Monday, April 18, 2011

Strategic Options for Healthcare Providers

The article “Types of Strategy: Which Fits Your Business?” presents an overview of strategic options and summarizes four generic strategies – low-cost leadership, differentiation, customer relationship, and the network effect. In this blog, I am applying the concepts to the healthcare industry and evaluate the applicability of the options to this specific industry. My focus here is to explore the strategic options in the healthcare provider industry and to jot down my ideas on this topic.


Low-cost leadership

  • · There seems to be no clear evidence that low-cost leadership works effectively among the healthcare providers. Why so? The nature of healthcare as a service: quality is the most important attribute of healthcare as service because health has significant impacts on one’s quality of life. In general, consumers typically perceive the strong correlation between quality and price; the higher the price of a service, the better quality is. Therefore, low-price healthcare providers are likely to be perceived to provide low-quality healthcare services, which failing to expand the share.

  • · However, the first point above may not hold true when the medical condition is relatively less complicated. Retail clinics illustrate this point. Retail clinics, an innovative business model among providers, treat a limited number of common medical conditions –e.g. red eyes, fevers – with a lower price. In this sense, the market of healthcare is being segmented by the complexity of medical conditions.
  • Another reason why low-cost leadership may not be effective in the healthcare industry is disjoint between low-cost and high-volume: One of the prevalent business models with low-cost leadership is to sell a large number of products/services at a small profit. This model does not work for healthcare providers mainly because of the third party payment system. Even though a hospital lowers prices for services, it does not necessarily lead to an increased patient volume because 1) patients do not directly pay for healthcare services because they consume services through their health plans, 2) patients typically do not have access to pricing information of services. Therefore, in the healthcare provider industry, the impacts of lowering prices for a service are somewhat limited.

  • · Is low-cost leadership always linked to low-pricing? Low-cost strategy always reminds me of Wal-Mart. Despise lower prices they offer, the company generates huge profits because they sell large volume. In this sense, low-cost, low-price, and large market share are always linked together. And if so, this business model is not effective as I hypothesized above. My hypothesis above is based on the assumption that a low-cost leader is always a low-price setter to seek for a larger market share. However, there should be alternative models where low-cost leaders do not necessarily set low-prices. For example, Toyota, as the article points out, achieves low-price through “continuous improvement in operating efficiency,” but they do not necessarily set the lowest price. Instead, they seem to compete based on values and maximize profits by optimizing price and volume. Is Toyota’s business model applicable to healthcare providers?

Differentiation

  • · Is healthcare service commodity? Or are consumer informed well enough to differentiate medical services?
  • · If healthcare service is not perceived as commodity by consumers, what attributes help providers to differentiate their services? Speed or no wait-time? If so, what would be the priority of each attribute? Or, is quality the only attribute of healthcare service?

  • · If healthcare service is considered commodity, is it still possible to differentiate on the basis of accompanying services? If so, what would those be? Single billing?

Customer Relationship / Focus

  • What factors help hospitals establish strong customer relationship beside the ones listed in the article? Does the size of hospitals impact the nature of customer relationship? How does training of staff improve customer relationship? How open physicians are to the idea of patient as customer?

REFERENCES:

  1. 1. Types of Strategy: Which Fits Your Business? (Excerpted from: Strategy: Create and Implement the Best Strategy for Your Business (HBS Press), 2006)

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