The bankruptcy of RadioShack and rumored purchase of many of its stores by Amazon illustrate the complex and high-stakes business decisions that today's retail companies need to make. In an increasingly retail healthcare environment, provider organizations face a similar set of decisions — ones that are unlike any decisions providers have had to make in the past.
The decline of RadioShack
RadioShack's history shows the difficulties of keeping up with changing consumer product demands while balancing in-store and online assets and focus. In the 1960s and 1970s, RadioShack thrived by providing inexpensive electronics components to value-conscious do-it-yourselfers, according to a Bloomberg Business retrospective. RadioShack's many locations made it highly convenient, and its knowledgeable staff provided expert advice.
As the public's interest in electronic devices grew, RadioShack worked to keep pace. In the 1970s, CB radios were a popular item and a significant percentage of RadioShack's sales. When the public tired of CBs, RadioShack more than made up for the lost revenue with one of the first widely available personal computers — powered by software from startup Microsoft. However, soon competitors began offering improved personal computers at lower prices, leaving RadioShack with an unprofitable hardware business.
In the 1990s, RadioShack attempted to broaden its reach by launching big-box stores. These provided a spike in revenue, but were unprofitable and ultimately closed. "I don't think we knew how to operate those stores," said a former RadioShack executive.
In the early days of cellphone adoption, RadioShack found a successful niche signing up new cellphone users, getting a portion of the sale and monthly service payment. Soon, however, wireless companies opened their own retail outlets and renegotiated their agreements with RadioShack. In addition, the rise of smartphones, with their diverse capabilities, cannibalized RadioShack's sales of items such as GPS devices and answering machines.
RadioShack's digital strategy, according to one former executive, suffered because leadership was focused on problems with the company's stores. Online purchasing was not possible on RadioShack's website until the late 1990s, and RadioShack outsourced its e-commerce until recently. RadioShack was an early adopter of in-store pick-up of online orders, but despite this effort, the company's online sales actually declined 22 percent between 2003 and 2012. RadioShack tried to use Amazon's popularity to create in-store traffic by hosting lockers for picking up Amazon orders, but the expected sales bump did not materialize.
As RadioShack strove for the right in-store and online strategies, its customer service — once a distinguishing feature — suffered. An article by a former employee describes RadioShack staff and management as perpetually exhausted, underpaid and subject to unpredictable demands and unattainable revenue expectations.
In the end, RadioShack sought to tap the new hobbyist movement, offer cellphone repairs and revamp its digital presence. However, these moves could not coalesce into the dramatic turnaround the company needed.
What would Amazon do differently?
With RadioShack's bankruptcy filing came news that Sprint would operate up to 1,750 of RadioShack's approximately 4,000 stores. Speculation on who will take over the other stores has centered on Amazon.
Reports have long persisted that Amazon would launch a bricks-and-mortar presence. According to analysts, having physical stores would help Amazon create a stronger connection with customers, reduce shipping costs, compete with big-box stores and compete with retailers that are successfully integrating the in-store and online experience. With only 6.7 percent of retail purchases being made through e-commerce, bricks and mortar would seem an important channel for a company whose goal has been characterized as having all retail purchases flow "through one pipe called Amazon."
Amazon's store strategy would no doubt be very different from RadioShack's. Reports have suggested that an Amazon store would sell products such as Kindle e-readers; be a facility for product pickup, exchanges, and returns; and act as a small warehouse to allow same-day delivery within the area of the store.
Yet, Amazon would share many of the same risks as any retailer, with some additional ones thrown in. Like any retailer, Amazon needs to ensure that its in-store products keep pace with consumers' changing buying patterns. Amazon would need to determine the most effective way to integrate the online and in-store shopping and find the right mix of its physical and virtual assets. In this regard, Amazon would be facing competitors such as Macy's, Wal-Mart and Home Depot that have made huge strides balancing in-store and online offerings. In addition, Amazon does not have experience managing the costs, operations or customer experience of physical stores.
Amazon's online success does not guarantee store-based success. When Amazon has ventured beyond online selling, its track record has been mixed. The Kindle reader platform revolutionized books, but the Amazon Fire Phone is now selling for 99 cents. Amazon has been willing to spend large amounts on experiments and walk away when the results were not good. That culture of experimentation could well extend into its physical store strategy.
New decisions for healthcare providers
As more healthcare purchases are driven by consumer choice, providers are becoming vulnerable to the same forces affecting retailers like RadioShack and Amazon, and are facing the same complex strategic questions.
Like RadioShack and Amazon, providers need to determine what types of facilities to have and what to offer within them. Community-based healthcare sites could be limited in size and offer a single service, such as urgent care or physical therapy. Or they could be larger, offering multiple services such as specialty care, surgery and diagnostics at various degrees of comprehensiveness. In medical centers, too, executives need to determine the right mix of services, number of inpatient beds, and role as a community, regional or even national entity. Equally challenging, executives need to determine how many of each type of facility to have, and where they should be located.
Healthcare providers also need to develop and configure their virtual offerings. At its most basic, online and mobile interaction can be used to schedule an appointment, send/receive reminders, communicate test results and exchange messages with providers. However, the potential for virtual care to complement or replace traditional in-person healthcare services is large. Companies like Doctor on Demand and HealthTap use video apps to provide smartphone-based physician visits. Other smartphone apps allow consumers to diagnose conditions from ear infections to skin cancer. Smartphones can also be used to take blood-pressure readings and do an electrocardiogram. Wearable wristwatch sensors are being developed that are the equivalent of "intensive care unit monitoring on your wrist," according to cardiologist and geneticist Eric Topol, allowing hospital rooms to be "replaced by our bedrooms."
Kaiser Permanente Northern California forecasts that its number of virtual visits will surpass its number of in-person visits in 2018, fueled both by Kaiser's well-developed virtual care platform and its capitated payment system. A report from information and analytics firm HIS suggests that telehealth revenue will grow from $240 million in 2014 to $1.9 billion in 2018. A Salesforce.com survey found that, among consumers ages 18-34, 73 percent are interested in using mobile devices to share health information with their provider, 63 percent are interested in providing health data from wearable devices and 60 percent are interested in using telehealth options, such as video chats, with physicians.
As both the RadioShack and Amazon experience shows, developing virtual capabilities requires significant focus and resources. Healthcare providers need to determine a strategy for offering virtual care, integrating it with in-person offerings, establishing price and managing reimbursement scenarios. They need intellectual capital, infrastructure and technology. Some providers will opt to partner with others for these services, and some will want to develop their own.
A challenging strategic decision for retailers and healthcare providers alike is determining the most effective balance between physical and virtual assets. RadioShack chose to focus on its large footprint of small stores, while Amazon is contemplating adding stores to complement its online dominance. Macy's, having built a robust online presence thanks to a $2 billion investment, is closing some stores and opening a fulfillment center. Wal-Mart, whose e-commerce sales grew 22 percent in 2014, is increasing its number of small stores and slowing the expansion of its large stores.
Risks and rewards
In the same way, providers need to determine the best combination of single-service outpatient sites, multi-service outpatient sites, inpatient sites and virtual services. For organizations that get the right mix, the potential rewards are great. Providers may be able to dramatically reduce fixed costs associated with their physical assets, make more productive use of clinicians' time, provide a greater level of convenience and potentially lower prices for consumers, and position themselves for success in an environment of value-based payment, capitation and consumer choice.
Balancing physical and virtual services is a complex and high-stakes strategic challenge for healthcare providers. Compared with companies like Amazon, Wal-Mart and Macy's, America's hospitals have relatively modest resources to invest in such a major pivot in their business. And unlike Amazon, hospitals would be highly reticent to approach such an investment as an expensive experiment.
Rooted in its stores, RadioShack attempted to branch out into e-commerce. Rooted in e-commerce, Amazon is considering branching out into stores. The right balance proved elusive for RadioShack; Amazon, doubtlessly, will invest extensively to find that balance.
Hospitals need to move rapidly to make similar strategic calculations. With their deep roots in acute care, hospitals face a steep challenge to identify how inpatient facilities will need to change, the appropriate channels for outpatient care, and — least familiar of all — the specific virtual care options they should offer. At the same time, hospitals need to make the even more difficult determination of calibrating all of these channels. Like RadioShack and Amazon, hospitals have to make these decisions in the midst of constantly changing purchaser expectations, technological capabilities and competitive pressures.
These decisions are unfamiliar and extremely complex, and they carry millions of dollars in risk. Yet making these decisions carefully and correctly is the new strategic imperative for a successful provider organization.
Kenneth Kaufman can be reached at kkaufman@kaufmanhall.com.
This column is reprinted with permission from Kaufman, Hall & Associates.