Article

Don’t Be Stuck in the Middle

dont-be-stuck-in-the-middle

Kroger has long been the 800-pound gorilla of grocery chains. The company has been in business for 134 years. It is the largest supermarket chain in the country by revenue, bringing in $115 billion in 2016 and achieving steady growth over time. Kroger has a big footprint, with more than 2,700 stores in 35 states. It is the No. 1 or No. 2 chain in 98 of its 120 markets. Kroger stores offer a wide variety of products at low prices, made possible by the chain’s focus on data-driven cost efficiency. The chain also was an early mover in e-commerce; more than 600 of its stores offer online shopping and in-store pickup or, in some locations, delivery.

Unfortunately, in today’s environment, even a large, high-performing, forward-looking legacy company faces formidable challenges by competitors that are finding new ways to meet customers’ rising expectations for price, selection, and convenience.

For Kroger, these challenges are coming from all sides. Deep discounters like Aldi are attacking on price. Specialized stores like Trader Joe’s are attacking on contemporary product selection. And Walmart is attacking on all fronts: price, product selection, footprint, and digital convenience. 

As if those competitors weren’t enough, Amazon is poised to become an even larger force with its acquisition of Whole Foods. Amazon has the size to compete on price, the customer-focused digital innovations to transform the shopping experience, and—if the Whole Foods deal closes—a significant bricks-and-mortar footprint. 

All of which leaves Kroger stuck in the middle. Although Kroger seems to be making the right moves, its earnings are softening and its share price is suffering. Perhaps even worse, despite its history and strengths, Kroger is not the first name mentioned in discussions about the future of the grocery shopping experience.

Stuck in the Middle of Healthcare

The size, complexity, and stakes are far greater in healthcare than in the grocery business, but a similar dynamic is emerging. 

For many years, not-for-profit hospitals and health systems were the center of the healthcare universe. Now, rapid technological innovations, rising healthcare entrepreneurship, and changing consumer expectations are making legacy organizations vulnerable to attack by innovative, nimble companies. 

As with Kroger, the attacks are coming from all sides. Retail clinics, urgent care chains, and diagnostic chains offer lower prices and improved access for low-intensity services. Direct primary care providers offer conveniences such as same-day appointments and patient-provider messaging. Clinical data analytics companies are developing standardized care models. And huge tech and life sciences companies are improving diagnostics through techniques such as genomics and artificial intelligence.

Many of these competitors are large companies capable of rapid growth through acquisition. For example, UnitedHealth, which had $185 billion in revenue in 2016, recently acquired Surgical Care Affiliates for $2.3 billion. This acquisition is a significant enhancement to United’s Optum healthcare division, adding 190 ambulatory surgery centers and surgical hospitals serving about 1 million patients per year in more than 30 states. 

For another example, Teladoc, the nation’s largest telehealth company, recently announced its planned $440 million acquisition of Best Doctors, which offers medical consultations and second-opinion assessments on difficult diagnoses and treatment plans. The acquisition will add more than 50,000 physicians in 450 medical specialties to Teladoc’s network. Equally important, the acquisition will move Teladoc from its focus on routine primary care to acute and chronic care, and provide a stronger data and analytics platform for developing care models.

The companies encroaching on traditional hospitals and health systems may not be providing direct acute care, but they are targeting services all around acute care, as well as the technological capabilities and intellectual properties associated with all facets of healthcare. For traditional healthcare organizations, being stuck in the middle is an increasingly real possibility. 

What It Takes to Avoid the Squeeze 

Avoiding the phenomenon of being stuck in the middle is no easy undertaking, especially for long-standing organizations with entrenched structures and processes. Yet, there are several foundational elements that can help organizations position themselves for a broader role in a changing environment.

Focus on consumers. In today’s socioeconomic environment, successful businesses focus relentlessly on consumers, not only meeting but anticipating their needs. This consumer focus is not a core capability for most healthcare organizations, which tend to be vulnerable on convenience, access, and price. A deep and nuanced understanding of each organization’s consumers is necessary—from demographics to health status to attitudes. This understanding needs to be integrated into ongoing strategic planning, and organizations need to master capabilities such as broad access, contemporary patient experience, and price transparency. 

Fix the factory. To succeed in an era of rapid change and innovation, organizations need to do the basics extremely well. For example, they need to operate with a high degree of efficiency, significantly reducing clinical variation, eliminating duplicative sites and services, and reworking clinical and operational processes to eliminate unnecessary steps and costs. Common consumer dissatisfiers, like long wait times and confusing websites, need to be remedied.

Reimagine growth. Taking a broader view of growth is critical to avoid being stuck in the middle while competitors encroach from all sides. The traditional focus of hospitals and health systems—inpatient and outpatient care—is only one piece of a much larger realm of healthcare services. Virtual visits, digital assistants, medical devices, transportation, wellness services—all of these and many more are part of the healthcare picture for consumers. In addition, healthcare organizations may develop expertise in specific areas, such as logistics, that could be marketed to other providers. Organizations may be able to develop this broader range of services internally, or they may need creative partnerships with established innovators, start-ups, other providers, or a combination of these. 

Such changes will require significant leadership and focus to ensure that the organization is willing and able to take this journey of transformation. The process is as challenging as it is worthwhile. As Amazon CEO Jeff Bezos told his employees in 1997: “We are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy.” More than any other type of organization in any industry, hospitals and health systems have an opportunity to build something truly important for the people they serve.

Your comments are welcome. I can be reached at pcrnkovich@kaufmanhall.com.

Download This Article