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PEMBA 2008

Residency
January, 2008
If business is like a
gamestrategy 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 firms 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
Strategic
External Choice
Analysis

Strategic Implementation

Competitive advantage
Mission and Vision

Mission: Core purposereason 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 vanillasay the same as others but
do not influence the behavior of the company
Some are hazelnutcentral to everything the
organization stands for, visionary, tied to
profitability
Some are licorice (like Greek ouzo)
consistent only with the founder or CEOs
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
Groups who can affect performance
Stakeholders

Must maintain performance at an


adequate level in order to maintain
the participation of key Capital Market
stakeholders

Hospital/ Stock market/Investors


Practice Debt suppliers/Banks

Product Market
Organizational

Primary Customers Employees


Suppliers 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 performance-
generating 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, low-
cost 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 cerealtop 4/90% sold)
Can earn significant profit.
Monopoly: single firm, costly entry (close:
operating systemsMicrosoft) Use market
power to set prices that generate significant
economic value
SCP and strategy

Instead of seeking ways to increase


competitiveness of industries
In strategySCP 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 firms 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


resourcesbaby-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 ideaslook
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 otherswhat 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
reacthigh riskstays 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


paymentyou 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 Atlantano 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 FTEsall you need is an RN
Reduce overhead costsset 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 reputationwarranted 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 Marketmust be a large enough
marketand 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 cant copy easilyit 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

Prospectorsembrace change
Analyzers--fast followers
Defenderstargets a narrow market, feeds on
stability
Reactorshoots from the hip

You never want to be in the reactionary mode!


Factors to successfully implement
your strategy

Buy-ineveryone affected must be


involved from the beginning
CEO
Staff
Stakeholders***they are very important
Controlsdetermine effectiveness
Capitalmonetary, human, resources
Implementation involves change

It could affect your human resourcesor


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 changeif 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 changesupport it
with actions and policies
Never stop monitoring

Strategically you must continually monitor and


adjust your strategies

Remember, strategic planning is ongoingyour


environment is ever-constant!
Blue Ocean Strategy

Extending traditional Strategy


to thinking outside the box
How can you grow in an
unattractive market?

In todays 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 wont
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 out-
competing rivals
Red oceans will always existthey are a
part of business life
Most businesses wont look outside of the
red oceans because of the risk involved
Red verses Blue
Compete in existing Create uncontested
market market space
Beat the competition Make competition
Exploit existing irrelevant
demand Create and capture
Make the value-cost new demand
trade off Break the value-cost
Choose between trade-off
differentiation and low Pursue differentiation
cost 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
businesses86%
Most of the profitability existed in the
businesses aimed at blue oceans
Why do we need blue oceans?
Technological changes have flattened the
playing fieldquality 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
irrelevantleaping 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 giventhey can be
reconstructed by actions of industry
players
Key issues of Blue Ocean
Reconstruct market boundaries
Focus on the big picturenot merely
numbers
Look past existing demand
Dont 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 companys relative
performance across its industrys 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 industrys 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 industrys standard?
Which factors should be reduced well below
the industrys 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


compromiseswhat are we forcing
customers to settle for?
This changes existing rules of competition
Which factors should be raised well above
the industrys 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?
Dont 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 alternativesinclude 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
Dont usually look outside because dont
believe they are competing
Path 2: Look across strategic
groups within industries
Break out of tunnel vision
Curvesentered oversaturated market
Aim is to spend social as well as exercise time
Question to be answeredwhat makes
people trade up or down
For curves it offered a womens 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
influencersmay have different ideas of
value (consider insurance)
Most players in an industry focus on same
buyereg: 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 patientdeveloped the ease
of insulin injections with a pencontinually
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 termsbuilt 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 Dellin 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 dont exist in vacuum
Offering babysitting services at a gym or
movie theater
NABI (Hungarian):
Bus companies competed on lowest bid
Costs were highdesigns 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
issueit 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 usedlook before
and after
Audio equipment to hear CDs
Living room for book stores
Filter-less coffee pots
Dysonno 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 dreampositioned
as a gift registry
Viagramedical treatment to lifestyle
enhancement
Path 6: Look across time
External trends affect businesseg: 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
couldnt do all themselves
Using the 4 Paths

Where might you find a Blue


Oceanbrainstorm 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/serviceshow can you eliminate,
change, create
Visual Strategy Fairwhat could you be get feedback
Visual CommunicationsLook 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 samewhat
is the value?

Sears didnt 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 dont 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 employeesbefore 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
offeringsoften 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 marketminimally
purchase industrys offering out of necessity
but would jump ship if opportunity arises
(cant find anything better or a better fit)
2nd: Refuse to use industrys offerings
(country clubsocial member but wont
spring for golf membership)
3rd: Never even thought of ever indulging!
First-tier
Example:
Want quality foodquickbut 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 cant 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 couldnt afford
Second-tier
Looked for stationary downtown locations to
advertisepeople 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: Wont go to dentist for teeth
whitingconsidered extravagant
Most companies would be amazed at the
ocean of latent demand
Third tier
Book looked at defense industrybuilding
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


oceanmust 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 Utilityis there an exceptional utility in the
idea (compelling reason)
Pricecan the masses afford (compelling
reason to pay the price)
Costcan you attain cost target to be
profitabledont let cost drive prices
Adoptionwhat are the adoption hurdles (will
there be resistance)
Buyer Utility: Dont fall in
technology trap
Unless makes buyers lives more simple,
more convenient, more productive, less
risky, more fun or fashionablewont
attract the masses
Remember focused, divergent, compelling

Value innovation is not the same as


technology innovation
Test of exceptional utility
A buyers 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 leversthe more blocks
uncovered the bettergo back and refine
The map highlights differences between ideas
truly new and those that are only revisions
Purchase Delivery Use Supplements Maintenance Disposal

Customer
Productivity

Simplicity

Convenience

Risk

Fun &Image

Environmental
Friendliness
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
paydont 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 entertainmentincluding
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 publicenvironmentalist
McDonald and Styrofoam
Overcoming organizational
obstacles
First need to show employees why there is
a need for change
Secondyou generally end up cutting
resources
Thirdyou have to motivate the key
players
Overcome politicsdont let yourself be
shot down
You need a champion

And a leader that is willing to


do what is needed
Execution
Engagementinvolved in decision
Explanationunderstand why final
decisions are made
Expectation clarityexplain 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 imitationcant
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 Britains 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
pointyet 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 formstime,
materials or unneeded process steps
All non-value added steps and
processes

Lean is a multi-year strategic


directionlike anything strategic, it
doesnt happen overnight nor can you
ever stop monitoring
Toyota Lean Method: a 46 Step
Process
1. Define value from the perspective of the
patient-
Easy 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 wastecreated more
capacity and scrapped planned expansion
Even with a no layoff policy, through attrition
and no need to replaceFTEs decreased in
2003 and 2004 after six years of annual
increases
Step one
Technically, a value-added task
An activityimportant 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 Patients 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 value-
added 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
systemToyota does not
Uses a pull systemkanban 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 stepwith 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 feartoughest 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 benefitshort 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 thisit 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 everyones 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
systemsbut 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
tagsput 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 employees skill or potential
Step 25
60% of health care costs are labor
Consider a float staff for peak times
To be cost efficientassure frontline
employees are qualifiedcross 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 value-
added 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 staffif 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 bottlenecksclassic book,
Goldratts 2004 book The Goal
Only three key performance measures matter:
Increase throughputrate at which systems
generate money through sales
Decrease inventoryall the money involved in
purchasing things necessary for sales or
production
Decrease operating expensesall 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
Skodaextension of production line
Toyotaminority financial interest in first-tier suppliers
Hospitalsclinical partners that refer patients to youmake
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, Wal-
Mart 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 detectedso 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.

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