PEMBA 2008
Residency
January, 2008
If business is like a
game—strategy is the
theory of how to excel in
that game
Compare it to blackjack
There are a variety of theories on when or
when not to take a card
– Intuition and luck
– Theories based on a predetermined set of
rules
– Theories based on probability and knowing
how a casino operates
Businesses are often run the same way
The best way to win a competitive
game
Total understanding of the game, how it is
played and how the rules should be
implemented
In business you must know the
competitive arena and how to apply the
“rules”
– The rules: How to apply, motivate and apply
people to implement the “rules”
Strategic Management Process
It is a sequential set of analyses and choices
that can increase the likelihood that a firm will
choose a strategy that will enable it to perform
well.
Strategic Management process is:
Concerned with identifying barriers and issues
that need to be overcome in order to accomplish
the firm’s vision.
A good strategy is based on a working
assessment of the internal and external
environment that affects the business.
Strategy and health care
Health coverage premiums rose 7.7% annually
in 2006
Health benefit costs were expected to jump 11%
last year (verdict is still out)
Health insurance premiums have increase an
average of 11% annually over the past 5 years
As on 2005, 46.6 million American were without
health insurance
The medical environment continues to evolve and uncertainty is the
only thing certain
Strategy and health care
Regulations/legislation changing how you
do business
More educated public
– Seek alternative medicine providers—
domestically and internationally
– Self-diagnose via internet
– Ask questions
Health care in never certain
Some of the predictions of the past have not been
realized
– We thought TB was a thing of the past (1960)
– We expected full capitation (1993)
– We thought the physician practice management
groups were the way to go (1997)
– The US public believes unlimited access to health
care is an inalienable right
How can this be realized given the practical economics
of unlimited access?
Strategy and uncertainty
Strategy helps you live within the realities of
uncertainty
– Strategy helps to work through issues, assess risk,
establish contingency plans
– Acting on instinct can prove disastrous
Strategy helps to recognize the different sources
of uncertainty
– The degree of risk is directly related to planning (or
lack of planning)
Hierarchy of Strategy
Corporate
– In which businesses should we be?
– How should we manage the array of
businesses?
Business
– How should we compete in a given
business?
Functional
– How best can each function support the
business level strategy?
The Strategic Management process
Internal
Analysis
Mission/Vision
Objectives
External
Analysis
Strategic
Choice
Strategic Implementation
Competitive advantage
Mission and Vision
Mission: Core purpose—reason for being
– Generally not exciting to outsiders
Vision: Envisioned future
– What is the desired future state
Mission
The strategic management process begins
when a firm defines its mission
– Mission is the firms long-term purpose
– Defines what a firm aspires to be and what it
wants to avoid
Mission statements
Missions come in several “flavors”
– Some are vanilla—say the same as others but
do not influence the behavior of the company
– Some are hazelnut—central to everything the
organization stands for, visionary, tied to
profitability
– Some are licorice (like Greek ouzo)—
consistent only with the founder or CEO’s
beliefs and inconsistent with economic
realities
Objectives
Specific measurable targets a firm can use
to evaluate the extent to which it is
realizing its mission
– Objectives should be tied to the mission
– Objectives should be relatively easy to track
over time
Objectives
Set Targets
– Become….
Common Enemies
– Beat…..
Role Model
– Be Like….
Internal Transformation
– Transform the company how……
Knowing your stakeholders
Stakeholders are any person or group that
affects your organization
– Patients
– Government (local and national)
– Hospitals
– Other physicians
– Nursing staff
– Suppliers
– Creditors
Stakeholders
Groups who can affect performance
Must maintain performance at an
adequate level in order to maintain
the participation of key
stakeholders
Hospital/
Practice
Capital Market
Stock market/Investors
Debt suppliers/Banks
Product Market
Organizational
Primary Customers
Suppliers
Employees
Managers
Non-Managers
Stakeholder Involvement
Each of the key stakeholders involved wants a
piece of the same pie
1
How do you divide the pie in
order to keep all of the
stakeholders involved?
2
How do you increase the size of
the pie so that there is more to
go around?
Honda case
Looking at strategic success
Environmental Assessment
Internal and External Assessment
Environmental Assessment
Serves as the backbone to the strategic plan
Serves as the platform for strategic decisions
Helps to reduce uncertainty
Understanding strengths and weaknesses
internally and opportunities and threats
externally required for high performancegenerating strategies
Scenario One
OB-GYN Specialists Part 1
Analyzing your external
environment
Industry and Competition
Primary objectives of external
analysis
Evaluate overall economic attractiveness of the
industry
Attractiveness of industry dependent on level of
opportunity and threats
– Highly attractive: many opportunities/limited threats
– Unattractive: significant threats and limited
opportunities
– Average performance highly correlated to
attractiveness of the industry
Frameworks for analysis
Structure-conduct-performance model
Five forces model
SCP Model
Industry Structure
Number of competing firms
Homogeneity of products
Cost of Entry and Exit
Firm Conduct
Price taking
Product differentiation
Tacit collusion
Exploiting market power
Performance
Firm level: Normal, below normal
above normal performance
Society: Productive and allocative efficiency,
Level of employment, progress
The linkage
Attribute of industry structure defines the
range of options and constraints facing a
firm
– If there are few options and many constraints:
firms generate enough to cover cost of capital
and social welfare in maximized
Structure here completely determines firm conduct
and long-run firm performance
Competition in an industry
Varies from
– Perfectly competitive: many firms,
homogenous product/respond to changes by
adjusting price (crude oil) competitive parity
– Monopolistically competitive: many firms, lowcost entry and exit. Not homogenous with
respect to cost or product attributes—
differentiation (toothpaste) Many conduct
options and can gain competitive advantage
Competition in an industry
– Oligopolies: small number of firms,
homogeneous or heterogeneous, costly exit
and entry (breakfast cereal—top 4/90% sold)
Can earn significant profit.
– Monopoly: single firm, costly entry (close:
operating systems—Microsoft) Use market
power to set prices that generate significant
economic value
SCP and strategy
Instead of seeking ways to increase
competitiveness of industries
– In strategy…SCP is used to describe the
attributes of an industry that makes it less
than perfectly competitive
Determine ways to help firms obtain competitive
advantage
In less competitive industries
Firms face fewer constraints and a greater
range of conduct options
– Have better chance of competitive advantage
– Industry structure constrains options
– Barriers to entry pose constraints
Environment threats
Anything outside the firm that seeks to reduce
level of firm’s performance
– In SCP terms: forces that tend to increase
competitiveness and force firm performance to
competitive parity
Five forces model
Used to assist in analyzing threats of an
industry to be more effective in developing
neutralizing strategies.
Five Forces of Competition
Rivalry of area providers
– Complement of patients to providers
Threat of new providers/entry barriers
– How easy is it to enter the market?
– Is there a need?
Threat of a substitute for your service
– Non-traditional, eg. Herbal medicine
Five Forces of competition
Bargaining power of the suppliers
– Can you negotiate deals with suppliers?
Bargaining power of the buyer
– This would include business/industry,
insurance companies, patients
The role of the market
Market volatility makes assessment critical
The more thorough, the more prepared
Ability to establish scenarios increases
Economic drivers
Trends in the national economy
Inflation
Interest rates
Changes in government spending
May result in changes in Medicare
payments
Changes in the stock market
Demographics
National demographic changes deal with overall
resources—baby-boomers, elderly
– Declining birth rates
– Increasing life span
Local demographic changes and population
trends look at allocations
– Retirement communities
– Unemployment could increase indigent care
$$s needed
Regulatory Analysis
Certificate of Need-in some states
FDA Requirements
HIPPA
Legislations affecting reimbursement rates in
some specialties could be a driver for new
entrants in the field
Labor Market analysis
Health care is a labor intensive industry
Who is available and how much will it cost you
Movement to outpatient has increased the need
for specialized clinical practitioners
– Mal-distribution across specialties and regions
of MDs
– What do changes mean to the future medical
school enrollments?
Competitive Analysis
Identification of competition
– Other hospitals, doctors, alternative methods
– Should competition dictate health care
offerings?
What are the geographic locations of your
competitors?
What is the demographic make-up of the
competition?
What is your market position?
Competitive Analysis
Entry or exit of major competitors
– New MDs or hospitals
– Closed facilities or practices
What differentiates you from your competition?
– Private/Public Hospital
Specialty Hospital or Practice
– Hours of Operation
– Scope of Services
Technological analysis
How does new technology change or impact the
industry?
How important is this technology to future
viability?
In your practice, how do technological changes
affect you?
Market Demand Analysis
Oversupply of physicians
Available market to support new ventures
What exactly will the market support
Cultural/Social
Abortion Clinics
Animal Research
Ethics Issues
– “Economy Hospital”
– “Tiers” of hospitals
The Consumer
– Patients are more demanding today of GOOD
service due in part to the media
Consequences: Patients are less loyal to
physicians
– Patients expect more time and information
Email
Longer consultations
Other factors to consider
National trends
– Learn from others
Geographic assessment
– What is happening in your environment
Geographic
Rural verses urban
Part of the country
Progressive state
Primary service area
In your community
Scenario Two
OB-GYN Specialists Part 2
Benchmarking practices
Look for those factors that exist in or outside the
industry that point to success
– Service marketing
– Specialized equipment
– Overall package
Planning assumptions
Informed guesses about the future
Good planning assumptions are based on
information in the external environment
Developing planning assumptions
The organization anticipates its future
environment and contemplates potential
challenges, opportunities, and critical success
factors
Planning assumptions must be joined by
implications for organizational success or failure
Assumptions mimic the
organizational culture
Culture is optimistic and forward thinking---look
for opportunities
Culture is closed, not prone to new ideas—look
for threats
It is important not to gloss over internal
weaknesses
Tools to address uncertainty
These tools help to provide a mental picture of
what is going on in the environment
They are used to complement rather than
replace the other components of the strategy
process
The environmental analysis provides a good
basis of information
– Scenario planning
– Decision analysis-decision tree simulations
– Game theory
Scenario planning
Systematic approach to imaging scenarios in the
future
– Each plausible but not sure
– Identifies potential risks and alternatives
Scenario planning
Each scenario tells a story of how the future
might unfold and how critical elements might
interact
It helps to develop a broad range of possibilities
Most useful when the levels of uncertainty are
high for several critically important assumptions.
Scenario planning
Identify a fundamental questions that you need
answered
Identify the greatest areas of uncertainty that are
impacting these fundamental question
Develop best and worse case scenarios
– These scenarios are the plausible extremes
for these uncertainties
Scenario planning
Flesh out the scenarios and develop
descriptions of what could happen
These scenarios help you to get a better picture
of what the future COULD hold
When to use
Too many costly surprises in the past
The organization does not usually generate new
opportunities
Strategic thinking is not innovative
Develop scenarios
The Curtis Clinic
Game Theory
In game theory you are adding other elements:
– Hospital A is considering a merger with B:
asks to develop a merger proposal
– Hospital A wants to have a better negotiating
position
– Hospital A asks Hospital C to develop a
merger proposal
Game Theory
Hospital A added a new player
Game theory helps you to think outside the box
– Basically, any strategy or tactic that affects
someone is going to trigger some kind of
reaction
– You have to focus on others…what are they
thinking
Game Theory
Added value is critical to game theory
In the example, Hospital A increased its added
value by changing the scope to three-party
negotiations
The value of game theory is that it recognizes
that at any time there are others making
decisions and these decisions are based on
what will ultimately result in their success.
Internal Analysis and
Strategy Formulation
Dr. Garry Adams
What is your Market Stance?
Risk and the marketplace
Dr. Sharon Oswald
Determining market stance
The market stance is how you go about realizing
your vision
The market stance depends on the degree of
uncertainty, the corporate culture, the philosophy
on risk, the current strategic position and the
financial situation
Three risk positions
Enactors
Adapters
Survivors
Philosophy on risk
Enactors: want to lead the market, change the
nature of competition, forces the competition to
react—high risk—stays the course in the face of
adversity but is willing to make radical changes if
necessary
– High tolerance for risk
– Likes to change the rules of the game
– Must have a strong financial position
Philosophy on risk
Adapters: Establishes strategies on what is
believed to occur in the market.
Creates few waves for competitors
Willing to exit the market if necessary
Works within the boundaries of the “game”
Not the first to move but a good follower
Philosophy on risk
Survivors: Waits to move until the environment
becomes more certain
– Corporate culture is to sit back and wait
– Often difficult to establish strategies because
of the rapid rate of change
– Very adverse to risk
Covenant Medical Center
A Risky Venture
Setting a strategic direction
What direction to follow
Strategic direction
Another consideration is in what direction do you
want to take your practice
There are basic strategic directions that help you
in further defining who you are
The Basic Strategic directions
High Price Leader
Low Cost Leader
Differentiation
Focus or Niche
High Price Leadership
If your specialty is predominately out-of-pocket
payment…you can choose to be a high price
leader
-Elective cosmetic procedures
-Experimental procedures
Low Cost Leader
In the state of Oregon in 2003, some physician
groups cancelled insurance contracts opting for
cash only
– Doctors here would want to be low cost
leaders
– OB physician outside of Atlanta—no staff
– Establish a “travel clinic”
– Other physicians who are “fed up” with
insurance
Low Cost Leader
How do you do this?
– Eliminate computer billing/accounts receivables
Drastically reduced paperwork
– Reduce FTEs…all you need is an RN
– Reduce overhead costs—set up practice in your
basement
Bill Cosby (Dr. Huckstable) had office in basement
Low Cost Leader
How do you make money?
– Charge what the others are charging and you
have greater margins
This can be done if you are in an area with little or no
competition
This can be done if you are in a very specialized area
Low Cost Leader
Charge less and gain a greater
market share
–
Works best when insurance is not
accepted
Differentiated
Something different that people are willing to pay
more for
Perceived better or more prestigious
– Plastic surgeon “to the stars”
How do you make money?
– Out-of-pocket payment may be higher in your
specialty
– Perceive better because of reputation—warranted or
not
Focus or Niche
Exploit one segment of the Market
Must be a segment that is not essential to a
competitor
Target all efforts to that segment of market
Focus or Niche
How do you make Money?
– Carry that Market…must be a large enough
market…and must control that market
– The only “game” in town
What are the alternative paths
After best assessing who you are and the
direction for your practice, you next want to look
at alternative paths for getting there
Market Penetration
Getting your existing market to increase usage
– Advertise services
– Special offers
– More assessable operating hours
Market Development
Moving into another market
– Establishing a Satellite Clinic
Service Development
Diversifying into new services
– Weight loss clinic
– Day Spas
– Wellness services: massage, vitamins, lifestyle
modification
Other forms of service development
Other ancillary services:
– Laboratory services
– X-ray
– Mammography
Backward and Forward Integration
– Backward:
For hospitals, owning physician practices
– Forward:
Providing rehabilitation
Backward Integration
Hospitals in the 1990s purchased physician
practices to assure a steady stream of patients
A negative consequence
Formerly profitable medical practices sustained
large losses
– Guaranteed salaries for physicians resulting in
decreased productivity
– Provided richer benefit packages which contributes to
higher overhead costs
Example: Miami Valley Hospital,
Dayton, OH
Purchased 110 physician practices
Average loss in 1999--$126,000 per office
Miami Valley in 2000
Terminated contracts with unproductive
physicians
Cut staff
Closed facilities
Cut $4 million out of their administrative budget
Horizontal Integration
Buying a competitive practice
Strategy and Competitive
Advantage
Winning strategies are grounded in sustainable
competitive advantage
There are many sources of competitive
advantage--you must decide what best fits your
practice and situation
Something others can’t copy easily—it is the
whole package
Strategy and Competitive Advantage
Competitive Strategy consists of the Business
Approaches and Initiatives needed to attract
customers, withstand competitive pressures and
strengthen market position
Strategy and Competitive Advantage
To succeed, your strategy must aim at providing
the buyer what they want or what they think they
want:
– Quality service at a higher price
– Better product that is worth paying more for
– Immediate service
Strategic Implementation
Putting it to work
What are typical problems?
Planning document placed on a shelf
The new plan is not supported by those affected
The new strategy is completely adverse to the
organizational culture
The new strategy was lofty and not in line with
the resources (people, money and space)
Matching
If you have done a good job in determining your
strategy you will have a strategy that matches
your organizational style
If not, you may have serious problems or you will
not effectively implement your strategy
Strategic Styles
Prospectors—embrace change
Analyzers--fast followers
Defenders—targets a narrow market, feeds on
stability
Reactor—shoots from the hip
– You never want to be in the reactionary mode!
Factors to successfully implement
your strategy
Buy-in—everyone affected must be
involved from the beginning
– CEO
– Staff
– Stakeholders***they are very important
Controls—determine effectiveness
Capital—monetary, human, resources
Implementation involves change
It could affect your human resources—or
reallocation of human or capital resources
It could change your structure--..eg hiring office
manager
– Or opening up practice to membership by other
doctors
Implementation
Buy-in is the key to implementation
– -clearly and persuasively instill commitment
– -should have practice-wide buy-in
Implementation
– -no blueprint--different things work differently
in different organization
– Test the change—if you are large enough, try
it on a subsection
Implementation
Try to focus on and celebrate short
term wins in order to keep everyone
motivated
Institutionalize the change—support it
with actions and policies
Never stop monitoring
Strategically you must continually monitor and
adjust your strategies
Remember, strategic planning is ongoing—your
environment is ever-constant!
Blue Ocean Strategy
Extending traditional Strategy
to thinking outside the box
How can you grow in an
unattractive market?
In today’s world of medicine
where do you find growth
opportunities.
Cirque du Soleil
Sprung out of a declining industry
Other forms of entertainment seemed
much more appealing than the circus
Traditional entertainment had turned to
computer games
Animal rights groups were rebelling
Cirque du Soleil
Created a new market space
The competition was no longer relevant
The appeal was contrary to tradition
Cirque du Soleil entered a new frontier
What is a Blue Ocean Strategy?
Characteristics the “the new frontier”
– Traditional strategic efforts probably won’t
work
– Untapped market space
– Competition is irrelevant
– The realization that to win in the future must
stop trying to beat the competition
– Rules of the game are waiting to be set
Another very simple example: Leggs egg
What is a Red Ocean?
The traditional market place
Must always swim successfully by outcompeting rivals
– Red oceans will always exist…they are a
part of business life
– Most businesses won’t look outside of the
red oceans because of the risk involved
Red
verses
Compete in existing
market
Beat the competition
Exploit existing
demand
Make the value-cost
trade off
Choose between
differentiation and low
cost
Blue
Create uncontested
market space
Make competition
irrelevant
Create and capture
new demand
Break the value-cost
trade-off
Pursue differentiation
and low cost
Blue oceans are not new
No industry stands still
– Change inspires blue oceans
– Focusing on a red ocean is like war
Limited terrain and the need to beat the enemy to
succeed
New business launches
Most are expansions in present
businesses—86%
Most of the profitability existed in the
businesses aimed at blue oceans
Why do we need blue oceans?
Technological changes have flattened the
playing field—quality and efficiency are not
an advantage
– Supply exceeds demand
– Globalization has compounded the problem
– Business environment of the past no longer
exists
Some successes of past were actually
changes in industry rather than one company
(eg. HP)
Value Innovation: the Cornerstone
of Blue Ocean
VI means making the competition
irrelevant—leaping into value for
customers
Equal emphasis on value and innovation
– Innovation without value is usually technology
driven
– Value without innovation is generally
incremental and not sufficient to stand alone
in the market
Value innovation
Defies the value-cost trade off
Red oceans make a choice between
differentiation and low cost
– Blue oceans pursue simultaneously
Look at Cirque du Solei….completely
broke from tradition and looked at a
different market and the addition of
sophistication (theatre aspect)
Cirque du Soleil
Eliminated costly elements– eliminated
factors an industry competes on
Lifted the price point
Added an entertainment aspect
Blue Ocean
Drive costs down while simultaneously
driving value up
Looks at the whole system of a company
Market boundaries and industry structures
are not a given—they can be
reconstructed by actions of industry
players
Key issues of Blue Ocean
– Reconstruct market boundaries
– Focus on the big picture—not merely
numbers
– Look past existing demand
– Don’t be bogged down by organizational
hurdles
– Include execution in your strategy
Analytical tools
Traditional strategy uses five forces and
generic strategies
Comfort in “tools”
Blue ocean suggests entrepreneurial
behavior and risk reduction
The Strategy Canvas
Looks at the state of the known market
place
– Where the competition is investing
– What they are competing on in products,
services and deliveries
– What customers receive from the competitive
offerings
The value curve
A graphic depiction of a company’s relative
performance across its industry’s factors
of competition
– plotting all together shows the makeup of the
industry
To fundamentally shift the strategy canvas
– Reorient from competitors to alternatives
– From customers to non-customers
Four Actions Framework:
to create new value curve
Which factors should be reduced well
below the industry’s standards?
Which factors that the industry takes for
granted should be eliminated?
Which factors should be created that the
industry has never offered?
Which factors should be raised well above
the industry’s standard?
Which factors should be reduced well below
the industry’s standards?
Eliminate factors that companies in the
industry have always competed on
– Sometimes there is a fundamental change in
buyer preference but companies
benchmarking each other may never perceive
1960s and 1970s US auto industry
Which factors that the industry takes for
granted should be eliminated?
Have some of the products been
overdesigned in the race to meet or
exceed competition
Perhaps $$$ spent in advertising that were
unnecessary
Over serving can increase cost structure
Which factors should be created that the
industry has never offered?
Pushes to reveal and eliminate
compromises—what are we forcing
customers to settle for?
This changes existing rules of competition
Which factors should be raised well above
the industry’s standard?
Forces you to look for new value for
buyers and create new demand
Forces a change in strategic pricing
The case of Sam Adams beer
Strategy canvas
What do you see as the strategy canvas in the
American beer industry?
Now, look at the strategy canvas on page 32 of
Yellow tail wine. Compare this to the strategy
canvas for the wine industry on page 26.
How did Sam Adams step outside the box?
What would the strategy canvas be for Sam
Adams?
Grid
Eliminate-reduce-raise-create grid
– Can be used to force companies to put on
paper how they will act on the four questions
in the four action framework
Characteristics of a Good Strategy
Focus
Divergence
Compelling tagline
Focus-Divergence-Compelling
Tagline
Focus: What is the emphasis of the company?
Don’t have to focus on everything.
– Southwest Airlines: frequency, service and speed as
opposed to lounges, meals, seating classes etc.
Divergence: How are they different from other
companies? Reactive strategists tend to share
same strategic profile
– Southwest Airlines: point to point between midsized
cities as opposed to hub and spoke
Focus-Divergence-Compelling
Tagline
Compelling Tagline: must deliver a clear
message but also a truthful message
How do you reconstruct market
boundaries?
“Blue Ocean companies” have followed six
basic approaches: six path framework
Path 1: Look across alternative
industries
Not substitutes (Coke verses Pepsi)
Look at alternatives…include products and
services that have different functions and
forms but same purpose
– Restaurants/movies: enjoy an evening out
– NetJets: fractional jet ownership
Fly commercial or purchase a corporate plane
1/16th ownership/50 hours per month
5500 airports across country
Path 2: Look across strategic
groups within industries
Strategic groups are companies within an
industry that share a similar strategy
Strategic groups are generally built on
price and performance
– Most companies want to improve their
position within strategic groups
– Don’t usually look outside because don’t
believe they are competing
Path 2: Look across strategic
groups within industries
Break out of tunnel vision
– Curves—entered oversaturated market
Aim is to spend social as well as exercise time
– Question to be answered…what makes
people trade up or down
For curves it offered a “women’s only” atmosphere
Champion Enterprises allows for inexpensive
prefab homes….with high end finishings
Path 3: Look across the chain of
buyers
Chain of buyers: purchasers may be
different from users and there also may be
influencers—may have different ideas of
value (consider insurance)
Most players in an industry focus on same
buyer—eg: pharmaceutical industry on
physicians
– Blue Ocean concept is to challenge
conventional wisdom as to the target group.
Can gain insights into redesign
Novo-Nordisk
Insulin producers usually targeted doctors
– Broke away from competition
– They looked at patient…developed the ease
of insulin injections with a pen…continually
upgraded
– Went from insulin producer to a diabetic care
company
Bloomberg
Shifted from purchasers who valued
standardization (IT managers)
To users –2 flat paneled monitors to see
all at once; keyboards with familiar
financial terms—built in analytical
capability
– Also, additional information and purchasing
services for down times aimed at enhancing
personal lives (ordering flowers etc.)
UPS
Handle problems with computers shipped
back to Dell—in the hanger
– Cut down on time away from owner
Path 4: Look Across Complementary
Product/Service offerings
Usually compete product for product but
most products don’t exist in vacuum
– Offering babysitting services at a gym or
movie theater
– NABI (Hungarian):
Bus companies competed on lowest bid
Costs were high—designs outdated and delivery
time late, not to mention quality
Buses stayed in existence for usually 12 years
Path 4: Look Across Complementary
Product/Service offerings
NABI realized that the cost of the bus was not the
issue—it was maintenance after purchase
Took attention away from initial cost of a bus but
focused on long term use
Made buses out of fiberglass to cut costs of
preventive maintenance, less cost in fuel
Initial price was higher but average life cycle cost
was considerably lower
Concept
How is product/service used…look before
and after
– Audio equipment to hear CDs
– “Living room” for book stores
– Filter-less coffee pots
– Dyson—no bags (always run out)
Path 5: Look Across Functional or
Emotional Appeal to Buyers
Swatch from functional to emotional—
fashion statement
Body Shop from emotional to functional—
no nonsense cosmetics
Cemex-from functional to emotional,
cement is “building a dream”—positioned
as a gift registry
Viagra—medical treatment to lifestyle
enhancement
Path 6: Look across time
External trends affect business—eg: internet
Most companies adapt incrementally
– Blue Ocean looks at how the trend will change value to
customers
Value offered tomorrow
– To find trends across time
Must be decisive to your business
Irreversible
Clear trajectory
CNN first global real-time news network
Pharmaceutical industries getting into biotech realizing
couldn’t do all themselves
Using the 4 Paths
Where might you find a Blue
Ocean—brainstorm in your
groups
How do you align strategy to
focus on the big picture?
Typically managers spend time
filling in boxes and running
numbers rather than thinking
outside the box.
Focusing on big picture
Focus strategy toward blue ocean
– Strategy canvas helps visualize current
position but also helps chart future direction
Four steps to visualizing strategy
– Visual Awakening: how do you compare to your
competition
– Visual Exploration: look at distinctive advantages of
alternative products/services—how can you eliminate,
change, create
– Visual Strategy Fair—what “could you be” get feedback
– Visual Communications—Look at before and after—
support only moves that close gap
Visual Awakening
Take a critical look at where you are
Compare this with your competitors
If your strategy canvas is the same…what
is the value?
– Sears didn’t do this until it was too late
– WalMart on the other hand looked to see how
they could be different
Visual Exploration
Go out in the field and find out how people
use or don’t use products or services
– Someone familiar needs to do this
Look at customers as well as non
customers
Propose a new strategy based on what
you observed
Visual Strategy Fair
Brainstorming about what you can
be..always with $$ behind and expertise
How add value
How become more focused
Always including a compelling tagline!
Visual Communications
Communicate to employees—before and
after strategies..in writing
– Explain why need to change, eliminate etc.
Whirlpool in late 1980s teleconferences worldwide
with all employees to talk about changes
– The soul never thinks without an image
How do you maximize the size of
the Blue Ocean?
BO principle: Reach beyond
existing demand
Reach Beyond existing Demand
Conventional strategy practices
– Focus on existing customers
– Drive for finer segmentation
The more intense the competition, greater
on average the customization of
offerings—often risk too-small target
market
Blue oceans look to noncustomers
Build on commonalities of what buyers
value
– Think non customers before customers
– Commonalities before differences
– Desegmentation before finer segmentation
Look to the noncustomers
3 Tiers
– 1st: Sit on edge of market…minimally
purchase industry’s offering out of necessity—
but would jump ship if opportunity arises
(can’t find anything better or a better fit)
– 2nd: Refuse to use industry’s offerings
(country club…social member but won’t
spring for golf membership)
– 3rd: Never even thought of ever indulging!
First-tier
Example:
– Want quality food…quick…but want it fresh:
sandwiches at the Fresh Market (book gave
example of Pret A Manger)
– Come in, look, pick (could even pre-pay)
What are the key reasons to jump
ship?
Look for commonalities in responses
– Perhaps long lines
Second-tier
These customers are refusing
– Either do not use or can’t afford
– Needs are dealt with elsewhere or ignore
Example: French Outdoor advertising
– …viewed as transitory and expensive
– Repeat visits low, not a popular form
Many companies refused
– Low value added OR
– Luxury couldn’t afford
Second-tier
– Looked for stationary downtown locations to
advertise…people could read and therefore
message come across better
Company provided street furniture to
municipalities-- maintained and used as venue for
advertising
– Must determine: why are these customers
refusing and look to the commonality of
responses
Third-tier
Not even considered as potential
customers by anyone in industry
– Example: Won’t go to dentist for teeth
whiting—considered extravagant
– Most companies would be amazed at the
ocean of latent demand
Third tier
Book looked at defense industry—building
aircraft that would suit Air Force, Marines
and Navy…
Built plane that could meet all demands…
But had to map out what each wanted first
Not enough to maximize the size of the
ocean…must create a sustainable win-win
outcome
Next need to build a robust business
model to ensure a healthy profit
Get the strategic sequence
right
Build strategy in the sequence of:
Buyer Utility—is there an exceptional utility in the
idea (compelling reason)
Price—can the masses afford (compelling
reason to pay the price)
Cost—can you attain cost target to be
profitable—don’t let cost drive prices
Adoption—what are the adoption hurdles (will
there be resistance)
Buyer Utility: Don’t fall in
technology trap
Unless makes buyers’ lives more simple,
more convenient, more productive, less
risky, more fun or fashionable—won’t
attract the masses
Remember focused, divergent, compelling
Value innovation is not the same as
technology innovation
Test of exceptional utility
A buyer’s experience can usually be
broken into a cycle of six stages from
purchase to disposal
Test for exceptional utility:
– Does company offerings remove the greatest
blocks to utility across entire buyer experience
Buyer experience cycle
Purchase: how to, place, security, speed
Delivery: how long, how difficult, how to do (self
arrangement), how costly
Use: need for training, ease of storage,
effectiveness of features, how does it compare
to competition
Supplements: complimentary products? If so
cost, time, ease
Maintenance: external maintenance, ease, cost
Disposal: waste, ease, environmental issue,
cost
Buyer Utility Map
– Utility levers:
How a company can unlock exceptional utility for
buyers
Greatest blocks often represent the most pressing
opportunities
– Look across levers…the more blocks
uncovered the better…go back and refine
– The map highlights differences between ideas
truly new and those that are only revisions
Purchase
Customer
Productivity
Simplicity
Convenience
Risk
Fun &Image
Environmental
Friendliness
Delivery
Use
Supplements
Maintenance
Disposal
Uncovering blocks
Customer Productivity: where is the
biggest block to customers
Simplicity: where are the biggest blocks to
simplicity
Convenience: where are the biggest
blocks to convenience
Risk: same
Fun and Image: same
Environmental Friendliness: same
Strategic pricing
People must be attracted and willing to pay
Know from the start what people will be willing to
pay—don’t start at one level and drop price later
To some the value of a product may be tied to
number using it (eg: eBay)
– Must earn reputation from beginning
Curves
Starbucks
– Price must not only attract buyers but retain them also
Identify price corridor of the mass
Challenge to pricing:
– Understanding price sensitivities of people
comparing products to yours outside the
industry
– How then:
Look at products of different forms but same
function
Products of different forms and functions but same
overall objective
Different form, same function
Ford priced Model T against horse drawn
carriage..not other cars (price point lower)
Different form and function, same
objective
Cirque du Soleil lured customers from all
other areas of entertainment—including
bars and restaurants---objective, an
evening out
Specify level within price corridor
Determine how high can price without
inviting imitation products as competitors
Dependent on:
– Degree it is protected legally (patents or
copyrights)
– Degree company owns core assets or
capabilities
Example: Dyson patent and hard to imitate
bagless vacuum
Companies should choose mid to
lower pricing if
High fixed cost and marginal variable
costs
Attractiveness depends on network
externalities
Cost structure benefits from steep
economies of scale and scope
Strategic Pricing to Target Costing
To maximize profit potential..start with
strategic price..deduct desired profit
margin and arrive a target cost
Price-minus costing not cost plus pricing
– Profitable and hard for followers to match
Must drill down and be creative
– Eg: can raw materials be replaced by unconventional,
less expensive
Sometimes partnering helps
The next step is Adoption
Any new business idea needs adoption for
employees
– Must address their concerns
Same goes for business partners
General public—environmentalist
– McDonald and Styrofoam
Overcoming organizational
obstacles
First need to show employees why there is
a need for change
Second—you generally end up cutting
resources
Third—you have to motivate the key
players
Overcome politics—don’t let yourself be
shot down
You need a champion
And a leader that is willing to
do what is needed
Execution
Engagement—involved in decision
Explanation—understand why final
decisions are made
Expectation clarity—explain the new rules
of the game
Sustainability and Renewal of Blue
Ocean Strategy
Like all strategy, it is a dynamic process
Soon imitators appear
When do you reach out to create a new
blue ocean?
Barrier to Imitation
Sustainability can be traced to these
barriers:
– Sometimes value innovation defies
conventional logic
– Brand image conflicts prevents companies
from imitating blue ocean (imitation might
invalidate current practices)
– Natural monopoly blocks imitation—can’t
support more than one in market
Barrier to Imitation
Patents
Initial high volume results in cost
advantages
Network externalities block (more
customers of eBay the more attractive to
others)
Imitation requires substantial changes
Loyal followers
When to value innovate again?
Continually map and monitor value curves
If it begins to converge with competition, it
is time to reach out
As rivalry intensifies supply exceeds
demand and a red ocean emerges
Strategy and Lean Health
Care
The Toyota Production Method
Lean and Healthy
Great Britain’s NHI is taking
some lessons from Toyota
Blue Ocean and Toyota Lean
Blue Ocean is about sustaining a
competitive advantage—
– So is the Toyota Method
Blue Ocean is about eliminating what is
not necessary
– So is the Toyota Method
Toyota Lean Method is a natural extension
of Blue Ocean
Toyota Lean
Toyota Lean has been catching on across
the country
It took 30 years for Toyota to get to this
point—yet if you start here, it makes those
“Blue Ocean” ideas easier to implement
Waste in Healthcare
An estimated 30-40 percent of the total cost of
health care is waste
That includes, waste of time, waste of money,
waste of material resources
Some who have already adopted lean say waste
totals 60 percent
Most organizations save 50% of labor and space
by converting to lean
– Is it possible that this can happen in health care?”
What do we mean by lean?
Elimination of waste in all forms—time,
materials or unneeded process steps
All non-value added steps and
processes
Lean is a multi-year strategic
direction—like anything strategic, it
doesn’t happen overnight nor can you
ever stop monitoring
Toyota Lean Method: a 46 Step
Process
1. Define value from the perspective of the
patientEasy access to appointments
No waiting times
Timely reports
Timely decisions
Good outcomes
Courtesy….reasonable costs etc.
Examples from industry
Virginia Mason Medical Center (Seattle)
– Using lean since 2002
– Through eliminating waste—created more
capacity and scrapped planned expansion
– Even with a no layoff policy, through attrition
and no need to replace…FTEs decreased in
2003 and 2004 after six years of annual
increases
Step one
Technically, a value-added task
– An activity…important to the patient
(something the patient is willing to pay for),
that changes the way things have been in the
past and is done right the first time (without
rework or waste)
Example: episode of Flip this House and the city building inspector
Focus groups
Find out what, when, where and how
much the patient actually requires verses
what is actually being delivered
– Would an uninsured patient choose to pay for
a particular process step, activity or feature?
– Why not eliminate?
– How much value does a fountain or brass
doors on an elevator bring to the patient?
– Do expanded services provide true value if
they are already being provided elsewhere?
What is the true goal?
Bottom line and market share?
Cost effectively and measurably improve
the health status of the community?
Step 1
Have a clearly defined project charge and
make sure this charge is clearly aligned
with your mission and vision
Step 2: Map the Patient’s Value
Stream
All the actions, both value-creating and
non-value creating, required to bring the
patient from admission, through discharge
and follow up
– Map out in flow chart
– Label as:
Those that definitely provide value
Those that provide business value but little value
to patient
Those that provide no value whatsoever
Step 2
What can be eliminated without taking
away value from the patient? Think in
terms of what an uninsured person would
be willing to pay for
– Consider pedometer to see where steps can
be eliminated
– Goal is to eliminate waste, waiting anything
that is not adding value
Step 2: Advise from former
PEMBA
Clearly define what is value-added and
non-value added
– This is imperative to a successful outcome
Have a clear knowledge of the WASTE
Develop an “as is” and “to be” value
stream map
Group Activity
Map out activities in one of your offices
– First: develop as “as is” value stream map
Everyone in the group can help by posing questions
–
–
–
–
Second: what is value-added and non-value-added
Third: determine what is waste
Four: develop a “to be” value stream map
Fifth: identify your problem areas for implementation
of the “to be” map
Step 3: Look at how all core
processes work in detail
Spend time observing all processes..even
doing
– Require all supervisors/managers to do valueadded work
– Give everyone a say in how things can be
improved
– Consider creating an internal observation and
improvement team
Step 4: Implement Toyota-style
lean production methods
Establish a continuous work flow
Set a target of reducing patient wait time
to a maximum number
– Post signs to inform desk if time maximum
has been exceeded
– With continuous flow, size of waiting room/
physician and treatment room numbers can
be reduced
Step 4
Could invest in efficient patient scheduling
system—Toyota does not
Uses a pull system—kanban system
– Use identifying card with patient ID
Card given to patient upon arrival
After every step..card returned to receptionist or nurse in
charge..used as a notification that a process has been
completed and another ready
– Draw services to patient
Review all systems to assure the “pull value” is automatic
More on Kanban
Invented in 1950 at Toyota
– Belief that parts will only be produced at the
previous step to satisfy demand at the next
step of the process
– As each container of parts used up at a
manufacturing step, it was sent back to the
previous step—with a kanban card
– The kanban card signals for more inventory at
the right place at the right time
Pick a process (other than
the example I gave)
How might you use a kanban
system?
Step 5: Train administrators to be
lean leaders
Being a lean leader means you respect
the contributions and knowledge of ALL
employees
– Frontline employees know the problems they
encounter better than anyone
Traditionally managers think vertically
A lean leader thinks horizontally to
optimize the overall value to the patient
Step 5
Key here is the involvement and
empowerment of the employees
– Look for process improvement in cost and
quality
– Avoid blame even though problems should be
expected
– The key is exposing problems, not covering
them up
Step 6: Provide empathetic
change management
Employees will alter mindset ONLY if they
see the point of change and agree with it
Behavior will be changed if:
– See the need for change
– Surrounding structures support the change
– The requisite employee skills are available
– Leadership is realized
Step 6
Six layer of resistance to buy-in
– Lack of agreement on the problem
– Lack of agreement on the direction for a solution
– Lack of agreement that the solution addresses the full
problem
– Concerns regarding side effects of solution
– Concerns regarding obstacles to implementation of
the solution
– Unspoken fear—toughest to overcome
Leadership … good leadership is the only way to deal with it
Step 7: Institute a Quality and Cost
improvement department
Typical quality improvement efforts need
to focus on both quality and cost
– Establish a vision for continuous improvement
for the entire organization
Meet monthly to establish and review procedures
– Set goals like:
There will be no cost increase in 2008
– Then figure out how to attain this goal
Step 8: Change name of manual to
include cost
Quality improvement manuals should
include both quality and cost improvement
techniques
Step 9: Educate everyone about
strategic plan
Display mission and vision publicly
Business cards with mission and vision
Continually link strategic decisions to what
has been written in the strategic plan
Step 10: Improvement plan with
goals, assignments and dates
Once again, this is where you can align
with your strategic plan
Look first at those areas that will provide
the greatest benefit—short term gains help
to solidify process
– What can speed up accounts receivables?
Step 11: Implement a simple
scorecard for entire organization
Efficiency scorecard:
– In terms of number of patients seen, staffing
provided and cost per patient
– Look at the peek time periods..use variable
staffing
Keep scorecard on daily basis
Balance scorecard has become popular in
health care
Balance scorecard
If you are currently using this…it dovetails
well into the Toyota lean method
Included in Balanced Scorecard..
Balanced Scorecard is directly linked to mission
and strategy; therefore can vary across
organizations
Balanced Scorecard traditionally includes both
objective and subjective measures divided into
four major areas:
–
–
–
–
Financial perspective
Customer perspective
Internal business process
Learning process and growth perspective
Five principles of Balanced Score
Card
Translate the strategy into operational terms
Align the organization to the strategy
Make strategy everyone’s job
Make strategy a continual process
Mobilize change through executive leadership
Step 12: Scorecards to monitor
each department
Establish a scorecard for each department
to monitor cost and quality and assure
working toward the organizational goals
Step 13: Involve Board
Top level of organization should initiate
selected strategic quality and cost
improvement goals
– Shows commitment throughout
Step 14: Annual quality report
Make quality as important as financial
aspects
– Annual financial and quality report
Step 15: Create a Rapid
Improvement team
Each member should be empowered with
the goal of reducing budget by at least 3
percent within a year
Each must document a specific cost
reduction/quality improvement on a
monthly basis until achieve goal
Step 16/Step 17: Use Toyota-style
work teams when possible
Multifunctional teams
– Responsible for everything
Housekeeping
Fixing problems
Establish “spin off circles”
Next steps
18: Establish permanent structure around cost
and quality improvement
19: Expect 4 new suggestions for improvement
per team per month
20: Have clear reward and recognition
systems…but also have consequences if cost
and quality improvement targets are missed
21: Teach continuous improvement throughout
the organization
Step 22: Implement a 5S program
1S: sort. Remove all things from
workplace not necessary
2S: set in order. Arrange things so that
they are easy to get to.
3S: shine. Clean equipment and make
things look good
4S: standardize. Determine how the first
three can be done continuously
5S: sustain. Keep it up.
Next steps
23: Identify unnecessary items using red
tags…put in holding area
24: Promote visual control. Have all work
processes a visible as possible to all
employees
Step 25: Eliminate all Forms of
Waste
Overproduction or producing the wrong
thing: Again, make sure products and
services are what patients really want and
need
Incorrect utilization of staff:
– Using the wrong level of staff for a certain task
– Understaffing or overstaffing
– Not fully using an employee’s skill or potential
Step 25
60% of health care costs are labor
Consider a float staff for peak times
To be cost efficient…assure frontline
employees are qualified—cross train if
necessary
Waste includes defects and rework
Defects: medication errors, poor
outcomes
Reworks: multiple bed transfers, retesting,
rescheduling
Create a system to fix the cause of the
problem as it occurs
– Mistake-proofing
– Or halt operations once an error is detected
Waste: Waits and delays
Idle time created when:
– People wait for machines
– Machines wait for people
– People wait for people
Transportation: moving anything around is
non-value-added
Unnecessary motion: not being able to
reach, restocking, distances between parts
of a process
Waste: Excess inventory and
processes
Inventory: again, kanban system
Processes:
– Complex registration processes
– Repetitive registration processes
– Multiple signatures/duplicate information
entries
Meetings are good example of waste!
Step 26: Other examples of waste
Excessive layers of administration,
managers, supervisors, inspectors
– Jack Welch at GE: 25-30 employees per
supervisor
Look for a benchmark:
– Calculate the ratio of direct patient valueadded employees by total of employees
– Try the same using salary dollars
Other potential areas of waste
Utilization review depts: should be
incorporated in patient care
Patient advocates: is this necessary if
frontline are truly adding value
Infection control staff—if proper sterile
techniques are followed, should there be a
need?
Need to look at number of secretaries etc.
More steps
27: Sequence work and standardize it
– Moving a patient from place to place is not
continuous flow
– Accomplishing as many steps as possible
with minimal movement and transport –
efficient patient work flow
– Use correct instruments and procedures—
otherwise hampers process improvement
More steps
#28: Eliminate bottlenecks—classic book,
Goldratt’s 2004 book The Goal
– Only three key performance measures matter:
Increase throughput—rate at which systems
generate money through sales
Decrease inventory—all the money involved in
purchasing things necessary for sales or
production
Decrease operating expenses—all the money
spent turning inventory into throughput
More steps
#29: Document all important processes
– Make sure you document standardized processes
and follow
#30: Implement and maintain continuous
improvement
– Kaizen (Japanese)
Identify each process owner and educate
Define process boundaries
Use functional and cross-functional improvement teams
Use diagrams, flow charts, statistical techniques
More steps
#31: Consider radical improvement
May involve rearranging major processes
Re-engineering the entire value stream
#32: Videotape or photograph steps of the
process to identify visually areas of improvement
#33 and #34: Use flowcharts and spaghetti
diagrams (shows actual path taken by patient)
#35: Determine total process times: amount of
time it take to complete a process step
Step 36: Implement quick
changeovers within a process
Allow processes to resume with little delay
How can you speed up turnover of a
procedure room, patient room, operating
room, etc
Personal Example: four hours to prepare room for
patient
Benchmark: how does NASCAR do it?
Establish targets
More Steps
#37: Complement Nursing Care delivery models
with lean
– Some use decentralization, cross training,
standardization etc.
#38: Challenge and work extended network of
suppliers and partners
– Treat them as an extension of your business
– Work together to achieve continuous flow
Skoda—extension of production line
Toyota—minority financial interest in first-tier suppliers
Hospitals—clinical partners that refer patients to you…make
sure seemless
More Steps
#39: Automate processes to further
improve quality and cost
– Improve processes first, standardize, then
automate
But only after establishing firm goals for
improvement
#40: Look outside the industry
– What can you learn from Ritz Carlton, WalMart or Disney?
Give some examples of what could translate
More Steps
#41 and #42: Benchmark against other
hospitals, Baldrige award winners, or learn
from Institute of Healthcare Improvement
(IHI)
– Baldrige award focuses on quality awareness
– IHI is a source for cost reduction and quality
improvement
http: www.ihi.org
More Steps
#43: Hold on to the gains achieved
– Implement measures
#44: Reduce administrative overhead
costs
– Continually monitor to make sure direct care
services are truly value-added
Last Steps
#45: Avoid insurance company overhead
costs
– A macro issue which involved redoing the
American health care system
#46: Take a total system view of all of
health care
– Again, macro issues looking at nursing homes
etc.
In conclusion
Words of Wisdom from Enrique Vazquez,
MD, MBA, Chief Quality Officer and
Certified Lean Six Sigma Specialist
– Develop a good Project Charter that aligns
the lean initiatives with the mission and goals
of your facility
– Assure high levels of support through all
phases of the initiative
– Clearly define what is value-added verses
non-value-added
Words of Wisdom
– Have a clear knowledge of all of your waste
categories
– Develop an “as is” and a “to be” value stream map
– Always get input from rank and file personnel. They
tend to know the root cause to many issues and have
80% of the issues
– As much as possible, employee mistake-proofing as
much as possible OR halt the activity as soon as the
problem is detected—so that it does not convert into a
defect
– Always base initiatives on the VOICE OF THE
CUSTOMER
Words of Wisdom
– Always remember that Lean is to increase
speed, productivity and efficiency. Use root
cause analysis, statistical process control etc.
to decrease defects and increase quality.