CHAPTER 2

UNDERSTANDING AND

ANALYZING THE EXTERNAL ENVIRONMENT

Minakshi GautamAssistant Professor

IIHMR, Delhi

Understanding and Analyzing the External Environment

“ Indian health care is in a state of hyper turbulencecharacterized by accumulated waves of change inpayment systems, delivery system, technology,professional relations, and societal expectation. Itcan be likened to an earthquake in its relativeunpredictability, lack of a sense of control, andresulting anxiety.”

THE IMPORTANCE OF ENVIRONMENTAL INFLUENCES

The external environment increasingly has become afactor in the success of health care organization.

Health care organizations must have an understanding ofthe external environment in which they operate.

The ability to anticipate dramatically enhances yourchances of success

– Futurist Joel Barker.

• A change will occur in health care institutions asa result of external, technological andcompetitive forces.

• Organizations that fail to anticipate change,ignore the external forces, or resist change willfind themselves out of touch with the needs ofthe market.

• The introduction of an early recognition systemto identify external opportunities.

• Impact of technology- clearly growing

• E.g. 64 slice CT allows patients to be scanned with highresolution

• Can be used to scan cardiac patients with heart failures andother breathing disorders very fast.

• Robots can now perform surgery with accuracy

• Telemedicine in healthcare

• Small micro chips like Verichip – an implanted medical devicecan link patients to their medical records.

• Drug packaging is another low tech innovation.

• Many patients in US die due to unintentional overdoses of prescriptiondrugs

• Researchers at the University of Kentucky’s Centre for manufacturing aretesting a device which can reduce accidental overdoses.

• Coming up with device - Pill dispenser called Pill Safe – square box.

• Technological innovations will continue to be a major influence on thenature of health care.

• It must be considered in the development of strategies for mostorganizations.

EFFICIENCY VERSUS EFFECTIVENESS

• Success or failure of a health care organization – “do the rightthing” (effectiveness) and not just “do things right” (efficiency).

• Efficiency on the other hand has an internal orientation.

• Health care organizations should strive to be both effective andefficient.

• Increased pressure on health care organizations to reduce costsmake critical to success.

• Efficiency and effectiveness must be balanced.

• Effectiveness in a dynamic environment, on theother hand, requires learning and changes.

• Health care managers must be careful not to letroutines and efforts directed toward efficiency.

THE EXTERNAL ROLE OF STRATEGIC MANAGEMENT

• It should be directed toward positioning the organization mosteffectively within its changing external environment .

• Environmental analysis is an integral part of the situationalanalysis.

• A process of understanding the issues in the externalenvironment, including the general environment, the health careindustry.

Evolving External Issues

• Legislative/Political Changes

– More regulations of health plan activity

– Legislations for clinical protocols, privacy of medical records

– Expected legislative efforts to reduce escalating health care costs

– Employer based health insurance, government schemes, private health insurance etc.

Evolving External Issues• Economic Changes

– Health Care Spending

– Uncontrolled procedure costs

– Large population without health insurance in India

– Copayment Schemes

– Nearly three quarters of the population still lives in rural areas

Evolving External Issues• Economic Changes

– Some 300 million people in India live on less than a dollar a day, and more than 50% ofall children are malnourished.

– Healthcare is one of India’s largest sectors, in terms of revenue and employment, andthe sector is expanding rapidly.

– During the 1990s, Indian healthcare grew at a compound annual rate of 16%.

– Today the total value of the sector is more than $34 billion. This translates to $34 percapita, or roughly 6% of GDP.

– By 2012, India’s healthcare sector is projected to grow to nearly $40 billion.

Evolving External Issues

• Social/Demographics Changes

– One driver of growth in the healthcare sector is India’s booming population, currently 1.1 billion andincreasing at a 2% annual rate.

– By 2030, India is expected to surpass China as the world’s most populous nation.

– By 2050, the population is projected to reach 1.6 billion.

– By 2025, an estimated 189 million Indians will be at least 60 years of age—triple the number in 2004,thanks to greater affluence and better hygiene.

– The growing elderly population will place an enormous burden on India’s healthcare infrastructure.

Evolving External Issues• Social/Demographics Changes

– Shortfall of 84,000 nurses

– Annual training capacity 40,000

– Acute shortage of human resources with an average of 0.4 doctors per 1000and

– 0.32 nurses per 1000 population as against the global norm of 2.25 per 1000population.

– Nearly two-thirds of these nurses are concentrated in urban areas

Evolving External Issues• Social/Demographics Changes

– India has a doctor-population ratio of 59.7 physicians for 100,000 population,

– It is worse than most developing countries which have 200 and more for every 100,000population.

– There are extensive distributional inequities in the availability of doctors.

Evolving External Issues• Technological Changes

– High costs of purchasing new, sophisticated technologies

– Significant advances in Medical Information technology are anticipated

– New technologies in areas of drug design, imaging, Minimally invasive surgery, geneticmapping and testing, vaccines, artificial blood, transplantation of organs and tissues.

– Development of new treatments for previously untreatable terminal conditions

– Major advances in clinical ability to treat previously untreatable acute conditions, suchas coronary artery bypass graft;

Evolving External Issues• Competitive Changes

– Budget for health

– The competition is expected to intensify with the entry of more global firmsinto the medical equipment marketplace.

– Health care corporations will continue to expand into segments that have lessregulation and into businesses outside of the traditional healthcare industry.

– Outpatient care and the development of innovative alternative healthcaredelivery systems will continue to grow.

Determining The Need for Environmental Analysis

Based on extensive research in business sector, A.H. Meschdeveloped a series of questions to determine if an organizationneeds environmental analysis?

– Does the external environment influence capital allocation anddecision-making processes?

– Have previous strategic plans been scrapped because ofunexpected changes in the environment?

– Has there been an unpleasant surprise in the externalenvironment?

Determining The Need for Environmental Analysis

– Is competition growing in industry?

– Is the organization or industry becoming more marketingoriented?

– Do more and different kinds of external forces seem to beinfluencing decisions and does there seem to be more interplaybetween them?

– Is management unhappy with past forecasting and planningefforts?

External environment analysis attempts to identify, aggregateand interpret environmental issues as well as provideinformation for the analysis of internal environment anddevelopment of directional strategies.

THE GOALS OF ENVIRONMENTAL ANALYSIS

1. To classify the changes generated by outside organizations.

2. To identify and analyze current important issues.

3. To detect and analyze the weak signals of emerging issues.

4. To speculate on the likely future issues.

5. To foster further strategic thinking throughout the organization

6. To provide organized information for internal analysis, mission, etc.

THE GOALS OF ENVIRONMENTAL ANALYSIS

• Often, in attempting to identify important external issues,general labels leads strategic thinkers to think in terms ofpotential strategies to address the issue rather than theimpact of the issue.

• Therefore, at this stage in strategic planning, it is beneficial toavoid using the terms opportunities/threats and insteadconsider the consequences of issue itself.

THE LIMITATIONS OF ENVIRONMENTAL ANALYSIS

Managers cannot see everything.

Pertinent and timely information is difficult.

Delays between the occurrence of external eventsand management’s ability to interpret them.

Cannot foretell the future.

General inability on the part of the organization to respondquickly.

Manager’s strongly held beliefs.

• Greatest limiting factor in external environmental analysis – pre-conceived beliefs of management.

• Organizations do not change despite long and loud signals forchange.

Edward De Bono explains, “We are unable to makefull use of the information and experience that isalready available to us and is locked up in oldstructures, old patterns, old concepts and oldperceptions”

COMPONENTS OF THE GENERAL ENVIRONMENT

• Government institutions• Business organizations• Educational institutions• Religious institutions• Research organizations and foundations and• Individuals and consumers

Components of health care environment

• Organizations that regulate the primary and secondaryprovider

– Organizations that provide health services (primary providers)

– Organizations that provide resources for the healthcare system(secondary providers)

• Consumers of healthcare services (individuals involved inhealthcare and patients)

THE PROCESS OF ENVIRONMENT ANALYSIS SCANNING

•View external environment information•Organize information into desired categories•Identify issues within each category

MONITORING•Specify the source of data •Add to the environmental database•Confirm or disprove issues (trends, developments, dilemmas and possibility of events)•Determine the rate of change within issues

FORECASTING•Extend the trends, developments, dilemmas or occurrence of the event•Identify the interrelationships between issues and between environmental categories•Develop alternative projections

ASSESSING•Evaluate the significance of the forecasted issues to the organization•Identify the forces that must be considered in the formulation of the vision, mission, internal analysis and strategic plan

• The scanning function serves as the organization’s window orlens on the external world.

• Monitoring function is the tracking of issues identified inscanning process

• It investigates the sources of information obtained in scanningprocess.

• The monitoring function has much narrower focus thanscanning

• The object is to accumulate database around the identifiedissue

• The primary goal of forecasting is to identify the full range ofpossibilities.

• Forecasting function attempts to answer the question, ‘ifthese trends continue, or if issues accelerate beyond theirpresent rate?’

ENVIRONMENTAL ANALYSIS TOOLS AND TECHNIQUES

Simple trend identification and extrapolation.Trend/Issue Evidence Impact on our

organization (1-10)

Probability of trend continuing (1-10)

Aging population 1 in 5 will be at least 65 by 2030

9 9

Wealthier Elderly Income of hose 60+ has increased 10% faster than any other group

7 6

Local competition Over past 5 years number of nursing homes in service areas have increased from 5 to 7

7 9

• Environmental trends/ issues plot

Low High

Probability of trend continuing

High

0 5 10

5

10

High Impact Low Probability

High Impact High Probability

Low Impact Low Probability

Low Impact High Probability

Wealthier Elderly

Aging Population

Local Competition

Critical issues to the right of the line should be addressed in the strategic plan

Critical issues to the right of the line should be addressed in the strategic plan

ENVIRONMENTAL ANALYSIS TOOLS AND TECHNIQUES

Solicitation of expert opinion.

Often used to identify, monitor, forecast and assess environmental trends. Many expert based environmental analysis

techniques Helps synthesize the opinions and best judgments of

experts within various fields.

ENVIRONMENTAL ANALYSIS TOOLS AND TECHNIQUES

Delphi Method – e.g. British association of Sports and exercise Medicine, UK The nominal group technique (NGT). A brainstorming group. Focus groups.• Dialectic inquiry.• Stakeholder analysis.• Scenario writing and future studies.

Scenario Writing• Multiple scenarios allow the future to be presented by

different cause-effect relationships, different key events andtheir consequences, different variables and differentassumptions.

• The key question is ‘ if the environmental event happens (ordoes not happen), what will be the effect on theorganization?’

• E.g. impact of increasing medical value travel in India onIndian healthcare system

SELECTING THE TECHNIQUE

• The intent of environmental analysis is to identify andunderstand the issues in the external environment.

• The technique selected for environmental analysis willdepend on size of the organizations, diversity of theproducts.

• Technique selected for environmental analysis maydepend on the style and preferences of management.