Analysis template

35

CHAPTER

5

B efore you can begin to analyze the strengths of your organization and develop a corresponding strategy, you need to understand the industry in which you oper- ate. To begin, many strategists will use a strategic industry map. The industry map

allows you to view your industry by size and category. The industry map attempts to capture a snapshot of an entire industry in a way that

allows for one quick glance to provide a high level of information. First, a matrix is cre- ated. The matrix will have two axes each with one variable. Typically, one axis has some component of price/quality/image, and the other axis has some measure of product mix or service offering. The analyst chooses any axis identifiers believed to be appropriate; those that are selected will significantly affect the resulting industry map.

Consider an industry map in in which one analyst chooses a horizontal axis identi- fier of “Breadth of Procedures Offered” (few to many); a second analyst chooses a hori- zontal axis identifier of “Ease of Access” (low to high). The resulting industry maps may look very different, and this difference could lead to different industry assumptions, which may, in turn, lead to different end strategies. These variations can explain in part why two organizations in the same industry often embark on different strategies even though they start with the same data.

Exhibit 5.1 shows the beginning of an industry map for healthcare providers.

STRATEGIC INDUSTRY MAP

EXHIBIT 5.1 Beginning of a Strategic Industry Map

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Service Categories

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Private Practice Healthcare Systems

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2 0 2 1 . A C H E L e a r n .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing: eBook Collection (EBSCOhost) printed on 6/22/2025 4:18:57 PM UTC via WALDEN UNIVERSITY 2636870; Warren G. McDonald, Michael S. Wayland; Strategic Analysis for Healthcare: Concepts and Practical Applications, Second Edition Account:eds.

Strategic Analysis for Healthcare36

Once the horizontal and vertical axes have been defined, the analyst identifies the various industry segments. Using the clothing industry as an example, one might identify a number of segments ranging from custom-made-clothing tailors to mass-market retail- ers such as Walmart. As we discussed in chapter 4, Walmart has expanded its reach with in-store clinics, so it now appears on the healthcare map as well. In healthcare, we look at everything from walk-in clinics to private practices to hospital systems. We must include all segments of the industry to gain a clear perspective of our position in the marketplace.

Each industry segment is represented by a circle on the matrix, and each circle is placed at the appropriate intersection of the two axes. The size of each circle represents the size of the industry segment relative to the other segments. Some analysts include the projected dollar volume of each segment in parentheses immediately following the segment’s name—for instance, “Mini-clinics ($250 billion),” meaning that “mini-clinic” retail providers account for $250 billion in sales in the industry.

The industry map in exhibit 5.2 displays the different price, quality, image, and product mix attributes of major segments in the healthcare provider industry. However, how one defines the industry can drastically affect the industry map. For example, an industry map of healthcare payers would have different segments than a map of healthcare providers or a map of the medical equipment industry.

The map can be used to analyze any level of an industry. For example, within healthcare, an industry map could be created representing segments of the medical equip- ment industry (e.g., manufacturing, sales, leasing); this map may be different from an industry map of the medical equipment manufacturing subindustry, which might include such segments as diagnostic equipment manufacturing and patient use equipment. One’s definition of the industry being studied then is essential. Note that on the industry map, the circles represent industry segments, not specific organizations. Specific organizations can be included in parentheses simply to typify the segment.

Notice the area in the map that represents the intersection of low price and specialty care. Is there a business opportunity there for an entrepreneurial provider? At one time there was.

EXHIBIT 5.2 Strategic Map of Healthcare Providers

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Product Mix Specialty

Healthcare

Chain providers (Walmart,

etc.)

Concierge service

Free- standing surgery centers

Specialty surgical

providers

Local acute care

hospitals

Teaching hospitals

(tertiary care facilities)

Healthcare systems

Urgent care

providers

Broad-Category Healthcare

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Chapter 5: Strategic Industry Map 37

When that corner of the map was empty, stores such as Walmart, CVS, and Wal- greens saw a demand for primary care and developed walk-in clinics at many of their locations. Time will tell how such efforts are received, but initial signs suggest they are successful.

Kim and Maugborgne (2005) identified gaps in the industry map as blue oceans— uncontested spaces where no one competes. Red oceans are places where competition already exists and has left “blood in the water.” A blue ocean strategy involves seeking out uncontested market space and providing new market offerings. Under those circum- stances, the lack of competition can lead to quicker market dominance and higher profits.

So often, managers are focused on the competition. A blue ocean strategic approach does not focus on the competition but rather focuses on creating value where competition does not exist. For example, in the early 2000s the personal electronics industry consisted of segments that included personal computers, personal digital assistants, handheld game consoles, cell phones, MP3 music players, and so forth. One could imagine “Price” on the vertical axis and “Complexity” on the horizontal axis. Succeeding in any of those existing segments required a head-to-head red ocean contest with existing competitors. Various price points combined with various complexities existed, but there was a big gap (a blue ocean) in the area of high price and high complexity. Apple sidestepped the head-to-head competition by creating an all-in-one product called the iPhone.

Reference

Kim, W. C., and R. Maugborgne. 2005. Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston: Harvard Business Review Press.

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Chapter 5: Strategic Industry Map 39

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Create an industry map using the blank map provided. For this exercise and the exercises in later chapters, you will use a project organization of your choosing. Your project organization can be an organization with which you are currently associated or any other organization you wish to use in the book’s exercises.

1. Identify the industry your organization is a part of, and title your map appropriately. 2. Identify the appropriate axis labels to use on your map, such as price versus breadth of

product mix. 3. Identify the market segments within the market. Note that you are identifying market

segments, not brands. 4. Identify the size of each market segment. 5. Identify the attributes of each segment. 6. Place each market segment on the map, using the size of the circle to represent the size of

the segment in dollar volume. Use the location on the map to correspond to the attributes you identified.

Strategic Map for___________________________________________________________

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__ __

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__ __

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__ __

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Axis Identifier __________________________________________________

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Low Medium High

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Strategic Analysis for Healthcare40

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After completing the map of your industry, answer the following questions:

1. Do you see any weaknesses in the industry?

2. How about opportunities?

3. Are there any blue oceans?

4. What implications for strategy development does the industry map provide?

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41

CHAPTER

6

F ive forces analysis is a popular approach to analyzing the competitive forces in an industry that are likely to affect strategy. It was developed by Michael Porter (1980) and made popular in his book Competitive Strategy: Techniques for Analyzing Indus-

tries and Competitors. While the approach is decades old, it remains significant, widely used, and highly applicable to healthcare. The five competitive forces shape, constrain, and provide opportunities for competitive advantage for your organization. The forces influence how profitable a business in the particular industry will be, how much reasonable investment can be made into the industry, and how much growth opportunity exists in that industry. The five forces are (1) threat of entry, (2) intensity of rivalry, (3) threat of substitute products, (4) bargaining power of suppliers, and (5) bargaining power of buy- ers. The forces are shown in exhibit 6.1 and discussed in detail in the sections that follow.

FIVE FORCES IN AN INDUSTRY

EXHIBIT 6.1 Five Forces

Bargaining power of sellers

Threat of entry

Rivalry among existing firms

Bargaining power of buyers

Threat of substitutes

Threat of Entry

The threat of new competitors entering a given market is one industry force that affects strategy. If an organization invests billions of dollars to create a new product that can be easily imitated by new entrants in the market, where is the competitive advantage? There may be some advantages, such as the profit made while a potential new entrant is still developing its product, goodwill among customers, or the building of a top-of-mind brand name, but as we will see in later chapters, a sustainable “first mover” advantage does not always exist. On the other hand, if competitors are hard-pressed to enter the market,

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Strategic Analysis for Healthcare42

a significant competitive advantage may exist for your company to move into the market first. Alternatively, if your company is in an existing market, analysis of the threat of entry can help you ascertain your ability to maintain your market share and prepare defensive strategies to prevent a potential new competitor from arising.

The threat of entry can be considered in terms of two main factors: (1) barriers to entry and (2) response of existing competitors. Exhibit 6.2 shows some potential bar- riers to entry. If there is one supplier of a critical component and your company has a contractually exclusive arrangement with that supplier, if a resource is scarce and you have it controlled, or if the dollar investment is prohibitively high for a competitor to justify entering the market, one would say the barrier to entry for a new competitor is high. In healthcare, cost is an especially significant barrier, as costs to establish a new healthcare product or service are typically high because of a variety of factors (regulations by the US Food and Drug Administration, for instance). Conversely, if you are dealing with broadly and inexpensively available commodities, easy technology, and consumer indifference to brand, the barrier to entry for a new competitor is low. We have seen this effect in the eye care industry, with new online providers offering contact lenses and glasses at greatly reduced prices.

Competitor responsiveness can lower the threat of entry if the existing competitors are well funded, have the ability to leverage well-established brand names, can aggressively cut prices and maintain low profit margins that would put new competitors out of busi- ness, or have a willingness to “defend their turf.” Organizations will be less likely to invest large sums of money in a venture that might not get off the ground or might fail to deliver a generous rate of return on investment because of competitor response.

Does this scenario exist in contemporary healthcare? Of course. We are seeing the systemization of healthcare organizations to ensure some level of dominance in the markets they serve. Individual hospitals have little chance of competing with the larger healthcare systems today, so they attempt to keep others out of their markets by becoming larger and stronger.

Intensity of Rivalry

Some have said that there is no such thing as a sustainable competitive advantage, because your competitors will always find a way to imitate anything that succeeds for you. If you buy new technology for your operation, the suppliers, or their competitors, will tout their

EXHIBIT 6.2 Potential Barriers to Market Entry

1. Financial capital requirements 2. Market share of existing competitors 3. Economies of scale in favor of the current competitors 4. Entrenched relationships between buyers and current suppliers 5. Government regulation, tax, tariffs, protectionism 6. Patents and trademarks 7. Established and widely recognized brand names 8. Switching costs from old competitor to new competitor 9. Research and development costs 10. Advertising, marketing, and promotion costs 11. Product interchangeability

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Chapter 6: F ive Forces in an Industry 43

equipment to your competitors, citing your purchase. If you invent a new product, your competitors will at some point find a way around your patents with a similar product. The intensity of rivalry among existing industry competitors drives this imitation strategy. This intensity can be easily seen in many industries, including healthcare. The higher the inten- sity, the more difficult it will be for your company to profit and grow in the market. A high intensity will also dictate a strong need for defensive strategies to protect your competitive advantages for as long as possible.

An organization cannot directly control the intensity of rivalry in an industry, but it can benefit from certain strategic actions. Some organizations may seek to intertwine themselves into their customers’ business so as to make the customer dependent on them (e.g., Dell computers). Some may adopt strategies of increasing product differentiation to separate themselves from the crowd, raising customers’ switching costs by customiz- ing applications or products to build dependency, providing services and repairs for their products, or focusing sales and marketing efforts on areas that have some form of advan- tage, such as high growth or low fixed costs. We see these efforts frequently in healthcare through the lens of electronic health records.

Consider the highly competitive healthcare marketplace of today. For the last few decades, hospitals have been doing all in their power to maintain and solidify their domi- nance in the market. Many hospitals, for instance, have bought private practices to provide for a ready self-referral network. This strategy had previously been unsuccessful but is now becoming popular among physicians tired of the increasingly complex healthcare business environment.

Threat of Substitutes

The availability of substitutes limits the amount of money an organization can charge for its product or service. All things being equal, if prices rise, customers will switch to a cheaper competitor to substitute an equivalent service or product. In reality, the compet- ing options in a market are rarely equivalent. But when they are, the product or service is referred to as a commodity—in other words, the product or service is perceived to be the same regardless of where it was purchased. Crude oil is one example of a commodity product. An example from the healthcare industry is the flu vaccine, which can be easily administered in a pharmacy or big box store rather than in a physician’s office. Another example is the easy substitution of one manufacturer’s generic drug for a different manu- facturer’s generic drug.

Some products or services may not be considered equal but have only a limited degree of difference. For example, a consumer may have a preference for a particular brand of gasoline, but if the price for that brand increases more than a few cents per gallon over competitors’ prices, the consumer will substitute a lower-priced brand. In the example of medications, some consumers feel loyalty to their personal brand but, in the face of end price or availability differences, will become more accepting of lower-cost options. For example, Cialis (tadalafil) can be easily substituted for Viagra (sildenafil), and many herbal remedies claim to be a substitute for both.

Strong brand loyalty, clear service or product differentiation, and other strategies that create distinction can reduce the threat of substitutes. The ability to substitute is influenced not just by intrinsic attributes but also by such factors as political constraints

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Strategic Analysis for Healthcare44

and geographic shipping costs. People in the healthcare industry see substitutes frequently, and maintaining product or service loyalty can be difficult.

Availability of information is a factor related to the ability to substitute. In the medi- cal services industry, information about procedure pricing, for example, is limited. This limitation reduces the healthcare consumer’s ability to price shop for an equivalent but lower-cost provider, thus reducing the threat of substitutes.

Bargaining Power of Suppliers

The power held by raw material, component, subassembly, assembly, transportation, dis- posal, and other suppliers over companies in an industry directly affects the competitive nature of the industry. The theory of supply and demand suggests that if there are only a small number of suppliers of a necessary component, prices will rise. Suppliers can hold the corporate buyer over a barrel.

For example, in the computer industry, microprocessors were once at risk of becoming a commodity item. Retail consumers did not see them or understand them. However, the technology company Intel used a strategy to change the microprocessor from a commodity item to a branded item. Through a combination of outstanding prod- uct development and intense marketing, retail consumers were convinced that having “Intel Inside” made a computer better. Retail customers began to demand Intel processors in the computers they purchased, which in turn put pressure on the original equipment manufacturers (OEMs) to incorporate Intel processors into their computers.

Intel gained significant bargaining power as a supplier to OEMs such as IBM and Hewlett-Packard. If OEMs wanted to create a product with an Intel microprocessor, they had to buy from Intel. These conditions gave Intel greater power in negotiations over price and terms with the OEMs. As a result, Intel processors became significantly more expen- sive than competitive processors. Can you think of other computer hardware components that are in such demand? Probably not. An OEM can substitute one supplier’s mother- board for another supplier’s motherboard, because motherboard suppliers have little to no bargaining power. But what about operating systems? Do consumers demand Microsoft operating systems or no-name open-source operating systems? Microsoft has significant bargaining power over the OEMs.

Drug manufacturers have used a similar approach, with direct-to-consumer market- ing designed to brand their products. Consumers now approach providers with specific requests for a particular drug, as opposed to the generic substitute, because they have gained familiarity with the branded product and perceive it to be superior. As described earlier, however, this preference will only go so far. If the price goes up significantly, that preference will become less important.

Mergers and acquisitions have become more common in healthcare. In many respects, this activity has been driven by a desire to decrease the bargaining power of sup- pliers to the newly combined organization. In 2017 alone, the following major mergers and acquisitions were announced:

• Providence St. Joseph Health and Ascension proposed to merge to create the largest American owner of hospitals, which would have revenue of $44.8 billion per year from 191 hospitals in 27 states. Although this proposed merger fell through in 2018,

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Chapter 6: F ive Forces in an Industry 45

it would have provided the combined nonprofit organization with leverage over healthcare insurers who supply it with patients and payment.

• CVS Health offered $69 billion for Aetna Inc. Despite opposition from the Ameri- can Medical Association (AMA), this deal closed in 2018. The AMA said that the merger would reduce the bargaining power of suppliers over a combined CVS and Aetna company in health insurance, pharmacy benefit management, and specialty pharmacy (AMA 2020).

• Aurora Health Care and Advocate Health Care completed their merger, which resulted in more than $11 billion in annual revenue for the combined Advocate Aurora Health, with 70,000 employees in more than 500 medical facilities. The merger provided the new organization with increased ability to resist the bargain- ing power of suppliers of medical supplies, medication, and patient insurance (e.g., private insurance companies, Medicare).

• Intermountain Healthcare formed a joint venture—not a merger—with Ascension, SSM Health, and Trinity Health, in consultation with the US Department of Veterans Affairs to form a new generic drug company. Intermountain says the “new company intends to be an FDA-approved manufacturer and will either directly manufacture generic drugs or subcontract manufacturing to reputable contract manufacturing organizations. It will … seek to stabilize the supply of essential generic medications administered in hospitals, many of which have fallen into chronic shortage.” This shortage left these organizations with limited bargaining power and forced them to pay higher prices. The first drug was brought to market in 2018. Intermountain, with 40,000 employees, provides for the healthcare needs of people across Utah, southern Idaho, and southern Nevada through clinics, a medical group, affiliate networks, hospitals, home care, telehealth, health insurance plans, and other services (Intermountain Healthcare 2020).

Another category of supplier not found in general business consists of the surgeons and other physicians who provide services to healthcare organizations. Most are indepen- dent contractors who essentially provide labor to the hospitals. Healthcare organizations must recognize the power of these suppliers and work to meet their needs through effi- cient and effective support services.

Bargaining Power of Buyers

The bargaining power of buyers is the opposite of the power of suppliers. If large cor- porate buyers can shop around for their raw material, components, subassemblies, or other inputs and find lower prices, these buyers will have significant power over their suppliers. Conditions through which industry buyers can gain bargaining power include the following:

• The buyer purchases in sufficiently large amounts to be able to demand lower prices. • The buyer purchases in sufficiently large amounts to make the supplier dependent on

the purchase. • The buyer has the ability to easily switch to a different supplier. • The buyer has the option of dropping the supplier and fulfilling its own need.

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Strategic Analysis for Healthcare46

• The buyer has the ability to buy a supplier and cut the current supplier out. • Quality or brand is unimportant to the business.

The same rules apply for hospitals and other healthcare organizations. The system- ization of healthcare aims largely for efficiency and economies of scale, and it provides an excellent example of the bargaining power of buyers. For example, we seek bids for every- thing from surgical gowns to hospital beds to multimillion-dollar technologies for patient care. We must have all of these items, and we wish to pay a reasonable price for them. For example, a university student was asked during an internship to evaluate the supply of hospital beds, both leased and purchased. Specific bids were received, and the buying power of the local hospital system that uses a large number of beds created the bargaining power for a significantly reduced price. Another example involved the contract for security services, which was found to be extremely expensive. The hospital sought additional bids and saved millions annually because the company providing the services, not wanting to lose the contract and bowing to the bargaining power of the hospital, readily renegotiated a better price.

The bargaining power of buyers is found up and down the value chain, and not just within the hospital or other large entities. It is found in the hospital bed manufacturer’s relationship with the steel manufacturer that provides the material for the bed springs. It is found in the supplier of tongue depressors, which purchases wood from those who grow and process wood products. Buyers’ bargaining power even extends to the patient, who buys healthcare services from providers.

The lack of buyers’ bargaining power can be seen in prescription drug pricing. In 2018, Nostrum Laboratories, a small Missouri-based drug manufacturer, drew public criti- cism when it increased the price of a bottle of nitrofurantoin, an antibiotic used to treat bladder infections, from $474.75 to $2,392. Similarly, in 2015, Turing Pharmaceuticals raised the price of Daraprim, an AIDS and cancer drug, from $13.50 to $750 per tablet (Crow 2018). Both of these price increases were enabled by the lack of bargaining power of buyers (at the consumer, institutional, and even government levels) because of the absence of alternative sources of these medications.

Analyzing the Five Forces

To assess the five forces, the analyst considers each force, one at a time. The analyst identi- fies all the issues that impact the particular force, how each issue affects the organization, and the implications of each issue for strategy. Exhibit 6.3 provides an example of an analysis of the threat of entry for hospitals.

The implications for strategy answer the question, “What should I be thinking about when I go to develop strategy?” You have identified an issue and the impact of the issue on the company, and next you need to identify the implications of that issue for developing strategy. Does the issue limit your strategic options? Expand them? Will the issue cause the company to spend huge amounts of cash dealing with it?

The key here is to avoid making specific strategic recommendations in the implica- tions for strategy section. If you develop a specific strategy, you shut out all other possible strategies (i.e., you limit your strategic options). For example:

Issue: A small upper class controls significant wealth. Implication for Strategy: Market concierge services to rich people.

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Chapter 6: F ive Forces in an Industry 47

EXHIBIT 6.3 Analyzing the Threat of Entry

Force Issue Affecting the Industry*

Impact on the Organization†

Implication for Strategy (What We Should Think About When Developing Strategy)†

Threat of entry

(Overall: medium)

1. Government regulation requires licensing and accreditation of hospitals to participate in Medicare and Medicaid programs.

Significant time and resources are spent in achieving and maintaining accreditation and licenses.

Must include strategies to address legal issues and other issues related to accreditation.

2. Technological developments demand regular changes to meet patient and competitive demands.

Significant replacement costs are involved.

Must include strategies to ensure our organization is well positioned technologically to keep competitors from the market.

3. Competitors in close surrounding communities have higher profit margins because of higher levels of specialty and tertiary care.

We risk appearing “less than” because of the lack of specialty care availability. New entrants may consider entry if we are not cutting edge.

Must include a method to develop an expanded scope of services to better compete with larger competitors and keep them from entering.

4. Dominant players have the ability to buy smaller players, thus consolidating costs and expanding market share.

Industry consolidation is becoming the norm in healthcare, and it requires significant resources. Our organization may appear vulnerable.

Must include proactive strategies to address industry consolidation (systemization) or a method to compete in a consolidated industry.

5. Exclusive supplier contracts are in place with major buyers, which currently lock out new suppliers.

We may find ourselves at a competitive disadvantage if suppliers are limited too much.

Must include strategies that allow for evaluation of suppliers on a regular basis to ensure availability of competitive pricing so that new entrants see us as competitive.

*Note that the issue is relative to the industry. †Note that the impact on the organization and implication for strategy are specific to the organization being studied.

This response is an error as it shuts out all options other than marketing concierge services to rich people; it is a specific strategy rather than an implication for strategy. Are there other ways to handle the issue? Yes. For example:

Issue: A small upper class controls significant wealth. Implication for Strategy: Many potential clients will not be able to afford expen- sive elective procedures.

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Strategic Analysis for Healthcare48

The second response is an implication for strategy, not a strategy itself. It allows the organization to consider many potential ways to handle the wealth gap when it begins to develop strategies later on.

An implication for strategy identifies a broad possibility and allows for brainstorm- ing of many strategies that could be used to respond to that possibility. In contrast, identifying a particular strategy ends the discussion and shuts out other possible strategies that have not yet been considered. For example, issue 4 in exhibit 6.3 has many possible strategic responses. If the implication for strategy had been stated as “buy out a supplier,” that singular strategy would have been identified and the search for strategies would be over, thus eliminating other, possibly better, strategies that might have been developed.

Analysts often use a radar chart, which is easily made in an electronic spreadsheet, to visually show the interrelationships between the forces (exhibit 6.4). To create the radar chart in an electronic spreadsheet, enter the names of the forces in column A and the aver- age rating of each force in column B (using 1 as low through 5 as high), highlight the data in both columns, click the insert tab, and select radar chart.

References

American Medical Association. 2020. “CVS-Aetna Merger.” Accessed May 3. www.ama-assn.org/ delivering-care/patient-support-advocacy/cvs-aetna-merger.

Crow, D. 2018. “Without Pharmaceutical Price Regulation, Gouging Is To Be Expected.” Physicians for a National Health Program. Published September 11. https://pnhp.org/ news/without-pharmaceutical-price-regulation-gouging-is-to-be-expected/.

Intermountain Healthcare. 2020. “Generic Rx Company.” Accessed May 3. https:// intermountainhealthcare.org/about/transforming-healthcare/innovation/business- development/ventures/generic-rx-company/.

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

EXHIBIT 6.4 Porter’s Five Forces Analysis

0

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2

3

4

5 Threat of Entry

Intensity of Rivalry

Power of SuppliersPower of Buyers

Threat of Substitutes

Company X

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Chapter 6: F ive Forces in an Industry 49

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Use the blank five forces table to list the issues, impacts, and strategic implications for your project organization.

Five Forces Table

Name of Industry ___________________

Five Forces Issue Affecting the

Industry Impact on the Organization

Implication for Strategy

(What We Should Think About

When Developing Strategy)

Threat of entry

(Overall: low, medium, or high)

1.

2.

3.

4.

5.

Intensity of rivalry

(Overall: low, medium, or high)

1.

2.

3.

4.

5.

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Strategic Analysis for Healthcare50

E

X

E

R

C

I

S

E

Five Forces Issue Affecting the

Industry Impact on the Organization

Implication for Strategy

(What We Should Think About

When Developing Strategy)

Threat of substitutes

(Overall: low, medium, or high)

1.

2.

3.

4.

5.

Power of suppliers

(Overall: low, medium, or high)

1.

2.

3.

4.

5.

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Chapter 6: F ive Forces in an Industry 51

E

X

E

R

C

I

S

E

Five Forces Issue Affecting the

Industry Impact on the Organization

Implication for Strategy

(What We Should Think About

When Developing Strategy)

Power of buyers

(Overall: low, medium, or high)

1.

2.

3.

4.

5.

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53

CHAPTER

7

A nother tool, the PEST analysis, helps you examine conditions much more broadly than does the five forces analysis. PEST stands for political, economic, social, and technological, the four perspectives from which the process examines the environ-

ment. (Some authors have added environmental and legal to form the acronym PESTEL; for our purposes, however, environmental and legal matters fall under the political, because both areas tend to be politically charged and regulated in healthcare.) The pur- pose of a PEST analysis is to look at the macroenvironment that affects the industry in which the organization competes.

The timing and success of particular strategies can be influenced positively or negatively by political, economic, social, and technological factors within the industry. The strategic analyst studies the macroenvironment both as an input to strategy and as a limiting factor on strategy. Strategic inputs may involve issues identified in an environmen- tal analysis that lead to opportunities for an organization (e.g., a huge influx of China’s rural population into urban areas, leading to an increased need for modern urban medical services). Other findings may limit opportunities for an organization’s strategy (e.g., low disposable per capita income in Zimbabwe limits the ability of residents to afford advanced medical services). Imagine you are considering building a plastic and reconstructive surgery center in a small, rural Alabama community. A PEST analysis might show that, though some people in the area have sufficient resources to pay for reconstructive surgery, such people are not the norm; therefore, that area might not be a suitable place for such a facility. The environment can be analyzed at multiple levels depending on business need. One could perform a PEST analysis on a single state (California), country (Colombia), trading block (European Union), or region of the world (South America).

For example, an organization considering the acquisition of a California healthcare business might perform a PEST analysis of the state. The organization would want to understand all the political implications of doing business in California. Such implications might include a high minimum wage, an excessive tax structure on both individuals and organizations, state Occupational Safety and Health Administration (OSHA) require- ments that exceed federal OSHA requirements, environmental regulations, a legislature less friendly to business, and so on. These factors need to be analyzed and included in the decision regarding whether to buy the business. Some of these issues will increase the cost of doing business in California; as a result, the acquirer would need to adjust its break- even point on the acquisition and develop strategies to compensate. Other PEST factors may help offset the political concerns, such as ease of access to new technology partners in Silicon Valley.

To perform a PEST analysis, the analyst considers each PEST factor one at a time. The analyst identifies the macroenvironmental issues that influence each factor, how

PEST ANALYSIS OF THE ENVIRONMENT

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Strategic Analysis for Healthcare54

EXHIBIT 7.1 Questions to Consider in a PEST Analysis

Political 1. How stable is the political environment you are analyzing? 2. How will government policy influence your ability to do business and make a profit? 3. What is the risk of war, conflict, civil unrest, or trade wars? 4. How favorable are the existing tax laws regarding your industry and, potentially, your business? 5. What is the government’s position on financial reporting and corporate transparency? 6. What is the government’s economic policy? 7. What impact does religion have on government and law? 8. Does the location belong to international trade agreements such as the United States–Mexico–

Canada Agreement, European Union, the Association of Southeast Asian Nations, or the Southern Common Market in South America?

9. Will tax policy encourage or discourage business? Is it stable? 10. What kind of employment laws are in place? 11. What are the existing environmental regulations, and how are they trending? 12. What is the dominant political ideology? 13. What are the trade restrictions and tariffs?

Economic 1. What are the short-, middle-, and long-term prospects for the economy? 2. What is the average disposable income, and how is income distributed? 3. What are the interest rates? 4. What is the rate of inflation? 5. What employment trends have appeared in recent years? 6. What are the exchange rates? 7. What is the gross domestic product per capita? 8. Is the economy predicted to be in a state of growth, stagnation, or recession? 9. What is the weather trend and impact on work, people, and economics?

Social 1. What are the cultural aspects of the area you are analyzing? 2. What are the roles of men and women in the society? 3. What is the demographic distribution of the population? 4. What are the population growth trends? 5. What is the dominant religion? 6. What is the social and religious view of healthcare? Does this change according to age or

geography? 7. What are the work ethics and career attitudes of the area? 8. How is education valued? 9. How much time do residents have for leisure? 10. What is the role of the media, and what is the level of freedom of the press? 11. What attitudes exist toward foreign companies and products? 12. How does language affect such things as employment and advertising? 13. What is the influence of tradition, and who are the keepers of tradition? 14. Which individuals are regarded as role models, and what are the society’s ideals? 15. What is the popular view of the environmental impact of industry? 16. What are the major lifestyle trends?

Technological 1. Does the location have available technology infrastructure? 2. Does the location have available technological resources? 3. Does the area have reliable access to the internet? 4. What is the area’s overall research and development investment rate? 5. How advanced is the manufacturing capability? 6. Can products or services be produced more cheaply there because of technology? 7. Is technology available to produce high-quality products and services? 8. Do consumers and businesses take advantage of, and demand, technology? 9. Is technology sufficient to allow for effective distribution systems? 10. Does technology give consumers the ability to shop suppliers? 11. What is the rate of technological change? 12. How advanced is the educational capability?

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Chapter 7: PE ST Analysis of the Environment 55

each issue affects the organization, and the implication of each issue relative to strategy. Implications for strategy answer the question, “What should I be thinking about when I develop strategy?” You have identified an issue and the impact of the issue on the com- pany; next, you need to identify the implications of that issue for developing strategy. Does the issue limit your strategic options? Expand them? Will the issue cause the company to spend huge amounts of cash dealing with it?

As discussed in chapter 6, the key here is to avoid making specific strategic recom- mendations in the implications for strategy section. If you write a specific strategy, you shut out all other possible strategies (i.e., you limit your strategic options). Exhibit 7.1 lists some questions to consider when performing a PEST analysis.

Exhibit 7.2 provides an example of an analysis focusing on technical factors in the healthcare industry. Note again that “implication for strategy” is different from “strategy.”

EXHIBIT 7.2 PEST Factor Analysis Example: Technical

Environmental Issue Affecting the Industry Impact on Organization

Implication for Strategy (What We Should Think About When Developing Strategy)

Robots are entering the operating department and are capable of performing precision work (Landro 2018).

Utilization of robots is improving our patient outcomes, leading to higher reimbursement.

Competitors are adopting and utilizing robots more rapidly than we are.

Children are experiencing increased social isolation because of high technology use, which is causing a rise in psychological problems (Blumenthal 2018).

Our psychiatric unit is experiencing higher than historical levels of admittances.

Our psychiatric unit might provide revenue that could be reallocated to fund other strategies.

Magenta Therapeutics and other startups are embracing stem cell transplant technology such as MGTA-456 treatment, which boosts cord blood stem cell numbers by more than 300 times (Winslow 2018).

None, as we have not availed ourselves of this advanced technology.

Advanced stem cell therapies hold significant competitive advantage opportunities.

Artificial intelligence (AI) developments are being aimed at assisting the blind (Kornelis 2018).

The cost of this technology is prohibitive so our patients are going elsewhere.

The market for AI is expanding rapidly, thus providing us with many strategic opportunities.

Chatbots, robots, and digital assistants such as Alexa and Siri are helping the elderly stay healthy (Moise 2018).

None, as we don’t have the equivalent of an Alexa app.

Opportunities are expanding for healthcare apps within products such as Alexa.

Sensors, tablets, and other devices are extending the lives of patients with dementia (Wang 2018).

We are not in this space. Opportunities exist to incorporate device technology into long- term treatments.

(continued)

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Strategic Analysis for Healthcare56

EXHIBIT 7.2 PEST Factor Analysis Example: Technical (continued)

Environmental Issue Affecting the Industry Impact on Organization

Implication for Strategy (What We Should Think About When Developing Strategy)

Crowd-funding platforms such as Kickstarter are opening to healthcare entrepreneurs (Constable 2018).

We are not in this space. Cutting-edge technology may be available to us before our competitors through crowd funding.

Higher-quality video conferencing technology is leading to an increase in diagnosis over cell phones (Evans 2018).

Our broadband access points are slowing because of increased use of video conferencing that is using up our bandwidth.

Must be aware that the general population is shifting away from use of computers and toward cell phones.

Data breaches at major corporations suggest that hackers may target healthcare facilities soon (Harris 2018).

Increased expenditures to protect patient financial and personal data.

Any strategy must take into consideration exposure to technology hacking.

Detailed technological surveillance of physicians is decreasing human errors and reducing preventable mistakes (Ward 2018).

We have not used this technology, and the cost to do so could drain money from other projects.

Potential strategies can include adding physician surveillance.

New technology for DNA sequencing is speedier and enabling diagnoses and treatments that can save sick babies’ lives (Linden 2018).

Our patients are beginning to request DNA testing.

Strategies that have the opportunity to incorporate DNA sequencing could potentially be more profitable.

Technology is saving the lives of patients who, in the past, would have been declared dead (Marcus 2018).

We have had three lawsuits over the determination of death in the past year.

Any strategy should take into consideration the fact that patients’ families may use technology to overrule our determinations.

Bitcoin block chain digital ledger technology is being used to organize healthcare records (Geron 2018).

Our accounts receivable department has been struggling with collecting payments from self- pay patients, and this technology could improve our collections.

Leveraging Bitcoin technology can help reduce the administrative burden in future strategies.

Technology is enabling nurses to meet with patients online (Holland 2018).

Our efficiency and patient throughput could be improved by shifting nurse– patient contact online.

Technology to meet with patients online can make future strategies more efficient and productive.

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Chapter 7: PE ST Analysis of the Environment 57

An implication for strategy identifies a broad possibility and allows for future brainstorm- ing of many strategies that could be used to respond to that possibility. By contrast, iden- tifying a particular strategy at this point ends the discussion and shuts out other possible strategies.

Analysts often think of the PEST technology issue as referring to high technology, as exemplified earlier, but keep in mind that technology can also refer to low-technology issues. For example, consider this: The lack of interstate road structure in rural America makes it difficult for rural patients to access distant specialty healthcare. In this example, interstate road structure is a low-technology issue but, nonetheless, falls in the technical category.

Case Study Example

Consider the following scenario, drawn from The Wall Street Journal (2018):

On March 23, 2010, Congress passed and President Obama signed into law the Patient Protection and Affordable Care Act (also known as the ACA). One aspect of this law is that it changed the income thresholds for Medicaid eligibility to extend to people who make up to 133 percent of the poverty line, which resulted in the addition of many Ameri- cans to the Medicaid rolls. Each state manages its own Medicaid program, and each state has extensive authority to determine who qualifies for it. After the Supreme Court issued its ruling in National Federation of Independent Business v. Sebelius, states no longer had to conform to this 133 percent level and could instead continue with their pre-ACA requirements.

Many of Ohio’s residents live in rural communities. Their average income is low, and as a result of the Medicaid income threshold being set at 133 percent of the pov- erty line, 21.4 percent of Ohio’s population qualifies for Medicaid. In these rural areas, Medicaid is the primary insurer. Ohio outsources its Medicaid prescription drug benefit management to five managed care organizations (MCOs). Four of these five MCOs out- source their drug benefits management to CVS Caremark, which happens to operate a pharmaceutical benefit manager (PBM) business that acts as a middleman among drug manufacturers, pharmacies, and insurers. The PBMs decide which drugs are listed on a formulary, how much money pharmacies are reimbursed, and how much insurers will pay.

Rural Ohio has few big box chain pharmacies. Instead, there are many small, inde- pendent, and family-run drug stores. Medicaid is the primary insurer. The Wall Street Journal spoke with eight current or former independent pharmacists in Ohio who complained that CVS has used its PBM ability to set drug prices at a level below the pharmacists’ wholesale drug costs. Thus, these independent pharmacies lose money on each of the prescriptions they fill for the majority of their customers. For so many of these local drug stores, the only options appear to be filing for bankruptcy or selling out to CVS, which then closes the drug store, forcing customers to choose between skipping their medications and, if they are able, driving long distances to purchase them.

The Wall Street Journal interviewed Dominic Bartone, a pharmacist for 41 years. He operated two pharmacies in Lebanon, Ohio. After CVS cut payment rates, these pharma- cies began taking a loss on between 40 and 50 prescriptions a day. Eventually, Bartone sold the stores to CVS. Between May 2015 and May 2018, Ohio lost 164 independent pharmacies while CVS has added 68.

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Strategic Analysis for Healthcare58

Now, reconsider the same article from a PEST analysis perspective (where P = political, E = economic, S = social, and T = technical):

On March 23, 2010, Congress passed and President Obama signed into law the Patient Protection and Affordable Care Act (also known as the ACA) (P). One aspect of this law is that it changed the income thresholds for Medicaid eligibility to extend to people who make up to 133 percent of the poverty line (E), which resulted in the addition of many Americans to the Medicaid rolls (S). Each state manages its own Medicaid program, and each state has extensive authority to determine who qualifies for it (P). After the Supreme Court issued its ruling in National Federation of Independent Business v. Sebe- lius, states no longer had to conform to this 133 percent level and could instead continue with their pre-ACA requirements (P).

Many of Ohio’s residents live in rural communities (S). Their average income is low (E), and as a result of the Medicaid income threshold being set at 133 percent of the poverty line, 21.4 percent of Ohio’s population qualifies for Medicaid (S). In these rural areas, Medicaid is the primary insurer (E). Ohio outsources its Medicaid prescription drug benefit management to five managed care organizations (MCOs) (P). Four of these five MCOs outsource their drug benefits management to CVS Caremark (E), which hap- pens to operate a pharmaceutical benefit manager (PBM) business that acts as a middle- man among drug manufacturers, pharmacies, and insurers. The PBMs decide which drugs are listed on a formulary, how much money pharmacies are reimbursed, and how much insurers will pay (E).

Rural Ohio has few big box chain pharmacies. Instead, there are many small, independent, and family-run drug stores (E). Medicaid is the primary insurer. The Wall Street Journal spoke with eight current or former independent pharmacists in Ohio who complained that CVS has used its PBM ability to set drug prices at a level below the pharmacists’ wholesale drug costs (E). Thus, these independent pharmacies lose money on each of the prescriptions they fill for the majority of their customers (P). For so many of these local drug stores, the only options appear to be filing for bankruptcy or selling out to CVS, which then closes the drug store, forcing customers to choose between skipping their medications and, if they are able, driving long distances (T) to purchase them (S).

The Wall Street Journal interviewed Dominic Bartone, a pharmacist for 41 years. He operated two pharmacies in Lebanon, Ohio. After CVS cut payment rates, these pharma- cies began taking a loss on between 40 and 50 prescriptions a day. Eventually, Bartone sold the stores to CVS. Between May 2015 and May 2018, Ohio lost 164 independent pharmacies while CVS has added 68 (E).

Clearly, political, economic, social, and technological issues exist in all industries. One must look closely to extract the information. When considering a PEST analysis, keep in mind that the PEST factors in an industry are multifaceted. They can be obvious or obscure, customer focused or inwardly focused, high tech or low tech.

Consider the breadth of the technological factor (T) in the aerospace manufactur- ing industry, using the recent case of the Boeing 737 MAX as an example. Boeing manu- factures airplanes for the commercial airline industry. In 2017, Boeing released an updated version of the widely flown 737 model called the 737 MAX.

In October 2018, Lion Air Flight 610, a 737 MAX, crashed, killing all aboard. In March 2019, a second 737 MAX crashed in Ethiopia, also killing all aboard. Aviation experts found similarities between the crashes. The technology involved in designing the airplane, and more specifically the software that runs and monitors the flight control sys- tem, seemed to be a probable cause.

From a human factors technology perspective, one “senior Boeing official said the company had decided against disclosing details about the [flight control technol-

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Chapter 7: PE ST Analysis of the Environment 59

ogy] system that it felt would inundate the average pilot with too much information and significantly more technical data than he or she needed or could realistically digest,” according to an article by Pasztor and colleagues (2019).

The consumer response, enabled by technology, was swift. Twitter was ablaze with anti-Boeing and anti-737 MAX tweets and #737MAX8 hashtags demanding the immedi- ate grounding of this airplane model. Soon thereafter, the Federal Aviation Administration grounded all 737 MAXs in the United States. As of May 2020, the airplanes were still grounded.

On March 24, 2019, American Airlines, like other airlines, posted a statement on its website (American Airlines 2020):

American continues to await information from the Federal Aviation Administration (FAA), Department of Transportation (DOT), National Transportation Safety Board (NTSB), other regulatory authorities, and Boeing, that would permit the 24 Boeing 737 MAX aircraft in our fleet to resume flying.

In an effort to provide more certainty and avoid last minute flight disruptions, Ameri- can has extended cancellations through April 24. This will result in the cancellation of approximately 90 flights each day based on our April schedule. By proactively canceling these flights, we are able to provide better service to our customers with availability and rebooking options.

American’s Reservations team will contact affected customers directly by email or telephone. We know these cancellations and changes may affect some of our customers, and we are working to limit the impact to the smallest number of customers.

While the PEST analysis is industry focused, not company focused, the Boeing incident demonstrates how different dimensions of technology can play a role in the avia- tion manufacturing industry. Technology in this industry affects the design, development, manufacturing, flight, customer, corporate response, and consumer response to name a few issues. The Boeing accidents demonstrate the impact of technology not just for Boeing but for the industry as a whole, a factor that, in this situation, was literally a matter of life and death for stakeholders from airline passengers to medical freight transportation companies.

References

American Airlines. 2020. “An Update on the Boeing 737 MAX.” Updated February 14. http:// news.aa.com/news/news-details/2020/The-Latest-Information-About-737-MAX- Operations-OPS-DIS/default.aspx.

Blumenthal, D. 2018. “The High Health Cost of Social Isolation—and How to Cure It.” Wall Street Journal. Published February 28. https://blogs.wsj.com/experts/2018/02/28/the- high-health-cost-of-social-isolation-and-how-to-cure-it/.

Constable, S. 2018. “For Scientists Seeking Research Backing, Crowdfunding May Be the Answer.” Wall Street Journal. Published May 28. www.wsj.com/articles/for-scientists- seeking-research-backing-crowdfunding-may-be-the-answer-1527559200.

Evans, M. 2018. “Kaiser Permanente Cultivates the Digital Doctor–Patient Relationship.” Wall Street Journal. Published May 28. www.wsj.com/articles/kaiser-permanente-cultivates-the- digital-doctor-patient-relationship-1527559500.

Geron, T. 2018. “How Blockchain Could Help Lower Health Costs.” Wall Street Journal. Published May 28. www.wsj.com/articles/how-blockchain-could-help-lower-health- costs-1527559440.

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Strategic Analysis for Healthcare60

Harris, D. 2018. “How to Keep People’s Health Data Private—Without Hurting Research.” Wall Street Journal. Published May 4. https://blogs.wsj.com/experts/2018/05/04/how-to- keep-peoples-health-data-private-without-hurting-research/.

Holland, E. 2018. “Telemedicine Reinvents the Visit to the School Nurse.” Wall Street Journal. Published May 25. www.wsj.com/articles/telemedicine-reinvents-the-visit-to-the-school- nurse-1527259188.

Kornelis, C. 2018. “AI Tools Help the Blind Tackle Everyday Tasks.” Wall Street Journal. Published May 28. www.wsj.com/articles/ai-tools-help-the-blind-tackle-everyday- tasks-1527559620.

Landro, L. 2018. “The Operating Room of the Future.” Wall Street Journal. Published May 28. www.wsj.com/articles/the-operating-room-of-the-future-1527559862.

Linden, D. W. 2018. “DNA Testing Offers New Hope for Infants with Genetic Disease.” Wall Street Journal. Published May 28. www.wsj.com/articles/dna-testing-offers-new-hope-for- infants-with-genetic-disease-1527559800.

Marcus, A. D. 2018. “When Are You Dead? And Who Decides?” Wall Street Journal. Published May 28. www.wsj.com/articles/doctors-face-scrutiny-about-defining-death-1527559740.

Moise, I. 2018. “For the Elderly Who Are Lonely, Robots Offer Companionship.” Wall Street Journal. Published May 28. www.wsj.com/articles/for-the-elderly-who-are-lonely-robots- offer-companionship-1527559260.

Pasztor, A., A. Tangel, R. Wall, and A. Sider. 2019. “How Boeing’s 737 MAX Failed.” Wall Street Journal. Published March 27. www.wsj.com/articles/how-boeings-737-max- failed-11553699239.

Wall Street Journal. 2018. “Why CVS Loves ObamaCare.” Published May 29. www.wsj.com/ articles/why-cvs-loves-obamacare-1527633490.

Wang, S. S. 2018. “For Those with Dementia, Help from Technology.” Wall Street Journal. Published May 28. www.wsj.com/articles/for-those-with-dementia-help-from- technology-1527559380.

Ward, L. 2018. “Do Doctors and Nurses Skip Hand Washing?” Wall Street Journal. Published May 28. www.wsj.com/articles/do-doctors-and-nurses-skip-hand-washing-cue-the- video-1527559320.

Winslow, R. 2018. “New Promise for Bone-Marrow Transplants.” Wall Street Journal. Published May 28. www.wsj.com/articles/new-promise-for-bone-marrow-transplants-1527559680.

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Chapter 7: PE ST Analysis of the Environment 61

E

X

E

R

C

I

S

E

Use the PEST table below to list the issues, impacts, and strategic implications for your industry.

PEST

Environmental Issue Affecting the

Industry Impact on the Organization

Implication for Strategy (What We Should Think About When

Developing Strategy)

Political 1.

2.

3.

4.

5.

Economic 1.

2.

3.

4.

5.

(continued)

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Strategic Analysis for Healthcare62

E

X

E

R

C

I

S

E

PEST

Environmental Issue Affecting the

Industry Impact on the Organization

Implication for Strategy (What We Should Think About When

Developing Strategy)

Social 1.

2.

3.

4.

5.

Technological 1.

2.

3.

4.

5.

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63

CHAPTER

8

U nderstanding the position of competitors in the market is essential for the devel- opment of an effective business strategy. One way that analysts achieve this understanding is through competitive market benchmark analysis. This approach

helps analysts identify key factors that differentiate a company from its competition. Benchmarking—that is, establishing goals through comparisons with other organizations’ performance—is widely used in healthcare as a quality improvement tool, and it can be extremely helpful in ensuring a competitive advantage over the competition. Analysts are able to use comparisons and differentiation to drive strategy development. For example, consider a company that currently ranks first in market share but sees a competitor quickly rising in the rankings for price, quality, service, and reputation. Benchmark analysis helps the company identify this new competition and decide what to do about it.

To begin a benchmark analysis, analysts need to identify the factors that are impor- tant in the industry being studied. Each industry has a unique set of critical success fac- tors, key competencies, requirements, driving forces, and indicators. In retail sales, for instance, productivity has been measured in sales per square foot, and this measure serves as a key indicator of the efficiency of operations, trends (when measured over time), and competitive position (when compared with other retailers). In healthcare organizations, analysts evaluate conditions across a number of categories (operations, finance, and so on) and compare the organization under study with organizations considered to be the best in those specific categories, in or outside of healthcare.

Conducting a competitive market benchmark analysis involves a series of steps. First, through research, select the appropriate broad categories for your organization (exhibit 8.1). Some broad categories will be appropriate for all industries (i.e., finan- cial results), and some will be industry dependent (i.e., manufacturing capability for a healthcare product manufacturing company). You need to find the right ones for your industry. The categories shown earlier are simply examples.

Second, identify the particular items that are important to your industry. What are the critical success factors and driving forces in your industry? These are the issues that should be benchmarked.

COMPETITIVE MARKET BENCHMARK ANALYSIS

EXHIBIT 8.1 Some Possible Broad Categories

• Product related • Patient related • Innovation related • Financial related • Price related • Sales related

• Employee related • Quality related • Service related • Manufacturing related • Geography related • Distribution related

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Strategic Analysis for Healthcare64

For example, within the finance category, “return on assets” may be important to an industry such as manufacturing, which is highly dependent on equipment, whereas in the retail credit industry, “number of accounts 30 to 59 days past due” is much more important. You can select as many items as you feel are important.

In identifying factors, analysts sometimes fall into conceptual traps such as failure to think in terms of the big picture or failure to move from the present to future tense. Consider the US automotive industry in the 1960s. The industry failed to foresee the oil crisis of the 1970s, the growth of the Japanese automotive industry, and the trend of increasing consumer sensitivity to price and quality. Looking back, one might wonder how analysts could have missed those issues. This example illustrates the need to think broadly and consider future possibilities. American auto industry analysts could have, and in ret- rospect should have, identified those issues, which might have enabled the US automotive industry to stop the Japanese automotive industry in its tracks. However, given the five- to seven-year lead time needed then to manufacture a new vehicle model, it was too late for American strategists to identify these issues in the 1970s.

Healthcare is different from the auto industry, but the key points still apply. Consider the rapidly evolving healthcare system in the United Sates. People have long acknowledged that some type of reform is necessary, but there is little agreement on how to approach it. Can you consider the big picture to address the healthcare needs in your community and develop a strategy to ensure the competitive viability of your organization well into the future?

The industry critical success factors are important to understand before embarking on strategy development. An example of a company that misstepped is Airbus, an industry leader in airplane manufacturing. Airbus’s customers are airlines. A critical success factor in the airplane manufacturing industry is designing more cost-efficient airplanes. Because fuel is a key cost for the airlines, they want airplanes that are smaller and more fuel effi- cient for their long-distance flights. Airbus ignored this critical success factor and instead embarked on a strategy of building bigger and faster planes. It rationalized that buying one big airplane rather than three smaller planes would be more attractive to the airlines and that getting passengers from point A to point B more quickly would also be more desirable. Airbus then invested billions in developing a giant, less-fuel-efficient airplane called the A380 despite its customers’ desires. For airlines, the cost of the airplanes is about 10 percent of their cost structure, whereas fuel is about 30 percent (Wall 2019). In 2019, Airbus announced that it was ending production of its A380. The company suggests that it broke even on the A380; however, the reality is unclear.

Third, identify the competitors in your industry and obtain information regarding each key item you have identified. Consider adding an industry average if you are not list- ing all companies in the industry. Presenting the results in a table format enables the user to quickly grasp the issues.

Fourth, extract meaning from the data. Ask questions such as, “Why is it so?” “Who is the best of the best and why?” “What is the trend?” “Given these data, what are the competitors likely to do?” In subsequent chapters we will be looking at strengths, weak- nesses, opportunities, and threats (SWOT). The information from the Competitive Market Benchmark Analysis will provide you with some of the information necessary to complete the SWOT analysis.

Remember to think broadly. Your competition includes any business that could compete for your customers. As an example, while theaters compete with other theaters directly, they also compete indirectly with cable TV, streaming video, video games, restau- rants, live music venues, Broadway-style theater, and circuses.

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Chapter 8: Competit ive Market Benchmark Analysis 65

There are many ways to determine how competitors compare. Common methods include numeric data reporting, forced ranking (in which competitors are assigned ranks from best to worst), scoring (e.g., on a scale of 1 to 5 for each factor), and selecting “yes” or “no” for key items. Examples of these approaches are presented in exhibits 8.2 through 8.5.

For all of these examples, it is valuable to observe trends over time. For instance, using the numeric data reporting method, one could look at the percentage increase in

EXHIBIT 8.2 Analysis Example Using Yes or No

Service Our

Hospital Alpha

Hospital Beta

Hospital Omega

Hospital Industry

Practice network Yes No No Yes Yes

Trauma center Yes No No Yes No

Cancer center Yes Yes No No No

Emergency department Yes No Yes Yes Yes

EXHIBIT 8.3 Analysis Example Using Scoring Scale

Human Resources Our

Hospital Alpha

Hospital Beta

Hospital Omega

Hospital Industry

Overall quality rating 1 2 2 5 3

Retention 2 1 2 5 2

Flexibility 1 4 2 5 3

Onboarding and training 1 4 3 5 3

Note: 1 = superior, 5 = poor.

EXHIBIT 8.4 Analysis Example Using Numeric Data Reporting

Finance Our

Hospital Alpha

Hospital Beta

Hospital Omega

Hospital Industry

Liquidity ratio 2.18 1.95 .98 2.02 2.11

Long-term debt to assets 0.25 48 67 33 0.21

Age-of-plant ratio 9.49 7.80 8.21 5.72 10.31

Average days in accounts receivable

48 59 62 54 49

EXHIBIT 8.5 Analysis Example Using Forced Ranking

Productivity Our

Hospital Alpha

Hospital Beta

Hospital Omega

Hospital Median

Market share 1 2 3 4 2.5

Adjusted operating revenue 2 4 3 1 2.5

Revenue per provider 2 4 1 3 2.5

Patient loyalty 1 3 2 4 2.5

Note: 1 = superior; 5 = poor.

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Strategic Analysis for Healthcare66

stock price of three publicly traded (meaning they have issued stock on the stock market) healthcare providers: DaVita Inc. versus two competitors, AMN Healthcare and Select Medical Holdings Corporation. Looking at today’s change in stock price does not tell us a lot; however, looking at the longer period of December 15, 2019, to May 18, 2020, shows that something is happening that needs to be investigated as part of the strategic analysis and strategy development process. Rather than just listing the share price increase for today, exhibit 8.6 dramatically displays DaVita’s outperformance. Simply knowing that DaVita experienced an increase of 6.9 percent during the period compared with a 26 percent to 31 percent drop for its competitors does not convey the whole story, how- ever. Examining the data over a period of time allows us to observe a significant difference, and that difference then allows us to ask, “Why do investors believe in DaVita and not its two competitors? What is DaVita doing that the others are not?” That is the power of benchmarking.

Further, consider this trend analysis of patients’ perception of quality on a scale from 1 to 5 (exhibit 8.7). This chart clearly shows that something is going on with

EXHIBIT 8.7 Patients’ Perception of Quality

3 3 3 3 3 3

1 1

2

3

4

5

0

1

2

3

4

5

6

1 2 3 4 5 6

Our Company Their Company

Note: 5 = best; 1 = worst.

EXHIBIT 8.6 DaVita Outperformance

16 23 2020 13 20 10 17 Mar Apr9 16 23 13 20 May 11 18

SEM

AMN

DVA

1.48M

25.00% SEM 28.21 AMN 74.15 DVA 84.09

0.00%

10.31%

–32.11%

–26.95%

Feb

× ×

Note: DVA = DaVita Inc.; AMN = AMN Healthcare; SEM = Select Medical Holdings Corporation. Source: Yahoo Finance (2020).

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Chapter 8: Competit ive Market Benchmark Analysis 67

patients’ perception of quality. A single point in time does not tell the entire story; for that we need the trend data.

A benchmark analysis that contains both financial and nonfinancial information is often called a balanced score card. The term balanced refers to the fact that companies in the past often only considered and measured themselves and their competitors on the basis of financial data. The inclusion of a broad range of categories from corporate culture to technical innovation gives the strategic analyst a deeper insight into the company under study, its competitors, and the industry, which increases the possibility of developing a more effective strategy.

Wherever an anomaly exists, you should be able to discuss why (exhibit 8.8). In this chart, which shows medical equipment sales per employee, why did the sales for “Us” start to go down in 2016, whereas the sales for “Them” continued to gain? Understanding why is a key to later strategy development.

The point of competitive benchmarking is to be able to identify strengths on which your strategy can capitalize and weaknesses that you can strategically defend. Conversely, where can you strategically gain advantage over your competitors and where may they have an advantage over you? Results from your competitive benchmark analysis will most likely show up in your SWOT analysis.

References

Wall, R. 2019. “Airbus to Retire the A380, the Superjumbo That Never Quite Took Off.” Wall Street Journal. Updated February 14. www.wsj.com/articles/airbus-will-stop-building-its- a380-superjumbo-jet-11550121699?=wsj_StratW5A1.

Yahoo Finance. 2020. “Interactive Stock Chart.” Accessed May 20, 2020. https://finance.yahoo. com/chart/SEM.

2010

$70,000 SALES PER EMPLOYEE

$65,000

$60,000

$55,000

$50,000

$45,000

$40,000

$35,000

$30,000 2011 2012 2013 2014 2015 2016 2017 2018 2019

ThemUs

Medical equipment: Sales per employee for “Us” dropped as a result of increased head count in corporate functions such as marketing and finance, whereas “Them” continued its rapid new product introduction rate without adding employees.

EXHIBIT 8.8 Example of an Anomaly

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Chapter 8: Competit ive Market Benchmark Analysis 69

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Conduct a competitive market benchmark analysis for your industry. Follow the steps below.

Competitive Market Benchmark Analysis of the _____________________________ Industry

1. Identify the critical success factors and driving forces for your industry:

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

(continued)

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Strategic Analysis for Healthcare70

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2. Identify the key broad categories for your industry:

1.

2.

3.

4

5.

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Chapter 8: Competit ive Market Benchmark Analysis 71

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3. Within those categories, identify the key factors for your industry. Consider your company, identify your competitors, and complete the table using the matrix approach identified in this chapter. The categories chosen should be based on what is critical in the industry, not simply on what your organization is doing well on. If an analyst chooses the issues on which the organization is doing well rather than those that are driving the industry forward, the results will be skewed and the strategic opportunities will not be identified.

Category

Your Organization

Competitor 1

Competitor 2

Competitor 3 Industry

1.

a.

b.

c.

d.

e.

f.

g.

2.

a.

b.

c.

d.

e.

f.

g.

(continued)

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Strategic Analysis for Healthcare72

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Category

Your Organization

Competitor 1

Competitor 2

Competitor 3 Industry

3.

a.

b.

c.

d.

e.

f.

g.

4.

a.

b.

c.

d.

e.

f.

g.

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Chapter 8: Competit ive Market Benchmark Analysis 73

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Category

Your Organization

Competitor 1

Competitor 2

Competitor 3 Industry

5.

a.

b.

c.

d.

e.

f.

g.

Important issues can be more visually impactful by using a chart.

0

0.2

0.4

0.6

0.8

1.0

1 2 3 4 5

Benchmark Analysis Graph of Issue _________

Competitors

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Strategic Analysis for Healthcare74

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Implications for Your Organization’s Strategy:

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

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