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A. L. Hamdan

Strategic Thinking
in a Hospital Setting

123
A. L. Hamdan
Department of Otolaryngology
American University of Beirut Medical
Center
Beirut
Lebanon

ISSN 2192-3698 ISSN 2192-3701 (electronic)

SpringerBriefs in Public Health
ISBN 978-3-319-53596-8 ISBN 978-3-319-53597-5 (eBook)
DOI 10.1007/978-3-319-53597-5
Library of Congress Control Number: 2017932084

© The Author(s) 2017

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I dedicate this book to my parents Hussein
and Jamila Hamdan with warm gratitude
for their inspiration and guidance
&
To my wife Sawsan for her relentless support
and enchanting smile.
Preface

The healthcare system is facing numerous challenges. These include the explosion in sci-
entific knowledge, the link of pay to performance, and, most importantly, the shift to
“patient-centered” care approach. Attempts to circumvent these challenges and improve on
the quality of care have been invariably mitigated by a prohibitive rising cost. All the
aforementioned has fostered a transition in the understanding and delivery of health care
from an industrial economical view that focuses on services and products as outcome
measures to a modern view that highlights the importance of customer’s perception and
experience as determinants of quality of care provision.

This transition in the healthcare industry mandates the adoption of a strategic plan
that anticipates the dynamic changes in patient’s needs and the rising cost in the
provision of those needs. Physicians in administrative positions and managers have
to acquire and develop different types of strategies commonly used in health care
and other industries in order to maintain their financial viability and defend their
market’s share. To this end, this book is intended to equip physicians and
administrators with the right strategic tools and frameworks. The focus of this book
is on the different strategic directions commonly adopted by strategist in different
industries. The different strategic views conceptualized in health care in addition to
a crafted strategic framework that can be used to draw a summary of the market
competitive dynamics will be described. Once the strategist has chosen the strategic
direction for its firm, a strategic plan must follow. The application of the most
common strategies used in other industries to develop and sustain a competitive
advantage will be discussed with special focus on Porter’s strategies, namely
low-cost leadership and service differentiation. These strategies have been descri-
bed thoroughly in the literature as dominant typologies adopted by many firms in
various industries; however, few are the reports on the application of these strate-
gies in hospital settings. In the last two chapters, this book highlights the application
of Porter’s strategies in a set of Lebanese hospitals with emphasis on the limitations,
constraints, and correlation factors between types of strategies used and

vii
viii Preface

performance of these hospitals. Last but not least, eight strategic tactics will be
discussed thoroughly with special attention to the operational initiatives, indicators,
and goals of each.

Beirut, Lebanon A. L. Hamdan

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2 Strategic Directions and Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3 Porter’s Strategies in Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Choice of Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Cost Leadership Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.1.2 Differentiation Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4 Sources of Competitive Advantage . . . . . . . . . . . . . . . . . . ......... 17
4.1 Types of Competitive Advantage . . . . . . . . . . . . . . . . ......... 18
4.2 Implementation and Sustainability of Value-Based
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 20
4.3 How to Sustain a Competitive Advantage . . . . . . . . . ......... 21
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 21
5 Innovation in Hospital Settings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1 How to Prepare an Organization for Innovation . . . . . . . . . . . . . . 25
5.1.1 Developing Organizational Ambidexterity . . . . . . . . . . . . . 26
5.1.2 Increasing the Ratio of Exploration to Exploitation . . . . . . 27
5.1.3 Knowledge Brokering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.1.4 Network and Filling Structural Hole . . . . . . . . . . . . . . . . . 27
5.2 Enablers for Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6 Strategic Framework in a Hospital Settings . . . . . . . . . . . . . . . . . . . 31
6.1 External Environmental Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1.1 PESTEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1.2 Competitive Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

ix
x Contents

6.1.3 Industry Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

6.1.4 Key Success Factors in the Healthcare Industry . . . . . . . . 35
6.1.5 Threat of Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.2 Internal Environment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.2.1 Strength and Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.2.2 Capabilities and Competencies . . . . . . . . . . . . . . . . . . . . . 37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7 Eight Strategic Tools Implemented . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.1 The “S2P Project” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
7.1.1 Facets of the S2P Project . . . . . . . . . . . . . . . . . . . . . . . . . 42
7.1.2 Mission of the S2P Project . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 The Nero Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.3 The Group Purchasing Project . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.4 Creation of Clinical Pathways and Guidelines . . . . . . . . . . . . . . . 46
7.5 Patient Loyalty Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.6 Physician Integration Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.7 Physician Liaison Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7.8 Staff Engagement Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8 Application of Porter’s Strategies in Lebanese Hospitals . . . . . . . . . 63
8.1 Material and Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
8.1.1 Statistical Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
8.2 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
8.2.1 Demographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
8.2.2 Reliability of Differentiation and Low-Cost
Leadership Scales . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 69
8.2.3 The Mean Score and Frequency Across the
Differentiation Strategy Items, Low Leadership
Strategy Items and Performance Measures . . . . . . . . .... 69
8.2.4 Strategy Score Analysis by Strategy Preference
with Their Corresponding Performance Scores . . . . . .... 69
8.2.5 Clustering Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . .... 70
8.2.6 Correlation Between Type of Strategy and Quality
of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
8.3 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
8.3.1 Descriptive Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
8.3.2 Correlation Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Contents xi

9 Correlation Between Type of Strategy and Performance . . . . . .... 75

9.1 Analysis of the Correlation Between the Types of Strategy
and Performance in Lebanese Hospitals . . . . . . . . . . . . . . . . .... 75
9.1.1 Why Would Cost Leadership Correlate with Quality
of Care? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 75
9.1.2 Why Would Differentiation Strategy and Quality
of Care Correlate? . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 76
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 78
10 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
About the Author

A. L. Hamdan is currently a Professor of Otolaryn-

gology—Head and Neck Surgery, Head of Division of
Laryngology and Director of “Hamdan Voice Unit” at
the American University of Beirut Medical Center
(AUBMC). He holds an Executive Master’s in
Business Administration from The American
University of Beirut, a Master’s degree in Health
Science and a Master’s degree in Hospital
Administration from École Supérieure Des Affaires, in
addition to a Diploma in Strategy and Innovation from
Oxford University.
He is the founder and director of the “Hamdan
Voice Unit” at AUBMC, founder and president of the
“Lebanese Voice Association” and the “Voice
Foundation Lebanon Chapter”, with 120 publications
in refereed journals in the field of Voice and
Laryngology. Following his position as Chairperson
of the Faculty Development Committee for two years,
during which he promoted the business aspect of
medicine through the organization of numerous
workshops in collaboration with the Olayan School of
Business, he assumed the position of Medical Director
of Strategy and Innovation at AUBMC where he has
been engaged in the assessment and development of
strategic initiatives.

xiii
Abbreviations

AHRQ Agency for Healthcare Research and Quality

HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems
NHS National Health Service
NQF National Quality Forum

xv
Chapter 1
Introduction

The Health Care System is facing numerous challenges. These include the
explosion in scientific knowledge, the link of pay to performance, and most
importantly the shift to “Patient Centered Care” approach. Attempts to circumvent
these challenges and improve on the quality of care have been invariably mitigated
by a prohibitive rising cost. The healthcare expenditure estimated to be $26 billion
in 2003 has exceeded one sixth of the GDP in the United States [1] and is still
draining the economy with an increase to 2.97 trillion in 2014 [2] Similarly, the rise
in health care expenditure in 2014 has reached the figures of $271.99 trillion in the
United Kingdom and $14.382 billion in the United Arab of Emirates accounting for
3.6% of its annual budget. Add to this exuberate cost is the frequency of medical
errors which represents the eighth leading cause of death with 98,000 mortalities a
year from medical errors in the United States [3].
That being said, the healthcare system is in crisis. It has failed to meet patient’s
expectations with more than 40 million people having no medical coverage in the
United States. Based on “Crossing the Quality Chasm” by the Institute of Medicine,
“—the nation’s healthcare delivery system has fallen far short in its ability to
translate knowledge into practice and to apply new technology safely and appro-
priately” [4]. These shortcomings in healthcare delivery were brought further to
light with the public reporting of healthcare measures by the “Hospital Consumers
Assessment of Healthcare Providers and Systems (HCAHPS)”, and the public
expression of views on medical service, an act that was formally endorsed by the
National Quality Forum (NQF) in 2015 [5]. All the aforementioned has fostered a
transition in the understanding and delivery of healthcare from an industrial eco-
nomical view that focuses on services and products as outcome measures to a
modern view that highlights the importance of customer’s perception and experi-
ence as determinants of quality in care provision. It has set ground for a new phase
in healthcare described by the National Health Service (NHS) as the “Next Stage”
with high quality care for all [6]. In this stage, pay became linked to performance as
stated by the Affordable Care Act, and patient’s reported measures of care became
critical to Pay and performance [7]. To this end, many cross cutting patient-reported
© The Author(s) 2017 1
A. L. Hamdan, Strategic Thinking in a Hospital Setting,
SpringerBriefs in Public Health, DOI 10.1007/978-3-319-53597-5_1
2 1 Introduction

measures have been described and these include patient satisfaction, patient per-
ception, patient participation and patient preferences. Despite the complexity in the
definition of patient’s engagement, there is a unanimous agreement on the con-
structs that need to be incorporated in the healthcare reform plan, with emphasis on
clinical and managerial quality.
This transition in the healthcare industry with the focus on quality in patient’s
care mandates the adoption of a ‘Strategic Plan’ that anticipates the dynamic
changes in patient’s needs and the rising cost in the provision of those needs. Given
the high degree of interdependence in the current global economy, hospitals after
thorough examination of the various industry profitability and growth, must posi-
tion themselves in the right market, be it primary, secondary or tertiary care. Once
in the proper strategic position, the corresponding resources must be allocated and
capabilities must be exploited towards the delivery of better services and the
development of new offerings. To this end, knowledge exploitation and the avail-
ability of resources for innovation must lead to technological advances, a major
attribute that challenges all healthcare providers who wish to remain at the forefront
in medical care.
Similarly, given the blurred boundaries of Physician’s role in Hospital settings,
medical practitioners, from their own conceptual term, must also properly position
themselves in the right industry. This can be any venue in the healthcare arena,
including third party providers and pharmaceutical companies. In order to gain
competitive advantage, physicians in key administrative or leadership positions
must reinvent themselves to meet the changes in healthcare. A shift in value from
salaried employee to strategic thinkers must take place in order to better manage the
global market in healthcare. This mandates enhancement of Physicians’ strategic
competencies in addition to their leadership, managerial and communication skills.
Again, once rightly positioned, they need to allocate their own resources to achieve
the strategic goals intended. The resources can be personal such as inherent com-
petencies, tacit information and business acumen, or financial. If properly cultivated
into capabilities of strategic relevance, these resources can help achieve not only
individual goals as mentioned previously but also the vision and mission of their
medical institution at large. For this reason, proper alignment of both physicians
and administrators interest through the development of physician integration pro-
grams and strong liaison between the two is crucial for the success of any strategy.
Given the constantly growing needs in healthcare and the increasing challenges
of globalization, there is rarely uniformity in the vision of the various staff and
faculty within a medical organization. The discrepancy between the vision
embraced by the leader and the actual stand of the organization creates tension and
assumptions. A good strategist will convert these assumptions to values and will
capitalize on the discrepancy between factuality and expectations to gear the energy
of all staff and physicians towards that vision. By drawing a concrete image of the
organization’s goals and objectives, embracing that image by all the key players,
and allocating resources towards the achievement of these goals, strategists can
succeed in sailing the organization to its right destination.
1 Introduction 3

That being said, this book will focus on the different strategic directions com-
monly adopted by strategist in different industries. The different Strategic views
conceptualized in healthcare in addition to a crafted strategic framework that can be
used to draw a summary of the market competitive dynamics will be described.
Once the strategist has chosen the strategic direction for its firm, a strategic plan
must follow. The application of the most common strategies used in other industries
to develop and sustain a competitive advantage will be discussed with special focus
on Porter’s strategies, namely Low cost leadership and service differentiation. Last
but not least eight strategic tactics will be discussed thoroughly with special
attention to the operational initiatives, indicators and goals of each.

In the last two chapters I will highlight the application of Porter’s strategies in
a set of Lebanese Hospitals with emphasis on the limitations, constraints and
correlation factors between types of strategies used and performance of these
hospitals.

References

1. Herzlinger, R. E., 2006. Why Innovation in Health Care is so Hard. In: no ed. 2011.
2. Xu, K., Evans, D.B., Kawabata, K., Zeramdini, R., Klavus, J. and Murray, C.J., 2003.
Household catastrophic health expenditure: a multicountry analysis. The lancet, 362(9378),
pp. 111–117. Available at: http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS.
3. Spear, S. J., 2005. Fixing Health Care from the Inside, Today. In: no ed. 2011. Harvard
Business Review Fixing Health Care From Inside & Out. Boston, Massachusetts: Harvard
Business Review Press. pp. 49–90.
4. Institute of Medicine, 2001. Crossing the Quality Chasm: A New Health System for the 21st
Century. Washington, DC: National Academies Press.
5. HCAHPS, 2015. Hospital consumer’s assessment of healthcare providers and systems. [online]
Available at: http://www.hcahpsonline.org/home.aspx [Accessed 14 January 2015].
6. Department of Health. 2008. High Quality Care For All: NHS Next Stage Review Final Report
[online]. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_
data/file/228836/7432.pdf [Accessed 14 January 2015].
7. Hofer, A.N., Abraham, J. and Moscovice, I., 2011. Expansion of coverage under the
Patient Protection and Affordable Care Act and primary care utilization. Milbank Quarterly,
89(1), pp. 69–89. Available at: http://www.dpc.senate.gov/healthreformbill/healthbill04.pdf
[Accessed 14 January 2015].
Chapter 2
Strategic Directions and Views

Once the goals and objectives of an enterprise have been set, different strategic
views and directions ought to be solicited in attempt to meet those goals. Two main
views are traditionally used in any industry and these include the positional view
and the resource based view [1].
In the Positional view, strategic planning primarily lies in envisioning the
position of a given healthcare provider in the healthcare arena whether it is a
primary care or tertiary care provider. The strategist tries to answer the question
“where do we stand, what is our market share, and how can we defend it?”. The
main Competitive advantage of the firm or hospital is its current position in the
market with the industry structure being the arena for competition. In this per-
spective marketing information system is often deployed as a competitive advan-
tage and used to determine the hospital market share and position. This fact
mandates proper understanding of the various industry’s attributes as well as the
competitive forces that shape the position of the firm and its long term profitability
[2]. The main Industry attributes that are analyzed are the rate of growth and
profitability, geographic accessibility, strategic alliances, in addition to the weight
and impact of technological innovation on its performance.
In the healthcare industry both growth and technological advances carry sig-
nificant weight on the Performance of healthcare providers. A fast growing industry
is inclined to empower both suppliers and consumers. This is attributed to the
demographic changes, advances in research and explosion in medical knowledge at
large. Demographically, the increase in the overall world population in parallel with
the increase in the average lifespan puts the healthcare industry on a fast growing
track with growing demands such as the need for geriatric medical facilities, home
care centers and palliative medicine. Similarly, the Technological advances have an
impactful role on the growth and profitability of healthcare providers. In the
healthcare industry at large and in hospital settings in particular, technological
growth is key in providing medical care. Hospitals that assume a forefront position
in the health care arena have to ensure a constant stream of financial and human
resources to maintain their technological advancement, which in turn challenges
© The Author(s) 2017 5
A. L. Hamdan, Strategic Thinking in a Hospital Setting,
SpringerBriefs in Public Health, DOI 10.1007/978-3-319-53597-5_2
6 2 Strategic Directions and Views

administrators who are keen on providing state of the art diagnostic and therapeutic
regimens. On the other hand, when technological advancement is slow, the impact
of technological shifts on medical practice is little. This is more commonly seen in
primary care facilities or practice in rural areas.
Of equal importance to the industry attributes is the ecosystem which allows the
success or failure of a firm’s complementary products and services [3]. Example is
the role of governmental rules and regulations in healthcare which plays a
tremendous role in the insurgence of new competitors such as new hospital facilities
and or in fostering the expansion of existing capacities, such as the increase in the
number of beds within a hospital. Other examples of Complementary products in
healthcare are the means for financial and geographic accessibility to medical
services, availability of accessary and adjunctive therapeutic services such as
physical therapy following major head and neck surgery.
Once the aforementioned industry attributes have been examined, the strategic
analyst in his positional view must dissect Porter’s five forces in order to estimate
Industry profitability and the rivalry among the existing competitors [4]. The major
competitive forces include the “threat of entry”, the “power of suppliers”, the
“power of the customer”, the “threat of substitute” and “rivalry among existing
competitors” [4].
The threat of entry is intimately related to capital cost requirement, the demand
side benefits of scale, and or customer/patient switching cost, in addition to
restrictions imposed by governmental policies such as trading barriers, emergence
of new laws and patents [4]. In healthcare provision, invariably a large capital is
needed as a start, which makes the threat of entry low, especially if the local
healthcare policies deter the development of new healthcare facilities. This threat is
further deterred by constraints in the healthcare budget. Patient loyalty is also a
crucial fact when new threats are in surge. This latter can be enhanced thru the
availability of electronic medical record and the accessibility of patients to medical
information. The threat of entry also depends on incumbency advantages in terms
of cumulative experience and competencies, access to distribution channels, and
economy of scale from the supply side. A fifty year old medical center with inherent
competencies in terms of processes, flow of patients and flow of information, in
addition to a strong network with physicians and neighboring healthcare providers,
must have a strong position in the market and thus raises the barriers to entry.
Customers may also exert tremendous power. By customer we are obviously
referring to patients who can often exert pressure on hospitals and medical centers
especially if they are self-payers. Patient’s power can also be derived from group
purchasing as seen in compacts made by selected groups, usually of similar pro-
fession, and hospitals. A low switching cost exemplified by the presence of nearby
competitors, the lack of differentiated services secondary to insufficient resources
and expertise, and the ability of customers to integrate backward are also factors
that strengthen patient’s position in the healthcare chain. The ability to integrate
backward is often exemplified when insurance companies buy group practices and
2 Strategic Directions and Views 7

consolidate with hospitals in attempt to control cost and exert pressure on health-
care providers.
Substitutes can also represent a threat and limit the profitability of hospitals by
reducing their dominance in the market as well. Again this is more prominent when
medical services lack differentiation and or branding. Substitutes for conventional
medicine can include acupuncture, homeopathic therapy, cognitive therapy, medi-
tation, Chinese medicine and biologically based therapies [5]. These alternatives or
complementary medical therapies will not be the subject of discussion in this
chapter, but suffices to say that these need to be considered as threats given the
cultural context and environment.
Last but not least is market rivalry among existing competitors. This latter is
more precipitated in the presence of numerous competitors with almost even
powers and when the industry growth is low. When Growth in healthcare is slow,
hospitals can turn aggressive in order to either maintain their market share or
increase their profitability. The competition becomes fiercer when the exit barriers
are high making it very hard and non-lucrative for competitors to leave.
Once the industry attributes have been examined and the competitive forces have
been understood with all their underpinning, the role of the strategist is to properly
position the firm or hospital vis-à-vis its competitors in the market, to anticipate
possible shifts in the market, and to exploit the expected industry changes in
attempt to identify emerging opportunities and claim new strategic position. The
strategist should also shape the industry structure by reacting to the competitive
forces in a constructive manner [6]. In healthcare two examples can be given; one is
value constellation and two is Game theory. In value constellation the role of all the
key players is reconfigured in order to add value to the end product. The con-
ventional role of each is re-examined in attempt to provide a better product or
service [7]. In the supply to purchasing (S2P) project, where suppliers, surgeons
and purchasing are the key players, surgeons are invited to examine the most
common surgical supplies used with the purpose of optimizing utilization and cost.
Engaging physicians in the design and utilization of supplies is an example of value
constellation and value addition. Another example of reacting to the competitive
forces is the value net strategic frame by Brandenburger and Nalebuff [8]. In any
game the essence of a win-win relation lies in the provision of an added value to the
end product or service by all the key players. By looking at the position of all the
stakeholders and using an allocentric rather than egocentric perspective, the
cooperative as well as the competitive nature of any game is enhanced. This value
net strategic framework highlights the interdependence of the participants in
healthcare provision, namely the patient, physician, medical staff and third party
players, while emphasizing the strong interaction between them. So in order to
create value within this framework identification of the major players and the
understanding of the basic rules of the game is crucial.
Another equally important strategic view in addition to the positional view is the
Resource based view. In this view the strategist looks within the institution at its
resources and capabilities in attempt to develop new competencies that are of
strategic relevance [9]. The main question to be answered is “What are we good at”
8 2 Strategic Directions and Views

and how can we leverage on our competencies to expand our market share and
grow further. This view is more commonly adopted in unstable environments
characterized by turmoil that makes industry attractiveness an elusive strategic start
[10]. Instead, the firm’s bundle of resources and capabilities are exploited in a
strategic competitive manner. The resources, defined as “the productive assets of a
firm” can be either tangible such as properties and equipment or intangible such as
branding, reputation and tacit information embedded in routinization and processes.
Capabilities on the other hand are the way resources are deployed in a constructive
manner towards the achievement of a desired end result. These can be classified
either on a functional basis thru the identification of various capabilities within the
different functional units of the institution, or based on a value chain analysis of the
main activities undertaken by that institution. An example of a capability within a
functional unit is the diagnostic yield in the department of radiology. The imaging
equipment considered as resources are deployed in a successful manner thru the
radiology staff to generate a major capability that carries a high diagnostic yield.
Similarly, if we were to examine the value chain activities in the work up of a
patient with chest pain, the Fast flow of information and efficient management in the
emergency department may be considered as major capabilities. In both cases, it is
important to note that for a capability to be of strategic relevance it must generate a
competitive advantage through proper exploitation of its corresponding
competencies.

References

1. Peteraf, M.A., 1993. The cornerstones of competitive advantage: a resource‐based

view. Strategic management journal, 14(3), pp. 179–191.
2. Miller, D., 1988. Relating Porter’s business strategies to environment and structure: Analysis
and performance implications. Academy of management Journal, 31(2), pp. 280–308.
3. Adner, R., 2006. Match your innovation strategy to your innovation ecosystem. Harvard
business review, 84(4), p. 98.
4. Porter, M.E., 2008. “The five competitive forces that shape strategy”. Harvard Business
Review 57 (January 2008):57–71 Porter five forces.
5. Swierzewski, S. J., MD. (2001, January 01). Traditional Chinese Medicine Overview.
Retrieved September 05, 2016. Available at: www.healthcommunities.com/…chinese-
medicine/alternative-medicine/tcm-treatments.shtml.
6. Porter, ME. (2007), Understanding Industry Structure, Harvard Business School note
#9-707-493.
7. Normann, R. and Ramírez, R. (1993), ‘From Value Chain to Value Constellation: Designing
Interactive Strategy’, Harvard Business Review, 71(4): 65–77.
8. Brandenburger, AM. and Nalebuff, BJ. (1995), ‘The Right Game: Use Game Theory to Shape
Strategy’, Harvard Business Review, 73(4): 57–71.
9. Porter, M., 1980. Competitive Strategy. New York: Free Press.
10. Miller, D., and Friesen, P.H., 1984. Organizations: A Quantum View. New Jersey:
Prentice-Hall ref on resource based view being more suitable in unstable environment.
Chapter 3
Porter’s Strategies in Healthcare

Healthcare delivery has undergone a dramatic reform over the last few decades. It
has witnessed a paradigm shift where patient’s satisfaction has become critical.
Patient empowerment has transformed healthcare into a value based business where
physicians and healthcare providers are challenged to meet the emerging needs of
patients in a dynamic market constrained by financial resources and governed by
the challenges of the global business environment.

On one hand hospitals need to remain at the forefront in the provision of state of the
art medical care using high technology imaging and unique services, on the other
hand they have to undergo radical cost transformation in view of the diminished
budget for healthcare both in the private and public sectors.

Cemented to these hurdles, and in consequence to the aforementioned trans-

formation, there have been a large number of consolidations among hospitals in
attempt to maintain their financial stability and expand their market share. As a
result, the healthcare system in the United States has witnessed more than 900
merges between hospitals [1]. Despite the large number of mergers and acquisi-
tions, there was still fierce competition among hospitals with deep concern on the
rise in prices and the quality of care that is delivered [2]. Subsequently, healthcare
managers have adopted different types of strategy, the most common of which are
low cost leadership and service differentiation [3].
According to Porter these two types of strategies can be further categorized into
four depending on the market segment and niche where the strategy is imple-
mented, be it a narrow segment of the market or the market as a whole [3]. In the
first scenario where cost leadership is used in a focused or well defined market
segment, the strategy is referred to as a focused cost leadership strategy whereas
when differentiation is used in a focused market segment, the strategy is referred to
as focused differentiation strategy. The hybrid form, combining low cost leadership
with service differentiation, has been most challenging to managers who aim at
quality care and cost reduction.

© The Author(s) 2017 9

A. L. Hamdan, Strategic Thinking in a Hospital Setting,
SpringerBriefs in Public Health, DOI 10.1007/978-3-319-53597-5_3
10 3 Porter’s Strategies in Healthcare

3.1 Choice of Strategy

The application of Porter’s generic strategies in the hospital industry has been
proven to be useful despite the scarcity in the reports [4, 5]. Both types of strategy,
namely cost leadership strategy and differentiation strategy in their focused and
broad applications have been used to coop with the changes in healthcare
environment.
There are only two reports on the applicability of Porter’s strategies in health-
care, one by Kumar et al. on the United States hospitals and the other by Hlavacka
et al. on Slovak hospital industry [4, 5]. The first study by Kumar et al. performed
on 600 acute care hospitals looked at the types of strategies used by chief
administrators and how these strategies correlated with performance. Five groups of
strategies have been reported and traditional performance criteria were used as
measure of organizational performance. The five types of strategies included cost
leaders, differentiators, stuck in the middle, focused cost leaders and focused dif-
ferentiators. With respect to performance, return on new services and facilities,
ability to retain patients and to control expenditure, were used as measures of
effectiveness and efficiency. The second study by Hlavacka et al. was conducted on
Slovak hospitals using a translated version of Kumar’s questionnaire. Again their
findings indicated four types of strategy, namely the Focused cost leadership, the
stuck in the middle, the “wait and see group” which had medium emphasis on cost
leadership and low emphasis on focus and differentiation, and last but not least is
cost leadership. The results showed that the “stuck in the middle” performed better
that the remaining groups.
The use of differentiation strategy has been linked and attributed to the presence
of discontinuous or turbulent environments which invariably favor the adoption of a
differentiation strategy. According to the resource-based view [6], looking inside
the firm’s resources and capabilities is the cornerstone for differentiation strategy in
a market that is unpredictable and discontinuous. Despite that several studies
support the notion of Porter’s generic strategies’ applicability and viability in dif-
ferent environmental contexts [7, 8], many others have emphasized the importance
of fitting the organizational strategy with environmental conditions [9, 10]. The
discontinuous environment in healthcare can be characterized by surges in tech-
nology, introduction of new payment’s method, unforeseen patients’ needs,
healthcare business restructuring, last but not least are political conflicts which
always had an impact on the overall socio-economic status among which is
healthcare expenditure.
The lack of pursuit of differentiation strategy on the other hand can be attributed
to several factors: One is the limited resources and scarcity in funding. Based on
numerous studies [11, 12], differentiation mandates funding and significant
resources, the lack of which can circumvent the establishment of new services and
the ability to enhance current ones. Asides from having access to research funds and
endowments primarily used in academic institutions, private and non-academic
hospitals are at a disadvantage in terms of financial resources as the cut down in
3.1 Choice of Strategy 11

healthcare budgeting had affected the overall expenditure and reduced allocation of
resources used in differentiation of existing medical services [13, 14]. The second
reason why hospitals may not adopt a differentiation strategy is the type and mode
of reimbursement. When pay is based on contractual agreements between hospitals
and third party payers, with a fixed amount allocated for the management of disease
entities, there is less of an incentive to spend on differentiation of medical facilities,
unless reimbursement is also linked to patient experience or other intermediate
healthcare outcome measures [15]. A third Reason for missing on differentiation
strategy is lack of a market information system. Based on a study by Narver [16],
institutions that are market oriented tend to adopt more differentiation strategy. This
inclination stems from the urge to meet patient’s needs and emerging quests.
Institutions that follow closely the market and what patients want tend to differ-
entiate their services from both the demand side and the supply side as well. In
developing countries “Utilizing market research to identify new services” is rarely
used.
That being said, Cost leadership has been more advocated in stable environ-
ments where competitive forces and threats are rather predictable, whereas differ-
entiation strategy has been more advised in unpredictable and dynamic
environments. A main reason to adopt the low cost leadership is the nature of the
payer mix, that is when the majority of patients are insured by third party payers
and only a small fraction pay for their medical fees. In this case, most of the hospital
bill is covered or reimbursed by insurance companies. Based on a report by
Newhouse [17] on “the structure of the health insurance and the erosion of the
medical market place” insured patients are less inclined to search for the lowest
prices in seeking medical care. From the supply side, hospitals tend to compete less
on price and more on differentiation to attract patients. This has been referred to as
the “medical arms race” by Robinson and Luft [18] where hospitals try to attract
patients by widening the breadth of their products or by introducing new services
rather than by reducing cost. Focusing on differentiation when the price is fixed is in
accordance with numerous reports on non-price competition that were described in
other industries, such as the airline industry [19, 20].

3.1.1 Cost Leadership Strategy

To be a cost leader means to be the lowest cost producer in the industry. The
competitive advantage is derived from widening the gap between the cost of pro-
duction and what the customer is willing to pay [7]. This entails Minimization of
cost in various operational fields, business restructuring and revamping of the
overall cost structure.
Different approaches to reduce cost have been described in the literature. One
basic approach is catalog activity with value chain analysis [21]. All the services
within a department are dissected and evaluated in terms of cost. Using catalog
activities, each service is disintegrated into a set of activities where the importance
12 3 Porter’s Strategies in Healthcare

and cost of each is analyzed in relation to the overall cost and in relation to the
customer’s need and market segment. The cost drivers are identified and analyzed
in terms of opportunities for outsourcing or reallocation in order to reduce the
overall cost. The market cost drivers are used as a benchmark for cost management.
Redundancies, duplications in services and wasteful expenditures are reexamined.
Not essential activities are either outsourced or re-allocated. A relevant product for
catalog activity analysis in healthcare setting is the hospital bill. This latter is
usually stratified into room and service, use of supplies, pharmaceuticals, diagnostic
tests, and operating room in case a surgical procedure has been done. The cost
drivers would be the length of stay, the choice of surgical supplies used, the variety
of diagnostic tests requested, and last but not least the duration of surgery. By
dissecting these cost drivers in relation to the consensual figures in the market, one
can identify how financial resources are being spent and how cost can be reduced.
Another approach for low cost leadership is cost management in the different
segments or departments of an institution. Based on Michael E. Rindler book on
strategic cost reduction [22] cost is dissected along six dimensions; Management
cost, supply cost, labor cost, service cost, utilization cost and capital cost. In each
dimension, different strategic tools can be used. Hence several strategic areas for
cost reduction starting from inbound logistics to marketing and sale should be
contemplated. With respect to input cost, a decrease in cost can be realized using
economy of scale whereas in the production phase, cost reduction can be reached by
re-engineering the business processes and improving the quality of the products or
services. Economies of learning can also assist in cost reduction by improving the
agility at the individual level and the global know how at the institutional level. In
marketing and sale, proper matching between customer needs and service/product
supply is crucial in retaining customers and sustaining loyalty.
In a hospital setting, the biggest challenge is to reduce cost without jeopardizing
the quality of care or the range of services. For cost reduction to be successful it
must be aligned with the overall strategy of the institution and must engage all
levels of management including physicians and staff. This requires integration
between the different key players in order to enhance the flow of patients, infor-
mation and hence care. Inability to engage physicians and or poor alignment with
the institutional vision invariably leads to failure.
Whereas economies of learning by enhancing the know-how and dexterity of
care givers, by designing services that are easy to deliver, and by improving the
clinical utilization of the hospital resources and capabilities, can result in cost
reduction and lead to success.
With respect to sales and marketing, it is about meeting patient’s expectations
and keeping the promise of delivering the best services at an affordable cost. While
keeping this promise, the hospital is ensuring good visibility to its staff and caring
team. There are several examples to cost reduction in hospital settings and these
include: merging and acquisition, staff layoff, supply chain management, reducing
waste, outsourcing and insourcing of given services, reducing the layers in man-
agement, capital cost management, and so forth.