Almost all businesses have to re-examine and renovate their business model from time to time, and healthcare providers are no exception. Too often, that process is disorganized, and thus decision-makers can miss opportunities to improve profitability, productivity, and efficiency. In an article recently published in the Harvard Business Review, “Four Paths to Business Model Innovation,”1 the authors suggest that the secret to success in business model innovation lies in addressing four essential questions:

• What mix of products and services should you offer?
• When should you make your key decisions?
• Who are the best decision-makers?
• Why do key decision-makers decide as they do?

Girotra and Netessine contend that companies that are re-thinking their product and service mixes have three options.

A narrow focus. For example, the diaper business focuses on a distinct market segment: parents of babies, who will use the product predictably for about two years per child. Diapers are nearly a commodity, of limited variety, and while profit margins on diapers are low, they’re reliable. The main drawback to a narrow focus is that it might overlook other customer needs that work in tandem with your product.

Seek product commonalities. Volkswagen produces components that all its vehicles can use. Thus, it’s easy for the company to quickly and painlessly switch production from one model to another whenever the demand for car models shifts. Similarly, Amazon.com saw that its products all required more or less the same logistics capabilities; thus it doesn’t much matter to them whether books, CDs, or DVDs are currently the more popular medium.

Hedge the portfolio. For example, LiveOps uses virtual call centers. Instead of setting up brick-and-mortar call centers and hiring a certain number of employees who put in a set number of hours, LiveOps saved up-front costs by hiring freelance employees who work at home and make themselves available to take calls when they please. Employees who have signaled their availability will have calls routed to their homes, with the most calls (and consequently the highest earnings) going to employees who turn in the highest-quality, most dependable performance.

The Chilean airline LAN uses the same type of aircraft for both passengers and cargo, unlike many of its competitors. Often, a craft that has delivered passengers can then pick up cargo, and deliver it, arriving back at the Santiago airport in time to make its next scheduled passenger flight.

Another example might be a supplier of ski equipment. That company might focus its marketing and production on the Northern Hemisphere at one time of the year, and on the Southern Hemisphere at another time, since the seasons are reversed.

When should you make your key decisions?

Girotra and Netessine recommend deferring certain key decisions until it’s absolutely necessary to make them. Pricing decisions made too early, for example, will often expose a company to grave risk if market conditions change. American Airlines, about 30 years ago, introduced the SABRE booking system, which allowed the airline to adjust prices up or down based on supply and demand.

Similarly, Caesars Entertainment’s Total Rewards loyalty program considers the profitability of each individual customer when determining pricing and availability of its services to that individual. A customer’s total spend, gambling habits, and so on, are monitored, and the loyal high-rollers reap benefits such as room upgrades and comps.

A company that’s used to making decisions in a regular ABCD progression might re-shuffle that order, depending on circumstances, and decide in a CDAB or ADBC sequence instead—allowing them to postpone commitments of time, money, and other resources until the requirements are known. For example, a company that often introduces new products to the market might hire another company to handle research and development, thus laying off the risk.

LiveOps, again, provides an example of how to time decisions. LiveOps pays its agents according to the duration of a call and depending on whether the customers’ needs are met. (The calls are monitored to determine these factors.)

“Intelligent software routes callers to the most qualified agents available according to the nature of the call,” Girotra and Netessine explain, “so capacity and staffing are constantly adjusted in real time to meet actual demand. This business model depends on having an ample supply of people for whom downtime has a relatively low cost.”

In some cases, new technologies allow more precise decisions about resource commitment. Girotra and Netessine again point to Amazon.com, whose self-publishing and publish-on-demand operations allow them to produce books and other media strictly in accordance with customer demand.

Decisions, decisions: Who and why

Girotra and Netessine recommend placing the bulk of the decision risk on the shoulders of the party best equipped to manage the consequences. The drop-shipping model that Amazon.com employs involves the parent company stocking only about 2,000 book titles. The less-popular titles are available—but when a customer orders one of them, that order gets passed to a wholesaler or publisher, who fulfills it. This way, the risk falls lightly and manageably on many different suppliers.

The authors also suggest splitting up key decisions when a new venture is in the planning stage. Different interested parties should research different questions relating to the startup, and form their own hypotheses, passing these along and allowing the business plan to evolve continuously as it unfolds.

Sometimes, it pays to allow outside parties to make corporate decisions. For example, Walmart allows some of its larger suppliers to make decisions about delivery, production, and stocking of product. A common mistake, Girotra and Netessine warn, is to allow key decisions to be made by people who have the least to gain or lose.

Girotra and Netessine cite the U.S. Department of Defense’s 2003 decision to pay its aircraft suppliers according to the amount of time the craft was in service (as opposed to on the ground, being maintained or repaired). The previous model—paying for labor and materials on a cost-plus basis—actually made it more profitable for the supplier if the aircraft needed more repairs.

Another example is Amazon.com’s Amazon Prime service, in which customers pay a flat subscription fee instead of paying for individual shipments. This encourages frequent purchases, including more impulse purchases.

In conclusion, the authors assert that almost any business can improve its business plan by addressing one or more of those four key questions. With healthcare reimbursement increasingly restrained, these four questions could be useful as providers evolve their business models to meet market changes.

Reference
Girotra K, Netessine S. Four paths to business model innovation. Harv Bus Rev. 2014; 92(7/8):96-103.