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

20 Dec 2011 1

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

1 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 – it’s how we will learn 20 Dec 2011 2 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer .

Iyer . shout down or flame Enjoy learning strategy  20 Dec 2011 3 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. case analysis.1 Introduction How to Learn Preparation and class participation essential to learning • Do – prepare well for the class – readings. repeat what others said – monopolise the class time – rubbish. 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 • Don’t – 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.

deals with the concerns. market share. what else? – Non-profit: Effective and efficient attainment of goals specific to the organisation’s 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 20 Dec 2011 4 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer .1 Introduction About Strategy Strategic management. 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. or strategy.

1 2 Introduction Narayana Hrudayalaya Heart Hospital 20 Dec 2011 5 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer .

2% for US Infection rate for CABG: 1% for NH Vs. Iyer .27% for NH Vs.65k to 90k at NH against Rs. 1.2 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. 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 20 Dec 2011 6 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.250k average of other Indian hospitals – Effectiveness: Mortality rate for CABG: 1.

but can’t afford to pay for it 20 Dec 2011 7 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.). Iyer . large number of diseases/ procedures covered – Telemedicine: Train GPs to diagnose heart problems. Devi Shetty – Karuna Hrudaya: Subsidised heart surgery @ 65k against break-even cost of 90k and regular price of 110k. 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.2 Narayana Hrudayalaya Performance of NH Is Narayana Hrudayalaya (NH) successful? On what basis would you assess its success? • Social contributions of NH/ Dr. 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. equip health centres (ECG etc.

9% 52.047 106.3% Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.8% 35.231.0% 41.6% 30.57% 72.047 9.46% 88.210 Jun 08 .000.May 04 Numbers Value Rs.138 2.632.5% 51.4% No of Members Enrolled Contribution collected Government Contribution Interest Total Amount Collected Claim Status – Surgery Claims Received Claims Settled Surgeries Cost per surgery (Rs.300 593.8% 30.) Member Contribution / Collection Govt. 97.2% 119.417 106. Contribution / Collection 20 Dec 2011 8 1.May 09 Numbers Value Rs.2% 46.417 11.7% 41.269 75.535.341 9. Iyer .448.381 612.4% 52.1% 48.047 9.8% 74.086.622 146.398.000 3.535.000 300.28 52.7% 191.584 73.109 6.942.436 39.314 692.2% 60.7% 43.) % of surgeries wrt enrollment Cost of Surgeries/ Collection Out-patient Benefits Free OPD Treatment benificiaries % Free OPD wrt enrollment Contribution Breakup Contribution/ Member (Rs.2 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 13.335 603.601.698 45.152 3.8% Jun 03 .417 106.000 26.189.3% 36.5% 41.550 8.814 2.786 0. 364.94 66.059.567.743.000.869.

30 398.53 9.114. Millions for FY 2003-04 Source: Capitaline How does NH’s financials look in comparison – esp.60 2.50 132.63 9.20 74.2% 13.08 12.51% 1.24 9.10 8.1% Breach Candy 615.40 746.42 12.70 4.45 592.80 155.2% 1.59% 1.0% 2.05 -26.275.2% 15.41 4.10 1.30 2.84% 1.8% 2.14 4.8% -66. Return on Sales. Iyer .70 372.466.1% 60.805.40 608.42 5.80 (155.63 9.0% Kovai Medical 282.21 12.90 10.2% 1.50 570.0% 8.14 12.5% All figures in Rs.40 1.40 235.6% Apollo Hospitals 4.20 7.04% 1.98% 1.25 35.2% 13.1% 6.58 58.30) -25. 1. Asset Turnover? 20 Dec 2011 9 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.45% 1.2% 1.9% Firm Total Assets (A) Equity (E) Income (S) PAT (R) R/S S/A R/A A/E RoA RoE NH 387.46 -26.1% Fortis Healthcare 579.20 11.2 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.030.997.

poor liquidity – on the whole. Millions for FY 2003-04 387.53 22. facilities etc.96% 2.45 830.3% High utilisation of assets.65% 3.58 58.1% 20% Discount on Market Price for Paying Customers + Subsidy 387.14 70.10 166.76 32.98% 1.58 58.86 41. 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. is NH successful? 20 Dec 2011 10 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. high leverage.36 644.25 35.) would be the appropriate way to compare the productivity of NH with its peers – Or else. 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.53 9. equipment.9% Full Pricing for Paying Customers + Subsidy 387.6% Full Pricing for All 387. reasonable sales margins after passing on substantial value to the customers.45 592.45 719. Iyer .2 Narayana Hrudayalaya Performance of NH Given all the great things said about NH’s operations.53 53.59% 1.42 5.58 58.201.58 58.45 1.37 162.60 273.

2 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 20 Dec 2011 11 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Iyer .

meaningful • Be flexible.2 Narayana Hrudayalaya Objectives of NH Why does NH exist? What’s its business? • Mission: – Raison d'être 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. 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. enduring – Examples: • Lever Brothers – reduce the chores of housewives. the differences will be clear 20 Dec 2011 12 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. broad. Iyer .

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.) 20 Dec 2011 13 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. reagents. Iyer .2 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. consumables • Alternative/ local sources of drugs/ consumables (sutures.

Iyer .2 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 NH’s 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 NH’s activities?) – Telemedicine helps increase awareness and preparedness. 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? 20 Dec 2011 14 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. 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.

supportive non-profit initiatives Each element of the who. facilities etc. 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 20 Dec 2011 15 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.) – Operations: Economies of scale and scope drive high productivity and lower costs from suppliers. Iyer . 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. 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. middle class get affordable cardiac care which costs only half the market price.2 Narayana Hrudayalaya Business Model of NH Can we tease the mission of NH from its business model? • • • Who: People in need of health care.

poor liquidity. Apollo) – Below-par return on sales.g. Iyer . 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? 20 Dec 2011 16 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R..2 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 NH’s 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.

Devi Shetty & NH What is Dr.2 Narayana Hrudayalaya Vision of Dr.. Devi Shetty’s vision? How does NH fit into realising his vision? • Dr. Shetty’s 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.e. Shetty face in trying to replicate the NH model in Health City? 20 Dec 2011 17 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. i. Devi Shetty’s 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. Iyer . going beyond cardiac care Point to ponder: What challenges will Dr. Shetty’s initiatives to realise his vision in the broader context of tertiary care.

The horse will have disappeared from our highways. and everyone will have one.[and we will] give a large number of men employment at good wages What’s the vision for NH? What about Dr. before this decade is out.. Vision and Values Mission. Iyer . 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. the automobile will be taken for granted.2 Narayana Hrudayalaya Mission. address to the US Congress 1961) – Vivid description: Vibrant.. of landing a man on the Moon and returning him safely to the Earth (JF Kennedy.. When I'm through. engaging and specific description of the envisioned future Ford in 1900’s: I will build a motor car for the great multitude .. Devi Shetty’s vision? How are they related? How are they different? 20 Dec 2011 18 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R.. 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 1960’s: This nation should commit itself to achieving the goal. everybody will be able to afford one...

Vision and Values – just pin-up or more than that? • Values: What is the firm’s 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. Iyer . vision and values of firms/ businesses you are familiar with – what’s your take? 20 Dec 2011 19 Strategic Management: Session 1 IIM Calcutta / Sai Prakash R. Vision and Values Mission.2 Narayana Hrudayalaya Mission. does not change much in response to market changes • What are the values espoused by NH? Point to ponder: Think of the mission.

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