Final Project

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CHAPTER

Understanding and Analyzing

the General Environment and

the Health Care Environment

“When written in Chinese, the word ‘crisis’ is composed of two characters – one represents danger and one represents opportunity.”

Anonymous

2

Introductory Incident

Tax Exempt Status for Hospitals Under Scrutiny

its property tax exemption valued at $1.1 million annually.1 Aggressive collection practices were cited. According to Provena, “the State of Illinois revoked the tax exemption for one of our hospitals. The State’s decision was restricted to property taxes and that issue is under appeal.”2 The hospital

About 85 percent of the 5,000 hospitals in the United States are not-for-profit, but some of them are facing legal challenges to maintain their tax exempt status. State regulators in Illinois ruled that Provena Covenant Medical Center was no longer considered a charitable organization and thus lost !

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4 6 C H A P T E R 2 : U N D E R S T A N D I N G A N D A N A L Y Z I N G

in uncompensated and charity care in the past nine years. Under IRS regulations, to be declared not-for-profit, hospitals have to demonstrate that they “provide a community benefit.”

The lawsuits claim that hospitals in Illinois, Minnesota, Ohio, Texas, Georgia, Alabama, Florida, and Tennessee used creative accounting practices to grossly distort the small amount of charity care they provide to uninsured patients. “Instead, the hospitals charge the uninsured ‘sticker’ prices for health care, an amount higher than any other patient group, and then, when the uninsured can’t pay, harass the uninsured through, among other tactics, aggressive collection efforts such as garnish- ment of wages and bank accounts, seizures of homes, and personal bankruptcies,” Scruggs said.5

Since June 2004, there have been 39 suits filed against 340 hospitals in 20 states. Trinity Health, operator of 12 hospitals in Michigan, is included. For the fiscal year ended June 30, 2003, Trinity Health reported net income of $110.9 million and an operating margin of 2.3 percent above average compared with other large Catholic health sys- tems, according to Trinity. The system said it provided $438.4 million in community health care services in fiscal ’03, including $224.5 million in unpaid cost of Medicare and $79.0 million in unpaid cost of Medicaid.6

Rep. Bill Thomas (R, California), chair of the House Ways and Means Committee, is planning hearings on federal tax exemptions for not-for-profit hospitals.

Notes 1. Philip Betbeze, “Aggressive Collections,”

HealthLeaders, July 1, 2004. 2. Thomas H. Hansen, Provena Health, Letter to

Editor of Time Magazine, dated October 15, 2004. www.provenahealth.com/news.

3. Philip Betbeze, “Aggressive Collections.” 4. Wall Street Journal, June 17, 2004. 5. Holbrook Mohr, “Nonprofit Hospitals Face Lawsuits,”

Detroit Free Press, June 18, 2004. 6. Kim Norris, “Charity Suits Name 2 Hospitals: Trinity,

Beaumont Accused,” Detroit Free Press, July 22, 2004.

has so far paid almost $2 million in property taxes for 2002 and 2003.

Against a tight economy and a deteriorating bot- tom line, hospitals across the country have been advised to increase their collections of bad debts. Many hospitals have hired collection agencies that are paid fees based on a percentage of the amount collected. The agencies are aggressive in their efforts, sometimes with intimidating phone calls and letters, but also with other tactics, such as threatening to report patients with Hispanic-sounding last names to the immigration authorities or the practice of “body attachment” that makes a patient with an unpaid balance subject to arrest for not appearing in court.3

Richard Scruggs, the attorney known for his class- action suits and billion dollar settlements against the tobacco industry, filed federal class-action lawsuits in June 2004 against 18 hospitals in 11 states on behalf of uninsured patients. He alleged that the hospitals did not deserve tax exempt status because of their aggressive collection practices and their lack of char- ity care as they overcharged uninsured patients. Scruggs considers the actions by the hospitals to be a “breach of contract” based on the agreement that the not-for-profits have with the government to receive tax exempt status in return for treating uninsured patients.4

At issue is the practice by many hospitals to charge uninsured patients full price whereas insured patients, especially those working for large employers, have a negotiated price that is significantly lower. In addition, government payors (Medicare and Medicaid) require the greatest dis- counts. Hence, the “full price” may be three or four times that charged to insured patients. As the economy declines, there are more uninsured. More and more small businesses are dropping health care insurance for employees; employees who still receive coverage for themselves are opting not to cover their families.

One of the hospitals being sued, Advocate Health Care in Chicago, defended its charity care noting that it has provided more than $1 billion

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4 7T H E I M P O R T A N C E O F E N V I R O N M E N T A L I N F L U E N C E S

Learning Objectives After completing this chapter the student should be able to:

1. Appreciate the significance of the external environment’s impact on health care organizations.

2. Understand and discuss the specific goals of environmental analysis.

3. Point out some limitations of environmental analysis.

4. Describe the various types of organizations in the general and health care environments and how they create issues that are of importance to other organizations.

5. Identify major general and industry environmental trends affecting health care organizations.

6. Identify key sources of environmental information.

7. Discuss important techniques used in analyzing the general and health care environments.

8. Conduct an analysis of the general and industry external environments for a health care organization.

9. Suggest several questions to initiate strategic thinking concerning the general and industry environments as a part of managing the strategic momentum.

The Importance of Environmental Influences

Fifty years ago the delivery of health care was a relatively uncomplicated rela- tionship of facilities, physicians, and patients working together. Government and business stood weakly on the fringes, having little significant influence. Today, a multitude of interests are directly or indirectly involved in the delivery of health care. For instance, the for-profit provider segment has grown dramatically; private-sector businesses are largely responsible for the development and delivery of drugs and medical supplies; and government agencies regulate much of the actual delivery of health care services. As a result, in their quest for competitive advantage, organizations are pouring increasingly more money into collecting and organizing information about the world in which they operate.1

Ultimately, strategic thinking is directed toward positioning the organization most effectively within its changing external environment. Peter Drucker writes, “The most important task of an organization’s leader is to anticipate crisis. Perhaps not to avert it, but to anticipate it. To wait until the crisis hits is already abdication. One has to make the organization capable of anticipating the storm,

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weathering it, and in fact, being ahead of it.”2 Therefore, to be successful, health care organization leaders must have an understanding of the external environ- ment in which they operate; they must anticipate and respond to the significant shifts taking place within that environment. Strategic thinking, and the incor- poration of that thinking into the strategic plans for the organization, is now more important than ever. Futurist Joel Barker has suggested that “in times of turbulence the ability to anticipate dramatically enhances your chances of success. Good anticipation is the result of good strategic exploration.”3 Organizations that fail to anticipate change, ignore the external forces, or resist change will find themselves out of touch with the needs of the market, especially because of anti- quated technologies, ineffective delivery systems, and outmoded management. Institutions that anticipate and recognize the significant external forces and modify their strategies and operations accordingly will prosper.

The introduction of an early recognition system to identify external opportun- ities and threats is a major task for health care managers. This task has evolved because of the growing impact of economic factors, new technologies, increasing government influence, new centers of power, demographic shifts, changes in motivation for work, and changes in values and lifestyles, as well as changes in the kind and extent of competition. Therefore, strategic thinking must be directed toward “reading” the many shifts occurring in the external environment and determining which are important to the success of the organization. As discussed in the Introductory Incident, should hospitals be concerned about the shift tak- ing place in tax exempt status?

One of the greatest challenges for health care organizations is identifying the changes that are most likely to occur and then planning for that future. Interviews with health care professionals and a review of the health care liter- ature suggest that health care organizations will have to cope with change in some or all of the following areas: legislative/political, economic, social/demographic, technological, and competitive.4

Legislative/Political Changes

• More regulation of health plan activity is expected, including legislation to curb health plan abuse, disclosure rules, mandates for clinical protocols, and pri- vacy of medical records.

• Incremental legislative reform can be assumed, rather than large-scale health or social programs; legislative efforts to reduce escalating health care costs.

• Health care will become the political “hot potato” that it was during the early 1990s because of medical inflation, pressure to control the cost of Medicare, and so on.

Economic Changes

• Moderate but consistent increases in the cost of health care are anticipated, accounting for 15 percent of the gross domestic product (GDP).

• Employers will become more unwilling to shoulder the entire burden of increasing costs for health care insurance and health care for their employees.

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• Over 15 percent of Americans are without health insurance – a number that is predicted to be 48 million by 2009.

• Forced mobility of patients from one health care provider to another will increase because of changes in the health plan selected by employers.

Social/Demographic Changes

• An aging population and increased average life span will place capacity burdens on some health care organizations while a lessening of demand threatens the survival of others. By 2020, the US population over the age of 65 is expected to reach 53.7 million.

• The Hispanic population, many of whom do not speak English or speak it poorly, will continue to grow. Hispanics could become the largest minority child popu- lation as early as 2010. By 2050, one out of four Americans will be Hispanic.

• A more ethnically diverse and better-educated population will develop. • An increase in income disparity is expected – a critical factor in determining

health care delivery. • “Tiered” access to health care is anticipated, with the division between the tiers

becoming more extreme. • There are predictions of critical shortages of nonphysician health care profes-

sionals and primary care physicians, yet a surplus of physicians within some specialties and in some geographic regions.

Technological Changes

• The high costs of purchasing new, sophisticated, largely computer-based tech- nologies to meet the demand for high-quality health care will continue to rise.

• Significant advances in medical information technology are anticipated, such as automation of basic business processes, clinical information interfaces, data analysis, and telehealth.

• New technologies will emerge in the areas of drug design, imaging, minimally invasive surgery, genetic mapping and testing, gene therapy, vaccines, arti- ficial blood, and xenotransplantation (transplantation of tissues and organs from animals into humans).

Competitive Changes

• Further consolidation will be seen within the health care industry because of cost pressures and intensified competition.

• The disintegration of some health care networks can be expected. • Health care corporations will continue to expand into segments that have less

regulation, and into businesses outside of the traditional health care industry. • The importance of market niche strategies and services marketing will increase. • Outpatient care and the development of innovative alternative health care

delivery systems will continue to grow. • The decreasing viability of many of the nation’s small, rural, and public hospitals

means there will be a reconfiguration of the rural health care delivery system.

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• Increasing numbers of physician executives will have leadership roles in health care organizations.

• More emphasis will be on preventive care through wellness programs and healthy behavior.

• An increased emphasis will be placed on cost containment and measurement of outcomes of care (cost/benefit).

• A changing role for public health is expected, moving back to “core” activities (prevention, surveillance, disease control, assurance) and away from the delivery of primary care.

• A shortage of 800,000 nurses will occur by 2020. • Pressure to reduce the costs of administration of health care will increase.

Major Industry Shifts

Such legislative/political, economic, social/demographic, technological, and competitive changes over the past three decades have shaped the health care industry and have contributed to the creation of a new language to describe it. Perspective 2–1 examines the growing list of health care acronyms and abbrevi- ations that characterize the nature of industry change. Major industry shifts are perhaps most obvious in two related areas – the evolution of the financing of care and the restructuring of the industry’s organizations.

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• AHC (academic health center) or AMC (academic medical center): a group of related institutions including a teaching hospital, a medical school and its affiliated faculty practice plan, as well as other health profes- sional schools.

• CMS (Center for Medicare and Medicaid Services): part of the US Department of Health and Human Services, the contracting agency for health maintenance organizations (HMOs) that seek direct contrac-

tor/provider status for provision of Medicare and Medicaid benefits. (Formerly HCFA.) • CON (certificate of need): laws in some states require a CON to determine whether the state will

permit a hospital or a physician’s practice to add beds, operating rooms, or expensive pieces of tech- nology (see Perspective 2–4).

• DRG (diagnosis related group): a classification system using 383 major diagnostic categories that assign patients into case types. It is used to facilitate utilization review, analyze patient case mix, and deter- mine hospital reimbursement. For example, the classification DRG 320 indicates a kidney and urinary tract infection.

• DSH (disproportionate share hospital): programs that provide for additional payments to hospitals that serve a large number of low-income inpatients.

• EMR (electronic medical record): A medical document stored in a machine-readable format. Data are entered into the record via many different sources, including computerized entry and various docu- ment imaging systems. Also called an electronic patient record. !

Perspective 2–1 The Changing Language of Health Care

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• EPO (exclusive provider organization): although structurally similar to a preferred provider organ- ization (PPO) in that an EPO can simply be a network of health care providers, the plan beneficiaries cannot go out of the network or they must pay the entire cost of services. EPO physicians are reimbursed only for services actually provided to plan beneficiaries (rather than a capitated rate).

• FFS (fee for service): refers to a provider that charges the patient according to a fee schedule set for each service or procedure performed; the patient’s total bill will vary by the number of services or procedures actually performed.

• HEDIS (healthplan employer data and information set): a set of standardized measures of health plan performance that allows comparisons of quality, access, satisfaction, membership, utilization, financial information, and management.

• HIPAA (Health Insurance Portability and Accountability Act): enacted in 1996, it includes five primary sections or “titles.” Title 1: Health Care Access, Portability, and Renewability. Title 2: Preventing Health Care Fraud and Abuse; Administrative Simplification. Title 3: Tax-Related Health Provisions. Title 4: Application and Enforcement of Group Health Plan Requirement. Title 5: Revenue Offsets.

• HMO (health maintenance organization): an organization interposed between providers and payors that attempts to “manage the care” on behalf of the health service consumer and payor. HMOs are responsible for both the financing and delivery of comprehensive health services to an enrolled group of patients.

• IDS (integrated delivery system): IDSs combine and own, or closely coordinate, multiple stages of health care delivery. The integration usually includes many steps in the full spectrum of health services delivery, including physicians, hospitals, and long-term care facilities.

• IPA, IPO (independent practice association, independent practice organization): a legal entity composed of physicians who have organized for the purpose of negotiating contracts to provide medical services. Typically, physicians maintain their independent businesses but come together as a group to negoti- ate with payors. A super IPA has many IPAs rolled into one to contract with payors.

• JCAHO (Joint Commission on Accreditation of Healthcare Organizations): the major accredit- ing body for many health care organizations. Hospitals must be JCAHO accredited to receive Medicare and Medicaid funds; thus, the organization has great importance in the health care delivery system.

• LOS (length of stay): length of stay is also known as the average length of stay (ALOS) or the arith- metic mean of length of stay (AMLOS). It is the average number of days patients stay in the hospital for a specific DRG (diagnosis related group).

• MCO (managed care organization): any organization whose goal is to eliminate excessive and unneces- sary service, thereby keeping health care costs manageable.

• MSO (management service organization): a legal corporation formed to provide practice management services to physicians. At one extreme, an MSO could own one practice or several hundred practices. At the other extreme, an MSO may not own any physician practices or provide management services. In that case, the MSO would be strictly an entity that signs managed care contracts for an affiliated provider group. Typically, an MSO will require a commitment of 10 to 40 years from the physician or group practice contracting for its services.

• NCQA (National Committee for Quality Assurance): a private, not-for-profit organization, NCQA is governed by a board of directors that includes employers, labor representatives, consumers, health plans, quality experts, policy makers, and representatives from organized medicine.

• NIH (National Institutes of Health): one of the agencies of the Public Health Service, which is a part of the Department of Health and Human Services of the US federal government. The NIH is responsible for medical and behavioral research for the United States.

• NP (nurse practitioner): a nurse who serves as the initial contact into the health care system and co- ordinates community-based services necessary for health promotion, health maintenance, rehabilitation, !

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or prevention of disease and disability. Nurse practitioners work interdependently with other health professionals to provide primary health care in many communities.

• OON (out of network): describes health care services received from providers who do not participate in a managed care program’s contracted network of providers. Typically, patients pay all costs out of pocket (no reimbursement).

• OSHA (Occupational Safety and Health Act): a comprehensive plan for regulating workplace safety. • PA (physician assistant): an allied health professional who, by virtue of having completed an educa-

tional program in the medical sciences and a structured clinical experience in surgical services, is qualified to assist the physician in patient care activities. Physician assistants may be involved with patients in any medical setting for which the physician is responsible, including the operating room, recovery room, intensive care unit, emergency department, hospital outpatient clinic, and the physician’s office.

• PBM (pharmacy benefit management). • PCP (primary care physician): a physician responsible for coordinating and managing the health

care needs of members. PCPs may be trained in primary care, pediatrics, obstetrics/gynecology, internal medicine, or family medicine. They determine hospitalization and referral to specialists for their patients.

• PHO (physician–hospital organization): an organization designed to integrate a hospital and its medical staff to contract with payors as a single entity. Physicians retain their independence. A super PHO has many PHOs rolled into one to contract with payors.

• PMPM (per member per month): under capitation, the amount paid to care for each member per month, regardless of the number and extent of services used by the member.

• POS (point-of-service): combines a health maintenance organization insurance plan with traditional insur- ance. “Point-of-service” refers to members deciding whether to go in or out of the network. The employee belongs to a managed care plan but can opt for the traditional plan anytime. POS members usually pay less when they stay within the HMO network but can avoid restrictions. When they choose the traditional insurance plan, typical coverage requires them to meet a deductible and 70 to 80 percent of health care costs are paid. Sometimes POS is called an “HMO with an escape hatch.”

• PPO (preferred provider organization): an entity through which various health plans or carriers contract to purchase health care services for patients from a selected group of providers, typically at a better per-patient cost.

• PPS (prospective payment system): a system designed to control costs for Medicare and Medicaid patients. Rather than reimbursing on a retrospective cost-plus system, PPS legislation in 1983 reimbursed hos- pitals on a prospective (predetermined) basis. For example, a hospital would know that it would receive a set amount to treat a broken hip. If the patient could be treated at a cost lower than the reimbursed amount, the hospital could keep the “profit.” On the other hand, if the hospital spent more than the reimbursable amount, for whatever reason, it had to absorb the loss.

• PSO (provider-sponsored organization): integrated groups of doctors and hospitals that assume man- aged care (often Medicare) risk contracts.

• RBRVS (resource-based relative value scale): a national fee system for Medicare payments to physicians. The fee schedule is designed to shift payment patterns from a number of more costly specialties (such as those in surgery) to primary care.

• SNF (skilled nursing facility): an institution that provides inpatient skilled nursing care and rehabil- itative services and has transfer agreements with one or more hospitals.

• TPA (third-party administrator): a firm that performs administrative functions such as claims processing and membership for a self-funded health care insurance plan or a start-up managed care plan.

• UR (utilization review): the review of services delivered by a health care provider to evaluate the appro- priateness, necessity, and quality of the prescribed services.

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Financing of Health Care and Managed Care

Because of health care cost escalation during the 1970s and 1980s, Medicare’s prospective payment system (PPS) was implemented in 1983. As a result of PPS, the financing of health care delivery today is quite different than it was in the mid-1980s. PPS shifted national priorities from insisting on high-quality care regard- less of cost to reducing or holding health care delivery costs in check. The health care system was characterized by cost shifting among patients, providers, physi- cians, payors, employers, and the government.5 As a result, national health care expenditures have continued to increase, rising from $190 billion in 1978 to an estimated $2.2 trillion in 2008 and $3.1 trillion in 2012. Total health care spend- ing as a percent of GDP leveled off at about 13.7 percent at the end of the 1990s but is expected to be 16.2 percent of GDP by 2008 and 17.7 percent in 2012. Another significant result of PPS has been a shift from inpatient to outpatient services, with outpatient visits increasing from 285 million in 1989 to over 500 million at the beginning of the 2000s.

The evolution of managed care systems, including PPOs and HMOs, is the most visible sign of the change in competition and the financing of health care. Although often referred to as health care providers, these organizations are actu- ally interposed between providers and payors and attempt to “manage the care” on behalf of the health service consumer and payor. By the first decade of the twenty-first century, system emphasis was on consumer choice, reducing errors, and competition among health plans for patients.6 As a result HMO market penetration varied dramatically throughout the United States, largely related to the level of competition. In 2004, HMO penetration varied from a low of under 3 percent in states such as Mississippi, North Dakota, Wyoming, and Alaska to over 40 percent in California, Connecticut, and Massachusetts. In addition, over 95 percent of all urban hospitals were affiliated with HMOs. Now more than 70 percent of major employers offer managed care plans and over 80 percent of inpatient care is covered by some fixed-price, managed care payment system.

As well as changing the financing of health care, managed care has fostered industry restructuring and the growth of integrated health systems. Yet, despite the profound effect that managed care had on how providers were organized and how health care was financed, by year 2000, it had only a modest effect on how health care organizations actually deliver medical care. The “revolution” in health care was related more to the “business” of health care than to its delivery.7

As a result, in the first decade of the twenty-first century there has been a renewed interest in quality, reducing medical errors, and improving hospital practices.

Restructuring of the Industry’s Organizations

Significant restructuring of the industry began in the early 1990s and con- tinues today, though at a somewhat slower pace. The large number of failures of health care organizations, on the one hand, and the large numbers of mergers,

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acquisitions, alliances, and cooperatives, on the other, indicate the magnitude of the restructuring that has taken place. This volatility has given rise to many types of new organizational forms and strategies. As health services researchers have noted:

Nowhere has this [change] been felt more than in the multitude of different organizations that make up the health care industry. Historical, regulatory, and geo- graphic boundaries that traditionally divided the various sectors of the industry have toppled, creating new opportunities for organizations to expand outside their traditional domains. . . . Changing technology and population demographics have given rise to a multitude of organizational types providing niche services or products at various points along the continuum of care. Health care insurors and government payors have shifted more of the risk of health costs to providers and patients. This sharing and shirking of risk has spawned a plethora of new organizational forms as providers seek to gain greater coordination and control over cost and utilization.8

The peak of the merger and acquisition activity by hospital companies appears to have occurred in 1996 when 768 hospitals were involved in 235 separate merger or acquisition deals. Since 1996 there has been a steady decline in the level of hospital mergers or acquisitions but there are still significant numbers of hos- pitals involved in this type of activity. In 2003, 100 hospitals were involved in 68 mergers or acquisitions.

Consolidation is taking place in every segment of the health care industry, not just hospitals. Physician medical groups, long-term care, home health, HMOs, rehabilitation, psychiatric, and so on are involved. Even academic medical centers have not escaped restructuring. The academic medical center as an independent, not-for-profit institution of higher learning, research, and patient care may be a thing of the past. Accustomed to having the most difficult cases referred to them, academic medical centers that are not part of a managed care system find they are being left out as they deal with high-cost patients. Institutions that were either state supported or private-university affiliated are seeking alternatives to management and even ownership. They are reengineer- ing themselves into lean, cost-efficient, less bureaucratic, more market-responsive organizations and are renegotiating relationships with the universities, state governments, medical schools, and others to attain greater flexibility and the ability to innovate.

Examples of organizations reading shifts in the external environment and being open to change include the development and growth of outpatient clinics spe- cializing in various alternative medicine approaches such as chiropractic therapy, alternative wound care, nonsurgical cardiac care, and mind/body medicine. Changes in the health care delivery system, institutional support, and the pub- lic’s attitudes are environmental shifts that have provided these opportunities in nontraditional medicine.9 As discussed in Perspective 2–2, another, more recent, shift in the external environment to which health care organizations must suc- cessfully respond is terrorism and disaster preparedness.

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At a time when many health care organizations are struggling to remain solvent, the specter of terrorism continues to shape the health care deliv- ery system. Since the September 11, 2001 terror attacks, the anthrax mail- ings, and the increasing threat of infectious disease outbreaks from agents such as SARS and pandemic flu, the national agenda has focused on the ability of health care organizations to respond to emergencies, both ter- rorist related and naturally occurring. Increasingly, federal agencies such as the Health Resources and Services Administration and the Joint Commission on Accreditation of Healthcare Organizations identify emer-

gency preparedness as a major initiative for hospital accreditation. However, planning and holding disaster preparedness exercises by hospitals and communities across the nation reveal that large gaps exist in the health care system, such that many institutions lack the capacity or the capability to respond to an incident that produces multiple victims. Additionally, emergency planning intensifies the financial burden already plaguing health care organizations. Recent evidence from nationally based disaster pre- paredness exercises indicates that disaster response mandates are insufficiently funded and hospitals must make up the difference in cost from operating revenues – while still maintaining the full array of patient services.

The challenges faced by health care institutions adapting to the current environment are manifold; however, all problem areas must be examined and solutions must be identified prior to an emergency situation. The failure to do so will severely hinder community response and may result in unnecessary casualties. Some of the fundamental issues that affect the preparedness level of any health care system are as follows:

• The health care delivery system is burdened with increased patient utilization and severe staff short- ages as well as decreased medical and financial resources. Care must be taken by hospital planners to maximize response capability without taxing the already fragile situation.

• Hospitals will be the “first receivers” as patients exposed to bioterror or infectious disease agents seek care in hospital emergency departments as serious symptoms begin to emerge. Because emergency departments are already overcrowded and hospitals operate at capacity on a daily basis, a successful planning initiative must consider surge capacity, or a means to free up patient care areas and resources to care for large numbers of affected individuals.

• Even a small event with minimal casualties can overload the hospital response system. Therefore, plans should be regional in nature. Integration and coordination of the spectrum of response agencies in the community will enable the combination of existing resources to provide for the optimum outcome.

• Existing information technologies, such as those that facilitate data transfer, real-time situational analysis, diagnostics, and surveillance must be utilized to manage the flow of information before, during, and after an event to improve coordination, incident management, and response.

• Training must be ongoing. Hospital staff members must be familiar with the incident command struc- ture of the facility and all the policies and procedures associated with emergency event response. An emergency plan must be constantly evaluated through exercises to identify strengths and weaknesses and to keep it current and realistic.

Source: Rachel D. Vásconez, MPH, University of Alabama at Birmingham, from Dan Hanfling, Klaus O. Schafer, and Carl W. Armstrong, “Making Healthcare Preparedness a Part of the Homeland Security Equation,” Topics in Emergency Medicine 26, no. 2 (April–June 2004), pp. 128–143 and John L. Hick, Dan Hanfling, Jonathan L. Burstein, Craig DeAtley, Donna Barbisch, Gregory M. Bogdan, and Stephen Cantrill, “Health Care Facility and Community Strategies for Patient Care Surge Capacity,” Annals of Emergency Medicine 44, no. 3 (2004), pp. 253–261.

Perspective 2–2 Health Care

Facility Disaster Preparedness: Planning for

Emerging Threats

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Efficiency Versus Effectiveness

The key to strategic management and, indeed, to the organization’s success is to “do the right thing” (effectiveness) and not just “do things right” (efficiency). Organizational effectiveness has an external orientation and suggests that the organization is well positioned to accomplish its mission and realize its vision and goals. Efficiency, on the other hand, has an internal orientation and suggests that economies will be realized in the use of capital, personnel, or physical plant. However, if an organization is doing the wrong thing, no amount of efficiency or good management will save it from decline. Health care organizations, of course, should strive to be both effective and efficient. With the continued pressure on health care organizations to reduce costs, a great deal of emphasis has been placed on efficiency; in fact, it may be critical to survival. However, effectiveness is pri- mary; first we must understand what we should be doing.

Overall, efficiency and effectiveness must be balanced. Efficiency is established through the institution of routines directed toward achieving a high level of performance; however, routines are aimed at maintaining the status quo and preventing change. Sometimes highly structured “routines get us into ruts, dull our senses, stifle our creativity, constrict our thinking, remove us from stimulation, and destroy our ability to compete. Yet some routines are essential to a definable, consistent, measurable, and efficient operation.”10 Effectiveness, especially in a dynamic environment, requires learning and change. One of the costs of a learn- ing organization may be lowered performance in the short run. The dynamics of the learning process hamper performance by discouraging the establishment of routine, whereas the demands of performance inhibit learning by institutional- izing routine.11 Therefore, strategic managers must carefully balance efficiency, routines, and the requirements for performance with effectiveness, disorder, learning, and lowered short-term performance. Health care strategic managers must be careful not to allow routines and efforts directed toward efficiency to smother creativity, the organization’s external orientation, or its ability to respond to change – its opportunity to be effective.

The External Nature of Strategic Management

Strategic thinking, strategic planning, and strategic momentum should be dir- ected toward positioning the organization most effectively within its changing environment. Environmental analysis is a part of the situational analysis section of the strategic thinking map presented in Exhibit 1–3. The conclusions reached in environmental analysis will affect the directional strategies and internal analysis. Environmental analysis is largely strategic thinking and strategic planning and con- sists of understanding the issues in the external environment to determine the implications of those issues for the organization.

Environmental analysis requires externally oriented strategic managers. Strategic managers search for opportunities – ways to radically alter the status

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quo, create something totally new, or revolutionize processes. They search for opportunities to do what has never been done previously or to do known things in a new way. The fundamental nature of strategic management requires the awareness and understanding of outside forces. Strategic managers encourage adoption of new ideas in the system, maintain receptivity to new ways, and expose themselves to broad views. Strategic managers, through environmental analysis, can remove the protective covering in which organizations often seal themselves.12 Effective environmental analysis occurs through strategic thinking. This chapter concerns methods to assess the general environment and the health care environment and Chapter 3 focuses on analysis methods to evaluate the service area and competitors within it.

Determining the Need for Environmental Analysis

Based on extensive experience in business, A. H. Mesch developed a series of questions to determine if an organization needs environmental analysis. The questions include:

1. Does the external environment influence capital allocation and decision- making processes?

2. Have previous strategic plans been scrapped because of unexpected changes in the environment?

3. Has there been an unpleasant surprise in the external environment? 4. Is competition growing in the industry? 5. Is the organization or industry becoming more marketing oriented? 6. Do more and different kinds of external forces seem to be influencing deci-

sions, and does there seem to be more interplay between them? 7. Is management unhappy with past forecasting and planning efforts?13

These questions concern the general and health care industry environments as well as the service area. Answering “yes” to any of the questions suggests that management should consider some form of environmental analysis. Answering “yes” to five or more of the questions indicates that environmental analysis is imper- ative. In today’s dynamic environment, most health care managers would prob- ably answer “yes” to more than one of these questions and should therefore be performing environmental analysis – assessing trends, events, and issues in the general environment, the health care industry environment, and the service area.

External environmental analysis attempts to identify, aggregate, and interpret environmental issues as well as provide information for the analysis of the inter- nal environment and the development of the directional strategies. Therefore, environmental analysis seeks to eliminate many of the surprises in the external environment. Organizations cannot afford to be surprised. As one writer has pointed out, “to the blind all things are sudden.” However, while certain repetitive patterns, such as seasons, may be predictable, the forecasting of discontinuities, such as technological innovation or price increases, is virtually impossible.14 Yet,

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strategic managers who practice environmental analysis are so “close” to the environment that by the time change becomes apparent to others, they have already detected the signals of change and have explored the significance of the changes. These managers are often called visionaries; however, vision is often the result of their strategic awareness – thoughtful detection and interpretation of subtle signals of change. Such strategic managers are able to eliminate “predict- able surprises” for the organization – surprises that shouldn’t have been. These mangers are able to avoid disasters by recognizing the threat, making it a priority in the organization, and mobilizing the resources required to address it.15

The lack of forecasting and planning success sometimes is the result of direct- ing processes internally toward efficiency rather than externally toward effectiveness. Such planning systems have not considered the growing number and diversity of environmental influences. Early identification of external changes through environ- mental analysis will greatly enhance the planning efforts in health care organiza- tions. For example, as it became clear that health care reform was moving toward some form of managed care or managed competition (in the health care industry environment and service area), many physician group practices and solo practi- tioners joined together to create large physician-driven health care organizations that could compete for prepaid health care contracts. These physicians viewed such organizations as a way to evolve competitively to ensure their survival.

The Goals of Environmental Analysis

Although the overall intent of environmental analysis is to position the organiza- tion within its environment, more specific goals may be identified. The specific goals of environmental analysis are:

1. to classify and order issues and changes generated by outside organizations; 2. to identify and analyze current important issues and changes that will affect

the organization; 3. to detect and analyze the weak signals of emerging issues and changes that

will affect the organization; 4. to speculate on the likely future issues and changes that will have significant

impact on the organization; 5. to provide organized information for the development of the organization’s inter-

nal analysis, mission, vision, values, goals, and strategy; and 6. to foster strategic thinking throughout the organization.

There is an abundance of data in the external environment. For it to be meaningful, managers must identify the sources as well as aggregate and classify the data into information. Once classified, important issues that will affect the organization may be identified and evaluated. This process encourages managers to view environmental changes as external issues that may affect the organization.

In addition to the identification of current issues, environmental analysis attempts to detect weak signals within the external environment that may

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portend a future issue. Sometimes based on little hard data, managers attempt to identify patterns that suggest emerging issues that will be significant for the organization. Such issues, if they continue or actually do occur, may represent significant challenges. Early identification aids in developing strategy.

Strategic managers must go beyond what is known and speculate on the nature of the industry, as well as the organization, in the future. This process often stimulates creative thinking concerning the organization’s present and future products and services. Such speculation is valuable in the formulation of a guid- ing vision and the development of mission and strategy. The bulleted list of external trends and issues at the beginning of this chapter provides some of the emerging and speculative trends and issues that strategic managers will begin to incorporate into their thinking today.

When strategic managers – top managers, middle managers, and front-line supervisors – throughout the organization are considering the relationship of the organization to its environment, innovation and a high level of service are likely. Strategic thinking within an organization fosters adaptability, and those organizations that adapt best will ultimately displace the rest.

The Limitations of Environmental Analysis

Environmental analysis is important for understanding the external environ- ment, but it provides no guarantees for success. The process has some practical limitations that the organization must recognize. These limitations include the following:

• Environmental analysis cannot foretell the future. • Managers cannot see everything. • Sometimes pertinent and timely information is difficult or impossible to obtain. • There may be delays between the occurrence of external events and manage-

ment’s ability to interpret them. • Sometimes there is a general inability on the part of the organization to

respond quickly enough to take advantage of the issue detected. • Managers’ strongly held beliefs sometimes inhibit them from detecting issues

or interpreting them rationally.16

Even the most comprehensive and well-organized environmental analysis processes will not detect all of the changes taking place. Sometimes events occur that are significant to the organization but were preceded by few, if any, signals. Or the signals may be too weak to be discerned.

Perhaps the greatest limiting factor in external environmental analysis is the preconceived beliefs of management. In many cases, what leaders already believe about the industry, important competitive factors, or social issues inhibits their ability to perceive or accept signals for change. Because of managers’ beliefs, signals that do not conform to what he or she believes may be ignored. What an individual actually perceives is dramatically determined by paradigms (ways

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of thinking and beliefs). And any data that exist in the real world that do not fit the paradigm will have a difficult time permeating the individual’s filters. He or she will simply not see it.17 As creativity expert Edward De Bono explains, “We are unable to make full use of the information and experience that is already available to us and is locked up in old structures, old patterns, old concepts, and old perceptions.”18 Despite long and loud signals for change, in some cases organ- izations do not change until “the gun is at their heads,” and then it is often too late.

The External Environment

Organizations and individuals create change. Therefore, if health care managers are to become aware of the changes taking place outside of their own organiza- tion, they must have an understanding of the types of organizations that are cre- ating change and the nature of the change. Exhibit 2–1 illustrates the concept of

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The General Environment

• Government Institutions • Business Organizations • Educational Institutions • Religious Institutions • Research Organizations/

Foundations • Individuals/Consumers

The Health Care Environment

• Planning/Regulatory Organizations

• Primary Providers • Secondary Providers • Provider Representatives • Individuals/Patients

• Competitors • Government Services • Business Organizations • Non-profit Organizations • Other Local Organizations • Individuals/Consumers

Demographics Psychographics Health Status

Impact the

Organization

The Service Area

Impact the

Organization

Impact the

Organization

Exhibit 2–1: The External Environment of a Health Care Organization

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the external environment for health care organizations. In this chapter we will explore the types of changes initiated in the general environment and the health care industry environment.

Components of the General Environment

All types of organizations and independent individuals generate important issues – and subsequently change – within the general environment. For example, a research firm that is developing imaging may introduce a new technology that could be used by a variety of other organizations in very diverse industries such as hospitals (magnetic resonance imaging) and manufacturing (robotics). The members of the general environment may be broadly classified in a variety of ways depending on the strategic management needs of the organization analyzing the environment. These groups of organizations and individuals make up the broad context of the general environment:

1. Government institutions, 2. Business organizations, 3. Educational institutions, 4. Religious institutions, 5. Research organizations and foundations, and 6. Individuals and consumers.

Organizations and individuals in the general environment, acting alone or in concert with others, initiate and foster the “macroenvironmental” changes within society. These organizations and individuals generate technological, social, regulatory, political, economic, and competitive change that will, in the long run, affect many different industries (including health care) and may even directly affect individual organizations. Therefore, external organizations engaged in their own processes and pursuing their own missions and goals will affect other industries, organizations, and individuals.

In the general environment, changes usually affect a number of different sectors of the economy (industry environments). For example, passage of the prescription drug bill during the George W. Bush presidency affected a variety of organizations as well as individuals. Similarly, the early health care reform ini- tiatives of the Clinton administration would have affected virtually all institutions in the general environment, not just health care organizations. Market forces, not politicians, speeded much of health care change during the 1990s, although two pieces of legislation were passed from the Clinton health care reform efforts – HIPAA and CHIP.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 was passed to protect those who already had health insurance from losing it if they changed jobs, create a pilot program for medical savings accounts, increase the deductibility of health insurance for the self-employed, and provide tax breaks to increase the use of long-term care insurance.19 Compliance was legislated for

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February 2000; however, by 2004 there were still issues to be resolved regarding security and privacy of patient medical information as it became standardized and electronically available. The final rule adopting HIPAA standards for the secur- ity of electronic protected health information was not published in the Federal Register until February 20, 2003.20

The Balanced Budget Act of 1997 incorporated the Children’s Health Insurance Program (CHIP) to provide insurance coverage for low-income children who did not qualify for Medicaid. Many of the 10 million children who have no health insurance are from working families with incomes too high to qualify for Medicaid but too low for them to afford private health insurance. CHIP is a jointly funded federal/state program that gives the states three options: states can ex- pand their Medicaid program to cover these children, create a separate program, or employ a combination of the two. Fifteen states and the District of Columbia have expanded their Medicaid programs, 16 states created separate state programs, and the remaining 19 states developed combination programs.21

Government organizations that foster changes in the general regulatory climate or businesses that develop breakthroughs in computer technology contribute to environmental changes that, although perhaps not specifically related to health care, may have a significant and long-lasting impact on the delivery of health care. For instance, although initially developed in the business sector, innovations in computer systems and information processing technologies have significantly affected the delivery of health care – e-health.

The organization itself may be affected directly by the technological, social, regulatory, political, economic, and competitive change initiated and fostered by organizations in the general environment. In the aggregate, these alterations represent the general direction of societal change that may affect the success or failure of any organization. Therefore, an organization engaging in strategic management must try to sort out the fundamental changes being generated in the external environment and detect the major shifts taking place. A shift in consumer attitudes and expectations about health care is an example of a societal change that may affect the success or failure of health care organizations. Demo- graphic changes are somewhat more predictable and the growing number of seniors in the US population will impact every aspect of the macroenvironment as well as the health care environment.

Typically, as information is accumulated and evaluated by the organization, it will be summarized as environmental issues affecting the industry or organiza- tion. The identification and evaluation of the issues in the general environment are important because the issues will accelerate or retard changes taking place within the industry yet may affect the organization directly as well.

Components of the Health Care Environment

Organizations and individuals within the health care environment develop and employ new technologies, deal with changing social issues, address political change, de- velop and comply with regulations, compete with other health care organizations,

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and participate in the health care economy. Therefore, strategic managers should view the health care environment with the intent of understanding the nature of all these issues and changes. Focusing attention on all the major change areas facilitates the early identification and analysis of industry-specific environmental issues and trends that will affect the organization. The environmental analysis techniques and methods presented in this chapter help pinpoint important gen- eral and industry issues. However, in today’s environment a more focused service area competitor analysis is typically required as well (see Chapter 3).

The wide variety of health care organizations makes categorization difficult. However, the health care system may be generally grouped into five segments:

1. Organizations that regulate primary and secondary providers; 2. Organizations that provide health services (primary providers); 3. Organizations that provide resources for the health care system (secondary

providers); 4. Organizations that represent the primary and secondary providers; and 5. Individuals involved in health care and patients (consumers of health care

services).22

Exhibit 2–2 lists the types of organizations and individuals within each segment and provides examples. The categories of health care organizations listed under each of the health care segments are not meant to be all-inclusive, but rather to provide a starting point for understanding the wide diversity and complexity of the industry.

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Exhibit 2–2: Organizations in the Health Care Environment

Organizations that Regulate Primary and Secondary Providers • Federal regulating agencies

Department of Health and Human Services (DHHS) Center for Medicare and Medicaid Services (CMS)

• State regulating agencies Public Health Department State Health Planning Agency (e.g., certificate of need [CON] )

• Voluntary regulating groups Joint Commission on Accreditation of Healthcare Organizations (JCAHO)

• Other accrediting agencies (CAHME, CEPH)

Primary Providers (Organizations that Provide Health Services) • Hospitals

Voluntary (e.g., Barnes/Jewish/Christian Health System) Governmental (e.g., Veteran’s Administration Hospitals) Investor-owned (e.g., HCA–The Healthcare Company, Tenet)

• State public health departments • Long-term-care facilities • Skilled nursing facilities (e.g., Beverly Enterprises, Mariner Post-Acute Network, ManorCare)

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• Intermediate care facilities • HMOs and IPAs (e.g., Care America, Aetna Health Care, United Healthcare) • Ambulatory care institutions (e.g., Ambulatory Care Centers, Ranchos Los Amigos

Rehabilitation Center) • Hospices (e.g., Hospice Care, Inc., Porter Hospice, Grace House of Minneapolis) • Physicians’ offices • Home health care institutions (e.g., CareGivers Home Health, Arcadia Home Health Care,

Visiting Nurses Association [VNA], Interim Home Care)

Secondary Providers (Organizations that Provide Resources) • Educational institutions

Medical schools (e.g., Johns Hopkins, University of Alabama at Birmingham [UAB] ) Schools of public health (e.g., The University of North Carolina at Chapel Hill, Harvard) Schools of nursing (Presbyterian School of Nursing) Health administration programs (University of Washington, The Ohio State University)

• Organizations that pay for care (third-party payors) Government (e.g., Medicaid, Medicare) Insurance companies (e.g., Prudential, Metropolitan) Businesses (e.g., Microsoft, Ford Motor Company) Social organizations (e.g., Shriners, Rotary Clubs)

• Pharmaceutical and medical supply companies Drug distributors (e.g., Bergen Brunswig, Walgreen, McKesson) Drug and research companies (e.g., Bristol Myers Squibb, Merck, Pfizer, Hoffman-LaRoche,

Eli Lilly, Upjohn, Warner Lambert) Medical products companies (e.g., Johnson & Johnson, Baxter International, Abbott Labs,

Bausch & Lomb)

Organizations that Represent Primary and Secondary Providers • American Medical Association (AMA) • American Hospital Association (AHA) • State associations (e.g., Illinois Hospital Association, New York Medical Society) • Professional associations (e.g., Pharmaceutical Manufacturers Association [PMA], American

College of Healthcare Executives [ACHE], American College of Physician Executives [ACPE], Medical Group Management Association [MGMA] )

Individuals and Patients (Consumers) • Independent physicians • Nurses • Nonphysician professionals • Nonprofessionals • Patients and consumer groups

Source: Adapted from Beaufort B. Longest, Jr., Management Practices for the Health Professional, 4th edn (Norwalk, CT: Appleton & Lange 1990).

Exhibit 2–2: (cont’d )

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6 5T H E E X T E R N A L E N V I R O N M E N T

ORGANIZATIONS THAT REGULATE A number of organizations regulate primary and secondary health care pro- viders. These organizations may be generally categorized into four groups: federal regulating agencies, state regulating agencies, voluntary regulating groups, and accrediting groups.

Federal involvement in the regulation of the health care industry has increased in the past 30 years. The passage of legislation to begin and supervise the Med- icare and Medicaid programs in the mid-1960s and the 1974 enactment of the National Health Planning and Resource Development Act dramatically increased the federal government’s participation in the regulation of health care.23 Import- ant federal health care regulating organizations include the Department of Health and Human Services (DHHS) and the Center for Medicaid and Medicare Services (CMS), formerly known as the Health Care Financing Administration (HCFA). Federal legislation can have a profound long-term impact on the health care industry, such as did the Medicare Prescription Drug Improvement and Modernization Act discussed in Perspective 2–3.

In a similar manner, state governments have become concerned about the provision of health care and have created a variety of organizations and agen- cies to regulate health care within the states. For example, many states enacted certificate of need (CON) legislation in order to regulate provider growth and viability (see Perspective 2–4). Similarly, state Medicaid agencies have attempted to ensure health care access to the poor.

In addition to federal and state government regulating agencies, there are a number of voluntary regulatory groups such as the American Association of Blood Banks (AABB) and accrediting agencies such as the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO). In addition, a number of separate discipline accrediting agencies such as the American Dietetic Associ- ation, the National League of Nursing, and the Commission on Accreditation of the American Dental Association provide regulation. With a growing emphasis on quality, the role of these types of organizations likely will expand in the future.

PRIMARY PROVIDERS There are a number of ways to classify the wide and diverse range of primary providers – those that “touch” the patient and the most visible component of the health care system. (Note: primary and secondary providers should not be con- fused with primary, secondary, and tertiary levels of hospital care.) Exhibit 2–2 suggests one approach that has nine, sometimes overlapping, groups: hospitals; state public health departments; long-term care facilities; intermediate care facil- ities; HMOs, PPOs, and IPAs; ambulatory care institutions; hospices; physicians’ offices; and home health care institutions. These types of organizations make up the delivery portion of the health care industry.

In the past, hospitals have been the dominant segment, but as the industry becomes more specialized and fragments further, other primary providers have grown in importance. In 2002, hospitals accounted for 31 percent of personal health

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When President Bush signed the Medicare Prescription Drug Impro- vement and Modernization Act, he signed off on changes to the Stark II law as well. A temporary (18 month) ban on physician investment in new specialty hospitals when the investing doctors referred patients to the facil- ity was put into effect and then extended to January 1, 2007. The law grand- fathered specialty hospitals already in existence and under development. At the same time the ban provided some breathing room for acute care

hospitals facing competition from specialty hospitals. Some find this political action puzzling. Although the number of specialty hospitals in the United States

has tripled since 1990, the total number of cardiac, orthopedic, surgical, and women’s hospitals repres- ents only 2 percent of the total number of acute care hospitals nationwide. Apparently, the concern is really over physician investment. Of the 100 specialty hospitals in existence or under development, 70 percent have physician owners.

Many health care observers agree that there is no overwhelming evidence to suggest that physician ownership has a negative impact on Medicare and Medicaid programs. Before the Stark law was enacted, studies were carried out to analyze the effects of physicians having financial relationships with clin- ical laboratories and other designated health services. These studies found that when physicians had financial relationships with laboratories they ordered significantly more laboratory services than did physicians without a financial interest. Congress admits that it has not sufficiently studied or collected data on the issue.

Advocates for specialty hospitals argue that physician investment actually improves quality by giving doctors control over treatment and provides tangible incentives to improve the quality of care. Opponents argue that physician-owned specialty hospitals will adversely affect the viability of acute care hospitals because they siphon off more lucrative specialty care patients. To date, however, data do not exist to resolve the controversy. Specialty hospitals are viewed by opponents as patient prospectors who skim off the best-insured patients in areas with the most generously reimbursed procedures. Moreover, these “boutique” hospitals tend to be for-profit entities and are jointly owned by doctors. Advocates say that specialty hospitals are being unfairly targeted, claiming that physicians are merely responding to market forces and delivering services more efficiently than general acute care hospitals.

Although the ban on specialty hospitals does not apply to existing hospitals and those under development, the changes to the Stark law do affect them. For example, existing specialty hospitals are prohibited from increasing the number of physician investors. Questions such as “What happens when a physician investor retires or dies?” remain unanswered.

Source: Christopher J. Gearon, “A Different Nice?” Hospital & Health Networks 78, no. 2 (2004), pp. 16–18 and Sarah Swartzmeyer and Carrie Norbin Killoran, “Specialty Hospital Ban Was Premature, Studies Would Have Shown Whether Those Facilities Help or Harm Healthcare,” Modern Healthcare 34, no. 21 (January 21, 2004), pp. 21–23.

care expenditures compared with 36.8 percent in 2000, 39.5 percent in 1995, and 41.7 percent in 1990.24 Managed-care organizations have already had a significant influence in the 1990s but may have reached maturity. Total enrollment in HMOs dropped after 27 years of growth (since InterStudy began collecting data in 1973). On January 1, 1999 there were 81.3 million Americans enrolled in HMOs; on January 1, 2000 the number had dropped to 80.9 million.25

Perspective 2–3 Really, What Is the Effect of Specialty

Hospitals?

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A certificate of need (CON) is a process that begins with a state body sur- veying the health care needs of its population and using that information to determine whether a hospital or physician’s practice will be given per- mission to add beds, operating rooms, or expensive pieces of technology. In 2005, 36 states and the District of Columbia had some form of CON review; three of the states limited the review to long-term care.

CON statutes came into existence during the 1960s. A federal law enacted in 1974 provided grant funding for states to operate CON programs, effectively expanding the number of states that used CON. CON laws were aggressively adopted by states in an effort to encourage consolidation of small (and pre- sumably inefficient) hospitals and reduce expensive duplication of medical services. At its peak, all states except for Louisiana had a CON program. Under President Ronald Reagan, federal officials began to cut funding for state CON programs in 1981 and by the end of the 1980s federal funding ended. Fourteen states have repealed CON laws and others have lessened the impact by restricting CON to long-term care.

Hospitals generally are in favor of CON laws because they believe that without them, medical spe- cialists and for-profit organizations supported by Wall Street investors would build outpatient centers and specialty hospitals to effectively skim the paying patients. Community hospitals would struggle to keep open some services such as emergency rooms and labor and delivery rooms because of the loss of paying patients.

Proponents of the CON process argue that it is a way to control health care costs. In addition, they believe that because health care is “different,” increased competition will not lead to reduced costs. Opponents of CON believe that it favors hospitals (which they believe is unfair and illegal), stifles new business and innovation, and, because the health care market is changing, CONs are no longer needed. The arguments against CON persuaded the state of Ohio to deregulate its CON program for same-day surgery centers. Within one year there were 103 new centers built. Opponents are concerned that so much proliferation will dilute the quality of medical care. They worry that by spreading procedures across many providers, none will have the critical mass necessary to develop and maintain expertise, thereby dimin- ishing the quality of health care.

Critics argue that the state-appointed council that determines the “need” is subject to industry politics, especially because many of the large hospitals have a representative on the council. This enables the large hospital to limit competition.

Michael Morrisey, Lister Hill Center for Health Policy at University of Alabama Birmingham, stated that “in a standard economic model, CON would be viewed as a barrier to entry and by artificially restrict- ing the supply of a health care service, current providers would be able to charge higher prices, and be less motivated to innovate.” In addition, they would likely devote resources to maintaining their “franchise” through a restrictive CON. He noted that proponents of CON argue that health care is not price competitive and that regulation of supply is necessary to control costs. His review of the research that has been done finds that CON has not resulted in lower hospital costs. In fact, he found that hos- pitals in states with CON had costs that were 20.6 percent higher.

Because each state determines its own CON statutes, the variations are significant, making it very difficult to assess whether CON has contributed to higher costs. There is some agreement that CON has limited the number of beds; some researchers have found that the restricted supply led to higher costs per day and per admission and higher hospital profits.

There has been no definitive research to settle the argument. Thus, each side continues to provide “evidence” for the benefits and limitations of CON.

Source: Michael A. Morrisey, “State Health Care Reform: Protecting the Provider,” in R. Feldman (ed.) American Health Care: Government, Markets and the Public Interest (Oakland, CA: Independent Institute, 2000), pp. 229–266 and Christopher J. Conover and Frank A. Sloan, “Does Removing Certificate-of-Need Regulations Lead to a Surge in Health Care Spending?” Journal of Health Politics, Policy and Law 23, no. 3 (June 1998), pp. 455–481.

Perspective 2–4 The Pros and Cons of CONs

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SECONDARY PROVIDERS Essentially composed of support organizations for primary providers, the secondary provider component includes educational institutions, organizations that pay for health care, and pharmaceutical and medical equipment and supply companies. Educational institutions, through their medical schools, nursing schools, schools of public health, and allied health care programs, educate a variety of health care personnel. Organizations that pay for care (third-party payors) include the government (principally through Medicare and Medicaid), commercial insurance companies, and employers. The pharmaceutical and medical equipment and supply organizations make up a particularly important segment supporting the research and material needs of primary providers. These organizations include drug distributors, drug production and research companies, and medical prod- ucts companies.

REPRESENTATION OF THE PRIMARY AND SECONDARY PROVIDERS The various providers of health care are typically represented by associations created for the purpose of fostering the disciplines and representing the interests of their constituencies. Examples include national associations such as the American Medical Association, the American Hospital Association, the Pharma- ceutical Manufacturers Association, and so on. In addition, there are a variety of state and local health care associations.

INDIVIDUALS AND PATIENTS The final segment of the health care industry includes individuals working within the industry (either independently or in health care organizations), patients, and consumer groups. Individuals working within the industry create the culture of the industry and are the source of many issues. Patients are the reason that health care organizations exist. In the past this group was treated as a mere component of the health care system; in today’s competitive environ- ment the needs and wants of the users of health services are driving the system. Patients create important issues for health care managers. In addition, groups of consumers such as the American Association of Retired Persons (AARP) and the American Cancer Society make their voices heard about health care issues. As indicated in the discussion of the general environment, the US population is aging and these mature consumers are profoundly affecting the delivery of health care (see Perspective 2–5).

The Process of Environmental Analysis

There are a variety of approaches to conducting an environmental analysis. Regardless of the approach, four fundamental processes are common to envi- ronmental analysis efforts (see Exhibit 2–3): (1) scanning to identify signals of

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environmental change, (2) monitoring identified issues, (3) forecasting the future direction of the issues, and (4) assessing the organizational implications of the issues.26

Scanning the External Environment

As suggested earlier in this chapter, the external environment is composed of a number of organizations and individuals in the general and health care environ- ments. Some of the organizations and individuals in the external environment have little direct involvement with the health care industry while others are directly

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The 2000 census counted more than 60 million people 55 years of age and older; the number is expected to double in size and constitute 33 percent of the US population by 2030. Not only are older consumers increasing in absolute and relative terms, they account for a disproportionately larger share of health care spending.

The older population is a prime customer for health care because:

• Nearly every hospital and physician provides services for the elderly under Medicare; • The elderly are predictable in their utilization and reimbursement for most hospital and physician

services; • Discretionary income is available for additional services; • The elderly customer is loyal to both physician and hospital; • Price insensitivity exists for health care; • The older consumers have the time and opportunity to use health services; • An average of four chronic health conditions per elderly person require ongoing care; • Older consumers have high personal interest in their own health.

Not all seniors are alike however. The Center for Mature Consumer Studies at Georgia State University found that seniors are clustered into four distinct groups: (1) Healthy Hermits – seniors who are in rel- atively good health yet are somewhat withdrawn socially (20 million); (2) Ailing Outgoers – seniors who are in relatively poor health yet determined to remain socially active (18 million); (3) Frail Recluses – inactive individuals with health problems (18 million); and (4) Healthy Indulgers – relatively wealthy and healthy and focused on making the most of life (7 million). Depending on the cluster, elderly con- sumers will make health care choices differently. For example, Ailing Outgoers are more influenced by low fees/prices charged by hospitals, more likely to consider senior discounts and engage in special deals through group or membership programs, and prefer ads that have people of similar age. On the other hand, Healthy Indulgers prefer to be able to receive a variety of health services in one place and want staff to willingly explain various health services. In addition, they are more likely to seek personal refer- rals in choosing a hospital – from people their own age. Frail Recluses value convenience.

The growing elderly market offers significant opportunities to those who understand its different segments and offer services that fit the different clusters.

Source: George F. Moschis, Danny N. Bellenger, and Carolyn Folkman Curasi, “Before Targeting the Elderly Market, Find Out How They Make Choices,” Marketing Health Services 23, no. 4 (Winter 2003), pp. 16–21.

Perspective 2–5 What Influences

the Mature Consumer?

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involved. The distinction is not always clear. These organizations and indi- viduals, through their normal operations and activities, are generating changes that may be important to the future of other organizations. Changes in the general environment are always “breaking through” to the health care environment, as when laser technology was developed outside of the health care industry and was quickly adopted within the industry. This phenomenon sometimes is referred to as “environmental slip”.

The environmental scanning process acts as a “window” to these organizations. Thus, these general environment strategic issues may shape the entire health care industry or have a direct impact on any one health care organization. Through

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Exhibit 2–3: Strategic Thinking Map of the Environmental Analysis Process

• View external environmental information • Organize information into desired categories • Identify issues within each category

Scanning

• Specify the sources of data (organizations, individuals, or publications)

• Add to the environmental database • Confirm or disprove issues (trends, developments,

dilemmas, and possibility of events) • Determine the rate of change within issues

Monitoring

• Extend the trends, developments, dilemmas, or occurrence of an event

• Identify the interrelationships between issues and between environmental categories

• Develop alternative projections

Forecasting

• Evaluate the significance of the extended (forecasted) issues to the organization

• Identify the forces that must be considered in the formulation of the vision, mission, internal analysis, and strategic plan

Assessing

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this window, managers engaged in environmental scanning carry out three func- tions. They:

1. view external environmental data; 2. organize external information into several desired categories; and 3. identify issues within each category.

Thus, strategic issues are trends, developments, dilemmas, and possible events that affect an organization as a whole and its position within its environment. Strategic issues are often ill-structured and ambiguous and require an interpreta- tion effort (forecasting and assessment).27

The scanning function, conceptualized in Exhibit 2– 4, serves as the organ- ization’s “window” or “lens” on the external world. The scanning function is a process of moving the lens across the array of external organizations in search of current and emerging patterns or issues. Using the lens, the viewer can focus on diverse and unorganized data generated by external organizations and indi- viduals, and compile and organize it into meaningful categories. Thus, issues generated in the external environment are organized through the scanning pro- cess. Prior to this interpretation process, change is diverse, unorganized, sporadic, mixed, and undefined. The scanning process categorizes, organizes, accumulates, and, to some extent, evaluates issues. This organized information is then used in the monitoring function.

INFORMATION CATEGORIES To monitor and further analyze issues, they must be organized into logical cat- egories. Categories not only aid in tracking but also facilitate the subsequent assessment of the issues’ impact on the organization. The categories most used to classify issues are technological, social, political, regulatory, economic, and competitive. Issues, of course, are not inherently technological, social, and so on. However, using this approach helps managers to understand the nature of the issues and to evaluate their impact. In addition, such classification helps aggreg- ate information and organize it for the identification of important issues that may affect the organization. Through the aggregation and organization process, patterns may be identified and evidence accumulated to support an issue.

INFORMATION SOURCES There are a variety of sources for environmental information. Although organiza- tions create change, they themselves are often difficult to monitor directly. How- ever, various secondary sources (published information) are readily available to most investigators, allowing them to monitor other organizations. Essentially, people and publications both outside and inside the organization serve as the lens to the external world. These sources are outlined in Exhibit 2–5.

Typically, within the organization, there are a variety of experts who are famil- iar with issues created outside the organization and who may be the best sources

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Scanning As the Organization’s Lens

The scanning process allows the organization to focus on technological, political, competitive, regulatory, social and economic issues, trends, dilemmas, and events important to the organization. The “viewing process” must sort diverse, unorganized data. This process also filters out data not relevant to the mission of the organization.

General Environment

Health Care Environment

Prior to Scanning Data are:

• Diverse • Unorganized • Sporadic • Unevaluated • Uncategorized

After Scanning Information is:

• Categorized • Organized • Accumulated • Evaluated

Regulatory

Te ch

no lo

gi ca

l I nf

or m

at io

n

Social

Economic

Technological Political Competitive

Re gu

la to

ry In

fo rm

at io

n

Po lit

ica l I

nf or

m at

io n

So cia

l In fo

rm at

ion

Co m

pe tit

ive Inf

or m

at ion

Ec on

om ic I

nfo rm

ati on

D at

a

Da ta

Scanning Lens

Da taD

at a

Da ta

D at

a

Monitoring Process

Da ta

Exhibit 2–4: The Concept of Scanning the External Environment

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of such information. Outside the health care organization, nonmembers and patients may be considered important direct sources. Indirect sources are mostly newspapers and journals, the Internet, television, libraries, and public and pri- vate databases.

Environmental scanning is perhaps the most important part of environmental analysis because it forms the basis for the other processes. In the scanning activ- ity, issues and changes are specified and sources identified. It is from this begin- ning that a database for decision making will be built. It is crucial that managers understand the thinking that led to the development and selection of strategic and tactical issues from among those identified in the scanning process. It is therefore advantageous if as many managers as possible take part in scanning. An important aspect of environmental scanning is that it focuses leaders’ attention on what lies outside the organization and enables them to create an organiza- tion that can adapt to and learn from that environment.28

Monitoring the External Environment

The monitoring function is the tracking of trends, issues, and possible events iden- tified in the scanning process. Monitoring accomplishes four important functions:

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Personal – Directly Involved

Individuals – Patients, Consumers, Physicians, Nurses, Other Providers

Suppliers – Pharmaceutical, Medical Others – Third-Party Payors,

Banks, Managed Care

Indirect Sources

Newspapers, Trade Publications, Consultants’ Reports, Internet, Exhibits, Databases, Television

Indirect Sources – Peer Reviewed

Journals Technical and Medical

Conferences Monitoring Reports

Personal – Indirectly Involved

Individuals Professional

Associates Business

Associates

Outside Sources

Inside Sources

Personal Superiors Peers Subordinates

Impersonal Reports, Notices, Scheduled Meetings

Exhibit 2–5: Information Sources

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1. It researches and identifies additional sources of information for specific issues delineated in the scanning process that were determined to be important or potentially important to the organization.

2. It adds to the environmental database. 3. It attempts to confirm or disprove issues (trends, developments, dilemmas, and

the possibility of events). 4. It attempts to determine the rate of change within issues.

The monitoring process investigates the sources of the information obtained in the scanning process and attempts to identify the organization or organizations creating change and the sources reporting change. Once the organizations creat- ing change and the publications or other information sources reporting change have been identified for a given health care organization, special attention should be given to these sources.

The monitoring function has a much narrower focus than scanning; the object- ive is to accumulate a database around an identified issue. The database will be used to confirm or disconfirm the trend, development, dilemma, or possibility of an event and to determine the rate of change taking place within the environment.

The intensity of monitoring is reflected in management’s understanding of the issue. When managers believe they understand the issue well, less monitor- ing will be done. However, when environmental issues appear ill-structured, vague, or complex, the issues will require a larger amount of data to arrive at an interpretation.29

Forecasting Environmental Change

Forecasting environmental change is a process of extending the trends, develop- ments, dilemmas, and events that the organization is monitoring. The forecasting function attempts to answer the question, “If these trends continue, or if issues accelerate beyond their present rate, or if this event occurs, what will the issues and trends ‘look like’ in the future?”

Three processes are involved in the forecasting function:

1. Extending the trends, developments, dilemmas, or occurrences of an event; 2. Identifying the interrelationships between the issues and environmental cat-

egories; and 3. Developing alternative projections.

Assessing Environmental Change

Information concerning the environment, though abundant, is seldom obvious in its implications. Strategic managers must interpret and intuit the data they receive. After all, facts do not speak for themselves; one has to make sense of the facts, not just get them straight.30 Therefore, assessing environmental change is a process

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that is largely nonquantifiable and therefore judgmental. The assessment process includes evaluation of the significance of the extended (forecasted) issue on the organization; identification of the issues that must be considered in the internal analysis; development of the vision and mission; and formulation of the strat- egic plan.

The complexity of what is found and the grossness of most of the data that is collected are not consistent with traditional decision-making methods.31 There are few procedures for incorporating “fuzzy” issues into the planning process.32

In addition, even when exposed to identical issues, different managers may interpret their meaning quite differently. Different interpretations are a result of a variety of factors including perceptions, values, and past experiences.

An excellent example of organizations attempting to assess the significance of an issue on the organization occurred in late 1996 when HIPAA was signed into law. Some health care organizations did not wait for all the regulations to be written before they began to process electronically and reaped rewards. The assessment or interpretation of a strategic issue is often represented by general labels such as opportunity or threat. These labels capture the strategic leadership’s belief about the potential effects of environmental events and trends. Other dimensions may be used, such as positive/negative, gain/loss, and con- trollable/uncontrollable.

Unfortunately no comprehensive conceptual scheme or computer model can be developed to provide a complete assessment of environmental issues. The assessment process is not an exact science, and sound human judgment and creativity may be bottom-line techniques for a process without much struc- ture. The fundamental challenge is to make sense out of vague, ambiguous, and unconnected data. Analysts have to infuse meaning into data; they have to make the connections among discordant data such that signals of future events are created. This involves acts of perception and intuition on the analyst’s part. It requires the capacity to suspend beliefs, preconceptions, and judgments that may inhibit connections being made among ambiguous and disconnected data.33

Environmental Analysis Tools and Techniques

Several different strategic thinking frameworks and techniques may be used to examine the general and health care environments. These frameworks, which are informal and generally not overly sophisticated, have been variously described as “judgmental,” “speculative,” or “conjectural.”34 Indeed, environmental analysis is largely an individual effort and is directed to person-specific interests. Environmental analysis usually is not limited to just one of the environmental analysis processes, but rather encompasses scanning, monitoring, forecasting, and assessing. The remainder of this chapter will discuss environmental analysis frameworks that identify trends and issues in the general and health care environ- ments. An approach and techniques for more specific market segmentation and competitive analysis will be discussed in Chapter 3.

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Simple Trend Identification and Extrapolation

Trend identification and extrapolation is a matter of plotting environmental data and then, from the existing data, anticipating the next occurrence. Perhaps because of its relative simplicity, trend extrapolation is a widely practiced ana- lysis method. Obviously, such a method works best with financial or statistical data. Environmental issues are rarely presented as a neat set of quantifiable data; rather, environmental issues are ill-structured and conjectural. Thus, in many cases, trend identification and extrapolation in environmental analysis is a matter of reaching consensus on the existence of an issue and speculating on the like- lihood of its continuance.

Trend identification and extrapolation was applied by Vern Cherewatenko, MD, when he was operating Washington State’s largest independent practice asso- ciation (55 doctors, 130 employees, 75,000 patients, $10 million in revenues). He realized that in 1997 the IPA was losing $7 for every patient seen or about $80,000 per month and the trend was continuing! He determined that the insurance com- panies, including Medicare and the state’s workers comp, were reimbursing at about half of the practice’s costs and the trend was not changing. For example, a vasectomy was billed at $550 with all its proper coding and he was reimbursed $180 after any number of hassles back and forth with the insuror. Dr. Cherewatenko and his partner bailed out of the IPA and began “SimpleCare,” a cash-based practice where they spend more time with patients and charge them about half of the former billing amount.35 SimpleCare has expanded into a national network of cash-based practices.

In the case of Lake Villa Nursing Home, demographic trends as well as others are of interest. As illustrated in Exhibit 2–6, the trend identification and extra- polation process includes the identification of issues by environmental category, the designation of an issue as an opportunity or threat, and the determination of its probable impact on the organization. Additionally, managers may assess the likelihood that the trend, development, or dilemma will continue or that the event will occur, and then identify the sources for additional information.

These issues may then be plotted on the chart shown in Exhibit 2–7. The assumption is that the issues to the right of the curved line in the exhibit have a significant impact (high impact) on the organization and are likely to continue or occur (high probability) and should be addressed in the strategic plan.

The formats illustrated in Exhibits 2–6 and 2–7 are useful for organizing environmental data and providing a starting point for speculating on the direc- tion and rate of change for identified trends. However, as with Dr. Cherewatenko’s move to a cash-based practice, trend extrapolation of environmental issues requires extensive familiarity with the external environment (the issues) and a great deal of sound judgment.

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Exhibit 2–6: Trend/Issue Identification and Evaluation by Lake Villa Nursing Home

Impact on Our Probability of Opportunity/ Organization Trend Continuing

Trend/Issue Threat Evidence (1–10) (1–10)

Aging Population Opportunity 1 in 5 Americans will 9 9 be at least 65 by 2030

Wealthier Elderly Opportunity Income of those 60+ has 7 6 increased 10% faster than any other group

Local Competition Threat Oven past 5 years, number 7 9 of nursing homes in the service area has increased from 5 to 7

10 = High probability of occurring 1 = Low probability of occurring

Low Impact Low Probability

Impact on the

Organization

Critical issues to the right of the line should be addressed in the strategic plan

10

5

0

Low High 5 10

Low Impact High Probability

High Impact Low Probability

High Impact High Probability

Wealthier Elderly

Local Competition

Aging Population

High

Critical issues to the right of the line should be addressed in the strategic plan

Probability of Trend Continuing

Exhibit 2–7: Environmental Trends/Issues Plot

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Solicitation of Expert Opinion

Expert opinion is often used to identify, monitor, forecast, and assess environmental trends. Experts play a key role in shaping and extending the thinking of leaders. For example, health care experts have concluded that these managerial skills will be essential throughout the remainder of the decade: the ability to deliver quality care at reasonable cost, the ability to enhance the health status of the community, the ability to gain the respect of the business and medical com- munities, and the ability to improve outcomes and satisfaction. Health care leaders can use these opinions to stimulate their strategic thinking and begin developing human resources strategies.

To further focus leaders’ thinking and generate additional perspectives concerning the issues in the external environment, there are a number of more formal expert- based environmental analysis techniques. These strategic thinking frameworks help solicit and synthesize the opinions and best judgments of experts within various fields.

THE DELPHI METHOD The Delphi method is a popular, practical, and useful approach for analyzing envir- onmental data. The Delphi method may be used to identify and study current and emerging trends within each environmental category (technological, social, economic, and so on). More specifically, the Delphi method is the development, evaluation, and synthesis of individual points of view through the systematic solic- itation and collation of individual judgments on a particular topic. In the first round, individuals are asked their opinions on the selected topic. Opinions are sum- marized and then sent back to the participating individuals for the development of new judgments concerning the topic. After several rounds of solicitation and summary, a synthesis of opinion is formulated.36

S. C. Jain found that the traditional Delphi method has undergone a great deal of change in the context of environmental analysis. Jain suggests that the salient features of the revised Delphi method are to:

1. identify recognized experts in the field of interest; 2. seek their cooperation and send them a summary paper (based on a literature

search); and 3. conduct personal interviews with each expert based on a structured questionnaire.37

In contrast to traditional Delphi methods, there is no further feedback or repeated rounds of questioning. The major advantage is that it is easier to recruit recognized experts because they do not need to commit as much of their time.

The Delphi method is particularly helpful when health care managers want to understand the opportunities and threats of a specific environmental issue. For example, a Delphi study was designed to define the role and responsibilities of sports medicine specialists in the United Kingdom. A mail questionnaire was sent

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to a random sample of 300 members of the British Association of Sport and Exer- cise Medicine. The original questionnaire contained 300 attributes and allowed participants to modify their responses based on feedback from other participants. The study concluded that sports medicine was an evolving specialty in the United Kingdom. The study, however, was recognized as the first systematic attempt to define the role and responsibilities of the sports medicine specialist and should be a valuable resource in the future development of career pathways for physicians.38

NOMINAL GROUP TECHNIQUE, BRAINSTORMING, AND FOCUS GROUPS The nominal group technique (NGT), brainstorming, and focus groups are interactive group problem identification and solving techniques. In nominal group technique, a group is convened to address an issue, such as the impact of consolidation within the health care industry or the impact of an aging popula- tion on hospital facilities. Each individual independently generates a written list of ideas surrounding the issue. Following the idea-generation period, group members take turns reporting one idea at a time to the group. Typically, each new idea is recorded on a large flip chart for everyone to consider. Members are encouraged to build on the ideas of others in the group. After all the ideas have been listed, the group discusses the ideas. After the discussion, members privately vote or rank the ideas. After voting, further discussion and group generation of ideas continue. Typically, additional voting continues until a reasonable consensus is reached.39

A brainstorming group is convened for the purpose of understanding an issue, assessing the impact of an issue on the organization, or generating strategic altern- atives. In this process, members present ideas and are allowed to clarify them with brief explanations. Each idea is recorded, but evaluation is generally not allowed. The intent of brainstorming is to generate fresh ideas or new ways of thinking. Members are encouraged to present any ideas that occur to them, even appar- ently risky or impossible ideas. Such a process often stimulates creativity and sparks new approaches that are not as risky, crazy, or impossible as first thought.40

NGT and brainstorming could be used to understand and respond to the moratorium on specialty-hospital physician investment and referral mandated by the Medicare Prescription Drug Improvement and Modernization (MMA) Act on December 8, 2003 (effective through June 8, 2005). Under the moratorium a doctor was not allowed to refer a patient to certain specialty hospitals in which the physician had an ownership or investment interest and the hospital was not allowed to bill Medicare or any other entity for services provided as a result of a prohibited referral. Hospitals under development as of November 18, 2003 were excluded from the moratorium, which applied specifically to hospitals engaged exclusively in the care and treatment of patients with cardiac or orthopedic conditions, surgical patients, and patients receiving other specialized types of services that CMS designated.41

Obviously, managers of specialty hospitals and their competitors faced a great deal of uncertainty as to how the moratorium might “play out.” Specialty

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hospitals would have to decide whether or not to continue with plans for the development and expansion of new facilities after June 2005. Brainstorming groups would be useful in carefully thinking about the various options facing specialty hospitals during the moratorium.

Similar to the process of brainstorming, focus groups bring together 10 to 15 key individuals to develop, evaluate, and reach conclusions regarding environmental issues. Focus groups provide an opportunity for management to discuss particu- larly important organizational issues with qualified individuals. Hospitals and large group practices have used focus groups of patients to better understand the perceived strengths and weaknesses of the organization from the patient’s view. For example, Johns Hopkins was considering the establishment of an integrated delivery system under one umbrella name. Focus groups of physicians, present and past patients, nonpatients, and others convinced them to change plans (see Perspective 2–6). Focus groups can provide new insights for understanding the issues and suggest fresh alternatives for their resolution.

Dialectic Inquiry

Dialectic inquiry is a “point and counterpoint” process of argumentation. The nineteenth-century German philosopher Hegel suggested that the surest path to truth was the use of a dialectic process – an intellectual exchange in which a thesis is pitted against an antithesis. According to this principle, truth emerges from the search for synthesis of apparently contradictory views.42

More specifically, in environmental analysis, dialectic inquiry is the develop- ment, evaluation, and synthesis of conflicting points of view (environmental issues) through separate formulation and refinement of each point of view.43 For instance, one group may argue that health care costs will be declining between 2005 and 2010 (thesis) because of the prospective payment system, pressure by businesses and labor, market-based health care reform, physician reimbursement reform, and so on. Another group may present a case that the trend toward rising health care costs will continue (antithesis) because of hospital failures, the high cost of new technology, failure of health care reform initiatives, and so on. Debating this issue will unearth the major factors influencing health care costs and the implications for the future.

Any health care provider can utilize this technique by assigning groups to debate specific external issues. The groups make presentations and debate conflicting points of view concerning the environment. After the debate, the groups attempt to form a synthesis of ideas concerning the likely future.44

Stakeholder Analysis

Stakeholder analysis is based on the belief that there is a reciprocal relationship between an organization and certain other organizations, groups, and individuals. They are referred to as stakeholders: that is, organizations, groups, and individuals

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Although US News and World Report ranks Johns Hopkins among the best in the country, “locals” (who are 75 percent of its patients) often perceive it as a place of last resort. Hopkins wanted to better understand the rational and emotional value of the Johns Hopkins name among con- sumers and physicians. In addition, strategists wanted to know whether the Hopkins name could be extended to primary sites or other hospitals.

The research was carried out in a number of phases. First, 14 focus groups of consumers from seven regions of Maryland and southern Pennsylvania were conducted to understand what people “knew” about Hopkins.

Results verified Hopkins’s excellent image for medical quality and top-notch physicians, but it was per- ceived as inaccessible, expensive, impersonal, and in a bad location. Further, consumers did not under- stand the benefits of a “health care delivery system” (perceiving it as an HMO). Consumers were mixed on extending the Hopkins name as they thought it was somewhat akin to a “Good Housekeeping seal of approval” on the one hand, but would imply higher costs and dilute the Hopkins name on the other.

An additional 14 focus groups were conducted to understand the emotional value of the Hopkins name. A variety of groups were included: current patients, individuals who had attended a Hopkins seminar but never been a patient, individuals who had had no contact with Hopkins, physicians who referred to Hopkins, and Hopkins Medicine leadership. In these focus groups individuals were asked to do a vari- ety of exercises that led to positive, mixed, and negative conclusions about the emotional value of the name. The positive conclusions were: the community had pride and respect for Hopkins as an institu- tion in the city, there was security in knowing that Hopkins had the highest quality doctors and nurses as well as latest technology, the research and teaching tradition led to hope and pride in innovation, and the former patients group perceived compassion and excellence in patient care. The mixed response was for “patients coming from all over the world.” Some saw this as indicative of providing quality care, whereas others saw it as Hopkins serving only important people or people from outside Baltimore. The negatives were that Hopkins was a big, powerful institution and thus overpriced, and Hopkins was elitist and dis- criminating (interpreted by the focus groups as intimidating, unwelcoming, and overwhelming).

The focus groups led to the following conclusions:

• Protect the hospital’s strong brand image for medical excellence in complex cases and discovery. • Use care in extending the hospital’s name to other parts of the system as the positive associations are

with the main campus. • Position Hopkins as a “family of hospitals and doctors” under the leadership of Johns Hopkins rather

than an “integrated delivery system.” • Use Johns Hopkins Medicine as an endorser of other faculties. • Emphasize the accessibility of members of Johns Hopkins Medicine. • Expand the Hopkins brand from a “place of last resort” to cover the broad range of services. • Soften the intimidating and unwelcoming image perceived by current and potential customers.

Source: Michael P. Harnett and Carol A. Bloomberg, “Johns Hopkins Brand Research: Case Study,” Healthcare Growth Strategies 2001 (Santa Barbara, CA: COR Health LLC, 2000), pp. 15–18.

Perspective 2–6 Johns Hopkins Uses

Focus Groups to Understand Consumer

Perceptions

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that have an interest or “stake” in the success of the organization. Examples of possible health care stakeholders, shown as a “stakeholder map,” are presented in Exhibit 2–8.

Stakeholders may be categorized as internal, interface, and external. Internal stakeholders are those who operate primarily within the bounds of the organ- ization, such as managers and other employees. Interface stakeholders are those who function both internally and externally, such as the medical staff and the cor- porate officers of the parent company. External stakeholders operate outside the organization and include such entities as suppliers, third-party payors, com- petitors, regulatory agencies, the media, the local community, and so on.45 Such stakeholders have been referred to as the “organization ecosystem” – organizations that affect and are affected by the creation and delivery of the organization’s product or service. Part of stakeholder analysis is to systematically identify the

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Exhibit 2–8: A Stakeholder Map for a Large Multispecialty Group Practice

Specialty physician referrals

Nonspecialty physician referrals

Competing physicians

Third-party payors

Self-insured employers

Local paying patients

Organizations managing

care

Nonlocal patients

Professional associations

Federal, state, and local regulators

Federal Medicare

State Medicaid

Indigent patients

Professional employees

Practice administrative

services

Multispecialty group medical

practice

Nonlocal physicians

Hospital

Governing board

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organizations with which their future is most closely intertwined and determine the dependencies that are most critical.46

Some of these stakeholders are almost always powerful or influential; others are influential regarding only certain issues; still others have little influence or power. If the stakeholders can be identified and evaluated, then the “forces” affecting the organization may be specified. The needs and wants of these con- stituencies may dramatically affect the strategy of an organization.47

Stakeholders can impact the strategic management process by demanding to participate or certain groups might be invited to participate (physicians, directors from a community-based board of directors, and so on). Some stakeholders (patients, employees, insurance companies) may not be a direct part of strategic management but their interests are clearly considered as part of the scanning process.

Management usually relies on its collective judgment to provide an accurate assessment of the relative power of the important stakeholders. It can be a crit- ical error not to understand how the stakeholders perceive their own power and how they would contribute to the strategy formulation process. Blair and Buesseler point out that an organization does not choose its stakeholders; rather, the stakeholders choose themselves.48

To know how these self-selected stakeholders view their power offers an opportunity to know how to negotiate with them. In one study, all other groups rated physicians as having greater power than the physicians rated their own power.49 The board of directors, however, rated its influence as very high; all other groups did as well. Despite the recent emphasis in health care on developing a customer orientation, patients did not believe they had much influence; nor did any other group rate them as possessing very high influence. A patient may com- plain to a physician about some aspect of a hospital experience and expect some action; however, the physician will probably feel relatively unable to cause any change. Because those who feel they have power in an organization are more likely to support its mission and strategic plan, it is no wonder that leaders have to be diligent in involving the medical community.

Typically, managers tend to focus attention on known, salient, or powerful stakeholders to help protect existing competitive advantages. However, there is growing evidence that “fringe” stakeholders are important as well – particularly for developing new ways of thinking. Stuart Hart and Sanjay Sharma suggest that “the knowledge needed to generate competitive imagination and to manage dis- ruptive change increasingly lies outside the organization, at the periphery” of the organization’s established stakeholder network.50 Therefore, strategic thinkers must be open to fringe ideas and nontraditional thinking developed by fringe players. At first, these stakeholders may apear to be poor, weak, isolated, non- legitimate or radical.51 In reality, they may be strong purveyors of change.

Stakeholders should be viewed as partners who create value through problem solving that results in a corporate community. From a profit-centered model to a social responsibility-centered model, corporate governing boards are now moving toward collaborative working relationships or a corporate community model. This shift has occurred as capital assets (factories, land, money) have declined relative

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to the value of information or knowledge. Knowledge cannot be used up and the “more that is dispensed, the more you generate.”52 Stakeholder collaboration does more than gain political clout – it encourages joint problem solving to increase valuable knowledge. A health care organization can benefit from knowing its stake- holders and being the beneficiary of input from such valuable stakeholders.

Scenario Writing and Future Studies

Many businesses regularly use scenarios. The popularity of scenario analysis is due in large part to the inability of other, more quantitative forecasting methods to predict and incorporate major shifts in the environment and provide a context for strategic thinking. Scenarios avoid the need for single-point forecasts by allowing users to explore several alternative futures.53 Scenario analysis is an alternative to conventional forecasting that is better suited to an environment with numerous uncertainties or imponderables – where there is no map.

A scenario is a coherent story about the future, using the world of today as a starting point. Based on data accumulated in the scanning and monitoring pro- cesses, a scenario or narrative that describes an assumed future is developed. The objective of scenarios and future studies is to describe a point of time in the future as a sequence of time-frames or periods of time. Scenario writing often requires generous assumptions. Few guidelines indicate what to include in the scenario. In most cases several plausible scenarios should be written. It is an all-too-common mistake to envision only one scenario as the “true picture of the future.”54 Most authorities advocate the development of multiple scenarios. However, to avoid decision makers focusing only on the “most likely” or “most probable” scenario, each scenario should be given a distinctive theme name, such that they appear equally likely.

Multiple scenarios allow the future to be represented by different cause–effect relationships, different key events and their consequences, different variables, and different assumptions. The key question is: “If this environmental event happens (or does not happen), what will be the effect on the organization?” The use of multiple scenarios was particularly helpful as organizations considered the prob- able impact of health care reform legislation on their organizations. Exhibit 2–9 presents a brief summary of three scenarios or alternative futures for health care between now and 2010. The scenarios were developed by the Institute for the Future to provide a description of critical factors that will influence health and health care in the first decade of the twenty-first century.

Selecting the Strategic Thinking Framework

The purpose of analyzing the general and health care environments is to identify and understand the significant shifts taking place in the external environment. Exhibit 2–10 summarizes the primary focus, advantages, and disadvantages of each strategic thinking framework.

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Exhibit 2–9: Three Future Health Care Scenarios

Scenario One: Stormy Weather None of the fundamental problems of cost, quality, or access are resolved by 2005. Between 2005 and 2010, managed care fails to deliver reduced costs or push quality resulting in a backlash by consumers and providers. Legislation is enacted to negate the authority of managed care. Medicare cherry-picking by risk insurance plans leaves the sickest patients to be covered by conventional indemnity plans. A few major provider groups emerge; physicians and hospitals fear leaving their group. In a tight labor market, large employers continue to offer health benefits to employees; smaller employers are less able to pay for the increased costs. Health care spending reaches 19 percent of GDP and 22 percent of the population is uninsured. New technology continues to offer improved, less invasive alternatives and is demanded by baby boomers – a knowledgeable group that expects to participate in their own health care decisions. No social consensus develops to limit end-of-life care. Information technologies require huge investment but lead to disappointing results in terms of cost savings. The public health sector minimally meets its mandated functions. People worry about losing health benefits and most are unhappy with the increased out-of-pocket costs. Medicaid strains state budgets; Medicare strains the federal budget – especially as early boomers begin to access the system in 2010. Health care reform is in the forefront of public policy once again.

Scenario Two: Long and Winding Road Large employers maintain price pressure on health plans and require greater contribution by employees. The increased out-of-pocket costs cause employees to reduce their use of health care services. Health plans tighten control through closed networks that pressure providers for clinical price controls. Providers attempt to resist the insurance “hassles” with very limited success. The 1998 federal budget bill includes Medicare and Medicaid cost containment as it does each year following. The public health system continues to compete with the private sector on health service delivery. Health care costs reach 16 percent of GDP and 16 percent of the population is uninsured. The system remains tiered with 20 percent in public coverage or uninsured, 60 percent in restrictive managed care, and 20 percent in high-end, indemnity insurance programs. Cost-based reimbursement is curtailed; large integrated providers have not materialized. Physicians tend to practice in small groups (although there are no solo practices). Comprehensive health care reform does not rise to the top of the public policy agenda because the system is managing to “muddle on through . . .”

Scenario Three: Sunny Side of the Street Competition drives excess capacity from the system and providers and patients work together to improve health. Newly trained physicians have lowered income expectations. Providers with best practices survive; consolidation occurs and excess capacity (especially hospital beds) is eliminated. Prospective payment covers all outpatient services. Clinical information systems improve care processes and outcomes. The electronic patient record becomes a reality. Technology focuses on improved outcomes and reduced costs. Therapy trade-off can be made based on cost- effectiveness. Public health will engage in public–private partnerships and will focus on assessment, development of policy, and assurance. Health care costs are 15 percent of GDP, and 10 percent of the population is uninsured. The systems are in place to minimize unnecessary variations in health care practices, operate efficiently, track outcomes to lead to further improvements, and handle the aging of baby boomers. Insurors are rewarded for improving the health of a population and focusing on long-term health care decisions.

Source: Institute for the Future, Health and Health Care 2010: The Forecast, The Challenge (San Francisco: Jossey-Bass Publishers, 2000), pp. 10–14.

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Exhibit 2–10: Primary Focus, Advantages, and Disadvantages of Environmental Techniques

Technique

Simple Trend Identification and Extrapolation

Delphi Method

Nominal Group Technique

Brainstorming

Focus Groups

Dialectic Inquiry

Stakeholder Analysis

Scenario Writing

Primary Focus

Scanning Monitoring Forecasting Assessing

Scanning Monitoring Forecasting Assessing

Scanning Monitoring Forecasting Assessing

Forecasting Assessing

Forecasting Assessing

Forecasting Assessing

Scanning Monitoring

Forecasting Assessing

Advantage

• Simple • Logical • Easy to communicate

• Use of field experts • Avoids intimidation

problems • Eliminates management’s

biases

• Everyone has equal status and power

• Wide participation • Ensures representation • Eliminates management’s

biases

• Fosters creativity • Develops many ideas,

alternatives • Encourages communication

• Uses experts • Management/expert

interaction • New viewpoints

• Surfaces many subissues and factors

• Conclusions are reached on issues

• Based on analysis

• Considers major independent groups and individuals

• Ensures major needs and wants of outside organizations are taken into account

• Portrays alternative futures • Considers interrelated

external variables • Gives a complete picture of

the future

Disadvantage

• Need a good deal of data in order to extend trend

• Limited to existing trends • May not foster creative

thinking

• Members are physically dispersed

• No direct interaction of participants

• May take a long time to complete

• Structure may limit creativity

• Time consuming

• No process for making decisions

• Sometimes gets off track

• Finding experts • No specific structure for

reaching conclusions

• Does not provide a set of procedures for deciding what is important

• Considers only a single issue at a time

• Time consuming

• Emerging issues generated by other organizations may not be considered

• Does not consider the broader issues of the general environment

• Requires generous assumptions

• Always a question as to what to include

• Difficult to write

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The approach selected for evaluating the general and health care environments will depend on such factors as the size of the organization, the diversity of the products and services, and the complexity and size of the markets (service areas). Organizations that are relatively small, do not have a great deal of diversity, and have well-defined service areas may opt for a simple strategic thinking framework that may be carried out in house, such as trend identification and extrapolation, in-house nominal group technique or brainstorming, or stake- holder analysis. Such organizations may include independent hospitals, HMOs, rural and community hospitals, large group practices, long-term care facilities, hospices, and county public health departments.

Health care organizations that are large, have diverse products and services, and have ill-defined or extensive service areas may want to use a strategic think- ing framework that draws on the knowledge of a wide range of experts. As a result, these organizations are more likely to set up Delphi panels and outside nominal groups or brainstorming sessions. In addition, these organizations may have the resources to conduct dialectics concerning environmental issues and engage in scenario writing. Such approaches are usually more time consuming, fairly expen- sive, and require extensive coordination. Organizations using these approaches may include national and regional for-profit health care chains, regional health care systems, large federations and alliances, and state public health departments. Ultimately, the strategic thinking framework selected for environmental analysis may depend primarily on the style and preferences of management. If used prop- erly, any of the frameworks can be a powerful tool for identifying, monitoring, forecasting, and assessing issues in the general and health care environments.

Issues in the Health Care Environment

The health care industry is faced with many dynamic issues and will have to deal with a host of new developments in the rapidly changing external environment. Strategic managers of health care organizations should assess these issues and others unique to their organizations to provide a foundation for understanding the complexity of health care delivery and to furnish a backdrop for developing strategy. An excellent example of identifying environmental issues, recognizing opportunity, and building a strategy around that opportunity is provided by Accordant Health Services, Inc., an independent disease management company involved with 15 chronic diseases (see Perspective 2–7).

For the foreseeable future, the health care environment will continue to gener- ate numerous complex issues. Using a format similar to that shown in Exhibit 2–6, a list of current issues can be generated. This format can provide a useful summary of environmental issues and encourage managers to cite specific evid- ence supporting their beliefs concerning those issues. For instance, the high cost of technology is commonly cited as a health care issue, but what is the specific evidence indicating that it is still an issue or is continuing as an issue? Individual health care managers will have to assess the likelihood that these issues will con- tinue and what their impact will be for individual organizations.

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Accordant Health Services, Inc., was started by Steve Schelhammer in 1995 because he believed that the complications and catastrophic crises asso- ciated with chronic diseases were manageable or preventable and that patients with these diseases wanted to participate in their own health care. Many insurors have in-house programs for some of the more common chronic diseases such as diabetes and asthma. However, there are addi-

tional complex chronic diseases that do not occur as frequently in the population. These diseases could be managed with greater cost and clinical effectiveness by outsourcing this function to a disease man- agement company.

Accordant, an AdvancePCS company based in Greensboro, NC, has grown to become the nation’s largest independent provider of health improvement services, touching the lives of more than 75 million health plan members and managing approximately $28 billion in annual prescription drug spending. AdvancePCS offers health plans a wide range of health improvement products and services designed to improve the quality of care delivered to health plan members and manage costs.

By 2005, Accordant was providing disease management programs for 15 complex, chronic diseases: multiple sclerosis, Parkinson’s disease, lupus, myasthenia gravis, sickle cell anemia, polymyositis, cystic fibrosis, chronic inflammatory demyelinating polyradiculoneuropathy (CIDP), amyotrophic lateral sclerosis (ALS), scleroderma, dermatomyositis, hemophilia, gaucher disease, rheumatoid arthritis, and seizure disorder. In 2003, Accordant earned Full NCQA Patient- and Practitioner-Oriented Disease Management Accreditation for all 15 of its disease management programs – more than any other organization nationwide.

According to Accordant, “Effective chronic disease management is the application of continuous quality improvement to the whole spectrum of care. We recognize that a disease management program stressing prevention, education, and support can positively impact both the customer’s cost of care and the patient’s quality of life.”

Accordant’s quarterly disease specific assessments stratify a health plan’s population of patients for severity of illness and risk of adverse events. The company relies on its expert “tele-web” system that integrates Internet and call-center technologies to enable flexible, intelligent, and customized information sharing among patients, providers, and health plans. Chronic, progressive diseases such as multiple scle- rosis, hemophilia, cystic fibrosis, lupus, myasthenia gravis, and rheumatoid arthritis cause physical and lifestyle impairment. For some MS patients, the web is an important way to communicate with someone who can answer questions and who understands their disease, because they no longer can speak. Other patients prefer to call the 1–800 number to talk to one of the nurses that are on duty 24 hours a day.

Using Accordant’s disease management program, the following services are available to insurors:

• Risk stratification of diagnosed members; • Disease-specific education resulting in better self-management; • 24-hours per day 1–800 number for enrolled members; • Development of individual care plans; • Disease management reports; • Demographic oriented reports; • Outcomes reports – reports relating to clinical/functional status; • Distribution of reports – health plan and physician.

Patients are offered education and resources:

• Self-motivating methods to help them recognize early signs of problems. • Self-motivating techniques to help them maintain their health. !

Perspective 2–7 Accordant Health

Services, Inc.

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Strategic Momentum – Validating the Strategic Assumptions

The strategic plan is based in part on an analysis of the external environment. Initially this analysis provides the basic beliefs or assumptions that management holds concerning various issues in the external environment. Once strategic man- agement is adopted as the operating philosophy of managing, strategic thinking, strategic planning, and strategic momentum require frequent validation of the strategic assumptions to determine whether issues in the external environment have changed and to what extent. Continued strategic thinking is vital to main- taining strategic momentum.

The strategic thinking map presented in Exhibit 2–11 provides a series of ques- tions designed to detect signals of new perspectives regarding these assumptions. The questions examine management’s understanding of the external environment and the effectiveness of the strategy. The board of directors, strategic managers, or others may use these questions as a beginning point to confirm the assump- tions underlying the strategy. Such strategic thinking questions may indicate the emergence of new external opportunities or threats that will affect the organ- ization and may suggest areas where additional information will be required in future planning efforts. Current, accurate information may mean survival for many health care organizations. Questions concerning the external environment may reveal that a group practice knows far too little about the views of its major constituents (stakeholders) or the existence of new technologies or social trends. A validation (or invalidation) of the strategic assumptions reinvigorates strategic thinking and provides a basis for investigating whether to change the strategy.

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• Educational resources to help them learn more about their disease. • Information on the latest medical breakthroughs.

Through Accordant’s services, one-on-one relationships with patients are built by regular contact with them as nurses monitor and assess patients’ health status and provide targeted education, support, and guidance for both patients and their caregivers. In addition, Accordant nurses communicate frequently with treating physicians to keep them up to date on the clinical status and specific health care needs of patients. Accordant’s Medical Advisory Board is comprised of national medical experts who participate in the development and continuous quality improvement of the company’s programs.

Accordant focuses on managing complex chronic diseases with the goal of improving clinical, patient satisfaction, and cost-of-care outcomes. According to Steve Schelhammer, “We work with the patients’ existing medical community to facilitate access to coordinated, preventive care and provide better man- agement of crises. For the purpose of outcomes reporting, key disease-specific data points are collected for each patient. Accordant tracks and reports financial, functional, clinical, and patient satisfaction outcomes for all diseases. We stand behind our methodology and provide performance-based contracts, sharing risk for cost and quality outcomes.”

Source: Accordant company documents.

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Exhibit 2–11: Strategic Thinking Questions for Validation of the Strategic Assumptions

1. Has the organization’s performance been adversely affected by unexpected or new trends or issues in the general environment?

2. Has the organization’s performance been adversely affected by unexpected or new trends or issues in the health care environment?

3. Have new opportunities emerged as a result of new trends, issues or events in the external environment?

4. Is the strategy acceptable to the major stakeholders? 5. Are there new technological developments that will affect the organization? 6. Have there been social or demographic changes that affect the market or strategy? Changes in

ethnic mix? Language barriers? Family structure? 7. Are there new regulations or has the political environment changed? 8. Are there new local, state, or federal regulations or laws being introduced, debated or passed

that will affect operations or performance? 9. Are there new economic issues?

10. Have new competitors outside the industry considered entering or actually entered into health related areas?

11. Is the strategy subject to government response? 12. Is the strategy in conformance with the society’s moral and ethical codes of conduct?

Summary and Conclusions

This chapter is concerned with understanding and analyzing the general environment and health care industry environment. To be successful, organiza- tions must be effectively positioned within their environment. Organizations involved in making capital allocations, experiencing unexpected environmental changes or surprises from different kinds of external forces, facing increasing competition, becoming more marketing oriented, or experiencing dissatis- faction with their present planning results should engage in environmental analysis.

The goal of environmental analysis is to classify and organize the general and health care industry issues and changes generated outside the organization. In the process, the organization attempts to detect and analyze current, emerging, and likely future issues. The gathered information is used for internal analysis; development of the vision and mission; and formulation of the strategy for the organization. In addition, the process should foster strategic thinking throughout the organization.

Although the benefits of environmental analysis are clear, there are several limitations. Environmental analysis cannot foretell the future; nor can managers hope to detect every change. Moreover, the information needed may be impossible to obtain or difficult to interpret, or the organization may not be able to respond quickly enough. The most significant limitation may be managers’ preconceived beliefs about the environment.

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This chapter provides a comprehensive description of the broad external environment for health care organizations. The environment includes organiza- tions and individuals in the general environment (government institutions and agencies, business firms, educational institutions, research organizations and foundations, and individuals and consumers) and organizations and individuals in the health care environment (organizations that regulate, primary providers, secondary providers, organizations that represent providers, and individuals and patients).

Organizations and individuals in both the general and health care environments generate changes that may be important to health care organizations. Typically, such change is classified as technological, social, political, regulatory, economic, or competitive. Such a classification system aids in aggregating information concerning the issues and in determining their impact. Sources for environ- mental issues are found both inside and outside the organization and are direct as well as indirect.

The steps in environmental analysis include scanning to identify signals of environmental change, monitoring identified issues, forecasting the future direc- tion of issues, and assessing organizational implications. Scanning is the process of viewing and organizing external information in an attempt to detect relevant issues that will affect the organization. Monitoring is the process of searching for addi- tional information to confirm or disprove the trend, development, dilemma, or likelihood of the occurrence of an event. Forecasting is the process of extending issues, identifying their interrelationships, and developing alternative projec- tions. Finally, assessing is the process of evaluating the significance of the issues. The information garnered from external environmental analysis influences internal analysis, the development of the vision and mission, and formulation of the strategy for the organization.

Several strategic thinking frameworks were discussed to conduct the scanning, monitoring, forecasting, and assessing processes. These methods include simple trend identification and extension, solicitation of expert opinion, dialectic inquiry, stakeholder analysis, and scenario writing. In addition, several relevant issues in the health care environment were explored. Finally, as part of strategic momentum, strategic thinking questions were presented to evaluate the strategic assumptions generated from the external environmental analysis. The next chap- ter will focus on service area competitive analysis.

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Key Terms and Concepts in Strategic Management Assessing Brainstorming Delphi Method Dialectic Inquiry Efficiency/Effectiveness Expert Opinion External Environmental Analysis

Focus Groups Forecasting General Environment Health Care Environment Monitoring Nominal Group Technique (NGT) Primary Provider

Scanning Scenarios Secondary Provider Stakeholder Analysis Strategic Awareness Strategic Issues Trend Identification

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QUESTIONS FOR CLASS DISCUSSION

1. What types of changes are likely to occur in the health care environment in the next several years? Explain how any major shift in an industry creates a wide range of changes throughout the industry.

2. Why is environmental analysis important for an organization? 3. Describe the “setting” for health care management. Is the setting too complex

or changing too rapidly to accurately predict future conditions? 4. Most health care managers would answer “Yes” to many of A. H. Mesch’s ques-

tions to determine whether an organization needs environmental analysis. Are there other questions that seem to indicate that health care organizations should be performing environmental analysis?

5. What are the specific goals of environmental analysis? 6. What are the limitations of environmental analysis? Given these limitations, is

environmental analysis worth the effort required? Why? 7. Why is it important to be able to identify influential organizations in the exter-

nal environment? How may these organizations be categorized? 8. What four processes are involved in environmental analysis? What are their

subprocesses? 9. How does the scanning process create a “window” to the external environment?

How does the window concept help in understanding organizations and the types of information they produce?

10. Why is the process of environmental analysis as important as the product? 11. What are some important technological, social, political, regulatory, economic, and

competitive issues that are affecting health care today? 12. Which of the environmental analysis strategic thinking frameworks are most

useful? Why? 13. Using Exhibit 2–8 as an example, develop a “stakeholder map” for a health care

organization in your metropolitan area or state. On this map show the import- ant health care organizations and indicate what impact they may have on the industry.

14. Which of the scenarios in Exhibit 2–9 do you think is most likely? Why? Based on today’s trends, issues, dilemmas, and so on, develop your own scenario of health care in 2010.

15. A strategic plan is based on a set of beliefs and assumptions that management holds in terms of the environment. What are some of those assumptions for a health care organization in your community?

16. What are an organization’s strategic assumptions? How may the strategic assumptions be evaluated as part of managing the strategic momentum?

17. Go beyond your immediate data and speculate on the major forces that will affect the delivery of health care after the year 2010.

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NOTES

N O T E S 9 3

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1. Kathleen M. Sutcliffe and Klaus Weber, “The High Cost of Accurate Knowledge,” Harvard Business Review 81, no. 5 (2003), p. 75.

2. Peter F. Drucker, Managing the Nonprofit Organiza- tion: Principles and Practices (New York: HarperCollins Publishers, 1990), p. 9.

3. Joel A. Barker, Future Edge: Discovering the New Paradigms of Success (New York: William Morrow, 1992), p. 28.

4. This partial list of issues in the health care industry results from tracking the strategic issues in health care in the professional and trade literature as well as numerous interviews with both public and private health care professionals by the authors. Also, issues were included from Institute for the Future, Health and Health Care 2010: The Forecast, The Challenge (San Francisco: Jossey-Bass Publishers, January 2000).

5. Michael E. Porter and Elizabeth Olmsted Teisberg, “Redefining Competition in Health Care,” Harvard Business Review 82, no. 6 ( June 2004), pp. 65–76.

6. Ibid. 7. Linda T. Kohn, “Organizing and Managing Care in

a Changing Health System,” Health Services Research 35, no. 1 (April 2000), pp. 37–52.

8. James B. Goes, Leonard Friedman, Nancy Seifert, and Jan Buffa, “A Turbulent Field: Theory, Research, and Practice on Organizational Change in Health Care,” in John D. Blair, Myron D. Fottler, Grant T. Savage (eds) Advances in Health Care Management (New York: Elsevier Science, 2000), pp. 143–144.

9. John Burns, “Market Opening Up to the Non- Traditional,” Modern Healthcare 23, no. 32 (August 9, 1993), pp. 96–98.

10. James M. Kouzes and Barry Z. Posner, The Leader- ship Challenge: How to Keep Getting Extraordinary Things Done in Organizations (San Francisco: Jossey- Bass Publishers, 1995), p. 44.

11. David K. Hurst, Crisis and Renewal: Meeting the Challenge of Organizational Change (Boston: Harvard Business School Press, 1995), p. 49.

12. Kouzes and Posner, The Leadership Challenge, pp. 47–48.

13. A. H. Mesch, “Developing an Effective Environ- mental Assessment Function,” Managerial Planning 32 (1984), pp. 17–22.

14. Henry Mintzberg, “The Fall and Rise of Strategic Planning,” Harvard Business Review 72, no. 1 (1994), pp. 107–114 and Mie Augier and Saras D. Sarasvathy, “Integrating Evolution, Cognition, and

Design: Extending Simonian Perspectives to Strategic Organization,” Strategic Organization 2, no. 2 (2004), pp. 169–204.

15. Michael D. Watkins and Max H. Bazerman, “Predictable Surprises: The Disasters You Should Have Seen Coming,” Harvard Business Review 81, no. 3 (2003), pp. 72– 80.

16. J. O’Connell and J. W. Zimmerman, “Scanning the International Environment,” California Management Review 22 (1979), pp. 15–22.

17. Barker, Future Edge, p. 86. 18. Edward De Bono, Serious Creativity: Using the

Power of Lateral Thinking to Create New Ideas (New York: HarperBusiness, 1992), p. 17. See also Bradley L. Kirkman, Benson Rosen, Paul E. Tesluk, and Christina B. Gibson, “The Impact of Team Empowerment on Virtual Team Performance: The Moderating Role of Face-to-Face Interaction,” Academy of Management Journal 47, no. 2 (2004), pp. 175–192.

19. “Bill Makes Health Insurance Portable,” Con- gressional Quarterly Almanac, 104th Congress, 2nd Session (1996), pp. 6-28–6-39.

20. Nilay B. Patel, “A Guide to the Final Installment of the HIPAA Trilogy: The Security Regulation,” Journal of Health Care Compliance 6, no. 4 (2003), pp. 13–19.

21. Karl Kronebush and Brian Elbel, “Simplifying Medicaid and SCHIP,” Health Affairs 23, no. 3 (2004), pp. 233–247.

22. Beaufort B. Longest, Jr., Management Practices for the Health Professional, 4th edn (Norwalk, CT: Appleton & Lange, 1990), pp. 12–28.

23. Ibid., p. 23. 24. http://www.hcfa.gov/stats/NHE-Proj/proj1998/

tables/table2.htm. Centers for Medicare and Med- icaid Services, Office of the Actuary, 2004.

25. Vince Gallaro, “Drop in Uninsured and Drop in HMO Ranks,” Modern Healthcare 30, no. 41 (October 2, 2000), pp. 2–3.

26. Liam Fahey and V. K. Narayanan, Macroenviron- mental Analysis for Strategic Management (St. Paul: West Publishing, 1986).

27. James B. Thomas and Reuben R. McDaniel, Jr., “Interpreting Strategic Issues: Effects of Strategy and the Information-Processing Structure of Top Management Teams,” Academy of Management Journal 33, no. 2 (1990), p. 288.

28. P. T. Terry, “Mechanisms for Environmental Scan- ning,” Long Range Planning 10 (1977), p. 9.

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29. Thomas and McDaniel, “Interpreting Strategic Issues,” pp. 289–290.

30. Sutcliffe and Weber, “The High Cost of Accurate Knowledge,” p. 75.

31. W. R. Dill, “The Impact of Environment on Organ- izational Development,” in S. Mailick and E. H. VanNess (eds) Concepts and Issues in Administrative Behavior (Englewood Cliffs, NJ: Prentice-Hall, 1962).

32. Harold Klein and W. Newman, “How to Use SPIRE: A Systematic Procedure for Identifying Rel- evant Environments for Strategic Planning,” Journal of Business Strategy 5 (1980), pp. 32–45.

33. Fahey and Narayanan, Macroenvironmental Analysis, p. 39.

34. H. E. Klein and R. E. Linneman, “Environmental Assessment: An International Study of Corporate Practice,” Journal of Business Strategy 5 (1984), pp. 66–75.

35. David O. Weber, “The Working Uninsured: A Lucrative Market for Innovative Providers,” Healthcare Growth Strategies 2001 (Santa Barbara, CA: COR Health LLC, 2000), pp. 115–121. For details see the SimpleCare website at www. simplecare.com.

36. James L. Webster, William E. Reif, and Jeffery S. Bracker, “The Manager’s Guide to Strategic Planning Tools and Techniques,” Planning Review 17, no. 6 (1989), pp. 4 –13 and Pamela Tierney and Steven M. Farmer, “The Pygmalion Process and Employee Creativity,” Journal of Management 30, no. 3 (2004), pp. 413– 432.

37. S. C. Jain, “Environmental Scanning in US Cor- porations,” Long Range Planning 17 (1984), p. 125.

38. B. Thompson, D. MacAuley, O. McNally, and S. O’Neill, “Defining Sports Medicine Specialist in the United Kingdom: A Delphi Study,” British Journal of Sports Medicine 38, no. 2 (2004), pp. 14–18.

39. Ricky W. Griffin and Gregory Moorhead, Organiza- tional Behavior (Boston: Houghton Mifflin, 1986), pp. 496–497 and Lucy L. Gilson and Christina E. Shalley, “A Little Creativity Goes A Long Way: An Examination of Teams’ Engagement in Creative Processes,” Journal of Management 30, no. 4 (2004), pp. 453–470.

40. Ibid., pp. 495–496.

41. “CMS Provides Details on Specialty Hospital Moratorium,” Healthcare Financial Management 58, no. 5 (2004), pp. 12–14.

42. Barbara Karmel, Point and Counterpoint in Organiza- tional Behavior (Hinsdale, IL: Dryden Press, 1980), p. 11.

43. Webster, Reif, and Bracker, “The Manager’s Guide,” p. 13.

44. Ibid. 45. Myron D. Fottler, John D. Blair, Carlton J.

Whitehead, Michael D. Laus, and G. T. Savage, “Assessing Key Stakeholders: Who Matters to Hospitals and Why?” Hospital and Health Services Administration 34, no. 4 (1989), p. 527.

46. Marco Iansiti and Roy Levien, “Strategy as Ecology,” Harvard Business Review 82, no. 3 (2004), pp. 68–78.

47. Fottler, Blair, Whitehead, Laus, and Savage, “Assessing Key Stakeholders,” p. 532.

48. John D. Blair and J. A. Buesseler, “Competitive Forces in the Medical Group Industry: A Stakeholder Analysis,” Health Care Management Review 23, no. 2 (1998), pp. 7–27.

49. Don Daake and William P. Anthony, “Under- standing Stakeholder Power and Influence Gaps in a Health Care Organization: An Empirical Study,” Health Care Management Review 25, no. 3 (2000), pp. 94–106.

50. Stuart L. Hart and Sanjay Sharma, “Engaging Fringe Stakeholders for Competitive Imagination,” The Academy of Management Executive 18, no. 1 (2004), pp. 7–18.

51. Ibid. 52. William E. Halal, “Corporate Community: A Theory

of the Firm Uniting Profitability and Responsibility,” Strategy & Leadership 28, no. 2 (2000), pp. 10 –16.

53. Audrey Schriefer, “Getting the Most Out of Scenarios: Advice from the Experts,” Planning Review 23, no. 5 (1995), pp. 33–35 and J. Alberto Aragón-Correa and Sanjay Sharma, “The Social Side of Creativity: A Static and Dynamic Social Network Perspective,” Academy of Management Review 28, no. 1 (2003), pp. 89–106.

54. P. Leemhuis, “Using Scenarios to Develop Strategies,” Long Range Planning 18 (1985), pp. 30– 37.

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Capper, Stuart A., Peter M. Ginter, and Linda E. Swayne (eds) Public Health Management and Leadership: Cases and Context (Thousand Oaks, CA: Sage Publications, 2002). Two comprehensive industry notes and four chapters provide the context for the 15 public health cases. One industry note profiles the US health care system and the other focuses on the US public health system. The chapters cover case analysis, health care information sources, oral presentations, and health care finance. The 15 cases deal with a variety of community health issues for leaders in public health.

Enthoven, Alain C. and Laura A. Tollen, Toward the 21st Century Health System (Indianapolis, IN: Jossey-Bass, 2004). New and significant research is provided in this book that argues pre-paid group practices are a cost-efficient, high-quality alternative to HMOs. Topics include integrated health care systems, quality of care, working with physicians, and financing physician practices.

Kovner, Anthony R. and Steven Jonas, Jonas & Kovner’s Health Care Delivery in the United States, 7th edn (New York: Springer Publishing, 2004). The authors address emergent and recurring issues such as national and local health care reform, primary care and prevention, alternative medicine, multicultural issues, hospital organization, ethics, physician-assisted suicide, and so on. The book attempts to answer several key questions: How do we assess and understand the health care sector of our economy? Where is health care provided? What are the characteristics of those institutions that provide it? How are the changes in health care systems affecting the health of the population, the cost, and access to care?

Mahoney, Joseph T., Economic Foundations of Strategy (Thousand Oaks, CA: Sage Publishing, 2004). This book looks at the essential concepts of business strategy and integrates them with five major theories of the firm. These theories have stood the test of time and provide important insights into the nature of strategy formulation. Applications of the theories of the firm, strategy, and organization are made to management practice.

McGee, Kenneth G., Heads Up: How to Anticipate Business Surprises and Seize Opportunities First (Boston, MA: Harvard Business School Press, 2004). Even the worst business crises rarely happen without some warning. Leaders in organizations can minimize the surprises that are too often followed by desperate reactions. The author argues that leaders need to master understanding the present, what is happening now, and develop methods for understanding how current events will affect the future. Potential disasters can be turned into opportunities.

Mitchell, Donald and Carol Coles, The Ultimate Competitive Advantage (New York: Berrett-Koehler, 2003). Continuous business model innovation is the key to improving organizational performance. Do not focus solely on doing better what you did poorly yesterday. Instead, find better ways to prepare for unexpected events in the future. It is important to deliver value by developing and implementing a superior management process and fairly reward all stakeholders.

Robinson, Alan G. and Dean M. Schroeder, Ideas Are Free: How the Idea Revolution Is Liberating People and Transforming Organizations (Williston, VT: BK Publishers, 2004). People working in the trenches of factories, hospitals, and other organiza- tions often see opportunities and challenges that those managing them miss. Unfortunately, very few organizations take advantage of the revenue-enhancing and cost-reducing knowledge that exists among rank-and-file employees. This book provides recommendations for tapping into this virtually free and perpetually renewable source of ideas and innovations.

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ADDITIONAL READINGS

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CHAPTER

Service Area Competitor Analysis

“The competition will bite you if you keep running; if you stand still, they will swallow you.”

William Knudsen, Jr.

that built and was operating 13 free-standing heart hospitals, began having discussions with local cardiologists. MedCath partnered with cardio- logists, cardiovascular surgeons, and other physi- cians to deliver patient-focused health care to those with cardiovascular disease. MedCath enabled physi- cians to be involved in the design and planning of the facility as well as managing its operations. Often physicians were involved in ownership, enabling them to enhance stagnant incomes. MedCath targeted states, such as Indiana, that did not have certificate of need (CON) laws.

As a defensive ploy, and to avoid the potential loss of physicians (and through them, their patients), Indianapolis service area hospitals forged partner- ships with physicians to consolidate or expand

A heart-care building boom is occurring in many cities, although the volume for open heart surgery seems to be declining. Critics believe that over- building may split up heart surgery volume enough that many facilities will not meet Leapfrog- recommended volume standards just at a time when consumers are becoming much more aware of them (see Perspective 6–1 on the Leapfrog Group). For example, in Milwaukee, 13 cardiology programs serve a population of 1.6 million, whereas Cleveland has five open-heart centers for a metropolitan statistical area (MSA) of 2.7 million and Rochester has two programs for a population of 1.1 million.

In the Indianapolis service area, cardiac capacity increased 15–20 percent in the past three years. The reason? MedCath, the for-profit corporation !

3

Introductory Incident

Competition Revs Up in the Indianapolis Service Area

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heart surgery programs. Each of the four hospital systems – Clarian Health Partners, Community Hospitals of Indianapolis, St. Vincent Hospitals, and Wishard Health Services – built free-standing heart hospitals and two of them – Clarian and St. Vincent – were built as joint ventures with physicians.

Population for Marion County (which includes Indianapolis) is 1.62 million. The Indianapolis MSA includes nine counties with a population of more than 1.8 million. The MSA has more than 3,600 physicians (1.9 per 1,000 population) and 15,800 registered nurses. Although the MSA has 2.5 staffed hospital beds per 1,000 population, the city of Indianapolis has 3.0 staffed beds per 1,000 population.

HMO penetration is low in the city (21 percent and declining); most of the 22 major employers (including Eli Lilly, Anthem, Inc., and Conseco, Inc. on the Fortune 500 list) offer PPOs. About 12 percent of the population is without health insurance (13 percent in the county). In both the city and the county 11 percent of the population is over 65 years of age (compared with an average of 15 per- cent for the United States).

Indianapolis had been a city where health care was described as “genteel competition” but that is no longer the case. Competition among the hospitals has intensified as several of the systems have built new hospitals or significantly renovated older facilities in what has traditionally been others’ geo- graphic market areas. Some of the construction is designed to move services of flagship hospitals to

more lucrative, faster growing areas (outside the city limits of Indianapolis). In addition, St. Vincent’s Hospital opened a children’s hospital to compete with Clarian’s Riley Children’s Hospital (affiliated with Indiana University and historically the only children’s hospital in the region). Orthopedics groups were announcing plans to open orthopedic hospitals and oncologists were in discussions with a for-profit national company, spurring hospitals to build additional outpatient cancer facilities.

In addition, there has been friction among the physicians at Indiana University and Methodist Hospital (merged in 1997 to become Clarian Health Partners) such that many physicians affiliated with Methodist have left to go to competing hospitals, undermining Clarian’s dominant market position.

Health and medical care in the Indianapolis ser- vice area is very competitive. With population growth, will demand for cardiac services increase 20 percent over the next few years to utilize the new facilities? Will each of the heart centers perform sufficient numbers of surgeries to remain com- petitive? Which of the systems will be survivors in such a competitive market?

Source: Aaron Katz, Robert E. Hurley, Kelly Devers, Leslie Jackson Conwell, Bradley C. Strunk, Andrea Staiti, J. Lee Hargraves, and Robert A. Bereson, “Competition Revs Up the Indianapolis Health Care Market,” Community Report No. 1: Indianapolis (Washington, DC: Center for Studying Health System Change, Winter 2003) and Michelle Rogers, “Cardio- vascular Services: Heart Race,” HealthLeaders (January 28, 2004) at http://www.healthleaders.com/magazine/cover.

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Learning Objectives After completing this chapter the student should be able to:

1. Understand the importance of service area competitor analysis as well as its purpose.

2. Understand the relationship between general and health care environmental issue identification and analysis and service area competitor analysis.

3. Define and analyze the service area for a health care organization or specific health service.

4. Conduct a service area structure analysis for a health care organization.

5. Understand strategic groups and be able to map competitors’ strategies along important service and market dimensions.

6. Understand the elements of service area competitor analysis and assess likely competitor strategies.

7. Aggregate general environmental and health care industry issues with service area and competitor issues and synthesize specific strategy implications.

8. Suggest several questions to initiate strategic thinking concerning the service area and competitors as a part of managing the strategic momentum.

Further Focus in External Environmental Analysis

Environmental analysis involves strategic thinking and strategic planning, focusing on increasingly more specific issues. Chapter 2, “Understanding and Analyzing the General Environment and the Health Care Environment,” provided the fundamental approach and strategic thinking frameworks for scanning, monitoring, forecasting, and assessing trends and issues in the environment. However, once the general and industry trends and issues in the external environ- ment have been identified and assessed, a more specific analysis is required. As shown in Exhibit 2–1, service area competitor analysis is the third part of a comprehensive environmental analysis. Service area competitor analysis attempts to further define and understand an organization’s environment through identify- ing specific service area/service category issues, identifying its competitors, determining the strengths and weaknesses of these rivals, and anticipating their strategic moves. It involves collecting data concerning the service area and rivals to analyze and interpret the data for strategic decision making.1

The Service Area

The service area is considered to be the geographic area surrounding the health care provider from which it pulls the majority of its customers/patients. It is usually

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limited by fairly well-defined geographic borders. Beyond these borders, services may be difficult to render because of distance, cost, time, and so on. Therefore, a health care organization must not only define its service area but must also analyze in detail all relevant and important aspects of the service area, including economic, demographic, psychographic (lifestyle), and disease pattern characteristics.2

The service area is defined by customers’ preferences and the health care pro- viders that are available. Certainly, the consumer has become empowered by the amount of information available concerning disease conditions and providers (see Perspective 3–1). Exhibit 3–1 shows the determinants of a service area

The empowered patient has become a significant presence in the health care environment and a challenge for health care organizations. With con- fidence gained from Internet access and media exposure, the patient often has an opinion and may not appreciate the paternalistic style of health care delivery, no matter how well-intentioned. “Informed” consumers expect to be participating partners in their own health care and when their families need care.

There is an upside to this challenge. Fully informed patients who participate in the decision process are more likely to be satisfied with their care and to adhere to the treatment advice.1 Treatments will reflect patient preferences and values. Patient expectations will be knowledge-based. The challenge is to make sure that the patient’s information is based on good evidence.

To become a fully informed and participating partner, a patient must experience the following process: (1) The patient must obtain an accurate understanding of the risks or seriousness of the condition. (2) The patient must understand the risks, benefits, and uncertainties of the treatment under consideration and the alternatives. (3) The patient must have weighed his or her values as they relate to the potential harm and benefit of the treatment. (4) The patient must have had the opportunity to participate in the decisionmaking process at whatever level he or she desires.2

Health care providers may see this task as unreasonable in the face of reduced reimbursements and the pressure to streamline care. However, failure to ensure that the patient is fully informed will leave a void to be filled by other suppliers of information. Such information may be poorly researched or subtly biased to serve ulterior motives. Providers who succeed in this educational endeavor will gain their patient’s trust and loyalty. The power of this approach can be seen on the web page of Cancer Treat- ment Centers of America. Their message presents their model of “Patient Empowered Medicine” as an argument for choosing their centers over the more traditional medical center.

As patients are asked to face higher deductibles and cost sharing of premiums, this empowerment phenomenon seems even more appropriate. Providers need patients to be active partners in the redesign of a delivery system that is more efficient and is available to everyone. The empowered patient should fit well into the health care system of tomorrow.

Notes 1. R. Grol, “Improving the Quality of Medical Care: Building Bridges Among Professional Pride, Payer Profit, and

Patient Satisfaction,” JAMA 286, no. 20 (2001), pp. 2578–2586. 2. S. Sheridan, R. Harris, and S. Woolf, “Shared Decision Making About Screening and Chemoprevention,” American

Journal of Preventive Medicine 26, no. 1 (2004), pp. 56–66.

Source: Edmond F. Tipton, MD, MBA, and PhD student, University of Alabama at Birmingham.

Perspective 3–1 The Empowered

Patient – Challenge and Opportunity

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including the consumer variables and the market (provider) variables. For the con- sumer, the services need could include health care that is preventive, diagnostic, alternative, routine, episodic, acute, or chronic. Usage rate would be related to a variety of economic, demographic, psychographic, and disease pattern variables. Brand predisposition indicates the consumer has a preference for some health care providers over others. For example, if there is only one hospital in town, and the consumer does not like its “looks,” location, or perceived quality of care, he or she may prefer to drive to the nearest larger city. For routine medical care, some consumers prefer to go to specialists; others prefer a primary care doctor; still others prefer clinics that have primary care physicians and specialists; and, finally, some consumers prefer physician assistants or nurse practitioners. These different consumer preferences will be determinants in defining the service area.

Another group of consumer determinants will be related to personal factors such as personal and social values, epistemic (knowledge) values, past experiences, and the individual’s personal state of health. In concert, these variables develop the

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Exhibit 3–1: Service Area Determinants

Services Type Personal Values Usage Rates Social Values Brand Predisposition Epistemic Values Preferred Image Past Experiences

Personal State of Health

Consumer Determinants

Location • Drive Time • Transportation • Parking Ease/Access

Convenience • Hours of Operation • Safety • Wayfinding

Price Level Image

Services Available Service

• Friendliness • Caring • Wait Time

Quality of Information • Website • Phone Consults • Brochures and Advertisements • Instructions • Demonstrations

Service Area

Market/Organization Determinants

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individual’s preferences for health care providers. However, if providers are not available in that there are limited or no options in the immediate area, the con- sumer will travel greater distances to gain the desired care.

Options or choices are controlled by the health care structure. The market and organizations within it determine what will be offered or made available to the consumer. The “market” contains health care providers in a variety of locations that bear on convenience and image. Location includes drive time from home (or, increasingly, work), availability of transportation, as well as access and parking ease. Convenience may be hours of operation, safety, availability of food, signs to assist in finding the way, and so on. Image for the market entails positioning among the various providers. The health care provider might have the image of being more caring, friendlier, or more high-tech; or it may be perceived as attracting desirable or undesirable demographic, socioeconomic, or ethnic groups. The organization itself has an image of the services (health care provided) as well as the service and the quality of information provided. Location, convenience, and image are all in relationship to the other providers in the area, including those within driving distance and those that are remote but perceived as providing better quality, further services, or other desirable characteristics. Health care providers make these decisions, in part, based on their understanding of consumers’ needs and wants.

Managed care interrupts the normal decision making by consumers. An employed individual today usually has some choice in health care insurance. The employer may offer one or more different health plans. However, once the con- sumer has selected a managed care plan, the ability to choose providers – both hospitals and physicians – becomes more restrictive. And, in fact, the more the HMO attempts to control health care costs by further structuring health care delivery, the more restricted the choice becomes for consumers. Restricted choice is not favored by most Americans and they have been quite vocal about it with their employers. The result is that many employers are only willing to commit to a health plan that offers choice (and thereby removes the quantity discounts previously offered) and, hence, organizations have seen health care cost increases in double digits again.

Competitor Analysis

In addition to the trends and issues associated with the service area, health care organizations must focus specifically on service area competitors. Business organizations have long engaged in competitor analysis, viewing it as an essen- tial part of environmental analysis. These companies have learned that focusing on competitor analysis aids in the identification of new business opportunities, the clarification of emerging ideas, improved ability to anticipate surprises, and the development of market penetration and market share growth strategies.3 As a matter of fact, one well-documented reason Japanese automobile firms were able to penetrate the US market successfully, especially during the 1970s, was that they were much better at doing competitor analysis than US firms.4 For business organizations the task of understanding the industry and specific competitors is

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a challenge; it is far more difficult for health care organizations because consumers will travel great distances for some kinds of care. For example, people from around the world travel to the Mayo Clinic in Rochester, Minnesota for care.

In the past, general environmental and industry analysis were sufficient for most health care organizations. General and health care industry technological, social, political, regulatory, economic, and competitive issues provided enough information to make most strategic decisions. Service area competitor moves and countermoves were not that important. However, during the past decade, because of fundamental changes within the industry brought about by the influences of managed care, efforts to reduce costs and increase efficiency, and the increased presence of for-profit health care organizations, every segment of the industry has become highly competitive. Certainly, as suggested in the Introductory Incident, aggres- sive competition has entered the health care market in Indianapolis.

CHALLENGES FOR THE HEALTH CARE MARKET Analyzing this new competitive environment is difficult for health care organ- izations for a variety of reasons. Perhaps most obvious is that in the recent past very few health care organizations were concerned with competition. In fact, those in the “helping professions” believed there was no need to compete. Hospitals, long-term care facilities, and physicians were more concerned with trying to meet the demand for their services. This history of noncompetition changed when legis- lation led to an increased number of hospital beds and an increased number of physicians (particularly within certain specialties). Eventually, the oversupply led to a more competitive environment. As discussed in Perspective 3–2, in health care, competition has occurred between health plans, health care networks, and hospital systems when perhaps health care organizations should instead compete on specific disease treatment and outcomes.

Another major reason for the lack of competitor analysis within health care is that the separation of consumers of health services (patients) from payors (insur- ance companies and employers) provided few checks on the system. When all the health care providers in a service area were well paid by insured patients, increasingly higher costs for more and more services provided to insured as well as uninsured patients were passed on to the insured patients. This “cost shifting” became a major concern in the tight economy of the early 1990s, and again in the first years of the twenty-first century, because employers paid for most insurance coverage for their employees. When US companies felt they could no longer be competitive in world markets because of high health care costs, they began searching for ways to decrease the burden. They brought pressure on health care providers to reduce costs and began focusing on price competition. Employers began requiring employees to pay a higher portion of the health care costs (higher premiums, co-pays, and then higher co-pays) and businesses became increasingly interested in “managing health care.”

The philosophy of managed care was that by controlling consumer choice to a limited number of providers, greater buying power was achieved through economies of scale. When patients’ choices of hospitals or physicians were

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According to Michael Porter and Elizabeth Teisberg, in healthy competi- tion: ongoing improvements in processes and methods drive down costs; product/service quality improves; innovation leads to improvements which are quickly adopted; uncompetitive producers go out of business; value-adjusted prices fall; and the market expands. However, in health care: costs are high and rising, despite efforts to reduce them; rising costs are not the direct result of improvements in quality; medical services are

restricted (rationed to those who can pay); patients receive care that is not the current accepted practice; and high rates of medical error continue. In addition, considerable variation in cost and quality occurs among providers and across geographic areas. Diffusion of best practices takes, on average, 17 years to become standard practice.

Clearly the health care system is broken but the authors do not advocate that government takes over and “solves” the problem. Rather, they suggest that business could cause changes to occur if employers were to insist on competition occurring at the right level. For Porter and Teisberg, problems in health care occur because the competition is at the level of health plans, networks, and hospital systems whereas the “right level” is competition to care for the various health conditions or diseases. If providers com- peted directly across a broad geographic area for cardiac patients, for example, businesses would pay a premium for best results. The provider with the best results would attract patients and would be imit- ated quickly or the other providers (who did not achieve good results) would end up with no patients. Currently, hospitals and physicians are paid to provide care for the citizens in a service area regardless of the quality of outcomes.

According to the authors, wrong forms of competition include:

• Annual competition among health plans to sign subscribers (effectively blocking competition at the disease level);

• Deep discounting to payors/employers with large patient populations (it does not cost less to treat a patient employed by a large business versus a small one);

• Provider concentration that does not create patient value but boosts bargaining power; • Cost shifting that creates no patient value; • Local competition insulating mediocre providers and inhibiting the use of best practices; • Suppressing information that would enable patients to choose the best provider (many providers do

not even make available how many patients they have treated for a specific disease/condition); • Incentives for payors to enroll healthy people and deny coverage to sick people (and complicate the

billing process); and • Not referring to other providers with more experience.

Porter and Teisberg believe positive competition occurs when:

• Providers develop distinctivenesses (create unique value); • No restrictions are placed on patients’ selection of providers; • Pricing is transparent; • Billing is simplified; • Information is easily accessible and comparable; • Non-discriminatory insurance underwriting is available (large risk pools for small businesses); • Fewer lawsuits reduce defensive medicine; and • Minimum levels of coverage are offered.

Companies have purchased health care on the basis of cost not quality. If employers were to refocus their goals to have healthy employees, they would buy health care differently. Competition would be efficient – the best providers would thrive and those delivering inferior service would go out of business.

Source: Michael E. Porter and Elizabeth O. Teisberg, “Redefining Competition in Health Care,” Harvard Business Review 82, no. 6 (June 2004), pp. 65–76.

Perspective 3–2 Redefining

Competition in Health Care

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limited, strong competition emerged among health care providers for the managed care organization’s insured group. Physicians, notably primary care physicians, became “gatekeepers” into the system and attempted to direct patients to only one hospital to obtain the best possible rates. Hospitals “com- peted” for these desirable contracts.

In the first decade of the twenty-first century, managed care has produced con- siderable backlash from physicians, who do not want managed care “bureaucrats” telling them how they should practice medicine, and from consumers, who want choices. Some state legislatures have enacted laws dictating to HMOs the min- imum length of stay for various diseases and conditions. The federal government and several state legislatures are investigating a patient’s bill of rights. Exclusive contracts have been replaced by greater choice for employees by employers – multiple health plans to choose from – and greater choice within a specific plan – the option to go outside the plan to seek care from a specific physician who might not be a member of that particular plan. The result, according to the Interstudy Competitive Edge Report 4.0, is that HMO enrollment has declined from around 80 million in 1999 to less than 72 million in 2003.5

STRATEGIC SIGNIFICANCE OF COMPETITOR ANALYSIS Within the health care community there is a growing understanding that health care organizations must be positioned effectively vis-à-vis their competitors. Competitor information is essential for selecting viable strategies that position the organization strongly within the market. Many health care managers agree that an organized competitor intelligence system is necessary for survival. The system acts like an interlinked radar grid constantly monitoring competitor activity, filtering the raw information picked up by external and internal sources, processing it for strategic significance, and efficiently communicating actionable intelligence to those who need it.6

The pharmaceutical industry makes extensive use of competitive intelligence gathering – estimates are that more than $20 billion per year is used on govern- ment filings, trade news, and market research. A number of services, such as DRUGLAUNCH, DRUGNL, and DRUGUPDATES provide information on R&D activities, new product launches, and patent analysis for the US market as well as around the globe.7 Others, such as PHAR (Pharmaprojects) and PHIN (Pharmaceutical and Healthcare Industry News), provide information on new product development in major markets worldwide through publications and prepublication news. A relatively new competitive intelligence company, Skila (named after Dustin Hoffman’s secret agent brother in Marathon Man), goes beyond data gathering to information analysis (see Perspective 3–3).

The Focus of Competitor Analysis

An organization engages in competitor analysis to gain a general understanding of the competitors in the service area, identify any vulnerabilities of the competitors,

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assess the impact of its own strategic actions against specific competitors, and identify potential moves that a competitor might make that would endanger the organization’s position in the market. Analyzing competitors assists organ- izations in identifying a clear competitive advantage – some basis on which they are willing to compete with anyone. Competitive advantage is the means by which the organization seeks to develop cost advantage or to differentiate itself from other organizations. Organizations constantly take offensive and defensive actions in their quests for competitive advantage vis-à-vis competitors.8 Competitive advantage might be centered on image, high-quality services, an excellent and widely recognized staff, or efficiency and low cost, among others.

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Skila is an information services company that operates as a virtual intel- ligence officer by improving decision making in the pharmaceutical, medical device, and biotechnology industries. Its Internet-based informa- tion system combines all the pieces of data, sifts and sorts them, and then selects just the information that clients need to make decisions about their products and markets. Leveraging its proprietary Intelligration® techno-

logy, services, and methodology, Skila integrates all relevant information and people into a Single Touch Point (Skila’s term for a sophisticated database accessible by all members of a team, department, group, or organization) to deliver the right information, to the right people, at the right time, for commercial- ization processes. By providing fast and easy access to up-to-date, dynamic, and relevant knowledge to brand management (improving the coordination across subteams), alliance management (enabling alliance partners to function as a single fast, agile, and effective team), medical teams (helping build and maintain the support of opinion-leading physicians with local, regional, national, and global influence), and managed markets (creating access and coordinating pull-through), Skila offers technology that rapidly brings together a variety of information and people relevant to the achievement of the organiza- tion’s objectives.

Skila’s strategic advantage is well-packaged information and a delivery system full of “bells and whistles” to create its Intelligration® platform. The system seeks and automatically integrates informa- tion from Skila’s proprietary research, a client’s own databases and computer banks, and third-party sources such as Lexis/Nexis, Edgar, and Medline. Intelligration® summarizes huge amounts of data and then con- solidates, categorizes, and organizes all relevant information based on the client’s requirements. The client’s team is able to find the precise information needed to make effective business decisions by aligning objectives and increasing the speed of access to relevant knowledge. The system sends the data through various tags, filters, and matching programs to develop what lands on the client’s desk – a comprehen- sive but tightly focused report on, for example, treating psoriasis, that is delivered electronically in the morning and added to or updated daily until the decision maker feels that he or she can develop closure.

Skila’s service offers three benefits:

1. One-stop shopping for information; 2. Content determined by the client’s business needs; and 3. Information delivered directly to decision makers.

Skila’s service offers time and money savings as well as better intelligence to provide “knowledge for the business of health care.”

Source: Company sources.

Perspective 3–3 Skila Is a Secret

Weapon

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It is useful to classify competitor information as general, offensive, and defensive. This classification system will aid in strategy development.

General competitor information is important for an organization to:

• avoid surprises in the marketplace; • provide a forum for leaders to discuss and evaluate their assumptions about

the organization’s capabilities, market position, and competition; • make everyone aware of significant and formidable competitors to whom the

organization must respond; • help the organization learn from rivals through benchmarking (specific meas-

ures comparing the organization with its competitors on a set of key variables); • build consensus among executives on the organization’s goals and capabilities,

thus increasing their commitment to the chosen strategy; and • foster strategic thinking throughout the organization.

Offensive competitor information is helpful to:

• identify market niches and discontinuities, • select a viable strategy, and • contribute to the successful implementation of the strategy.

Defensive competitor information will aid in:

• anticipating competitors’ moves, and • shortening the time required to respond (countermoves) to a competitor’s moves.

Depending on the intent of the competitor analysis, an organization might use all of these categories or just one or two. For example, in the early stages of competitor analysis, the organization may seek only general information. As an organization plans to enter new markets, offensive information may be the primary focus of the competitor analysis. In the face of strategic moves by a powerful competitor, defensive information may take precedence. In large, com- plex markets, all of these information categories are appropriate and essential for positioning the organization.

Impediments to Effective Competitor Analysis

Monitoring the actions and understanding the intentions of competitors is often difficult. Health care executives agree that it is necessary and growing in import- ance, yet they are still not doing effective competitor analysis. Six common impedi- ments or “blind spots” have been identified that slow an organization’s response to its competitors’ moves or even cause the selection of the wrong competitive approach. Flawed competitor analysis, resulting from these blind spots, weakens an organization’s capacity to seize opportunities or interact effectively with its rivals, ultimately leading to an erosion in the organization’s market position and profitability.9 The six impediments to effective competitor analysis include:

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• misjudging industry and service area boundaries, • poor identification of the competition, • overemphasis on competitors’ visible competence, • overemphasis on where, rather than how, to compete, • faulty assumptions about the competition, and • paralysis by analysis.10

CLEARLY DEFINED SERVICE AREA A major contribution of competitor analysis is the development of a clear defini- tion of the industry, industry segment, or service area. To avoid a focus that is too narrow, the industry, industry segment, and service area must be defined in the broadest terms that are useful. In today’s health care environment, competition may come from very nontraditional competitors (outside the health care industry). For instance, based on their experience in the hotel business, the Marriott Cor- poration entered the long-term care and retirement center markets. Utilizing its expertise in accommodations management, Marriott created Senior Living Services in 1984. In 2000, the corporation had 144 senior living communities in 29 states with others under development. Marriott’s mission statement for its Senior Living Centers is summed up in two words: “We Care.” Accommodations for independent and assisted living, Alzheimer’s and other memory loss disorders, and nursing care were provided.11 However, by mid-2003, Marriott had concluded that even inde- pendent senior living centers were not part of its core competency and sold Senior Living Services to Sunrise Senior Living and a number of its properties to CNL Retirement Properties, Inc. The total sale amounted to almost $350 million. In the past, multihospital systems and nursing home chains dominated this industry seg- ment. As competition increases from nontraditional competitors, social activities, décor, meals, and housekeeping may become more important competitive factors.

Typically, health care managers have focused their analysis on locally served markets. Patients were treated by the local doctor, in a local hospital (or the closest one available). There was little travel for medical or health care. Thus, doctors and hospitals were insulated from other health care organizations outside their geographic service area; however, that is no longer the case. Market entry by com- petitors from outside the metropolitan area, the region, or the state is now quite common. For example, expansion by multihospital for-profit systems such as HCA–The Healthcare Company (formerly Columbia/HCA) and Tenet represent serious new competitive challenges in many markets. MedCath has built specialty hospitals in a number of markets for cardiac care. Nationally recognized clinics, such as the Mayo Clinic and the Cleveland Clinic, have expanded to locations in Florida and Arizona. A health care organization that maintains a local or regional focus may be delayed in recognizing changes in the service area boundaries.

COMPETITOR IDENTIFICATION Often, only cursory attention is given to other segments of the health care industry. Hospitals traditionally focused on acute care. They were not concerned with intermediate care or home care as a competing segment. Yet, because of length-of-stay issues, patients have been sent to an intermediate care or home

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care situation outside the hospital’s purview, which increased revenues to those organizations and decreased the hospital’s revenues. For hospitals to survive, integrated delivery systems, seamless care, and continuum of care emerged. As a result there are fewer but more direct competitors in many market areas today. Clearly, misjudging how the industry, industry segments, or service area is defined will lead to poor competitor analysis.

Another possible flaw of competitor analysis is the improper or poor iden- tification of precisely which organizations are the competitors. In many cases, health care executives focus on a single established major competitor and ignore emerging or lesser-known potential competitors. This is especially true when the perceived strengths of competitor organizations do not fit traditional measures or there is an inflexible commitment to historical critical success factors (tradi- tional inpatient services instead of outpatient approaches). Academic medical cen- ters, with their focus on research, have traditionally viewed only other academic medical centers as competitors. However, with the impact of managed care and lowered reimbursements, some of them are in real danger of having to close.

INFORMATION ABOUT COMPETITORS Another problem in performing competitor analysis is the tendency to be concerned only with the visible activities of competitors. Less visible attributes and capabilities such as organizational structure, culture, human resources, service features, intellectual capital, management acumen, and strategy may cause mis- interpretation of a competitor’s strengths or strategic intent. Certainly the Mayo Clinic’s strong culture of excellence has played an important role in shaping its strategic decisions. Similarly, in an environment of rapid change, intellectual capital represents a primary value creation asset of the organization.12 In addition, effective competitor analysis requires predicting how competitors plan to posi- tion themselves. Although often difficult, determining competitors’ strategic intent is at the heart of competitor analysis. An effective competitor analysis should focus on what rivals can do with their resources, capabilities, and competencies – an extension of what competitors are currently doing – and include possible radical departures from existing strategies.13

Accurate and timely information concerning competitors is extremely important in competitor analysis. Misjudging or underestimating competitors’ resources, capabilities, or competencies is a serious misstep. Faulty assumptions can suggest inappropriate strategies for an organization. Poor environmental scanning perpetuates faulty assumptions.

Because of the sheer volume of data that can be collected concerning the exter- nal environment and competition, paralysis by analysis can occur. In environments undergoing profound change, huge quantities of data are generated and access to it becomes easier. Under such conditions, information overload is possible and separating the essential from the nonessential is often difficult. As a result, it should be emphasized that the intent of competitor analysis is to support strategic deci- sion making; overanalysis or “endless” analysis should be avoided. Competitor information must be focused and contribute to strategy formulation.

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A Process for Service Area Competitor Analysis

Service area competitor analysis is a process of understanding the market and identifying and evaluating competitors. Together with the general and health care trends and issues, service area competitor analysis must be synthesized into the strategic issues facing the organization. The synthesis will be an explicit input into the formulation of the organization’s strategy.

As illustrated in the strategic thinking map in Exhibit 3–2, service area com- petitor analysis begins with an understanding and specification of services or service categories the organization provides to its customers. Next, the service area must be specified for the various services or service categories. Then the service area structure or competitive dynamics should be assessed. Competitors providing services in the same category in and around the service area must be analyzed. Each of the organizations can be positioned against the important dimensions of the market and assessed as to their likely strategic moves. Finally, the results of the analysis must be synthesized and implications drawn. These conclusions will provide important information for strategy formulation.

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Exhibit 3–2: Service Area Competitor Analysis

Synthesize Analyses

Map Strategic Groups

Conduct Competitor Analysis

Conduct Service Area Structure Analysis

Create a Service Area Profile

Define the Service Categories

Define the Service Area

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Defining the Service Categories

The first step in service area competitor analysis is to specify the service category to be analyzed. Many health care organizations have several service categories or products, and each may have different geographic and demographic service areas. For a multihospital chain deciding to enter a new market, the service cat- egory may be defined as acute hospital care, but for a rehabilitation hospital, the service category might be defined as physical therapy or occupational therapy or orthopedic surgery. In addition, because many health care services can be broken down into more specific subservices, the level of service category specificity should be agreed on before analysis begins. For example, pediatric care may be broken down into well-baby care, infectious diseases, developmental pediatrics, pediatric hematology-oncology, and so on. Certainly pediatric hematology- oncology as a service category would have a far larger service area than well- baby care. A parent with a child who has cancer would travel farther for care from a specialist than a parent who sought well-baby care available from nurse practitioners.

Another example of a service that requires a clear definition is the subacute care segment. Subacute care, sometimes termed the middle ground of health care, provides services for those patients who no longer require inpatient acute care, but need a higher level of care than can be provided in a skilled-nursing facility or through home care. There are multiple ways to segment this market that includes diverse post-acute care and rehabilitation services. An organization could select one or a combination of services to offer within subacute care. For example, Vencor, Inc., founded in 1985, provides long-term care and rehabilitation services through 295 nursing centers in 31 states. It grew rapidly by purchasing Hillhaven Corporation, a traditional supplier of long-term care; TheraTx, a provider of rehabilitation and respiratory therapy program management services to nursing centers; and Transitional Hospitals, providers of care for ventilator- dependent patients. By combining these service categories the company focused on treatment programs for patients with complex medical conditions. However, its strategy was not very successful: Vencor filed voluntary reorganization under Chapter 11 in September 1999. In third quarter 2000, Vencor reported a loss of $27 million or $0.38 per share compared with a loss of $42 million or $0.61 per share in third quarter 1999.14 Vencor emerged from the reorganization in April 2001 and changed its name to Kindred Healthcare. The 52-week high for its stock in 2002 was $49.78 but in 2003 the price fell below $20 per share. By mid-2004 the stock had rebounded to a little over $25 per share. Many long-term care fa- cilities are in bankruptcy because of the impact of the Balanced Budget Act of 1997 that significantly reduced reimbursements for long-term care.

In addition, several competitor nursing home chains, such as the largest in the industry, Beverly Enterprises, with 550 facilities in 30 states and 62,878 licensed beds, and the second largest, Mariner Post-Acute Network, with over 430 fa- cilities in 40 states and 50,686 licensed beds, have added subacute care for the chronically ill to their services offering, thereby further increasing competition for

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Vencor. On the other hand, the number of seniors requiring care is projected to rise drastically in the near future. Thus, to have a clear idea of what is to be accom- plished by the service area competitor analysis, it is important to first under- stand and define the service category, starting narrowly with direct competitors, but then expanding the category to include more indirect competitors.

Plastic surgery is a medical specialty that can be defined as a service category. However, there are additional service categories that need to be explored to deter- mine direct and indirect competitors. For instance, reconstructive plastic surgeons often specialize on the face, dealing with congenital deformities and injuries due to trauma. Eye, ear, nose, and throat physicians as well as oral surgeons are performing some of the same procedures. Cosmetic plastic surgeons may offer a full range of services including reconstructive surgery, or they may specialize on the face, breast, or other body parts. Furthermore, they may specialize on the basis of procedures they use, such as laser or liposuction. Thus, to understand how customers perceive the organization’s service category is an important deter- mination for a beneficial service area competitor analysis.

Determining Service Area Boundaries

Understanding the geographic boundaries is important in defining the service area, but is often difficult because of the variety of services offered. In an acute care hospital, the service area for cardiac services may be the entire state or region, whereas the service area for the emergency room might be only a few blocks. Thus, for a health care organization that offers several service categories, it may be neces- sary to conduct several service area analyses. For example, the Des Moines, Iowa, market has two geographic components: the metropolitan area of the city as well as the suburbs of Polk County (population approximately 350,000) and the 43 primarily rural counties of central Iowa that surround the capital (population about 1 million). The opportunities and threats for each of these multiple service areas may be quite different; therefore, considerable effort is directed toward understanding and analyzing the nature of the health care organization’s vari- ous service areas. At the same time, for some organizations, defining only one service category may suffice (such as in the case of a long-term care facility).

Service areas will be different for different organizations. A national for-profit hospital chain may define its service area quite generally, but even then there may be different strategies in place. For example, HCA–The Healthcare Company’s strat- egy is to become a major health care presence in highly concentrated markets, whereas Health Management Associates’ strategy is to only enter nonurban mar- kets. An individual hospital, home health care organization, or HMO may define its service area much more specifically. In general, health services are provided and received within a well-defined service area, where the competition is clearly identified and critical forces for the survival of the organization originate. For instance, hospitals in rural areas have well-defined service areas for their particu- lar services. These hospitals must be familiar with the needs of the population and with other organizations providing competing services. Some of the competitive

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Small community hospitals face a number of challenges. They cannot offer the depth and breadth of physician subspecialties and clinical professionals as academic medical centers and integrated health care systems. They face considerable patient out-migration to larger competitors in nearby or dis- tant markets, especially when consumers with the desire and means to shop around perceive that the local provider offers low quality. In addi- tion, small community hospitals often are weaker financially because

they have limited access to capital, they have a larger proportion of underinsured and uninsured to treat, and they encounter diseconomies of scale because of lower patient volumes. Yet small community hospitals do have their own strengths and can compete effectively with academic health centers and larger health care networks for services that are appropriately delivered in the community hospital setting. Bigger is not always better.

Today, there is considerable evidence that the customer is beginning to drive health care. Customers are exercising considerable influence over the selection, purchase, and use of health care products and services. Forces contributing to consumer-directed health care include the number of baby boomers aging into retirement, higher education levels and greater access to medical and health care information through the Internet, advances in technology and science (accompanied by consumer expectation to access the latest innovations in pharmaceuticals and treatments), public pressure to scrutinize provider quality and patient safety, and the shifting of more of the risk and burden for health care to consumers through higher co-pays, defined contribution plans, and other financial incentive plans. In addition, pay-for- performance initiatives are developing among government, employers, and insurors. Measures of quality performance are required for many of these initiatives and provider “scorecards” are increasingly available.

All hospitals are facing increased expectations to deliver quality care. Quality is definitely an issue given:

• According to the Institute of Medicine reports, between 44,000 and 98,000 Americans die annually from medical error;1

• Only 55 percent of patients sampled from 12 metropolitan areas received recommended care, whether for acute episodes, chronic conditions, or prevention;2

• The lag between the discovery of more effective treatment and incorporation into routine patient care is 17 years;3

• The Institute of Medicine reports that 18,000 Americans die each year from heart attacks because they did not receive preventative medications for which they were eligible;4

• The Institute of Health reports that more than 50 percent of patients with diabetes, hypertension, tobacco addiction, hyperlipidemia, congestive heart failure, asthma, depression, and chronic fibrillation are currently managed inadequately.5

According to consultants with The Strategy Group (TSG), “Academic medical centers and large clinically advanced hospital systems often draw headlines and build brand reputations with miraculous medical breakthroughs that most health care consumers are fortunate enough to never need. This is not the arena in which community and rural hospitals should, or can, compete.” They point out that the health care needs and illnesses of many consumers can be treated and managed in the small community hospital. For example, diabetes, pneumonia, heart attack, and heart failure can be treated locally through the adoption and application of evidence-based standards of medicine. A smaller facility that adheres to standards and objective measures of performance can stand up against a larger competitor.

For the most part, the standards of care reporting requirements are not focused on rare or complex surgeries and procedures; nor do they require extensive investment in staff and technology. For instance, evidence-based protocols for acute myocardial infarction include aspirin on arrival, aspirin prescribed at !

Perspective 3–4 Small Community

Hospitals Can Compete

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challenges of small community hospitals are discussed in Perspective 3–4. Similarly, the service areas for public health departments vary within a state, depending on whether they are metropolitan or rural, and may suggest quite different opportunities and threats.15

Determining the geographic boundaries of the service area may be highly sub- jective and is usually based on patient histories, the reputation of the organization, available technology, physician recognition, and so on. In addition, geographic impediments such as a river, mountains, and limited access highways can influence how the service area is defined. The definition of communities (see Perspective 3–5) is often helpful in determining a service area.

SERVICE AREA PROFILE Once the geographic boundaries of the service area have been defined, a general service area profile should be developed. Capturing the dimensions of a service area requires tapping and synthesizing information from various sources:

• both quantitative and qualitative data for framing and understanding a ser- vice area;

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discharge, beta-blocker on arrival, beta-blocker prescribed at discharge, and ACE inhibitor for left ven- tricular systolic dys-function. Over time, a small community or rural hospital can adhere to the standards and objective measures and perform better than many larger competitors. In this situation, a smaller hos- pital is not necessarily at a disadvantage because a larger hospital with “failing grades” will struggle more to turn it around than a small hospital that is quick to grasp the opportunity to do what it does very well.

The authors conclude, “Embracing targeted clinical excellence is likely to be the most important initiative of the decade for community hospitals. Success will be defined by the speed and scope of clinical improvement, physician participation/commitment to the strategy, and then the organization’s ability to create customer preference for superior care.” A community hospital will need to achieve clinical excellence and then market it to an ever more educated health care consumer. Consumers want quality care and prefer to stay in their community if they can receive it there.

Notes 1. Linda Kohn, Janet M. Corrigan, and Molla S. Donaldson (eds) To Err is Human: Building a Safer Health System

(Washington, DC: Committee on Quality of Health Care in America, Institute of Medicine, 2000). 2. Elizabeth McGlynn, Steven M. Asch, John Adams, Joan Keesey, Jennifer Hicks, Alison DeCristofaro, and Eve A.

Kerr, “The Quality of Health Care Delivered to Adults in the United States,” New England Journal of Medicine 348, no. 26 (June 26, 2003), pp. 2635–2646.

3. E. Andrew Balas, “Information Systems Can Prevent Errors and Improve Quality,” Journal of the American Informatics Association 8, no. 4 ( July–August 2001), pp. 398–399.

4. Karen Adams and Janet M. Corrigan (eds) Priority Areas for National Action: Transforming Health Care Quality (Washington, DC: Committee on Identifying Priority Areas for Quality Improvement, Institute of Medicine, 2003).

5. Institute of Health 2003 and Sixth Report of the Joint National Committee on Prevention, Detection, Evaluation, and Treatment of High Blood Pressure (Washington, DC: National Institutes of Health, November 1997).

Source: Karen V. Corrigan and Robert H. Ryan, MD, “Community Hospitals Can Leverage Unique Strengths to ‘Raise the Quality Bar’ in their Market,” COR Healthcare Market Strategist 5, no. 8 (August 2004), pp. 1, 21–24.

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• population-based health status data (specifics of the various health dimensions of an entire population and its subgroups); and

• health services utilization data (specifics on the patterns and frequency of health service use for various health conditions by different groups of individuals in the population).16

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Community is a very important concept in public health as well as health care policy, planning, and management. In general parlance, a commun- ity refers to a group of people living together in a defined place; the place could be a neighborhood, a rural village, an urban area or an entire coun- try. In addition, community implies a collective group of individuals who share some feature in common, be it a profession (the scientific

community), a religion (the Jewish community), or some other characteristic (the gay community; the Hispanic community).

The public health community (a group of professionals who share a common purpose) spends con- siderable effort monitoring the health of communities (groups of people living together in geographic communities within states and nations) because of its interest in promoting and preserving the health of entire populations. Within the health care community, issues relating to the larger community within which health care organizations do business must be critically examined and either accommodated or exploited to promote successful health care outcomes.

In this context, the community represents the competitive environment within which health care organizations function, while also representing a set of community factors – values, needs, resources, and constraints – that may suggest modifications to a typical health care structure or a usual set of ser- vices arranged and delivered. The competitive environment as community would include such factors as availability of and access to care, available financing strategies, the ways in which resources are allocated, and systems of accountability.

Examples of community factors that can affect health care organizations include:

1. The level (federal, state, local) and scope of governmental entities that regulate the health system and the extent of regulation directed at health care organizations;

2. The nature and scope of professional organizations that set standards, accredit or otherwise engage in accountability functions for health care organizations;

3. The nature and scope of health care financing agencies, including purchasers and private and public insurors, that participate in the health care marketplace in the community;

4. The availability of health care providers, facilities, supplies, and ancillary services across the commun- ity; and

5. The characteristics of the populations ultimately paying for and receiving health care services. These characteristics could include socioeconomic status (education, occupation and income), race and ethnicity, family structure, health status, health risk, and health seeking behaviors.

A community, then, in this context, can refer to the health care community, the community of indi- viduals served by a health care system, the physical community within which the individuals reside and the health system functions, and the competitive environment within which any given health care organization operates. Identifying and considering the community of interest (service area) facilitates strategic planning and strategic management of health care organizations.

Source: Donna J. Petersen, MHS, ScD, Dean, College of Public Health, University of South Florida.

Perspective 3–5 What Is a

Community?

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The service area profile includes key competitively relevant economic, demographic, psychographic (lifestyle), and community health status indicators. Relevant economic information may include income distribution, major industries and employers, types of businesses and institutions, economic growth rate, seasonal- ity of businesses, unemployment statistics, and so on. Demographic variables most commonly used in describing the service area include age, gender, race, marital status, education level, mobility, religious affiliation, and occupation.

Psychographic variables are often better predictors of consumer behavior than demographic variables and include values, attitudes, lifestyle, social class, or personality. For example, consumers in the service area might be classified as medically conservative or medically innovative. Medical conservatives are only interested in traditional health care – drugs, therapies, and diagnostics they are familiar with – whereas medically innovative individuals are willing (often eager) to try new alternative drugs, therapies, or diagnostics. Although medic- ally independent individuals are high in self-esteem and assertiveness, often questioning one physician’s diagnosis and seeking a second opinion, medically dependent individuals follow what the doctor prescribes exactly and would never think of questioning “doctor’s orders.”

Health status of the service area is also important in considering its viability, as disease may be related to age, occupation, environment, or economics. Health status includes all types of data normally considered to represent the physical and mental well-being of a population. Demographic, psychographic, and health status information should be included in the analysis only if it is competitively relevant. Possible variables in developing a service area profile are summarized in Exhibit 3–3.17 These variables produce issues that must be integrated and con- sidered in conjunction with the general and health care environmental issues.

Service Area Structural Analysis

Harvard’s Michael E. Porter developed a five forces framework for analyzing the external environment through an examination of the competitive nature of the industry. Service area structural analysis provides considerable insight into the attractiveness of an industry and provides a framework for understanding the competitive dynamics (the future viability of an industry). Porter’s five forces framework has been applied to industry analysis for many industries – however, because of the nature of competition in health care, it is more appropriate to apply the framework to the service category/service area. Use of Porter’s five forces in health care can be referred to as service area structural analysis.

Porter suggested that the level of competitive intensity within the industry is the most critical factor in an organization’s environment. In Porter’s model, intensity is a function of the threat of new entrants to the market, the level of rivalry among existing organizations, the threat of substitute products and ser- vices, the bargaining power of buyers (customers), and the bargaining power of suppliers.18 The strength and impact of these five forces must be carefully monitored and assessed to determine the viability of the service category today

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and may be used to assess the changes likely to occur in the future. As illustrated in Exhibit 3–4, Porter’s industry structural analysis may be adapted to service areas to understand the competitive forces for health care organizations.

THREAT OF NEW ENTRANTS New entrants into a market are typically a threat to existing organizations because they increase the intensity of competition. New entrants may have sub- stantial resources and often attempt to rapidly gain market share. Such actions may force prices and profits down. The threat of a new competitor entering into

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Exhibit 3–3: Service Area Profile Variables

Economic • Income Distribution • Foundation of the Economy • Major Employers • Types of Businesses • Growth Rate • Seasonality • Unemployment

Demographic • Age Profile • Gender Distribution • Average Income • Race Distribution • Marital Status • Education Level • Religious Affiliation • Population Mobility • Stage in Family Life Cycle • Occupational Mix • Residence Locations

Psychographic • Medical Conservatives • Medical Innovators • Medical Dependents • Personal Health Controllers • Youthfulness • Sociability

Health Status Indicators • Mortality • Deaths from all causes per

100,000 population

• Motor vehicle crash deaths per 100,000 population • Suicides per 100,000 population • Female breast cancer deaths per 100,000 population • Stroke deaths per 100,000 population • Cardiovascular deaths per 100,000 population • Work-related injury/deaths per 100,000 population • Lung cancer deaths per 100,000 population • Heart disease deaths per 100,000 population • Homicides per 100,000 population • Infant deaths per 1,000 live births

Notifiable Disease Incidence • AIDS incidence per 100,000 population • Tuberculosis incidence per 100,000 population • Measles incidence per 100,000 population • STD incidence per 100,000 population

Risk Indicators • Percentage of live-born infants weighing under 2,500 g

at birth • Births to adolescents as a percentage of live births • Percentage of mothers delivering infants who

received no prenatal care in first trimester of pregnancy

• Percentage of children under 15 years of age living in families at or below the poverty level

• Percentage of children under 15 years of age without all childhood inoculations

• Percentage of women over 50 without a mammogram • Percentage of population more than 50 pounds

overweight • Percentage of persons living in areas exceeding the US

EPA air quality standards • Percentage of persons who do not wear seatbelts

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a market depends on the industry or service area barriers. If the barriers are substantial, the threat of entry is low. Porter identified several barriers to entry that may protect organizations already serving a market:

• Existing organizations’ economies of scale; • Existing product or service differentiation; • Capital requirements needed to compete; • Switching costs – the one-time costs for buyers to switch from one provider to

another; • Access to distribution channels; • Cost advantages (independent of scale) of established competitors; and • Government and legal constraints.

These barriers may be assessed to determine the current or expected level of competition within an industry or service area. In health care markets, the barriers to entry for new “players” may be substantial. Consolidation (creation of large

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Exhibit 3–4: Service Area Structural Analysis: Forces Driving Service Area Competition

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors. Copyright © 1980 by the Free Press. All rights Reserved. Adapted with the permission of The Free Press, a division of Simon & Schuster Adult Publishing Group.

Potential Entrants

Threat of New Entrants

Service Area Competitors

Rivalry Among Existing Firms

Threat of Substitute Products or Services

Substitutes

BuyersSuppliers

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

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health care systems) and system integration (control of physicians and insurors) may make entry into a particular service area difficult because of economies and cost advantages. In an effort to create cost efficiencies, managed care has had the effect of limiting the ease of entry into markets. Where managed care penetration is high, market entry by new competitors will be more difficult because switch- ing costs for some populations are high. However, the difficulty of adding new service categories for existing organizations in a managed care market may be lessened. Service categories may be added to better serve a captured (managed care) market.

Certificate of need, or CON, laws and regulations can present significant bar- riers to entry in those states that have them. CON is the reason that MedCath, based in the southeast, started building heart hospitals in states in the southwestern US and Midwest, where there are no CON barriers.

INTENSITY OF RIVALRY AMONG EXISTING ORGANIZATIONS Organizations within an industry are mutually dependent because the strategy of one organization affects the others. Rivalry occurs because competitors attempt to improve their position. Typically, actions by one competitor foster reactions by others. Intense rivalry is the result of the following factors:

• Numerous or equally balanced competitors; • Slow industry (service area) growth; • High fixed or storage costs; • A lack of differentiation or switching costs; • Capacity augmented in large increments; • Diverse competitors – diverse objectives, personalities, strategies, and so on; • High strategic stakes – competitors place great importance on achieving

success within the industry; and • High exit barriers.

Often consolidation has created several balanced large health care systems in a service area. For example, in the Cleveland market, consolidation has resulted in two large integrated systems with high fixed costs and extremely high strategic stakes. For some markets, consolidation has resulted in competition between large for-profit and not-for-profit systems. Additionally, because of managed care, switching costs for consumers are high. Because many markets have supported too many providers in the past, the strategic stakes are extremely high. Most experts agree that further consolidations are likely, rivalry will intensify, and still more providers will not survive.

THREAT OF SUBSTITUTE PRODUCTS AND SERVICES For many products and services there are various substitutes that perform the same function as the established products. Substitute products limit returns to an industry because at some price point consumers will switch to alternative

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products and services. Usually, the more diverse the industry, the more likely there will be substitute products and services. A major substitution taking place in health care has been the switch from inpatient care to outpatient alternatives. In addi- tion, alternative therapies such as chiropractic, massage therapy, acupuncture, biofeedback, and so on, are increasingly substituted for traditional health care (see Perspective 3–6).

BARGAINING POWER OF CUSTOMERS Buyers of products and services attempt to obtain the lowest price possible while demanding high quality and better service. If buyers are powerful, then the competitive rivalry will be high. A buyer group is powerful if it:

• purchases large volumes; • concentrates purchases in an industry (service area); • purchases products that are standard or undifferentiated; • has low switching costs; • earns low profits (low profits force lower purchasing costs); • poses a threat of backward integration; • has low quality requirements (the quality of the products purchased by the buyer

is unimportant to the final product’s quality); and • has enough information to gain bargaining leverage.

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Americans are frustrated with the inability of traditional medicine to meet their expectations and needs. In addition, US society has a growing interest in generally better health and wellness. Further, individuals have access to more health care information than ever before through the Internet. Discontent and the search for “more” have led many Americans to explore complementary and alternative medicine (CAM).

The five domains of CAM used in the United States include alternative medical systems built on complete systems of theory and practice separ-

ate from conventional medical approaches, including homeopathy and naturopathy; biologically based therapies that use substances found in nature, such as herbs, special diets, or vitamins (in doses outside those used in conventional medicine); energy therapies that involve the use of energy fields, such as magnetic fields or biofields (energy fields that some believe surround and penetrate the human body); manipulative and body-based methods including massage therapy, chiropractic, and osteopathy; and mind–body medicine that uses a variety of techniques designed to enhance the mind’s ability to affect bodily function and symptoms (yoga, spirituality, and relaxation therapy).

According to the CDC Advance Data Report more than 36 percent of adults are using some form of CAM. (When megavitamin therapy and prayer specifically for health reasons are included in the definition of CAM, that number rises to 62 percent.) CAM use spans people of all backgrounds, although, according to the survey, some people are more likely than others to use CAM. Overall, CAM use is greater by women than men; people with higher educational levels; people who have been hospitalized in the past year; and former smokers, compared with current smokers or those who have never smoked. !

Perspective 3–6 Complementary and Alternative

Medicine: Moved to Integrative Medicine?

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According to a 2004 American Hospital Association Health Forum survey, about 16.6 percent of US hospitals provided CAM services (up from 7.9 percent in 1998). The most frequently provided services by those hospitals that offer CAM include massage therapy (78 percent), pastoral counseling (62 percent), stress management (61 percent), and yoga (58 percent).

Consumers are somewhat wary of untested CAM therapies. A possible threat to CAM potential is that some complementary therapies interfere with effective conventional treatments and cause unintended but harmful side effects. Although the threat exists, the majority of patients integrate both conventional care and CAM interventions into their health care and wellness programs instead of viewing the two entities as substitutes.

In 1998, cognizant of society’s changing perspectives on health care and well-being, Congress expanded the Office of Alternative Medicine (started in 1993) by creating the National Center for Complementary and Alternative Medicine (NCCAM). NCCAM is one of the 27 institutes and centers that make up the National Institutes of Health (NIH). The NIH is one of eight agencies under the Public Health Service (PHS) in the Department of Health and Human Services (DHHS). According to the “NCCAM Strategic Plan: 2005–2009,” it has four primary areas of focus:

1. Research. We support clinical and basic science research projects in CAM by awarding grants across the country and around the world; we also design, study, and analyze clinical and laboratory-based studies on the NIH campus in Bethesda, Maryland.

2. Research training and career development. We award grants that provide training and career development opportunities for predoctoral, postdoctoral, and career researchers.

3. Outreach. We sponsor conferences, educational programs, and exhibits; operate an information clear- inghouse to answer inquiries and requests for information; provide a website and printed publications; and hold town meetings at selected locations in the United States.

4. Integration. To integrate scientifically proven CAM practices into conventional medicine, we announce published research results; study ways to integrate evidence-based CAM practices into conventional medical practice; and support programs to develop models for incorporating CAM into the curric- ulum of medical, dental, and nursing schools.

With a budget of $117.8 million in 2004, its mission states: “NCCAM is dedicated to exploring com- plementary and alternative healing practices in the context of rigorous science, training complementary and alternative medicine researchers, and disseminating authoritative information to the public and professionals.” Its vision includes: “NCCAM will advance research to yield insights and tools derived from complementary and alternative medicine to benefit the health and well-being of the public, while enabling an informed public to reject ineffective or unsafe practices.”

As stated by Dr. Stephen E. Straus, the first and current Director of NCCAM, “As CAM interventions are incorporated into conventional medical education and practice, the exclusionary terms ‘comple- mentary and alternative medicine,’ will be superseded by the more inclusive, ‘integrative medicine.’ Integrative medicine will be seen as providing novel insights and tools for human health, practiced by health care providers skilled and knowledgeable in the multiple traditions and disciplines that contribute to the healing arts.”

Source: Originally written by Meredith Willard Luber, UNC Charlotte MBA, from the National Center for Complementary and Alternative Medicine website (http://nccam.nih.gov/) and its strategic plan, Expanding Horizons of Healthcare 2001 to 2005; updated from the website and P. Barnes, E. Powell-Griner, K. McFann, and R. Nahin, “Complementary and Alternative Medicine Use Among Adults: United States, 2002,” CDC Advance Data Report #343 (Washington, DC: May 27, 2004); and “Hospital Trends,” Marketing Healthcare Services 24, no. 2 (Summer 2004), p. 9.

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Perhaps the greatest change in the nature of the health care industry in the past decade has been the growing power of the buyers. Managed care organizations purchase services in large volume and control provider choices. The increas- ing power of the buyers has fueled system integration as well as blurring of providers and insurors. Large employers as buyers have power over managed care organizations, because they determine whether the MCO will be on the list that employees have to choose from for their health care. The poor economy, resulting in lowered profits during the period between 2000 and 2004 has pushed employers to find ways to lower their health care costs.

BARGAINING POWER OF SUPPLIERS Much like the power of buyers, suppliers can affect the intensity of competition through their ability to control prices and the quality of materials they supply. Through these mechanisms, suppliers can exert considerable pressure on an industry. Factors that make suppliers powerful tend to mirror those making buyers powerful. Suppliers tend to be powerful if:

• there are few suppliers; • there are few substitutes; • the suppliers’ products are differentiated; • the product or service supplied is important to the buyer’s business; • the buyer’s industry is not considered an important customer; and • the suppliers pose a threat of forward integration (entering the industry).

Traditionally, physicians and other health care professionals have been import- ant and powerful “suppliers” to the industry because of their importance to health care institutions. Because of the nature of managed care, the physician remains the “gatekeeper” to the system and plays a crucial role in controlling consumer choice. This supplier power has added pressure to include physicians in system integration through the purchase of primary care individual and group practices by hospital systems. Other suppliers, such as those who supply general medical needs such as bandages, suture materials, thermometers, and so on, have tended not to exercise a great deal of control over the industry.

Concluding Structural Analysis

Porter’s approach is a powerful tool for assessing the level of competitive intensity within the health care service area. Porter’s framework for analyzing the external environment is applied to a nursing home in Exhibit 3–5. Competitive intensity and ultimately the profitability of the service category in the service area is determined by the number of favorable factors. In Exhibit 3–5, the threat of entry is low which is favorable to the existing skilled-nursing facilities. Similarly the intensity of rivalry among existing organizations is low, the threat of substi- tutes is relatively low, and suppliers (labor) have not been powerful players. All these factors are favorable. However, the bargaining power of the buyer is high

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Exhibit 3–5: Using Porter’s Industry Structure Analysis

The Hanover House Nursing Home, a skilled-nursing facility, used differentiation as its major com- petitive advantage. In its early years, in a less regulated environment, the home was very profitable. As the facility began to age, and with increasingly stricter regulations for long-term care, profit margins began to deteriorate. The administrators of Hanover House used Porter’s Industry Structure Analysis to better understand the forces in their external environment. The following is a summary of their analysis.

Threat of New Entrants The supply of nursing homes and other long-term care facilities is currently limited because there is a moratorium on additional beds within the geographic area. Competition is based on process or quality. If the moratorium is lifted, it will remain costly to enter the market because it is highly regulated. The greatest threat as a new entrant (when the moratorium is lifted) will be hospitals attempting to compensate for decreasing occupancy rates. Switching costs are low for hospitals (the same bed can be used for acute care or long-term care). Access to the distribution channel is high as hospitals have many of the required resources, including access to nurses, familiarity with the regulations, and capability to enter quickly (by converting acute care beds to long-term care).

Intensity of Rivalry Among Existing Organizations Although there is competition, the long-term care industry is not fiercely competitive. Hanover House has six competitors – Mary Lewis Convalescence Center, Hillhaven, Altamont Retirement Com- munity, St. Martins in the Pines, Lake Villa, and Kirkwood – that have relatively stable market shares. Because the service has both quality and dollar value, there is the opportunity to differentiate, and switching costs are high for the consumer. It is a highly regulated area and, therefore, not a great deal of diversity among competitors is apparent. The long-term care industry is maturing but remains a rapid-growth industry driven by demographic and social trends (the graying of America and the deterioration of the extended family). The most significant factor creating rivalry is the high fixed assets, which make exit difficult and success important.

Threat of Substitute Products and Services There are few substitute products for nursing home care. Home care is a substitute but an increasingly less available alternative because of the mobility and dissolution of the family unit. Other alternatives include nonskilled homes, retirement housing, and domiciliaries. Increased costs and DRGs have virtually eliminated hospitals as an alternative. On balance, substitutes do not appear to be a strong force in the nursing home industry.

Bargaining Power of Customers The power of the customer in the industry is generally high. The major consumer, the government, purchases over 45 percent of nursing home care and regulates reimbursement procedures as well as the industry. Therefore, significant levels of information are available. In addition, for private-pay customers, the purchase represents a significant investment and comparison shopping is prevalent. Product differentiation tends to reduce buying power but relatively low switching costs and govern- ment involvement make nursing home care a buyers’ market.

Bargaining Power of Suppliers Because the product is simultaneously produced and consumed in service industries, labor is the major supplier in the nursing home industry. Although Hanover House is unionized, it has maintained good labor relations, and the union is not particularly powerful. Most who work in long-term care have selected the field to satisfy their need to care for others or make a contribution rather than to earn large salaries. Suppliers are not a dominant force in the nursing home industry.

Source: Elaine Asper, “Hanover House Nursing Home,” an unpublished case study.

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and thus unfavorable to the service category. As a result, four factors are favorable and one is unfavorable. Competitive intensity for this service category in this ser- vice area is relatively low, leading to favorable returns. Four or five unfavorable factors make competition intense and will lower profitability.

Conducting Competitor Analysis and Mapping Strategic Groups

The next step in service area competitor analysis (refer back to Exhibit 3–2) is to evaluate the strengths and weakness of competitors, characterize their strategies, group competitors by the types of strategies they have exhibited, and predict competitive future moves or likely responses to strategic issues and initiatives by other organizations.

COMPETITOR STRENGTHS, WEAKNESSES, AND STRATEGY In assessing the rivalry of the service area, the competitors are identified. Next, the strengths and weaknesses of each competitor should be specified and evalu- ated. Organizations have a unique resource endowment and a comparison with a given competitor will help to illuminate the relationship between them and to predict how they compete with (or respond to) each other in the market.19

Evaluation of competitors’ strengths and weaknesses provides clues as to their future strategies and to areas where competitive advantage might be achieved.

Both quantitative and qualitative information may be used to identify strengths and weaknesses. Competitor information is not always easy to obtain, and it is often necessary to draw conclusions from sketchy information. A list of possible competitor strengths and weaknesses is presented in Exhibit 3–6

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Exhibit 3–6: Potential Competitor Strengths and Weaknesses

Potential Strengths Potential Weaknesses

• Distinctive competence • Lack of clear strategic direction • Financial resources • Deteriorating competitive position • Good competitive skills • Obsolete facilities • Positive image • Subpar profitability • Acknowledged market leader • Lack of managerial depth and talent • Well-conceived functional area strategies • Missing key skills or competencies • Achievement of economies of scale • Poor track record in implementing strategies • Insulated from strong competitive pressures • Plagued with internal operating problems • Proprietary technology • Vulnerable to competitive pressures • Cost advantages • Falling behind in R&D • Competitive advantages • Too narrow a product/service line • Product/service innovation abilities • Weak market image • Proven management • Below-average marketing skills • Ahead on experience curve • Unable to finance needed changes in strategy

• Higher overall costs relative to key competitors

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Such information may be obtained through local newspapers, trade journals, websites, focus groups with customers and stakeholders, consultants who specialize in the industry, securities analysts, outside health care professionals, and so on. Identification of competitor strengths and weaknesses will aid in speculating on competitor strategic moves. The range of possible competitive actions available to organizations varies from tactical moves, such as price cuts, promotions, and service improvements that require few resources, to strategic moves, such as service category/area changes, facilities expansions, strategic alliances, and new product or service introductions that require more substantial commitments of resources and are more difficult to reverse. Such competitive actions represent clear, offensive challenges that invite competitor responses.20

SERVICE CATEGORY CRITICAL SUCCESS FACTOR ANALYSIS Critical success factor analysis involves the identification of a limited number of activities for a service category within a service area for which the organization must achieve a high level of performance if it is to be successful. The rationale behind critical success factor analysis is that there are five or six areas in which the organization must perform well and that it is possible to identify them through careful analysis of the environment. In addition, critical success factor analysis may be used to examine new market opportunities by matching an organization’s strengths with critical success factors.

Typically, once the service category critical success factors have been identified, several goals may be developed for each success factor. At that point, a strategy may be developed around the goals. Important in critical success factor analysis is the establishment of linkages among the environment, the critical success factors, the goals, and the strategy. In addition, it is important to evaluate com- petitors on these critical success factors. Indeed, excellence in any (or several) of these factors may be the basis of competitive advantage. Further, these factors form the fundamental dimensions of strategy.

Organizational strategies may differ in a wide variety of ways. Michael Porter identified several strategic dimensions that capture the possible differences among an organization’s strategic options in a given service area:

• Specialization: the degree to which the organization focuses its efforts in terms of the number of product categories, the target market, and size of its service area.

• Reputation: the degree to which it seeks name recognition rather than competi- tion based on other variables.

• Service/product quality: the level of emphasis on the quality of its offering to the marketplace.

• Technological leadership: the degree to which it seeks superiority in diagnostic and therapeutic equipment and procedures.

• Vertical integration: the extent of value added as reflected in the level of forward and backward integration.

• Cost position: the extent to which it seeks the low-cost position through effici- ency programs and cost-minimizing facilities and equipment.

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• Service: the degree to which it provides ancillary services in addition to its main services.

• Price policy: its relative price position in the market (although price positioning will usually be related to other variables such as cost position and product qual- ity, price is a distinct strategic variable that must be treated separately).

• Relationship with the parent company: requirements concerning the behavior of the unit based on the relationship between a unit and its parent company. (The nature of the relationship with the parent will influence the objectives by which the organization is managed, the resources available to it, and perhaps determine some operations or functions that it shares with other units.)21

The organization can determine the strategic dimension or dimensions that it will use to compete – however, these decisions cannot be made in a vacuum. Consideration must be given to which of the dimensions competitors have selected and how well they are meeting the needs of customers.

STRATEGIC GROUPS Service area analysis concentrates on the characteristics of the specific geographic market whereas strategic group analysis concentrates on the characteristics of the strategies of the organizations competing within a given service area. Strategic groups have been studied in many different industries and there are often several strategic groups within a service area. A strategic group is a number of organizations within the same service category making similar strategic decisions. Members of a strategic group have similar “recipes” for success or core strategies.22 Therefore, members of a strategic group primarily compete with each other and do not compete with organizations outside their strategic group – even though there are other competitors outside the group that may offer similar products or services.

External stakeholders have an image of the strategic group and develop an idea of the group’s reputation. The reputation of each strategic group differs because the identity and strategy of each group differ.23 Organizations within a strategic group use similar resources to serve similar markets. However, leadership in an individual organization must find ways (sometimes subtle) to have its organiza- tion stand out from the group (differentiation) to develop competitive advantage over other group members.24

Reputation has been defined as an organization’s true character and the emotions toward the organization held by its stakeholders. Strategic group reputation may be a mobility barrier leading to increased performance. If reputa- tion does lead to increased performance, individual organizations within the strategic group may need to consider the impact of their actions on the collective reputation of the group.25 Thus, if several managed care organizations in a service area are in the same strategic group, the actions of one influence the reputation of them all. The grouping of organizations according to strategic similarities and differences among competitors can aid in understanding the nature of competi- tion and facilitate strategic decision making. There are four major implications for the strategic group concept:

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1. Organizations pursue different strategies within service categories and service areas. Creating competitive advantage is often a matter of selecting an appro- priate basis on which to compete.

2. Organizations within a strategic group are each other’s primary or direct com- petitors. As Bruce Henderson, founder of Boston Consulting Group, has noted, “Organizations most like yours are the most dangerous.”

3. Strategic group analysis can indicate other formulas for success for a service category. Such insight may broaden a manager’s view of important market needs.

4. Strategic group analysis may indicate important market dimensions or niches that are not being capitalized on by the existing competitors. Lack of attention to critical success factors by other competitive organizations offering the same or a similar service may provide an opportunity for management to differen- tiate its services.

Organizations within a group follow the same or similar strategy along the strategic dimensions. Group membership defines the essential characteristics of an organization’s strategy. Within a service category or service area there may be only one strategic group (if all the organizations follow the same strategy) or there may be many different groups. Usually, however, there are a small number of strategic groups that capture the essential strategic differences among organ- izations in the service area.26

The analysis of competitors along key strategic dimensions can provide con- siderable insight into the nature of competition within the service area. Such an analysis complements Porter’s structural analysis but provides some additional insights. As a means of gaining a broad picture of the types of organizations within a service area and the kinds of strategies that have proven viable, strategic group analysis can contribute to understanding the structure, competitive dynamics, and evolution of a service area as well as the issues of strategic management within it.27 More specifically, the usefulness of strategic group analysis is that it:

• can be used to preserve information characterizing individual competitors that may be lost in studies using averaged and aggregated data;

• allows for the investigation of multiple competitors concurrently; • allows assessment of the effectiveness of competitors’ strategies over a wider

range of variation than a single organization’s experience affords; and • captures the intuitive notion that “within-group” rivalry and “between-group”

rivalry differ.28

When analyzing strategic groups, care must be taken to ensure that they are engaging in market-based competition. Many organizations may not be direct or primary competitors because of a different market focus. Organizations will have little motivation to engage each other competitively if they have limited markets in common. It is not unusual for organizations that serve completely different markets yet have similar strategic postures to be grouped together and assumed by analysts to be direct competitors when in fact they are not.29 For example, a pediatric group practice affiliated with a children’s hospital and a community health clinic emphasizing preventive and well care may serve the same population but not be direct competitors because of a different market focus.

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MAPPING COMPETITORS Mapping competitors for any service category (broadly or narrowly defined) within a service area may be based on the critical success factors or important strategy dimensions. Exhibit 3–7 shows strategic groups of assisted-living organizations within a service area. Several strategic maps may be constructed demonstrating different strategic views of the service area. In addition, a single dimension may be so important as a critical factor for success that it may appear on several strategic maps.

Likely Competitor Actions or Responses

Strategy formulation is future oriented, requiring that management anticipate the next strategic moves of competitors. These moves may be projected through an evaluation of competitor strengths and weaknesses, membership in strategic

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Exhibit 3–7: Service Area Assisted-Living Competitors

Price

High

Low Few Many

Range of Services*

Strategic Group 2

Strategic Group 3

Strategic Group 1 Strategic

Group 4

For this service area, assisted living organizations are pursuing four basic strategies: high price with highly specialized services (Strategic Group 1), low price with few ancillary services (Strategic Group 2), medium price with some (selected) services (Strategic Group 3), and high price with many services (Strategic Group 4). The primary (direct) competitors for these organizations are other organizations within their own strategic group. Customers who seek the attributes of one strategic group, such as highly specialized rehabilitation services, are unlikely to be attracted to another strategic group. These assisted-living organizations should change strategy cautiously as a decision to add services may move an organization to a new strategic group and therefore a new set of competitors. Note that in this example there may be an opportunity to enter or move toward a medium-cost, many services niche and become a strategic group of one.

*Range of services includes skilled nursing, organized social activities, outings, physical therapy, education, rehabilitation, speech therapy, Alzheimer’s care, nutritional services, infusion, pharmacy, homemaker services, live-ins, companions, and so on.

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groups, and the characterization of past strategies. In many cases competitor strat- egic goals are not difficult to project, given past behaviors of the organization. Strategic thinking is a matter of anticipating what is next in a stream of consist- ent decisions. Strategic behavior is the result of consistency in decision making, and decision consistency is central to strategy. Therefore, in determining competitors’ future strategies, strategic managers must look for the behavioral patterns that emerge from a stream of consistent decisions concerning the positioning of the organization in the past. A thorough analysis of the key strategic decisions of competitors may reveal their strategic intent. A strategic decision timeline can be helpful in showing the stream of decisions. Strategic response includes the likely strategic objectives and next strategic moves of competitors. These may be anticipated because of their perceived strengths and weaknesses, past strat- egies, or strategic group membership. If an organization is planning an offensive move within a service area, an evaluation of competitor strengths and weaknesses, past strategies, strategic group membership, and assumed strategic objectives can anticipate the likely strategic response. For example, HCA–The Healthcare Company’s analysis of the strategic response of competitors for a new market they are considering is an important variable in their expansion strategy.

Synthesizing the Analyses

To be useful for strategy formulation, general and health care external environ- mental analysis (see Chapter 2) and service area competitor analysis (as covered in this chapter) must be synthesized and then conclusions drawn. It is easy for strategic decision makers to be overwhelmed by information. To avoid paralysis by analysis, external environmental analysis should be summarized into key issues and trends, including their likely impact, and then service area competitor analysis summarized.

Example of a Service Area Competitor Analysis

Service area competitor analysis is increasingly important for health care organ- izations. For-profit as well as not-for-profit health care organizations will have to understand the competitive dynamics of service categories and service areas. For example, ophthalmologists are in a medical specialty that is quite competitive, not only because there are typically a number of them in a given service area but also because there are licensed optometrists that deliver some of the same services and at a lower price to the consumer. If an ophthalmologist were to consider entering the refractive surgery market in Charlotte, North Carolina, the service area competitor analysis is a systematic method to evaluate whether the area represents a potentially profitable opportunity. Refractive surgery is a surgical procedure aimed at improving the focusing power of the eye. Perspective 3–7 provides an overview of the nature of eye care and serves as background for a service area competitor analysis.

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Three different types of health care professionals provide care of the eye: ophthalmologists, optometrists, and opticians. Ophthalmologists are medical doctors (MDs) who specialize in the medical and surgical care of the eyes and visual system and in the prevention of eye disease. They are trained to diagnose, treat, and manage all eye and visual systems and

licensed by a state to practice medicine and surgery. In addition, they can deliver total eye care includ- ing vision services, contact lenses, and eye exams.

Optometrists have attended a four-year course in optometry but not medical school. They are state licensed to examine the eyes and to determine the presence of vision problems. They prescribe spec- tacles, contact lenses, and eye exercises. In some states they are permitted to prescribe pharmaceuticals for some eye conditions.

Opticians are technicians who make, verify, and deliver lenses, frames, and other specialty fabricated optical devices or contact lenses. They provide the product prescribed by the ophthalmologist or the optometrist.

Service categories for care of the eye include the following:

• General services – eye chart exams, pupil exams, optometric eye exams, vision therapy, low-vision aids, prescription contact lenses, prescription eyeglass lenses, prescription eye drop solutions and ointments, custom contact and eyeglass fittings, eye dilation.

• Specialized services – glaucoma, cataracts, legally defined blindness protocols, pediatric ophthalmology, geriatric ophthalmology, eye disease, and eye injury.

• Surgery – radial keratotomy (RK); corrective laser surgery: photorefractive keratectomy (PRK), laser in-situ keratomileusis (LASIK), laser thermokeratoplasty (LTK); NearVision CK (for presbyopia); corneal rings, implantable contact lenses (ICLs), and transplants; reconstructive and plastic surgery; and catarectomy (removal of cataracts).

• Retail services – glasses and sunglasses, nonprescription eye drop solutions, carrying cases, frames, eye- glass straps, designer frames, and so on.

In the example marketplace discussed in the text – Charlotte, North Carolina – all eye care services are offered. Analysis and a strategic group map in Exhibits 3–8 to 3–11 illustrate the major competitive groups.

Corrective refractive surgery is an elective surgery performed on the eye to improve focus and lessen dependence on glasses and contact lenses. Treated primarily as cosmetic surgery by insurance com- panies, consumers are paying out of pocket for this surgery because it offers freedom from dependency on glasses or contact lenses. Many consumers are tired of the inconvenience of contacts, the discomfort of glasses, the limitations of glasses or contacts while playing sports (comfort and safety), and the insecur- ity of knowing that they are helpless without their corrective lenses (such as felt by mothers of young children). Some consumers will choose surgery for occupational enhancement (fire fighters, airline pilots, police officers, professional athletes, and so on), and frequent travelers want to be less dependent on corrective eye wear for safety and convenience. Others choose surgery simply to improve their looks or self-image. It is an expensive choice – the average was $1,700 per eye in 2004, up from the lower average of $1,590 in 2002. The increase was primarily because of new technology that allows for greater accuracy in vision correction. The total value of the surgery includes: direct out-of-pocket cost, long- and short-term effects of the surgery (no need to buy glasses or contact lenses times the number of years), experience of the surgeon, risk versus benefits, and recovery time from the surgery (time away from work). In addi- tion, consumers have to understand what the price of the surgery does and does not include and that prices charged can vary tremendously. Many ads tout $299 per eye for LASIK, but that “price” is avail- able only to those who need minimal vision correction and have no astigmatism (uneven cornea). Factors affecting price include: !

Perspective 3–7 Eye Care

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1. Severity of vision correction required and presence or absence of astigmatism; 2. Expertise of the physician performing the surgery; 3. Pre-operative and post-operative visits (included in the price or extra?); 4. Surgeon performing the surgery (customer choice or assigned the day of surgery?); 5. Post-operative care (surgeon or optometrist?); 6. Complications (if they occur, who will provide care and cover the cost?); 7. Enhancements (provided as part of the initial procedure price, or, if extra, how much – full price or

reduced price?) and for how long after the initial procedure (specified time period or lifetime?).

Research on the excimer laser began in the 1970s. Its use in ophthalmology was introduced in the 1980s. In 1995 the FDA granted approval to use excimer lasers for photorefractive keratectomy (PRK) in the United States. Analysts predicted that there would be as many as 1.4 million surgeries to correct myopia by 1998. There were actually about 250 thousand, translating into an $840 million business. The excimer laser brought more accuracy to refractive surgery, less discomfort, and faster healing. The newest tech- nology, wavefront guided laser surgery, was approved by the FDA in 2003.

During 2003, global demand for refractive surgery was 3.02 million procedures, up from 2.87 million procedures in 2002. The increase resulted primarily from rapid growth in China, India, and other devel- oping countries. In the United States, the number of procedures was flat (attributable to the generally poor economy during 2000 through 2003, uncertainty in the economy between 2004 and 2005, and unemployment figures that persistently remained higher than desired over the same period). Consumers who are uncertain about their future job prospects are hesitant to spend on discretionary items such as LASIK. During 2001, 1.31 million refractive procedures were performed in the United States, but the number declined to 1.15 million in 2002. For 2003 the number performed was 1.3 million and estimates were that the number of surgeries in 2004 would be improved, assuming the economy strengthened and unemployment declined.

Over 4,500 US ophthalmologists are trained to perform laser vision correction. Vision may need to be corrected for myopia (nearsightedness), hyperopia (farsightedness), astigmatism (uneven corneas, resulting in impaired sight), or presbyopia (aging eye syndrome). Over 162 million people in the United States need corrected vision; 150 million use corrective eyewear; over 70 million are nearsighted. Americans spend approximately $18 billion each year on corrective eyewear.

LASIK surgery provides the greatest range of correction, is the least painful, has the quickest recovery time, and incurs the fewest infections of any of the current vision correcting surgeries. According to the American Society for Cataract and Refractive Surgery, 56 percent of consumers who undergo LASIK surgery achieve vision of 20/20 or better and 90 percent achieve 20/40 or better (the minimum requirement for driving without corrective lenses). Between 8 and 17 percent of patients require enhancements (under- going further surgery in the attempt to improve vision or correct for errors). Some enhancements are deliberate, as when the patient has severe myopia and the surgeon proceeds cautiously, allowing several months to pass to see how much further correction is necessary. With LASIK procedures, vision can continue to improve up to six months for some patients (three months is typical). Recently approved by the FDA, wavefront “custom” LASIK uses sophisticated measuring technology with a guided laser to improve correction and eliminate some of the problems such as nightblindness, haloing, and so on with traditional LASIK.

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Service Category and Service Area

The analysis would begin by identifying the service category – refractive eye surgery – and investigating the service area – Charlotte, North Carolina – as in Exhibit 3–8. All analyses of the service area should be related to the identified service category. The “comments” column is used to indicate the applicability.

Service Area Structural Analysis

To assess the viability of the market, Michael Porter’s five forces analysis is used to evaluate the service area. As described in Exhibit 3–9, the five forces suggest that it would be challenging to enter this market, but opportunities do exist. Barriers to entry for new competitors are somewhat high and the other forces suggest that this is a difficult market in which to compete – rivalry is high, consumers (buyers) wield a great deal of power, there are substitutes (which continue to increase), and suppliers of laser equipment (required to do refractive surgery) have increased to five in number and they have had to become somewhat more com- petitive: however, not all lasers are the same and the best technology is still tightly controlled. One of the manufacturers (Bausch & Lomb) is rumored to be think- ing of withdrawing from the market in the near future. Thus, the power of sup- pliers has decreased somewhat but remains powerful for those physicians who want to use the very best equipment. In the future, the five forces for this service category, in this service area, are not likely to change dramatically. Barriers to entry for new competitors may decrease somewhat, rivalry will remain high, the consumer will be able to shop on price and defer purchase, and substitutes will likely increase. The number of suppliers of the technology may decrease from the current five major suppliers.

Strengths and Weaknesses

Next, the strengths and weaknesses (see Exhibit 3–10) should be assessed for providers of refractive surgery. Assessing strengths and weaknesses of com- petitors is often difficult for outsiders. However, careful observation and data gathering through websites and media can make this somewhat speculative process fairly accurate. In addition, over time the understanding of competitors’ strengths and weaknesses can be refined and improved.

Critical Success Factors

From the preceding analysis the critical success factors for this service category in this service area may be surmised. The critical success factors for refractive eye surgery in Charlotte include the following:

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Exhibit 3–8: Analysis of the Charlotte, North Carolina, Eye Care Market

Service Category Eye Care Services, Refractive Surgery

Service Area Charlotte, Mecklenburg County, North Carolina

I. Service Area – General

Competitively Relevant Issues

• The largest city in either of the Carolinas, located on the border. The nearest city, Winston-Salem, is more than 90 miles away

• Many people come to Charlotte for their health care. People travel to Duke University for extraordinary care (no medical school in Charlotte)

• Insurance covers injury to the eye, diseases of the eye, and malfunctions of the eye, but does not typically cover correcting vision (although it may be covered and some employers offer flexible spending accounts that can be used to cover the cost of refractive surgery so that it is at least pretax dollars that are spent)

• Nearly 60 percent of all Americans need corrective lenses, 30 percent have myopia

• Cataracts and glaucoma are eye diseases that occur with aging

II. Service Area – Economic

Competitively Relevant Issues

• Median household income in Charlotte is $48,975 (compared with $38,204 in NC and $43,057 in US)

• Percentage below poverty at 10.6% is less than the state and nation (NC: 12.3%; US: 12.4%)

• Retail sales per capita $13,867 (NC: $9,740; US: $9,190)

• Economy improving and number of jobs increasing – however, unemployment is still considerably higher than pre-9/11/01, at 5.6% for Charlotte (NC: 6.3%; US: 6.0%)

• Identified as one of the top cities for entrepreneurs • Nearly 80 percent of residents work in businesses of

less than 100 employees

Comments

• Not much need to travel outside of Charlotte for health care, especially routine care

• Physicians who have pursued corneal fellowships after ophthalmology residency practice in Charlotte

• There are few employers that offer eye care insurance for routine care in the Charlotte area. Flexible spending accounts are common among the major employers, but uncommon among small businesses

• 60 percent in a growing market represents an opportunity

• Laser surgery has been used for cataracts

Comments

• Charlotte has a population that can afford the procedure

• People with a higher standard of living are interested in LASIK

• People in Charlotte spend 39.5% of the money they earn at retail (27.5% in NC; 24.8% in the US)

• Unemployed postpone the purchase because it is an out-of-pocket expense (not covered by insurance)

• Entrepreneurs are often innovators and early adopters

• Big business tends to require the corporate “look”

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Exhibit 3–8: (cont’d )

III. Service Area – Demographic

Competitively Relevant Issues

• More than 620,000 people live within Charlotte’s city limits; 800,000 in Mecklenburg County; 1.5 million in the Charlotte MSA; Mecklenburg County is expected to grow by 3.6% in 2005

• Population over 65 at 7.6% is lower than the state and nation (11.6% in NC; 11.9% in US); median age in Charlotte is 32.7 years (NC: 35.3 years; US: 35.3)

• Population over 25 with college degree in Charlotte: 36.4% (NC: 22.5%; US: 24.4%)

• Ethnic mix is 58.3% white (NC: 72.1%; US: 75.1%), black 32.7% (NC: 21.6%; US: 12.3%), Native American 0.3% (NC: 1.2%; US 0.9%), Asian 3.4% (NC: 1.4%; US: 3.6%), Hispanic 7.4% (NC: 4.7%; US: 12.5%)

IV. Service Area – Psychographic

Competitively Relevant Issues

• Younger, upwardly mobile population; youthful orientation

• Business-oriented community: second largest banking center, sixth largest in wholesaling, sixth in number of Fortune 500 company headquarters

• Bible belt – 73% church or synagogue members • Outdoor activities at the beach or mountains; both in

easy driving distance

V. Service Area – Health Status

Competitively Relevant Issues

• Generally healthy population • NC is in the middle range of numbers of the

population that requires vision correction • Diabetes occurs more frequently in the South and

contributes to problems with the eyes often leading to blindness

Comments

• A growing population may mean there is more room for a new provider using LASIK surgery

• A younger population is more likely to adopt the new surgery

• Better educated consumers are more likely to pay for the surgery

• The black population has been slower to adopt the new surgery, but as more experience occurs, it presents an expanding market

Comments

• LASIK is generally surgery for lifestyle and cosmetic reasons

• Population wants to “look” successful and not be hindered by glasses or wearing contacts

• Religious question: is surgery for cosmetic reasons the right thing to do?

• Outdoor activities are easier without having to keep up with glasses or search for a lost contact

Comments

• Healthy candidates required for this elective procedure

• Sufficient market size • Refractive surgery is not recommended

for anyone with diabetes or the possibility of developing diabetes, although the new technologies are enabling many diabetics to have LASIK if they choose to

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Exhibit 3–9: Service Area Structural Analysis

Five Forces

Threat of New Entrants

Intensity of Rivalry

Threat of Substitutes

Bargaining Power of Customers

Forces Driving Service Area Competition

• Existing providers have already climbed the learning curve – experience level is important in successful surgeries (need more than 500 performed to be “experienced”) and establishment of economies of scale

• Capital requirements are high – the laser equipment costs $200,000 to $800,000 to buy, requires frequent and costly upgrades as well as maintenance, and a $150/eye to $500/eye royalty fee

• Barriers to entry – only ophthalmologists (MD degree) who have been trained on the laser equipment and have access to it can perform the procedure

• Existing service differentiation – perceived differentiation (high image) for Christenbury Eye Center as the first provider of LASIK and Dr. Christenbury performs the most procedures each month

• Thirteen practices have physicians who perform laser eye surgery

• Capacity is augmented in large increments – a laser costs between $200,000 and $800,000

• Diverse competitors – competitors employ distinctly different strategies (also diverse personalities)

• High strategic stakes – focusing primarily on refractive surgery increases risks (narrow product line)

• High exit barriers – once the equipment commitment is made, it is difficult to alter strategy or move in new direction

• Do not bother to correct vision that is worse than 20/20 • Nonsurgical vision correction – contacts and glasses • Orthokeratology – use of specially designed rigid

contact lenses that progressively reshape the curvature of the cornea over time (nonsurgical)

• Older methods: RK – the oldest surgical procedure; PRK – older laser surgery; LASIK (without wavefront custom)

• Implantable corneal rings and contact lenses • Cornea replacements

• Elective surgery – rarely covered by insurance and consumer can easily defer procedure to later time

• Can obtain enough information to gain bargaining leverage – some customers are traveling to Canada where the procedure is as much as $1,200 per eye less expensive

Conclusion

Medium Threat of new entrants into market is presently medium, primarily because of the increase in the number of providers (new graduates with the ophthalmology specialty have learned to use the equipment) Economies of scale and the high equipment costs are still barriers but more options exist and equipment costs have declined somewhat, although new technology (wavefront custom) has raised the cost of equipment

High Rivalry is likely to remain intense in this market as the competitors are well balanced, strategic stakes are high, and it is difficult to exit the market

High Currently there are a number of low-cost, nonsurgical substitutes Older surgical methods are less expensive

High Consumers have high bargaining power because of elective nature of the procedure and its out-of- pocket cost

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1. Expertise in number of procedures performed. Number of procedures has to be more than 80 procedures per month to break even because of high fixed costs: $200,000 to $800,000 to buy a laser with all the various components to perform LASIK or custom LASIK surgery and $150 to $500/eye royalty depending on volume, surgeons’ fees, and referral fees. • Experience and reputation of the surgeon. • Price. • Service – pre-op, post-op, and billing.

2. By 2004, low rate of complications: < 3 percent generally, < 1 percent for experienced surgeons. (Many consumers believe that even 1 percent of com- plications is high for elective surgery.) • Success with achieving 20/20 vision. • Number of enhancements (additional surgeries required to fine tune and

improve vision). • Lifetime guarantee.

3. Positive word-of-mouth (estimates are that a satisfied patient refers on aver- age five others); 55 to 75 percent of new patients are referrals. • Satisfaction of the clients. • Latest technology.

4. Offer complementary consultations (all current practices offer free consultations although what is included in the consultation may vary considerably from a simple eye check and discussion with an aide to a full work-up and discus- sion with the surgeon).

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Exhibit 3–9: (cont’d )

Five Forces

Bargaining Power of Suppliers

Forces Driving Service Area Competition

• Consumers can “shop” for price and service (low switching costs before procedure)

• Word-of-mouth is powerful

• Few suppliers of equipment: – Alcon, Inc. manufactures the LADARVision

System – Bausch & Lomb manufactures the Technolas

217Z – INTRALASE manufactures the INTRALASE FS – NIDEK manufactures the NIDEK EC-5000 – VISX manufactures the VISX Star S3

• Equipment substitutes are not expected in the near future

• Equipment is essential to the business

Conclusion

Consumers can opt for a much less expensive substitute, shop price, or wait for prices to decline

Medium Currently there are five suppliers, all have FDA approval as of 2005

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Exhibit 3–10: Competitor Strengths and Weaknesses

Competitor

Carolinas Eye Center

Charlotte Eye, Ear, Nose, and Throat

Christenbury Eye Center

Weaknesses

• Dr. Clement is the sole provider of the procedure

• No lifetime program; however, enhancement discount offered

• Pre-op and post-op handled by another physician

• Although six MDs were doing LASIK surgery, there is now one physician in the practice that performs laser surgery

• Performs 50 surgeries per month (two Fridays/month)

• No laser on site; uses TLC Laser Center

• Dr. Christenbury is the sole provider of the procedure

• Clients feel “herded” to “keep the doctor on schedule”

• So much advertising that it diminishes the image

• Very fast-paced, sometimes stressful work environment

• Minimal discounts (special promotional discount for teachers in the month of August)

Strengths

• Owned by local ophthalmologist and does only refractive surgery

• Performed more than 25,000 surgeries; 200/month

• Less than 4% enhancements required • $299/eye to $1,500/eye • Uses Bausch&Lomb Technolas 217Z

wavefront custom laser • Extensive payment plans offered

• A large, comprehensive practice with 20 physicians who specialize in treatment of the eye

• Ophthalmologist has done more than 5,000 procedures

• Handles all care, pre-op and post-op, unless the patient prefers to use their own optometrist

• Payment plan is handled through TLC, although Charlotte EENT offers a discount with some insurance companies

• Cost/eye is $2,450 to $2,750

• Personality and energy of Dr. Christenbury

• First to do LASIK surgery and first to perform Wavefront Custom IntraLASIK in Charlotte; completed more than 50,000 procedures

• General manager who’s responsible for strategic planning

• Extensive marketing by a marketing manager and Dr. Christenbury

• Business development director makes sales calls on companies to speak to corporate discounts and flexible spending accounts

• Systematic marketing research • Skilled staff of 45 • Number of procedures done

per month: 600 to 800, all by Dr. Christenbury

• Offers five machines: IntraLASIK FS, LADARVision 4000, LaserSight LSX, Nidek EC-5000, or Bausch & Lomb Technolas 217Z

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Horizon Eye Care

LASIKPlus Center

• Cost based on severity of impairment from $595/eye to $2,195/eye; financing available

• Ad agency that creates and places ads in TV, radio, direct mail, newspaper, magazines, Yellow Pages, and Internet

• Good information systems, budgeting, and billing procedures

• Locally owned

• “Charlotte’s Leader in Refractive Surgery” because seven MDs of thirteen in the clinic perform refractive surgery

• One price, $1,799/eye, complete package (all services covered, enhancements for two years, any prescription, no extra charge for astigmatism)

• Financing payment plan options available through The Vision Fee Plan (custom plan), assistance with flexible spending accounts

• Chosen surgeon provides all patient services

• Locally owned; five locations • Uses VISX Star S4 wavefront custom

system – FDA approved • Website excellent

• National organization, headquartered in Cincinnati, Ohio; 39 centers in major markets in the US, plus four centers in Canada and Finland

• Four employees operate the Center along with one ophthalmologist (Selkin) who has had a corneal fellowship after residency, is certified on four different lasers, and has performed more than 40,000 procedures

• All employees are cross-trained and can substitute for each other

• Number of procedures is 200/month

• Variability in physician experience: Ugland & Galentine more than 3,000 procedures each; others “several hundred” to “less than a hundred;” the group performs about 10,000 in a year

• They “do not keep numbers” of individual doctors’ procedures

• No numbers on frequency of “enhancements;” enhancements are “done for those who have higher prescriptions to fine tune”

• Between 5 and 10% are not candidates for LASIK (these numbers have fallen as the use of wavefront custom lasers allows for greater correction)

• Less “local” orientation • Dr. Selkin rotates between centers

in North Carolina, Tennessee, and Texas. He spends about six to eight days (occasionally up to ten days) a month in Charlotte

• Pre-op and post-op is done by the patient’s own ophthalmologist

• Ophthalmologists generally have older patients

Exhibit 3–10: (cont’d )

Competitor Strengths Weaknesses

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• Area ophthalmologists are invited to use the facilities

• Cost $299/eye to $2,200/eye, one seminar attendee will be given a free procedure (drawn from a hat)

• Three different payment plan options available; assistance with flexible spending accounts

• Lifetime Continuous Care Program (no additional charges)

• Good information systems, budgeting, and billing procedures

• Surgery is done on one Saturday per month with day-after follow-up done at 8:00 A.M. on Sunday morning

• National organization, headquartered in Canada; 50 centers in the US, seven in Canada, two in Mexico, and one in London

• Six employees plus two local ophthalmologists on staff (Jaben has performed over 4,900 surgeries and Tate has performed over 15,000 surgeries)

• Performs 176 procedures per month • Advertises in radio, magazines,

Yellow Pages, and Internet with personal calls on local optometrists

• Customer satisfaction: 93% satisfied or very satisfied; 99% would recommend TLC to family/friends; enhancements at no charge for up to two years

• Tiger Woods is a well-known and credible spokesperson

• Lifetime Commitment Program (for additional fee and required annual visits with a TLC-affiliate doctor; no charge for additional myopic procedures forever)

• Developed a network of 45 physicians and optometrists who use or refer to the Center (of 92 ophthalmologists and 180 optometrists in the Charlotte area)

• LCA does little marketing for the Center; rather it expects physicians to market themselves and use the Center

• General manager often has to make appointments and handle phones

• Scheduling of independent physicians to perform the procedure on their clients

• Employees are consistently asked to work overtime

• Only a moderately helpful website

• Less “local” orientation • Marketing handled by corporate, with

local coordinator • Near capacity at current location • Referrals usually from optometrists

who will be responsible for follow-up and are owed $400/eye for referral

• Tate performs surgeries every other Thursday and Jaben performs surgeries three Tuesdays and two Fridays per month

• Website only moderately helpful. Refers to telephone numbers often

Exhibit 3–10: (cont’d )

Competitor Strengths Weaknesses

TLC Laser Center

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Competitor Analysis – Strategic Groups

There are many opticians located in the offices of ophthalmologists as well as offices of optometrists. Many opticians work in nationally owned vision center chains where customers seek retail purchase of eye wear. They may receive referral fees for recommending a particular practice, but they do not otherwise participate in refractive surgery.

There are 92 optometrists in the Charlotte/Mecklenburg area, with estimates of another 200 in the service area. Younger, healthier clients who simply need periodic eye exams for glasses or contacts typically go to optometrists because the average price for an eye exam by an optometrist is between $80 and $90 in the Charlotte area. (Contact lens exams/fittings are nearly twice that amount.)

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Exhibit 3–10: (cont’d )

Competitor Strengths Weaknesses

Mecklenburg Eye Associates

Providence Eye & Laser Specialists

• Dr. Blotnick is the sole provider of the procedure

• Uses TLC Center for surgeries • Difficult to get through on the phone • Website only moderately helpful

• Dr. Mozayeni is the sole provider of the procedure

• Payment plan financing available, negotiated contracts with some insurance plans for reduced rates, assists with flexible spending accounts; $250/eye discount if procedure can be watched by others, $100/eye discount if attended a seminar prior to surgery

• VISX Star3 laser used • Good information systems, budgeting,

and billing procedures

• One ophthalmologist has performed several hundred procedures

• Uses custom LASIK and IntraLase lasers

• Full service eye care (three physicians)

• Cost $1,000/eye to $2,000/eye

• One ophthalmologist who has performed more than 10,000 procedures; corneal fellowship after residency

• Doctor works with the patient from pre-op through post-operative care

• Three different lasers • Cost is $1,200/eye to $1,800/eye • Excellent website • Extensive newspaper advertising

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Older patients are advised to see an ophthalmologist because of their increased risk of eye diseases such as cataracts and glaucoma. The average price for an eye exam performed by an ophthalmologist in the Charlotte area is between $160 and $180. (Some physicians charge as high as $250.)

Prior to 1998, most of the ophthalmologists in Charlotte were in solo practices although there were several practices of three or four. As managed care became more of a market force in North Carolina, a number of mergers occurred. In 2004, 57 ophthalmologists practiced in the Charlotte market area and more than half work in two large practices: Horizon Eye Care has 13 eye care physicians (seven perform refractive surgery) and Charlotte Eye, Ear, Nose, and Throat has 20 physi- cians who specialize in eye care (six performed refractive surgery but did not perform enough to include it in their practice long-term; now just one physician performs the procedure routinely and the others in the practice refer to him).

There are three practices that have three physicians. In each of these smaller practices, there is one physician who performs refractive surgery (Childers/Cook/ Woody, Christenbury/Gross/Santander, and Adair/Bedrick/Blotnick). There are three partnerships. In one partnership, both partners perform refractive surgery (Mundorf/Renaldo); in the other two partnerships, none of the partners performs refractive surgery (Greenman/Greenman and Tillett/Tillett). The nine remaining ophthalmologists are solo practitioners. Seven of the nine solo practitioners perform refractive surgery in their own practice (Grayson, Mozoyeni, Reeves, and Titone) or as employees of one of the surgery centers (Clement, Selkin, and Tate). A total of 18 physicians from 13 different practices in the Charlotte area have training and expertise in laser surgery. However, only eight locations have the laser equipment necessary to perform the procedures; consequently, those with- out equipment on site use LASIKPlus or TLC Laser Centers.

In Charlotte’s eye care market, four providers – Carolinas Eye Center, LASIKPlus, and TLC Laser Eye Center, and Providence Eye & Laser Specialists – are surgery centers that offer only or primarily LASIK surgery. Several local ophthalmologists focus on LASIK surgery but their practices offer other aspects of eye care in addition to the LASIK – Charlotte Ophthalmology Clinic, Christenbury Eye Center, Eye Care Clinic Vision & Laser Center, Genesis Eye Center, Mecklenburg Eye Associates, Mundorf & Renaldo, and Reeves Eye Clinic. Charlotte EENT (Eye, Ear, Nose, and Throat) and Horizon Eye Care are large prac- tices that provide comprehensive, full-service eye care from routine eye exams to treatment of complex disease and surgery on the eye. Therefore, at the beginning of 2005, three strategic groups existed for the service category, each one having emerged using a different strategy.

Competitor Analysis – Mapping Competitors

Exhibit 3–11 shows a map of the strategic groups for refractive surgery in the Charlotte eye care market. In 2000, there was just one strategic group for refract- ive surgery. By the beginning of 2005, three distinct groups had emerged – the laser centers that only provide refractive surgery, the large group practices that

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provide comprehensive care plus refractive surgery, and the very small group practice/solo practitioners who provide eye care and refractive surgery. The competitors will likely attempt to maintain the positioning that they have already established – or attempt to differentiate. The providers are somewhat different in their prices, equipment, the number of refractive procedures they perform in a month, and the comprehensiveness of the practice.

Competitor Analysis – Likely Response

A new competitor or any of the existing competitors have to realize the following:

• Any price decrease will likely be matched. • Dr. Christenbury was the first to perform refractive eye surgery in the city. He

owns more equipment than the other practitioners and continues to perform a high number of surgeries. More than likely he will continue to be at the fore- front of any new technology.

• Competition is intense and the entrance of a new provider will be met with considerable resistance.

E X A M P L E O F A S E R V I C E A R E A C O M P E T I T O R A N A L Y S I S 1 4 1

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Exhibit 3–11: Competitor Analysis – Mapping Competitors

$3,000

$2,000

$1,000

Price/eye

TLC

LASIKPlus

Providence Eye

Carolinas Eye

Christenbury

Mecklenburg Eye Horizon

Eye Care

Charlotte EENT

LASIK only

Full service eye care

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• Preemptive strategies – more advertising, reduced prices, and so on – by current competitors are highly likely if they have any indication that a new competitor may enter the market, thereby increasing the difficulty of entering the market.

Synthesis

Surgery to correct vision problems moved into maturity between 2002 and 2005 in the Charlotte market; the number of providers, the price competition, and the amount of advertising have all increased substantially. Consumer demand is increasing as the surgery is being performed with less pain and more accurate results. Providers who perform the surgery must gain enough experience to avoid complications and gain positive word of mouth. Until costs begin to decline as the laser technology moves through the product life cycle, providers need to perform more than 80 surgeries per month to surpass break even.

The four laser centers are in a strategic group; they are mutually dependent because the strategy of one affects the others. Intense rivalry exists as they attempt to improve their position in the market. Carolinas Eye Center is owned by a local ophthalmologist who has performed more than 25,000 procedures (200 procedures per month). Providence Eye & Laser Specialists is also owned by a local ophthalmologist who had a corneal fellowship after residency and has performed more than 10,000 procedures. Both of these locally owned centers focus exclusively on corrective vision surgery.

LASIKPlus Center’s strategy is to develop relationships with ophthalmologists in the area and offer the Center for them to use to perform the LASIK surgery. LASIKPlus benefits from having many ophthalmologists in the area learn the LASIK surgery techniques and use its facilities to perform the surgery on their patients. Preemptive discounting to local ophthalmologists could wrap up its referral base.

TLC’s strategy is to develop relationships with the many optometrists in the area to gain referrals. Again, preemptive discounting could wrap up the optometrists’ referral base for TLC. Because younger consumers tend to use optometrists more, and optometrists cannot perform surgery, TLC provides staff surgeons. The younger population (but over eighteen with no change in eye prescription in the past two years) offers better candidates for LASIK as they do not have the problem of presbyopia (aging eye).

All four in this strategic group have to be aware of and ready for any of the new technologies that may receive FDA approval at any time. The introduction of a new technology would be the best chance to enter the market as a new provider.

Among the local ophthalmologists, Dr. Christenbury has positioned his practice as the best value, himself as the most experienced in performing the surgery (50,000 at the beginning of 2005), and he owns six laser machines. He has the legitimate claim of being the first to do LASIK surgery in Charlotte and his continued referrals and full waiting room attest to the investment he has made in developing the first-mover advantage. The other partnerships and smaller group practices offer refractive surgery as part of comprehensive care.

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In conclusion, a new provider entering the market would have significant challenges and would need deep pockets. Certainly the provider would have to be experienced in the procedure, willing to invest heavily in advertising to develop a position in the market, use the latest technology, and be willing (and able) to have low volume for some time. Given the risks, high barriers to entry, competitive rivalry, and so on, it appears that Charlotte would not be a new ophthalmologist’s first choice location for setting up a practice to start refractive surgery. An established ophthalmologist in the Charlotte area would have a better opportunity to seek additional training and certifications on equipment and begin offering refractive surgery to his or her own patients rather than referring them to other physicians. On the other hand, for either the new-to-the-Charlotte-market or the new-to-refractive-surgery physician, the Charlotte market is growing, its population is younger than average, and it pos- sesses higher discretionary spending ability.

This analysis reveals that a provider who is new to the service area or the service category would have to develop some competitive advantage not cur- rently offered to be successful. Given deep pockets and excellent surgical results (no complications to achieve effective word of mouth), it is possible.

Strategic Momentum – Validating the Strategic Assumptions

As with the general and health care environments, the initial analysis of the service area provides the basic beliefs or assumptions underlying the strategy. Once the strategic plan has been developed, managers will attempt to carry it out. However, as implementation proceeds, new insights will emerge and new understanding of the competitive services will become apparent. Changes in the service area or new competitor strategies will directly affect performance of the organization and therefore must be monitored and understood. Competitive awareness and analysis are ongoing activities. The strategic thinking map pre- sented in Exhibit 3–12 provides a series of questions designed to surface signals of new perspectives regarding the service area assumptions.

The Use of General Environmental and Competitor Analysis

In health care organizations today there is a real understanding that not every organization will survive; that no one health care organization can be “everything to everybody.” Understanding the external environment – including the gen- eral, health care, and service area/competitor environments – is fundamental to strategic management and survival. A comprehensive general and health care environmental analysis and service area competitor analysis combined with an assessment of competitive advantages and disadvantages (Chapter 4) and establishment of the directional strategies (Chapter 5) provide the basis for strategy formulation.

U S E O F G E N E R A L E N V I R O N M E N T A L A N D C O M P E T I T O R A N A L Y S I S 1 4 3

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Summary and Conclusions

Service area competitor analysis is the third element of environmental analysis and increases the focus. Service area competitor analysis is an increasingly im- portant aspect of environmental analysis because of the changes that have taken place in the health care industry throughout the past decade. Specifically, service area competitor analysis is the process of assessing service category/service area issues, identifying competitors, determining the strengths and weaknesses of rivals, and anticipating their moves. It provides a foundation for determining com- petitive advantage and subsequent strategy formulation.

Health care organizations engage in service area competitor analysis to obtain competitor information and for offensive and defensive reasons. However, analysts must be careful not to misjudge the service area boundaries, do a poor job of com- petitor identification, overemphasize visible competence, overemphasize where rather than how to compete, create faulty assumptions, or be paralyzed by analysis.

The process of service area competitor analysis includes an identification of the service category for analysis, assessment of the service area conditions, service area structure analysis, competitor analysis, and a synthesis of the information collected and analyzed. Identification of the service category provides the basis for the analysis. Service categories may be defined very broadly or quite specifically and will vary with the intent of the analysis. An identification of the service area will include establishing geographic boundaries and developing a service area profile that might include economic, demographic, psychographic, and disease pattern information.

Service area structural analysis may be accomplished through a Porter five forces analysis: evaluating the threat of new entrants into the market, the service area rivalry, the power of the buyers, the power of the suppliers, and the threat of substitute products or services. Next, competitor analysis should be under- taken. Comprehensive competitor analysis would include an identification and

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Exhibit 3–12: Strategic Thinking Questions Validating the Strategic Assumptions

1. Is the strategy consonant with the competitive environment? 2. Do we have an honest and accurate appraisal of the competition? 3. Have we underestimated the competition? 4. Has the rivalry in the service category/service area changed? 5. Have the barriers to entering the service category/service area changed? 6. Does the strategy leave us vulnerable to the power of a few major customers? 7. Has there been any change in the number or attractiveness of substitute products or services? 8. Is the strategy vulnerable to a successful strategic counterattack by competitors? 9. Does the strategy follow that of a strong competitor?

10. Does the strategy pit us against a powerful competitor? 11. Is our market share sufficient to be competitive and generate an acceptable profit?

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evaluation of competitor strengths and weaknesses, competitor strategy, strat- egic groups, critical success factors, and likely competitor actions and responses. Finally, service area and competitor information should be synthesized and strategic conclusions drawn to allow recommendations to be made.

Chapter 4 will explore how an organization examines its own strengths and weaknesses to understand competitive advantages and disadvantages as a basis for strategy formulation.

Q U E S T I O N S F O R C L A S S D I S C U S S I O N 1 4 5

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Key Terms and Concepts in Strategic Management Competitive Advantage Competitor Analysis Critical Success Factor Analysis Mapping Competitors

Service Area Service Area Competitor

Analysis Service Area Profile

Service Area Structural Analysis Service Category Strategic Group Strategic Response

QUESTIONS FOR CLASS DISCUSSION

1. What is entailed in service area competitor analysis? Why should health care organizations engage in competitor analysis? Should not-for-profit organizations perform competitor analysis?

2. What is the relationship between general and health care environmental ana- lysis and service area competitor analysis?

3. What competitor information categories are useful in competitor analysis? Are these categories appropriate for health care organizations? How can these information categories provide a focus for information gathering and strategic decision making?

4. What are some impediments to effective competitor analysis? How may these impediments be overcome?

5. Explain the steps or logic of service area competitor analysis. 6. Why must the service categories be defined first in service area competitor ana-

lysis for health care organizations? 7. Why is it important to clearly define the service area? How does managed care

penetration affect service area definition? 8. How does the use of Porter’s five forces framework help identify the major com-

petitive forces in the service area? 9. Why is an identification and evaluation of competitor strengths and weaknesses

and the determination of strategy essential in service area competitor analysis? 10. What are the benefits of strategic group analysis and strategic mapping? 11. Why should a health care organization attempt to determine competitors’ strat-

egies and likely strategic responses? 12. What is the purpose of the synthesis stage of service area competitor analysis? 13. Conduct a service area competitor analysis for a health care service with which

you are familiar.

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NOTES

C H A P T E R 3 : S E R V I C E A R E A C O M P E T I T O R A N A L Y S I S1 4 6

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1. Shaker A. Zahra and Sherry S. Chaples, “Blind Spots in Competitive Analysis,” Academy of Manage- ment Executive 7, no. 2 (1993), pp. 7–28 and Witold J. Henisz and Bennet A. Zelner, “The Strategic Organization of Political Risks and Opportunities,” Strategic Organization 1, no. 4 (2003), pp. 451– 460.

2. Carl Pegels and Kenneth A. Rogers, Strategic Management of Hospitals and Health Care Facilities (Rockville, MD: Aspen Publishers, 1988), pp. 35–36.

3. John E. Prescott and Daniel C. Smith, “The Largest Survey of ‘Leading-Edge’ Competitor Intelligence Managers,” Planning Review 17, no. 3 (1989), p. 12.

4. David Halberstam, The Reckoning (New York: William Morrow, 1986), p. 310.

5. Interstudy: A Division of Decision Resources, Inc., Interstudy Competitive Edge Report 4.0 (St. Paul, MN: Interstudy, 2003).

6. Sumantra Ghoshal and D. Eleanor Westney, “Organizing Competitor Analysis Systems,” Strategic Management Journal 12, no. 1 (1991), pp. 17–31.

7. Chemical Abstract Service (CAS), a division of the American Chemical Society, website: http://www.cas.org.

8. Joel A. C. Baum and Helaine J. Korn, “Competitive Dynamics of Interfirm Rivalry,” Academy of Man- agement Journal 39, no. 2 (1996), p. 256.

9. Zahra and Chaples, “Blind Spots in Competitive Analysis,” p. 9.

10. Ibid. 11. http://www.marriott.com/senior/about.asp. 12. Hubert Saint-Onge, “Tacit Knowledge: The Key

to the Strategic Alignment of Intellectual Capital,” Strategy & Leadership 24, no. 2 (1996), pp. 10–14.

13. Zahra and Chaples, “Blind Spots in Competitive Analysis,” pp. 19–20.

14. http://marketguide.com/MGI/home.asp. 15. Joseph P. Peters, A Strategic Planning Process for

Hospitals (Chicago: American Hospital Publishing, 1985), pp. 71–73 and Stephen Cummings and Duncan Angwin, “The Future Shape of Strategy: Lemmings and Chimeras,” Academy of Management Executive 18, no. 2 (2004), pp. 21–36.

16. Voluntary Hospitals of America, Inc., Community Health Assessment: A Process for Positive Change (Irving, TX: Voluntary Hospitals of America, Inc., 1993), p. 49.

17. There are several community assessment ap- proaches available such as Advancing Community Public Health Systems in the Twenty-First Century

(Washington, DC: National Association of County and City Health Officials, 2001); Voluntary Hospitals of America, Inc., Community Health Assessment: A Process for Positive Change (Irving, TX: Voluntary Hospitals of America, Inc., 1993); The Hospital Association of Pennsylvania, A Guide for Assessing and Improving Health Status: Community . . . Planting the Seeds for Good Health (The Hospital Association of Pennsylvania, 1993); and James A. Rice, Community Health Assessment: The First Step in Community Health Planning (Chicago: American Hospital Association Technology Series, 1993). Perhaps the best known is Assessment Protocol for Excellence in Public Health (APEX PH), a collab- orative project of the American Public Health Association, the Association of Schools of Public Health, the Association of State and Territorial Health Officials, the Centers for Disease Control and Prevention, the National Association of County Health Officials, and the United States Confer- ence of Local Health Officers funded through a cooperative agreement between the Centers for Disease Control and Prevention and the National Association of County Health Officials, 1991.

18. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), pp. 3–33 and Benoit Mandelbrot and Richard L. Hudson, The (Mis) Behavior of Markets (New York: Basic Books, 2004).

19. Ming-Jer Chen, “Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration,” Academy of Management Review 21, no. 1 (1996), p. 101.

20. Baum and Korn, “Competitive Dynamics of Inter- firm Rivalry,” p. 257.

21. Adapted from Porter, Competitive Strategy, pp. 127– 128.

22. R. K. Reger and A. S. Huff, “Strategic Groups: A Cog- nitive Perspective,” Strategic Management Journal 14, no. 2 (1993), pp. 103 –123.

23. Tamela D. Ferguson, David L. Deephouse, and William L. Ferguson, “Do Strategic Groups Differ in Reputation?” Strategic Management Journal 21, no. 12 (December 2000), pp. 1195–1214.

24. M. Peteraf and M. Shanley, “Getting to Know You: A Theory of Strategic Group Identity,” Strategic Man- agement Journal 18, Special Summer Issue (1997), pp. 165–186.

25. C. J. Fombrun, Reputation (Boston, MA: Harvard Business School Press, 1997).

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26. Porter, Competitive Strategy, p. 129. 27. Robert M. Grant, Contemporary Strategy Analysis,

5th edn (Malden, MA: Blackwell Publishing, 2005), pp. 124–126.

28. Karel Cool and Ingemar Dierickx, “Rivalry, Strategic Groups and Firm Profitability,” Strategic Manage- ment Journal 14, no. 1 (1993), pp. 47–59.

29. Chen, “Competitor Analysis and Interfirm Rivalry,” p. 102.

A D D I T I O N A L R E A D I N G S 1 4 7

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Cummings, Stephen and David Wilson (eds) Images of Strategy (Malden, MA: Blackwell Publishing, 2003). This book develops an approach to strategic man- agement that is based on analysis and integration. It attempts to look outward at strategy from inside the organization rather than from the outside in. Readers are exposed to the way in which strategic choices are made and how these choices result in actions that shape the business and organizational world.

Institute for the Future, Health and Health Care 2010, 2nd edn (Indianapolis, IN: Jossey- Bass Publishing, 2003). This is the second edition of a comprehensive review of the technological and diagnostic advances of today’s health care system. The book pro- vides an overview of a number of areas critical to an understanding of the US health care system. Some of the important topics include demographic trends, managed care, health care customers and competitors, public health services, and a variety of other important topics.

Morley, David and Scott Miller, The Underdog Advantage: Using the Power of Insurgent Strategy to Put Your Business on Top (New York: McGraw-Hill, 2004). The under- dog advantage is a set of principles that have been proven successful over time. The advantage of the incumbent has diminished over time and may have dis- appeared completely. According to these authors, today is the day of the underdog. Since today’s customers are empowered with instant information they often feel overloaded and many traditional approaches to marketing are no longer effective. This book provides a strategy for the insurgent that is designed to overcome estab- lished competitors.

Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors (Boston: The Free Press, 1998). In this classic work, Porter reviews com- petitive structure and the generic strategies in the first chapter – vintage Porter. The third chapter provides a detailed approach and framework for competitive analysis. He goes on to address competition in various types of industries. The discussion of industries that are fragmented, those in transition, and those with vertical integration are particularly pertinent for health care leaders.

Salaman, Graeme and David Asch, Strategy and Capability: Sustaining Organizational Change (Malden, MA: Blackwell Publishing, 2003). Virtually every writer has a formula for changing complex organizations in a way that will improve their effectiveness. This book also looks at how to effect organizational change in a fast-paced world. The major approaches to organizational improvement are identified, analyzed, assessed, and evaluated. The sometimes subtle relationships between strategy and capabilities are highlighted.

Tsoukas, Haridimos and Jill Shepherd (eds) Managing the Future: Strategic Foresight in the Knowledge Economy (Malden, MA: Blackwell Publishing, 2004). A set of ten papers by leading authorities on strategy and organizational learning. The papers address questions such as how organizational foresight can be conceptualized, how organizations make sense of their environments, how foresight can be developed, and similar issues. The book is a valuable source of information on strategic man- agement in the knowledge-based society of today.

ADDITIONAL READINGS

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Zook, Chris, Beyond the Core: Expand Your Market Without Abandoning Your Roots (Boston, MA: Harvard Business School Press, 2004). Growth is an imperative. Growth, how- ever, involves risks. Only about one fourth of growth initiatives succeed. Most of the business disasters of the past five years were growth initiatives gone bad. Most enduring performers succeeded by focusing on one or two well-defined dominant cores. Many organizations fail because they prematurely abandon their core to chase after a hot topic or fad.

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