GLOSSARY OF SELECTED TERMS

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1 GLOSSARY OF SELECTED TERMS Atomistic Market Model A market characterized by many small competitors. Its two primary forms perfect competition and monopolistic competition differ depending on the degree of product differentiation that exists across competitors. In perfect competition, the level is low; in monopolistic competition, it is high. Perfectly competitive markets are rare, while monopolistically competitive markets are very common. The relatively small sizes of competitors in monopolistically competitive markets mean that no one competitor has sufficient power to affect the well-being of other competitors. Lacking immediate threats from their rivals, competitors in such markets do not need to engage in the more aggressive forms of competition, especially price competition and power strategies. Instead, they focus on serving consumer needs (positioning), strengthening internal capabilities and resources (potential), and improving performance. If those taking this approach can find ways to consolidate the market, then the pursuit of power strategies could produce considerable competitive advantage. If they mistakenly think that the markets are consolidatable, then engaging in power strategies could be highly risky. Most physician markets are monopolistically competitive: each of the many competitors enjoys some degree of product differentiation and therefore market power. Average Distance As used by StratCenter, this is the average distance between each system member (a hospital that is a member of a multihospital chain) and the headquarters of the company or local cluster. The average distance reflects the relative degree to which the hospitals within a multihospital chain or local cluster are widely dispersed or tightly clustered spatially. BCG Grid Originally developed by the Boston Consulting Group (BCG), this 2x2 grid compares the business units within a firm by whether they are high or low in market share (business unit characteristic) and in market rates of growth (market characteristic). High market share and market growth are considered ideal, and low market share and growth are less ideal. A modified version of this grid can be used to evaluate the markets in which a multihospital chain has facilities. Catholic Multihospital Chain A multihospital system that is owned and/or controlled by a Catholic entity, such as a nun order (e.g., Franciscan Services Corporation, Hospital Sisters Health System, Little Company of Mary Health System) or a collective of Catholic systems (e.g., Ascension, Catholic Health Initiatives, Catholic Health Partners).

2 Competitor Refers to local market rivals. As used in StratCenter, these include freestanding hospitals as well as local hospital clusters. Competitive Advantage Gains in market strength or power relative to competitors that are the result of strategic actions taken or capabilities and resources attained. Competitive advantage is the objective of competitive strategy. The many sources of advantage can be grouped into five categories, all of which begin with P for ease of remembering them: Pace Measured timing and intensity of strategic action Position Projection of distinctive and valued images to consumers Potential Access to distinctive and superior capabilities and resources Performance Superiority in operations and the implementation of strategy Power Accumulation and effective use of organizational mass (as generated through horizontal expansion, vertical integration, horizontal integration, or portfolio strategies). Also, power strategies can be differentiated by whether the focus is on absolute mass (measured by company size, revenues, and so on) or relative mass (measured within individual markets by market share). Concentration Ratio The concentration ratio (CR) is a measure of market concentration, the formula for which is the following: CR n = s 1 + s 2 + s s n where s i is the market share of the ith competitor, and n is the number of top competitors included in the measure (e.g., n = 4 for the four-firm ratio). The most common measure of CR includes only the top four firms, called the 4- firm ratio. In general, the higher the value, the more concentrated and therefore the less price competitive the market. Markets with 4-firm ratios that measure 40 percent or less are commonly considered to be fragmented and thus assumed to be more price competitive. See Herfindahl-Hirschman Index. Conduct The collective actions that organizations take within markets in pursuit of competitive advantage. For our purposes, both conduct and strategy refer to the strategic behaviors of competitors. The difference is that conduct refers to the collective and strategy applies to individual competitors.

3 Core-based Statistical Area This new designation (by the Office of Management and Budget) identifies two types of urban areas: Metropolitan Statistical Areas (METSAs) and Micropolitan Statistical Areas (MICSAs). METSAs include at least one urbanized area of 50,000 or more population, plus adjacent territories that have a high degree of economic integration with the central urban area. MICSAs fall within the population range of 10,000 and 50,000 and are otherwise defined much like the METSAs. Currently, there are 362 METSAs and 560 MICSAs, which in total represent about 93 percent of the U.S. population. StratCenter focuses mostly on the METSAs. For more information on these categories, go to the U.S. Census Bureau web site Corporate Strategy Those key concepts and ideas that relate to the selection, financing, and integration of business units for the purpose of gaining and sustaining competitive advantage for the organization as a whole. Dominant Firm Sometimes called a market leader, this is a competitor that enjoys an overwhelmingly greater market share or level of power within its local market than do other local rivals. Dual Economy Market Sometimes called a segmented market, this is a market that combines more than one structural model, usually an oligopoly plus a fringe of competitors that fall within a monopolistically competitive structure. Competitors in such markets face different structural worlds, depending on their position in the spectrum of market shares. Entry Barriers Technological, economic, regulatory, institutional, and other factors that inhibit firms from engaging in new businesses or entering new markets. Environment External factors (not otherwise included in market structure) that play or are likely to play an important role in influencing the structures of markets, conduct of rivals, and individual firm strategies. Examples include new technologies, regulations, and natural disasters. Exit Barriers Technological, economic, regulatory, institutional, and other factors that inhibit firms from disengaging from businesses or exiting markets.

4 Five Forces Framework A framework, developed by Michael Porter, designed for use in analyzing market structure, and competition. The focus is on five primary sources of competitive threat: rivals, buyers, sellers, entrants, and substitutes. Flat Model A local strategic configuration in which a hospital cluster is composed of two or more owned hospitals that are relatively equal in size and complexity. This model is to be contrasted with the hierarchical model. For-profit Multihospital Chain A multihospital chain (e.g., HCA, Tenet, Health Management Associates) that is owned by investors/stockholders and pays federal and state income taxes on revenues derived from its business entities. Fringe Firms Sometimes called peripheral firms, these are one or more very small competitors within oligopolistically structured markets. Fringe firms have market shares that are too small to be considered threatening to local oligopoly group members or dominant firms. Functional Structure An organizational division of authority that is based on areas of expertise. This form structures firms by common tasks, services, or functions. This is the traditional structure of individual hospitals in which structures are segmented by functional duties such as marketing, finance, nursing, and radiology. Herfindahl-Hirschman Index The Herfindahl-Hirschman Index (HHI) is a measure of market concentration, the formula for which is the following: HHI = s s s s n 2 where s i is the market share of the ith firm, and n is the total number of competitors in the market. The key feature of the HHI is the squaring of the shares, which serves to undervalue small shares and overvalue large ones, thereby magnifying concentration where it is extensive. Multiplying the HHI by 10,000 is a common practice that thereby effectively removes the decimal point. For example, an HHI of.4233 would be recorded as 4,233 after multiplying by 10,000. The U.S. Department of Justice has established guidelines for judging levels of market concentration. Markets with HHIs under 1,000 are

5 considered to have low concentration levels; those between 1,000 and 1,800, to be moderately concentrated; and those exceeding 1,800 to be highly concentrated and are serious candidates for antitrust intervention. See also Concentration Ratio. Hierarchical Model A local strategic configuration in which a hospital cluster is composed of a large referral center surrounded by one or more spatially proximate community hospitals. It is sometimes called a hub-spoke model. This model contrasts with the flat model. Horizontal Expansion A power strategy that builds advantage by expanding the scale of existing businesses (e.g., the merger of two or more hospitals). Horizontal Integration A power strategy that builds advantage by combining and coordinating different types of businesses that are not vertically related (e.g., jointly managing hotel and hospital companies). Hospital Cluster Two or more hospitals that are members of the same multihospital chain and are located within the same local market. Industry Refers to all competitors engaged in an area of business. In healthcare, the term is used broadly to include insurers, providers (hospitals, physicians), and members of the supplydistribution channel. In StratCenter, the term sector is used to refer to subgroups within the broader healthcare industry (e.g., the hospital sector). Learning Curve Sometimes called the experience curve, this term expresses the inverse relationship that is generally assumed to exist between learning (and/or experience) and production costs. Market An arena in which one or more sellers of given products/services and their close substitutes exchange with and compete for the patronage of a group of buyers. Healthcare markets are typically delimited in geographic (e.g., metropolitan areas) and/or product terms (e.g., general acute medical/surgical care).

6 Market Concentration A market is concentrated when a small number of competitors exist. As a result, they exercise collectively high levels of market power (as in oligopolistically structured or monopoly markets). Market concentration is typically measured by either the HHI or the CR. Market Power A competitor enjoys market power when it is able to affect the decisions of competitors (e.g., decisions relating to pricing, offering new products, and engaging in a merger) and/or customers in a market context. In terms of strategy, competitors that experience increases in competitive advantage, by definition, experience gains in market power. Market Share The percentage of the market controlled by a given competitor. For hospitals and hospital clusters, this can be calculated using a variety of measures, including the percentages of beds, patient days, and revenues controlled by given competitors. This is an important indicator of local market (or relative) power. Market Structure The organizational features of a market (e.g., seller concentration, entry barriers, degree of product differentiation) that condition or influence the conduct and strategies of competitors. Market Structure Perspective The perspective on strategy that emphasizes the role of market structure in driving competitive behaviors and advantage. Matrix Structure A simultaneous combination of functional and divisional organizational structures. This type of structure can come into being when a large cross-functional team, which frequently involves two or more leaders (a functional representative and a product/geographic leader), is created to coordinate management and control within an organization. Mission Expresses the core purposes of an organization.

7 Mobility Barrier The factors that inhibit members of one strategic group from capturing or duplicating the distinctive sources of competitive advantage enjoyed by members of another strategic group. Monopoly Model Monopolies are defined as having only one competitor. However, this does not mean that competitors in such markets do not face competition. Many single-competitor markets are contestable that is, they are threatened by the entry or strategic behaviors of outside rivals. Hospital competitors in many nonurban markets are contestable monopolies in that they are threatened by the strategic maneuvers of competitors located in nearby nonurban or urban markets. Multidivisional Structure An organization divided into divisions that operate relatively autonomously. Generally, most functional services are relegated to each division. In a multidivisional structure, greater decision-making authority is decentralized to divisions. Often, the structures are divided by product or service and geography (region or nation). Multihospital Chain A company that owns or manages (both strategically and operationally) two or more acute care general hospitals. Niche Strategy A strategy in which a competitor seeks advantage by focusing on a single or small number of product lines or population segments. Nonprice Competition Competition in which rivals compete using any other sources of advantages than low prices (which would be price competition). Not-for-Profit Multihospital Chain A multihospital chain that has no investor owners or stockholders and pays no federal or state income taxes on revenues derived from its not-for-profit business entities. Not-forprofit hospitals and hospital chains, however, very often compete directly aggressively with for-profit and other types of rivals.

8 Oligopoly Groups These are the small number of large but fairly equal (in terms of market power) competitors that often dominate local markets. Oligopoly Model Oligopoly markets have relatively few competitors, and each of these competitors has sufficient market power to affect the pricing and other strategic decisions of its competitors. Because of small numbers, competitors in oligopoly markets tend to be highly interdependent strategically (sometimes referred to as conscious interdependence). This means that competitors are often acutely aware that their survival depends on what their rivals do. A likely strategic response, therefore, would be to countervail the threats from rivals by engaging in acquisition and merger activities. Portfolio Strategy A power strategy that builds advantage by combining and coordinating financially different types of businesses. Portfolio s exclusive focus on financial synergies is what makes it different from horizontal integration, which draws advantage from financial factors as well as other sources. Product Differentiation An approach to positioning that emphasizes the projection of distinctive values to actual and potential consumers. If successful in differentiating itself, a firm, business, or product can enjoy an increase in market power or competitive advantage. Resource-based View The theoretical perspective that emphasizes the need to acquire/develop unique, inimitable, and strategically valuable resources and/or capabilities to sustain competitive advantage. Sector Subgroups of seller types within a broader industry (e.g., the hospital sector within the healthcare industry). Stages of Market Growth Descriptors of different market types according to their overall, long-term rates of growth and consequent market dynamics. The following stages are (1) emergent (nascent, a market that is in its very earliest stage of development), (2) growth (a stage in which demand is increasing rapidly), (3) mature (a stage in which demand has flattened or is increasing very slowly), and (4) decline (a stage in which demand is declining and is

9 expected to do so for some extended period of time). These stages are expected to affect the strategic behaviors of all competitors the market. Strategic Business Unit Strategic business units (SBUs) are sub-businesses or facilities that are operated somewhat independently by a corporation. For example, a hospital chain s hospitals located in different markets might be treated as different business units for purposes of management and control. SBUs also can represent the different types of businesses that are owned by a company. Strategic Groups: Firms Groups of firms that are fairly similar in terms of a few key sources of advantage (e.g., firm size, ownership type, geographic dispersion). Comparisons of markets within and between strategic groups provide insights into subtle differences in firm strategies and market conditions and their implications for strategic behaviors. Given their strategic commonalities, competitors within each group are expected to respond in similar ways to market forces. Strategic Groups: Markets Groups of markets that are fairly similar in terms of a few key market structure characteristics (e.g., market size, region, HMO penetration, average income). Comparisons of markets within and between strategic groups provide insights into subtle differences in market structures and their implications for strategic behaviors. Strategic Intent The value-based concepts and statements an organization uses to frame and constrain strategic choice as well as internal organizational behaviors. Such statements are also used to rally organizational members to support the implementation of formalized strategies. Expressions of strategic intent are contained within an organization s statements of values, mission, and vision. Strategy Those key concepts and ideas that organizations use (or have used) to achieve and sustain competitive advantage over their rivals. Substitutes Substitutes can take two forms: (1) significantly different business models that compete in the same product areas and (2) distinctly different products that serve the same function from a consumer perspective.

10 Switching Costs The costs incurred and difficulties encountered in switching from one buyer, seller, or partner to another. Such costs often create entry barriers and lock in relationships established through market negotiations and agreements. They thus inhibit strategic maneuverability on the part of the firms facing such costs. SWOT (Strengths, Weaknesses, Opportunities, Threats) A simple analytical framework that includes assessments of factors that are internal (strengths and weaknesses) and external (opportunities and threats) to the organization. Values The common beliefs and strongly held preferences of members of an organization. The mission, vision, and strategic actions of an organization should be congruent with its values. Vertical Integration A power strategy that builds advantage by combining and coordinating businesses that share input-output or buyer-seller relationships (e.g., integrating hospital and managed care companies). Virtual Structure Involves various interorganizational relationships between two or more distinct organizations, not involving common or full ownership. Virtual structures are sometimes called virtual or quasi firms, alliances, partnerships, joint ventures, networks, consortia, or trade associations. Vision Expresses in broad conceptual terms where an organization desires to go and what type of organization it hopes to become. Vision will often include some general (nonproprietary) strategic content.