MARKET GROWTH THROUGH DIVERSIFICATION

VERSUS GEOGRAPHIC EXPANSION

PRESSURE CAUSING THINKING ABOUT DIVERSIFYINGIncreased CompetitionLower ReimbursementGreater Regulatory ScrutinyTechnology and Automation ImplementationCapital Funds Needed

IS DIVERSIFICATION A PANACEA?

DIVERSIFICATION HAS RISKStudy of 1935 food product introductions

showed a 11.6% success rate for smaller companies versus 76% rate for large firms.Researchers concluded that smaller businesses

lacked strategic marketing skills and resources.

Study by McKinsey & Co. showed that 65-70% of all mergers fail to increase shareholder value.

DIVERSIFICATION MODEL• Model is designed to guide hospice

management is assessing the viability of diversifying into a new business or geographically versus continuing to focus on its current market—”Stick to Its Knitting”

• Model is based on assessing the market maturity an competitiveness of the current service area

• The greater the maturity and the more competitive a market is the more attractive diversification becomes

MARKET MATURITYMarket maturity is based on the percentage

of Medicare enrollees, who access the Medicare hospice benefit annually.

Research indicates a 80-95% correlation between this measure and the traditional utilization metric of “percentage of deaths”.

Can be calculated at the state, regional/multi-county or county level

RULE OF THREEProfessors Sheth & Sisodia studied over the

evolution of 200 industries and saw the development of 2 types of firmsFull Line GeneralistsProduct/Market Specialists

Hospital based or local VNA – market specialist Ortho agency – product specialist

Over time, 3 full line generalists grow to 70%-90& of the share

Increased share results in better performance for the full line generalists, but weaker results for the specialists

UNDERLYING ASSUMPTION: The more concentrated a market is, the more difficult it is to gain market share

MARKET COMPETITIVENESS• Metric based on “Rule of Three”—Level of market

concentration• It infers prospects for future success.• Once referral source has “locked in” a preference,

it requires a greater degree of differentiation to get their attention and gain trial.

• Referrals to captive agencies by parent organization employees are not a “free market” situation and should be excluded.

• Combined freestanding market share of 65% or more indicates a “locked” market

FACTOR CALCULATIONMarket Maturity

Medicare Hospice Patients Served Medicare Eligible

Market CompetitivenessCombined Market Share of 3 Largest Hospices

WHAT RESULTS MEAN• Quadrant 1

– Your area has low/moderate utilization in an unconcentrated market.

– Therefore, focus on gaining market share through differentiation or finding new sources of patients or types of patients.

• Quadrant 2– Your area has low/moderate utilization in a

concentrated market.– Therefore, focus on finding new sources of patients

or types of patients.

 

WHAT RESULTS MEANQuadrant 3

Your area has high utilization in an unconcentrated market.

Therefore, focus on gaining market share through differentiation.

Quadrant 4Your area has high utilization in a concentrated

market.Therefore, explore diversification.

DIVERSIFICATION ALTERNATIVESExpand into new geography

Able to utilize existing skills, systems and resources.

Lessons learned elsewhere can easily applied to new territory.

Company’s infrastructure can be leveragedSenior managers may have to learn the “rules

of the game’ in the new market.THIS IS THE PATH TAKEN BY MOST FOR-

PROFITS

DIVERSIFICATION ALTERNATIVES• Enter new line of business

– Senior managers may not be as familiar with the subtleties of this new endeavor

– Risk of a misstep is greater– Culture required for new venture may be

incompatible with organization’s current culture

– New systems, skills and infrastructure may have to be built

– Considerable management time and cash flow may be invested before first dollar is realized

OBSERVATIONS• Consider uneven record of home health

agencies entering the hospice field in recent years.

• With for-profits, geographic expansion appears to be the diversification method of choice.

• Non-profits appear to be constricted by the community focus of their mission or their board’s geographic bias.

CONCLUSIONS• Three out of the four quadrants call for

hospices to focus on their core business—This is what is called “sticking to your knitting.”

• Tom Peters & Bob Waterman’s In Search of Excellence advocates that one of the eight key to business success is to stay with the business you know—”Stick to Your Knitting.”

• Geographic expansion may be the least risky and most financially rewarding diversification alternative.

CONTACT INFORMATIONRich Chesney

President, Healthcare Market Resources

rchesney@healthmr.com

215.657.7373

215.657.0395(f)

www.healthmr.com