Strategic Analysis 1

Running head: STRATEGIC FIT

Central Valley Medical Center (CVMC) Value Network:
A Strategic Roadmap to Beating Kaiser
Ryland C. Hamlet
September 10, 2003
Strategic Analysis 2
Abstract
One of Kaisers main strength is its shear size. In attempting to move into the Central
Valley the time it takes such a large organization to make decision could be a weakness. The
strength of Central Valley Medical Center (CVMC) is its experienced workforce. Entrenched
companies may have cost advantages not available to potential rivals, no matter what their size
and attainable economies of scale. Using a process coined precision project guidance or PPG
and utilizing the experience curve, CVMC personnel are guided on a daily basis to meet
customer needs. Using precision project guidance, CVMCs workers can maximize the learning
curve, rapidly creating services customized for each sub-segments at a lower price than Kaiser
can offer. These services produced using a supplier and partner network will repel any effort by
Kaiser to make a profit in the Central Valley.

Strategic Analysis 3
CVMC Value Network:
A Strategic Roadmap to Beating Kaiser
In the June 3
rd
edition of Forbes magazine, Phyllis Berman wrote Columbia's super
powered growth has been fueled by brilliant use of a common financial technique: Create a high-
priced stock, then use it as currency to buy other properties (Berman & Condon, 1996). That
was then, and this is now. By 1998, health care provider, Columbia/HCA, once the 7
th
largest
employer in the U.S. was paying the government $1 billion to keep from going to court (Sellers,
1998) and possibly out of business. What comes to mind is the old adage, The bigger they are
the harder they fall. This is true if a firm has experienced resources. This is true if a firm
positions itself to use these resources to take advantage of its strengths and of its competitors
weaknesses. For Columbia, their strength was the ability to purchase valuable hospital
properties at extremely low prices. In a sense, Columbias weakness was greed. How greedy?
Columbia officials pleaded guilty to filing fraudulent Medicare claims.
Like Columbia, Kaiser Permanente is also big. At $22B per year, 8 million members in
nine states and the District of Columbia, Kaiser is one of the largest not-for-profit managed
health care companies in the U.S. (Hoover's Online, 2003). Their size is their strength, but size
can also be a weakness. Size is no longer the trump card it once was in todays brutally
competitive world marketplacea marketplace that is unimpressed with logos and sales
numbers but demands, instead, value and performance (Pearce & Robinson, 2001, p. 370).
Kaiser has recognizable logo, large sales, and a desire to expand into the CVMC market. It is
possible to deter Kaisers entry through value and performance. This paper describes a roadmap
for Central Valley Medical Center (CVMC) to erect barriers to Kaisers pending market entry.
This paper describes the vision for CVMC, value net analysis, competitive positioning, and the
barrier grand strategy. A conclusion summarizes and describes the next step for CVMC.
The Vision
Often the definition of a vision is a lofty, unattainable hope that a firm wants to
communicate to stakeholders. In a globalizing economy, vision has been redefined to mean
Strategic Analysis 4
targeting a very narrowly defined strategic intentan articulation of a simple criterion or
characterization of what the company must become to establish and sustain global leadership
(Pearce & Robinson, 2001, p. 413). The vision for CVMC is to be a cost efficient hospital with
services rapidly created just in time (JIT) to meet customer needs. The visions strategic intent is
to enable CVMC to make rapid tactical changes to produce new services faster and at a lower
cost than competitors do. Achieving the vision would allow customized service offerings
designed to keep competitors from lure away customers. That is, raise barriers to entry and
reduce the threat of substitution through service differentiation and absolute cost advantages.
Value Net Analysis
To create low priced differentiated services, successful companies are using value
network analysis. A value net is the result of value net analysis. A value net starts with real
customer demand, then mobilizes a dynamic network of suppliers and partners to deliver the
right service, to the right placefast (Mercer Management Consulting, 2000, p. 2). Companies
such as Apple, Biogen, Cisco, Gateway, Miller SQA, Order Trust, Progressive, Streamline, and
Vauxhall have all created value nets. Biogen is a notable example. By utilizing value nets,
Biogen, a biotech company, broke industry records by bringing [AVONEX] into the channel
just 35 hours after receiving the final FDA approval (Mercer, 2003). To put Biogens
accomplishment into perspective, consider companies challenged to reduce their fixed assets and
increase service and product flexibility. Biogen's story offers valuable lessons to nearly all
executives about how to manage the crucial back end to deliver the front-end promise (Mercer).
Biogen efficiently used a value net to deliver the right product to the customer. CVMC
might use a value net to connect suppliers and partners to CVMC employees. This network of
specialists would shorten service development cycles, allowing CVMC to deliver the right
services to patients. Instead of using cost effective value nets, Kaiser may attempt to utilize their
financial strength to take the Central Valley by brute force. Under former CEO David Lawrence,
Kaiser embarked on its Net effort in 1997. There is also some doubt about how Lawrences
focus on information technology will pan out. He has invested $2 billion in the effort (Diamond,
Strategic Analysis 5
2002). The effort continues under new CEO George Halvorson. Kaiser is bent on creating
sustainable competitive advantage in its markets, including in the Central Valley market.
Competitive advantage for Kaiser and other health maintenance organizations (HMO),
has come by offering a large array of choices to their customers. Choices include a choice co-
pay amounts, benefit limits, and accessible providers. The wide choice adds to Kaisers cost of
doing business. Costs were so high at one point that in 1998, Kaiser lost $288 million (Heimoff,
2000). Today, Kaiser continues to offer choices, but not at as low of a price as before. To turn
Kaiser around Lawrence decided to raise prices. Kaiser has gone from being its lowest-priced
health plan to eighth in affordability (Heimoff). Kaisers significant price increase reduces its
competitive advantage. The prices cripple Kaisers effort to expand into the Central Valley.
Crippled, that is, if CVMC has substitute services at a lower price. By placing a ceiling
on the prices it can charge, substitute products or services limit the potential of an industry
(Pearce & Robinson, 2001, p. 88). That industry is the local Central Valley market. To reduce
Kaisers Central Valley potential gain, CVMC must use the value net to create these substitutes
services. The value net would be a factory of new service offerings created so quickly that
Kaiser, will have trouble responding. That is, responding and making a profit.
Competitive Positioning
Positioning of services is the key to the success of the CVMCs value net defense. Well
positioned services, offered at a low price and high quality would be a major threat to Kaiser.
Kaisers entry into the Central Valley is dependent on its ability to offer a suitable substitute to
consumers. Substitutes often come rapidly into play if some development increases competition
in their industries and causes price reduction or performance improvement (Pearce II, 2001, p.
88). In a race for competitive advantage, for Kaiser that development may be the Electronic
Medical Record (EMR). For CVMC, however, the development of value net services is
probably that key development.
An example of a value net service is a one recently implemented by PacifiCare. This
service, named after the value net analysis, is called the Value Network. The Value Network
Strategic Analysis 6
limits the number of doctors and medical facilities available to employees. Only doctors and
hospitals screened for affordability and higher scoring on quality of care measures may
participate (Ceniceros, 2002). Especially, a value net supported by CVMCs experienced
workforce and no trade unions. CVMCs value net would help lower costs, erecting a major
barrier to entry to Kaiser based on absolute cost advantage.
Recommended Grand Strategies
A grand strategy is statement of means, which indicates how the objectives are to be
achieved (Pearce and Robinson, 2001, p. 13). To deliver the vision of efficient service
development, CVMCs objectives are to increase efficiency through a Value Net, create multiple
sub-segments, and to create customized services for each viable sub-segment. To counteract
copying, CVMC must take on a grand strategy of producing customized JIT services that are
inimitable. Rapidly producing and changing services based on customer demands is one way to
accomplish inimitability. An example is constantly altering same day surgery services just in
time based on changing demographics like age or sub-segments like handicap males. Kaiser
slow to react and lacking the local marketing experience will find it costly to keep up.
CVMC may try service inimitability through economic deterrence. Economic deterrence
occurs when a competitor understands the resource that provides a competitive advantage and
may even have the capacity to imitate, but chooses not to because of the limited market size that
realistically would not support two players the size of the first mover. To deter Kaiser
economically, CVMC needs to segment markets small enough to make them not of interest to
Kaiser. CVMS then uses the value net to create services for these segmented markets. After
segmenting, effective precision project guidance (PPG) is used to complete matching inimitable
services. Kaiser may have the resources in another market to copy the service. Unlike
regionally managed Kaiser, CVMC has less management levels. This results in much lower
coordination costs and, since every function is represented, usually reduces the number of
management levels above the team level needed to approve team decisions (Pearce & Robinson,
Strategic Analysis 7
2001, p. 404). The low value of the sub-segments and time needed to make decision serves as
significant deterrence.
Summary and Conclusion
One of Kaisers main strength is its shear size. In attempting to move into the Central
Valley the time it takes such a large organization to make decision could be a weakness. The
strength of CVMC is its experienced workforce. With this experienced workforce, CVMC could
rapidly create services and build an absolute cost advantage in each service. The absolute cost
advantage is based on the workforce creating high quality designs customized to the needs of
each sub-segment at a low cost. Entrenched companies may have cost advantages not available
to potential rivals, no matter what their size and attainable economies of scale. These advantages
can stem from the effects of the learning curve (Pearce & Robinson, 2001, p. 85). Using a
process coined precision project guidance or PPG and utilizing the experience curve, CVMC
personnel are guided on a daily basis to meet customer needs.
The experience curve is not an entry barrier at allin fact, new or less-experienced
competitors may actually enjoy a cost advantage over the leaders (Pearce & Robinson, p. 86).
Other barriers a Kaiser entry are raised by sub-segmenting the Central Valley market and using a
fast team decisions. These teams are made up of the experienced workers, which make up
CVMCs greatest strength. Using precision project guidance, CVMCs workers can maximize
the learning curve, rapidly creating services customized for each sub-segments at a lower price
than Kaiser can offer. These services produced using a supplier and partner network will repel
any effort by Kaiser to make a profit in the Central Valley. The CVMC Value Network is the
roadmap to beating Kaiser.
Strategic Analysis 8
References
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52-54. Retrieved September 6, 2003, from EBSCO Host Web Site:
http://web25.epnet.com/
Ceniceros, R. (2002). Doc network downsizing attempts to cut costs. Business Insurance, 36(48),
3-4. Retrieved September 9, 2003, from http://web3.epnet.com
Diamond, F. (2002, June). A Look at Kaiser CEO's Legacy: Faith in Quality Never Waned.
Retrieved August 31, 2003, from
http://www.managedcaremag.com/archives/0206/0206.lawrence.html
Health Data Management. (2003, February 4). Trends: Kaiser Picks Epic for Electronic Records.
Retrieved September 1, 2003, from
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Mercer Management Consulting. (2000). Value Nets Thought Questions. Retrieved September 6,
2003, from http://www.valuenets.com/ideas/self-diagnostic/value_nets_thought_qs.pdf
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7, 2003, from
http://www.valuenets.com/ideas/innovators_db/company/biogen/index.html
Pearce, J. A., & Robinson, R. B. (2001). Strategic Management: Formulation, Implementation,
and Control (7th ed.). Boston: McGraw-Hill.
Sellers, P. (1998). The no. 1 health-care company goes under the knife. Fortune, 137(1), 26-27.
Retrieved September 6, 2003, from EBSCO Host Web Site: http://web25.epnet.com/
Strategic Analysis 9