Frame the Problems/Issues into a Decision Question: frame the major issues and/or problems around a key goal or objective, differentiating the long from the short-run.
What is the best course of action for this case in order to achieve lower blood prices while spurring economic competition in the Carolina's?
In the long run, all health care organizations want to lower the overall cost of blood operations. Economically, the cost of these operations as the Red Cross is the sole provider of blood to many health care organizations in the Carolina's. As such this organization has pricing power over many of the health care organization in the region primarily due to its leading position in the market. Blood has no substitute. Therefore, blood operations are essential to hospitals and therefore can not be cut or mitigated from budgets. Routine client operations pertain mainly to blood withdrawal, donations, infusion and much more. As such, hospitals have less negotiation power as blood is needed in their operations, and there is only one provider in the region. To help lower prices, competition should be encouraged in the region to better allow for a more efficient market. This competition will ultimately lower prices as two providers are in the region supplying all the health care organizations as oppose to one. In addition, if an independent operation can lower its over costs to operations, these cost can be transferred to consumers.
In the short run, the key objective is to create an atmosphere conducive to competition with the region. The could include pooling resources to form an independent blood center, or providing incentives for private equity investors to create a center. For example, as the case indicates, a community blood center was formed pooling the assets of 10 hospitals in the region. In addition, the organization will need free cash flow to continue operations and service. The organization will also need to attract and retain highly talented personnel to run the organization while also increasing donations (Severo, 1999).
Analyze the problem/situation by identifying the pertinent facts vs. assumptions. Ask yourself three questions: where did the facts come from, how do I know they are correct? Are they a final, reliable reality or an interpretation or an assumption? Be sure to identify your assumptions explicitly. What models or concepts are most useful to understand the problem?
In order standing the problem of creating a blood center and subsequently maintaining it, one should first look at the cost structure of competition organizations. In addition, the market viability of the operations must be analyzed as well. Is there a sufficient market to support multiple blood operations or centers within the region? The business operations of a blood center are predicated on the ability and willingness of management to attract donors. Historically, 5% of a regions resident donates blood. Exhibit 3.1 shows that the charlotte area alone has approximately 60% of its population eligible to donate blood. Of those, only 5% will actually donate which equates to roughly 75,000 people. Both North Carolina and South Carolina have approximately 9.8 million and 4.7 million residents which equates to roughly 700,000 donors in both regions. These statistics are assumptions as there is no guarantee that 5% of the population will donate. In fact, it is highly possible that this figure could decline, putting further pressure on the blood center.
Another concept useful in understanding the problem is the capital structure of the blood centers themselves. Looking at exhibit 3.8 shows that many competing blood centers have a high fixed asset base. Aspects such as rent comprise $207,000 of the budget. Equipment repairs and rental comprise another $48,000 and $15,000 respectively. Supplies add an additional $331,000 to the budget. Each of these is primarily fixed in nature. As such, revenue from operations must, at the very least, cover these expenses if the operation is to survive. Otherwise, the firm will operate at a loss, eventually becoming insolvent. Donations, which are often low cost, are critical to operations. Without donation, the firm will become insolvent. As such the ability of the firm to remain in business hinges on its ability to identify, attract, and retain viable donors.
Finally, another fact to consider is the extent of competition that could potentially arise in the region. The Red Cross has a strong brand and financial backing. This allows it to have pricing power with its operations. The ability to compete with the Red Cross hinges primarily on the…