Strategic Financial Planning


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Strategic Financial Planning

  1. 1. Fall 2007 Tools for blending finance and strategy Fall 2007 Strategic Financial Planning Using a Portfolio Model to Prioritize Your Service Line Strategies By Nancy A. Lyle Today, more than ever, effective prioritiza- line and organization. This article describes tion’s portfolio should capitalize on its tion and sound investment decisions are a portfolio planning model developed strengths while exploiting market oppor- critical to healthcare organizations’ long- specifically for application to the health- tunities. The two best-known portfolio term viability. A portfolio model can pro- care industry. models for strategic planning are the vide a framework for guiding strategic Boston Consulting Group’s Growth-Share decisions by identifying and capitalizing on An organization’s portfolio is the compila- Matrix and the McKinsey/General Electric products that offer the greatest economic tion of strategic business units (SBUs) that Matrix. These tools were first introduced potential and market size, coupled with the together form the company. In health care, in the early 1970s, and many adaptations of internal business strengths of the service SBUs are synonymous with service lines them are still in use today. and/or product lines. Ideally, the organiza- Boston Consulting Group’s Growth-Share Matrix Market Share High Low High Market Growth Stars Question Marks Low Cash Cows Dogs Source: Stern, C.W., and Stalk, G., eds., Perspectives on Strategy from the Boston Consulting Group, New York: Wiley and Sons Publishers, 1998. Strategic Financial Planning Fall 2007
  2. 2. Early Models The Boston Consulting Group model was McKinsey/General Electric Matrix called the BCG Growth-Share Matrix. This Industry Attractiveness simple model considers and compares two factors: market growth and market share High Medium Low relative to the largest competitor. In this model, SBUs or product lines are grouped High Business/Competitive Strengths into four categories: dogs, question marks, Selective Manage Selectively for Grow/ Grow/ Earnings or Harvest stars, and cash cows. Invest 49% for Cash Generation Invest The strengths of the BCG Growth-Share Matrix include its simplicity and the ready Medium Segment Invest for Growth Harvest availability of the data required for the Selective 29% and Build Strength or Divest Investment analysis. On the downside, the model con- siders only two factors, thus limiting its 9% strategic implications. Moreover, it assumes that an increase in market share Selective Controlled Rapid Exit Low will boost the generation of cash and prof- Investment/ Exit or Divest Divest itability. This does not always hold true in health care, as some diseases have large Note: Size of the circles represent market size; size of the pie represents the SBU’s market share; arrows represent future markets yet do not generate significant projections of the SBU cash (e.g., diabetes). Strategic Implications: Green squares-Highly Attractive/Invest; Yellow squares-Medium Attractive/Selective Investments; Blue squares-Low or Unattractive/Divest or Harvest Source: As adapted by Wilson, R.M.S., and Gilligan, C., Strategic Marketing Management, 3rd ed., Burlington, Mass.: Butterworth-Heinemann Publishers, 2005. In 1971, McKinsey and Company devel- oped a multifactorial model while working with General Electric in an attempt to factors. Together, they allow for greater early portfolio models, the overall improve upon the BCG matrix. This model discrimination in terms of strategic impli- concept and rationale remains the same: uses weighted criteria to evaluate SBUs in cations. Additionally, the McKinsey/GE prioritization, portfolio balance, and terms of industry attractiveness in con- Matrix accounts for forecasting, size of the sound decision making regarding resource junction with business/competitive market, and market share. Limitations allocation to support future growth and strengths. The scores are plotted on a include the subjective weighting and scoring financial performance. Over the past nine-cell grid, in which each cell indicates of the criteria, the complexity of the model, 10 years, portfolio models have been a strategic proposition. and the fact that composite scores can mask increasingly used in health care to evaluate significant differences among SBUs. and prioritize those service lines with the The grid is one of this model’s strengths; greatest economic potential and favorable another is its ability to consider multiple Despite numerous adaptations of these market conditions. Healthcare variations TCG Portfolio Growth Model: Criteria for Weighted Scores Without a sound strategic Market Appeal: Business Strengths: plan, healthcare organizations Size of market Marketshare and volumes may find that they fall victim Market growth/demand forecast Relative brand strength/image to crisis management, Price and reimbursement trends Contribution or profit margins ineffective execution due to Number and strength of competitors Quality outcomes lack of focus, and decision Opportunity to differentiate Competencies/physician talent Stage in life cycle Strength of distribution channels making heavily influenced Segmentation Technology/innovation by political pressures. Capital requirements and returns Breadth of line (net present value) Fall 2007 Strategic Financial Planning
  3. 3. Using a Portfolio Model to Prioritize Your Service Line Strategies continued from page 9 Examples of Relative Importance Weighting and Rating/Ranking Scores popular for their simplicity include: Market share plotted against annual Relative Rate/Assign Importance Points* Total Weight market growth rate (on a bubble chart, Market Appeal Criteria Weighting (1 to 10) or Rank the size of the circle is often used to Size of market 0.40 10 4.0 indicate financial performance, such as contribution margin or profit margin Market growth rate/demand forecast 0.30 5 1.5 per case/discharge) Competition 0.15 8 1.2 Market factors (e.g., market share, volumes, market size) using weighted Price and reimbursement trends 0.10 3 0.3 scores in conjunction with financial Distribution channels 0.05 6 0.3 performance Weighted Rank 7.3 However, as with the original BCG Relative Rate/Assign Growth-Share Matrix, these models con- Importance Points* Total Weight sider only market and financial factors, Business Strength Criteria Weighting (1 to 10) or Rank thus restricting the extent to which the data Market share 0.35 4 1.4 can be interpreted for strategic purposes. Contribution margin 0.25 10 2.5 A Multifactorial Healthcare Portfolio Model Brand equity 0.15 4 0.6 A new, healthcare-specific model, known Strength of assets 0.15 4 0.6 as the TCG Portfolio Growth Model, was developed by the author to refine the port- Distribution channels 0.10 4 0.4 folio analysis process and integrate vital Weighted Rank 5.5 clinical, financial, and marketing factors. Source: Triad Consulting Group, nc. It has been used at the service line level and for product offerings within the ser- vice line (e.g., the diagnosis-related group Plotting Scores on the Matrix and procedure level). 10 Build Strength, Manage Invest for Building on the early portfolio frame- Selectively for Growth/Build Earnings or Harvest for Invest/Grow works, the TCG Portfolio Growth Model Strength Score 7.3 Cash Generation uses weighted scores to consider external market factors (market appeal) against Market Appeal internal business criteria (business strengths) (see sidebar). Strengthen Business/ Segment Invest in Selective 5 Consider Selective Selective Growth/Consider Divest or Harvest Investment Acquisitions, Niches Limiting criteria to five for each group, paying particular attention to factors that have the greatest relevance in specific Consider Acquisitions, markets, strengthens the model’s ability to Consider Selective Harvest or Exit Divest or Harvest Niches, Expanding distinguish service lines with high market Market Area appeal and high business strengths. Each 1 criterion is assigned a weight indicating its 1 5 10 relative importance, with the total value Score 5.5 equal to 1.0 for market appeal and 1.0 for business strength. Business Strength Source: Triad Consulting Group, Inc. Once relative weights are established, Strategic Financial Planning Fall 2007
  4. 4. products or service lines are rated on each criterion using a score from 0 to 10: Portfolio Analysis Application in Healthcare 0-3 weak, 4-6 average, 7-10 high. To The market size or contribution margin can be represented by the relative size of the circle, along with an arrow indicating the future forecast. ensure objectivity, it is recommended that 10 parameters be explicitly defined prior to Invest/Growth assigning rating scores. Once the score is 9 Build Strength, Invest for Market Appeal (Weighted Score) assigned, it is multiplied by the weight Manage Selectively Growth/Build Cardiac 8 for Earnings Strength Size of Market and Annual Growth Rate • Competition factor to determine overall ranking; these Cancer Life Cycle Stage and Reimbursement Trends scores are then totaled for both market 7 Medicine appeal and business strength. 6 NeuroS Strengthen Business/ Segment Invest in Selective Following the rating and ranking process, 5 Consider Selective Selective Growth/Consider Divest or Harvest Investment Acquisitions, Niches the total scores for each service line are 4 plotted on a nine-cell matrix, with busi- 3 ness strengths on the horizontal axis and Urology market appeal on the vertical axis. Transplant Consider Acquisitions, 2 Harvest or Exit Niches, Expanding Consider Selective 1 Market Area SBUs or product lines are then grouped Divest or Harvest into nine cells or categories, based on the 0 0 1 2 3 4 5 6 7 8 9 10 weighted score for each major category. Brand Equity and Competencies/Assets • Profit Margin or Contribution Margin Marketshare and Volume Each cell in the matrix provides guidelines for strategic direction, prioritization, and Business Strength (Weighted Score) resource allocation. Note: Size of bubble represents contribution margin. Attractive or growth service lines (or products). Source: Triad Consulting Group, Inc. Service lines that fall into the Investment Service lines that fall into the Invest in and Growth cell have appealing markets In other kinds of companies, Selective Growth/Consider Acquisitions or (high growth, significant size market, it is easy to “divest” or Niches cell are those with average market favorable reimbursement trends, limited appeal and impressive business strengths. “harvest” a product or service competition, and capital resource require- ments with favorable returns) along with These service lines should identify key that is underperforming; growth segments while considering further however, in health care, these strong business strengths (market share specialization, niches, and/or mergers/ and volumes, brand equity, quality out- types of investment decisions acquisitions to gain access to new markets. comes, competencies and physician talent, raise issues of public interest, profit or contribution margins). This cell Average service lines (or products). Service community need, and tax represents the most attractive service lines; healthcare organizations should prioritize lines that fall into the Build Business benefits. Strength, Manage Selectively for Earnings, these service lines for investment and Mergers, or Harvest for Cash Generation resource allocation with a focus on growth. cell are competing in appealing markets capital investments should be rigorously (e.g., size and growth) with low business evaluated in terms of returns. Service lines that fall into the Invest for strengths (minimal margins, low market Growth and Build Business Strength cell share, poor quality or competencies). Service lines that fall into the Segment have high market appeal and average Healthcare organizations should focus on and Selective Growth/Investment cell are business strengths; they should focus on building business strengths, particularly competing in markets with average appeal growth strategies while improving their those products within the service line that along with average business strengths. operational capabilities. generate the greatest margins. Further The service line should focus on growth V Fall 2007 Strategic Financial Planning
  5. 5. Using a Portfolio Model to Prioritize Your Service Line Strategies continued from page 11 in selective products or segments while Model is its ability to consider multiple and marketing strategies. For market and strengthening the business line to maxi- factors that often distinguish success in financial success, strategy formulation mize profitability (e.g., supply chain, rev- the healthcare marketplace. Its flexibility should focus on market alignment, inno- enue cycle, brand equity, or enhancing allows organizations to customize the vation, differentiation, and solving market- quality outcomes). criteria based on what is relevant to their place issues. respective markets. Bubble size can be Service lines in the Consider Mergers/ used to account for and communicate Healthcare organizations face challenges Acquisitions, Niches, or Expanding Catch- demand projections, contribution margins, in using portfolio analysis models that are ment Area cell are competing in markets or size and share of the market. The portfolio specific to our industry, particularly when with minimal appeal; however, they have framework can be applied at the service line it comes to vulnerable service lines. In impressive business strengths. Organiza- level to assist in organizationwide strategic other kinds of companies, it is relatively tions should cautiously invest in growth, planning and priority setting, or it can be easy to “divest” or “harvest” a product or particularly those products and services used to evaluate DRGs or procedures with- service that is underperforming or is at that offer the greatest opportunities for in a service line. Lastly, the model uses an the end of its life cycle. However, in health ROI. Consider further specialization, integrated approach that considers clinical, care, which consists of predominantly niches, mergers/acquisitions, and/or mar- financial, and marketing criteria deemed public and not-for-profit organizations, ket area expansion. vital to overall market and financial success. these types of investment decisions raise The result is a balanced view, useful for stra- issues of public interest, community need, Vulnerable service lines (or products). Service tegic planning and prioritization purposes. and tax benefits, not to mention politically lines in the Strengthen Business, Consider charged emotions regarding the haves and Selective Divest or Harvest cell are com- It is important to note that the composite have-nots. peting in average markets with low busi- scores of this model can conceal significant ness strengths. The organization may want differences among service lines. To minimize Certainly prioritizing service line invest- to consider divesting select products and this limitation of the tool and capitalize on ments and determining the fate of under- services that have minimal margins or little data-driven decisions, organizations may performing service lines, or those with relevance to core mission. In some cases, want to concurrently view data subsets limited returns, represent some of the the organization may want to strengthen collected in the portfolio analysis process most challenging decisions healthcare the business line to improve market posi- by service line. Again, considering more leaders face today. However, with limited tion as well as maximize profitability. than five factors within each group can resources available, the future of their become too complicated. Lastly, if param- organizations depends on their making Service lines that fall into the Consider eters for assigning rating scores have not precisely these tough decisions. Selective Divest or Harvest cell are com- been explicitly defined, the scores may be peting in markets with minimal appeal viewed as subjective, thus calling into ques- Without a sound strategic plan, healthcare and they have low business strengths. tion the validity and reliability of the model. organizations may find that they fall vic- The organization may want to consider tim to crisis management, ineffective harvesting for cash generation if the Interpretation and Use of Portfolio Data execution due to lack of focus, and decision investment requirements outweigh the The portfolio model provides overall rating making heavily influenced by political potential return on investment. and ranking information on market appeal pressures. Portfolio models, in conjunction and business strengths that can help orga- with other strategic planning tools, can Service lines in the Harvest or Exit cell nizations identify and prioritize service guide the organization in prioritizing and have nominal business strengths in an lines. While this includes guidance on top making investment decisions, identifying unattractive market, and therefore are the lines for growth and resource allocation, a market opportunities, and ensuring long- least attractive SBUs. Organizations should portfolio model cannot by itself provide term financial performance. consider harvesting and/or divesting enough detailed data for the purpose of unless relative strengths can be improved. formulating specific service line strategies Nancy A. Lyle is a principal, Triad Consulting Group, nc., Portland, Ore. ( or tactical plans. Business plans must be Strength and Limitations developed for each service line to formu- The strength of the TCG Portfolio Growth late and refine specific clinical, financial, Reprinted from the Fall 2007 issue of strategic financial planner. Copyright 2007 by Healthcare Financial Management Association, Two Westbrook Corporate Center, Suite 700, Westchester, L 60154. For more information, call 1-800-252-HFMA or visit