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Applying the Five Forces

Applying the Five Forces. by Wesley Shu, text by D. Besanko et al. Hospital Market in Chicago Area. Thriving in 80s, then declined, recently on the rise. Internal Rivalry – Background. about 70 hospitals, mostly independent, i.e., low Herfindahl index (HHI) Fierce internal rivalry, because

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Applying the Five Forces

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Presentation Transcript

  1. Applying the Five Forces by Wesley Shu, text by D. Besanko et al.

  2. Hospital Market in Chicago Area • Thriving in 80s, then declined, recently on the rise

  3. Internal Rivalry – Background • about 70 hospitals, mostly independent, i.e., low Herfindahl index (HHI) • Fierce internal rivalry, because • Many competitors • Production costs vary • Substantial excess capacity – occupancy rate < 70% at many hospitals • Stagnant or declining demand

  4. Internal Rivalry – MCO Took Advantage • Managed care organizations (MCO, insurance companies) took advantage: • Contract with hospitals offering the most favorable rates • Lower the co-pay to encourage patients to choose those hospitals • Due to high price elasticity, demand increase – hospitals are more homogenous

  5. Internal Rivalry – MCO Took Advantage • Negotiations between MCO and hospitals were secret, hospitals in disadvantageous position • Contracts are infrequent – hospitals assumed pressure

  6. Internal Rivalry – Hospital Fought Back • Established brand identity, e.g., Northwestern Medical Center • Diversified into related products, e.g., skilled nursing services • Differentiated their services, e.g., establishing cancer center, etc. • Patients required hospital in neighborhood – increase loyalty • Merger

  7. Entry - Barriers • Government regulation on new hospital construction • Hospitals are capital intensive • Brand identity not easy for new hospitals

  8. Entry – The Other Side • Chicago area grew • Innovations allowed smaller niche hospitals

  9. Substitutes and Complements • Few inpatient services could be performed outside the hospitals • But improvement in surgical techniques made it possible • Outpatient diagnostic facilities (ODF) – substitutes • But ODF can also be complement – hospitals already had technology and experience to do it – economies of scope

  10. Suppliers • Demand for nurses high, supply low • Price rising for drugs and other medical supplies

  11. Buyers • Insurers wield substantial power • Insurers are large size – high negotiation power, e.g., Blue Cross and Medicare • Highly skilled physicians became strong buyers who brought patients

  12. Overview

  13. Pentagonal Analysis

  14. Use of Pentagonal Analysis • Compared the intensity of competition of two industries (or the same one, different time) • Entry strategy and decision for entrant, ex. • Better enter in 80s in Chicago hospitals than now • Now, form an alliance with suppliers or buyers to bargain or compete with sub/comp and other hospitals • In 80s, differentiate to avoid sub/comp

  15. Template – Internal Rivalry

  16. Template – Internal Rivalry

  17. Template – Threat of Entry

  18. Template – Threat of Entry

  19. Template – Substitutes & Complements

  20. Template – Suppliers

  21. Template – Buyers

  22. Template – Buyers

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