The competitive market facing hospitals in urban areas is very different from other markets. The nature of this market is that each hospital is large enough to have considerable influence on the market. Because there are only a few hospitals serving the same clientele in the market, they are interdependent and closely watch one another’s moves .As they serve and compete for the same local clientele, sustaining market share is their primary concern. It is a zero-sum game where, if one gains market share, others lose. To sustain market share, hospitals usually engage in two fundamental strategic activities around their service offerings—service duplication and service differentiation.
The first strategy involves duplicating services that are already offered by rivals in an attempt to attract customers away from them. By providing the same or similar services, hospitals have a chance to compete with rivals,service by service [2–5]. This kind of competition among local hospitals can lead to a “medical arms race,” and eventually to a price war, where hospitals end up as either winners or losers. The second strategy is service differentiation, which avoids competition based on prices [6–9]. Hospitals may provide services that others do not offer, thus making themselves different from their rivals. As these hospitals focus in a segment of services not offered by others, they may be more likely able to demonstrate the competence and high proficiency needed to control or to bring down the cost of these services . While not a contributor to a medical arms race, the differentiation strategy can encourage hospitals to offer services that may not be justified economically.
The purpose of this paper is to study what influences hospitals in their pursuit of either service duplication or service differentiation, and the impact of their strategic activities on hospital performance, including market share, profits, and costs. We focus on high-tech services because these represent a special segment of a local market that has the potential for creating differentiation as well as duplication. This study is different from previous research because it examines how a hospital decides which services to be duplicated or differentiated in a dyadic relationship embedded in a complex competitive network, and because it examines the relationship of both strategies to performance.
Framework and Hypotheses
The institutional theory of organizations argues that firms often will better position themselves in a market by duplicating services (a form of imitation) that are offered by rivals [11,12].A firm uncertain of customer needs tends to imitate the practices of successful firms, assuming its rivals are accepted in the competitive market. The advantage of offering similar services is to gain legitimacy while avoiding the risk of making the first move [13–15]. If a firm is not sure what the best course of action is, imitating others is a way to maintain its relative position or to neutralize the action of rivals . On the other hand, there is a risk that competition can be very intense, eroding prices and profits . It is common to see hospitals in the general acute service market providing similar services such as general medicine, obstetrics, cardiology, pediatric, etc.
In addition, cost-based reimbursement historically has motivated hospitals to compete without considering the costs of care, offering a full range of services and latest technologies to attract physicians and patients [18–20]. Under cost-based reimbursement, hospitals have incentives to offer services with little regard for economic efficiency even when the services are duplicated across hospitals . Previous studies have focused on the effects of duplicated services on hospital performance, and the environmental and organizational characteristics that influence service duplication [2–5]. Other studies have focused on the service offerings of hospitals clustered in the same multihospital system. They found that consolidation of services lags behind consolidation of administrative services, which suggests that medical staff are reluctant to change practice patterns and hospitals prefer to continue to preserve revenues [21–35]. These forces uphold the offering of duplicative services across cluster members.
The strategic management theory suggests that firms can also compete by providing services that rivals do not have, a form of differentiation. By being different, a firm can benefit as it faces less competition, earns higher revenues, and has a good chance to run a local monopoly [36–38]. There are many ways hospitals can differentiate their services. Some focus on high-tech services and use of the latest technologies such as robot surgery, or organ transplant. Some focus on quality of medical staff. Others pursue rare services such as burn care, proton therapy, and magnetoencephalography (MEG). Both duplication and differentiation are associated with benefits and costs that can have a profound impact on hospital performance in market share, cost of services, and profits.
Service differentiation has received some attention as a means of classifying hospital system types [39,40], and differentiation of services has been associated with several factors, most notably higher market competition [9,19,41]. However, its relationship with performance remains relatively unexplored.
One of the key arguments we propose in this study is that geographical proximity induces rivalry, which, in turn, leads to either duplication or differentiation of services. Economic theory suggests that firms located far distant from each other will face less competition. When they are closer to each other geographically, competition becomes fierce . In a hospital market, when hospitals locate far apart, competition for similar high-tech services is less intense because distance serve as an effective barrier, sorting out real from potential rivals . When there are no nearby rivals (e.g., within 15 miles), hospitals face less direct competitive threat, as nearby customers have convenient access to their services. If firms locate near each other, however, they may avoid providing similar services from rivals because similarity forces them into a price war that squeezes profit. They turn to differentiation of services to reduce competition. The above discussion suggests the following hypotheses.
Hypotheses 1–2 Hospitals duplicate more services of rivals if their location is geographically farther apart. Hospitals differentiate more services from rivals if their location is geographically proximate.
Another key factor influencing the choice of duplication or differentiation is asymmetry among firms. Not all firms possess the same level of resources. Some firms have unique and valuable resources, which allow them to sustain competitive advantage and enhance opportunism to expand market share, deliver services that are most profitable, and leave services that are imitable to weaker firms. Power asymmetry exists when a firm uses its power, through its valuable resources, to dominate or influence the actions of other firms in a dyadic relationship for its own advantages . The asymmetrical relationship puts a weaker firm at greater degree of vulnerability to opportunism. The powerful firm may use its advantage to maximize its capabilities that distinguish it from its rivals . It also uses its advantage to gain more leverage at the expense of the weaker firm, and coerces the weaker firm to perform tasks on its behalf .
In a local hospital market, a powerful hospital with special capabilities usually provides customers with high-tech services that are not only inimitable but also more profitable than other imitable services. Inimitable high-tech status is not easy to deliver as it is a combination of possession of knowledge, use of the knowledge, and proficiency of its use . A hospital with these capabilities would leverage its power advantage to oppose or circumvent competition, whatever it decides to do . Since the dominant hospital substantially holds more capabilities than the others, it establishes the power asymmetry which eventually is accepted by other hospitals in the market . A dominant hospital tends to exercise its potential capabilities to differentiate high-tech services, while a weaker hospital duplicates services that are imitable. We therefore hypothesize the following.
Hypotheses 3–4 Hospitals with more power asymmetry differentiate more services from rivals. Hospitals with less power asymmetry duplicate more services of rivals.
Strategic management theory suggests that market competition is a key component that induces firm to protect market share from rivals. Because firms in the same industry located in a local market are mutually dependent, the strategy of one firm will affect that of rivals. As competition is mounting, a firm must position itself vis-à-vis its rivals, and it looks for ways to differentiate its services from the rest. With differentiation, firms circumvent duplication of services. By offering different services, a firm reduces competition and avoids competition based on price. In a hospital market, market competition is likely to influence hospitals to protect their market share with service differentiation [9,47].
Hypotheses 5–6 Hospitals in more competitive markets duplicate fewer services of rivals and differentiate more services from rivals.
In addition to geographical proximity, power asymmetry, and market competition, other market forces also influence firms’ strategic behavior. In the health care industry, other market pressures notably come from population density, community munificence, specialist physicians, and managed care. In a community with high population density, there are naturally more patients with medical problems that require more high-tech services. Located in such a high- density community, hospitals are likely to provide as many services as possible. They tend to duplicate as well as differentiate services from rivals.
Hypotheses 7–8 Hospitals in communities with higher population density duplicate and differentiate more services from rivals.
Community munificence plays a role in firm strategies as it is the resources that support firm growth. Firms located in a community with high munificence have more advantages to survive . These firms are able to pursue exploration strategies for new services to make them unique. Wealthy patients in a highly munificent community have ample financial resources to pay for expensive high-tech services, and hospitals are more likely to meet their needs.
Hypotheses 9–10 Hospitals in wealthier communities duplicate and differentiate more services from rivals.
To compete with rivals, firms will try to attract the most talent to work for them. Likewise, hospitals tend to offer high-tech services as an inducement to attract the most talented physicians, particularly specialist physicians [3,49].
Hypotheses 11–12 Hospitals in communities with higher density of specialist physicians duplicate and differentiate more services from rivals.
To attract buyers, firms are more likely to present themselves as purveyors of high-quality services. In the health care industry, insurance companies demand high-tech services on behalf of their members. Hospitals in a community with greater managed care penetration are more likely to provide high-tech services to attract customer businessas a way of maintaining or increasing market share [3,50].
Hypotheses 13–14 Hospitals in communities with more managed care presence duplicate and differentiate more services from rivals.
As other characteristics from the organization might influence firms’ strategic behaviors, we include them in our study as control variables. They are multihospital membership, non-profit ownership, bed size, and case mix index. These variables could influence the levels of service duplication and service differentiation.
Economic theory suggests that firms with valuable assets that are rare, inimitable and difficult to copy will be able to pursue strategic differentiation. These firms will face less competition and thus will have a good market share with a better profit. In a local market, firms closely watch rivals’ move, and such a strategic position will soon be copied by others. They are attracted to this profitable opportunity and are eager to join in the good fortunes of the successful firms . But imitation is associated with costs as well as with benefits. The benefits firms can enjoy are the legitimacy and access to the market. The cost is the erosion of profitability. As some firms imitate the successful firms, imitation of products can lead to competition with lower prices . As more firms offer the same or similar services, they sooner or later engage in direct competition through which a price war emerges. Lower prices will unavoidably squeeze profits to the level that no firms will be able to make extra profits. However, firms can avoid this unexpected situation if they find ways to collude. Empirical research indicates that firms offering similar services often recognize their interdependence and collude [51–53].
In a local hospital market, offering different services has both benefits and costs. With a wide range of high-tech services that are inimitable like robot surgery and organ transplantation, hospitals are able to increase market share by attracting more customers for more revenues. With the increase in usage of these services, cost per unit will fall [10,54]. However, they might not be able to maximize economies of scales if their high-tech services are too expensive for consumers to afford. On the other hand, duplicating services might not gain adequate volumes of services for lowering cost per unit. It also might inevitably force hospitals to engage in a price war that leads to lower profits.
Hypotheses 15–16 Hospitals differentiating more services will have higher market share, higher profits and lower costs. Hospitals duplicating more services will have lower market share, lower profits, and higher costs.