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Portfolio Management for Off-line Revenue Initiatives
Volume 9, No.3
FalllAutomne 1996
Brief Report
Portfolio Management for Off-line Revenue Initiatives by Scott J. Edgett
During the past decad e, the health services sector has experienced a period of rapid change that has resulted in the creation of a large number of new services. This article advocate the u e of a service developrnen matrix as a planning aid for senior managers seeking to attract additional revenue through the development of new services. By strategically selecting and developing new services, rather than imply imitating other health care providers, marketer will be better able to focus limited corporate resources on new service initiatives that generate po itive returns.
Au cours de la derniere decienne, le secteur des services de saute a CO IIIIII Ime periode de changenien! rapide, periode durant laquelle un grand nombre de nouveal/X services ont ete cree«. Cet article recommande une matrice de deoelappemeut de service conune ouiil de planification a l'intention des cadres qui desirent gelllfrer des revenus en creant de nOllveartx services. ElI choisissant et ell creaut de lIouveaux services de[aeon strategioue pllltOt qu'en intitani simplement d'autres pOllrvoyerlrs de soius desante, les specialistes du marketing pourront mieux orienter les ressources restreintes des etablissements uer de ,wI/veal/x projets de services qui procurent des revellus substantiels.
T
here is little doubt that the way in which Canadian health care is provided and funded will undergo significant restructuring in the next few years. To operate effectively in this new fiscal climate, institutions will have to contain costs, generate new revenue or do both. The implications of cost containment are already evident across the country in measures that range from salary freezes and mass layoffs to mergers and closings of hospitals. A less widespread reaction to budget pressures has been offline revenue generation through approaches such as business development and fee recovery. Off-line revenue generation encompasses a wide range of activities that generate funds in excess of the cost of delivery. Well planned development of revenuegenerating services allows a health care organization to concentrate on those services that are required and, at the same time, are supportive of the corporate focus. This article explores the service development matrix as a tool for strengthening the strategic planning phase of the new service development process for health care. This process enables maximum utilization of limited resources - both human and financial - while FORUM Gestion des soins de sante
increasing the probability that revenue-generating initiatives will be successful.
Portfolio management Before the micro issues of new service development can be properly addressed, the development process requires a clear strategic focus. Failure to achieve this focus will often result in allocation of scarce resources to the wrong projects, In the short term this is a waste of valuable personnel and financial resources. Over the long term, not only can this hurt an institution's bottom line, but it can also affect its ability to compete with other health service providers. One approach that can assist managers to develop and retain a clear focus when identifying and developing new revenue-generating possibilities is the theory of portfolio management. This approach to strategic management assesses business opportunities and market attractiveness. A common approach in applying portfolio management to the development of tangible products is the product/market matrix. This matrix, originally developed by Ansoff.' is used for examining new opportunities in product development.
49
FaWAutomne 1996
Volume 9, No. 3
Figure 1: Ansoffs ProducVMarket Matrix
Figure 2: New Service Development Matrix
Existing Products
New Products
Existing Markets
Market Penetration
Product Development
New Markets
Market Development
Diversification
Existing Markets
New Markets
In Figure 1, each of the cells in Ansoffs matrix represents a possible marketing strategy for expansion. Strategies for market penetration and market development are based on products that already exist within the firm, while the product development and diversification squares represent opportunities for growth through new product development. Although t h s method of analysing different approaches to developing new business has a long history in the marketing of physical goods, the same claim cannot be made for the health care sector. However, with some modifications, this matrix does offer the health sector a planning aid that is useful for developing a strategc focus for new service development. In Figure 2, a revised planning grid is presented.2By adding an additional column for modified new services, the matrix recognizes and incorporates the need for health care organizations to develop and launch new services that are extensions to their existing service bases. In a dynamic market environment many of the existing services in a firm's product portfolio must be continually evaluated and modified as the needs of the marketplace change. However, this type of service development requires less strategic input because the development costs are usually not as large, nor is the development project as risky, as the more innovative types of service development. The first two cells of the new service development matrix - market penetration and market expansion are similar to Ansoff's model in representing the need for ongoing evaluation of existing services. An institution always has the option of trying to develop more business in its current markets with its existing service portfolio (market penetration), or by trying to expand its revenue base for existing services by targeting new market segments (market expansion), for example, by targeting a new geographic region. These two approaches are not, strictly speaking, new service development. However, they do need to be considered, as efforts directed toward these areas will usually mean that fewer resources are available for other new service development projects. The remaining four cells in the new service development matrix represent options for the strategic direction of new service development. Each of the four cells represents a different type of opportunity and risk.
I I
Existing Services Market Penetration Market Expansion
I
Modified Services Modified Markel Penetration Modified
1
New Services Market Development
1
Market
The closer a new service is to existing services or the core competencies of the institution, the lower is the risk of failure. In the following section, four types of new service development options are discussed.
Modified market penetration In this block, current service offerings are changed or modified in order to better address the needs of the current customer base. This allows the organization to better serve the existing client base as their needs change, thereby reducing the impact of competition. Conversely, a firm may be trying to achieve greater penetration into its current market by redeveloping existing service offerings. Examples of a modified service could be: 0 expanding the range of services offered by an outpatient clinic; changing the mix of rooms to allow for more single, "upscale" rooms that attract premium rates from insurance plans or more affluent clients; and changing the cafeteria to make it more appealing to both employees and customers, thereby increasing its revenue potential (e.g., specialty coffees). Modified diversification In this case, the institution changes its current service offerings with the goal of trying to attract new customers previously outside its customer base. Care must be taken here to ensure that the modifications do not unduly upset the existing client base. Examples of modified diversification might include: trying to fill underutilized operating rooms by offering targeted surgery procedures to nonresidents; 0 capitalizing on economies of scale by expanding food services to deliver meals to nearby senior citizens homes; and 0 expanding educational services to new markets that cannot afford to mount their own training sessions. Market development In this block, the objective of new service development is to allow the institution to gain a larger amount of revenue from its existing customer base. This is achieved by designing new services that complement
__
50
Healthcare Management FORUM
FalVAutomne 1996
Volume 9, No. 3
the institution's current service offerings. By crossselling services to an existing consumer base, more revenue is gained per client, usually at a cost which is lower than trying to sell services to a potentially new client. Examples of market development opportunities might include: 0 cooperative ventures with private firms to provide additional services traditionally not covered by medicare; renting out rooms (beds) that were formerly closed to family members wishing to remain overnight; and expanding the depth of care provided for by in-home visits.
Market diversification In this case, the institution attempts to attract new customers with services that are completely new to the organization. Of the six cells in the new service development matrix, market diversification is the most risky. Here, the institution targets a group of consumers new to the organization. Therefore, this strategy requires the highest levels of market knowledge before developing and launching the new service. Examples of market diversification include: 0 developing a consulting arm to market expertise to other organizations, for example, expertise gained from successfully implementing a CQI program; starting spin-off corporations to develop and market new inventions, for example, new medical instruments; and developing and selling medical/ health education programs for private sector companies.
Implications By utilizing a planning grid such as the one illustrated in Figure 2, senior health care executives can plan for new service development in terms of targeted growth areas and, in turn, can better integrate and achieve corporate and revenue objectives. For example, if a hospital's corporate objective is both to enter new markets and expand existing ones, then future new service development should be planned to help achieve this objective. The institution can direct the new service development activity toward creating services that will fit each of the blocks in Figure 2.
FORUM Gestion des soins de santd
None of the six blocks in the new service development matrix operates in a market vacuum. Thus, successful efforts in one block can have spillover effects. For example, the extended operating hours of a clinic directed at current customers may also help attract new consumers who find these new hours of operation more convenient than those offered by their current facility. Similarly, the addition of a new counselling program to help existing customers may well attract new customers who are willing to pay a fee for the additional benefits received. Another advantage to using a planning grid for offline revenue is the ability to better balance the risks involved. From a strategic perspective, it is usually best to have a mixed portfolio of projects underway at any given time. This allows for the development of low-risk new services as well as a manageable number of higher risk projects that should produce higher returns to offset the higher levels of risk. Portfolio planning also helps identify the types of off-line revenue projects most attractive to a particular organization. For example, as part of its strategic plan an organization may wish to focus on developing its existing market rather than targeting new markets. Thus, projects that fall into the bottom half of the new service development matrix would not be funded. The service development matrix can help managers with off-line revenue objectives better focus their service development efforts. By using a directed development strategy, an organization will be in a better position to deal with a rapidly changing environment and will therefore be more effective in the marketplace.
Notes and references 1. Ansoff I. Strategies for diversification. Harvard Business Review 1957; September/October: 113-124. 2. This figure is a modification of a service/market opportunity matrix introduced by P. Kotler and P. Bloom in Marketing Professional Services, Englewood Cliffs, New Jersey, Prentice-Hall Inc., 1984.
Scott J. Edgett, PhD, MBA, is Associate Professor of Marketing a t the Michael G . DeGroote School of Business, McMaster University, Hamilton, Ontario.
51
FalllAutomne 1996
Brief Report
Portfolio Management for Off-line Revenue Initiatives by Scott J. Edgett
During the past decad e, the health services sector has experienced a period of rapid change that has resulted in the creation of a large number of new services. This article advocate the u e of a service developrnen matrix as a planning aid for senior managers seeking to attract additional revenue through the development of new services. By strategically selecting and developing new services, rather than imply imitating other health care providers, marketer will be better able to focus limited corporate resources on new service initiatives that generate po itive returns.
Au cours de la derniere decienne, le secteur des services de saute a CO IIIIII Ime periode de changenien! rapide, periode durant laquelle un grand nombre de nouveal/X services ont ete cree«. Cet article recommande une matrice de deoelappemeut de service conune ouiil de planification a l'intention des cadres qui desirent gelllfrer des revenus en creant de nOllveartx services. ElI choisissant et ell creaut de lIouveaux services de[aeon strategioue pllltOt qu'en intitani simplement d'autres pOllrvoyerlrs de soius desante, les specialistes du marketing pourront mieux orienter les ressources restreintes des etablissements uer de ,wI/veal/x projets de services qui procurent des revellus substantiels.
T
here is little doubt that the way in which Canadian health care is provided and funded will undergo significant restructuring in the next few years. To operate effectively in this new fiscal climate, institutions will have to contain costs, generate new revenue or do both. The implications of cost containment are already evident across the country in measures that range from salary freezes and mass layoffs to mergers and closings of hospitals. A less widespread reaction to budget pressures has been offline revenue generation through approaches such as business development and fee recovery. Off-line revenue generation encompasses a wide range of activities that generate funds in excess of the cost of delivery. Well planned development of revenuegenerating services allows a health care organization to concentrate on those services that are required and, at the same time, are supportive of the corporate focus. This article explores the service development matrix as a tool for strengthening the strategic planning phase of the new service development process for health care. This process enables maximum utilization of limited resources - both human and financial - while FORUM Gestion des soins de sante
increasing the probability that revenue-generating initiatives will be successful.
Portfolio management Before the micro issues of new service development can be properly addressed, the development process requires a clear strategic focus. Failure to achieve this focus will often result in allocation of scarce resources to the wrong projects, In the short term this is a waste of valuable personnel and financial resources. Over the long term, not only can this hurt an institution's bottom line, but it can also affect its ability to compete with other health service providers. One approach that can assist managers to develop and retain a clear focus when identifying and developing new revenue-generating possibilities is the theory of portfolio management. This approach to strategic management assesses business opportunities and market attractiveness. A common approach in applying portfolio management to the development of tangible products is the product/market matrix. This matrix, originally developed by Ansoff.' is used for examining new opportunities in product development.
49
FaWAutomne 1996
Volume 9, No. 3
Figure 1: Ansoffs ProducVMarket Matrix
Figure 2: New Service Development Matrix
Existing Products
New Products
Existing Markets
Market Penetration
Product Development
New Markets
Market Development
Diversification
Existing Markets
New Markets
In Figure 1, each of the cells in Ansoffs matrix represents a possible marketing strategy for expansion. Strategies for market penetration and market development are based on products that already exist within the firm, while the product development and diversification squares represent opportunities for growth through new product development. Although t h s method of analysing different approaches to developing new business has a long history in the marketing of physical goods, the same claim cannot be made for the health care sector. However, with some modifications, this matrix does offer the health sector a planning aid that is useful for developing a strategc focus for new service development. In Figure 2, a revised planning grid is presented.2By adding an additional column for modified new services, the matrix recognizes and incorporates the need for health care organizations to develop and launch new services that are extensions to their existing service bases. In a dynamic market environment many of the existing services in a firm's product portfolio must be continually evaluated and modified as the needs of the marketplace change. However, this type of service development requires less strategic input because the development costs are usually not as large, nor is the development project as risky, as the more innovative types of service development. The first two cells of the new service development matrix - market penetration and market expansion are similar to Ansoff's model in representing the need for ongoing evaluation of existing services. An institution always has the option of trying to develop more business in its current markets with its existing service portfolio (market penetration), or by trying to expand its revenue base for existing services by targeting new market segments (market expansion), for example, by targeting a new geographic region. These two approaches are not, strictly speaking, new service development. However, they do need to be considered, as efforts directed toward these areas will usually mean that fewer resources are available for other new service development projects. The remaining four cells in the new service development matrix represent options for the strategic direction of new service development. Each of the four cells represents a different type of opportunity and risk.
I I
Existing Services Market Penetration Market Expansion
I
Modified Services Modified Markel Penetration Modified
1
New Services Market Development
1
Market
The closer a new service is to existing services or the core competencies of the institution, the lower is the risk of failure. In the following section, four types of new service development options are discussed.
Modified market penetration In this block, current service offerings are changed or modified in order to better address the needs of the current customer base. This allows the organization to better serve the existing client base as their needs change, thereby reducing the impact of competition. Conversely, a firm may be trying to achieve greater penetration into its current market by redeveloping existing service offerings. Examples of a modified service could be: 0 expanding the range of services offered by an outpatient clinic; changing the mix of rooms to allow for more single, "upscale" rooms that attract premium rates from insurance plans or more affluent clients; and changing the cafeteria to make it more appealing to both employees and customers, thereby increasing its revenue potential (e.g., specialty coffees). Modified diversification In this case, the institution changes its current service offerings with the goal of trying to attract new customers previously outside its customer base. Care must be taken here to ensure that the modifications do not unduly upset the existing client base. Examples of modified diversification might include: trying to fill underutilized operating rooms by offering targeted surgery procedures to nonresidents; 0 capitalizing on economies of scale by expanding food services to deliver meals to nearby senior citizens homes; and 0 expanding educational services to new markets that cannot afford to mount their own training sessions. Market development In this block, the objective of new service development is to allow the institution to gain a larger amount of revenue from its existing customer base. This is achieved by designing new services that complement
__
50
Healthcare Management FORUM
FalVAutomne 1996
Volume 9, No. 3
the institution's current service offerings. By crossselling services to an existing consumer base, more revenue is gained per client, usually at a cost which is lower than trying to sell services to a potentially new client. Examples of market development opportunities might include: 0 cooperative ventures with private firms to provide additional services traditionally not covered by medicare; renting out rooms (beds) that were formerly closed to family members wishing to remain overnight; and expanding the depth of care provided for by in-home visits.
Market diversification In this case, the institution attempts to attract new customers with services that are completely new to the organization. Of the six cells in the new service development matrix, market diversification is the most risky. Here, the institution targets a group of consumers new to the organization. Therefore, this strategy requires the highest levels of market knowledge before developing and launching the new service. Examples of market diversification include: 0 developing a consulting arm to market expertise to other organizations, for example, expertise gained from successfully implementing a CQI program; starting spin-off corporations to develop and market new inventions, for example, new medical instruments; and developing and selling medical/ health education programs for private sector companies.
Implications By utilizing a planning grid such as the one illustrated in Figure 2, senior health care executives can plan for new service development in terms of targeted growth areas and, in turn, can better integrate and achieve corporate and revenue objectives. For example, if a hospital's corporate objective is both to enter new markets and expand existing ones, then future new service development should be planned to help achieve this objective. The institution can direct the new service development activity toward creating services that will fit each of the blocks in Figure 2.
FORUM Gestion des soins de santd
None of the six blocks in the new service development matrix operates in a market vacuum. Thus, successful efforts in one block can have spillover effects. For example, the extended operating hours of a clinic directed at current customers may also help attract new consumers who find these new hours of operation more convenient than those offered by their current facility. Similarly, the addition of a new counselling program to help existing customers may well attract new customers who are willing to pay a fee for the additional benefits received. Another advantage to using a planning grid for offline revenue is the ability to better balance the risks involved. From a strategic perspective, it is usually best to have a mixed portfolio of projects underway at any given time. This allows for the development of low-risk new services as well as a manageable number of higher risk projects that should produce higher returns to offset the higher levels of risk. Portfolio planning also helps identify the types of off-line revenue projects most attractive to a particular organization. For example, as part of its strategic plan an organization may wish to focus on developing its existing market rather than targeting new markets. Thus, projects that fall into the bottom half of the new service development matrix would not be funded. The service development matrix can help managers with off-line revenue objectives better focus their service development efforts. By using a directed development strategy, an organization will be in a better position to deal with a rapidly changing environment and will therefore be more effective in the marketplace.
Notes and references 1. Ansoff I. Strategies for diversification. Harvard Business Review 1957; September/October: 113-124. 2. This figure is a modification of a service/market opportunity matrix introduced by P. Kotler and P. Bloom in Marketing Professional Services, Englewood Cliffs, New Jersey, Prentice-Hall Inc., 1984.
Scott J. Edgett, PhD, MBA, is Associate Professor of Marketing a t the Michael G . DeGroote School of Business, McMaster University, Hamilton, Ontario.
51