Generic Strategies for Consolidation and an Explanation of Market Structure

Marketing

Consolidation Strategies and Market Structure

Consolidation

Business may need to adopt a strategy of consolidation. The financial pressures in healthcare organizations have been noted as increasing the occurrence of consolidation (Goldstein, 2012). There are different consolidations strategies available, the choice of strategy should depend in the firms own situation and the general macro-environmental conditions as well as opportunities that exist. Berkowitz (2010) outlines four potential strategies; divestment, pruning, retrenchment, and harvesting. Each may be considered individually.

Divestment occurs where a business unit or product line is sold. A firm may decide that a particular business unit or product is not profitable, or does not add sufficient value. If the division or product range is profitable, it may be perceived as having a high opportunity cost; investment in one business/product may be tying up capital that may be used elsewhere (Morris, Devlin, Parkin, & Spencer, 2012). If a division is not profitable or aligned with the core operation of the firm selling it off may be seen as best for the firm (Berkowitz, 2010). In many instances divestment may be undertaken if there has been a former unsuccessful diversification strategy (Berkowitz, 2010). A recent example of divestment was seen in Chicago, when Presence Health sold a 269 bed hospital, Our Lady of the Resurrection hospital, to Community First Healthcare of Illinois (Cherone, 2014).

The second consolidation strategy is pruning (Berkowitz, 2010). Pruning is undertaken when a company continues to serve a particular market, but reduces its' services or products, and may be referred to as cutting back (Berkowitz, 2010). With an estimated 25% of hospitals in the red, many are seeking to cut costs by reducing services that are costly to provide (Nisen, 2012; Berkowitz, 2010).

The third consolidation strategy is retrenchment, this occurs where a firm makes the decision to withdraw from selected markets, focusing n its core areas of operations (Berkowitz, 2010). For example, a hospital may choose to close a satellite clinic if it was ineffective or the market did not justify the investment. Firms may withdraw form markets if they are unable to compete efficiently, for example if there is a high level of more successful competition, or if a market is not as lucrative as expected (Berkowitz, 2010).