by Rita McGrath
An incredible example of a device that helps customers get jobs done more easily is the modern smartphone. It has replaced myriad single-function devices, from a flashlight to a digital recorder, a camera, a video camera, an email platform . . . I could go on and on. The smartphone has been brilliant in helping us get more and more jobs done, all without having to carry around specialized devices. Today, digitization means we create and interact with more content than ever before, while using traditional tools less. This in turn has created an inflection point in how we experience the world around us.
For instance, consider watching Tiger Woods play golf. In a tweet that has since gone viral, Ryder Cup Europe and European Tour content director Jamie Kennedy compared what the crowd watching Woods looked like in 2002 versus 2018. The 2002 crowd was, well, simply watching Woods play. But by 2018, Woods was playing amidst a veritable sea of cell phones, all trying to capture photos and videos of the famous player. In other words, during his 2018 comeback tour, the audience was not so much watching him as they were recording him, overwhelmingly via cell phone. Like the teenagers in the previous chapter, just being at an event isn’t enough. You need to have photos and footage that prove you were there.
To put this situation in the context of jobs to be done, we might describe it this way:
When . . .
I want to . . .
So I can . . .
Situation
Motivation
Outcome
I am watching a live event of great interest to others I care about
Capture it in some way
Share the video and images with others who couldn’t be there with me
When you think about it this way, it’s clear that cell phones are far better for accomplishing this outcome than conventional cameras. Even today, dedicated video cameras are bulky. They are single-purpose. They run out of battery power quickly. They take up a lot of space on storage media. And then to share the video you’ve captured with others, there is usually a complicated process of pulling the content from some kind of storage media and transforming it into a format that others can see as well. With a smartphone, you simply fire up the camera app, set it to “video,” and away you go!
This is an example of how shifting constraints—everything from the replacement of bulky videocassettes with slim DVDs to the ability to take videos on a device that is probably in your pocket anyway—can help a company identify opportunities to change the customer journey. To begin to anticipate the effects of a shift in constraints, it’s important to experience the customer journey and customer frustrations at not being able to get their jobs done. This leads us to think through what customer pain points may be at different links in the consumption chain.
Let’s consider how ride-hailing companies such as Uber and Lyft seemed to come out of nowhere to disrupt traditional taxi service, particularly in places like New York City. It’s a classic example of how the assumptions in an existing business can blind its leadership to changes that will unravel them.
I’ll take New York City as an example. During the Great Depression, many unemployed people turned to driving cabs in a desperate effort to support themselves. The consequences were too few customers being chased by too many drivers, intense traffic congestion, and unsafe conditions, including run-down vehicles and reckless driving. This situation eventually convinced New York City leaders that the taxi business could benefit from regulation that would ensure riders a safe trip, fewer drivers, and some guarantee of quality. In 1937, the Haas Act put into place the “medallion system” for cabs that could be hailed on the street. Medallions had to be purchased from the City, and a market for them subsequently developed. The number of medallions was strictly limited (13,587 in 2013), which led to the price of a medallion skyrocketing to as much as $1.3 million by 2013.
The monopoly on supply that medallion restrictions created, while guaranteeing taxi drivers and fleet owners steady business, inadvertently created a large number of downsides for customers. As Megan McArdle, a writer for the Atlantic, explained in a 2012 article titled “Why You Can’t Get a Taxi,” the service offered was less than ideal from the customer’s point of view.
Like most urbanites, I’ve spent a lot of time voicing the standard complaints about taxis: They’re dirty and uncomfortable and never there when you need them. Half the time, they don’t show up for those six a.m. airport runs. They all seem to disappear when you most need them—on New Year’s Eve or during a rainy rush hour. Most cabbies drive like PCP addicts. Women complain about scary drivers. Black men complain about drivers who won’t stop to pick them up.
In her article, McArdle enthused about the new service offered by a company called Uber. At the time, Uber’s business model was basically to match potential riders with existing limousine companies. The model in which ordinary people could become Uber drivers had not yet emerged. Taxi companies objected to Uber and tried to use regulations to prevent the company from expanding, but the reality that it was customers, not regulators, they would need to win over was not yet evident to them.
The situation was ripe for disruption.
When . . .
I want to . . .
So I can . . .
Situation
Motivation
Outcome
I need to get somewhere that is too far to walk and I don’t have the use of a car
Successfully arrange a trip
Get from point A to point B with a minimum of expense, hassle, and complexity
That’s when ride-hailing companies stepped in to change the job of getting from point A to point B.
Consumption Chain Link
Conventional Taxi Practices
Negative Attributes/Customer Pain Points
Booking a ride
Call central dispatch
Hail on a street corner
Arrange limo beforehand
Go to a taxi stand
Unreliable
Not available where I am
Long wait times
Drivers discriminate
Taking a ride
Uneven experience
Dirty cars
Driver on cell phone
Old vehicles
No temperature control
Wild driving
Unpleasant environment in general
Paying for the ride
Use cash
Use credit card in cab
Ask for receipt
Driver doesn’t accept credit cards
Driver doesn’t carry change
Long wait for receipt to process with expense account
This analysis throws up some important customer pain points—that is, factors that interfere with customers getting their job done as conveniently and affordably as possible. The next step is to ask why the pain points are the way they are.
Negative Attributes/Customer Pain Points
Why Is It This Way?
How Might It Be Changed?
Unreliable
Not available where I am
Long wait times
Drivers discriminate
Economies of central dispatch: it isn’t economical to have a fleet of vehicles widely distributed
App to connect drivers and riders who are geographically dispersed
Unpleasant environment in general
No sanctions for an unpleasant experience—monopoly conditions
Ratings system in which riders rate their rides and drivers rate their riders
Driver doesn’t accept credit cards
Driver doesn’t carry change
Long wait for receipt to process with expense account
No investment in new technology—monopoly conditions
Credit card preregistered; no need to process card at end of trip; receipts automatically captured and available online
Ride-hailing companies’ solution to the transportation problem has proved to be a major inflection point for the taxi business in places like New York C
ity. Legislators and public officials were taken by surprise by the inflection point represented by the rise of these services. By 2017, Uber was making more trips than the city’s yellow cabs.
This is frequently the case: institutions take a while to catch up to the changes wrought by inflection points. One institutional response to ride-hailing services has been for New York City to mandate that drivers earn a minimum wage from the company. With studies suggesting that the only way these companies make money is by banking on inadvertent subsidies from its drivers, the change represented by the ride-hailing revolution may already be on to its next phase.
And, of course, other on-demand alternatives to urban transportation are blossoming as well. Recently, competition has become extreme in the market for on-demand scooters. The e-scooter company Bird was valued in 2018 at over $2 billion. There are even rumors that ride-hailing companies are interested in moving into the bike-sharing programs operated by Motivate, which runs such offerings as Citi Bike in New York. While Uber seems intent on offering across-the-board access to urban mobility solutions, it isn’t clear yet which ones will survive the inevitable shakeout.
Back to our analytical approach. The issue you need to focus on in your analysis of arenas is whether a change in the daily constraints that your business operates under might allow a competitor to address customer pain points differently or better than you do.
Think about that.
If that’s a real possibility, then it’s time to pay attention.
Redrawing an Arena: The Tangle That Is Healthcare in the United States
Warren Buffett, CEO of Berkshire Hathaway, is ever brilliant at the turn of a phrase. In describing healthcare in the United States, he calls it a “hungry tapeworm” affecting the economy. Not only are healthcare costs in the United States higher than in the rest of the world, they’ve also been rising faster than elsewhere. According to Consumer Reports, if you sliced out healthcare spending in the United States and made a country out of it, it would be the world’s fifth-largest economy.
The negative consequences of one sector sucking up so much of the economy are indeed dire. Funds going into healthcare aren’t available for other things—things like raises for workers, for instance, which contribute to flat wages and limited earning power for many. The 2018 agreement between Jeff Bezos, Warren Buffett, and Jamie Dimon (CEO of JPMorgan Chase) to enter into an as yet unnamed joint healthcare venture signals that the frustration with seemingly intractable momentum in rising costs has reached some kind of tipping point. In other words, they are going to try to spark an inflection point by changing just about every element of the healthcare arena.
The piecemeal delivery of most fee-for-service healthcare services in the United States creates incentives to do more, not less, even if the activity is not strictly speaking necessary. Unlike other industries, in which increased efficiency makes an organization more competitive, efficiency in healthcare delivery often means less revenue. Innovating to require one CT scan rather than three, for instance, means a provider only gets paid once, not three times.
To better align incentives with rewards, many players in the ecosystem have concluded that a payment system based on value—on patient outcomes, for instance—rather than activities makes more sense. If a group made less money, not more, by operating inefficiently, the incentive to do so would diminish. The unintended consequence is that with the incentives now heading in the opposite direction, there may well be rewards for withholding necessary or expensive care from patients. Or of rationing care, which is already common practice in countries with single-payer systems. The United States differs from most other countries where effectiveness calculations are used to determine who has access to care. The result in many places is rationing. The sad reality, of course, is that the United States is no different from any other place in the sense that only so much can be spent on healthcare and so some form of rationing is inevitable.
While dealing with the whole US healthcare system would be worthy of an entire book, for our purposes let’s focus on the potential opportunities reflected by a shift in simply how pharmacy benefits are managed. This represents a potentially significant inflection point for an industry that has grown so complex and opaque that its inner workings are extremely difficult to figure out.
Pharmacy Benefit Managers: Middlemen Gone Rogue?
Pharmacy benefit managers (PBMs) are organizations that act as intermediaries between various players in the healthcare system. They were originally created to “reduce administrative costs for insurers, validate patient eligibility, administer plan benefits as well as negotiate costs between pharmacies and health plans.”
In the years since this relatively straightforward service was created, PBMs have grown enormously and become involved in just about every aspect of the prescription drug business. Critics argue that their eye-popping profitability comes as they make money from every element of the pharmaceutical supply chain. Indeed, the Wall Street Journal found that “pharmacy-benefit managers are exceptionally profitable; 85% of their gross profit converted into Ebitda over the past two years.”
The firms, such as Express Scripts, OptumRx (a unit of the insurer UnitedHealth Group), and CVS Health, processed 72 percent of the nation’s prescriptions in 2017, according to Pembroke Consulting. A 2017 analysis showed that $15 of every $100 spent on brand-name pharmaceuticals goes to middlemen, as opposed to about $4 in other countries.
In a clear indication that standard PBM practices are not necessarily in their customers’ best interests, the industry has strongly resisted being held to a fiduciary standard (in which they would have to keep the interests of their customers in mind as they made recommendations). As Bloomberg reported in 2018, “Some of the biggest players in the industry have warned that a fiduciary standard could be deeply damaging to their business. Express Scripts Holding Co., which agreed to be bought by health insurer Cigna Corp. this year, said in a 2015 filing that a fiduciary rule ‘could have a material adverse effect upon our financial condition, results of operations and cash flows.’”
In a sign of what I anticipate will become an inflection point for these businesses, an increasing din of criticism of industry practices is rising.
Inconsistent and Opaque Pricing
Some consumers have found that they can purchase drugs for less by paying directly for medications rather than using their insurance. The negotiating tactics of PBMs have been blamed, as has the industry for making drug pricing so complex that nobody can understand it.
This situation led to the founding of GoodRx, a startup that offers customers an app that searches for different prices on the same drugs in their local area. A search for a thirty-pill prescription for Lipitor in my area found prices that ranged from $9 (cash, at Walmart) to $27.62 (with a coupon, at Duane Reade).
Clawback: List Prices That . . . Aren’t
PBMs negotiate discounts from list prices with drug manufacturers. That doesn’t help customers with respect to reimbursements, however. As one observer noted in an ABC News report, “List price does matter when it comes to co-pays, co-insurance and other out-of-pocket costs. These payments are often based on the list price of a drug, not the discounted price. So if you are paying 20 percent co-insurance on a $200 vial of insulin per month, but your insurer is paying a discounted $75 per vial, you pay the 20 percent on the list price, or $40, instead of the $15 you would pay if the co-insurance was 20 percent of the discounted price.” The patient doesn’t get the savings.
According to the same report, “Claw backs allow pharmacies to keep the full customer copay amounts, even if it’s more than the reimbursement. For example, if a patient’s copay is $10 and the PBM reimburses the pharmacy for the cost of the generic drug plus a dispensing fee for roughly $6, the PBM pockets the extra $4 paid by the patient.”
There are even cases in which the co-pay for a prescription exceeds the actual cost of the prescription, with the difference in price going back to the PBM. Lawsu
its have been filed with respect to this practice, and public anger is so intense that several state legislatures have started to evaluate banning it. In a particularly nasty twist on this, some pharmacists have reported being told by their employers that they are not allowed to let patients know that the drug might be available at a lower price. A court ruled against Cigna for doing this in a 2018 case, and the issue is getting a lot more attention from lawyers and legislators.
The Murky Practice of Rebates
PBMs and manufacturers negotiate so-called rebates on various drugs. The pharmaceutical company charges the PBM the list price of a drug, then pays a rebate back to the PBM. This allows that all-important list price to look higher than the real price that is actually paid for the drug. In an escalating interindustry battle over healthcare profits, pharmaceutical companies have been attempting to draw attention to the actions of PBMs (rather than their own price increases) as the reason for increased costs to consumers.
What’s the bottom line? All these practices are now seeping out into the public’s perception, creating real confusion and an overall distrust of the whole business. To see how that’s playing out, let’s take a look at how one major corporation has taken on the challenge of reducing prescription drug costs for its employees.
Caterpillar: Part of the Future That Isn’t Evenly Distributed Yet?
As mentioned in Chapter 1, science fiction author and artist William Ford Gibson is often cited as the first person who said, “The future is already here—it’s just not very evenly distributed.” That is an extremely useful perspective in terms of anticipating potential inflection points. The goal is to find situations where forward-thinking entities have overcome some of the constraints of the ways things are done today and are innovating to find a better solution. With that perspective, let’s see how Caterpillar has circumvented the constraints of the PBM business as it is currently designed.