Session 1 Introduction to Strategic Management

Strategic Management
PGP Term 3 Sections A & B Indian Institute of Management Calcutta
Sai Prakash R. Iyer 20 Dec 2011

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Introduction Narayana Hrudayalaya Heart Hospital

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Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer

Introduction

Course Structure

Welcome to Strategic Management

20 sessions of 90 minutes each

Sessions 1 3: Introduction and analysis of industry structure Sessions 4 7: Competitive strategy Sessions 8 11: Corporate strategy Sessions 12 20: Strategy process

Case studies to go with topic of the day Evaluation

Class Participation In-class Quiz Mid-term Exam End-term Exam 20% 10% 35% 35%

Class Participation not just a component in evaluation its how we will learn
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Introduction

How to Learn

Preparation and class participation essential to learning

Do
prepare well for the class readings, case analysis, develop points of view on discussion questions speak up when you have something to say be precise and concise take the class discussion forward help the discussion to be inclusive respect colleagues points of view try to understand where they come from

Dont
try to be innovative in class without prior reading/ preparation hesitate to speak up there are no silly remarks in our class go on a long-winded story paraphrase, repeat what others said monopolise the class time rubbish, shout down or flame

Enjoy learning strategy

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Introduction

About Strategy

Strategic management, or strategy, deals with the concerns, issues and challenges faced by top managers of a line of business or a corporation
Primary question that engages the strategic management discipline is about superior performance
Manager: How can I make my business/ firm perform better? Academic Researcher: Why do some firms (businesses) perform better than others?

What is the yardstick to measure superior performance?

For-profit: Shareholder value, returns to investors, market share,, what else? Non-profit: Effective and efficient attainment of goals specific to the organisations mandate

How to develop the way to achieve superior performance in a for-profit context?

Line of business/ Single business firm: Business Strategy or Competitive Strategy Corporate/ Conglomerate: Corporate Strategy

How to implement the way to achieve superior performance? Strategy Process Throughout this course, we will take the view of a top manager CEO of a firm/ line of business
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Introduction Narayana Hrudayalaya Heart Hospital

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Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer

Narayana Hrudayalaya

Performance of NH

Is Narayana Hrudayalaya (NH) successful? On what basis would you assess its success?

Functional parameters to assess the performance of NH

Cost of surgery: Open Heart Surgery: Rs.65k to 90k at NH against Rs.250k average of other Indian hospitals Effectiveness:

Mortality rate for CABG: 1.27% for NH Vs. 1.2% for US

Infection rate for CABG: 1% for NH Vs. 1% for US Number of surgeries compared to US: Not really a good indicator if you normalise for population and demand for cardiac care What else?

On functional parameters, NH seems to offer best quality cardiac care at low cost
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Narayana Hrudayalaya

Performance of NH

Is Narayana Hrudayalaya (NH) successful? On what basis would you assess its success?

Social contributions of NH/ Dr. Devi Shetty

Karuna Hrudaya: Subsidised heart surgery @ 65k against break-even cost of 90k and regular price of 110k, which accounts for 40% of all surgeries at NH in 2004 NH Trust: Charitable trust to help the really poor get heart surgery for almost free (65k borne by the trust/ raised from donors) Yeshasvini: Health insurance for members of co-operatives in Karnataka access to large number of hospitals for inpatient and out-patient treatments, large number of diseases/ procedures covered Telemedicine: Train GPs to diagnose heart problems, equip health centres (ECG etc.), access to experts at NH for consultation, mobile health centres

NH seems to be making a difference for quite a few people who need healthcare, but cant afford to pay for it
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Narayana Hrudayalaya

Performance of NH

Yeshasvini data shows that it has been growing fast and steady over the years (data not available in case)
CAGR 03-04 to 08-09 Growth in Growth in Numbers Value 13.8% 30.2% 46.1% 48.3% 36.4% 52.5% 51.9% 52.7% 41.5% 41.0% 41.8% Jun 03 - May 04 Numbers Value Rs. 97,567,698 45,000,000 3,743,622 146,448,341 9,047 9,047 9,047 106,535,417 106,535,417 106,632,417 11,786 0.57% 72.8% 74,584 73,269 75,210 Jun 08 - May 09 Numbers Value Rs. 364,942,000 300,000,000 26,869,314 692,189,335 603,398,300 593,231,381 612,086,550 8,138 2.46% 88.4%

No of Members Enrolled Contribution collected Government Contribution Interest Total Amount Collected Claim Status Surgery Claims Received Claims Settled Surgeries Cost per surgery (Rs.) % of surgeries wrt enrollment Cost of Surgeries/ Collection Out-patient Benefits Free OPD Treatment benificiaries % Free OPD wrt enrollment Contribution Breakup Contribution/ Member (Rs.) Member Contribution / Collection Govt. Contribution / Collection
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1,601,152

3,059,436

39.8%

35,814 2.2% 60.94 66.6% 30.7%

191,109 6.2% 119.28 52.7% 43.3%

Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer

Narayana Hrudayalaya

Performance of NH

Is Narayana Hrudayalaya (NH) successful? On what basis would you assess its success?

What about the financials of NH?

Comparing with peers would be a good starting point
Indraprastha Med. 1,275.40 1,114.10 1,805.80 155.10 8.59% 1.42 12.2% 1.14 12.2% 13.9%

Firm Total Assets (A) Equity (E) Income (S) PAT (R) R/S S/A R/A A/E RoA RoE

NH 387.58 58.45 592.25 35.42 5.98% 1.53 9.1% 6.63 9.1% 60.6%

Apollo Hospitals 4,030.60 2,466.70 4,997.70 372.20 7.45% 1.24 9.2% 1.63 9.2% 15.1%

Breach Candy 615.50 570.40 746.20 74.90 10.04% 1.21 12.2% 1.08 12.2% 13.1%

Fortis Healthcare 579.40 235.40 608.80 (155.30) -25.51% 1.05 -26.8% 2.46 -26.8% -66.0%

Kovai Medical 282.50 132.30 398.20 11.30 2.84% 1.41 4.0% 2.14 4.0% 8.5%

All figures in Rs. Millions for FY 2003-04 Source: Capitaline

How does NHs financials look in comparison esp. Return on Sales, Asset Turnover?
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Narayana Hrudayalaya

Performance of NH

Given all the great things said about NHs operations, the Asset-Turnover ratio of NH seems quite comparable with peers any idea why?
NH prices its services 50 to 75% lower than the market price (private hospitals in India)
Ratio of output (surgeries) to inputs (number of operating theatres, equipment, facilities etc.) would be the appropriate way to compare the productivity of NH with its peers Or else, we can normalise for the price and compare S/A to get a fair comparison of how productive NH is
Current Pricing Total Assets (A) Equity (E) Income (S) PAT (R) R/S S/A R/A
All figures in Rs. Millions for FY 2003-04

387.58 58.45 592.25 35.42 5.98% 1.53 9.1%

20% Discount on Market Price for Paying Customers + Subsidy 387.58 58.45 719.37 162.53 22.59% 1.86 41.9%

Full Pricing for Paying Customers + Subsidy 387.58 58.45 830.60 273.76 32.96% 2.14 70.6%

Full Pricing for All 387.58 58.45 1,201.36 644.53 53.65% 3.10 166.3%

High utilisation of assets, reasonable sales margins after passing on substantial value to the customers, high leverage, poor liquidity on the whole, is NH successful?
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Narayana Hrudayalaya

Objectives of NH

What are the broad objectives of NH?

Case provides multiple views on the objectives

Provide affordable cardiac care to the masses Provide best quality health care at low cost / Wal-martisation of health care

Social objectives philanthropy

What else?

While some of these statements look similar, there are critical differences
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Narayana Hrudayalaya

Objectives of NH

Why does NH exist? Whats its business?

Mission:
Raison d'tre of the firm the reason why it exists Defines the business of the firm in terms of
Customers (who) Needs (what) Technology (how)

Should
Help identify the firm uniquely in the market Be short, meaningful Be flexible, broad, enduring

Examples:
Lever Brothers reduce the chores of housewives, popularise cleanliness Disney to make people happy

If we look at the various statements of objectives of NH in terms of who, what and how, the differences will be clear
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Narayana Hrudayalaya

Business Model of NH

What is the business model of NH? Is it strategy or just operational effectiveness?

Focus on cost reduction: Multiple activities in NH seek to reduce per unit cost of procedures
Fixed Cost
High utilisation of doctors/ surgeons/ paramedics leads to lower per unit employee cost

High utilisation of equipment leads to lower per unit asset cost

Convert fixed to variable costs rent/ lease equipment instead of purchase

Variable Cost
Hard bargains with vendors lower prices for medicines, reagents, consumables

Alternative/ local sources of drugs/ consumables (sutures, medicines)

Technology to reduce cost digital X-rays

Focus on high quality:

Specialisation of doctors/ paramedics in cardiac care High volumes provide much better experience and learning for the staff (may take many more years to get similar experience elsewhere) Best quality equipment and facilities (no second-hand machines etc.)
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Narayana Hrudayalaya

Business Model of NH

What is the business model of NH? Is it strategy or just operational effectiveness?

Non-profit initiatives that support NHs activities:

NH Trust helps the really poor patients to raise even the subsidised cost of surgery Yeshasvini insurance for co-operative members funds part of their surgical expenses (how much does the insurance feed into NHs activities?) Telemedicine helps increase awareness and preparedness, channels patients to NH

Social objectives rally the organisation to its cause:

Dedicated/ service oriented staff the social objective of reaching cardiac care to the poor increases the commitment of staff Processes that demand high productivity from staff is not likely to be seen as management trying to exploit them, as the shareholders are not appropriating the extra profits (goes to poor patients)

Operational effectiveness alone? Why is NH not retaining more of the value created through higher productivity? Why the non-profit initiatives?
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Narayana Hrudayalaya

Business Model of NH

Can we tease the mission of NH from its business model?

Who: People in need of health care, with emphasis on those who cannot afford currently available private sector healthcare options What: Cardiac care How: Best-in-class cardiac care with focus on lower costs to the patient through improved efficiency and lower costs from suppliers, supported by non-profit activities
Pricing: Poor get subsidised (or free) cardiac care, middle class get affordable cardiac care which costs only half the market price, and those who can afford get premium care surplus from paying/ premium customers cross-subsidises service to the poor Differentiation: Everyone gets the same medical care; differences in value delivery on non-medical aspects only (type of room, facilities etc.) Operations: Economies of scale and scope drive high productivity and lower costs from suppliers; supportive non-profit initiatives

Each element of the who, what and how clearly defines the set of activities that NH should and should not do changing one of these elements will change the configuration of NH
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Narayana Hrudayalaya

Business Model of NH

How does the business model support the objectives of NH?

Who:
NH able to provide subsidised services for 40% of its patients with the surplus generated from fully paying and premium patients Price to fully paying patients 50 to 75% lower than market price Full suite of cardiac care including paediatric heart care Higher productivity evident from the analysis Suppliers/ vendors acknowledge NHs focus on hard bargains and cost reduction Non-profit initiatives are supporting NH High asset utilisation and lower costs translates into lower price for customers consistent with the model of low-cost/ high-quality Return on assets comparable with for-profit hospitals (e.g., Apollo) Below-par return on sales, poor liquidity, high leverage consequence of the business model

What:
How:

Outcomes:

Point to ponder: Can NH improve some of the financial outcomes without compromising its overall objectives?
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Narayana Hrudayalaya

Vision of Dr. Devi Shetty & NH

What is Dr. Devi Shettys vision? How does NH fit into realising his vision?

Dr. Devi Shettys vision is to reach affordable tertiary healthcare to all

Influenced by the work of Mother Theresa Shaped by his experiences after coming back to India

NH was Dr. Shettys first experiment at a self-sustaining business model where the poor get access to cardiac care we discussed the key features of this model in terms of value delivery
NH can also be seen as a proof of concept for Dr. Shettys initiatives to realise his vision in the broader context of tertiary care, i.e., going beyond cardiac care

Point to ponder: What challenges will Dr. Shetty face in trying to replicate the NH model in Health City?
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Narayana Hrudayalaya

Mission, Vision and Values

Mission, Vision and Values just pin-up or more than that?

Mission: We already discussed Vision: What the firm wants to be

Long term view: articulated as goals to be achieved over several years (should it be open ended?)

BHAG: Big Hairy Audacious Goal (not fully constrained by current realities) NASA in 1960s: This nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth (JF Kennedy, address to the US Congress 1961)
Vivid description: Vibrant, engaging and specific description of the envisioned future Ford in 1900s: I will build a motor car for the great multitude .... It will be so low in price that no man making a good salary will be unable to own one and enjoy with his family the blessing of hours of pleasure in God's great open spaces... When I'm through, everybody will be able to afford one, and everyone will have one. The horse will have disappeared from our highways, the automobile will be taken for granted...[and we will] give a large number of men employment at good wages

Whats the vision for NH? What about Dr. Devi Shettys vision? How are they related? How are they different?
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Narayana Hrudayalaya

Mission, Vision and Values

Mission, Vision and Values just pin-up or more than that?

Values: What is the firms philosophy/ ideology in doing its business

Guiding principles that endure over a long time Guides the organisation in what it would and would not do Does not depend much on external environment; does not change much in response to market changes

What are the values espoused by NH?

Point to ponder: Think of the mission, vision and values of firms/ businesses you are familiar with whats your take?
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