Alan M. Zuckerman
Is "competition" still a dirty word in your healthcare organization? Then it's time to get with the times.
At a Glance
By adopting five basic practices, your organization will be ready to advance to the next level of competitive fitness:
- Develop a reliable financial baseline.
- Insist on development of a competitive intelligence database system.
- Employ rigorous business planning.
- Advocate for focus and discipline.
- Really commit to competing.
Read the Web Exclusive: Interview with hfm's November 2007 Cover-Story author, Alan Zuckerman
When I first entered the healthcare field 35 years ago, planning focused mainly on fulfilling needs. Growth seemed almost unlimited, and most hospitals struggled to grow fast enough. Healthcare organizations were small and largely not-for-profit, debt financing was modest, and program and facility development were carried out if fund-raising was successful. With healthcare demands booming and so many needs to meet, competition was almost nonexistent.
Fast-forward to 2007: Healthcare organizations are often the largest employers in their communities-complex, sprawling monoliths with multiple companies, divisions, and sites. For-profits are a significant presence in all areas within the healthcare field. As can be seen in the newspaper clippings throughout this article, hospital planning and development initiatives conflict more often than not with those of other local organizations.
In many areas of the country, concerns about competitive impact are paramount. Expansive new initiatives are being carried out despite questionable community benefit and potentially damaging effects on other healthcare organizations.
Sound competitive strategy in health care is now a necessity for all organizations-from those hospitals and systems spending hundreds of millions of dollars on expansion to those organizations that believe they are immune to competitive threats. But few, if any, markets are so isolated or so strongly defended that providers can afford to remain ignorant of or uninterested in the basics of competitive strategy.
Some Offensive Strategies ...
Many healthcare organizations are in a growth mode in some aspects of their businesses. The following questions provide a framework for discussions about formulating competitive strategy in health care:
- Where should we compete? To what degree is an organization interested in further penetrating its existing market or expanding into new markets?
- What products should we compete with? Is the appropriate approach to use existing products or services, extend existing products, or develop new products?
- How will we gain sustainable competitive advantage in these chosen markets?
- What approaches will be needed now and in the future? Is there value in initiatives that cross markets?
Although this framework may seem oversimplified, all offensive strategies start with this rudimentary view.
... And a Few Defensive Tactics
Much less is written and said about what to do if your organization is put on the defensive by a competitor's strategic initiatives, although this situation is quite common. Organizations need to be on the alert for competitive forays and be prepared to defend their turf. Critical for success is a well-developed, up-to-date intelligence database that includes ongoing qualitative assessment of competitors and their strategies:
- What is driving each competitor's strategy and behavior?
- What is each doing, and what can they do?
- What is the future strategy of each competitor?
- What is the likelihood of new competitors and their potential strategies?
As Gen. Dwight D. Eisenhower observed, "The problem in defense is how far you can go without destroying from within what you are trying to defend from without." A balance should be struck to ensure that opportunities to improve and grow services and products don't get lost among efforts to defend market position.
What Is Competitive Strategy?
Michael Porter, one of the most prominent authorities on the topic, defines competitive strategy this way:
Competition is at the core of the success or failure of firms. Competition determines the appropriateness of a firm's activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive strategy is the search for a favorable competitive position in an industry, the fundamental arena in which competition occurs. Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition.a
Porter later refined his ideas on the essence of competitive strategy: "[C]ompetitive strategy is about being different. It is choosing a different set of activities to deliver a unique mix of value."b
Consider examples outside health care in which companies have a clear, successful competitive strategy that meets this definition. Wal-Mart's clear competitive strategy has catapulted it to the top of the retailing industry to become one of the largest companies worldwide. Southwest Airlines has certainly used a different approach to establish the only continually profitable and growing airline in the past decade. And Starbucks has turned a low-price commodity-coffee-into a highly profitable global company.
As those examples suggest, good competitive strategy generally is based on one of three approaches.
Cost leadership, or producing the same product or service at a lower cost than competitors. Creating a more efficient production or service delivery process than that of its competitors allows the organization to charge a lower price (à la Wal-Mart) and be profitable. Some healthcare organizations have innovated in certain aspects of their operations, such as supply chain and care delivery models, to give them a sustainable cost advantage relative to their competitors.
Differentiation, or producing the same product or service at a higher quality than competitors do. Being better than the competition in a way that customers truly value (e.g., 99th percentile ranking for patient satisfaction) creates clear competitive advantage. As Southwest Airlines demonstrates, the differentiation needs to result from sustainable improvements in the way the organization operates; it can't be just a one-time occurrence.
Niching, or focusing exclusively on a narrow segment of the market. Focusing on a small, carefully defined area-as Starbucks does with coffee-is another effective way to stand out from the competition. Niche providers are able to customize and concentrate their resources on specific customer needs in a way that more diverse organizations usually can't.
Where the Rubber Meets the Road
Carrying out competitive strategy (Porter's "different set of activities to deliver a unique mix of value") is where healthcare organizations, especially not-for-profits, have a long way to go to be truly formidable competitors.
Many healthcare organizations have employed a variety of "power" strategies in the past decade through vertical and horizontal integration to circumvent the difficulties of true competition and yet succeed in the marketplace. In so doing, they seek to dominate the markets in which they operate and eliminate competition. Such strategies have enjoyed mixed success, often leading to the creation of large, unwieldy organizations that are difficult to manage and operate profitably-which have spawned more nimble niche competitors who pick off financially attractive pieces of the large organizations'
It is not possible to reduce the "hows" of competitive strategy to a formula. To create "a different set of activities to deliver a unique mix of value" means developing an approach that is not easily replicated and that can be sustained over time. Many companies outside health care pick a path to follow but then falter on the hard, creative work of implementing it. In health care, few companies even choose the path, and only a small number ever get to the point of implementing it.
How One Hospital Found Its Competitive Edge
Baptist Healthcare in Pensacola, Fla., is perhaps the premier example in the healthcare industry of a provider that has employed exceptional management expertise and competitive strategy to become a national leader in patient-focused care. Patient satisfaction scores for both inpatient and outpatient care have been near the 99th percentile since 1999. Baptist has, in fact, been so successful that it shares its leadership and management expertise with other providers through the Baptist Health Care Leadership Institute.
The hospital's list of national accolades is long: Malcolm Baldrige National Quality Award, six consecutive years on Fortune magazine's list of "100 Best Companies to Work For," 2006 VHA Leadership Award for Clinical Excellence, Press Ganey's 2006 Summit Award for customer satisfaction. However, achieving these accomplishments was a long journey for the organization. As Baptist CEO Al Stubblefield writes in his book The Baptist Health Care Journey to Excellence: Creating a Culture that WOWs!
Just as our amazing turnaround has not happened overnight, neither did our descent to such dismal satisfaction ratings occur quickly. A variety of factors contributed to our downturn, including poor management decisions, changes in the healthcare industry, and other distracting pursuits that ultimately proved more harmful than beneficial. These factors, combined with a lack of vision, caused us to lose our focus as a healthcare organization.
After five years in major merger discussions and three failed merger attempts, the organization's leaders moved their focus from the external environment toward home in 1995. Harsh realities set in quickly. Baptist had strayed from its mission and was failing to live up to its potential as confirmed by employee and patient satisfaction surveys. Finding a competitive edge took patience.
Knowing that they couldn't outspend their competitors on technology, programs, and facilities, the hospital's leaders realized that quality could be a competitive advantage-although at the time there were plenty of skeptics who believed that quality wasn't concrete enough and couldn't be measured. Although Baptist's decision to focus on service excellence was the right choice, Stubblefield admits that, "While turning our focus to service excellence may sound like a noble endeavor, it was born largely out of desperation. In effect, we heeded the sage advice of author and consultant Peter Drucker: 'You don't have to change-survival is optional.' "
Baptist employs numerous initiatives that can be categorized as innovative and cutting-edge within the healthcare industry. The organization uses listening and learning approaches such as surveys and customer value analyses to evaluate customer needs and examine patient loyalty. Information is analyzed in a customer relationship management database to determine key requirements for each customer group. This information is then used as input for strategic planning, service design, and performance improvement initiatives.
All Baptist employees receive 60 hours of learning each year. A daily lineup of all organization leaders and employees communicates important operational information and provides oppor-tunities to keep attention focused on Baptist's values. A Bright Ideas program, performance improvement teams, around-the-clock employee forums, and peer interviewing are used to solicit suggestions for improvement from employees. Each year, thousands of these suggestions are implemented.
Ongoing Competitive Fitness
Even if your organization lacks a clear and carefully developed competitive strategy, a variety of fundamental practices will make the organization more competitively fit and better able to succeed in its initiatives in its market. By adopting these five basic practices, your organization will be ready to advance to the next level.
Develop a reliable financial baseline. First and most important for financial managers is ensuring that their internal statistics and databases are reliable and support decision making. Detailed, accurate, current data should include:
- Current financial performance and position for each company and/or operating unit
- Comparison of current financials with those of local and national peer groups and benchmarks
- Current financial performance by product line and service, subdivided into at least inpatient and outpatient components
- Current and projected (at least three years out) capital expenditures aggregated by program and department and for operating units and divisions
- Projected financial performance (at least three years out) by category (as above) and overall, including major underlying assumptions
Such data are no longer simply nice to have; they are required for good decision making. My unscientific estimate is that fewer than 25 percent of healthcare organizations have these data today-and the only reason the other 75 percent do not have them is that those organizations choose not to collect them.
Insist on development of a competitive intelligence database system. Competitor and market intelligence form the foundation for successful competitive strategy. Unfortunately, most healthcare organizations are plagued by weak or nonexistent systems for gathering intelligence. For far too long, hospitals and systems have claimed that a lack of meaningful data rendered thoughtful and thorough planning impossible.
Organizations that have broken this cycle of making excuses and remaining inwardly focused have been rewarded with a wealth of useful information that allows them to keep track of who their competitors are and what those competitors are doing and planning. Sound competitive intelligence databases enable organizations to organize, analyze, summarize, compare, and share accurate and reliable information about the competition. Information about goals, strategies, strengths, and weaknesses ideally should be collected, including both soft and hard data, as shown in the exhibit .
View Exhibit 1
A competitive intelligence database system that is functioning well produces actionable information that leads to sound, fact-based decisions.
Employ rigorous business planning. Business planning in health care is rarely rigorous-meaning thorough, analytically sound, and perceptive. Ask yourself whether your organization's current business plans (if it has any) are comprehensive, detailed, and persuasive enough to pass the test of securing outside funding. Increased rigor is necessary in plan development and implementation, monitoring, and revision.
Demand business plans and update them regularly, at the very least for the most critical business lines of the organization, generally comprising 60 percent to 80 percent of total revenue and a higher proportion of margin. These plans should clearly describe your product and market approach, including product development and refinement, as well as an attack plan for target markets.
Advocate for focus and discipline. It sounds so simple: focus and discipline, two behaviors that are common in financial managers. But they are distressingly uncommon in the larger organizations in which these managers operate. Competitive fitness and success require focus and discipline so that resources are applied judiciously to the areas where they can have the greatest impact. "Just saying no," a common financial manager's reaction to the fragmentation and chaos of healthcare decision making, is not sufficient. Be a constructive, positive advocate for a focus on strategic priorities and a disciplined approach to decision making and resource allocation.
Really commit to competing. Competition is still a dirty word in some not-for-profit healthcare circles. Competition certainly can lead to redundancy and waste, but it can also serve as a mechanism for strengthening organizations: improving quality, keeping costs under control, and maximizing patient satisfaction.
Let's take competition and competitive tools out into the sunlight and position them as primary resources for strengthening healthcare organizations and allowing them to better serve their communities.
Alan M. Zuckerman, FACHE, FAAHC, is president, Health Strategies & Solutions, Inc., Philadelphia (email@example.com).
a. Porter, M., Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Books, 1985.
b. Porter, M., "What Is Strategy?" Harvard Business Review, November-December 1996.
Publication Date: Thursday, November 01, 2007