Cleveland Clinic Case Study
Introduction

The Cleveland Clinic is a large health care provider based in Cleveland, but with some expansion under its belt already. The Clinic has in recent years been an innovator in a number of areas, and an early adopter in others such as the use of information technology. These approaches have set the Clinic up for success. Since 1999, operating revenue has increased consistently, each year, including the recession years of 2008 and 2009, going from around $2.3 billion in 1999 to nearly $7 billion in 2014. While the operating margin has fluctuated during that period, it has been above zero since 2002 and is on a two-year upward trend. Thus, there is significant success attached to recent endeavors. For the leadership of the Cleveland Clinic, there are a number of strategic and tactic options on the table, including those with respect to international expansion, operating structure and use of information technology. The choice of different options will reflect the broader strategic thrust of the organization, so the first step in determining the optimal strategy is to understand the high level strategy that the Cleveland Clinic should pursue.

Differentiation

The differentiated strategy is one of the basic strategies that Michael Porter has identified, along with cost leadership and hybrid strategies. At the heart of the differentiated strategy is an approach that places a premium on service and product excellence, and doing things differently than competitors. In health care, where there is a vast body of literature and practice that informs the best approaches to each type of ailment, disease or injury, there is nevertheless an opportunity to differentiate. At the low end of the market, services are likely to be more standardized.

One element of the differentiated strategy is to improve the patient care experience. The Cleveland Clinic has been a leader in this over the past several years. When Cogrove became the CEO, improving the patient experience was a key initiative, and a new executive role was created specifically to focus on the patient experience. Care was organized around departments and then specific conditions within those departments, in order to create specialized teams that were able to excel at treating those specific conditions with which they were tasked. The upside of this higher level of specialization is that the teams are able to deliver superior service within that, but the downside is that over time the people working in those specialties may end up being less flexible, and lack the required skillsets to move between departments, That in turn can create quality of care issues down the road when people need to be moved around, and it can increase turnover intention for employees who are stuck behind other people in the department without any hope of career progression – something that is especially true in care fields like nursing, moreso than for physicians who are often more specialized by their nature.

A second element of the differentiated strategy is the focus on IT innovation. Information technology is becoming increasingly important in health care, not just for the things in the case like electronic health records and use of diagnostic tools, but for other things as well, like outpatient care, marketing and information gathering. More advanced use cases for IT technology include reducing cybercrime risk (i.e. breaches) and innovative AI uses beyond diagnostics. There is little doubt that technology can be a vector for improving the quality of care and the level of differentiation. A large, wealthy organization like the Cleveland Clinic is in a much better position than smaller providers to invest in new innovations, which typically cost more during their early rollout stages than they do later when the technology becomes more commoditized. Furthermore, using innovation requires taking risks, and that entails fostering an innovation and risk-taking mindset. The Cleveland Clinic appears to have had significant success in this regard. The organizational culture appears conducive to innovation – to the point where two executives were in favor of a reorganization that threatened to eliminate their jobs. This culture, combined with the large size and substantial reputation of the Cleveland Clinic, bodes well for leveraging IT has a pathway to being a differentiated provider of health care services going forward.

Another aspect of being a differentiated provider is continuous education. This is best understood by contrasting the way a differentiated provider would operate versus a low cost provider. A low cost provider seeks to maximize throughput in order to generate the highest revenue per cost unit. The differentiated provider instead takes time to provide education – which has no direct ROI – to its physicians and nurses. The ultimate objective of doing this is that the Clinic will have staff with superior training, and an innovation mindset. Constant education creates the innovation mindset, but also the care mindset, because it reflects a commitment to offering the best care possible, even if that means rejecting the way things have always been done in the past. Thus, education of professional staff is critical to ensuring that the Clinic not only has the talent to be truly differentiated by virtue of providing superior care, but that the culture that the organization needs to differentiate...…done concurrently. In this case, a focus on recruiting can be done concurrently with the other options, as can continued focus on IT as a means of supporting a differentiated strategy. In fact, those two alternatives are synergistic. Both should be adopted, regardless of what decision is made with respect to the expansion plans of the Cleveland Clinic.

There are significant benefits to the HR strategy, and to the innovation strategy. Both support a high level differentiated strategy, and ultimately both fit in with the approaches that the Cleveland Clinic has taken in recent years. There are no obviously obstacles within the organizational culture that would negate the logic of pursuing either of these recommendations. All told, both the third and the fourth recommendations should be adopted by the Cleveland Clinic, and neither would entail a significant drain on organizational resources.

The expansion plans, however, would entail a significant drain on resources and therefore do constitute two mutually exclusive options. Therefore, the Cleveland Clinic needs to choose between these options. The US healthcare market has some growth potential because of the baby boomers aging, and that trend should continue for many years. However, this is also a known trend and should already be built into the asking price for US healthcare assets. The international option, on the other hand, probably has a lower level of price efficiency. Combine this with the expertise that the Cleveland Clinic has in international markets – and different types of international markets – and the Cleveland Clinic should probably pursue international markets.

The international market mode of expansion is recommended because there are fewer operators with the requisite experience, so prices are probably more economically efficient – lower premiums. Furthermore, the Cleveland Clinic has the experience to apply its innovation attributes to foreign market operations, and thereby significantly improve the competitive posture of those operations. Beyond that, international markets are likely growing at a faster pace than the US market, which is more mature, and is also more likely to come under stricter regulation to contain costs. Plus there are spinoff benefits associated with entering international markets that are not apparent with expansion to US markets.

Therefore, there are three main recommendations. The first is to focus expansion on international markets, for the reasons listed above. Concurrent to that the Cleveland Clinic should continue to pursue tactical approaches that support its differentiated positioning, namely continuing its focus on IT and innovation, and then supplementing this with a human resources focus on recruiting and retaining the best talents in the field, in order to accelerate the pace of innovation and care…