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    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD)
    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD)
    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD)
    Ebook393 pages5 hours

    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD)

    By Harvard Business Review, Michael E. Porter, James C. Collins and

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    About this ebook

    Is your healthcare organization spending too much time on strategy--with too little to show for it?

    If you read nothing else on strategy, read these 10 articles. We've combed through hundreds of Harvard Business Review articles and selected the most important ones for healthcare professionals to help you catalyze your organization’s strategy development and execution.

    Leading strategy experts, such as Michael E. Porter, Jim Collins, W. Chan Kim, and Renee Mauborgne, provide the insights and advice you need to:

    • Understand how the rules of corporate competition translate to the healthcare sector
    • Craft a vision for an uncertain future
    • Segment your market to better serve diverse patient populations
    • Achieve the best health outcomes--at the lowest cost
    • Learn what disruptive innovation means for healthcare
    • Use the Balanced Scorecard to measure your progress

    This collection of articles includes "What Is Strategy?" by Michael E. Porter; "The Five Competitive Forces That Shape Strategy," by Michael E. Porter; "Health Care Needs Real Competition," by Leemore S. Dafny and Thomas H. Lee; "Building Your Company's Vision," by Jim Collins and Jerry I. Porras; "Reinventing Your Business Model," by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann; "Will Disruptive Innovations Cure Health Care?" by Clayton M. Christensen, Richard Bohmer, and John Kenagy; "Blue Ocean Strategy," by W. Chan Kim and Renee Mauborgne; "Rediscovering Market Segmentation," by Daniel Yankelovich and David Meer; "The Office of Strategy Management," by Robert S. Kaplan and David P. Norton; and "The Strategy That Will Fix Health Care," by Michael E. Porter and Thomas H. Lee.

    LanguageEnglish
    PublisherHarvard Business Review Press
    Release dateApr 10, 2018
    ISBN9781633694316
    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD)
    Author

    Harvard Business Review

    Harvard Business Review es sin lugar a dudas la referencia más influyente en el sector editorial en temas de gestión y desarrollo de personas y de organizaciones. En sus publicaciones participan investigadores de reconocimiento y prestigio internacional, lo que hace que su catálogo incluya una gran cantidad de obras que se han convertido en best-sellers traducidos a múltiples idiomas.

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    HBR's 10 Must Reads on Strategy for Healthcare (featuring articles by Michael E. Porter and Thomas H. Lee, MD) - Harvard Business Review

    Index

    Introduction

    Rediscovering Strategy

    by Thomas H. Lee, MD

    Health care leaders are facing pressures for performance that demand departures from business as usual. In the United States, patients and their employers are becoming more sensitive to service costs and quality. Meanwhile, reimbursements are decreasing, yielding flat or declining revenues for health care providers. As Michael E. Porter and I argued in our 2015 New England Journal of Medicine article Why Strategy Matters Now, these factors mean that health care organizations need to start making more and smarter choices about how to differentiate themselves. These kinds of decisions lie at the heart of classic business strategy, and it is incumbent on health care leaders to approach strategy development and execution with the same ferocity as do their counterparts in other sectors.

    Until recently, the U.S. health care marketplace frequently allowed leaders of health care organizations to get by without a real strategy as it is understood in most other business sectors. The amount of money pouring into health care was growing rapidly. Commercial insurance payment increases made up for shortfalls for Medicare, Medicaid, and uninsured patients, so that, overall, fee-for-service contracts usually covered the provider’s costs plus a modest margin. Meanwhile, quality was considered difficult or impossible to measure, so competition was based on organizations’ brands. Patients could go to almost any provider, so as long as provider brands brought patients in the door; organizations could thrive by focusing on operational effectiveness—disciplined adoption of best practices, hiring good people, and working hard.

    Operational effectiveness remains critical to health care providers’ success; indeed, the most brilliant strategy cannot save an organization with poor management. However, the changes in the health care marketplace over the last decade made operational effectiveness table stakes, requiring providers to find other sources of differentiation.

    The most conspicuous of these changes are economic. Arguments about how much of the economy can be devoted to health care now seem moot; the practical reality is that taxpayers and employers are simply unable and unwilling to support payment rates that rise faster than general inflation. In the past, health care providers could argue that their costs should be covered as long as their work was noble and good, and some still do. Today, however, no one is really listening, as company and personal budgets are stretched to their limits. For example, 43% of Americans with health insurance report having difficulty affording their deductible expenses, and one-third report difficulty affording their premiums—and both of these rates increased from 2015 to 2017.

    A less obvious change—but one that, in the long run, may prove more compelling—is that quality of care is no longer considered unmeasurable. The 1999 and 2001 reports from the Institute of Medicine To Err Is Human and Crossing the Quality Chasm made explicit that health care had serious problems in safety, technical quality, access, and patient experience. Those reports created a true sense of urgency about improving quality in health care, and efforts to develop and use measures of quality moved into a new, higher gear. Government and private payers first provided modest financial incentives for organizations to collect and report these data, then reporting became mandatory, and then financial consequences emerged, either in direct incentives or through threats to market share.

    As a result of these changes, the meaning of performance for health care organizations is being redefined: Measures of quality are being considered in that evaluation as well as traditional financial outcomes. And the particular quality measures used are shifting from those that gauge process (for example, how reliably did providers perform an action that was supported by guidelines, such as screening patients for various types of cancer) to those that assess outcomes that matter most to patients. Forward-looking providers like the Cleveland Clinic are collecting a wide array of outcomes data and publishing it online. For example, patients considering radiation therapy for prostate cancer can see data on not only survival rates at this institution, but also what proportion of patients had urinary incontinence, fatigue, and diarrhea.

    Combine this with patients’ and their employers’ pressure for higher-quality care and lower prices, and the pieces are now in place for a health care marketplace driven by competition on value for patients. The prospect of such a marketplace may not immediately seem good news to all health care stakeholders, since competition is always less comfortable than no competition. But the alternative to such a marketplace is one in which purchasers focus on price, and price alone, and provide no direct reward for improvement in safety, outcomes, or the disutility of care. Such a marketplace will not be good for patients or the rest of health care’s stakeholders.

    But to achieve differentiation, health care leaders must make choices about their unique approach to creating value for patients. Each health care provider cannot be all things to all patients: A hospital must choose to be a trauma center or a cancer specialist, to serve a local population or a full region. Indeed, in our New England Journal of Medicine article, we suggested six strategic questions that health care leaders should ask themselves:

    What is our fundamental goal?

    What businesses are we in?

    What scope of businesses should we compete in?

    How will we be different in each business?

    What synergies can we create across business units and sites?

    What should be our geographic density and scope?

    Another common challenge in today’s health care world is change management: As new policies and directions are instituted, there are sure to be many upset constituents. If they perceive decisions as dictated by internal or external politics, the risks rise for unending discussions about which stakeholders are winning or losing, and paralyzing internal negotiations. But the good news is that if decisions are clearly based on the two issues at the core of strategy—how to create value for the organization’s customers and how the organization is going to differentiate itself from competitors—then consensus can be easier to achieve.

    The Harvard Business Review articles in this collection prepare health care leaders to address these questions and execute upon the decisions that flow from them. Three of these articles have a clear health care focus, but the more general, classic articles that form the bulk of this volume are those that have shaped thinking about strategy across all business sectors.

    The first two articles define at a high level what we have to do and why we have to do it. Michael Porter’s landmark 1996 article What Is Strategy? opens with the distinction between operational effectiveness and strategy, and then describes the concept of strategic positioning to achieve sustainable competitive advantage. The second piece, also by Porter, is his 2008 synthesis of how strategy can serve as the antidote to the threats posed by competitive forces and the way to identify the opportunities. I am sure that I am not the only reader who felt, after absorbing these two articles, that a switch had been flipped, a dark room was illuminated, and the work to be done became visible with a new clarity.

    We have chosen the other articles because they, too, provide frameworks that change the way leaders view their work and can help health care leaders decide how to move forward. We have included landmark articles on building an organization’s vision (Collins and Porras), reinventing business models (Johnson, Christensen, and Kagerman), and perceiving opportunities in new markets (Kim and Mauborgne). Health care–specific articles describe the nature of competition in this sector and the role that various stakeholders can and should play (Dafny and Lee); and the health care threats and opportunities presented by disruptive innovation (Christensen et al.).

    In a marketplace driven by competition on value, leaders have to identify the levels of their organization at which they can measure and create value. That means segmenting customers (that is, patients) into groups tailored to strategic decisions (Yankelovich and Meer), and then connecting strategies to execution (Kaplan and Norton). The final article, by Michael Porter and me, offers a six-component framework for health care leaders to integrate these insights from strategy and create a path forward for their organizations.

    This path must be one that leads to better value for patients. Clarity on this goal leads to strategies that are inherently good for patients and the professional satisfaction of health care organizational personnel. Lack of clarity and lack of strategy set the stage for organizations that will never feel that they are thriving and leaders who do not lead. Our hope is that these must-read articles will help health care leaders set their goals, make choices that serve their patients, and ensure that their organizations succeed.

    What Is Strategy?

    by Michael E. Porter

    I. Operational Effectiveness Is Not Strategy

    For almost two decades, managers have been learning to play by a new set of rules. Companies must be flexible to respond rapidly to competitive and market changes. They must benchmark continuously to achieve best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few core competencies in race to stay ahead of rivals.

    Positioning—once the heart of strategy—is rejected as too static for today’s dynamic markets and changing technologies. According to the new dogma, rivals can quickly copy any market position, and competitive advantage is, at best, temporary.

    But those beliefs are dangerous half-truths, and they are leading more and more companies down the path of mutually destructive competition. True, some barriers to competition are falling as regulation eases and markets become global. True, companies have properly invested energy in becoming leaner and more nimble. In many industries, however, what some call hypercompetition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.

    The root of the problem is the failure to distinguish between operational effectiveness and strategy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability. And bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.

    A Bit of Context

    For many leaders of health care organizations, this article and the next may be the equivalent of looking in the mirror under harsh, unforgiving light. These articles force leaders to confront the questions of (1) whether they have a real strategy, and (2) whether they are using onetime tactics to get through every year, as opposed to creating sustainable competitive differentiation. Leaders may find it deeply uncomfortable to honestly assess where they stand on these issues, but having a clear picture of their strategic position is essential for health care organizations if they mean to survive in an increasingly competitive environment.

    When Michael Porter discusses with health care leaders the ideas at the core of these articles, he often begins by emphasizing what is not strategy. He argues that the term has been used loosely in health care, a holdover from the days when funding was expanding rapidly, and it was a generally accepted notion that the more services that were being delivered, the better. However, those conditions have lapsed, and organizations must confront the reality that their strategy cannot be simply growth. Nor can it be achieving a specific financial margin target or merging with other organizations to deflect competitive pressures.

    Instead, as Porter argues, defining a real competitive strategy requires clarity on what the organization is trying to do for whom, and in health care, as we’ve seen, that means how it is creating value for patients. The more effectively that organizations design their work around meeting the needs of patients, the more successfully they will compete for market share. This article helps leaders identify where and how they need to make difficult choices about this design: what activities the hospital or health care system or other provider will or will not do.

    For example, many hospitals are facing the worrisome combination of flat revenues, rising costs, and full occupancy. Their reflex response is to try to move even more patients through the same old system and to replace higher-paid employees with lower-paid personnel. Both of these moves are important for survival, but their competitors are doing the same thing. To thrive, to have a sustainable competitive advantage, the hospital must make choices. For example, should academic medical centers try to compete for market share on the basis of providing primary care? Or should they try to make their high-end specialty services as high value as possible? Should hospitals concede that their volumes for some services (for example, cancer surgeries) are too low for excellence or efficiency, and work with other institutions to consolidate some aspects of the care (for example, the operations themselves)?

    As in any sector, these choices frequently cause discontent among constituents, and health care organizations, in particular, have a hard time working well with disgruntled personnel. But they can mitigate this discontent by reminding stakeholders that their organization’s focus is on meeting the needs of patients and doing so with increasing effectiveness and efficiency. Strategy in the pursuit of this goal is inherently good. These articles help leaders articulate this message and bring their organizations’ strategy to life.

    —Thomas H. Lee

    Operational effective ness: necessary but not sufficient

    Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in very different ways.

    A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.

    Ultimately, all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services, such as calling on customers, assembling final products, and training employees. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and how they are performed. Activities, then, are the basic units of competitive advantage. Overall advantage or disadvantage results from all a company’s activities, not only a few.¹

    Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.

    Differences in operational effectiveness among companies are pervasive. Some companies are able to get more out of their inputs than others because they eliminate wasted effort, employ more advanced technology, motivate employees better, or have greater insight into managing particular activities or sets of activities. Such differences in operational effectiveness are an important source of differences in profitability among competitors because they directly affect relative cost positions and levels of differentiation.

    Differences in operational effectiveness were at the heart of the Japanese challenge to Western companies in the 1980s. The Japanese were so far ahead of rivals in operational effectiveness that they could offer lower cost and superior quality at the same time. It is worth dwelling on this point, because so much recent thinking about competition depends on it. Imagine for a moment a productivity frontier that constitutes the sum of all existing best practices at any given time. Think of it as the maximum value that a company delivering a particular product or service can create at a given cost, using the best available technologies, skills, management techniques, and purchased inputs. The productivity frontier can apply to individual activities, to groups of linked activities such as order processing and manufacturing, and to an entire company’s activities. When a company improves its operational effectiveness, it moves toward the frontier. Doing so may require capital investment, different personnel, or simply new ways of managing.

    Idea in Brief

    The myriad activities that go into creating, producing, selling, and delivering a product or service are the basic units of competitive advantage. Operational effectiveness means performing these activities better—that is, faster, or with fewer inputs and defects—than rivals. Companies can reap enormous advantages from operational effectiveness, as Japanese firms demonstrated in the 1970s and 1980s with such practices as total quality management and continuous improvement. But from a competitive standpoint, the problem with operational effectiveness is that best practices are easily emulated. As all competitors in an industry adopt them, the productivity frontier—the maximum value a company can deliver at a given cost, given the best available technology, skills, and management techniques—shifts outward, lowering costs and improving value at the same time. Such competition produces absolute improvement in operational effectiveness, but relative improvement for no one. And the more benchmarking that companies do, the more competitive convergence you have—that is, the more indistinguishable companies are from one another.

    Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It means performing different activities from rivals, or performing similar activities in different ways.

    The productivity frontier is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available. Laptop computers, mobile communications, the Internet, and software such as Lotus Notes, for example, have redefined the productivity frontier for sales-force operations and created rich possibilities for linking sales with such activities as order processing and after-sales support. Similarly, lean production, which involves a family of activities, has allowed substantial improvements in manufacturing productivity and asset utilization.

    For at least the past decade, managers have been preoccupied with improving operational effectiveness. Through programs such as TQM, time-based competition, and benchmarking, they have changed how they perform activities in order to eliminate inefficiencies, improve customer satisfaction, and achieve best practice. Hoping to keep up with shifts in the productivity frontier, managers have embraced continuous improvement, empowerment, change management, and the so-called learning organization. The popularity of outsourcing and the virtual corporation reflect the growing recognition that it is difficult to perform all activities as productively as specialists.

    Idea in Practice

    Three key principles underlie strategic positioning.

    Strategy is the creation of a unique and valuable position, involving a different set of activities. Strategic position emerges from three distinct sources:

    serving few needs of many customers (Jiffy Lube provides only auto lubricants)

    serving broad needs of few customers (Bessemer Trust targets only very highwealth clients)

    serving broad needs of many customers in a narrow market (Carmike Cinemas operates only in cities with a population under 200,000)

    Strategy requires you to make trade-offs in competing—to choose what not to do. Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says no to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies. By contrast, Maytag’s decision to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of return on sales.

    Strategy involves creating fit among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one another. For example, Vanguard Group aligns all of its activities with a low-cost strategy; it distributes funds directly to consumers and minimizes portfolio turnover. Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can’t easily imitate them. When Continental Lite tried to match a few of Southwest Airlines’ activities, but not the whole interlocking system, the results were disastrous.

    Employees need guidance about how to deepen a strategic position rather than broaden or compromise it. About how to extend the company’s uniqueness while strengthening the fit among its activities. This work of deciding which target group of customers and needs to serve requires discipline, the ability to set limits, and forthright communication. Clearly, strategy and leadership are inextricably linked.

    Operational effectiveness versus strategic positioning

    As companies move to the frontier, they can often improve on multiple dimensions of performance at the same time. For example, manufacturers that adopted the Japanese practice of rapid changeovers in the 1980s were able to lower cost and improve differentiation simultaneously. What were once believed to be real trade-offs—between defects and costs, for example—turned out to be illusions created by poor operational effectiveness. Managers have learned to reject such false trade-offs.

    Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers’ needs. The most generic solutions—those that can be used in multiple settings—diffuse the fastest. Witness the proliferation of OE techniques accelerated by support from consultants.

    OE competition shifts the productivity frontier outward, effectively raising the bar for everyone. But although such competition produces absolute improvement in operational effectiveness, it leads to relative improvement for no one. Consider the $5 billion-plus U.S. commercial-printing industry. The major players—R.R. Donnelley & Sons Company, Quebecor, World Color Press, and Big Flower Press—are competing head to head, serving all types of customers, offering the same array of printing technologies (gravure and web offset), investing heavily in the same new equipment, running their presses faster, and reducing crew sizes. But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability. Even industry-leader Donnelley’s profit margin, consistently higher than 7% in the 1980s, fell to less than 4.6% in 1995. This pattern is playing itself out in industry after industry. Even the Japanese, pioneers of the new competition, suffer from persistently low profits. (See the sidebar "Japanese Companies Rarely Have

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