Recommendation: Shouldice Hospital has successfully created a hernia operation assembly line that is so effective that it makes every patient feel different and unique even though those patients are merely cogs in the Shouldice Hospital process. It is this irony that has made Shouldice Hospital a success, which is clearly evident based on its rate of "word of mouth" referral and the attendance at annual "reunion" parties. Without any form of formal marketing, the Company has its largest backlog of customers to date. Upon conducting a partial House of Service Quality analysis, it is abundantly clear that Shouldice Hospital's service attributes and capabilities are aligned with customer needs and expectations. The greatest form of flattery is often said to be imitation. Shouldice Hospital's latest challenges arise from these imitators.

Copycats are affecting the image of the Shouldice method of hernia surgery. Further exacerbating the problem, lack of capacity at the Shouldice Hospital is forcing patrons to seek out these hospitals that are imitating the procedures. Seeking out potential growth opportunities will help overcome this challenge. In the near term, management of the Shouldice Hospital must expand capacity by conducting surgeries on Saturdays. This expansion will allow the hospital to decrease backlog as well as decrease the number of patrons who defect to other hospitals.

To implement this change in schedule, management must: 1) Win the support of employees by clearly communicating the challenges facing the hospital 2) Hire more surgeons and nurses to overcome increased work load concerns of employees Rationale: Shouldice Hospital has built a highly profitable niche business by aligning customer needs and expectations with the service the hospital delivers. Exhibit 1, a partial House of Service Quality analysis, outlines the different expectations that hernia patients have as well as the controllable elements that the hospital can use to deliver to these expectations. From this analysis, which ranks the expectations of patients based on survey results, it is clear that reliability is a highly important factor for patients. For the hospital to be successful they have to invest heavily in training and equipment. The hospital has effectively delivered to this expectation through extensive research by Dr. Shouldice and the development of the Shouldice method.

Furthermore, each surgeon develops expertise by performing nearly 600 hernia operations per year versus 25-50 for a surgeon at a general hospital. Due to these factors, the success rate of the hospital is much higher than general hospitals and potential patients are presented strong empirical evidence. Similar to the Mayo clinic, the Shouldice Hospital strongly differentiates itself by delivering to the assurance and empathy needs of its patients as well. As seen in Exhibit 1, assurance and empathy are just as important as reliability to these patients. Patients at Shouldice Hospital are looking for a complication-free experience with staff members that are sensitive to their discomfort prior to the operation but also effective at inspiring exercise to shorten recovery time after the procedure. Not surprisingly, nurses spend an abnormally high amount of time counseling.

In addition, from housekeeper to physician, the entire staff is trained to push patients to exercise from the moment the procedure is completed. Similarly, the Hospital facilities were designed for the benefit of hernia patients. The vast estate with numerous amenities creates an atmosphere that is less like a hospital and more like a hotel. The overall space also allows for significant movement by patients. Carpeted hallways and specially designed steps reduce the possibility of falls.

A real testament to the strength of the facilities is the lack of television in the hospital rooms. Patients are clearly entertained through other more productive venues. Customers also play a pivotal role in creating an atmosphere that meets expectations. As a part of the Shouldice Hospital process, patients are encouraged to interact with each other and share experiences (Tea and Cookie hours, recreation rooms, etc. ).

These processes, as outlined in Exhibit 2, play a critical role in helping the hospital maintain consistent service quality. The machine-like flow allows for little variation and keeps employees on their toes. Furthermore, because the hospital is focused solely on hernia procedures, employees repeatedly practice the process thus creating the efficiencies that the hospital enjoys today. Where to go from here Shouldice Hospital has reached the pinnacle of efficiency and utilization out of its current service offering. The Company is at a crossroads as to how to continue growing while also overcoming some of the challenges it does face.

The New Service Strategy Matrix in Exhibit 3 shows some of the possible directions the hospital can take. As a large part of the Company's value proposition is the innovative Shouldice procedure, venturing into new service offerings either at the same location or at a new location would be a stretch. The current staff holds little medical expertise in any areas other than hernia. Furthermore, the Company's processes that are so effective for hernia operations (i.e. quick recovery / exercise process) may not be the easily transposed onto new services. Despite exceeding customer expectations and creating an extremely efficient process, the Shouldice Hospital does face some new challenges. First, the Company's backlog is increasing.

Responsiveness is a key driver of customer satisfaction (see Exhibit 1) and current backlogs are not allowing Shouldice Hospital to exceed customer expectations in this area. Second, copycat services are appearing and tarnishing the image of the Shouldice procedure. Both of these challenges are highly correlated. As more and more customers are seeking out the Shouldice procedure, the hospital's backlog is increasing. As the backlog is increasing, customers are searching elsewhere for similar services. The solution to both of these problems is to expand capacity.

The Hospital is considering three different proposals for expansion; add Saturday surgeries, add another floor to the hospital, and finally, build a similar facility in a new location. Developing a similar facility in a new location would require several of the doctors to relocate in order to maintain their level of service consistency. There is also a potential moral hazard issue at the other locations as employees there could live off the Shouldice name to garner profits without implementing a similar corporate culture driven by the machine-like processes. Furthermore, although there may be areas with a demographic population that could drive demand (i.e. Florida), the Company would have to work in a new legal environment that may hamper its abilities (i.e. malpractice insurance). Lastly, by opening a new facility, Dr. Obney's worries about not being able to maintain the right guiding principles would not be alleviated. Building another level at the existing facility could over utilize the existing hospital's operating rooms and overburden the surgeons.

In addition, building new capacity would require permission from the provincial government and would disrupt the existing flow of business until the expansion is completed. The costs of building the floor ($2 million plus the additional cost of operations) have a lower ROI than the Saturday surgeries solution. The lowest risk proposal, therefore, is to add Saturday services. Based on this increase in workdays, capacity is estimated to increase 20%. By working Saturdays, the Hospital will increase the number of working days by 52. With an average of 27 surgeries (6850 surgeries per year / 261 working days), and average revenue of $1029 per customer ($411 hotel stay + $450 surgery + $60 for assistant surgeon + $75 for anesthesiologist), an increase in 52 working days would result in increased revenue of $1.4 million with little disruption to the current business flow.

Clearly, many people within the company have concerns regarding a new Saturday surgery schedule. First, there is the concern that everyone's hours will increase. Second, Dr, Obney is worried that he will not be on premise to ensure that the process is running smoothly. Additionally, Mr. O'Dell is concerned that expansion would make it difficult to maintain the working relationships and attitudes.

To alleviate all these fears, Dr. Shouldice must effectively communicate the challenges the Hospital faces and position expansion as necessary. Employees must understand that remaining status quo will lead to deterioration of the brand name by copycat firms and defections of potential patients to other hospitals (further exacerbating the problem). Dr. Shouldice must convince employees of Shouldice Hospital that their current work levels will not change with the change in schedules. Hiring and training the employees will be of paramount importance.

Therefore, the expansion should be done deliberately, perhaps working surgeries every other Saturday to start. The deliberate start will also test the expandability of the Shouldice Hospital process. Conclusion: Shouldice Hospital had been very successful at maintaining service quality by creating a very consistent process that nearly mirrors an efficient assembly line in a factory. Even more impressive is the hospital's ability to make customers feel as though they are receiving individual attention when in reality the patients are merely cogs in the machine. Together these two factors have allowed the Shouldice Hospital to consistently exceed customer expectations. As the Company moves forward, if the implementation of the Saturday surgeries proves to be successful, then it would make sense to stretch the Shouldice Hospital process further by expanding the physical facilities and potentially exploring new locations in the United States.

However, without first testing the malleability of the culture and process that Shouldice has developed; the Company must take baby steps to build capacity.