AHP Case Study 1Optimal selection of location for Taiwanese hospitals to ensure a competitive advantage by using the analytic hierarchy process and sensitivity analysis

Outline1. Introduction2. Literature review3. AHP methodology4. Case implementation5. Selecting the optimal location of

hospitals to ensure a competitive advantage

6. Conclusions

•Implementation of the National Health Insurance scheme in Taiwan since 1995 has intensified competition in the local medical sector.

•Given elevated living standards islandwide, Taiwanese residents have become more health conscious and attach increasing importance to quality healthcare.▫Heightened consumer demand in the quality

and scope of medical services.

Introduction

Introduction•The medical service sector has improved

its organizational structure and encouraged hospitals to establish management practices that would increase their competitiveness.

•In such an intensely competitive environment, selecting the optimal location of hospitals to be established is of priority concern.

Introduction•In considering where to select a location,

besides legislation restrictions, policymakers and business groups seldom consider how selecting the optimal location during the decision-making process could possibly affect its competitiveness.

Introduction•Health plan of 1984 ….. & Aging -> more

new hospitals ->fierce competition in medical service sector->impact of wrong location decision

•Selecting the optimal location for a hospital in terms of competitiveness involves the various hospital types in Taiwan, devising appropriate evaluation criteria and categorizing hospitals according to those evaluation criteria.

Introduction•Despite the considerable attention paid to

selecting an optimal location for medical care facilities, establishing a hospital must strictly comply with governmental regulations, often causing decision makers to overlook the importance of selecting an optimal location.

Introduction•This study adopts the renowned diamond

model introduced in Porter’s The Competitive Advantage of Nations (1990) that influences how competitive advantages, especially with respect to developing and evaluating the objectives of optimal location selection, are related in order to devise a standardized operational procedure.

Introduction•Besides a literature review and

interviews with experts, this study also adopts the modified Delphi method, the analytic hierarchy process (AHP) and the sensitivity analysis to develop an evaluation method for selecting the optimal location of a regional hospital in Taiwan to determine its effectiveness.

Introduction•The proposed evaluation criterion

provides a valuable reference for hospital administrators and academic in establishing a standardized means of selecting the optimal location for new medical care facilities.

Literature reviewPorter’s diamond model•Porter’s diamond model comprises six

elements; four country-specific determinants (i.e. Factor conditions, Demand conditions, Firm strategy, structure and rivalry and Related and supporting industries) and two external variables, (i.e. chance and government).

Literature reviewLocation theory•Weber (1909) proposed the position

problems of a factory. Early location theory focused mainly on the production of raw materials and selling to markets in order to determine a factory’s optimal position by minimizing transportation costs.

Literature review•Plant location research can be

categorized into three perspectives such as:

1. Prescriptive, i.e. how to make plant-location-related decisions.

2. Nation-based, i.e., what a nation should do to attract overseas firms to locate domestically

3. Customer-based business, i.e. what criteria are adopted to make plant-location-related decisions

AHP Methodology•Skipped. Please refer to the original

paper: ▫Wu, C.-R., Lin, C.-T., & Chen, H.-C. (2007).

Optimal selection of location for Taiwanese hospitals to ensure competitive advantage by using the analytic hierarchy process and sensitivity analysis. Building and Environment 42, 1431-1444.

Case implementation•An AHP-based evaluation model can be

developed for selecting the optimal location of hospitals to ensure a competitive advantage via the following steps:

•Step 1: Define the evaluative criteria for selecting the optimal location of

hospitals to ensure a competitive advantage.

Case implementation•Step 2: Establish a hierarchical structure.

On the basis of the modified Delphi method, acquire important indicators into a hierarchy of interrelated decision elements, including goal, criteria, sub-criteria and alternatives.

Case implementation• Step 3: Establish the pair-wise

comparison matrix. Each decision maker makes a pair-wise comparison of the decision elements and assigns them relative scores.

•Step 4: Calculate the eigenvalue and eigenvector of each pair-wise comparison matrix.

Case implementation•Step 5: Test the consistency of each

comparison matrix.

•Step 6: Aggregate the related scores provided by all decision makers using the geometric mean method, and then estimate the relative weights of the relative weights of the weight of the elements of each level.

Case implementation•Step 7: Combine the relative weights of

the elements of each level to select the optimal location for hospitals to ensure a competitive advantage.

•Step 8: Sensitivity analysis of three location selection areas under six criteria.

Case implementation•According to government’s data, among

these three geographical position, Taiping City is the biggest land area. The most of population number is in Dali City. The east district of Taichung City was economically developed and metropolis lively area.

•So, the selective regions for establishing hospital can be considered East district of Taichung City, Taiping City, and Dali City.

Case implementation

Selecting the optimal location of hospitals to ensure a competitive advantage• Step 1: Define the evaluative criteria and sub-

criteria used to select the optimal location of hospitals to ensure a competitive advantage.▫The modified Delphi method is applied to

define the evaluation criteria and sub-criteria. ▫Murry and Hammons (1995) suggested that the

modified Delphi method must summarize expert opinions on a range from 10 to 30.

▫Seventeen hospital administrators and academics are then issued a preliminary questionnaire in which six evaluation criteria and 18 evaluation sub-criteria are incorporated.

Selecting the optimal location of hospitals to ensure a competitive advantage

1. Factor conditions(1)Capital: for building a hospital capital is

required.(2)Labor: demand for hospital personnel,

including physicians, pharmacists, healthcare personnel, dieticians, registered professional nurses, medical equipment technicians, medical care talent, as well as the quality and quantity of specialized talented individuals.

(3)Land: how the land obtained will affect the cost; the plan as to how the land is used; and the appropriate disposition to avoid a situation in which land is unavailable when hospital expansion occurs in the future.

Selecting the optimal location of hospitals to ensure a competitive advantage

2. Demand(1)Population number: the demand for

medical services varies according to the local population. For instance, the demand for medical services is greater in metropolitan areas than in rural areas.

(2)Population density: hospital scale and rank (district hospital, regional hospital and medical center) must correspond to the population density of the region, such as Taipei with a highly dense population.

(3)Population age distribution: type of illness of hospital patients (acute, chronic, faculty or synthesis) must correspond to the distribution of population age. For instance, ex, the area with low ratio of old age population suits to set up the women and children hospital.

Selecting the optimal location of hospitals to ensure a competitive advantage

3. Firm strategy, structure and rivalry(1) Management objective: hospital administrators

establish a mission for the hospital to continue management practices.

(2) Rank of competing: medical centers, regional hospitals and district hospitals for both Western and Chinese medicine, depending on their number and scale, affect how hospitals rank in position.

(3) Policymaker’s attitude: individuals include the board of directors (administrators), consultants (including hospital management and financial personnel) and other related professionals such as architects have opinions towards management’s style, such as an authoritative or a benevolent one.

Selecting the optimal location of hospitals to ensure a competitive advantage

4. Related and supporting industries(1) The medicine practice and the pharmaceutical

sector: the medicine practice includes biochemistry technology, cultivation of medical personnel and related industrial development. The pharmaceutical sector includes medical instrumentation, pharmaceuticals and medicinal preparation, medicinal cosmetics and related industrial development.

(2) Hospital administration sector: this area includes management consultants, the information technology industry, material flow and related industrial development.

(3) The healthcare sector: this area involves sustaining community health, home caregivers, long-term care, residential caregivers, the insurance sector and related industrial development.

Selecting the optimal location of hospitals to ensure a competitive advantage

5. Government(1) Qualifications of the hospital’s establishment and

the regulations of the established standard: this area includes establishment of the hospital. After health authorities approve the hospital, the construction license can be applied for, along with related governing laws complied with.

(2) Efforts to promote a medical network: in order to promote the medical resources balanced development, the division medical service region, and establishes the graduation medical service formulation. For example, lacking the regions to the medical resources and rewarding the folk to establish medical organizations.

(3) Promulgating tasks that require a hospital’s assessment: to strengthen the business management of hospitals and guarantee the quality of medical service, establishing a graded medical system will influence whether individuals seek a physician.

Selecting the optimal location of hospitals to ensure a competitive advantage

6. Chance(1)Violent change in market demand: an

increasing population in this region has increased both hospital bed capacity and the number of illnesses, e.g., SARS, subsequently creating a dramatic fluctuation in the demand for the local medical market.

(2)Dramatic fluctuations in production costs: this includes the global rise in the price of steel and iron or events such as an energy crisis.

(3)Significant changes in the financial market and exchange rate: fluctuations in the debt–credit interest rate of banks or the influence of global currency values incur changes in the cost of medical instrumentation and pharmaceuticals.

Selecting the optimal location of hospitals to ensure a competitive advantage•Step 2: Establish a hierarchical structure

Selecting the optimal location of hospitals to ensure a competitive advantage

• Step 3: Establish the pair-wise comparison matrixPurposive sampling is applied to sample 13

respondents from various hospital administrators and academics.

The weights of level 2 criteria and level 3 sub-criteria are then determined for a sample group of 13 individuals matching the above characteristics with each respondent, making a pair-wise comparison of the decision elements and assigning them relative scores.

The relative scores provided by 13 experts are aggregated using the geometric mean method.

Selecting the optimal location of hospitals to ensure a competitive advantage

Table . Aggregate pair-wise comparison matrix for criteria of level 2

Goal Factor DemandFirm

strategy

Related and supportingindustries

Government Chance weight

Factor 1.000 0.380 0.408 3.706 0.318 2.266 0.121

Demand 2.632 1.000 0.907 4.696 0.608 3.061 0.223

Firm strategy 2.453 1.102 1.000 4.318 0.682 2.985 0.227

Related and supportingindustries

0.270 0.213 0.232 1.000 0.2444 0.305 0.046

Government 3.148 1.645 1.466 4.099 1.000 3.378 0.296

Chance 0.441 0.327 0.335 3.275 0.296 1.000 0.086

max 6.211571; CI=0.042314; RI=1.24; CR=0.034124 0.1

Selecting the optimal location of hospitals to ensure a competitive advantage

•Step 4 : Calculate the eigenvalue and eigenvector

•Step 5 : Results of the consistency test and the CR of the comparison matrix from each 13 experts are all 0.1, indicating ≦consistency.

Selecting the optimal location of hospitals to ensure a competitive advantage

Factor Capital Labor Land weight

Capital 1.000 2.261 1.414 0.464

Labor 0.442 1.000 0.587 0.201

Land 0.707 1.704 1.000 0.335

max 3.000449332; CI=0.000224666; RI=0.58; CR=0.000387355 0.1

Selecting the optimal location of hospitals to ensure a competitive advantage

Eigenvalue and CR

Factor λmax=3.00044; CI=0.00022; RI=0.58CR=0.000387 0.1≦

Demand λmax=3.00013; CI=0.000669; RI=0.58CR=0.001154 0.1≦

Firm strategy λmax=3.00116; CI=0.000584; RI=0.58CR=0.001007377 0.1≦

Related and supportingindustries

λmax=3.000972; CI=0.000486; RI=0.58CR=0.000838 0.1≦

Government λmax=3.00534; CI=0.00267; RI=0.58CR=0.004606 0.1≦

Chance λmax=3.00128; CI=0.000643; RI=0.58CR=0.001108 0.1≦

max 6.211571; CI=0.042314; RI=1.24; CR=0.034124 0.1 max 6.211571; CI=0.042314; RI=1.24; CR=0.034124 0.1

Selecting the optimal location of hospitals to ensure a competitive advantage

•Step 6 : Estimate the relative weights of the elements of each level.

•Step 7 : Calculate the weights of overall levels

•Step 8:Sensitivity analysis of three location selection areas under six criteria

Sensitivity analysis•The performance graph displays how the

alternatives perform with respect to the change in scenario of all parameters.

East district of Taichung cityTaiping cityDali city

Sensitivity analysis•Performance sensitivity of alternatives

when related and supporting industries (Rsi) is increased by 25%

Sensitivity analysis•Performance sensitivity of alternatives

when Change (Ca) is increased by 30%

Sensitivity analysis•Performance sensitivity of alternatives

when Government (Gv) is increased by 20%

Selecting the optimal location of hospitals to ensure a competitive advantage

Criteria Sub-criteria Weights of sub-criteria

East district of Taichung city Taiping city Dali city

Factor

Capital 0.464 0.239 0.137 0.624

Labor 0.201 0.51 0.127 0.364

Land 0.335 0.616 0.118 0.267

Synthesis 0.42 0.129 0.452

Demand

Population number 0.197 0.25 0.123 0.627

Population density 0.274 0.552 0.119 0.329

Population age distribution 0.529 0.504 0.128 0.368

synthesis 0.467 0.125 0.408

Table. Eigen vectors and weights of three location selection areas under 18 sub-criteria

Selecting the optimal location of hospitals to ensure a competitive advantage

Criteria Sub-criteria Weights of sub-criteria

East district of Taichung city Taiping city Dali city

Firm strategy

Management object 0.166 0.24 0.129 0.631

Rank of competing hospitals

0.266 0.55 0.124 0.326

The healthcare sector 0.568 0.57 0.11 0.319

Synthesis 0.51 0.117 0.373

Related and supporting industries

The medicine practice and the pharmaceutical

sector0.42 0.548 0.113 0.338

Hospital administration

sector0.287 0.565 0.121 0.314

The healthcare sector 0.293 0.296 0.133 0.571

Synthesis 0.479 0.121 0.399

Selecting the optimal location of hospitals to ensure a competitive advantage

Criteria Sub-criteria Weights of sub-criteria

East district of Taichung city Taiping city Dali city

Government

Qualifications of the hospital’s

establishment and the regulations of

the established standard

0.563 0.586 0.111 0.303

Efforts to promote a medical network 0.196 0.499 0.133 0.368

Promulgating tasks that require a

hospital’s assessment0.242 0.332 0.143 0.526

Synthesis 0.508 0.123 0.37

Chance

Violent change in market demand 0.282 0.442 0.128 0.43

Dramatic fluctuations in production costs 0.403 0.584 0.112 0.304

Significant changes in the financial

market and exchange rate

0.314 0.369 0.145 0.486

Synthesis 0.476 0.127 0.396

Conclusions•Demand conditions, firm strategy,

structure and rivalry and government are high.

Goal The synthesis valuesFactor conditions 0.121

Demand conditions 0.223Firm strategy, structure

and rivalry 0.227

Related and supporting industries 0.046

Government 0.296Chance 0.086

Conclusions

Conclusions• Priorities of the three location selection areas are the locations of the East district of Taichung city (EDoTC), Dali City and Taiping City.