Is Diversification Right for Your Hospice or Home Health Organization?
Don't Be Too Quick to Jump on the Diversification Bandwagon
Before hospice and home health care organizations jump on the diversification bandwagon too quickly, taking a look at other industries that have attempted to diversify or merge their product lines is important. For example, a study of 1,935 new product introductions conducted by Linton, Matysiak and Wilkes, Inc. a market research and new product development firm for the perishable food industry demonstrated:
Smaller food companies distributing through retail grocers had an 11.6% success rate.
The 20 largest food companies had a 76% success rate.
What made the difference in outcomes between these two groups? The larger firms had strategic marketing skills and resources that the smaller companies lacked a scenario most home-care organizations can identify with. Plus, a study of mergers by the world-renowned consulting firm McKinsey & Company showed that between 65% and 70% of all mergers fail to increase shareholder value.
How to Determine if Diversification Is the Right Path for Your Organization
Given these findings, the risks of diversification are significant. So, how do you determine whether diversification is the proper path or just an exciting way to get out from under the tough work of building your current business step-by-step? We propose that by determining and plotting the maturity and competitiveness of your local market, you can construct a model that indicates whether or not diversification will work for your organization.
Step 1 Determine Your Market's Maturity & Competitiveness Level
Market Maturity
Market maturity is based on the percentage of potential users. For home health care organizations, potential users are usually defined as the percentage of Medicare fee-for-service enrollees who use the Medicare home health or nursing home benefit in a given year. In the case of hospice, potential users are Medicare enrollees who access the hospice benefit annually. Research indicates that there's an 80% to 95% correlation between this hospice measure and the industry's traditional utilization metric of percentage of deaths on hospice. If your market's utilization level falls outside of the top quartile, an opportunity likely exists to grow your business by finding new patients from:
new referral sources
existing sources that have not referred a particular kind of patient in the past.
Market Competitiveness
The competitiveness of a market determines how easily you can gain market share. In their academic research, marketing professors Sheth and Sisodia developed the "Rule of Three" by studying the evolution of 200 industries. They saw that over time, three firms tend to accumulate a combined market share of between 65% and 70% of the available market. The underlying phenomenon is that the more concentrated a market is, the more difficult gaining market share is. Their findings also proved that at this level of concentration, "equilibrium share" is unlikely to shift dramatically.
If the combined market share is below the 65% level, hospice and home health organizations have an opportunity to gain share within their current market. A combined market share above 65%, however, indicates referral sources are "locked" in a pattern that will require a meaningful point of differentiation to promote change.
Step 2 Plot Your Market's Maturity and Competiveness Level
The next step is to plot the market maturity and competitiveness level as a means of determining the attractiveness of a market. The "x" axis becomes the upper limit of the third quartile of utilization (75% level) and the "y" axis, becomes the 65% concentration level. By plotting these factors for your individual geography on a chart, your market will fall in one of the following four quadrants:
Quadrant I Low/moderate utilization, not concentrated
Quadrant II Low/moderate utilization, concentrated
Quadrant III High utilization, not concentrated
Quadrant IV High utilization, concentrated
Based on the combination of factors, therefore, the possible strategies to pursue in each market type become apparent:
Quadrant I Focus on both gaining market share through differentiation and finding new sources of patients or types of patients
Quadrant II Focus on finding new sources of patients or types of patients to fuel primary growth
Quadrant III Focus on gaining market share through differentiation
Quadrant IV Explore diversification
How Should Your Organization Diversify?
If you determine that your organization falls in Quadrant IV (high utilization, concentrated), then diversification is likely the best way to effectively grow your business. How can you diversify? Entering a new geographic market and developing a new line of business are two important options for diversification.
1. Enter a new geographic market
There are several advantages to entering a new geographic market:
A company can utilize its existing skills, systems, and resources.
Although it may take time for management to learn the new territory's "rules of the game," they can easily apply the lessons they've already learned.
The company can leverage its infrastructure during the expansion.
2. Develop a new line of business
Developing a brand new business, however, poses much more risk:
The management team may not be as familiar with the intricacies of the new business and the risk of a misstep is greater.
New systems, skills, and infrastructure may have to be built.
A considerable amount of money and management time need to be invested before the first dollar of cash flow is realized.
The demands of a start-up may cause management to detrimentally lose focus on the original business.
The culture required of the new business may not be compatible with the organization's current one.
While many home health agencies have entered the hospice market in recent years, they've demonstrated an uneven record of success. Lately geographic expansion has become the hallmark of for-profit chains, indicating diversification as the obvious choice for this group. It's the non-profit organizations, however, that "get tied up in their own underwear" because of the community or geographic focus of their missions or their board of directors' bias. Thus, entering a new business is the diversification trap that non-profit agencies often fall into.
Perhaps You Need to "Stick to Your Knitting"
If an organization can put its ego and control issues aside, geographic diversification may be the least risky and most financially rewarding alternative. Keep in mind, however, that three out of the four quadrants in the model we presented call for home-care organizations to continue to focus on growing their current businesses within their existing geography. This is what is called "sticking to your knitting."
Tom Peters and Robert Waterman, in their classic book on business strategy, In Search of Excellence, advocate that one of the eight keys to business success is to "stick to your knitting"stay with the business that you know. If you want to get better at knitting, you read up about knitting, you go to a knitting store and speak to the experts, or you join a knitting circle and watch experienced knitters. How to gain knowledge about growing your home-care organization (your "knitting") is a topic for a future newsletter article.
Is Diversification Right for Your Hospice or Home Health Organization?
By: HealthMR
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