This article addresses the commercial mission of a hospital as distinct from its purpose. Revenue is the lifeblood of an organisation. In this context, to do well, the best business leaders focus on one of three disciplines. They focus on lowering costs, create innovative products, or provide excellent customer service. From a customer’s point of view, such focus delivers lower prices, better products or better customer service.
Prevailing thinking suggests that organisations should focus on one discipline otherwise they run the risk of diluting their overall offering. However, with the use of enabling technology and network effects, there is another discipline, marketing innovation. Market innovation is about creating new demand.
The fourth discipline
Paul Broadfoot, the author of ‘Xcelerate’, suggests that this is a fourth discipline, market innovation that can change the way that business is done so that companies are defined less by their products or services and much more by their ability to move markets. They become xcelerators. They add new users to the market and create a product or service offering that’s superior in performance.
Although xcelerators are enabled by technology, they do not invent the technology. Companies that invent technology become innovators in their fields. Companies that use new technology and change the way the industry works become xcelerators.
In this post, I would like to explore how the Xcelerate Framework could be used to change the way the hospital supply chain works. Changing the hospital supply chain will create a source of income for hospitals independent of regulation funding.
The Hospital Supply Chain
In hospitals, the supply chain is the second-largest expense category after labour costs. According to the Logistics Bureau is likely to overtake labour costs by 2022. With the covid-19 pandemic and the disruptions to the global supply chain, these costs may already have overrun labour costs.
Traditionally the hospital supply chain is fragmented. It is hampered by conflicting goals and is operated by several professional stakeholders. In my experience, the main hospital warehouse holds under 20 per cent of the hospital’s inventory the other 80 per cent is either brought in as required or managed by clinical stakeholders themselves in their treatment rooms or specialist stores. Hence, orders are placed by different professional factions within a single hospital and these are fulfilled by multiple manufacturers, wholesalers and distributors.
The sheer variety of product ranges and the different types of individual packaging makes the hospital supply chain a very complex environment. As a result, the hospital’s loading dock fills up fast each day, with bulk deliveries and small orders arriving constantly. These deliveries must either be put away in a warehouse or distributed around the hospital campus.
Efforts to reduce healthcare supply chain costs are gaining momentum as hospital and healthcare executives seek ways to do more with less.
Doing more with less
To appreciate how the xcelerate framework can be useful we must first understand the implications of disruption. Disruption is an unfortunate term. Market innovation is perhaps a better term. The concept has been misunderstood as it has been disproportionally applied to start-ups.
Christensen defines it as a process whereby a newer market entrant, often a smaller company with fewer resources, introduces a product or service that caters to segments of the market that incumbents have overlooked or whose offering is less appealing.
The new offerings are often not as good as the incumbent’s but are often cheaper. The new offering finds a foothold in the market, from which the new entrant can improve performance to the point where an incumbent’s mainstream customers start switching to the disruptor.
To think only of start-ups is to throw the baby out with the bathwater. Notwithstanding the difficulty of organisational change, the key criteria here is improved performance. So let’s ask how hospitals can improve performance to create opportunities for market innovation instead of asking how new-entrants disrupt the market.
Hospitals, similar to large organisations, have many internal customers. In the hospital supply chain, we need to ask which internal-customer segment is not being adequately served. Looking in from the outside, we can hazard a guess that 80 per cent of the customer base is not being served – the clinicians.
An audit of the hospital supply chain by the Western Australia Auditor General’s Office found that once an item left a shelf, no hospital can determine if the item was used, discarded, or remained somewhere within the hospital. Item use or waste was not known.
The current hospital accounting system considers all items as consumed once it is sent to the user department. No further tracking of the product occurs.
A study in the United States found that clinicians took items out of circulation and created private stashes. This resulted in 60 per cent of inventory being underutilised, with the flow-on effect that in an average-sized hospital approximately $10 million was of surplus stock was purchased although the items were at the hospital. Nurses spend 20 per cent of their working day looking for items and often a third of all operation procedures had to be delayed or postponed.
There is a need for industry-wide improvement. Broadfoot makes an important distinction in market innovation. He says that successful companies leverage newer technology, they do not invent the technology, to change the way the industry operates.
The Xcelerate Framework
The xcelerate framework comprises of four models:
1 The business model
The business model is the strategy used to create and capture value for customers. The cornerstone for creating a business model is to understand what income-generating assets are required and to identify what the income-generating activities opportunities there are. The hospital supply chain, to the best of my knowledge, has never been seen as a potential source of income.
Broadfoot identifies six different types of income-generating assets. These can be physical, financial, digital, knowledge, marketplace, or syndicate [I refer to this as networks. Use this link to learn more about Network effects].
Broadfoot identifies four different activities. These are distribution, connection, creation, and contracting.
What would happen if hospitals are seen as marketplaces? Could they, like supermarkets and Amazon, be able to charge for shelf space, listing fees, transaction fees and advertising? To explore this further click on this link Paul Broadfoot.
2 The revenue model
Business leaders can increase business income by changing the revenue model. The revenue model is easier to change than the business model. Changing the revenue model does not necessitate changing the business model. To work out the best revenue model to use we need to answer two questions:
- Will the customer own or rent the asset?
- Are there more than two parties involved?
The answers to these questions generate four revenue options. These options can enhance the business model.
This is the most common revenue model. It involves two parties usually a buyer and a seller. Ownership changes when the transaction is completed. These transactions take place when we hire a plumber, visit the supermarket, hail a taxi, or purchase goods.
This is usually a three-party transaction. A facilitator earns a fee for introducing two parties involved in a transaction. These can be seen in real estate, broker, or recruiting contracting.
This involves payment in exchange for usage, time, or access. Ownership does not change and there are usually two parties involved. We often experience this when we pay subscriptions for the use of products or services. Once utilisation payment stops so does the ability to use the service.
GE changed its revenue model from a transaction model to a utilisation model when they started selling their engines for a fee per operating hour.
With affiliation, there are usually three parties involved. We often see this involved with membership sites like LinkedIn and professional or recreational clubs.
How could the hospital supply chain reinvent their revenue model to incorporate transaction, introduction, utilisation and affiliation fees?
3 The communication model
Revenue is the lifeblood of a company. When a company operates differently from the prevailing model used in an industry it can gain powerful growth. However, this must be communicated properly. The xcelerate communication model identifies eight different communication channels. In B2B communication face-to-face and word of mouth are the most promising channels. In the early stages of change, these are the most effective channels to use.
4 The differentiation model
The differentiation model defines how a company can grow, dominate, and win business using its ‘difference’ as a strategy.
The strategy for differentiation does not seem to have changed in the past few decades. In 1980, we had the Porter model which defined the strategies as cost leadership, uniqueness of product and services, and market niche. In 1993, Michael Treacy and Fred Wiersema postulated three values, operational excellence, product innovation and customer intimacy. In 1999, John Hagel and Marc Singer wrote about infrastructure, product innovation and customer relationships.
Each of these examples presents the same three ways of differentiation. Cost leadership, product innovation, and customer focus. And, all three perspectives suggested that companies should focus on only one dimension because trying to focus on all three diluted success.
More recently successful companies like Amazon, Netflix, Dell, Xero and Uber have shown that by innovating the way that business was done in their industry they were able to spread their resources across multiple dimensions. These companies used newly available technology, which they did not invent themselves, to change the way that business was done with exponential success.
How hospitals can achieve similar results
Google, Amazon, Facebook and Apple are seen as new age businesses because they use readily available technology to enhance the way markets work. In a previous article, I have written that in this networked world companies never work alone. They collaborate with other organisations adapting business practices to obtain increasing returns. The crucial high-level commitments for these corporate worlds are maintained by the CEO and the board of directors.
Hospitals can begin this journey if they act on the Western Auditor General’s report to stop the waste that is occurring internally with newer track and trace technology. The savings gained can be used to change the way the whole healthcare marketplace works for the betterment of everybody.
If you enjoyed reading this post, please share it with your colleagues. You may also enjoy reading my book, ‘Hidden Hospital Hazards’. Use this link to download a free copy.