MEMO FROM PROFESSOR HERZLINGER
MARKETING
The marketing step consists of sizing the market and developing a competitive strategy.
The key part of this process is to identify the end buyers and their key influencers. For example, the payor for an implantable medical device is the hospital, but the surgeon, the group purchasing organization, and hospital financial administrators of the hospital are key influencers.
Sizing the Market
One method for obtaining market information is by describing it to potential consumers, who are then queried about if they would buy it, at what price, and how rapidly.
The length of the sell cycle—the amount of time required to close the sale—is a critical piece of information. Many health care products and services require a capital-draining sell cycle of several years. This process also ascertains potential consumers’ responses to product attributes. For example, one entrepreneur discovered a strong preference for one firm’s PC as the platform for a proposed new management information system among hospital chief financial officers who were its intended clients. The discovery was fortunate, because the system was initially designed to run on another brand of computer. But the mere presence of voluminous data does not necessarily indicate a penetrating market analysis. The data presented must be clearly relevant to the market being discussed.
Armed with research that positions the product in one of the three opportunities and the likely buyers in this segment, the next step is to estimate the size of the market. Establishing market size is essential to the evaluation of the opportunity’s financial attractiveness. Usually, the larger the market the more financially appealing the opportunity. Ventures for small markets find it hard to attract financing interest unless they are extraordinarily profitable or highly differentiated.
Sizing the Market :Some Examples
For a medical literature search program, the likely users are the integrated health care systems called ACOs, about 500 in the U.S.37 If the average ACO has 10,000 members, the entrepreneur can price it at some reasonably low price, such as $2 per member per month, with an additional percentage for the savings this search routine enabled. Thus, without consideration of the savings, this market amounts to 500 ACOs, with 10,000 members each, at $24 per year, or $120 million. This market size is respectable but not large enough to stir the interest of most established venture capitalists, absent substantial profits. The sell cycle is likely to be lengthy initially, more than a year, because ACOs are relatively new organizations and data-mining is not their highest priority.
What about the market size of a retail medical clinic venture? In contrast, its market size is enormous. With a clinic positioned to appeal to empowered health care activists who make up as much as 40% of the U.S. adult population, the market size is well over 100 million adults. If each activist visits a doctor four times a year and pays $100 per visit, the financial value of this market can be estimated at $40 billion ($400 per person per year x 100 million users). If the clinic is positioned as an integrator, by contrast, the market is even larger, because interest in the cost reduction that occurs with integration applies to virtually every patient rather than only the 100 million.38
As in the examples above, estimates of market size should be linked to basic characteristics of the health care system.
Competitive Strategy
The analysis of the competition in the new venture’s intended market is critical. The competitive strategy should be closely linked to the pros and cons unearthed in the analysis of the impact of the Six Factors on the new venture. If competitors do not presently exist, they are likely to be attracted when the new venture proves viable. Founders should explain the competitive barriers they will erect to protect their market. If competitors already exist, the new venture must clarify its competitive advantage.
There are three competitive strategies: first mover, fast follower, and legal barriers
First mover strategy
In some cases, the first company to offer the product may accrue significant first-mover advantages because many consumers are loyal to their vendors or do not want to be troubled with finding another source for a product (consumer force). For example, many patients are loath to switch physicians; health care professionals are reluctant to switch medical supplies or instruments with which they are comfortable (structure, accountability factors); and competitive health insurers are reluctant to switch providers (financing force).
In other cases, however, the first-mover advantage may be negligible. For example, because consumers may readily switch antacid medication brands, the company must create brand loyalty.
At times, the first mover may be at a disadvantage. For example, the firm manufacturing the first cochlear implant for the hearing impaired abandoned it due to unanticipated regulatory difficulties (public policy force). It failed to ask its intended recipients if they wanted the product (consumer force). After creating the product, managers discovered that some of the hearing impaired so strongly preferred the use of sign language that they created regulatory hurdles to the implant’s dissemination. Competitors learned from its difficulties in managing the regulatory process and succeeded where the first mover failed by working with activists and consumer groups.
Fast followers: Managerial barriers
Learning from the first mover’s mistakes ,as in th cochlear implant example, and correcting them with excellent management is a viable competitive strategy. Innovators with excellent management can create viable barriers to competition.
To erect managerial barriers, the backgrounds of key managers should reflect successful past experience with key factors in each of the three types of innovation: consumer services or products for consumer-focused ventures, medical technology for technology-based ventures; and financing for integrators.
Legal barriers
These barriers to entry are created by the public policy force. Integrators may benefit from laws against excessive market concentrations that protect them from other consolidators. For example, ruling that northern Palm Beach County’s hospital market was saturated with empty beds, a state judge recommended against Tenet Healthcare’s application to build an 80-bed hospital across from Scripps Florida in Palm Beach Gardens. The decision was a major victory for Jupiter Medical Center and HCA’s West Palm Hospital, which argued they would lose millions if the project went forward.39
But anti-trust issues are seldom clear cut. For example, the U.S. government has lost virtually all its anti-trust lawsuits against hospital integrators.
But, in 2013, the Supreme Court strengthened the power of the Federal Trade Commission to block hospital mergers, with an opinion that could limit the ability of public hospital authorities to claim immunity from federal antitrust laws. The unanimous decision restored the authority of the F.T.C. to challenge the merger of the only two hospitals in Albany, Ga. Some experts said the decision could mean that hospitals will have to be more cognizant of antitrust considerations when they join forces with other health care providers to
form so-called accountable care organizations (ACOs).40 It has, however, won against physicians who integrated on the argument that the purpose of the integration was merely to control prices and not to bring the cost-reducing benefits of economies of scale to the consumer.41
In technology-based companies, the regulatory process can create barriers to entry. Although obtaining patents and FDA approvals is a costly and time-consuming process, they can prevent casual competitors from entering the business. Patents do not guarantee lack of competition, however. A patent may not be broad enough to prohibit competitors. Or it may focus on a new substance while the competitor patents a new use. In the biotechnology field, the novelty of the science to both examiners and applicants inevitably creates chinks that will be discovered in future patent litigation.
Even a perfect patent provides no assurance of lack of competition. If the market is large enough, competitors with deep pockets will be attracted to it and may risk patent infringement suits to enter the market. Small companies frequently lack the financial war chest needed to fight a competitor armed with tens of millions of dollars to spend on a legal battle. Even if they might have eventually prevailed in the courts, some ventures settle or sell out to competitors for smaller sums than they could have earned if they were armed with the financial resources to enforce their patents. Others persist in defending their patents—but these ventures risk losing their identity as operating companies and becoming more like law firms devoted to winning legal battles.
As a result, some innovators decide not to patent their new technology device. In their judgment, lack of disclosure is their best protection. But sometimes David may defeat Goliath. For example Medtronic, the medical device maker, said it would pay $1.35 billion to a surgeon turned inventor to gain ownership of patents related to spinal surgery and to settle litigation between them.42
Legal barriers to entry are weaker for other types of health care ventures. Licenses and trademarks are virtually the sole legal barriers to entry that can be erected by firms that serve new health care consumers. Certificates of need and other regulatory requirements for health service integrators generally can also be met by competitors. Strong evidence (the Accountability force) and Structural and Consumer support are critical for overcoming such challenges.
Example of a Competitive Strategy for the Medical Literature Search Firm
The data-mining innovation can follow a first-mover or fast-follower strategy.
Are there any competitors? There are three, including the federal government itself and a large well-financed company with an excellent track record for selling a similar search program to lawyers. Why then would anybody buy this program? Because the founder is himself a professor of medicine and thus understands his market better than his competitors. His program is unusually user-friendly and adopters are loathing to switch. He is essentially counting on his customer knowledge to create competitive barriers. His marketing strategy is to use published articles, appearances at conferences, and his client network, built over years of academic work, to spur adoption of this program.
First-mover is preferable in this case , because the ACOs are unlikely to dislodge an installed program.
Switching costs are high when the user is not the payer (Financing factor) and switching requires the user to change long-established patterns. Thus, the market sustainability of some implanted medical devices is high—surgeons do not pay for the device and have spent considerable time in training in their use. But switching costs for effective, low-side-effect drugs, like those for allergies, are low for the physician. Similarly, health care insurers have low sustainability. They typically experience a 20% annual churn. Patients also exhibit low loyalty rates to a hospital. After all, most enrollees hardly use their insurance and most people use hospitals rarely and are referred to them by their physician. Consumers’ loyalty is typically with the physician, whom they see 2–6 times a year. In cases of low switching costs, founders must demonstrate how they will protect their market from erosion by a competitor.
In the example under discussion, users will be reluctant to switch to another computer program which requires them to learn install and integrate yet another new software product. Thus, market share is probably sustainable if the company continues to deliver a good product at a competitive price.
Fast-follower is also viable, however, because the long sales cycle will enable the salespeople to observe problems in competitive programs. Thus the entrepeneur should expect some serious competition a few years after he starts his venture.
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CONSUMER-FACING
Early Experiences With Consumer Engagement: Initiatives To Improve Chronic Care
Health Affairs, May 2015
Findings from a program launched in 2006 by the Robert Wood Johnson Foundation studying consumer engagement in health care in fourteen communities. The study sheds light on how to mount and sustain community wide consumer engagement initiatives.
2015 OEP: Insight into Consumer Behavior
McKinsey’s Center for U.S. Health System Reform, 2015
Findings from McKinsey’s Center for U.S. Health System Reform seventh national online survey. Provides insights into how the individual market has evolved. The survey is a nationally representative sample of ~3,000 qualified health plan (QHP) eligible uninsured and individually insured consumers. The survey examines actions consumers reported taking during the 2015 OEP (e.g., how they shopped for, and evaluated, various plans, whether they decided to enroll or go uninsured).
What Global Health Can Learn from Consumer Companies in Africa
BCG Africa Blog, May 2014
Suggestions on what global health firms can learn from effective consumer firm marketing strategies.
Capturing a Share of China’s Consumer Health Market: From Insight to Action
BCG Perspectives, February 2014
China’s growing health and wellness market—which is expected to reach nearly $70 billion by 2020—presents an enormous opportunity for forward-looking companies. But to gain a share of this market, manufacturers must understand the unique characteristics of Chinese consumers and how best to reach and serve them.
Market Insights: the Evolution of Consumer Engagement in Healthcare
Porter Research: A Billian Company, 2013
Based on consumer engagement research projects with payers and providers, the report provides trends, challenges and opportunities healthcare stakeholders face pertaining to consumer engagement. The report includes emerging consumer engagement business models, analysis from the technology vendor perspective, consumer, payer and provider perspectives as well as an outline of market forces driving engagement.
The Value of OTC Medicine to the United States
Consumer Healthcare Products Association, January 2012
Presents the findings and conclusions of an independent study to estimate the Value of OTC Medicine to the United States. Analysis was performed for seven categories of the most common acute and chronic, self-treatable conditions representing the majority of OTC medicine purchases: Allergy, Analgesics, Anti-fungals (both foot and vaginal), Cough/Cold/Flu, Lower and Upper
Gastrointestinal (GI), and Medicated Skin (first aid and anti-itch).
Policy Implications of the Use of Retail Clinics
RAND Corporation, 2010
Commissioned by the Office of the Assistant Secretary of Planning and Evaluation at the Department of Health and Human Services, this RAND corporation study presents a picture of what is currently known about retail clinics, identifies unanswered questions, and flags key issues for federal policy. The work aims to improve understanding of retail clinics and clarify their potential role in the U.S. health care system.
Global Nutraceutical Industry: Investing in Healthy Living
Frost & Sullivan and FICCI
Provides market size, growth rates and drivers & restraints for the U.S., Europe, India and globally. Examines the key ingredients per region along with the consumer need or want for nutraceuticals. Analyzes the various forms of customization that take place in the nutraceutical space to suit the customer and also captures how it differs per region. Synthesizes trends and developments in each of the key geographies.
INTEGRATION
2015 Global Health care Sector Outlook: Common goals, competing priorities
Deloitte, 2015
This report examines the current issues impacting the global health care sector, provides a snapshot of activity in a number of geographic markets, and suggests considerations for stakeholders as they look ahead to 2015. Students can download the full global report, or select a country(ex: Canada, China, India, US) for specific market updates.
The Strategy That Will Fix Health Care
HBR.org, October 2013
Presents a strategy for restructuring the healthcare system including organizing clinicians into integrated practice units.
Modern Healthcare, July 2013
Reports on Modern Healthcare’s Annual Accountable Care Organization (ACO) survey. Results show care coordination remains a work in progress for many providers.
Los Angeles: Fragmented Healthcare Market Shows Signs of Coalescing
California Health Care Almanac, January 2013
Provides a case study illustrating the fragmentation of the health care market in Los Angeles.
Modern health care delivery systems, care coordination and the role of hospitals
WHO Europe, 2012
The existing models of health care provision, often subject to fragmentation and insufficient coherence, appear to be one of the main causes limiting efficiency of interventions and quality of health outcomes.
Disruptive Innovation in Integrated Care Delivery Systems
Robert Wood Johnson Foundation, October 2011
Investigators studied seven integrated health systems to uncover what factors are necessary to encourage disruptive innovations that have the potential to decrease costs while improving quality.
Combating Health Care Fragmentation through Integrated Health Service Delivery Networks in
Journal of Integrated Care, Volume 19, Issue 5, October 2011
Analyzes the challenge of health services fragmentation, presents the attributes of Integrated Health Service Delivery Networks (IHSDNs), reviews lessons learned on integration, examines recent developments in selected countries, and discusses policy implications of implementing IHSDNs.
What Does it take to make Integrated Care Work?
McKinsey.com, January 2010
Defines integrated care, provides questions to consider when piloting an integrated program and offers insight into successful implementation.
Integrated Delivery Systems: The Cure for Fragmentation
The American Journal of Managed Care, Volume 15, Number 10, Supplement — December 2009
Abstract (from journal): Our healthcare system is fragmented, with a misalignment of incentives, or lack of coordination, that spawns inefficient allocation of resources. Fragmentation adversely impacts quality, cost, and outcomes. Eliminating waste from unnecessary, unsafe care is crucial for improving quality and reducing costs—and making the system financially sustainable. Many believe this can be achieved through greater integration of healthcare delivery, more specifically via integrated delivery systems (IDSs).
Transforming Health: Enabling integrated Care
IDC and EMC2
Provides analysis of business drivers influencing investments in hospitals, regional and national government healthcare entities. The study provides a framework for an integrated care service model.
TECHNOLOGY
Connected health: How digital technology is transforming health and social care
Deloitte, April 2015
This report focuses on how digital technology is impacting health and social care in the UK.
Unlocking Value Growth in the Biopharmaceutical Market
KPMG.com, November 2014
Based on analysis of 21 biopharmaceutical companies, the report provides an overview of the biopharmaceutical landscape outlining critical areas of focus for players in this sector.
EvaluateMedTech: World Preview 2014, Outlook to 2020
Evaluate MedTech, October 2014
Provides market data including current medical technology sales and forecasts by device, company, and medical technology vs. prescription drugs. Data for in vitro diagnostics, diagnostic imaging, cardiology and orthopedics are also included.
Rapid growth in biopharma: Challenges and opportunities
McKinsey.com, December 2014
Article suggesting that biopharmaceuticals could become the core of the pharmaceutical industry but not without significant transformation in the laboratory and in strategy, technology, and operations.
Winning in China’s Changing Medtech Market
BCG Perspectives, July 2014
This report notes significant changes that will impact the medtech market in China.
McKinsey & Company, July 2014
Results from an international survey about the digital future of healthcare.
The potential of telemedicine in developing countries
KPMG Africa, March 2014
This report looks at how telemedicine can improve the healthcare landscape in areas where infrastructure is often a barrier to care.
eHealth and innovation in women's and children's health: A baseline review
WHO/ITU, March 2014
This report discusses the critical role that information and communication technologies (ICTs) will have on health services for women and children.
Telemedicine: Changing the Definition of “Point of Care”
Accenture, 2014
Provides three reports focusing on trends in telemedicine including: a study highlighting innovative digital solutions being developed by high-tech companies to deliver care, anywhere, anytime; a case demonstrating the used of disruptive IT to enable location independent care in Basque Country; and a study showing how people over 65 are going digital for a range of healthcare needs.
Health Care Industry: Post Shaping Your Telehealth Strategy
Ernst and Young, 2014
Provides insight and analysis for healthcare providers and payers regarding on telehealth strategy and landscape.
Healthcare Information Technology: Issues Trends & M&A Outlook
JEGI Sector Insights, July 2013
Produced by investment bank, Jordan Edmiston Group, Inc., provides an overview of the Healthcare IT market with emphasis on M&A trends in this sector.
Strengthening Health Information Infrastructure for Health Care Quality Governance:
Good Practices, New Opportunities and Data Privacy Protection Challenges.
OECD, May 2013
This report is about the progress OECD countries have made in the development and linkage of health and health care data and in the development and use of data from electronic health record systems for statistics and research. (Select "Free Preview" to access the report)
Issues in Technology Innovation: How Mobile Devices are Transforming Healthcare
Center for Technology Innovation at Brookings, May 2012
Provides trends and forecasts on mHealth initiatives (mobile health initiatives) and remote monitoring devices for chronic disease management as well as the implications and impact of these technologies as they are deployed worldwide.
Compiled by:
Meghan Dolan and Mallory Stark
Baker Library, Harvard Business School