Tag: Michael Porter

OM in the News: A Stopwatch in the Operating Room?

stopwatchMost businesses know the cost of everything that goes into producing what they sell — essential information for setting prices.  “Medicine is different. Hospitals know what they are paid by insurers, but it bears little relationship to their costs”, writes The New York Times (Sept. 8, 2015). Now, thanks to a University of Utah project, its hospital is getting answers, information that is not only saving money but also improving care. The cost issue has taken on new urgency as the U.S. accelerates the move away from fee-for-service medicine and toward a system where hospitals will get one payment for the entire course of a treatment, like hospitalization for pneumonia.

The linchpin of Utah effort is a computer program with 200 million rows of costs for items like drugs, medical devices, a doctor’s time in the operating room and each member of the staff’s time. The hospital has been able to calculate, for instance, the cost per minute in the emergency room (82 cents), the surgical intensive care unit ($1.43), and the operating room for an orthopedic surgery case ($12). With such information, as well as data on the cost of labor, supplies and labs, the hospital has pared excess expenses and revised numerous practices for more efficient care. Harvard’s Michael Porter called the accomplishments “epic progress.”

The hospital began by looking at how much supplies cost — bandages, sutures, medications. Then it started tracing use of those items to individual patients. It added in labor costs, a more complicated question. Porter told the hospital to go into rooms with a stopwatch and time how long each staff member spends on each procedure and with each patient.

With its software, the hospital is also finding simple ways to improve outcomes and reduce costs. When doctors looked at their costs per day, they were stunned to see how much they were spending on lab tests. Each was cheap, $10-$20, but the total bill came to about $2 million a year. It turned out that 20-50% of lab tests were completely unnecessary, ordered by residents with no questions asked.

Classroom discussion questions:

  1. How can stopwatch studies be used in hospitals?
  2. Why is it so difficult to control costs in hospitals?

Good OM Reading: Michael Porter on Restoring U.S. Competitiveness

“Michael Porter has influenced more executives –and more nations– than any other business professor on earth,” writes Fortune (Oct.29, 2012), in a story on the 65-year old Harvard scholar. Porter’s newest article, with Jan Rivkin, in the same Fortune issue, called What Business Should Do to Restore U.S. Competitiveness, is critical reading for OM professors.

Porter and Rivkin write: “America’s feeble economy reminds us every day that our global competitiveness is in trouble.” Whose fault is that?  One camp holds that national competitiveness is the responsibility of policymakers, not business leaders, who need to focus on running their companies. The opposite camp says companies owe loyalty to the country that supports them, and executives who move American jobs overseas are Benedict Arnold CEOs. “Both positions are deeply flawed, reflecting simplistic views of how competition and economies really work,” say the authors.

They  explain that the U.S. is competitive to the extent that firms operating here can compete successfully in the global economy while supporting high and rising living standards for the average American. Doing one without the other means we aren’t really competitive. A high-wage economy like the U.S. can achieve both only by being a highly productive location, one where firms can create innovative, distinctive products and produce them efficiently.

“Managers must run their U.S. operations well,” they write. ” This means positioning U.S.-based activities to draw on unique American strengths.” For instance, La-Z-Boy has avoided head-to-head competition with low-wage Asian furniture manufacturers by emphasizing the customization and faster delivery that its U.S. location and worker skills make possible.

But running U.S. operations well does not always mean staying at home, they add. Going overseas often improves competitiveness by allowing U.S. companies to penetrate foreign markets. U.S. multinationals that expand faster abroad also tend to grow faster in America. And well-run companies do bring activities back to America as costs rise overseas and managers feel offshoring’s hidden costs, such as lower foreign worker productivity, quality problems, and loss of intellectual property.

OM in the News: R&D Shifts Towards Asia

If yesterday’s blog about increased productivity in US factories provided some good news during these difficult economic times, today’s may take the wind out of our sails. It is based on with two separate articles in the Wall Street Journal (Jan.18,2012) about why we are losing critical (and high-paying) R&D jobs.

In the first, we find we are rapidly losing our research labs to China and Asia. Firms like GE and Caterpillar are spending billions to expand R&D overseas to: “tap a broader pool, of scientific talent, tailor products to overseas markets, and curry favor with foreign governments”. Here is what 3M’s CEO George Buckley has to say: 3M is expanding overseas labs “in preparation for a world where the West is no longer the dominant manufacturing power. Given the moribund interest in science in the US, this is strategically very important”. 

To a large extent, companies are setting up labs near factories (where ideas can be tested) and where engineering and scientific talent is becoming concentrated. Since 56% of the world’s engineering degrees are awarded in Asia–compared to 4% in the US — Caterpillar is hiring 500 engineers at its China R&D center while GE is setting up six product development centers there.

In the second Journal article, Harvard’s  Michael Porter answers that what is making us less competitive is “political gridlock, faltering schools, and a convoluted tax code”. Nearly 1/3 of the 9,750 execs he surveyed said “other countries offered better access to high-skilled workers and labor productivity”. More disquieting, of 607 site decisions resolved the prior year by respondents, work was moved out of the US in 511 (or 84%) of the cases–and many of these “involved R&D and engineering activities, belying the common perception that only low-skill jobs are at risk”.

Discussion questions:

1. What are the chief obstacles to retaining high-paying R&D jobs in the US?

2.  Why are the major manufacturers moving labs overseas?