Welcome to the Plexius Group blog-site

August 17, 2010 § Leave a comment

Plexius Group is a management consultancy that believes timing is crucial to sustained profit making.  New products & markets are essential for survival as is solid, feet-on-the-ground operating effectiveness.  Management is challenged to provide both in order to deliver enduring success.

Here, you’ll read articles from George Daniels, Randall Atkin, Mike Fritz, Ken Morton and Doug Brockway.  Posts that discuss management challenges in achieving lasting success, driven by timing and making focused decisions.


December 7, 2011 § Leave a comment

By George Daniels

Numerous companies are now using or have been introduced to lean and/or six sigma concepts for improving performance. If you are not using them or are not familiar with them, then without a doubt you will be at a disadvantage to those that have.

There are now institutes and numerous resources available to assist in lean and six sigma programs, and the Plexius Group has a team of experts to as well. The first program implemented by our experts using both lean and six sigma was almost thirty years ago before it was even named.

However the critical issues not addressed by many of these resources is how to make these efforts a manageable and sustainable process, how to transition an improved process into a new innovative one, and finally how to insure the efforts are in sync with the business strategies and customers’ needs.

The following pictorial from The book “Staying Lean: Thriving, not just surviving” by S A Partners helps to visualize these points:

The  model suggests what in fact happens in most businesses. The experts, the consultants and the “six sigma belts” come in and tackle the cream off the top (above the water line).

As the manger you can’t help but be impressed with the results, feeling you got your monies worth.

If they have not left you with an organizational system of continuous improvement then the true bonanza will not be visible nor will it be worked on.

It is this effort that is the most valuable to your business today and every day after.

The objective is how to get below the water line. The Plexius Approach does just that and is only three steps:

1)       Alignment and Synchronizations of actions with Strategy

2)       A Management System that ties improvement efforts with business goals and customer needs

3)       A problem Solving Culture driven by the business goals and Customer needs

All improvement efforts must be aligned with your future direction and its needs in order to optimize their value. Our group is qualified through our unique “Life Cycle Methodology” to provide solutions to this issue. It is about the future product and service decisions relative to the market needs and technological trends. Thus the Plexius Group provides you with the critical business intelligence that allows you to create alignment with surety and minimize risk. The last thing you want is a major effort improving yesterday’s needs.

Next if you have numerous improvement projects going on, as the CEO you know how difficult and time consuming the management process is and how you are concerned that each project is focused, controllable and measurable to results. This becomes the second required element. The need for management reports that drive the improvement process. You cannot review all projects all the time in person. The reports we use today such as P&L’s, Balance sheets, Cash flow, project reviews and the like are insufficient at best.  A Management process that drives improvement, that ties improvement to business goals and that ties business goals  to customer and internal needs would be invaluable. It is invaluable and the Plexius Group will assist you in developing and implementing a proactive, improvement driven, results oriented management process. A simple Management Operating System (MOS) to drive your future.

The third step is to tie the MOS to the actions of each improvement team effort. This provides the structure for a continuous improvement culture, where each and every employee is bettering the performance of the company within their skills, measurable and verifiable. Not just the consultants and “belts”. The results are the water level recedes quicker allowing for new projects to be tackled and breakthroughs to occur.

If you are a Shingo Award or Baldrige Award recipient then this is probably not knew as the approach outlined above  is a prerequisite to being the Best and moving beyond just a Lean and Six Sigma project.

Answering the following questions is a good barometer and thought provoker.

  1. You do not know or are unsure of the number of improvement projects in your company.  True——   False——-
  2. The improvement projects are generally led by specialists.  True—–  False—–
  3. You have already done lean or six sigma.  True——  False——-
  4. Your cost reduction results per year are less than 5%.True—- False–
  5. The number of improvement projects is far less than the number of employees.   True—-  False—-
  6. Too often we seem to be fixing the same problem.  True—-  False—-
  7. Innovation is scarce or limited. True—  False—
  8. The number of improvement projects is limited by management’s time and the number of experts. True—  False —-
  9. You do not have a report that summarizes the improvement in business objectives and customer needs by project. True— False —

Every question answered “true” is an opportunity. If you would like more information or further the conversation please contact me at george@plexiusgroup.com.

“Organic Growth-A value Creation Engine”

July 13, 2011 § Leave a comment

By George Daniels

Creating an effective organic revenue generator within a business entity adds greatly to the value of the business whether it is in the multiples/evaluations for an acquisition target or the contributor to earnings per share. This has never been truer than now where we are coming out of a deep recession. During the recession much effort has been put into “rightsizing” and improving operational efficiencies, but at the same time many of the products and services have aged within their individual life cycles which were already becoming shorter. Thus, there is a greater need to replenish the pipe line with new products and services or expand into new markets in order to organically grow and increase the value of the entity. This is particularly true with private equity firms where holding times have extended to five to ten years on numerous acquisitions.

Effective “Organic Growth Engines” are not the everyday staple in business today, but those that have them do exceptionally well. Just look at one of the premier players today, Apple. It was just a little over a decade ago that they languished with flat revenues and stock price. Today their “organic growth engine” (new products and new markets) has propelled them to revenues and a stock price which have increased more than tenfold!

For those entities wanting to create value this is a model and strategy worth considering.

It is the famous Peter Drucker who may have said it best:

Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation.”

“Marketing and innovation produce results; all the rest are costs…”

There are numerous CEO’s that turn around finanicially ailing entities, but it is the next steps in which CEO experience is in short supply.

Getting the house in order is tough, but it is more difficult to decide what you want to be (the new products and markets and customers) and then even harder to define and execute getting there. If it were easy all companies would be successful and have longevity.

After spending time studying “the successful” companies only to find many do not exist anymore, The Plexius Group studied hundreds of companies to find why they fail. In the failing companies the poor portfolio management and the related decisions and execution were primary reasons for failure. Also important were poor operations not just in their efficiency, but in their misalignment with the portfolio needs. It is not just about lean or six-sigma! It is critical that your resources, no matter how efficient, are aimed at the products and services that support today and will also define your future.

Self funded organic growth is the diamond in the rough for business success, value creation, and longevity.

The Plexius Group’s recommended approach begins with improving business effectiveness to generate cash. This enables and reduces the risks of the new product introduction and marketing which is the driver of the “Organic Growth Engine”.

We provide unique methods to improve your marketing and the release and management of innovation and then execution of the development process.

If your firm is looking to improve its “Organic Growth Engine”  begin the dialogue by contacting george@plexiusgroup.com .

Thinking outside the Health Care Box, Leveraging Lessons from Other Service Providers

May 2, 2011 § Leave a comment

by Randy Atkin and Ken Morton

The Situation

The US health care market is entering ”interesting times” –  increased government participation, smarter and more involved consumers, and global influence and competition place health care in the United States at a major cross roads.  The key question:  Is the present business model sustainable?  The topic is drawing attention of the media, government and public thought leaders like Professors Clayton Christensen and Michael Porter of the Harvard Business School, both having recently provided analyses and recommendations with regard to the need for change in America’s health care system.

In response to these challenges, American consumers will push for transparency, enhanced quality, and administrative efficiency in health care delivery in pursuit of their own well being.  Governments will necessarily need to facilitate this access.  Buyers of these services are making, and will continue to make comparisons to other industries and (internal and external) markets. These drivers will ultimately test the sustainability of marginal players in the US (i.e., health providers with less than top notch quality, efficient operations and reasonable prices, aka strong patient value propositions).

Unfortunately, American industry has seen declining market share and revenues.  Looking inward for answers to growing global competition and consumer value sensitivity has not provided concrete solutions. The US health care industry is not entirely shielded from these same competitive factors, and health care is no longer a ‘local, price insensitive delivery system’ as some would argue. For example, it is possible to order prescriptions by mail from other countries at lower cost, it is possible to consult with a physician over internet delivered video services, and it is possible to fly to another country in order to have surgery at less expense than in the US.

The Opportunity

What can our health care system learn from best practices in other industries that can prepare it for the business pressures arising from greater government involvement, a more enlightened and value sensitive consumer, and the potential for greater global competition? We believe there are three main areas where the US health delivery system could benefit from the experience of other service industries that have faced similar challenges:

  • Process design and control:  improving patient handling and management for better quality scores, higher satisfaction and lower costs relate closely to the payments transaction and investment management businesses where consumer relationship with local banks and advisors has rapidly evolved to a global market place of services.
  • Information management and security:  Having the right information in the right hands at the right time to improve efficiencies, makes better decisions and reduces unnecessary treatments.  This focus on better information management, availability and analysis, has helped credit card processors reduce fraud by billions of dollars. At the same time, improved security has allowed greater access and availability across legal and banking networks.
  • Asset management optimization: Approach care delivery management like an investment advisor, including monitoring your patients’ health metrics throughout their life stages, providing access to the right expert resources as/when  required will  assist them in understanding the ‘investments’ in health choices that they may face. Making the consumer an accountable member of the team, sharing information, and encouraging a proactive stance to one’s health as an asset to be managed should improve the health dividend yields.

Comparison to Financial Services

Recently a colleague saw his doctor about a boil on his finger.  As it happens the doctor could not heal it but would recommend a specialist.  The doctor picked up his mobile computer, keyed in a request and said the appointment was set-up.  As it happened, instead of making a query into the specialist’s calendar, confirming the referral and securing the appointment the doctor’s electronic message went 50 feet down the hall to the nurse’s station where a printout awaited our colleague who took the piece of paper and made calls to the specialist’s office, the specialist’s medical group, and his own insurance group to secure and confirm the appointment; so much for efficiency.

Health Care likes to think that it is a totally unique industry and that you have to “make your bones” only in that space in order to have credibility and expertise but disconnected and incomplete processes like the one described here are the very kind of thing banks, brokerages, asset managers and insurance companies have successfully attacked for years.  We would argue that the Health Care Industry can and should embrace and learn from Financial Services.

The areas where the industries can share knowledge, expertise, and capabilities include:

  • Transaction Processing
  • End-to-End (Straight Through Processing)
  • Data Security
  • Cost Containment
  • Portfolio Analysis
  • Fiduciary Duty
  • Technology

More specifics

Transaction Processing – Financial Service organizations process a high volume of transactions (and transaction types) per day – requiring a high degree of accuracy while meeting tight daily deadlines.  Financial Services had developed workflow management and optimization procedures to help insure processing efficiency.  These procedures are essentially content-independent, while the large number of transactions (in both industries) requires constant attention to detail in both processing and training – a clear opportunity for knowledge transfer.

End to End Processing – Closely related is the idea of End to End Processing, essentially treating a transaction as a highly automated continuous (“straight through”) process focused on quality, accuracy and smooth customer service.  A particular point of emphasis is one-stop/step problem resolution.  This area long practiced by Financial Services is just started to be explored by some of the more innovative Health Care providers and would have saved our colleague, the specialist, and at least three administrative centers time and money.

Data Security – There are intense requirements for customer/patient confidentiality in both industries. HIPPA requirements are similar in concept and application to Financial Privacy Policies followed by most Financial Services companies.  The mindset is the same; procedures and training to implement industry regulations and norms (often from overlapping regulatory interests) regarding the creation, access to, and the long-term maintenance of sensitive data are transferable.

Cost Containment – The Financial Services Industry has been living through severe revenue and expense pressures – as has Health Care.  The measures taken by Financial Services to contain costs over the past three years has given them significant expertise in wringing out expenses, streamlining operations and maximizing efficiency at every step of a process.  Lessons learned can be shared and we would argue that Financial Services has the advantage.

Portfolio Analysis – a recent article in the New Yorker (“The Hot Spotters” Atul Guwande, Jan 24, 2011) outlined a new approach to analyzing the patterns that drive health care costs, an approach, interestingly enough, which developed from New York City’s Compstat approach to crime prevention.  This type of data analysis and mining are fundamental strengths of the Financial Services industry.  The industry’s deep experience in not only statistical models and complex mathematics but also knowing how to use that information to drive day-to-day  and actions should be easily transferable and of great utility within Health Care.

Fiduciary Duty – Both industries have a primary duty to do the best for the clients/patients. Taking a look at control processes, risk management systems, and accountability models within Financial Services should provide some interesting baseline approaches for Health Care.

Technology – Here, Financial Services shines.  It is constantly at the leading edge of technology and applying that technology to key operational functions like process management and improvement, risk management, financial management and controls and portfolio analytics.  A major area of leadership is customer service – beyond efficiently handling normal interactions, Financial Services knows how to handle customers throughout their life cycle and has developed interesting techniques to get the right information to the customer at critical points of his life.   This is a model that Health care could easily follow.

These are not the only areas where the long term goals of service industries participants are congruent.  Much could be learned and outcomes improved if “Not Invented Here” were replaced by more dialogue, at every level.

Ken Morton and Randy Atkin are principals at Plexius Group.  You can reach them at ken@plexiusgroup.com and randy@plexiusgroup.com.

The Arbitrage Impact of Lifecycle Analysis

April 1, 2011 § Leave a comment

By Doug Brockway and George Daniels

Buyers and sellers of assets agree on a price at the time of the transaction but each is hoping, expecting and planning that the actual value is better than the price paid.  To this end, accurately understanding the value of an asset is key to success in buying and selling.

Value calculations are based on historical performance as well as projected future revenues and profits.  Plexius uses lifecycle diagnosis and analysis to quickly and deeply inform on the accuracy of that view and whether, at the current price, it actually represents good value.

One way to illustrate the power of lifecycle analysis is to look at Apple, Inc.  Today, Apple is the second largest company in the world, when measured by market value, behind only Exxon/Mobil.  In 2000 Apple was a successful company, to be sure, but since then their success has been explosive.

What has occurred in the last decade is a multi-pronged relentless assault on both the corporate and the consumer markets.  Apple has not only introduced a series of products on a near-maniacally consistent pace of new products every year, but products seemingly aimed at one market spawn products in entirely different markets and then merge back together or feedback on each other with increasingly positive revenue.

The IPOD Case

The iPod family provides a telling illustration.  Introduced in October of 2003, over the next five years there were seven major releases of the iPod itself.[1] Each new product provided a combination of new features that drew existing and new customers back into the stores.  Memory would increase to handle more songs.  The user interface would change or the look of the device itself.  By the fifth release images and video were added and eventually the “standard” iPod was replaced by the iPod Touch which looks like and has all the features of an iPhone without the phone.  To date there have been two releases of the Touch.

In the 7 years of this analysis there have been 6 new products or branches on the iPod tree.  There were two versions of the iPod Mini, five of the iPod Nano, and three of the iPod Shuffle, all compact, stylish players.  There was an interim iPod Photo which added the ability to take and display pictures, subsumed into the standard iPod in release five.

The regularity of the releases is striking.  On average, across the family, there is a new release of a product every 1.2 years.  If you remove the iPod Shuffle, which averages 1.6 years/release from that analysis, Apple, in each branch of that family tree, adds a new release once a year.

Apple’s success includes many factors.  Two of them are deeply insightful understanding of markets and marketing combined with a product introduction juggernaut that both defines new markets and effectively cripples less nimble competitors.  Everything about Apple is organized around the ability to look beyond the current product and, while realizing the rewards of a successful current product actively designing, developing and delivering its replacement without waiting for the lifecycle curve to turn downwards towards commoditization.

– Plexius’ Reinforcing Innovation Model –

As a standalone product the iPod was successful.  It protected its revenue steam and expanded its market and dominated its market.  But, it was the iPod (and iTunes) piled on by the iPhone (and the App Store) then piled again with the iPad, that revolutionized Apples revenue growth in the 2007 to 2010 time window growing from $37 million to $65 million.  It is difficult to recall such a compounding of product and market innovation in so short a period.  How would you have valued Apple in 2005 if all you saw was historical performance without examining the development pipe line? The stock market price was from $30 and $70 during 2005.  Apple is now trading at $350 per share.

If you are thinking of buying a company that has a very successful line of products but for which there are relatively few replacement products in the pipeline ready to replace the current offerings at their peaks then the future cash flows of that company must be discounted.  However dominant the products are they will soon fall prey to commoditization and competitors.  The prices you are able to charge customers will go down, the marketing costs needed to maintain share and volume will go up and funds for reinvestment will be compressed.  Expect a squeeze.

Conversely, if you are thinking of selling a company that has a good set of products but each of them has replacement products in line and in the course of delivery ready to not only replace your installed base but that of your competitors you should hold out for a very good bid.  Expect a premium.

The information needed to reasonably estimate life-cycle positions for a company and its competitors offerings can be obtained through an examination of readily available data. The value of such insights to the buyer or the seller is priceless.   By having that information you are in a position to arbitrage, to your advantage, any acquisition or sale of an asset.  “To the [best informed] go the spoils.”

Doug Brockway and George Daniels are Principals with The Plexius Group

The Perfect Storm in Medical Devices

March 17, 2011 § 1 Comment

By George Daniels

Not long ago the medical devices industry was a darling of the investment community.  A wealth of medical innovation, rapid growth and profits were the attraction. Recently, the alignment and timing of numerous influences creates an ominous picture. With this post the Plexius Group intends to describe that picture and engage the discussion on possible solutions.

Our Industry research has uncovered a number of factors that combine to form an economic “Perfect Storm.”  First, there is a lack of profitability.  Putting the elite players aside, the majority of the mid range companies have not been profitable over the past few years and therefore cannot self-fund their development needs to stay competitive.

Second, this leads to shrinking investment dollars.  The investment community has almost totally retracted from the start ups in this space.  Recent discussions with investors and advisors show that now they look only for the end stage investments where revenues are imminent. The vast majority of investments made since 2000 are still waiting to realize return. The community is well aware of the external pressures from the FDA and the Patient Protection and Affordable Care Act (PPACA) that has injected near-term uncertainty into the industry’s economics and will almost certainly negatively impact the costs and profitability of this market. All of these things make finding cash less and less likely.

Thirdly, the governmental costs are rising in terms of actual regulatory costs and the uncertainty and variability in the interpretation and implementation of regulations[1].  The industry is well aware of the impact on the development process when the FDA’s 501K approval process is in change mode, resulting in longer times, moving demands and greater testing costs. The term “time is money” is very appropriate and approval is becoming far more costly due to the moving targets requirements.

Unless amended, the new health care law will add an excise tax on manufacturers and importers of certain medical devices in 2014, while capping payments for all Medicare and Medicaid services.

However laudable on a national basis the intent of the law to reduce medical costs means there is no room for the industry’s customers to pay a higher price for new products and pressures to reduce price and frequency of use (demand) of products already on the market.

Fourth, exit alternatives are few.  The two main avenues for investors to recover are either an IPO or a sale to another company. This market is not IPO attractive due to the uncertainties and the historical lack of profitability. Acquisition by one of the elite players in most cases has already been cherry picked, but there may still be some but not enough.

Fifth, on a product life-cycle basis the industry is out of sync.  Due to the governmental factors the industry market is having major discontinuities. It is uncertain that new technology products will replace the older ones due to cost pressures. It is uncertain that even better technologies will be adopted for the same reason.  The strategy of technology and growth leaves numerous products in the market that are in their mature product phase and yet have not produced returns. Thus they are unable to support funding their replacement.

These factors combine to form a “Perfect Storm” for any industry or business.  Although all jobs and all industries are important Plexius believes the US can more easily afford to lose, say, the hot-dog industry than medical devices.  It is too important to the health and welfare of our citizens and too crucial to maintaining a vibrant participation in the scientific and technical industries that dominate future economic success.

The way to survive this storm is not to follow the movie and press on with the course already set but to think and act differently.  While awaiting for help from the market and regulators medical devices companies need to find ways to make money now. The three areas that need innovation and reinvention now are:

1.   Go to market more effectively and for far less cost

2.   Develop products that do more, cost less and cost less to develop and how to more effectively manage the FDA approval process

3.   Make current products profitable now and new ones profitable at the get go

Plexius would like to hear from readers about this industry diagnosis.  We have some ideas on how to better go to market, develop new products, and increase the profitability of existing products.  Let’s not lose one of the great industries created in the USA again.

If you have ideas or comments, please share them.

If you want to discuss it directly e-mail me at george@plexiusgroup.com.

[1] At a recent seminar it was shown that FDA analysts require different tests on proposed devices when shown the same application and often over-rule approved test plans if the supervising FDA analyst who made the initial approval moves on and is replaced.

How Social and Mobile Will Transform Your Business

March 1, 2011 § 2 Comments

– Participation is Obligatory. Your Choice is How –
By Doug Brockway

It’s fairly easy to find examples of presentations, articles, and videos that describe how to think about how and whether to participate in social media for your business. Similarly, it’s an easy thing to find a great deal of content about how Cloud Computing is changing everything and you have to start thinking about it. Most of this is fairly useful and very little is harmful. Little of it expresses the stark reality that mobile technology is now out shipping total PC shipments, that the entire planet has overtly adopted social media, that Cloud and related technologies are making any place you are right now a fully functioning business location.

For all intents and purposes all of your customers, competitors and influencers, and all of your staff either now have or soon will have a smart phone or a tablet and often both. These devices, always connected, are part of our daily lives. It’s not just that egotists can Twitter about their soy latte’s or that many people can’t navigate without their GPS’s but people are doing transactions with mobile technology using a social media metaphor wherever they happen to be located. 60% of the usage on smart phones is on things phones have never been used for until very recently: mail, apps, games, maps and GPS and the like. Kleiner Perkins’ John Doerr calls it SoLoMo, Social, Local, Mobile.

Source: Top Ten Internet Trends, Mary Meeker and Matt Murphy

This is true around the world. In Japan 85% of page views are from mobile devices today, only 15% from desktops and you can guess the trend. Global mobile data traffic, performing tasks like searching for data, sharing files, capturing and sharing video, and voice over IP is predicted to grow by 26 times over the next five years.

We don’t propose for a second that you must now consider what your mobile-to-mobile gaming strategy will be within your business (though that may make sense in YOUR case…) but we do believe that your customers and your staff, and your competitors, will be working in a SoLoMo fashion, changing their management practices, their tasks, the definitions of who does what, when and how and so will you.

Whether you’re planning for it or not all of your value chains, all of your processes, everything you do will either be mobile or be heavily influenced by SoLoMo over the next 5-10 years. You only need to look towards Tunisia and Egypt to see the potential effect. Whatever lines of communications you are used to, whatever hierarchies of who is aware of which data or trend, they are likely to come undone.

There are whole economies where laying down land-lines is not going to happen and an entire generation in the industrialized world that acts, thinks and lives as if land lines don’t exist (I’m using “land-lines” here as a metaphor for traditional business processes). And the SoLoMo vision isn’t new. In 1987 Apple produced this highly stylized video, The Knowledge Navigator, which shows the potential of an intelligent, widely networked, multi-purpose tablet device. People have been working in this direction for quite a while.

Start thinking about how to take advantage of the inevitable. One way is to make day-to-day activities of management and staff far more responsive to day-to-day information. A metric driven business improvement plan starts with the definition of key business metrics (e.g. a certain improvement in new product introduction rate), ties them to operational metrics that actually create value (e.g. the speed with which new product production is brought on line) and then are used in a combination of ways to do work and to solve problems (quality issues, cost overruns, faulty orders):

source:  Plexius Group

Now design your implementation of your plan assuming that the key business metrics and the operational metrics can be displayed on management and staff smart phones and tablets, not just their PCs or in reports. Update the information as it happens. Embed in the tablets analytic tools, use the smart phones to capture video of processes as they happen, use the tablets to run improvement workshops and directly adjust the operational metric standards. Since your staff is living in a SoLoMo world use it to embed a team problem solving culture in your business. Since its networked, whenever possible and prudent involve your suppliers, partners and customers directly in the process.

An enormous amount of technological change is happening all around us. Seize the [data]!

Doug Brockway, a Principal with The Plexius Group, can be reached at (617) 834-0067

Taking Care in Pricing Care

January 17, 2011 § 5 Comments

Pricing is a difficult skill at any time and in any market.  Determining how much of costs to recover, by offering or by service, within the limits of market demand requires a comprehensive understanding of a myriad of factors and forces including; market dynamics, competitive drivers, internal direct and indirect actual costs, the appropriate allocation of indirect costs, and calculations regarding gross sales projections.

If you’re running a hospital in today’s newly regulated, capital intensive and competitive environment proper pricing can make the difference between success and failure.  The new health care regimen requires that health insurers reimburse reasonably for services rendered.  They cannot allow some hospitals to demand high prices for standard services while others are receiving a lower price.  From a reimburser’s perspective all prices must be “efficient.”

Currently hospitals are quoting quite different prices for the same or similar services, a practice that cannot survive.  A recent investigation in the Massachusetts market by the Boston Business Journal uncovered wide ranges in prices for CT Scans, Weight Loss Surgery, Angioplasty and C-Sections.

Source:  Boston Business Journal, Dec. 3-9, 2010

As seen, pricing varies widely in these local hospitals.  There is a 100% variance in CT Scans[1].  Leaving out the CT-Scan as an outlier, the most expensive option for a service tends to be 40% more costly on average than its lowest priced competitor.  This leads price conscious insurance companies to make choices.  In one case a local care group, Partners HealthCare, is being written out of certain insurer programs due to pricing levels.

One key requirement for pricing success is branding selection and clarity.  For example, some time back a well known large Boston hospital looked into defining its brand.  As the story goes they were inconsistent in how they wanted to be perceived by their customers.  It should be obvious that the operational needs of, say, psychiatry are more about communication and social skills while that of heart surgery are more weighted toward technical surgical and procedural skills.  It is difficult at best to be good at one thing but impossible to excel at everything.  In our example the skills and market reputation favored technical offerings but their pricing favored social skills and the result was that the beds were full but not with patients requiring the offerings at which they excelled.  This negatively affected their costs, effectiveness and severely impacted profitability.  This hospital has since re-focused on its brand clarity, priced its services to attract patients that match its skills, and seen strong success as a result.

Pricing discrepancies like those shown above are often the result of utilizing a limited ‘cost plus’ pricing model that does not give full consideration to:

  • Your true cost of service
  • The purpose of the service relative to your Brand and its archetype strategy
  • The competitive environment
  • Patient alternatives
  • The perceived value of your services
  • Aligned product/service portfolio profit models

For example, hospitals might consider if their CT Scan service is supportive of heart surgery, is a standalone product, or is supportive of a radiology service strategy?  Each alternative necessarily supports different cost structures, pricing and purpose strategies which cannot be intertwined without potentially unfavorable consequences.

The Plexius Group does not propose pricing strategy as a cure all but we do believe there are opportunities to fundamentally improve business prospects by aligning skills, branding, market clarity and pricing.  Hospitals should examine how to best position and price their services to compete effectively and profitably in the local market.

George Daniels, Randy Atkin and Doug Brockway contributed to this post.  Their contact information can be found at http://www.plexiusgroup.com/contact_us.html.

[1] We know of a New Hampshire hospital asking $2,500 for a CT Scan

Kick the Can is a Dangerous Game

October 18, 2010 § 1 Comment

by Doug Brockway

Whether you’re working on day-to-day operational efficiency and effectiveness, or the long-term value of the products and services in your portfolio, it is almost never advisable to put off a decision about a difficult problem.  There are situations when either the resources or the time to deal with a problem are not immediately available.  And, you can’t profitably fight all battles at all times from all comers.  You must choose when and where to take your shots.  But, the continuously festering US mortgage crises are an example of what happens when people leave a mess for others to clean up.

As of this writing in October 2010 the rate of foreclosures on mortgage in the US is now one in every 21 mortgages.  Just two years ago it was one in every 100 mortgages:

Similarly, the number of mortgages that are past due has skyrocketed as the combination of variable interest rate jumps in an economy that stubbornly fails to create sufficient new jobs for the people ready, willing and able to work:

Like the proverbial frog in the incrementally heating pot of water, you can imagine the managers and executives on Wall Street, in the mortgage banks,  the public policy makers, even individual homeowners, incrementally “loosening the screws” on underwriting and documentation, telling themselves that it will be OK.  You can imagine regulators convincing themselves that the business is solid.  Rating agencies basking in credit for analysis “well done.”  As Citi’s former CEO Charles Prince said during the height of the sub-prime boom, “”As long as the music is playing, you’ve got to get up and dance.”

Throughout the mortgage value chain, from borrowers and brokers through to bankers and investors we were not actually examining the value, import, and risk of our business bets.  As the foreclosure snafu makes clear, we were busily assuming we had everything under control and not actually checking.  Attending mortgage industry conferences in the 2000’s the mood increasingly went from hopeful to aggressive to an outward euphoria.  But if you asked people how all that credit and all those loans would work out you could tell that they didn’t know and they also didn’t want to, couldn’t personally afford to be the one to start asking around.

Don’t kick the can down the road.  If you have a product that is growing year-over-year but you’ve put off decisions to fundamentally improve it “until you have to” then you’re too late already.  If you have managers and sales people who create revenue just by the uplift of “market action” then you had better be actively preparing for a change in the market that deflates revenues (but likely leaves egos intact).  If you detect a chink in your armor but things are good, fix it.  Either the market or your competitors won’t be forgiving.

Life cycle View on Shareholder Value

October 10, 2010 § Leave a comment

by Randall Atkin

The concept of shareholder value enhancement, also known as value based management, has the objective of assisting management in considering the interests of shareholders, typically their financial enrichment through earnings power and cash flow optimization. As shareholder value is difficult to influence directly by any one manager, it is usually broken down into components of so called value drivers. A widely used model comprises seven drivers of shareholder value[1], giving some guidance to managers: Revenue, Operating Margin, Cash Tax Rate, Incremental Capital Expenditure, Investment in Working Capital, Cost of Capital, Competitive Advantage Period.

Based on these seven components, all functions of a business can plan and demonstrate how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components.  However, organizations that possess a singular focus on shareholder value are not without their critics. What can inadvertently be neglected are social issues like employment, environmental sustainability, or ethical business practices. These aspects of corporate accountability are typically referred to as stakeholder values, and will be the subject of a separate discussion by our organization.

“Time-Based Value Management”

Plexius’ principle of time-based value management (TBVM) comprehensively deals with the issues of shareholder enrichment, management accountability and the dimension of time.

It can be defined as the analysis of external, or non-controllable, and internal, or manageable business cycle components (e.g., product, technology, regulatory, etc.) and the proper alignment of management processes and decisions to the activities that form a company’s strategy and execution plans. Interrelated to the cycle analyses are the elements of people (skills, knowledge, accountability, etc.), process (design, efficiency, cost, etc.) and technology (leverage, investment, alignment).  Combined, these assessments drive decisions regarding the key dimensions of competitive design that a company embraces.  These inputs are all used in suggesting a properly balanced portfolio of products, development initiatives, operational processes and investment plans that will optimize shareholder value interests.

What Management Should Do

Begin by measuring your current life cycle position by product/service offering.  This includes evaluating external life cycles: the market, competitive offerings, regulatory changes, and the underlying technologies driving the market.  Do the same for the controllable cycles.  This should be done for each of your current offerings, your planned next offering and for the 2 to 3 previous offerings.

The competitive design aspects (operational excellence v product excellence v customer intimacy) vary by life cycle stage.  For instance, one competes in a mature market more with operational excellence than with product superiority.  Misalignments of these relationships can be damaging shareholder value.  Look for these misalignments between the life cycle you are in and how you are competing.  Devise plans to eliminate them.  Within markets, make sure that pricing, promotion, and product development plans are aligned with the current life cycle.  For instance, it is during the growth phase that the next product must be planned and initiated, not before and not after.  With these analyses in hand examine each offering for its impact on shareholder value and how it could be improved.

[1] See: “Corporate Financial Strategy”, Ruth Bender, Keith Ward, 3rd edition, 2008, p. 17

Do Products Die? or, Product Development and Management through Life Cycle Analysis

October 1, 2010 § Leave a comment

By Ken Morton

Products, like human beings, have their own life cycle. They are introduced (born), grow, mature, decline and often “die.”  Each phase in the cycle poses significant management challenges, involves many professional disciplines, and requires broad skills, tools and processes. Within this context, there are four key principles:

  1. Products have a limited, predictable life
  2. Sales/Revenues pass through distinct stages, each with different challenges, opportunities, and problems
  3. Profits rise then fall throughout the different stages
  4. Success requires different marketing, financial, manufacturing, purchasing, and human resource strategies and planning horizons in each stage

Successful managers must challenge themselves constantly to know if they are making the right decisions: Do I have the right product, at the right time, exploiting the right resources, to generate the right profit?

A life cycle strategy helps you plan, understand and structure your product development and management activities to ensure that you are.

(source: “Managing Products and Brands”, Rohan, SDSU)

Business success combines allocating scare resources and balancing needs.  Knowing where you are in the product life cycle allows you to manage your risks to achieve the optimum marketing mix – Product, Price, Promotion, Place, and guides your actions to ensure success- at every stage.

What Management Should Do

Begin by evaluating your entire product line showing life cycle stage, and analysis of price, promotion, place (distribution), as well as competition and consumers.  The individual maps consolidated to create a full product/market strategy.

(source: “Managing Products and Brands”, Rohan, SDSU)

At this point you must ruthlessly analyze where you are in the life cycle vis-à-vis the competition and take action to ensure that scarce management, operational, technical and financial resources are being properly managed and developed – both now and in the future.  In this way you will match your Investment, Development, Planning and Profit horizons synchronized within the field of competitive actions.