Chapter 2
External Analysis
“Change is the law of life. And those who look only to the past or present are certain to miss the future.”
—JOHN F. KENNEDY, 35TH PRESIDENT OF THE UNITED STATES
Why External Analysis Is Important
President Kennedy’s quote reminds us that organizational failure is often the result of failing to look to the future. Organizations fail to anticipate significant external changes and subsequently do not make the necessary adjustments in strategy that might save them. Organizational success is predicated on tailoring strategy – not to the past or even the present – but rather to well-informed, credible assumptions about the future.
Looking to the future is both an art and a science. The art involves strategic thinking and the science involves rigorous external analysis. Together, strategic thinking and external analysis processes enable the generation of realistic strategic assumptions about the future for strategy building. Both the art and science are critical for envisioning the future.
The art of looking into the future requires a strategic manager who is informed about and perceptive to an organization’s external changes – requiring an external orientation and inquisitive awareness. Strategic managers must be able to see the big picture, understand relationships, and use systems thinking. They have to use critical thinking to determine the consequences and implications of what they see. These leaders need creativity to transform change signals into actions as well as create visions and strategic goals. As introduced in Chapter 1, strategic thinking is an art made up of awareness, anticipation, analysis, interpretation, synthesis, and reflection driven by a passion to know, understand, and succeed.
The science of anticipating the direction of change involves using structured processes for understanding an organization’s external conditions – the general (macro-environment), health care system, and service area changes – utilizing the processes of a number of external analysis tools and techniques. These processes help organize and structure information, aid in focusing on what is important, and provide a foundation for integrative strategic thinking. External analysis coupled with strategic thinking will generate new perspectives and insights to provide a plausible glimpse of tomorrow.
Use the concepts in this chapter to see into the future!
Learning Objectives
After completing the chapter you will be able to:
Discuss the significance of external analysis for health care organizations.
Articulate the specific goals of external analysis.
Point out some limitations of external analysis.
Describe how various types of organizations in society (the macro-environment), the health care system, and the service area influence the delivery of health care.
Identify major general environment, health care system, and service area trends affecting health care organizations.
Describe the utilization of key sources of external information.
Discuss important techniques used to identify and analyze external issues, trends, and events.
Suggest several questions to initiate strategic thinking that focus on identifying and responding to external change.
Strategic Management Competency
After completing this chapter you will be able to map and analyze external issues, trends, and events in the general environment, the health care system, and the service area for a health care organization.
The External Nature of Strategic Management
External analysis requires strategic managers who search for ways to radically alter the status quo, create something totally new, or revolutionize processes. They search for opportunities to do what has never been done or to do known things in a new way. Therefore, the fundamental nature of strategic management requires awareness and understanding of outside forces. Strategic managers encourage adoption of new ideas in the system, maintain receptivity to new ways of operating, and expose themselves to broad views. More specifically, leaders must have an understanding of the current and potential external issues, trends, and events that may impact the organization and be able to see new possibilities that these changes may bring. This understanding is informed through the process of external analysis. External analysis is a strategic thinking activity directed toward identifying, aggregating, and interpreting the issues outside an organization to determine the implications of those issues on the organization as well as providing information for internal analysis and the development of the directional strategies. External analysis can remove the protective covering in which organizations often seal themselves.1 External analysis is a part of the situational analysis section of the strategic thinking map presented in Chapter 1 (Exhibit 1–1).
The Goals of External Analysis
Although the overall intent of external analysis is to position the organization within its industry and service area, more specific goals may be identified. The specific goals of external analysis are:
To identify and analyze current important issues and changes that will affect the organization.
To detect and analyze early or weak signals of emerging issues and changes that will affect the organization.
To speculate on the likely future issues and changes that will have significant impact on the organization.
To classify and order issues and changes generated by outside organizations.
To provide organized information for the development of the internal analysis, mission, vision, values, goals, and strategy of the organization.
To foster further strategic thinking throughout the organization.
In addition to the identification of current issues, external analysis attempts to detect early or weak signals outside the organization that may portend a future issue. Weak signals are early evidence of emerging trends from which it might be possible to deduce important changes in demography, technology, customer tastes, social, political or regulatory shifts, or economic patterns.2 Sometimes based on little hard data, managers attempt to identify patterns that suggest emerging issues that will be significant for the organization. Such issues, if they continue or actually do occur, may represent significant challenges or opportunities. Timely identification of external issues aids in developing strategy.
Chapter 3
Service Area Competitor Analysis
“Your most dangerous competitors are those most like you.”
—BRUCE D. HENDERSON, AMERICAN ENTREPRENEUR AND FOUNDER OF THE BOSTON CONSULTING GROUP (BCG)
Why Service Area Competitor Analysis Is Important
As Bruce Henderson concluded, not all organizations competing in the same broad market are necessarily direct competitors; however, organizations with the same or similar strengths serving a particular market will be rivals – the more similar they are, the greater the rivalry. Diverse competitors may all do well in a single market by focusing on different market dimensions. Organizations that compete in several different markets may find that their competitors in one market are completely different from those in another market.
The amount of competition varies from market to market as well. Service area competitor analysis helps strategic managers structure their thinking to determine on what market dimensions they desire to compete, the specific organizations that are most like their own organization in a market segment, and what other products or services may be seen as effective replacements or substitutes for a given product or service. Identifying direct competitors and understanding the nature of the market itself is essential.
In some markets, competition is quite genteel, whereas in others competition is quite fierce. Understanding why competitive intensity in markets varies and what makes a market attractive is profoundly important for strategic managers. Organizational strategy is drawn to attractive markets.
Strategic thinking and structured processes for service area competitor analysis work together to help strategic managers accurately assess their markets (service areas) for their product or service, the nature of the competition, and the attractiveness of the market. Further, strategic thinking and its disciplined processes can determine the specific organizations that compete with each other in a given market. The strategy developed by most organizations rests on this analysis.
Use the concepts in this chapter to assess and understand competitors and markets!
Learning Objectives
After completing the chapter you will be able to:
Describe the process of service area competitor analysis. Why is it important?
Examine the relationship between the general environment, the health care system, and service area for identification of issues and competitors.
Explain the importance of a service area structure analysis for a health care organization.
Develop critical factors for success for a product or service in a service area.
Identify strategic groups and map competitors’ strategies along important service and market dimensions.
Assess likely competitor strategic responses.
Synthesize a service area competitor analysis into some strategic conclusions.
Validate strategic assumptions to reinitiate strategic thinking concerning the service area and competitors.
Strategic Management Competency
After completing this chapter you will be able to conduct a comprehensive service area competitor analysis for a health care organization.
Further Focus within External Analysis
External analysis involves strategic thinking and strategic planning, focusingon increasingly more specific issues. Chapter 2 provided the fundamental approach and strategic thinking frameworks for organizing, scanning, monitoring, forecasting, assessing, and mapping issues and trends in the general environment, health care system, and service area. Once these trends and issues have been identified and mapped, a more focused competitor analysis is required. A service area competitor analysis is a more specific process to understand the nature of competition, evaluate competitors, identify critical success factors, and anticipate competitors’ strategic moves in a defined geographic area (neighborhood, city, state, United States, or in the world). Along with the economic, social/demographic, legislative/political, technological, and competitive issues assessed in the general environment, health care system and service area, the service area competitor analysis will provide an understanding of the competitive context in which the strategy of the organization will have to be successful.
Clearly a new competitive marketplace is emerging in the health care system and competition is expected to increase over the next decade. As reimbursement incentives move to delivering value, outcomes data become more transparent, and consumers are asked to pay a greater portion of their health care costs, health care organizations will have to develop new, more competitive care-delivery models.1 Health care organizations that attempt to avoid competing or deny industry changes currently underway will find their patients moving to other providers. Therefore, within the health care community there is an understanding that health care organizations must be positioned effectively vis-à-vis their competitors. Competitor information is essential for selecting viable strategies that successfully position the organization in the market. Many health care managers agree that an organized competitor intelligence system is necessary for survival. The system acts like a radar grid constantly monitoring consumer and competitor activity, filtering the raw information picked up by external and internal sources, processing it for strategic significance, and efficiently communicating intelligence to those who need it.2
A Process for Service Area Competitor Analysis
Service area competitor analysis is a process of understanding the market and identifying and evaluating competitors within that market. Together with the results of the general environment, health care system, and service area trends and issues, service area competition will be analyzed and the results synthesized into the strategic issues facing the organization. The synthesis is an explicit input into the formulation of the organization’s strategy. Not every potential competitor in a service area is of concern because of targeting differences, positioning differences, quality differences, pricing differences, and so on. The process for service area competitor analysis is illustrated in the strategic thinking map in Exhibit 3-1. The conclusions will provide crucial information for strategy formulation.
Exhibit 3.1 Process for Service Area Competitor Analysis
Chapter 4
Internal Analysis and Competitive Advantage
“Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match.”
—PHILIP KOTLER, AMERICAN MARKETING AUTHOR AND DISTINGUISHED PROFESSOR
Why Internal Analysis and Competitive Advantage Are Important
As defined by Professor Kotler, enhancing and leveraging competitive advantage is central to strategy. Organizations are constantly trying to “distance themselves” from competitors; responding to the demands of their situation in unique ways enables them to be separated from their competitors. Competitive advantage is created inside the organization through the development of a unique bundle of resources, exclusive technology, access to the market, or new product/service characteristics, that competitors “cannot or will not match.” Differentiation is typically the basis for competitive advantage.
Competitive advantage is found in the strengths of the organization; however, these strengths must be relevant to the markets served. Moreover, competitive advantage does not exist in a vacuum – there is no one universal competitive advantage. Competitive advantage occurs in context – what is a competitive advantage in one market may not be a competitive advantage in another market. Finally, competitive advantage must differentiate the organization enough from its competitors to make a meaningful difference in the mind of the buyer. If competitive advantages are easy to copy, they do not remain competitive advantages for long.
An organization’s self-examination is difficult – strengths are sometimes over estimated and weaknesses difficult to acknowledge. Therefore, methods to help strategic managers objectively surface their organizational strengths and weaknesses as well as assessment guidelines for determining sustainable current and potential competitive advantages are essential. An organization’s external analysis, service area analysis, and internal analysis are the basis for identifying competitive advantage.
Use the concepts in this chapter to appraise internal strengths and weaknesses, identify unique characteristics, and create competitive advantages for a health care organization!
Learning Objectives
After completing the chapter you will be able to:
Explain how external analysis creates the context for internal analysis and the development of competitive advantage.
Discuss the ways in which value can be created at various places in the organization.
Articulate the rationale of using the organizational value chain to conduct internal analysis.
Use the value chain to identify organizational strengths and weaknesses.
Determine the competitive relevance of each organizational strength and weakness.
Describe how competitively relevant strengths and weaknesses can be used as the basis for developing strategic plans.
Discuss the importance of identifying and developing competitive advantage for a health care organization.
Strategic Management Competency
After completing this chapter you will be able to perform an internal analysis and determine the competitive advantages and competitive disadvantages for a health care organization.
The Process for Internal Analysis and the Search for Competitive Advantage
Although an understanding of an organization’s external environment is critical and provides the context for strategic planning, it is the organization’s strengths that provide the foundation for creating a competitive advantage. Competitive advantage is derived from organizational strengths that are valuable to external stakeholders, relatively rare among competitors, difficult to duplicate by competitors, and can be sustained by the organization. Typically, these strengths are directed toward achieving a cost advantage or differentiating the organization from its competitors. Therefore, a detailed understanding of the organization’s internal strengths and weaknesses relative to the changes taking place externally is a necessary element for developing a viable strategic plan. The search for competitive advantage consists of five steps as shown in Exhibit 4-1.
Exhibit 4.1 The Process for Internal Analysis