One of the key issues for NHS organisations is the issue of how to manage in a dynamic and competitive market place whilst at the same time operating within the boundaries of national tariff, payment by results and choice.
We see many organisations embracing the challenges and opportunities that these policies present. It also presents a way of bringing a demand and supply cycle common to industry to the heart of the NHS. This paper sets out how NHS organisations can use a tried and tested industrial method of developing a competitive strategy to help respond to market forces and to forecast the evolving industry structure.
Aspiring and existing Foundation Trusts need to have in place a mechanism for the development of a robust service development strategy that has a deep understanding of changes in the market place, how these will affect them and importantly a model for developing their competitive strategy.
Michael Porter said that the intensity of competition in an industry is neither a matter of coincidence or luck. Rather, competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors. The intensity of competition ultimately depends upon the collective effects of five forces:
Substitutes - threat of substitutes
Suppliers - bargaining power of suppliers
Buyers - bargaining power of buyers
Potential entrants - threat of new entrants
All acting on Industry competitors - Rivalry among existing firms
This model is well used and has stood the test of time in industry. It is equally applicable in today's NHS market. It provides a framework for holding strategic conversations with key stakeholders and acts as a catalyst for understanding changes in the economic and competitive environment.
The use of this model enables organisations to consider key aspects of business strategy and will generate different thought insights that ultimately lead to clear decisions regarding direction and tactics in how to respond to market signals.
Fundamentally NHS organisations need to develop a competitive strategy as a key component of their overall strategic plan. This is more than scenario planning on excel. When applying this model in the NHS there are some key issues that typically arise. These are considered briefly in turn below:
Rivalry among existing firms - Rivalry has in many ways been in place since the NHS was created. In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and in today's NHS, for the moment, there is less overt rivalry because of the duty to provide healthcare for all. In industry firms strive for competitive advantage over others - and yet we see this becoming a theme in the NHS particularly where there are a number of similar providers in close proximity and many facing large deficits, often resulting in mergers or as we have seen recently, acquisitions.
The types of behaviour amongst rivals likely to be witnessed include:
- Changing prices - raising or lowering prices to gain a temporary advantage
- Improving product [service] differentiation - how can we improve features of the clinical services we offer
- Creatively using channels of distribution - using vertical integration is something we can expect to see in primary care with GPs providing end to end secondary and primary care.
NHS trusts now operate in an environment whereby low switching costs exist - when a patient can freely switch (exerting their patient choice rights) from one supplier to another there is a greater struggle to capture patients. Currently we also see potential of an industry shakeout - the NHS is a growing market, mergers are likely, acquisitions have started and ultimately if a true industry model were ever to exist healthcare organisations could be placed into administration rather than turnaround mode.
Threat of substitute products and suppliers- we are seeing this already. Independent Sector Treatment Centres providing services and diagnostics are here; long standing private healthcare providers remain but are also feeling the strain of a market where supply is increasing; however, one of the biggest threats in this area could come from entrepreneurial GPs who embrace the new potential that practice based commissioning brings.
It is not only providers of services that this market force relates to. Technological advances in healthcare and improvements in drug treatments continue and therefore play a part in helping organisations understand that investing in substitute 'products' could act as a way of securing future service provision.
Buyer power - The power of buyers (commissioners) is the impact that customers (patients) have on a producing industry. Commissioning functions are changing. We are likely to see larger conglomerate commissioning agencies contract with providers to ensure that best quality and access is achieved. Commissioning buyer power can be increased where they are concentrated - look out for the development of large commissioning hubs representing cooperatives of primary care trusts. Commissioners will be powerful buyers if they purchase a significant proportion of clinical output, and they will be powerful if they develop a powerful backward integration threat through the acquisition of the supplier (such as the expansion of primary care through inpatient surgery?)
Supplier power - NHS Trusts who supply services can be powerful in a number of ways. The location, historical reputation and track record of solid performance all contribute to maintaining a powerful force. Potentially they could increase this by developing a credible forward integration threat. For example, if suppliers (e.g. a foundation trust) provide their own out of hours service for GP provision (e.g. they employ GPs direct) it could provide a potential income generator. As eluded to above, local "customer" support can act as a powerful leverage for maintaining the status quo - how often do we see local residents lobbying for the protection of their hospital?
One key element for Foundation Trusts to consider is to encourage as many members of the local economy to become members of their local Foundation Trust. It is highly likely that if they are members they will want to choose their local hospital and consequently "tie" themselves to the Trust, ultimately making it their supplier of choice. Switching costs then increase.
There are weaknesses to consider briefly. If many suppliers provide the same range of services (more likely in urban/inner city areas than rural NHS); then individual suppliers will need to find a differentiator to ensure that the commissioning bodies still send business their way - if this does not occur - as mentioned elsewhere in this paper - Trusts will close and/or merge. Additionally, if commissioners develop credible backward integration channels (e.g. provision of "in-house" surgery, employment of clinical consultants), then we could see an interesting model of competition develop.
Barriers to entry and threat of entry - the NHS with the policy of plurality and choice has provided a large entry opportunity for the independent healthcare sector. This is a big threat to existing NHS suppliers.
Barriers to entry arise from several sources, and although Government is normally a key barrier, for the NHS it has been the main source of threat of entry. One could argue that patients want more choice and yet it could have been provided with more NHS provision. Regulation still exists and will be a barrier to some independent healthcare providers.
There are also difficulties for suppliers to exit the market. Specialized assets will have been procured; high exit costs will exist and there will be a level of interrelationship with other businesses.
In summary, NHS organizations need to work through a model such as this to unravel the complexities of their own local circumstance. In particular the introduction of new providers, larger and potentially more powerful commissioners, means that the need to develop a thorough and dynamic competitive strategy to recognize and act on market signals early, is now higher than ever before.
David Ramsey is a senior member of the Courtyard Group, which is a Canadian healthcare consulting company operating in the UK