Every day, as we scroll through our business or healthcare news feeds, we are confronted with headlines that paint a picture of what can appear to be business anarchy. Amazon is putting Alexa in a microwave oven. Taco Bell is opening a resort hotel. Carmakers are no longer making cars. New restaurants have no place for diners to sit.

The headlines for healthcare can be equally baffling. A primary care startup targets an IPO valuation of $2 billion. A pharmacy company plans to open 1,500 health clinics in two years. Health systems are partnering with ride-share companies.

This seeming chaos actually does have an order. Understanding the organizing principles of the internet economy allows us to sort the daily deluge of events into a framework that shows the economy’s new business models, the strategies that innovative companies are employing, and the path forward for legacy organizations.

These are the five organizing principles of the internet economy.

#1: The Funnel Is the Business Model of the Internet Economy

“Amazon Fresh delivery is now free for Prime members”

Yahoo, Feb. 4, 2020

Why is Amazon offering free grocery delivery to Prime members? To attract as many people as possible to the top of the Amazon funnel and to get more transactions inside the funnel.

The best way to describe the core business model of the internet economy is as a funnel. The goals of the funnel define the goals of companies in this new era of business: to use access, convenience, affordability, and experience to create as much traffic and as many commercial transactions as possible. Here is how the funnel works:

The Funnel Business model

 

At Amazon, Jeff Bezos has taken the funnel business model to an entirely new place. How many people could be inside the Amazon funnel? Basically anyone. Not only does Amazon offer a mind-boggling number of products, but it also offers a broad array of highly desirable personal and business services. In addition, Amazon’s platform is so technologically advanced, it allows almost an infinite number of people to be in the platform at any given time.

Amazon attracts people into the platform with the ability to find and select products easily and to get them into the hands of consumers rapidly. Inside the funnel, Amazon’s extraordinary algorithms, Prime subscription service, and cross-marketing offer limitless opportunities for complementary transactions. Almost any click generates additional revenue for Amazon.

In short, Bezos’ genius has been to create an extremely broad top of the funnel, to make it extremely attractive to enter the funnel, and to offer seemingly infinite opportunities within the funnel.Offering free two-hour grocery delivery to Prime members is just one of many ways that Amazon attracts more people to Prime—which is Amazon’s primary feeder into the funnel—and gives them new incentives and opportunities to transact business through Amazon.

We are seeing the funnel business model emerge in a serious way in healthcare.

UnitedHealth/Optum draws people into the funnel via about 49 million UnitedHealth memberships; about 45,000 employed physicians; and Optum services are provided to four out of five U.S. hospitals and to more than 67,000 pharmacies. Optum has approximately 900 primary care, urgent, and surgery care centers. Inside the funnel, UnitedHealth/Optum offers an incredibly broad collection of interrelated services for individuals, employers, and healthcare providers.

The CVS Health funnel targets anyone wanting to fill a prescription, take a yoga class, or buy a bag of potato chips. The entrance to the CVS funnel combines a massive physical footprint with a growing digital presence. Eighty percent of Americans live within 10 miles of one of roughly 10,000 CVS stores nationwide. With the expansion of CVS’s HealthHUBs, one analysis suggests that 75 percent of Americans would live within 10 miles of a HealthHUB. In addition, CVS/Aetna has access to about 22 million Aetna medical members in all 50 states. Inside the funnel, CVS is aiming to create large collections of products and services pertaining to health and wellness that combine in-person and digital interactions.

CVS Health already is seeing a benefit inside the funnel from just its first three HealthHUBs, announcing that those stores are seeing higher prescription volumes, MinuteClinic visits, front-of-store sales, traffic, and margins. This is the funnel in action.

The funnel business model is a reality for healthcare. For hospitals, the question is not if but how to participate. For some, participation will include building or rethinking their own funnel. For others, participation will mean partnering with other companies, either to provide content for those companies’ funnels or to gain capabilities to create a new funnel.

#2: You Can’t Win If You’re Competing in the Wrong Business Model

“Macy's Closing 125 Stores, Cutting 2,000 Jobs As Mall Stores Struggle “

NPR, Feb. 5, 2020

Why is Macy’s forced to close stores and lay off staff? Because it is competing in the wrong business model.

Eighteen months after Netflix launched its streaming service, Blockbuster went out of business. Blockbuster could have executed perfectly on its existing plans, and it wouldn’t have mattered, because Blockbuster was competing in the wrong business model. It was competing in the real estate model, while Netflix was competing in the streaming business model. Once demand migrated to the streaming business model, there was no way that Blockbuster could win with its traditional model.

In recent years, Macy’s has worked hard to improve on its online ordering, mobile app, search optimization, in-store pickup, and other elements of retail’s new digital age. However, it never changed its basic department store-based business model. The digital attributes were trimmings, not the focus. This left Macy’s in a highly vulnerable position as demand shifted at an ever-increasing pace toward true digital retail options that offer a different magnitude of product offerings, low prices, and shopping ease.

#3: Healthcare Is Moving from a Wholesale to a Retail Business

“Checkup for $30, Teeth Cleaning $25: Walmart Gets Into Health Care”

Bloomberg, Feb. 25, 2020

Why is Walmart undercutting competitors on price for healthcare services? Because it is betting big on healthcare as a retail rather than a wholesale business, and it is using the tools of retail competition.

In 1995, community hospitals collected 70 percent of their revenue from inpatient care. By 2018, outpatient care accounted for nearly half of all community hospital revenue, according to the American Hospital Association. But demand migration in healthcare is far more than a simple shift from inpatient to outpatient care—it’s driving the industry to an entirely new business model.

Healthcare is becoming a retail business, not a wholesale business. It is increasingly virtual and platform-based, supplanting bricks-and-mortar. It brings completely new expectations from consumers, including immediate access and a relationship that is more personal than commercial. And it brings intense pressure on price from new, well-resourced competition skilled at delivering a seamless consumer experience.

In the last six months, Walmart has opened two standalone primary care clinics in Georgia, next door to Walmart stores. Consumers reserve appointments for primary care, lab, imaging, dental, and counseling services on WalmartHealth.com for prices that are roughly 30 to 50 percent below legacy providers and other retail clinics. With more than 5,300 stores, a digital platform, and capital to invest, Walmart might rapidly become one of the nation’s largest providers of primary care, disrupting legacy hospitals and health systems in the same way Walmart once disrupted downtown shopping districts all over the country.

Hospital strategy needs to fully embrace the new retail business model. That means focusing on consumer traffic and loyalty. It means developing an entirely new way of interacting with consumers. It means developing a highly convenient and appealing ecosystem of services. And it means completely rethinking all consumer interactions for a digital world.

#4: In the Internet Economy, Successful Companies Are Either Very Big or Very Small

“The New York Times Tops 5 Million Subscriptions as Ads Decline”

New York Times, Feb. 6, 2020

Why has The New York Times been able to survive the onslaught of Google and other online news sources while other newspapers have shrunk or vanished? Scale.

Jeff Bezos once said, “On the Internet, companies are scale businesses…. You can be two sizes: You can be big, or you can be small. It's very hard to be medium.”

The rise of the internet economy has seen the rise of scale companies—ones that have the financial and intellectual capital to invest in rapid innovation and to utterly dominate the industries they enter. The legacy companies that are able to play in this sandbox are those with the greatest scale, and they use that scale to pivot to the new business model.

Healthcare has historically been a cottage industry, but in today’s $3 trillion healthcare market, that is no longer the case. If legacy organizations are going to remain relevant, they need size that is historically different than what we have seen before. Achieving this goal requires larger everything: revenue, cash flow, capital capacity, and intellectual capital. Size brings a wider array of strategic options. It brings a larger consumer base. It brings a greater ability to invest in innovation. It brings greater access to talent. And it brings greater diversity of revenue to weather market changes.

Although there has been much hospital and health system consolidation activity in recent years, even the largest health systems continue to be dwarfed by the scale of new competitors that bring a national presence and exceptionally deep pockets to the table. And although their plans are less certain, tech giants with even deeper pockets have strongly signaled their interest in moving into healthcare.

This is the new competitive battleground as the internet economy comes to healthcare. Scale is a key step for legacy organizations to remain strong and relevant.

#5: Organizations Need a Methodology to Move from the Present to the Future

“Ford Will Stop Making Cars—Except These 2 Models”

Fortune, April 25, 2018

“Ford to Invest $500 Million in Rivian, a Tesla Rival”

The New York Times, April 24, 2019

“How Ford Bungled the 2019 Launch of its Bestselling Explorer

CNBC, Feb. 19, 2020

While serving as CEO of Steelcase, Ford CEO Jim Hackett developed a framework to confront disruption in the office furniture industry. This framework, which Hackett now employs at Ford, challenges companies to work simultaneously in three time dimensions: the now, the near, and the far.

  1. Be successful in the now and simultaneously make the critical pivot to the far.
  2. Place bets on the future and pivot resources to support those bets.
  3. Envision a future state and future role, knowing that any prediction is uncertain and subject to change.

Unlike traditional strategic planning, Hackett’s approach starts with “far”—developing a point of view about the future and the organization’s role in that future.

The next step is to look at “now”—to study current resources and capabilities, compare those with necessities for the “far,” and identify gaps. Another requirement for the “now” is exquisite execution in order to have a firm foundation for building resources to reach the “far.”

The next step is “near”—identifying the tactics and timing for developing the necessary financial and intellectual capital and capabilities for success in the “far.”

For Ford, “far” is electric and autonomous vehicles, with an emphasis on trucks and SUVs. That “far” requires significant financial investment, which led to Ford’s decision to end unprofitable lines of business—specifically, to stop manufacturing most of its sedans. This move freed $8 billion for investment in the “far.”

Ford also has needed to ensure that every move in the “now” is well executed in order to have the best chance to pivot to the “far.” That has proved a challenge, even for Ford. For example, recent manufacturing problems seriously hurt the launch of the 2020 Explorer—one of Ford’s highest revenue sources—undermining investor confidence and sending stock prices lower.

Hackett’s “now, near, and far” ask organizations to do two incredibly difficult things. One is developing a clear, cogent, and correct vision of the future. The other is to perform exquisitely in the “now.” Ford’s experience shows just how difficult this navigation is for even large, smart, and capable organizations.

Order from Chaos

The seemingly chaotic events in contemporary business do in fact have an overarching logic. That logic is defined by the principles of the internet economy.

In the internet economy, successful companies find creative methods to attract as many people as possible and derive revenue by translating that traffic into interconnected opportunities for commercial transactions.

In the internet economy, companies that stick with an outdated business model have no chance to succeed.

In the internet economy, healthcare’s traditional wholesale business model is giving way to a new retail business model.

In the internet economy, successful companies are very large, giving them the resources to draw huge amounts of traffic and create the largest number of interactions.

Finally, in the internet economy, legacy companies need a clear view of the future, exquisite performance in the now, and a plan to pivot strategies and resources.

The headlines that whizz past us as we scroll through our news feeds offer daily examples of how these principles are playing out in real-time. For hospitals and health systems, the ability to translate the apparent chaos of the business environment into effective strategies will be the measure of success in the coming decade.

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Kenneth Kaufman

Managing Director, Chair
Kenneth Kaufman offers deep insights on the economic, technological, and competitive forces undermining healthcare’s traditional business model.
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