Rethinking the hospital - The value of business models for hospitals

Rethinking the hospital The value of business models for hospitals Master thesis Maarten den Braber ([email protected]) October, 2008 – Enschede, The Netherlands

Rethinking the hospital The value of business models for hospitals

Master thesis University of Twente School of Management and Governance master Industrial Engineering and Management track Health Care Technology and Management Student M.M. den Braber BSc. (s0010863) [email protected] Supervisor Prof. Dr. H.E. Roosendaal [email protected] Co-supervisor Prof. Dr. W. van Rossum [email protected]

Company supervisor The Decision Group Ir. M. Koomans [email protected]

Front page: The photo depicts “Maggie’s Centre” at Dundee, United Kingdom. The building is designed by the architect Frank Gehry and located at Ninewells Hospital in Dundee. It was opened in 2003 and fulfills the purpose of helping people with cancer, their carers, family and friends to learn how to manage the physical and emotional impact of living with cancer. Photo courtesy of “Royal Arch” http://flickr.com/photos/46235637@N00/526055454/

Table of contents ACKNOWLEDGEMENTS ................................................................................................................... 1 EXECUTIVE SUMMARY .................................................................................................................... 3 1

INTRODUCTION: MAKING THE RIGHT CHOICES................................................. 9

2

RESEARCH BACKGROUND......................................................................................... 11 2.1 2.2 2.3 2.4 2.5 2.6 2.7

3

POSITION OF THIS RESEARCH ................................................................................................ 11 FOCUSING ON THE BUSINESS MODEL .................................................................................... 12 RESEARCH QUESTIONS ......................................................................................................... 13 RESEARCH METHOD ............................................................................................................. 14 EXPLORATORY RESEARCH .................................................................................................... 14 RESEARCH CONTEXT ............................................................................................................ 15 CONCLUSION ........................................................................................................................ 16 STRATEGIC ENVIRONMENT OF DUTCH HOSPITALS ........................................ 17

3.1 3.2 3.3 3.4 3.5 3.6 4

EVOLUTION OF THE HOSPITAL .............................................................................................. 17 POSITION OF THE HOSPITAL IN THE HEALTHCARE DELIVERY SYSTEM ................................... 19 HOSPITAL LANDSCAPE ......................................................................................................... 20 HOSPITAL FUNCTIONS AND ACTIVITIES ................................................................................ 22 DUTCH HOSPITAL REFORM: A SHORT HISTORY ..................................................................... 24 CONCLUSION ........................................................................................................................ 25 BUSINESS MODEL THEORY ....................................................................................... 26

4.1 4.2 4.3 4.4 4.5 4.6 5

CONCEPT OF THE BUSINESS MODEL ...................................................................................... 26 THE BUSINESS MODEL OF CHESBROUGH & ROSENBLOOM ................................................... 28 BUSINESS MODEL AND VALUE .............................................................................................. 30 A MODEL APPROACH TO STRATEGY ...................................................................................... 32 BALANCING VALUE IN STRATEGY: INSIDE-OUT VERSUS OUTSIDE-IN .................................... 33 CONCLUSION ........................................................................................................................ 34 STRATEGIC ISSUES FOR THE HOSPITAL............................................................... 36

5.1 5.2 5.3 5.4 5.5 6

FIELD RESEARCH .................................................................................................................. 37 INTERVIEWS ......................................................................................................................... 38 DISCUSSION SESSIONS .......................................................................................................... 39 OUTCOMES ........................................................................................................................... 46 CONCLUSION ........................................................................................................................ 52 BUSINESS MODEL THEORY AND HOSPITAL POLICIES .................................... 53

6.1 6.2 6.3 6.4 6.5 6.6

LITERATURE REVIEW............................................................................................................ 54 MCKEE AND HEALY (2002) ................................................................................................. 55 NVZ VERENIGING VAN ZIEKENHUIZEN (2000) ..................................................................... 56 MACKINNON (2002) ............................................................................................................ 57 DARZI (2007) ....................................................................................................................... 58 CONCLUSION ........................................................................................................................ 59

7

VALUE OF BUSINESS MODEL THEORY FOR HOSPITALS ................................. 60 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8

8

VALUE PROPOSITION ............................................................................................................ 60 MARKET SEGMENT ............................................................................................................... 62 STRATEGIC POSITION ............................................................................................................ 64 VALUE CHAIN ....................................................................................................................... 66 COMPETITIVE STRATEGY ...................................................................................................... 68 COST STRUCTURE / REVENUE POTENTIAL ............................................................................. 70 BENEFITS AND LIMITATIONS OF THE BUSINESS MODEL APPROACH ....................................... 72 CONCLUSION ........................................................................................................................ 74 CONCLUSIONS, DISCUSSION AND FURTHER RESEARCH ................................ 76

8.1 8.2 8.3

CONCLUSIONS ...................................................................................................................... 76 DISCUSSION.......................................................................................................................... 80 FURTHER RESEARCH............................................................................................................. 83

REFERENCES ..................................................................................................................................... 85 APPENDIX A

INTERVIEWEES ............................................................................................... 89

APPENDIX B

ATTENDEES DISCUSSION SESSION ........................................................... 90

APPENDIX C

STRATEGY CANVAS SCORING QUESTIONS ........................................... 91

List of figures, tables and boxes FIGURE 3.1 FIGURE 3.2 FIGURE 3.3 FIGURE 4.1 FIGURE 5.1 FIGURE 5.2 FIGURE 7.1 FIGURE 7.2 FIGURE 7.3 FIGURE 8.2

HOSPITAL LOCATIONS IN THE NETHERLANDS (RIVM, 2007) DIFFERENT DUTCH HOSPITALS OVERVIEW OF INTERNAL HOSPITAL (SERVICE LINE) ACTIVITIES APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS PRESSURE FOR CHANGE IN HOSPITALS (MCKEE & HEALY, 2002, P. 37) STEPS FOLLOWED TO BUILD STRATEGY CANVASES AND FIND DIFFERENTIATING FACTORS HEALTHCARE DELIVERY VALUE CHAIN (PORTER & TEISBERG, 2006) PORTERS FIVE FORCES MODEL BCG MATRIX (JOHNSON ET AL., 1997) APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS

20 21 23 30 37 40 67 69 71 77

TABLE 3.1 HISTORICAL EVOLUTION OF HOSPITALS ADAPTED FROM MCKEE & HEALY (2002).............. 18 TABLE 4.1 PROPOSED ROLES OF THE BUSINESS MODEL .......................................................................... 27 TABLE 6.1 ANALYSIS OF CURRENT IMPLICIT DUTCH HOSPITAL BUSINESS MODELS (ESTABLISHED POLICIES) ....................................................................................................................................... 54 TABLE 6.2 POSSIBLE ROLES OF A DISTRICT GENERAL HOSPITAL (MCKEE & HEALY, 2002, P. 69) ......... 55 TABLE 6.3 STRATEGIC PATHS TO FUTURE CHANGE IN THE ORGANIZATION OF HOSPITAL HEALTHCARE (NVZ VERENIGING VAN ZIEKENHUIZEN, 2000).............................................................................. 56 TABLE 6.4 NEW HOSPITAL ENTERPRISES ONTARIO HOSPITAL ASSOCATION (MACKINNON, 2002) ........ 57 TABLE 6.5 DELIVERY MODELS NHS LONDON (DARZI, 2007)................................................................ 58 BOX 2.1 THE NEED FOR INCLUSIVE WAYS OF FRAMING PROBLEMS ........................................................ 12 BOX 2.2 RESEARCH QUESTIONS ............................................................................................................. 13 BOX 3.1 VALETUDINARIUM ................................................................................................................... 17 BOX 3.2 DUTCH HOSPITAL TYPES .......................................................................................................... 21 BOX 3.3 FUNCTIONS OF AN ACUTE CARE HOSPITAL ............................................................................... 23 BOX 4.1 ABOUT XEROX CORPORATION AND ITS SPIN-OFFS ................................................................... 29 BOX 4.2 ATTRIBUTES OF THE BUSINESS MODEL (CHESBROUGH & ROSENBLOOM, 2002)....................... 29 BOX 4.3 ZERO-SUM COMPETITION ......................................................................................................... 31 BOX 4.4 ATTRIBUTES OF VALUE CREATION IN HEALTHCARE ................................................................. 32 BOX 4.5 STRATEGY AS A MODEL ........................................................................................................... 32 BOX 4.6 COMPLEXITY AND DELIVERING VALUE .................................................................................... 33 BOX 5.1 INTERVIEW GOALS ................................................................................................................... 38 BOX 5.2 INTERVIEW STARTER QUESTIONS ............................................................................................. 39 BOX 5.3 OUTCOMES OF THE FIRST DISCUSSION SESSION ........................................................................ 41 BOX 5.4 GUIDING QUESTIONS DEFINING THE VALUE PROPOSITION ........................................................ 43 BOX 5.5 GUIDING QUESTIONS DEFINING THE MARKET SEGMENT ........................................................... 43 BOX 5.6 GUIDING QUESTIONS DEFINING THE STRATEGIC POSITION........................................................ 43 BOX 5.7 GUIDING QUESTIONS DEFINING THE ORGANIZATIONAL ASPECTS (VALUE CHAIN)..................... 44 BOX 5.8 GUIDING QUESTIONS DEFINING THE COST STRUCTURE AND REVENUE POTENTIAL ................... 44 BOX 5.9 HOSPITAL CONFIGURATION IDEAS FOR THE SECOND DISCUSSION SESSION WORKSHOP ............ 45 BOX 5.10 OUTCOMES OF THE SECOND DISCUSSION SESSION .................................................................. 46 BOX 5.11 MOST IMPORTANT OUTCOMES OF FIELD RESEARCH (INTERVIEWS, DISCUSSIONS) .................. 47 BOX 7.1 BENEFITS OF THE BUSINESS MODEL APPROACH FOR HOSPITAL................................................. 72 BOX 7.2 LIMITATIONS OF THE BUSINESS MODEL APPROACH FOR HOSPITAL ........................................... 73

Rethinking the hospital

Maarten den Braber

Acknowledgements After organizing Orientation Week 2005 I made a very distinct choice to pursue a career path involving people and healthcare, and have not regretted it since. During these past few years I have been able to meet, discuss and work with the most interesting and skillful people I can imagine. I would like to thank my friends and roommates, Joost and Maarten. Thank for your passionate discussions, honest critiques and always being there when I most needed you guys. Don’t know where this would have ended without you! To my other friends Lumine, Koen, Peter, Marieke, Mirte, and Annet: thank you for your humor and kind remarks. You never ceased listening to my ever-changing ideas and concepts about my thesis. I look forward to being able to discuss, talk and laugh with you for a long time to come. Professor Hans Roosendaal I would like thank for his inspiration and showing me insights into strategic management, also for not letting me walk the easy route. And Professor Wouter van Rossum I thank for his comments and shared insights on this thesis. To everyone at The Decision Group, Maarten, Merijn, Roald, Fred, Lydia, Karin and Wendie, thank you for all the expertise, taking ideas to the next level and never holding back on your feedback. Thank you for letting me experience consulting and giving me a seat at the table. I still do not know of any other place that would have done the same! And all the inspiration from the Nexthealth crowd: Martijn, Jen, Jacqueline, Niels and Jeroen. We have already accomplished some mind-blowing things and I am confident it will not end here. A special thanks to Jen, my English-speaking partner in crime and things even beyond Nexthealth. Never forget that the ones that talk about changing the world are often the ones that do! Also a big thank you to all of you who have taken the huge effort in reading, spellchecking and logic testing this document! And last but not least a great thank you to all my family: mom, dad, Marieke and Gerhard. You may have not always got all the details of what I was working on, but you have never ceased to show your interest in what I was doing. Thanks for your everlasting support and love! 1

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To end this acknowledgement…: I am looking ahead to the future, and it is bright. I know of no better words than those of two friends who also made me smile every day writing this thesis. So in the words of Calvin and Hobbes, created by Bill Waterson, I’d like to close by saying: “It’s a magical world…

Maarten den Braber Amsterdam, October 2008

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Executive summar y Running a hospital is a balancing act. Hospital decision makers must balance pressures from the demand-side (demographics, patterns of disease, public expectations), the supply-side (technology and clinical knowledge, health care workforce) and the wider societal level (financial pressures, internationalization, global R&D market). This leaves many of them questioning how to react. We analyze the strategic background and issues of hospitals to better understand what causes this anxiety. As a case example we focus on the situation of the Dutch hospital. Hospitals emerged in the 1st century when they were mainly focused on providing curative, stationary therapy to soldiers of the Roman Empire. Later they evolved into “places where people could die” (by isolating them from the rest of society). Well after that – from the 19th century onwards – hospitals evolved more and more into places where symptom-based, treatment-oriented care was administered. Important in the last two centuries (19th and 20th century) was the development of aseptic and anti-septic techniques, better understanding of infections and the development of effective anesthesia. Overall, the development of the hospital in these two centuries was driven largely by technology. But unfortunately, other roles and service line strategies on the other hand developed with little conscious thought. Where is the hospital today? The link with the environment of the (Dutch) hospital is mostly determined by its “neighboring medical institutions”, such as GPs or other hospitals. There is a structure that determines the position of the hospital based on the complexity of care and level of specialization. We discern 5 types: general hospital, topclinical hospital, academic hospital, specialty hospital and focus clinic. With each of these hospitals there is a different mix of six main functions that the organization provides: patient care, teaching, research, health system support (e.g. management of primary care), employment role and societal role (e.g. provider of social care). Analysis shows relatively large similarities between current hospital configurations. What about strategic change? Hospitals have a long history of reactive behavior towards change (coinciding with their overall organic, rather than proactive change). Hospital reform in The Netherlands has been, especially from the 1980s, a struggle between government, hospital management and medical specialists. Attempts to implement new fee structures and fee cuts therefore never proved effective. In this research we establish what possibilities for change there are according to current decision-makers. We have conducted semi-structured interviews with 11 field experts 3

Rethinking the hospital

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(chairmen and members of hospital boards of directors). The main question of the interview was: “Will future hospitals be different and where/how will they differ?” The interviews were structured based on themes of the business model: what will be the (future) value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential. This structure provided us with a framework to categorize the different questions as well as the outcomes to later identify the applicability of the business model framework as a relevant theory to build current and future hospital strategy. The outcomes of the interviews are two-fold. On the one side it shows us that the themes of the business model structure give a comprehensive view of current and future hospital strategy and are relevant themes to hospital decision makers. On the other side the interviews express anxiety of hospital decision-makers how change could be structured and/or accomplished. Few of the interviewees expressed that they were confident about how they could structure change in their own organization. These concerns added to the fact that it is useful to focus on tools, such as business model theory, that hospitals can use to build strategy. Tools can be considered the opposite of pre-defined solutions (which are proposed by many consultants or advisory bodies). Pre-defined solutions often look interesting and thought-provoking, but they give no pointers on how to realize and implement the proposed changes. Also pre-defined solutions are exclusive: they only address a fixed number of solutions. Decision-makers identified this as a major short-coming of such models, because such solutions therefore never align with organization characteristics. Another problem with pre-defined solutions is that they tend to focus on providing value for the organization rather than the customer (patient). The solution to building sustainable future hospital configurations is not in focusing on a single. Sustainable future hospital strategy will have to balance views that provide value for the consumer with views that provide value for the organization. To do so they need to provide a coherent and sound logic. This is why we focus on the business model: a comprehensive strategy building tool using a model (template) approach with value at its core. We have been able to identify four distinct uses of the business model as defined in literature: strategic choice, linking different strategic domains, focus on value creation and focus on value appropriation.

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The business model is an approach that balances the inside-out views of strategy (based on the resources an organizations has) with the outside-in views of strategy (what the competition offers and customers demand). The uses “strategic choice” and “linking different strategic domains” shows the comprehensiveness of the business model. It does not focus on one specific strategic domain (e.g. the value chain), but on providing a sound business logic that connects different domains. Using the business model to focus on both value creation and value appropriation makes sure that what is asked for can be delivered, and what can be delivered is what is really for. Using a model approach to strategy, such as the business model, gives structure to be able to answer complex questions. This is useful to hospital decision makers that have since long had an organic approach to strategy. By using a structured approach it also enables decision makers to be better knowledgeable about sources of success and failure in the past, present and future – which is something that often lacks in organizations like hospitals that have little experience with explicit strategy making. The business model used in this research is based on that of Chesbrough & Rosenbloom (2002). This theory is operationalized well, compared to other definitions available in literature. See the figure below for a graphical overview.

Business model Customer preferences

Value proposition

Market segment

Strategic position

value creation

Value chain

implementation

Competitive strategy

Cost / revenue

Value delivered

value appropriation

The business model consists of six different elements linked in sequential order: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure / revenue potential. At the start of the model customer preferences drive the value proposition and the result is value delivered. The notion of value is at the core of the business model: value as input and value as output. This is important to solve current problems in healthcare. The current problem in healthcare is aptly described by Porter & Teisberg (2006) as zero-sum competition: no value is created, competition is about shifting costs, increasing bargaining power and competition to capture patients. Escaping this zero-sum competition can be done through a value-based strategy. Value for hospitals is defined by three dimensions: it must be viewed from the customer perspective, it must span the complete process and be delivered through a sustainable process. 5

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To research the value of the business model approach to strategy we asked hospital decision makers for their strategic issues. See the list below for the ten most apparent issues found. Using these issues we have tested the business model approach in how it can help solve these issues. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Providing specialized medical care is considered core business Strategic decisions are often supply-driven Scale and scope are considered most important axes for change Current governance structure complicates decision-making Relationship with the patient is considered of growing importance Financial structures difficult to match with strategic initiatives Hospitals show large similarities in strategic structures/configuration Patients are not always considered end-users Regulated competition is not fully functioning yet Strategy development is replacing established policies

In addition to the strategic issues found through field research, we have also analyzed four different sources in literature about hospital strategies (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000). From the analysis of the literature we conclude that hospital strategy literature focuses on pre-defined solutions, rather than on techniques and tools to build strategy. The focus is often on value realization (through strategic positioning or value chain optimization), but less on questions about what value should be realized (value proposition) or how value is appropriated (cost structure / revenue potential). The reasoning with hospital strategy in literature is often inside-out: strategy is built based on the resources the hospital has, rather than the value it should provide. The value of the business model in this aspect is the fact that it balances an inside-out with an outside-in view on building strategy. The elements of the business model (value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential) together build comprehensive, concise business logic of the organization. Each of the individual elements can provide (different) value for the hospital in tackling their strategic issues. Defining a value proposition requires the hospital to think about its stakeholders and its end-customers. The value proposition is not only about products and services but about core functions: is the hospital focused on curing sick people or keeping people healthy? The market segment follows the value proposition and focuses on segmenting potential customers in quantifiable groups and specifying targets for what customers to reach when. Current hospitals are showing only little segmentation in their customer focus. 6

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The link with the environment is the third element of the business model (strategic position) and oriented towards how to create the relevant value. It puts the attention of the hospital on issues of organizational structure, such as (de)centralization, in/outsourcing, transaction/coordination costs and addressing issues of governance. The relevance of determining the strategic position is that is makes clear what the borders of the organization are: where does it start and where does it end. These organizational borders are needed to further explicate the value chain of the hospital: what does the hospital do itself and where and how does it add value? In each step of the value chain the hospital takes, value is exchanged, which must be relevant to the value proposition. The following element, competitive strategy, is relevant for hospitals to offer sustainability and not be overtaken by competitors. Competitors might not be limited to the “usual suspects” of other healthcare organizations, but might come from other industries as well. Therefore also reconsidering the focus on medicaltechnical quality as a single competitive dimension is relevant. The cost structure and revenue potential of the business model shift focus towards the fact that no organization is sustainable if no revenue is generated. The hospital needs to build a comprehensive service portfolio balancing cost as well as revenue-generating activities. Considering what customers are willing to pay for (exchange value) can help in identifying new revenue streams that go beyond the current mechanism of paying for procedures. Through field research, literature research and assessing the model elements we have reached the point to draw the conclusions about the value of the business model approach as a whole, our main question for this research. We do this by evaluating the business model based on three criteria to evaluate strategic options: suitability, feasibility and acceptability. Suitability is concerned with the questions whether an option fits the firm’s situation and if there is evidence to support it. The business model helps to answer seemingly complex issues by using a model approach to strategy, putting hospital decision makers in control of their own strategic decisions, rather than providing ill-aligned pre-defined solutions. The business model solves the issue of causal ambiguity by making decision-makers aware of the (needed) logic behind strategic scenarios. It enables decision makers to expand the scope of their strategy beyond medical care as their core business and focus on value as defined by customers. Strategic issues (scale/scope, governance, competition, financial incentives) all get a place within the elements of the business model to be adequately addressed as part of the comprehensive approach connecting all the domains. 7

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And not only can the business model be used to test current strategies, it is also usable to test new scenarios for hospitals looking at how to gain competitive advantage in the future. Feasibility is concerned with the question whether there are resources to do it and likely competitor response. The business model is no easy solution to implement for hospitals that have long followed established policies, rather than explicit strategy development. Rigor and discipline is needed to determine what sound business logic is. But hospitals also do not have to (re)invent the wheel. We have shown with each step in the business model that there are methods, tools and techniques that help the hospital assessing and connecting the different strategic domains. When the hospital connects these tools and techniques through the comprehensive business model it can evaluate the business logic of the current strategy as well as test future scenarios. But building a business model needs also a strategic mindset throughout the organization. When not everyone inside of the organization is knowledgeable about what the ultimate value delivered should be, it will be hard the least to deliver this, even if there is a sound logic in theory. The acceptability of using the business model is closely linked to willingness of the hospital to rethink the organization. If there is no perceived need for change with the decision-makers, there will likely be little interest in any value-based strategy (building tool) at all. If the hospital is aware of the fact that delivering value in a sustainable way is of increasing importance they will be more likely to accept the business model. During our field research we have found many examples of the fact that hospitals do perceive the need for change as well as the need for inclusive ways of framing seemingly complex problems. The business model is a likely candidate for this as we have been able to proof in this research. The business model contributes to the efforts of hospital decision makers interested in providing value to their customers and their organization: it provides them with a tool rather than a pre-defined solution. The model approach of the business model makes the hospital (decision maker) smarter and allows for a clear strategic fit with the organization. Using business models hospitals can focus on delivering value for the consumer as well as for the organization.

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“Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where…” said Alice. “Then it doesn’t matter which way you go,” said the Cat. -- LEWIS CARROLL, Alice in Wonderland

1

Introduction: Making the right choices

Hospitals and other healthcare organizations are working their hardest to deliver optimal care in cost-efficient ways. Examples are many and include finding optimal planning algorithms, patient satisfaction surveys or building new clinical paths, such as mammacare service lines for focused breast cancer screening and treatment. The tension between these two objectives is challenging for decision-makers to manage. Choices ultimately have to satisfy the preferences of the patient (optimal care, outstanding communication and collaboration or information transparency, just to name a few). At the same time organizational issues have to be addressed in order to deliver products in services in a sustainable way (cost-effective, evidence-based, state-of-the art, etcetera). How than can the hospital make the right choices to balance the interest of the patient/customer as well as the organization? Process optimization, total quality management or medical-technical innovations are some of the efforts organizations in healthcare are making to deliver the best care possible to patient/customers. Analyzing different parts of the hospital process and looking at the many new initiatives in healthcare, the question comes up: what value does the hospital provide? Is the current hospital the best way to deliver value to the patient/customer? In other words: do we still know why the hospital should actually exist? Hospitals have a long history of responsive organic changes, rather than a history of predictive explicit changes (explored further elsewhere in this research). But current pressures demand organizations cultivate an awareness of the value they deliver: what, why, how and when. But answering these questions is not a challenge just for hospitals, it is a challenge for all that deal with balancing customer and organizational preference. Therefore we take a premise in this research that best practices from other domains such as business can be used to help hospitals address this issue.

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Business strategy is the scientific domain focusing on making choices. “What?”, “when?”, “how?” and “who?” are four questions for any organization to answer about their business. Hospitals can benefit from a comprehensive and structured approach to help them answer these strategic questions and make the right choices: balancing patient/customer and organizational preferences. This research is about what is available for hospitals to use and focuses in-depth on the approach of the business model.

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“Research is to see what everybody else has seen, and to think what nobody else has thought.” -- ALBERT SZENT-GYORGI, Nobel Price for Medicine 1937

2

Research background

Helping hospitals make the right choices can be as easy as trying to point out the direction to go. But who follows such a suggestion without knowing if it is the right one for his organization? And how would you know that it is the right solution? There is definitely value in visionary answers and possible routes to take: they are often thought-provoking, good start for a discussion and may be close to the actual best route possible. But there is additional value in asking good questions: it is 100% focused on the specifics of the organization, it calls for a sound logic to connect the dots and it can be repeated if situations change. We show an overview of current approaches to new hospitals strategies and configurations in 2.1. Following that we will explain that we chose the business model as the research object of this master thesis and why the business model adds to the current research domain (2.2). To guide the research we pose a set of research questions (2.3) and list the research methods (2.4). The context of this research is exploratory (2.5 and 2.6).

2.1 Position of this research What hospitals might look like in the (near) future is becoming an increasingly popular field of research. Not surprisingly maybe, consultants are amongst the most avid publishers of change in healthcare, issuing (trend) reports about future configurations of hospital and other healthcare organizations (PriceWaterhouseCoopers, 2005; Roland Berger, 2007; Vreeman & Laeven, 2008). Often these reports are trying to give insight into several exclusive paths that healthcare organizations within a certain field (e.g. hospitals, nursing homes, primary care) can possibly take. Not only consultancy firms are publishing about paths for the future, also policy makers, associations and other noncommercial parties are doing so (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000). How can hospitals go about incorporating these possibly innovative ideas into their own organizations? When we look at the academic literature for references to “recipes” rather than predefined solutions we find some literature that point to different elements: blending 11

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custom and standard care (Bohmer, 2005), analysis of integrated delivery networks (Burns & Pauly, 2002), transformation processes (Golden, 2006) or an analysis of configurations (Reeves, Duncan, & Ginter, 2003). Most of the publications found have two things in common: (1) most of them focus on an analysis of the present-day situation and (2) they often focus on one specific issue. Our goal is to look for ways or tools that can help hospitals find new inclusive ways of innovating strategies, rather than only giving pre-defined solutions (Box 2.1). Box 2.1 The need for inclusive ways of framing problems

“We live an extremely complex, pluralistic society where it is increasingly difficult to achieve consensus. In the effort to deal with the complexity, we often oversimplify by posing "solutions" in either-or terms. We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.”

(Shortell et al., 2000)

2.2 Focusing on the business model This research focuses on a comprehensive method for innovating hospital strategy: the business model. A business model explains how different elements of a business are tied together to embody coherent and comprehensive business logic. It does so by combining a perspective from both the organization (e.g. how can we sustain?) and customer (e.g. do I get what I want?). The business model may differ from the focus of strategy in at least three important ways: (1) it focuses on creating value for the customer, (2) it focuses more on creation of value for the business than for the shareholder and (3) it assumes knowledge is cognitively limited and biased by earlier success of the firm (Henry Chesbrough & Richard S. Rosenbloom, 2002, p. 535). The attributes of the business model mentioned in the previous paragraph can be beneficial for hospitals: combining customer value creation with creating value for the business. Non-profit businesses, as viewed from a strategic standpoint, can benefit from the same tools and discipline as used by for-profit businesses (Collins, 2005). The question of what the value of the business model is for (non-profit) healthcare organizations will be at the center of this research. We focus on one specific type of healthcare organization: the hospital. Using the hospital makes it possible to relate to real-world examples and test validity through example. Further research may extend this research to healthcare organizations other than the hospital.

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We analyze the use of business models as a way to rethink the hospital. We acknowledge therefore that this approach might mean changing our ideas about what defines a “hospital”. We assume that the strategic definition of a hospital is not written in stone, instead can be a myriad of different things. Today’s healthcare organizations, particularly ‘one stop shops’ like hospitals, must have a fluid, adaptable approach to strategy development. We test this one approach, the business model, to be able to judge at the end of this research the potential value for reexamining non-profit hospitals strategic positioning using traditional business models.

2.3 Research questions “What is the value of business model theory for hospitals?” is the main research question for this research. We follow this by breaking down this research in six different sub-questions in Box 2.2. Box 2.2 Research questions

What is the value of the business model theory for hospitals? 1. 2. 3. 4. 5.

What is the strategic environment of hospitals? What defines a business model? What is value? What indicates a need for the approach of business model theory for hospitals? What value does business model theory add for hospitals, compared to existing literature and methods already available? 6. What are the benefits and limitations of the business model elements and approach for hospitals?

To be able to asses the value of the business model we need to understand in what realm we are testing value. We choose hospitals as the one type of healthcare organization to be the case example for using the business model in the wider realm of healthcare organizations. The Dutch hospital situation is known to the author and useful to show the relevance of the business model by example. The second research theme is the subject of our research question: value. Starting to define value immediately raises a plethora of additional questions: value for whom, which type of value, when is value delivered? We define value in the second part of this research to know what we link to the business model in the third part of this research. The strategic environment of hospitals and the definition of value are linked to the business model in the subsequent part. The three sub questions concerning the business model are: 13

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1. What are the theoretic elements of the business model? 2. What value do business model elements deliver in building hospital strategy? 3. What are the uses of the business model for current hospital makers?

2.4 Research method For this research we use both literature and field research. Literature offers us many views and theories of what business models can offer. We test how these different views of the business model might apply to hospitals. We gain information about the current and future strategic issues of hospitals and healthcare in The Netherlands from interviews and two discussions sessions with relevant decision makers. Eleven interviews were conducted, mainly with Board of Directors chairmen and members (general hospital 2, top-clinical hospital 4, academic hospital centers 3, specialist hospitals 2) and 1 healthcare entrepreneur. A complete list with names and functions of the interviewees is found in Appendix A. The discussion sessions were attended by a total of 33 people, representatives of hospital or healthcare delivery organizations, (specialist) associations, hospital-related government organizations and facilitating organizations. A complete list with names and functions can be found in Appendix B. The interviews and groups discussions were held in private settings. This allowed the interviewees and attendees to speak freely and allowed for more room to express strategic issues or concerns. The outcomes of these interviews and discussions are summarized in chapter 5, where the strategic issues for the hospital in building strategy are discussed. In the tables below (2.1 – 2.3) we listed the attendees for the interviews and the first and second

2.5 Exploratory research This research offers an explorative view on a combination of two otherwise often disjunctive concepts: business (models) and healthcare. Because of the exploratory nature of this research we have chosen a qualitative approach. When searching for available literature on conducting sound academic research in a non-quantitative ways, we utilize the theories of Popper (1935), later adapted by Kuhn (1962) and Lakatos (1970). They can guide us through this explorative research. Popper introduced the theory of falsification: while there is no one definitive way to prove a single statement or theory, we can falsify it if we find a proper counter-example

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(all swans are white – until we find a black one). Kuhn identified that in practice this isn’t the case with most scholars. Many hang on to their theory, dismissing any counterevidence, stating it is unsound or not true, rather than admitting their theory may be wrong. Explorative research such as this might lead others to state that the business model theory is not applicable to hospitals and other healthcare organizations. We take the stand in this research that this is not the case, until we have found a counterexample (evidence which shows that business model theory does not apply to hospitals) Lakatos, another scholar of research philosophy, offered an alteration to the theories of Kuhn and Popper. He didn’t view a theory as a single statement, but rather as a collection of statement, he called a research program. The research program is made up of a hard core and different auxiliary hypothesis. With business models we can mirror this: the hard core is the fact that strategy can captured in a model, while the auxiliary hypotheses can be seen as the different themes and elements residing under that model, which might need to be changed at a later stage. This is than without dismissing the fact that strategy can be viewed as a model (see for a more detailed explanation section 4.4). Changing these auxiliary hypotheses can explain apparent refutations and possibly also produce new facts. Lakatos named such a rule a positive heuristic. If changing the auxiliary hypotheses does not yield the prediction of new facts then it would be labeled degenerative. A progressive research program, with a positive heuristic, is interesting for scholars to research further, because it produces new facts and can explain apparent refutations. We look into if the theory of business model to research if it provides such a positive heuristic.

2.6 Research context This research is the master thesis project of the author, enrolled in the master track Health Care Technology and Management (HCTM). HCTM is a specialization track of the master Industrial Engineering and Management (IEM), taught at the School of Management and Governance at the University of Twente (Enschede, The Netherlands). This research was supervised by Prof. Dr. Hans Roosendaal (Professor of Strategic Management at the Dutch Institute for Knowledge Intensive Entrepreneurship NIKOS) and co-supervised by Prof. Dr. Wouter van Rossum (Professor of Innovation Management and director of the Institute of Governance Studies - IGS). Both NIKOS and IGS are directly linked to the University of Twente. The day-to-day research has taken place at The Decision Group (Breukelen, The Netherlands), where the author has been employed full-time from October 2007 to June 2008 as a business analyst. The Decision Group is a strategy consulting firm with more

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than half of its client base in the health care and life-sciences sectors. Supervision at the Decision Group was performed by Drs. Merijn Stouten (consultant) from October 2007 to April 2008 and by Ir. Maarten Koomans (partner) from May 2008 to June 2008. Data for this research was gathered from the study “Changing Roles and Configurations of Hospitals,” executed as a joint-venture by Nyenrode Business Universiteit (Breukelen, The Netherlands), The Decision Group and Assist BV. Supervision of the study is by Prof. Dr. Fred van Eenennaam (Professor of Dynamics of Strategy at Nyenrode Business University and partner at The Decision Group). The author has been a member of the research project group for the full duration of the project.

2.7 Conclusion This research focuses on devising whether the business model approach applies to healthcare and is able to ask the right questions instead of giving pre-determined routes of change. The main reasons why this research is different from currently available research is that focus on inclusiveness (“asking questions”) rather than exclusiveness (“giving answers”). The goal is to provide decision-makers with tools which can be tailored to our specific situation and repeated to strengthen our own decision-making. The research object is the theory of the business model and the according research question is: “What is the value of the business model?” The themes of this research are three: the hospital, the business model and value. There are six guiding questions used throughout this research: 1. 2. 3. 4. 5.

What is the strategic environment of Dutch hospitals? What defines a business model? What is value? What indicates a need for the approach of business model theory for hospitals? What value does business model theory add for hospitals, compared to existing literature and methods already available? 6. What are the benefits and limitations of the business model elements and approach for hospitals? Our research is exploratory in nature and we use qualitative research methods (interviews, discussions sessions) which give more insight in the relevance of the business model theory we are researching. We state that the business model can be used as a model to build strategy for hospitals. The contents of this business model we will have to test in this research.

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“A hospital is no place to be sick.” -- SAMUEL GOLDWIN, Hollywood producer

3

Strategic environment of Dutch hospitals

The business model is part of the domain of tools at our disposal to build strategy. Strategy as we will discuss in more detail in the next chapter evolves around questions of what, where, how and when products and services are delivered1 . If we want to be able to analyze further the value of the business model, we need to know more about in what context it is applied. This context is the strategic environment of the hospital: its positions in the landscape of healthcare organizations and its functions and activities. To be able to place this research in a broader context that also shows why any approach to building strategy is relevant, we show the evolutionary stages of the hospital.

3.1 Evolution of the hospital There is no single definition of “the” hospital. The first notions of what may be considered the emerging of a hospital can be traced back to the Asclepius temple, 300 B.C. (NAi, 2006; Wikipedia contributors, 2008a) and the Roman valetudinarium, see Box 3.1. Box 3.1 Valetudinarium

“The hospital as institution was invented about 2 000 years ago, in the era of emperor Augustus (63 B.C. to 14 A.D.). It emerged in the context of the transformation of the Roman army from mobile troops to an army of occupation. Roman officers created a new type of building, the valetudinarium (military hospital) which was integrated within large permanent headquarters. Hence any service a patient might have required – from an operating theatre to a sickroom – was available under one roof […] As opposed to medieval hospitals which devotedly supplied health care for the poor, the weak and the sick, Roman hospitals were exclusively organized with the aim of providing curative, stationary therapy and simultaneously furthering the education of physicians and nursing staff”

(Wilmanns, 2003)

1

The questions of what, where, how and when are not defined as one distinct strategic theory but are apparent in many strategic theories and related literature. We use them in this research as guiding questions that help us easily identify what strategy is about in its core (Mintzberg, Ahlstrand, & Lampel, 1998; H.E. Roosendaal, 2006)

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Table 3.1 gives an overview of the historical evolution of hospitals as well as their changing role in current society. Table 3.1 Historical evolution of hospitals adapted from McKee & Healy (2002)

Role of hospital

Time

Characteristics

Curative, stationary therapy

1st to 5th century

Focused on soldiers

Practicing medicine as science

7th century

Byzantine Empire, Greek and Arab theories of disease

Nursing, spiritual care

10th to 17th centuries

Hospitals attached to religious foundations

Isolation of infectious patients

11th century

Nursing of infectious diseases such as leprosy

Health care for poor people

17th century

Philanthropic and state institutions

Medical care

Late 19th century

Medical care and surgery; high mortality

Surgical centers

Early 20th century

Technological transformation of hospitals; entry of middle-class patients; expansion of outpatient departments

Hospital-centered health systems

1950s

Large hospitals; temples of technology

District general hospital

1970s

Rise of district general hospital; local, secondary and tertiary hospitals

Acute care hospital

1990s

Active short-stay care

Ambulatory surgery centers

1990s

Expansion of day admissions; expansion of minimally invasive surgery

Clinical pathways

2000s

Focusing not only on medical treatment, but on control of the complete path of care given.

Online and offline personalized health related services

Next

Providing information, advice and treatment in personalized service concepts both online and offline

(McCabe Gorman & den Braber, 2008) Starting out as military institutions, the first hospitals grew out of care made available through those realizing the Christian ideal of providing relief for the sick and poor. Together with this function came also the ‘added benefit’ of isolating those with infectious diseases from the rest of society. With the rise of industrialization, urbanization expanded (19th century) and the state stepped in, alongside religious and

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philanthropic institutions, forming public hospitals. Admission was no longer based so much on social status, but rather on medical criteria. The 19th century also saw the rise of symptom-based, treatment-oriented medical care: infection was better understood, aseptic and anti-septic techniques developed, effective anesthesia became available etcetera. Together with greater surgical knowledge and an increase in medical technology, these developments gave rise to the model of health care delivery we now see in most Western countries. In the 20th century military surgery had a profound impact on hospitals, introducing advances including: safe blood transfusion, penicillin, and surgeons trained in trauma techniques. Chemical engineering meant an increase in the diseases that could be treated. This broadened the scope of hospitals, but also medical technology got more expensive and complex. In the second half of the 20th century medical technology increased even further, especially the field of medical imaging and diagnostics. All these improved technologies also mean an increased burden on the health care system - people that would otherwise have died can now be kept alive much longer, especially with the now common use of life support technologies in industrialized nations such as the United States. This quick 2 overview shows that the evolution of hospitals is organic. In the last two centuries the configuration of hospitals was driven largely by technology, and other roles and service line strategies developed with little conscious thought (Edwards, Wyatt, & McKee, 2004).

3.2 Position of the hospital in the healthcare delivery system The Dutch healthcare delivery system consists of three separate modalities: public health services, primary care and secondary/tertiary care 3 . Primary healthcare is provided by family physicians, district nurses, home care givers, midwives, physiotherapists, social workers, dentists and pharmacists. Each patient is supposed to be on a GP patient list and must be referred to specialist physicians or the hospital by the family physician. Secondary and tertiary care in hospitals is largely provided in private not-for-profit institutions.

2

Much more can be said on the background and evolution of hospitals. The scope of this research does not provide sufficient space for an in-depth review of all developments. For those interested in such a review, we recommend reading the second chapter (The evolution of hospital systems) of ‘Hospitals in a changing Europe’ (McKee & Healy, 2002). 3 The division of care delivery in three separate modalities can be argued: the distinction between secondary and tertiary care is not always clear: e.g. psychiatric care is part of hospital care (secondary) as well as considered tertiary care (independent psychiatric hospitals). It is important to make a distinction between primary and ‘further’ care because of the referral system used in The Netherlands.

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The family physician (GP) is the gatekeeper of the healthcare system in The Netherlands. The gate keeping principle is one of the main characteristics of the system. It denotes that patients do not have free access to specialists or hospital care, but must go “through” the GP. Family physicians “specialize” in common and minor diseases, in care for patients with chronic illnesses and in addressing the psychosocial problems related to these complaints. Complicated non-comprehensive (and expensive) specialist care is reserved for patients who require special expertise and highly technical skills (European Observatory on Health Systems and Policies, 2004, p. 63). “In the Dutch system, family physicians do not have hospital privileges: they cannot admit their patients to, nor treat them in, the hospital. They may, however, use the hospital for diagnostic procedures, such as blood tests, X-rays, endoscopies and lung tests. Although some family physicians visit their hospital patients, this is not common in practice. This illustrates one of the disadvantages of the existing health care system: a gap between outpatient and hospital care.” (European Observatory on Health Systems and Policies, 2004, p. 69)

3.3 Hospital landscape Currently there are 93 non-academic and 8 academic hospital organizations in the Netherlands providing specialized medical care combined with (overnight admissions) stay, comprising 141 hospital locations and 45 outpatient clinics (see Figure 3.1). Figure 3.1 Hospital locations in The Netherlands (RIVM, 2007)

Current Dutch hospitals are defined as ‘institutes delivering specialized medical care including stay’ (RIVM, 2007). In Dutch law all hospitals are known as institutes for specialized medical care. This same name is given to independent/focus clinics. The

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difference between those clinics and other institutes for specialized medical care is that only hospitals are allowed to offer stay, or overnight admissions. The three main functions of Dutch hospitals are patient care, education and research (Ministerie van Volksgezondheid, Welzijn en Sport, 2006; STZ, 2006). Through analysis of available publications and views expressed by different stakeholders of hospitals a categorization of hospitals in five distinct types emerges: general, top-clinical, academic, and specialty hospitals and the focus clinic, see Box 3.2. Box 3.2 Dutch hospital types

!

General hospital : regional focus, wide range of treatments

!

Top-clinical hospital: regional focus, wide range of treatments, offering teaching facilities and some highly specialized medical treatments

!

Academic hospital: national focus, focusing on complex treatments, offering teaching and research facilities

!

Specialty hospital: national focus, focusing on a single treatment category (e.g. oncology or rehabilitation), may offer teaching and research facilities

! Focus clinic: national focus, specializing in a single type of treatment or medical condition, does not offer teaching and research facilities

The differences between the hospitals (as defined by the interviewees and discussion participants themselves) are based on differences in complexity and specialization of patient care. Detailing the different types of hospitals based on these two axes yields the figure displayed in Figure 3.2.

Complexity of care

Figure 3.2 Different Dutch hospitals

Academic hospital Specialty hospital

Focus clinic General hospital

Top- clinical hospital (STZ)

Specialization

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Dutch hospitals and other institutions for specialized medical care are not permitted to be organized around a for-profit classification. Most other healthcare organizations, including general practitioners, dental care or paramedic care providers are allowed to be for-profit organizations. An important distinction between for-profit and not for-profit organizations is the component of overnight admission. When offered care is inpatient (including overnight admission), organizations are not allowed to be for-profit. Establishing a (new) health care institution in The Netherlands is regulated by means of the Health Care Establishments Licensing Act (Wet Toelating Zorginstellingen). An application has to be submitted to the Netherlands Board for Health Care Institutions (Bouwcollege) who tests the application on the four different themes: transparency of management, continuity, quality and that accumulated equity is kept for health care purposes. This test is compulsory for institutions such as hospitals and care, but not for maternity care, dental care and GPs (Ministerie van Volksgezondheid, Welzijn en Sport, 2007b). Medical treatments in the Dutch system are reimbursed based on diagnosis treatment combinations (DBC), somewhat similar to the American system which uses Centers for Medicare and Medicaid Services (CMS) diagnosis related group (DRG) nomenclature. This implies a ‘package of care activities’ with a single price for a complete diagnose and related treatment. Currently these are divided into two segments. The B-segment entails 20% of all treatments, most of them low in terms complexity (such as cataract surgery or hip replacement). Prices may be negotiated between the hospital and the insurer. For the other 80% (A-segment) prices are not negotiable (set by the government).

3.4 Hospital functions and activities The current hospital is a virtual organization: it often presents itself as a monolithic, singular, homogeneous entity to the outside world, but on the inside it is a network of different entities, working together in different ways at different stages of the process. An acute care hospital delivers six functions (McKee & Healy, 2002, p. 79) listed in Box 3.3.

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Box 3.3 Functions of an acute care hospital

Patient care Inpatient, outpatient and day patient; emergency and elective; rehabilitation Teaching Vocational; undergraduate; postgraduate; continuing Research Basic research; clinical research; health services research; educational research Health system support Source for referrals; professional leadership; base for outreach activities; management of primary care Employment Inside: Health professionals; Other healthcare workers; Outside: suppliers; transport services Societal State legitimacy; political symbol; provider of social care; base for medical power; civic pride

The first three functions in the previous box (patient care, teaching and research) directly translate to service line activities inside the hospital, see Figure 3.3. Service line activities inside the hospitals are often grouped around a specific medical field (e.g. surgery) rather than a specific condition. There is a shift towards organizing around clinical pathways and diseases (e.g. diabetes, COPD, heart failure). This shift is an important shift towards focusing more on the customer. See Figure 3.3 for an overview of internal hospital (service line) activities. Figure 3.3 Overview of internal hospital (service line) activities Research Teaching Patient care

Internal

Operating

-

-

Internal medicine Endocrinology Hematology Gastroenterology Oncology Kidney diseases Pulmonology Outpatient care Rheumatology

Neurosensing

Cardiology Physiotherapy Surgery Obstetrics / gynaecology Orthopedics Plastic surgery Emergency medicine Thorax surgery Urology

-

Dermatology Pediatrics Geriatrics Otolaryngology (ENT) Ophthalmology (eye care) Oral / dental surgery Neurosurgery Neurology Neurophysiology Psychiatrics

Biomedical

Supporting

-

-

Anatomy Biochemistry Cell biology Epidemics and statistics Pharmacology/ toxicology Medical- and biophysics

Extramural -

GP care Social medicine Nursing home care

Diagnostics

Medical facilities

-

-

MRI CT Ultrasound Bucky Blood sampling Endoscopy

Anesthesiology Intensive care Operating theatres Nursing ward Sterilization Admission desk

-

Integrated care

Allergy/asthma/immunology Transplantation immunology

-

Hematology laboratory Chemical endocrinology Clinical chemistry Clinical pharmacy Medical microbiology Nuclear medicine Pathology Radiology Radiotherapy

Diabetes care Heart failure clinic General Practitioner IVF treatment Prenatal diagnostics Mamma-care Neonatology Psychiatric ward (PAAZ) Emergency Care Stroke Unit

Personal services Maternity ward Pharmacy Plaster room Transport Transfer point Blood transfusion

-

Diabetes nurse Dieticians Medical social work Mediator Religious support Speech therapy

Management

Non-medical facilities

Commercial activities

-

-

-

Board of Directors Supervisory board Medical staff Working council

Personnel en organization Facility management ICT Finance and control

23

Advisory services Independent clinic Facility services Lifestyle advice

-Travel agency -Library -Gift shop -Swimming pool -Postal office

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3.5 Dutch hospital reform: a short history We have looked at the current-day strategic environment of Dutch hospitals. Certain current-day practices, such as governance issues arise from the long and sometimes difficult path of health reform in The Netherlands. To provide context on that we provide a short background on the Dutch hospital reform. A chronology of main events in Dutch health policies 1941-2003 lists “many radical changes that have been realized within a relatively short period of time” (European Observatory on Health Systems and Policies, 2004, p. 120). In the last decades there has been an increasing focus to increase competitiveness: regulated competition. This is not similar to a free healthcare market. Although government does not directly control volume, prices and productive capacity, they create necessary conditions to prevent the undesired effect of a free market (such as “cream skimming” or “cherry picking”). Besides certain negative effects, there most certainly are also positive results to report. “As a result of only discussing a more market-oriented health care system, a huge increase in activities concerning quality improvement and quality assurance was observed during the early 1990s. Probably the main driving force for all of these quality-improving activities was the idea that quality of care will be a major issue in a competitive health care system.” (European Observatory on Health Systems and Policies, 2004, p. 124) During the 1980s and 1990s the relationship between specialists, health insurers and government often was under pressure. Attempts to implement new fee structures and fee cuts never proved effective: “The introduction of a fixed total budget for specialist care in 1988 was a disaster from a cost-control perspective. During the period 1980 to 1989, aggregate nominal expenditures for specialist care grew by an average of 2.6% per year. This average rose to 6.3% for the period 1990 to 1992, when it should have been nil. Budget overruns set the stage for intense conflict, because the Minister of Health used retrospective fee cuts to compensate for overruns of previous years.” (Maarse, Mur-Veenman, & Spreeuwenberg, 1997). Another example is the fact that until 1992 sickness funds had the legal obligation to enter into a uniform contract with each physician established in their working area, instead of having the option to selectively contract with physicians (European Observatory on Health Systems and Policies, 2004). The Biesheuvel committee in 1994 stated that there was a need for fundamental reconsideration of the position of medical specialists. Their advice was to introduce management participation of specialists to also let them part of the responsibility for effective cost-control. The commission also recommended integration of the specialist’s revenues into the hospital budget to underscore the position of the hospital as an integrated healthcare delivery institution. Cautiously, to bypass opposition of the 24

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National Association of Medical Specialist, the Minister of Health started with a small number of experiments in that direction. “Preliminary evaluation of the experiments suggests that the financing of specialists within budgets is a complicated matter with direct repercussions on professional behavior” (Maarse et al., 1997). One of the difficulties in the current healthcare system is the unique position of medical specialists: there are few substitutes or competitors. One of the reasons for this is the underinvestment in human resources (training and education of medical specialists) in The Netherlands (European Observatory on Health Systems and Policies, 2004, p. 134). For a market oriented approach of healthcare there is a need for approximately 5% overcapacity, but the Dutch government has not committed itself to this task. As long as this is so, a demand-driven system in healthcare will remain illusive (Raad voor de Volksgezondheid & Zorg, 2003, p. 138)

3.6 Conclusion Hospitals have a long history of reactive growth and development. Proactive strategy development and subsequent decisions about products and services to deliver have therefore not for long been part of hospital decision making. Rather hospitals would follow established polices by “doing what they had been doing for long time.” The current position of the Dutch hospital in the Dutch healthcare system is well established as an institution that “follows right behind” the gate keeping function of the GP: if the GP is not able to “solve the problem” a patient is referred to the hospital. Hospitals between them have a role division of general, top-clinical, academic and specialist roles with the addition of private clinics as highly specialized institutions but with another access pattern (direct instead of through gate-keepers). The functions and activities of the hospital can be divided in six different types: patient care, teaching, research, health system support, employment and societal. All in all Dutch hospitals have a well established and rather clear position. There tends to be an increase in focusing on customer needs by providing specific services to specific patient/customer groups. However, this shift tends to mainly exist within the current boundaries and structures and is not accompanied by any major change in how the hospital delivers its services and goods overall.

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“Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime” -- CHINESE PROVERB

4

Business model theor y

Business model is a comprehensive approach to building strategy. It is a “conceptual tool that contains a set of elements and their relationships and allows expression of the business logic of a specific firm” (Osterwalder, Pigneur, & Tucci, 2005). We can use a business model as a tool to build strategy balancing both the internal, organizational views as well as the external, patient/consumer views. This sets the business model apart from other approaches at strategy which focus one side or the other. We define the concept of the business model in the first section (4.1) and focus on the specifics of one the most operationalized versions of the business model, Chesbrough and Rosenbloom in the following section (4.2). An important part of this research is how the business model has a focus on value at its core which we highlight in 4.3. Section 4.4 and 4.5 detail the backgrounds of taking a model approach to strategy and balancing value (inside-out versus outside-in views).

4.1 Concept of the business model The term ‘business model’ is often used these days but seldom defined explicitly (Henry Chesbrough & Richard S. Rosenbloom, 2002). A business model can be described as strategic model that explains how a company does business. If we analyze what such a description means we see that “how a company does business” draws on many different (strategic) aspects but is not limited to a specific focus on a single area. This sets the business model apart from other areas of strategic management, focusing on specific issues, such as marketing strategy or value chain analysis. To research what is proposed in literature of the function of the business model we have analyzed different publications to compile a list of uses (Table 4.1)

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Table 4.1 Proposed roles of the business model

Proposed use

Source

Analyzing, implementing and communicating strategic choices

Shafer, H. J. Smith, & Linder, 2005

Telling a good story

Magretta (2002)

Linking strategy and operations

Mäkinen & Seppänen, 2007

Linking of strategic management and entrepreneurship theories of value creation

Amit & Zott (2001)

Focusing device that mediates between technology development and economic value creation

Chesbrough & Rosenbloom (2002)

Conceptual tool that contains a set of elements and their relationships and allows expression of the business logic of a specific firm

Osterwalder, Pigneur, & Tucci (2005)

Intermediate unit of analysis in managing technological ventures arising from R&D

Mäkinen & Seppänen (2007)

Planning

Magretta (2002)

Analyzing the available literature, four important dimensions are visible between the definitions of the different authors. The business can be used for: 1. Strategic choice (Shafer et al., 2005) 2. Link different strategic domains (H. Chesbrough & R. S. Rosenbloom, 2002; Mäkinen & Seppänen, 2007) 3. Focus on value creation (Henry Chesbrough & Richard S. Rosenbloom, 2002; Amit & Zott, 2001) 4. Focus on value appropriation (Amit & Zott, 2001; Henry Chesbrough & Richard S. Rosenbloom, 2002) The use of the business model for strategic choice is not surprising. It is a technique that is located in the domain of strategic tools and techniques all aimed at supporting strategic choice in one way or another. What makes the business model stands out is its focus on comprehensiveness. Compared to other strategic techniques such as SWOT-analysis or the BCG-matrix - which only focus on specific strategic domains (competitive strategy and strategic position respectively) – the business model links different strategic domains focuses on a comprehensive view of the strategic option: ranging from value for the end-user to revenue generation for the organization as we will see in the next section.

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The comprehensiveness of the business model is expressed through the range of strategic domains it links (we detail this in the following section). On the one side there is the issue of what value must be delivered. This focuses on customer preferences: how do we provide what the customer wants? Who are our customers? We will detail these questions more in the following section. At the “other side of the spectrum” are questions of how to realize this: what resources do we need, how do we compete/collaborate with others and how do we generate revenues from the activities we do, in order to provide a sustainable course of action? The balance between these two sides makes sure that what is asked for can be delivered, and what can be delivered is what is really asked for. This is an exercise that must be executed by the organization; it does not come as a pre-defined solution of what to do. What the business model provides is a consistent and comprehensive model (or: template) of the elements needed to build a strategy that delivers value to both the consumer and the organization. In the following section we operationalize the elements of the business model. In chapter 5 and 6 we research what issues this model can help solve for the hospital. In chapter 7 we detail further how each element of the business model delivers value in helping solve these issues.

4.2 The business model of Chesbrough & Rosenbloom Strategic literature in the last few years has given rise to many different ideas and definitions of the business model (Mäkinen & Seppänen, 2007). To decide which definition of the business model best suits, we have analyzed strategic management literature to look for an operationalized definition of the business model that adequately defines three important elements: value creation, value realization and value appropriation. We identify one business model approach (that fits our first selection criteria) instead of reviewing and comparing all available definitions. We analyze the selected business model approach to test whether it has as positive heuristic: the ability to generate the discovery of new facts (Lakatos, 1970). Our choice is the well operationalized model of Chesbrough & Rosenbloom (2002). In their article “The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spin-off companies”, they analyze how Xerox Corporation spin-offs became successful by taking technological offerings that were not valuable using the Xerox business model but did thrive by employing a different business model (see Box 4.1).

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Box 4.1 About Xerox Corporation and its spin-offs

Xerox Corporation started out as the Haloid Corporation originally manufacturing photographic paper and equipment. The company grew substantially in the 1960s by focusing on copying (“xerography”). The Palo Alto Research Center (PARC) of the company developed many prototype technologies, resulting in commercial spin-offs such as 3Com (network infrastructure), Adobe (publishing software) and Documentum. (information management structures). All successful spin-offs employed business models that differed in important ways from the traditional Xerox business model (this notion is also important to hospitals, we get back to this in the next chapter).

Chesbrough & Rosenbloom (2002) derive their definition of the business model from different available definitions, focusing on detailing and operationalizing the definition. The also note that “many of the definitions of the current day business model are actually variations on Andrew’s 1971 classic definition of the strategy of a business unit (p. 533). Box 4.2 Attributes of the business model (Chesbrough & Rosenbloom, 2002)

1. Articulate the value proposition, i.e. the value created for users by the offering based on the technology. 2. Identify a market segment, i.e. the users to whom the technology is useful and for what purpose, and specify the revenue generation mechanism(s) for the firm. 3. Describe the [strategic] position 4 of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors. 4. Define the structure of the value chain within the firm required to create and distribute the offering, and determine the complementary assets needed to support the firm’s position in this chain. 5. Formulate the competitive strategy by which the firm will gain and hold advantage over rivals. 6. Estimate the cost structure and revenue 5 potential of producing the offering, given the value proposition and value chain structure chain chosen.

The “six attributes collectively serve additional functions, namely to justify the financial capital needed to realize the model and define a path to scale up the business” (p. 534). The focus of the approach of Chesbrough & Rosenbloom is technology. Our approach is to adapt the model in

4

We prefer to identify this attribute as “strategic position”, rather than “value network” which is more descriptive and prevents discussions about the naming of value network, value constellations, value shops etcetera (Stabell & Fjeldstad, 1998). 5 Because of the non-profit nature of the (Dutch) hospital we have replaced profit potential from the model of Chesbrough & Rosenbloom with ‘revenue potential’ to express that the generation of revenue does not necessarily has to be profit oriented as an end-goal.

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such a way that we can also try using it for non-technological businesses, replacing notions of “technology” with the more generic definitions of ‘offering” where applicable. Applying the business model the authors do not follow a sequential structure, although they start with the value proposition. Through our field research and discussions with various experts we conclude that is it not strictly necessary to define such a structure. At the same time giving a possible structure acts for many as a reference to align their thinking process. We propose a structure to identify the three main subjects: value creation, realization and value appropriation (Figure 4.1). Also we include the underlying notion of the business model approach that it starts with customer preferences and “ends’ with value delivered. Figure 4.1 Application of the business model in 6 sequential steps Business model Customer preferences

Value proposition

Market segment

Strategic position

value creation

Value chain

implementation

Competitive strategy

Cost / revenue

Value delivered

value appropriation

The six attributes of the business model and their application to form a comprehensive and coherent model is the study object for the final part of this research. To what extent do the sequence and combination of these elements and their combination deliver value for the hospital?

4.3 Business model and value The key concepts of what a business model is all evolves around value: value creation, value realization and value appropriation. How do we define value creation for hospitals in a way that informs future strategic planning? This research focuses on building a valuecreating strategy for hospitals in a comprehensive and coherent way. Using strategy as a model, gives heads and tails to the question of what to analyze. It enables us to deal with complexities - which may, in many cases, actually result from the absence of a strategy (Kiewik, 2007). The concept of causal ambiguity, not being knowledgeable of sources of past success, and of impediments to future success states the need for a strategic model: “Because of causal ambiguity, it could be that the demise of firms is more to do with not knowing exactly what to change and what to change it to, than with any structural, or cultural rigidities.” (Bowman & Ambrosini, 2000, p. 7)

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Exclusive views on strategy such as RBV/CBV or the competence view (see section 4.5), highlight just one side the metal. Such approaches can result in an unbalance skewed either towards unsustainable value creation (too much customer focus) or towards value capture (too little customer focus). A model focused on value-creation helps hospitals escape zero-sum competition, which is the problem in the current healthcare systems (see Box 4.3). Box 4.3 Zero-sum competition

“Health care competition is not focused on delivering value for patients. Instead, it has become zero sum: the system participants struggle to divide value when they could be increasing Zero-sum competition in health care is manifested in a number of ways, none of which creates value for patients: competition to shift costs, competition to increase bargaining power, competition to capture patients and restrict choice, competition to reduce costs by restricting services.”

(Porter & Teisberg, 2006) Value, previously viewed as the price of things (Barbon, 1937, p. 2) is now often more market-oriented and must be viewed from the customer’s perspective (Coyle, Bardi, & Langley, 2003). The graphical representation of the business model expresses this by starting with customer preferences. Customer preferences are infinite, which is why we cannot define the contents (exclusive) of value, but only its attributes (inclusive). The first attribute is value must be viewed from the customer perspective. The second attribute is that value spans a complete process. “Value-based competition spans the full-cycle of care” (Porter & Teisberg, 2006). While the mention of a “cycle of care” applies well to a healthcare delivery organization (such as a current hospital), it might be too limited for the setting of the future hospital, which may extend its service portfolio to wellness (rather than sickness). That is why we define that value spans the complete process. This is different from much of the current day activities which are disparate interactions with an intermittent process. Interactions with the healthcare system are too often incident-based instead of focused on the complete process. Ultimately it depends on what is the described as the process, if it is keeping people healthy e.g. than incidentbased interactions are not delivering value, as opposed to life-long coaching. If the process is simply to “get fixed” than they may. Thus this asks for a clear view on what the process and accompanying value proposition is. Sustainability is the third attribute of value. Sustainability is the characteristic of a process, system or state that can be maintained at a commensurate level in perpetuity (H.E. Roosendaal, 2006; Wikipedia contributors, 2008b). Commensurate is defined as: comparable or compatible with other instances.

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Box 4.4 Attributes of value creation in healthcare

1. Value must be viewed from the customer perspective 2. Value spans the complete process

3. Value must be delivered through a sustainable process Box 4.4 summarized the attributes of value creation in healthcare. These are the attributes we will focus on when analyzing to what the business model delivers: is it viewed from the customer perspective, does it concern the complete process and is it delivered trough a sustainable process?

4.4 A model approach to strategy Strategy, originally a military term, is defined as “the science and art of military command exercised to meet the enemy in combat under advantageous conditions” (Merriam-Webster's Online Dictionary, 2008). Nowadays it is used in many disciplines, but the goal of the concept is the same for every discipline: “The essence of strategy – whether military, diplomatic, business, sport, (or) political… - is to build a posture that is so strong (and potentially flexible) in selective ways that the organization can achieve its goals despite the unforeseeable ways external forces may actually interact” (Quinn, 1998). Strategy can be used as a model to analyze the environment and set direction (Box 4.5). Box 4.5 Strategy as a model

“Ask someone sitting in a room to describe the environment around him and he will do either of two things. The first is that he will start naming all the different things he observes: chairs, tables, a flip-over, carpet, lights, a plant, persons etcetera. As long as no-one gives a sign when to stop the person will go on and on naming everything: dust particles, shadows, shirt buttons, shoelaces, window glass, a door knob, etcetera. Eventually he will ask how long this ‘naming process’ should continue? That moment is what another person would have asked beforehand: ‘What should I observe?’ This question gives a frame of reference and gives heads and tails to the description of the environment. This approach can look limiting, but is not. It can be repeated for every level of detail needed. The use of a model acting as a frame of reference makes a potentially unanswerable question answerable. That is what happens when we view strategy as a model.”

Roosendaal (2006) free after Popper (1963) Most hospitals have become complicated and entangled entities in the eyes of many decision makers. This stirs interest in an approach to strategy that can help decision makers in hospitals (and other healthcare organizations) to make a “potentially unanswerable question answerable”.

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The issue of having difficulty deciding what to do is also known as causal ambiguity. Causal ambiguity means not being knowledgeable about sources of past success, and of impediments to future success - something that might be the case with many hospitals. “Because of causal ambiguity, it could be that the demise of firms is more to do with not knowing exactly what to change and what to change it to, than with any structural, or cultural rigidities.” (Bowman & Ambrosini, 2000, p. 7). Causal ambiguity is of great relevance to hospital decision-making. The ways hospitals have done business has been subject to little change for many years (see the previous chapter). Many hospital executive teams do not analytically examine potential sources of past success, much less future positioning, using a structured approach. In the introduction of this research and the first chapters we have clarified that current pressures (including consumerism, changing workforce, demographics) result in pressures on the current hospital organization. This can lead to anxiousness and uncertainty with decision makers (see also the outcomes from the field research in the next chapter). Results might include the unfortunate tendency to propose oversimplified solutions to complex problems, which results in poor decision-making. We highlight once more the quote from Shortell et al. (Box 4.6). Box 4.6 Complexity and delivering value

“We live an extremely complex, pluralistic society where it is increasingly difficult to achieve consensus. In the effort to deal with the complexity, we often oversimplify by posing "solutions" in either-or terms. We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.”

(Shortell et al., 2000) Strategy as a model provides structure. Without structure trying to answer questions (what, when, where, how) is without start and end: one could go on and on defining possible answers, just as in the example of Box 4.5. Situations where uncertainty is prevalent and over-simplification of answers lies looming, we can benefit from the structure of a model. A model allows us to explore decision-making within a specified, relatively objective, structured framework (McCabe Gorman & den Braber, 2008)

4.5 Balancing value in strategy: inside-out versus outside-in Views on strategy traditionally often focus on a particular perspective. Two prevailing views on strategy are the inside-out and the outside-in views. We detail them here shortly because it shows how the business model is different by balancing those views, rather than focusing one of both.

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The inside-out view on strategy focuses on the internal strengths of the organization to define its strategy. Based on what the hospital itself is good at, strategy is defined. This can also be seen with hospitals: if a hospital has specific strengths, such as rare equipment, highly specialized surgeons or other specific assets, strategy is often based on those strong points. In literature the inside-out view is often associated with what is called the Resource Based View (Barney, 1991) or the Competence Based View (Teece, Pisano, & Shuen, 1997). These views focus on the notion that a sustained competitive advantage can be built through the potential of a firms resources. The outside-in view on strategy opposes this view in that it focuses first on the external environment of the organization, rather than the internal environment (resources). A prime example of this view is the Porters Competitive Strategy which focuses on analyzing the external environment of the organization to determine strategy (Porter, 1980). If competitors are focusing on particular market segments, using specific resources or occupying certain strategic positions, strategy for the organization must focus on addressing those competitive issues in order to build its own competitive advantage. The business model does not favor one of these two approaches, rather it balances them. Strategic resources can be a starting point for building a business model. But they have to be logically connected to the other elements and provide value for the end-customer. The movements of competitors can also be reason to build or change a business model but again, not without linking it back to the other elements such as a value chain that connects in a logical sense to the strategic position, market segment and value proposition. The business model does not provide a single answer to how these issues strategies should be built. But it continually stresses the need for logically connecting all the elements so that eventually value is delivered for the end-user in ways that adhere to the ideas about sustainability of the organization.

4.6 Conclusion The business model provides a structured, comprehensive and sequential approach to building strategy. We base our definition of the business model on the version of Chesbrough & Rosenbloom (2002). The business model enables decision-maker such as hospital executives to take the lead in building their own strategies through an inclusive model, rather than following exclusive advices on predefined paths to take.

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The model approach to strategy building provides structure that makes it possible to give answers to increasingly complex problems in healthcare. It balances an inside-out and outside-view on strategy. Starting with the value preferences it uses six steps to reach the final stage of value creating. The three stages of the business model are value creation (value proposition, market segment), value realization (strategic position, value chain, competitive strategy) and value appropriation (cost structure / revenue potential).

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“Resting on your laurels is as dangerous as resting when you are walking in the snow. You doze off and die in your sleep.” -- LUDWIG WITTGENSTEIN, philosopher

5

Strategic issues for the hospital

The previous chapter shows the strategic environment of Dutch hospitals. The Dutch healthcare system and its hospitals are rated amongst the best (Health Consumer Powerhouse, 2007) and followed by other countries, such as the United States., with close attention (Naik, 2007). As with any such system, ratings in healthcare are largely arbitrary. A prime example of the arbitrary nature of what is defined as good is the fact that only in the Netherlands we have at least three totally different hospitals ratings (Roland Berger, Elsevier/Lagendijk, Algemeen Dagblad), all three producing different end results about what is the best hospital. Producing different results (by measuring different things) is not necessarily a bad thing. It highlights the fact that there are an infinite number of possible customers out there, all with different wishes and expectations. These preferences are related to areas of importance of your target market, and ‘expressed’ or value provided by service lines you choose to offer. Serving a specific type of service for every specific patient is something that not all hospitals are confident with yet. Chapter 3 shows that hospital configurations have been formed in organic ways over long periods of time. While the technical and medical advantages have been enormous over the last 100+ years, the way hospitals treat their patients has stayed largely the same (large buildings, function-related departments, supply-driven). Discussion about how hospitals should treat patients has been limited. Patients have long expected hospitals to behave the way they currently do. And because of little actual differentiation and possibilities to compare hospitals, there was little incentive for a hospital to change the way it did business. That was until recent years.

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Figure 5.1 Pressure for change in hospitals (McKee & Healy, 2002, p. 37)

Current changes in healthcare are no longer mainly about technology and clinical knowledge (supply-side), as can be seen in Figure 5.1. They are also about demand-side (changing demographics, patterns of disease, public expectations) and wider societal changes (financial pressures, internationalization, global market) 6 . These changes have a different impact than the changes in technology and clinical knowledge. They result in both patients and government (policy-makers) asking new types of questions and expecting concise answers: why does this treatment cost more than with another hospital?, how does the hospital address the needs of people with a large number of comorbidities? what is the impact of international competitors? Such questions trigger the need for hospital to explicitly define and research their (strategic) position. This is change from the previous situation (as we found out in our field research), where hospitals could lean on their ‘established policies’ and do what they had done for years.

5.1 Field research To identify what triggers the specific issues for hospitals that might lead them to rethink their current business(es) we have performed on-site field research as we explained in our research approach. We conducted non-structured interviews with 11 different hospital

6

For more in-depth analyses of current pressures in hospital and healthcare we refer to Innovatieplatform (2007); Ministerie van Volksgezondheid, Welzijn en Sport (2007a); PriceWaterhouseCoopers (2005); Putters & Frissen (2006); Roland Berger (2007)

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decision makers and organized two discussion meetings. See Table A – 1.3 for a list of attendees. The interviews and discussion meetings were organized as part of the Nyenrode research program ‘Changing Roles and Configurations of Dutch Hospitals’. The interviews were held at the location of the interviewee (most often the hospital) and carried out and summarized by Merijn Stouten, Paul van der Nat and the author in rotating order. As an introduction the background of the study was given and the fact that no remarks from the interviews would be directly quoted in a final report. This anonymity allowed all participants to speak more freely about their strategic issues.

5.2 Interviews The interviewees were positioned as experts in the field of what a hospital is about (also meaning not as experts on strategic management). Goal of the interviews was defined as getting insight into the strategic issues for hospitals within the next 5-10 years, both on the content-side (what defines the future hospital?) as well as the process and difficulties leading up to futuristic configurations. The five key questions of the interviews give insight into the current and near-future dimensions of the configuration of the hospital. These dimensions have been based on the business model theory of Chesbrough and Rosenbloom, which we have defined in the previous chapter. We have not asked hospitals for their competitive strategy. The current status of the Dutch healthcare system has just yet introduced the idea of regulated competition and competitiveness. We did not introduce the competitive strategy as a separate topic in the interviews for the reason of wanting to focus more on the elements that come “before” the competitive strategy, about what defines a new hospital configuration. What we have done is review relevant literature and coined the questions of competitive strategy on other occasions such as personal discussions and the discussion sessions to gain insight on a broader level (5.3). Box 5.1 Interview goals

What is considered the current and near-future (5-10 years):

1. 2. 3. 4. 5.

value proposition market segment strategic position organizational structure (value chain) cost structure and revenue model

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Because of the disjunction between terminology in the fields of business and healthcare we have chosen to not directly use the definitions above in our interview, but use “starter questions” that give more practical answers that can be used to fill in the different goals. These starter questions have been defined in several brainstorm sessions with the project team and fine-tuned during the course of the project. Box 5.2 lists the questions (in no particular order). Box 5.2 Interview starter questions

1. 2. 3. 4. 5. 6. 7. 8. 9.

On what themes are future hospital organizations going to differentiate in the future? Will patients ‘simply’ keep coming to the hospital? Who will be the most important customers of future hospital organizations? What will be important partners for the future hospital organization? What is the relevance of ‘cooperation between competitors’ in health care? What is the main incentive for changing hospital configurations? Is it possible to create demand in health care? What will be the influence of internationalization on the future hospital organization? How are decisions about large investment taken?

10. What are the current strategic issues of the hospital?

5.3 Discussion sessions The discussion sessions were also used to get more insight into to the current and nearfuture value proposition, market segment, strategic position, organizational structure (value chain), cost structure and revenue potential. We explained to the audience - just as we have done in this research - that this might very well mean going outside the “borders” of what is currently defined as a hospital. 5.3.1

Session 1 – Elements and strategy canvases

The preliminary outcomes of the interviews were that different strategic choices were made in hospitals, but the actual “width” of these decisions was supposedly small. As an example, look at the dimension ‘coordination of care’. Some hospitals make an effort to coordinate a larger part of the care process, rather than ‘just’ the surgical procedures. But considering the full potential of such an option, one could consider that the hospital would offer coordination of care for the patient from cradle to grave, always and everywhere. Unfortunately it seems that options chosen by the hospitals are at the “same end” of the spectrum, such as offering coordination only around a single treatment and only inside the organization. Therefore to get more insight into the options we employ the strategy canvas tool. Strategy canvases allow a graphical representation of an organization’s strategic profile (Kim & Mauborgne, 2002, p. 78). Using the same dimensions for multiple organizations 39

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and scoring them from low to high makes it possible to quickly compare the strategic profile of similar organizations. Figure 5.2 Steps followed to build strategy canvases and find differentiating factors P1: Diversity in medical treatments

P2: Complexity of medical condition

P3: Treatment P5: Coordination volume needed P4: Service level of care

P6: Education and training

P7: Research

P8: Non-medical services

Product offerings

High

P1: Diversity in medical treatments

P2: Complexity of medical condition

P3: Treatment P5: Coordination P6: Education volume needed P4: Service level of care and training

P7: Research

P8: Non-medical services

Product offerings

High

P1: Diversity in medical treatments

Low

P2: Complexity of medical condition

P3: Treatment P5: Coordination P6: Education volume needed P4: Service level of care and training

P7: Research

P8: Non-medical services

Product offerings

Market segm

Strategic position

Market segments

High

Economic engine

Organization

Low

E1: Focus on cost reduction E2: Focus on profit E3: Value-based payment E4: Cost-based payment E5: Insurer payments E6: Income from private payments E7: Income from non-core E8: Income from (public) funding E9: Income from private E10: Negotiable prices

O1: Process optimization O2: Physician in the lead O3: Management in the lead O4: Capital intensive O5: Standardization of care O6: Outsourcing

Strategic position Organization P1: Diversity in medical treatments Product offerings

Product offering

Low

S1: Cooperation: primary process S2: Cooperation: support process S3: Growth S4: Social-economic role S5: Innovation S6: Transparency S7: Supply chain integration S8: Public-private partnerships

Low

M1: Patient M2: Physician M3: Healthy people M4: Sick people M5: Geographic scope

P1: Diversity in medical treatments P2: Complexity of medical P3: Treatment volume needed P4: Service level P5: Coordination of care P6: Education and training P7: Research P8: Non-medical services

High

Economic engine

P2: Complexity of medical condition P3: Treatment volume needed P4: Service level P5: Coordination of care P6: Education and training P7: Research P8: Non-medical services M1: Patient M2: Physician M3: Healthy people M4: Sick people M5: Geographic scope S1: Cooperation: primary process S2: Cooperation: support process S3: Growth S4: Social-economic role S5: Innovation S6: Transparency S7: Supply chain integration S8: Public-private partnerships O1: Process optimization O2: Physician in the lead O3: Management in the lead O4: Capital intensive O5: Standardization of care O6: Outsourcing E1: Focus on cost reduction E2: Focus on profit E3: Value-based payment E4: Cost-based payment E5: Insurer payments E6: Income from private payments E7: Income from non-core activities E8: Income from (public) funding E9: Income from private investments E10: Negotiable prices

Figure 5.2 shows the steps which were followed in the workshop to identify which elements were differentiating the organizations. The scoring questions used to build the strategy canvases can be found in Appendix C. As seen in the figure, there were 5 steps to draw the strategy canvases and determine the differentiating factors: 1. Start with a blank strategy canvas per theme for each of the five business model themes (value proposition, market segment, strategic position, organizational structure and cost structure/revenue potential). 2. Score the elements per theme for the organization of choice on a 5-point scale (low, low/medium, medium, medium/high, high) 3. Merge all scores per theme; discuss differences in outcomes between organizations 4. Merge all themes (this figure becomes too complex to discuss) 5. Calculate the standard deviation per element to identify the themes to differentiate the most and the least; discuss lowest and highest scoring elements.

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We identify that answering questions with qualitative answers such as low, medium and high might be considered too subjective. Also the sample of organizations having filled in the canvas can be considered arbitrary (although the mix of organizations attending was held as diverse as possible – spread between academic, specialist, general hospitals and other relevant organizations). But the goal of this exercise was defined as getting more qualitative rather than quantitative insight in the “width” of the differences between the strategic profiles, for which this method was actually proving useful. Participants noted that strategy canvases gave them insights into their and other organizations they had not previously encountered. The outcome of calculating the standard deviations is shown in graphical form below in Participants also noted that the scores within an organization about similar issues could be far apart. Meaning that if one participant from a certain hospital would score the dimension “diversity of medical treatments” as ‘2’ (low-medium), another participant from the same hospital might score it as ‘4’ (medium-high) depending on his/her views. This signals room for discussions about clearing up what defines the features of the organization. During the sessions it became apparent that the more focused an organization was (e.g. a specialist hospital), the more easy it was for participants to be able to fill in the strategy canvas. The goal of the first session was to gain more insight into the differences between the current hospital configurations to identify dimensions that can be changed in future hospital configurations. The most important outcomes are shown in Box 5.3. Box 5.3 Outcomes of the first discussion session

1. Choices about what services and products delivered (and how) have a large correlation with the issue of scale. 2. Choices about services and products are largely made on similar themes resulting in limited distinctiveness of hospitals (small “width”). 3. Current cost structures are named as limiting the hospital in its room for innovation. 4. A strong focus on the nearby region is considered very important by many hospitals. 5. Current discussion has not yet progressed beyond defining healthcare as a win-loose game (reshuffling existing resources and activities) – no “straying from the path”. 6. One of the ‘big unknowns’ is what near-future patient behavior will be (willingness to choose, travel, pay).

7. Value for the patient can be defined beyond medical-technical issues, offering new possibilities for hospitals. 8. Disruptive configurations are suspected to have large impact by current decision makers.

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Evaluating these outcomes there are two important conclusions that we can draw: current configurations show large similarities and reasons for similarities are often defined in “outside factors” (location, cost structure, win-loose decisions). At the same time room is considered for disruptive configurations redefining what quality is (more reasoning outside-in, based on patient preferences). If such configurations would more prominently emerge, this is considered disruptive by most current decision makers. Examples of such configurations can be what is done now with retail clinics in the US, or the initiatives such as Hello Health or American Well (American Well, 2008; Hello Health, 2008; McCabe Gorman & den Braber, 2008). In short: current hospitals are limited in their uniqueness, but are aware that the moment truly disruptive configurations will pop up is only a matter of time (because there is ample room for). We take this as indication for the need of a structured approach to strategic (re)thinking the current hospitals if they want to sustain. This differs from the current approach of following established policies. 5.3.2

Session 2 – Using structure to put together configuration

The first session indicated in several ways that there is room for changing current configurations and possibly inventing entirely new ones. We organized a second discussion session to test the use of a structured approach towards building configurations in order to help hospitals (re)think their strategies. We distilled a list of elements that had been identified in the interviews and the previous discussion session as relevant guidance questions for hospitals to decide about the elements of the business model (Box 5.4 - Box 5.9). The guiding questions in the boxes mentioned are what they say: guiding questions. They should not be viewed as the complete list of relevant questions about the different business model elements. They can be viewed as a comprehensive list guiding structured thinking into building strategy.

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Box 5.4 Guiding questions defining the value proposition

What business are we in? This hospital focuses on sickness / health / well-being / ... What is type of products/services delivered? The type of product / services is medical treatment / nursing care / research / education / ... What is the primary function of the organization? The primary function is delivering / facilitating / coordinating/ ... Is the organization focused on B2B or B2C? The most important customer are patients / specialists / other businesses / ... What is the complexity of the product offering? The products offered are complex / basic/ ... What is the diversity of the product offering? The medical treatments offered are diverse / specialized / ... What is the service level provided? The service level provided is below standard / standard / above standard / ... Box 5.5 Guiding questions defining the market segment

What is the geographic scope? The geographic scope is regional / national / international / ... What are the target populations for what products? Target populations are elderly people / expats / diabetes patients / ... What defines the attractiveness of a market segment? Attractiveness is defined in volume / profitability / social need / challenge / ... What is the mobility of patients within our market segment? Patient mobility is low / average / high / ... Box 5.6 Guiding questions defining the strategic position

What is the competitive strategy? To what extent is the organization collaborating / competing / collaborating and competing / ... Why is competitive strategy relevant? Competitive strategy is relevant because survival / sustainability / growth / ... Who are strategic partners? Strategic partners are other hospitals / suppliers / insurers / GPs / ... Where (to which activities) does what competitive strategy apply and why? Where: core processes / support processes / ... What: collaborate / compete / compete and collaborate / ... Why: revenue / scale / quality / reputation / ...

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Box 5.7 Guiding questions defining the organizational aspects (value chain)

What are the core activities? Core activities are orthopedics / urology / diagnostics / ... What are the support activities? Support activities are pharmacy / patient transport / counseling / ... Who has to execute the activity? Activities can be done ourselves / joint venture / outsourced / ... What is the scale of the organization? The scale is small / large / dynamic / ... What are the strategic assets? Strategic assets are personnel / infrastructure / data / ... What is the process focus of the activities? The process focus is customer intimacy / product leadership / process excellence / ... What is the governance structure (parties and responsibilities) ? The governance structure is RvB-RvT- medical staff / cooperative / single entrepreneur / ... Who are the strategic decision makers? The strategic decision makers are management / medical staff / investor / ... What is the position of the professional? The position of the professional is on the payroll / free-employed / partnership / ..._ What is the level of independence (of the separate business units)? Business units are completely independent / tightly coupled / (de)centralized / ... What is the preferred organizational culture? The preferred organizational culture hierarchic / informal / innovative / ... Box 5.8 Guiding questions defining the cost structure and revenue potential

What is the cost structure of the product offering? The costs for the product offering are based on labor / medicine / overhead / ... Who pays for the services? Services are paid for by the insurer / patient / employer / ... What determines price? Price is determined by quality / volume / health outcome / ... How is economic sustainability reached? Economic sustainability is reached mixing profitability of treatments / additional services / ... What is the capital intensity of the organization? The capital intensity of the organization is low / high / dynamic / ...

The structure of the discussion session was that five different groups of 4-5 attendees with different backgrounds were given a certain direction of a possible future hospital configuration (see Box 5.9). Participants were asked to go through the different questions to further define the different elements of the configuration.

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Box 5.9 Hospital configuration ideas for the second discussion session workshop

1. Large volume focus hospital: focusing on a specific type of medical condition and/or treatment on a very large scale. 2. Small scale focus clinic: focusing on a specific type of medical condition and/or treatment on a small scale. 3. Network hospital: hospital part of an alliance with other providers, dividing what care is delivered where. 4. Wellness organization: organization responsible for the complete well-being of a person or population. 5. GP hospital: hospital with a long-term relation with their customer, resulting in a low threshold for access. 6. Virtual hospital: hospital not delivering care, but acting as a single point of entry to the health system. 7. Personalized healthcare organization: organization providing healthcare services when and where the clients wants. 8. Facility provider: only providing services and facilities professionals (business to business organization).

The beneficial outcomes of this exercise were twofold: process and content. The process of going through the different questions was assessed by almost all participants as helpful and stimulating their thought about the implications of the different choices. Room was given to the participants to suggest additional questions or subjects that could enhance the current list, but, interestingly, none were given. Critique arose because of the method used (focusing on a limited number of ‘predefined’ ideas for future configurations). Most of the critique focused on the fact that participants felt limited by the different configurations. One of the arguments used more than once as the fact that configurations such as these were thought up by ‘system thinkers’ (mostly “business scholars”) and that they fail to reflect the diversity that exists in reality. A parallel was drawn with the ideas about school reform in the Netherlands in the last decades. Looking at this research (assessing the value of the business model for hospitals) it is important to note two things: (1) the business model is no tool to use in the first place for defining systems, but rather individual organizations (or businesses as you like) and (2) we claim there is value in explicitly defining strategy and that this does not limit the options individual organizations have. The business model approach does not explicitly dictate any of the choices hospitals must make to define their strategy. It is inclusive rather than exclusive, just as the list with guiding questions is only to be used as guidance. Employing the business model 45

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approach does even the opposite: it can be used to think about the many options of organizations in a structured and comprehensive way. But this has eventually to be followed by choosing between these options, something which the audience still seemed somewhat reluctant too, judging by their responses about feeling limited in their choices. This shows the fact that hospitals have not yet completely adapted to both the ideas about choices itself as well as making decisions about the available choices, much less considering the impact these might have on future performance. The outcomes about the configurations that were discussed and analyzed in the session are listed in Box 5.10. Summarizing these outcomes we can see an interesting problem emerge: while there maybe a string of different barriers, at the same time hospitals are acknowledging the fact that others might be entering their domain, as well that there is a general need to rethink the configuration (see previous paragraphs). This strengthens our idea that the business model might be one of the tools that, by structuring the process needed, might help hospitals find a comprehensive and concise way of modeling how to (re)define their strategy. Box 5.10 Outcomes of the second discussion session

1. There are several factors seen as limiting to creating new configurations, most prominently the current cost/insurance structure and the need for solidarity. 2. There seems to be relative high reluctance of current players to allow access to other players (while new configurations often depend on cooperation) 3. It is very much thought to be likely that other players than the current hospital (e.g. insurer, patient organizations or industry) might develop new configurations competing with the hospital.

5.4 Outcomes The outcomes of both the interviews and the meetings have been summarized in this paragraph, grouped as the 10 most important outcomes (Box 5.11). In the following section we will detail each issue and analyze its relevance and implications from a strategic viewpoint.

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Box 5.11 Most important outcomes of field research (interviews, discussions)

1. 2. 3. 4. 5. 6. 7. 8. 9.

Providing specialized medical care is considered core business Strategic decisions are often supply-driven Scale and scope are considered most important axes for change Current governance structure complicates decision-making Relationship with the patient is considered of growing importance Financial structures difficult to match with strategic initiatives Hospitals show large similarities in strategic structures/configuration Patients are always end-users, but not always end-customers Regulated competition is not fully functioning yet

10. Strategy development is replacing established policies

5.4.1

Providing specialized medical care is considered core business

When asked to define the core business of the hospital many decision makers talk about providing specialized medical care: surgeries, stay, nursing, diagnostics etcetera. Much of the core business is defined in product terms. While this may seem logical - the official definition of the hospital is after all institute for specialized medical care – many options are left unexplored. We argue that there is much to gain from widening the scope of what is considered core business of the hospital, by considering as its core not products delivered (e.g. surgeries), but value delivered (keeping people healthy, patient satisfaction, increased patient autonomy). The product of the hospital does not exist in a vacuum, it is only relevant when it delivers value to the patient/customer. 5.4.2

Strategic decisions are often supply-driven

Hospital decision makers consider their service line portfolio one of their most important decision points. What types of surgeries or treatments should we offer and why? Often this analysis is based on the strengths and weaknesses of the hospitals, such as quality/availability of the respective surgeons, available equipment, amount of revenue generated etcetera. Decision options are considered: do-it-yourself, collaborate with other hospitals, outsource or abandon activities. Service line portfolio is an important decision area for current hospitals. The previously wide scope of hospital service line portfolio is increasingly difficult to combine with the needed scale to provide a sustainable level of quality. Decisions about what is provided (service portfolio) are often deemed more important than how it is provided (service level). Service portfolio decisions are mainly driven by internal factors (supply-driven) while service level decisions are often driven by customer request (demand-driven). This

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can be considered ‘survival tactics’ of the hospital or a sign of difficulty to adapt to a new demand-driven structure. 5.4.3

Scale and scope are considered most important axes for change

Hospital leaders often define their hospitals options on two axes: scale (increase or decrease) and scope (increase or decrease). The most common current combination (large scale together with large scope) is expected to be non-maintainable in the future. Ever increasing scale is needed according to current decision makers if hospitals want to keep offering research and education and limit risk/provide quality. Also the sheer size of investments needed asks for a certain scale to justify those investments. Another option: decreasing scale and scope steers the current hospitals more in the direction of smaller focus clinics. Many hospitals do not like this direction because they view it as their obligation (and their income stream) to deliver a wide range of services to their geographic area. A difficult issue with changing scale and/or scope is what to do with the complex or chronic patients who often fall between different configurations. Figure 5.3 gives an indication of directions for hospital change on the axes of scale and scope. Important to acknowledge is that with many decisions about scale and scope issues of large investments done or needed play an important role. . Figure 5.3 Possible directions for hospital change - scale versus scope (diagram made by author) scale

focus factory

network

merger/ acquisition

specialized hospital

current

independent growth

small focus clinic

limit access

broker scope

Scale and scope decisions are supply-driven, not demand driven. There are more options in changing the hospitals by looking at other axes next to scale and scope (which are definitively important). Such options may include more demand-driven axes such as service availability or service level. This is more about the value delivered than the structure used.

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Current governance structure complicates decision-making

The most significant choices in hospitals are not made on the ‘corporate’ level (whole hospital) but on the business-unit level (specialty). Because of the level of independence of professional partnerships in most hospitals, the ability of hospital boards to make decisions spanning the whole of the hospital is often limited. Often it is unclear who is in charge of the hospital: the board or the different professional partnerships of physicians. One of the effects is that when board and medical staff clash, the board of governors has to choose ‘sides’ often resulting in firing one or several members of the boards. A small number of hospitals (e.g. Bronovo or Ziekenhuis Groep Twente) try to tackle this issue by putting individual specialists on the hospital payroll. Hospitals are virtual organizations that are viewed as a single organization by the customer. But this ‘image’ is changing. Individual professional partnerships are independently advertising their services directly to patients. Hospital ratings are changing towards specialty rating. The still complex internal structure of the hospitals is often viewed as an impediment to structural change. 5.4.5

Relationship with the patient is considered of growing importance

In all interviews and discussion it was acknowledged that the position of the patient and the relationship with the patient is of ever growing importance. Much has been done in the past decades to improve this relationship – and there is still much that can be done. There are stratifying differences between hospitals in how to view their relationships with patients: some view patients still as people who have to adapt to the structures and processes of the hospitals, while others actively try to engage patients as responsible actors in their own healing process. There is a notion that the (combined) views of the patient, of the hospital and physician are increasingly important. E.g. reputation management is actively practiced by several hospitals. 5.4.6

Financial structures difficult to match with strategic initiatives

The single most heard complaint about realizing (new) strategic initiatives is the fact that financial incentives and reimbursement structures do no match. The main problem for many hospitals is that better quality is not paid for. One example is that of academic hospitals: they try to position themselves as centers for last-resort care (including experimental treatment and other high-risk procedures). This last-resort care is more expensive than basic or top-clinical care, but the reimbursement for these types of treatments is disproportional (reimbursement is less than the costs). Therefore all academic centers also deliver basic care to pay for the more expensive type of last-resort care.

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Hospitals are right in signaling the failure of the current reimbursement structures and financial incentives to align properly with the practice of healthcare. But this also means that hospitals cannot afford to “sit back and wait” until better systems will “pop up”. Other financial structures such as joint ventures with industry partners (e.g. as is practiced in the St. Maartenskliniek) or HMO-types of financing (as was tried by Rivas Zorggroep) may show new ways to finance healthcare. This can still complement strategies trying to align financial incentives and reimbursement structures with the real practice of healthcare. 5.4.7

Hospitals show large similarities in strategic structure c.q. configuration

The choices hospital make for their products or service offerings show very large similarities (look ahead to the introduction of chapter 6). The largest distinctive criteria are level of complexity/expertise needed, geographic location and size. Hospitals link their position in the value chain to the level of complexity of the disease pattern or expertise needed. General hospitals have more expertise than GPs, top-clinical hospitals more than general hospitals and academic hospitals are used as “last resort”. Another defining factor of the hospital is its geographic location. One of the first arguments when choosing a hospital is defined, by both decision-makers and patients alike, to be its geographic location. This is therefore one of the more distinctive elements of the hospital. Also the size of the hospitals is an important differentiating factor: the number of hospital beds ranges from small (< 50) to large (1300+) (RIVM, 2007) Hospitals decision makers mostly talk about current distinctive characteristics in terms of organizational features: expertise, location, size. Secondary product features that indicate how products are delivered (staff friendliness, communication possibilities etcetera) are not amongst the first elements that are considered important in discerning hospitals. But changes are visible e.g. because different Dutch hospitals are now adopting concepts such as the Plane-Tree concept that focuses on different issues than technical/product qualities. Examples are integrating family, friends and social support, focusing on architectural and interior design (provide a healing environment) or offer complementary therapies (Planetree, 2008) 5.4.8

Patients are always end-users, but not always end-customers

The stakeholders in hospitals are many, including patients, physicians, nurses, management, insurers, neighbors, government, family and suppliers. And the list can be even longer. The question of who the consumer is for hospitals is therefore not always easy to answer. Who should the hospital consider the patient as its “consumer” to focus on when building value-based strategy? Should this be the patient (receiving care) or the insurer (paying bills) or maybe the physician (providing services)? There are many

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options to choose from, indicating that it important for the hospital to be clear about its customers in order to be able to know what value to deliver, where, to whom etcetera. What we can say is that the ultimately the patient is always considered the end-user: take away the patient (person receiving care) and there is no reason for any of the other stakeholders to be involved. This makes the patient the end-user but not necessarily always the end-consumer. Hospitals currently express different views on who they consider the end-consumer. Some hospitals state that the patient is their end consumer, other see themselves as facilitators of physicians who deliver the real services, while other still focus on the insurer as their final customer, because it defines the parameters about what should be delivered. Hospitals agree that the patient is always considered the end-user, but that the endconsumer can be different depending on what/who is considered more important. 5.4.9

Regulated competition is not fully functioning yet

The system of regulated competition which was gradually introduced in The Netherlands since the 1980s does not yet serve up to its promise of more choice and better quality for patients. The different players of the game blame each other for slowing down or even obstructing the process. Different problems identified that hold off regulated competition include: lack of transparency of hospitals, no excess capacity in e.g. surgeons or hospitals, lack of strategic entrepreneurship with physicians or perverse reimbursement systems. Regulated competition is one of the possible approaches to ensure better quality of care. But after having taken this path, it has become an almost never-ending struggle between all stakeholders involved: government, hospital management, physicians, policy advisors etcetera (this is not only in The Netherlands, but also in other countries such as the United States). See section 3.5 for a short history of Dutch health reform. Most stakeholders agree on the fact that the current status of regulated competition in Dutch healthcare is still a far cry from what it should be. But the causes for this are many and different depending on your viewpoint. Two claims often made are that physicians and other professionals for a long time have tried to protect their own interests (keeping the status quo) at the expense of improving the quality of the system. Another argument is that government has too much tried “easing in” the system instead making explicit decisions and making hospitals more responsible e.g. for their financial situation. 5.4.10 Strategy development is replacing established policies One of the interviewees describes the hospital strategic process in earlier days as follows: “we used to add up all the individual wish list of the physicians, now we first define a focus and base our 51

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wish lists on that focus”. Hospitals, as we found out through field research, have only rather recently (last 5-10 years) focused on the value of an explicit strategy development process. Because of their strategic environment (based on budgets, a steady flow of patients and little or no competitive incentives) hospitals were run by established policies: doing things the way they had been done for years – taking the internal drivers (supply-driven) of the hospitals as the guideline for changing policy, rather than external drivers (demand-driven). If stakeholders always have been used to get what they wanted (just by yearly submitting “wish lists:) it is more difficult to change that strategic process. A growing number of hospitals are looking into new ways of facilitating the strategic process, e.g. by doing SWOT-analysis per specialty, putting a manager plus physician in charge of a department or providing education/training about strategic entrepreneurship to medical professionals.

5.5 Conclusion What emerges from the field research above are signs of a struggle: healthcare organizations are actively trying to fight their old habits to increase future relevance to the customer (focusing only medical care, large similarities between organizations, focusing more on professionals than patients). There is large acknowledgement amongst the participants that there is a need for change in hospitals: whether it is driven by the need for a better financial position or more focus on the patient. It is important to note that participants in all of these discussions have granted us permissions to discuss their strategic issues. This alone can already be seen as an issue of confidence or at least transparency that shows their interest in improving at least their own position, but also the position of others by supporting this research. We have not reached every hospital, and while this often is because of practical issues such as scheduling and time limitations, we can never be completely sure whether or not the current list of participants might be skewed to those more interested in realizing change than the general average of hospital decision makers. Many hospitals identify (possible) problems on their road to change: health systems does not allow enough room for experiments, complex governance structures, financial incentives are mainly perverse. There is no single, clear-cut solution that solves all the problems, especially the scale/scope problem and the perverse financial incentive issues, which worries many of the participants.

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“Try not to become a man of success but rather to become a man of value.” -- ALBERT EINSTEIN, physicist

6

Business mo del theory and hospital policies

The previous chapter focused on giving an overview (using qualitative field research) of current strategic issues for hospitals. The focus of this research is to assess the value of the business model theory for hospitals. Let us take a look at what we define as the current “implicit business models” of the Dutch hospital. This term is very much a contradictio in terminis as business models are only business models if they are explicitly defined, otherwise they are established policies (“how we have always done it”). To be able to link these to the business model theory we analyze the different elements of current hospital strategy as elements of the business model (Table 6.1): value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential. The analysis in the table above shows relatively little differences in (implicit) business model between the current types of hospital. The previous chapter specifies several reasons decision-makers give for this (scale/scope issues, difficulty to match financial structure, complex governance structures). The business model is no panacea to all of these issues. What it does help with is providing a comprehensive and concise approach to “asking the right” questions that eventually help tackling these problems. It is like the quote about quality at the beginning of this chapter: “Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives.” The fifth research question is: “What value does business model theory add for hospitals, compared to existing literature and methods already available?” The previous section lists different reasons why there is a need for a structured comprehensive approach towards strategy building. We analyze different literature that focuses on the issue of strategic hospital configurations in relation to the proposed approach and elements of the business hospital (6.1). We focus on the relation of the existing literature with the business model elements and sequential structure: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential.

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Table 6.1 Analysis of current implicit Dutch hospital business models (established policies)

General hospital

Top-clinical hospital

Academic hospital

Specialty hospital

Value proposition

all basic care; average service

all basic and top-clinical care; teaching; average service

all basic and top-referent care; teaching; research; average service

single specialty full range; aboveaverage service

single specialty focused range; no stay; aboveaverage service

Market segment

all patients regional; low patient mobility

all patients supra-regional; low patient mobility

all patients national; average patient mobility

single patient type national; average patient mobility

single treatment national; average patient mobility

Strategic position

between GP and STZ/academic; collaborate to compete

between academic and general; collaborate to compete

last resort; collaborate to compete

stand-alone; industry partnering; competing; reputation

stand-alone; competing; reputation

Value chain

small scale; product focus; physician selfemployed

medium scale; product focus; physician selfemployed

large scale; product focus; physician on payroll;

medium scale; service focus; physician selfemployed

small scale; process focus; physician selfemployed

Competitive strategy

travel distance, patient relation

treatment type

expensive equipment; last resort

expert position, customer focus, speed

speed, service

Cost structure / revenue potential

DBC A+B; medium capital intensity

DBC A+B; WBMV; high capital intensity

DBC A+B; research; government; high capital intensity

DBC A+B; research industry; high capital intensity

DBC B; medium capital intensity

Focus clinic

Concluding from this literature review and our field research, we derive for the hospital the benefits and limitations of the business model elements in the next chapter, in accordance with our last research question: “What are the benefits and limitations of the business model elements and approach for hospitals?”

6.1 Literature review A literature review into the possible different strategic configurations and models for a hospital returned only few results (MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000; Darzi, 2007). We take a look at the results found and assess their relevance compared to what the value of the business model can be. Beforehand we notice that none of the references found in the literature offers a (basic) model to help decision-makers guide the strategy building process, but rather focus on concrete and practical delineations of what the possible development routes of the

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hospital strategies and structures can be. That differs from the business model approach, which is actually about building strategy. But it can also be used (when the relevant questions and elements are answered) to define those different routes. We will highlight the different authors and approaches below.

6.2 McKee and Healy (2002) McKee & Healy (2002, p. 69) list the possible role of a district general hospital in their book about hospitals in a changing Europe. They define four different types of hospitals: dominant, hub, comprehensive and separatist hospital (Table 6.2). Table 6.2 Possible roles of a district general hospital (McKee & Healy, 2002, p. 69)

Name

Description

Dominant hospital

A dominant hospital monopolizes skilled staff and equipment and consumes most of the health care budget, including resources for primary care.

Hub hospital

A general hospital may be the hub of an integrated health system for a dened population catchment area. The hospital is involved in planning, administering, supervising and funding (but not providing) community health services.

Comprehensive hospital

In the comprehensive model, the hospital undertakes tertiary and secondary as well as primary care and also delivers services outside its walls.

Separatist hospital

The separatist hospital is the prevailing model in most high-income countries. The acute hospital divests itself of all but the core functions of short-stay specialist care, providing only services that primary care practitioners and community-based specialists are unable (for various reasons) to undertake.

If we look at the sequential model of the business model (Figure 4.1) we see it starts with customer preference. The configurations described above take their strategic position as their main driver, not the preference customer. This way of defining the hospital corresponds directly with the inside-out reasoning in strategy. Although the configurations above do not start with customer preferences, they can be linked to other elements of the business model, mostly the element of strategic position. Their structure and way of working is defined by at what place they are in the value chain of healthcare organizations. That makes this categorization of hospitals actually usable if hospitals have to define in more detail their strategic position.

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6.3 NVZ vereniging van ziekenhuizen (2000) The Dutch Hospital Association (NVZ vereniging van ziekenhuizen) in 2000 issued a report about strategic paths to future change in the organization of hospital healthcare (Table 6.3) Table 6.3 Strategic paths to future change in the organization of hospital healthcare (NVZ vereniging van ziekenhuizen, 2000)

Name Open and connected hospital

Connecting the various organizations in the care chain; focused on forming strategic alliances

Specialization in modular form

Specializing in a specific area, including particular medical afflictions, community care or emergency care

High-risk professional organization

Combination of a mobile internationally oriented professional workforce and high risk organization where professionals have a great deal of autonomy.

Civil enterprise

Operates on different frontlines: the commercial competitive market, the involvement of the public sector, and the people, both as a patient and as a concerned citizen

The reasoning behind these hospitals is rather similar to that of McKee and Healy: inside-out, but in certain aspects more progressed towards the value chain (internal organization, such as workforce organization) in addition to the strategic position of the hospital. Also these configurations do not serve as a structured model to build strategy. They are practical outcomes of what can by drivers for strategic change. They answer the question of “what type of hospital do you want to be?” This question focuses on the inside-out (organizational) side of what the hospital could be. The question about the type of hospital (from the list of NVZ) is only part of the business model, similar to what is defined as the strategic position (link with the environment). Just as with the previous literature of McKee and Healy this categorization is usable with decisions for certain elements of the business model (strategic position, value chain). It does not provide a comprehensive overview of hospital strategy.

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6.4 MacKinnon (2002) The Ontario Hospital Association (OHA) (MacKinnon, 2002) has published about hospital configurations in a fashion that already resembles the approach of the hospital business model rather well. They have defined different aspects relevant to the configuration, beyond only defining the strategic position of the market segment. Table 6.4 New hospital enterprises Ontario Hospital Association (MacKinnon, 2002)

Name

Description

Reformed cathedral

Hospital at the centre with satellite clinics and access through levels of care; business is wellness and illness; provides full spectrum of services; market sees hospital as core to management of health care system; managed by clinical and management team; providers are multidisciplinary, work in teams and function through intra-system referrals

Focus factory

Hospital with special service delivery; business is production of specialize services; wellness, disease specific and treatment specific services; market served is dense population requiring same service; hospital seen as “expert” providers or centre of excellence; management horizontal and facilitates seamless clinical care; health management team supplies services

Mall

Flagship hospital can be adjacent to, or part of a traditional mall; business is product and retail sales; services are store specific; market served is community based; local customers seek specialty malls, power malls and outlet malls

Broker

Hospital acts as a ‘virtual mall’ or network; business is connectivity and knowledge brokering; market served varies (large or small) – connects customers needs with service provider; management flat, relationship driven and very entrepreneurial; suppliers are small and large providers

Fire station

Hospital facility is structured as a response model only; business is strictly acute emergency health problems; market served varies (rural and urban) depending on local and surrounding resources; response team is community based; management complex (may be associated with other centers); full spectrum of health care providers

The OHA specifies five different types of hospital: reformed cathedral, focus factory, mall, broker and fire station (Table 6.4). The value of the approach of the OHA is also that they address the issues of governance (who manages the organization), which is of true importance to many of the new configurations and currently often named as a hurdle towards changing configurations.

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6.5 Darzi (2007) Lord Darzi researched the different healthcare delivery models for the NHS London region (Darzi, 2007). He identified six different types: home care, polyclinic, local hospital, elective centre, major acute hospital and the specialist hospital (Table 6.5). Table 6.5 Delivery models NHS London (Darzi, 2007)

Name

Description

Home care

There is increasing potential to provide care in people’s homes, including specialist care, rehabilitation and support for long-term conditions

Polyclinic

Polyclinics provide the infrastructure to shift hospital-based care into a more local setting and improve existing GP and community care and social services

Local hospital

Local hospitals provide non-complex inpatient and day case care in the local setting, ensuring patient access and convenience without sacrificing quality of care

Elective centre

Elective centres focus on specific types of activity and exclude emergency work to be more productive and produce better clinical outcomes

Major acute hospital

Major acute hospitals enable co-location and critical mass of specialist services to maximise clinical quality and efficiency, some being a hub for teaching and R&D

Specialist hospital

Specialist hospitals retain established infrastructure, expertise and focus to deliver leading-edge complex services in a specific area

The value of the approach that Darzi has taken towards the rethinking of the healthcare delivery models is by research systemic development as a whole, rather than focusing on individual organizations. He identifies complementary models that together form a healthcare system. Example of this is the identification of home care as an additional important type of care delivery. This makes clear that we may need to think beyond the borders of the traditional hospital, because there are needs for other types of organizations than hospitals. Models such as Darzi’s can be useful in different ways considering what the value proposition and subsequent elements of a hospital business model should be. Healthcare delivery is a point which is most visible in the business model with the element of strategic position: where does the organization fit in “the system” with respect to other organizations. This research makes it clear that we cannot go about defining a single organization without placing it in the realm of the system. We can try, but that obliterates any chance we have at obtaining or maintaining a competitive position. Even with a “socialized” system. 58

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6.6 Conclusion Looking at the six elements of the business model (value proposition, market segment, strategic position, value chain, competitive strategy, cost structure/revenue potential) we can conclude that there is mostly focus on the elements of strategic position and value chain – resembling the long tradition of hospitals with reasoning inside out. There is less reference to the value position of the hospital asking questions like “what do we want to be for whom”. This illustrates the long tradition of hospital reasoning from the insideout (where can we, what can we deliver) instead of looking at the starting point of what their ultimate customer would want. Lacking in any of the overviews is a reference to value appropriation. This might be absent from the strategic conversations amongst hospital executives for several reasons. The first reason can be the diversity of cost structures around the world. There are many different ways that healthcare organizations can get reimbursed, ranging from being completely paid for by a government to direct payment structures. But when viewing this from a business model perspective there is a clear link between the possible cost structure/revenue potential of a model and the other elements, because they together will have to form a comprehensive logic. Defining different cost structure/revenue potential can only be done if all strategic elements are aligned and logically connected. Another reason might be the absence of a mindset of strategic entrepreneurship throughout the organization. Strategic entrepreneurship (SE) means managing resources strategically: structuring the resource portfolio, (re)bundling resources and leveraging those capabilities (flowing from financial, human and social capital) to simultaneously enact opportunity- and advantage-seeking behavior to deliver value (Ireland, Hitt, & Sirmon, 2003; Hagel III & Singer, 1999). SE must not be practiced only at the level of strategic management, but through the whole organization. The last conclusion from this analysis is the absence of a structured way (model) to group the models and analysis we reviewed. They focus on parts of a strategic decision, but do not offer comprehensiveness. The business model links strategic domains to offer a comprehensive and concise view on the business logic.

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“We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.” -- SHORTELL ET AL. (2000)

7

Value of business model theor y for hospitals

Business model theory focuses on comprehensiveness and a concise approach to building strategy. The six elements of the business model all add up to sound business logic (value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential). This chapter compares what the value of each element versus the current situation of how it is defined by hospitals (7.1 - 7.6). We base our analysis on the literature review in the previous chapter as well as the field research detailed in chapter 5. This is followed by an analysis of the benefits and limitations of the business model approach in the last paragraph (7.7). What we do not do here is claiming exclusivity and focusing on concrete examples of how each element can be defined. We focus on the inclusive ways of approaching each element and listing how it currently is used versus how it can be used. This aligns with the nature of the business model of inclusiveness by asking questions, rather than exclusiveness by giving (pre-defined) answers.

7.1 Value proposition The value proposition is about the core functions of the organization (H. E. Roosendaal & Geurts, 1997). And when the value proposition is defined this is based on the value preferences of the customer (Figure 4.1). Therefore the value proposition always must include the notion of whom the core functions are offered to. When determining a value proposition with business model theory it is not possible to define the outcome, but it is possible to define the attributes that need to be addressed to build a relevant value proposition. With the list of guiding questions used for the second discussion session (Box 5.4) we have already introduced several themes that can be included in the definition of the value proposition. We here give the summary of the attributes to be addressed when building a valid value proposition based on the essential strategic question: what (and for who), where, how and when. The value proposition is “at the start” of the business model and can be seen as a summary of all following elements that 60

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must be appealing to the customer. Less comprehensive versions of a value proposition can often be spotted as slogans or taglines for organizations, such as “Mayo Clinic: The needs of the patient come first” or “Cleveland Clinic Heart and Vascular Institute: Treating heart, vascular and thoracic conditions for patients from around the world”. As identified the value proposition starts with the core function of the offering. Field research indicated that hospitals define as their core offering providing specialized medical services (5.4.1). But can this be described as the real core offering of the organization or are there possible deeper and more fundamental functions the hospital wishes to fulfill – from which providing specialized medical services can be one? We can clarify this with an example from literature about scientific communication (H. E. Roosendaal & Geurts, 1997). What is the core function of a publishing company (focused on scientific communication)? One the surface one might say that the core function of the publishing company is to publish scientific journals. But digging deeper the core functions of the publishing company leads to the focus on the scientific communication network, which can be described as four main forces and their interplay. The forces are actors (author/reader pair), accessibility, content, and applicability. Scientific communication is described as providing registration, awareness, certification and archive. The example above indicates two important issues: (1) the value proposition is not automatically related to a concrete product or service offering and (2) has to be linked to actors, such as customers or end-users. It is precisely these two outcomes that are currently ill provided in hospital value propositions. Hospital decision makers, when asked to define their core business, almost often define it as “offering specialized medical services”. This is not wrong, but the same as with the scientific publishing company, the real value might be elsewhere. Examples of such “deeper core” functions can be “keeping people healthy” or “making people feel well”. When the hospitals views it value proposition in such a way, it might just as with the publishing company, result in a shift in focus where other service are provided that are beneficial to the deeper core functions. The other outcome was that the value proposition is linked to actors such as customers or end-users. The end-user of the hospital can be defined as the patient - not always the customer, though. But as we found out through our field research – hospitals often not base their strategic decisions on the demand-side (5.4.2) and also not always consider patients as the end-consumer (5.4.8). Thus in order to build a solid value proposition and answer the strategic questions of what (and for who), hospitals need to venture out and define their core functions instead of only their (current) offerings.

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The other strategic questions are where, how and when. These are all possible attributes of the value proposition if considered relevant. The very least, if one wants to build a solid value proposition, it is needed to consider each of these elements. The question of “where” can concern different definitions, including the physical location of delivery of products/services (e.g. virtual versus brick and mortar (McCabe Gorman & den Braber, 2008)) or the geographical region (more about that also in the next section on market segment). This indicates that issues of scale and scope are at the core of the organizations value (and should not be determined through circumstance). This does not address the issues of scale and scope that we have identified in the field research (5.4.3), but it highlights that it is important to make concise choices about these aspects to be able to build a further sustainable model. The “last” strategic elements are related to the questions of how and when the core offering is provided. These questions concern different topics, including the service (level) of what is provided. We have already identified through field research that current hospital offerings are largely similar (5.4.7) and also that there is much room for differentiation on the theme of service (level). As an example we mention that there currently is no one hospital that bases its business model on things as friendliness or information provided. There are currently new models emerging, such as the Planetree concept which has the idea of “open information” to patients at its core (Planetree, 2008). The conclusion about the value of the value proposition for hospitals is that it determines the attributes of the core functions of the organization, which might be more than the current ideas about product/services offered. Elements of the business models are concerned with the strategic questions of what, where, how and when. Attributes to be addressed are products/services offered, consumer/end-user connection, target market, scale/scope of the organization and service level. Additional relevant questions can also be found in Box 5.4 which features guiding questions for building a value proposition.

7.2 Market segment The market segment already came into view with defining the value proposition. They are both directly considered with the part of the business model that focuses on value creation (see Figure 4.1). But where the value proposition focuses on the high-level aspects of what target markets or groups to address, the element of market segment focuses deeper on the attributes that help to further specify this.

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Defining a market segment means that a goal is set for an attainable “market share” of possible customers. Thus the market segment must be a quantifiable and identifiable group of persons (or maybe other entities) that is reached by the value proposition of the organization. This calls for a breakdown of the different possible market segments, in order to give any relevancy to the potential of the group. This identification of possible groups poses a difficulty for many hospitals (5.4.8). Often market segmentation in healthcare focuses at least on people with medical conditions (patients) and also the length of the condition. Acute patients are (to be) diagnosed and/or treated that acute patients for example. But because hospitals are reactive organizations, the interactions of patients/consumers with the system are also reactive. That means that hospitals often have great difficulty in identifying e.g. what size of their current patients is to be considered chronic. This might be possible for hospitals to identify in the case that a patient is always a patient with their hospital, but what if this patient is treated elsewhere? This indicates why there is an increased need for accurate information tracking and storing for medical services. Nevertheless market segmentation (also beyond segmentation by medical indication) is an important issue in defining the market segment. The notion of the patient as customer of the hospital is just one of the possibilities for the hospital as we have seen (5.4.8). To determine what stakeholders are relevant for the hospital to define as part of its market segment, it can benefit from techniques such as stakeholder analysis, determining stakeholders based on power, legitimacy and urgency (Mitchell, Agle, & Wood, 1997). If the segment is identified, it must be detailed in size/volume, which in turn is needed to determine the potential of the segment. The current size/volume is needed to be able to set a starting point. To define a market segment is also to set the end goal: what share of the possible market segment does the hospital want to reach with its value proposition in e.g. 5 years? These goals are determined by at least the potential value of the market segment. In business literature the value of a market segment is often determined as Net Present Value (NPV) which is the total present value of a time series of cash flows. Using this technique shows clearly how the choice for a specific market segment connects to a later choice of cost structure and ultimately revenue (see 7.6). But there are also other options on how the hospital can value different market segments. It can well be that there are considerations of prestige or providing a full service portfolio that express the value of a certain market segment. Which such choices it is always important that these choices

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adhere to the value proposition. Especially with choices concerning prestige or exposure it is often very much the question how this relates to value for the customer. We give two examples of the link between the value proposition and market segment and how this might expand the scope of the hospital. Hospitals focus on sick people (“patients”) in their region. When researching a large number of hospitals in our field research we showed that the market segment of all hospitals is actually determined by the same two attributes: a close geographic region and often “all possible types” (or a largely similar wide customer focus) - see 5.4.7. There are two ways that hospitals can change this market segmentation and differentiate more. The first is the often proposed idea of specialization (Laeven & Vreeman, 2008): the hospital can focus on a smaller niche that allows it to focus on its other relevant business model elements of this specific niche. Another, less often used approach is to widen the scope from the domain of “sick people” to “healthy people”. This opens up a huge potential of new customers, although of course the hospital cannot longer do with a value proposition of “offering specialized medical services”, but rather will have to think about value propositions that focus on wellness and being/staying healthy. Concluding the section on market segment it shows the need for a clear segmentation of possible segments and identifying size/volume. This needs to be combined with a quantifiable objective for the future to determine the potential of a certain segment. Currently hospitals often lack such clear definitions of the market segment, making competition harder for many because they all “shoot for the same target” (5.4.7).

7.3 Strategic position The strategic position of an organization is about what the link is between the organization and its environment (H.E. Roosendaal, 2007). To be able to define the strategic position it must therefore be very clear what the borders of the organization are: where does the organization start and where does it stop? What is considered “inside” the organization and what is considered “outside” the organization? Current hospitals struggle with issues of scale and scope (5.4.3). One of the results is a tendency of hospitals to engage in mergers and acquisitions in order to tackle these issues through increased scale. But unfortunately it is often the case that patients/customers do not reap the benefits of such actions (Delnoij, 2003). There are many possible views on the organizational form that can be tested for the hospital. As well as the other factors the business model in itself does not provide an answer to what form is best, but only that it is important to consider organizational structure.

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An apparent example of hospitals considering their strategic position and respective organizational form is the idea of “collaborate to compete”, which was also often mentioned during field research. “Collaborate to compete” means that hospitals on the one side share certain facilities, e.g. diagnostic centers but at the same time compete for customers in the same market (e.g. knee replacements). These tactics are very similar to the tactics of car manufacturers where e.g. Volkswagen and Seat share production facilities and ground components, but also compete in the same market. Considering the relevant organizational form and structure for the organization, it is needed to consider the transaction costs concerned with each decision (Johnson, Scholes, & Whittington, 1997). While decisions to e.g. outsource certain organization elements might seem beneficial in terms of costs or time spent, there is always the issue of (added) transaction costs to integrate outsourced elements back into the organization (Haspeslagh & Jemison, 1991) Also decisions about organizational form are related to the needed agility (e.g. small and quick but less powerful versus large and powerful but slow) or capital intensity needed. The large capital intensity of many current hospitals is why they show such large similarities (5.4.7), because many of their activities and also needed material (equipment) are owned by the organization, rather than shared, leased or otherwise not part of the organization. The second important attribute of strategic position is the (internal) governance and control structure. While governance structure is a complicated issue already with many business organizations, it might be even more so with hospital organizations as we discovered through our field research (5.4.4). The complexity of the current governance structure complicates many decision-making efforts. To determine the strategic position (how is the organization linked to the environment) of the hospital is also to specify the governance structure. Is the management of the hospital independent from the different strategic business units (SBUs, e.g. specialties) and what does this mean for the position of the hospital? Who determines the course of which organizational element – are the SBU independent of the organization or are they steered by centralized decision making? The current governance structure is such that many of the strategic decisions are made on the level of the specialty rather than at the level of the hospital management (Lodewick, 2007). This does not have to a problem, but it signals a possible lack of coherence between strategic decisions if these decisions are not coordinated in some way. Also it is unlikely that it is possible for a hospital to realize the strategic objective of all SBUs at the same time, not having to make choices. One example of a hospital where 65

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they have changed the decision making structure is the Bronovo Hospital in The Hague. There all SBUs (specialties) can submit their strategic proposals to the hospital board which is in the position to divide the total of funds between chosen projects, other than the SBUs with the most money, being able to spend it just on their own “shop” (which could be less beneficial for the hospital as a whole). A third important attribute of strategic position (link with the environment) is where the organization places itself in the value chain. Current hospitals often define their strategic position as the “next in line of medical specialists”, because they have added expertise to the previous party in the value chain. Examples are the general hospital following up the GP, the top-clinical hospital following up the general hospital or the academic hospital following up the top-clinical hospital. All of these relationships are based on differences in expertise. But expertise is not static. This is already visible with GPs now employing more products and services previously only offered by hospitals, or district hospitals integrating offerings previously only seen with top-clinical or academic hospitals. Another example is the reordering of tasks within the hospital where increasingly complex tasks can be undertaken by an increasing number of professional trough technological innovation (Christensen, Bohmer, & Kenagy, 2000). We see that the strategic position of the hospital (its link with the environment) is important because it directly shapes what the organization does itself (how it functions internally) and what is done outside the organization. Important attributes are decisions about centralization/decentralization (collaborate to compete, in-sourcing versus outsourcing, transaction costs), governance structure and position in the value chain. A list of (additional) guiding questions concerned with strategic position can be found in Box 5.6.

7.4 Value chain The value chain is the concept first described by Michael Porter about how in a chain of activities value is added (downstream) in exchange for other value (upstream). Originally the concept was focused on industrialized businesses, but in his latest publication, Porter together with Teisberg, details what they call the healthcare delivery value chain (Figure 7.1). The healthcare delivery value chain focuses on four main levels of provided services: informing & engaging (including communication), measuring (including diagnostics) and accessing (including office visits). The fourth level is the actual delivery of healthcare split up in monitoring/preventing, diagnosing, preparing, intervening, recovering/rehabbing and monitoring/managing.

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Figure 7.1 Healthcare delivery value chain (Porter & Teisberg, 2006)

The concept behind the value chain is that every step in the chain is a value exchange. (Lancaster, 2000; Lepak, Smith, & Taylor, 2007; Porter & Teisberg, 2006) Downstream value must be added (e.g. in the diagnosing step of the healthcare delivery value chain, a clear(er) diagnosis is the added value), this should be balanced by an upstream value exchange (e.g. internal costs are calculated for performing diagnosis). This shows that steps in the value chain only are valuable if there is a balanced value exchange. Steps in the value chain that do not add value may be cut from the process to have a leaner process, with less waste. The area of value chain analysis and optimization is already relatively popular with hospital. Value-chain wide techniques include Total Quality Management (TQM), lean management and Six Sigma. Also many very focused techniques and tools are used such as optimized OR scheduling tools or technology that helps apply technology only when and where needed (such as focused radiotherapy treatment). The value chain, as any element in the business model should always be linked back to the core function of the hospital and is about providing value for the customer. (Lepak et al., 2007) identified that different types of value exist. They differentiate between use value which is subjectively assessed by customers and exchange value, which is only realized at the point of sale. This stresses the importance for those designing and analyzing the value chain to ask the question if the value delivered ads up to value that is appreciated by the customer and/or end-user. Building the value chain with that idea in mind puts focus on building a value-based strategy instead of “just” strategy. This gives hands and feet to what

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we found in our field research (5.4.5): that the relationship with the patient is considered more and more important by hospital decision makers We conclude that the value chain is already an item of focus for many hospitals through process improvements and medical-technological innovation. There are many different methods available to (further) streamline the value chain, even especially focused on healthcare such as the healthcare delivery value chain model from Porter & Teisberg. Throughout the value chain a focus must be kept on whether the value exchange is ultimately beneficial to the consumer and/or end-user in order to build value-based strategy.

7.5 Competitive strategy Competitive strategy is not a strategic element that is on the radar of many healthcare executives, at least not in The Netherlands. There are different reasons for this, including the large span of basic insurance (limiting the need to search for alternatives if something is always reimbursed), the fact that Dutch hospitals are not allowed to be for-profit and the fact that the introduced system of regulated competitions is not fully functioning yet (5.4.10) A competitive strategy is relevant to the hospital in a competitive environment (even a not fully functioning one) to deliver sustainable success. If no competitive strategy is devised, other organizations might sooner or later provide competitive offerings, including similar products with better service or “simply” better products. This will hit organizations harder once the system of regulated competition matures and they are unprepared for competition. The question to ask is what competitive strategy is relevant for your hospital. Is it about being the most profitable (for-profit), surviving or maybe being the best on medicaltechnical level? This is another point that goes back to the value proposition (if we want to be the number one on a medical-technical level we specify so in our value proposition to our customers). But there are many other dimensions besides monetary or medicaltechnical to base a competitive strategy on. The important question is to choose “what race to run” and only than decide on “how to be the best” and devising ways on how to reach that goal. To define competitive strategy is often a work of discipline and rigor in defining goals and how to reach them. Collins (2005) describes in “From Good To Great: The Social Sectors” that non-profit, just as well as for-profit institutions, can define their success (beyond the basic monetary dimensions). Collins gives an example of the Cleveland

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Orchestra. They defined their success according to three seemingly inaccessible goals: superior performance, distinctive impact, lasting endurance. Through a disciplined and rigorous approach they where able to measure their success (numbers of highly acclaimed venues players, duration of applause, number of invitations). The approaches to analyze and define competitive strategy do not have to be invented by the hospital. There are many useful tools and techniques that can assist in determining what the competitive environment and relevant competitive strategies are. Examples include Porters 5 forces model ( Figure 7.2), PESTEL-analysis (Political, Economic, Social, Technological, Environment and Legal) or SWOT analysis (Strengths, Weaknesses, Opportunities and Treats). Which model is most useful depends on the circumstances and goals defined by the organization. Figure 7.2 Porters Five Forces model

Current competitive strategies are focused often on medical-technical quality (largest number of state-of-the-art procedures, lowest number of injuries, most cited specialists). Whether these dimensions are always relevant to patients/consumers remains the question because as one of the interviewees put it: “[After our patient satisfaction survey] one of the important factors for patients to decide for our hospitals turned out be the parking ticket fee.” Formulating an explicit competitive strategy is not quite common yet with Dutch hospitals. One of the reasons is the not fully functioning system of regulated competition (5.4.9). But even in a not fully functioning competitive environment, being prepared for competition is needed to deliver sustainable success (and not being put out of business). 69

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There are several tools and techniques available, also for non-profit organizations such as hospitals, that can help analyze the competitive environment and provide the basis for a competitive strategy. Examples include PESTEL-analysis, SWOT-analysis or Porters Five Forces Framework. Important to notice is that competitive strategy in hospitals might go beyond the theme of competing on medical-technical quality, but needs to be concerned with what end-users consider as important.

7.6 Cost structure / revenue potential Cost structure defines what costs the hospital has versus the possible revenues it can generate from the products/services offered. These elements balance the business model: without a sustainable cost structure and revenue potential there is little possibility that the business will survive (even though the value created might be superior to everything else out there). This is what happened to many high-tech startups in the dot-com era (Shafer et al., 2005). The cost structure is considered a difficult issue by Dutch hospital executives, limiting their current abilities to innovate (5.4.6). Because of the predetermined cost structures (including DBC payments) little room is thought to be left for deploying (innovative) strategic initiatives. As one of the session attendees (a hospital executive) told a private clinic executive: “Of course we also want to welcome our patients with flowers, nice paintings and fancy decorated waiting rooms, but we don’t have any money to do so.” The questions concerning cost structure and revenue potential are economic and do not have to be (so much) different from other for-profit organizations. To determine the cost structure the hospitals must analyze their economic structure. Which costs are fixed, which are variable, what are the investments needed, what are our tangible and intangible assets, etcetera. Such tools and techniques are not new to hospitals and already used. What is important is that they are used within the business model to build a comprehensive strategy – so it is shown how these cost structures are relevant to realizing the value proposition. As we have seen in the field research hospitals are currently in the process of slowly replacing established policies with more explicit strategy development (5.4.10). This is different from using these techniques for accountability purposes which is often the case nowadays. The second important subject with this business model element is that of the service portfolio. The service portfolio is the range of products and services the hospitals delivers. But not all of these offerings might generate (enough) revenue to sustain themselves. This is not a problem, as long as the hospital makes clear decisions on how

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to balance the service portfolio: how can profit centers (revenue generating activities) be balanced with loss centers (loss generating activities) in order to provide a comprehensive service portfolio. Many different tools and techniques are available for the hospitals to analyze and manage the service portfolio, including the BCG matrix (Figure 7.3) and the GE matrix (Johnson et al., 1997). Figure 7.3 BCG matrix (Johnson et al., 1997)

Concerning portfolio analysis, the example of many academic hospitals makes for an interesting case. Many of them would rather divest their basic care activities, because they do not add to their value proposition of high-end, state-of-the-art care. When they do this it leaves them with crippled business logic of not having a solid revenue stream. But yet there seems not be one hospital that has identified a new cost structure, by revising their business model. What triggers this reluctance might be subject for further research, but one reason at least is the capital-intensiveness of many academic centers. Much discussion concerning cost structure and revenue potential is about “pay for quality.” This is interesting for hospitals because there is no strict definition about quality. Besides medical-technical quality, there might be very different things patient/consumers and insurers would want to pay (or exchange value) for, including additional advice, friendly staff or better information. We explicitly include exchange value instead of only pay, because new value exchanges are very likely to define new cost structures and revenue potentials. Value from patients to hospitals might include patient data, choice behavior or help in treating others. There are not yet many examples of such new types of value exchange, indicating that those who identify them might have first mover advantages.

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Concluding we say that the element of cost structure and revenue potential is the closing chapter of the business model and needs to be used proactively. Important focal points are portfolio analysis (e.g. using the BCG or GE matrices) and economic cost/investment analysis (cost types, investment needs etcetera). Currently methods concerning costs and revenue are often used for reasons of accountability, but in building an explicit strategy they need to be used proactively. Hospitals have room for devising new revenue potential beyond the currently popular mechanism of “pay for quality”. To do so the important question is if quality is always medical-technical quality or that it can also be expanded to topics such as maybe friendliness, information shared or providing a healing environment, resulting in new types of value being exchanged.

7.7 Benefits and limitations of the business model approach The business model approach as we have learned through this exploratory research has several benefits to hospitals, but also limitations – it does not solve all of hospitals problems and questions. At the end of this research we give an overview of these in the following sections. 7.7.1

Benefits

The benefits of the business model have been highlighted throughout the different chapters and sections – they are listed together in Box 7.1. Box 7.1 Benefits of the business model approach for hospital

The business model approach 1. provides an inclusive model rather than exclusive solutions 2. provides a comprehensive, structured, sequential model 3. identifies the need for making choices to build comprehensive, coherent logic 4. solves causal ambiguity 5. is usable for analyzing as well as creating new horizons

The business model is a tool rather than offering pre-defined solutions and an addition over currently available literature on hospital strategies. The business model does this by providing a comprehensive, structured and sequential model. That results in a clearer identification of the fact that hospitals need to make choices in order to build this comprehensive, coherent logic. In making these choices it solves causal ambiguity which is currently often apparent with hospitals (they are little aware of the reasons of previous success or failure). Finally, the business model approach is useful at least for the analysis of current strategic logic (steering current activities) as well as to define new and/or changed strategies (new

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horizons). These two uses might be just two of many possible uses of the business model approach (see discussion in 8.2.1) 7.7.2

Limitations

No model with only benefits exists. There are always limitations of what a model can do – for the business model we list them in Box 7.2. Box 7.2 Limitations of the business model approach for hospital

The business model approach 1. needs rigor and discipline – it does not make decisions on its own 2. only delivers results with a mindset of strategic entrepreneurship 3. works for individual organizations, less for systems

Something needing rigor and discipline might not be considered a limitation – rather a prerequisite. We list it here because this is what puts the business model approach apart from other types of strategic initiatives providing “ready-made” clear-cut initiatives rather than a repeatable model approach. Therefore the business model is only of use if the organization is willing to “invest” this rigor and discipline (including time, money and other resources) in executing the model. It asks more from organizations then picking an “off-the-shelf” solution. Such solutions can lead to the customer and the organization adapting to the solution, rather than the solution adapting to the (value) preferences of the customer and the organization. The business model approach is of no use (implementing) if it is not accompanied by a mindset of strategic entrepreneurship. The concept of value at the organizations core implies that everyone in the organization must be knowledgeable about what is considered value to deliver optimal results. If this is not the case – there is little value in “simply” applying the model without having instilled the right mindset throughout the organization. The business model approach is targeted towards individual business. Several times (in interviews and discussions) the suggestion has come up to also use the approach for analyzing the healthcare system. What value does the system provides, for whom, in what way etcetera. Using the business model approach to answering is problematic in that it the business model focuses on making decisions. With defining a healthcare system the question of finding one matching value proposition based on choices made is less likely to happen. The question for healthcare systems is how all the individual organizations fit the system (Darzi, 2007) for which the business model is less useful, but the element of strategic positioning and corresponding tools/techniques might help.

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7.8 Conclusion The business model has the ability to address the strategic issues that hospital decision makers see in their current strategic environment. It provides the hospital decision maker with a model approach (template) to focus on building a comprehensive and concise logic to make strategic decisions. Defining a value proposition requires the hospital to think about its stakeholders and its end-customers. The value proposition is not only about products and services but about core functions: is the hospital focused on curing sick people or keeping people healthy? The market segment follows the value proposition and focuses on segmenting potential customers in quantifiable groups and specifying targets for what customers to reach when. Current hospitals are showing only little segmentation in their customer focus. The link with the environment is the third element of the business model (strategic position) and oriented towards how to create the relevant value. It puts the attention of the hospital on issues of organizational structure, such as (de)centralization, in/outsourcing, transaction/coordination costs and addressing issues of governance. The relevance of determining the strategic position is that is makes clear what the borders of the organization are: where does it start and where does it end. These organizational borders are needed to further explicate the value chain of the hospital: what does the hospital do itself and where and how does it add value? In each step of the value chain the hospital takes, value is exchanged, which must be relevant to the value proposition. The following element, competitive strategy, is relevant for hospitals to offer sustainability and not be overtaken by competitors. Competitors might not be limited to the “usual suspects” of other healthcare organizations, but might come from other industries as well. Therefore also reconsidering the focus on medicaltechnical quality as a single competitive dimension is relevant. The cost structure and revenue potential of the business model shift focus towards the fact that no organization is sustainable if no revenue is generated. The hospital needs to build a comprehensive service portfolio balancing cost as well as revenue-generating activities. Considering what customers are willing to pay for (exchange value) can help in identifying new revenue streams that go beyond the current mechanism of paying for procedures.

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Listing the benefits and limitations of the business model gives an overview of what hospitals must realize when implementing this approach to build value-based strategy: + + + + +

provides an inclusive model (template), rather than exclusive solutions provides a comprehensive, structured, sequential model identifies the need for making choices to build comprehensive coherent logic solves causal ambiguity analyzes current strategies as well as tests new scenarios

! needs rigor and discipline – it does not make decisions on its own ! only delivers results with a mindset of strategic entrepreneurship ! works for individual organizations, less for systems

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“Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives.” -- WILLIAM A. FOSTER, United States Marine

8

Conclusions, discussion and f urther research

8.1 Conclusions In this research we have established the attitude towards strategic change with current decision-makers. We have done so through conducting semi-structured interviews with 11 field experts (mainly chairmen and members of hospital boards of directors). The main question of the interview was: “Will future hospitals be different and where/how will they differ?” The interviews were structured using the elements of business model of Chesbrough & Rosenbloom (2002) consisting of six sequential elements: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential. The business model approach used in the interviews was considered useful by the interviewees to structure (talking about) strategic change. But the interviewees also asked how strategic changes could be realized, rather than only discussed. This confirms the usefulness of researching the business model for hospitals as a strategy building tool, rather than focusing on pre-defined strategic solutions. Hospitals have a long history of reactive behavior towards (strategic) change. Hospital reform in The Netherlands has been (at least since the 1980s) a struggle between government, hospital management and physicians. But current pressures are signaling the need for more proactive strategic behavior on the side of the hospital. Pressures at the demand-side (demographics, patterns of disease, public expectations), the supply-side (technology and clinical knowledge, health care workforce) and on a wider societal level (financial pressures, internationalization, global R&D market) put hospitals in a position where they can no longer follow established policies. Hospitals need to balance their decisions between the value that is created for the customer as well as for the organization. This means that different strategic options have to be defined and evaluated. Each of these options needs to be concise and comprehensive in order to evaluate whether it delivers value in a sustainable fashion. The business model is a strategic model (or template) that provides decision-makers with a 76

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tool to build “tailor-made” and comprehensive strategic scenarios. This is different from offering pre-defined scenarios about strategic direction for the organization (as is often the case with current literature on hospital strategy). We have been able to identify four distinct uses of the business model as defined in literature: strategic choice, linking different strategic domains, focus on value creation and focus on value appropriation. The business model is an approach that balances the inside-out views of strategy (based on the resources an organizations has) with the outside-in views of strategy (what the competition offers and customers demand). The uses “strategic choice” and “linking different strategic domains” shows the comprehensiveness of the business model. It does not focus on one specific strategic domain (e.g. the value chain), but on providing a sound business logic that connects different domains. Using the business to focus on both value creation and value appropriation makes sure that what is asked for can be delivered, and what can be delivered is what is really for. Using a model approach to strategy, such as the business model, gives structure to be able to answer complex questions. This is useful to hospital decision makers that have since long had an organic approach to strategy. In using a concise structure it also enables decision makers to be better knowledgeable about sources of success and failure in the past, present and future – which is something that often lacks in organizations like hospitals that have less strategic experience than business organizations. The business model used in this research is based on that of Chesbrough & Rosenbloom (2002). This theory is operationalized well, compared to other definitions available in literature. See Figure 8.1 below for a graphical overview. Figure 8.1 Application of the business model in 6 sequential steps Business model Customer preferences

Value proposition

Market segment

Strategic position

value creation

Value chain

implementation

Competitive strategy

Cost / revenue

Value delivered

value appropriation

The business model consists of six different elements linked in sequential order: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure / revenue potential. At the start of the model customer preferences drive the value proposition and the result is value delivered. Value for hospitals is defined by

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three dimensions: it must be viewed from the customer perspective, it must span the complete process and be delivered through a sustainable process. To research the value of the business model approach to strategy we asked hospital decision makers for their strategic issues. See the list below for the ten most apparent issues found. Using these issues we have tested the business model approach in how it can help solve these issues. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Providing specialized medical care is considered core business Strategic decisions are often supply-driven Scale and scope are considered most important axes for change Current governance structure complicates decision-making Relationship with the patient is considered of growing importance Financial structures difficult to match with strategic initiatives Hospitals show large similarities in strategic structures/configuration Patients are not always considered end-users Regulated competition is not fully functioning yet Strategy development is replacing established policies

In addition to the strategic issues found through field research, we have also analyzed four different sources in literature about hospital strategies (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000). From the analysis of the literature we conclude that hospital strategy literature focuses on pre-defined solutions, rather than on techniques and tools to build strategy. The focus is often on how value must be realized (through strategic positioning or value chain optimization), but less on questions about what value should be realized (value proposition) or how value is appropriated (cost structure / revenue potential). The reasoning with hospital strategy in literature is often inside-out: strategy is built based on the resources the hospital has, rather than the value it should provide. The value of the business model in this aspect is the fact that it balances an inside-out with an outside-in view on building strategy. The elements of the business model (value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential) together build comprehensive, concise business logic of the organization. Each of the individual elements can provide (different) value for the hospital. Defining a value proposition requires the hospital to think about its stakeholders and its end-customers. The value proposition is not only about products and services but about 78

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core functions: is the hospital focused on curing sick people or keeping people healthy? The market segment follows the value proposition and focuses on segmenting potential customers in quantifiable groups and specifying targets for what customers to reach when. Current hospitals are showing only little segmentation in their customer focus. The link with the environment is the third element of the business model (strategic position) and oriented towards how to create the relevant value. It puts the attention of the hospital on issues of organizational structure, such as (de)centralization, in/outsourcing, transaction/coordination costs and addressing issues of governance. The relevance of determining the strategic position is that is makes clear what the borders of the organization are: where does it start and where does it end. These organizational borders are needed to further explicate the value chain of the hospital: what does the hospital do itself and where and how does it add value? In each step of the value chain the hospital takes, value is exchanged, which must be relevant to the value proposition. The following element, competitive strategy, is relevant for hospitals to offer sustainability and not be overtaken by competitors. Competitors might not be limited to the “usual suspects” of other healthcare organizations, but might come from other industries as well. Therefore also reconsidering the focus on medicaltechnical quality as a single competitive dimension is relevant. The cost structure and revenue potential of the business model shift focus towards the fact that no organization is sustainable if no revenue is generated. The hospital needs to build a comprehensive service portfolio balancing cost as well as revenue-generating activities. Considering what customers are willing to pay for (exchange value) can help in identifying new revenue streams that go beyond the current mechanism of paying for procedures. Through field research, literature research and assessing the model elements we have reached the point to draw the conclusions about the value of the business model approach as a whole, our main question for this research. We do this by evaluating the business model based on three criteria to evaluate strategic options: suitability, feasibility and acceptability (Johnson et al., 1997). Suitability is concerned with the questions whether an option fits the firm’s situation and if there is evidence to support it. The business model helps to answer seemingly complex issues by using a model approach to strategy, putting hospital decision makers in control of their own strategic decisions, rather than providing ill-aligned pre-defined solutions. The business model solves the issue of causal ambiguity by making decision-makers aware of the (needed) logic behind strategic scenarios. It enables decision makers to 79

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expand the scope of their strategy beyond medical care as their core business and focus on value as defined by customers. Strategic issues (scale/scope, governance, competition, financial incentives) all get a place within the elements of the business model to be adequately addressed as part of the comprehensive approach connecting all the domains. And not only can the business model be used to test current strategies, it is also usable to test new scenarios for hospitals looking at how to gain competitive advantage in the future. Feasibility is concerned with the question whether there are resources to do it and likely competitor response. The business model is no easy solution to implement for hospitals that have long followed established policies, rather than explicit strategy development. Rigor and discipline is needed to determine what sound business logic is. But hospitals also do not have to (re)invent the wheel. We have shown with each step in the business model that there are methods, tools and techniques that help the hospital assessing and connecting the different strategic domains. When the hospital connects these tools and techniques through the comprehensive business model it can evaluate the business logic of the current strategy as well as test future scenarios. But building a business model needs also a strategic mindset throughout the organization. When not everyone inside of the organization is knowledgeable about what the ultimate value delivered should be, it will be hard the least to deliver this, even if there is a sound logic in theory. The acceptability of using the business model is closely linked to willingness of the hospital to rethink the organization. If there is no perceived need for change with the decision-makers, there will likely be little interest in any value-based strategy (building tool) at all. If the hospital is aware of the fact that delivering value in a sustainable way is of increasing importance they will be more likely to accept the business model. During our field research we have found many examples of the fact that hospitals do perceive the need for change as well as the need for inclusive ways of framing seemingly complex problems. The business model is a likely candidate for this as we have been able to proof in this research. The business model contributes to the efforts of hospital decision makers interested in providing value to their customers and their organization: it provides them with a tool rather than a pre-defined solution. The model approach of the business model makes the hospital (decision maker) smarter and allows for a clear strategic fit with the organization. Using business models hospitals can focus on delivering value for the consumer as well as for the organization.

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8.2 Discussion The discussion questions below are based on several of the points touched in this research. The first is the focus on the use of the business model use, which is (as is the model) exclusive, rather than inclusive (8.2.1). To address the focus on value is to be addressed by hospitals in a constructive ways. This asks for a conversation with customers rather than a one-way information push (8.2.2). The third discussion point is the prerequisite of a strategic (entrepreneurial) mindset needed to make the value-based approach of the business model a success (8.2.3). The last section, 8.2.4, puts forward the discussion that a model should matter more than outcomes for it enhances the (strategic) capabilities of the organization, rather than providing clear-cut solutions put forward by others outside the organization. 8.2.1

Business model uses are many

In chapter 4 the proposed uses of the business model are listed (Table 4.1) and our analysis state four different uses: strategic choice, linking different strategic domains, focus on value creation, and focus on value appropriation. The goal is to deliver a model that encapsulates comprehensive and coherent business logic. But what ‘problems’ can this model ultimately solve? We argue here that there are two clear examples (steer current directions, set new horizons) which fit with different strategic capabilities. But the value of the business model is ultimately in the hands of the user and might be stretched further for different uses. The first focus (analysis and steer current directions) is a probable approach for many hospitals that have a not so long history with building coherent strategy. The business model approach serves as a tool that can support analysis (through following sequential steps): how well is the business logic of the current strategy? What are the value preferences and what value is ultimately delivered? This approach focuses on identifying illogic elements of the current (implicit) business model The second focus (set new horizons) is the more probable approach for hospital organizations already more aware of their current strategy and the soundness of the connected business logic. The business model can be used to revise the focus for a new value proposition and “calculate” the corresponding sequential elements. This might result in building new and different business models that better support the new-found value proposition, just as Xerox Corporation did with its spin-offs (Henry Chesbrough & Richard S. Rosenbloom, 2002). This reminds us again of the fact that not one single business model might fit all our “needs” – and we must be willing to consider splitting up different value propositions between different business models to make business prosper and deliver right value to the right people at the right moment in the right way.

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The opinion of the author is that the use of the business model is likely to be often focused on one the above approaches (analyze and steer current directions, set new horizons) but is not limited to these. What other uses for the business model are is not up to the author to define, but to the user. Suggestions include using the business model as strategic position tool (comparison), corporate communication (who are we) or internal communication (how do we work and why). The business model approach is based on inclusiveness, as is its proposed use. 8.2.2

A conversation with customers is needed, not a one-way information push

The business model is a model that focuses on value: between value preferences and value delivered. As we have identified value does not exist without the preferences of the customer. To know these preferences, it is not enough (anymore) to determine if patients are satisfied with the service provided. Hospitals must actively engage in an ongoing conversation with their patients/customers. There is a large array of possible tools that the hospitals can use nowadays so, many of them powered through the use of new communication technologies. Health 2.0 is a widespread terminology to group many of the new tools and techniques at the disposal of (for one) the hospital organization to converse with their customers. Health 2.0 is about content (information) and community (collaboration, co-creation). Examples of tools are wikis (Joint Commission, 2008), blogs (Paul Levy, 2008) or even micro-blogging (Twitter, 2008). Real value for hospitals as well as patients will be delivered if the current tools and applications evolve from community/content to commerce/coherence where the will be an integrated part of the healthcare products and services delivered by a hospital (McCabe Gorman & den Braber, 2008). 8.2.3

Strategic entrepreneurship is a prerequisite for business model success

The approach of the business model as a strategy building tool will fail without a mindset of strategic entrepreneurship throughout the organization. The business model balances value creation, realization and value appropriation:= (comprehensiveness). One of the aspects of comprehensiveness is that the “results” of the business model are visible throughout the organization and all link up to sound business logic starting with value preferences. When all elements of the business are retraceable to the value preferences of the customer, then all of the stakeholders of the organization must be aware that these preferences are at the core of how the organization works. Strategic entrepreneurship is about creating awareness in the organization at all levels. Everyone, from the cleaner to 82

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the hospital executive must know what value means, to its customers (what do they want) and the organization (how do we work). The full potential of a value-based approach like the business model only shows when everyone in the organization is aware of the value that forms the fundaments for everything else the organization does. 8.2.4

A model should matter more than outcomes

Many approaches of researching hospital strategy focus on exclusive outcomes, rather than the approach. Although the approaches presented are often thought-provoking and a good starting point for discussion, they do not provide a constructive way into helping hospitals solve problems on their own. It makes them “more wanting”, instead of “smarter”. Hospitals that focus on (strategic) sustainability of their own organizations benefit from approaches which provide constructive tools and ways of building strategy including the business model, than from only futuristic visions. As long as the knowledge of constructing solid strategies still rests with consultants and other external organizations, hospital will not have to depend on others to build their strategies, instead of being able to stress their own preferences to their full potential.

8.3 Further research In this research not every question posed can be answered within the research scope. Different topics have come up that pose interesting questions for further research which may be followed up by other scholars interesting in expand, strengthen and test business model theory in hospital organizations and beyond. 8.3.1

What are current hospital strategy development practices?

The focus of this research has been to test the value of business model theory for hospitals (in an exploratory fashion). This scope has limitations in that it for one does examine current strategy building practices and compares them to the approach of the business model. Future research may be focused on determining the strategy development practices of current hospitals. When comparing these with each other as well as with the business model approach this might be insightful and help to determine where and when different tools and methods can be optimally deployed.

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Refine business model element guiding questions

The current guiding questions of the different business model elements (Box 5.4 - Box 5.9) can be further refined. Currently these questions are based on a selection of hospital decision makers. This can be extended by taking them “outside” and combining them with views of (1) more decision-makers and (2) others outside of the regular decisionmaking field. This gives room to e.g. let patients help hospitals build strategy by defining their value preferences, expressed as guiding questions. 8.3.3

Expand current research to other healthcare organizations

This research has explored the application of business model theory mostly for a single type of healthcare organization, the hospital. Now the foundations for the combination of these two - previously thought disjunctive fields - has been laid out, it is possible to expand to other areas of research, such as other healthcare organizations. Widening the field of possible organizations to apply the business model too, might also call for a more specific revision of relevant guiding questions, as was defined in 8.3.2.

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Appendix A Interviewees Table A.1 below lists the interviewees of this research. There are a total of 12 interviewees: 11 hospital Board of Directors chairmen and members (2 general hospitals, 4 top-clinical hospitals, 3 academic hospital centers and 2 specialist hospitals) and 1 healthcare entrepreneur. Table A.1 Interviewees

Deleted for privacy reasons – contact the author for more information

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Appendix B Attendees disc ussion session The tables below list the attendees of the discussion sessions of March 7th 2008 and April 9th 2008. The total number of attendees in the first session (March 17th, 2008) was 16. Together they represent a diverse spectrum of hospital and healthcare-related organizations: ! representing a hospital or healthcare delivery organization (7) ! representing a (specialist) association (4) ! representing a hospital-related government organization (2) ! representing a facilitating organization (3) Table B.1 Participants first discussion session (March 7th, 2008)

Deleted for privacy reasons – contact the author for more information The total number of attendees for the second discussion session (April 9th, 2008) was 17 also representing a diverse spectrum of organizations: ! representing a hospital or healthcare delivery organization (7) ! representing a (specialist) association (3) ! representing a hospital-related government organization (3) ! representing a facilitating organization (4) Table B.2 Participants second discussion session (April 9th, 2008)

Deleted for privacy reasons – contact the author for more information

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Appendix C Strategy canvas scoring questi ons Table C.1 Strategy canvas scoring question: value proposition Level of V1: Diversity in medical treatments V2: Complexity of medical condition V3: Treatment volume needed V4: Service level V5: Coordination of care V6: Education and training V7: Research V8: Non-medical services

Question What is the diversity in medical treatments? What is the complexity of the medical condition? What is the relevance of volume, needed for medical treatments? What is the level of service the organization provides? What is the level of coordination of care? What is the level of education and training the organization offers? What is the focus on research? What is the extent of non-medical services offered?

Table C.2 Strategy canvas scoring questions: market segment Level of M1: Patient M2: Physician M3: Healthy people M4: Sick people M5: Geographic scope

Question Is the patient the primary client of the organization? Is the physician the primary client of the organization? What is the focus on healthy people? What is the focus on sick people? What is the size of the adherence area?

Table C.3 Strategy canvas scoring questions: strategic position Level of S1: Cooperation: primary process S2: Cooperation: support process S3: Growth S4: Social-economic role S5: Innovation S6: Transparency S7: Supply chain integration S8: Public-private partnerships

Question What is the level of cooperation with "competitors" on the primary processes? What is the level of cooperation with "competitors" on the support processes? How important is growth? What is the importance of the organization as a social-economic entity? What is the focus on finding new products and markets to serve? What is the level of openness offered to clients? What is the level of integrating other parties into the organization? What is the level of participation of public-private partnerships?

Table C.4 Strategy canvas scoring questions: organizational structure (value chain) Level of O1: Process optimization O2: Physician in the lead O3: Management in the lead O4: Capital intensive O5: Standardization of care O6: Outsourcing

Question What is the role of process optimization? Is the physician in the lead? Is management in the lead? What is the capital intensity of the organization? What is the focus on standardizing care? What is the level of outsourced activities?

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Table C.5 Strategy canvas scoring questions: cost structure / revenue potential Level of E1: Focus on cost reduction E2: Focus on profit E3: Value-based payment E4: Cost-based payment E5: Insurer payments E6: Income from private payments E7: Income from non-core activities E8: Income from (public) funding E9: Income from private investments E10: Negotiable prices

Question How important is reducing costs? How important is profitability? Are payments based on the value delivered? Are payments based on the costs incurred? Are services paid for by an insurer? Are services paid for directly by the client? What is the reliance on income from non-core activities? What is the reliance on (public) funding? What is the reliance on private investments? What is the level of negotiability of prices?

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