Strategic planning in laboratory industry

Strategic Planning

Dr Varsha Shahane

Objectives• To define strategy and contrast strategic

planning with the management of operations• To describe the competitive structure of the

laboratory industry• To articulate the elements of competitor

analysis• To characterise strategic positions commonly

used by clinical laboratories• To explain how strategies are sustained and

how they commonly fail

Marketing

Finance

Operations

Introduction

• Operations management –

efficient use of resources, supply chain management, financial planning, quality control.

• It includes optimizing all processes namely – marketingclient servicesspecimen processingbillingsafetyinformation technologytesting operations

Business strategy• It is all about equipping an organization to withstand

competitive market forces• To maximise the effectiveness of each part of the lab

system (operations management)- delete parts which do not fit into the strategy (business strategy)

• To understand the structure of her industry, her firm’s competitors, define a unique market place for her lab, enable her lab to withstand fierce competition

• Be creative but disciplined.....focus on GROWTH !

Elements of business strategy

• Understanding industry structure• Assessing a firm’s and competitors’ strengths

and weaknesses• Identifying a distinctive market position• Adopting business activities that reinforce a

market position• Avoiding common strategy traps Operations management ↔ Business

strategy

Economic theory• When one firm earns profits that are larger

than average, other organizations will emulate the firm’s practices and subsequently be on the same level of profits as that of the firm.

• So, profitability of firms in an industry should tend to equalize over time.

• If a firm consistently outperforms its adversaries, then there are factors other than operational effectiveness at work in the marketplace

Strategic planning- to formalise or not to formalise, that is the question !

• Henderson – most dangerous competitors are the ones who are like you !

o Differences between you and others are the basis of your advantage

o Also, not all stakeholders be involved in developing a business strategy

o No need of a written document

Work upon the differences between your firm and its competitors ONLY and build your strength on this factor alone

• Kim and Maugorgne opine that when all stakeholders are included in the strategic planning, the competitive agendas of each one of them clash and a clear sense of purpose is lost

• Some think that a written document can in fact mislead an organization. Because business strategy is all about ‘insights’ rather than ‘plans’

• Current needs and demands, the current trends, selling skills etc –The present TIME- has to be considered rather than a standardized document.

• According to some – inputs/ feed back is very crucial to develop strategies. This is not so in case of ‘non profit companies’ or ‘ mission based/ charitable’ firms

Formal strategic planning process

• Formation of strategic planning committee• Development of a mission statement – values and

targets• Situation analysis – strengths and weaknesses of the

organization are analysed. Threats and opportunities are identified

• Development of tactics (specific objectives) that will further the organization’s mission

• Formalize and document all policies of the strategic plan and distribute it to all board members and senior staff

Structure of the Clinical Laboratory Industry

• Competition pressure is not only from the existing rivals but also from

potential future candidates substitute products customers suppliers

So, first know the structure of your firm ! KNOW THYSELF !!

So, first know the structure of your firm KNOW THYSELF !!

(i) Size of the testing market

As a rule : Revenue = Quantity x price Demand α 1/ price

• Inpatient v/s Outpatient• Routine v/s esoteric

(ii) Concentration of competitors• Mergers and acquisitions of hospitals• Consolidation of commercial labs

(iii) Barriers to entry

• State and federal regulations – labs must meet experience and education demands (accreditation) – limit entry to lab industry

• Customer and physician loyalty• Inaccessibility to doctors• Cost to customers of switching – patients and

physicians switch from lab to lab- patient data update problem

(iv) Barriers to exit

• Unprofitable hospitals not permitted to be closed by local community

• Specialised staff in unprofitable hospitals/labs not willing to leave employers produces surplus of competitors- lab/ hospital keeps ‘working’ without any work !

(v) Seperation of payor, purchaser and beneficiary

• Insurance companies and government is the payor. Rarely it is the patient, nowadays.

• It is neither the payor nor the patient who orders the lab services. It is the doctor.

So the health care industry is fragmented as the roles are separate- it can affect competition and incentives. Exact inferences cannot be made - affects policy making.

(vi) Economies of scale

• Volume of tests done per full time staff and cost/test- most important to determine cost effectivity. Other factors which have a heavy impact on economy of the lab namely, marketing, courier, transportation services, professional oversight, informatics are overlooked.

(vii) Markups and Kickbacks

• Doctors consultation fees added to the lab services in insurance programs – markups

• Doctors benefit from the lab economically by way of referral services to that lab – kickback

• Unnecessary tests avoided, but with strict laws, lab offers services at higher price than the prices offered with the markup policy !

(viii) Powerful buyers and sellers

• Sellers build a strong and close relation with buyers. They produce a unique position for themselves and thereby blunt all the competition.

• Insurance companies are powerful buyers who greatly influence the working of the lab in many respects, namely, reporting structure, turn around time, costs, billing policies etc

(ix) Substitute products

• Certain factors like (i) non laboratory workers using lab equipments (ii) pharma companies running medical programs and (iii) demanding lab services - over the counter requests – affect the overall working of the lab industry. It alters the total scenario of the present day trends in the lab industry. USA has strict laws to curb these factors, not so in many developing countries.

(x) Economics of inpatient care

• This refers to inpatient/ hospital based labs. Depends totally on the responsible physician or the hospital policy which solely influences its economics.

Strategic positions in the lab industry

• It refers to an organization’s commitment to serve the needs of a ‘specific group’ of customers or ‘specific needs’ of customers

Types of strategic positions

• Variety based : perform narrow scope of services exceptionally well, faster and sometimes at cheaper rates than rivals

• Need based : to serve the needs of a defined demographic group

• Access based : due to geography or differences in size of the customer pool

• Cost based : some competitors profit by lowering the production costs

• Product differentiation-based positioning : convincing the customer through marketing or different attributes that their product is superior

Strategic positions of clinical laboratories

• To differentiate themselves from rivals • To defend their operations from competition outpatient – centered testing : exclusive contracts

with multiple insurers, large volume to contain costs, extensive courier system

Reference centered testing : specialized and esoteric testing, specimen logistics, professional support

Hospital-centered testing : support for inpatients and intensive care, participate in hospital planning committees

• Discipline centered testing : specific tests with specific format of reporting ( urology, dermatology etc) eg- PSA + prostate biopsy reports

• Community centered testing : outreach by hospital labs to physicians on medical staff

• Multi-hospital core laboratory : centralization of routine testing by labs of a multi hospital system

• Co tenancy : shared ownership of esoteric lab by a group of hospitals

Implementing strategy

• Tradeoffs• Hospital based labs ↔ community physicians• Lab ↔ group/ association → insurance

companies , community physicians

Failure of strategy - 3 types of preventable errors

• Straddling : an attempt to hold several stategic positions at once, focus is lost. Trade offs !

• Growth trap : do the additional services fit with the firm’s existing strategy ? And to the existing competencies ?

• Hubris : loss of contact with reality and an overestimation of one's own competence or capabilities, especially when the person exhibiting it is in a position of power.

SWOT Analysis

• Weakness →strength →opportunities → threats

• Competitor Analysis :

competitor’s goals competitor’s assumptionscompetitor’s capabilities

SWOT Analysis - exercise

Favourable Unfavourable

• Internal

• External

Strengths Weaknesses

Opportunities Threats

Win over your competitors !ALL THE BEST !!