Why Is Proactively, Aggressively, And Intelligently Managing Dental Practice Growth In A Stalled Economy More Important Than Ever Before?

In A Professional Service Business, Such As A Dental Practice, In The American Healthcare Industry, It’s Either Feast Or Famine.

This claim means that all professional service businesses in the healthcare industry are hypersensitive to the annual industry rate of growth.

In other words, small changes in the rate of industry growth mean big changes in the revenues flowing into all organizations depending on the organization’s size and it’s market share.

One of the projects in a private 27-year R&D program in San Diego produced a model of a professional service business in the healthcare industry. This exclusive model is the first to achieve high predictive validity and explanatory power. In the world of science, these attributes mean that any claims, or hypotheses, made are valid, authoritative, legitimate, and easily demonstrated.

Without going into all of the details now, a professional service business in American healthcare is vastly different that any other type of service business. Service businesses include the commercial service businesses such as a supermarket, a car repair shop,  a dry-cleaning establishment, or a plumbing company. A institutional service business would include a power company, a prison, the local water department, or a college. The third type of service business is the personal service business such as a barber, a tailor, a priest who pardons sinners, or a prostitute. The fourth type of service business is the professional service business, such as an attorney, a doctor, a consultant, or a marriage counselor.

One of the unique attributes of a professional service business in American healthcare is that there is a dramatically asymmetrical, hair-trigger, highly leveraged relationship between the rate of industry growth and revenues flowing into firms, such as the private practices of dentistry and medicine.

When the industry is growing, revenues flowing into private practices can soar; alternatively, when the industry rate of growth is shrinking, revenues into firms can plunge. This  phenomenon is sometimes called “feast or famine.”

To demonstrate this claim, let’s assume that we take five dental practices that are exactly identical in every possible dimension. Each dental practice commands 20% share of the market. Given the fact that during the growth stage of the US Dental Service Industry, the industry growth was virtually exploding; there were some decades where the industry was almost doubling ever year in terms of gross revenues.

Generally speaking, all the practicing dentist had to do in the growth stage of the industry was show up for work. The “rising tide was raising all boats.” The annual rate of growth was 12% or better. See the chart.

This chart presents a computer model depicting the relationship among market share, the annual industry rate of growth, and the percentage of new patients that are required to capture to produce a practice that is consistently growing at 10% per year, or better.

In this favorable situation, each of the practices with 20% of the market did not have to capture their fair share of the new patient volume to enjoy a practice that was growing at 10% per year, as demonstrated in this chart. Consistent, annual growth of 10% is what some of the best run companies in the nation can claim.

Now consider what happens when the rate of industry growth slips to 8%; now each of the five practices must capture about 23% of the new patient audience to achieve the same 10% growth in annual revenues.

Again, when the rate of industry growth slips to the 6% level, now each of the five practices must capture about 40% of the new patients in their service area. The natural competition for patients starts to heat up.

Likewise, when the industry rate of growth slips to the 4% level now things start to become really difficult; it’s because, now each of the five practices must capture about 50% of all of the new patients. It means that in order to enjoy a practice growing at 10% per year, there must be a lot more patients in the service area who are actually demanding dental services and making appointments.

Finally, when the industry annual rate of growth falls to the 2% level, now each of the five practices must capture 100% of all the new patients in the service area. For each practice to continue to just show up for work and enjoy the prosperity that prevailed in the growth stage, there must be about five times more new patients in the community than are actually there.

Clearly, for each practice to capture 100% of all of the new patients is and impossible challenge. Competition for patients grows intensively as the rate of industry growth falls. If the decline is gradual, the pain comes on slowly as practices start to cut back, start to close, or move to another locality. However, when the decline in the industry rate of growth plunges as it did in the first and second industry crashes, “shakeouts” dominate the business environment.

High numbers of firms experience sudden failure. It’s a big jolt, for which people are not adequately prepared. In the second, or “killer,” crash in 2009, the plunge was equivalent to forty-three 1929 stock market crashes. This sudden crash is driven by the same phenomena that trigger stock market crashes, avalanches, and wildfires. It’s a bimodal annihilation catastrophe–little bang, big bang.

Working through this predicament for larger organizations, such as one that may have a 40% share of the market, demonstrates that the challenges start earlier for bigger practices. This predicament may help to explain why most dental practices are solo practitioners.

Because  there is a dramatically asymmetrical, highly leveraged, hair-trigger (highly sensitive to small changes) relationship between the industry rate of growth and revenues flowing into the professional services businesses in healthcare, then those activities that generate growth in the annual industry rate of growth become mandatory.

Controlling practice growth by controlling the flow, volume, clinical and payment mixture of patients requires a level of marketing and management sophistication that generally does not exist. One reason is that for most of the life cycle of the US Dental Services Industry, all the incumbents had to do was show up for work. This predicament produced a 100-year management knowledge-gap in the industry. Closing the huge gap must be closed before it is too late. And indeed, time is rapidly running out because there is now an easily demonstrated time line.

When any industry or economy reaches its catastrophic threshold, it becomes extremely fragile (“unstable equilibrium”) and “critical,”– relatively minor events have major impacts. Like an avalanche, it’s little bang, big bang.

In this fragile condition, the industry becomes extremely vulnerable to relatively minor jolts.  A single negative media event can trigger a bi-modal annihilation catastrophe such as happens in a stock market crash. Surprisingly, catastrophes are what drive the evolutionary process and propel an industry through its life cycle.

In the mature-decline stage of the industry life cycle, every firm has only three choices: the bailout (the mass exodus), the shakeout, (mass, sudden business failures) or breakout (the paradigm shift into the new life cycle). Successfully making the breakout requires mastering innovation by creating new products and services that add value to the traditional model (drill, fill, and bill)

Mastering innovation is vital in any industry in the mature-decline stage of its life cycle. Most progressive practices will look to adding new technology to give them a competitive edge. Technology has its limits and requires capital investment. On the other hand, mastering service innovation works by offering new services that are cash-based and do not necessarily involve huge capital outlays that new technology requires.

Surprising, the present challenging economic environment is a period of great, if not unprecedented, opportunity for private practices that master the innovation process. It’s making the right moves at the right time, in the right way.

Best Regards,
Frank Toto
San Diego, at 858-278-5050

Incidently, for more information, please visit:
http://www.rightmovesproject.com  and http://dental.rightmovesproject.com