Understanding How to (and Why) to Pivot a Healthcare Business Model (4 of 5)

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18 min read21 hours ago

The last three posts have discussed the concepts and techniques for creating a winning healthcare Value Proposition that ensures business success. But sometimes, no matter how good the idea is, the business model that responds is not quite right. As I always tell my teams, “Not every idea is a good one, and not every good idea should be done!”

Today, we will discuss how to pivot your business model when it does not work or your competitors are doing better. Pivoting in the context of a healthcare business model refers to making a significant change in your business strategy or operations to adapt to changing market conditions or to gain a competitive edge. Our objectives are as follows.

Understand what you can learn from your competition.
Learn about Porter’s Generic Strategies for Competition.
Learn about and differentiate between Blue & Red Ocean Theory.
Learn about and differentiate between a Lever and a Pivot.

It is useful to pre-read our earlier posts here:

Everyone has Competition

“If I had asked people what they wanted, they would have said faster horses.” — Henry Ford

A big part of business model innovation is creating and validating your Value Proposition. Every business needs one. Likewise, every Value Proposition can be disrupted by someone else, creating competition. Every business has a competitor. If you cannot identify yours, you do not have a clear Value Proposition (and you are fooling yourself).

Even product category inventors have competitors. Everyone can learn from their competitors but must be agile enough to take advantage of what they find. I’d like to review two core competitive analysis frameworks I employ in modelH.

Michael Porter’s Generic Strategies
W. Chan Kim & Renee Mauborgne’s Blue Ocean Strategy

Porter’s Generic Strategies

Michael Porter is a renowned authority on competitive strategy. His work fundamentally reshaped how businesses understand and approach competition. Porter emphasizes that industries are characterized by specific competitive forces that influence profitability and sustainability. These forces include the threat of new entrants, the bargaining power of suppliers and buyers, the threat of substitute products, and the intensity of rivalry among existing competitors.

Porter introduced the concept of generic strategies, suggesting that companies can achieve competitive advantage through cost leadership, differentiation, or focus. Additionally, his work on value chain analysis highlights the importance of understanding a company’s internal activities to identify opportunities for cost reduction, differentiation, or creating value for customers — more on this at another time. Porter’s Generic Strategies insights have been instrumental in helping organizations analyze their competitive environments, develop effective strategies, and achieve superior performance. Let us take a deep dive into this topic.

Cost Leadership

Under the Cost Leadership strategy, companies target large-scale markets and provide the lowest possible prices to attract customers. This strategy centers on maintaining the lowest cost position relative to competitors within an industry. This position can be accomplished through two primary avenues: aggressive cost reduction or leveraging economies of scale to optimize pricing.

Substantial capital investment is often required to execute this strategy effectively. Organizations must minimize costs across the value chain, including materials, labor, and production processes. However, it is crucial to recognize the limitations of cost reduction. Excessive cost-cutting can erode product quality, diminish customer satisfaction, and hinder innovation. Therefore, a delicate balance between cost efficiency and maintaining a competitive value proposition must be struck.

Think Walmart in general, but also in healthcare. The $4 prescriptions they introduced changed the retail pharmacy game overnight. They have successfully implemented a cost leadership strategy in healthcare by optimizing its supply chain, negotiating favorable terms with suppliers, and operating highly efficient distribution centers — enabling Walmart to offer lower prices to consumers while maintaining profitability. Walmart has significantly increased the number of pharmacies within its stores, expanding its geographic reach and customer base. They emphasize lower-cost generic medications, attracting price-sensitive customers. Their vast customer base provides a built-in advantage for pharmacy services. The company has continued to invest in other healthcare services, including clinics and telehealth, positioning itself as a comprehensive healthcare provider. While specific market share figures might be unavailable, these factors indicate Walmart’s growing dominance in the retail pharmacy sector by employing a Cost Leadership strategy.

Differentiation

Under the Differentiation strategy, companies target many markets and provide a product with unique features. These organizations must create value propositions that achieve a competitive advantage by attracting customers to their product’s unique features and benefits. Companies using the differentiation strategy must invest in research and development to continuously improve the product and flex as their market changes.

Precision medicine is a prime example of a differentiation strategy in healthcare. It involves tailoring medical treatment to individual patients based on their genetic makeup, environment, and lifestyle. This approach offers a distinct value proposition compared to traditional, one-size-fits-all therapies. By analyzing a patient’s genetic information and other relevant data, healthcare providers can develop highly customized treatment regimens, increasing the likelihood of positive outcomes. Precision medicine has the potential to revolutionize healthcare by reducing adverse drug reactions, optimizing treatment efficacy, and accelerating drug development. Patients receiving personalized care report higher satisfaction levels due to the tailored approach and improved health outcomes.

The value and complexity of precision medicine often justify premium pricing, allowing for higher profit margins. Companies like Illumina, specializing in genomic sequencing, and companies developing personalized cancer treatments exemplify the differentiation strategy. They command premium pricing by offering unique and valuable services, enjoying a competitive advantage, and dominating market revenues. By focusing on differentiation through precision medicine, healthcare organizations can create a sustainable competitive advantage, enhance patient care, and drive innovation in the industry.

Focus

A Focus strategy involves targeting a specific market segment or niche. This approach allows organizations to tailor their offerings to meet the distinctive needs of a defined customer group. There are two primary focus strategies: cost focus and differentiation focus.

Cost focus involves achieving low-cost leadership within a specific market segment, while differentiation focus aims to provide unique and superior products or services to a particular customer group. Both approaches can yield significant competitive advantages, including increased customer loyalty, reduced competition, and a deeper understanding of target customer needs.

Lululemon + Athletica are prime examples of successful focus strategies. Lululemon has cultivated a loyal customer base and established a strong brand identity by concentrating on the premium athletic apparel and yoga-inspired clothing market. Their ability to understand and cater to fitness enthusiasts’ specific needs and preferences has driven their market success.

Borrowed from https://shop.lululemon.com/

However, focus strategies also carry risks. Market segments can change, and economic conditions can fluctuate. Organizations need to continuously monitor their target market and adapt their offerings accordingly.

Red Ocean and Blue Ocean

In their book Blue Ocean Strategy, professors Chan Kim and Renée Mauborgne introduced the terms “red ocean” and “blue ocean” as another distinct approach to examining market competition. I have successfully used this approach when developing or refining business models.

Red Ocean Business Models

A Red Ocean strategy describes traditional competition-based strategies. It involves operating within existing industry boundaries, where competition is fierce, and profit margins are often squeezed. It focuses on growth through market penetration.

Companies in Red Oceans compete for market share by offering similar products or services, leading to price wars and reduced profitability. These models rely on the Value Proposition being more clearly communicated to the market than competitors. As such, they require a sustained marketing (Experience) and distribution strategy (Channels). Red Ocean models are designed to achieve incremental growth from your core business.

The generic drug manufacturing industry is a classic example of a Red Ocean environment. Its characteristics include intense competition, low-profit margins, and a relentless focus on cost reduction. These challenges exemplify the difficulties of operating in a highly contested market.

Generic drug manufacturers primarily engage in price-driven competition, often offering products that are bioequivalent to brand-name drugs at significantly lower costs. This move has led to commoditization, where products are primarily perceived as interchangeable. To survive in this competitive environment, companies must relentlessly focus on operational efficiency, supply chain optimization, and cost minimization.

While there have been instances of innovation and differentiation within the generic drug industry, the overall competitive landscape remains fiercely competitive, making it a quintessential example of a Red Ocean environment.

Blue Ocean Business Models

Conversely, a Blue Ocean strategy involves creating uncontested market space with minimal competition and high demand. Companies pursuing Blue Ocean strategies identify new market opportunities, often by combining different industries or offering innovative solutions to unmet customer needs.

They focus on creating new value for the company and its customers by innovating your product, price, and cost positions. This approach is sometimes called “Value Innovation.” Blue Ocean models help achieve breakout growth by unlocking new demand and making the competition irrelevant.

Teladoc Health is an excellent example of a company successfully implementing a Blue Ocean strategy in the healthcare industry. By creating a new market for virtual healthcare, Teladoc challenged the traditional model of in-person doctor visits.

Teladoc pioneered telehealth services, creating a new market with minimal competition. By offering convenient, accessible, and often lower-cost healthcare, Teladoc addressed a previously unmet customer need.

The company’s early entry into the telehealth market allowed it to establish a strong market position before significant competition emerged. Through its focus on technology and patient convenience, Teladoc has redefined healthcare delivery, expanding access to medical services and improving patient satisfaction.

But first-mover advantage does not mean a business model will work. While Teladoc pioneered in the telehealth space, it has encountered significant challenges that have impacted its stock price and overall performance. First, the telehealth industry is now more competitive and, in many ways, is becoming a red ocean market rather quickly. The telehealth market has become increasingly crowded with new entrants and established players expanding their offerings. This gold rush has intensified competition and pressured Teladoc’s market share and pricing.

Second, Teladoc’s stock price reached absurd levels, creating unrealistic expectations. Third, the acquisition of Livongo, while intended to expand services, resulted in substantial goodwill impairment charges and investor skepticism about the deal’s value.

Fourth, despite rapid growth, Teladoc has struggled to achieve profitability. High operating costs and intense competition have hindered its ability to generate consistent profits. Also, the surge in telehealth usage during the COVID-19 pandemic has somewhat normalized, leading to a decline in demand for some services.

Finally, and most concerning, the telehealth industry faces evolving regulatory landscapes and reimbursement uncertainties. Navigating these complexities has been a hurdle for Teladoc.

It’s important to note that Teladoc is actively addressing these challenges through cost-cutting measures, focusing on profitability, and expanding its service offerings. The new CEO, Chuck Divita, is a friend and up for the task. I hope this renewed focus, coupled with Teladoc’s pioneering efforts, will re-solidify its position as a leader in the space.

Looking at Business Model Levers & Pivots

Once you have applied competitive analysis to your business model’s Value Proposition, you can think about your relative market position and how you might adjust it to maximize your competitiveness. I suggest two forms these adjustments can take: Levers and Pivots.

What is a Lever?

A business model lever is a strategic element within a business model that can be adjusted to influence overall performance and outcomes. It describes how a company might leverage one or more building blocks in its canvas to improve profitability and overall performance in the markets it already serves. It’s a manipulatable variable that can be used to optimize revenue, costs, customer value, or other key metrics.

Think of a business model as a machine with many interconnected parts. Levers are the controls that allow you to fine-tune the machine’s performance. By understanding and effectively utilizing these levers, businesses can adapt to changing market conditions, increase profitability, and gain a competitive advantage. A lever does not change a business model; it makes it more profitable.

If your business model is the machine, your modelH business model canvas, and its building blocks are the cogs of that machinery. Over time, the Key Activities that deliver your product (Value Proposition) to your customers (Buyers and Users) through your sales (Channels) and service (Customer Relationship) mechanisms will vary in maturity. This variance results in some elements of your business performing sub-optimally.

modelH Business Model Canvas Building Blocks

Levers can be both large and small. “Small levers” apply pressure to a single element (building block) of your business model to produce incremental changes in your revenues and costs. “BIG LEVERS” seek to change one of the core fundamentals of your business models (Customer/Who, Product /What, Operations/How, and Economics/How Much) to produce substantial change in either revenue creation or cost reduction.

modelH Business Model Canvas for Healthcare — The What of Your Business Model

Examples of Business Model Levers:

Revenue: Adjusting product or service prices to optimize income and profit margins.
Costs: Identifying and reducing operational expenses to improve profitability.
Customer Segments: Targeting specific customer groups (Buyers) to enhance customer value and satisfaction.
Value Proposition: Modifying product or service offerings to better meet customer needs or exploring new ways to generate income beyond core offerings.
Channels: Optimizing how products are distributed and how services reach customers.

Businesses can create sustainable growth and improve performance by carefully analyzing and manipulating these levers.

What is a Pivot?

A business model pivot describes how a company might change direction, with one foot grounded in the existing model while the other lands on a new model. This approach is the opposite of compulsively moving from one version of your future to another. Like a basketball player — pivots are grounded at one spot yet can move into a more advantageous position. Over time, a pivot may result in a divergent path for your current model, but not away from the business principles that link each step.

Pivots can also be both large and small. The small pivots look to change a single element (building block) of your business model to produce incremental change and incremental revenues. The BIG PIVOTS seek to change one of the core fundamentals of your business models (Customer, Product, Operations, and Economics) to produce substantial change and revenues.

Common Business Model Pivots

What are some of the most common types of pivots?

Job to be done: Here, you use your same Value Proposition to solve a different problem for the same customer segment (User). For example, WeightWatchers has been pivoting away from its traditional in-person workshops and meal plans to focus on digital services and prescription treatments for GLP-1s. Same Buyer, different problem solved.

*Note: I consulted for WW.

Customer Segment. Here, you use your existing Value Proposition to solve a similar problem for a different set of Buyers. For example, FitOn (acquired by FitOn) pivoted from a direct consumer model to a channel sales model for its digital fitness platform, which gives employees, employers, and Medicare Advantage members access to various fitness studios, gyms, and digital workouts.

*Note: I was an early investor in Peerfit.

Platform: Here, you repurpose your existing technology Platform to solve a more pressing, marketable, or solvable problem as you learn from customers. For example, Tendo pivoted from focusing on Customer Care Journey software (sometimes called Digital Front Door) to concentrate on Quality Measurement and Improvement. Same platform — different purpose.

*Note: I am an advisor to Tendo.

Value Proposition: Here, you change your product feature prioritization based on identification (during your MVP and lean product development processes) of what customers are doing with your product rather than what you initially projected they would do. Another example is bundling services with a physical or digital product. See this earlier post for more information on the various types of products you can bundle or arrange.
Channel: Here, you change your sales channels or partners to better reach your desired Customer Segment. For example, you can move from direct sales to a distribution partner or pivot from a direct sales team to an ecommerce modality. Returning to our Walmart example, consider how many disposable blood glucose test strips they sell with their $4 insulin prescriptions.
Revenue: Here, you change your Value Proposition pricing from a premium and personalized focus to a low-cost, generic alternative. Another pivot would be to convert from one-time sales to ongoing SaaS revenue via subscriptions or licensing. Additionally, consider the well-known razor-and-blade model, where a product is sold at a low price (or even given away for free) to encourage the purchase of complementary consumable goods at a higher profit margin.

Unlike a lever adjustment focused on altering the existing model, pivots offer a new direction entirely, even though you are starting from the same place. The key to pivoting is spotting trends from actual data and objective market experience and optimizing your product/market fit without leaving a hole in your market or marring your credibility.

Before you pivot, it’s important to gather multiple data points. Keep in mind that no product can satisfy every customer. Therefore, it’s crucial to avoid making random jumps based on limited information. Such a hasty approach can lead to unsuccessful pivots, risking your business’s stability and credibility.

Recent Business Model Pivot Examples

I have recently seen a few large and small business model pivots in the healthcare and life science markets.

Telehealth Companies: Many telehealth startups initially focused on acute care visits. However, as the industry matured, they pivoted to chronic care management, mental health services, or specialized care areas like dermatology or pediatrics. They are also moving to value-based care models.
Pharmacies: Independent pharmacies have pivoted to offer additional services like immunizations, medication therapy management, and wellness programs to increase revenue and patient loyalty.
Medical Device Companies: Some medical device companies have expanded their offerings to include data analytics and remote patient monitoring, creating new revenue streams and value for customers.
Health and Wellness Startups: Initially focused on fitness or nutrition, many startups have expanded into mental health, sleep wellness, or chronic disease management to address broader consumer needs.
CVS Health: Traditionally a pharmacy chain, CVS pivoted to become a healthcare services company. They acquired health insurance provider Aetna, expanded into primary care clinics, and focused on preventative care services. This transformation positions CVS as a comprehensive healthcare provider.
Johnson & Johnson: While known for consumer health products, J&J has increasingly focused on medical devices and pharmaceuticals. In May 2023, they sold shares in Kenvue, which owns brands such as Band-Aid and Tylenol, through an initial public offering that netted J&J $13.2 billion in cash. This pivot has allowed them to tap into higher-margin segments and address unmet medical needs.
UnitedHealth Group: Originally an insurance company, UnitedHealth has diversified into care delivery through Optum, offering services like care management, pharmacy benefits management, and population health. This pivot enables them to manage costs and improve patient outcomes.

Business Model Levers vs. Pivots

Let us review these two concepts again to ensure we understand the distinction. While both involve changing a business model, business model levers and pivots represent different levels of strategic adjustment.

Business Model Levers

Scope: Levers are incremental adjustments made to specific business model blocks without altering the core concept.

Focus: Levers look to optimize existing operations, improve efficiency, or increase revenue.

Examples:

Changing pricing strategies for a drug or software app.
Modifying sales channels to go direct.
Enhancing customer service with conversational AI.
Implementing marketing tactics to highlight trends.

Business Model Pivots

Scope: Pivots involve substantial alterations to the business model, often affecting its core value proposition, target market, or revenue model.

Focus: Pivots realign a business with changing market conditions or pursuing new opportunities.

Examples:

Shifting from a product-based to a subscription-based model.
Changing the target customer segment.
Developing a completely new product or service.

Levers are about fine-tuning an existing business model for better performance. Pivots are about redefining the business model to adapt to new realities or explore new potential. Levers are like adjusting the sails on a boat to optimize its course, while pivots are like changing the boat’s direction altogether.

How to apply Competetive Analysis and Pivoting Techiques to evaluate Business Model Possibilities?

So, how do you combine Porter’s competitive forces with a Blue Ocean strategy to create space to win in your markets using levers and pivots?

The diagram below represents the viable “levers” and “pivots” that might be considered part of your modelH business model canvas for healthcare. They are broken down into categories:

Red Ocean (small levers & BIG LEVERS)
Blue Ocean (small pivots & BIG PIVOTS).

Let’s use this technique against a hypothetical use case so you can see how it works in the process. Let’s pretend our business model canvas is for a company, as described here.

HealtHCoX offers care navigation services directly to affluent consumers with high-acuity cases using clinical standards, quality, and training. Customers can opt-in for premium buy-ups that include access to hospital clinicians. The company also offers a marketplace for care navigation services, training, and certification to professionals seeking advanced accreditation and meaningful casework. Care navigation services are orchestrated and tracked through an electronic system accessible to patients, their family members, and the navigators.

To better compete, HealtHCoX has used the model canvas and competitive analysis techniques described above to develop these Levers and Pivots that they might apply.

modelH Business Model Pivots — Example Use Cases for HealthCOX

Red Ocean (Expansion via Market Share)

Reselling Protocols, Education, & Standard Content

HealtHCoX might use its existing Platform to make its clinical care navigation protocols and education content sellable. This lever is low-risk for HealtHCoX as it only requires them to package existing content for high-acuity care navigation services so other care-providing organizations can use it. This new value proposition gives customer care navigators access to quality curricula and protocols (without certification) to learn and employ in their practices. Annual updates and new care treatment protocols would drive continued purchases. Annual certification and continuous learning also drive continued purchases. The curriculum and content can be delivered over the existing Platform (ex., their learning management system, and electronic medical record).

Lead Generation

HealtHCoX might pivot to offer a care navigator “matching marketplace” to high-acuity patients who need an expert care navigator using the algorithms developed from their existing clinical protocols and training. The idea is like Angie’s List for Care Navigators.

This lever is medium-risk for HealtHCoX due to the need to move from being a care provider to a software developer. The new Platform would be used by patients and care providers (like individual navigators and agencies) to find an ideal “match” and service plan at an agreed price point. Matches and service plans can be based on patient condition, locale, and a proprietary algorithm derived from care navigator training protocols. The marketplace must be constantly updated with new findings and condition matches. The product can be built on top of an existing SaaS platform, such as Salesforce’s Health Cloud, significantly reducing the required technical debt. Should HealtHCoX want to refrain from investing in the technology build, a technology partner can build on their behalf. HealtHCoX would receive annual membership fees for the care navigators listed and potentially a percentage of the care navigator’s fees. *Note: I used to run Health Cloud at Salesforce. You could use any SaaS platform to do this — but Health Cloud would work well.

Blue Ocean (Expansion via New Market Definition)

Navigation Platform

HealtHCoX might offer a comprehensive digital care navigation application to care providers. The new Platform would be accessible to the patient, their family members, and the navigators. The Platform would give care navigators access to a complete system for care navigation and patient communication in their practices. HealtHCoX’s care treatment protocols would drive the workflows. This pivot is medium-risk for HealtHCoX as it requires developing a Software-as-a-Service platform that can be sold to care providers (like agencies and hospitals) for use in their markets. The risk is medium due to the need for Mayo/JU to enter the software development space. The product can be built on top of an existing SaaS platform, such as Salesforce.com, significantly reducing the required technical debt.

Home Healthcare

HealtHCoX might enter the home healthcare business with care navigation services that are directly available to all consumers using their clinical standards, quality, and training. The company would use the Care Navigation Platform described above and also offer premium buy-up services that include access to HealtHCoX clinicians. This pivot is high-risk for HealtHCoX as it requires starting a new company and developing a Software-as-a-Service platform in a crowded market with many Cost-Focused players.

In Summary

This blog post is our series’ next-to-last installment on creating winning healthcare Value Propositions. It underlines that even the best business models (ideas) might need adjustments due to competition and changing Buyer or User behaviors. I encourage readers to utilize the competitive analysis frameworks outlined here (like Porter’s Generic Strategies and Blue Ocean Strategy) or others they choose to help define what Levers and Pivots they might consider to strengthen their performance. Use levers (minor adjustments) to fine-tune a business model and pivots (significant changes) to re-align a business model for new opportunities.

What is Next?

Next, we will wrap up our five-part series on business model Value Propositions. But wait — there’s more. In a subsequent series, we will cover Experience, Channels, and Customer Relationships, which are also part of the WHAT section of our modelH business model canvas.

Are you interested in what I am doing and want to learn more? You can read all about modelH business model innovation for healthcare on Medium.

to your health,

- Kevin Riley