User Report

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Running head: TENET HEALTHCARE: STRATEGIC ANALYSIS

Ashley Burns

University of Houston Victoria

MGMT6359 Dr. Wang

1 TENET HEALTHCARE: STRATEGIC ANALYSIS

Tenet Healthcare: Strategic Analysis

Name Hidden

University of Houston – Victoria

MGMT6359 – Spring 2018

(Warning: This work is copyright protected)

2 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table of Contents 1.0 Executive Summary ..................................................................................................................... 6

2.0 Company History............................................................................................................................... 7

2.1 Background .......................................................................................................................7

2.2 Purpose of this Study.........................................................................................................8

3.0 External Analysis............................................................................................................................... 9

3.1 General Environmental Analysis .......................................................................................9

3.1.1 Demographic Segment ............................................................................................................ 9

Figure 1: Projected U.S. Population............................................................................................ 10

Figure 2: Projected Number of Children and Adults 65+ ............................................................ 11

3.1.2 Economic Segment ............................................................................................................... 12

Figure 3: Economic Projections for 2017-2027........................................................................... 12

Figure 4: Unemployment Rate Projections through 2027 ............................................................ 13

Figure 5: Inflation and Interest Rate Projections Through 2027 .................................................. 14

3.1.3 Political/Legal Segment ........................................................................................................ 14

3.1.4 Sociocultural Segment........................................................................................................... 17

Figure 6: Percent of Each Generation Identifying with Liberals and Conservatives ..................... 18

3.1.5 Technological Segment ......................................................................................................... 20

3.1.6 Global Segment..................................................................................................................... 22

Figure 7: 2018 GDP Projections................................................................................................. 24

3.1.7 Summary of General Environment Analysis .......................................................................... 24

3.1.8 Driving Forces ...................................................................................................................... 27

3.2 Industry Analysis.............................................................................................................29

3.2.1 Description of the Industry .................................................................................................... 29

3.2.2 Industry Dominant Economic Features .................................................................................. 31

Figure 8: Healthcare Spending 2015-2020.................................................................................. 32

Figure 9: Healthcare Expenditures as a Percentage of GDP in 2016............................................ 33

Figure 10: Employment Data in the General Medical and Surgical Hospitals Industry ................ 34

Figure 11: Quarterly Rates of Change in Industry ....................................................................... 34

Figure 12: Average Employee Compensation Breakdown for 3 rd

Quarter 2017........................... 35

3.2.3 Market Size........................................................................................................................... 35

Figure 13: Global Revenue in USD in 2016 including Percentage of Total Industry Revenue ..... 35

Figure 14: Percent of 2016 Market Share by Geographical Location........................................... 37

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3.2.4 Market Growth Rate.............................................................................................................. 37

Figure 15: Global Industry Growth Rates 2012-2016.................................................................. 38

Figure 16: Global Industry Growth Rates including Projections 2016-2021 ................................ 39

3.2.5 Industry Trends ..................................................................................................................... 39

3.2.6 Five Forces Analysis ............................................................................................................. 41

3.2.6.1 Threat of New Entrants................................................................................................... 42

Table 1: Threat of New Entrants................................................................................................. 43

3.2.6.2 Power of Suppliers ......................................................................................................... 45

Table 2: Power of Suppliers ....................................................................................................... 45

3.2.6.3 Power of Buyers ............................................................................................................. 47

Table 3: Power of Buyers ........................................................................................................... 47

3.2.6.4 Power of Substitutes ....................................................................................................... 49

Table 4: Power of Substitutes ..................................................................................................... 50

3.2.6.5 Intensity of Rivalry......................................................................................................... 51

Table 5: Intensity of Rivalry....................................................................................................... 52

3.2.6.5.1 Industry Competitors ............................................................................................... 56

Figure 17: Revenues Growth vs. Earnings Growth 2017, Q3 ...................................................... 57

Figure 18: Gross Margin vs. Working Capital Days 2017, Q3 .................................................... 58

Figure 19: Gross Margins vs. EBITDA Margins 2017, Q3.......................................................... 59

3.2.6.5.2 Rivals Anticipated Strategic Moves.......................................................................... 59

3.2.6.6 Summary of Five Forces Analysis .................................................................................. 61

Table 6: Five Forces Strength Summary and Overall Industry Attractiveness per Segment ......... 62

3.2.7 Industry Key Success Factors ................................................................................................ 64

Table 7: KSFs for General Medical and Surgical Hospitals Industry........................................... 66

4.0 Internal Analysis.............................................................................................................................. 67

4.1 Organizational Analysis...................................................................................................67

4.1.1 Corporate Mission................................................................................................................. 67

4.1.2 Products and Services............................................................................................................ 67

4.1.3 Leadership ............................................................................................................................ 68

4.1.4 Organizational Culture .......................................................................................................... 69

4.1.5 Structure ............................................................................................................................... 71

Figure 20: Tenet Board of Directors Organizational Chart 2018 ................................................. 72

4.1.6 Strategy................................................................................................................................. 73

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4.1.6.1 Current Strategy ............................................................................................................. 73

4.1.6.2 Components of Strategy ................................................................................................. 74

4.1.6.3 Competitive Strength...................................................................................................... 75

Table 8: Competitive Strength Analysis ..................................................................................... 76

4.1.7 Summary of Organizational Analysis .................................................................................... 77

4.2 Analysis of Firm Resources .............................................................................................78

4.2.1 Tangible Resources ............................................................................................................... 78

Table 9: Tenet’s Tangible Resources .......................................................................................... 79

4.2.2 Intangible Resources ............................................................................................................. 81

Table 10: Tenet’s Intangible Resources ...................................................................................... 82

4.2.3 Summary of Firm’s Resources............................................................................................... 84

4.3 Capabilities .....................................................................................................................84

4.3.1 Value Chain Analysis............................................................................................................ 85

Figure 21: Generic Value Chain ................................................................................................. 85

Table 11: Primary Activities Value Chain Analysis: Tenet and HCA.......................................... 88

Table 12: Support Activities Value Chain Analysis: Tenet and HCA .......................................... 90

4.3.2 Core Competencies and Sustainable Advantages ................................................................... 91

Table 13: VRIN Test of Resources and Capabilities ................................................................... 93

4.3.3 Summary of Firm’s Capabilities ............................................................................................ 95

4.4 Financial Analysis ...........................................................................................................95

4.4.1 Valuation Analysis ................................................................................................................ 96

Table 14: Internal and Free Cash Flow for Tenet and HCA......................................................... 96

4.4.2 Growth Analysis ................................................................................................................... 96

Table 15: 3-Year Growth Rates for Tenet, HCA and the Industry ............................................... 97

4.4.3 Profitability Analysis............................................................................................................. 97

Table 16: Profitability Ratios for Tenet, HCA and the Industry................................................... 97

4.4.4 Financial Strength Analysis ................................................................................................... 99

Table 17: Financial Ratios for Tenet, HCA and the Industry ....................................................... 99

4.4.5 Management Efficiency Analysis ........................................................................................ 100

Table 18: Management Efficiency Ratios for Tenet and HCA................................................... 100

4.4.6 Summary of Financial Analysis........................................................................................... 100

5.0 Strategic Issues Analysis................................................................................................................ 101

Table 19: Driving Forces and Key Success Factors................................................................... 101

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5.1 Critical Challenges ........................................................................................................102

Table 20: Critical Challenges Based on Driving Forces and KSFs ............................................ 103

5.2 Resources and Capabilities ............................................................................................104

Table 21: Strategic Fit Analysis for Tenet ................................................................................ 104

5.3 Strengths or Weaknesses Analysis .................................................................................107

Table 22: Tenet’s Strengths and Weakness ............................................................................... 107

5.4 Opportunities or Threats Analysis..................................................................................108

Table 23: Tenet’s Opportunity and Threat ................................................................................ 108

5.5 Summary of Strategic Issues Analysis ...........................................................................109

Table 24: Two Most Critical Challenges Tenet is Facing .......................................................... 109

Table 25: Most Critical Issue Tenet is Facing ........................................................................... 109

Table 26: SWOT Diagram for Tenet ........................................................................................ 109

Table 27: TOWS Matrix for Tenet ........................................................................................... 110

6.0 References ..................................................................................................................................... 112

6 TENET HEALTHCARE: STRATEGIC ANALYSIS

1.0 Executive Summary

Tenet Healthcare, Corp. is one of the main competitors in the general medical and surgical

hospitals industry with hundreds of facilities throughout the United States as well as several

locations in the United Kingdom. Despite its extensive reach and multiple partners, it has

experienced a recent decrease in profits of nearly $2 million. Market conditions are changing

and the company must remain abreast of the external and internal factors that may present as

challenges. This study analyzes the general environment and the industry in order to identify the

external driving forces and industry key success factors that present as challenges later. Tenet’s

key resources and capabilities are then identified and assessed to determine if they provide

competitive and sustainable advantages. This data is then combined and compared in a strategic

fit analysis in which the most critical challenge for Tenet is determined as well as its strengths,

weaknesses, opportunities and threats. The identification of the firm’s most critical challenge

and its strengths, weaknesses, opportunities and threats will allow Tenet to alter its strategy as

needed in order to achieve superior profitability, growth and long-term sustainability.

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2.0 Company History

Tenet Healthcare Corporation (Tenet) is a healthcare service provider in the United

States. Though the corporate office is located in Dallas, Texas, Tenet provides care at its acute-

care hospitals, ambulatory surgery centers, diagnostic imaging centers and urgent care centers in

forty-seven states across the U.S and within the U.K. With a total of ninety hospitals including

USPI hospitals and 460 outpatient centers, Tenet has had over eleven million patient encounters

and delivered upwards of ninety thousand babies. Its commitment to its patients and to quality

care combined with a 2017 revenue of $19.2 billion has earned Tenet the 134th spot on the

Fortune 500 list (Tenet Healthcare, 2018d). The organization has three business segments to

include hospital operations, ambulatory care and Conifer. Conifer provides support to both

Tenet and non-Tenet hospitals and self-insured employers seeking financial risk management,

clinical integration and population health management. The potential sale of this particular

segment, however, is being considered while simultaneously attempting to drive its growth

(Tenet Healthcare, 2018d).

2.1 Background

Tenet was originally founded in 1967 by Richard Eamer, Leonard Cohen and John

Bedrosian under the name of National Medical Enterprises (NME). Within just twenty-three

years, it was recognized as the second largest hospital company in the United States, but it soon

fell victim to numerous scandals which forced it to divest some of its specialty facilities. In

1994, nevertheless, NME acquired American Medical Holdings for $3.35 billion which resulted

in a stronger presence in California and Florida in addition to its subsequent rebranding and

name change to Tenet Healthcare Corporation (Wikipedia, 2018).

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Tenet is investor-owned and has managed to grow considerably by way of joint ventures,

subsidiaries, partnerships and additional brand launchings. In 1998, for example, it purchased a

total of eight hospitals in Philadelphia for $345 million that were owned by the Allegheny

Health, Education and Research Foundation which had gone bankrupt (Companieshistory.com,

2018). Despite millions of dollars paid in the forms of fines and penalties due to allegations of

fraud, tax evasion, kickback schemes and unnecessary surgeries, Tenet still managed to grow. In

2008, the company founded Conifer Health Solutions and by the end of 2009 it managed to

secure the number two spot on the S&P 500 index (Wikipedia, 2018). Additional acquisitions

including Vanguard Health Systems, Inc. in 2013 and United Surgical Partners International

(USPI) in 2015 led to Tenet becoming the third-largest for-profit hospital chain and largest

operator of outpatient surgery centers in the United States (Companieshistory.com, 2018).

Despite the trials and tribulations Tenet has faced, it is still recognized as a leading

healthcare service company that is absolutely committed to quality. It aims to drive healthcare

innovation through its many partnerships with for-profit and not-for-profit health system partners

(Tenet Healthcare, 2018). Through diversification, Tenet is able to assist patients, hospitals and

self-insured employers on a variety of platforms. Given the uncertainty in the healthcare

industry resulting from vague and pending healthcare legislation, this diversification may be just

the thing to ensure sustainability.

2.2 Purpose of this Study

The purpose of this study is to determine the most critical issue among the critical issues

identified that present as challenges to Tenet Healthcare Corporation through a detailed analysis

of the strategies employed. The challenges analyzed will be aligned with the internal resources

and capabilities of the firm in regards to the internal circumstances for core competencies in the

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dynamic SWOT analysis. This is a priority and must be completed prior to addressing the most

critical issue facing Tenet Healthcare so that an immediate recommendation may be made.

3.0 External Analysis

The external analysis pertains solely to the macro environment. In other words, it is

representative of the “broad environmental context” in which the firm operates (Thompson et al.,

2016, p. 48). Factors in the macro environment are strategically relevant in that they may have

some impact on an industry and even a company meaning that they should be analyzed and

considered.

3.1 General Environmental Analysis

The general environment includes the demographic, economic, political/legal,

sociocultural, technological and global segments as outlined in the following subsections. When

analyzing these segments, the acronym PESTEL is often used. The six components of the

PESTEL analysis are listed as political, economic, sociocultural, technological, environmental

and legal/regulatory. They are representative of the competitive conditions in which the firm

operates (Thompson et al., 2016, p. 47). Each industry is impacted differently, but this section

will focus on all industries including the healthcare industry.

3.1.1 Demographic Segment

Demographic factors include a variety of things that pertain to the world’s or a particular

nation’s population such as population size, growth rate, age and diversity. These factors are

ever-changing and projections are based on best-guess estimates.

The world’s population continues to grow. Currently, there are approximately 7.3 billion

people in the world and projections put this number at 8.5 billion people by 2030 (EBSCO

Publishing, 2017). The U.S. specifically will grow by an additional 78 million people by 2060

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with the nation’s population exceeding the 400 million mark in 2058 (United States Census

Bureau, 2018). The figure below demonstrates an average growth rate in the U.S. of

approximately 2.3 million people per year until the year 2030 at which time the rate slows to an

average growth rate of only 1.8 million people per year between 2030 and 2040. This average

then falls again between 2040 and 2060 to roughly 1.5 million people year (United States Census

Bureau, 2018). Despite the ever increasing population, the anticipated growth rate steadily

declines around year 2040.

Figure 1: Projected U.S. Population

This is due largely in part to the aging demographic. While the world’s population is expected to

increase by an astounding one billion people by the year 2025, the real surprise is that 300

million of them will be age 65 or older (PWC, 2017). Life expectancy is increasing and the baby

boomers are entering the retirement age. In the U.S. alone, one in every five residents and every

baby boomer still living will be of retirement age in 2030 (United States Census Bureau, 2018).

In fact, this age group will actually outnumber children ages eighteen and younger by the year

2035 as evidenced below (United States Census Bureau, 2018). As the population increases and

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ages, industries may have to reevaluate their product and service offerings as well as adjust to the

demand for them. The market economy will undoubtedly change as will the expectations placed

on each industry.

Figure 2: Projected Number of Children and Adults 65+

The world is undoubtedly becoming more racially and ethnically diverse due to the

reduction in physical boundaries as it relates to travel and employment following numerous

technological innovations combined with interracial relationships. In the Unites States alone, the

number of children to be of mixed race (i.e. two or more races) is projected to more than double

from 5.3 percent to 11.3 percent of the population by 2060 while the white non-mixed population

is projected to shrink from 199 million to 179 million despite a growing population (United

States Census Bureau, 2018). This increase in diversity will be predicated by interracial couples

having children as well as migration from other countries. Hispanics and mixed race people, for

instance, will experience relatively high growth rates as a result of natural increase, but migration

will be the driving force behind the elevated growth rate of Asians (United States Census

Bureau, 2018). Each culture is unique with its own style and preferences. Furthermore, mixed

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race people will experience a blending of cultures thus resulting in even more change in

preferences. As the world becomes more racially and ethnically diverse, industries must adapt to

meet the population’s changing cultures, preferences and needs.

3.1.2 Economic Segment

The economic segment looks at the general economic climate of the U.S. as it relates to

the unemployment rate, economic growth, interest rates and inflation rates. It also identifies the

manner in which these factors may impact industries. It must be noted, however, that some

industries may benefit when economic conditions are less than favorable while others suffer

(Thompson et al., 2016, p. 50).

In June of 2017, the Congressional Budget Office (CBO) published an update to the

budget and economic outlook from 2017 to 2027 based on the assumption that current laws

pertaining to federal spending and revenues remain the same over the next ten years

(Congressional Budget Office, 2017). Figure 3 below provides some economic projections

through 2027.

Figure 3: Economic Projections for 2017-2027

The economy through 2018 is expected to continue to grow, but this growth will result in

a tightening of the labor market. According to the CBO, “greater demand for workers will put

downward pressure on the unemployment rate and upward pressure on the rate of labor force

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participation (Congressional Budget Office, 2017). There will be an increased demand for

workers which will ultimately reduce the slack in the labor market even though many baby

boomers will be retiring due to the aging population as aforementioned. This reduced

unemployment rate, however, will not remain as it is forecasted to increase again in 2019 as

shown in figure 4. This increase in unemployment could potentially impact industries as it

relates to revenue. If consumers have less disposable income then spending will likely decrease.

A reduction in demand could lead to reduced revenue for industries.

Figure 4: Unemployment Rate Projections through 2027

Inflation and interest rates are both predicted to rise though inflation will experience only

a modest increase and will then remain relatively stable while interest rates will continue to rise

for a few years before stabilizing around the year 2021 as indicated in figure 5. Inflation is

expected to rise to 2% by the end of 2018 and then remain at or around the same percentage

through 2027. This is indicative of a modest increase in the price of goods and services in the

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United States. Interest rates, on the other hand, will continue to increase through 2027. The end

of 2020 will likely reflect an interest rate of 2.7% on three-month treasury bills and a 3.5%

interest rate on ten-year treasury notes. Seven years later, the interest rate on three-month

treasury bills will likely rise by 0.1% and the interest rate on ten-year treasury notes will rise by

0.2% (Congressional Budget Office, 2017). The federal government tends to increase interest

rates when the economy is growing too fast. An increase in interest rates and inflation will more

often than not motivate people to save more money as opposed to spending it. Though doing so

can assist in alleviating some pressure imposed by inflation, it can result in industries suffering

from reduced revenues. Furthermore, it would result in an increase in borrowing costs for the

industries and could interfere with expansion, R&D and overall sustainability.

Figure 5: Inflation and Interest Rate Projections Through 2027

3.1.3 Political/Legal Segment

Political and legal factors include the overall political climate of the world as well as

financial regulations, healthcare legislation and immigration laws. Political policies and actions

may result in differing implications for different industries (Thompson et al., 2016, p. 50).

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The political environment in the world is relatively stable with a few exceptions. Most

notably is the conflict between the U.S. and North Korea. North Korea is attempting to

obtain/design a nuclear bomb that can actually hit the continental U.S. This is clearly a potential

crisis that threatens all involved. President Trump has proven that he will increase the number of

troops and use force as needed. He has also proven that he has no problem pulling out of a deal

if need be. For instance, Trump pulled the nation out of the Trans-Pacific Partnership which was

a trade deal between eleven countries (Edward Carr, 2018). The interactions, deals and

disagreements that the U.S. and President Trump have with other nations can impact the

economy of the U.S. and the rest of the world. The strength of the economy and the U.S. dollar

impacts inflation, interest rates, taxes and more. All of these things impact industries.

The world economy is still recovering from the great recession that began in 2008

following a financial crisis largely due to the subprime mortgage crisis and housing bubble burst

in the United States. Though most countries have come out of the recession successfully, some

are still struggling. In the U.S., the economy is poised for growth. Financial regulations are at

the heart of the nation’s recovery. Community banks are eagerly awaiting financial reform such

as the potential rollback to Dodd-Frank and other similar reforms thereby eliminating the one-

size-fits-all approach to banking regulations. Recent and upcoming tax reforms are also

beneficial financial legislation due to a reduced burden on the banking industry (Sorrentino,

2017). Since banks tend to pay some of the highest tax rates, these rates effectively carry over

into all industries as businesses within the different industries seek to obtain loans for start-ups,

expansion and more. Reduced tax rates may result in more loans and increased capital in the

various industries which will then be put back into the economy.

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The future of U.S. healthcare is a hot button issue that impacts individuals and employers

alike. The Affordable Care Act (a.k.a. Obamacare) was designed to reduce the medically

uninsured population in the U.S. through the expansion of Medicaid eligibility in addition to

modifications to individual health insurance markets. If some people failed to purchase coverage

then they would be assessed a penalty. Under Trump’s new tax law, this penalty for not

purchasing medical coverage will be eliminated in 2019 (Business Radio, 2018). Some

entitlement programs such as Medicare and Medicaid may be reformed as well in the near future.

Trump’s actions may have a negative impact on industries because health insurance premiums

will likely increase across the board. If no penalty is imposed for not having health coverage,

those who are typically healthier may opt to drop their existing coverage. This will result in

fewer people covered in the U.S. so health insurance providers would be inclined to increase

their premiums to make up the difference in revenue. These increases would impact all

industries.

There is a lot of uncertainty regarding immigration in the United States right now. The

Trump administration is currently contemplating new legislation which could result in reduced

immigration to the U.S. and could also significantly reduce or eliminate the public benefits that

some immigrants are eligible for. Furthermore, according to CNN, there is consideration

regarding the grounds upon which immigrants may be denied green cards or visa extensions.

The Department of Homeland Security may impose stricter requirements when it comes to

immigrants proving their income (Kopan, 2018). The goal is to curtail illegal immigration and

protect the American taxpayer from paying into benefit programs that might be taken advantage

of. Though the government should use taxpayer funds in a legal and nationwide, beneficial

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manner, these potential restrictions could result in less immigration to the U.S. which could

reduce the number of qualified workers needed by industries.

3.1.4 Sociocultural Segment

Sociocultural forces tend to impact demand for goods and services and include factors or

trends such as societal values, attitudes, lifestyles and cultural influences. They can vary by

location and tend to change with time (Thompson et al., 2016, p. 50).

The various generations and their changing ideals are an excellent example of how

sociocultural forces vary with time. Baby Boomers, discussed earlier, is the current aging

population. Born between 1946 and 1964, they represented nearly 80 million people in the U.S.

alone in 2016. Generation X, as they’re often known, were born between 1965 and 1980 and

accounted for roughly 65 million people in the U.S. in 2016. The Millennials are those

individuals born between the years 1981 and 1997. This generation is more diverse than

previous generations with 44.2% belonging to a minority race or ethnic group. Additionally,

they represent one quarter of the nation’s population and are more likely to have a college degree

than Generation X members though there are more Millennials living in poverty than their

Generation X counterparts (CNN, 2017). As evidenced by figure 6 below, Millennials and

members of Generation X are showing a trend of identifying more as liberal Democrats while

Baby Boomers are identifying more as conservative Republicans (CNN, 2017). Liberals tend to

be more diverse, accepting of alternate lifestyles and open to change whereas conservatives tend

to be less diverse, more set in their ways in which they’re accustomed and less open to change.

Industries must take into account their target markets and promote their brands accordingly.

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Figure 6: Percent of Each Generation Identifying with Liberals and Conservatives

The youngest generation is known as Generation Z and includes all of those born after

1997. This generation has never known a time without high speed Internet and mobile devices.

They are accustomed to a fast-paced society where they metaphorically have the world at their

fingertips. By the year 2020, this generation will account for an incredible 40% of all consumers

(Patel, 2017). This generation seeks value and engaging, user-friendly content across a variety

of platforms. Typical advertisements are a thing of the past and will easily be skipped over or

ignored by Generation Z members. What this means for industries is that they will need to adapt

to the needs, wants, desires and even expectations of this generation in order to keep demand for

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their goods and services high. Furthermore, industries must recognize that members of this

generation may be more than just consumers. They may, in fact, become their competitors.

One might think that due to the familiarity of Generation X and Z members with

technology across multiple platforms that they would be the biggest users of social media. This

is not the case though. Adults ages 35 to 49 who belong to the Millennials generation tend to

spend more time on social media than any other age group – an astounding 6 hours and 58

minutes per week with the most popular social network being Facebook with over 178 million

users followed by Instagram with nearly 92 million users (Bromwich, 2017). Given the amount

of time that the average consumer spends on social networks, industries would be wise to have

their own sites on social media networks in order to increase their presence and drive up demand

for their offerings.

Industries must also consider that online shopping has become more popular in recent

years. Our society is extremely fast-paced and the market borders that once separated the U.S.

from other nations is all but completely gone. The market has become increasingly global and

competitors are no longer just down the street. They may be housed in nearly any location

around the world. E-commerce is huge. Take Amazon for instance. Over 75% of online

consumers in the U.S. primarily shop on Amazon where products from all around the world are

sold (Reagan, 2017). Regardless of what online “store” is utilized, however, consumers are

looking for convenience and value. They want a plethora of choices at a great price. CNBC’s

All-America Economic Survey conducted in September 2017 revealed that 43% of Americans

rank free shipping as the most important aspect of online shopping and the ability to compare

prices is ranked second at 26% (Reagan, 2017). This is important as brick-and-mortar stores

must also have a strong online presence if they hope to remain competitive. Additionally, those

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offering their goods and services online must ensure that they provide the convenience and value

consumers are looking for.

Overall, industries must ensure that their offerings are tailored to the diverse market that

they are hoping to reach and that their methods of delivery provide convenience, value and

availability over a wide variety of platforms in order to attract and engage the market.

3.1.5 Technological Segment

Technological factors include not only technical and innovative developments, but also

R&D efforts and facilities in addition to the pace of technological change (Thompson et al.,

2016, p. 50).

Artificial intelligence (AI) and machine learning (ML) have been the most important and

ground-breaking technologies of this era. Not only are machines able to continuously improve

their performance without direct guidance and “explanations” from humans, but their

applications appear to have no bounds. ML systems are capable of accomplishing a wide variety

of tasks at a level of superhuman performance otherwise unheard of. This technology is

changing how we approach various tasks and is capable of outperforming humans in voice and

emotion recognition and is even being used in vision systems that work as security guards or

even scan medical images. “The effects of AI will be magnified in the coming decade [as]

virtually every industry transforms their core processes and business models to take advantage of

machine learning” (Brynjolfsson & McAfee, 2017).

Nanotechnology is another groundbreaking technology that is changing the way people

live and work. Stemming from nanoscience, it is essentially the study and application of

extremely tiny things about 1 to 100 nanometers in size (United States National Nanotechnology

Initiative, 2018). This technology is applicable in virtually every field including chemistry,

21 TENET HEALTHCARE: STRATEGIC ANALYSIS

biology, engineering, medicine and so much more. As with AI, the potentials applications are

endless. Next-generation electronics, drug delivery systems and water purifications systems are

all successfully incorporating nanotechnology. Despite being around for over thirty years, it is

still considered a rather new technology. Nanotechnology is in its infancy, but has already

proven useful and made significant strides (Panjwani, 2018). Where applicable, industries

should experiment with and embrace nanotechnology in an effort to explore new opportunities

and improve upon current offerings.

Groundbreaking technology is not the only technological thing important to the world,

however. Security ranks high if not higher. As aforementioned, the younger generations are

more tech savvy than the older generations. Social media, smartphones, personal computers and

mobile devices like laptops and tablets are fully incorporated into their lives. More importantly,

their lives are fully embedded into many of these devices and on multiple accounts. As such,

they both desire and require that their information is secure. Cloud storage is currently the best

way to achieve this and many companies are already onboard. “Files stored in reliable cloud

services are some of the most secure files you can have, provided you have good passwords.

Google, Microsoft and Amazon all provide reliable cloud services for consumer file storage”

(Quora, 2017). This means that the files are actually kept on various hard drives located in

secure data centers, but are capable of being accessed remotely at any time. Furthermore, cloud

storage is redundant. Typically, at least three copies of each file are stored in different places.

This prevents one from accidentally deleting a file and then being unable to recover it. It also

acts a safety net should a hard drive fail. Lastly, cloud storage enables the user to safely and

securely share a file with another if desired. This may be done with read access only or with

read/write access. Regardless, it prevents the file from needing to be copied onto a thumb drive

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or emailed to someone. If industries are lacking in cybersecurity, consumers may not feel

comfortable doing business with them. Additionally, employees may not feel as though their

information is secure which could result in understaffing.

Technological innovations have been the fundamental drivers of economic growth for

more than 250 years (Brynjolfsson & McAfee, 2017). These innovations can spawn new

industries and disrupt or destroy others. Technological progress and innovation usher in a new

world of opportunities. Those industries that are nimble, adaptable and able to think outside the

box will be the ones that come out on top. In order to keep up with the changing times as well as

the demand of the newer generations, industries must not only embrace new technologies, but be

security conscious and innovative themselves.

3.1.6 Global Segment

There are arguments that the world is essentially flat in regards to the global competitive

market and due to technological advancements. It has been argued that technology has leveled

the playing field, but Richard Florida suggests otherwise. Florida argues that the world is, in

fact, spiky because “the reality of the global economy is that certain places offer far more

opportunity than others” (Florida, 2008, p. 18). Population growth, innovation and economic

activity can vary significantly by location. Globalization does exist and modern-day

advancements have broken down many of the barriers that at one time inhibited trade and

growth, yet all things are not equal between all nations. Imports and exports exist and

multinational companies are plentiful, but the fact is that there are limitations based on location

and key industry clusters.

According to the World Trade Statistical Review of 2017 by the World Trade

Organization, trade between nations has continued to bolster economic growth and development

23 TENET HEALTHCARE: STRATEGIC ANALYSIS

thereby aiding in the reduction of poverty around the world. Exports of merchandise worldwide

has risen 32% since 2006 ultimately reaching USD $16 trillion while the exports of services

increased by an astounding 64% reaching USD $4.77 trillion (World Trade Organization, 2017).

Developing economies are participating in trade more now than in previous years, but the least

developed countries are struggling on this front. To backup Florida’s claim pertaining to a spiky

world instead of a flat world where the playing field is supposedly leveled, one could simply

examine the exports by the least developed countries in the world. These countries make up less

than 1% of all world merchandise and commercial services exported. Instead, it is the top ten

traders (imports and exports) that account for more than 50% of the world trade each year

(World Trade Organization, 2017). This is grossly imbalanced, but is representative of a spiky

world as Florida stated. Industries should be knowledgeable when it comes to global trade as it

could help reduce costs and control quality.

The world is still recovering from the economic upheaval that began in 2008 despite

stronger than anticipated economic growth in 2017 and a worldwide economic growth forecast

by the World Bank of 3.1% in 2018 (The World Bank, 2018). As mentioned in previous

sections, economic slack is beginning to disappear and policy makers and industry leaders must

capitalize on this opportunity in order to boost long-term potential and sustainability.

The Economist Intelligence Unit (EIU) expects the world’s GDP to increase by 2.7%

which is only slightly less than the increase of 2.9% experienced in 2017. China represents

about one-third of total global expansion and is the single biggest contributor of growth at a

projected rate of 5.8% which is surprisingly 1% less than the country’s rate in 2017. India is

actually the fastest growing, large economy in the world with a healthy projected GDP increase

of 7.8%. Overall, most countries will see an increase in their respective GDPs with only a few

24 TENET HEALTHCARE: STRATEGIC ANALYSIS

exceptions due to hyperinflation, international sanctions and natural disasters (The Economist,

2018). Industries should consider the projected GDPs of the countries in which they intend to

conduct business and understand why their GDPs may be higher or lower comparatively to other

countries. Figure 7 below highlights the 2018 GDP projections for countries around the world.

Figure 7: 2018 GDP Projections

3.1.7 Summary of General Environment Analysis

The general environment analysis assists with the determination and evaluation of factors

that may be deemed strategically relevant outside of industry boundaries. The factors may be

important enough to have influence over decisions pertaining to long-term direction, strategies,

25 TENET HEALTHCARE: STRATEGIC ANALYSIS

objectives and even business models (Thompson et al., 2016, p. 48). The results of the general

environmental analysis conducted on the demographic, economic, political/legal, sociocultural,

technological and global segments are summarized below.

The world population is steadily increasing and projected to hit 8.5 billion people by the

year 2030. The U.S. population is also growing with an additional 78 million people expected

by the year 2060. This indicates a growth rate of 2.3 million people per year, but this will not

last in the U.S. and forecasts show that this rate will slow beginning in 2030. Due to an increase

in life expectancy and an aging population courtesy of the baby boomers, adults age 65 and up

will outnumber children 18 and under by the year 2035. This will impact the population that is

of working age barring additional migration. Migration, however, will occur as the nation

becomes more diverse. Supplementing the diversity stemming from migration will be diversity

due to mixed races as interracial relationships gain more ground.

Slack in the labor market will diminish thus increasing the demand for more workers as

the economy continues to grow. The unemployment rate in the U.S. is expected to continue to

decrease until the year 2019 when it will then begin increasing. Inflation and interest rates will

also increase which may lead to tighter lending policies and an increase in the overall price of

goods and services. This will ultimately impact disposable income and could impact industry

growth due to lack of capital received from lenders.

The United States and North Korea are currently at odds due to the design and testing of

nuclear weapons and their ability to potentially hit the U.S. Tensions are rising and the future

regarding this situation is currently unknown. Financial regulations are beginning to loosen thus

allowing smaller banks to be more competitive and potentially opening the door for increased

lending to businesses. Healthcare regulations are currently being discussed and revamped. Tax

26 TENET HEALTHCARE: STRATEGIC ANALYSIS

penalties for those who are uninsured are supposed to be removed by 2019, but Medicare and

Medicaid programs may have tighter restrictions placed on them which could impact the aging

population. Additionally, health insurance premiums could go up thereby impacting employers

in every industry as well as all residents. Immigration is also a hot topic in the U.S. right now as

stricter requirements for green cards and visas are being discussed in addition to proof of income.

This could very well impact the number of workers available in the U.S. when the demand is

anticipated to be quite high and the labor market slack diminished.

There is considerable differences between the current generations in the U.S. as it relates

to politics, diversity and technology. The younger generations tend to be more diverse, liberal

and outspoken than their older counterparts who are often more traditional and democratic.

Additionally, the younger generations are more tech savvy and mobile in terms of their

expectations, needs and wants. They utilize social media on a number of platforms and are

accustomed to information being readily available for their instant gratification. As such,

product, service and platform demand varies considerably as should the marketing directed at

them.

Technology plays a tremendous role in society across the globe. The demand for

innovative technologies is at an all-time high. Artificial intelligence (AI) and machine learning

(ML) are incredibly useful technologies with endless applications. They are capable of

surpassing human capabilities as well as exceeding our expectations. Used for a variety of

business purposes, AI and ML are redefining operations. Nanotechnology is similar in that it is

capable of being used for a multitude of purposes in nearly every industry imaginable. It has the

ability to simplify processes, increase performance and even save lives. Another incredibly

important technology, though in a different way, is cloud storage. Cloud storage provides

27 TENET HEALTHCARE: STRATEGIC ANALYSIS

businesses and consumers with the ultimate digital security, redundancy and peace of mind. Due

to the increasingly technologically advanced world in which we live, security is an absolute

must-have as our lives have become gradually more digital.

The technology used today has resulted in a more globally competitive market. We are

more linked to each other than we have ever been before, but we are not all equal in regards to

competitive advantages. The world is spiky as opposed to flat because different locations have

different strengths and weaknesses. Over 50% of world trade, for example, stems from the top

ten traders in the world whereas the least developed countries only account for less than 1% of

the trade. Inequality is also evident in the world’s GDP which is projected to hit 2.7% in 2018.

While most countries are predicted to experience an increase in their respective GDPs, some will

experience a decrease in 2018 as a result of poor government decisions and even natural

disasters.

Ultimately, the world as we know it is changing and these changes will impact businesses

across all industries. The changes in demographics and sociocultural factors will no doubt have

an impact on demand as preferences, expectations and marketing tactics change. Advances in

technology may simplify some processes and result in reduced costs, but innovation must

continue. Economic growth is only sustainable if industries have the tools and ability to grow.

They must not sit idly by. Instead, they must focus on the identification of any potential

opportunities or challenges that may impact their business models and strategies.

3.1.8 Driving Forces

Driving forces are capable of being either disruptive (revolutionary) or ongoing

(evolutionary) and are the most dominant change agents due to their ability to alter competitive

conditions and reshape the industry landscape (Thompson et al., 2016, p. 67). Based on the

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general environmental analysis above, two ongoing driving forces have been identified as major

determinants of how and why the industry landscape is changing.

The first driving force is ongoing and pertains to regulatory influences and government

policy changes. This is applicable to not only the U.S., but the world as a whole. Government

mandates are capable of bringing about significant change in industry policies, practices and

business models all across the globe. Financial regulations, healthcare legislation and

immigration laws impact each and every industry in one way or another. Add to that the fact that

technology has removed some global barriers, foreign markets could actually offer domestic

consumers goods or services at a lower price or with fewer restrictions due to their respective

locations. Financial regulations, for instance, could make it easier or more difficult for

businesses in different industries to obtain funding. Taxes and interest rates could increase or

decrease which would impact all involved. The same could be said of healthcare legislation

pertaining to health insurance programs and fees. All involved would be impacted in one way

another. Premiums could go up due to competitors dropping out of the industry and residents

could find themselves without insurance. This could even prompt more travel outside of the U.S.

in order to obtain cheaper medical care. Immigration laws also impact every industry. Many

skilled workers come from other countries to the U.S. to work. Depending upon the laws

implemented or changed, it is possible that some industries will suffer significantly from a

shortage of skilled workers. This ongoing driving force could have a significant impact on

demand, competition and overall industry profitability depending upon the regulations and policy

changes made.

The second driving force is also ongoing and pertains to technological changes.

Technological changes have the ability to spawn completely new industries. Conversely, they

29 TENET HEALTHCARE: STRATEGIC ANALYSIS

may also destroy them. The level of innovation varies significantly as does the impact that each

change has. Artificial intelligence, machine learning and nanotechnology, for example, have

changed the way the world approaches different tasks. They are changing industries at their

cores. Cloud storage has also become increasingly vital as the world has become largely digital.

Consumers and industries alike require secure locations to house their data and cloud storage is

the answer. Given that the younger generations are far more tech savvy and comfortable,

industries must offer technological options to meet their demands. Likewise, they must attract

and engage them with technology as well. We live in a fast-paced society where the next big

thing is just around the corner. Though technological changes can be very beneficial to

industries, they may also create challenges for them that impact demand.

3.2 Industry Analysis

The competitive analysis of the healthcare industry will concentrate primarily on the

economic features specific to the industry in addition to its key success factors and competitors.

When analyzing an industry, the focus remains on a group of companies that provide similar

products or services and compete for similar customers. Porter’s five forces analysis included in

this section will aid in the determination of the attractiveness and potential profitability of the

healthcare industry.

3.2.1 Description of the Industry

Tenet Healthcare Corporation falls under the very broad health care and social assistance

industry with over 1.4 million business establishments in the United States (NAICS, 2018).

30 TENET HEALTHCARE: STRATEGIC ANALYSIS

Narrowing this down, however, results in a more precise industry that falls under the category of

general medical and surgical hospitals with a North American Industry Classification System

(NAICS) code of 622110 which includes 19,200 business establishments in the U.S. (NAICS,

2018).

The general medical and surgical hospitals industry includes recognized and licensed

hospitals that provide surgical and nonsurgical diagnostic and medical treatments. This industry

provides services to inpatients with varying ailments and maintains inpatient beds in order to do

so. Additionally, inpatients are also provided with meals designed to meet their dietary needs.

Outpatient services may be provided as well. These include diagnostic imaging services such as

CT scans and x-rays, laboratory services, pharmacy services and more. The hospitals are staffed

with physicians, nurses and additional medical and maintenance personnel as needed (NAICS,

2018).

The general medical and surgical hospitals industry may be further divided into two

business segments: hospital operations and ambulatory care. Hospital operations typically

involve the inpatient services described above while ambulatory care is usually provided as an

outpatient service unless the patient requires additional diagnostic and medical treatment which

would warrant him/her being admitted to the hospital as an inpatient. S/he would then be cared

for by the hospital operations business segment.

Companies in this industry must be able to accommodate a diverse group of people with

a number of different medical conditions at all times of the day and night. Staff must be properly

31 TENET HEALTHCARE: STRATEGIC ANALYSIS

licensed and trained as required by law and adhere to a strict code of ethics. Furthermore, patient

privacy must be maintained by all participating companies within the industry and all pertinent

legislation must be adhered to. All of this must be achieved while simultaneously striving to

save lives, improve the quality of life for patients and earn a profit.

3.2.2 Industry Dominant Economic Features

The general medical and surgical hospitals industry is impacted by numerous economic

factors all across the globe. The money spent on healthcare as a whole is dependent upon

inflation, interest rates, legislation, demographics, unemployment rates and more.

Considering the demographic data presented in the demographic segment of the general

environmental analysis, it comes as no surprise that global healthcare spending is increasing. As

consumers across the globe increase in population and age due to a longer life expectancy and

relatively stable growth rate, costs are going up. The projected rate of increase in healthcare

spending is 4.1% annually between 2017 and 2021 with the per person healthcare cost averaging

$11,356 in the U.S. in 2021 (Cooper & Allen, 2018).

Financial performance and poor operating margins are hitting many companies in the

industry worldwide. Financial resources are already quite strained due to funding limitations,

rising costs and increasing demand for services. Costs have increased so much that healthcare

spending in the major regions of the world are expected to reach a jaw dropping USD $8.7

trillion by 2020 which is USD $1.7 trillion more than in 2015 (Cooper & Allen, 2018).

32 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 8: Healthcare Spending 2015-2020

It is important to note that higher spending on healthcare does not necessarily guarantee

healthier residents or longer life expectancies. See figure 9 below showing healthcare

expenditures as a percentage of GDP in 2016. Evident here is the fact that the U.S. spends

significantly more on healthcare each year than most comparable countries, yet it falls in the

lower half of life expectancy rankings when compared to many of the same countries (Cooper &

Allen, 2018).

33 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 9: Healthcare Expenditures as a Percentage of GDP in 2016

Total costs are becoming too much of a burden on many companies in the industry.

Profit margins are dwindling and the world’s healthcare providers are doing all they can to stay

afloat. For several years now as well as in the foreseeable future, industry spending is driven by

not only aging and growing populations, but also market expansion, clinical and technological

advances and increasing labor costs (Cooper & Allen, 2018). See figures 10-12 below for

industry employment and wage information for U.S. employees (United States Department of

Labor, 2018).

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Figure 10: Employment Data in the General Medical and Surgical Hospitals Industry

Figure 11: Quarterly Rates of Change in Industry

35 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 12: Average Employee Compensation Breakdown for 3rd Quarter 2017

3.2.3 Market Size

From a global perspective, the healthcare industry had total revenues of USD $7,442.4

billion in the year 2016. Outpatient care consisting of ambulatory care and diagnostic imaging

was the most profitable segment with total revenues of USD $3,030 billion while inpatient care

(i.e. hospitals) totaled $1,791.3 billion in 2016. Projections for 2018 revenues are slightly over

USD $8 billion and anticipated to approach USD $10 billion in the year 2021 (EBSCO Publishing,

2017).

Figure 13: Global Revenue in USD in 2016 including Percentage of Total Industry Revenue

36 TENET HEALTHCARE: STRATEGIC ANALYSIS

40.70%

24.10%

35.20%

Global Industry Revenue 2016

Outpatient Care Inpatient Care Other

The U.S. is leading the way in terms of industry revenue compared to its global

competitors. Segmented by geographical location, the United States held the majority of the

percent share of the market in 2016 with 45.1%. It was trailed by Europe which held 24.1% of

the market share and then Asia-Pacific with 22.7% of the market share in 2016. The Middle East

and the rest of the world lagged significantly behind with barely over 8% of the market share

combined (EBSCO Publishing, 2017).

37 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 14: Percent of 2016 Market Share by Geographical Location

The historical data and projected future revenues indicate that the industry as a whole will

continue to generate increasing revenue in the foreseeable future. Additionally, the U.S. will

likely still be the leading global force considering its percent of the market share when compared

to other locations.

3.2.4 Market Growth Rate

From 2015 to 2016, the global healthcare industry including general medical and surgical

hospitals and ambulatory care experienced a lower growth rate than in previous years. The

compound annual growth rate (CAGR) between 2012 and 2016 was 4.9% globally. Asia-Pacific

and the U.S., nevertheless, experienced relatively high growth rates of 7.4% and 4.7%

respectively over the same time period. The growth during this period in Asia-Pacific was

primarily due to local governments striving for universal health coverage combined with

growing populations and increasing incomes in the region ultimately increasing public

expenditures (EBSCO Publishing, 2017).

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Figure 15: Global Industry Growth Rates 2012-2016

Since 2016 the industry has experienced slightly higher growth and projections indicate

that this growth is likely to continue. The global CAGR for 2016-2021 is forecasted to be 5.2%

which is 0.3% higher than the previous period from 2012-2016. Asia-Pacific’s anticipated

CAGR for 2016-2021 is actually 0.3% lower than the previous time period indicating that

growth will be slowing down in this region. Conversely, the CAGR for the U.S. is forecasted to

be 5.8% from 2016-2021 which is an increase of 1.1% over the previous period. This is

indicative of more growth in the industry for the U.S. (EBSCO Publishing, 2017).

39 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 16: Global Industry Growth Rates including Projections 2016-2021

3.2.5 Industry Trends

Despite medical breakthroughs, the healthcare industry is seeing an increase in

preventable diseases around the world. Technology has resulted in tremendous strides in all

industries, but has brought about rapid urbanization and rather sedentary lifestyles. The younger

generations, as aforementioned, are quite tech savvy and always on the go. The problem is that

they are not on the go in a manner that could be considered exercise. Personal vehicles and

public transportation now usher people all over the world to their intended destinations. Quick,

convenient and rather unhealthy food offerings litter the way. As such, the prevalence of chronic

diseases is now soaring. Cancer, heart disease and diabetes top the charts. China and India, for

instance, have the highest number of diabetes sufferers in the world with 114 million and 69

million respectively. Worldwide, this number is expected to grow from 415 million in 2018 to

642 million sufferers by the year 2040 (Cooper & Allen, 2018). This puts a heavy burden on the

healthcare industry as it will cause costs to climb even more.

40 TENET HEALTHCARE: STRATEGIC ANALYSIS

At the same time, technology can also assist in reducing industry costs while

simultaneously tackling the need for easier data sharing, better diagnostics, increased efficiency

and much more. The healthcare industry, like most others, is experiencing tremendous change as

the world becomes more technologically advanced. As more advancements are made, quality

care will become more efficient, more accessible and less expensive for providers and consumers

alike. Hospitals and ambulatory care centers around the globe have really begun to dive into the

seemingly endless possibilities that technology provides. Japan is trying out “care robots” while

clinicians in China are using AI to aid in the diagnosis of lung, ophthalmic and skin diseases as

seen on imaging films. Moreover, one U.S. startup company has successfully incorporated AI

into one hospital’s system in order to free up staff to provide care to more patients while

improving their outcomes. As a result, that hospital treated 3,000 additional patients in a year

with the same resources (Cooper & Allen, 2018). Cloud storage is being used to store and share

medical information securely and wearable devices are able to transmit medical information to

secure sites for access at a later date. Telehealth, a method by which healthcare is provided

remotely using telecommunications technology, is also widely in use throughout the industry.

This is especially helpful for rural areas that have the technical ability to communicate with

providers, but lack the physical ability to do so because of disability or geography.

The healthcare industry as a whole in the U.S. is facing considerable uncertainty due to

potentially substantial healthcare reform. The Affordable Care Act (a.k.a. Obamacare),

Medicare and Medicaid are all being considered for modification, repeal or reform in one way or

another. This could significantly impact the number of U.S. residents that are eligible for and/or

sign up for these programs. This, in turn, could result in an increase or decrease in revenue for

companies in the general medical and surgical hospitals industry. Given the increasing costs that

41 TENET HEALTHCARE: STRATEGIC ANALYSIS

the industry is facing each year, a decrease in revenue could be detrimental and result in

companies being forced out of the industry as premiums rise and funding decreases.

Globally, government interventions have also negatively impacted the industry. In the

past, China’s hospitals were authorized to add a 15% surcharge to the cost of all medication

which resulted in up to 40% of their annual revenues. Since China implemented a zero markup

policy in 2009, profit margins have eroded considerably. Similarly in Brazil, the high court

reduced profit margins by forcing industry providers to reimburse the Brazilian public healthcare

system (Cooper & Allen, 2018).

To remain competitive in the industry, many hospitals worldwide are engaging in

mergers and acquisitions in addition to various other partnering schemes. The hope is to increase

each company’s geographical reach and diversify their offerings to achieve economies of scale

and acquire more capital for continued growth and staffing purposes. Hospitals are partnering

with outpatient centers, joint ventures are taking place among various business segments within

the industry and public-private partnerships are being formed across sectors. As recently as

April 2017, Japan’s government authorized medical corporations to create nonprofit holding

companies sans corporate acquisitions. This was done to promote organizational change and

increase operational efficiencies (Cooper & Allen, 2018). Operating more efficiently could

result in significant savings for companies industry wide.

3.2.6 Five Forces Analysis

The five forces analysis takes a close look at the competitive character and strength of the

following framework components: threat of new entrants, power of suppliers, power of buyers,

power of substitutes and intensity of rivalry. This incredibly useful and widely employed tool

42 TENET HEALTHCARE: STRATEGIC ANALYSIS

aids in the determination of the competition that drives the industry and determines industry

attractiveness and potential profitability.

The following analysis will identify the competitive pressures in the general and medical

surgical hospitals industry broken down by segment as well as select industry competitors,

industry attractiveness and the industry’s key success factors.

3.2.6.1 Threat of New Entrants

When new entrants enter into an industry, the position of existing firms within the market

is threatened. Competition increases in an attempt to gain and maintain market share. In fact,

competition will increase even if just the threat of a new entrant is deemed credible.

Participating industry members often lower their prices and act defensively in the hopes of

deterring potential new entrants. The actual seriousness of the threat of entry is dependent upon

barriers of entry as well as the anticipated reaction of firms within the industry (Thompson et al.,

2016, p. 54-55).

For the general and medical surgical hospitals industry, the overall threat of new entrants

is rather weak. Table 1 below highlights some barriers to entry for both the hospital operations

segment as well as the ambulatory care segment in addition to the anticipated reactions from

existing industry firms.

43 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 1: Threat of New Entrants

The hospital operations segment would require a significant amount of capital to enter.

The cost of real estate, medical equipment and supplies, licensing, properly trained and licensed

staff and additional fixed costs would involve a significant investment. Incumbent hospitals

already have a tremendous cost advantage over new entrants due to economies of scale,

previously negotiated contracts and strong networks or other partnerships. New entrants would

likely struggle to come up with the necessary required capital to open and then find that they

would almost certainly be paying more than their competitors due to a lack of economies of scale

and buying power. Add to that the diminishing profit margins discussed in earlier sections and

that alone may deter them. If it doesn’t, however, the highly restrictive and uncertain regulations

pending and already in place may be unappealing as many of the customers that they would be

trying to attract would already be utilizing other hospitals for reasons such as insurance

requirements and/or quality and continuity of care. For these reasons, existing firms within the

hospital operations segment of the industry would determine that the threat of new entrants is

44 TENET HEALTHCARE: STRATEGIC ANALYSIS

low. As such, the anticipated reactions of the incumbent companies would be minimal with few

exceptions. These exceptions could include a well-known and liked company with a familiar

brand trying to gain market share or a potential competitor in a rural location where customers

are few. These exceptions may prompt additional action.

The ambulatory care and diagnostic imaging segment, on the other hand, is slightly

different. Though it may require quite a bit of capital to enter this segment, it is considerably

less than what is required to enter the hospital operations segment. The fixed costs would be

much lower with fewer staff and medical equipment required and, of course, the size of the

building would not need to be as large as a hospital resulting in almost certainly lower real estate

costs. Revenue in this segment has proven to be more lucrative than in the hospital operations

segment as previously mentioned. Furthermore, new entrants would not have to compete as

much for customers as there is very little brand preference or switching costs from their

perspective. In emergency situations, the closest ambulatory care center is often what is

selected. Incumbent firms in this segment may attempt to lower their prices, advertise quality

and boast about experience in the industry, but this may or may not impact where a customer

chooses to go. It would depend largely on whether the needed service pertains to ambulatory

care or simply to diagnostic imaging. For these reasons, the threat of new entrants in this

segment is moderate.

When the number of competitors entering the market increases and they become

relatively equal in regards to size and capabilities, industry rivalry intensifies. When both

industry segments are collectively considered, the threat of new entrants is weak and would not

result in any significantly increased rivalry.

45 TENET HEALTHCARE: STRATEGIC ANALYSIS

3.2.6.2 Power of Suppliers

The power of suppliers stems from having ample bargaining power meaning that they

would be able to negotiate contracts in order to favor their respective companies as opposed to

the company that they are selling to. When suppliers have significant bargaining power, they are

able to raise industry member prices in order to cover additional costs and improve their profit

margins. Furthermore, the suppliers may even be able to limit the ability of industry members to

seek out better deals from other suppliers (Thompson et al., 2016, p. 60-61).

When it comes to the power of suppliers in the general medical and surgical hospitals

industry, the two primary segments both experience similar situations. The hospital operations

segment and the ambulatory care and diagnostic imaging segment both require essentially the

same supplies – medication, medical equipment/supplies and specialized laboratories and

diagnostic services.

Table 2: Power of Suppliers

46 TENET HEALTHCARE: STRATEGIC ANALYSIS

For medication, firms in the industry rely on pharmaceutical companies. These

companies have quite a bit of power because there are few to choose from. They do not have to

compete with too many competitors and they are often quite large in size due to diversification

into multiple industries. They usually hold patents for many of their drugs and demand is high

while few substitutes are available until a patent expires. Each drug is heavily regulated and the

time and money put into the R&D of them is astronomical. It isn’t until many substitutes for a

particular drug are available that their power begins diminishing.

When it comes to medical equipment companies, the market is dominated by a few,

rather large international companies like Johnson & Johnson and Siemens. They benefit from

economies of scale and worldwide brand name recognition. As such, they have tremendous

bargaining power and are able to negotiate prices and contracts that benefit them greatly.

Just as both industry segments rely on pharmaceutical and medical equipment companies,

they also rely on specialized laboratories and diagnostic services. There is much that each

segment is capable of performing on their own, but there are times in the industry when

specialized services are required. It would not be cost effective for each segment to be able to

perform all services in-house which means that there are times when outside assistance is

required. Due to the specialization of the services and minimal competition in this niche

industry, these specialized companies have quite a bit of power as suppliers. They understand

that their services are needed and charge accordingly.

Minimal competition within each niche often increases the power of the suppliers. They

have more negotiating power which results in more favorable prices and contract terms for them.

As such, the associated threat level is high. The overall power of suppliers is assessed as strong.

47 TENET HEALTHCARE: STRATEGIC ANALYSIS

3.2.6.3 Power of Buyers

Buyer power is determined by buyer price sensitivity and degree of bargaining power.

These two factors will impact the strength of the competitive pressures that buyers will be able to

place on industry members. Strong bargaining power may result in better payment terms, price

concessions and additional requirements which could ultimately increase industry members’

costs thereby limiting their profitability. Buyer price sensitivity also has the potential to limit the

profitability of industry members due to price restrictions. If the buyer is rather price sensitive

and industry members raise prices then the buyer may go elsewhere thus resulting in decreased

revenues for the industry members (Thompson et al., 2016, p. 62).

In the general medical and surgical hospitals industry, the primary buyers are individuals

and insurance providers for both segments.

Table 3: Power of Buyers

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When it comes to bargaining power in the hospital operations segment, individuals have

very little and insurance providers have only moderate bargaining power. The bargaining power

of individuals is often restricted by insurance providers that they may be using whether through

an employer or self-purchased. They are also limited by location and any specialty care that may

be needed. Though they may occasionally be able to negotiate lower prices on some services,

this is not common. Insurance providers, on the other hand, have some bargaining power, but

they still have to remain competitive in the industry and ensure that they abide by all regulations

applicable to the country or state that they operate in. It may be quite difficult to remain

competitive depending upon healthcare legislation and not-for-profit or government-based

insurance programs. Their bargaining power is considered moderate. If large enough, they may

be able to obtain slightly better pricing and contract terms from hospitals because hospitals

understand that part of their revenue stems from patients that utilize these insurance providers

For these reasons, the bargaining power of insurance providers is considered to be moderate.

In order to fully assess the threat level for the hospital operations segment, price

sensitivity must also be considered. Individuals have limited to no price sensitivity if care is

actually needed. It is primarily based on affordability rather than sensitivity for individuals.

Insurance providers, however, are somewhat price sensitive. They want to be profitable and yet

still have the ability to offer attractive insurance packages to potential clients. Combining the

price sensitivity information for individuals and insurance providers with their bargaining power

results in a threat level of low to moderate in the hospital operations segment.

The ambulatory care and diagnostic imaging segment is very similar in threat level.

Once again, the bargaining power and price sensitivity of individuals is rather weak. It is based

on need and affordability depending upon the service, but need reigns supreme in emergency

49 TENET HEALTHCARE: STRATEGIC ANALYSIS

situations. The goal is just to survive. Insurance providers understand this so their bargaining

power is rather weak in this segment as well. The nearest location often dictates where care is

received as opposed to what is considered in-network. This does not mean that insurance

providers are not price sensitive. They absolutely are in terms of profitability, but once again

they must offer affordable and attractive packages to their clients with the needs of the

individuals in mind. This segment, all things considered, has a very low threat level.

Considering all variables in both segments, the power of buyers is assessed as weak.

3.2.6.4 Power of Substitutes

Substitutes are provided by companies outside of the particular industry being analyzed,

but these outside companies are members of closely related industries. In other words, potential

consumers consider one good or service offered by industry A as a possible substitute for a good

or service offered by industry B. There are three considerations when determining whether

substitutes apply strong competitive pressures or not: 1) availability and price, 2) quality,

performance and other relative attributes are comparable or better, and 3) switching costs

(Thompson et al., 2016, p. 58-60).

In the general medical and surgical hospitals industry, there are very few alternatives to

the actual imaging, care and treatment provided by the two primary segments.

50 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 4: Power of Substitutes

Alternative medicine does exist and is practiced worldwide in developed nations as well

as developing nations. The success rates for alternative medicine has minimal scientific

evidence supporting it depending upon the treatment in question. The safety and effectiveness of

it has been questioned while others sing its praise. Though not considered conventional

medicine, alternative medicine is an option and includes acupuncture, faith healing, homeopathy,

special diets, massages and more.

The threat level for substitutes is low in the hospital operations segment. When looking

at the availability and price of alternative medicine, the consumer would really have to factor in

his/her location. Not all alternative medicine offerings are available worldwide. It largely

depends on the condition of the patient as well as other factors including religion. Some

treatments may be illegal in certain countries and others may be offered in multiple locations in

the city. Just as availability varies, so does price. Some uncommon or trendy treatments (i.e.

acupuncture and cupping) may be more expensive than common treatments (i.e. massage). Add

to that the fact that alternative medicine is not usually covered by insurance and the costs could

51 TENET HEALTHCARE: STRATEGIC ANALYSIS

add up quickly. Just because it may be more expensive does not necessarily guarantee that it is

better. As aforementioned, there is very little scientific evidence supporting the claims of many

forms of alternative medicine. Whether it is comparable or better would ultimately be a personal

decision likely influenced by religion, culture and loved ones. Some people actually utilize both

the hospital and alternative medicine because the switching costs are minimal depending upon

the method of treatment (i.e. over-the-counter supplements vs. acupuncture). Generally, the

threat level faced by the hospital operations segment by alternative medicine is low.

The same holds true for the ambulatory care and diagnostic imaging segment. The threat

level is incredibly low. There is no substitute for ambulatory care. There is no substitute for

imaging such as CT scans, x-rays, MRIs, etc. Ultimately, the only alternative to treatment or

imaging in this segment is no treatment or imaging. No treatment or imaging means no price,

availability or quality comparisons here. There are essentially no switching costs either. It

would just be considered money saved by not getting any treatment, but the potential loss of life

should be considered a cost as well.

Though support of alternative medicine varies by location, it is available in many areas of

the world and must be considered as a plausible substitute for conventional medicine. With this

being said, the power of substitutes in the industry is weak.

3.2.6.5 Intensity of Rivalry

As the strongest of the five competitive forces, intensity of rivalry has the ability to

impact the profit margins of industry members the most. Weak rivalry results in minimal if any

offensive actions taken to lure customers away from competitors and is indicative of no negative

impact on profitability. Conversely, strong rivalry results in intense competition for market

share and often results in the majority of industry members barely squeaking by in terms of profit

52 TENET HEALTHCARE: STRATEGIC ANALYSIS

margins. Between these levels of competition is moderate rivalry. At this level, the bulk of

industry members have a healthy percentage of the market share and earn acceptable profits

(Thompson et al., 2016, p. 53-54).

The general medical and surgical hospitals industry is a highly competitive industry

across both segments: hospital operations and ambulatory care and diagnostic imaging.

Table 5: Intensity of Rivalry

53 TENET HEALTHCARE: STRATEGIC ANALYSIS

The number, size and capabilities of existing companies in both segments results in

intense rivalry. For hospital operations, rivalry is more intense when hospitals are located in

large, urban areas as opposed to smaller hospitals in more rural areas. The more specialized the

services (i.e. oncology, dialysis, open heart surgery), the more intense the rivalry is regardless of

location. With ambulatory care and diagnostic imaging, fierce competition exists not only

between other outpatient clinics like this, but also with hospitals who are able to provide many of

the same services. What helps here is the fact that outpatient care is becoming more lucrative

due to patient preference and technological advancements. This results in more price

competition and an overall high threat level for this competitive pressure.

Buyer demand clearly impacts the intensity of rivalry. As previously mentioned,

outpatient care in the ambulatory care and diagnostic imaging segment is becoming more

profitable. This segment has experienced steady growth in recent years and medical innovations

have reduced the need for inpatient treatment at hospitals. Moderate rivalry in the ambulatory

care segment is the result, rivalry has intensified in the hospital operations segment for the same

reason. Demand is slowing in this segment due to these medical innovations combined with

changing and uncertain government regulations and healthcare legislation. Buyer demand is

therefore assessed as a high level threat in the industry.

When it comes to differentiation within hospitals, most offer the same basic services with

the exception of certain specialty providers. The same holds true with ambulatory care and

diagnostic imaging. When the majority of all providers offer the same services in their

respective segments, intensity of rivalry increases because buyers have less reason to be loyal to

a particular company. In these cases, location and price often become the buyers’ determining

factors. For both segments, the threat level associated with differentiation is high.

54 TENET HEALTHCARE: STRATEGIC ANALYSIS

Switching brands does occur in both segments especially when it comes to individuals

because the cost of switching brands is often minimal. Additionally, in the ambulatory care

segment, individuals are not price sensitive as described in previous sections. The low switching

costs for individuals intensifies rivalry between existing industry companies. Conversely,

insurance providers tend to have higher switching costs as aforementioned. This occurs in both

segments and does little to impact rivalry intensity. When considering the significant impact that

individuals have on rivalry combined with the smaller impact that insurance providers have on

rivalry, the final threat level is assessed as moderate regarding switching costs.

Costs are not only important to individuals and insurance providers, but also to the

companies within the industries. Inventory costs or idle production capacity can have a

substantial impact on existing industry companies especially if the products or services offered

already impose high fixed costs. In the hospital operations segment, fixed costs are quite high

due to real estate, medical equipment, staffing needs and medication. When the space,

equipment, supplies and staff are remaining idle or not being fully utilized, the intensity of

rivalry increases because this significantly impacts the firms’ profit potential and they may

attempt to reduce prices whenever possible provided they remain within regulations. The same

is true for ambulatory care and diagnostic imaging centers. They must ensure that they have the

necessary supplies, machines and staff on hand to save lives as needed. There are occasions

when the number of patients is fewer than anticipated. This leads to increased rivalry between

competing companies. Ultimately, the threat level for the industry in regards to inventory and/or

production capacity is determined to be high.

To achieve economies of scale and aid in cost reduction, many companies diversify.

They involve themselves in multiple business segments and various locations around the world.

55 TENET HEALTHCARE: STRATEGIC ANALYSIS

For the hospital operations segment, rivalry is intense when it comes to diversity. Some

companies benefit from brand recognition on a variety of fronts and are multinational in both

developed and developing countries which allows them to focus on key aspects of healthcare

important to those regions. Intensity is higher is largely developed regions including Europe and

North America when compared to other regions that are considerably less developed. When it

comes to ambulatory care and diagnostic imaging, the intensity of rivalry is only moderate due to

the strategies employed and technologies used by companies. Companies in this segment do not

offer much in the way of specialty care or providers and tend to include smaller companies that

can benefit financially from participation in this segment only versus hospital operations.

Cumulatively, the threat level is high though this is primarily the result of the sheer size and

number of large companies participating in the hospital operations segment in various regions of

the world.

If a company is not doing well in a particular industry, the usual response would be to

pull out of the industry and minimize losses. This is not always possible though. Exit barriers

exist in many industries, but some more than others. In the general medical and surgical

hospitals industry, exit barriers may be difficult to overcome. In the hospital operations segment,

companies may find it rather difficult to sell off or transfer their assets including equipment, real

estate and unused supplies. This only serves to make rivalry stronger between the companies

because the diminishing profit margins may seem more appealing than going bankrupt. This

logic is present in the ambulatory care and diagnostic imaging segment as well. Though

companies in this segment tend to have less real estate and fewer assets including staff than

hospitals, it may still be quite difficult to sell off or transfer the assets. Moderate to intense

56 TENET HEALTHCARE: STRATEGIC ANALYSIS

rivalry is likely to result in this segment. This may cause drastic price drops across the industry

thus resulting in a high threat level in regards to exit barriers.

When all factors of intensity of rivalry are assessed, the resulting strength of the

competitive pressure is determined to be strong.

3.2.6.5.1 Industry Competitors

The general medical and surgical hospitals industry falls under the very broad health care

and social assistance industry. Though there are numerous companies within the industry, it is

highly competitive and only a handful of companies actually dominate in this arena with multiple

hospitals, surgery centers and freestanding clinics throughout the nation. The key players

include Community Health Systems, Inc. (CYH), HCA Holdings, Inc. (HCA), and Universal

Health Services, Inc. (UHS). All three companies were named on Fortune’s top 500 companies

list for 2017. HCA ranked 63rd, CYH was 130th and UHS came in at the 276th spot (Rege, 2017).

In regards to revenues for the year, HCA, CYH and UHS brought in $44,747 million, $21,374

million and $10,508 million respectively (Fortune 500, 2018).

The strategic group map below shows the revenues growth versus the earnings growth for

several industry competitors in the third quarter of 2017. The majority of companies rest on or

around the peer median in regards to earnings growth as a percentage whereas revenues growth

as a percentage is where the bulk of the differences are. While many competitors surround the

peer median, there are a few identifiable laggards and leaders. CYH is the biggest laggard

having suffered a sizable negative percentage change in revenues. Other laggards include

LifePoint Hospitals and SunLink Health Systems. Leaders in this regard include Fresenius

Medical Care and HCA (CapitalCube, 2017).

57 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 17: Revenues Growth vs. Earnings Growth 2017, Q3

Figure 18 below is a strategic group map showing gross margin versus working capital in

days for the third quarter in 2017. When it comes to being cash rich or cash starved, most

companies in the industry vary only slightly one way or the other from peer median. Once again,

however, SunLink Health Systems and CYH are quite different from the group in that they are

both considerably cash starved. Of important note is that regardless of which side of the peer

median for cash a company is on, their sources of financing fluctuate greatly. CYH and UHS are

both more supplier financed while HCA is more customer financed (CapitalCube, 2017).

58 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 18: Gross Margin vs. Working Capital Days 2017, Q3

Though the comparison of industry companies’ financial placement is important, it is also

important to determine what companies are doing that is impacting their financials in such a way.

Figure 19 below shows gross margins versus EBITDA margins for competing companies, but,

and perhaps more importantly, it shows the differences in the focus of the companies. Of

significance is the noticeably increasing slope that occurs from high-cost commodity to low-cost

differentiation. Note that there are no companies offering low-cost commodity with low-cost

differentiation. The opposite is true as well in that no company is offering high-cost commodity

with high-cost differentiation. There is definitely a trend here. The industry is focusing more on

value and quality of care as opposed to quantity.

59 TENET HEALTHCARE: STRATEGIC ANALYSIS

Figure 19: Gross Margins vs. EBITDA Margins 2017, Q3

3.2.6.5.2 Rivals Anticipated Strategic Moves

A company’s strategy pertains to the actions it takes in order to outperform its

competitors and achieve higher profit margins in an effort to promote long-term sustainability

and growth (Thompson et al., 2016, p. 3). These actions may be broad or focused and pertain to

cost or differentiation. Note that the fees for service that healthcare companies receive is often

predetermined based on contractual agreements with insurance providers or otherwise limited in

some way based on government regulations and healthcare legislation. Given the highly

competitive nature of the general medical and surgical hospitals industry, it is anticipated that

competing firms within the industry implement the strategic approaches below.

As discussed in previous sections, technological advancements and medical innovations

are changing the way that patients are monitored and services are rendered. These advancements

60 TENET HEALTHCARE: STRATEGIC ANALYSIS

and innovations are saving lives, increasing efficiency and satisfying the demand of the changing

demographics with the younger generations due to their high-tech and fast-paced lifestyles. The

latest technology, however, comes at a steep price. The companies that are willing and able to

pay for this technology and associated R&D will achieve broad differentiation. Their services

will be different from those offered by their competitors and will appeal to a very broad spectrum

of potential clients. This could result in increased revenues, more brand appeal and better life-

saving capabilities.

If rival companies were seeking to further differentiate themselves, they could use the

focused differentiation strategy. Instead of appealing to the masses, companies would focus on

specialized needs. Given the seemingly endless list of possible ailments, specialty clinics could

be opened for the treatment of various diseases and could include dialysis centers, chemo

treatment clinics, burn clinics and more. This would allow the patients to seek treatment in an

environment designed specifically for their needs and comfortability. Given the prevalence of

diabetes in addition to its forecasted growth rate discussed in the external analysis, specialized

clinics like these would surely be advantageous in regards to profit, growth and sustainability.

Low-cost provider strategies may also result in better profits, growth and sustainability.

With this strategy, companies focus on low-cost advantages. Healthcare costs are quite high

when the required real estate, medical equipment and supplies, medication, R&D and staff are

considered. If a company within the industry can reduce costs then it could ultimately improve

its profit margin. Mergers and acquisitions are one way in which to do this. As the company

grows more and more, it will achieve economy of scale over its competitors. Additionally, it

will further its reach and recognition which would likely result in additional patients and

increased revenues.

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What is most likely to happen is that companies within the industry will combine various

components of low-cost and differentiation strategies in order to benefit from what is known as a

best-cost strategy. Strategies like these provide more value to the consumers while keeping

provider costs low. It is fully anticipated that rivals within the industry will seek to merge with

or acquire other companies so that they may achieve economies of scale while focusing on

differentiation as it relates to quality of care, innovative technology and specialized centers. This

would potentially be the most successful strategy a company in the industry could use in order to

outperform competitors, achieve superior profit margins, grow and secure its long-term industry

position.

3.2.6.6 Summary of Five Forces Analysis

The five forces analysis for the general medical and surgical hospitals industry

demonstrates that the strength of the competitive pressures associated with each of the five forces

varies considerably depending upon whether it relates to the hospital operations segment or the

ambulatory care and diagnostic imaging segment. Table 6 below ranks the short-term and long-

term strength of each force in each segment in addition to ranking the profit potential and overall

industry attractiveness which relates directly to its long-term profit potential.

62 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 6: Five Forces Strength Summary and Overall Industry Attractiveness per Segment

Regarding the hospital operations segment, the overall industry attractiveness is rated as

moderate. Currently, profit potential is high due to the low threat levels assessed for buyer

leverage, the threat of new entrants and the threat of substitutes. Supplier leverage and intensity

of rivalry is high now and in the short-term. Looking into the future or long-term, supplier

leverage and intensity of rivalry remain high while the threat of new entrants and the threat of

substitutes remain low. The only force that changes in strength of competitive pressure is buyer

leverage which has the ability to decrease profit potential to medium. This is due in part to the

aforementioned uncertainty surrounding potential new legislation as it relates to healthcare

reform. If the tax penalty for uninsured U.S. residents goes away in 2019 as anticipated, those

who are relatively healthy may opt to not purchase health coverage either through their

employers or as individuals. This could result in less revenue for both the insurance providers

63 TENET HEALTHCARE: STRATEGIC ANALYSIS

and healthcare providers and ultimately impact any favorable contract conditions that these

healthcare companies have with insurance providers.

Regarding the ambulatory care and diagnostic imaging segment, overall industry

attractiveness is moderate. As it stands, both buyer leverage and the threat of substitutes is low,

supplier leverage and intensity of rivalry is considered high and the threat of new entrants is

assessed as medium. This is higher than the threat of new entrants for the hospital segment due

to the increased revenue in the outpatient segment versus the inpatient/hospital segment.

Outpatient treatment is becoming more lucrative as previously mentioned. These factors result

in a medium profit potential ranking in the short-term. The long-term profit potential in this

segment is also medium. Buyer leverage and the threat of substitutes remain low, while intensity

of rivalry remains high. The only change in threat level when comparing now to the future

relates to the threat of new entrants. As discussed, the outpatient segment is becoming more

lucrative for competing companies within this segment of the industry. This will likely motivate

more companies to enter this particular segment.

Worth mentioning is that regardless of the segment within the industry, there are three of

the five forces that remain the same in terms of threat level. Supplier leverage is always high

due to the rather large, multinational and diversified companies that act as suppliers. The

intensity of rivalry is high and will likely continue to be so in the foreseeable future. Healthcare

will always be needed and, if the companies are properly positioned and managed, will likely

remain profitable thus promoting competition in the industry. The threat of substitutes is

minimal due to very few other options available. While there are some forms of alternative

medicine, many are controversial and very few are supported and deemed beneficial by actual

science.

64 TENET HEALTHCARE: STRATEGIC ANALYSIS

As outlined above, the industry attractiveness or long-term profit potential of each

segment is moderate which results in a moderate overall industry attractiveness assessment. This

means that existing industry companies will compete to remain in the industry and even expand

while other companies may attempt to break into the industry in order to reap the potential

profits therein.

3.2.7 Industry Key Success Factors

Companies desire to not only survive, but to thrive in their respective industries. In order

to do this, however, they must identify the key success factors (KSF) that will determine their

competitive strengths and ultimately result in either profits or losses. These KSFs are so vital to

success that they must always be thoroughly considered when conducting analyses and

determining strategies. As such, companies must ask themselves which product or service

attributes are considered crucial to consumers, what resources and/or capabilities are needed to

deliver the products and services, and how can they achieve a sustainable competitive advantage

in the industry (Thompson et al., 2016, p. 75).

The KSFs that any firm in the general medical and surgical hospitals industry must focus

on in order to survive and thrive are:

1. Prioritize high-quality, safe and high-value care – Quality, safety and value are at the

forefront of all patients’ minds. If a firm within this industry fails to deliver such care,

not only may patients choose to go elsewhere while simultaneously voicing their

concerns and criticisms online for all to see, but they could actually die. Any and all of

these things would likely result in decreased revenues and reduced profit margins.

Additionally, malpractice lawsuits could be filed thereby increasing costs through legal

fees and settlements in addition to tarnishing the brand name. This would almost

65 TENET HEALTHCARE: STRATEGIC ANALYSIS

assuredly further decrease revenues as news spreads throughout the region. Poor-quality,

unsafe and low-value care could even result in fewer contracts with insurance providers

because they would probably anticipate selling fewer policies if those policies required

the purchaser (patient) to visit a less than desired hospital, ambulatory care clinic or

diagnostic imaging center.

2. Focus on reducing costs and achieving economies of scale – When companies achieve

economies of scale, they benefit from proportionate cost savings due to an increased level

of production. Companies in the general medical and surgical hospitals industry may

achieve economies of scale through mergers and acquisitions resulting in significant

growth and oftentimes diversification in regards to the services offered. They may also

be better positioned to bargain with suppliers. Costs can be quite high in this industry

due to real estate, supplies and equipment, medication, staff and additional fixed costs.

Increasing production and reducing idle production time would benefit the companies

tremendously. Furthermore, if the companies are able to break into other segments

within the industry then they would be able to provide additional services thus enticing

more patients to use them as opposed to a competitor. Again, increased revenues would

result along with more brand recognition. If revenues are increasing and costs are

decreasing then the profit margins would become more favorable and capital may even

be freed up in order to continue expanding into other regions and markets.

3. Invest in technology – As mentioned in the technological segment of the general

environmental analysis, technological innovations have been driving economic growth

for more than 250 years, but even more so in recent years. Recent technological progress

and innovations have transformed the manner in which we live, operate and

66 TENET HEALTHCARE: STRATEGIC ANALYSIS

communicate. A whole new spectrum of opportunities has been ushered in and only

those who are quick to adapt and think outside the box will survive and thrive as the

world becomes more technologically advanced. New generations not only rely on, but

demand a more tech-savvy and innovative society. As such, it’s imperative that all

companies within the general medical and surgical hospitals industry jump on the

bandwagon. Artificial intelligence and machine learning have already proven capable of

surpassing human capabilities and have demonstrated an ability to increase efficiency in

hospital settings. Nanotechnology is being used to directly target cancer cells thus

improving patient outcome and minimizing side effects and cloud storage allows for

easier and more secure storing, transferring and sharing of medical records as needed.

Despite the initial cost of R&D, technologically advanced diagnostic equipment and

astonishing medical innovations, they are well worth it. Those companies that adopt new

technology and drive innovation will secure a competitive advantage and stronghold in

the industry. Technological advancements may result in increased organizational

efficiency, reduced costs, improved diagnostics, happier and healthier patients, higher

quality of care and better utilization of resources.

Table 7: KSFs for General Medical and Surgical Hospitals Industry

Prioritize High-Quality, Safe and High-Value Care

Focus on Reducing Costs and Achieving Economies of Scale

Invest in Technology

Identification of and focus on the KSFs should allow the average firm in the general

medical and surgical hospitals industry to earn profits in order to survive and thrive. The

three KSFs listed in table 7 above are the attributes that every firm in the industry must focus

on in order to retain customers and actively compete with rivals.

67 TENET HEALTHCARE: STRATEGIC ANALYSIS

4.0 Internal Analysis

The previous section focused on the external situation as it relates to the macro

environment and included the general environmental analysis in an effort to identify the two

driving forces shaping the industry landscape and the industry analysis from which three industry

key success factors were identified. This section, however, will focus on Tenet Healthcare

Corporation’s internal environment. It will delve deeply into the firm’s organization, resources,

capabilities and financial strength.

4.1 Organizational Analysis

This section will examine the key components of Tenet’s organization to include its

mission, products and services offered, leadership, culture, structure and competitive strategy.

4.1.1 Corporate Mission

A firm’s vision is what it plans to do for the long-term (i.e. 2-5 years), but its mission

identifies what it is doing now and for the next 12 months. Tenet’s mission is “to help people

live happier, healthier lives” (Tenet Healthcare, 2018i). The firm’s five core values help guide it

along the way. The five values include a commitment to quality, a culture of innovation, a

culture of service that values teamwork, integrity and high ethical standards, and transparency

(Tenet Healthcare, 2018f).

4.1.2 Products and Services

Tenet maintains a broad network of healthcare facilities and partnerships committed to

delivering the highest quality of care possible to its patients. According to the website, the firm

operates numerous healthcare facilities in forty-seven states across the U.S. These facilities

include hospitals, urgent care centers, diagnostic imaging centers, surgery centers and satellite

emergency departments. These facilities require the employment of approximately 115 thousand

68 TENET HEALTHCARE: STRATEGIC ANALYSIS

employees of which 32 thousand are active physicians and 33 thousand are nurses (Tenet

Healthcare, 2018i).

Tenet’s hospitals and affiliated staff are dedicated to providing high-quality care focused

on the needs of the patients. With ninety hospitals total including twenty-one United Surgical

Partners International (USPI) hospitals, the company has quite a reach in the hospital operations

segment. With its partner USPI, its reach extends overseas as well. USPI has more than 390

facilities in the U.S., but also operates what is known as Aspen Healthcare. Aspen Healthcare is

comprised of nine healthcare facilities in the U.K. Moreover, it has 460 outpatient centers where

noninvasive imaging is done for diagnostic purposes, minor injuries and illnesses are treated,

outpatient surgeries are performed and life-saving ambulatory care is rendered (Tenet

Healthcare, 2018f).

In addition to its healthcare facilities which provide medical services to patients in need,

Tenet also owns Conifer Health Solutions (Conifer). Stemming from the firm’s financial

services division, Conifer is responsible for the annual processing of more than $30 billion while

simultaneously supporting care management for approximately 5.7 million people in 135 local

regions throughout the U.S. It does this for over 800 clients and multiple business segments

including physician groups, health plans and self-insured organizations among others (Tenet

Healthcare, 2018j).

4.1.3 Leadership

Tenet is currently in the processing of refreshing its board of directors. It has added six

new directors since 2015 and anticipates making some additional changes to the board in the

near future (Tenet Healthcare, 2018d). It is the board’s job to determine whether or not the

current CEO of a company is successful from a strategic leadership perspective. If and when a

69 TENET HEALTHCARE: STRATEGIC ANALYSIS

new CEO is elected, either an insider or an outsider may be chosen to not only assume the role,

but assess and redirect the company’s strategy as needed (Thompson et al., 2016, p. 38). Having

served on the board of directors since 2010, Tenet just recently named Ronald Rittenmeyer as the

firm’s executive chairman in August 2017 as well as the new CEO in October 2017. He is

“responsible for guiding the next phase of growth following [the company’s] reorganization”

(Tenet Healthcare, 2018d).

Leadership is not solely a matter of who is in charge. On the contrary, it has everything

to do with the relationships between upper level management and the rest of the team.

Leadership involves the achievement of organizational goals through influential actions and the

communication of ideas.

Tenet has been recognized as an organization with top-tier leadership development

programs that prepare individual employees for possible leadership roles in the future as well as

target high-potential leaders in middle management roles. Two of Tenet’s academies were

recognized in five categories and were ultimately presented with Leadership Excellence and

Development (LEAD) awards in 2017. The two academies are the Tenet Leadership Academy

(TLA) and the Tenet Finance Academy (TFA). The firm is “committed to supporting colleagues

through dedicated programs for career enhancement and education, as well as opportunities to

grow and proper with the organization” (Tenet Healthcare, 2017).

4.1.4 Organizational Culture

An organization’s culture is the shared actions, values, beliefs, ingrained attitudes and

company traditions that guide its members’ behavior towards others inside and outside of the

firm. No two organizations share the same exact culture and operate in the same manner

(Thompson et al., 2016, p. 347). There are four primary components of an organization’s

70 TENET HEALTHCARE: STRATEGIC ANALYSIS

culture: 1) CEO or founder influence, 2) structure, 3) artifacts, and 4) compensation. Tenet’s

organizational culture is one of growth, integrity, accountability and quality.

Ronald Rittenmeyer was just named executive chairman of Tenet in August 2017 and

CEO in October 2017. He has extensive turnaround experience and may be just what Tenet

needs to guide its next phase of responsible growth while cutting out unnecessary costs. He has

extensive experience leading companies out of Chapter 11 bankruptcy and his leadership

experience will serve Tenet well (Tenet Healthcare, 2018d).

Tenet is committed to serving not only its patients, but also its employees, physicians and

partners. As it strives to help people live happier, healthier lives, it focuses on five core values.

These values include quality with respect to all the company does and all decisions it makes,

innovation designed to create new solutions to challenges in the healthcare system, service as it

relates to teamwork and the needs of others, integrity in its business dealings and transparency

via sharing results and outcomes of operations (Tenet Healthcare, 2018i). Tenet’s focus on its

five core values is evident in its Quality Compliance and Ethics Program Charter enforced by the

firm’s Ethics and Compliance Department (Tenet Healthcare, 2018b).

At the core of everything that Tenet does is a genuine commitment to quality. It is

committed to providing high-quality care to patients and by providing its staff with the necessary

equipment, technology and resources needed to effectively diagnose and treat patients. To

Tenet, safety, service and industry-leading clinical outcomes are paramount (Tenet Healthcare,

2018i).

In regards to compensation, Tenet goes above and beyond what is required of it. It offers

more than just the average comprehensive benefits package with medical, dental and vision plans

in addition to 401(k) options with company matching and employee stock purchase plans. Tenet

71 TENET HEALTHCARE: STRATEGIC ANALYSIS

has its own online learning program designed to provide continuing education and training to all

employees in an effort keep current on changing processes and procedures so that they may

better serve their customers (Tenet Healthcare, 2018h). Similarly, the company has two different

academies that focus on leadership and finance. These academies teach 15-month long programs

aimed at developing leaders and preparing individuals for leadership roles. They also just

recently won several LEAD awards as previously mentioned in the leadership section of the

internal analysis. It also offers financial assistance to employees in need who are experiencing

financial hardships due to circumstances beyond their control. This is known as the Tenet Care

Fund and is a 501(c)(3) charity that provides financial grants to help cover the cost of housing,

utilities, food and other essentials. It is fully funded by Tenet employees for Tenet employees

and is a true testament to the company’s culture (Tenet Healthcare, 2018e).

4.1.5 Structure

An organization’s structure is a critical component of strategy execution and contains the

formal and informal arrangement of tasks, responsibilities and authority (Thompson et al., 2016,

p. 308). There are three levels to an organization’s structure. These three levels are

infrastructure, social structure and super structure. Infrastructure refers to the framework of the

organization, social structure relates to the interactions of those discussed in the infrastructure,

and super structure pertains to the guiding values and culture of the employees within the

organization.

Figure 20 below is the organizational chart for Tenet’s board of directors (Tenet

Healthcare, 2018e). There have been several changes to the board since the beginning of 2015 as

the company has been focusing on refreshing the board to ensure that it consists of a diverse and

experienced group of leaders (Tenet Healthcare, 2018d). In addition to the board of directors,

72 TENET HEALTHCARE: STRATEGIC ANALYSIS

leadership includes the senior corporate and business unit officers, hospital operations leaders,

Conifer leaders and USPI leaders with presidents, CEOs and directors in each area (Tenet

Healthcare, 2018e). This results in a matrix structure as the firm is organized along multiple

dimensions in an effort to enhance communication, collaboration and coordination (Thompson et

al., 2016, p. 311).

Figure 20: Tenet Board of Directors Organizational Chart 2018

73 TENET HEALTHCARE: STRATEGIC ANALYSIS

The social structure of Tenet pertains to the manner in which the members of the

infrastructure interact. As previously mentioned, Tenet operates as a matrix or combination

structure. This facilitates better sharing of ideas, knowledge and resources across the various

organizational units to allow for more oversight, encourage growth and achieve economies of

scale.

The super structure relates more to the values and culture of the organization. As stated

in the organizational culture section, Tenet is dedicated to healthier, happier living. Tenet

employees are fully committed to quality on all fronts. They believe in providing high-quality

and high-value care to their patients through innovation, service, integrity and transparency.

These values resonate at all levels within the organization.

4.1.6 Strategy

A company’s strategy is essentially its plan of attack. It is the set of actions that the firm

uses in order to outdo its industry competitors and ensure long-term sustainability and growth in

addition to superior profitability. It is about competing differently in an effort to achieve a

competitive advantage.

4.1.6.1 Current Strategy

Tenet’s current strategy is what is known as the best-cost provider strategy. This strategy

is based on the firm providing patients/customers with more value for their money than its

industry competitors. It also includes the element of differentiation. In this case, Tenet strives to

provide high-quality care and services so as to exceed the expectations of their customers.

This type of strategy targets more value-conscious customers while offering better

services at more attractive prices. It is important, however, that costs are managed appropriately

so they remain low for both Tenet and its customers while higher quality service and standards

74 TENET HEALTHCARE: STRATEGIC ANALYSIS

are maintained. This is what equates to the best value. This does not necessarily have to be the

best service or best attributes.

4.1.6.2 Components of Strategy

In order to fully execute its best-cost provider strategy, Tenet is focusing on the following

strategic components:

1. Expand ambulatory care segment – As mentioned in previous sections, outpatient care is

now becoming more lucrative than inpatient care received at hospitals. Tenet is looking

to expand this segment in order to capitalize on growing industry trends. This growth

will be achieved by building new outpatient centers and by forming strategic

partnerships. These additional centers similar to those of USPI will “offer many

advantages to patients and physicians, including greater affordability, predictability,

flexibility and convenience” (Tenet Healthcare, 2018a). Lower cost structures and

greater efficiencies are anticipated.

2. Continue to grow imaging and urgent care businesses – Tenet’s outpatient services,

similar to the industry trend, has proven to generate significantly higher profit margins

than its hospitals or inpatient services. As such, it will continue to grow these businesses

through its USPI joint venture. This will allow Tenet to increase its capabilities as it

relates to physicians and offer more services to its patients which will increase customer

satisfaction. These businesses are far less capital intensive and tend to grow faster than

its inpatient businesses (Tenet Healthcare, 2018a).

3. Sell Conifer – Conifer originally stemmed from Tenet’s patient financial services

division. It currently supports care management and processes over $30 billion in net

revenue annually. Conifer was determined to be a very valuable asset, but Tenet has

75 TENET HEALTHCARE: STRATEGIC ANALYSIS

decided that it is not strategic to actually own it. As such, it will sell it, but plans on

executing strong service level agreements with the new owner in order to maintain a high

level of service in cash collections (Tenet Healthcare, 2018d).

4. Increase the focus on quality of care – Tenet maintains that it is committed to high-

quality care. Out of twenty USPI hospitals, sixteen of them received a rating of four stars

or higher on the Hospital Consumer Assessment of Healthcare Providers and Systems

(HCAHPS) patient satisfaction survey. With that being said, patient experience at Tenet

hospitals is below the HCAHPS national average with Tenet averaging 66.1% and the

nation averaging 71.7%. Furthermore, Tenet’s Centers for Medicare and Medicaid

Services (CMS) rating was 2.29 which was far below the national average of 3.15. The

firm even had some hospitals rated as 1-star. These hospitals will receive personal visits

from the new CEO (Tenet Healthcare, 2018d).

5. Divest non-core hospitals – A total of twelve U.S. hospitals and nine U.K. facilities are

targeted for divestment. This will be completed in 2018 and will result in upwards of

$700 million in cash proceeds and the elimination of roughly $300 million of capital

lease debt (Tenet Healthcare, 2018l).

4.1.6.3 Competitive Strength

Tenet’s main competitive strength is the economies of scale it has achieved through its

own operations combined with its joint ventures and partnerships. The firm currently has 90

hospitals and 460 outpatient centers located in the U.S. as well as the U.K. With roughly

115,000 employees and over 11 million patient care encounters, Tenet is a force to be reckoned

with. Additionally, the firm benefits from 50 health system partners and has over 800 Conifer

clients (Tenet Healthcare, 2018i).

76 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 8: Competitive Strength Analysis

The identification of Tenet’s competitive strength required an in-depth and weighted

rating of the industry’s KSFs as well as the two business segments within the industry as

indicated in Table 8 above. This was done for Tenet and its two primary competitors: HCA

Holdings and Community Health Systems. At a glance, it may seem as though HCA has greater

economies of scale as it too has operations in the U.S. and the U.K. with twice as many

employees as Tenet and more than 27 million patient encounters per year. Furthermore, HCA

has nearly double the number of hospitals that Tenet has, but it only has 119 freestanding surgery

centers. This brings the total of HCA healthcare facilities to 296 compared to Tenet’s 550

facilities. Though HCA’s reach extends to the U.K. much like Tenet’s, HCA facilities in the

U.S. are only in twenty states while Tenet has facilities in forty-seven states (Tenet Healthcare,

2018i). Similarly, Community Health Systems has fewer healthcare facilities than Tenet. In

truth, it has fewer health facilities than HCA as well. Community Health Systems has a total of

127 facilities located in twenty states and no international locations (Community Health

77 TENET HEALTHCARE: STRATEGIC ANALYSIS

Systems, 2018). Though the company may benefit from economy of scale, its weighted score for

this particular KSF is lower than Tenet’s and HCA’s scores.

4.1.7 Summary of Organizational Analysis

The organizational analysis of Tenet provided an overview of the company’s mission,

products and services offered, leadership, culture, structure and competitive strategy. Tenet’s

mission revolves around its commitment to quality and its endeavor to help people live happier

and healthier lives. It achieves this through its wide variety of services offered at its multiple

hospitals, urgent care centers, diagnostic imaging centers, surgery centers and satellite

emergency departments. Its staff of approximately 115,000 people are dedicated to providing

high-quality and high-value care in forty-seven states in the U.S. and several locations in the

U.K. This is evident in its culture of integrity, commitment to quality and dedication to

developing leaders within the organization.

The firm has a matrix organizational structure as it includes multiple dimensions such as

the board of directors, senior business officers, hospital operations leaders, Conifer leaders and

USPI leaders complete with presidents, CEOs and directors of their own where necessary. This

structure enhances communication, collaboration and coordination between the units. Moreover,

Tenet recently named Ronald Rittenmeyer as its new executive chairman and CEO. Rittenmeyer

has several years of turnaround experience which is exactly what the firm needs. Under his

leadership, Tenet has identified and begun implementing its best-cost provider strategy designed

to lower patient cost while increasing value and differentiation in regards to its services as it

relates to quality, convenience and innovation. It is in the process of expanding some of its

business segments while simultaneously selling others. This is all being done while focusing on

the quality of care that patients receive. This strategy will decrease Tenet’s costs, free up capital

78 TENET HEALTHCARE: STRATEGIC ANALYSIS

for additional growth in predetermined areas, increase efficiency and add additional patient

value.

Tenet has already achieved economies of scale over its primary competitors which

include HCA Holdings and Community Health Systems. This allows it to pursue its strategy

more effectively. Moreover, the economies of scale that it benefits from are a direct result of its

widespread reach across the U.S. and the U.K. stemming from its multiple partnerships, joint

ventures and business segments. The leaders of which are included in the firm’s matrix

organizational structure. There is strength in numbers here in addition to bargaining power and

reduced costs. Tenet’s performance is a direct result of its structure and best-cost provider

strategy. They work well together and should benefit the company in the long-term as it relates

to profitability and sustainability.

4.2 Analysis of Firm Resources

Resources are a vital part of a firm’s competitive strategy. They are the competitive

assets and productive inputs that the firm owns or controls and may vary significantly by not

only type, but by quality as well (Thompson et al., 2016, p. 88).

4.2.1 Tangible Resources

Tangible resources are those that may be quantified or touched which makes them the

most easily identifiable types of resources. They include physical resources such as real estate

and equipment, but also include financial, technological and organizational resources such as

cash, patents and communication systems (Thompson et al., 2016, p. 88-89). See table 9 for a

list of Tenet’s tangible resources by category.

79 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 9: Tenet’s Tangible Resources

Tenet’s physical resources include its locations of operation which currently include

forty-seven states in the U.S. and several locations in the U.K. The firm has a total of ninety

hospitals and 460 outpatient centers between it and USPI. With a total of 550 healthcare

facilities in the U.S. and U.K., the firm has a considerable amount of real estate (Tenet

Healthcare, 2018i). Each facility is also fully equipped with all necessary supplies. All of the

diagnostic imaging centers, for instance, are equipped with all relative imaging equipment to

include x-ray, MRI, CT scan and ultrasound machines. Overall, Tenet has strong physical

resources in regards to competitive strength.

80 TENET HEALTHCARE: STRATEGIC ANALYSIS

Regarding its financial resources, Tenet is doing quite well. The firm has improved its

financial situation considerably in recent months. As of December 31. 2017, Tenet had $611

million in cash and cash equivalents which is significantly higher than the $429 million it had on

September 30, 2017. Additionally, it had no outstanding borrowing on its $1 billion credit line.

Regarding net cash from operations, Tenet has $1.2 billion which was an increase of $642

million when compared to its net cash from operations in 2016. Even Ronald Rittenmeyer, the

newly named executive chairman and CEO, stated that the company’s financial results in the

fourth quarter were strong in each business segment and that volume growth had actually

returned to the firm’s hospital operations and ambulatory segments (Tenet Healthcare, 2018l).

Based on the above financial resources, Tenet’s competitive strength is improving and rated as

strong.

Compared to its competitors, Tenet’s technological resources are of moderate strength.

Saint Vincent Hospital in Massachusetts was the first of Tenet’s hospitals to receive the new GE

Healthcare Signa Artist MRI machine. This machine is designed to enhance patient comfort,

reduce anxiety and ease pain while in use. It has the latest MRI technology which takes

advantage of 2D and 3D images used to enhance diagnosis and treatment capabilities. Many of

its features are advanced and the quality of the images will work to satisfy a plethora of medical

needs. By April 2018, Tenet plans to have this advanced MRI machine in an additional five

facilities (Tenet Healthcare, 2018k). Tenet understands the importance of technology in the

medical field. In addition to the new MRI machines, it is focused on technological

advancements in other arenas. Tenet and USPI recently partnered with Hospital for Special

Surgery (HSS) to create an orthopedic care center in Florida. HSS holds many honors in the

field of orthopedics including being ranked number one in the nation eight years in a row and

81 TENET HEALTHCARE: STRATEGIC ANALYSIS

being recognized as the world’s leading academic medical center focused on musculoskeletal

health research, innovation and education. In 2016 alone, HSS made a total of 112 invention

submissions (Tenet Healthcare, 2018c). Partnering with HSS will undoubtedly benefit Tenet

from a technological resource perspective. The firm and its patients will profit from this

partnership and the additional innovations it brings with it.

Tenet’s organizational resources are strong in that they provide economies of scale and

extend the company’s reach internationally. These resources include Tenet’s joint venture with

USPI, its fifty health systems partners and its current ownership of Conifer and the over 800

clients that come with it. It is because of Tenet’s partnerships and joint venture that the company

employs the matrix organizational structure allowing for better communication and coordination

between all parties involved.

4.2.2 Intangible Resources

Intangible resources are often more difficult to identify than tangible resources though

they are often the most important competitive assets of a firm. They include human assets and

intellectual capital, brands, company image and reputation, relationships, and company culture

and incentive systems (Thompson et al., 2016, p. 89). Table 10 below is a list of Tenet’s

intangible resources.

82 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 10: Tenet’s Intangible Resources

Tenet’s human assets and intellectual capital resources are rather strong. The firm

requires highly educated and trained staff in order to provide high-quality care to its patients. To

date, Tenet employs 32,000 active physicians and 33,000 nurses (Tenet Healthcare, 2018i). This

makes up over half of its 115,000 employees which also consists of accountants, lawyers and

other degree holding personnel. CEO Rittenmeyer also has a lot to offer the company in terms of

leadership and experience. Not only is he intimately familiar with the company after serving on

the board since 2010, but he also has years of experience assisting organization’s in financial

trouble. Since being named executive chairman and CEO in late 2017, Tenet has already seen a

significant improvement in its financial position (Tenet Healthcare, 2018d).

The hope is that Rittenmeyer can also help improve the company’s image like he did with

its financials. When it comes to company image and reputation, Tenet’s rating is weak at best.

It has been involved in various scandals and lawsuits over the years which has not only

83 TENET HEALTHCARE: STRATEGIC ANALYSIS

negatively impacted its reputation, but also cost the company a great deal financially. Its most

current issue, however, is its reputation with its patients. HCAHPS stands for Hospital

Consumer Assessment of Healthcare Providers and Systems. It is a patient satisfaction survey

required by the Centers for Medicare and Medicaid Services (CMS). For the year 2017, Tenet’s

HCAHPS average was only 66.1% which is considerably lower than the nation’s average of

71.7%. It also suffered from a low CMS star rating. The national CMS star rating in 2017 was

3.15, but Tenet’s rating was 2.29. Some of Tenet’s hospitals even received 1-star ratings and

will be personally visited by the CEO in the coming months to address the low patient ratings

received (Tenet Healthcare, 2018d).

Despite the weak reputation and company image, Tenet does have strong industry

relationships. This is evident in its successful joint venture with USPI, its partnerships with 50

health systems and its new partnership with HSS. Its most recent partnership with HSS has

provided increased access to new technologies and innovations as discussed in the tangible

resources section. Naturally, these strong industry relationships help to garner trust and result in

economies of scale.

Regarding company culture and incentives as it relates to intangible resources, Tenet’s

assessed strength is strong. The company and its team members are committed to quality and are

working each day to improve the quality of care they provide to their patients. They also value

teamwork and integrity as it relates to ethics, compliance in all facets of the company’s dealings

and transparency. They even have what is known as the Tenant Care Fund which is a charity

funded by employees for employees in the event that they find themselves in dire financial

circumstances due to situations beyond their control (i.e. natural disaster) (Tenet Healthcare,

2018h). Tenet is a company of inclusion and support.

84 TENET HEALTHCARE: STRATEGIC ANALYSIS

4.2.3 Summary of Firm’s Resources

For the most part, Tenet has relatively strong tangible and intangible resources. It

benefits from economies of scale related to its physical and organizational relationship resources

which extend the companies reach to far more states than its competitors and even overseas. The

firm’s financial situation has improved since the third quarter of 2017 and will likely continue to

do so provided that it invests and grows smartly. Its strong human assets and intellectual capital

resources should help the company to achieve its desired growth and financial success, but it

must invest more in its technological resources. Though not necessarily weak here, it could

benefit from increased R&D and the incorporation of more medical innovations and

technologically advanced equipment. Doing so could help improve the company’s image and

overall reputation as Tenet is very weak here. Patient satisfaction levels are below the national

averages. With the company’s strong commitment to quality, integrity and teamwork, it should

be able to strengthen its reputation by end of 2018. Doing so would likely result in an increase in

revenue and could positively impact the company’s profit margin.

4.3 Capabilities

The capabilities of a firm pertain to its capacity to successfully and competently perform

some internal activity. Much like resources, the form, quality and competitive importance of

capabilities differ. A firm’s capabilities stem from its use of its resources and typically involve

its intellectual capital, organizational processes and systems, and its people (Thompson et al.,

2016, p. 88-90).

Tenet’s most important capability is cross-functional (relationships, organizational and

human assets) and revolves around its multiple partnerships and joint venture with USPI. It has

established great trust with multiple organizations and has achieved tremendous growth and

85 TENET HEALTHCARE: STRATEGIC ANALYSIS

brand recognition as a result. The company’s joint venture with USPI combined with its

partnership with fifty health systems including HSS has led to its increased power with suppliers

and other benefits resulting from economies of scale including lower costs associated with

providing services to its clients in the U.S. and U.K. It has also allowed the company to offer its

patients higher quality and high-value services at reduced costs thus supporting its best-cost

provider strategy. It has established strong relationships which are supported by its matrix

organizational structure, highly educated and trained staff, proven leaders and a dedicated team

of physicians and nurses. The combination of multiple resources has resulted in what is known

as a resource bundle and contributes to the competitive strength of the company (Thompson et

al., 2016, p. 91).

4.3.1 Value Chain Analysis

The purpose of a company’s activities is to create value for consumers so that there is

demand for their goods and/or services. The combination of these activities is what is known as

the company’s value chain. Figure 21 below shows a generic value chain.

Figure 21: Generic Value Chain

86 TENET HEALTHCARE: STRATEGIC ANALYSIS

The value chain includes both primary and support activities. The primary activities are

the most crucial to creating customer value, but the support activities aid in the development and

facilitation of the primary activities. As such, they too aid in value creation and must be taken

into account.

A value chain analysis examines the value chains of two or more competitors to compare

their value creating activities. This helps to determine their relative cost positions and capacity

for differentiation thus revealing their competitive differences (Thompson et al., 2016, p. 101).

The value chain analysis below compares Tenet and HCA Holdings. The primary and support

activities are identified and then assessed to determine which company performs the activity in a

way that provides it with a competitive advantage through either differentiation or lower costs.

Tenet’s primary activities for each subcategory include:

• Supply Chain Management – Tenet has the advantage over HCA when it comes to the

management of its suppliers. The main suppliers to healthcare companies often have

significant buying power as a result of their sheer size, but Tenet has managed its

suppliers as it too is quite large and benefits from economies of scale. Additionally, it

has to ensure that the correct supplies get to the intended facilities and this could only be

achieved through proper management of supplier relationships as well as proper

inventory management. Where it falls behind HCA in this subcategory is when it comes

to its business and operational services where one of its business segments receives

inputs from the hospitals and additional clients and then processes the revenue and

provides other key outputs based on those inputs. This segment is Conifer and though it

is considered valuable, it has just recently been decided that it is not strategic to own it

anymore. As such, it is being sold, but HCA still owns Parallon which performs similar

87 TENET HEALTHCARE: STRATEGIC ANALYSIS

tasks as Conifer thus giving HCA a leg up on this front. This subcategory, however, still

goes to Tenet due to lower costs.

• Operations – Regarding quality of patient care, HCA comes out on top. It is

differentiated based on its superior services rendered and the fact that it has 106 hospitals

on the Joint Commission’s top performers list for quality (HCA Healthcare, 2018).

Unfortunately, this is at a time when Tenet’s HCAHPS and CMS star ratings are below

the national average as previously mentioned. With that being said, Tenet still benefits

from differentiation when it comes to the number of outpatient facilities it has and the

services that are offered. Tenet’s 460 outpatient centers support the trend and meet the

demand of the U.S. more so than HCA’s 117 outpatient centers. It also benefits from

lower costs associated with its hospitals as there are only ninety compared to HCA’s 177.

Hospitals are not as lucrative as outpatient centers and current trends are moving away

from inpatient facilities like this.

• Distribution – Tenet benefits from differentiation here in that in offers services in 47

states in the U.S. compared to HCA’s services only being offered in 20 states in the U.S.

This also helps Tenet achieve economies of scale thus reducing overall costs. Both

hospitals have facilities in the U.K.

• Sales and Marketing – Since demand is growing for and trends are leaning towards

outpatient centers versus inpatient centers, Tenet is currently focused on expanding its

reach in this segment. Though it has nearly four times as many outpatient centers as

HCA, it is following demand and following the money. This also allows Tenet to benefit

from economies of scale and its patients to benefit from lower costs due to the price of

services at outpatient centers compared to at hospitals.

88 TENET HEALTHCARE: STRATEGIC ANALYSIS

• Service – The key focus here is on location. Tenet has far more locations throughout the

U.S. than HCA does. Furthermore, it provides much needed services at facilities more

conducive to patient demand – outpatient centers.

Table 11: Primary Activities Value Chain Analysis: Tenet and HCA

Tenet’s support activities for each subcategory include:

• Product R&D, Technology and Systems Development – HCA takes two out of 3 in this

subcategory. Though Tenet claims to have a culture of innovation, there is very little for

it to stand on in this regard. Technology and innovation activities go to HCA with its in-

house HCA Information Technology and Services segment that assists all other business

89 TENET HEALTHCARE: STRATEGIC ANALYSIS

segments within the company thereby increasing efficiency which helps to reduce costs.

When it comes to technologically beneficial partnerships though, Tenet scored big when

it recently partnered with HSS with its inventions, innovation institute and leadership

position in orthopedics. Technology also plays a role in Tenet’s Conifer segment which

deals in business revenue management for over 800 clients. Unfortunately, the plan is to

sell Conifer in the near future which means that Tenet will no longer benefit from the

technology it utilizes. HCA, on the other hand, utilizes Parallon which also incorporates

technology and manages business revenue for multiple clients thereby giving HCA the

upper hand. Since technology aids in differentiation and can increase efficiency thus

reducing costs, HCA leads in this subcategory (HCA Healthcare, 2018).

• HR Management – Both Tenet and HCA employ thousands of highly educated and

skilled physicians and nurses, but this comes at an incredible cost to both companies.

HCA actually employs 5,000 more physicians and nearly three times as many nurses as

Tenet despite having significantly fewer facilities. Tenet has recently begun thinning the

herd meaning that it is currently in the process of reducing its number of employees while

increasing efficiency. This allows Tenet to benefit from reduced costs which can then

carry over to its patients. The staff it will keep is still highly trained and benefits from

ongoing training and education provided by Tenet. HCA offers similar ongoing training

and education, but it also provides compensation to its staff during their residency

programs (HCA Healthcare, 2018). This actually further increases the costs that HCA

has meaning that Tenet once again has the cost advantage.

• General Administration – Tenet is focused on cost reduction programs right now so that it

may provide its patients with more for their money. Tenet strives to provide high-value

90 TENET HEALTHCARE: STRATEGIC ANALYSIS

services at reduced costs. One of its focuses is on reducing overhead. The company

successfully reduced corporate overhead costs by 20% when compared to 2016 (Tenet

Healthcare, 2018d). These savings better help to position it as a best-cost provider. Its

partnerships with over fifty health systems and its joint venture with USPI also allow it to

benefit from economies of scale thereby reducing production costs and allowing it to

have more bargaining power with suppliers further saving the company money. HCA

does not have the number of partnerships and joint ventures that Tenet has and does not

benefit from the same economies of scale.

Table 12: Support Activities Value Chain Analysis: Tenet and HCA

91 TENET HEALTHCARE: STRATEGIC ANALYSIS

4.3.2 Core Competencies and Sustainable Advantages

Core competencies are the internal activities that a company performs consistently well.

They are paramount to a company’s strategy, market success and profitability as they create

competitive advantages on multiple fronts and drive growth. Core competencies are not easily

imitated by competitors, provide access to multiple markets and provides value behind the end-

product or service.

One of Tenet’s core competencies is based in its comprehensive network. Its reach is far

and wide as it has 550 facilities throughout the U.S. and the U.K. In fact, Tenet’s facilities are

located in 47 states in the U.S. which is more than double the number of states that HCA

facilities are located in. These facilities include hospitals, urgent care centers, diagnostic

imaging centers, surgery centers and satellite emergency departments. Tenet’s network includes

over fifty health systems partners in various specialties and locations which allows the firm to

access more markets via these partnerships. Furthermore, its joint venture with USPI includes

twenty-one USPI hospitals with sixteen of them achieving a four-star or higher rating for

HCAHPS and ten achieving the same rating for CMS overall quality in 2017. This also allows

Tenet to offer and continue building on a full continuum-of-care solution with multiple access

points for consumers (Tenet Healthcare, 2018j). This extensive network is difficult to rival as

expansion and growth require considerable time and capital investments.

Tenet also has a core competency as it relates to quality of care. Despite Tenet’s

hospitals receiving HCAHPS and CMS ratings below the national average, it has benefitted from

USPI’s hospitals receiving considerably high HCAHPS and CMS ratings. Also, when Tenet’s

hospital key indicators are analyzed, Tenet’s score towers over the national average. Tenet’s

core measures are at 97.7% compared to the national average of 92.5%. Furthermore, its

92 TENET HEALTHCARE: STRATEGIC ANALYSIS

hospital safety GPA is 3.19 over the national average of 2.81. The safety aspect of Tenet’s care

directly relates to the quality of care that patients receive. Additionally, 85% of the firm’s

hospitals are in Accountable Care Organizations (ACO). ACOs focus on improving the quality,

efficiency and coordination of care through established and innovation relationships between all

parties involved including physicians, payers, employers and patients. ACOs bolster the

numerous value-based arrangements that the firm has and directly result in more comprehensive

and cost-effective care of patients (Tenet Healthcare, 2018j). Through Tenet’s dedication to the

quality of care that its patients receive, it has managed to increase value to the patients and its

other affiliates while simultaneously creating a competitive advantage designed to contribute to

growth.

The identification of Tenet’s core competencies is the key to sustaining a long-term

competitive advantage, but management must ensure that these core competencies are closely

monitored and revised or updated as needed because market conditions do change. A close

evaluation of Tenet’s resources and capabilities will determine whether or not they can support a

competitive advantage and whether or not the competitive advantage is sustainable or not.

93 TENET HEALTHCARE: STRATEGIC ANALYSIS

Table 13: VRIN Test of Resources and Capabilities

Tenet’s resources and capabilities are analyzed using the VRIN test as seen in table 13

above. The VRIN test allows for a more in-depth analysis of the identified resources and

capabilities so that it may be determined which support a competitive advantage and which are

sustainable. Ideally, sustainable competitive advantages are identified, but very few pass all four

tests.

The VRIN test measures the value, rarity, inimitability, and non-substitutability of

resources and capabilities. If they are valuable, they are directly relevant to the strategy of a

company and allow it to compete more effectively. Rare resources/capabilities mean that

competing companies lack them as they are not widely available. If a resource or capability is

94 TENET HEALTHCARE: STRATEGIC ANALYSIS

inimitable then it is hard to copy or imitate. Non-substitutable means that the resource or

capability is not vulnerable in regards to substitutions (Thompson et al., 2016, p. 91-92).

The value and rarity of the resources and capabilities determine whether or not they

support a competitive advantage, but the inimitability and non-substitutability of them are

indicative of whether or not the competitive advantage is sustainable. Worth noting is that very

few companies actually have resources and capabilities that are capable of passing all four tests,

but greater profit potential exists for those that do (Thompson et al., 2016, p. 93).

After conducting the VRIN test on Tenet’s resources and capabilities, it was determined

that the majority of the company’s resources and capabilities do not contribute to a sustainable

competitive advantage. In fact, none of Tenet’s tangible resources resulted in a sustainable

competitive advantage and only one of four intangible resources did. That only intangible

resource that contributed to a sustainable competitive advantage for Tenet is its degree of

relationships which is essentially the same thing as its comprehensive network listed under core

competencies which also passed all four tests. In other words, its numerous partnerships are

competitively valuable as they contribute directly to the company’s best-cost provider strategy.

Furthermore, they are rare and hard to copy. Though some of Tenet’s competitors have formed

some partnerships in the industry, this number is quite small and the partnerships formed by

others do not have the reach that Tenet’s partnerships resulted in. These partnerships may be

costly to form and require considerable trust and mutually beneficial results. Also, there are

really no substitutes when it comes to such a comprehensive network. A company either has it

or it doesn’t. The few that do have such a network benefit from economies of scale, more

bargaining power with suppliers, increased differentiation and reduced costs.

95 TENET HEALTHCARE: STRATEGIC ANALYSIS

4.3.3 Summary of Firm’s Capabilities

As a whole, Tenet has rather strong tangible and intangible resources as it relates to

physical, financial, technological, organizational, intellectual, relationships and culture. Where it

is weak is the company’s image and reputation following some lower than average HCAHPS and

CMS ratings in its hospitals. Its commitment to quality and high-value care will likely improve

these scores for 2018. The strength demonstrated in the majority of Tenet’s resources will

undoubtedly allow the company to continue pursuing its best-cost provider strategy so that it

may achiever superior profitability and long-term sustainability. It must ensure, however, that it

continues to monitor the changing market as it relates to demographics and trends as it prepares

to secure its position within the industry.

4.4 Financial Analysis

A financial analysis can provide considerable insight into a company’s financial health

and paint a picture of not only the company’s current standing compared to its competitors and

the industry as a whole, but may also predict where the company may be in the future. It

involves an evaluation of the firm’s financial statements and assists in the assessment of its

current strategy. Key financial ratios are used in this evaluation process and help to determine

valuation, growth, profitability, financial strength and management efficiency. A full evaluation

of these factors is performed and analyzed below for Tenet and its main competitor HCA

Holdings along with industry ratios when available. All financial information was retrieved from

CSI Market and MorningStar Financials.

96 TENET HEALTHCARE: STRATEGIC ANALYSIS

4.4.1 Valuation Analysis

A valuation analysis aids in the determination of the financial worth of a company and is

quite useful for comparing companies in the same industry or estimating intrinsic values and

future ROIs. Since Tenet does not pay out dividends, none of these ratios were performed.

Table 14: Internal and Free Cash Flow for Tenet and HCA

Tenet HCA

12/2017 12/2016 12/2015 12/2017 12/2016 12/2015

Internal Cash Flow 1200M 558M 1026M 5426M 5653M 4734M

Free Cash Flow 493M 256M 733M 2411M 2893M 2359M

Internal cash flow provides an estimates of the cash that a company is actually making

after handling expenses to include operating expenses, taxes and interest. Tenet’s internal cash

flow took a nose dive in 2016 indicating that the company may have either made less revenue or

had far more expenses than in 2015. Its internal cash flow did double in 2017 which is likely

indicative of either fewer expenses that had to be paid or more revenue that was made.

Compared to HCA, however, it has had significantly less internal cash flow each year.

Free cash flow is similar to internal cash flow, but also includes reinvestment expenses

that were paid out. Again, Tenet’s free cash flow is much lower than HCA’s each year, but this

is to be expected considering that its internal cash flow was also lower each year. With its

limited free cash flow, it may find it difficult to expand through mergers or acquisitions and may

have a difficult time funding new strategic initiatives.

4.4.2 Growth Analysis

A growth analysis is indicative of the rate of growth that a company is experiencing.

High growth rates speak to a firm’s potential ROI. Firms with higher ROIs tend to be more

profitable and more successful.

TENET HEALTHCARE: STRATEGIC ANALYSIS 97

Table 15: 3-Year Growth Rates for Tenet, HCA and the Industry

Tenet HCA Industry

3 Year Growth 12/2017 12/2016 12/2015 12/2017 12/2016 12/2015 12/2017 12/2016 12/2015

Revenue 4.90% 20.90% 26.90% 5.71% 6.67% 6.32% 4.97% 23.48% 12.90%

Operating Income 6.36% 22.51% 12.13% 2.86% 28.05% 6.84% -17.39% 7.93% -43.79%

The growth rates year-over-year as they relate to revenue and operating income vary

considerably by year and entity. Regarding revenue growth, HCA is the only one of the three

that remained relatively consistent year-over-year. Both Tenet and the industry had relatively

high revenue growth rates in 2015 with Tenet having nearly double that of the industry average.

Furthermore, Tenet was on par with the industry in 2016 and 2017 demonstrating that its revenue

growth rate is consistent with its competitors.

The same cannot be said for operating income year-over-year. In 2015 and 2017, the

industry average was actually negative which speaks to the growth that Tenet and HCA achieved

as their operating income growth percentages were positive each year with Tenet pulling ahead

in 2015 and 2017. Overall, Tenet appears to be doing better than HCA and the industry average

in terms of growth. This could be attributed to its many partnerships that it continues to form

each year. It appears to be growing and expanding its reach steadily.

4.4.3 Profitability Analysis

When a profitability analysis is conducted, the ability of a company to earn a return or

profit is determined. The ratios below indicate profit potential both before and after taxes as they

relate to operations, sales and relative ROI.

Table 16: Profitability Ratios for Tenet, HCA and the Industry

Tenet HCA Industry

12/2017 12/2016 12/2015 12/2017 12/2016 12/2015 12/2017 12/2016 12/2015

TENET HEALTHCARE: STRATEGIC ANALYSIS 98

Gross Profit Margin 35.56% 36.54% 35.85% 83.20% 83.30% 83.30% 62.06% 62.16% 66.00%

Operating Profit Margin 5.80% 6.36% 5.78% 13.90% 14.90% 15.00% 12.82% 16.05% 12.11%

Net Profit Margin -3.67% -0.98% -0.75% 5.08% 6.97% 5.37% 3.26% 10.57% 1.57%

Total Return on Assets -2.93% -0.79% -0.67% 6.30% 8.69% 6.66%

Gross profit margin is the percentage of revenues that is available to a company to not

only cover operating expenses, but also to yield a profit. Tenet’s gross profit margins from 2015

through 2017 are roughly half of the industry’s averages each year. In all three years, HCA

dominated the industry and Tenet on gross profit margins demonstrating that HCA likely had

overall lower operating expenses and made wiser financial decisions each year than Tenet. In

order to increase its profitability, Tenet will have to focus on reducing its operating expenses

through increased efficiency, lower fixed costs or some other means.

Tenet’s operating profit margin is once again lower than HCA’s and the industry average

each year. This is not surprising though considering it has already been established that Tenet

needs to reduce its operating expenses. Since the operating profit margin directly relates to the

profitability of current operations, Tenet needs to address this in order to make more profits each

year and remain competitive in the industry.

The net profit margin shows the profits per each dollar of sales after taxes. Note that

Tenet’s net profit margin is negative. HCA and the industry remain positive year after year, but

Tenet does not have one year from 2015 through 2017 that it benefits from a positive net profit

margin. Tenet must reevaluate its pricing strategies and do all it can to increase revenue.

The total return on assets speaks to the ROI after interest is added to the profits after

taxes. Essentially, it shows the percentage of profit that a company earns in relation to its

resources. HCA is once again positive each year, but Tenet’s total return on assets is negative

TENET HEALTHCARE: STRATEGIC ANALYSIS 99

each year. This means that the company is not turning a profit as it should be when compared to

its resources.

4.4.4 Financial Strength Analysis

A financial strength analysis is used to determine how well a company is managing its

debt or liabilities. Financially strong companies will have more leverage than weaker companies

when it comes to debt as it will have an easier time meeting both its short-term and long-term

obligations.

Table 17: Financial Ratios for Tenet, HCA and the Industry

Tenet HCA Industry

12/2017 12/2016 12/2015 12/2017 12/2016 12/2015 12/2017 12/2016 12/2015

Current Ratio 1.29 1.3 1.2 1.62 1.56 1.67

Working Capital 5.31 4.95 3.63 1.85 1.95 2.03

Debt-to-Equity 36.12 20.81 0.08 0.07 0.08

Current ratios show a company’s ability to pay its current debts with its assets that may

be converted into cash in the near future. Current ratios higher than 1.0 are indicative of good

financial strength in this regard. Both Tenet and HCA have current ratios higher than 1.0

showing that each year they have had the ability to pay their current debts with their easily

convertible assets.

Working capital ratios demonstrate that companies have enough cash available to pay for

their day-to-day operations. Compared to the industry average, Tenet is doing rather well in this

regard and has more than enough available cash to covers its daily operations.

Debt-to-equity ratios show the balance between funds borrowed for the short-term and

long-term and the amount of funds invested into the business by stockholders. Ratios below 1.0

indicate a greater capacity to borrow funds. The industry average each year is below one which

demonstrates that the majority of competitors have the ability to borrow needed funds if

100 TENET HEALTHCARE: STRATEGIC ANALYSIS

necessary. Tenet’s ratio is quite the opposite. Its capacity to borrow funds is quite limited as its

ratio is significantly higher than 1.0.

4.4.5 Management Efficiency Analysis

The management efficiency analysis determines how well a company is using its assets

and liabilities within the company.

Table 18: Management Efficiency Ratios for Tenet and HCA

Tenet HCA

12/2017 12/2016 12/2015 12/2017 12/2016 12/2015

Days of Inventory 9.08 9.29 8.92 76.73 77.44 74.73

Inventory Turnover 40.19 39.31 40.94 4.76 4.71 4.88

Days of inventory indicate how efficiently inventory is being managed. Fewer days are

better than more days. Comparing HCA and Tenet, we see that Tenet has fewer days of

inventory each year than HCA. In fact, it has considerably fewer days of inventory

demonstrating that it is more efficient at managing its inventory. Efficiency in this regard can

help keep costs down.

Inventory turnover is similar, but the higher the number of days the better. This is

because it indicates the number of inventory turns each year. Considering HCA’s incredibly

high number of days of inventory, it comes as no surprise that its inventory turnover is rather

low. Conversely, Tenet benefits from a high inventory turnover which means that its inventory

is being used efficiently thus helping to keep costs lower.

4.4.6 Summary of Financial Analysis

Tenet is doing relatively well from a financial perspective. Its growth is consistent if not

better than the industry’s average. With the exception of its debt-to-equity ratio, Tenet’s

financial strength is good as is its management efficiency. Where the company really falters is

101 TENET HEALTHCARE: STRATEGIC ANALYSIS

its profitability analysis. With its gross profit margin and operating profit margins at less than

half of HCA’s and the industry’s average, it appears to be making some poor pricing decisions

and suffering from relatively high operating costs. Its net profit margin and total return on assets

have been negative each year which is of great concern.

5.0 Strategic Issues Analysis

This section will identify and analyze the critical challenges that Tenet faces as it relates

to its resources and capabilities, strengths and weaknesses, and opportunities and threats. The

driving forces identified in the general environmental analysis include regulatory influences and

government policy changes in addition to technological change. The industry key success

factors identified in the industry analysis include the prioritization of high-quality, safe and high-

value care, focusing on reducing costs and achieving economies of scale, and investing in

technology. The strategic fit analysis performed will determine if Tenet has the required

resources and capabilities needed to achieve the industry key success factors and overcome the

prevailing driving forces so that it may grow, achieve superior profitability and long-term

sustainability. Lastly, this section will identify the most critical strategic issue that Tenet is

facing so that a call for immediate recommendations may be made.

Table 19: Driving Forces and Key Success Factors

Driving Forces

Regulatory Influences and Government Policy Changes

Technological Changes

Key Success Factors

Prioritize High-Quality, Safe and High-Value Care

Focus on Reducing Costs and Achieving Economies of Scale

Invest in Technology

102 TENET HEALTHCARE: STRATEGIC ANALYSIS

5.1 Critical Challenges

Challenges are sure to abound in every industry regardless of the company. The

challenges that a particular company within an industry faces stem from not only the external

environment, but also from within the industry itself. Tenet is no different in this regard. It too

faces critical challenges stemming from the external environment as well as the general medical

and surgical hospitals industry.

Driving forces may be either ongoing or disruptive and are the change agents in the

external environment that have the ability to alter competitive conditions thus reshaping the

industry landscape. There are two ongoing driving forces that were previously identified in the

general environmental analysis. They include regulatory influences and government policy

changes and also technological changes. Regulatory influences and government policy changes

include financial regulations, healthcare legislation and immigration laws among others. They

have the ability to impact the availability of capital, taxes, interest rates, insurance programs and

fees, and the availability of skilled workers across the globe. It could tremendously impact

demand, competition and profitability either positively or negatively depending upon the

regulations and policy changes made. Similarly, technological changes could have widespread

positive or negative impacts around the world. The world has become increasingly global and

every new innovation has the ability to spawn new industries or destroy them completely.

Technology has changed the way that the world communicates, works and lives. It surrounds us

and is highly prevalent among the younger generations as more technological advancements are

made. It is these advancements that could prove beneficial to some companies and detrimental

to others as they impact demand and consumer expectations.

103 TENET HEALTHCARE: STRATEGIC ANALYSIS

Industry key success factors (KSF) may also present challenges as they relate to

competitive strengths and have the potential to seriously impact profit margins. The following

KSFs were determined when analyzing the general medical and surgical hospitals industry. The

prioritization of high-quality, safe and high-value care, focusing on reducing costs and achieving

economies of scale, and investing in technology were determined to be the primary KSFs that the

industry needs to focus on in order to survive and thrive. Prioritizing high-quality, safe and high-

value care may result in increased revenues while simultaneously decreasing costs. If the

industry fails to prioritize accordingly, patients could suffer serious injury or death, lawsuits may

be filed and revenues would decrease thus negatively impacting profit margins. Focusing on

reducing cost and achieving economies of scale, however, could positively impact profit margins

and provide additional growth opportunities. This may be achieved through mergers and

acquisitions, joint ventures and various other forms of partnership. Better bargaining power with

suppliers would result and diversification within the industry would expand offerings and further

increase revenues. As competitors within the industry focus on care and growth, they must also

focus on and invest in technology. Technological innovations have been consistently driving

growth for years and there is no end in sight. The way that we live, operate and communicate

continues to change. Younger generations both rely on and demand that new technologies be

available and implemented wherever possible. Medical innovations have improved the quality

and duration of life and those companies that fail to invest in technology will fall behind and

miss out on the increased efficiency, reduced costs, improved diagnostics and higher demand

that is likely to follow.

Table 20: Critical Challenges Based on Driving Forces and KSFs

Associated Rank Critical Challenge

Type of Challenge

104 TENET HEALTHCARE: STRATEGIC ANALYSIS

1 Regulatory Influences and Government Policy Changes Ongoing Driving Forces 2 Technological Changes

1 Prioritize High-Quality, Safe and High-Value Care Industry Key

Success Factors 2 Focus on Reducing Costs and Achieving Economies of Scale

3 Invest in Technology

5.2 Resources and Capabilities

Tenet’s resources and capabilities were previously identified in sections 4.2 and 4.3

respectively. This section will further address the challenges that Tenet is facing and how the

company’s resources and capabilities stack up to the challenges as outlined in table 21.

Table 21: Strategic Fit Analysis for Tenet

It is necessary to delve into each critical challenge faced and the resources or capabilities

that exist to combat the challenges. Once the appropriate resources and capabilities are

identified, their strengths relative to the challenges may then be determined.

105 TENET HEALTHCARE: STRATEGIC ANALYSIS

• Regulatory Influences and Government Policy Changes – Government regulations and

legislation is outside of Tenet’s control. As such, it is cause for considerable uncertainty

as it has the potential to impact the company tremendously. Financial regulations have

the ability to impact tax rates and inflation which can put a dent in borrowing power and

the value of the dollar. Healthcare reform may eliminate penalties for those who are

uninsured which could result in even more residents cancelling insurance policies thus

impacting the contractual terms between Tenet and insurance providers. Overall

revenues could decrease as well which would naturally impact the company’s profit

margin. Despite Tenet’s numerous partnerships, matrix organizational structure,

intellectual capacity and human assets, and its culture of compliance, Tenet’s strength is

weak here. There is little that the company can do to combat this challenge.

• Technological Changes – The world and its relative economic growth is driven by

technology. Tenet has the financial means and intellectual capital necessary to keep up

with these technological changes. It also has strong relationships with and a

comprehensive network of other health systems and partners that have proven to be

innovative in this regard. Yet, Tenet’s strength to combat this particular challenge is

deemed moderate relative to its resources and capabilities because it has not set itself

apart from its competitors in regards to R&D or the technology that it utilizes in its

facilities.

• Prioritize High-Quality, Safe and High-Value Care – Tenet’s resources and capabilities

are strong compared to this particular challenge. This challenge speaks directly to

Tenet’s best-cost provider strategy designed to provide high-value to its patients at an

affordable price. The company has hundreds of facilities throughout the U.S. and U.K. as

106 TENET HEALTHCARE: STRATEGIC ANALYSIS

a result of its multiple partnerships and its joint venture with USPI. It has a well-

established and diversified network of trusted partners with additional resources and

advanced technologies. They value high-quality healthcare and have a reputation of

safety and overall quality based on key indicators in the hospital setting.

• Focus on Reducing Costs and Achieving Economies of Scale – This is an industry KSF

used to combat competition in the industry. As aforementioned, Tenet has established

trusted relationships, partnerships and joint ventures across forty-seven states in the U.S.

and several locations in the U.K. With ninety hospitals and 460 outpatient centers, it has

the physical resources required to meet the needs of its consumers. Financially, the

company is improving and has no outstanding debt on its $1 billion credit line. It has

achieved economies of scale resulting in lower production costs and increased bargaining

power with suppliers. This allows Tenet to pass on some savings to its consumers where

possible and could result in increased capital required for additional future growth.

Overall, its resources and capabilities are strong when compared to the challenge.

• Invest in Technology – Much like with the technological changes challenge discussed

earlier, the strength of Tenet’s resources and capabilities are only considered moderate

when compared to the challenge presented. The company has the financial resources

necessary to invest in the much needed technology, but it is not doing so to the extent that

it should if it hopes to compete with its industry rivals. Its culture speaks of innovation

and it utilizes technology, but it seems to be behind the technological curve. The bulk of

its technologies stem from its vast network of partners. It is through these relationships

that Tenet benefits as opposed to its own innovative technologies or investment in R&D.

107 TENET HEALTHCARE: STRATEGIC ANALYSIS

5.3 Strengths or Weaknesses Analysis

Strengths refer to attributes that enhance a company’s competitiveness while weaknesses

refer to deficiencies related to a company’s competitiveness. Strengths and weaknesses stem

from the internal analysis meaning that the industry KSFs will be the critical challenges in

question here. Table 22 below identifies Tenet’s strengths and weakness that are internal to the

company based on the industry’s KSFs previously described.

Table 22: Tenet’s Strengths and Weakness

Critical Challenges Status Against

Challenge

Ability to Handle

Challenge

Strength or

Weakness Prioritize High-Quality,

Safe and High-Value Care Strong Yes Strength

Focus on Reducing Costs

and Achieving Economies

of Scale Strong Yes Strength

Invest in Technology Moderate Yes Weakness

The prioritization of high-quality, safe and high-value care is considered one of Tenet’s

strengths. The company has the ability to handle the challenge as its resources and capabilities

are strong when compared to the challenge itself. The same holds true for the challenge

pertaining to the focus on reducing costs and achieving economies of scale which is also

considered a strength. Tenet has the ability to handle the challenge in accordance with the

company’s resources and capabilities previously discussed.

The company, however, is not without a weakness. From the previously identified KSFs,

it has been determined that investing in technology is considered to be a weakness of Tenet’s.

Compared to the challenge itself, the company’s resources and capabilities are of moderate

strength. Tenet has the ability to address this challenge and potentially turn it into a strength, but

it has yet to do so. If Tenet handled this challenge accordingly, it would be better positioned

within the industry and benefit from an additional competitive advantage.

108 TENET HEALTHCARE: STRATEGIC ANALYSIS

5.4 Opportunities or Threats Analysis

Opportunities play a role in shaping a company’s strategy while threats have the potential

to negatively impact a company’s profitability, sustainability and overall competitive foothold in

the industry. Opportunities and threats come from the external environment with threats often

being completely out of the company’s control. Table 23 below identifies Tenet’s opportunity

and threat that come from the external environment.

Table 23: Tenet’s Opportunity and Threat

Critical Challenges Status Against

Challenge

Ability to Handle

Challenge

Opportunity or

Threat Regulatory Influences and

Government Policy

Changes Weak No Threat

Technological Changes Moderate Yes Opportunity

Tenet has one identifiable opportunity as it relates to technological changes. Investing in

technology was previously determined to be an industry KSF and a weakness for Tenet, but

technological changes stem from the external environment and are a driving force. As such, it is

an opportunity if Tenet acts on it. The company’s strength is assessed as moderate when it

comes to its resources and capabilities. It is able to handle the challenge as it has the necessary

tools to do so.

Regulatory influences and government policy changes is a driving force and a critical

challenge that Tenet faces. It is considered to be a significant threat to the company as Tenet’s

resources and capabilities are too weak to challenge this threat. It is unable to handle the threat

as government regulations and legislation are out of the company’s control. If unfavorable

regulations and legislation are implemented and passed, Tenet could suffer from reduced

revenues, higher tax rates and a shortage of skilled workers which could negatively impact its

profit margin and threaten its competitive position within the industry.

109 TENET HEALTHCARE: STRATEGIC ANALYSIS

5.5 Summary of Strategic Issues Analysis

The two most significant challenges Tenet is facing include technological changes and

regulatory influences and government policy changes as identified in table 24 below.

Table 24: Two Most Critical Challenges Tenet is Facing

Challenges Type – Opportunity or Threat Regulatory Influences and Government Policy

Changes Threat

Technological Changes Opportunity

The most critical issue that Tenet is facing pertains to regulatory influences and

government policy changes which is classified as a threat to Tenet. As it stands, Tenet’s

resources and capabilities are weak compared to the challenge it faces so it is not currently able

to handle the challenge.

Table 25: Most Critical Issue Tenet is Facing

Most Critical Issue Type Regulatory Influences and Government Policy

Changes Threat

Per sections 5.3 and 5.4, Tenet’s strengths, weaknesses, opportunities and threats are

identified in table 26 below. Each aspect of the SWOT diagram were the direct result of the

strategic fit analysis based on Tenet’s resources and capabilities in relation to the external driving

forces and industry KSFs.

Table 26: SWOT Diagram for Tenet

Strengths

Prioritize High-Quality, Safe and High-Value Care

Focus on Reducing Costs and Achieving Economies of

Scale

Weaknesses

Invest in Technology

Opportunities Threats

110 TENET HEALTHCARE: STRATEGIC ANALYSIS

Technological Changes Regulatory Influences and Government Policy

Changes

The TOWS matrix is derived from the SWOT analysis and is useful in determining

strategic options that may exist for a company based on an external-internal analysis. The

TOWS matrix below may be used to further analyze ways in which Tenet may overcome its

most critical challenge. Additionally, it can aid in the identification of linkages between the

company’s strengths, weaknesses opportunities and threats which may then be used in the

determination of recommended actions.

Table 27: TOWS Matrix for Tenet

111 TENET HEALTHCARE: STRATEGIC ANALYSIS

As indicated by the TOWS matrix above, there are multiple strategies that Tenet may

pursue in an effort to capitalize on its strengths and exploit its opportunities while defending its

weaknesses and safeguarding against threats. Given the nature of Tenet’s most critical

challenge, it cannot prevent the threat from becoming a reality. What it can do though, is

formulate a plan of action based on recommendations designed to alleviate the potential risks

involved. Tenet should consider the opportunities presented to the company. In this case,

investing in technology could help to offset changes in costs by increasing efficiency, reducing

overhead and increasing the number of consumers thus increasing revenue. All of this would

add value for the consumers and could positively impact Tenet’s profit margin, growth and long-

term sustainability.

112 TENET HEALTHCARE: STRATEGIC ANALYSIS

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4. Internal Analysis

4.1 Organizational Analysis

4.1.1 Corporate Visions and Mission

4.1.2 Products and Services

4.1.3 Leadership

4.1.4 Organizational Culture

4.1.5 Current Organizational Structure

4.1.6 Current Corporate and Business Strategies

4.1.7 Summary of Organizational Analysis

4.2 Analysis of Firm Resources, Capabilities, and Value Chain

4.2.1 Tangible Resources

4.2.2 Intangible Resources

4.2.3 Capabilities

4.2.4 Core Competencies and Sustainable Advantages

4.2.5 Value Chain Analysis

4.2.6 Summary of Firm Resources, Capabilities, and Value Chain

4.3 Financial Analysis

4.3.1 Valuation Analysis

4.3.2 Growth Analysis

4.3.3 Profitability Analysis

4.3.4 Financial Strength Analysis

4.3.5 Management Efficiency Analysis

4.3.6 Summary of Financial Analysis

5. Strategic Issues Analysis

5.1 Critical Challenges

5.2 Resources and Capabilities

5.3 Dynamic SWOT Analyses

5.4 Strategic Issues

5.5 Summary: The Most Critical Issue Identified

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