Examining Market Research Strategies (Kindly read attachment)

6 Developing Strategic and Operational Plans

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To mean well is nothing without to do well. —Plautus

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Learning Objectives

After reading this chapter, you should be able to do the following:

• Identify strategy concepts, including the components of organizational strategy; generic strategies; diversi- fication, integration, and implementation strategies; and blue ocean strategy.

• Describe the use of strategies for large, multiunit organizations, including the use of the Boston Consult- ing Group matrix to discern strategic implications from the analysis of existing operations, and the use of product/market expansion strategies and diversification strategies for organizational growth.

• Discuss tactical issues that are relevant to pursuing participation in a managed-care network.

• Delineate the factors that influence the selection of a strategy by an organization.

• Explain how operational plans support strategic plans, and describe how operational plans are developed.

Section 6.1Strategy Concepts

Introduction After developing a set of objectives for the time period covered by the strategic plan, the strat- egy necessary for accomplishing those objectives must be formulated. First, planners must design an overall strategy, and then define the operating details of that strategy as it relates to providing services, promoting operations, determining locations, and increasing revenue sources. This chapter introduces the concept of strategy, and describes strategy elements, approaches to strategy development, and how operational plans support strategic plans.

6.1 Strategy Concepts The word strategy has been used in a number of ways over the years and especially so in the context of business. As we discussed in Chapter 2, strategy means leadership and may be defined as the course of action taken by an organization to achieve its objectives. It is a description first in general terms and then, in increasingly greater detail, of the activities the organization will undertake to meet its goals and fulfill its ongoing mission. Strategy is the catalyst or dynamic element of managing that enables a company to accomplish its objectives.

Strategy development is both a science and an art, a product of both logic and creativity. The scientific aspect deals with assembling and allocating the resources necessary to achieve an organization’s objectives with emphasis on matching organizational strengths with envi- ronmental opportunities, while working within cost and time constraints. The art of strat- egy is mainly concerned with the effective use of resources, including motivating people to make the strategy work, while being sensitive to the environmental forces that may affect the organization’s performance and maintaining the ability to adapt the HCO to these chang- ing conditions.

Components of Organizational Strategy The focus of strategy varies by the planning level: the organization as a whole or a unit within the organization. However, we can identify five components of strategy that define strategy at each level. The following list provides descriptions of these five components.

1. Scope. The scope of an organization refers to the breadth of its strategic domain— the number and types of locations, services offered, and market segments it com- petes in or plans to enter. Decisions about an organization’s strategic scope should reflect management’s view of the firm’s vision, mission, and value discipline. This common thread among its various activities and product/markets defines the essen- tial nature of what its business is, what it should be, and how it contributes value to its customers.

Section 6.1Strategy Concepts

2. Goals and objectives. Strategies should detail the desired levels of accomplish- ment for one or more dimensions of performance—such as volume growth, profit contribution, return on investment, and customer satisfaction—over specified time periods for each of those service areas and for the organization as a whole.

3. Resource deployments. Every organization has limited financial and human resources. Formulating a strategy also involves deciding how those resources are to be obtained and allocated—across locations, services offered, market seg- ments, functional departments, and activities within each business or product/ market.

4. Identification of a sustainable competitive advantage. The heart of any strategy is a specification of how the organization will compete in each service arena and prod- uct/market within its domain. How can it position itself to develop and sustain a competitive advantage over current and potential competitors? To answer such questions, managers must examine the market opportunities in each unit and prod- uct/market and the company’s distinctive competencies or strengths relative to its competitors (that is, its differential advantage). Real competitive advantages exist only when all four qualifying conditions are met.

5. Synergy. Synergy exists when the organizational units, product/markets, resource deployments, and competencies complement and reinforce one another. Synergy enables the total performance of the related businesses to be greater than it would otherwise be: the whole becomes greater than the sum of its parts.

Generic Strategies Strategy options are the alternative courses of action evaluated by management before a com- mitment is made to a specific course of action, which is eventually outlined in the strategic plan. Thus, strategy is the link between objectives and results. Designing strategies is a pro- cess that involves (a) identifying strategic options, (b) assessing options, and (c) selecting the most appropriate strategy or strategies (“1993—A boom year,” 1993). Most companies have growth as one of the basic objectives, so one area of strategy development revolves around the question of how growth will be obtained.

For the most part, an HCO can use one of the following four basic, or generic, strate- gies to accomplish its objectives. The two primary strategies are broad differentiation strategy and focused differentiation strategy. However, with pressures from payers and competitors now forcing an increased emphasis on cost containment in the deliv- ery of health services, overall low-cost strategy has also become a basic and necessary competitive strategy that applies to overall cost leadership. A fourth generic strategy is focused low-cost strategy, which is a low-cost strategy that focuses on cost leadership for a particular service or segment. In any case, the strategy selected must be an outgrowth of the organization’s basic vision and mission. The four different generic strategies are depicted in Figure 6.1.

Section 6.1Strategy Concepts

Figure 6.1: Generic HCO strategies

Any of these four generic strategies, whether broad or focused, can be used to accomplish objectives and achieve results.

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Source: Adapted from Gamble, J. E., and Thompson, A. A. Jr., Essentials of Strategic Management: The Quest for Competitive Advantage, McGraw-Hill-Irwin, 2009, p. 36.

Broad Differentiation Strategy This strategy differentiates an HCO from other HCOs. An HCO that pursues this strategy sees that an important aspect of being able to fulfill its mission involves cultivating the perception of uniqueness in the minds of its service recipients and sponsors regarding the HCO’s services or products. In a sense, this means building brand loyalty so that when patients or potential patients think of a certain service, their first thought is of that HCO.

For many HCOs, the broad differentiation strategy takes the form of several distinct services, each targeted to meet specific needs of patient groups in the HCO’s service area. For example, a medical group practice specializing in orthopedic services could consider expanding the number of programs it offers.

This medical group practice might seek to set itself apart from its peers in the eyes of patients by offering natural extensions of its current operations. Physical therapy, outpatient rehabili- tative medicine, or sports medicine services could be added to the practice as part of a con- tinuum of services for its patients. The patients would benefit from the close coordination of services and the convenience of multiple services, under one roof. The medical group practice would benefit from several additional sources of revenue.

By developing a reputation for high quality in programs such as these, an HCO can come to be associated in a positive way with certain types of needs for a broad cross section of the community. Becoming synonymous with quality services in the public’s mind can enhance

Section 6.1Strategy Concepts

the diversity and intensity of sources of revenue generation. The end result of such differen- tiation is a greater capability to fulfill the HCO’s mission mandate in terms of its patient and client needs.

For example, by using survey results to identify what was important to its patients, Cleve- land Clinic improved areas such as room cleanliness, the medical staff ’s communication with patients, and even the hospital’s noise level at night. These differentiating factors improved the hospital’s overall satisfaction rating from the 55th percentile to the 92nd percentile for all major hospitals in the United States in just four years (Merlino & Raman, 2013).

Focused Differentiation Strategy An HCO can also pursue its objectives by using a focused differentiation strategy. This strategy concentrates on a single service or a category of very similar services offered by an HCO that meets the needs of a specific group of patients/clients but still seeks to differentiate the HCO from its competition.

The Recreation Center for the Physically Limited employs a focused differentiation strategy. This center’s services are highly specialized: providing recreational activities as a means of enhancing the growth and well-being of its clients.

This center’s service recipients are tightly defined as well. Recreational opportunities are provided for the physically handicapped, excluding children under the age of five. Using a focused differentiation strategy, the recreation center seeks to fill a service gap for the physi- cally challenged in its community.

The main advantages of a focused differentiation strategy include (a) capitalizing on the dis- tinctive competencies of the people involved and (b) concentrating on doing one thing well. These advantages can also create a knowledge base of how to carry out certain types of pro- grams and improve efficiency in performing the services. An example of a focused differentia- tion strategy is in-home pharmaceutical services offered to non-mobile patients. The chosen segment must be big enough to justify the investment and operating costs for serving the segment. For for-profit organizations, it must also be a profitable segment to serve.

Low-Cost Leadership Strategy Another fundamental method for achieving objectives is a low-cost leadership strategy, which can involve either an overall low-cost strategy or a focused low-cost strategy. The hallmark of the low-cost leadership strategy is a major emphasis on efficiency. By keeping the lowest costs among providers in the HCO’s target region, the organization is effectively positioned to attract and maintain service recipients on the basis of low pricing. The HCO is also better positioned to match other providers’ pricing strategies for extended periods, as competitive bidding for major contracts becomes a way of life in a managed-care industry environment.

The use of the low-cost leadership strategy has its challenges. Because the HCO is competing basically on price, the organization must have a clear understanding of its costs for rendering its services. Administrative and indirect costs must be kept to a minimum. With the use of the

Section 6.1Strategy Concepts

low-cost leadership strategy, the services offered by an HCO focus more on the fundamentals and less on the frills. In the face of price competition, differences between costs and rev- enues—margins—are typically reduced with this strategy, making higher volumes necessary to maintain operating surpluses. All this requires an excellent management information sys- tem to track actual costs of care and revenues generated. An overall low-cost strategy could be adjusted for a focused low-cost strategy if lower costs are achieved for a particular service or segment in which the HCO competes with others that offer similar services. An example of a focused low-cost strategy is My Dentist Complete Care Dentistry, which is a family of dental practices in Arkansas, Kansas, Missouri, Oklahoma, and Texas. My Dentist, which was founded in 1983 by Pat Steffen, DDS, offers cleaning and exams for $39 and charges $99 for an extrac- tion. Costs are kept low at My Dentist, while patients are provided with quality care, because several dentists operate out of the same facility, using a single receptionist, insurance proces- sor, and shared equipment.

Some of the low-cost leadership strategy’s operational demands, such as large service vol- umes, are beyond the capabilities of many stand-alone HCOs. Those HCOs sometimes require integrated relationships with other providers, which will be either peers (horizontal integra- tion) or organizations that provide other spectrums of care (vertical integration).

Diversification Strategies Several strategy options may supplement or complement the basic, or generic, strategy cho- sen by an HCO. These strategy options are usually referred to as diversification strategies, and they may take many forms. Great care must be exercised in embarking on the usage of these strategies because the use of some of them involves entering a new business, which the HCO may not be administratively or financially prepared to manage. Summaries follow for diversification strategies that include (a) integration strategies, as well as strategies for imple- menting integrated relationships, or implementation strategies, which include (b) strategic alliances, (c) joint ventures, and (d) mergers/acquisitions.

Integration Strategies Integration strategies take two basic forms: horizontal integration and vertical integra- tion. Horizontal integration strategies take the form of alliances between providers of similar services, such as hospital groups. Vertical integration refers to the major addition of services closer to the client (forward vertical integration), such as when a nursing home decides to add home health services. It may also mean backward vertical integration, where the added services move away from the patient toward suppliers, such as in the case of a large regional hospital that contracts management services out to a small rural hospital, hoping to draw patient referrals that require more sophisticated treatment.

Achieving these integrated relationships can be accomplished through a number of imple- mentation strategies. These implementation strategies include strategic alliances, joint ven- tures, and mergers/acquisitions.

Section 6.1Strategy Concepts

Strategic Alliances Alliances are loose relationships among providers to achieve certain common goals. While contractual relationships are common, there is no exchange of ownership or loss of ultimate local autonomy. The organizations combining forces typically are not directly competing within a region.

Strategic alliances seek some of the economies of scale required by the cost leadership strat- egy by standardizing, for example, certain aspects of their operations and combining their purchasing power. These moves provide added negotiating clout with suppliers of equipment and materials as well as with suppliers of specialized consulting and health program services. One such alliance is VHA, Inc. VHA member facilities enjoy such benefits as purchasing dis- counts, access to consultants on operational issues, and architectural services, among others.

HCOs may develop these alliances with suppliers to have an assurance of supplies and to achieve priority in order fulfillment with suppliers. For example, a hospital may form an alli- ance with an emergency care organization to staff their emergency rooms instead of hiring their own physicians. These emergency-care providers usually provide separate patient bill- ing and collection for rendered services.

Joint Ventures In joint ventures, which are more formalized versions of strategic alliances, two HCOs seek, in various ways, to combine strengths and overcome the weaknesses of their respective organizations, often with some exchange or pooling of management control of the venture. HMOs are a prime example of this technique. Physician groups and hospitals combine forces, allowing the medical groups to better compete on a price basis where services and risks are spread over larger, combined patient volumes. The hospitals benefit by solidifying their patient referrals and gaining additional control over the costs of care. In this vertical relation- ship, both entities are better positioned to bid competitively for the health services of large employee groups.

Another example of joint ventures involves large, urban hospitals providing management contracts and specialist physicians for smaller, rural hospitals. For example, DeSoto Regional Health System in Mansfield, Louisiana (population 5,027) is a 38-bed acute-care hospital. While the hospital is locally owned by the DeSoto Regional Foundation, management is pro- vided by Willis-Knighton Health System of Shreveport, Louisiana, whose flagship hospital is a 902-bed general medical and surgical center.

Mergers/Acquisitions Mergers/acquisitions, or merger arrangements, take the joint venture a major step further. Here, as in the joint venture, two organizations seek to do better, together, what they had been doing alone. With the merger/acquisition, however, the separate organizations become a single entity through some exchange of ownership. Typically, the conditions driving such a major ownership change portend dramatic, and often negative, consequences, if ignored. Market share, profitability, and organizational viability often are threatened without some major operational changes.

Section 6.1Strategy Concepts

By combining resources and ownership, HCOs hope to achieve greater efficiency through a reduction in service duplication, improved and enlarged geographic coverage, larger volumes of care, and improvements in other critical operational aspects. An example is Health Net’s and Qual-Med’s $775 million merger in 1993 (H&HN Daily Display, 2013). The combining of their resources produced California’s largest, proprietary managed-care organization, with 1.1 million enrollees.

Despite these potential benefits, successful mergers are difficult to achieve. Autonomy and managerial control are not given away lightly. Even where this transition is successfully negotiated, mergers often run afoul of the differences in organizational cultures between the merging partners. The differences can be so profound and the personalities of the organiza- tions so entrenched that mergers have failed to achieve anticipated results on this basis alone.

One trend in mergers involves joint ventures of for-profit hospitals with academic medical centers. For example, LifePoint Hospitals, Inc., which is a publicly traded company with 51 hospitals, has a joint venture agreement with Duke University Health System. Similarly, Health Management Associates has joint ventures with the University of Florida and the University of Mississippi Medical Center, while the Biomedical Research Foundation Holding Company operates LSU Health Sciences Center in Shreveport, Louisiana (Blackmon, 2013) and a satel- lite institution in Monroe, Louisiana (Weiner, 1994).

Acquisitions do not result in a new entity, but the acquiring HCO does use its name on the newly acquired organization. The acquired organization may be left intact administratively, with more general oversight provided by the parent organization, or the parent organization may staff the acquired organization with its own administrators.

Using a low-cost leadership strategy in an environment dominated more and more by man- aged care means partnering among service providers. The higher overhead of stand-alone organizations, the substantial financial risks of mistakes in capitation expense and revenue estimates in making competitive bids, and the bargaining power with clients and suppliers of larger competitor groups make it very difficult for individual providers to effectively imple- ment a cost/price leadership approach by themselves. Alliances, joint ventures, or mergers/ acquisitions can provide a means for maintaining organizational viability in the fast-changing healthcare environment.

Blue Ocean Strategy In their groundbreaking work, Blue Ocean Strategy, Kim and Mauborgne (2005) describe another approach to strategy that does not rely on the traditional low-cost leadership, broad differentiation, or focused differentiation strategies. Instead, Kim and Mauborgne (2005) suggest that industry assumptions be questioned and that firms look for areas where demand can be created and competition does not exist. They call such competitive spaces blue oceans. Blue oceans create demand, rather than fight over it. In contrast, red oceans represent all the industries in existence today that compete for the same customers (or patients), using the traditional low-cost leadership, broad differentiation, or focused differentiation strategies. Outperforming the competition in one or more of these areas is the goal of a blue ocean strategy (Kim & Mauborgne, 2004). Table 6.1 clarifies the differences between red and blue ocean strategies.

Section 6.1Strategy Concepts

Table 6.1: Red ocean strategy versus blue ocean strategy

Red ocean strategy Blue ocean strategy

Compete in existing market space Create uncontested market space

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture new demand

Make the value/cost tradeoff Break the value/cost tradeoff

Align the whole system of a company’s activities with its strategic choice of differentiation or low cost

Align the whole system of a company’s activities in pursuit of differentiation and low cost

Source: Kim, W. C, & Mauborgne, R. (2004). Blue ocean strategy. Harvard Business Review, (October), 76–84.

Blue ocean strategy involves increasing the value proposition for the customer while simul- taneously lowering costs, thus creating a new value curve, or relationship between perfor- mance of activities and the value received by consumers in relation to competitors. Kim and Mauborgne (2005, Spring) suggest that firms reference the following four questions, which are known as the Four Actions Framework, when they begin to develop a blue ocean strategy:

1. Which of the factors that the industry takes for granted should be eliminated? Rationale for this question: The problem many industries face is that certain accepted practices no longer add value for the consumer, yet everyone performs these activities and competes with each other on the basis of these activities.

2. Which factors should be reduced well below the industry’s standard? Rationale for this question: In many cases, firms have overdesigned products or services in their zeal to compete. The result is a product or service that offers more than customers want and that adds needlessly to cost.

3. Which factors should be raised well above the industry’s standard? Rationale for this question: The goal here is to eliminate the compromises custom- ers are forced to make.

4. Which factors should be created that the industry has never offered? Rationale for this question: This question forces the firm to look at entirely new value for customers and, thus, to create new demand (Kim & Mauborgne, 2005, Spring).

Consider the following example of the use, in effect, of a blue ocean strategy by a healthcare company. Danish insulin producer Novo Nordisk examined the insulin industry and noticed that the target market for insulin was patients’ doctors. The idea was that the doctor had the most influence on which insulin the patient purchased. Doctors, for their part, wanted access to a purer form of insulin. The 1980s saw a great deal of progress on this front; now every- one’s insulin was of comparable quality. As a result, insulin suppliers had no way of effectively competing on the basis of the product’s quality.

Novo Nordisk’s solution was to break with the industry standard by shifting its marketing from doctors to the patients themselves. The company explored how insulin was sold in vials; patients faced the challenge of dealing with syringes, needles, and the insulin itself. In 1985, Novo Nordisk developed the NovoPen. The device, which looked like a fountain pen, allowed

Section 6.2Strategies for Large Multi-Unit Organizations

the patient to administer the insulin with one click and contained a week’s worth of the drug. Following this innovation, vials, syringes, and needles were eliminated. By 1989 the com- pany had developed the NovoJet—a disposable device even easier to use than the NovoPen. In 1999, the Innovo came along, with a built-in memory that told the patient the amount of the dose, the amount of the last dose, and the time between doses. In 2010, Novo Nordisk came out with the NovoLog for type 1 diabetes.

By adopting a blue ocean strategy, Novo Nordisk became a diabetes care company rather than just an insulin producer. The company’s innovations transformed the insulin indus- try. Prefilled insulin devices are the primary way insulin is delivered to diabetes patients today. Novo Nordisk commands 60% of the insulin market in Europe and 80% in Japan (Gabel, Liston, Jensen, & Marsteller, 1994).

6.2 Strategies for Large Multi-Unit Organizations As companies become more diversified and complex, the industry analysis that is useful to a single organizational unit operating in one industry becomes less meaningful because of multiple businesses operating in multiple industries. For example, a large medical equipment manufacturer may have several divisions catering to different healthcare providers, such as dentists, physicians, hospitals, and so forth. Each market has its own characteristics and spe- cialized equipment needs that should not be lumped together for analysis.

The Boston Consulting Group Matrix The Boston Consulting Group created a matrix that is a useful tool for analyzing existing oper- ating units or divisions of a large, complex organization. Using this matrix involves the clas- sification of operating units or services into one of four cells, based on relative market share and the growth rate of the market. Relative market share is an organization’s share of a given market compared to competitors’ shares. The growth rate of the market is the annual increase in revenues/patients in a market. The classification of a unit into one of the four cells has strategic implications for each of the units. The Boston Consulting Group (BCG) matrix is shown in Figure 6.2.

Stars are operating units that generate growth for the organization. They are in service areas that have a high growth rate, and they have a relatively high market share. Stars may require large infusions of cash to keep up with market growth. When the market for these units matures and market share is retained, stars become cash cows. Cash cows are operat- ing units with a relatively high market share, but they serve a market that is not growing rapidly. They provide the cash flow for the stars and the resources to fix question marks. Cash cows must be kept healthy and may require some reinvestment to maintain that health. Question marks are operating units that are in a rapidly growing market but have a rela- tively low market share. If successful strategies are put in place, question marks have the opportunity to become stars. Dogs are operating units with a relatively low market share in a low-growth market.

Section 6.2Strategies for Large Multi-Unit Organizations

Figure 6.2: The Boston Consulting Group matrix

The matrix can be used to classify existing operating units or services of an organization.

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Source: Adapted from The Boston Consulting Groups. http://www.bcg.com/about_bcg/history/history_1968.aspx

One way to think about strategies for these four different types of operating units is to envi- sion a finance window with a line of business unit managers lined up to ask for money. Which ones should you give money to, if any? What amount of money should each manager receive to use in his or her specific unit? The BCG matrix would offer the basic strategies shown in Figure 6.2 to these operating units.

Basic Strategies for These Units Based on the classification in the BCG matrix, there are strategy implications for each of the four quadrants of the matrix, which are shown in Figure 6.2. These strategy implications are overall for the business units, but should not be applied to every unit in an HCO. Some units, such as Imaging, may not generate enough revenue to cover all costs (a dog) but are still nec- essary for the operation of other profitable units.

Section 6.2Strategies for Large Multi-Unit Organizations

Growth Strategies Most organizations have a desire to grow. Growth: (a) provides opportunities for employees to advance in the organization, (b) creates a bigger impact in the market, and (c) may increase an organization’s profitability. In addition to the strategies derived from the BCG matrix, other strategy alternatives can be used to help the stars grow and the cash cows continue to keep their market share.

While there are many possible growth strategies, this chapter will discuss the following two:

1. Product/Market Expansion Strategies: market penetration, product/service develop- ment, and market development

2. Diversification Strategies

These growth strategies are illustrated in a 2×2 product/market growth matrix, which is shown in Figure 6.3.

Figure 6.3: Product/market growth matrix

Each strategy involves different types of growth opportunities. Growth benefits an organization by providing opportunities for employees, the ability to impact the markets, and opportunities to increase profit.

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Source: Adapted from H. I. Ansoff, Product/Market Opportunity Matrix from Strategies for Diversification, Harvard Business Review, 3, No. 5 (September–October 1957), p. 113–124.

Section 6.2Strategies for Large Multi-Unit Organizations

Product/Market Expansion Strategies Product/market expansion strategies involve the following growth opportunities: (a) pen- etration of existing markets with existing products, (b) development of new products aimed at existing markets, (c) development of new markets for existing products, and, finally, (d) development of new products aimed at new markets (diversification). Each of these stra- tegic options carries with it advantages and risks as far as management is concerned.

In a market penetration strategy, management has the advantage of both product knowledge and knowledge of existing markets. The obvious disadvantage is the fact that the products will eventually pass through various product life-cycle stages, ending with sales decline and extinction.

With a product/service development strategy, management has the advantage of knowing the market it is dealing with because the products or services are aimed at existing markets. A disadvantage for management is the lack of product or service knowledge.

When a market development strategy is used, product knowledge is the advantage, while a lack of market knowledge is the disadvantage.

When a diversification strategy is used, managers are under the most strain. They have nei- ther product knowledge nor market knowledge as an advantage, so they must quickly acquire this knowledge or rely on hiring managers or on finding companies that already possess the sought-after product and market knowledge.

A brief summary follows for each of the following three product/market expansion strategies, which are shown in Figure 6.3 and which focus on growth though (a) reaching the same mar- kets with new products, (b) reaching new segments, or (c) sampling increasing usage from existing segments.

Market penetration is a strategy that involves growth through increasing sales of existing products in existing markets. This expansion of sales can come about by (a) altering pur- chase patterns of existing customers—getting them to buy more when they purchase, or to purchase more frequently; (b) attracting nonusers to purchase the product; and (c) attract- ing purchasers of competitors’ products to switch, thereby increasing market share. Alterna- tives (a) and (b) involve increasing the total size of the market, while alternative (c) involves increasing market share.

Product/service development is a strategy of increasing sales through the introduction of new products and services to existing markets. Product development involves altering existing products and services by (a) adding new features, (b) offering different quality levels, or (c) offering different sizes of the product.

Market development is a strategy that entails offering existing products to new markets. These markets can be (a) new geographical markets, such as foreign countries; or (b) new market segments not currently using the product.

Section 6.2Strategies for Large Multi-Unit Organizations

Diversification Strategies Diversification strategies, which have been previously discussed in this chapter, are a final strategic alternative for growth. Diversification entails introducing new products into new markets or acquiring firms that are already engaging in business opportunities with those new products or markets. Diversification strategies can take various forms. The most com- mon forms for diversification strategies are: (a) product/technology-related, (b) market- related, and (c) non-product/non-market-related. Diversification strategies may involve stra- tegic alliances, joint ventures, or mergers/acquisitions. Diversification strategies are the most difficult strategies to implement because the organization seeking growth may have little or no knowledge of the new market or the new product or service. An example of this type of situation might be a clinic that decides to enter the home health market, which is a transac- tion that requires new staff, new services, and knowledge of new regulations.

Integrative Diversification Strategies Another diversification growth strategy involves the integration of activities within an HCO’s current industry. The three alternatives for this type of growth are: (a) forward integration, (b) backward integration, and (c) horizontal integration.

Forward integration as a growth strategy means that the company looks “down” the channel of distribution to the next channel members who currently represent a customer type. For example, a manufacturer who “looks down the channel” sees either wholesalers or retailers as the next channel member. Thus, forward integration takes the form of expanding—inter- nally or through acquisitions—by the company taking over wholesaling or retailing functions.

Backward integration as a growth strategy seeks growth through the ownership of com- panies that are “up the channel,” such as companies that are suppliers of products or raw materials. For example, a hospital might buy out a supplier of gowns or other supplies that it uses in its operation.

Organizations that do not want to acquire other organizations through forward or backward integration, both of which are a form of vertical integration, can accomplish some of the bene- fits of vertical integration through a concept called supply chain, or value chain, management. This involves focusing on managing the relationship among the entire sequence or chain of suppliers that are involved in creating or delivering a product. This process affects relation- ship with upstream suppliers and downstream users.

Effective supply chain management can create a competitive advantage for a marketer through the following means:

• Increased innovation • Decreased costs • Improved resolution of conflict among chain members • Improved cooperation among members

Horizontal integration as a growth strategy seeks growth through the ownership of com- petitors. This strategy involves identifying and acquiring firms that are in competition with the company seeking growth, and it is a commonly used strategy in the healthcare industry.

Section 6.4Factors Influencing Strategy Selection

Horizontal growth can also be achieved through strategic alliances. A strategic alliance is a partnership between companies to create a competitive advantage. These relationships are created to improve each partner’s ability to create or enhance their competitive stance in today’s fast-changing markets.

6.3 Tactical Issues In 2012, the enrollment estimate for HMOs was 70.24 million and PPOs, 245.84 million (MCOL, n.d.). It is estimated that approximately 88% of physicians have contracted with a managed-care organization (“Majority of docs contract with managed care,” 2009). Because of this growth, a closer look at some special concerns in pursuing participation in a managed- care network is warranted.

Managed-care networks exist, fundamentally, to drive down healthcare costs for large employ- ers, consortiums of employers, and other groups capable of wielding enough buying power to engage the interests of health service providers. Most providers do not control sufficient service assets to compete alone in this new environment. This constraint typically means that providers must look to contracting with other providers or a managed-care company to compete.

Entering into managed-care agreements can be an essential method for stabilizing income sources for many HCOs. For the agreements to work, however, there must be substantial and equitable vested interests for all participants, so that the organizations are committed and fully engaged in the alliance. Mississippi Health Partners, which is a physician–hospital alliance that involves three hospitals and approximately 350 physicians, provides an example. The hospitals put up 50% of the roughly $1 million in seed money to establish the alliance. Approximately 100 primary care physicians invested $1,100 apiece and another 200 specialists put up $1,500 each to match the hospitals’ contributions. The organization uses two types of voting stock, with the physicians holding ten votes of each type of stock and the hospitals, six of each. Board decisions are determined by a simple majority of each type of stock (Gabel et al., 1994).

6.4 Factors Influencing Strategy Selection At least four factors influence the choice of a strategy selected by an organization: its inter- nal resources, the distinctive competencies of its leaders and staff, its stage in its life cycle, and the strategies used by competing HCOs. There is no one best strategy that will always prove successful. Instead, the strategy that is chosen must be the one that is best for the HCO, given the nature of these four factors. Resources, for example, may limit the organization to a focused differentiation strategy. The organization may even be an innovator in terms of ideas but not have the financial, communications, or personnel resources to offer other services.

As Chapter 2 emphasized, an HCO’s strategy must derive from its organizational purpose and objectives. If the organizational mission is focused on serving needs of diverse groups, then the organization’s strategy must be one that is compatible with that mission. In other words, what an organization does must be a function of what it is.

Section 6.5Operational Plans

The distinctive competencies of an HCO have a direct bearing on the strategy selected. Distinc- tive skills and experience in dealing with the physically challenged, for example, can influence strategy choice. Possession of these skills could mean the HCO could target these individuals as potential patients. These distinctive competencies are the basis of doing things well.

The organization’s life-cycle stage is an additional factor influencing strategy selection. For example, an organization may begin with a focused differentiation strategy but over time add programs that serve more varied needs. Repositioning the organization through introducing new programs or serving new markets would be a pivotal point in reformulating strategy. The strategy selected must be given sufficient time to be implemented and affect groups served, but an obviously ineffective strategy should be changed. The concept of changing an ineffective strategy may seem self-evident, but resistance to change is commonplace in many organizations.

The strategies competing HCOs use are another factor that influences strategic choice. Pursu- ing a copycat strategy may work in some cases, but positioning an HCO among rival organi- zations based on distinctive competencies is a much better way to differentiate that HCO’s offerings from its competition. For example, a competitor may have already established itself as the coronary specialist in a region. If so, that niche is occupied, and it may be difficult to recruit the staff needed to compete effectively in this specialty.

6.5 Operational Plans Chapter 2 introduced a discussion about creating operational plans. Aspects of that discus- sion are restated and summarized, and then continued anew here.

After all the planning steps are complete and a strategy has been developed to meet the orga- nization’s objectives and goals, it is time to develop an operational, or action, plan. The opera- tional plan represents the action or doing stage of strategy implementation. Here, an HCO serves, hires, fires, builds, advertises, and so forth. How many times has a group of people planned something with enthusiasm, only to see nothing happen? This is usually because the group did not complete an operational, or action, plan to implement their strategy.

Operational plans need to be developed in all of the areas that support the overall strategy. These areas include service delivery operations, communications, staffing, and finances. Each of the more detailed operational plans is designed to spell out what needs to happen in a given area to implement the strategic plan.

The service delivery operations plan identifies exactly what services will be provided to a spe- cific group and the exact nature of those services. For example, a home healthcare agency pur- suing a differentiation strategy by expanding services must now specify the limits of the new offerings. Will the expanded services include rehabilitation, or, possibly, hospice care, using volunteers? Perhaps elder care will be offered or equipment rental services will be added in- house instead of being contracted.

The communications plan communicates the nature, location, and time parameters of the program to the intended audience and the rest of the HCO’s staff. This plan needs to be well thought out and carefully analyzed to avoid miscommunication or a lack of communication. For example,

Section 6.5Operational Plans

as part of its operations plan, a community rehabilitation center needs a communication strategy to provide information about its purpose and services. Its communication strategy, which follows, will involve three key elements: informing, persuading, and reminding:

1. Informing—This involves providing information to individuals and groups about the organization. Specific elements of this plan call for the following: a. Use of video presentations and social media b. Newsletters, pamphlets c. Personal speaking appearances by executives or healthcare professionals d. Hosting luncheons/educational events e. On-site visits by individuals/groups to the HCO

2. Persuading—This involves presenting the challenges and the benefits of rehabilita- tion, methods for dealing with these issues, and how the HCO’s services deliver on these issues. a. Prepare application forms with which service recipients may request additional

information or interested individuals may apply as volunteers. b. Provide convenient means for patients to access services such as transportation

services, if there is a major need unfilled in this area. 3. Reminding—This involves continuing the provision of information to people already

familiar with the HCO so they will be constantly reminded of its service capabilities. a. Send letters/newsletters and other materials regularly. b. Develop a complete file of individuals and organizations by name for the future.

The staffing plan identifies who will carry out the activities involved. Many HCOs must rely on professionals to carry out plans, so it may be necessary to develop a recruitment plan just to staff the activity. Such a plan should consider the following basic questions:

• What healthcare professionals will be needed to deliver the services proposed? • Can part-time staff or possibly independent contractors be used? • If temporaries will be used, what is the availability of properly credentialed staff in

this category?

Finances must also be planned, usually in the form of a financial budget. The budget is the means to execute the plan. If the financial means to support the plan are not available, then the objectives must be adjusted. The budget and the operational plan are in constant interplay.

Many people do not understand the budgeting process. Budgets are a tool. Too often, how- ever, the budget becomes the tail wagging the dog for the HCO. “We put it in the budget so we had better spend it” or “We had better add a little to this year’s budget” are statements that reflect this misunderstanding. Budget money must be tied directly to performance. Perfor- mance is measured against objectives. Key results and objectives in an HCO’s operation need to be prioritized. Money and resources are then allocated.

An example of this interplay can be reflected in this hypothetical give-and-take regarding the operation of a rehabilitation center. In a planning meeting, the center’s leadership confronts the realization that most of their resources for the next two years will have to go into finishing

Section 6.5Operational Plans

current building programs. Money is available only to maintain the staffing status quo despite the organization’s wish to expand the staff. That does not mean that appropriate staffing levels are not important—they are. The timing for expansion and growth of the program, however, cannot come until the other projects are completed.

Shown in Tables 6.2 and 6.3 are action, or operational, plans for a large, professional phar- macists’ group with several different types of services and locations planned. The operational plans in this example are related directly to the strategy to be used and show the objectives to be accomplished in a step-by-step fashion. This format forces the planner to align objec- tives, strategies, and action plans. Notice that the action-plan format takes one objective out of a five-year strategic plan and isolates it for further study and analysis. In this case, it shows the targets that this professional pharmacists’ group is aiming toward in terms of pharmacy operations and professional staff. Planners must make definitive efforts to ensure that the targets are clear and understood by everyone before action is taken. It is important that all those involved in executing a plan are aware of the plan and involved in developing it. That is the key to staff enthusiasm and support.

With targets, objectives, or goals in mind, managers agree on various strategies. These strate- gies are listed directly under the objectives. Next, planners list all the actions that must take place. Note the sections in which to record who is in charge, the date started, and the date completed. This document becomes not only a guide to action but a timeline for starting and completing plans.

The person(s) responsible for completing the actions in the action plan and the expected dates must be agreed on. All involved receive a copy of the action plan, with their areas of responsibility indicated. One person can coordinate a multitude of projects and programs because that individual has a clear record of what is to be done. As each action or task is com- pleted, the person responsible for the completion of the action or task submits a completion report to the coordinator. With this approach, the coordinator is always aware of the project’s or program’s status.

Periodic updates of the action plan are carried out so that everyone sees the progress being made. Once people become accustomed to using the action plan format, which supports time- saving and coordination efforts, they discipline themselves. They do not want others to see that they are falling behind.

Table 6.2: Action plan for opening new pharmacies

OBJECTIVE: To open seven new pharmacies within the next five years (2014–2018). Cumulatively: 2014: 1 pharmacy 2015: 2 pharmacies 2016: 3 pharmacies 2017: 5 pharmacies 2018: 7 pharmacies

STRATEGIES: A. Explore financing options. B. Hire marketing consulting firm to determine feasible locations. C. Select an architect. D. Select a realtor.

(continued)

Section 6.5Operational Plans

Table 6.2: Action plan for opening new pharmacies (continued)

Action Plan Person Responsible Start Date Date Completed

Contact 4–5 lending insti- tutions for loan potential and costs.

Network within profes- sional associations for marketing consultants and architect candidates.

Set up architectural plan review team.

Establish relationship with realtor.

Table 6.3: Action plan for recruiting pharmacists

OBJECTIVE: To recruit 50 additional pharmacists within the next five years (2014–2018) for placement at our new locations.

Cumulatively: 2014: 6 pharmacists 2015: 16 pharmacists 2016: 26 pharmacists 2017: 38 pharmacists 2018: 50 pharmacists

STRATEGIES: A. Make contact with pharmacist programs at nearby university to determine recruiting potential and

procedures. B. Develop informational/marketing brochure on current and planned operations for use as a recruit-

ing tool.

Action Plan Person Responsible Start Date Date Completed

The assistant adminis- trator will serve as the primary recruiter.

The administrator will appoint a selection team to review and recommend candidates, to the group’s principals, who have been screened by the primary recruiter.

The assistant administra- tor will set goals for the number of organizations to be contacted to become part of the placement network.

Summary and Resources

Summary and Resources

Chapter Summary This chapter has concentrated on the development of strategic and operational plans for an HCO. Successful strategies tend to evolve over time as the organization “goes up” the learning curve of a given strategic plan, and the strategy is tweaked, or adjusted, as feedback on the success of the strategic plan dictates. Starting with Chapter 7, the focus of this textbook will be on the marketing of the HCO to position the organization and reach the selected markets.

Key Points 1. Strategy is the course of action taken by an organization to achieve its objectives.

Strategy begins as a general statement and becomes more detailed as it addresses the specific actions the organization will take to meet its goals. Strategy is both a science and an art. As a science, strategy deals with assembling and allocating the resources necessary to achieve the organization’s objectives, matching organiza- tional strengths with environmental opportunities. The art of strategy is concerned with motivating people to make the strategy work, being sensitive to the environ- mental forces that may affect the organization’s performance, and being able to adapt the HCO to rapidly changing conditions.   Five components of strategy are important to remember. These are scope, goals and objectives, resource deployments, identification of a sustainable competi- tive advantage, and synergy. Scope refers to such factors as types of services offered, number of locations, and market segments in which the HCO competes. Goals and objectives are specific, desired levels of accomplishment that can be measured over a definite time period. Resource deployment refers to the use of financial and human resources, which are always limited. Therefore, choices have to be made about how to best use these resources to achieve the organization’s strategic objec- tives. To effectively compete in the long term, the organization needs to identify its sustainable competitive advantage. This sustainable advantage needs to be identi- fied in each area in which the firm competes. Synergy exists in an organization when the organizational units, product/markets, resource deployments, and competen- cies complement and reinforce one another: the different departments or units are mutually supportive, and everyone works together toward the same goal.   Four generic strategies apply to almost all strategic decisions. The first is the broad differentiation strategy. The objective of this strategy is to distinguish an HCO from competing HCOs. The broad differentiation strategy sets the HCO apart from its competitors, increases patient loyalty, develops a recognizable brand, and reduces price competition. A second generic strategy is the focused differentiation strategy. This is similar to the broad differentiation strategy, except that the HCO is focused on a more narrow market. In other words, the HCO chooses a market where it is particularly competitive and allocates the bulk of its resources toward that market. Finally, low-cost leadership is a strategy where the organization controls its costs, which it can then pass on to patients or receive a higher return on money invested. The HCO can have a focused low-cost strategy when lower costs can be achieved for a particular service or segment of the operation. It is important to note that the strategy is low-cost leadership. An organization must understand and control its costs before it attempts to compete on price.

Summary and Resources

2. Other strategy options include strategic alliances, joint ventures, and mergers/ acquisitions. Strategic alliances are loose relationships among providers to achieve certain common goals. While contractual relationships are common, there is no exchange of ownership or loss of ultimate local autonomy. Joint ventures are more formalized versions of strategic alliances where two HCOs seek in various ways to combine strengths and overcome the weaknesses of their respective organizations, often with some exchange or pooling of management control of the venture. Merg- ers/acquisitions take the joint venture a major step further. Here, as in the joint ven- ture, two organizations seek to do better together what each had been doing alone. With the merger/acquisition, however, the separate organizations become a single entity through some exchange of ownership.

3. An alternative to the generic strategies is the blue ocean strategy. Blue ocean strate- gies create uncontested market space rather than attempting to beat the competi- tion in existing markets. Further, blue ocean strategy involves creating new demand. Primarily, blue ocean strategy posits that the organization pursue a differentiation and a low-cost leadership strategy instead of choosing between a differentiation or a low-cost leadership strategy.

4. The BCG matrix is another way to analyze products and services. This 2×2 matrix divides products and services into four categories: stars, cash cows, question marks, and dogs. Stars are products or services that have a high market share combined with high growth. Cash cows have a high market share but are at the mature stage of the product life cycle. Cash cows contribute cash flow for the organization. Ques- tion marks have a high growth rate and a low market share. Question marks must be monitored to determine whether they require new investment or need to be ter- minated. Dogs are products and/or services that have a low market share and low growth. Often, it is wise to divest dogs.

5. One way to view the opportunities available to an organization is to use the prod- uct/market growth matrix. This 2×2 matrix looks at new and existing markets and products. The organization can decide to sell more of an existing product or service to the markets currently served (market penetration), develop new markets for cur- rent products and services (market development), design new products/services for existing markets (product development), or develop new products/services for new markets (diversification). These growth opportunities are known as product/mar- ket expansion strategies.

6. Additional growth strategies include integrative diversification strategies. Integra- tive strategies involve growing the organization through integration within the cur- rent industry. One such action is forward integration, where the organization looks at ways to get closer to the end consumer. For example, a compounding pharmacy may decide to acquire its retail customers. Backward integration looks back toward vendors, manufacturers, and other suppliers. The recent acquisition of physician practices by hospitals is backward integration because the physicians in those prac- tices supplied patients and medical services to the hospital. Finally, horizontal inte- gration occurs when one organization acquires competitors or enters into strategic alliances with them. One example discussed in this chapter is the strategic alliance between LifePoint Hospitals, Inc. and Duke University Health System.

7. Operational plans are the action steps that the organization needs to take to activate the chosen strategic goals. The operations plan details exactly what services will be provided to each specific group and the nature of the services offered. Opera- tional plans need to be developed in all areas that support the overall strategy. Each

Summary and Resources

operational plan should have a timeline for completion and a designated person or committee responsible for its completion. Events rarely go as planned, so there is a need for senior management to update the plan for changes in the environment and to keep everyone informed of the progress the organization is making toward achieving its goals.

8. Operational plans need to address service delivery operations, communications, staffing, and finances. Each unit needs to identify its target market and indicate how it will reach that market and offer its services. Additionally, the operational plan needs to be communicated to everyone in the organization as well as any involved stakeholders, such as vendors. Often people will need to be told more than once about the operational plan, and reluctant staff will need to be persuaded to par- ticipate in the plan. Human resources will also need to develop a plan to staff the organization for achievement of its objectives. For example, if one of the objectives is to increase the number of patients in the maternity unit, a sufficient number of OB- GYN doctors and nurses will need to be hired or contracted. Finally, money needs to be allocated to achieve the strategic plan. Money is always a limited resource, so the proper budgeting for the implementation of the strategic plan is of upmost importance.

Key Terms backward integration A growth strategy that a company uses to identify possible areas of growth by looking up the channel of distribution toward ownership of other companies.

blue ocean strategy Attempts to create demand, rather than fight over it. Firms look for areas where demand can be created and competition does not exist.

Boston Consulting Group (BCG) matrix  A useful tool for analyzing existing operating units or divisions of a large, complex organi- zation. Using this matrix involves classifying operating units/services into one of four cells, based on relative market share and the growth rate of the market.

broad differentiation strategy  Cultivates the perception of uniqueness in the minds of an HCO’s service recipients and sponsors regarding that HCO’s services or products.

focused differentiation strategy  Concentrates on a single service or category of very similar services offered by an HCO

that meets the needs of a specific group of patients/clients but still seeks to differenti- ate the HCO from its competition.

forward integration A growth strategy that a company uses to anticipate possible areas of expansion by looking down the channel of distribution toward other cus- tomer types.

horizontal integration A combining of HCOs that are performing similar tasks. For example, one hospital merges with another hospital.

integration strategies Strategies that seek to integrate one HCO’s activities with those of another HCO to generate operating advan- tages for both organizations.

joint ventures More formalized versions of strategic alliances; in a joint venture, two organizations seek in various ways to combine strengths and overcome the weak- nesses of their respective organizations, often with some exchange or pooling of management control of the venture.

Summary and Resources

Critical Thinking Questions 1. How could a dental practice implement a focused differentiation strategy? Who

would the practice target and how? 2. Could a pharmacy use a blue ocean strategy in its operating area? What services and

products could they offer to create demand? 3. What are the basic differences between a strategic plan and an operating plan?

low-cost leadership strategy A strat- egy with a major emphasis on efficiency. By keeping the lowest costs among providers in the HCO’s target region, the organization is effectively positioned to attract and maintain service recipients on the basis of low pricing.

mergers/acquisitions Take the joint ven- ture a major step further. Here, as in the joint venture, two organizations seek to do better together what each had been doing alone. With the merger/acquisition, however, the separate organizations become a single entity through some exchange of ownership.

product/market growth matrix A 2×2 matrix, which looks at new and existing mar- kets and products and offers four strategies for growth: market penetration, market

development, product development, and diversification.

relative market share An organization’s share of a given market compared to com- petitors’ shares.

strategic alliances Loose relationships among providers to achieve certain, com- mon goals. While contractual relationships are common, there is no exchange of owner- ship or loss of ultimate local autonomy.

vertical integration Focuses on the sup- pliers and end users of medical services to combine operations with those HCOs. For example, a hospital may contract with an urgent care center to provide medical staff.