient has a religious objection to the transfusion of human blood.4, 5

Recombinant DNA research has isolated the genetic code of the proteins necessary to clone derivative products now made from human plasma. It seems just a matter of time until the clotting factor in platelets can be duplicated genetically.1, 6, 7

It is debatable whether all these blood substitutes are economically feasible for mass production and widespread use. But the threat is real--and the impact on blood banking will be considerable, regardless of the degree of use.5, 6

With all these dark clouds gathering, is there a long-term future for blood banking? The answer is yes, if blood bankers make timely plans to match their special abilities with new opportunities.8 These options include organ procurement, bone and tissue banking, nonrelated bone-marrow do-nor programs, and expanded laboratory services.

Blood banks cannot respond to these challenges effectively unless they reexamine their business strategies. They must identify their strengths and weaknesses and focus on areas where they enjoy a competitive edge. Let's begin this strategic planning by analyzing the industry's move toward competition, potential outside threats, and factors necessary for present and future success. Then we'll sort blood banks into four groups based on volume, and suggest how each might reposition itself for survival and growth.

What are the driving forces in the blood banking industry? An organization's size and affiliation status are important determinants of its resources for coping with change. The not-for-profit blood banking industry comprises more than 2,200 collection establishments (Figure I). While 90 per cent of these are hospital-based, they only account for 10 per cent of total collections. In contrast, regional and national blood banks serving multiple counties or hospitals account for 10 per cent of the establishments but 90 per cent of the 11 million units collected annually.2

It's critical for strategists to understand where an industry is headed and why.9 In blood banking, at least four main forces are shaping the competition. These forces, in order of importance, are: product safety, product innovation, cost containment pressures, and process innovation. Figure II shows sources and anticipated impact of these forces.

Product safety. The blood banker's top priority must be the safety of the blood supply. Various tests and other safety measures have created a safer but more costly supply. With manufactured blood substitutes, quality control may be both cheapter and more effective than with continued reliance on human donors.

Product innovation. The discovery of more and better clinical uses for blood components has boosted the demand for blood products over the last decade-a demand that has only slackened in the last few years. Potential blood substitutes may profoundly change the industry's future, however. We will discuss trends in that area shortly.

Cost containment pressures. As the cost of health care approaches 10 per cent of the gross national product, we have seen a host of public and private attempts at restraint. Among them have been the Tax Equity and Fiscal Responsibility Act of 1982. which laid the groundwork for Medicare reform, and the DRG-based prospective payment system. Reimbursement based on incurred costs had offered no incentive for efficiencies within hospitals or blood banks.1 In the future, aggressive blood banks are likely to take advantage of cost containment pressures by cutting prices and muscling in on the market share of other blood banks.

Process innovation. The introduction of the multibag plastic blood container allows harvesting of blood components such as platelets and cryoprecipitate from whole blood. Subsequent refinements have extended shelf life from 21 days to 42 days. This has improved the blood supply, enhanced buyers' bargaining positions, and stimulated price competition.

These forces--especially cost containment and product innovation --are changing the structure of the industry and the nature of its competition. We can better understand these developments by using an analytical tool known as the five forces model of competition.10 This model, shown in Figure III, assesses the relative threat of five key factors and their specific application to blood banking.

How will the blood market behave as competition heats up? At persent, the keenest competition is in large metropolitan regions where several blood centers operate. Regional banks that supply 100 per cent of an area's need have yet to feel the effects of a struggle that will soon take place between regions as well as within them. Let's look at the five forces that are influencing this struggle.

Substitute products. There is still no real substitute for human blood products, but technological advances suggest that their arrival in the marketplace is imminent. The two most promising areas are red cell and plasma derivative substitutes.

Red cell substitute research has focused on two alternatives. The first is perfluorocarbons, cellular aqueous emulsions of synthetic carbons and fluorine with both oxygen transport and plasma expansion properties. The second is stroma-free hemoglobins (SFHs), "natural' substances derived from outdated red cells. Both these products require no cross-matching and can be made disease-free. Their use is limited, however, because they rapidly lose their oxygenation capacity and require special handling.5

The consensus of medical and research experts is that these blood substitutes are now usable in only about 10 per cent of all red cell applications. But as technology races ahead, artificial blood is expected to claim a growing share of total blood usage. Meanwhile, even a conservative 10 per cent estimated cut in RBC demand will hit the human blood collection industry hard.

Genetically produced plasma derivative substitutes are the most urgent threat to blood banking. Recombinant DNA research has already cloned the proteins for serum albumin and Factor VIII, which are undergoing clinical trials. Several hurdles remain before mass production is feasible, but these products are expected to achieve widespread use before artificial red cells do. The worldwide market for plasma proteins approaches $1 billion in annual sales, so there is considerable interest in perfecting substitutes for mass consumption.

As we develop more cost-effective production methods, the need for human plasma may be eliminated. Blood banks should prepare for this possibility by investigating alternative sources of revenue, detailed below.

Rivals' strategies. The blood products industry is reaching a mature stage of its life cycle where price sensitivity becomes more apparent--and price cutting proliferates to maintain or increase market share. Although price wars and territory raiding have so far been limited to large cities, there's every reason to believe that more blood centers will market their products beyond their own regions.

Some will be maintaining revenue defensively in the face of declining demand for human blood. Others will make the first move to exploit spending pressures. All blood centers will have to reevaluate their current pricing policies.

Economic power of suppliers. Two groups supply the blood banking industry: donors with blood, and manufacturers with containers, reagents, and other collection and processing materials. Today, the local blood bank controls access to donors. This critical control protects the market position of small hospital-based blood banks and makes marketing and recruiting expertise essential.

The need for donor access explains the industry's structure, characterized by numerous small hospital-based blood banks (under 25,000 units collected). With the introduction of manufactured substitutes, local blood banks will lose some control over blood supplies. Expertise in marketing and donor recruitment may decline somewhat in importance.

The highly specialized marke for blood collection and processing materials is dominated by a few firms. If consolidation continues in that sector, blood banks may find it difficult to pass cost pressures on to their suppliers.

The economic power of buyers. In the past, hospitals--the buyers of the blood supply--had little chance or motivation to wield economic power over blood banks. But two factors have created a buyers' market for blood products. First, the recent slowdown of demand and an increasing product availability have essentially eliminated overall shortages. Second, pressures to cut health costs have sharpened demand for lower prices. In the future, look for hospitals to make greater use of their economic clout.

Potential for new entrants. New players find that the field of blood banking is not easy to enter, thanks to high capital investment costs and rigid technical and licensing requirements. However, there's a strong possibility for diversification by organizations already in the health field, particularly the national chains.

Examining these five forces raises serious questions about the future of blood banking as we know it. Substitute products will at least partially replace reliance on human donors. The cost squeeze will stimulate price cuts and territory raids among rivals. Organizations with high costs and limited resources may go under, and mergers are likely as the industry contracts. Despite this unsettling outlook, there are opportunities for diversification that maximize the strong points of regional blood banks.

A blood center can create several growth scenarios by diversifying the mix of products and services offered. Vehicles for expansion into related products and activities include organ procurement, bone and tissue banking, a nonrelated bone marrow donor program, crossmatching services, paternity testing, and outpatient transfusions. Such opportunities abound, but that doesn't make them an appropriate choice for every center. Thus, before deciding to integrate a particular product or service, a blood center must evaluate a growth area in relation to its size, affiliation, and certain crucial determinants for success.11 The importance of these success factors to various strategies is shown in Figure IV.

Three factors stand out as absolute essentials for success: technical expertise, marketing and recruitment skills, and competitive prices. Less significant factors such as size, financial resources, and corporate affiliation will figure prominently in any plans to compete in organ procurement, nonrelated bone marrow, and advanced lab services.

Organ transplanation, for instance, has made tremendous strides in the last decade. Each year, thousands benefit from transplanted kidneys, corneas, hearts, and livers. Thousands more live with the hope that researchers will soon conquer the immunological barriers to transplanting other organs, such as the pancreas for diabetics.1 The enormous demand for organs continues to escalate, far outpacing supply.

Blood banks have a tremendous opportunity to turn their skill and experience in recruitment, collection, testing, and distribution to the task of filling this void. Because of the need for intense clinical sophistication and swift timing, large blood banks located near transplantation centers would be the likely candidates here. The hefty startup capital might also discourage smaller centers from choosing this option.

Bone and tissue banking present an opportunity nearly all blood banks could explore, regardless of size. More than a half-million bone transplants are performed annually. Research shows that the use of human bone, even from a nonrelated donor, works better than plastic or other synthetic materials. The success of anti-rejection drugs broadens the potential for reconstructive applications.

Bone tissue must be size compatible with the recipient and tested for disease prior to transplantation.12 Collection, testing, and storage of bone and other tissues are within the capabilities of most blood banks and would require little added investment. A centralized bone bank in a regional or even a hospital setting would be far better than the present hit-or-miss collection methods. A blood bank would be a natural vehicle for this activity.

A nonrelated bone marrow donor program is another avenue. One of the few successful treatments for some leukemias and other genetic blood diseases has been marrow transplants from siblings or other close relatives. Technical advances are making rejection of marrow from nonrelated donors a less serious problem.

While bone marrow donation requires a surgical procedure and cannot be equated with the donation of blood, blood banks would certainly be a logical recruiting agency. Pheresis donors are highly committed and may have undergone histocompatibility testing for matching with a specific patient. Why not try to persuade them to contribute bone marrow as well?

Recruitment and testing would be a natural outgrowth for centers conducting hemapheresis procedures and capable of HLA testing. Such blood banks are usually large ones, with high levels of technical and recruiting expertise. Blood banks affiliated with a national corporate network would have an extra advantage in donor/ recipient matching.

Blood banks could also generate revenues through expanded laboratory services such as patient crossmatches, paternity testing, and outpatient transfusions. These services are now offered primarily within hospitals for their own patients. But as budgets tighten on redundant services, regionalization looks more attractive. Regional blood centers, and even some larger hospital-based ones, are appropriate sites for consolidation. Those offering good service at the lowest cost will be the winners.

This analysis suggests that we can classify blood banks by size and affiliation status into four groups whose members share similar options for diversifying. The groups are: independent hospital-based blood banks collecting fewer than 25,000 units per year; affiliated or independent regional banks collecting fewer than 25,000 units per year; independent regional banks collecting more than 25,000 units per year; and regional blood banks affiliated with a corporate network and collecting more than 25,000 units per year. (None of the 2,000 independent hospital-based blood banks collects more than 25,000 units annually.)

The unique operating assets and liabilities of each strategic group (Figure V) tend to favor or preclude involvement in various growth plans. Take, for example, a large regional blood center strategically located near a transplant center and having a national affiliation for assistance with finances, research and development, and communication. Such an organization would have an obvious head start in organ procurement.

Most blood banks in each group will have enough strong points to compete successfully in any of the appropriate options listed. Hospital-based blood banks collecting fewer than 25,000 units, for instance, may find either bone and tissue banking or paternity testing to be workable alternatives. Large, affiliated blood banks have the resources to explore all six diversification routes.

Success in these enterprises will depend on a blood bank's competencies and the ability of management to formulate and implement the right strategies for the situation. In general, collection size and affiliation status are the biggest influences on the scope of diversification.

To sum up: The driving forces in blood banking--product safety and innovation, cost containment, and process innovation--are shaking up the balance of economic power in the industry. We've seen how these forces may alter traditional patterns of rivalry.

The options open to a blood bank depend on size, affiliation, and resources. Diversification holds out promise to all strategic groups, but smaller hospital-based centers may have the toughest time adapting. Independent regional centers, depending on size, have more choices because they serve multiple users, and may have more investment resources available. Affiliates of national parent organizations, even the smaller ones, have a support base for complex programs that independents may lack.

The industry will become increasingly hostile but no less essential. Not every blood center will make it. Those that do will need a spirit of innovation and clarity of purpose. And the survivors will take an active, aggressive role in developing alternative products and services for the needs of the future.

1. Kahn, Richard. "Opportunities Beyond Blood Services.' Speech to ARC Blood Services Management Conference, Cleveland, Sept. 15, 1983.

2. "Blood Policy and Technology.' Washington, D.C., U.S. Congress. Office of Technology Assessment, OTA-H-260, 1985.

3. Banking on artificial blood. Changing Times 37: 16, March 1983.

4. Bolin, R.B., et al. "Advances in Blood Substitute Research.' New York, Alan R. Liss, 1983.

5. Bonhard, K., et al. International forum: What is the foreseeable clinical application of oxygencarrying blood substitutes (fluorocarbons and hemoglobin solutions)? Vox Sang. 42: 97-109, March 1982.

6. Aledort, L.M., et al. International forum: What is the prospective impact of the recompinant DNA technique on the production of human plasma derivatives? Vox Sang 44:390-395, December 1983.

7. U.S. market for major blood proteins. Genetic Technology News 4: 6-7, October 1984.

8. Oberman, H.A. A new era for blood banks. Transfusion 24: 279-280, July-August 1984.

9. Porter, M.E. "Competitive Strategy. Techniques for Analyzing Industries and Competitors.' New York, Free Press, 1980.

10. Porter, M.E. How competitive forces shape strategy Harvard Business Review 57: 137-145, March-April 1979.

11. Hofer, C.W., and Schendel. D. "Strategy Formulation: Analytical Concepts.' New York, West, 1978.

12. "Procedures for Establishing and Operating a Bone Bank.' St. Paul, Minn., American Red Cross Transplant Donor Services, 1984.

Table: Figure I Today's blood banking industry by annual collection volume

Table: Figure II Driving forces in blood banking

Table: Figure III The five forces of competition

Table: Figure IV How key success factors affect strategic opportunities
COPYRIGHT 1986 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1986 Gale, Cengage Learning. All rights reserved.

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Author:Rietzke, Mary Lee; Doll, William J.
Publication:Medical Laboratory Observer
Date:Jul 1, 1986
Words:2933
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