Insiders in every industry will be quick to explain how the challenges they face are unique and beyond the experience of others. Auto executives can point to a relentless onslaught of foreign competitors, beginning with the Germans and Japanese and, more recently, the Koreans and Indians. Airline executives can point to the uncertainty in oil prices, which can cause dramatic fluctuations in their profits. Executives in the electronics industry can rightly emphasize ever-accelerating advances in technology that quickly obsolete their products.
But despite the diversity of challenges among industries, an argument can be made that, at a high level, the options for winning boil down to just three. Harvard's Michael Porter identified three generic strategies in 1980:
- differentiation (offering unique products and services);
- focus (being uniquely attuned to customer needs);
- cost leadership (achieving the lowest cost structure).
For Porter, all competitive advantage results from differences in price or differences in cost. Thus, generic strategies represent pathways to a higher price or lower costs to generate more margin. The central concept in this argument is differences. To win, an organization must compete to be unique. This is an insight much older than Porter, of course. Biologists long have recognized that every species makes its living in a different way and, in so doing, achieves a degree of sustainability in environments with scarce resources.
Porter also has emphasized the discrete chain of activities necessary to support differences that matter; he called this a value chain. Meaningful competitive advantage arises from disparities in the differentiation, focus and cost leadership within this value chain. The metaphor of a chain underscores the highly interrelated and mutually dependent nature of these activities. A weak or missing link compromises every other link.
Henry Ford provided a solid example of a cost leader. In an era when most automobiles cost thousands of dollars, Ford organized his value chain to deliver a Model T for around $500. In doing so, he dramatically expanded the number of customers who could afford a car. GM's Alfred Sloan relied on a different tack. He focused on the unique needs that defined customer segments to deliver a car for "every purse and purpose." Sloan's GM is often used to point out the vulnerability in Ford's thinking.
In truth, Ford and GM found different ways to win rather than the best way to win. Other auto manufacturers like Rolls Royce, Mercedes Benz and BMW eventually chose a third way — differentiated products targeted to luxury buyers.
The Three Disciplines
In their 1997 book, The Discipline of Market Leaders, Michael Treacy and Fred Wiersema emphasized three pathways to market leadership analogous to those identified by Porter. They also argued that each required a distinct organizational discipline:
- To provide unique products you need a discipline of product leadership, which includes developing a constant stream of products with leading edge capabilities positioned at the outer boundaries of performance. Think of Apple and its string of product successes.
- To focus effectively on customer needs you need a discipline of customer intimacy. Think of Southwest Airlines' focus on the needs of business travelers.
- Finally, to become the low-cost player you need a discipline of operational excellence. Think here of Walmart.
These disciplines can be seen to generally define the theme for a supporting value chain.
Treacy and Wiersema also suggest that, while you must be the market leader in one of the three disciplines, you also need to be competitive in the other two. In other words, a market leader needs to be exceptional in one discipline and good enough in the other two.
Are these three ways to win evident in health care? The pattern is certainly there. Most academic medical centers rely on reputations for product leadership. Mayo Clinic has a 100Ã¢â‚¬â€˜year legacy of commitment to the customer intimacy discipline, and Hospital Corporation of America has throughout its history pursued the discipline of operational excellence.
Still, there is little evidence that most hospitals and health systems pursue a market discipline with any degree of intention. To the extent that one of these paths has been pursued, it has been largely accidental. If intention is missing, it is likely that discipline is missing as well. For example, an academic medical center may be winning because it enjoys the fruits of owning the product leadership position. But disciplined commitments to ensure that the advantage is protected, built and leveraged may be lacking.
Organizations unaware of how they are winning are unlikely to reinforce their winning ways. This makes an undisciplined academic medical center vulnerable. Other academic medical centers may outrun them by offering more advanced capabilities. Or large communityÃ¢â‚¬â€˜based hospitals may begin to chew away at their advantage by recruiting their faculty and offering their own advanced capabilities.
Covering All Bases
Applying Treacy and Wiersema's thinking, an academic medical center must do more than reinvest constantly in talent and technology. The institution has to come as close as possible to matching the strengths of health care organizations that win on the basis of low cost or customer intimacy.
For example, both the Cleveland Clinic and the Medical University of South Carolina have succeeded through product leadership. Yet, both organizations also have recognized the need to address customer intimacy and operational excellence. They've responded by instituting service-excellence programs and cost-reduction initiatives.
Customer intimacy should be the natural discipline of advantage for most community hospitals. They often have a relatively exclusive geographic franchise. Their smaller size and less complex structures let them deliver a superior experience to patients and their families. Their location outside congested urban centers also makes them more accessible. But they can be threatened by other community hospitals with a more disciplined approach to customer intimacy, or by an academic medical center that delivers good enough service and cost.
Multihospital systems ought to have an inherent cost advantage through operational excellence. In theory, any health care organization can drive its costs down, but multihospital systems can better amortize the cost of administration and new program development, for example, for three hospitals rather than one.
Most multihospital systems display little true systemness and, instead, operate as conglomerates unified by a lame brand. Generally, they have proven unable to make the tough decisions necessary to press their advantage. There are notable exceptions, however, including Advocate Health Care in Illinois, Banner Health in Arizona and Sentara Healthcare in Virginia.
Within each way to win, there are differing ingredients, some of which are fundamental to the recipe. In health care, the product leaders will rely above all else on physicians with reputations. The customer-focused organization depends on empathetic people (particularly nurses) and comforting environments. The cost leader relies on processes and methods, including standardization.
The Importance of Culture
In defining and leveraging their value chain, hospitals and health systems may have an unrecognized ally — culture. At most academic medical centers, even though there may not be a conscious commitment to product leadership, there will be physicians, scientists, nurses and others who are already strongly oriented toward delivering advanced capabilities, making breakthroughs in research and educating the best and the brightest. They don't have to be pushed toward a discipline of product leadership; they are already leaning in that direction.
Community hospitals, particularly those with 150 beds or fewer, have an inherent cultural advantage in customer intimacy. They aren't overwhelmed by the size and complexity that create distance in patient relationships. They have the same affinity for responsiveness and concern that is often attributed to a small town.
Size is the enemy of intimacy. I've often heard physicians, nurses and patients lament the loss of the small hospital feel that occurred as their institution grew. This loss of intimacy is usually felt to have been inevitable, but it might also have occurred because no one was disciplined in preserving it. It just withered away like an unwatered flower. A disciplined community hospital can preserve, accentuate and apply its natural cultural tendencies, offering excellent service that is intimately focused to unique needs.
Likewise, executives at a cost leader such as the Hospital Corporation of America have been acculturated to become strong operators with well-tuned business instincts. They usually won't need to be pushed toward pursuit of the low-cost position. It's already in their blood.
An organization that can't answer the question "What sets your culture apart?"has a culture that is likely to be useless in a competitive environment. Organizational culture needs to be different in a way that's meaningful and valuable. A culture of discipline results in physicians with a difference. Nurses with a difference. Patient experience with a difference. Leaders with a difference.
Disciplined about Being Different
Each of the three disciplines demands consistency. A discipline for winning must extend throughout the organization, with a degree of commitment that approaches obsession, to the hospital floors, to the emergency department, to the practices of physicians. The discipline of winning isn't a black box. It's a way of being.
Discipline also demands continuity. You can't switch disciplines willy-nilly. Continuity of disciplined leadership is in evidence in winning organizations.
By definition, winning requires competition. If there is no competition, there is obviously no need for competitive strategy. Today, the U.S. health care industry is a mix of market and mandate. In a market, there is choice, and organizations compete to be chosen. That choice is made on a comparative basis by weighing benefits against costs. Current government policy promises to increase the level of competition in health care by shining an ever-brighter light on comparative quality, cost and satisfaction.
Back in the early '80s, I got a call from a professor at the London Business School asking whether I'd have any interest in providing perspectives for efforts to introduce competition to the National Health Service. Margaret Thatcher was on a roll in those days and, having succeeded at privatizing a string of governmentÃ¢â‚¬â€˜owned enterprises, was turning her sights on health care. It soon became apparent that the prime minister had run into an institution she wasn't going to be able to privatize, and the effort died.
Is it possible that competition in U.S. health care will succumb to choices made in governmental bureaucracies rather than in the market? Perhaps. And if it does, there won't be a compelling reason to be different or disciplined. But, if in the end, competition prevails, being disciplined about being different will remain an essential obligation for disciplined leaders.
Dan Beckham is the president of the Beckham Co., a strategic consulting firm based in Bluffton, S.C. He is also a regular contributor to H&HN Daily.