HA4110D – Healthcare Planning and Evaluation 

 Discussion 11: Assessing Your Organization: Reflection

Discuss how your strategic analysis helped you in planning a strategic assessment of your chosen organization. Provide your personal thoughts and assessment in this reflection discussion.

Use your own thoughts on this discussion.

Strategic Analysis for Healthcare

Chapter 25

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1

Strategy Selection
To begin the process of strategy selection, the analyst reviews the potential strategies identified in the Ansoff and TOWS matrices.
Many strategists place each possible strategy on a separate sticky note, so the strategies can be sorted and moved around into clusters.
The strategist searches for commonalities among the strategies.
Most likely, about 25 strategies can be grouped under four or five main headings.
The strategist identifies those main headings and places the appropriate strategies under each.
The main headings become “overarching strategies,” and the specific strategies from the Ansoff and TOWS matrices become “supporting strategies” or “substrategies.”
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Strategy Selection
In a strategy consolidation from the Ansoff and TOWS matrices, “Expand into adjacent counties,” “Expand into urgent care,” “Place satellite locations,” “Open cancer center,” and “Buy out private practices” could all be grouped together.
A title of “Facility Expansion” could be placed above these strategies, and that could become an overarching strategy.
Likewise, many Ansoff and TOWS example strategies could be consolidated under other overarching strategies, such as “Service Expansion,” for instance.
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Strategy Selection
Pursuing every good strategy is not recommended.
An organization likely will not have sufficient funds to pursue every option, and doing so would lead to a lack of focus.
The strategic options need to be culled and the most promising ones retained.
After the strategies have been consolidated, the analyst can evaluate the strategies at two levels.
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Strategy Selection
First, the overarching strategies can be compared against one another.
For example, the facility expansion strategy would be compared with service expansion.
At the second level, the substrategies under an overarching strategy can be evaluated and then either retained or discarded.
In the facility expansion example, the analyst would decide whether to retain or discard “Expand into adjacent counties,” “Expand into urgent care,” “Place satellite locations,” “Open cancer center,” and “Buy out private practices.”
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Strategic Fit Assessment
and the QSPM
To choose among the overarching strategies, the strategist constructs a quantitative strategic planning matrix (QSPM).
This matrix assesses each overarching strategy based on how attractive it is relative to the external factor evaluation (EFE) and internal factor evaluation (IFE) factors (see Chapters 10 and 18).
This assessment produces an attractiveness score (AS) and a total attractiveness score (TAS) for each strategy.
The strategy with the highest total attractiveness score is the strategy considered most appropriate for implementation.
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QSPM
To create the QSPM, place the external opportunities and threats from the EFE analysis and the internal strengths and weaknesses from the IFE analysis into the left column of the matrix.
Make sure you list at least ten external factors and ten internal factors. Include the weight from the IFE and EFE with each item.
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QSPM
The attractiveness score in the QSPM indicates whether each IFE/EFE factor is important to, has a significant impact on, or produces an “attractive” match with each strategy.
The scores are determined by analyzing each IFE/EFE factor and considering whether the factor makes a difference in the decision of which strategy to pursue.
If the factor does not make a difference, the attractiveness score is zero.
If the factor does make a difference, the strategy is rated relative to that factor.
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QSPM
The rating scale, from 0 to 4, is as follows:
1 = not attractive
2 = somewhat attractive
3 = reasonably attractive
4 = highly attractive
0 = not applicable
The strategist assigns the attractiveness score based upon everything known about the organization and its competitive environment.
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QSPM
As an example on the next slide, the overarching strategy of facility expansion is compared to service expansion.
The weight multiplied by the attractiveness score assigned by the strategist yields the total attractiveness score.
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QSPM
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QSPM
The entire IFE and EFE, containing all of the strengths, weaknesses, opportunities, and threats and their corresponding weights, is used.
Each item is issued an attractiveness score.
The attractiveness score is multiplied by the weight to arrive at a total attractiveness score.
The entire total attractiveness score column is summed for each strategy individually.
The strategy with the highest TAS is the strategy that is quantitatively most attractive and thus selected.
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Assessing the Supporting Strategies
The supporting strategies within the overarching strategy can be assessed next.
Not all the supporting strategies will be appropriate, and some may be mutually exclusive.
Many strategists run a QSPM again on the supporting strategies and retain those with the highest scores.
Other analysts use research and intuition to determine which ones stay and which go.
The cost of implementing one supporting strategy might affect how many other strategies the company can afford to take on.
At the same time, multiple supporting strategies might be necessary for successful completion of the overarching strategy.
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Consistency Check
Once strategies have been selected, they should be checked for consistency with the directional matrices discussed in previous chapters.
If the grand strategy matrix, SPACE matrix, and internal–external (I/E) matrix suggest a conservative strategy and the strategist has chosen an aggressive overarching strategy with aggressive supporting strategies, then something is wrong.
The inputs and decision making may need to be reconsidered.
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Facility ExpansionService Expansion
Opportunities
WeightAttractiveness ScoreTotal Attractiveness ScoreAttractiveness ScoreTotal Attractiveness Score
OpportunitiesWeight
1Expansion of Existing Services0.050
30.15040.200
2Additional Locations0.100
40.40040.400
3Greater Exposure and Branding0.050
40.20030.150
4Addition of Trauma Center0.025
40.10040.100

Strategic Analysis for Healthcare

Chapter 26

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1

Financial Fit Assessment
and Projection
In strategy selection, the financial investment required to support implementation is a significant criterion, as is the amount of time needed to recoup the investment and profit potential.
The QSPM model might show one proposal to be superior to the others in a strategic sense; however, the organization might not have the financial resources to successfully implement and maintain that strategy.
To address concerns of this nature, the strategist must apply a financial screen to the proposed strategies.
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Financial Fit Assessment
and Projection
In a survey of 1,139 executives by McKinsey & Company, 75 percent said companies that get the best results use a balanced mix of financial and strategic targets; only 11 percent disagreed.
The point behind these findings is that a strategic fit is not enough. One needs both a strategic fit and a financial fit.
A complete financial analysis, using factors such as depreciation, tax effect, and so on, is beyond the scope of this book. However, this chapter introduces several important financial analysis measures, including net present value, internal rate of return, profitability index, payback period, and probability of success.
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Net Present Value
The net present value (NPV) of a future stream of income recognizes that the future income is worth less in today’s dollars than a simple arithmetic sum of the same dollars would indicate.
The basic idea behind this concept is that a dollar in hand today is worth more than the promise of a dollar five years from now.
The promise five years from now will be eaten away by inflation, which lessens the dollar’s purchasing power.
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Net Present Value
The next slide demonstrates a calculation for net present value using Microsoft Excel.
To begin, set up a chart showing the annual cost of capital or discount rate, followed by each yearly income.
You can then use Excel’s “=NPV” function to calculate the net present value.
Use the discount rate as “rate,” and highlight the cells with the initial cost and yearly incomes to finish the equation.
In the example shown in the exhibit, the total return less the up-front investment is $4,000,000; however, the net present value is only $1,188,443 due to the time value of money.
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Net Present Value
Excel syntax: NPV(rate,value1,value2, …)
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Internal Rate of Return
The internal rate of return (IRR) determines the percent return on an investment considering an initial start-up expenditure followed by an annual income stream.
The measure enables a strategist to compare one strategy to another to determine which has the highest percent return.
Some companies use the discount rate for comparison with the IRR.
However, most companies have a discreet decision criteria threshold such as, “Any project investment must have an IRR of 10 percent or greater, or we will not pursue it.”
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Internal Rate of Return
The next slide shows a Microsoft Excel calculation of internal rate of return.
Using the same chart you used for calculating the NPV, select Excel’s “=IRR” function and then highlight the cell with the initial cost plus the cells with the yearly incomes to finish the equation.
Excel allows a space in the syntax for “guess,” but we recommend that you leave this field blank, in which case Excel will automatically assume 10 percent.
In the example shown in the exhibit, the total income less the up-front investment is $4,000,000, and the internal rate of return is 16 percent.
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Internal Rate of Return
Excel syntax: IRR(value1,value2, …, Guess)
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Profitability Index
The profitability index (PI) is similar to the internal rate of return, but it is calculated differently and gives a slightly different percent return.
The PI provides information on your strategic investment opportunity, as well as a decision rule by which you can accept or reject an investment.
The PI tells you what your return will be for every dollar invested in a strategic initiative (e.g., for every $1 invested you will return $1.29).
The PI also suggests that a project with a PI score of less than 1 should be rejected as an insufficient return, whereas a project with a PI score of 1 or greater should be considered for investment.
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Profitability Index
Formula: (NPV + startup costs) / start-up costs
($1,188,443 + $10,000,000) / $10,000,000
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Payback Period
The payback period (PP) answers the question, “If I make the required investment in this strategy, how long will it take to recoup my investment?”
This period can be expressed in the number of months or number of years.
In the previous example, the payback period is approximately 30 months to recoup the initial $10,000,000 invested (excluding the time value of money).
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Probability of Success
Potential strategies will each have different likelihoods of success, and a strategy’s profit potential should be discounted by the probability of achieving it.
You can estimate the probability of success based on research and intuition, and then multiply the probability by the NPV.
This calculation enables you to compare across potential strategies that have different NPVs and different probabilities of success, to level the comparison playing field.
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Putting It All Together
Lining up the various calculations in a single display, as shown on the next slide, allows you and your viewer to quickly see the values and thus more easily compare competing strategies to find the best financial fit with your organization.
Keep in mind that a strategy with a good financial fit might not be a good strategic fit; likewise, a strategy with a great strategic fit might not make the most financial sense.
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Putting It All Together
  NPV IRR PI PP Prob Prob*NPV Choice
Strategy A $28.1M 15.1% 1.2 7.1yrs 91% $26.133M 1st
Strategy B $30.7M 16.3% 1.3 7.5yrs 85% $24.867M 2nd

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Data Description
10% Annual discount rate
$(10,000,000) Initial cost of investment one year from
today
$3,000,000 Return (less costs) from first year
$4,200,000 Return (less costs) from second year
$6,800,000 Return (less costs) from third year
$4,000,000 Total return
$1,188,443 NPV

Data Description
10% Annual discount rate
$(10,000,000) Initial cost of investment one year from
today
$3,000,000 Return (less costs) from first year
$4,200,000 Return (less costs) from second year
$6,800,000 Return (less costs) from third year
$4,000,000 Total return
16% IRR

Data Description
10% Annual discount rate
$(10,000,000) Initial cost of investment one year
from today
$3,000,000 Return (less costs) from first year
$4,200,000 Return (less costs) from second year
$6,800,000 Return (less costs) from third year
$4,000,000 Total return
$1,188,443 NPV
1.12 PI