Industry analysis:Analysis of the external environment

An analysis of the external environment covers the industry or segment in which the orga- nization competes, its competitors, markets, and other relevant environmental trends and changes. As illustrated in Figure 1.1, external analyses are part of the strategic thinking process. The purpose is to understand how the environment relevant to the organization is changing and might change in the future—in this sense, “relevant” means anything the organization might affect or could be affected by. Without such an understanding, doing strategic planning becomes much more difficult.

4.1 Industry Analysis An industry analysis is the study of the healthcare industry and the forces that might be causing it to change. It involves using a number of standard but indispensable tools that will be discussed in this chapter. Because the ways in which the healthcare industry changes can dramatically affect the decisions an organization makes, this analysis is a key element in strategic planning.

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The word industry in “industry analysis” can mean a segment of the larger healthcare industry or the entire industry itself. If a healthcare organization provides services for homebound patients, for example, for the purposes of doing a strategic analysis it is com- peting in the home care industry, even though it is really a segment of the healthcare industry. While HSOs must consider what is happening in the entire healthcare industry during strategic planning, the in-depth industry analysis focuses on the arena in which the organization competes. So while discussions in the next section use the broader term industry analysis, remember that for HSOs this refers to their narrower segment of the healthcare industry.

One thing to keep in mind when conducting an industry analysis is to write down what is true for the industry—not for the organization under analysis. Sometimes data on an

industry or industry segment are easy to obtain because they are regularly published or because trade groups or consulting firms keep tabs on certain statistics. However, in some situa- tions it may be difficult to get data for a meaningful analysis.

To minimize errors when using inad- equate data or relying on one person’s estimates, it is advisable to assemble a group of people to share perspec- tives and use shared estimates in the analysis. If the group is fairly knowl- edgeable about the industry in which the organization competes, the per- ceptions gathered will be more useful and make the understanding more complete. Group members who have

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An industry analysis is best conducted by a group of people who can use shared estimates.

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CHAPTER 4Section 4.1 Industry Analysis

differing estimates and opinions will be forced to explain their views and, in the process, either convince others they are correct or be persuaded to change their own views or esti- mates. In this way, a shared perspective leads to greater understanding.

An industry analysis is done for the purpose of better understanding the environment in which the organization is competing. The analysis allows organizations to identify the following:

• The industry’s dominant economic characteristics • How the industry is changing and what is causing it to change • Who has more bargaining power • Barriers to entry and how high they are • Concentration or fragmentation in the industry • What is necessary for success • The industry’s overall “attractiveness”

Each of these considerations will be discussed in the sections that follow.

Dominant Economic Characteristics of an Industry

Economic characteristics can vary by industry but generally are applicable throughout business and include the following:

• Industry size—This is the total dollar sales of all firms in the industry. • Industry growth rate—This is the percentage increase or decrease over the previ-

ous year. • Scope of competitive rivalry—This can be local, regional, national, or international. • Number of competitors—This may or may not be known. • Stage in the industry’s life cycle:

○ emerging—must be a brand-new industry with total industry sales less than 5%

○ growth—total industry sales growing at more than 5% per year ○ shakeout—a transitional period between growth and maturity where some

competitors fail, others are acquired, and the total number of competitors shrinks

○ mature—total industry sales of between 0 and 5% ○ declining—must have negative growth rate for several years in a row

• The consumers or purchasers—How many are there and who are they? Where are they located?

• Rate of technological innovation—How dependent is the industry on technological innovation? How much innovation is taking place?

• Rate of disruptive innovation—To what extent are market entries expanding their scope of products and services?

• Product characteristics—Are the products commodity-like or differentiated? This determines to a large extent the bargaining power the industry has with respect to buyers. Are the products high- or low-tech?

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CHAPTER 4Section 4.1 Industry Analysis

• Economies of scale—Those present in purchasing, production, shipping, distribution, or advertising are examples.

• Capacity utilization—Is capacity utilization in the industry high or low? How sen- sitive are variations in capacity utilization to profits? In commodity-like indus- tries, profits are very sensitive to capacity utilization.

• Industry profitability—If profitability in the industry is not high, what are some causes? Commodity-like industries are low-profit, while those with differenti- ated companies command higher profits.

Forces Driving Healthcare Industry Change

To understand how the healthcare industry is changing, identify the driving forces causing those changes. The following are examples of driving forces:

• Changes in the industry growth rate • Changes in who buys the services and

how consumers use it • Service or marketing innovations • Technological change • Entry or exit of major organizations • Diffusion of technical know-how • Increasing globalization of healthcare

services • Changes in cost and efficiency • Emerging purchaser preferences for

differentiation • Changes in governmental or economic

policy • Deregulation or increasing regulation • Changing societal concerns, attitudes,

and lifestyles • Reductions or increases in uncertainty

and business risk • Likelihood that this and one or more other industry segments will merge or


It is one thing to say that the healthcare industry has been and is changing, but quite another to gauge the way it will change in the future. That is, however, the challenge managers must face. If one can come to understand how the healthcare industry is chang- ing and what is causing it to change, the chances are good that future changes can be pre- dicted and possibly anticipated. Identification of the driving forces can provide a starting point for examination of a particular segment of the healthcare industry and how it may be changing. Of course, it is important to keep in mind that every segment is unique and may have driving forces other than those listed here.

© FRED PROUSER/Reuters/Corbis

One way to characterize an industry is by examining where it is in its life cycle. The business this woman is patronizing has just filed for bankruptcy protection, a sign that it is in a stage of decline.

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CHAPTER 4Section 4.1 Industry Analysis

Bargaining Power

What exactly is bargaining power? In simple terms, it comes down to who dictates the terms of a negotiation, such as price, delivery, and quality. Consider the example of some- one trying to sell a used car. There is a certain “Blue Book” price for a car of a certain model, age, mileage, condition, and options. If the make and model is in high demand, the car has low mileage, and it is in good condition, then the price will be higher. It is possible that several potential buyers may actually bid up the price. The seller in that situation can request full payment in cash and other conditions and would probably have those demands met. In this case, the seller has bargaining power and will end up making a favorable deal. On the other hand, if the seller is desperate to sell the car, or it is not in very good mechanical condition, and the seller has to incur costs to advertise extensively, he may have to accept the first offer that comes along, even at some fraction of his asking price. In this case, the buyer would have all the bargaining power and the seller none.

Sometimes both buyers and suppliers have bargaining power. In such a situation, it is likely that the industry in question has low profitability, the product is viewed as a com- modity, rivalry among competitors is fierce, and innovation is relatively low. On the other hand, if companies in the industry have more bargaining power than both buyers and suppliers, chances are the industry is profitable, the products and competitors are differ- entiated and have strong brands, competition is controlled as it is in monopolistic compe- tition, and innovation may be fairly rapid.

The concept of bargaining power in the healthcare services segment of the healthcare industry is more complex than simple supply and demand. For instance, primary buyers of health- care services—health insurers—are also suppliers as they “supply” patients to HSOs. In the 1990s, there was tremendous growth in man- aged care health plans with selective panels of providers that limited con- sumers’ choices to particular doctors and hospitals. In communities with large concentrations of managed care health plans, individual provid- ers “were concerned about exclu- sion from a plan’s network if they did not come to an agreement on plan payment rates” (Ginsburg, 2005, p. 1514). It was at this time that merg-

ers between hospitals and physician practices began to take place as a way to increase HSO bargaining power. If a health plan could not reach an acceptable payment agreement with a hospital-physician group, both the hospital and the physicians would drop out of the insurer’s network—potentially harming the insurer’s ability to keep and attract new subscribers.

Design Pics/SuperStock

When inventory has been sitting around for a long time, as is sometimes the case on a used car lot, the buyer has most of the bargaining power.

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CHAPTER 4Section 4.1 Industry Analysis

After the year 2000, the bargaining power of managed care health plans started to unwind. Consumers began to expect that all hospitals in the area, including academic medical cen- ters, be included in their plan’s provider network. Tight hospital capacity also contributed to increased provider bargaining power. As for physicians, most still lacked leverage with health plans—the exception being single-specialty groups and very large multi-specialty groups with a big enough share of the market to negotiate higher payment rates.

The largest purchaser of healthcare services—the federal government—adds another layer of complexity to the relationship among buyers, suppliers, and HSOs. As the largest purchaser and also the source of regulations affecting the healthcare industry, the govern- ment has the most bargaining power. The Federal Trade Commission can prevent HSO mergers considered to be anti-competitive. Medicare influences provider reimbursement levels and quality measurement activities. The Affordable Care Act further increases the role of the federal government and its bargaining power. Even though the government faces immense pressures to control healthcare costs, there is also considerable consumer pressure to improve public health and expand access, which requires additional funds to be expended.

Another factor affecting the bargaining power of hospitals and other HSOs is today’s consumer-driven market. People are personally paying for more of their healthcare costs. They now have access to data that allows them to make informed choices among provid- ers and among different diagnosis and treatment options. It is too soon to know if this consumer-driven market will give patients more negotiating leverage.

Suppliers to HSOs, in the traditional free-market sense, are the companies from which organizations purchase supplies, equipment, medications, and the like. If an organization has many suppliers all competing for the contract to supply it, the organization has bar- gaining power. That is why many healthcare organizations join group purchasing organi- zations (GPOs) such as Veira Medical Group and HPSI. These purchasing groups are able to negotiate lower prices than what a single HSO could expect to receive from suppliers. High volume purchasing gives the GPO a bargaining advantage.

One strategy that suppliers have for retaining bargaining power is to raise the switch- ing costs of the buyer—that is, make it so onerous for a buyer to switch to a competing supplier that the buyer will not do so. Consider a supplier that provides a healthcare organization with computer terminals that are tied in with its own system, enabling the organization to order at any time, track the status of delivery of any order, and so on. The service could be so convenient, and the organization’s purchasing staff so well trained and comfortable in using the ordering system, that it might not change suppliers even if a lower-cost competitor came along.

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CHAPTER 4Section 4.1 Industry Analysis

In healthcare, physicians and other clinical professionals are considered suppliers. Physi- cians in particular play a crucial role in controlling consumer choices—which affects the “supply” of patients for a healthcare facility or service. This supplier power has resulted in pressure to include physicians in system integration through purchase of physician practices as well as including physicians in the organization’s strategic planning process. See Porter’s Five-Forces Model for an important tool in assessing an industry’s competitive- ness and structure.

Porter’s Five-Forces Model

In 1980, Michael E. Porter of the Harvard Business School developed what is probably the most influential tool for assessing the structure and competitive threats of an industry. Porter proposed that in a given industry, five forces determine the degree of competitiveness in that industry. Com- petitiveness, in turn, establishes the attractiveness or profitability of the industry. This model can be used by organizations considering a wide range of strategic plans, including entry into the indus- try and beyond. The five forces described by Porter are the following:

• Rivalry among existing competitors • Bargaining power of buyers • Bargaining power of suppliers • Threat of new entrants • Threat of substitutes

Figure 4.1 depicts Porter’s five-forces model in diagrammatic form. The five main boxes in the shape of a cross constitute the actual model. The four “analysis” boxes in each corner add meaning to the model and enhance the industry analysis.

In the model, the “buyers” and “suppliers” are the customers of the industry and the firms that supply the raw materials, respectively. Rivals are all of the companies presently competing in the industry. New entrants are firms not currently engaged in the industry but which could potentially compete in the future. An example is MedCath, an operator of cardiac catheterization laboratories. When it entered the U.S. healthcare market in 1988, MedCath began to partner with physicians to build car- diac specialty hospitals and diagnostic or therapeutic facilities; the development of these partnerships constituted its growth strategy. Although MedCath operated only nine hospitals in seven states as of 2002, existing providers offering these same services were wise to be aware of the MedCath threat.


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CHAPTER 4Section 4.1 Industry Analysis

Porter’s Five-Forces Model (continued)

Figure 4.1: Diagram of the five-forces model

Source: Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press, 4. Used with permission.

HSOs can use Porter’s five-forces model to consider a wide range of strategic plans, including entry into another segment of the industry and beyond.

Substitutes are services in other healthcare segments or industries that have the potential to draw consumers away and are, in effect, also competitors. Quick care clinics in pharmacies and shop- ping malls are examples of substitutes. Other substitute examples are companies offering at-home laboratory testing services and self-referred whole body scanning.

To perform an industry analysis for a particular healthcare organization using Porter’s model, list the organization’s name as well as those of its principal competitors. Next, write a description of the buyers and suppliers of the industry (not the company under study). Porter intended that healthcare purchasers such as health plans be considered buyers and not also suppliers of patients. Enter the names of any businesses that could possibly join the industry as New Entrants. If no potential new entrants can be identified, mark them as “unknown.” Finally, write any substitutes to what the industry produces.


Bargaining Power of Buyers

Bargaining Power of Suppliers

Threat of New Entrants

Threat of Substitute

Products or Services

Rivalry Among Existing


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CHAPTER 4Section 4.1 Industry Analysis

Barriers to Entry

High barriers to entry can keep potential entrants out of the service segment of the health- care industry. This is a good thing for HSOs already in the industry, but a bad thing for an organization trying to enter the industry. Barriers to entry could take any of several forms. Certificate of Need (CON) regulations require coordinated planning of new services, equipment, and facility construction for the purpose of controlling costs and minimiz- ing duplication (National Conference of State Legislatures, 2012). These regulations came about after passage of the federal Health Planning Resources Development Act of 1974. While this Act was repealed in 1987, most states still have some type of health planning agency that evaluates healthcare needs in the state and regulates services based on these needs. New market entrants and HSOs seeking to expand services covered by the state’s CON regulations must obtain approval from the health planning agency. Opponents of CON laws question their value, indicating that approvals appear to be more politically motivated than what is in the best interests of the community.

A significant capital investment can also be a high entry barrier, particularly for smaller HSOs. Another type of barrier is the need for expertise in a certain technology or core competence. An established brand name and customer loyalty, both of which take time to develop, may also provide a deterrent to would-be entrants. When a particular geo- graphic region includes HSOs with significant market share and market power or com- petitors with low costs that realize significant economies of scale, prospective entrants into that market would probably view this as a barrier.

What if the potential entrant is a much larger corporation, such as HCA Healthcare, with more than adequate financial resources and possibly also a strong brand identity? The results of this assessment might turn out quite differently. The issue is to try to (a) imag- ine who the likely potential entrant might be, (b) determine why it might want to enter the healthcare services market now, and (c) make as best an assessment as you can. What is perceived by one organization to be a high barrier to entry may not present a deterrent to another.

Porter’s Five-Forces Model (continued)

Once the five areas have been identified for the model, write a brief assessment of the intensity of rivalry (low, medium, or high, and why), bargaining power of buyers and suppliers (low, medium, or high, and why), entry barriers (low, medium, or high, and what they are), and threat of substitutes (low, medium, or high, and why) in each of the corner analysis boxes.

Porter’s model provides a clear, straightforward way to assess the nature of competition in any industry. Users should take care not to be misled by the seemingly simplistic nature of this tool. Strategic thinkers must be thorough and wide ranging in their thinking when analyzing each ele- ment within the context of their businesses, industries, and environments. Shortsighted or narrow thinking may lead to an inaccurate assessment of the elements and potentially negative implica- tions for profit, public relations, employee morale, and more.

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CHAPTER 4Section 4.1 Industry Analysis

Also, in some segments of the healthcare services market, it may be easy to enter the industry but difficult to compete effectively on a wider scale once having entered. For example, an entrepreneurial physician and nurse practitioner might start an urgent care clinic that serves local consumers (“easy to compete with”). Yet such an entrant would not likely compete with a large national chain like Concentra, a provider of occupational healthcare services and urgent care with more than 340 locations across the country (“hard to compete with”).

Industry Concentration

A concentrated industry is one in which a few firms in the industry account for a large portion of total industry sales. Examples are commercial aircraft manufacturing, in which only two firms compete (Boeing and Airbus), or the business of auditing public com- panies in the United States, in which 96% of the work is shared among the “Big Four” certified public accounting (CPA) firms. Even six to eight firms, accounting for upwards of 40% of an industry’s sales, would qualify to be called concentrated. In a concentrated industry, suppliers have more bargaining power and there are fewer threats of new entrants or substitutes.

Healthcare services have tradition- ally been considered a fragmented industry because no one organiza- tion has had more than a small per- centage of the total industry sales. This is changing with the growth in consolidation. Hospitals are pur- chasing other hospitals or creating joint partnerships. In southeastern Wisconsin, for example, as of 2011 the 21 full-service hospitals had con- solidated into six systems, with two counties having four systems and the other four counties having only two systems. Health systems are purchasing physician practices, and small physician groups are merging with larger practices. Small health plans are being purchased by larger health plans.

These consolidations are intended to create greater efficiencies and better position HSOs and insurers to deliver high-quality care in response to healthcare reform. There is concern, however, that such consolidation will have a negative impact on costs and quality. Martin Gaynor, professor of economics and health policy at Carnegie Mellon

Sergiy Timashov/Hemera/Thinkstock

Healthcare has traditionally been considered a fragmented industry.

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CHAPTER 4Section 4.1 Industry Analysis

University, warned that provider consolidation can enhance the market power (of hos- pitals and physician services) and lead to increased prices or reduced quality (2011). In some geographic areas, the healthcare services market is dominated by just a few systems, which gives them considerable negotiating power with commercial insurers and reduces the likelihood of new entrants or substitutes coming into the market. For example, in the Boston metropolitan area there are just two groups, Partners Healthcare and Beth Israel/Deaconess, dominating the hospital market (Hixon, 2012). In the San Francisco Bay area, two large health systems—Sutter Health and Catholic Healthcare West—and three large teaching hospitals—Stanford, University of California at San Francisco, and Davis— provide the largest share of hospital services (Berenson, Ginsburg, & Kemper, 2010).

Critical Success Factors

When an organization is considering entering a particular industry, it often needs to iden- tify the industry’s critical success factors (CSFs). Think of these factors as the “rules of the industry.” Just as every sport has its own set of unique rules, there is no way that one can “play” in an industry, let alone dominate it, without knowing and playing by those rules. CSFs are attached to an industry, not to a company, and every industry has a different set. In the healthcare industry, each segment has its own factors. The CSFs in the pharmaceu- tical segment of the healthcare industry are different from the CSFs in the healthcare ser- vices segment. Ideally, an organization wanting to enter the healthcare services segment is able to identify six to eight CSFs for that industry. For a free-standing ambulatory surgery center, CSFs might include the following:

• Customer satisfaction as measured by surveys • Operating costs, by category • Proper location with easy access and sufficient parking • Effective advertising using a variety of media • Prices for self-pay patients • Acceptance of patients with insurance coverage • Availability of latest surgical technologies • Modernization of facility

Start by identifying a much larger number and then edit them down to those factors that are really essential to succeeding in the particular industry.

The value of identifying the industry’s critical success factors becomes evident when they are used to compare an organization with its key competitors. For instance, a hospital con- sidering expanding more into the occupational health market can compare itself with its principal competitors already in this industry using CSFs as the dimensions to do so (see Table 4.1). After choosing six appropriate CSFs for the occupational health service indus- try, the hospital and its competitors are rated along the dimensions of the listed CSFs on a scale of 0–10, 10 being the highest. The ratings are based on the best information available to the hospital’s leaders, often with input from outside consultants.

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CHAPTER 4Section 4.1 Industry Analysis

Table 4.1: Critical success factor analysis

Critical Success Factor Hospital Competitor A Competitor B Competitor C Competitor D

Location 10 8 9 8 10

Price level 6 10 9 8 7

Image/brand 8 5 10 7 8

Services available 9 6 10 8 9

Consumer satisfaction

8 7 8 9 5

Convenience 5 6 5 6 9

Totals 46 42 51 46 48

In the example shown, the hospital under analysis rated a total of 46 out of a possible 60. Comparing the scores gives a rough idea of how the organization stacks up against its competitors, as well as how each of the key competitors stacks up against the others. To the extent that the hospital’s ratings and those of its competitors are accurate or realistic, the analysis provides useful information regarding whether or not the hospital has com- petitive advantages or vulnerabilities and which competitors are the strongest.

Across the rows, the table reveals where there may be a competitive advantage or com- petitive vulnerability. In this example, the hospital’s location and variety of available ser- vices may constitute a competitive advantage. Competitor A may have an advantage on price levels and Competitor B an advantage in image/brand as well as services. Any rat- ing of 5 in the table would signify a competitive vulnerability, something that should be addressed in that hospital’s short-term plans (like the hospital’s convenience rating).

Down the columns, the analysis identifies which competitors are stronger than others. In the table, judging from the totals at the bottom, the hospital lies in the middle of the pack, with Competitors B and D to be feared more than the other two competitors. Competi- tive analysis includes how the organization might react to attacks, especially from strong competitors (Coyne & Horn, 2009).

Industry Attractiveness

Can one measure industry “attractiveness,” and is it important? The answers to these questions are yes and yes, but the measurement is highly subjective, and the result is more useful in some situations than others. Industry attractiveness is based on several attributes or characteristics. To discover them, imagine what an ideal industry would look like. It would, for example, have a huge market (potential customer base), be growing rap- idly, be hugely profitable, have few competitors, be unregulated, have low entry barriers, and not need technological expertise. This would yield the following initial list of factors for an industry-attractiveness analysis:

• Size of the potential market • Industry growth rate • Intensity of competition • Degree of regulation

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CHAPTER 4Section 4.1 Industry Analysis

• Entry barriers • Degree of technological innovation

These factors, of course, constitute an incomplete list; they may be changed or amplified. Notice also that the fac- tors are stated in a neutral way: “size of the potential market,” not “large market.”

An industry-attractiveness analysis might be used by HSOs looking to enter a segment of the larger health- care services market. For example, this analysis could help hospital lead- ership evaluate whether the conve- nient care market (clinics located in a retail store) would be a viable growth strategy. To perform an industry- attractiveness analysis, first assign a weight to each of these factors as a

percentage according to their perceived importance. Next, rate each factor from the point of view of the organization doing the analysis on a scale of 0–1.0. Finally, multiply the weight by the rating for each factor. Be careful in two instances: (a) If degree of competition is high, the rating should be low because it makes the industry less attractive, and (b) if degree of regulation is low, the rating should be high as it makes the industry more attractive. Remem- ber that the rating should be high for any factor that makes the industry more attractive, and low if the opposite. Add up the products to yield a percentage figure, known as the industry- attractiveness (I.A.) index. The higher the percentage figure, the more attractive the indus- try is considered to be, assuming realistic ratings.

Table 4.2 shows an industry-attractive matrix, which is a weighted technique based on a number of factors to determine how attractive an industry is. The I.A. index of 75.6 shows this to be an attractive industry, attractive enough to stay in it and invest in improving the organization’s position. When such an analysis yields a result of less than 50%, the HSO might well ask the fateful question “Should we continue to be in this segment of the healthcare industry, or should we exit?”

Table 4.2: Industry-attractiveness matrix

Factor Weight Rating Patient care service

Industry growth rate 24 0.8 19.2

Profitability 20 0.7 14.0

Size of potential market 18 1.0 18.0

Intensity of competition 16 0.3 4.8

Entry barriers 12 0.8 9.6

Degree of regulation 10 1.0 10.0

Totals 100 I.A. Index 75.6

Dmitriy Shironosov/iStock/Thinkstock

If the degree of competition within an industry is high, the industry is less attractive to potential entrants.

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CHAPTER 4Section 4.2 Competitive Analysis

4.2 Competitive Analysis In virtually every business, including healthcare services, companies must be aware of and know how to deal with their competitors.


The first step is to ask, “How much do I know about my competitors?” One should know— or try to obtain—at least the following benchmarks about one’s competitors:

• Market share—This information can be obtained for all segments of the health- care industry, including data for HSOs. Occasionally, organizations will have to determine a competitor’s market, or industry, share on their own.

• Geographic scope—Are your competitors local, regional, national, or international/global?

• Diversification—Are your competitors conglomerates with a portfolio of busi- nesses in unrelated industries, health systems with many related healthcare businesses, organizations with many strategic alliances, or HSOs in only one seg- ment of the market?

• Vertical integration—The degree to which competitors are vertically integrated, especially backwards along the supply chain, may give them cost and competi- tive advantages that can be difficult to overcome.

• Competitive advantage—Do your competitors possess a competitive advantage? What is it? How large is it? How have they sustained it?

• Core competence—What are the core competencies that underlie your competitors’ strategies?

• Strategic intent—How are your competitors trying to position themselves in the industry? Are they aggressively trying to overtake rivals on their way to market dominance, or are they more concerned with defending their ranking and main- taining market share?

• Strategy—What strategies are your competitors following? In most cases, strat- egies can be inferred from other information known about the organizations and what they are actually doing. Have the strategies been working, or are they about to be changed? Are mergers among key competitors likely? Are any of them looking to be acquired?

• Resources and capabilities—How strong financially and technologically are each of your competitors? How flexible are they to adapting to the changing environ- ment? How well managed? How fast do they bring new services to market? Do they have innovative cultures and a record of innovation? Which one just got a new CEO?

While trying to get this kind of information about key competitors, an organization will also discover how much or how little is known about its competitors.

In Case Study: Nursing Home Conducts Industry Structure Analysis, you can see how an HSO might use Porter’s five-forces model to assess its structure and competitive threats.

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CHAPTER 4Section 4.2 Competitive Analysis

Case Study: Nursing Home Conducts Industry Structure Analysis

Legacy Nursing Home is a skilled nursing facility in Oregon. For several years, it operated very profitably. However, its profit margins began to decline as the facility structure aged, government regulations for long-term care became stricter, and new nursing homes were built in the area. The administrators of Legacy Nursing Home followed Porter’s five-forces model to perform an industry analysis to better understand its external environment.

Threat of Entrants: The supply of nursing homes in the geographic area is sufficient to meet demand for the next 3–5 years. It would be costly to enter the market because it is highly regulated with low profit margin expectations due to declining Medicaid reimbursement. The greatest threat is local hospitals with the ability to switch inpatient beds to long-term care. Hospitals have the resources to provide skilled nursing care, including access to clinical staff, familiarity with govern- ment requirements, and the ability to quickly reallocate existing beds to long-term care services.

Competitive Rivalry: Competition is primarily based on amenities and quality of care. Legacy has six competitors, two of which are owned by national for-profit chains. Legacy and its competitors have relatively stable market shares. There is some opportunity to differentiate, but because the industry is highly regulated, there is not a great deal of diversity among competitors. The long-term care segment of the healthcare industry is rapidly growing due to the “graying” of America and weakening of the extended family. Fixed assets create the most rivalry among competitors, which makes it hard to exit the market.

Threat of Substitutes: The primary substitute for institutionalized long-term care is home and com- munity care. In Oregon, two-thirds of Medicaid funding for long-term care is spent on home and community care. However, noninstitutionalized care is not an option for people requiring more intensive medical staff. Some of the newly built retirement living facilities in the area have added assisted living services and one has a subacute care unit, but only people with apartments in the retirement facility can access these services. High occupancy at local hospitals has virtually elimi- nated them as an alternative.

Bargaining Power of Buyers: The power of buy- ers of long-term care services is high. The major consumer—the government—purchases more than 50% of nursing home care and regulates the level of reimbursement and the industry itself. This gives the government a considerable amount of information, which translates into a significant amount of bar- gaining power. For private pay residents, the costs are a major consideration, and comparison shopping is common. Though differentiation can reduce buyer power, it is still relatively easy for buyers to switch. Thus, nursing home care is a buyer’s market.

Bargaining Power of Suppliers: Companies that sup- ply equipment, bandages, crutches, wheelchairs, and the like have little control over nursing homes. Labor is the major supplier in the long-term care industry. Legacy has good labor relations; several employees have been with the organization for more than 10 years.

Lisa F. Young/iStock/Thinkstock

The long-term care segment of the healthcare industry is rapidly growing due to the “graying” of America and the weakening of the extended family.

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CHAPTER 4Section 4.2 Competitive Analysis

Creating a Strategic-Group Map

In industries that contain disparate competitors, a strategic-group map is a useful tech- nique to cluster and identify strategically similar competitors. Competitors can show differences—and similarities—to each other on various factors (Porter, 1982). Those that are similar to each other belong to the same strategic group; the more distant one strategic group is from another reflects the extent to which they are dissimilar and, therefore, not direct competitors.

Many industries, including healthcare, consist of a small number of distinct strategic groups. A strategic-group map is a two-dimensional representation of an industry’s stra- tegic groups. To create one, choose two strategic dimensions that are not correlated with each other, such as price and quality, and that have the capacity to separate the competi- tors in the industry. For example, if all home health agencies in the health services sector have broad service lines, choosing this dimension as one of the axes will not work—all the competitors would be bunched up at one end. On the other hand, brand recognition might be a useful dimension to use if there are some home health agencies at the high end, some at the midlevel, and some at the low end of the industry.

Other than the two guidelines given previously, there are no rules for choosing strategic dimensions that would serve as axes for the strategic-group map. The dimensions chosen as axes for a strategic-group map should embody strategic variables, not performance. Try several and see which two separate the competitors or rivals into clusters on the map. When you have several clusters that make sense and can articulate the strategy of each cluster, you have a useful strategic-group map. Naturally, using the technique presup- poses a good working knowledge of competitors in a particular industry.

Figure 4.2 is a simple strategic-group map that represents the pharmaceutical industry. The figure underscores the fact that companies in the same strategic group compete more intensely with each other, while competition between distant groups is virtually nonexis- tent. HSOs could create similar strategic-group maps for their market area. For instance, there are 19 dialysis facilities within 25 miles of the center of Denver, Colorado. These facilities could be mapped according to several different strategic dimensions: price, qual- ity measurement results, patient satisfaction, distance from downtown Denver, number of hemodialysis stations, presence or absence of peritoneal dialysis services, availability of evening appointments, and whether home hemodialysis training is offered.

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CHAPTER 4Section 4.2 Competitive Analysis

Figure 4.2: Simple strategic-group map of the pharmaceutical industry

Adapted from Hill, C. W. L., & Jones, G. R. (2001). Strategic management: An integrated approach (5th ed.). Boston: Houghton Mifflin, p. 96. Used by permission of the author.

A strategic-group map shows how companies in the same group compete more intensely with each other while those in distant groups do not directly compete.

What can be learned from a strategic-group map? First, the HSOs in a particular stra- tegic group are strategically similar and constitute the group’s key competitors. Those in a nearby group form the next tier of competitors. In all likelihood, HSOs in a distant strategic group are not really competitors although they are in the same industry. For example, in the U.S. beer industry, Anheuser Busch competes with Miller Brewing in the same strategic group, but not with the many microbrewers and some of the imported high-end beers, which are in distant strategic groups. In another example, this time in the hospitality industry, Days Inn (low end) does not compete with Ritz Carlton (high end) because they are strategically dissimilar and in different strategic groups; their markets are quite different.


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CHAPTER 4Section 4.2 Competitive Analysis

Discussion Questions

1. What additional information might an industry analysis provide that simply monitoring an organization’s competitors does not?

2. Porter’s five-forces model is a useful tool to analyze the competitive forces and structural characteristics of the healthcare services industry. But is not this, at best, a snapshot of a point in time? How could one get a more dynamic perspective?

3. Suppose an HSO has very little bargaining power with suppliers of equipment, medications, etc. What are some ways of gaining more bargaining power?

4. What might be a method for identifying an industry’s driving forces other than simply brainstorming?

5. What are the advantages/disadvantages for an HSO with regard to profitability in a concen- trated industry (not one of the industry leaders) or in a fragmented industry?


Secondly, the implications of Porter’s five-forces model are different for different strate- gic groups. Entry barriers vary among the groups, as does bargaining power with sup- pliers and customers, the threat of substitutes, and the intensity of intra-group rivalry. Thus, it could be more desirable to be in one strategic group than another (there could be more opportunities and fewer threats) (Hill & Jones, 2001). For example, a recession could adversely affect clinics specializing in cosmetic surgery but actually increase demand for lower-cost retail health clinics offered by Walgreens, CVS/Caremarks, or Walmart. Because of such differences, it may be worthwhile for an HSO to move consciously from one strategic group to another. The ease of doing so depends on the size of mobility bar- riers between the groups (factors that inhibit both entry into and exit from a group). For example, in Figure 4.2, Greenstone is a generic pharmaceutical company that competes with others in its strategic group; it would find it very difficult to move into the pro- prietary strategic group with companies like Valeant Pharmaceutical and Merck. This is because Greenstone lacks the necessary R&D skills and resources that would take time and a great deal of capital to acquire.

Thirdly, one could discover some unserved demand in an area of a strategic-group map not occupied by any strategic group. For example, in creating a strategic-group map of the automobile industry, using pricing and safety as the two strategic dimensions, a group of business students found that no company was offering a low-priced, high-safety auto- mobile. Such a car might appeal to parents with teenagers and possibly older drivers (Harrison, 2003).

Finally, it is possible for a diversified healthcare organization to belong to more than one strategic group. In the hospitality industry, Hilton Hotels and Marriott compete in both the high end and affordable ends, through the lower-rate Hampton Inns and Courtyards by Marriott, respectively. In this illustration, each company, rather than surmount mobil- ity barriers by moving to another strategic group, has penetrated another strategic group through internal diversification and acquisition. An example in the healthcare industry is Humana (a company in the health insurance strategic group), which owns Concentra, a chain of outpatient medical care providers (a company in the healthcare services stra- tegic group).

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CHAPTER 4Section 4.3 Market Analysis

Discussion Questions (continued)

6. The industry-attractiveness matrix is a highly subjective exercise. What are the benefits of doing one despite the subjectivity?

7. A strategic-group map clusters together strategically similar companies in an industry in a two-dimensional space. Yet, movement from one strategic group to another could lead to mobility or entry barriers, different competitors, and significant investment. Does that make each strategic group an industry segment? Explain. What would be the advantages of having a strategic group cube, looking at three factors simultaneously?

8. Once a healthcare organization has identified its industry’s dominant economic character- istics and driving forces and Porter’s five-forces analysis has been performed, how can the rules of the game for this industry and the critical success factors be discerned? Explain the steps this would take. How often should the external factor analysis be updated?

9. A critical success factor analysis can be very useful to an HSO in analyzing how it stacks up to its competitors. How might you tell if the numbers used in that analysis are realistic? Is there another kind of analysis you could do that would also yield good comparative data with your competitors?

4.3 Market Analysis We now turn to an examination of an HSO’s customers—its market. A market analysis is an umbrella term encompassing the collection and analysis of data and information about an organization’s customers. Customer groups include more than just recipients of health- care services (patients, residents, clients). They can be other HSOs; for instance, nursing homes may be customers of a hospital’s diagnostic and pharmacy services. Customers can also be companies in another industry, like the insurance industry. When an HSO is con- sidering an expansion or joint venture or when investors are interested in building a new HSO, the market for such services must be evaluated. It is important to keep in mind the target market and degree of market penetration, changing customer needs, and distribu- tion channels and pricing, as discussed in the following sections.

Target Market and Market Penetration

First consider the target market, or the customers the HSO aims to serve. For example, if insurance companies buy your services, your market includes insurance companies. But are you targeting all U.S. insurance companies (which is the overall market), only insur- ance companies doing business in your state, or only insurance companies that contract with providers in your geographic area? Very few HSOs can target the entire population of their markets, although there may be exceptions, such as HCA Healthcare or Tenet Healthcare Corporation. So an HSO needs to define its target market—what it is, how large it is, and how fast it is growing. It also must decide who is the served market, or that portion of the target market that is either currently served by the organization or its current focus.

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CHAPTER 4Section 4.3 Market Analysis

Another factor to establish is the degree of market penetration. How far have all the HSOs in the medical service area (MSA) penetrated the market? In other words, what pro- portion of the target market has bought a service that you are offering? Market share data for hospitals and other healthcare facilities can be obtained from several sources, includ- ing state health agencies, the American Hospital Association, the federal government (for instance, the healthcare cost and utilization project database sponsored by the federal Agency for Healthcare Research and Quality or the hospital market service area data available from Medicare), and proprietary vendors such as Truven Health Analytic, Inc.

At a minimum, a hospital would want to know its own percentage of patients admitted and the percentage admitted to the other hospitals in the MSA. Hospital market share can also be compared by other variables, including gross charges and percentage of admis- sions in various market segments (for example, maternity, geriatric, ethnic groups, payer, or specific disease categories). The “typical data lag is about six to nine months and mar- ket share information is often based on incomplete admissions data” (Kash, Ohsfeldt, & Gamm, 2009, p. 46).

Even with reliable data, HSOs may find that predicting market share has limited success due to changes in referral patterns and health plan contracts. A recent example of this situation involved orthopedic surgeons in an independent clinic in the Southwest who discovered they were performing more than 90% of the orthopedic surgeries in the area. They decided to build a surgery center on the presumption that virtually all people requir- ing orthopedic surgery would be operated on in their physician-owned facility. When administration at the local hospital learned of the orthopedic group’s plan, the hospital negotiated lower inpatient rates with the area’s largest insurance company in exchange for

being listed as the preferred provider for all outpatient surgeries. Because this insurance company had more than 75% of the commercial market in the area, the orthopedic group lost a large share of its patient base to the hospital, making the surgery center an unprofitable business venture.

The degree of market penetration is, however, more complex than dis- cussed here. For example, not all of the target market may purchase a service for various reasons—they cannot afford to, do not need to, do not want to, and the like. So the target market is often reduced to a served market, which is made up of viable consumers in the geographic area who could buy the service. Even the served market can be hard to define,

because some consumers travel a great distance for medical services. In rural areas, for example, it has been observed that people travel as much as 100 miles to receive medical treatment. With some HSOs targeting foreign consumers willing to travel to the United States for healthcare services, the served market can get even larger.

McClatchy-Tribune/Getty Images

Independent orthopedic surgery centers, like this one in Modesto, California, must compete with hospitals for patient business.

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CHAPTER 4Section 4.3 Market Analysis

Changing Customer Needs

What are healthcare consumers’ current needs? From what is known of an organization’s customers and industry, can their needs be inferred? And can the degree to which such needs are currently satisfied be assessed? When we speak of needs, we mean benefits, or what we now term value propositions. Companies that are constantly listening to their cus- tomers will know their needs and how they are changing (Ulwick & Bettencourt, 2008).

What will the healthcare consumer need in the future? This is a chicken-and-egg situation. New services often affect consumers and satisfy needs they never knew they had, and sometimes unsatisfied needs are the spark that causes services to be introduced. Direct- pay primary care clinics are filling an unsatisfied need for healthcare consumers lacking insurance or those with insurance who are facing higher out-of-pocket expenses. Some direct-pay clinics are “concierge” practices aimed at well-to-do patients. Others offer basic primary care visits for a low monthly subscription fee. At Access Healthcare in Apex, North Carolina, for example, members pay $39 a month plus $20 per visit for unlimited primary-care services (Access Healthcare, 2013). For insured patients, the $20 per visit fee is often cheaper than their insurance co-pay, which averages $35 to $50.

Some direct-pay primary care clinics are contracting directly with another consumer: employers. Corporations are seeking ways to provide less costly, easily accessible primary care services for their employees, which may include the addition of work-site clinics. It is estimated that one-third of companies with more than 500 employees have employer- based clinics (Mehrotra, 2013). The value proposition for employers is lower insurance premiums and claims costs.

Distribution Channels and Pricing

The next stage of the market analysis is a consideration of the organization’s distribution channels. This means learning how the organization gets its services to its market. Indus- tries that produce a product reach their market through wholesalers, distributors, or retail outlets. Healthcare services are not a product made in one location and used by customers in other locations. Thus, a discussion of distribution channels for an HSO centers on how the HSO will get potential consumers to use its services.

Some healthcare organizations employ salespersons to make direct sales calls. The mar- keting person at a weight loss clinic often makes direct sales calls to local HSOs and other potential consumer groups. Residential care facility representatives reach out to physician clinics, hospitals, senior centers, and the like. Many HSOs use direct mail marketing and newspaper and radio advertising to let consumers know about their services. The extent to which the Internet is used as a distribution channel is increasingly important. Note any differences between the distribution channels your organization uses and those used by the industry in general. Another way of looking at this is to ask how customers make choices among various healthcare service opportunities. What is the decision process they go through before they decide to buy (Court, Elzinga, Mulder, & Vetvik, 2009)?

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In many types of businesses, an analysis of the distribution channels also includes a determination of the size of channel markups. That is, for each stage in the distribution chan- nel, what price is paid by the whole- saler, the distributor, the retailer, and the final customer? For many HSOs, the service prices are unrelated to the actual monies received for those services. This is because insurance plans pay only a percentage of the billed charges. Only self-pay patients might actually pay the “retail” cost of healthcare services—if they pay at all.

Rather than considering prices at each stage of a distribution channel, healthcare organizations consider their payer mix, for example, com- mercial insurance, Blue Cross/Blue Shield, Medicaid, Medicare, Champus, and self-pay. HSOs should forecast the expected ratio of patients in each payer category, planned reimbursement from these payers, and its effect on the organization’s financial bottom line. In April 2013, Medicare, the nation’s largest insurer, reduced hospital reimbursement by 2%. This cut was in addition to others under the Affordable Care Act. Health systems that anticipated these cuts were better able to absorb the reductions (Evans, 2013). Scripps Health in San Diego projected $10 million a year in lost revenue. Scripps president and CEO Chris Van Gorder said the April 2013 Medicare payment reductions forced “the four-hospital system to dig a little harder” at improving its processes, faster than they had planned (Evans, 2013, p.17).

Any current trends in customer behavior—patients, payers, other HSOs—are vital to an understanding of how the target market may be changing. If an organization does busi- ness in several markets, such as different states or countries, this type of detailed market analysis should be completed for each of those markets.

© Ashley Gilbertson/VII /Corbis

This wellness program at the Cleveland Clinic teaches nutrition to individuals with chronic diseases. Marketing departments associated with weight loss programs sometimes make direct sales calls to HSOs and other potential consumer groups.

Discussion Questions

1. In what ways and to what extent is defining the target market for an HSO difficult? 2. Is distinguishing among “market,” “target market,” and “served market” useful? If so, in

what ways? 3. How might you discover that your target market would welcome opportunities to cocreate

value with your organization? 4. What surveys would you take of your consumers that would help guide what services to

offer and how to persuade them to buy? 5. Why is it that some recipients of healthcare services are not that price sensitive? 6. Are Medicare and Medicaid price sensitive? What about commercial insurance plans?

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CHAPTER 4Section 4.4 Environmental Trend Analysis

4.4 Environmental Trend Analysis The almost dizzying pace of change going on in the healthcare industry requires HSOs to plan differently from how they have in the past. To keep pace with the rapidly changing environment, organizations should divide the environment into catego- ries or manageable pieces. In each category, try to articulate (a) what is changing and in which direction, and (b) the impact on the organization. If the change has no relevance for the organization or for what it might do in the future, then it deserves to be ignored. If a trend cannot be clearly defined in terms of direction (for example, something getting larger or smaller, increasing or decreasing), then it should be omitted. Saying, for example, that the “economy is in a recession” is not useful as a trend.

Environmental scanning is a com- mon name given to identifying and analyzing trends that are external to the business (Fahey & Narayanan, 1986). People who engage in it have found that it is easy to get caught up in what they are discovering. Before they know it, they are collecting information for its own sake. Most HSOs cannot afford that luxury. The scan should be confined to trends that are relevant to the organization— specifically any trend that affects the organization or that may affect it in the future.

The currency of the collected data in environmental scanning is a valuable resource. Typi- cally, one can find information on trends using historical data. However, the milieu in which strategic planning takes place, or the period during which the consequences of present decisions play out, is the future. A trend noticed during the 2004–2009 time frame, for example, may have limited value or even none at all in the 2012–2017 time frame. However, if the trend can be extrapolated or extended in a justifiable manner to the future time frame in question, then it becomes valuable. Nevertheless, HSOs must be cautious, because some trends are discontinuous, meaning that behavior in the future is different from behavior in the past. While simple extrapolations can be performed by almost any- one, more complex forecasting, such as technological forecasting, must be done by an expert and may require consulting assistance. For such projects, the organization must have the requisite time and resources. The tradeoff between spending resources to do something properly and taking educated guesses when such resources are unavailable is something the organization’s leaders must consider carefully.

In many cases, rather than doing the forecasting internally, an HSO can find estimated or projected data on trends to fit its future time frame. For example, demographic data taken from census data contain projections for at least 30 years into the future. Whenever using such projections, it is important to know how reliable the source is and, preferably, how the projections were derived as well as how often they are updated. The more critical such

Maksym Plotnikov/iStock/Thinkstock

When forecasting, an HSO can often find estimated or projected data on trends to fit its future time frame.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

data are to the HSO, the more care the organization should exercise to ensure that reliable data and analyses are being used. Economic forecasts, for example, are particularly dif- ficult to verify as to quality; economists can be wrong even for short-term forecasts.

Finally, the environmental scan should cover a geographic scope that matches the area in which the organization competes. For example, a health system operating and competing only in New England should pay more attention to what is happening in the New England healthcare market, although what is happening nationally cannot be ignored. A multi- national healthcare system would have to extend its scan into every country in which it does business as well as include exchange rates between those countries and how events or trends in one of the countries might affect any of the others. The international environ- ment is far more complex than dealing with just one U.S. region or even the entire United States. In multinational health systems, managers in each country are typically asked to complete an environmental analysis in their own country along with other analyses and projections required for strategic planning. On the other hand, keeping track of changes in contiguous areas can be useful.

When conducting an environmental trend analysis, there are seven common categories that the company should consider: economic, regulatory/legislative, political, demographic, sociocultural, attitude/lifestyle, and technological. No one category is more important than another per se, though certain categories can be more relevant to a particular HSO and so demand more of its attention.

Economic Trends

Of the seven categories of trends, we are flooded with opinions and doom-and-gloom prognostications about the economy the most. A lot of such news is just “noise.” Economic data, not opinions, can provide a more solid feel as to how a country’s economy is faring.

For the healthcare industry, growth is directly tied to the explosive demand for healthcare services, not just the state of the overall economy. In 2011, Americans spent well over $2 trillion—close to 18% of the gross domestic product—on healthcare, and the Centers for Medicare and Medicaid Services project that between 2012 and 2021, America will spend $36.8 trillion on healthcare (Hartman, Martin, Benson, Catlin, & National Health Expenditures Accounts Team, 2013). These economic trends create financial challenges for payers of healthcare services—governments, businesses, and individuals. Every state is carefully scrutinizing Medicaid benefits and looking for alternative models of healthcare delivery to lower costs. Employers must cut other spending or shift some of the increas- ing insurance costs to employees. Individual consumers are facing higher out-of-pocket costs. These trends have produced a shift of economic risk to the providers of healthcare services. This economic reality is causing HSOs to expand their focus beyond providing illness care to improving the health of the community.

The number of consumers with health insurance is expected to increase because of the Affordable Care Act. This should mean that HSOs will no longer face significant financial losses from uncompensated care and charity care. However, the estimated $1+ trillion cost

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CHAPTER 4Section 4.4 Environmental Trend Analysis

of healthcare reform will be partially paid for by reducing the rates of reimbursement to providers. Will HSOs benefit from having more insured patients, or will lower reimburse- ments offset the potential financial advantages? Will healthcare access become so strained by the newly insured consumers that access and quality of care will suffer? Only time will tell. The effect of these economic trends on an HSO and its future must be carefully analyzed.

In addition to national economic trends, HSOs must consider what is happening in their local market: What is the level of unemployment in the community? Are local employers expanding their facilities? Are new employers moving into the area? Can HSOs easily secure a low interest line of credit and financing? Are local wage levels stable, or will wage increases be necessary to retain a qualified workforce? Both national and local economic factors must be taken into consideration in the environmental scan.

Regulatory/Legislative Trends

Regulations differ from laws in that they are made and enforced by city, state, and federal regulatory agencies, whereas laws are enacted by state assemblies and Congress. For both laws and regulations, indications of impending changes can be discerned by close obser- vation of the political process at the appropriate level of government. Also, rules are made according to well-defined processes that include opportunities for rebuttals by industry or interested parties. Consider the following regulatory/legislative trends:

• The volume of regulations enacted each year keeps increasing, as reflected in the number of pages in the Federal Register devoted to them.

• It behooves an organization to monitor potential changes to regulations govern- ing the industry in which it competes. While healthcare has always been consid- ered a regulated industry, the Affordable Care Act greatly expanded the scope of regulations.

• Many regulations cut across all industries. Examples of these include tax regula- tions, workplace safety, insider trading, bargaining in good faith in labor negoti- ations, anticompetitive practices, and price fixing. All industries encounter some form of regulation, even those not considered “regulated.”

• The standards set by regulation or legal precedent in an industry may change. In the healthcare industry, for example, this can be seen in the standards for secu- rity of patient information, disposal of medical waste, and antitrust rules affect- ing mergers.

• All the preceding regulatory trends affecting an industry may occur at both state and federal levels, as well as in many foreign countries.

Local, state, and national regulations and legislative initiatives have an increasing influ- ence on all industries, including healthcare services. This aspect of the environmental scan must be carefully conducted to ensure all current and anticipated future requirements are carefully considered. Government interventions can greatly affect the strategic direction of an HSO, as illustrated in Case Study: Economic and Legislative Trends Affect Free Clinics.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

Case Study: Economic and Legislative Trends Affect Free Clinics

Free clinics provide medical services to the unin- sured. As of 2011, there were just over 1,000 known free clinics spread throughout the United States. (Darnell, 2011). The Patient Protection & Affordable Care Act (ACA), signed into law by President Obama on March 23, 2010, will have an impact on the busi- ness model of these free clinics. ACA helps many uninsured people gain coverage through Medicaid, with eligibility increasing to 133% of the federal pov- erty level. Childless adults who meet income restric- tions will also be eligible. An estimated 30 million people are expected to become eligible for Med- icaid on January 1, 2014. Between 2014 and 2019, patients will gradually be enrolled. However, it is

predicted that some eligible persons will not be able to navigate the application process or obtain the required documentation to apply.

By 2019, it is expected that the numbers of uninsured will have declined, with undocumented immigrants representing one-third of those without insurance. The remaining two-thirds will fall into one of these categories:

• Naturalized citizens here less than 5 years • People choosing to pay the penalty rather than acquire insurance • People exempt from the mandate and who choose to remain uninsured, for example,

exempt from filing federal tax return, Native American, incarcerated, or religious conscience reasons

• Citizens without documentation of citizenship

The impact of healthcare reform raises several strategic issues for free clinics. Many of their unin- sured clients will become eligible for Medicaid and will need help with the transition to a new med- ical home. Some clients will need assistance completing the Medicaid application itself because the process can be overwhelming. If people in the community think ACA has solved the problem of lack of insurance, this could affect donor contributions and volunteer numbers. The relationship between free clinics and area hospitals may change. With the influx of newly insured people, it is questionable whether the community will have a sufficient number of primary care providers to meet the demand. Free clinics may need to continue to provide medical homes for insured clients unable to access other sources of healthcare.

Within 3 to 4 years, free clinics are likely to have excess capacity and will need to make a choice among several options:

• Continue as a free clinic to serve a smaller population of uninsured/underinsured cli- ents and address unmet healthcare needs in the community

• Transition to a federally qualified health clinic • Transition to a Medicaid primary care provider • Close

Source: Adapted from materials developed by Free Clinics of Michigan, n.d.

© Ed Kashi/VII/Corbis

Healthcare reform will affect the business model of free medical clinics in the United States.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

Political Trends

Politics is not just for politicians. Politics is about power, the powerless, and the actions and activities people take to redress perceived inequities or wrongs. The “Tea Party” movement that has spread across the country is an example of this. The growing Right to Life social movement is one that could have a significant effect on some HSOs and their perceived public reputation. Consider the following political trends:

• The relative influence and power of interest groups in every sphere of economic and social activity in the United States is a matter of growing debate. From professional organizations such as the American Medical Association, to indus- try groups like the American Health Care Association/National Coalition for Assisted Living, and demographic collectives exemplified by the American Asso- ciation of Retired Persons (AARP), interest groups are more organized and more influential than ever before. The term lobbyist is used in some circles as a pejora- tive term, giving some indication as to the controversial nature of this trend.

• Fighting against or demanding enforcement of regulations or laws is a trend observed in the nation’s courtrooms.

• The United States has always been a highly litigious society, and that trend is only increasing.

Demographic Trends

Because many healthcare services target specific demographic groups, monitoring trends in this category is imperative. For instance, if the population is aging, HSOs will need to provide more geriatric services. If there are new ethnic groups in the community, HSOs will need to expand cultural outreach and offer a greater diversity of culturally profi- cient patient care. If income levels are dropping, HSOs may need to offer low-cost clinics for nonemergent services staffed by nurse practitioners and physician assistants. Demo- graphic trends are, by definition, concerned with groups identifiable by specific common characteristics such as age, gender, income, national heritage, and many others. Consider the following demographic trends:

• A country’s population growth (or decline) is a demographic trend with impli- cations for most industries.

• The growth rate of a particular age group such as the 25–39 or over 65 age group gives clues as to whether the population of a country is aging or getting younger, or has a “demographic bulge” moving through it.

• The geographic distribution of population reveals migration patterns affecting local markets.

• Significant trends concerning gender, particularly gender differences, or in conjunction with one or more other demographic characteristics, such as age, ethnicity, education, or income levels, have critical strategic implications in a wide range of industries.

• Changes in ethnic mix reveal the extent to which regions or cities are growing more diverse or becoming dominated by one ethnicity.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

• Data on income levels show patterns of wealth distribution and indicate relative purchasing power, especially in combination with geographic data concerning average individual income and household income.

• Literacy rates reflect the extent to which a population has received basic educa- tion and can read its own language.

Attitude/Lifestyle Trends

This category of trends sheds light on how people live—their patterns of living—making the trends highly interrelated with one another as well as with demographic information. These are also an outward manifestation of people’s attitudes and values. Consider the following attitude/lifestyle trends:

• Household formation includes the established family structure, such as married-couple families, one-parent families with either female or male head of household, couples with no children, and gay or les- bian couples. Also of interest is the average number of persons per household.

• Trends in the type of work and who is working are important to consumer- oriented industries like healthcare services. For example, the rise of women in the workforce, especially in professional and technical jobs, and the increase of two-income households have had a tremendous effect on spending patterns and the types of services offered by HSOs. Similarly, the tendency of more elderly people to delay retire- ment and continue to work is a growing trend.

• Trends in the type and level of education achieved are significant, particularly when the data are combined with ethnicity, race, and sex demographic variables.

Sociocultural Trends

This category focuses on broader changes in society and the extant culture and becomes important only if societal or cultural changes might affect the business. For example, building a maternity center without patient rooms large enough to accommodate family members and overnight visitors could in turn translate to a lower market share. Consider the following sociocultural trends:


The rise of women in the workforce has affected spending patterns and the types of services offered by HSOs.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

• There are often changes in social regulations, such as increases in consumer and environmental protection, changes in Supreme Court rulings, and trends of the courts deciding issues that the political process cannot.

• Social expectations are constantly in flux. Healthcare organizations need to be aware of and prepared to respond to evolving consumer values across a wide range of issues. Examples include a growing emphasis on personal health and physical fitness, and increasing activism among women and minority groups.

• Changes in economic values have recently come to the forefront. Many people have expressed increasing concern with how economic benefits are distributed in society and how people are taxed. It can be argued that there is less acceptance of healthcare expenditures lacking societal benefit, such as excessive spending during the last few months of a person’s life.

• Changes in political priorities affect entire industries. For example, for Medicare to maintain budget neutrality, raising payment rates for one group of HSOs will necessitate reducing payment rates for another group.

Technological Trends

This category covers the entire swath of technology, from new energy sources to commu- nication technologies, electronic health records, healthcare modalities and cures, product

and process innovations, and so on. Clearly, HSOs must stay abreast of technological developments in their industry and how those advances affect people, businesses, and soci- ety. In rapidly changing fields, it is possible to detect early signs of new technologies by going to profes- sional society meetings and listening to presentations on new processes and techniques, which often precede the introduction of new technology by several years. There is currently debate over healthcare reform’s role in advancement of new technology. Some in the medical device indus- try fear that comparative effective- ness research may stifle innovation (Gross, 2010). Consider the following technological trends:

• The pace of change of basic science or research is manifested in the number and nature of new patents applied for and issued.

• The number and location of new companies formed to exploit new technologies and products based on new technologies are indicators of technology trends.

• Changes in the average percentage of sales spent on research and development (R&D) in a particular high-technology industry and for particular competitors, if publicly held, are critical trends for companies to monitor.

© Nati Harnik/AP/Corbis

This $3 million functional MRI (fMRI) scanner is being installed at the University of Nebraska to help detect and analyze concussions.

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CHAPTER 4Section 4.4 Environmental Trend Analysis

• Trends in technology diffusion describe changes in the time required for a new technology to become accepted in general use.

• Innovation lag indicates the period between when the scientific solution to a technological need is first recognized and the emergence of the first viable prod- uct using the solution technology and its successor.

A careful analysis of all relevant environmental trends provides an HSO with an indica- tion of strategic opportunities. These opportunities can manifest as trends that might have a strong positive impact on the business or as looming threats or trends that might have a strong negative impact on the business. While an adequate analysis of the environment can be time consuming, it provides valuable information for planning purposes.

In late 2011, Sierra Health Foundation conducted a market analysis of the healthcare safety net in the Sacramento, California region. The safety net is defined as “a care deliv- ery service with providers that organize and deliver a significant level of health-care and health-related services to uninsured, Medicaid and other vulnerable patients” (Institute of Medicine, 2000, p. 3). Data were obtained from public sources: California Health Inter- view Survey, California Office of Statewide Health Planning & Development, the fed- eral Health Resources and Service Administration Health Center Uniform Data System, and the U.S. Census. Interviews were held with representatives from community health centers, hospital systems, county public health services, and health plans. Focus groups from the medical community and healthcare users also provided input. The market analy- sis data were gathered in December 2011, with a final strategy plan addressing what is needed to help underserved populations completed in May 2012 (Sierra Health Founda- tion, 2012).

Environmental scanning should not be limited only to the period immediately preceding a strategic planning session. Ideally, environmental scanning is an ongoing, year-round activity done by many people throughout the organization. If scanning is done year- round, it would be unlikely that the HSO would be blindsided by any changes in its envi- ronment, and it would also be one of the first to notice opportunities as they arise. This last point is worth emphasizing, because the earlier an opportunity is noticed, the more lead time the organization has to exploit it.

Clearly, trends that have an immediate impact within the planning horizon—whether the impact is positive or negative—should receive the greatest attention. Trends that require a longer time to affect the organization beyond the planning horizon are correspondingly less important but should nevertheless be monitored. Trends that have no impact on the organization should be ignored.

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CHAPTER 4Summary & Resources

Summary & Resources

Chapter Summary

• This chapter explored the importance of and tools to help in analyzing an orga- nization’s external environment—its industry, competitors, markets, and general environment. Several useful tools for doing an industry and competitive analysis were presented and discussed, including Porter’s five-forces model, the industry- attractiveness matrix, strategic-group maps, and critical success factor analysis.

• Identifying the industry’s dominant economic characteristics and driving forces adds to one’s knowledge about the industry and how it might be changing— critical knowledge when deciding what strategy to pursue.

• A key part of the external analysis is finding out all one can about an organiza- tion’s customers (market). Included in a market analysis is distinguishing among a market, target market, and served market (which could be a niche) and deter- mining the size of the market and whether it is growing (not to be confused with industry growth rate), how far the market is penetrated, what consumers’ needs are and whether these are changing, the distribution channels used, payer mix, and any relevant trends (for example, in buying habits).

Discussion Questions

1. Complete the following matrix by indicating which environmental trends (economic, regula- tory/legislative, political, demographic, attitude/lifestyle, sociocultural, technological) are most in need of scanning by each type of healthcare organization, and provide your reasoning:

Organization Trends Reasoning Hospital Nursing home Home care agency Multispecialty physician clinic Freestanding dialysis center Senior residential care facility

2. List some sources of information for HSOs in each category of environmental scanning. 3. We know why environmental scanning is considered part of strategic planning, but why is it

part of strategic thinking? 4. Economic and demographic data are often quantitative, which makes it easier to identify

trends and their impact on the company. But attitude, lifestyle, and sociocultural trends are “soft,” subjective, and elusive. How can one understand better what is going on in these areas?

5. Scanning the technological environment is difficult for anyone but scientists or engineers in the field. Realizing what’s happening today in this environment is too late, because develop- ing technology takes years. How can one find out now what might be developing several years from now?

6. Assessing threats is a critical part of an external analysis that should precede, or be a part of, the strategic planning process. Forces that may adversely affect an HSO are constantly changing. How can an organization monitor these so that it is never caught unawares? What happens when threats are underestimated? Whose fault is it? Discuss.

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CHAPTER 4Summary & Resources

• A scan of the general environment should be done to look for any changes or trends that might favor (opportunities) or adversely affect (threats) the orga- nization. The general environment includes seven categories, not all of which are relevant to any one HSO: economic, regulatory/legislative, political/legal, demographic, attitude/lifestyle, sociocultural, and technological.

Web Resources On the website of the American Health Planning Association, you can find links to state CON laws, including the facilities, services, and equipment subject to regulation in each state. On the Nielsen Company website, you can try out the Prizm market segmentation research tool to look up the top consumer segments in your ZIP code and learn some basic infor- mation about demographic and lifestyle characteristics in your community. You can find out more about the health of people in your area on the County Health Rank- ings and Roadmaps website, sponsored by the University of Wisconsin Population Health Institute and the Robert Wood Johnson Foundation. The Healthcare Cost and Utilization Project sponsored by the Agency for Healthcare Research and Quality contains hospital and emergency department utilization data for all regions of the United States. The Health Resources and Services Administration (HRSA) is an agency of the U.S. Department of Health and Human Services. Its health data center includes a core set of information on the operation and performance of health centers, as well as health center trends, statistics, and rankings. Its mapping service provides information and assistance in creating a health services map of your neighborhood or potential service area. Performance results, including consumer satisfaction data, can be found on the Medicare website for hospitals, nursing homes, dialysis facilities, and home health services. On the website of Partners in Information Access for Public Health Workforce, you can find links to local, state, regional, and national healthcare statistics and links to relevant legislation and regulation affecting HSOs.

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CHAPTER 4Summary & Resources

Key Terms bargaining power An ability to dictate the terms—price, delivery, quality, and the like—in a trading negotiation.

barriers to entry Factors that could, if sufficiently high (like capital required, distribution channels, brand reputation, technological know-how, etc.), prevent a company from entering an industry.

benchmark Data about competitors used to compare with and improve one’s own product or services; guideline or general rule of thumb related to a specific industry or business segment.

Certificate of Need (CON) regula- tions State laws that require coordinated planning of new services, equipment, and facility construction for the purpose of con- trolling costs and minimizing duplication.

concentrated industry An industry in which only a few firms account for a large portion of total industry sales (considered the opposite of a fragmented industry).

critical success factors (CSFs) What an organization must do well in order to suc- ceed in the industry (they can be thought of as “rules of the industry”).

distribution channels How a healthcare organization reaches its consumers (can include directly via salespeople, advertise- ments, and the Internet).

environmental scanning A process that involves identifying and analyzing trends that are external to the business.

fragmented industry An industry in which no one firm has more than a fraction of a percent in market share (opposite of concentrated industry).

group purchasing organization (GPO) A collaboration of HSOs that are able to negotiate lower prices from suppliers than what a single HSO could expect to receive.

market analysis An umbrella term covering the collection and analysis of data and information about an organiza- tion’s customers, which could be compa- nies in another industry or individuals (consumers).

market penetration The proportion of a market that has bought a product/service from the industry (can vary from 0 for a brand new market to 100% and beyond, as when people own more than one car or TV).

Porter’s five-forces model An analyti- cal tool developed by and named after Michael E. Porter to assess the five sources of competitive threat extant in an industry and causes of industry profitability.

strategic-group map A technique to clus- ter, in a two-dimensional space, strategi- cally similar competitors in industries; this technique is especially useful when indus- tries contain disparate competitors.

target market The group of customers the organization aims to attract and serve.

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