Review the Learning Resource on research and competitive analysis. Review the Learning Resources on additional broad analyses. Review the rese

35

CHAPTER

5

B efore you can begin to analyze the strengths of your organization and develop a corresponding strategy, you need to understand the industry in which you oper- ate. To begin, many strategists will use a strategic industry map. The industry map

allows you to view your industry by size and category. The industry map attempts to capture a snapshot of an entire industry in a way that

allows for one quick glance to provide a high level of information. First, a matrix is cre- ated. The matrix will have two axes each with one variable. Typically, one axis has some component of price/quality/image, and the other axis has some measure of product mix or service offering. The analyst chooses any axis identifiers believed to be appropriate; those that are selected will significantly affect the resulting industry map.

Consider an industry map in in which one analyst chooses a horizontal axis identi- fier of “Breadth of Procedures Offered” (few to many); a second analyst chooses a hori- zontal axis identifier of “Ease of Access” (low to high). The resulting industry maps may look very different, and this difference could lead to different industry assumptions, which may, in turn, lead to different end strategies. These variations can explain in part why two organizations in the same industry often embark on different strategies even though they start with the same data.

Exhibit 5.1 shows the beginning of an industry map for healthcare providers.

STRATEGIC INDUSTRY MAP

EXHIBIT 5.1 Beginning of a Strategic Industry Map

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Service Categories

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Private Practice Healthcare Systems

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2 0 2 1 . A C H E L e a r n .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing: eBook Collection (EBSCOhost) printed on 6/22/2025 4:18:57 PM UTC via WALDEN UNIVERSITY 2636870; Warren G. McDonald, Michael S. Wayland; Strategic Analysis for Healthcare: Concepts and Practical Applications, Second Edition Account:eds.

Strategic Analysis for Healthcare36

Once the horizontal and vertical axes have been defined, the analyst identifies the various industry segments. Using the clothing industry as an example, one might identify a number of segments ranging from custom-made-clothing tailors to mass-market retail- ers such as Walmart. As we discussed in chapter 4, Walmart has expanded its reach with in-store clinics, so it now appears on the healthcare map as well. In healthcare, we look at everything from walk-in clinics to private practices to hospital systems. We must include all segments of the industry to gain a clear perspective of our position in the marketplace.

Each industry segment is represented by a circle on the matrix, and each circle is placed at the appropriate intersection of the two axes. The size of each circle represents the size of the industry segment relative to the other segments. Some analysts include the projected dollar volume of each segment in parentheses immediately following the segment’s name—for instance, “Mini-clinics ($250 billion),” meaning that “mini-clinic” retail providers account for $250 billion in sales in the industry.

The industry map in exhibit 5.2 displays the different price, quality, image, and product mix attributes of major segments in the healthcare provider industry. However, how one defines the industry can drastically affect the industry map. For example, an industry map of healthcare payers would have different segments than a map of healthcare providers or a map of the medical equipment industry.

The map can be used to analyze any level of an industry. For example, within healthcare, an industry map could be created representing segments of the medical equip- ment industry (e.g., manufacturing, sales, leasing); this map may be different from an industry map of the medical equipment manufacturing subindustry, which might include such segments as diagnostic equipment manufacturing and patient use equipment. One’s definition of the industry being studied then is essential. Note that on the industry map, the circles represent industry segments, not specific organizations. Specific organizations can be included in parentheses simply to typify the segment.

Notice the area in the map that represents the intersection of low price and specialty care. Is there a business opportunity there for an entrepreneurial provider? At one time there was.

EXHIBIT 5.2 Strategic Map of Healthcare Providers

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Product Mix Specialty

Healthcare

Chain providers (Walmart,

etc.)

Concierge service

Free- standing surgery centers

Specialty surgical

providers

Local acute care

hospitals

Teaching hospitals

(tertiary care facilities)

Healthcare systems

Urgent care

providers

Broad-Category Healthcare

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Chapter 5: Strategic Industry Map 37

When that corner of the map was empty, stores such as Walmart, CVS, and Wal- greens saw a demand for primary care and developed walk-in clinics at many of their locations. Time will tell how such efforts are received, but initial signs suggest they are successful.

Kim and Maugborgne (2005) identified gaps in the industry map as blue oceans— uncontested spaces where no one competes. Red oceans are places where competition already exists and has left “blood in the water.” A blue ocean strategy involves seeking out uncontested market space and providing new market offerings. Under those circum- stances, the lack of competition can lead to quicker market dominance and higher profits.

So often, managers are focused on the competition. A blue ocean strategic approach does not focus on the competition but rather focuses on creating value where competition does not exist. For example, in the early 2000s the personal electronics industry consisted of segments that included personal computers, personal digital assistants, handheld game consoles, cell phones, MP3 music players, and so forth. One could imagine “Price” on the vertical axis and “Complexity” on the horizontal axis. Succeeding in any of those existing segments required a head-to-head red ocean contest with existing competitors. Various price points combined with various complexities existed, but there was a big gap (a blue ocean) in the area of high price and high complexity. Apple sidestepped the head-to-head competition by creating an all-in-one product called the iPhone.

Reference

Kim, W. C., and R. Maugborgne. 2005. Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston: Harvard Business Review Press.

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Chapter 5: Strategic Industry Map 39

E

X

E

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I

S

E

Create an industry map using the blank map provided. For this exercise and the exercises in later chapters, you will use a project organization of your choosing. Your project organization can be an organization with which you are currently associated or any other organization you wish to use in the book’s exercises.

1. Identify the industry your organization is a part of, and title your map appropriately. 2. Identify the appropriate axis labels to use on your map, such as price versus breadth of

product mix. 3. Identify the market segments within the market. Note that you are identifying market

segments, not brands. 4. Identify the size of each market segment. 5. Identify the attributes of each segment. 6. Place each market segment on the map, using the size of the circle to represent the size of

the segment in dollar volume. Use the location on the map to correspond to the attributes you identified.

Strategic Map for___________________________________________________________

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s Id

en ti

fi er

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__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

Axis Identifier __________________________________________________

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Low Medium High

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Strategic Analysis for Healthcare40

E

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After completing the map of your industry, answer the following questions:

1. Do you see any weaknesses in the industry?

2. How about opportunities?

3. Are there any blue oceans?

4. What implications for strategy development does the industry map provide?

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41

CHAPTER

6

F ive forces analysis is a popular approach to analyzing the competitive forces in an industry that are likely to affect strategy. It was developed by Michael Porter (1980) and made popular in his book Competitive Strategy: Techniques for Analyzing Indus-

tries and Competitors. While the approach is decades old, it remains significant, widely used, and highly applicable to healthcare. The five competitive forces shape, constrain, and provide opportunities for competitive advantage for your organization. The forces influence how profitable a business in the particular industry will be, how much reasonable investment can be made into the industry, and how much growth opportunity exists in that industry. The five forces are (1) threat of entry, (2) intensity of rivalry, (3) threat of substitute products, (4) bargaining power of suppliers, and (5) bargaining power of buy- ers. The forces are shown in exhibit 6.1 and discussed in detail in the sections that follow.

FIVE FORCES IN AN INDUSTRY

EXHIBIT 6.1 Five Forces

Bargaining power of sellers

Threat of entry

Rivalry among existing firms

Bargaining power of buyers

Threat of substitutes

Threat of Entry

The threat of new competitors entering a given market is one industry force that affects strategy. If an organization invests billions of dollars to create a new product that can be easily imitated by new entrants in the market, where is the competitive advantage? There may be some advantages, such as the profit made while a potential new entrant is still developing its product, goodwill among customers, or the building of a top-of-mind brand name, but as we will see in later chapters, a sustainable “first mover” advantage does not always exist. On the other hand, if competitors are hard-pressed to enter the market,

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Strategic Analysis for Healthcare42

a significant competitive advantage may exist for your company to move into the market first. Alternatively, if your company is in an existing market, analysis of the threat of entry can help you ascertain your ability to maintain your market share and prepare defensive strategies to prevent a potential new competitor from arising.

The threat of entry can be considered in terms of two main factors: (1) barriers to entry and (2) response of existing competitors. Exhibit 6.2 shows some potential bar- riers to entry. If there is one supplier of a critical component and your company has a contractually exclusive arrangement with that supplier, if a resource is scarce and you have it controlled, or if the dollar investment is prohibitively high for a competitor to justify entering the market, one would say the barrier to entry for a new competitor is high. In healthcare, cost is an especially significant barrier, as costs to establish a new healthcare product or service are typically high because of a variety of factors (regulations by the US Food and Drug Administration, for instance). Conversely, if you are dealing with broadly and inexpensively available commodities, easy technology, and consumer indifference to brand, the barrier to entry for a new competitor is low. We have seen this effect in the eye care industry, with new online providers offering contact lenses and glasses at greatly reduced prices.

Competitor responsiveness can lower the threat of entry if the existing competitors are well funded, have the ability to leverage well-established brand names, can aggressively cut prices and maintain low profit margins that would put new competitors out of busi- ness, or have a willingness to “defend their turf.” Organizations will be less likely to invest large sums of money in a venture that might not get off the ground or might fail to deliver a generous rate of return on investment because of competitor response.

Does this scenario exist in contemporary healthcare? Of course. We are seeing the systemization of healthcare organizations to ensure some level of dominance in the markets they serve. Individual hospitals have little chance of competing with the larger healthcare systems today, so they attempt to keep others out of their markets by becoming larger and stronger.

Intensity of Rivalry

Some have said that there is no such thing as a sustainable competitive advantage, because your competitors will always find a way to imitate anything that succeeds for you. If you buy new technology for your operation, the suppliers, or their competitors, will tout their

EXHIBIT 6.2 Potential Barriers to Market Entry

1. Financial capital requirements 2. Market share of existing competitors 3. Economies of scale in favor of the current competitors 4. Entrenched relationships between buyers and current suppliers 5. Government regulation, tax, tariffs, protectionism 6. Patents and trademarks 7. Established and widely recognized brand names 8. Switching costs from old competitor to new competitor 9. Research and development costs 10. Advertising, marketing, and promotion costs 11. Product interchangeability

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Chapter 6: F ive Forces in an Industry 43

equipment to your competitors, citing your purchase. If you invent a new product, your competitors will at some point find a way around your patents with a similar product. The intensity of rivalry among existing industry competitors drives this imitation strategy. This intensity can be easily seen in many industries, including healthcare. The higher the inten- sity, the more difficult it will be for your company to profit and grow in the market. A high intensity will also dictate a strong need for defensive strategies to protect your competitive advantages for as long as possible.

An organization cannot directly control the intensity of rivalry in an industry, but it can benefit from certain strategic actions. Some organizations may seek to intertwine themselves into their customers’ business so as to make the customer dependent on them (e.g., Dell computers). Some may adopt strategies of increasing product differentiation to separate themselves from the crowd, raising customers’ switching costs by customiz- ing applications or products to build dependency, providing services and repairs for their products, or focusing sales and marketing efforts on areas that have some form of advan- tage, such as high growth or low fixed costs. We see these efforts frequently in healthcare through the lens of electronic health records.

Consider the highly competitive healthcare marketplace of today. For the last few decades, hospitals have been doing all in their power to maintain and solidify their domi- nance in the market. Many hospitals, for instance, have bought private practices to provide for a ready self-referral network. This strategy had previously been unsuccessful but is now becoming popular among physicians tired of the increasingly complex healthcare business environment.

Threat of Substitutes

The availability of substitutes limits the amount of money an organization can charge for its product or service. All things being equal, if prices rise, customers will switch to a cheaper competitor to substitute an equivalent service or product. In reality, the compet- ing options in a market are rarely equivalent. But when they are, the product or service is referred to as a commodity—in other words, the product or service is perceived to be the same regardless of where it was purchased. Crude oil is one example of a commodity product. An example from the healthcare industry is the flu vaccine, which can be easily administered in a pharmacy or big box store rather than in a physician’s office. Another example is the easy substitution of one manufacturer’s generic drug for a different manu- facturer’s generic drug.

Some products or services may not be considered equal but have only a limited degree of difference. For example, a consumer may have a preference for a particular brand of gasoline, but if the price for that brand increases more than a few cents per gallon over competitors’ prices, the consumer will substitute a lower-priced brand. In the example of medications, some consumers feel loyalty to their personal brand but, in the face of end price or availability differences, will become more accepting of lower-cost options. For example, Cialis (tadalafil) can be easily substituted for Viagra (sildenafil), and many herbal remedies claim to be a substitute for both.

Strong brand loyalty, clear service or product differentiation, and other strategies that create distinction can reduce the threat of substitutes. The ability to substitute is influenced not just by intrinsic attributes but also by such factors as political constraints

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Strategic Analysis for Healthcare44

and geographic shipping costs. People in the healthcare industry see substitutes frequently, and maintaining product or service loyalty can be difficult.

Availability of information is a factor related to the ability to substitute. In the medi- cal services industry, information about procedure pricing, for example, is limited. This limitation reduces the healthcare consumer’s ability to price shop for an equivalent but lower-cost provider, thus reducing the threat of substitutes.

Bargaining Power of Suppliers

The power held by raw material, component, subassembly, assembly, transportation, dis- posal, and other suppliers over companies in an industry directly affects the competitive nature of the industry. The theory of supply and demand suggests that if there are only a small number of suppliers of a necessary component, prices will rise. Suppliers can hold the corporate buyer over a barrel.

For example, in the computer industry, microprocessors were once at risk of becoming a commodity item. Retail consumers did not see them or understand them. However, the technology company Intel used a strategy to change the microprocessor from a commodity item to a branded item. Through a combination of outstanding prod- uct development and intense marketing, retail consumers were convinced that having “Intel Inside” made a computer better. Retail customers began to demand Intel processors in the computers they purchased, which in turn put pressure on the original equipment manufacturers (OEMs) to incorporate Intel processors into their computers.

Intel gained significant bargaining power as a supplier to OEMs such as IBM and Hewlett-Packard. If OEMs wanted to create a product with an Intel microprocessor, they had to buy from Intel. These conditions gave Intel greater power in negotiations over price and terms with the OEMs. As a result, Intel processors became significantly more expen- sive than competitive processors. Can you think of other computer hardware components that are in such demand? Probably not. An OEM can substitute one supplier’s mother- board for another supplier’s motherboard, because motherboard suppliers have little to no bargaining power. But what about operating systems? Do consumers demand Microsoft operating systems or no-name open-source operating systems? Microsoft has significant bargaining power over the OEMs.

Drug manufacturers have used a similar approach, with direct-to-consumer market- ing designed to brand their products. Consumers now approach providers with specific requests for a particular drug, as opposed to the generic substitute, because they have gained familiarity with the branded product and perceive it to be superior. As described earlier, however, this preference will only go so far. If the price goes up significantly, that preference will become less important.

Mergers and acquisitions have become more common in healthcare. In many respects, this activity has been driven by a desire to decrease the bargaining power of sup- pliers to the newly combined organization. In 2017 alone, the following major mergers and acquisitions were announced:

• Providence St. Joseph Health and Ascension proposed to merge to create the largest American owner of hospitals, which would have revenue of $44.8 billion per year from 191 hospitals in 27 states. Although this proposed merger fell through in 2018,

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Chapter 6: F ive Forces in an Industry 45

it would have provided the combined nonprofit organization with leverage over healthcare insurers who supply it with patients and payment.

• CVS Health offered $69 billion for Aetna Inc. Despite opposition from the Ameri- can Medical Association (AMA), this deal closed in 2018. The AMA said that the merger would reduce the bargaining power of suppliers over a combined CVS and Aetna company in health insurance, pharmacy benefit management, and specialty pharmacy (AMA 2020).

• Aurora Health Care and Advocate Health Care completed their merger, which resulted in more than $11 billion in annual revenue for the combined Advocate Aurora Health, with 70,000 employees in more than 500 medical facilities. The merger provided the new organization with increased ability to resist the bargain- ing power of suppliers of medical supplies, medication, and patient

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