Vol. 2, Issue 5 Sep - Oct 2004

Return to the Front Page Customer Base Dynamics Health Care Specialty Diagnostic Company Jim Ritchie Dunham Wilton, New Hampshire The company, one of the leaders in the field, is competing in a maturing market. Historically, new users come into this market niche as a result of being diagnosed with a relevant condition by a health care professional (HCP). Based on their awareness of the product's features and functionality, the HCP recommends one of the few products available to manage the condition. As such, a mainstay of the company's growth strategy hinges on their ability to stay "top of mind" with the HCP through technological superiority. Despite the company's success with the HCP, their market share has been declining over the past three years.

Jim Ritchie-Dunham, Associate of Psychology Department, Harvard University, Board of Trustees of the Society for Organizational Learning, 2002-2004. Jim is president of the Institute for Strategic Clarity . The Institute for Strategic Clarity is a non-profit scientific research and educational organizational that seeks to increase the clarity with which decision makers, in any organization, understand, determine, and communicate the organization's strategic decision. He has taught isee systems' courses since 1996 and provides both workshop and consulting services to isee systems client base. Jim has over eleven years experience helping individuals and organizations apply the tools and methods of Strategic Systems Thinking to important issues. As part of his research, Jim has written many academic and practitioner articles on system dynamics and its application to the strategic understanding of organizations. This includes the book he co-authored, Managing from Clarity  (Wiley 2001). Jim has consulted with many Global Fortune 1000 companies, government organizations, and civil society organizations, helping them to create more effective, actionable strategies that they clearly understand. E-mail: jimrd@instituteforstrategicclarity.org

The Approach The company brought us in to help them understand the dynamics of their customer base and to evaluate whether their current business policies would provide sustainable growth for the future. The iThink model we developed outlined the changing nature of the installed client base. Newly-diagnosed patients (versus repeat buyers) represent an ever-decreasing percent of the market. This will decrease the impact of HCP recommendations in the future. This realization leads to an insight that only focusing on staying "top of mind" with the HCP will not permit sustainable growth into the future.

The dynamics of the model also revealed that as the influence of repeat buyers increases, the impact of both competitive technology and distribution channel dominance on the system also becomes greater. Each requires significant capital and the model uncovered key insights regarding the relative benefits of investments in R&D and distribution development and the impact of each on future performance.

A big aha for the client came when we asked the obvious question, "Are there any other outflows of this stock? Such as people who stop testing?" Since the company had been focused so heavily on the inflow of new testers in the first years of the business, and the retention of customers with the competition, they had never even considered the outflow of testers who stop testing. We then studied the customer base attrition rates. The team tested different hypotheses regarding potential changes in the market, from breakthrough technology to increased subsidies, and the impact these would have on the customer base, while keeping the death rate constant. Breakthrough technology and subsidies could recapture people who stop buying the diagnostic products. This was a huge insight, from a very simple iThink model, for a company that been focused on getting new testers and fighting for the existing ones with the competition.

The model also revealed that proposed legislation that would amplify the defined limits of the condition might significantly affect the potential market size because many more people would be diagnosed with the condition. This exogenous change would bring a new wave of buyers into the market, converting the current business cycle from a mature market to a new growth phase. This would dramatically affect the opportunities for growth for all competitors in the market.

The Results After validating the model with management, we explored the implications that these insights might have on the existing governing policies and the ability to grow the company. This questioning produced significant shifts in marketing focus, from pursuing new entrants to retaining existing clients. The impact of new product functionality and timeliness of new product development were also reconsidered in the new marketing focus. The study also revealed the increasing importance of creating relative dominance in distribution as one important element for sustaining growth. Finally, the company used the results in a company-wide report, which focused on the path forward for the entire business. We attribute much of this success to the simplicity and comprehensiveness of the stock-flow model and the ability of the management team to play with it in iThink.