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Assessing the Organization Itself

Learning Objectives

After reading this chapter, you should be able to:

• Discuss what is involved in a thorough financial analysis of an HSO and how to make sense of the data.

• Perform an analysis of an HSO’s strengths, weaknesses, opportunities, and threats (SWOT analysis).

• Determine whether an HSO has a core competence and a competitive advantage.

• Analyze an HSO’s internal and external value chains, as well as determine the consumer-value proposition and how strong it is.

Chapter 5 Wavebreak Media/Thinkstock

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CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition

Analyzing and assessing the internal environment of an organization is a key part of strat- egy formulation. It is the first step in formulating strategies, as shown in Figure 1.1. The recent financial performance and current financial condition is an obvious place to start using quantitative data with which to reach an objective conclusion. There are also more subjective measures, including an examination of an HSO’s competitive strengths and weaknesses and its capabilities, and the determination of which, if any of them, might be core competencies that would give it a competitive advantage. The value of an HSO’s brand and the effectiveness of its management are also taken into consideration.

5.1 Analysis of Financial Performance and Condition Any analysis of an HSO usually begins with careful evaluation of its financial position. To assess the recent financial performance and current financial condition of the organi- zation, you need three to five years of historical financial data—income statements and balance sheets—including the most recent year for which complete data are available. (See Financial Statement Data boxes for examples of information you will likely need.) In nonprofit organizations, the income statement may be titled “statement of activity” or “statement of operations,” and the balance sheet may be titled “statement of financial position” or “statement of financial condition” (Ginter, 2013, p. 426).

Financial Statement Data: Income

The following is a list of typical line items on an HSO’s income statement, including what might be included in those categories.

Total unrestricted revenue (restricted revenue refers to income that is for a specific purpose, usually specified by a donor)

• Net patient service revenue • Other operating revenue

Total expenses • Salaries and benefits • Supplies • Purchased services • Depreciation and amortization • Interest

Total expenses (continued) • Provision for bad debts • Utilities and maintenance • Insurance and rent • State and local taxes (if applicable) • Other operating expenses

Net operating income (total unrestricted revenue minus total expenses)

Total nonoperating (losses) gains • Investment (loss) income, net • Loss on refinancing debt

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CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition

Financial Statement Data: Balance Sheet

The following is a list of typical line items on an HSO’s balance sheet, including definitions and what might be included in those categories.

Current assets (resources most likely to be used within the year)

• Cash and short-term investments • Accounts receivable for medical

services, less allowances for doubtful accounts

• Inventory • Prepaid expenses • Other current assets

Noncurrent assets (assets expected to be of use for longer than one year)

• Long-term investments • Net property and equipment • Other noncurrent assets such as

amounts due from restricted funds

Total assets (sum of total value of all current and noncur- rent assets)

Current liabilities (short-term obligations to outside parties)

• Principal payments on long-term obligations

• Accounts payable and accrued expenses

• Other short-term liabilities

Noncurrent liabilities (long-term obligations not due within one year)

• Long-term obligations, less current portion

• Other noncurrent obligations

Total liabilities (sum of total value of all current and noncur- rent liabilities)

Net assets (difference between assets and claim to those assets by third parties or liabilities)

• Unrestricted • Temporarily/permanently restricted

(restricted assets refer to donated items that have limitations on their use and must be listed separately from other assets)

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CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition

If the HSO is a private company with investors or a public company with shareholders, additional financial details are reported, including value of common stock, retained earn- ings, paid-in capital, other equity, and total shareholder/investor equity and liabilities.

An annual income statement presents a financial picture of an organization’s operations over the previous 12 months. A balance sheet is a snapshot at a point in time (usually at the close of the HSO’s fiscal year) that presents a financial picture of its assets and the proportion in which those assets are financed through debt and equity (if applicable). In a balance sheet, the total assets equal the total liabilities (debt) and stockholders’ equity (if applicable); the two sides must balance.

Ratio analysis is a common method for evaluating financial performance. The key finan- cial ratios that a hospital often evaluates are described in Table 5.1. Other types of HSOs use similar measures of financial performance.

Table 5.1: Key financial ratios for a hospital

Ratio Description Calculation

Days in accounts receivable (net)

A measure of the average number of days waiting for collection of payments. A high number of days shows the amount of cash that is not available for operations.

Net accounts receivable/Net patient revenue per day

Days cash on hand A measure of the number of days of expenses that the hospital can pay with its currently available cash

Cash/(Operating expenses less depreciation/365)

Operating margin A ratio of the percent of operating income to total operating revenue

Total operating revenue – Total operating expenses/Total operating revenue

Total margin A ratio of the overall profitability of the hospital considering both the operating surplus (or loss) and nonoperating surplus (or loss)

Excess of revenue over expenses/ Total revenue

Average age of plant

The average age of the property, physical plant, and equipment owned by the hospital

Accumulated depreciation/ Depreciation expense

Deduction ratio A measure of the proportion of total patient charges that are lost due to discounts and allowances

Total patient revenue – net patient revenue/Total patient revenue

While no single financial measure is capable of expressing the financial health of an HSO, there are some commonly used scoring systems. The Financial Strength Index (FSI) is a measure that reflects an HSO’s overall financial condition (Cleverley & Cleverley, 2005). The FSI index combines the effects of four financial ratios—profits, liquidity, debt expense, and age of physical plant—to reveal the financial strength of the organization. The dimen- sions used in this index and measures are shown in Table 5.2.

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CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition

Table 5.2: Dimensions of financial strength and measures

Financial strength dimensions Measured by

Profits Total margin

Liquidity Days cash on hand

Debt expense Debt financing percent

Age of physical facilities Average age of plant

The measures are normalized around a predefined average for the measure. Organiza- tions with a high margin, lots of cash, little debt, and new facilities have a higher FSI— meaning they are in better financial shape. Organizations with a lower index have loss, little cash, quite a bit of debt, and older physical facilities. The FSI is calculated as follows:

FSI 5 [(Total Margin 2 4.0)/4.0] 1 [(Days Cash on Hand 2 50)/50] + [(50 2 Debt Financing Percent)/50] + [(9.0 2 Average Age of Plant)/9.0]

An FSI greater than 3 is considered excellent, 0 to 3 good, 22 to 0 fair, and less than 22 poor (Clev- erley & Cleverley, 2005). By calculating its FSI for several years, an HSO can see how its financial strength has changed. In addition, the organiza- tion can consider how different financial man- agement tactics might affect its future financial health. For example, more aggressive bill collec- tions can increase cash on hand, or decreasing operating costs can increase profit margins.

Another way HSOs can evaluate their financial health is with the use of benchmarks. Financial benchmarks can be obtained from groups such as the Medical Group Management Association and the National Society of Certified Healthcare Busi- ness Consultants, and companies such as Hos- pitalbenchmarks.com and Navigant. In addition, many state health departments publish data on key financial ratios for HSOs in their state. Finan- cial benchmark data allows an HSO to see how its financial performance compares to that of similar types of organizations.

Huchen Lu/iStock/Thinkstock

Three to five years’ worth of historical financial data should be kept in order to adequately assess the financial state of an HSO.

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CHAPTER 5Section 5.1 Analysis of Financial Performance and Condition

The last step in the financial analysis is the most important. What sense can be made of the numbers? What picture do they paint of the organization’s performance over the past sev- eral years and current condition? You could draw any one of the following conclusions.

• The HSO is very well managed, has been performing extremely well, and is in strong financial condition and overall financial health (all key indicators are good and none is bad).

• The HSO is very well managed, has been performing extremely well, and is in strong financial condition and overall financial health except for one major bad thing, for example, having very high debt or declining operating margins (a pre- dominance of good indicators with one or possibly two bad ones).

• The HSO turned in a mixed performance over this period and is neither per- forming well nor in serious trouble. The results are, in fact, inconclusive (an equal or roughly equal number of good and bad indicators).

• The HSO’s performance and financial condition is poor, and key result indica- tors were declining steadily (or precipitously) over time. The organization is or should be in serious financial trouble except for one major good thing, such as decreasing debt expense (a predominance of bad indicators with one or possibly two good ones).

• The HSO’s performance is poor, and key result indicators were declining steadily (or precipitously) over time. The organization has not been managed well and is in serious financial trouble (all indicators of performance and condi- tion are bad and none is good).

After the financial analysis is completed, only one of the preceding five conclusions is possible. Whichever one is selected, it must be supported with statistics that summarize the current financial performance, condition, and health of the organization; otherwise, the conclusion is not valid. Because the principal ways for an HSO to finance any strategic initiative are through cash or debt (or in the case of a public company, stock), the financial analysis provides essential information to top management as to the organization’s ability to fund a proposed strategy.

Discussion Questions

1. What can you tell about an HSO’s operations from looking at the past few years of income statements?

2. How much profit an HSO makes after all its expenses are deducted is shown on the income statement. Yet, an organization cannot “spend” the profits it makes—it can spend only cash, which is a balance-sheet item. How do you explain this?

3. In a balance sheet, total assets must equal or balance total liabilities (plus total stockhold- ers’ equity if a publicly traded company). In what other ways is this principle of “balanc- ing” useful?

4. In the newspapers, one often reads about HSOs that are “not financially managed well.” Given what you have learned in this section (and perhaps in a previous course on healthcare finance), what do you think this means?

5. If a hospital increased its cash position by simply issuing additional debt, would its FSI score improve, go lower, or stay the same? Explain.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

5.2 Conducting a SWOT Analysis Once an HSO has a firm understand- ing of where it stands financially, the next part of the internal assessment is conducting a SWOT analysis. This is an evaluation of the organization’s strengths, weaknesses, opportunities, and threats. To be sure, opportunities and threats are more appropriately part of an external analysis, but doing a SWOT analysis is so widespread as part of a strategic analysis that the two areas are presented together here for convenience. As was discussed in Chapter 3, the search for opportu- nities is an integral part of strategic thinking.

Strengths

Strengths and weaknesses are the “internal” aspects of the traditional SWOT analysis. Whenever something—or someone—is reviewed or assessed, it makes sense to point out the good points or what was done well, as well as areas needing improvement. They are two sides of the same coin. This assessment is easy to do superficially, which is often the case, but difficult to do candidly and realistically. It is nearly always subjective, but less so if done by a group with multiple perspectives, which is why organizations sometimes hire outside consulting firms to help them analyze their strengths and weaknesses. Regardless of who conducts it, the strength analysis should compare the HSO to itself at some previ- ous point in its history, perhaps 2–4 years ago, and determine what it is doing better and what has not improved.

It might also be useful to think of strengths as special capabilities or expertise. These are things an HSO does well that have enabled it to be successful to this point, and how it has prepared itself to compete in the future. Comparing an organization’s strengths against those of its competitors and identifying the industry’s critical success factors (described in Chapter 4) also provides a useful assessment.

Typical strengths that HSOs have might include the following:

• Adequate financial resources to implement any likely strategy • Strong cash flow • Strong brand recognition • Effective differentiation • Effective advertising and promotion • Consistent high-quality patient care services • Economies of scale • Insulation from competition

Pupunkkop/iStock/Thinkstock

Conducting a SWOT analysis is an integral component of a strategic analysis.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

• Proprietary technology and patents • Leader in cost efficiencies • Ability to attract renowned physicians • Service-innovation skills • Proven management • Visionary CEO, strong leader • Collaborative culture that supports the strategy • Highly skilled/well-trained staff

It may be easy to classify what an HSO does “well,” but what exactly constitutes a “strength”? The answer is subjective; it depends on how high an organization’s internal standards are and how widely they are shared. For this reason, an HSO should also com- pare strengths (and weaknesses) with its closest competitors. For instance, using data available on the Medicare website, a hospital in the Denver area can see how its patient satisfaction survey results measure up against the results for local and regional competi- tors. This comparison helps determine whether the hospital’s satisfaction ratings are a strength or a weakness.

Weaknesses

Much like the strengths that an orga- nization may possess, weaknesses are internal. They include problems that need to be corrected, deficiencies recognized through a comparison with competitors, or shortcomings relative to proposed strategies, such as lacking the resources to grow. Whether or not what is identified is an actual weakness is not the issue— it is the perception of a weakness that counts.

Some managers have no problem admitting to weaknesses when they are self-evident. Other managers may find problems hard to own up to in the belief that doing so casts them in a bad light or as an ineffec- tive manager. Sometimes, if an HSO is having problems and the top man- agement team is meeting to discuss them, it is not unheard of for one department to find a way of blaming another department for the problems. The nursing department might blame information technology (IT) for

John Holcroft/Superstock/Getty

Although it is not uncommon for one department to blame another for company problems, faultfinding is rarely productive. It is more important to gain an understanding of weaknesses so that they can be overcome.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

inadequate support resulting in work disruptions. Surgeons might complain about a cut in funding for new surgical equipment while other equipment budgets were increased. Or the billing staff might point to nurse practitioners as the cause of delayed payments due to incomplete documentation in patient records. In all these examples, grappling with weak- nesses is not about finding who is at fault or who is to blame. It is about gaining a realistic understanding of the organization’s weaknesses so that steps can be taken to alleviate or correct them.

Weaknesses can take many forms, including the following:

• Obsolete facilities • Key skills and competences missing or obsolete • No core competence, hence no competitive advantage • Internal operating problems and inefficiencies • Lagging in adoption of new technology • Too narrow a service line • Long cycle time to get new service out • No marketing skills or plan • A culture that hasn’t changed with the strategy • Weak or eroding brand image • Low consumer satisfaction scores • Poor location • Poor or negative cash flow from operations, including low or negative profits,

resulting in an inability to service debt or fund needed programs • Inability to achieve high-quality scores

Weaknesses become real when an organization is compared to its competitors. For exam- ple, you might think your organization has low costs and believe that to be a strength, only to discover that your costs are among the highest. Suddenly, that supposed strength becomes a weakness. A new CEO participating in a SWOT analysis with the management team for the first time will have a different frame of reference and may have a different set of standards from those of the managers. Thus, the CEO might have difficulty agreeing with them on what strengths and weaknesses the organization has. As noted previously, it is the perception that ultimately matters most.

These illustrations show that when making any assessment, even a seemingly casual one like identifying a strength or weakness, you are using an implicit standard or reference in making it. More experienced people will tend to be more critical because they may once have worked in organizations where they observed things done better, thus raising their own standards. Again, the goal here is not to be “right” at the expense of someone else being “wrong.” Rather, it is to reach consensus on what is real and problematic so that it can be attended to and the HSO’s future prospects improved.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

Opportunities

An analysis of strengths and weak- nesses covers what is internal to the organization, but that is only half the story in assessing an HSO’s poten- tial success or failure. To stay com- petitive, one has to go looking for opportunities that would improve the HSO’s situation. Sometimes these opportunities are identified during the external analysis described in Chapter 4.

An opportunity has a specific techni- cal definition; it is a service-market issue. It must include a service the organization offers, including the existing ones, and a defined con- sumer group to whom that service is

targeted, including the existing ones. The following are examples of real opportunities (and concentration strategies).

• Staying with an existing service and existing market and penetrating the market further.

• Improving the service for an existing market; that is, implementing a service- development strategy. For example, a hospital could combine into one location all existing outpatient women’s health services to make it an easier “one-stop- shopping” consumer experience.

• Creating a new service for an existing market, which is also a service-development strategy. Examples are an outpatient diagnostic testing center that adds full-body scanning capabilities or an urgent care center that adds a weight loss clinic.

• Expanding the market for an existing service by implementing a market- development strategy, such as promoting women’s health services to high- school-aged girls or lowering mammogram costs for uninsured women.

• Finding a new market for an existing service, which is another market- development strategy. Examples abound of HSOs going regional from being just local, or regional organizations going national or entering a new country. For example, HCA Healthcare, an American company, owns six private hospi- tals in London. ProCure, a privately held company with proton therapy centers throughout the United States that treat patients with cancer, actively markets its services to international patients through its website (www.procure.com). Decreasing profit margins for U.S. patients and ease of marketing via the Inter- net are causing even small HSOs to expand to international markets (Hodges, Kimball, & Turner, 2012).

Typically, an organization only goes through the trouble of identifying opportunities annu- ally, during strategy formulation. But why not look for opportunities all the time? Why

© Tina Zellmer/Ikon Images/Corbis

Some health clinics provide free or low-cost mammograms to women who meet specific eligibility requirements, such as being uninsured or having income that falls below a certain level.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

not make “opportunity finding” a formal, ongoing activity that might generate ideas and feasible proposals? This is what is truly meant by “being opportunistic.” Some healthcare organizations have new-service-development committees through which they screen new service proposals from employees (an issue discussed in Chapter 3). Employees’ ideas are the basis for the more than 55 for-profit firms spun off by Cleveland Clinic Innovations, the corporate venturing arm of the Ohio-based Cleveland Clinic (Cleveland Clinic Inno- vations, 2013).

Consumers, too, may be a rich source for ideas and suggestions, and few HSOs think to ask. Rather than limiting suggestions to simply new service ideas, an HSO might also consider gathering ideas for any kind of innovation or improvement, creating an ongoing focus on recognizing all kinds of opportunity—with the potential to continually expand revenue-generating services.

Change—such as healthcare reform—produces both threats and opportunities. Many HSOs, however, worry only about the threats and do not undertake systematic or fre- quent-enough searches for opportunities. When an opportunity is found, several years may be required to take advantage of it, especially if it means acquiring and adapting to new technologies, understanding a new market, or changing the organizational culture to do it. The earlier it is found, the better, so the search for an opportunity should ideally be ongoing.

Threats

Threats are external to the organization (any “internal” threat is classified as a weakness). Threats are external trends or forces that adversely affect the organization. Left unad- dressed or even ignored, some threats can wipe out an organization. While threats derive from an external environment scan and analysis, as described in Chapter 4, they are dis- cussed here because they are typically included as part of a SWOT analysis. Threats can take many forms:

• Low-cost competition • Slower industry growth • Costly regulatory requirements • Regulatory changes that adversely affect the organization • Harmful effects of a recession or business cycle • Growing bargaining power of payers • Changing consumer tastes and needs • Demographic changes that adversely affect the organization • Increasing interest rates • Large area employer that changes insurance plan • Supply and equipment scarcities • Shortages of physicians and other clinical professionals • Major insurer limiting provider panel • Medicare reducing reimbursement for your services • Disruptive innovations

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

Implicit in recognizing a threat is the fact that it is a trend moving in a certain direction. Yet at what point does a particular threat become real? For example, organizations seek- ing to build or expand facilities would consider interest rates slowly inching upward as a threat. Or when the price of a critical medical supply rises, precisely when does it begin to threaten the HSO and prompt it to take offsetting action?

One way to deal with this problem is to classify threats on a two-dimensional grid (see Figure 5.1). Classifying helps sort out which threats to pay attention to and do something about, and which to continue monitoring. To plot a threat on the grid, you have to decide on the severity of the likely impact of the threat on the organization. Using the preceding interest-rate example, a slowly rising low interest rate would not have a high negative impact on the HSO, so it would go into the short-term, low-impact quadrant. However, a fast-rising, high interest rate would represent a short-term, high-impact threat, so it would be placed in the upper-right quadrant. It is a judgment call; however, if performed by a group of knowledgeable people, the assessment will be more reliable.

Figure 5.1: Classifying threats grid

Classifying threats helps sort out which ones need attention and which ones the organization can just continue monitoring.

The threats in the top-left quadrant—those having a high negative impact in the short term—should receive priority attention by the HSO. Those in the top-right and bottom- left quadrants should both receive second priority, with individual threats being han- dled in appropriate priority order. The least pressing threats are those in the bottom-right quadrant, which may need just steady monitoring but no action.

For high-priority threats, an organization should begin immediately to gather more data about them; assign a committee or task force to track, study, and report on them; and, most importantly, come up with contingency plans for dealing with them. These threats, along with selected threats from the top-right quadrant, should probably be treated as strategic issues.

Short Term (< 3 years)

High

Low

Long Term (> 3 years)

Time (years)

Severity of Negative

Impact

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

Case Study: SWOT Analysis in Rural Health Consortium

A rural health consortium made up of the local health systems in a region—hospital, physicians, long-term care facilities, home health, public health, etc.—conducted a SWOT analysis to evaluate the region’s ability to meet consumers’ needs for local access and safe and high-quality patient care at reasonable prices. Representatives from each provider group participated in the analysis. Below are the results:

Strengths • Primary care practitioners committed to rural health • Meeting community needs are a high priority for employees • Hospital board members strongly supportive of rural health initiatives • Quality of life • Established relationships with tertiary facility and specialists • Telemedicine capabilities at the hospital • Workforce willing to forgo higher wages for rural lifestyle • Strong K–12 school systems • Adequate number of well-trained EMTs • Adequate number of long-term care and assisted living facilities • Community supportive of the hospital • Small group size of providers makes them better able to adapt to change • Freedom to operate more independently; less influenced by competition and industry

trends • Good relations with social support networks, for example, senior centers, youth groups

Weaknesses • Lack of capital • Inadequate transportation system making it hard for people to get to appointments • Lack of Internet broadband throughout the region • Only the hospital has telemedicine capabilities • Insufficient number of mental health specialists; no psychiatrist • Difficulties reaching people with health education about lifestyle/health habit changes • Limited business management expertise outside of the hospital • Aging workforce, including physicians • No “big city” amenities • Workforce shortages particularly in nursing, dentistry, and pharmacy • Lack of negotiating strength • Information technology systems need to be modernized • Lack of collaboration among providers • Ill prepared to meet the health needs of the growing Hispanic population

(continued)

When conducting a SWOT analysis, it can also be useful to define what goal the organiza- tion wants to achieve. The respondents then reflect on the strengths and weaknesses and opportunities and threats facing the organization. This technique is illustrated in Case Study: SWOT Analysis in Rural Health Consortium.

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CHAPTER 5Section 5.2 Conducting a SWOT Analysis

Case Study: SWOT Analysis in Rural Health Consortium (continued)

Opportunities • Better coordination of healthcare services can reduce costs • Standardized electronic information exchange can improve quality and safety • Modernizing technology can broaden access to advanced education and telemedicine • Add new services, for example, dialysis, mobile PET scanner, senior living apartments • Level the playing field between rural and urban healthcare systems • Increased market share • More people will have access to health insurance under the Affordable Care Act • More public awareness of the benefit of a rural lifestyle • Collaborative efforts among providers will reduce cardiovascular risks in adolescents • More outpatient services

Threats • With rising costs of higher education,

new graduates are seeking higher-paying positions

• Public perception that rural healthcare is not as high quality or as safe as urban healthcare

• State legislature will not expand access to Medicaid in response to the Affordable Care Act

• Expanding government intervention and costly-to-implement regulations

• Consumers not taking personal responsibility for their health status

• Perception that high-quality healthcare is possible only with advanced technology capabilities

• Employers drop insurance for employees or greatly raise out-of-pocket costs • Undocumented immigrants unable to obtain health insurance • Federal and state charity care subsidies reduced • Low volume of patients

© Karen Kasmauski/Science Faction/Corbis

A student nurse provides a free medical checkup to a migrant worker in the state of Georgia. One strength of rural health systems is their concern for the welfare of all members of the community.

Discussion Questions

1. Imagine you are part of a top-management team at a meeting to formulate strategies. The discussion eventually turns to listing the organization’s strengths and weaknesses. People shout out what they believe are strengths and weaknesses to populate each list. Very sel- dom is there any discussion that challenges any of the items suggested. What would you suggest to delve a little deeper to ferret out real strengths and weaknesses from those on the list (or even not on the list)?

2. Which carries more weight as a source of strengths: a comparison with the HSO’s own past, its current competitors, or its future strategies? Give reasons for your point of view.

(continued)

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CHAPTER 5Section 5.3 Core Competence and Competitive Advantage

5.3 Core Competence and Competitive Advantage Core competence and competitive advantage are important concepts in strategy litera- ture, but the terms are often confused. The following should clarify their meaning.

• Capability—the ability to do something (Capability, n.d.); capabilities may or may not be strengths.

• Core competence—a strategic capability that is simultaneously valuable, rare, costly to imitate, and nonsubstitutable, and one that underpins a company’s strategy (Hitt, Ireland, & Hoskisson, 2005). Further, core competences are resources and capabilities that serve as a source of competitive advantage for an organization over its competitors.

• Competitive advantage—a significant edge over competitors. This is often mea- sured in developmental lead time, such as an 18-month lead over the nearest competitor in heart surgery services. It may otherwise be something an orga- nization can do that competitors cannot (e.g., integrate healthcare systems efficiently) or that an organization has (e.g., a core competence, a brand) that competitors lack.

• Sustainable competitive advantage—the ability to maintain or increase the edge that an organization has over its competitors over time. Given that a competitive advantage erodes over time, sustaining it takes focused effort and considerable resources (Grol, Schoch, & Roger, 1998). It involves “raising the bar” regularly; as soon as a competitor thinks it has caught up, the organization in question must have developed something new that maintains the original lead. As Kevin P. Coyne (1986) writes, “The most important condition for sustainability is that existing and potential competitors either cannot or will not take the actions required to close the gap” (p. 58).

Addressing these competencies can allow an HSO to gain a competitive advantage, and this has been the case for successful companies in various industries. One such business model is described in Case Study: IKEA’s Sustainable Competitive Advantage.

Discussion Questions (continued)

3. People in positions of authority admitting to shortcomings is considered by many to be a sign of weakness or inadequacy. How could such managers be persuaded that it is, in fact, a sign of strength?

4. Is the reluctance to admit mistakes or recognize weaknesses more of an individual failing or an aspect of the prevailing culture? How could this be determined? How could this be changed?

5. An HSO identified “lack of financial resources” as a weakness. If this were true only in the event of implementing a certain strategy, then shouldn’t the strategy be determined first and then the weakness? Or would such a weakness preempt choosing a strategy that required greater financial resources? Discuss.

6. The Affordable Care Act and related healthcare reforms are expected to change the U.S. healthcare system. What are some new opportunities for HSOs? What are some threats? Which threats may be high priority for action? Discuss.

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CHAPTER 5Section 5.3 Core Competence and Competitive Advantage

Case Study: IKEA’s Sustainable Competitive Advantage

IKEA, a well-known seller of Swedish furniture worldwide, is a prime example of sustainable com- petitive advantage. When it began operations in the United States in 1985, it used a business model that was unique in the industry. Customers were taken to the top floor of a large three-story showroom and made to walk a prescribed route through dozens of finished living room, office, kitchen, and bedroom sets, from the third floor to the second and then to the first, where purchases were picked up before the customers paid for them. No matter what the cus- tomer came into the store to buy in the first place, the idea was to expose the customer to other ideas for every room in the house, thereby selling more. The designs were simple, elegant, and modern, and

the prices were low. Also, all furniture was sold unassembled, saving huge costs at the factory and store locations, and passing the savings (and delivery and assembly) on to the customer. Clearly, the company has grown and is highly successful. Yet no one has been able to duplicate its business model or operations. Its competitive advantages have been sustained.

Questions for Critical Thinking and Engagement

1. Could something like the IKEA business model be applied to healthcare service deliv- ery? Try to think outside of the box when answering this question.

2. What HSOs, if any, have been able to create a sustainable competitive advantage—an advantage that could be hard for other HSOs to duplicate?

3. What strategic capability is most important in an HSO seeking to create a competitive advantage?

© Paul Souders/Corbis

IKEA is a highly successful business model. As of 2011, the company had more than 300 stores in 38 countries, like this one in Shanghai, China.

The four criteria that distinguish capabilities from core competencies are related to com- petitive advantage and organizational performance. Valuable capabilities are those that add or create value for a firm. Rare capabilities are those possessed by no known current or potential competitor. Costly-to-imitate capabilities are those that other HSOs cannot develop easily, quickly, or inexpensively. Nonsubstitutable capabilities are those that do not have strategic equivalents. The following is a list of typical capabilities that distinguish HSOs with a strong competitive advantage:

• A new and/or innovative service • Capabilities or cost advantages • Cultural connections • Extraordinary reputation • Special expertise and/or experience • Superior location or geographic advantage (Hirsch & Gandolf, 2012)

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Discussion Questions

1. The phrase “competitive advantage” is often tossed around loosely in the healthcare indus- try business press. CEOs will label seemingly anything the HSO does—the training they give their staff, how they communicate with patients, their technology—a competitive advan- tage. What might be the motivation for doing this?

2. The concepts of core competence and sustainable competitive advantage are discussed as part of an internal analysis. Yet without an in-depth knowledge of an HSO’s competitors, these concepts cannot be realized. Does this mean that an external analysis should always be done before an internal analysis? Discuss.

3. How many capabilities should be included in a search for a core competence? Explain the number you suggest as your answer.

4. Which of the four criteria for determining a core competence is the most difficult to answer? Why?

5. List the ways in which a core competence or competitive advantage can erode. 6. Is it more difficult to prevent erosion of an existing core competence or to develop a new one?

While these criteria appear straightforward, applying them is difficult. Take any of the capabilities above, for example, and try to apply these criteria. It may take some research to evaluate them. For HSOs without a core competence, or with capabilities that meet two or fewer criteria, the strategic management imperative is clear. An organization must work to develop a core competence that produces a sustainable competitive advantage. On the downside, a core competence can be outdated by environmental change, replaced by substitution, or eroded through imitation and competitive action.

5.4 Competitive Strength, Value-Chain Analysis, and Branding

How competitive is your HSO? To find out, do an analysis very similar to the industry- attractiveness analysis described in Chapter 4 (see Table 4.2). This time, you will use different factors (see the matrix shown in Table 5.3). As with the industry-attractiveness analysis, assign a weight to each of these factors according to its perceived importance, and then rate each factor from the point of view of the company doing the analysis on a scale of 0–1.0, 1.0 being highest. Finally, multiply the weight by the rating for each factor. Here, the factors should reflect what it takes to be competitive in an industry. When you have finished, you will have a resultant competitive-strength (C.S.) index at the bottom. The higher the percentage figure, the more competitive your company is considered to be in the industry, assuming realistic ratings. (While this technique is highly subjective, it becomes less so when done by a group of people with knowledge of the company.)

In Table 5.3, the competitive-strength (C.S.) index of 82.2 shows that the organization being analyzed is a strong competitor, assuming that the factors meaningfully describe its competitive characteristics.

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CHAPTER 5Section 5.4 Competitive Strength, Value-Chain Analysis, and Branding

Table 5.3: Competitive-strength matrix

Factor Weight Rating Patient care service

Brand reputation 24 0.9 21.6

Customer service 22 0.9 19.8

Cost control 18 0.9 16.2

Innovative capability 14 0.5 7.0

Financial strength 12 0.8 9.6

Management 10 0.8 8.0

Totals 100 C.S. Index 82.2

The result of an organization’s industry-attractiveness analysis—the I.A. index (discussed in Chapter 4)—and the C.S. index are used to place the organization on the G.E. (General Electric) matrix, which plots industry attractiveness against competitive strength (see Fig- ure 5.2). Notice that the grid is divided into nine cells. If an HSO were to end up in any of the three cells in the top-right corner of the grid (dark blue squares), the strategy would be to “grow, invest, and build.” If it were to end up in any of the three cells in the bottom- left corner of the grid (light blue squares), the strategy would be to “harvest or exit” from the industry. (What else can a weak, uncompetitive HSO do in an unattractive industry?) The remaining three cells are more difficult to assess, and strategies should be developed in these situations on a case-by-case basis. The value of plotting an organization on this grid is to get an early “take” on the strategy it should follow. Based on the indexes arrived at for the industry-attractiveness (see Table 4.2) and competitive-strength matrices (see Table 5.3), the example HSO would be plotted in a dark blue square as shown.

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CHAPTER 5Section 5.4 Competitive Strength, Value-Chain Analysis, and Branding

Figure 5.2: G.E. matrix

Use the G.E. matrix to plot your organization’s industry attractiveness against its competitive strength.

Is the Current Strategy Working?

First of all, what is the organization’s current strategy? Once it can be articulated (and there could be more than one—see Chapter 1), three questions should be asked to ascer- tain whether it has been working or not: (1) Has the HSO made progress toward achiev- ing, or has it achieved, its vision and strategic intent? (2) Have its stated objectives been attained? (3) Is its financial performance and condition good or at least meeting expecta- tions? A public company’s stock price depends heavily on this last question.

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CHAPTER 5Section 5.4 Competitive Strength, Value-Chain Analysis, and Branding

Consider the questions shown in Table 5.4. If you find that objectives have not been met, resist jumping to the conclusion that the strategy has not worked. The strategy could be appropriate in the circumstances, but the execution of it may be poor, or the organization may have underestimated how quickly objectives could be achieved. However, if execu- tion was good, then it is likely the strategy is not working and should be changed. Also, if the organization has been making satisfactory progress toward achieving its vision and strategic intent but not achieving its objectives, it could be that the objectives were set too high or were otherwise unreasonable. And a financial review of the past 3 to 5 years’ data could also surface additional problems. Thus, such a review ought to be done carefully, because what you conclude could set the stage for what strategic alternatives you come up with later in the process.

Table 5.4: Questions to challenge the current strategy

Questions about scope Questions about choices Questions about process

• What assumptions have you made about the market, competitors, technology, suppliers, or consumer needs? What if those assumptions were wrong?

• Are there regulatory trends that could force you to change the way you do business now?

• Are there reimbursement trends that could force you to change the way you do business now?

• Are the demands for more patient-centered care forcing you to change the way you do business now?

• If you had to double your growth, what new services would you offer?

• If you had to double your market share, what acquisitions or joint ventures would you pursue?

• What new uses for your patient care services and technologies have you explored?

• Are there other segments of the healthcare industry where you can effectively compete?

• What tactics are you choosing, and what are you rejecting, and for what reasons? Under what circumstances would you make different choices?

• Are you pursuing growth aggressively enough? Are you providing the resources necessary for growth?

• What assumptions about healthcare delivery are considered inflexible? Can they be challenged? What would be the benefit of doing so?

• How do your plans compare with your competitors’? What can you do to ensure a sustainable competitive advantage?

• How could you change the market dynamics in your service area over the next 3 to 5 years? What would be the most effective course of action?

• How have your competitors changed market dynamics in your service area in the last 3 to 5 years? What are the most disrupting things they could do in the next 3 to 5 years?

• What approaches and processes did you use to develop groundbreaking strategies?

• How many recipients of healthcare services did you interview? How many stakeholders (payers, community leaders, local employers, etc.)?

• How did you involve healthcare service markets you serve or would like to serve?

• Do you have sufficient resources—both in financial and human capital—to carry out your strategic initiatives?

• Have you ensured a robust leadership pipeline, capable of executing strategy long term?

Source: Adapted from Kaplan, S., & Beinhocker, E. D. (2003). The real value of strategic planning. MIT Sloan Management Review, 44(2), 73.

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MedCath Corp., a Charlotte-based operator of specialty heart hospitals that once had annual revenue of $636 million, filed paperwork to dissolve in September 2012. Why the strategies of this HSO were not sustainable is detailed in Case Study: Rise and Fall of Med- Cath Corporation.

Case Study: Rise and Fall of MedCath Corporation

MedCath was founded in 1988 as a private operator of cardiac catheterization labs. In 1994, it began selling stock to fund an expansion into specialty heart hospitals. By 2003, it owned and oper- ated 13 freestanding heart hospitals throughout the United States (MedCath Corporate profile, n.d.). Its business model was to partner with local cardiologists, cardiovascular surgeons, and other physicians to create facilities focused on delivering care to people with cardiovascular disease. These physicians were often investors and part owners. They helped design and plan the facility and helped manage its operation after it opened.

MedCath targeted areas of the country that did not have certificate of need (CON) laws that might have limited the building of new hospitals. MedCath was able to gain a significant market share for very lucrative, high-margin cardiac procedures (Gibson, 2002).

In 2003, the U.S. Congress put a moratorium on the building of new physician-owned hospitals. This was largely in response to conflict-of-interest criticisms from general hospitals accusing physician-owned hospitals of admitting only the least-sick patients. In addition, there were concerns that physician-owners might be financially incentivized to provide unnecessary services. With this regulatory change, cardiologists and cardiovascular surgeons seeking new business opportunities were left to partner with local hospitals. Some hospitals offered employment contracts to these phy- sicians as a way of maintaining or increasing their cardiac service market share.

The MedCath core business model of physician ownership was no longer a viable growth strategy, so in early 2005 MedCath shifted to a strategy of partnering with hospitals and health systems to help them build new cardiac units or expand their existing cardiac services. This change in strategy was popular with investors, raising its stock from a low of $14 in May 2006 to $31.80 in Septem- ber 2006. New shares offered in 2007 sold at $33.07 (Portillo, 2012).

At the same time, a shift to more outpatient cardiac catheterizations caused the number of inpatient procedures at MedCath hospitals to decline—from 13,417 in 2007 to 10,219 in 2010. Medicare reim- bursement rates for individual cardiac surgeries also declined during this time period. MedCath attempted to diversify from cardiac care by opening two general hospitals, but cardiac care was still its primary revenue source. In 2010, MedCath lost $48 million on $443 million in revenue (Portillo, 2012). Its strategy was clearly not working.

(continued)

© Bob Rowan/Progressive Image/Corbis

Cardiac catheter labs provide a specialized arena for a variety of coronary catheterization procedures, such as angioplasties.

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Case Study: Rise and Fall of MedCath Corporation (continued)

Passage of the Affordable Care Act negatively affected MedCath. The law curtailed the building of any new physician-owned hospitals. In addition, there were strong incentives for more consolida- tion among providers through joint ventures, mergers, and other contractual relationships. Larger systems were better able to negotiate managed care contracts and be part of accountable care organizations. In 2011, the Justice Department launched an investigation of MedCath for improp- erly billing Medicare for implantable cardiac defibrillators (Danner, 2012). MedCath entered into a multi-million dollar settlement agreement with the Department of Justice in September of 2013.

In a 2009 interview, former MedCath CEO Ed French said that “the company needed to diversify into areas such as weight loss, spine and orthopedic surgery and build bigger hospitals if it hoped to survive and expand” (Portillo, 2012, para. 20). This diversification did not occur quickly enough, and MedCath was forced to sell its remaining hospitals and cardiac care practices. The company was dissolved in September 2012 with stockholders expecting to receive liquidation payments totaling $13.18 per share (Portillo, 2012).

Discussion Questions

1. The matrix that is used to determine a competitive-strength index, like the one that deter- mines an industry-attractiveness index, is subjective. The final result depends on the kind and number of factors used in the analysis, how they are weighted, and how the company itself is rated on each of those factors. Discuss some ways of reducing the amount of subjec- tivity present.

2. Are there certain factors, independent of industries, which are perennially more important than others? Which ones and why?

3. Why do managers and executives find it difficult to tell an outsider what strategy an HSO is pursuing? Assuming that they are able to do so, why might their answers be different from one another? How might you address this problem?

4. Should an HSO’s strategies be confidential? Why or why not? 5. Many strategies don’t have core competence as an element, yet having a core competence is

central to maintaining a competitive advantage. How do you reconcile this seeming anomaly?

Value-Chain Analysis

Porter (1985) proposed the value chain as a way to identify and analyze business activi- ties that transform inputs so as to understand how to influence performance and cost. In an industry, say manufacturing, the value chain can be defined in two ways: (1) within a firm, it describes the various value-added stages from purchasing materials to distribut- ing, selling, and servicing the final product (Porter, 1985), and (2) external to the company, it delineates the value-added stages from raw material to end user as a product is manu- factured and distributed, with each stage representing an industry (Abraham, 2006). For convenience, we will refer to them as “internal” and “external” value chains, respectively.

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In service industries, such as health- care, the value-added stages are described differently. Patients are not raw materials that are made into a product that gets distributed. Each patient that comes into the healthcare system has unique characteristics— unlike the materials used to create an automobile. The internal value chain for an HSO starts at the points where consumers access the healthcare ser- vices (e.g., an ambulance company brings a patient to the emergency department) and then moves along a path where, purportedly, value is gained at each step (e.g., the patient receives care in the emergency department). The external value chain encompasses the downstream providers who care for patients after

they leave the organization’s control (e.g., a private physician sees the patient for follow- up after emergency treatment).

The service offerings of an HSO are diverse, with each specialty and disease grouping having a distinct value chain. For example, the internal value chain for an orthopedic clinic involves referrals from other physicians and other sources, such as the emergency department and diagnosis of the orthopedic problem, then a series of treatment choices based on scientific knowledge and evidence-based research, patient choices, and patient condition. These treatments may involve conservative therapy, surgery, rehabilitative ser- vices, or watchful waiting. Some of these treatment options also represent the external value chain for the orthopedic clinic.

In the field of strategic management, the internal value chain is a key concept that has been thoroughly explored; this is not so of the external value chain, which consists of important upstream and downstream processes. Even though these processes occur out- side the HSO, they present a number of strategic opportunities. Consider the following:

• Outsourcing—involves transferring certain primary or support functions in the internal value chain to the external value chain. For example, an orthopedic clinic might outsource transcription services.

• Vertical integration—involves taking control of one or more additional stages of the external value chain and making them internal. For example, an orthopedic clinic might add massage therapy services so patients are no longer referred to another provider for these treatments.

• Horizontal expansion—involves new product lines or expanded channels of distri- bution, including geographic expansion. For example, an orthopedic clinic might open a second facility in another location.

• Strategic alliances with suppliers—involves more closely managing external sup- pliers as if they were part of the organization’s internal value chain, but without

Fuse/Thinkstock

A follow-up appointment by the patient’s primary care physician to adjust the patient’s neck brace may represent part of the external value chain for an orthopedic clinic.

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CHAPTER 5Section 5.4 Competitive Strength, Value-Chain Analysis, and Branding

actually owning them. Healthcare reform is causing many HSOs to look for ways of adding value through various informal and strategic alliances. For example, orthopedic physicians can informally collaborate with nurse practitio- ners and physician assistants working at local drop-in clinics by offering assis- tance if needed and giving presentations on the latest advances in neurology and situations when a specialist referral is advisable.

Gamble, Savage, and Icenogle (2004) proposed the use of value-chain analyses to evaluate the cost benefit of telemedicine applications in rural locations. Their value chain of pri- mary and support telemedicine activ- ities for real-time examinations of patients with non-healing wounds is illustrated in Figure 5.3. The “spoke” is the distant rural provider site, and the “hub” is the central facility where specialists are located.

Figure 5.3: Value chain of primary and support activities for real-time patient examinations, telemedicine business model

Source: Gamble, J. E., Savage, G. T., & Icenogle, M. L. (2004). Value-chain analysis of a rural health program: Toward understanding the cost benefit of telemedicine applications. Hospital Topics, 82, 10–17. Used by permission of the author.

The value chain can be used by HSOs to better understand how to influence performance and cost throughout the activities of service delivery.

Staff at spoke site schedules appointments.

Patient information is transmitted to hub site.

Equipment is prepared at both hub and spoke sites immediately prior to appointment.

Specialist records the examination and transmits treatment plan.

Treatment is given at spoke site.

System Support Activities — Technical support in two locations

General Administration — Billing, accounts receivable, human resources in two locations

© F. Carter Smith/Sygma/Corbis

This telemedicine clinic at the University of Texas allows specialists to prescribe treatment for patients in remote locations in real time.

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Discussion Questions

1. Should value chains be a part of an HSO’s external or internal analysis, or both? Discuss. 2. Can you think of any reason why it might be worth an HSO’s time to analyze any of its value

chains? 3. The external value chain has two main aspects: “upstream” of the organization and “down-

stream.” Can you think of any situation where the upstream part of an HSO’s external value chain affects the downstream side or vice versa?

4. Can you think of any reason why it might be worth an HSO’s time to analyze any of its sup- pliers’ or customers’ value chains?

5. To what extent might pursuing a strategy of high-quality patient care involve an HSO’s inter- nal or external value chain?

6. How could a public health department use value-chain analysis to improve its services to people in the community?

Value-chain analysis is a good tool for getting everyone on the same page. The planning efforts become centered on the key issues of where to go and what to do by asking and answering the following questions:

• Who exactly are our healthcare consumers? • What are our consumers’ current “value” needs, and do they have related needs

that we could take care of? • When do these related needs arise and where? • How are these related needs currently met, and who meets them? • Where and when can consumer “value” be created? • Who should be involved in creating this value? (Walters & Jones, 2001)

Ultimately, this discussion leads to the question of what business an organization is in and where its strategic efforts should be directed.

Brand Reputation, Equity, and Loyalty

A brand is a reputational asset, the result of pursuing a differentiation strategy (see Chap- ter 3) for a considerable number of years and creating loyal customers. Unfortunately, as an intangible resource, it remains largely invisible in an organization’s balance sheet. A major reason why publicly traded HSOs have higher stock-market valuations as compared to their balance sheet valuations (book value) is the overt value of their brand (Grant, 2008).

Companies like Proctor & Gamble have 52 brands of beauty and grooming products and 46 brands of household-care products, each of which has a different budget, target custom- ers, and specific competitors. Most HSOs would want only one brand that covers all ser- vices; like Sony, Amazon.com, or Apple, they have one brand for all products. Promoting the whole HSO as a brand benefits all its services, which means that whenever a consumer interacts with that HSO, the experience will be “protected” by the same brand promise. For example, Access Sports Medicine and Orthopaedics promises to provide the highest qual- ity of care in the most convenient manner possible (http://www.accesssportsmed.com).

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Access has clinics in Exeter, Portsmouth, Raymond, and Plaistow, New Hampshire and also has a walk-in injury clinic, MRI and imaging center, occupational therapy services, athletic and sport enhancement training facilities, and other related services that all share the Access name (Access Walk-In Injury Clinic, 2013).

In Chapter 1, we learned that brand equity is the power of a brand to influence purchases and loyalty. It is a measure of the value of a brand and can, in fact, be quantified: One takes a brand’s annual sales volume and multiplies it by the price premium attributable to the brand, thereby calculating the net present value of this revenue stream (Grant, 2008). Given this formula, it is easy to see how brand equity or strength can erode over time. Either the price premium or total sales of the brand declines as a result of competition, or because the discount rate used in the net present value computation increases as a reflec- tion of a more difficult business climate in the future.

A strong brand also has a real effect on its target customers. Brand loyalty is customers’ repeated preference for either particular branded products or any product of a branded company (Jones & George, 2007). Healthcare consumers in rural or midsize communities might view local practitioners as inferior to the brand of “big city specialists.” Building consumer confidence in the quality of care at the local level is important to retaining cus- tomers. In urban locations, healthcare markets are more competitive. HSOs in these areas will want consumers to bond with their facilities—seeing them as a source of health edu- cation and supportive of wellness initiatives. If rivals in a particular geographic area are all branded and enjoy considerable brand loyalty, then new entrants will find this a major barrier to entry, requiring huge advertising costs and considerable time to build consumer awareness and, finally, loyalty.

Consumer-Value Proposition

As discussed in earlier chapters, a consumer-value proposition is a succinct statement summarizing why consumers you are targeting should receive healthcare services from

you and not your competitors. The unique value offered includes a mix of elements that could be quantita- tive (like price, speed, or quality of service) or qualitative (like amenities or customer experience). The stron- ger or more persuasive the organiza- tion’s consumer-value proposition is, the stronger its brand and the more loyal its consumers will be.

The following are some possible ways in which an HSO can create value for its consumers (Osterwalder & Pigneur, 2010). Some of these examples will quickly erode if it is easy for competitors to emulate.

BSIP/UIG/Getty

Patients can now experience cataract surgery without the use of bladed tools traditionally used for this procedure. HSOs offering consumers this option may have a competitive advantage.

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Discussion Questions

1. Some HSOs believe they will retain their “brand leadership” for many years, a dangerous assumption. Increasingly, consumers are finding it difficult to distinguish among competing healthcare service facilities. What type of resources are brands? Could a brand ever be the ultimate competitive weapon for an HSO?

2. Could a brand ever be an HSO’s weakness? Why or why not? 3. Consumer loyalty is more than just repeated use of healthcare services. Do you agree? Why

or why not? 4. Enterprise Rent-A-Car asks customers two questions: What is the customer’s rental experi-

ence, and how likely is the customer to rent from the company again? Are questions like this enough for HSOs to ask of healthcare consumers? Can you think of other questions that would help an HSO determine the extent of consumers’ loyalty?

5. What organizational capabilities are needed to develop consumer loyalty? 6. To what extent does consumer loyalty materially add to the value of an HSO’s brand? 7. Brand identity is how an HSO wants its consumers to perceive the organization, while brand

image is the consumer’s mental image of the brand. If they are different, how can the orga- nization reconcile them?

• Newness—for example, new technology such as a service that is the first of its kind in the geographic area, like 3-D mammography and bladeless cataract surgery.

• Performance—exemplary results for measures of quality and patient safety. • Customization—including recent trends like tailoring the availability of health

services to match consumer needs. • Reliability—reducing the risk of medical errors. • Design—hard to measure, some HSOs nevertheless succeed because their facility

design appeals to consumers. • Brand/status—from being named as winner of the Baldrige Quality Award to

being recognized as an employee-friendly place to work. • Price—although this aspect of a transaction may not be what healthcare recipi-

ents actually see, low costs can influence whether a health plan includes the HSO in its provider panel.

• Cost reduction—health plans and self-insured employers in particular will pur- chase healthcare services that can help them lower their costs, if they can realize significant savings for wellness care or case management, for instance.

• Accessibility—being able to use a service hitherto inaccessible to healthcare con- sumers, like secure, Web-based patient portals that allow consumers access to their health records or medical applications for smartphones.

• Convenience—making it easy to use, like 24-hour drop-in clinics or hospitals offering free concierge parking.

In conclusion, some major outcomes of a successful differentiation strategy are to enhance an HSO’s brand image, increase its brand equity, create strong brand loyalty, and help the organization achieve sustainable and growing profits. The challenge in assessing brand reputation, equity, and loyalty is to get consumers’ input as well as top management’s, and to have in place a system for tracking brand equity and brand loyalty so that neither erode. It is also impossible to have a strong brand without a compelling consumer-value proposition.

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Summary & Resources

Chapter Summary

• An internal analysis of an HSO entails arriving at a shared understanding among the team involved in formulating strategy. An essential first step is assessing the HSO’s financial performance and condition to see whether there are any financial problems that might affect its ability to fund its strategic initiatives in the near future. This requires an examination of its recent history by way of multiyear income statements and multiyear balance sheets. Benchmarks of key financial ratios can aid in this analysis.

• Conducting a SWOT analysis takes into account the HSO’s strengths, weaknesses, opportunities, and threats. It is beneficial to determine strengths and weaknesses compared to previous years and also with current competitors.

• The internal analysis must also include an assessment of the HSO’s breadth of capabilities to judge whether any of them gives the organization a strategic advantage. Each capability has to be tested against criteria of being valuable, rare, costly to imitate, and nonsubstitutable (having no strategic equivalent) to be considered a core competence and hence give the HSO a sustainable competitive advantage.

• To be a strong competitor in an industry, a core competence is highly desirable. HSOs that do not have a core competence should try to acquire one. If they do have one, they should make great efforts to make sure it does not erode.

• A value-chain analysis provides knowledge of an HSO’s internal activities that encompass provision of healthcare services. Value-chain analysis informs deci- sions whether to outsource any activities as well as whether to bring into the organization any part of the external value chain (upstream and downstream).

• Brand reputation is the consumer’s perception of what the HSO is promising. Dimensions of that are its brand equity, which should be preserved or increased, and how loyal its consumers are. The consumer-value proposition is a statement of why people should seek healthcare services from your organization instead of from competitors.

Web Resources http://www.clevelandclinic.org/innovations/ On the website of Cleveland Clinic Innovations, you can learn more about the process of joint venturing to provide new healthcare products and services.

http://runningahospital.blogspot.com/ This is a blog by a former CEO of a large Boston hospital aimed at sharing thoughts about hospitals, medicine, and healthcare issues.

http://www.hret.org/guides-reports/ On this website, you will find multiple action guides to accelerate and support perfor- mance improvement and healthcare reform initiatives, including A Guide to Strategic Cost Transformation in Hospitals and Health Systems (March 2012). The site is sponsored by the Health Research & Educational Trust of the American Hospital Association.

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http://www.orpricepoint.org This website provides basic, hospital-specific information about hospital services and charges in Oregon.

http://www.sdpricepoint.org This website provides basic, hospital-specific information about hospital services and charges in South Dakota.

http://www.utpricepoint.org This website provides basic, hospital-specific information about hospital services and charges in Utah.

http://www.whynotthebest.org This website, created and maintained by The Commonwealth Fund, is a free resource that enables organizations to compare their performance against that of peer organizations, against a range of benchmarks, and over time.

http://www.wipricepoint.org/ This website provides basic, facility-specific information about healthcare services and charges in Wisconsin.

Key Terms balance sheet A “snapshot” at a point in time (usually midnight on December 31 or whenever a company’s fiscal year ends) that presents a financial picture of a com- pany’s assets and the proportion in which those assets are financed through debt and equity (prepared according to GAAP).

current assets Resources most likely to be used within the year.

current liabilities Short-term obligations to outside parties.

Financial Strength Index (FSI) A score that reflects an HSO’s overall financial condition by considering four dimensions: profits, liquidity, debt expense, and age of physical facilities.

G.E. (General Electric) matrix A two- dimensional diagram of industry attrac- tiveness against competitive strength that forms a guide as to whether to invest and build or harvest and exit an industry.

income statement A financial summary of a company’s operations over the previous 12 months, prepared according to GAAP.

net assets Difference between assets and claims to those assets by third parties or liabilities.

noncurrent assets Assets expected to be of use for longer than one year.

noncurrent liabilities Long-term obliga- tions not due within one year.

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opportunity In a SWOT analysis, a way to improve the organization’s situation that includes a service the organization offers and a defined consumer group at which the service is targeted.

strengths In a SWOT analysis, special capabilities or expertise, things a com- pany does well that have enabled it to be successful to this point, and how it has prepared itself to compete in the future. Comparing a company’s strengths against competitors’ provides a more realistic assessment of them.

SWOT analysis An evaluation of an orga- nization’s strengths, weaknesses, opportu- nities, and threats.

threats In a SWOT analysis, external trends or forces that adversely affect the organization. Internal threats are known as weaknesses in SWOT.

value chain The various stages in which value is added, both inside and outside an organization; the business activities that transform inputs. Analyzing the value chain is important so as to understand how these activities influence performance and cost.

weaknesses In a SWOT analysis, prob- lems that need to be corrected, deficien- cies recognized through a comparison with competitors, or deficiencies relative to proposed strategies (e.g., not enough resources to grow). Weaknesses are internal.

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