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Value Innovation in the Radiology Practice¹

¹ From the Division of Diagnostic Imaging, Department of Diagnostic Radiology, University of Texas M.D. Anderson Cancer Center, 1515 Holcombe Blvd, Box 57, Houston, TX 77030 (D.F.S.); Braxton Enterprises, Houston, Tex (B.G.S.); and the Division of Radiology Informatics, Department of Radiology, University of Pittsburgh School of Medicine, UPMC Health System, Pittsburgh, Pa (P.J.C.). From the Plenary Session, Friday Imaging Symposium: Challenges to Radiology in the New Millennium, at the 2000 RSNA scientific assembly. Received March 12, 2001; revision requested April 2 and received April 24; accepted May 3. Address correspondence to D.F.S. (e-mail: dschomer@mdanderson.org).

Index Terms: Diagnostic radiology • Economics, medical • Radiology and radiologists • Radiology and radiologists, socioeconomic issues

	Introduction

Top Introduction What Is Value Innovation? Sources of Customer Value Conclusions References

 
In this new millennium, the practice of radiology as an economic endeavor will face a myriad of competitive challenges from both internal and external forces. A once-secure referral base is now threatened by alternative sources of competing service. As radiology groups expand, seeking economies of scale or of scope, competition to best satisfy the needs of that referral base will grow. As long as performance of imaging studies and interpretation of their results generate margin for the involved organization, non–imaging trained physicians will continue to erode the market share of trained and certified radiologists.

To cultivate success in this changing climate, radiologists must adopt an entrepreneurial attitude, which will adapt to the coming challenges in innovative ways. Innovation that focuses on maximization of satisfaction and value for the customer base is the best source of sustainable competitive advantage. This process, known as value innovation, has proved to be an effective management tool in a wide host of industries.

The basic business principles that govern value innovation are applicable to the practice of radiology. This article presents ways in which radiologists can think about their practice in terms of generating more value for their customers as a source of competitive advantage within the marketplace. Future economic success for radiology practices will depend on the radiologists’ willingness to build customer value through innovation.

	What Is Value Innovation?

Top Introduction What Is Value Innovation? Sources of Customer Value Conclusions References

 
Kim and Mauborgne (1) first described value innovation as a strategic business process. These authors studied over 30 companies in many different industries and determined that those businesses that focused their innovation around creating or improving customer value consistently outperformed competitors in their industries. After studying new business launches from 100 different companies, they found that the vast majority (86%) represented incremental product or service improvements whereas only 14% represented true value innovation. Revenue and earnings analysis from these 100 business launches demonstrated that the value innovators generated 38% of the cumulative revenues and 61% of the total profit. From these data, it seems that value innovation offers the potential for significant competitive advantage.

To understand how value innovation works, consider Bert Claeys, a Belgian company that owns and operates movie theaters. In the 1980s, the Belgian cinema market was rapidly shrinking due to competitive pressures from alternate sources of entertainment such as cable television and video. Increasing real-estate costs and a generalized lack of affordable parking in the city centers, where most of the cinemas were located, compounded this general market decline. Bert Claeys responded to these challenges by creating the world’s first megaplex, Kinepolis. While the competition was building 100-seat multiplex theaters with small screens, Kinepolis offered customers large (700-seat) viewing rooms with comfortable seating, excess legroom, and large screens featuring 70-mm projection equipment and the latest high-quality audio. Further, by placing these complexes outside the city center, Bert Claeys’ real-estate costs were reduced and the organization could offer patrons free parking in large, well-lit parking lots. Kinepolis radically altered the customers’ cinema experience while simultaneously reducing its cost of doing business.

The practice of radiology is in transition from a technology-driven market, where customers must rely heavily on the expertise of professionals to help them properly use the unique attributes of the product or service, to a customer-driven market (2). To survive and prosper during this transition, radiology groups can learn from the entrepreneurial innovations that have made companies like McDonald’s successful. McDonald’s first "studied what value meant to the customer, defined it as quality and predictability of product, speed of service, absolute cleanliness, and friendliness, then set the standards for all of these" (3). They essentially designed an end product that defined customer value and then created an efficient process to deliver this value, inexpensively to the customer and economically for the organization.

The competitive goal for any service industry is to ethically cover expenses for infrastructure development and resource expenditure and then to generate margin (earnings) for shareholders. This goal is best accomplished through the creation of greater customer value and by differentiating the business entity from its competitors. Although practice differentiation is important, value creation is crucial, since this new value is what a customer is willing to pay for. Successful execution of this strategy allows shareholders to extract an excess portion of this created value as earnings. Therefore, the organization gains advantage over competitors when it can create and deliver sufficient value to induce some customer to purchase its product or service, leaving residual margin for the organization.

A value proposition may be defined that builds sustainable competitive advantage for the organization. The process of value innovation seeks only those drivers that ultimately build unique value for the customer. The product or service is differentiated from those of competitors on the bases of quality, excellence, uniqueness, and customer convenience. Where possible, the organization leverages technology and harvests its own human capital to more effectively deliver on this goal. Value innovation also seeks the simultaneous reduction of costs to both the customer and the organization. Therefore, the value innovator will focus on all things that build increased value for its customers. Rather than blind acceptance of the status quo, the value innovator assumes a fresh-start mentality and attempts to shape the industry’s environment.

Porter (4) devised a tool to help organizations identify key value drivers. Every organization must successfully execute nine tactical activities that create value and satisfaction for its customers. There are five primary activities and four support activities that may be exploited to build customer value (Table). This tool, sometimes referred to as Porter’s value chain, can be generalized to the practice of radiology (Fig 1). The role of the four support activities in a radiology practice is straightforward, and the value innovator should generally focus on reducing costs in these areas, both for the customer and the organization. The five primary activities are quite specific for a radiology practice, and leveraging technology can often significantly enhance each of these.

View larger version (26K): [in this window] [in a new window] [Download PPT slide]   Figure 1.   Five primary activities and four support activities that can be exploited to build customer value. The roles of support activities (top part of diagram) in a radiology practice are straightforward, and they are generally oriented toward reducing costs to both the customer and the organization. The primary activities (bottom part of diagram) are quite specific for radiology and can be significantly enhanced by technology levers. Each box in the diagram has an associated cost, and the residual margin (black area) is retained as shareholder earnings.

Value innovation requires critical evaluation of all activities within the value chain to find improvements that potentially create additional value for customers. The value innovator considers all business processes of the organization and determines which activities should be reduced or eliminated and which activities should be improved. Further, the value innovator will introduce activities into the practice that create new value for customers. A customer value curve is defined, which details those activities that provide value to customers. The value innovator will evaluate the traditional value curve and change or modify business activities in ways that deform this curve to produce greater value for the customer.

To better understand the concept of defining and then devising a strategy to deform the value curve of an industry, consider the French chain of budget hotels, Formule 1, launched in 1985 by Accor (1). Accor’s managers evaluated the product and services of competing budget hotels in France and asked four specific questions: (a) Which factors are taken for granted by the industry and should be eliminated? (b) Which factors add little customer value and should be reduced? (c) Which factors create significant value and should be increased? (d) Which factors should be offered that are not currently available in the budget market? They concluded that customers really valued bed quality, hygiene, and quietness but did not find other factors such as on-site restaurants and architectural aesthetics particularly valuable. Although both one-star and two-star hotels offered all of these features, Accor’s managers chose to withhold those amenities that were less valuable to customers but to offer much better quality than even two-star competitors in the areas most valuable to customers (bed quality, hygiene, and quietness) at a price comparable with those of one-star hotels. Value curves that highlight relative levels of customer value can be developed to graphically display these managers’ strategic logic (Fig 2). This strategyultimately proved to be successful, and Accor’s market share in France is now larger than the sum of those of its five largest competitors.

View larger version (21K): [in this window] [in a new window] [Download PPT slide]   Figure 2.   Hypothetical value curve, adapted from Kim and Mauborgne (1), to graphically demonstrate the Accor managers’ strategic logic when they launched the Formule 1 chain of budget hotels in France. Rather than benchmarking to either one-star or two-star competitors, they radically deformed the industry value curve to emphasize attributes that maximized value for their target market.

View larger version (24K): [in this window] [in a new window] [Download PPT slide]   Figure 3.   Possible value curves for a traditional hospital service, an outpatient imaging center, and a hypothetical value innovator. Outpatient imaging centers gained market share over traditional hospital-based competitors by providing rapid turnaround to referring physicians and by increasing patient convenience and comfort. This simple deformation of the traditional industry value curve spawned a whole new way of providing radiology service. The value innovator of the future will deform this value curve further, thereby creating competitive advantage and practice differentiation.

A new breed of entrepreneur will evolve, the value innovator, who will further expand on the lessons learned in the outpatient imaging center market. The value innovator will leverage technology to enhance or even create value for the customers (the referring physician and the patient). Each point where a potential customer interacts with the practice will be evaluated and modified to make that interaction more pleasant and profitable for that customer. Services offered will be tailored to the needs of the referring physicians. Patient comfort and convenience will be maximized. In the past, it was not economically feasible to subspecialize within a geographically diverse practice, since each imaging center or small hospital could not generate sufficient volume to justify dedication of an individual to practice only his or her subspecialty. However, with modern telemetry, it is now possible to use each practice outpost as a funnel that appropriately directs images to those partners best qualified to interpret the results of a specific subspecialty examination. Modern telecommunication technology will maximize image interpretation quality by transferring images to the radiologist best trained to deal with that specific modality or disease process, thereby improving patient outcomes and enhancing referring physician satisfaction.

The value innovator will also lever technology to enhance communication with the referring physicians. Radiology’s legacy product is a report and a film jacket. The report traditionally includes a description of the imaging findings present within the study and an interpretation of the significance of those findings that are relevant to the patient’s clinical management. A quality radiology report clearly aids clinical management and constitutes an important medical-legal document that becomes a permanent part of the patient’s medical record. However, referring physicians are often justifiably critical of radiology reports that arrive at the point of care too late to affect clinical management because they were read in batch mode the following day. Further, reports that arrive without accompanying images have less information richness and may convey less meaning than a report that is directly coupled to appropriate key images. Therefore, the value innovator will use technology to enhance dissemination of expert radiology knowledge to the referring physicians. Communication will become more collaborative and consultative. This change will allow the radiologist to become more integrated into clinical management decisions, thereby creating value for the referring physician and the patient. In addition, since the radiologist is best qualified to recommend an efficient imaging work-up for a given clinical question, increased collaboration prior to the scheduling of an examination will improve patient outcomes at lower cost to the patient.

	Sources of Customer Value

Top Introduction What Is Value Innovation? Sources of Customer Value Conclusions References

 
Value can be approximated as a mathematical function that is proportional to patient outcome and satisfaction but inversely proportional to price. Measurable sources of customer value include product or service availability, convenience, and functionality (how efficiently does it affect clinical outcome). An intangible but important source of customer value concerns a feeling of relationship with and trust of the organization. The latter attribute may be difficult to measure but stems from competence, which can be demonstrated, and legitimacy, which can be documented. Each customer interaction point should be carefully evaluated to determine where processes can be improved or where technology can be leveraged to enhance value.

Therefore, value innovation requires deep understanding of the customers and their needs. Yet, some radiology practitioners may be hard-pressed to clearly articulate even who their customers are. Two critical decisions result in a radiology purchase transaction: whether to buy and where to buy. The first determines that a radiology imaging procedure is indicated, the decision to buy a radiology service. The referring physician usually makes this decision. However, occasionally the decision to buy is made by the patient or the patient’s family (eg, mammography patients often self-refer). The second critical decision influencing a radiology transaction is where to buy. The referring physician may make this decision, basing it on perceptions of quality, loyalty, and trust. Remember, any patient’s positive or negative experience with the radiology practice may influence this decision step at future transactions. As an alternative, the referring physician’s staff may make this decision, basing it on ease of scheduling or other logistical considerations. Finally, some third-party payer may influence the where to buy decision because of preexisting contracts (in this case, cost rather than quality becomes the key value driver).

Referring physicians interact with a radiology practice in a manner that creates three primary value drivers (availability of the radiologist for consultation, scheduling efficiency, image-report quality) and one secondary value driver (patient feedback). The physician may consult with the radiologist before the procedure is ordered to help determine the best imaging work-up or after it is completed to discuss the results of the study. Accessibility of the radiologist for consultation represents a strong positive value driver. If the consultative interaction can be supported by images, value is further enhanced, thereby influencing the where to buy decision. Therefore, a radiology practice with accessible consultants who are supported by electronic dissemination of image data gains significant competitive advantage.

Scheduling systems that minimize delays also strongly affect the where to buy decision. Limited capacity or operational inefficiency creates dissatisfaction in the referring physicians, whereas a "send the patient right over, we’ll work them in—thank you for shopping radiology" business model generates significant customer loyalty. The final direct interaction that referring physicians have with the radiology practice is through the images and the radiology report. Poor-quality images or an improperly performed procedure reflects badly on the radiology practice. A report that adds little to clinical management due to hedging or, even worse, errors is a strong negative value driver. Even accurate and succinct reports that arrive too late to affect clinical management provide little value to the customer. A secondary or indirect physician value driver is patient feedback. If a patient has a good experience in the radiology department, this may get back to the referring physician. If a patient has a bad experience, this will get back to the referring physician, thereby influencing future where to buy decisions.

Key value drivers for patients and their families include those factors that decrease hassle or delay, ensure privacy, enhance communication about the procedure, and finally demonstrate courtesy and concern. Clearly, confidence in the quality of the service product is important, but the patient’s perception of professionalism and quality will be strongly influenced by the above drivers, especially communication (an informed patient is a less anxious patient). Organization inefficiencies that make the patient wait are strong negative value drivers. These negative feelings are enhanced if the staff seems indifferent or uncaring. Remember, the Wal-Mart empire was successful largely due to a reputation for friendly, smiling staff.

Where possible, technology should be used to create or enhance customer value. Although technology implementations may be costly, modern accounting theory provides tools to help justify these expenditures. Activity-based costing (ABC) evaluates all activities associated with a given process. It recognizes that these activities are the major consumers of resources and allows managers to understand which activities drive costs and to what benefit. Therefore, ABC provides a method that helps align cost drivers to the creation of maximum customer value. For example, in a recent study of a distributed picture archiving and communication system (PACS) implementation over a hospital network (6), ABC methods demonstrated clear cost benefit to the organization over a conventional film management process. More important, turnaround of radiology information to the referring physician was improved and patient delays were reduced. Therefore, the organization was able to reduce costs while creating additional customer value.

	Conclusions

Top Introduction What Is Value Innovation? Sources of Customer Value Conclusions References

 
As radiology moves from a technology-driven market to a customer-driven market, internal and external forces will drive radiology practices toward sources of competitive advantage. The best source of sustainable competitive advantage is the creation of greater customer value. Successful organizations in this changing market will assume an entrepreneurial attitude that innovates to create or enhance customer value. Systems and processes will be modified and technology will be leveraged in an attempt to better satisfy customer needs. By creating more customer value, residual margin will be retained as shareholder earnings, ensuring success for the value innovator radiology service.

	References

Top Introduction What Is Value Innovation? Sources of Customer Value Conclusions References

 

1. Kim WC, Mauborgne R. Value innovation: the strategic logic of high growth. Harvard Business Review 1997; 75(1):102-112.
2. Enzmann DR. Surviving in health care St Louis, Mo: Mosby–Year Book, 1997; 6-8.
3. Drucker PF. Innovation and entrepreneurship: practice and principles New York, NY: Harper & Row, 1985; 17.
4. Porter ME. Competitive advantage: creating and sustaining superior performance New York, NY: Free Press, 1985.
5. Jacobs R. The struggle to create an organization for the 21st century. Fortune 1995; 131(6):90-99.[Medline]
6. Schomer BG. Cost effectiveness in telemedicine: conventional versus digital delivery of radiologic images.. Thesis Austin: University of Texas, 1999.

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