In ‘Linked: How everything is connected to everything else and what it means for business science, and everyday life’ Albert-László Barabási says that traditional businesses struggle with diminishing returns. New Age Businesses, in contrast, are constantly growing and reap increasing returns. This is a new phenomenon that leaders need to understand. New Age Businesses are shifting from owning physical assets to working with digital bits and information. As the value of physical inventory held in-house decreases, the business strategy must move to collaboration.
Such businesses are premised on growth and network effects, but growth and network effects alone does not account for success. They do not offer a miracle drug or a strategy that makes organisations invincible. The important role they play is in helping organisations adapt rapidly to changing market conditions.
Barabási says that businesses need to understand how networks grow. How each node exhibits preferential attachment and how nodes exhibit fitness. With this understanding businesses are better able to collaborate.
Collaboration for success
In the 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.
In a previous article, I referred to W Brian Arthur, who said that harnessing network effects were likely to be seen as a high-tech response when it is really about psychology, leadership and cooperation. Organisational socialist, Walter W. Powell suggests in ‘Neither Market nor Hierarchy: Network Forms of Organisation’, rather than use the standard market strategy for driving the hardest possible bargain for immediate exchange, network organisations focus on creating indebtedness and reliance over the long haul. Buyers and suppliers are not seen as competitors but as partners.
Where do hospitals begin?
In ‘The Networks Effects Bible’, James Currier writes that network effects account for 70% of the value created in technology since 1994. Although he identifies 13 network effects, he suggests that the important thing is, to begin by using one network effect; the other network effects are easier to build on top of the first.
The logical place for hospitals to begin would be materials because this is the 2nd largest category of spend in hospitals coming closely after manpower.
Marketplaces – two-sided networks
Let’s look at the growth of the Amazon marketplace and its relevance to hospitals. Matt Ward in ‘The five types of network effects and how to hack them’, says that Amazon started as a bookstore. Onboarding the first buyers and sellers were hard, but fast forward today and it’s one of the fastest-growing organisations.
Hospitals have a head start on Amazon. Amazon had to find their consumers, but for hospitals, consumers beat a path to their doors. Hospitals already have patients, physicians, medical device and pharmaceutical companies scrambling to get on board.
What hospitals lack is Amazon’s onboarding approach, they must like Amazon offer the widest possible choice, lowest prices and easy satisfaction. Why can’t hospitals use a similar flywheel, beginning with choice? I suggest choice because it generates indirect network effects that fuel growth. For hospitals, a marketplace is the most obvious starting point. Both sides of the marketplace are scrambling to get on board.
Indirect Network Effects
The mechanism for lowering costs and prices come about by indirect network effects. James Currier’s diagram depicts the mechanism that drives such a reduction.
The larger inventory in the diagram, in keeping with Barabási’s insights on ownership, should be carried by channel partners and not owned by the hospital. Hospitals are uniquely placed to engage 3rd Party Logistics Providers (3PLs) as channel partners. Most medical devices, consumables and pharmaceutical items are warehoused and distributed by 3PLs on behalf of the vendors that sell items to hospitals. As channel partners, 3PLs and hospitals will incur increased value.
In mid-2015 James Currier wrote about a new kind of market network. What was unique about market networks was that:
- It combined the main elements of networks and marketplaces.
- It used SaaS workflow software to focus around longer-term projects, not just quick transactions as done in marketplaces.
- It highlighted service and product providers as differentiated entities interested in building long-term relationships.
- It is unique from a monetisation point of view combining the strong elements of networks like LinkedIn with the revenue models of SaaS or marketplace businesses.
Seven Attributes of Successful Market Networks
James Currier says in the last decade tech companies have been obsessed over on-demand labour and ease of use marketplaces. The media abounds with stories about Uber, Airbnb, and Amazon. These organisations are focussed on commoditising products and services. This leaves a gap for pushing higher-value goods and services.
1 Market networks target more complex services
Healthcare and hospitalisation is a complex offer that is suited to such a market network. Most are highly involved and require longer-term engagement. In healthcare, people matter on both sides of the equation.
2 People matter
With a complex service such as healthcare, each person is unique and the professional they deal with matters. The person on both sides of the equation is not fully interchangeable like they are with commoditised services. Each person brings their unique perspectives, expertise and relationships to the transactions. In these instances personal histories matter. Hence a market network that acknowledges this core element is valuable.
3 Collaboration happens around a long-term intervention
For such complex services, multiple professionals collaborate amongst themselves and with the client/patient over some time. The SaaS at the center of market networks focuses on the action which can take days or even years to complete.
4 They have unique profiles of the people involved
Healthcare is generally provided locally. Information unique to such local contexts gives everybody a reason to keep interacting and provides lifetime value.
5 They help build lifetime value
When professional services move more and more onto software professional connections become more useful. Social networks like LinkedIn and Facebook have helped build professional profiles, however, most monetary transactions occur offline. Market networks make it possible to complete monetary transactions in one place building lifetime value for all involved.
6 Referrals flow freely
In healthcare, referrals are valuable for the client as well as the professionals involved. Market network software makes referrals simple and more easily assessable.
7 They increase transaction velocity and satisfaction
By moving the network of professionals and clients onto software, the market network increases transaction velocity for everyone. The software increases convenience for everyone.
Integrated value for everybody
Hospitals play a valuable part in our lives. In this article, I have tried to show how hospitals can integrate this value for everybody. The road map that I have drawn begins with the importance of networks in our connected world.
I have said that new-age businesses that understand how networks grow can harvest increasing returns, while traditional businesses that do not use networks will continue to struggle with diminishing margins. Hospitals can integrate value for everyone by first setting up a marketplace and then building other network effects on top of such a foundation.
Eventually, hospitals can create market networks which incorporates the value of marketplaces and other networks to provide integrated value for everybody.
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