Strategies & Alternatives

6

Chapter 5 Directional Strategies

Why Directional Strategies Are Important

As suggested by James Brian Quinn, strategic decisions set the overall direc- tion for an organization and shape its goals as well as its products and services, markets, and service delivery and support activities. The broadest strategic decisions are the directional strategies – vision, mission, values, and strategic goals – because they provide general limits for all subsequent organizational decisions. The directional strategies essentially document strategic thinking concerning “who we are, what we want to be, how we are going to behave, and what we want to achieve.”

“Strategic decisions are those that determine the overall direction of an enterprise and its ultimate viability in light of the predictable, the unpredictable, and the unknowable changes that may occur in its most important surrounding environments. They ultimately shape the true goals of the enterprise.”

—JAMes BriAn Quinn, sTrATegy AuThor AnD DArTMouTh professor

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

164 Strategic management of HealtH care organizationS

Directional strategies are profoundly important; they initially set all other activities in motion. The directional strategies create the first signs of momentum for the organization. They rest solidly on a close examination of the reasonably predictable changes that the strategic thinking activities (awareness, anticipation, analysis, and interpretation) have synthesized concerning the organization’s environment (external environmental analysis) and itself (internal analysis). in addition, to a considerable extent, the directional strategies must be able to weather the unpredictable and unknowable changes that will inevitably occur to guide subsequent organizational decisions. Vision, mission, and values are relatively enduring, whereas strategic goals may be short or long term, and will naturally evolve as some are accomplished and others are modified in a changing environment.

A change in the directional strategies is usually evolutionary rather than revo- lutionary. Therefore, directional strategies should be re-examined and modified over time, allowing an organization to remain nimble enough to maneuver in its changing environments. Transforming an organization’s identity and what it does is never an easy task. re-invention can be traumatic for the organization, but sometimes necessary for survival.

Because the directional strategies are relatively enduring, they must take an organization through good times and bad, and are difficult to change en masse; therefore, strategic managers must carefully create the organization’s directional strategies.

use concepts in this chapter to craft exciting and enduring directional strategies!

learning objectives

After completing the chapter you will be able to: 1. Discuss how external environmental analysis, service area analysis, and internal

analysis provide the context for developing the directional strategies. 2. Describe the roles of and relationships among mission, vision, values, and

strategic goals. 3. Develop a mission statement incorporating the important characteristics and

components of organizational missions. 4. Compose an organizational vision statement using the relevant characteristics

and components of organizational visions. 5. Develop a values statement based on established characteristics and components

of organizational values. 6. Use service category critical success factors to imbue strategic goals. 7. Develop a set of strategic goals that contribute to the mission, move the

organization toward the realization of its vision, and are consistent with the organization’s values.

8. Discuss the important issues in the governance of health care organizations and the role of boards of directors in creating and maintaining policy-making direction.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 165

Strategic Management Competency After completing this chapter you will be able to develop directional strategies for a health care organization.

Directional Strategies

Mission, vision, values, and strategic goals are appropriately called directional strategies because they guide strategists when they make key organizational decisions. The mission captures the organization’s distinctive purpose or reason for being – it is a broadly defined and enduring statement of purpose that dis- tinguishes one organization from other organizations of its type and identifies the scope of its operations in product, service, and market (competitive) terms. The vision creates a mental image of what leaders want the organization to achieve. it is an expression of hope for a desired future state – a description of what leaders want the organization to accomplish when it is fulfilling its mission. Values are the fundamental or guiding principles that are held dear by members of the organi- zation and shape the organization’s culture. These are principles the managers and employees will not compromise while they are in the process of achieving the mission and pursuing the vision and strategic goals. Strategic goals are bench- marks or end results related to critical success factors; consequently, the goals should provide more specific direction that accomplishes the mission and vision. unfortunately, there is rarely a clear distinction among the concepts and terms actually used in these statements – especially in the mission, vision, and value statements. studies of actual statements reveal that even when the statements are clearly labeled there is a wide variety of terms used to express the ideas contained in them.1 from an analysis of 100 firms in the Fortune 500, it was suggested that many mission statements are written at an educational level above what would be effective to communicate to all stakeholders.2

The Process for Establishing Directional Strategies

exhibit 5–1 provides an overview of the process for establishing the directional strategies. The exhibit demonstrates the sequence and the need to understand the broadest external analysis to the more narrow internal analysis followed by the narrower still service area competitor analysis. only after a thorough understand- ing of the situation the organization faces are the directional strategies formulated.

Step 1: Review Results of Situational Analysis in Chapter 2 guidelines for a situational analysis were developed and it was noted that an understanding of the external environment is essential for organizations to answer the question, “What should we be doing?” The “rules of success” are written outside the organization and these rules must be clearly understood before an effort is made to develop the mission, vision, values, and strategic goals

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

166 Strategic management of HealtH care organizationS

of the organization. A critical aspect of the external environment is the nature of the competitors in the organization’s market space (Chapter 3, service Area Competitor Analysis).

The more organizational leaders know about the strengths and weaknesses of competitors, the more likely they will be able to position the organization to establish or maintain its ability to compete effectively (its competitive advantage) as covered in Chapter 4. A complete review of the organization’s situation with regard to external and internal factors is necessary before beginning the process of formulating the directional strategies.

Step 2: Develop a Statement of Mission Chester Barnard, in his seminal book, The Functions of the Executive, stated that only three things are needed to have an organization: (1) communication, (2) a willingness to serve, and (3) a common purpose. The inculcation of the “belief in the real existence of a common purpose” is, according to Barnard, “the essential executive function.”3 purpose, among other things, helps managers make sense of the environment. When the purpose of an organization is clearly understood, the

EXHIBIT 5–1 The Process for the Development of Directional Strategies

Step 1 – Review Results of Situational Analysis – External Analysis, Service Area Competitor Analysis, and Internal Analysis

Step 2 – Develop a Statement of Mission

Step 3 – Develop a Statement of Vision

Step 4 – Develop a Statement of Values as Guiding Principles

Step 5 – Develop Strategic Goals

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 167

ESSEnTIAlS foR A STRATEgIC THInkER 5–1

What is the long-term care industry?

The long-term care industry is comprised of organizations that provide rehabilitative, restora- tive, or ongoing skilled nursing care to patients who require assistance with daily living. A variety of facilities dedicated to the intensity of care required have developed over time. The “old folks home” may now be a memory care facility, a skilled nursing facility, a rehab facility, and so on. The following list represents the main types (listed in ascending order by intensity of care).1

Independent lIvIng

Adult communities usually impose age restric- tions, offer social activities, and provide increased security. Generally, these facilities do not offer medical services but may facilitate access to care by providing convenient transportation, sched- uled visits from contract providers, and so on. Typically, residents are age 75 or younger.

Congregate Care faCIlItIes (CCfs)

These facilities provide social activities, security, and non-health related services such as meals,

housekeeping, and transportation for shopping and health care appointments. The target age population is 75–82 years.

assIsted lIvIng faCIlItIes (alfs)

Although there is no uniformly accepted defi- nition of ALFs, the U.S. Department of Health and Human Services defines ALFs as residences that provide either routine general protective oversight or assistance with activities necessary for independent living to mentally or physically limited persons. These facilities generally pro- vide care for individuals between the ages of 70 to 90+ years.

skIlled nursIng faCIlItIes (snfs)

The statutory definition of a skilled nursing facility as provided in the Social Security Act is an insti- tution (or a distinct part of an institution) that is engaged in providing skilled nursing care and related services for residents who require medical or nursing care, or rehab services (for the rehabili- tation of injured, disabled, or sick persons), and is

complexity of the environment can be reduced; leaders are able to analyze their situation in light of the goals the organization wishes to achieve. Thus the com- plex environment is no longer a “mere mess of things.” As a statement of purpose, the mission plays an important role in focusing strategists’ attention on relevant aspects of the environment.

for example, if the Ceo of a long-term care facility attempts to consider all the turbulence in the organization’s environment, it will be overwhelming. Can anyone effectively track all of the changes taking place in biotechnology, cultural values, demographics, and politics? however, if the Ceo focuses on only those aspects of the environment that relate to the mission of the long-term care organi- zation, the task becomes more manageable. essentials for a strategic Thinker 5–1, “What is the Long-Term Care industry?” provides an overview of this expanding industry.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

168 Strategic management of HealtH care organizationS

The common purpose (mission) to which Barnard referred is the reason that organizations exist. some organizations exist to make money for the owners; some are founded to provide health care to indigent patients; others are started to deliver health services as conveniently as possible, or to provide care to individu- als who belong to the same managed care plan.

Mission: A Statement of Distinctiveness in the hierarchy of goals (end results and organizational plans to accomplish them), the mission captures the organization’s distinctive character. Although a well-conceived mission is gen- eral, it is more concrete than vision. An organizational mission is an attempt to capture the essence of the organizational purpose and commit it to writing. stryker Corporation, an international leader in the development of medical technologies, has a mission statement that is simple and to the point – “Together with our customers, we are driven to make healthcare better.”4 emphasis is placed on the interactions with customers, physicians, researchers, and so on, in the development of innovative products and services. This simple statement is used to coordinate the actions of thousands of employees in more than 100 countries.

An organizational mission is a broadly defined and enduring statement of purpose that distinguishes a health care organization from other organizations of its type and identifies the scope of its operations in product, service, and mar- ket (competitive) terms.5 The mission statement of the university of Texas MD Anderson Cancer Center in exhibit 5–2, for example, distinguishes the center from other health care organizations in the service area by its relationship with the university of Texas; its emphasis on a specific disease (cancer); its commit- ment to the integration of patient care, research, education, and prevention; and its intention to accomplish these through education at the undergraduate as well as graduate levels.

not primarily for the care and treatment of mental diseases. Nursing facilities offer the most intense level of long-term care for individuals requiring around the clock care; they generally have transfer agreements with one or more hospitals.

Medicaid is the primary payer of long-term care services. Over 60 percent of the patients in nursing homes as well as almost 20 per- cent of residents in assisted living facilities,2 are Medicaid recipients. Medicare recipients, by comparison, return to their home after a relatively short stay of 36½ days for purposes of rehabilitation.

The future of the long-term care industry appears very promising because of the aging

of the population and advances in medical science that have prolonged human life. As the population ages, the demand for rehabilitative services, assisted living services, and treatment of chronic conditions increases.

referenCes

1. These definitions taken from: Long Term Care

Education. (www.ltce.com/learn/skilledcare.

php).

2. Payment for services information is from:

www.ahcancal.org/advocacy/

StateLongTermPostAcute/Pages/default.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 169

MD Anderson developed an effective logo that states that MD Anderson Cancer Center is dedicated to “Making Cancer history” with a bold red line through the word “cancer”. With cancer “wiped” out, MD Anderson is definitely making history. since 1990 when U.S. News & World Report began a ranking of hospitals, MD Anderson has been ranked first or second, and has received the top ranking nine times in the past ten years.

Although mission statements are relatively enduring, they must be flexible in light of changing conditions. The changes facing academic medicine will continue to impose pressures on specialized centers of excellence such as MD Anderson because of the substantial costs involved in integrating patient care with the teach- ing and research mission and the increasing reluctance of payers to reimburse for educational costs. essentials for a strategic Thinker 5–2, “What Are Academic Medical Centers?” highlights the nature and some challenges facing academic medical centers. Despite the challenges, MD Anderson has retained its mission statement for a number of years and has remained focused on its distinctiveness in a rapidly changing environment.

EXHIBIT 5–2 Mission Statement of the University of Texas MD Anderson Cancer Center

The mission of the University of Texas MD Anderson Cancer Center is to eliminate cancer in Texas, the nation and the world through outstanding integrated programs in patient care, research, education and prevention, and through education for undergraduate and graduate students, trainees, professionals, employees, and the public.

Source: University of Texas MD Anderson Cancer Center.

ESSEnTIAlS foR A STRATEgIC THInkER 5–2

What are academic medical centers?

According to the Association of American Medical Colleges (AAMC), an academic medical center (AMC) is a “university-based hospital or health system that is organizationally or admin- istratively integrated with a medical school.” Despite the Association’s singular definition, AMCs are diverse and complex – no two are alike. They differ in organizational, operational, financial, and governance structures. At their core, AMCs typically include a medical school, a teaching hospital, and faculty who teach medi- cal students and specialty trainees as well as provide clinical care for patients. The current

trend is toward greater alignment among these three components, yet no single corporate struc- ture is considered ideal. Of the approximately 140 allopathic medical schools, only 25 percent are fully integrated such as the University of Michigan Health System where the medical school, hospital, and faculty practice fall under one corporate structure. On the other end of the spectrum, fewer than 10 percent operate as separate entities, similar to George Washington University. In between are multiple examples of “corporate” alignment between school and hos- pital (University of Virginia), school and faculty

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

170 Strategic management of HealtH care organizationS

(Columbia University Medical Center), and hos- pital and faculty (Vanderbilt University Medical Center). Where an AMC falls along this alignment continuum is a product of its institutional history, culture, and financial interrelationships.

Not only do AMCs provide patients and their communities with health care services ranging from everyday needs to the most specialized care, in addition, they:

● Offer unique care and services not available anywhere else in their market.

● Teach the next generation of health care professionals and train these professionals in new care delivery models.

● Develop technologies, forge new discover- ies, and conduct research that improve the health and well-being of the citizens they serve.

According to a 2016 Advisory Board Outlook, AMCs account for only 5 percent of hospitals in the United States, but they deliver 25 percent of all clinical care and represent 100 percent of the hospitals featured on U.S. News & World Report’s 2016–2017 Honor Roll. In addition, AMCs pro- vide 41 percent of all hospital-based charity care and 28 percent of all Medicaid services while training over 100,000 residents annually.

Despite serving as a “safety net” for critical services, AMCs are economic engines, respon- sible for nearly $34 billion in state tax revenue

and more than 3.5 million full-time jobs (1 out of every 40 wage earners works either directly or indirectly for an AMC). A 2011 AAMC study estimated that the combined economic impact of AAMC member medical schools and teaching hospitals was over $587 billion.

Most AMCs have characteristics that can make planning challenging, especially their tripartite mission of clinical care, research, and educa- tion. Planning around a single mission is difficult enough, but to embrace and acknowledge all three can be insurmountable. Many times the goals and objectives for one mission can be at odds or in conflict with another. Plans to grow and invest in a strategic clinical service may result in less funding or resources to pursue research initiatives. Conversely, using limited capital to build more lab research space may require post- poning the expansion of patient clinics.

In addition to having several missions, AMCs have multiple stakeholders (i.e. chief execu- tives, deans of medical schools, department chairs, hospital or service line directors, etc.) and multiple channels of engagement with varying levels of oversight and scopes of responsibility. The relationship among these various organiza- tional components is often poorly defined but highly co-dependent and leads to an extensive consensus-driven decision-making process.

Source: David Randall, Senior Vice President, Strategy and Business

Development, University of Alabama at Birmingham Health

System.

Mission statements are sometimes not the true “living documents” that are capable of encouraging high performance. studies of mission statements confirm that the full potential of this directional strategy is rarely achieved.6 often mission statement creators seem to feel obligated to make reference to specific stakeholder groups such as patients or communities because of institutional pressures and refer to pressing social issues because of policy decisions within the organization.7 To be effective, mission statements must be carefully crafted to the organization’s unique purpose.8

one study of hospital mission statements found that almost 85 percent of the respondents had mission statements; however, some of the executives who

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 171

completed the survey did not perceive a high level of commitment to the state- ment by employees or that specific actions were influenced very much by the mission.9 Another study of state-level departments of public health indicated that more than 90 percent had formal, written mission statements. Despite the frequency with which formal mission statements are encountered, a great deal of confusion exists regarding their value and the influence that these statements actually have on behavior within organizations.10

This confusion is unfortunate because the mission statement is a crucially important part of strategic goal setting. it is the superordinate goal that stands the test of time and assists top management in navigating through periods of turbulence and change. it is, in other words, the stake in the ground that provides the anchor for strategic planning. it must be emphasized, however, that mission statements, even at their best, can never be substitutes for well-conceived and carefully formulated strategies.11 A sense of mission is not a guarantee of success. A positive relationship between mission statements and performance assumes a commitment to the organizational purpose. This is especially true of health care organizations.12 The organization has to adhere to the mission and regularly review it to be sure that it remains relevant. When the mission is carefully crafted, mission fulfillment influences a variety of key psychological states related to employee motivation (e.g. employee engagement, organizational identification, and so on).13 it has been suggested that “mythopoetic leaders,” who use the mission of the organization to anchor behaviors, can be instrumental in building robust cultures that can lead to a competitive advantage.14

Mission statements remind managers in health care organizations to ask questions of themselves and their colleagues. it is important to ask individuals throughout the organization the following questions as the answers radically affect how the organization performs. These questions include:

● Are we not doing some things now that we should be doing? A rehabilitative medicine center, after analyzing the environment and studying its own referral patterns, might determine that it should enter a joint venture with a group of surgeons to provide outpatient surgery services. The rehabilitative medicine center, located in a professional building adjacent to an acute care hospital, had simply been referring patients requiring surgery to the hospital. however, insurance company policies and patient preferences suggested that the majority of surgeries could be performed on an outpatient basis.

● Are we doing some things now that we should not be doing? The rehabilitative medicine center, after extensive analysis, concluded that it should divest its rehabilitative equipment business and contract with medical and sports equipment suppliers for needed services.

● Are we doing some things now that we should be doing, but in a different way? Throughout its history the rehabilitative medicine center required patients to come to the facility for services. for many patients, particularly those with serious injuries, travel to the facility was difficult and often impossible. As a strategic response, the center purchased a mobile trailer with a fully equipped diagnostic and treatment facility that can transport services to local high schools and industrial locations.15

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

172 Strategic management of HealtH care organizationS

An organization should carefully evaluate strategic decisions using its mission statement when new opportunities are presented. The above three questions may be used to determine whether or not the new opportunity is consistent with its essential distinctiveness. Moreover, these questions are important guards against mission drift, which is the tendency to move into businesses and programs not in line with the stated mission.16 As an example, Cancer Treatment Centers of America’s (CTCA) mission statement (see exhibit 5–3) provides guidance for its leaders and employees in its network of hospitals across the country in determin- ing whether or not new opportunities should be pursued. CTCA has established a reputation for “treating the whole person.” in pursuit of this central goal, the use of state-of-the-art technologies is prioritized and treatment teams include medi- cal oncologists, spiritual support personnel, rehabilitation therapists, dietitians, radiation oncologists, naturopathic clinicians, and more. Adherence to the mis- sion enables CTCA to evaluate any and all innovative and even sometimes less conventional cancer care.

EXHIBIT 5–3 Mission Statement of Cancer Treatment Centers of America

Cancer Treatment Centers of America (CTCA) is the home of integrative and compassionate cancer care. We never stop searching for and providing powerful and innovative therapies to heal the whole person, improve quality of life, and restore hope.

Source: Cancer Treatment Centers of America.

Another important function of mission statements is to assist the strategic leader in asking “what should we not be doing?” if leaders do not ask this ques- tion each time they face a new opportunity they open themselves to two dys- functional possibilities. The first is mission drift and the second is mission creep. Mission drift occurs when the mission is altered, often unintentionally, and the organization fades into areas it should not pursue. indeed, mission statements do eliminate certain areas of operation (for example, a well formulated mission state- ment would discourage a health care organization from entering the construction industry). When organizations devoted primarily to health care delivery engage in businesses where they have little or no experience the results are unsuccessful more often than not.

Another temptation for organizations is mission creep. in this case the health care organization does not drift into an unfamiliar activity, it simply allows itself to add on more and more related activities to the point where the diversity of operations becomes unmanageable. Consider a local public health department founded by a local government to ensure the health of the public. initially, this was interpreted as providing disease control services, vital records, and health policy advocacy. Then the absence of primary care resources for the local medi- cally indigent population required the health department to open primary care clinics; because many in the local population did not have the transportation required to receive the services of the primary care clinics, health officers decided to devote some minimal resources to home health activities. over time the demand for home health grew and consumed more and more limited resources.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 173

eventually, the local health department with essentially the same budget it had when it was founded, was providing a portfolio of services that included disease control, primary care, and home health and was considering additional services in the area of environmental health. This example demonstrates how organiza- tions can overwhelm their resources by allowing too many activities and services to creep into their organizational missions, even while proceeding with the best of intentions.

Characteristics of Mission Statements The mission statement of shriners hospitals for Children (exhibit 5–4) illustrates some of the important characteristics of an effective mission statement. The product portfolio (specializing in services to children with neuromusculoskeletal conditions, burn injuries, and other special health care needs) is articulated in the mission statement so that interested parties can immediately understand the uniqueness of shriners hospital for Children. Clearly, this is not the typical children’s hospital. Moreover, insights are given into the shriners hospital for Children’s concern for family, diversity, and so on. using the shriners mission statement, four important characteristics of effective mission statements can be illustrated:

1. Missions are broadly defined statements of purpose. Well-formulated mission statements are written and communicated to those involved in doing the work of the organization. They are broad but also, in a sense, specific. The shriners hospital for Children’s mission statement specifies the specific type of work it does. That is, mission statements should be general enough to allow for innovation and expansion into new activities when advisable (shriners covers this with the phrase “other special healthcare needs”) yet narrow enough to provide direction.17

2. Mission statements are enduring. The purpose, and consequently the mission, of an organization should not change often and should be enduring. people are committed to ideas and causes that remain relatively stable over time. shriners hospital for Children has evolved from specializing in pediatric orthopedic care in the 1920s, to burn units, to its present portfolio. The consistent underlying theme has been its focus on children and their families.

3. Mission statements should underscore the uniqueness of the organization. shriners hospital has a number of unique qualities including its focus on children, its emphases on education and research, and its non- discriminatory philosophy of providing care without regard to the patient’s ability to pay.

4. Mission statements should identify the scope of operations in terms of service and market. however, it is important for the mission statement to specify what business the organization is in (health care) and who it believes are the primary stakeholders.18 note that shriners hospital for Children clearly identifies the type of conditions it is committed to treating.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

174 Strategic management of HealtH care organizationS

These characteristics illustrate the essential properties of well-conceived and communicated mission statements and outline worthy ideals that are always in the process of being achieved by strategic leaders in health care institutions.19 The mission provides direction. Mission statements are not easy to write, but fortu- nately there is general agreement on what they should include.

Components of Mission Statements There is no one best way to develop and write mission statements. research has shown, however, that in non-profit organizations the content of mission statements is influenced by interorganiza- tional peers or other non-profits in their own networks.20 studies of Canadian not-for-profit hospitals indicate that they emphasize a variety of factors in their mission statements.21 To define the distinctiveness of an organization, mission statements must highlight uniqueness. some of the more important components of a mission are discussed and illustrated with the use of mission statements from a variety of health care institutions.

● Mission statements target customers and markets. frequently the mission statement provides evidence of the kind of customers or patients the organization seeks to serve and the markets where it intends to compete. exhibit 5–5 provides the mission statement of the Cleveland Clinic. This mission statement clearly states who are considered the customers or stakeholders of the Clinic – the patients, researchers, and all employees. ultimately, the mission is to provide better care for the sick by investigating the reasons for their illness, providing education to those who serve the patients, and engaging in research.

The mission of The Cleveland Clinic is to provide better care of the sick, investigation into their problems, and further education of those who serve.

Source: Cleveland Clinic.

EXHIBIT 5–5 Mission Statement of The Cleveland Clinic

● Mission statements indicate the principal services delivered or products provided by the organization. A specialized health care organization might highlight the special services it provides in its mission statement. Amedisys

EXHIBIT 5–4 Mission Statement of Shriners Hospital for Children

Shriners Hospitals for Children has a mission to: ● Provide the highest quality care for children with neuromusculoskeletal conditions, burn

injuries and other special healthcare needs within a compassionate, family-centered and collaborative care environment.

● Provide for the education of physicians and other healthcare professionals. ● Conduct research to discover new knowledge that improves the quality of care and quality

of life of children and families.

This mission is carried out without regard to race, color, creed, sex or sect, disability, national origin or ability of a patient or family to pay.

Source: Shriners Hospitals for Children.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 175

● Mission statements specify the geographical area within which the organization intends to concentrate. This element is most frequently included when there is a local, state, or regional aspect to the organization’s service delivery. The California Department of public health’s mission statement provides an example of this component of mission statements (see exhibit 5–7).

EXHIBIT 5–6 Mission Statement of Amedisys, Inc.

To provide patient-centered care every day and be the leading healthcare at home team in the communities we serve.

Source: Amedisys, Inc.

EXHIBIT 5–7 Mission Statement of California Department of Public Health

The California Department of Public Health is dedicated to optimizing the health and well- being of the people in California.

Source: California Department of Public Health.

EXHIBIT 5–8 Philosophy Statement of Amedisys, Inc.

Taking care of your loved ones as we would our own – that is the philosophy Amedisys was built on. This simple concept, coupled with our core beliefs, has guided Amedisys growth in becoming one of the nation’s leading health care companies focused on bringing home the continuum of care.

Source: Amedisys, Inc.

● Mission statements identify the organization’s philosophy. frequently the mission of an organization will include statements about specific and distinguishing beliefs, values, aspirations, and priorities. Although not specifically part of the mission statement, it is useful to see the statement of philosophy that Amedisys provides in addition to its mission statement (see exhibit 5–8).

● Mission statements confirm an organization’s preferred self-image. how a health care organization views itself may constitute a singularity that should be included in the mission. The mission statement of fresenius Medical Care makes it clear that it views itself as the standard setter when it comes to health care (see exhibit 5–9).

is a home health and hospice care company dedicated to providing a continuum of care in the home setting. its mission statement reflects its goal to deliver complete home health and hospice services to patients in their homes (see exhibit 5–6).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

176 Strategic management of HealtH care organizationS

● Mission statements specify the organization’s desired public image. This image customarily manifests itself in statements such as the organization’s desire to be a “good citizen” or a leader in the communities where its operations are located or a similar concern. however, organizations may have a particular approach or focus that they want to communicate to the public. The mission statement of promise healthcare, a long-term acute care hospital (LTACh) (see exhibit 5–10), expresses its intent to be known as a high-quality, professional, and compassionate organization.

EXHIBIT 5–10 Mission Statement of Promise Healthcare

Promise Healthcare’s mission is to deliver the highest quality of professional and compassion- ate care to our patients and their loved ones.

Source: Promise Healthcare

not every one of the characteristics should necessarily be included in the mission statement.22 Any particular statement will likely include one or several of these components but seldom will include all. The organization must decide which of these, or some other characteristics, really account for its distinctiveness and emphasize them in the mission statement. interestingly, studies have found that higher-performing organizations generally have more comprehensive mis- sion statements. elements such as organizational philosophy, self-concept, and desired public image were particularly associated with higher-performing organi- zations in the sample studied.23

Building a Mission Statement for a mission statement to be useful a leader must begin the discussion concerning the need to examine or re-examine the organization’s mission to clearly state its purpose. This statement helps all employees focus their efforts on the most important priorities. one process that can be conducive to building mission statements is to convene a group of interested employees (administrative and non-administrative) who understand the issues facing the health care system as well as the strengths and weaknesses of the organization. each member of the group should understand the “big picture” and be able to look at things from the perspective of the Ceo, not just from his or her personal viewpoint.

prior to actually writing the mission statement, everyone should understand why a mission statement is being written or rewritten and the desire for a well- understood and widely communicated statement of organizational distinctive- ness. Without a common ambition shared among organizational members, the usefulness of the mission statement and its ultimate purpose will not be realized.

EXHIBIT 5–9 Mission Statement of Fresenius Medical Care

To deliver superior care that improves the quality of life of every patient, every day, setting the standard by which others in the health care system are judged.

Source: Fresenius Medical Care.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 177

once commitment has been established, assessments should be made of what makes the organization successful from the perspectives of employees and other key stakeholders. further, consideration should be given to what perceptions of success will be in the future.

After the group has been given time to think about the organization, its dis- tinctiveness in its environment, as well as the likely future it will face, the group should meet in a planning retreat. often it is useful to remove the participants from the office, and encourage unplugging from social media to have the oppor- tunity to truly focus on the organization’s mission. To stimulate strategic thinking, each person should be asked to reflect on the mission statement components listed in exhibit 5–11. recognizing that some members may not have been previously involved in writing a mission statement, this exhibit was developed to encourage initial thought without introducing too much structure into the process. group members should be asked to present key words relative to each of the compo- nents. The key words should be recorded and eventually used as the raw material for the mission statement. participants can be encouraged to generate the key words through a series of fill-in-the-blank statements listed under each mission statement component.

EXHIBIT 5–11 Strategic Thinking Map for Writing a Mission Statement

Component key Words reflecting Component

1. Target customers and clients:

“The individuals and groups we attempt to serve are …” Do not be limited to only the obvious.

2. Principal services delivered:

“The specific services or range of services we will provide to our customers are …”

3. Geographical domain of the services delivered:

“The geographical boundaries within which we will deliver services to our customers are …”

4. Specific values:

“Specific values that constitute our distinctiveness in the delivery of our services to customers are …”

5. Explicit philosophy:

“The explicit philosophy that makes us distinctive in our service area is …”

6. Other important aspects of distinctiveness:

“Other factors that make us unique among competitors are …”

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

178 Strategic management of HealtH care organizationS

After discussion and fine-tuning of the language, a draft of the mission state- ment can be developed. The draft should be refined by the group until there is consensus on the wording and meaning of the mission statement. once the group is satisfied with the statement, it should be circulated among key individuals to gain their input and support.

Top-Level Leadership: A Must for Mission Development for a mission statement to be a living document, employees must develop a sense of ownership and commitment to the mission of the organization. involving employees is there- fore essential in the development and communication of the mission. however, top-level leadership must be committed. Management must stay engaged in the mission development process but not dominate it. Board rooms and executive suites can produce great ideas for mission development but everyone must com- mit to the mission for it to be achieved.24

Developing a mission statement is a challenging task. frequently, attempts are made to formulate “blue sky” statements of environmental and competitive con- straints and little more. for example, it is of little real value to state that a health care organization is devoted to being a good citizen in the community and to paying wages and benefits comparable to those of other organizations in the area. realistically, the organization must be a good citizen and, if it wants employees, its wages and benefits must be competitive.

The role of the chief executive officer in formulating the mission should not be underestimated. Mission statement development is not a task that should be del- egated to a planning staff. The Ceo, the leadership team, and other key individu- als who will be instrumental in accomplishing the mission should provide input.

Although the process appears to be simple, the actual work of writing a mis- sion statement is time consuming and complex, with many “drafts” before the final document is produced. The strategic thinking map (exhibit 5–11) is useful for identifying clients, services, and domain; however, the development and com- munication of a well-conceived mission statement requires use of the compass (leadership) as well.

Step 3: Develop a Statement of Vision The mission is developed considering the needs of stakeholders – groups who have a vested interest in the success and survival of the organization. Vision, on the other hand, is an expression of hope. it is a description of the organization when it is fulfilling its purpose.25 Vision involves creating compelling images of the future and produces a picture of what could be and, more importantly, what a leader wants the future to be.26

effective visions possess four important attributes: idealism, uniqueness, future orientation, and imagery.27 Visions are about ideals, standards, and desired future states. The focus on ideals encourages everyone in the organization to think about possibilities. it is dynamic and collaborative, a process of articulating what the members of an organization want to create. Vision communicates what the organization could be if everyone worked diligently to realize the potential. health care organizations need leaders who are forward looking. effective visions

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 179

are statements of destination that provide direction to where the organization’s leadership collectively wants to go. finally, visions are built on images of the future. When people are asked to describe a desirable place or thing, they almost always do so in terms of images. images motivate people to pursue the seemingly impossible. one study of archival information in 151 hospitals and experiments with 62 groups of full-time employees found that leaders who used specific combinations of large amounts of vision imagery and smaller amounts of values improved organizational performance by triggering a shared sense of organiza- tional goals thereby improving coordination.28

Origins of Vision health care leaders develop vision from an appreciation of the history of the organization, a perception of the opportunities present in the environment, and an understanding of the strategic capacity of the organization to take advantage of these opportunities. All these factors work together to form an organization’s hope for the future.

History and Vision An organization’s history is comprised of a variety of events and activities including the founder’s philosophy. The story of st. Jude Children’s research hospital began with Danny Thomas, a struggling enter- tainer, who prayed to st. Jude Thaddeus, the patron saint of hopeless causes and said, “show me my way in life and i will build you a shrine.” Thomas’ fortunes changed and he became one of the best known stars in the entertain- ment industry.

in the 1950s, Thomas enlisted members of the business community in Memphis to build a hospital for children. supporters became convinced that rather than a general hospital for children, a research hospital devoted to childhood cancers would be a better option. Thomas and his wife devoted their time to funding the hospital and eventually enlisted fellow Americans of Arabic-speaking descent to assist. The American Lebanese syrian Associated Charities (ALsAC) now raises hundreds of millions of dollars annually to support st. Jude. over 9 million donors and more than one million volunteers contribute to make st. Jude’s the nation’s largest health care charity.

Think of the inspirational impact of the relationship between the history and vison of st. Jude to employees, donors, and all other stakeholders. Danny Thomas’ dream was that “no child should die in the dawn of life.” in 1962 the survival rate for childhood cancer, for example, was 20 percent. As of 2017, it is over 80 percent. And, no child is turned away for an inability to pay.29

Vision and the Environment The vision must be relevant to the larger sys- tem and be sensitive to the changes taking place in the general and health care environments. for example, essentials for a strategic Thinker 5–3, “What Are health Care sharing Ministries?” demonstrates how some religious organizations reacted to the passage of the Affordable Care Act in 2010 that offered an exception to the individual insurance coverage mandate allowing individuals with simi- lar ethical or religious beliefs to form organizations to share medical bills. This resulted in the emergence of health care sharing ministries.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

180 Strategic management of HealtH care organizationS

ESSEnTIAlS foR A STRATEgIC THInkER 5–3

What are Health care Sharing ministries?

Health Care Sharing Ministries (HCSM) are faith- based not-for-profit organizations that allow mem- bers who share the same religious beliefs and values to share the risks of their health care expenses. Customarily, these ministries are 501(c)(3) organiza- tions that are considered legal alternatives to the individual mandate under the Affordable Care Act. The ACA allowed an exception for individuals with a “common set of ethical or religious beliefs” to share one another’s medical bills.1

Members join health sharing ministries for a variety of reasons. Some join because they can obtain less expensive coverage. The lower cost is made possible by the fact that these ministries are not required to include coverage in areas such as mental health, preventive care, and vision coverage for children. Others join because required procedures in insurance plans violate their personal religious beliefs.

It is estimated that half a million people rely on HCSMs for their health coverage. Some of the larg- est HCSMs include Samaritan, Medi-Share, Christian Healthcare Ministries, and Liberty HealthShare. It is important to note that HCSMs are not insurance companies in the conventional sense. Perhaps the most important issue is that they are not regu- lated and represent potentially riskier alternatives than traditional health care insurers. This risk was highlighted by the actions of a Circuit Judge in Kentucky who ruled that Medi-Share must cease operations in the state unless it obtains regulatory approval from the state Department of Insurance.2 Kentucky and other states, notably Washington and Oklahoma, have been unsuccessful in their efforts to close down HCSMs. It is estimated that 30 states exempt HCSMs from the same regulations as insurance companies, although some fear this leaves members without protection if their health care costs are not covered.3

Monthly costs typically range from around $64 for individual coverage to $450 per month for family coverage. The larger plans do not have a maximum limit on the coverage, although some plans have maximum payout of $125,000 per incident and $1,000,000 per diagnosis. Annual personal responsibility amounts (similar to a deductible) have a relatively large range depend- ing on the actual HCSM involved. For example, Medi-Share offers six programs and the annual personal responsibility can range from $1,250 to $10,000 depending on the program selected. Christian Healthcare Ministries’ Gold, Silver, and Bronze options have annual personal responsi- bility of $500, $1,000, and $5,000 respectively.

Medi-Share members participate in a pre- ferred provider organization and are charged negotiated rates as long as they stay in the network. Membership cannot be dropped for developing a medical condition and some HCSMs do not impose annual or lifetime limits.

referenCes

1. Much of this discussion relies on Maya

Dollarhide, “Health Care Sharing Ministries:

Obamacare Alternative,”

www.investopedia.com/…/health-care-

sharing-ministries-obamacare-alternative.asp.

2. Roger Alford, “Judge Shuts Down

Christian Health Ministry Medi-Share in

Kentucky,” Insurance Journal (October 4,

2012), www.insurancejournal.com/news/

Southeast/2012/10/04/265482.htm.

3. Kimberly Leonard, “Christians Find their

Own Way to Replace Obamacare,” U.S. News

(February 23, 2016). www.healthleadersmedia.

com/health-plans/christians-find-their-own-

way-replace-obamacare#.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 181

Vision and Internal Capacity A leader’s vision is related to the perceived strengths and weaknesses of the organization. The challenge to reconcile vision with internal capacity is illustrated by senge’s integrative principle of creative tension.30 Creative tension comes into play when leaders develop a view of where they want to be in the future (vision) and tell the truth about where they are now. The current reality is heavily determined by the organization’s internal capacity and how this capacity relates to its aspirations.

organizations deal with this creative tension in different ways. if the organi- zation has been successful in the past, it may be aggressive about the future and raise its current aspirations in pursuit of the vision. if it has experienced failure, limited success, or merely has a cautious philosophy, management may choose instead to revise and reduce the vision to bring it more in line with cur- rent reality.

Leaders have visions; organizations gain and lose competitive advantage based on how the vision fits the environment and the strategic capability of the organi- zation to capitalize on opportunities. however, developing a vision is “messy work,” and for this reason it is necessary to examine more closely what organiza- tional vision actually means.

Health Care Strategists as Pathfinders Building a vision for an organiza- tion is frequently referred to as pathfinding.31 When the leader of a health care organization functions as a pathfinder, the focus is on the long run. The goal of the pathfinder is to provide a vision, find the paths the organization should pur- sue, and provide a clearly marked trail for those who will follow. As senge notes, pathfinders have the opportunity to change reality by “holding a picture of what might be that is more important to people than what is.”32

strategic leaders are the key to establish a vision for an organization. The vision-led approach is a philosophy where leaders are committed to strive for high levels of performance that are inspiring although they cannot yet be achieved.33 A primary role of management using this approach is to clarify goals and priorities and ensure that they are understood and accepted by employees.34 individuals become engaged in the organization when they see connections between vision, performance objectives, and personal contributions to the pur- pose of the organization.35

The role of the strategic leader, however, is more than pathfinding. Because executives are responsible for inculcating the purpose into every employee, the leader must also be the keeper of the vision – a champion who communicates and models the vision. This is often the Ceo or another high-ranking executive. employees want to believe that what they are doing is important, and nothing convinces employees of the importance of their jobs more than a leader who reminds them of the shared inspirational vision (especially when things are not going well).

strategic leadership has traditionally focused on top management, particularly the Ceo. This individual is considered the person most responsible for scanning and influencing the environment, developing adaptive strategies, and managing key constituencies.36 unfortunately, the exclusive focus on the Ceo’s role in strategic leadership has implied that middle management has little or no involve- ment in determining the strategic direction of the organization. Admittedly, the primary responsibility of middle management is strategy implementation;

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

182 Strategic management of HealtH care organizationS

however, certain strategic directions require middle-management to give input and be actively involved. The increasing importance of quality as a strategic goal and middle management’s role in keeping this goal before all employees is a good example.37 Quality is an important value to which employees at all levels are able to be committed; middle managers are in the best position to encourage and rein- force this dedication.

Another critical area in which middle management should be involved is in the redefinition of organizational vision. grand strategies and futuristic visions are necessary for health care organizations. if the vision is to inspire nurses, pharmacists, medical laboratory technicians, and others, middle and first-line managers must take the lead in helping to redefine the organizational vision in terms that are meaningful to departments and work groups. finally, with regard to promoting commitment to service and quality, middle managers are in the best position to appeal to the motives that matter most to their health care employees. unfortunately, “most people either don’t know their organization’s vision, don’t understand it, or feel so disconnected from it that they can’t explain how it relates to their day job.”38

Characteristics of Effective Vision if vision is based on hope, it is – in real- ity – a snapshot of the future that the health care leader desires to create. for an organizational vision to be successful it must be clear, coherent, consistent, com- municative, and flexible.39 A clear vision is simple. Basic directions and commit- ments should be the driving forces of a vision, not complex analysis beyond the understanding of most employees.40

A vision is coherent when it “fits” with other directional strategies, including the mission and values. it is consistent when it is reflected in decision-making behavior throughout the organization.41 A vision “communicates” when it is shared and people believe in the importance of cooperation in creating the future that managers, employees, and other stakeholders desire. finally, to be meaning- ful, a vision must be flexible. Because the future is uncertain, an effective vision must remain open to change as the future and the strategic capabilities of the organization evolve over time.

To effectively outline the future and facilitate the pursuit of organizational and individual excellence, visions should possess certain characteristics:

● Visions should be inspiring, not merely quantitative goals to be achieved in the next performance evaluation period. in fact, visions should rarely be stated in quantitative terms. They are, however, nothing less than revolutionary in character and in their potential impact on behavior. The vision of shriners hospital for Children speaks of the inspirational nature of “transforming children’s lives” (exhibit 5–12).

EXHIBIT 5–12 Vision of Shriners Hospital for Children

Become the best at transforming children’s lives by providing exceptional healthcare through innovative research, in a patient and family centered environment.

Source: Shriners Hospital for Children.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 183

● Visions should be clear, challenging, and about excellence. There must be no doubt in the manager’s mind about the centrality of the vision. if the “keeper of the vision” has doubts, those who follow will have even more. The vision statement of MD Anderson Cancer Center provides a straightforward statement of the hope for this flagship cancer institute – to make cancer history. individuals working at MD Anderson should be able to understand the leadership’s sense of the future from this vision statement (see exhibit 5–13).

EXHIBIT 5–13 Vision Statement of MD Anderson Cancer Center

We shall be the premier cancer center in the world based on the excellence of our people, our research-driven patient care and our science. We are Making Cancer History.

Source: MD Anderson Cancer Center.

EXHIBIT 5–14 Vision Statement of Fresenius Medical Care

To be the trusted provider and valued partner by building the premier integrated renal disease network, expanding into a leading integrated chronic care network.

Source: Fresenius Medical Care.

EXHIBIT 5–15 Vision Statement of Cancer Treatment Centers of America

To be recognized and trusted by people with cancer as the premier center for healing and hope.

Source: Cancer Treatment Centers of America.

● Visions must make sense in the relevant community, be flexible, and stand the test of time. if the vision is pragmatically irrelevant, it will not inspire high performance.

● Visions must be stable, but challenged and changed when necessary. The vision statement of fresenius makes it clear that it intends to be a trusted provider and valued partner in the area of renal disease (see exhibit 5–14); however, the statement includes the possibility of moving to an expanded integrated chronic care network. such a move could be accomplished with little or no change in the vision statement.

● Visions are beacons and controls when everything else seems up for grabs. A well-formulated vision statement guides decision making because it provides inspiration for success in the future. The vision statement for Cancer Treatment Centers of America is simple and to the point both for decision makers and patients (see exhibit 5–15).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

184 Strategic management of HealtH care organizationS

● Visions empower employees (the organization’s own people) first and then the clients, patients, or others to be served. Because visions should be about inspiration and should drive excellence, it is critical to recognize that employees are the ones who must be inspired first. Many health care organizations make the mistake of devoting resources to pre-service promotion programs designed to enhance potential patients’ image of the organization only to disappoint them when they arrive and are greeted by the same lack of service they experienced before the advertising campaign. The Cleveland Clinic documents point out that this was the founder’s vision when the first patients were accepted in 1921 (see exhibit 5–16). The doctors who founded this world class clinic believed in diverse specialists working and thinking “as a unit.” That philosophy remains alive and well today.

EXHIBIT 5–17 Vision Statement of The Mayo Clinic

The Mayo Clinic will provide an unparalleled experience as the most trusted partner for health care.

Source: The Mayo Clinic.

EXHIBIT 5–16 Vision Statement of The Cleveland Clinic

Striving to be the world’s leader in patient experience, clinical outcomes, research and education.

Source: The Cleveland Clinic.

● Visions prepare for events to come while honoring the past. Although vision is the hope an organization has for the future, it is important to always acknowledge and honor a history of distinction and service. The Mayo Clinic, for example, points out that the values that guide the pursuit of its vision are the expression of the vision of its founding physicians and the sisters of saint francis (see exhibit 5–17). This association dates back to a tornado that struck rochester, Minnesota in 1883 when doctors in the Mayo family teamed with the sisters of st. francis to provide relief to those injured in the community. six years later saint Mary’s hospital was opened by the sisters and the Mayo brothers began seeing patients.

● Visions come alive in details, not broad generalities. The accomplishment of the vision eventually has to lead to tangible results. Although visions are futuristic and based on hope, they require strategic leaders who can articulate the vision and translate it into terms that everyone in the organization understands and supports.42

in the past decade more and more attention has been given to formal vision statements. Vision statements are difficult to write because they require insights into the future. however, there are some useful aids that can assist managers in developing their vision and setting the direction they desire for the future. exhibit 5–18 provides a strategic thinking map to assist in developing a vision

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 185

EXHIBIT 5–18 Strategic Thinking Map for Writing a Vision Statement

Component key Words reflecting Component

1. Clear hope for the future: “If everything went as we would like it to go, what would our organization look like five years from now? How would we be different/better than today?”

2. Challenging and about excellence: “When stakeholders (patients, employees, owners) describe our organization, what terms would we like for them to use?”

3. Inspirational and emotional: “When we think about the kind of organization we could be if we all contributed our best, what terms would describe our collective contributions?”

4. Empower employees first: “How can we ensure that employees understand and are committed to the vision? What needs to be done to get everyone’s buy in?”

5. Memorable and provides guidance: “What types of words should be included to ensure all organizational stakeholders remember and behave in accordance with the vision?”

statement and a series of questions that are a useful aid when thinking about vision statements. planning retreats can be used as effective forums for gaining insights into the thinking of organization stakeholders regarding their hopes for the future.

A Cautionary Note: The Problem of Newness strategic leaders are one of the most important elements in the strategically managed organization. Visionary leaders provide their greatest service by making the organization flexible and able to enter new markets, disengage from old ones, and experiment with new ideas. By entering into a new market first, organizations may achieve first-mover advan- tages that often accrue to those organizations who are the first into a new market.43 Pioneering organizations are those that seek first-mover advantages. A reputation for pioneering can be generated and market position can be more easily estab- lished when there are no, or only a few, competitors. sometimes it is expensive (monetarily and emotionally) for clients and patients to switch to other providers once loyalty and mutual trust have been developed.

however, visionary change, when directed toward early entry into markets, has its drawbacks. referred to as the liability of newness,44 disadvantages of early entry into new markets are typically in the form of risk (uncertainty), the steep (and sometimes long) learning curve, variable demand, and financial outlays for technological investments. innovators often experience pioneering costs. pioneers

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

186 Strategic management of HealtH care organizationS

make mistakes that others learn from and eventually correct. first movers face greater uncertainty because the demand for the service has not been proven. patient and client needs may change and, particularly when large technological investments are required, the first mover may be left with expensive equipment and little demand. Therefore, it is important that the demand for visionary man- agement be tempered with realistic knowledge of the market, consumers, and other factors that will affect the organization. The most substantial rewards often go to the first mover, but the risks are greater.

research confirms the dangers of being the first mover. studies of companies that were first in their markets exclude those firms that failed by focusing only on those that survived, prospered, and eventually dominated their markets.45 note that market leadership has less to do with an organization’s entry into the market and more to do with will and vision. enduring leaders have inspiring visions and the will to realize the vision. These leaders are persistent in the pursuit of their vision, innovative, committed financially, and know how to leverage their assets.

Step 4: Develop a Statement of Values as guiding Principles Values are the fundamental principles that organizations and people stand for – along with the mission and vision, they shape organizational culture. Most often, discussions of organizational values relate to ethical behavior and socially respon- sible decision making. ethical and social responsibility values are important, not just to a single hospital, hMo, or long-term care facility, but to all organizations and stakeholders. There are, however, other values that may be specific to an organization and characterize its members’ behavior in the past or the behavior to which members collectively aspire. for example, total quality management or continuous improvement is a value, as are entrepreneurial spirit, teamwork, inno- vation, and so on.46 it is important that managers, employees, and key stakehold- ers understand the values that are expected in an organization. in addition, values should be more than slick public relations statements. “Talking the talk” is insuf- ficient; “walking the walk” is what matters when it comes to values. essentials for a strategic Thinker 5–4, “What Are professional ethics?” demonstrates the relationship among ethics, values, moral principles, and duties.

ESSEnTIAlS foR A STRATEgIC THInkER 5–4

What are Professional ethics?

Ethics are guidelines for action that are based on values, moral principles, or moral rights and duties. Examples include honesty, respect, and compassion. Ethical guidelines may be reflected in laws, whereas others are norms, customs, and social expectations that develop and are main- tained by mutual consent.

It is useful to distinguish two categories of eth- ics in the health care environment: professional ethics and applied ethics. Professional ethics are the customs, norms, expectations, values, rights, and duties that guide individuals as they carry out particular work roles in society. Professional ethics reflect the societal expectations for people

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 187

who perform specific roles. We expect physicians and nurses to help rather than harm patients. We expect administrators and business officers to accept fiduciary responsibility (act for the benefit of the organization rather than themselves) and to be accountable to stockholders or boards of trustees for their decisions.

The norms guiding professional behavior can change over time, as society’s expectations change. For example, over the past few decades, physicians’ roles have evolved away from the expectation that doctors will make decisions on behalf of patients and their health to the expecta- tion that they will provide all relevant informa- tion to patients and families and help them to make their own decisions about their treatment. As another example, the implementation of the Health Insurance Portability and Accountability Act (HIPAA) in April 2003 represented the legal enforcement of a social expectation that health- related information on patients will be kept strictly confidential; some widely accepted practices of information sharing in health care organizations had to be altered under the HIPAA guidelines because they were not perceived to reflect the priority that members of society placed on confi- dentiality of medical information.

Health care organizations involve the inter- action of many sets of health professionals who, by definition, are bound by differing sets of eth- ics and norms. Decisions that must be made by the organization as a whole must be negotiated across these norms. For example, the imperative to help anyone in need of medical care must be balanced with the imperative to operate organi- zations that are financially sound. Organizations are best served when professionals are able to represent their own guiding values and princi- ples and comprehend the values and principles that guide their colleagues.

In contrast to professional ethics, applied eth- ics is the application of values, principles, and expectations to broader social choices, such as

whether some basic level of health care is a uni- versal right, or whether health care is a commod- ity that individuals can choose to purchase or not. Professional ethics are neutral on this issue; one may be an ethical physician or administrator and make either applied ethics choice. Some social choices have a broad consensus. In the United States the responsibility of society to cover the costs of health care for the elderly is generally accepted. Other social choices are the subject of considerable disagreement and conflict, even when one set of values or expectations has been codified into laws. The rights of individuals to have abortions or to enforce their care prefer- ences at the end of life are examples of ethical conflict that impact health care organizations. Organizations whose decision-making processes are affected by ethical conflicts must consider carefully the values and norms that guide their stakeholders and the laws that represent the cur- rent societal consensus on the issue.

All actions have an ethical component, but the underlying values for a decision may be so widely shared that we do not recognize or consider the implications of ethical choices. For example, we do not question the principle that health care is meant to benefit those who are sick. When faced with a decision about whether to provide effec- tive or harmful treatment to someone who is sick, we automatically make the ethical decision to help rather than to harm the person. On the other hand, we sometimes face situations where alternative courses of action reflect contrasting values. For example, we value individuals’ auton- omy and their right to make decisions about their own health. If an individual wants a treatment that we believe to be harmful, should we respect his or her wishes and provide the treatment, or refuse the treatment and adhere to the principle that treatment should not be provided if it is known to cause harm?

Source: Janet M. Bronstein, PhD, School of Public Health, University

of Alabama at Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

188 Strategic management of HealtH care organizationS

EXHIBIT 5–20 Value Statement of The Mayo Clinic

These values, which guide Mayo Clinic’s mission to this day, are an expression of the vision and intent of our founders, the original Mayo physicians and the Sisters of Saint Francis.

primary value The needs of our patients.

respect Treat everyone in our diverse community, including patients, their families and colleagues with dignity.

Compassion Provide the best care, treating patients and family members with sensitivity and empathy.

Integrity Adhere to the highest standards of professionalism, ethics, and personal responsibility, worthy of the trust our patients place in us.

Core values, beliefs, and philosophy may be clear during the early stages of an organization’s development but become less so as the organization matures.47 Therefore, statements such as MD Anderson’s demonstrate how the organization intends to treat patients, employees, and families (caring); deal with colleagues and vendors (integrity); and encourage personal and professional development; provid- ing an excellent example of how to keep core values at the forefront of organiza- tional operations, even as the organization grows and ages (see exhibit 5–19).

exhibit 5–20 illustrates Mayo Clinic’s well-developed and articulated set of organizational values. Their primary value is “the patient comes first.” Throughout the values statement are references to ideals such as integrity, respect, compassion, and excellence. Anyone reading this set of guiding principles can understand the motivational force such a statement of values might have on employees and the comfort it might provide patients.

EXHIBIT 5–19 Statement of Core Values, MD Anderson Cancer Center

Caring: By our words and actions, we create a caring environment for everyone. ● We are sensitive to the concerns of our patients and our co-workers. ● We are respectful and courteous to each other at all times. ● We promote and reward teamwork and inclusiveness.

Integrity: We work together to merit the trust of our colleagues and those we serve. ● We hold ourselves, and each other, accountable for practicing our values. ● We communicate frequently, honestly and openly. ● By our actions, we create an environment of trust.

discovery: We embrace creativity and seek new knowledge. ● We help each other to identify and solve problems. ● We seek personal growth and enable others to do so. ● We encourage learning, creativity and new ideas.

Source: MD Anderson Cancer Center.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 189

EXHIBIT 5–21 Value Statement of Stryker

Integrity. We do what is right.

accountability. We do what we say.

people. We grow talent.

performance. We deliver.

Source: Stryker.

Mission, vision, and value statements are tools for “becoming better at what we do.” The usefulness of any of these statements comes from the ownership taken by employees and the observed actions by stakeholders. framed mission, vision, values, and slogans are merely exercises – and futile ones at that – if they are not made real by commitment and action.48 The point is to motivate and guide all employees, managerial and non-managerial; provide high-quality care and respond to external as well as internal customers; to distinguish the organization from others in the perceptions of key stakeholders; and to let everyone know the organization stands for something important. To be most effective, the value state- ment for an organization should capture the guiding principles by which the staff is expected to function while achieving the organization’s mission.49

Step 5: Develop Strategic goals once strategic leaders are confident that the mission, vision, and values are well formulated, understood, communicated, and expressed in writing, they are able to focus on the activities that will make the most progress toward accomplishing the mission and moving the organization toward a realization of its vision – its strategic goals. Well-written mission statements are the beginning point for strategic goal setting. goal setting should be focused on those areas that are critical to mission

not all statements of values or guiding principles are as elaborate as that of the Mayo Clinic or MD Anderson; however, they need to be as well conceived. Value statements can be useful in clarifying to employees the specific behavioral norms that are expected of them as members of the organization. This clarification is effectively accomplished in the values of stryker (see exhibit 5–21).

Source: The Mayo Clinic.

Healing Inspire hope and nurture the well-being of the whole person, respecting physical, emotional and spiritual needs.

teamwork Value the contributions of all, blending the skills of individual staff members in unsurpassed collaboration.

excellence Deliver the best outcomes and highest quality service through the dedicated effort of every team member.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

190 Strategic management of HealtH care organizationS

accomplishment. strategic thinking would entail asking this important question when attempting to ensure that mission statements and strategic goals are consistent:

Does the mission provide for the formulation of a set of goals that are spe- cific enough to give guidance to the organization yet broad enough to pro- vide for the necessary flexibility?50

Critical success factors provide the targets for strategic goal setting. As dis- cussed in Chapter 3 concerning service area competitive analysis, critical success factors for the service category are similar for all members of a strategic group; however, the factors may vary from one service category to another and one strategic group to another.51 The strategic goals, in turn, become the anchors for objectives and action plans.

Critical Success Factors for the Service Category Critical success factors are the benchmarks that organizations must accomplish if they are to achieve high performance.52 The critical factors for success in a medical practice are not the same as the critical success factors in acute care hospitals.

As an example, pacific Cataract and Laser institute operates in the pacific northwest with ten locations in the state of Washington.53 Cataract surgery (one ser- vice category) is most frequently performed on older adults, whereas refractive sur- gery (another service category) is performed to improve eyesight so that a person can see without corrected vision (no need for eye glasses or contact lenses) in younger adults. Cataract surgery is medically warranted and typically covered by insurance (Medicare for many). The critical success factors for the service category of refractive surgery in the Washington state service area are identified in exhibit 5–22. These critical success factors provide an important bridge between external and internal environmental analysis.54 strategic leaders must continually ask themselves whether the mission, vision, and values of the organization are compatible with the critical success factors. once compatibility is ensured, leaders must prioritize a relatively small number of activities that are absolutely essential to accomplish the mission and build momentum to realize the vision. The application of the critical success factors relative to pacific is briefly noted in the second column. strategic leaders need to ensure that they address the factors that lead to success in the service category.

Strategic Goals strategic goals should be used to coordinate critical success factor activities, providing more specific direction to accomplish the mission and vision. At the same time, strategic goals should be broad enough to allow consid- erable discretion for managers to formulate their objectives for individual units.55 The most appropriate strategic goals possess the following characteristics:

● strategic goals should relate specifically to activities that are critical to the mission; goals that focus on activities that are not mission critical have the potential to divert leadership attention and employee energy.

● strategic goals should be the link between critical success factors and strategic momentum (carrying out unit objectives).

● strategic goals should be limited in number. When too many goals are pursued, the “trivial many” rather than the “critical few” activities are accomplished.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 191

The Johns hopkins Medical Center’s strategic plan includes six strategic priori- ties which are essentially Johns hopkins Medicine strategic goals. When describ- ing the priorities, the plan states these are “critical areas of focus for the success and sustainability of the institution.” 1. people – attract, engage, develop, and retain the world’s best people. 2. Biomedical research – become the exemplary model for biomedical

research by advancing and integrating discovery, innovation, translation, and dissemination.

3. patient-and-family-Centered Care – Be the national leader in the safety, science, teaching, and provision of patient- and family-centered care.

4. education – Lead the world in the education and training of physicians and biomedical scientists.

5. integration – become the model for an academically-based integrated health care delivery and financing system.

6. performance – create sustainable financial success and implement continuous performance improvement.56

EXHIBIT 5–22 Critical Success Factors Related to a Service Category (Refractive Surgery) in a Service Area (Washington State)

Critical success factors related to Individual organizations

Competitive price Multiple providers are in the service area around Seattle, Washington. The procedure is rarely covered by insurance. Prices have fallen over the past 30 years; however, purchasers are price conscious and the procedure is offered just across the border in Canada at a much lower price.

Latest technology available but choices offered for lower cost, safe options.

State-of-the-art technology is offered and it is faster, less invasive (thus safer), but significantly more expensive. Some individuals are willing to undergo the procedure using older, slower, but safe technology to be able to afford the surgery.

Number of procedures performed

Greater numbers preferred, “practice makes perfect” is backed by research.

Positive satisfaction ratings/ social media reviews

Today’s potential customers for refractive surgery read recom- mendations online and investigate satisfaction scores. Pacific Cataract and Laser has 97 percent of consumers saying they would recommend the Institute to a friend.

Name recognition Many MDs who perform these surgeries advertise; however, Pacific relies on referrals from family eye doctors (over 1,000 of them in the six states where they have offices) and does no advertising.

● strategic goals should be formulated by leaders but should be stated in terms that can be easily understood and appreciated by everyone in the organization.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

192 Strategic management of HealtH care organizationS

Roles and Responsibilities of Boards of Directors (or Trustees) in Strategic Management

The discussion of directional strategies has emphasized the importance of the involvement and participation of as many people as practical. The governing board (e.g. board of directors, board of trustees) is an important group that should be involved in the development of the strategic direction of the health care organization. The board members should be regularly informed about the strategic goals and the progress being made toward their accomplishment. governing boards have taken on particular importance in the past several years as ethical issues have escalated. health care has not been exempt, as evidenced by major corporate scandals involving companies such as Bausch and Lomb’s renu MostureLoc contact lens solution and waiting time issues at the Veterans Administration. increasingly, the question of the role and respon- sibility of governing boards is discussed in health care management. often not only the individual involved in a scandalous act but the organization and individual board members or the board collectively suffer damages to their reputations.57

four modes of governance have been applied to boards of directors. first is the fiduciary responsibility mode or stewardship of assets; the second is the strategic mode which involves collaborating with management to develop a vision for the future; the third is the generative mode where the board engages in shared creative thinking to make sense of data available to decision makers, and the fourth is the idea of the progressive board that focuses on contributions of individual members to a cohesive and comprehensive whole – the board is viewed as engaging in lively debate, discussion of important issues, and learning from one another.58

in the strategic mode, boards of directors or boards of trustees are responsible for making policies – providing general guidelines under which the organiza- tion will operate. Therefore, boards are important in formulating the mission, vision, and value statements of the organization and, depending on the nature of the membership, boards can represent very complex issues in organizational governance (see essentials for a strategic Thinker 5–5, “What Are interlocking Directorates?”). Board members are not likely to be directly involved in the pro- cess although, in some cases, members do participate. More likely, board members are interviewed during the formulation of the mission, vision, and values and their input is incorporated into the statements. in addition, boards are involved in determining the compensation of key executives, executive succession planning, and similar high-level decision making. With regard to mission, vision, and values the board should be informed about the statements and involved in the strategic thinking that results in their formulation; therefore, the selection of board mem- bers is a critical strategic decision.59

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 193

ESSEnTIAlS foR A STRATEgIC THInkER 5–5

What are interlocking Directorates?

Interlocking directorates occur when members of two or more boards of directors simul- taneously serve on the boards of the same organizations. The two or more organizations involved are said to be interlocked. There is a direct interlock of organizations when one or more members serve on the boards of each organization. Approximately one of every five directors sits on more than a single board, although service on multiple boards does not, in itself, constitute an interlock. Technically, it is a violation of the Clayton Act when an executive or board member serves on the board of a direct competitor. Although there are some exceptions, interlocking boards among competitors are risky.

Many experts believe distinct advantages of interlocking directorates result if the interlocked organizations are not competitors. In a sense, interlocking directorates can be viewed as a social network. This view suggests that direc- tors and executives connected in this manner can communicate faster and more effectively. Because boards are comprised of the more elite corporate and health care leaders, interlocking directorates make it easier for these executives to discuss issues of common interest and it is possible that best practices and innovations are disseminated faster and more efficiently when board members are interlocked. Imagining how a member of one board might observe manage- ment practices in one organization that would be beneficial to other organizations is easy to envision. The repository of expert information a person possesses is the primary reason why individuals are asked to serve on boards; thus, information sharing is a significant benefit of interlocking directorates.

On the other hand, there must be some potential dangers if interlocks among

competitors are outlawed by Section 8 of the Clayton Act. Some fear that interlocking direc- torates create an excessively powerful group of the most influential members of corporate America, academics, the legal profession, and other occupations. With the possible excep- tion of not-for-profit boards, it is admittedly true that corporate boards are comprised of elite members of society. Because board mem- bers are most often business and health care leaders, their concern may be inherently more closely associated with the values of manage- ment rather than rank-and-file employees or, more importantly, society as a whole. In the rare cases where interlocks are among competitors, collusion, price setting, and anti-trust liability represent clear and present dangers and behav- iors to be avoided.

Regardless of the pros and cons, interlocking directorates are a reality of modern business and health care life. Care must be taken when formulating boards of directors to ensure that the board is comprised of individuals who pos- sess the most critical combination of expertise. Further, a careful review of the associations of board members should be undertaken to ensure there are no conflicts of interest.

referenCes

Christine Shropshire, “The Role of the Interlocking

Director and Board Receptivity in the Diffusion

of Practices,” Academy of Management Review

35, no. 2 (2010), pp. 246–264.

Andrew V. Shipilov, Henrich R. Greve, and Timothy

J. Rowley, “When Do Interlocks Matter?

Institutional Logics and the Diffusion of

Multiple Corporate Governance Practices,”

Academy of Management Journal 53, no. 4

(2010), pp. 846–863.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

194 Strategic management of HealtH care organizationS

Health Care Performance and the Usual Suspects Much of the discussion regarding governing boards has related to issues that have been referred to as the “usual suspects.”60 primary attention has been given to questioning how these usual suspects influence the financial performance of an organization. some usual suspects are the number of outsiders on the board, shareholdings of board members, board size, and Ceo duality (Ceo simultane- ously functioning as the chief executive and board chair).61 An issue of particular interest has been board size. A comparative study of board composition by the executive search firm spencer stuart looked at the boards of the s&p 500. The results, reported in the Harvard Business Review,62 noted that boards of these lead- ing corporations are smaller in size, comprised of older members, and are more independent compared with a study conducted decades earlier. A 2014 study by the Corporate Library indicated that the average size of a board was 9.2 members but the size ranged from 3 to 31. The study noted that some experts believe seven is an optimum size for a board; however, no universal agreement regarding board size was promulgated.63

When compared with boards of directors of successful high-technology firms, governing boards in a sample of multihospital health care systems were almost twice as large (11 to 15 members).64 in fact, boards are frequently too large to be effective aids in decision making, and where the goal is stakeholder representation, board members often know so little about health care that Ceos are forced to spend a great deal of their time informing and educating lay members.

Board independence has been another topic that has received attention and has been particularly influenced by the public Company Accounting reform and investor protection Act of 2002 (public Law 107–240), also known as the sarbanes–oxley Act.65 essentially the issue of board independence relates to the number and nature of outside directors (those not employed by the organization). generally, boards are considered more independent if they have a majority of outside members who are not significantly involved in doing business with the focal organization.

primarily because of corporate scandals of recent years and the passage of the sarbanes–oxley Act, board of director research has been reignited.66 This law, which applies to publicly traded corporations, dramatically impacts the fiduci- ary responsibility of chief executive officers and boards of directors. some states have considered enacting similar legislation that would apply to not-for-profit organizations.

Another study examined the issue of outside directors in large investor-owned health care organizations. four major subsamples were examined, including hos- pitals, elder care organizations, hMos, and alternative care facilities (such as psy- chiatric clinics and ambulatory care centers).67 The results were that, in general, governing boards of health care organizations were comprised of more members from outside, rather than inside, the organization. outside representatives were primarily physicians, financial professionals, attorneys, and academics. The inclu- sion of physicians was found to be particularly significant in terms of bottom-line performance. The presence of physicians on governing boards enhanced the

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 195

support of the medical community, improving the organization’s market share and quality.

There are basically two different types of governing boards – philanthropic governing boards are service oriented, broadly represent diverse stakehold- ers, and are concerned primarily with fundraising. Corporate governing boards are typically involved in oversight, strategic planning, and policy making. philanthropic boards are larger and more diverse to gain as much community representation as possible. The inclusion of different types of stakeholders is important and requires that board members be selected from among business leaders, physicians, local politicians, consumers of health care services, and so on. The corporate board is smaller and comprised of individuals who possess expertise that will aid the organization in accomplishing its strategic goals.68 Membership diversity is important, but less so than the actual skills or expertise possessed by the members.

The current trend in health care organizations is toward the corporate board. To a great extent, the trend is the result of the increasingly competitive environment facing health care organizations and the need for expertise in dealing with the complexities of the economic environment. however, it should be noted that vir- tually no research confirms any positive relationship between the size and nature of board membership and organizational financial performance.69

research findings on boards of directors suggest that when profound or radical organizational change confronts a health care organization, the corpo- rate board is more likely to propose effective, positive responses. philanthropic boards, on the other hand, are more likely to be associated with either no change or negative responses to profound change.70 Boards of directors in health care organizations undergoing corporate restructuring (defined as the segmentation of the organization’s assets and functions into separate corporations to reflect specific profit, regulatory, or market objectives) tend to become less philan- thropic and more corporate, not only in composition but also in the way they operate.71

The evidence is underwhelming with regard to the usual topics of board inde- pendence (percentage of outside members), board size, Ceo duality, and so on.72 Although it is dangerous to generalize, some inferences can be drawn from the research on governing boards in health care organizations. in not-for-profit health care organizations, governing boards are more in line with the philanthropic model. They are generally large (in fact, too large to be effective aids in strategic decision making), do not compensate members, select members primarily as stakeholder representatives, and do not hold the Ceo formally accountable for performance. in this case, the primary motivation for board membership is service and recognition. When health care organizations are profit oriented, their boards take on more corporate characteristics. They tend to be smaller, compensate mem- bers for service, select members for specific expertise, involve the Ceo as a voting member, make him or her formally accountable to the board, and require the par- ticipation of board members in strategic decision making. from the perspective of the individual board member, the motivation to be on a board may be to provide a valuable service to the community, but board membership may be a source of income as well.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

196 Strategic management of HealtH care organizationS

Board Process: Missing link? The lack of consistent association between factors such as board size, inde- pendence, Ceo duality, member expertise, and organizational performance on financial measures has encouraged researchers to look at different variables. of particular interest is the board process – the means by which boards of directors undertake their work.73

interviews with experienced board members indicate that several behaviors lead to more effective boards:

1. Engage in constructive conflicts (especially with the CEO). it is important that board members debate diverse views among themselves and with the Ceo. An overabundance of insiders on a board may diminish the presence of constructive conflict since debate with the Ceo amounts to debate with the boss.

2. Avoid destructive conflict. personal friction and tension in the boardroom should be minimized. There must be a clear distinction between constructive debate and destructive conflict.

3. Work together as a team. The most important component of board process is teamwork, and it is the primary characteristic of the progressive board. The development of strong team norms, however, is difficult because board members spend little time together. given the members’ limited availability, maximizing board member interaction is critical.

4. Know the appropriate level of strategic involvement. Board members should limit their involvement to major strategic decisions. They should be very careful not to become too involved in the day-to-day management of the organization.

5. Address decisions comprehensively. Board members should consciously attempt to address issues with sufficient depth to make sound decisions. Too often, time demands and conflicting priorities tempt boards to deal superficially with important issues. effective boards find the time needed for important strategic decisions.74

The work of boards of directors is crucial for health care organizations. Boards are created to ensure that strategic leaders have additional expertise available to them for making policy decisions that provide direction to the organization. The effectiveness of the board is a key factor in the effectiveness of the organization.

Strategic Momentum – Evaluating Directional Strategies As part of managing strategic momentum, managers assess the performance of the organization and try to determine whether the mission, vision, values, and goals are – and continue to be – appropriate. To illustrate, hospices today reap billions of dollars annually in Medicare reimbursement. in just two decades since hospices began receiving reimbursement for their services, end-of-life care has emerged as an integral part of the health care system. The demand for palliative

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 197

care (end-of-life and comfort care) has increased so rapidly that hospitals and other providers have seized opportunities in this area. one example is a hospice company which states that its mission is “to provide care for dying patients and their families in their homes.” Another hospice, aware of the changes in the environment and concerned with managing strategic momentum, has slightly revised its mission to reflect the change in the competitive environment. its new mission is “to provide end-of-life and palliative care services.” if both organiza- tions should decide to offer services to Alzheimer’s patients living in nursing homes, only the second hospice would be acting in accordance with its mis- sion; therefore, this juxtaposition demonstrates how mission flexibility must be emphasized.75

Decisions to change an organization’s mission, vision, values, and goals are complex and involve many variables. To manage strategic momentum, ques- tions should be asked that concern the fundamental activities and direction of the organization. exhibit 5–23 provides guidance through several questions that will aid managers in their strategic thinking concerning the appropriate- ness of the organization’s directional strategies. perhaps the best approach for managing the directional strategies is to place the vision for the future, the existing mission statement, statement of values, and the organization’s goals next to the questions in exhibit 5–23 and ask the board of directors/trustees and the strategic management team to freely discuss and reach a consensus on each question. This process will either validate the existing mission, vision, values, and goals or indicate that there should be changes to maintain strategic momentum. This process invites clarification, understanding, and reinforce- ment of exactly “what this organization is all about” or “what this organization should be about.”

EXHIBIT 5–23 Strategic Map for Evaluating Directional Strategies

1. Are we not doing some things now that we should be doing?

2. Are we doing some things now that we should not be doing?

3. Are we doing some things now that we should do but in a different way?

4. Are our organization’s mission and vision unique in some way?

5. Is our mission relatively enduring?

6. Do our mission and vision allow for innovation?

7. Do our mission and vision allow for expansion?

8. Is our scope of operations clear (market, products/services, customers, geographic coverage)?

9. Do our mission, vision, and values fit the needs of our stakeholders?

10. Do our fundamental values make sense?

11. Are our strategic goals moving us toward achievement of our mission?

12. Are our strategic goals moving us toward achievement of our vision?

13. Have we addressed the critical success factors?

14. Based on the mission, vision, and values, is the image of the organization what it should be?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

198 Strategic management of HealtH care organizationS

Chapter Summary

Directional strategies allow leaders to state what they believe the organization should be doing and make explicit how they intend to conduct their business. every attempt should be made to develop and communicate well-conceived and written statements of the organization’s mission, vision, values, and strategic goals.

Directional strategies are the superordinate goals or outcomes that health care organizations plan to accomplish. Leaders should recognize that strategic plan- ning is a logical process. The progression of directional strategies illustrates the importance of the logic. The mission of the organization drives decision making because it is the organization’s reason for existing. The vision provides hope for the future and values tell everyone – employees, stakeholders, patients, and so on – how the organization will operate. The strategic goals more specifically state what the leaders believe is required to achieve the mission.

A mission alone is not enough. The mission, as a statement of purpose that distinguishes the organization from all others of its type, such as the care given to patients, physical location of the facility, the unusual commitment of physi- cians to research as well as to healing, or any other factor that is important in the minds of those served, is only the first step. The mission may motivate a few physicians and department managers, but real motivation comes from visionary leadership.

The vision is a hope that communicates what key stakeholders think the organization should be when the mission is being achieved. Values, as guiding principles, can be powerful motivating forces as well.

even a well-developed and communicated mission is likely to leave the health care strategist with far too many areas of responsibility, resulting in an impossible task. for this reason, critical success factors for the service category must be iden- tified and strategic goals must be set to accomplish the mission. strategic goals help to make the strategist’s job feasible and help focus strategists on those tasks that really make a difference with respect to organizational success.

Management research shows that the existence of goals can be powerfully motivating. Clearly stated and communicated strategic goals provide a sense of direction – they specify what leaders are expected to accomplish and remove anxiety from those who want to succeed. formulating mission, vision, values, and strategic goals and identifying critical success factors are often “messy” and unap- preciated. in the end, however, setting directional strategies is a major responsibil- ity for all strategic leaders.

engaging as many groups as practical in the process of developing direc- tional strategies is important. The board of directors should be involved in the thinking that ultimately results in the mission, vision, and value statements. in addition, board members should be regularly informed about the strategic goals of the organization and the progress being made in their accomplishment. Most importantly, the board should engage in a process that contributes to organizational effectiveness. research confirms that merely electing or selecting a board of directors/trustees comprising an appropriate percentage of outsiders, of individuals with the appropriate expertise, and small enough to be manage- able, will not ensure its effectiveness. The board must also be willing to engage

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 199

in constructive conflict, minimize destructive interpersonal tensions, avoid micromanagement, and devote the time required to make important strategic decisions.

Chapter 6 builds on the directional strategies of mission, vision, values, and strategic goals to address strategy formulation and the strategic alternatives avail- able to health care organizations.

Practical lessons for Health Care Strategic Thinkers

1. organizations need a carefully constructed statement of purpose or mission. Without such a deliberate statement the organization is likely to experience mission creep or mission drift.

2. A vision statement is equally important to provide direction and hope for the future.

3. Value statements provide tangible evidence of the behavioral norms that are expected of everyone. Value statements are, in effect, guiding principles as to how the mission and vision are to be accomplished.

4. Directional strategies are difficult to formulate so leaders are often tempted to hire a public relations firm or consultant to draft these statements; however, formulating statements of directional strategies represents an opportunity to build understanding and communicate expectations to all organizational members.

5. Top level executive buy-in is an absolute necessity for the formulation of directional strategies.

6. strategic leaders need to understand the factors that are required for success in their industry. once these critical success factors are identified they can be used to anchor the formulation of strategic goals.

7. Boards of directors have a critical role in the formulation of directional strategies.

8. health care organizations should carefully consider the expertise needed to effectively set policies and appoint board members who possess and expand the skills required for success.

THE LAngUAgE oF STRATEgIC MAnAgEMEnT: KEy TERMS AnD ConCEPTS

Corporate governing Board Creative Tension Critical success factor first-Mover Advantage Keeper of the Vision

Liability of newness Mission Mission Creep Mission Drift philanthropic governing Board

pioneering strategic goals Values Vision Vision-Led Approach

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

200 Strategic management of HealtH care organizationS

Questions for Class Discussion

1. is it necessary for organizational mission statements to include all the components dis- cussed in this chapter? how do you decide what components to include?

2. Think of an organization that you know relatively well and attempt to construct a mis- sion statement in light of the components of missions discussed in this chapter. What components did you choose to emphasize in the statement? Why? What component do you think really embodies the distinctiveness of the organization?

3. Where do organizational missions originate? how do you explain the evolution of organizational missions as an organization grows and matures? if mission statements are “relatively enduring,” how often should they be changed?

4. indicate two ways in which an organizational vision is different from other types of directional strategies.

5. it has been said that vision is necessarily a responsibility of leaders. Why is it important for health care organizations to have “keepers of the vision?”

6. Who determines the values of the health care organization? What values do you think should be shared by all health care organizations? Why?

7. Why are values referred to as an organization’s guiding principles? in what sense do values constitute a directional strategy for the organization?

8. how many strategic goals should a health care organization develop?

9. how can health care managers more effectively use directional strategies to stimulate higher levels of performance among all personnel?

10. What are critical success factors for an organization? how are they determined? how may they be used?

11. Why is the board of directors an important group to include in the formulation of directional strategies? What is the board’s proper role in formulating these strategies?

12. What is the best way to involve the board in the development of directional strategies? explain your answer.

13. List three reasons why boards of directors or trustees have become increasingly impor- tant factors in the effectiveness of health care organizations.

notes 1. steven h. Cady, Jane V. Wheeler, Jeff DeWolf, and

Michelle Brodke, “Mission, Vision, and Values: What Do They say?” Organizational Development Journal 29, no. 1 (2011), pp. 63–79.

2. setayesh sattari, Leyland f. pitt, and Albert Caruana, “how readable Are Mission statements?” Corporate Communications 16, no. 4 (2011), pp. 282–292.

3. Chester i. Barnard, Functions of the Executive (Cambridge, MA: harvard university press, 1938), p. 87.

4. stryker Corporation website, www.styker.com. 5. perry pascarella and Mark A. frohman, The Purpose

Driven Organization (san francisco, CA: Jossey-Bass publishers, 1989), p. 23.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 201

6. forest r. David and fred r. David, “it’s Time to redraft your Mission statement,” Journal of Business Strategy 24, no. 1 (2003), pp. 11–14.

7. s. eric Anderson and Brad Jamison, “Do the Top u.s. Corporations often use the same Words in their Vision, Mission and Value statements?” Journal of Marketing & Management 6, no. 1 (2015), pp. 1–15.

8. Barbara r. Bartkus and Myron glassman, “Do firms practice What They preach? The relationship between Mission statements and stakeholder Management,” Journal of Business Ethics 83, no. 2 (2008), pp. 207–217.

9. C. Kendrick gibson, David J. newton, and Dennis s. Cochran, “An empirical investigation of the nature of hospital Mission statements,” Health Care Management Review 15, no. 3 (1990), pp. 35–46.

10. W. J. Duncan, p. M. ginter, and W. K. Kreiel, “A sense of Direction in public health: An Analysis of Mission statements in state health Departments,” Administration & Society 26, no. 1 (1994), pp. 11–27.

11. Thomas T. Brown, “noble purpose,” Executive Excellence 21, no. 1 (January 2004), p. 7; robert e. McDonald, “An investigation of innovation in nonprofit organizations: The role of organizational Mission,” Nonprofit and Voluntary Sector Quarterly 36, no. 2 (2007), pp. 256–258.

12. Bhavesh s. patel, Lorne D. Booker, hazel Melanie ramos, and Chris Bart, “Mission statements and performance in non-profit organizations,” Corporate Governance: The International Journal of Effective Board Performance 15, no. 5 (2015), pp. 759–774.

13. Teewon suh, Mark B. houston, steven M. Barney, and ik-Whan g. Kwon, “The impact of Mission fulfillment on the internal Audience: psychological Job outcomes in a service setting,” Journal of Service Research 14, no. 1 (2011), pp. 76–87.

14. Chip Jarnagin and John slocum Jr., “Creating Corporate Cultures through Mythopoetic Leadership,” Organizational Dynamics 36, no. 3 (2007), pp. 288–295.

15. David J. forbes and siju seena, “The Value of a Mission statement in an Association of not-for-profit hospitals,” International Journal of Health Care Quality Assurance 19, no. 5 (2006), pp. 409–419.

16. roger Bennett and sharmila savani, “surviving Mission Drift: how Charities Can Turn Dependence on government Contract funding to Their own Advantage,” Nonprofit Management and Leadership 22, no. 2 (2011), pp. 217–228. see also Marshall B. Jones, “Multiple sources of Mission Drift,” Nonprofit and Voluntary Sector Quarterly 36, no. 2 (2007), p. 229.

17. James rajasekar, “A Comparative Analysis of Mission statement Content and readability,” Journal of Management Policy and Practice 14, no. 6 (2013), pp. 131–147.

18. s. g. Leggat and M. holmes, “Content Analysis of Mission, Vision, and Value statements in Australian public and private hospitals: implications for healthcare Management,” Asia Pacific Journal of Health Management 10, no. 1 (2015), pp. 46–55.

19. Aimee forehand, “Mission and organizational performance in the healthcare industry,” Journal of Healthcare Management 45, no. 4 (2000), pp. 267–275. see also Joseph peyrefitte and forest r. David, “A Content Analysis of the Mission statements of united states firms in four industries,” International Journal of Management 23, no. 2 (2006), pp. 296–301.

20. Bradley Koch, Joseph galaskiewicz, and Alisha pierson, “The effect of networks on organizational Missions,” Nonprofit and Voluntary Sector Quarterly 44, no. 3 (2015), pp. 510–515.

21. Christopher K. Bart and John C. Tabone, “Mission statement Content and hospital performance in the Canadian not-for-profit health Care sector,” Health Care Management Review 24, no. 2 (1999), pp. 18–26; Christopher K. Bart and J. C. Tabone, “Mission statement rationales and organizational Alignment in the not- for-profit health Care sector,” Health Care Management Review 23, no. 1 (1998), pp. 54–70.

22. These components adapted from John A. pearce ii and fred David, “Corporate Mission statements and the Bottom Line,” Academy of Management Executive 1, no. 1 (1987), pp. 109–116.

23. ibid. 24. Mary grayson, “Whose Mission is it Anyway?” Hospital

& Health Networks 85, no. 1 (2011), p. 6. 25. Cecilia falbe, Mark Driger, Lauri Larwood, and paul

Miesing, “structure and Meaning of organizational Vision,” Academy of Management Journal 38, no. 3 (1995), pp. 740–767.

26. Deborah Ancona, Thomas W. Malone, Wanda J. orlikowski, and peter M. senge, “in praise of the incomplete Leader,” Harvard Business Review 85, no. 2 (february 2007), p. 97.

27. James M. Kouzes and Barry Z. posner, “envisioning your future: imagining ideal scenarios,” Futurist 30, no. 3 (1996), pp. 14–19. see also shelley A. Kirkpatrick, J. C. Wofford, and J. robert Baum, “Measuring Motive imagery Contained in the Vision statement,” Leadership Quarterly 13, no. 2 (2002), pp. 139–151.

28. Andrew M. Carton, Chad Murphy, and Jonathan r. Clark, “A (Blurry) Vision of the future: how Leader rhetoric about ultimate goals influences performance,” Academy of Management Journal 57, no. 6 (2014), pp. 1544–1570.

29. st. Jude Children’s research hospital Web site. www. stjude.org/about-st-jude/history/html.

30. peter M. senge, “The Leader’s new Work: Building Learning organizations,” Sloan Management Review 31, no. 1 (1990), pp. 13–14.

31. g. B. Morris, “The executive: A pathfinder,” Organizational Dynamics 16, no. 2 (1988), pp. 62–77.

32. senge, “The Leader’s new Work,” p. 8. 33. James C. Collins and Jerry i. porras, “organizational

Vision and Visionary organizations,” California Management Review 34, no. 1 (1991), pp. 30–52.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

202 Strategic management of HealtH care organizationS

34. Timothy W. Coombs and sherry J. holladay, “speaking of Visions and Visions Being spoken,” Management Communication Quarterly 8, no. 2 (1994), pp. 165–189; Bing ran and p. robert Duimering, “imaging the organization: Language use in organizational identity Claims,” Journal of Business and Technical Communication 21, no. 2 (2007), pp. 155–188.

35. “Clear Vision, Dialogue help Align employee Actions to Business goals,” PR News 67, no. 25 (2011), p. 2.

36. howard s. Zuckerman, “redefining the role of the Ceo: Challenges and Conflicts,” Hospital & Health Services Administration 34, no. 1 (1989), pp. 25–38. see also stephen C. harper, “The Challenges facing Ceos: past, present, and future,” Academy of Management Executive 6, no. 3 (1992), pp. 7–25.

37. Arnold D. Kaluzny, “revitalizing Decision Making at the Middle Management Level,” Hospital & Health Services Administration 34, no. 1 (1989), pp. 39–51. see also s. W. floyd and Bill Wooldridge, “Dinosaurs or Dynamos? recognizing Middle Management’s strategic role,” Academy of Management Executive 8, no. 4 (1994), pp. 47–57.

38. shaun spearmon, “your Company Vision: if it’s Complicated, it shouldn’t Be,” october 14, 2013. http:// forbes.com/sites/johnkotter/2013/14/the-reason- most-company-vision-statements-arent-effective.

39. ian Wilson, “realizing the power of strategic Vision,” Long Range Planning 25, no. 5 (1992), pp. 18–28.

40. Les MacLeod, “Mission, Vision, and Value statements: The physician Leader’s role,” Physician Leadership Journal 3, no. 5 (2016), pp. 18–25.

41. David silvers, “Vision – not Just for Ceos,” Management Quarterly 35, no. 2 (1994), pp. 10–15.

42. Tom peters, Thriving on Chaos (new york: Alfred A. Knopf, 1988), pp. 401–404.

43. Jeremy C. short and Tyge payne, “first Movers and performance: Timing is everything,” Academy of Management Review 33, no. 1 (2008), pp. 267–269.

44. The term “liability of newness” was suggested by James March. however, the most extensive treatment of “first- mover” advantages and disadvantages is presented in Michael e. porter, Competitive Advantage (new york: free press, 1986), pp. 186–191.

45. gerald J. Tellis and peter n. golder, Will and Vision: How Latecomers Grow to Dominate Markets (new york: Mcgraw-hill, 2002).

46. L. D. Desimone, “how Can Big Companies Keep the entrepreneurial spirit Alive?” Harvard Business Review 73, no. 5 (1995), pp. 183–186; i. Morrison, “Creating a Vision from our Values,” Modern Healthcare 29, no. 39 (2000), p. 30.

47. susan Taft, Katherine hawn, Jane Barber, and Jamie Bidwell, “The Creation of a Value Driven Culture,” Health Care Management Review 24, no. 1 (1999), pp. 17–32 and fred Wenstøp and Arild Myrmel, “structuring organizational Value statements,” Management Research News 29, no. 1 (2006), pp. 673–685.

48. for some criticisms of these tools see Colin Coulson- Thomas, “strategic Vision or strategic Con: rhetoric or reality,” Long Range Planning 25, no. 1 (1992), pp. 81–83.

49. William A. nelson and paul B. Bardent, “organizational Values statements,” Healthcare Executive 26, no. 2 (2011), pp. 56–59. see also s. eric Anderson and Brad Jemison, “Do Top Corporations often use the same Words in their Vision, Mission, and Value statements?” Journal of Marketing and Management 6, no. 1 (2015), pp. 1–15.

50. steven g. hillestad and eric n. Berkowitz, Health Care Marketing Strategy: From Planning to Action (Boston, MA: Jones & Bartlett publishers, 2004) quoted in “Mission statement is Key to a good Marketing plan: goals should Be Tied to statement,” Hospice Management Advisor 8, no. 2 (2003), p. 17.

51. graham Manville, richard greatbanks, radica Krishnasamy, and David W. parker, “Critical success factors for LeAn six sigma programmes: A View from Middle Management,” International Journal of Quality & Reliability Management 29, no. 1 (2012), pp. 7–14.

52. M. e. freisen and J. A. Johnson, The Success Paradigm: Creating Organizational Effectiveness through Quality and Strategy (Westport, CT: Quorum Books, 1995), p. 3. Also see Vincent r. Kaval and Lawrence J. Voyten, “executive Decision Making,” Healthcare Executive 21, no. 6 (2006), pp. 16–21.

53. pacific Cataract and Laser institute website: www.pcli. com/company/locations.

54. Jeffery K. pinto and John e. prescott, “Variations in Critical success factors over the stages in the product Life Cycle,” Journal of Management 14, no. 1 (1988), pp. 5–18.

55. see also David p. Tarantino, “using simple rules to Achieve strategic objectives,” Physician Executive 29, no. 3 (May 2003), pp. 56–57; fabrizio Cesaroni, Alberto DiMinin, and Andrea piccaluga, “new strategic goals and organizational solutions in Large r&D Labs: Lessons from Centro ricerche fiat and Telecom italia Lab,” R&D Management 34, no. 1 (2004), pp. 45–57.

56. see Johns hopkins Medicine strategic plan at www. hopkinsmedicine.org/strategic_plan/index.html.

57. Michael K. Bednar, e. geoffrey Love, and Matthew Kraatz, “paying the price? Controversial governance practices on Managerial reputation,” Academy of Management Journal 58, no. 6 (2012), pp. 1740–1760 and Amanda p. Cowen and Jeremy J. Marcel, “Damaged goods: Boards Decisions to Dismiss reputationally Compromised Directors,” Academy of Management Journal 54, no. 3 (2011), pp. 509–527.

58. r. p. Chait, W. p. ryan, and B. e. Taylor, Governance as Leadership: Reframing the Work of Nonprofit Boards (hoboken, nJ: John Wiley & sons, 2005); r. Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage (san francisco: CA: Jossey-Bass, 2005); J. e. orlikoff, “old Board/ new Board: governance in an era of Accountability,” Frontiers of Health Services Management 21, no. 3 (2005),

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 5 DireCtional StrategieS 203

pp. 3–12; Kathryn J. McDonagh, “hospital governing Boards: A study of Their effectiveness in relation to organizational performance,” Journal of Healthcare Management 51, no. 6 (2006), pp. 377–391.

59. p. Michel Maher, Malcolm C. Munro, and flora L. stromer, “Building a Better Board: six Keys to enhancing Corporate Director performance,” Strategy & Leadership 28, no. 5 (2000), pp. 31–32.

60. sydney finkelstein and Ann C. Mooney, “not the usual suspects: how to use Board process to Make Boards Better,” Academy of Management Executive 17, no. 2 (2003), pp. 101–113.

61. Wayne f. Cascio, “Board governance: A social systems perspective,” Academy of Management Executive 18, no. 1 (2004), pp. 97–100.

62. idea Watch, “Corporate Boards: now and Then,” Harvard Business Review 89, no. 11 (2011), pp. 38–39.

63. Corporate Library study cited in “evaluating the Board of Directors,” Investopedia, september 14, 2014. www .investopedia.com/articles/analyst/03/111903.asp.

64. A. L. Delbecq and s. L. gill, “Developing strategic Direction for governing Boards,” Hospital & Health Services Administration 33, no. 1 (1988), pp. 25–35.

65. J. A. Alexander, L. L. Morlock, and B. D. gifford, “The effects of Corporate restructuring on hospital policymaking,” Health Services Research 23, no. 2 (1988), pp. 311–338; A. r. Kovner, “improving hospital Board effectiveness: An update,” Frontiers in Health Services Management 6, no. 2 (1990), pp. 3–27.

66. James e. orlikoff, “Building Better Boards in the new era of Accountability,” Frontiers of Health Service Management 21, no. 3 (2005), pp. 3–12; Brian pusser, sheila slaughter, and scott L. Thomas, “playing the Board game: An empirical Analysis of university Trustee and Corporate Board interlocks,” Journal of Higher Education 77, no. 5 (2006), pp. 747–775.

67. r. A. McLean, “outside Directors: stakeholder representation in investor-owned health Care

organizations,” Hospital & Health Services Administration 34, no. 1 (1989), pp. 25–38. see also Jayne oliva, “A seat at the power Table: The physician’s role on the hospital Board,” Physician Executive 32, no. 4 (2006), pp. 62–66; Bruce Walters, “Ceo Tenure, Boards of Directors, and Acquisition performance,” Journal of Business Research 60, no. 4 (2007), pp. 331–338.

68. s. M. shortell, “new Directions in hospital governance,” Hospital & Health Services Administration 34, no. 1 (1989), pp. 7–23.

69. Catherine M. Daily, Dan r. Dalton, and nandini rajagopalan, “governance through ownership: Centuries of practice, Decades of research,” Academy of Management Journal 46, no. 2 (2003), pp. 151–158.

70. M. L. fennell and J. A. Alexander, “governing Boards and profound organizational Change,” Medical Care Review 46, no. 2 (1989), pp. 157–187.

71. J. A. Alexander and L. L. Morlock, “Ceo–Board relations under hospital Corporate restructuring,” Hospital & Health Services Administration 33, no. 3 (1988), p. 436.

72. Catherine M. Daily, Dan r. Dalton, and Albert A. Cannella Jr., “Corporate governance: Decades of Dialogue and Data,” Academy of Management Review 28, no. 3 (2003), pp. 371–382; Matthew D. Lynall, Brian r. golden, and Amy J. hillman, “Board Composition from Adolescence to Maturity: A Multitheoretic View,” Academy of Management Review 28, no. 3 (2003), pp. 416–431.

73. see Jeffrey sonnenfeld, “good governance and the Misleading Myths of Bad Metrics,” Academy of Management Executive 18, no. 1 (2004), pp. 108–113; Jeffrey sonnenfeld, “What Makes great Boards great?” Harvard Business Review 80, no. 9 (2002), pp. 106–113.

74. finkelstein and Mooney, “not the usual suspects,” pp. 103–106.

75. “Mission statement is Key to a good Marketing plan,” Hospice Management Advisor, february 1 (2003), pp. 18–19.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:02:52.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 Identifying Strategic Alternatives

Why Identifying Strategic Alternatives Is Important

As Peter Drucker observed, understanding and seriously considering alternatives is the first step in making decisions. Careful evaluation of alternatives is even more critical for organizations making strategic choices because of the long-term consequences of such decisions.

Organizations typically have many strategic alternatives from which to choose – so many that selecting a strategy can become confusing at best and com- pletely overwhelming at worst. Systematic classification of the strategic alterna- tives available, as well as a description of the intent and required conditions for selecting each alternative within each classification, can aid strategic managers in working though the “clash and conflict of divergent opinions of the serious consideration of competing alternatives.” Despite one course of action appearing

“The understanding that underlies the right decision grows out of the clash and conflict of divergent opinions and out of the serious consideration of competing alternatives … Unless one has considered alternatives, one has a closed mind.”

—Peter F. DruCker, MAnAgeMent AuthOr AnD PhilOSOPher

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

206 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

obvious, examining alternatives will provide new information; test long held assumptions, biases, and opinions; and prevent tunnel vision.

Strategic decisions have a rational hierarchy. Decisions concerning the organi- zation’s mission, vision, values, and strategic goals are made first and provide guidance for subsequent decisions. An understanding of the hierarchy of strategic decisions – a map that shows the classes of decisions and a logical order to follow – is important for strategic decision makers. in addition, strategic managers need clear delineations of the available strategic alternatives and an understanding of the implication of each. A logical map of strategic decision alternatives (the analytical approach) lays the groundwork for the strategic planning process. As the strategy unfolds, learning (the emergent approach) will guide alternative decision making.

A map of strategic alternatives for health care organizations helps begin the pro- cess of alternative analysis. Being able to envision the complete “big picture” of how strategic decisions must progress provides perspective on the scope and hierarchy of strategic decision making and illustrates the linkage of strategic alternatives in organizations. Considering strategic alternatives opens one’s mind to what can be.

use the concepts in this chapter to identify and organize strategic alternatives.

learning objectives

After completing the chapter you will be able to: 1. Discuss the steps and logic of strategy development. 2. Identify the hierarchy of strategies and strategic decisions required in strategic

planning. 3. Explain the relationship among directional strategies, adaptive strategies, mar-

ket entry/exit strategies, and competitive strategies. 4. Identify strategic alternatives available to health care organizations. 5. Provide the rationale as well as advantages and disadvantages for strategic

alternatives. 6. Demonstrate how strategies may be used in combination to accomplish the

organization’s goals. 7. Map strategic decisions showing how they are linked.

Strategic Management Competency After completing this chapter you will be able to use the hierarchy of strategic decisions to identify strategic alternatives and begin the process of making rational strategic decisions for a health care organization.

The Process for Identifying Strategy Alternatives

Strategic thinking involves an awareness of the environment; intellectual curiosity that is always gathering, organizing, and analyzing information; and a willingness to be open to creative ideas and solutions. Strategic planning concerns reaching conclusions

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 207

based on information, setting a course of action, and documenting the plan. therefore, strategic planning is essentially decision making – determining which strategy to pur- sue from among the many available options. in addition, a health care organization may pursue several different types of strategies simultaneously or sequentially.

there is a logical order in making strategic decisions because as organizations make strategic choices, these choices will have downstream consequences that both limit and create opportunities. For instance, a merger or affiliation decision is part of a series of decisions rather than a single decision or an end in itself; there is a broader strategy that precipitated the merger or affiliation and there will be subsequent strategic decisions that will have to be made to ensure success. Strategy formulation is the process of developing strategic alternatives, evaluating alternatives, and making strategic choices. this chapter introduces and classifies the strategic alternatives for health care organizations and Chapter 7 discusses strategic thinking methods for analyzing alternatives to make a strategic choice.

exhibit 6–1 provides a six-step process for understanding the hierarchy of strategic decisions and identifying the strategic choices available to health care

EXHIBIT 6–1 The Process for Strategy Development

Step 1 – Understand the Decision Logic of Strategy Development

Step 2 – Understand the Role of Directional Strategies

Step 3 – Understand Adaptive Strategy Alternatives

Step 4 – Understand Market Entry/Exit Strategy Alternatives

Step 5 – Understand Competitive Strategy Alternatives

Step 6 – Understand Combination Strategies

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

208 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

organizations. Beginning with a general understanding of the rationale or logic of the process, the chapter works through the different types of strategy choices. understanding the decision logic is first, followed by directional strategies that frame subsequent strategic choices. next the adaptive strategic alternatives define the scope of the organization. the market entry/exit alternatives carry out the adaptive strategies whereas competitive alternatives define the nature of the rivalry among similarly focused organizations. Because strategy development is a creative (and iterative) process, some combinations of strategies may be required to enable the organization to pursue its mission and achieve its vision.

Step 1: Understand the Decision Logic of Strategy Development

the decision logic of strategy formulation is illustrated in exhibit 6–2. Decisions concerning five categories of strategies – directional, adaptive, market entry/exit,

EXHIBIT 6–2 The Decision Logic of Strategy Formulation

Directional Strategies

Adaptive Strategies

Market Entry/Exit Strategies

Competitive Strategies

Implementation Strategies

• Expansion of Scope • Reduction of Scope • Maintenance of Scope

• Purchase • Cooperation • Development • Market Exit

• Strategic Posture • Positioning

• Service Delivery • Support • Unit Action Plans

Organization-level Strategies

Unit-level Strategies

Corporate- and Divisional-level Strategies

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 209

competitive, and implementation – should generally be addressed sequentially with each decision more specifically defining the activities of the organization. thus, the organization must first establish or reaffirm consensus on its mission, vision, values, and strategic goals (directional strategies). next, the adaptive strat- egies must be agreed on and developed to accomplish the goals set forth by the directional strategies. Adaptive strategies are corporate-level decisions that specify the organization’s scope and focus on expanding, reducing, or maintaining oper- ations. then strategists should discuss market entry/exit strategies, as they are the means to accomplish the adaptive strategies through purchase, cooperation, inter- nal development, or market exit. Competitive strategies are generally indepen- dent of the adaptive and market entry/exit strategies as they are market- or service area-specific. Competitive strategies determine the organization’s strategic posture and position vis-à-vis other organizations within the market. Finally, implementation strategies are directed toward value-adding service delivery strat- egies, value-adding support strategies, and unit action plans and must be devel- oped to carry out competitive and market entry/exit strategies. the scope and role of the strategy formulation types are summarized in exhibit 6–3.

EXHIBIT 6–3 Scope and Role of Strategy Types in Strategy Formulation

Strategy Scope and Role

Directional Strategies The broadest strategies that set the fundamental direction of the organization by establishing a mission for the organization (Who are we?) and vision for the future (What should we be?). In addition, directional strategies specify the organization’s values and its strategic goals.

Adaptive Strategies These strategies are more specific than directional strategies and provide the primary methods for achieving the vision (adapting to the environment). These strategies determine the scope of the organization and specify how the organization will expand, reduce, or maintain scope.

Market Entry/Exit Strategies

These strategies provide the method of carrying out the adaptive strategies of expansion of scope and maintenance of scope strategies through purchase, cooperation, or internal development and reduction of scope through market exit.

Competitive Strategies Two types of strategies: one determines an organization’s strategic posture and one positions the organization vis-à-vis other organizations within the market. These strategies are market oriented and best articulate competitive advantage. When changes are not envisioned for adaptive or market entry/exit strategies, competitive strategies still may require changing.

Implementation Strategies

These strategies are the most specific and are directed toward value-added service delivery and the value-added support areas. In addition, individual organizational units develop objectives and action plans that support the market entry/exit strategies, competitive strategies, as well as the value-added service delivery and value- added support strategies.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

210 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

At each stage of the strategy formulation process, previous upstream decisions and the implications for subsequent downstream decisions must be considered. As leaders work through strategic choices, new insights and perspectives may emerge (strategic thinking) that suggest reconsideration of previous strategic decisions. therefore, although the decision logic for strategic decisions is generally sequential, in practice it is very much an iterative process. Strategy includes a plurality of inputs, a multiplicity of options, and an ability to accommodate more than one possible outcome. For example, where mission and vision are ignored, or where no linkage occurs between vision and strategy, strategy has no measurable end objective. in these situations, strategy suffers from being a means without an end, an end in itself, or a means of achieving an operational end, rather than being a design or plan for achieving the organiza- tion’s mission and vision.1

Strategic decisions should be based on as much information and strategic thinking as possible. Strategic thinking occurs in situational analysis and strat- egy formulation, as well as when managing strategic momentum. Before the strategic plan is adopted, it is important to remember that organization-wide consensus and commitment to the strategies must be established and actively promoted if they are to be managed successfully (strategic momentum). the choice of a strategic alternative creates additional direction for an organiza- tion and subsequently shapes its internal systems (technology, information systems, culture, policies, skills, and so on). Strategic momentum is rein- forced as managers understand, commit, and make decisions according to the strategy.

exhibit 6–4 presents a comprehensive strategic thinking map of the stra- tegic alternatives available to health care organizations. this map not only identifies the alternatives but also the general sequential relationships among them. using this organizing framework or decision logic keeps strategy for- mulation from becoming overwhelming and focuses strategic thinking. As strategic managers work through the strategic decisions, new understand- ings, insights, and strategies may (and in fact, should) emerge. therefore, decision makers must work through the decision logic and back again, ensur- ing that all the proposed strategies make sense together. Strategic thinkers must always be able to see the bigger picture. Decision makers should be prepared to adjust and refine earlier decisions in the decision logic as they make “downstream” decisions.

how-to formulas, techniques, or linear processes, of course, can never replace strategic thinking. Many of the greatest achievements in science, law, government, medicine, and other intellectual pursuits are dependent on the development of rational, logical thinkers; however, linear thinking can limit potential.2 leadership is essential to foster creativity and innovation and allow for the reinvention of the strategy formulation process. Strategy formulation involves managing dilemmas, tolerating ambiguity, coping with contradictions, and dealing with paradox.3 Often leaders must creatively resolve the tension between competing information and alternatives to generate new options and solutions.4 in addition, strategy development cannot ignore the entrepreneurial

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 211

spirit, politics, ethical considerations, and culture in an organization. the strat- egy formulation decision logic discussed in this chapter provides a starting point. it should foster strategic thinking, not limit it. the map starts the decision makers on their journey.

Step 2: Understand the Role of Directional Strategies Chapter 5 explored mission, vision, values, and strategic goals and indicated that these elements are part of both situational analysis and strategy for- mulation. they are a part of situational analysis because they describe the current state of the organization and codify its basic beliefs and philosophy. in many ways, as discussed in Chapter 5, they provide an operational con- text for the organization and an ethical and moral framework. in addition, directional strategies are a part of strategy formulation because they set boun- daries and indicate the broadest direction for the organization. the directional strategies should provide a sensible and realistic planning framework for the organization.

EXHIBIT 6–4 Strategic Thinking Map – Hierarchy of Strategic Decisions and Alternatives

Directional Strategies

Adaptive Strategies

Market Entry/ Exit Strategies

Competitive Strategies

Implementation Strategies

● Mission ● Vision ● Values ● Goals

Expansion of Scope ● Diversification ● Vertical

Integration ● Market

Development ● Product

Development ● Penetration

Reduction of Scope ● Divestiture ● Liquidation ● Harvesting ● Retrenchment

Maintenance of Scope ● Enhancement ● Status Quo

Purchase ● Acquisition ● Licensing ● Venture Capital

Investment Cooperation

● Merger ● Alliance ● Joint Venture

Development ● Internal

Development ● Internal Venture ● Reconfigure the

Value Chain Market Exit

● Fast/Slow ● Partial/Complete

Strategic Posture ● Defender ● Prospector ● Analyzer ● Reactor

Positioning – Marketwide

● Cost Leadership ● Differentiation

Positioning – Market Segment

● Focus/Cost Leadership

● Focus/ Differentiation

Service Delivery ● Pre-service ● Point-of-service ● After-service

Support ● Culture ● Structure ● Strategic

Resources Unit Action Plans

● Objectives ● Actions ● Timelines ● Responsibilities ● Resources ● Results/Measures

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

212 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Because formulation of the mission, vision, values, and strategic goals pro- vides fundamental direction for the organization, directional strategic decisions must be made first. then the adaptive strategies mobilize organizational goals by specifying the type and scope of product/market expansion, reduction, or maintenance. the adaptive strategies form the core of strategy formulation and are most visible to those outside the organization. After the adaptive strategies have been selected, the directional strategies should be re-evaluated. Seeing the directional strategies (ends) and the adaptive strategies (means) together may suggest refinements to either or both. this broader perspective is essential in strategic thinking.

Step 3: Understand Adaptive Strategy Alternatives From a practical standpoint, whether the organization should expand, reduce, or maintain scope is the first decision that must be made once the direction of the organization has been set (or reaffirmed). As shown in exhibit 6–5, several alter- natives are available to expand, reduce, or maintain the scope of operations. these alternatives represent major strategic choices for the organization.

Expansion of Scope Strategies if expansion is selected as the best way to perform the mission and realize the vision of the organization, several alternatives are available. the expansion of scope strategies grow an organization and include:

● Diversification. ● Vertical integration. ● Market development. ● Product development. ● Penetration.

Diversification Diversification is adding new related or unrelated products/ services (businesses) outside the organization’s core business(es). Diversification strategies, in many cases, are selected because markets have been identified out- side the organization’s core business that offer potential for substantial growth. Many hospitals have added hospice care as the increasing number of baby boomers are living longer and insurers (including Medicaid) began reimbursing for this type of care. Often, an organization that selects a diversification strat- egy is not achieving its growth or revenue goals within its current market, and these new markets provide an opportunity to achieve them. there are, of course, other reasons why organizations decide to diversify. For instance, health care organizations may identify opportunities for growth in less competitive or less regulated markets (such as medical office buildings, long-term care facilities, or outpatient care).

Diversification, at the level of the individual organization, is generally seen as a risky alternative because the organization is entering relatively unfamiliar markets or businesses. At the societal level it is sometimes thought of as a means of increasing the concentration of power among fewer firms and, again, is viewed

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 213

as possessing certain dangers or risk.5 Organizations have found that the risk of diversification can be reduced if markets and products are selected that com- plement one another. therefore, managers engaging in diversification seek syn- ergy between corporate divisions or strategic business units (SBus). Consider, for example, the discussion of hill-rom in Chapter 4. the core business of hill-rom is hospital beds and it dominates the market in this area. in recent years, however, the company has acquired Allen Medical (operating room beds), liko (specialized products for safe lifting and transfer of patients), Aspen Medical (surgical blades

EXHIBIT 6–5 Strategic Thinking Map of Adaptive Strategic Alternatives

Expansion of Scope

Reduction of Scope

Maintenance of Scope

Adaptive Strategies

• Diversification

Related

Unrelated

Backward

Total

Flexibility

Speed Innovation Efficiency

Quality

Products

Markets

Slow

Fast

Assets

Operations

Partial

Pricing

Distribution Promotion

Product Enhancements Product Line

Segment Geographic

Forward

• Status Quo

• Enhancement

• Retrenchment

• Harvesting

• Liquidation

• Divestiture

• Penetration

• Product Development

• Market Development

• Vertical Integration

Types

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

214 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

and scalpels), Völker (long-term care beds), trumpf Medical (advanced operating room products, lighting, surgical assistance systems), and Welch Allen (medical instruments). note that these acquisitions are concentric in that they “revolve around” the core business of hospital beds. With these acquisitions hill-rom has taken on a risky but a highly diverse portfolio of medical products.

there are two types of diversification: related (concentric) and unrelated (con- glomerate). exhibit 6–6 illustrates possible related and unrelated diversification strategies for one type of primary health care organization.

Related diversification is adding new, similar products/services (businesses) that are outside the organization’s core business. this form of diversification is some- times called concentric diversification because the organization develops a “circle” of related businesses (products/services) and is illustrated by hill-rom’s venture into a more diversified series of medical markets while focusing the diversi- fication effort on a series of similar medical products (e.g. long-term care beds, patient mobility equipment, operating room beds, and so on).

the general assumption underlying related diversification is that the organiza- tion will be able to obtain some level of synergy (a complementary relationship

EXHIBIT 6–6 Related and Unrelated Diversification by a Primary Provider

Hospice

Diagnostic Lab

Radiation Treatment

Physician Group

Ambulatory Care

Long-Term Care

Home Health

Hospital

Related Diversi�cation Unrelated Diversi�cation

Health Care Environment • Pharmaceuticals • Medical Supplies • Insurance • Managed Care • Medical Schools • Others

General Environment • Restaurants • Health and Fitness • Parking Lots • Shopping Centers • Of�ce Buildings • Laundry

Within the Health Care System

Outside the Health Care System

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 215

where the total effect is greater than the sum of its parts) between the production/ delivery, marketing, or technology of the core business and the new related prod- uct or service. this form of diversification has been characteristic of many firms in the pharmaceutical industry.6 For hospitals, the two primary reasons for diversify- ing are to introduce non-acute care or sub-acute care services that reduce hospital costs, or to offer a wider range of services to large employers and purchasing coalitions through capitated contracts.7 the movement of acute care hospitals into skilled nursing care is an example of related diversification.

On the other hand, unrelated diversification is adding new unrelated products/ services (businesses) unlike the organization’s core business. this action creates a “portfolio” of separate products/services. unrelated diversification, or conglom- erate diversification, generally involves semi-autonomous divisions or strategic service units. An example of unrelated diversification would be a hospital diversi- fying into the operation of a restaurant, parking lot, or medical office building. in such a case, the new business is unrelated to the provision of health care although it may be complementary (synergistic) to the provision of health services.

research on diversification indicates that financial performance increases as organizations shift from single-business strategies to related diversification, but performance decreases as organizations change from related diversification to unrelated diversification.8 Single-business organizations may suffer from limited economies of scope whereas organizations using related diversification can con- vert underutilized assets and achieve economies of scope by sharing resources and combining activities along the value chain. unrelated diversification has been found to increase strain on top management in the areas of decision making, control, and governance. the stress increases in some cases because of the diffi- culties associated with integrating and managing diverse organizational cultures.9 in addition, unrelated diversification makes it difficult to share activities and transfer competencies between units; it has been particularly difficult in hospital diversification.10

Vertical Integration A vertical integration strategy is a decision to grow along the channel of distribution or stages in the continuum of care of core operations. thus, a health care organization may grow toward suppliers or toward patients. When an organization grows along the channel of distribution toward its sup- pliers or toward earlier stages on the continuum of care (upstream), it is called backward vertical integration. When an organization grows along the channel of distribution toward the consumer/patient or toward later stages in the continuum of care (downstream), it is called forward vertical integration.

A vertically integrated health care system offers a range of patient care and sup- port services operated in a functionally unified manner. the expansion of services may be arranged around an acute care hospital and include pre-acute, acute, and post-acute services or be organized around specialized services related solely to long-term care, mental health care, or some other specialized area.11 the purpose of vertical integration is to increase the comprehensiveness and continuity (or continuum) of care, while simultaneously controlling the channel of demand for health care services.12

One of the more familiar examples of vertical integration in health care has been the strategy of hospitals acquiring physician practices in a move to more effectively

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

216 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

control the “patient flow.” this move, as with many others, has produced vary- ing results. Some have argued that tightly integrated relations between physician practices and hospitals have resulted in higher hospital prices and spending.13

Vertical integration can reduce costs and thus enhance an organization’s competitive position. Cost reductions may occur through lower supply costs and better integration of the “elements of production.” With vertical integration, management can better ensure that supplies are of the appropriate quality and delivered at the right time. For instance, some hospitals have instituted technical educational programs because many health professionals (the major element of production in health care) are in critically short supply. however, in many cases it seems that managerial incentives to build market share is the primary motivation for vertical integration.14

Because a decision to vertically integrate further commits an organization to a particular product or market, management must believe in the long-term viability of the product/service and market. As a result, the opportunity costs of vertical integration must be weighed against the benefits of other strategic alternatives such as diversification or product development. examples of vertical integration would be a hospital chain acquiring one of its major medical products suppliers (backward integration) or a drug manufacturer moving into drug distribution (forward integration).

Whether a strategic alternative is viewed as vertical integration or related diver- sification may depend on the objective or intent of the alternative. For instance, when the primary intent is to enter a new market to grow, the decision is to diver- sify. however, if the intent is to control the flow of patients to various units, the decision is to vertically integrate. thus, a decision by an acute care hospital to acquire a skilled-nursing unit may be viewed as related diversification (entering a new growth market) or vertical integration (controlling downstream patient flow). Vertical integration is the fundamental adaptive strategy for developing integrated systems of care and is central to many health care organizations’ strategies.

numerous extensive health networks are the result of integration strategies and some observers expected that the Patient Protection and Affordable Care Act (ACA) would increase the movement to integrated health care systems.15 Although there is limited data to support or refute this suspicion, according to the American hospital Association well over half of American hospitals may be affili- ated with a system or network.16 the major reason that hospitals join networks and systems is to help secure needed resources (financial, human, information systems, and technologies), increase capabilities (management and marketing), and gain greater bargaining power with purchasers and health plans.17 however, it appears that the pace of integration has slowed. in fact there has been some degree of “disintegration,” with health care systems divesting health plans, phys- ician groups, home health care companies, skilled care services, or facilities and selling or closing hospitals.18 the reason for this divesting trend is related to research that suggests that integrated health care networks have little or no signifi- cant effect on the improvement of overall organizational efficiencies and profits.19

to increase the supply of patients to various health care units, several patterns of vertical integration may be identified.20 in exhibit 6–7, an inpatient acute care facility is the strategic service unit or core technology that decides to vertically integrate. example 1 represents a hospital (D) that is not vertically integrated.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 217

the hospital admits and discharges patients to and from other units outside the organization. example 2 illustrates a totally integrated system in which inte- gration occurs both upstream and downstream. in this case, patients flow through the system from one unit to the next, and upstream units are viewed as “feeder” units to downstream units.

example 3 represents a hospital that has vertically integrated upstream. in addition, more than one unit is involved at several stages of the integration. For instance, there are two wellness/health promotion units, three primary care units, and three urgent care units. the dashed line represents the receipt of patients via external or market transfers. example 4 illustrates a multihospital system engaged

EXHIBIT 6–7 Patterns of Vertical Integration Among Health Care Organizations

1

2

3

4

5

Upstream Downstream

Strategic Business Unit

A B C D E F G

A = wellness/health promotion unit B = primary care unit C = urgent care unit D = hospital (inpatient acute care unit) E = skilled-nursing unit F = rehabilitation unit G = home-health unit

Solid lines depict fully internal transfers

Dashed lines depict market or external transfers

i

Sources: Adapted in part from K. R. Harrigan, “Formulating Vertical Integration Strategies,” Academy of Management Review 9, no. 4 (1984), pp. 638–652. Reprinted by permission of Academy of Management. And adapted in part from Stephen S. Mick and Douglas A. Conrad, “The Decision to Integrate Vertically in Health Care Organizations,” Hospital and Health Services Administration 33, no. 3 (Fall 1988), p. 351. Reprinted by permission from Health Administration Press, Chicago.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

218 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

in vertical integration. three hospitals form the core of the system, which also con- tains three nursing homes, two rehab units, a home-health unit, three urgent care facilities, three primary care facilities, and a wellness center. it is important to note that simply adding members to create an integrated health system is not enough. institutions must be truly integrated and create a “seamless” system of care to achieve the desired benefits for patients (effectiveness) and cost savings (efficiency).

Finally, some health care systems are closed systems with fixed patient popu- lations entirely covered through prepayment. thus, whereas in example 2 the health care organization is vertically integrated, in example 5 patients are a part of the closed system. this insurance function (letter i in the example) is shown as an additional unit.

Market Development Market development is a divisional strategy used to enter new markets with the organization’s present products or services. Specifically, market development is a strategy designed to achieve greater volume, through geographic (service area) expansion or by targeting new market segments within the present geographic area (market niche strategies). typically, market devel- opment is selected when the organization is fairly strong in the market (often with a differentiated product), the market is growing, and the prospects are good for long-term growth. A market development strategy is strongly supported by the marketing, financial, information systems, organizational, and human resources functions. An example of a market development strategy would be a chain of out- patient clinics opening a new clinic in a new geographic area (current products and services in a new market).

One type of market development is called horizontal integration. Horizontal integration is a method of obtaining growth across markets (in essence buying market share) by acquiring or affiliating with direct competitors rather than using internal operational/functional strategies to take market share from them. Many hospitals and medical practices engage in horizontal integration, creating multi- hospital systems. Such systems were expected to offer several advantages such as increased access to capital, reduction in duplication of services, economies of scale, improved productivity and operating efficiencies, access to management exper- tise, increased personnel benefits, improved patient access, improvement in qual- ity, and increased bargaining power with insurers and suppliers. however, many of these benefits have not materialized and consolidation often raises prices with no measurable impact on quality – increasing scale without creating solutions.21

Another special type of market development is a market-driven or focused factory strategy. A focused factory in health care is an organization that provides comprehensive services across multiple markets (horizontal integration) for one specific disease category such as cancer, diabetes, renal disease, asthma, or car- diac disease. the fundamental principle underlying a market-driven or focused factory strategy is that an organization that focuses on only one function is likely to perform better. Such focus allows an organization to achieve very high levels of effectiveness and efficiency. the shift includes:

… replacing giant providers and huge managed care networks, located in hard-to-reach sites with what i call “focused factories” (a nomenclature bor- rowed from the manufacturing sector) that provide convenient, specialized

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 219

care for victims of a certain chronic disease, or for those who need a particu- lar form of surgery, or for those who require a diagnosis, checkup, or treat- ment for a routine problem.22

Focused factories become so effective (high quality, convenient, and so on) and efficient (less costly) that other providers are “forced” to use their services. Thus, these other providers can obtain higher-quality services at less cost by outsourcing to the focused factory. In turn, the focused factory commands a place in the payment systems. Focused factory tools for pro- viders of health care services are outlined in Essentials for a Strategic Thinker 6–1 “What Is a Health Services Focused Factory?”

ESSEnTIALS foR A STRATEgIC THInkER 6–1

What Is a Health Services focused factory?

The health care providers who flourish in this mar- ket-driven environment will give customers the mastery and convenience as well as the focused, cost-effective services they want by following the rules of successful service entrepreneurs:

PAy AttEntIon to thE CuStoMER

Don’t call them patients, don’t fight their asser- tiveness, don’t give them hype, give them real convenience and quality.

FoCuS, FoCuS, FoCuS

Throw out the general-purpose, everything- for-everybody model; focus on your strengths; design the system that will lower costs and opti- mize quality.

LEARn FRoM thE RoCkEttES

Make sure that all the elements of your operating systems are integrated, resembling a well- choreographed dance, where disparate elements have been integrated into a harmonious whole.

RESISt thE EDIFICE CoMPLEx

Bricks and mortar are distractions; fixed costs drag the enterprise down; many assets are really

liabilities (money pits that consume your time and capital).

LowER youR CoStS, Don’t RAISE youR PRICES

Successful enterprises succeed by achieving more output from every unit of input, not by raising prices; enterprises that lower their costs create sustainable competitive advantage.

uSE tEChnoLogy wISELy

Use technology to enhance the productivity of the health care process, not as a marketing tool.

Don’t LEt thE DogMA gRInD you Down

Be open to new and different ways of thinking; don’t be a prisoner of your own thinking; obtain advice from the widest possible range of sources about what works and what doesn’t.

BE EthICAL

Don’t seek competitive advantage in unethical ways such as discriminating against sick or poor people or by denying people the health care services they need.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

220 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

in health care, focused factories have not escaped criticism. the success of some focused factories (cardiac surgery and treatment) led some states to propose legis- lation restricting them. the Federal Medicare Prescription Drug improvement and Modernization Act became law in 2003. An important part of the law included a moratorium that limited physician investments in specialty hospitals. Specifically identified were cardiac, orthopedic, surgical, and “other” hospitals owned by physicians. these focused factories targeted profitable procedures from insured patients, requiring local not-for-profits to care for less profitable diseases/ treatments without being able to offset the costs through the more profitable procedures being captured by focused factories. therefore, many politicians are opposed to specialty hospitals and advocated for the federal legislation to become permanent.

Additionally, consternation has been expressed concerning whether health care-focused factories really reduce costs and in turn prices. Some experts sug- gest that price reductions are offset by the tendency of physicians with financial interest in the hospital to increase their volume with elective procedures. As for increasing quality, most experts agree that it is too early to judge. Some sug- gest that physicians referred easy cases to specialty hospitals and more complex patients to general hospitals, but there is no data to support that claim. Further, most experts agree that specialty hospitals initiated a “medical arms race” that might eventually drive up health care costs. the fear is that as general hospitals perceive the need to compete with the physician-owned specialty hospitals, they will develop dedicated centers as “hospitals-within-hospitals” or as freestanding facilities, forcing up overall costs.23

Product Development Product development is the introduction of new prod- ucts/services to present markets (geographic and segments). typically, product development takes the form of product enhancements and product line exten- sion. Product development should not be confused with related diversification.

BREADth BEAtS DEPth

Don’t fall for the lure of vertical integration; remember all the problems you have experienced in running just your corner of the health services world; a horizontally integrated chain of focused factories will amplify your strengths in each of the separate units that comprise the chain.

Don’t gEt BIg FoR BIgnESS’ SAkE

Don’t think of horizontal integration as a way of blocking competitors; think of it as getting really good at what you do.

MEASuRE RESuLtS: youR own AnD youR CoMPEtItoRS’

What gets measured gets done; don’t ignore results you don’t like and don’t bury the results in a file – use them actively in continually recreating your operations; don’t believe your own press – you are at your most vulnerable when your measurement results are at their most flattering.

Source: Regina E. Herzlinger, Market-Driven Health Care: Who

Wins, Who Loses in the Transformation of America’s Largest Service

Industry (Reading, MA: Addison-Wesley Publishing Company,

1997), pp. 283–287.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 221

related diversification introduces a new product category (though it may be related to present operations), whereas product development may be viewed as refinements, complements, or natural extensions of present products. Product development strategies are common in large metropolitan areas where hospi- tals vie for increased market share within particular segments of the market, such as cancer treatment and open-heart surgery, and specialized women’s health clinics.

Penetration An attempt to better serve current markets with current products or services is referred to as a market penetration strategy. Similar to market and product development, penetration strategies are used to increase volume and market share. A market penetration strategy is typically implemented by market- ing activities such as promotional, distribution, and pricing strategies, and often includes increasing advertising, offering sales promotions, increasing publicity efforts, or increasing the number of sales representatives.

Although still using their sales force to pursue expansion strategies, some pharmaceutical companies have recently moved toward e-detailing (electronic physician education concerning drugs) as a key component of their pen- etration strategies. the use of e-detailing by pharmaceutical companies is on the rise because physicians increasingly prefer to replace sales calls with other forms of communication and are accessing physician-only informational web- sites, and other interactive communication formats. For example, one study of physicians and other medical professionals found that when e-detailing was used in combination with occasional visits by professional service represen- tatives the results were particularly effective. the argument was made that e-detailing and periodic, in-person visits are complementary in nature, less expensive, and that simultaneous use multiplied the effects of either approach on its own.24

Reduction of Scope Strategies Reduction of scope strategies decrease the size and reach of operations. reduction strategies include:

● Divestiture. ● liquidation. ● harvesting. ● retrenchment.

Divestiture Divestiture is a reduction of scope strategy in which an operating strategic service unit (SSu) is sold off as a result of a decision to leave all or a portion of the market despite its current viability. generally, the business to be divested has value and will continue to be operated by the purchasing organiza- tion.25 For example, in 2016 Community health Systems, inc. (ChS) announced it was divesting its majority stake (80 percent) in its home health division to pay down debt. the strategic plan was for Almost Family, inc. to purchase a majority interest and continue to operate the business.26

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

222 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

the strategy of “unbundling” (divesting by a hospital of one or more of its ser- vices) has become common. hospitals are carving out non-core services previously performed internally and divesting them. typical services and products produced in a hospital that are not necessarily part of the core bundle of activities include laboratory, pharmacy, X-ray, physical therapy, occupational therapy, and dietary services. in addition, “hotel” services (laundry, housekeeping, and so on) formerly performed by hospitals are being contracted to outsiders. even medical services in such specialty areas as ophthalmology are increasingly being performed outside the hospital in “surgicenters” and may be candidates for divestiture.

Divestiture decisions are made for a number of reasons. An organization may need cash to fund more important operations for long-term growth or the div- ision/SSu may not be achieving management’s goals. in some cases health care organizations are divesting services that are too far from their core business or area of management expertise. For example, many multihospital systems have divested their hMO (purchased only a few years earlier) to concentrate on care delivery. A multihospital system purchasing a managed care organization actually represents unrelated diversification. Although the strategy appears logical and synergistic, managed care businesses are difficult to manage and there is little skill transfer from managing provider organizations. Moreover, research has shown that divestitures are more profitable when they are part of a carefully crafted strat- egy as compared to piecemeal sell-offs of various components of the business.27

Liquidation Liquidation is a reduction of scope strategy involving the termination of a unit through the sale of its assets. the assumption underlying a liquidation strategy is that the unit cannot be sold as a viable and ongoing operation. however, the assets of the organization (facilities, equipment, and so on) still have value and may be sold for other uses. Organizations may be partially or completely liquidated. Common reasons for pursuing a liquidation strategy include bankruptcy, the desire to dispose of non-productive assets, and the emergence of a new technology that results in a rapid decline in the use of the old technology.

One strategy of the MedCath Corporation illustrates an example of liqui- dation. On September 21, 2012 a Certificate of Dissolution was issued for MedCath Corporation. MedCath consisted of a series of hospitals that specialized in cardio- vascular care. its strategy was to operate these specialty hospitals in partnership with physician groups. Although the strategy was successful initially, the opposition of acute care hospitals resulted in a moratorium on specialty hospital development, which proved to be a mortal blow to the strategy and the company. MedCath’s board of directors approved a “liquidating distribution” of assets to stockholders, removed its stock from trading on the nASDAQ stock exchange, and ceased operations.

On leaving a market, an aging hospital building may be sold for its property value or an alternative use. in a declining market, a liquidation strategy may be a long-term strategy to be carried out in an orderly manner over a period of years. recently, many hospitals have been liquidating their emergency helicopter oper- ations, which had historically been allowed to operate as loss leaders because they brought prestige and positive public relations to the hospital. however, because of increasing costs and limited reimbursements, many hospitals have shut down and liquidated such operations.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 223

Harvesting A harvesting strategy is a reduction of scope strategy to continue to operate a declining business and reap any remaining available profits while not investing additional resources. A harvesting strategy is selected when the market has entered long-term decline. the reason underlying such a strategy is that the organization has a relatively strong market position but industry-wide revenues are expected to decline over the next several years. therefore, the organization will “ride the decline,” allowing the business to generate as much cash as possible without further investment.

When implementing a harvesting strategy, the organization attempts to reap maximum short-term benefits before the product or service is eliminated. Such a strategy allows the organization an orderly exit from a declining seg- ment of the market by planned downsizing. harvesting has not been widely used in health care but will be more frequently encountered in the future as markets mature and organizations exit various segments. For instance, some regional hospitals that have developed rural hospital networks have experi- enced difficulty in maintaining their commitment to health care in small communities. the 20-bed hospitals frequently found in rural networks tend to struggle financially because of a lack of support from specialists and pri- mary care physicians, an aging population, and flight of the young to urban areas. twenty-bed rural hospitals are probably in a long-term decline with little hope for survival. On the other hand, 50-bed hospitals have managed to maintain or improve their financial position because of effective physician recruitment, good community image, and the continued viability of the com- munities themselves. therefore, regional hospitals with rural networks may have to employ a harvesting strategy for the 20-bed hospitals while using market development or maintenance of scope strategies for the 50-bed and larger hospitals.

Retrenchment A retrenchment strategy reduces the scope of operations, through redefining the target market, cutting geographic coverage, reducing the segments served, or reducing the product/service line. typically a retrenchment strategy is a response to declining profitability, usually brought about by increas- ing costs. the market is still viewed as viable, and the organization’s products/ services continue to have wide acceptance; however, costs are rising as a percent- age of revenue, placing pressure on profitability. retrenchment typically involves a redefinition of the target market and selective cost elimination or asset reduc- tion. retrenchment is directed toward reduction in personnel, the range of prod- ucts/services, or the geographic market served and represents an effort to reduce the scope of operations.

Over time, organizations may find that they are overstaffed given the level of demand. As a result, their costs are higher than those of competitors. When market growth is anticipated, personnel are added to accommodate the growth, but during periods of decline, positions are seldom eliminated. A reduction in the staff members who have become superfluous or redundant is often central to a retrenchment strategy.

Similarly, in an attempt to “round out” the product or service line, products and services are added. Over time, these additional products/services may tend to add more costs than revenues. in many organizations, less than 20 percent of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

224 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

the products account for more than 80 percent of the revenue. in these circum- stances, retrenchment may be in order.

Finally, there are times when geographic growth is undertaken without regard for costs. eventually, managers realize they are “spread too thin” to adequately serve the market. in addition, well-positioned competitors are able to provide quality products/services at lower costs because of their proximity. in this situation, geographic retrenchment (reducing the service area) is appro- priate. in many cases, a retrenchment strategy is implemented after periods of aggressive market development or acquisition of competitors (horizontal integration).

Maintenance of Scope Strategies Often organizations pursue a maintenance of scope strategy when management believes the past strategy has been appropriate and few changes are required in the target markets or the organization’s products/services. Maintenance of scope does not necessarily mean that the organization will do nothing; it means that management believes the organization is progressing appropriately. there are two maintenance of scope strategies: enhancement and status quo.

Enhancement Enhancement seeks to improve operations within present product or service categories in various ways, such as by implementing quality programs, increasing flexibility, increasing efficiency, improving speed of deliv- ery, and so on. When management believes that the organization is progressing toward its vision and goals but needs to “do things better,” an enhancement strat- egy may be used; neither expansion nor reduction of operations is appropriate but “something needs to be done.” typically, enhancement strategies take the form of quality programs (continuous quality improvement or CQi, total qual- ity management or tQM) directed toward improving organizational processes or cost-reduction programs designed to render the organization more efficient. in addition to quality and efficiency, enhancement strategies may be directed toward innovative management processes, speeding up the delivery of the products/services to the customer, and adding flexibility to the design of the products or services (marketwide customization). As discussed in essentials for a Strategic thinker 6–2, “What is health information technology (it)?” the adoption of information technology may be an enhancement strategy that cre- ates competitive advantage.

Many times after an expansion strategy, an organization engages in main- tenance/enhancement strategies. typically after an acquisition, organizations initiate enhancement strategies directed toward upgrading facilities, reducing purchasing costs, installing new computer systems, enhancing information systems, improving the ability to evaluate clinical results, reducing overhead costs, or improving quality.

Status Quo A status quo strategy is a maintenance of scope strategy seeking to maintain relative market share within a market and retain services at their current level. A status quo strategy is often based on the assumption that the market has

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 225

ESSEnTIALS foR A STRATEgIC THInkER 6–2

What Is Health Information technology (It)?

Health IT is a broad term that refers to a wide range of technologies and applications designed to store, share, and/or analyze health informa- tion. Health IT includes electronic health records (EHRs), health information exchanges (HIEs), and many other technologies. Whereas EHRs are computerized versions of patient records that allow clinicians secured access to patient information (e.g. prior history, test results, medi- cation information) and algorithms designed to assist clinicians to provide optimal care (e.g. dos- ing information, access to the newest medical guidelines), HIEs are the infrastructure that allow information from EHRs to be exchanged across different providers, settings of care, and time.

Ideally, health IT assists clinicians, managers, and public health officials to improve the quality of care, reduce inefficiencies, and lower health care costs. As such, federal policies have pro- moted the adoption and use of health IT by physicians, hospitals, and other providers. For example, the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009 promoted the uptake of EHRs and HIEs by paying providers “bonus payments” for success- fully installing, upgrading, or using health IT that met certain basic requirements.

Likewise, changes in reimbursement models by Medicare, Medicaid, and private insurance companies have also incentivized the use of health IT. Historically, most insurance companies reimbursed providers on a fee-for-service basis. That is, for a given clinical service, insurance companies would pay doctors and hospitals a predetermined fee on behalf of patients. Under this model, providers earned more if they pro- vided a higher volume of services – and quality of care was not necessarily rewarded. As costs of

care increased and quality concerns grew, new federal policies such as the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015, introduced newer reimbursement models that sought to financially reward physicians and hos- pitals that provide the best care for the lowest costs. Collectively, these new reimbursement models are known as value-based purchasing arrangements. Value-based (as opposed to vol- ume-based) models promote the use of health IT because such technologies play a role in improving quality and efficiency.

Despite much national attention to health IT by insurance companies and providers, and des- pite substantial technological improvements to EHRs and HIEs, the U.S. health care system has not yet lived up to the full potential of health IT. In retrospect, whereas the HITECH Act may have spurred increased adoption of health IT, it may not have fostered an environment where health IT could be used innovatively. Moreover, many organizations struggled with the implementa- tion process of health IT because the challenges with such wide-scale changes were underesti- mated. Lastly, despite improvements to com- mercially available health IT products, there is still a perception that the products available do not meet every organization’s needs. As such, one can expect that health IT will continue to be tailored to individual organizational needs, and researchers will continue to find ways for health IT to be used more effectively to improve care, support population health, enable new analyt- ics, and generally be a necessary ingredient of the modern U.S. health care system.

Source: Nir Menachemi, PhD Professor and Chair, Indiana

University Richard M. Fairbanks School of Public Health, Affiliate

Scientist, Regenstrief Institute, Inc.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

226 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

matured and periods of high growth are over. in this situation, the organization has secured an acceptable market share that managers believe can be defended against competitors. in addition, a status quo strategy may be appropriate when an organization is in a period of “active waiting.” Active waiting is a temporary strategy for organizations operating in dramatically changing or volatile markets. During periods of active waiting, leaders must remain alert to market anomalies that signal potential threats and opportunities, build financial reserves, and pre- pare to make strategic changes.28

in a status quo strategy, the goal is to maintain market share and keep services at their current level. environmental influences affecting the products or services should be carefully analyzed to determine when significant change is imminent. typically, organizations attempt a status quo strategy in some areas while engaging in market development, product development, or penetration in other areas to bet- ter utilize limited resources. For instance, a hospital may attempt to hold its market share (status quo) in slow-growth markets such as cardiac and pediatric services and attempt market development in higher-growth services such as intense, short- term rehabilitation care, renal dialysis, ophthalmology, or intravenous therapy.

in mature markets, industry consolidation occurs as firms attempt to add volume and reduce costs. therefore, managers must be wary of the emergence of a single dominant competitor that has achieved a significant cost differential. A status quo strategy is appropriate when there are two or three dominant pro- viders in a stable market segment because, in this situation, market development or product development may be quite difficult and extremely expensive.

A brief definition of the adaptive strategies and their rationales for selection are summarized in exhibit 6–8.

EXHIBIT 6–8 Definition and Rationales of the Adaptive Strategies

Adaptive Strategy Definition Rationale

Expansion of Scope

Related Diversification

Adding new related product or service categories. Often requires the establishment of a new division.

● Pursuit of high-growth markets. ● Entering less-regulated segments. ● Not achieving current objectives. ● Synergy is possible from new business. ● Offset seasonal or cyclical influences.

Unrelated Diversification

Adding new unrelated product or service categories. Typically requires the establishment of a new division.

● Pursuit of high-growth markets. ● Entering less-regulated segments. ● Cannot achieve current objectives. ● Current markets are saturated or in decline. ● Organization has excess cash. ● Antitrust regulations prohibit expansion in current

industry. ● Tax loss may be acquired.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 227

Adaptive Strategy Definition Rationale

Backward Vertical Integration

Adding new members along the distribution channel (toward a later stage) for present products and services or controlling the flow of patients from one institution to another.

● Control the flow of patients through the system. ● Scarcity of raw materials or essential inventory/supplies. ● Deliveries are unreliable. ● Lack of materials or supplies will shut down operations. ● Price or quality of materials or supplies variable. ● Industry/market seen as profitable for long term.

Forward Vertical Integration

Adding new members along the distribution channel (toward an earlier stage) for present products and services or controlling the flow of patients from one institution to another.

● Control the flow of patients through the system. ● Faster delivery required. ● High level of coordination required between one stage

and another – secure needed resources. ● Industry/market seen as profitable for long term. ● Gain bargaining power.

Market Development

Introducing present products or services into new geographic markets or to new segments within a present geographic market.

● New markets are available for present products. ● Provide comprehensive services across the market (focus

factory). ● New markets may be served efficiently. ● Expected high revenues. ● Organization has cost leadership advantage. ● Organization has differentiation advantage. ● Current market is growing.

Product Development

Improving present products or services or extending the present product line.

● Currently in strong market but product is weak or product line incomplete.

● Market tastes are changing. ● Product technology is changing. ● Maintenance or creation of differentiation advantage.

Penetration Seeking to increase market share for present products or services in present markets through marketing efforts (promotion and price).

● Present market is growing. ● Product/service innovation will extend product life cycle (PLC). ● Expected revenues are high. ● Organization has cost leadership advantage. ● Organization has differentiation advantage.

Reduction of Scope

Divestiture Selling an operating unit or division to another organization. Typically, the unit will continue in operation.

● Industry in long-term decline. ● Cash needed to enter new, higher-growth area. ● Lack of expected synergy with core operation. ● Required investment in new technology seen as too high. ● Too much regulation. ● Unbundling.

(Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

228 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Step 4: Understand Market Entry/Exit Strategy Alternatives

the expansion of scope adaptive strategies require entering or gaining access to a new market, while the maintenance of scope strategies may call for organizational improvements; therefore, it is likely that both strategies will require new resources. On the other hand, reduction of scope strategies may provide additional resources or free up committed resources. thus, the next important decision that must be

Adaptive Strategy Definition Rationale

Liquidation Selling all or part of the organization’s assets (facilities, inventory, equipment, and so on) to obtain cash. The purchaser may use the assets in a variety of ways and businesses.

● Organization can no longer operate. ● Bankruptcy. ● Trim/reduce assets. ● Superseded by new technology.

Harvesting Products or services typically in late stages of the product life cycle (late maturity and decline) where industry- wide revenues are expected to decline. These products or services will ultimately be discontinued but may generate revenue for some time. Few new resources are allocated to these areas.

● Late maturity/decline of the product life cycle. ● Consider divestiture or downsizing. ● Short-term cash needed.

Retrenchment Reducing the scope of operations, redefining the target market, cutting geographic coverage, reducing the segments served, or reducing the product line.

● Market has become too diverse. ● Market is too geographically spread out. ● Personnel costs are too high. ● Too many products or services. ● Marginal or non-productive facilities.

Maintenance of Scope

Enhancement Seeking to improve operations within present product or service categories through quality programs, increasing flexibility, increasing efficiency, speed of delivery, and so on.

● Organization has operational inefficiencies. ● Need to lower costs. ● Need to improve quality. ● Improve internal processes.

Status Quo Seeking to maintain relative market share within a market.

● Maintain market share position. ● Maturity/late maturity stage of the product life cycle. ● Product/market generating cash but has little potential

for future growth. ● Extremely competitive market.

EXHIBIT 6–8 (Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 229

made for these strategies concerns how the organization will enter and develop a market or exit the market. Market entry strategies carry out the expansion and maintenance adaptive strategies through purchase, cooperation, or internal development. reduction of scope strategies are carried out through market exit strategies.

there are three major methods to enter a market. As illustrated in exhibit 6–4, an organization can use its financial resources to purchase a stake in the new market, team with other organizations and use cooperation to enter a market, or use its own resources to develop its own products and services. it is important to understand that market entry strategies are not ends in themselves but serve a broader aim – supporting the expansion and maintenance of scope adaptive strat- egies. Any of the expansion and maintenance of scope strategies may be carried out using any of the market entry strategies but each one places different demands on the organization.

if a reduction of scope strategy is selected, the organization may choose to leave (exit) the market quickly or incrementally resulting in a partial withdrawal or a complete abandonment of the market. Similar to the market entry strate- gies, market exit strategies support a broader vision and may continue to require resources and careful management for a period of time before the strategy has been completed.

Purchase Strategies A purchase strategy uses financial resources to enter a market quickly. there are three purchase market entry strategies: acquisition, licensing, and venture capital investment.

Acquisition Acquisitions are entry strategies for expansion through the purchase of an existing organization, a unit of an organization, or a product/ service. thus, acquisition strategies may be used to carry out both corporate and divisional strategies such as diversification, vertical integration, market development, or product development. there are many reasons to purchase another organization, such as to obtain real estate or other facilities, to acquire brands, trademarks, or technology, and even to access employees. however, the most common reason is to acquire customers.29 One form of acquisition is inversion which has been used as a tax reduction strategy as well as a market development strategy. See essentials for a Strategic thinker 6–3, “What is inversion?”

the acquiring organization may integrate the operations of the newly acquired organization into its present operations or may run it as a separate business/ser- vice unit. Acquisitions offer a method for quickly entering a market, obtaining a technology, or gaining a needed channel member to improve or secure distri- bution. it is usually possible to assess the performance of an organization before purchase and thereby minimize the risks through careful analysis and selection. the “build internally” versus “acquire” decision is one where strategic leaders must determine whether the benefits of ownership justify the costs and whether the acquiring organization has the product and process knowledge to capital- ize on an opportunity quickly. if the acquiring organization does not have the

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

230 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

ESSEnTIALS foR A STRATEgIC THInkER 6–3

What Is Inversion?

Inversion, also termed expatriation, results when a U.S.-based multinational company restructures and relocates the parent company to a low-tax country.1 Inversions typically involve a U.S. com- pany’s acquisition of a smaller corporation in a foreign country and the combined company moves its headquarters from the United States to the nation of the acquired firm. For example, in 2014, Mylan, Inc. of Pittsburgh acquired the European generic drug division of Abbott Laboratories and incorporated the resulting enter- prise in the Netherlands. Mylan’s new enterprise will be managed by its executive team located in Pittsburgh; however, the company will be located in the Netherlands and will be a Dutch company.2 The term “inversion” references the “upside-down” structure that results from the acquisition and headquarters relocation – the headquarters entity is smaller than the U.S.-based main entity.3

The strategic rationale for inversion usually focuses on reducing the corporate income tax burden of multinational companies.4 The United States uses a “world-wide” system of taxation in which both domestic and foreign income are combined for income tax reporting and, thus, may result in double taxation – first in the country of income origin and second in the United States.5 In the case of the Mylan–Abbott transaction, Mylan’s tax rate was reduced from 35 percent to 21 percent.6 In selecting an acquisi- tion target, U.S. companies are typically seeking suitable business locations in countries that use a regional taxation system where income is taxed only in the country where it originates.

Ireland, the UK, and the Netherlands have been prime locations for inverted multinationals because of: (1) business tax rates that are lower than U.S. rates, (2) flexibility in creating corporate

governance models (the Netherlands), (3) com- mon law legal framework (Ireland and the UK), (4) English-speaking (all three countries), and (5) offering market development opportunities in Europe (all three countries).7

The first inversion occurred in 1982 when McDermott International Inc., a construc- tion company previously domiciled (head- quartered and located) in Louisiana, moved its headquarters to Panama. In the health care system, inversion has been used mostly by pharmaceutical and medical device com- panies, such as Medtronic’s move to Ireland, Convatec Healthcare’s move to Luxembourg, Valeant Pharmaceuticals International’s move to Canada, Jazz Pharmaceuticals’ move to Ireland, Activas’ move to Ireland, and Wright Medical Group’s move to the Netherlands.8

REFEREnCES

1. Hale E. Sheppard, “Fight or Flight of US-Based

Multinational Businesses: Analyzing the Causes

for, Effects of, and Solutions to the Corporate

Inversion Trend,” Northwestern Journal of

International Law and Business 23 (2002), p. 551.

2. Michelle F. Cortez, “Mylan to Add Abbott’s

Generic-Drug Unit, Cut Tax Rate,”

www.Bloomberg.com, (2014) (accessed

March 1, 2017).

3. U.S. Treasury, “Corporate Inversion Transactions:

Tax Policy Implications,” Office of Tax Policy,

Washington, DC (2002).

4. Kimberly A. Clausing, “Multinational Firm Tax

Avoidance and Tax Policy,” National Tax Journal

(2009), pp. 703–725.

5. Joseph A. Tootle, “The Regulation of Corporate

Inversions and Substantial Business Activities,”

Virginia Tax Review 33 (2013), p. 353.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 231

expertise or capability and there is an organization that provides a good strategic fit that does have such expertise then purchase may be warranted.30 however, even a small acquired organization can be difficult to integrate into the existing culture and operations. Often it takes several years to “digest” an acquisition or to combine two organizational cultures.

Despite the difficulties of combining organizational cultures, the creation of health systems with unified ownership has been an effective strategy. health systems have been better able than health networks (looser contractually- or alliance-based strategies) to provide needed resources, competencies, and capa- bilities. Direct ownership of assets enables systems to achieve greater unity of pur- pose and develop more focused strategies, on average, than more decentralized networks. in addition, hospitals in health systems that have unified ownership generally have better financial performance than hospitals in contractually-based health networks.31

Much of the growth of for-profit hospital chains has been via a market devel- opment acquisition strategy also called horizontal integration (or buying market share). More specifically, horizontal integration is a type of market development – a method of obtaining growth across markets by acquiring or affiliating with direct competitors rather than using internal operational or functional strategies to gain/grow market share. Aggressive market development through acquisi- tion of independent hospitals has been used to build the nation’s largest private for-profit hospital chains. For example, in California the seven largest hospital systems control more than one-third of the hospitals and licensed beds in the state.32 horizontal integration and vertical integration through acquisitions and alliances have been key entry strategies for initiating rapid market growth by health care organizations.

Licensing Licensing is an agreement for rights to a technology, product, trade- mark, franchise, or exclusive geographic area (territory) developed by one organi- zation and used by another for a fee. the da Vinci laser “knife” was licensed to surgeons. Acquiring a technology or product through licensing may be viewed as an alternative to acquiring a complete company. licensing agreements obviate the need for costly and time-consuming product development and provide rapid access to proven technologies, generally with reduced financial and marketing risk to the organization. however, the licensee usually does not receive pro- prietary technology and is dependent on the licensor for support and upgrades. in addition, the upfront dollar costs may be high.

6. Cortez, “Mylan to Add Abbott’s Generic-Drug

Unit, Cut Tax Rate.”

7. Matthew Gilleard, “Inversions: The Trend

Turning Transactional Tax Planning Upside

Down,” International Tax Review 25 (2014), p. 8.

8. N. S. Rao, “Corporate Inversions and Economic

Performance.” NYU, Wagner Research Paper

No. 2566429, (September 6, 2015). Available at

SSRN: Retrieved from https://papers.ssrn.com/

sol3/papers.cfm?abstract_id=2566429.

Source: Andrew C. Rucks, PhD, Professor, School of Public Health,

University of Alabama at Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

232 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Another common form of licensing is a franchise – the granting of an exclusive territorial license assuring the licensee all rights that the licensor has with respect to a defined activity.33 this practice is most commonly found in the field of trade- mark licensing. Franchisees benefit from exploitation of the goodwill, uniform format, and uniform quality standards symbolized by the franchisor’s trademark. An example is the license agreement by and between Blue Cross and Blue Shield Association and the various regional Blue Cross and Blue Shield Plans. Blue Shield Plans are granted the right to use the Blue Cross and Blue Shield names and trademarks in the trade and corporate name and the right to use the licensed marks in the sale, marketing, and administration of health care plans and related services within a geographic area. in such agreements no other health insurance provider can encroach on the Plans’ license under the Blue Cross and Blue Shield name within the stated territory.34

Venture Capital Investment A venture capital investment is a purchase strat- egy that provides capital to an organization with a developing technology, prod- uct, or market to participate (have a share) in its growth (profitability). Venture capital investments offer an opportunity to enter or “try out” a market while keep- ing risks low. typically, venture capital investments are used to become involved in the growth and development of a small organization that has the potential to develop a new or innovative technology. By making minority investments in young and growing enterprises, organizations have an opportunity to become close to and – possibly later – enter into new technologies.35

in addition, venture capital investments are a way for new health care organiza- tions to grow. Venture capital investment in health care companies (including bio- technology, pharmaceuticals, medical devices, and health care delivery) in early 2012 fell to its lowest level since 2010; however, the number of deals remained relatively high. Venture capital investment in health care technology firms was strong throughout the decade of the 1990s but e-health (internet-related) com- panies began receiving a large share of health care venture capital beginning in 2000. During 2012 most of the venture capital investments were made in firms located in California and Massachusetts. By far the most investments were in mature companies rather than seed money for start-ups. unlike the 1990s, 2010s venture capital investments involved firms in genomic research (Warp Drive Bio), non-invasive prenatal testing (Ariosa Diagnostics), radiation therapy (Mevion Medical Systems), and endoscopic surgery (Apollo endosurgery).36

Since 2012 venture capital investments in health care companies have reached almost $150 billion and, for the first time in over a decade, accounted for a larger percentage of total venture capital than information technology. Juno therapeutics, for example, did its initial public offering (iPO) less than a year after receiving its initial venture capital funding.37 the Wall Street Journal reported that venture capital funding in health care companies rose 34 percent between 2014 and 2015 primarily in new disease treatment and other medical technologies.38

Cooperation Strategies Probably the most used – and certainly the most talked about – strategies of the late 1990s and early 2000s were cooperation strategies. A cooperation strategy

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 233

occurs when organizations agree to work together to achieve a common goal through mergers, alliances, or joint ventures. Many organizations have carried out adaptive strategies – particularly diversification, vertical integration, prod- uct development, and market development strategies – through cooperation strategies.

Mergers Mergers are similar to acquisitions. in a merger, however, the two organizations combine through mutual agreement to form a single new organi- zation, often with a new name. Mergers have been used most often in the health care segment to combine two similar organizations (horizontal integration) in an effort to gain greater efficiency in the delivery of health care services, reduction in duplication of services, improved geographic dispersion, increased service scope, restraint in pricing increases, and improved financial performance.39 the expectation of increased merger activity has materialized, especially with regard to hospitals. Since 2009, for example, the number of hospital mergers per year has doubled from around 50 to over 100 per year.40 Another area that has experienced a substantial amount of merger and acquisition activity is medi- cal devices (pacemakers, surgical blades, catheters, and so on). According to PricewaterhouseCoopers, in the fourth quarter of 2012 alone medical device mergers and acquisitions amounted to $3.4 billion.41 the other primary use of merger strategies (as well as acquisitions and alliances) in health care has been to create integrated delivery systems (vertical integration). there are four motives underlying such mergers:

1. improve efficiency and effectiveness – by combining available resources and operations it is possible to exploit cost-reducing synergies and to take fuller advantage of risk-spreading managed care opportunities.

2. enhance access – by providing a broader range of sophisticated programs and services and offering services at a greater number of sites, quality of patient care is improved.

3. enhance financial position – by gaining market share, the sole or one of the dominant providers in the region’s health delivery system is able to increase total revenue.

4. Overcome concerns about survival – by merging, a free-standing health care organization is better able to survive in an increasingly aggressive, market- driven environment where huge and powerful networks are experiencing cutbacks in managed care, Medicare, and Medicaid reimbursement.42

nevertheless, managing organizations that merge to create integrated systems has been difficult. there are several reasons why integrated health systems encounter significant obstacles in realizing the proposed benefits. the most fre- quently cited reasons relate to the difficulty of creating an effective strategic fit, giving away too much money and power with respect to governance to the local governing board, inability to achieve operating efficiencies, and experiencing difficulties in realigning resources.43

As in acquisitions, a major difficulty in a merger is the integration of two separate organizational cultures. Mergers offer a more difficult challenge than acquisitions because a totally new organization must be forged. in an acquisition,

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

234 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

the dominant culture remains and subsumes the other. in a merger, a totally new organizational culture (the way we do things) must be developed. typically, there are significant changes in the organizational structure, governance, senior and middle management, service mix, product mix, and outside relationships. therefore, merging two distinctly different corporate cultures requires a great deal of communication at all levels in the organization. Medical staff and employees should engage in a reformulation of the mission, vision, and statement of the shared values of the new organization. Work groups must be formed to address how to effectively and efficiently meet the needs of patients. As well as communi- cating internally, external communications must be given top priority. even with such efforts, truly merging the two organizational cultures into one generally takes years to complete.

Mergers and acquisitions and other forms of combination continue to be impor- tant market entry strategies for health care organizations. An environment con- ducive to large health care combinations, institutional coordination, demands for efficiency, and the continuum of care (seamless care) has fostered many of these mergers and acquisitions.

Alliances Alliances are loosely coupled agreements between two or more organizations to achieve some long-term strategic purpose not possible by the organizations separately. Alliances include configurations such as federations, consortiums, networks, and systems.44 Strategic alliances are cooperative contrac- tual agreements that go beyond normal company-to-company dealings but fall short of merger or full partnership.45 Alliances have been used to create health networks – loosely coupled or organized delivery systems. they are an attempt to strengthen the competitive position in a marketplace while maintaining the independence of the organizations involved. With all of the mergers, acquisitions, and alliances of hospitals, community blood centers are being affected as well. A new, larger hospital system with a larger footprint wants to know that blood will be available to meet all its needs. the result is aggressive merger or alliance activity among blood centers; more than two-thirds of independent blood centers in the united States are operating in the red in 2017 as is the American red Cross. Many are entering mergers or alliances to survive.

Some research suggests that organizations that develop these cooperative relationships are likely to have similar status in the marketplace and have complementary resources, competencies, and capabilities.46 two organizations may establish an alliance when each one possesses strength in a different stage of the service category value chain – for example, when one organization has expertise in service delivery and another controls the distribution channel. As an illustration, it has been found that community hospitals have success- fully used alliances to provide specific advantages for patients.47 Further, organizations may form coalitions to defray costs and share risk when they undertake high-cost capital or development-intensive initiatives. Sometimes the resources available from an alliance partner can facilitate an organiza- tion’s effort to alter its strategic position.48 For instance, research indicates that biotechnology start-up organizations, in particular, could enhance their initial performance and strategic position by establishing upstream and downstream alliances.49

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 235

in health care, the term “alliance” is sometimes used to refer to the volun- tary organizations that hospitals join primarily to achieve economies of scale in purchasing. For some, this type of alliance provides the benefit of being part of a large system, yet allows them to exist as free-standing, self-governing insti- tutions. examples of some major hospital alliances include Vizient (includes the former VhA, university health Systems, Children’s hospital Association, and novation), Premier, intalere, and health trust. note that purchasing alliances are a different type from those based on an expansion/cooperation strategy.

Although they are not mergers, strategic alliances have many of the same problems – previously unrelated cultures have to learn to cooperate rather than compete; numerous “sessions” are required to determine what will be shared and what is proprietary, and how to balance the two; and efforts must be made to maintain cooperation over time within such an informal cooperative effort. On the other hand, strategic alliances offer several opportunities, including shared learning, access to expertise not currently “owned” by the organization, strengthened market position, and direction of competitive efforts toward oth- ers instead of each other. in addition, one of the advantages of integrated net- works and strategic alliances is the increased access to resources to obtain new technology or reduce the need to purchase duplicate equipment. Further, it has been suggested that these arrangements are promising mechanisms to reduce technology-driven health care cost inflation.50 in some cases, an alliance can lead to a merger. For example, Breech Medical Center in lebanon, Missouri moved its affiliation agreement with St. John’s health System of Springfield, Missouri to a full-asset merger over a several-year period (now St. John’s Beech regional Medical Center).

As the environment becomes more unpredictable, a number of health care providers have been seeking strategic alliances. Many primary providers have turned to alliances as vehicles for providing services, soliciting physician loyalty, and reducing investments in operations.51 hospitals form alliances with phys- icians for several reasons. Alliances serve to contract with the growing number of hMOs, to pose a countervailing bargaining force for providers in the face of hMO consolidation, and to accompany hospital downsizing and restructuring efforts.52 however, strategic alliances between physicians and hospitals should be anchored in their common purpose – improving patient care. the physicians involved may not agree with the hospital in its management of facilities, staffing, and so forth. in addition, conflict may emerge as hospitals diversify into areas that compete more directly with the physicians’ own clinics, such as ambulatory care centers, and diagnostic centers. Finally, although the hospital would prefer to have many qualified physicians admitted to the staff (who could refer more patients), allied physicians would prefer to limit credentialing of outside phys- icians (controlling competition).

Joint Ventures When projects get too large, technology too expensive, internal resources, competencies, or capabilities too scarce, or the costs of failure too high for a single organization, joint ventures are often used.53 A joint venture (JV) is a contractual agreement between two or more organizations to work together and combine resources to accomplish a designated task or project. A joint venture may involve a pooling of assets or a combination of the specialized talents or skills of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

236 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

each organization. the four most common organizational forms used in health care joint ventures are:

1. Contractual agreements. two or more organizations sign a contract agree- ing to work together toward a specific objective.

2. Subsidiary corporations. A new corporation is formed (called an equity JV), usually to operate non-hospital activities.

3. Partnerships. A formal or informal arrangement in which two or more par- ties engage in activities of mutual benefit.

4. not-for-profit title-holding corporations. tax legislation enacted in 1986 allowed not-for-profit organizations to form tax-exempt title-holding corpo- rations (providing significant benefits to health care organizations engaged in real estate ventures).54

Because of the dynamism in the health care environment, hospitals engage in joint ventures to lower costs and to improve and expand services. Joint ventures can be an innovative way to generate revenues, supplement operations, and remain competitive.55 through the first half of the 2000s, the most common joint venture was between hospitals and physicians. hospital/physician joint ventures are popular because they allow the hospital to pre-empt physicians as competitors and, at the same time, stabilize the hospital’s referral base. Often joint ventures with hospitals increase physicians’ profitability. Physicians enter joint ventures with hospitals to protect their incomes and autonomy, whereas hospitals are motivated to form joint ventures as a means of controlling medical care costs and gaining influence over physician utilization of hospital services. Changes in third- party payments have created competition based on price – joint ventures enable hospitals to reduce costs and compete more effectively.56

Although there are benefits to creating joint ventures, they have their own unique set of challenges. these challenges revolve around strategy, governance, economic interdependencies, and organization. For example, the parent organi- zations may hold different strategic interests and maintaining strategic align- ment across separate organizations with different goals, market pressures, and stakeholders can be difficult. in addition, sharing governance can complicate decision making, particularly with separate reporting systems and methods for measuring success. Further, problems develop in providing services, staffing, and other resources. Finally, building a cohesive, high-performing organization with a unique culture has proven difficult for many joint ventures.57

Development Strategies A development strategy is a decision to enter a new market using internal resources through internal development, internal ventures, or reconfiguring the value chain. Diversification and vertical integration through internal development or internal venture usually take considerably longer to achieve than through acquisition (although the costs may be lower). reconfiguring the value chain finds new ways to deliver value to customers and changes the “business model.”

Internal Development Internal development uses existing organizational resources to create new products/services or enter new markets and may be most appropriate for products or services that are closely related to existing products/

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 237

services. internal development is common for growing organizations, particularly when they can exploit existing resources (especially financial), competencies, and capabilities (leveraging existing resources and other assets).

Internal Ventures Internal ventures typically set up separate, relatively indepen- dent entities (businesses) within the organization to develop new products/services or to enter new markets. internal ventures may be most appropriate for products or services that are unrelated to the current products or services.58 For instance, internal ventures may be appropriate for developing vertically integrated systems. thus, initial efforts by a hospital to develop home health care may be accomplished through an internal venture.

the number of health systems setting up their own venture funds has increased in recent years. Cedars-Sinai health System set up a fund to help start-ups and had 500 applications for 11 open spots. twenty percent of the most active inves- tors over the past five years in the area of digital health have been corporate or strategic funds. inova health System established a $100 million venture fund for personalized medicine investment. Providence Venture Fund has made seven internally financed investments since 2014.59

in 2015 venture groups invested $7.5 billion to fund start-ups, about 13 percent of all venture capital dollars. Of this amount, health care venture funds accounted for about 20 percent of the venture capital market and included some very fami- liar names such as Mayo Clinic Ventures, Partners innovation Fund (Brigham and Women’s hospital), and Flare Capital Partners (Cleveland Clinic). in total, more than 40 health care provider systems have started their own venture funds.60

Reconfiguring the Value Chain the value chain represents the fundamental way organizations create and deliver value to the customer. it represents the business model. the features of the model define the customer value proposition, cost/value formula, delivery mechanism, organization, processes, and so on.61 Dominant business models for product categories tend to emerge over time; how- ever, an organization may reconfigure the value chain by changing the activities or sequence of activities it performs and therefore change how value is delivered to the customer – change the basic business model. Value chain reconfiguration requires rethinking the ways in which existing organizations serve customers. For the most part, reconfiguration takes place in the service delivery components of the value chain (pre-service, service delivery, after-service) and thus is marketing and operations focused.

in many cases reconfiguring the value chain involves using new technology or organizations to perform activities in ways that were not possible in the past.62 For example, pharmaceutical companies might create a whole new way to pro- vide value to physicians by using podcasts for physician education. As discussed in the essentials for a Strategic thinker 6–4, “What Are health Care Platform Businesses?” platform technology offers great potential for reconfiguring the value chain in health care. Further, reconfigurations with the greatest potential for the development of a completely new business model in health care appear to be:

● new models applying a business model from another industry to health care. ● new models that are better tailored than the dominant models to meet cus-

tomers’ personal and immediate needs.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

238 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

● new models that reduce resource costs across partners. ● new models that share costly assets where sharing happens by means of

two-sided online marketplaces (demand-side and supply-side) that unlock value for both sides through platform organizations.

● new models employing usage-based pricing. ● new models that improve collaboration with partners.63

Market entry and penetration strategies coupled with reconfiguring the value chain can be powerful combinations for creating new business models and effec- tively entering the market. For example, when an organization bypasses brick- and-mortar outlets and sells its products through a website (penetration strategy – channel of distribution), it is reconfiguring the value chain.64

ESSEnTIALS foR A STRATEgIC THInkER 6–4

What Are Health care Platform Businesses?

One of the recent hallmarks of strategy for con- sumer-facing goods and services has been the rapid rise in platform businesses with their ability to dramatically outperform traditional producers. A platform business brings together supply and demand by providing a marketplace, or ecosys- tem, where producers and consumers can more effectively and efficiently interact. The platform does not control supply and demand, but does control the rules of exchange as well as how products or services are delivered or accessed (e.g. through a mobile phone). In contrast, tra- ditional pipeline businesses focus on turning raw materials into products and tend to compete on factors such as cost and quality. These businesses, such as WalMart or a traditional hospital system, implement the classic value-chain model to con- trol resources, optimize internal processes to cre- ate strategic advantage, and focus primarily on the end user as the recipient of the value created.

In a sense, platform businesses have existed for a long time; for example, commercial malls bringing together customers and retailers. Recent advances in information technology

have created the ability to build a much more efficient and scalable platform. Whether it is the Apple iPhone and its app store, the “sharing economy” in the form of Airbnb or Uber, or the “on demand” economy with such platforms as NetFlix, platform businesses introduce a funda- mentally different way of delivering value than traditional pipeline producers. As a result, they have the potential to significantly disrupt tra- ditional business. For example, Uber provides a platform for ride-sharing where producers (car owners) can find consumers (people want- ing rides). Uber controls how the platform is accessed (e.g. through mobile devices) as well as the rules of how rides are delivered (e.g. pricing). The speed with which Uber has changed the face of global transportation demonstrates the potential of modern platform businesses.

Health care has many features that make plat- form businesses an effective and efficient busi- ness model; however, it has some unique features that make the entry of platforms difficult. Factors complicating the entry of platform businesses in health care are: (a) consumers of health care are

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 239

Market Exit Strategies the reduction of scope strategies of divestiture, liquidation, harvesting, and retrenchment may be implemented quickly or incrementally over a period of time. Additionally, these strategies may result in only a partial withdrawal from the market or a complete exit. generally divestiture may be achieved fairly rapidly (or it may take some time if the price is too high or the organization does a poor job of marketing the unit to be divested) and represents a decision by the organization to “go in a different direction.” Similarly, liquidation can happen very quickly as it involves the sale of assets that have value to others (again, the process may take longer than expected if the value to others is not as great as the seller expects). retrenchment generally is carried out quickly as it is often a cost saving effort in response to declining revenue or an over extension of organizational resources. harvesting, on the other hand, is a decision to slowly leave the market primarily because the product category remains profitable, but is expected to decline or be replaced over time.

Divestiture and liquidation are generally decisions to completely leave the market. harvesting and retrenchment are generally seen as decisions to partially leave the market. reduction of scope strategies are relatively enduring and once they are implemented it is difficult to reverse the strategy or re-enter a market once exit is complete. A retrenchment strategy, although a partial market exit, may be the implementation of a redefinition of the target market(s) – reduc- ing the number of market segments served allowing for market development in more attractive market segments – or the narrowing of the product line to focus on market development for key products or services. Both harvesting and retrenchment continue operations, at least temporarily, and require an imple- mentation plan.

not the sole “purchaser” of their care, and b) large fixed-cost assets such as hospitals are necessary for consumption of certain services such as MRIs. Yet, there are many health care services where platforms can better deliver services.

Companies such as Pack Health, a digital coaching platform, are using these concepts to connect individuals diagnosed with chronic conditions with suppliers of appropriate ser- vices for these conditions in a scalable fashion. In many cases, individuals with chronic conditions are motivated to be members of the platform because services are often difficult to obtain and coordinate and the services are subsidized by their employer, insurer, or a drug company. For example, individuals diagnosed with Type 2

diabetes have to change many aspects of their lives and consume unique goods and services to manage their disease. These services may include getting an annual eye and foot exam, signing up for an exercise program, shopping for healthy foods, and accessing medications. As part of platform services, an advisor is assigned to identify and coordinate appropriate services for the platform members (patients) considering their personal limitations and situations. On the supply side, the platform allows for the inclusion of a variety of service suppliers that pay to be a part of the platform and provide discounted services to platform members.

Source: Mazi Rasulnia, PhD, President, Pack Health.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

240 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Market Entry/Exit Strategy Linkage the definition, major advantages, and disadvantages of the market entry/ exit strategies are summarized in exhibit 6–9. the adaptive and market entry/exit strategies work in tandem. they are the means for accomplishing the adaptive strategies. this relationship is demonstrated as organizations struggle with cost containment and their managed care strategies. together the adaptive (scope of the organization) and market entry/exit strategies (means to achieve that scope) are shaping the health care landscape.

EXHIBIT 6–9 Definition, Advantages, and Disadvantages of Market Entry and Exit Strategies

Market Entry Strategy Definition Major Advantages Major Disadvantages

Purchase

Acquisition Strategy to grow through the purchase of an existing organization, unit of an organization, or a product/service.

● Rapid market entry. ● Image already established. ● Performance known before

purchase.

● New business may be unfamiliar to parent.

● Takes a long time to assimilate organization’s culture.

● New management team may be required.

● High initial cost.

Licensing Acquiring or providing a valued asset (product, technology, market, equipment, etc.) through contract.

● Rapid access to proven technology.

● Reduced financial exposure. ● Access to brand name. ● Exclusive territory.

● Not a substitute for internal technical competence.

● Not proprietary technology. ● Dependent on licensor. ● Rules and regulations. ● Ongoing expense.

Venture Capital Investment

Financial investment in an organization to participate in its growth or receipt of venture capital for start-up or expansion.

● Can provide window on new technology or market.

● Lowered risk.

● Alone, unlikely to be a major stimulus of growth.

● Extended time to profitability.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 241

Market Entry Strategy Definition Major Advantages Major Disadvantages

Cooperation

Merger Combining two (or more) organizations through mutual agreement to form a single new organization.

● Uses existing resources. ● Retains existing markets and

products. ● Reduces competition.

● Takes a long time to merge cultures.

● Merger match often difficult to find.

● Big guppy eats the little guppy.

Alliance Formation of a formal partnership.

● Fills in product line gaps. ● Creates efficiencies (e.g.

bargaining power). ● Reduces competition in weak

markets. ● Stabilizes referral base. ● Shared risk.

● Potential for conflict between members.

● Limits potential markets/ products.

● Difficult to align resources. ● Governance issues.

Joint Venture Combination of the resources of two or more organizations to accomplish a designated task.

● Technological/marketing joint ventures can exploit small/large organizational synergies.

● Spreads risks.

● Potential for conflict between partners (shared vs. proprietary).

● Objectives of partners may not be compatible.

Development

Internal Development

Products or services developed internally using the organization’s own resources.

● Uses (leverages) existing resources.

● Organization maintains a high level of control.

● Presents image of developing (growth) organization.

● Time lag to break even. ● Unfamiliarity with new

markets. ● Obtaining significant gains in

market share against strong competitors may be difficult.

Internal Venture Establishment of an independent entity within an organization to develop products or services.

● Uses existing resources. ● May enable organization to

retain a talented entrepreneur. ● Isolates development from

organization’s bureaucracy.

● Mixed record of success. ● Organization’s internal climate

(culture) often unsuitable.

Reconfigure the Value Chain

Changing the activities or sequence of activities in the value chain thereby changing how value is delivered to the customer.

● New approach may not be seen as a threat by existing competitors.

● Captures a special niche of the market.

● May create a low-cost business model.

● Not always possible. ● Initially must focus on a niche

rather than the entire market. ● Must be first to recognize the

new business model.

(Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

242 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Step 5: Understand Competitive Strategy Alternatives Competitive strategies are largely independent of the adaptive and market entry/exit strategies as they concern the basis for competing in a market or ser- vice area. As shown in the decision logic in exhibit 6–2, for many organizations, where there is no significant change in scope suggested by the directional strat- egies, the development of competitive strategies follow and are driven by the directional strategies. in all cases, managers must decide the strategic posture of the organization and how the products and services will be positioned vis-à-vis those of competitors. therefore, the results of competitor analysis and internal analysis play an important role in the selection of an organization’s competitive strategies.

Strategic posture concerns the organization’s fundamental behavior within the market – defending market position, prospecting for new products and markets, or balancing market defense with careful entry into selected new product areas and markets. in addition, an organization must consciously position its products and services within a market through one of the marketwide or market segment positioning strategies (generic strategies).

Market Exit Strategy Definition Major Advantages Major Disadvantages

Fast A decision to leave all or part of the market using divesture, liquidation, or retrenchment.

● The organization can move on to more viable market/products.

● Cash increase.

● Buyers may be difficult to identify.

● May have to sell at a discount.

Slow A decision to leave the market using harvesting.

● The organization reaps any remaining profitability from the product category.

● Some resources diverted to a declining product/ market.

● Deterioration of customer service hastens the exit.

Partial Serve fewer customers; reduce geographic areas served, or reduce the product line.

● Reduce costs while remaining in the product category accruing some profit.

● May allow for market development in more attractive segments or products.

● Reduces market prestige; may be a problem if retrenching.

Complete No longer attempting to satisfy any customers; geographic areas served and product lines eliminated.

● Allows management to refocus. ● Resources may be used more

effectively for more profitable products.

● No longer a player in a viable market.

● Some disappointed loyal customers.

EXHIBIT 6–9 (Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 243

Strategic Posture Organizations may be described by how they behave within their market segments or industry – their strategic posture. research has shown that there are at least four typical strategic postures for organizations – defenders, pros- pectors, analyzers, and reactors. Defenders, prospectors, and analyzers are explicit strategies that result in a pattern of consistent and stable behavior within a market. Defender, prospector, or analyzer strategic postures may be appropriate for certain internal, market, and environmental conditions. reactors, on the other hand, do not seem to have a strategy and may behave inconsistently; however, unless an organization exists in a protected environ- ment, such as a monopolistic or highly regulated market segment, it may not be able to continue to behave as a reactor indefinitely.65 Furthermore, an organization’s strategic posture should not be left to chance. health care organizations are able to change their strategic postures to match the demands of their environmental context and improve their performance.66 therefore, strategic decision makers should examine the current market behavior, explic- itly delineate the appropriate organization strategic posture, and redirect resources and competencies needed to transform themselves into a better environmentally suited posture.

Defender Strategic Posture Stability is the chief objective of a defender strategic posture. Managers using this strategy attempt to seal off a portion of the total market to create a stable domain. A defender posture focuses on a narrow market with a limited number of products or services and aggressively attempts to protect its market segment through pricing or differentiation strategies.

Defenders are organizations that engage in little search for additional oppor- tunities for growth and seldom make adjustments in existing technologies, struc- tures, or strategies. they devote primary attention to improving the efficiencies of existing operations. thus, cost efficiency is central to the defender’s success. in addition, defenders often engage in vertical integration to protect their market, control patient flow, and create stability. Defenders grow through penetration strategies and limited product development strategies.

Prospector Strategic Posture Organizations adopting a prospector strategic posture frequently search for new market opportunities and regularly engage in experimentation and innovation. A prospector’s major capability is that of finding and exploiting new products and market opportunities. As a result, the prospector’s domain is usually broad and in a continuous state of development. Prospectors are typically in rapidly changing environments or service categories such as health care technology and frequently engage not only in diversification and product and market development expansion strategies but also divestment and retrenchment strategies. One of the principal competitive advantages of a prospector strategic posture is that of creating change within the service category/ service area. Many times these changes come about because of disruptive innova- tions as discussed in essentials for a Strategic thinker 6–5, “What Are Disruptive innovations?”

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

244 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

ESSEnTIALS foR A STRATEgIC THInkER 6–5

What Are Disruptive Innovations?

Disruptive innovations change both the way firms operate and the underlying business models they use to compete. Most indus- tries have experienced a steady stream of technological advances and process improve- ment activities that increase product qual- ity or reduce cost. Such improvements are “sustaining innovations” that are necessary to meet customers’ ever-rising expectations, but they are not “disruptive” to the underly- ing business model. Disruptive innovations allow new competitors to enter the mar- ketplace by undercutting incumbent firms’ product prices, service delivery modes, or both. In health care, there have been many sustained innovations, but relatively few dis- ruptive innovations that have significantly changed the dominant organizational forms’ business models (such as medical groups and hospitals).1

One example of a disruptive innovation in health care delivery is the introduction of freestanding ambulatory surgery centers (ASCs) in the mid-1970s.2 The number and variety of services delivered by ASCs grew rapidly through 2005.3 The expansion was fueled in part by physicians’ desire to have an ownership stake in the facilities that delivered care and be more than just a member of the medical group. As with most disruptive inno- vations, ASCs were able to compete on price but struggled to demonstrate that outcome quality was comparable to traditional hospi- tals. Over time, ASCs were able to establish legitimacy by being a more efficient deliv- ery mode and competing on quality with

traditional hospitals. As often happens after a disruptive innovation takes hold, incum- bent firms modify their business models to accommodate the new technology or process to compete. In 2017, most health care systems have established ASCs. Given the success of ASCs in improving quality, controlling cost, and increasing access to care, it begs the question: Why are there not more disruptive innovations in the health care sector?

There are three main reasons that the health care sector is resistant to disruptive innovations. First and foremost is the highly regulated nature of the industry. The health sector requires governmental permission to introduce new products or processes (see for example, Essentials for a Strategic Thinker 3–2: “What Is CON?”). The approval process cre- ates a significant barrier to new entrants and reduces the probability of disruptive innova- tions. A second factor that impedes innova- tion is the lack of consumer empowerment. Most disruptive innovations rely on consum- ers shopping for better prices on compa- rable goods. Such is not the case for most health care services because of the third-party payer system. Lastly, health care delivery is an integrated activity with providers referring patients to one another in a networked fash- ion. In effect, a new market entrant seeking to disrupt existing competitors would need consent from the competitors to gain access to consumers. Taken together, these factors impede the disruptive innovations needed to repair a health sector with unsustainable cost, quality, and access issues.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 245

Analyzer Strategic Posture the analyzer strategic posture is a combination of the prospector and defender strategic postures. the analyzer tries to balance sta- bility and change through maintaining stable operations – typically in core busi- nesses – but also searches for new opportunities to engage in market innovation in other areas. Characteristically they watch competitors and rapidly adopt those strategic ideas that appear to have the greatest potential. Analyzers tend to use penetration strategies in their stable core products and markets whereas related diversification, product development, and market development are used to enter new promising areas.

Reactor Strategic Posture the defender, prospector, and analyzer pos- tures are all proactive strategies. those who are reactors may lack a strategy or plan or may be anticipating significant external changes or strategic moves by competitors. the reactor strategic posture may be the de facto result of a lack of strategy, leading to inconsistent and unstable responses to changes in the general environment, health care system, or the market segment and its competition. in such cases, reactors perceive opportunities and turbulence; but are uncertain or not able to adapt effectively (severe limitation of financial resources may be a factor). reactors lack consistent approaches to strategy and structure and make changes primarily in response to pressures in the environ- ment, especially competitive pressures. On the other hand, a “wait and see” strategy may sometimes be appropriate, as a short-term strategy, but seldom works in today’s rapidly changing world in the longer term. reasons that organizations become reactors include:

● top management may not have clearly articulated the organization’s strategy.

● Management does not fully shape the organization’s structure and pro- cesses to fit a chosen strategy.

● Management tends to maintain the organization’s current strategy– structure relationship despite overwhelming changes in environmental conditions.67

● the organization has consciously adopted a follower strategy.

REFEREnCES

1. J. Hwang and C. M. Christensen, “Disruptive

Innovation in Health Care Delivery: A

Framework for Business-Model Innovation,”

Health Affairs 27, no. 5 (2008), pp. 1329–1335.

2. A. D. Hecht, “Creating Greater Efficiency

in Ambulatory Surgery,” Journal of Clinical

Anesthesia 7, no. 7 (1995), pp. 581–584.

3. J. Bian and Michael A. Morrisey, “HMO

Penetration, Hospital Competition, and Growth

of Ambulatory Surgery Centers,” Health Care

Financing Review 27, no. 4 (2006), p. 111.

Source: Eric W. Ford, PhD, MPH, Professor, School of Public Health,

University of Alabama at Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

246 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

● the organization anticipates a “game changing” external change or stra- tegic move by competitors and is pausing to gather information prior to attempting a more effective strategic posture.

if the internal analysis reveals that the organization has been reactive without a clear strategy or that there is a mismatch between the strategy and implementa- tion, changes will have to be made to move the organization toward a more effec- tive strategic posture. there is some evidence that reactors may be able to hone their competencies and transform themselves into more viable strategic postures over time.68

understanding the organization’s preferred strategic posture and communicat- ing it throughout the organization provides decision guidelines and will shape the culture of the organization. it is important that the strategic posture be consistent with the directional, adaptive, market entry/exit, and positioning strategies. the definition, major advantages, and disadvantages of the strategic posture strategies are summarized in exhibit 6–10.

EXHIBIT 6–10 Definition, Advantages, and Disadvantages of Strategic Postures

Strategic Posture Definition Major Advantages Major Disadvantages

Defender Focus on a narrow market with limited number of products or services and aggressively attempt to keep others out of this segment through pricing or differentiation.

● Limited set of products and services.

● Narrow market segment. ● Stable environment. ● Difficult for competitors to

enter this segment.

● Reliance on the success of narrow product line.

● Must have long/sustaining product life cycles.

● Market segment must be stable – slow change.

● May be unable to respond to major market/industry shifts.

● Difficult to enter new markets or technologies.

Prospector Continuously seek out new products and new markets.

● Always involved in “cutting- edge” developments.

● Organization shifts with changing environment.

● Allows for a rapid response to a changing environment.

● Organization is in a constant state of change.

● New products and markets always being developed.

● Multiple technologies being employed, seldom able to achieve efficiency.

● Tend to have lower profits because of continuous change.

● Tend to overextend resources. ● Tend to underutilize financial, human,

and physical resources.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 247

Positioning Strategies: Marketwide or focus Michael Porter, a well-known strategic management writer, proposes that an organization may serve the entire market using marketwide strategies or serve a particular segment of the market using focus strategies. Porter called these generic strategies because they were general strategies that any organization could use to position itself in the marketplace.69 For both marketwide and market segment focus there are two fundamental positioning strategies – cost leadership and differentiation.70

Marketwide strategies determine a product or service’s place in the market vis-à- vis competitors and position the products/services of the organization to appeal to a broad audience (the entire market). For example, a community hospital may be positioned to serve all area residents – serve a broad market with a broad range of services. these products and services, therefore, are not tailored exclusively to the needs of any special segment of the population such as children or the aged. As shown in exhibit 6–11, marketwide positioning strategies can be based on differentiation or cost leadership. thus, the community hospital may try to

Strategic Posture Definition Major Advantages Major Disadvantages

Analyzer Balance defense in some markets with selectively entering a limited number of new markets or products.

● Allows for the maintenance of a core of stable traditional products and services.

● Allows for high-risk products and services to be borne by prospectors.

● Lower investment in research and development.

● Difficult strategy to pursue. ● Must respond quickly to follow lead

of key prospectors while maintaining efficiency in core products/services.

● Complex structure (matrix). ● Management of both stable and

dynamic products and markets. ● Communication is often difficult. ● Lack of consistent approaches to

strategy and structure; make changes primarily in response to environ- mental pressures.

Reactor React to the strategies of competitors; expects stability and does not like or want change.

● Little strategic planning required (monopolis- tic or highly regulated environment).

● A follower or “wait and see” strategy allows for additional information on changing external conditions.

● Comfortable with things as they are (until they are not).

● Inconsistency in response to environmental change.

● Instability in organization. ● Organization becomes both

ineffective and inefficient. ● No effective guide for decision

making. ● Follower strategy may be ineffective,

especially with multiple products in later stages of the PLC.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

248 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

differentiate itself from other hospitals by emphasizing quality or convenience or may compete as a low-cost provider.

Market segment strategies are directed toward the particular needs of a well- defined market segment, such as pediatric oncology or women’s health, and often are called focus strategies. thus, a focus strategy identifies a specific, well-defined “niche” in the total market that the organization will concentrate on or pursue. Because of its attributes, the product or service, or the organization itself, may appeal to a particular customer group (niche) within the market. Similar to mar- ketwide strategies, focus strategies may be based on cost leadership (cost/focus) or differentiation (differentiation/focus).

Because of the complexity of medicine and the entire health care system, focus strategies are quite common. Just as physicians have specialized, the institutions within the field have tended to focus on specialized segments. examples of focus strategies are rehabilitation hospitals, psychiatric hospitals, ambulatory care cent- ers, Alzheimer’s centers, and so on. these specialty organizations may be further positioned based on cost leadership or differentiation. each of the generic strategies results from an organization making consistent choices for product/services, markets (service areas), and distinctive competencies – choices that reinforce each other.

Cost Leadership Cost leadership is a positioning strategy designed to gain an advantage over competitors by producing a product or providing a service at a lower cost. the product or service is often highly standardized to keep costs low. Cost leadership allows for more flexibility in pricing and relatively greater profit margins.

Cost leadership is based on economies of scale in operations, marketing, administration, and the use of the latest technology. Cost leadership may be used effectively as the generic strategy for any of the adaptive strategies and seems

EXHIBIT 6–11 Porter’s Matrix

Marketwide (broad)

Particular Segment Only

(narrow)

Uniqueness Perceived by the Customer

Differentiation Overall Cost Leadership

Cost/Focus

Low-Cost Position

Differentiation/Focus

Strategic Advantage

Strategic Target

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors. Copyright © 1980 by the Free Press. All rights reserved. Reprinted with permission of the Free Press, a divi- sion of Simon & Schuster Adult Publishing Group.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 249

particularly applicable to the primary providers segment of the health care sys- tem. As Porter suggests:

Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reduction from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas such as r&D, service, sales force, advertising, and so on.71

to use cost leadership effectively, an organization must be able to develop a sig- nificant cost advantage and have a reasonably large market share; however, low cost is only an advantage if the organization in fact has the lowest cost and com- petitors know they cannot match it. Sustaining lowest cost is extremely difficult to achieve without extraordinary scale, market share advantages, or unique factor cost benefits.72 With an increase in value-based reimbursement, more availability of health outcomes information, consumers bearing a higher proportion of health care costs, and high deductible health plans opting for lower-cost narrowed net- works that limit access to more expensive providers, low-cost/high-value strate- gies will continue to be viable.73 As a result, low-cost, low-price strategies within the health care system are no longer perceived as necessarily meaning low quality.

A health care system segment where cost leadership is being used successfully is in the area of long-term care. long-term care facilities are a “thin-margin busi- ness” in which profit margins range from approximately 1.2 percent to 1.7 percent. however, long-term care facilities that have been able to drive costs down while maintaining quality have enjoyed higher margins. in addition, many of these facilities have been upgraded to be more efficient and have instituted tight cost controls. Advertising has been used to keep occupancy above 95 percent, which is often required in the industry to be profitable.

Differentiation Differentiation is a strategy to make the product/service not only different but also readily distinguishable from competitors’ products/ services. thus, consumers see the service as unique among a group of similar competing services. Differentiation is of no benefit unless that difference is both valuable to buyers and capable of being sustained against competitors.74

the product or service may be differentiated by emphasizing quality, a high level of service, ease of access, convenience, reputation, and so on. A number of ways to differentiate a product or service exist, however, the attributes that are to be viewed as different or unique must be valued by the consumer. therefore, organizations using differentiation strategies rely on brand loyalty (reputation or image), distinctive products or services, and the lack of good substitutes.

the most common forms of differentiation in the health care system have been based on quality and image. Many acute care hospitals emphasize and pro- mote quality care to differentiate themselves from other hospitals in their service area. note, however, that consumers expect to receive high-quality care at every hospital, making quality a difficult differentiating factor. A “high-tech” image is another basis for differentiation among health care organizations. Affiliation with a medical school – which performs the most sophisticated procedures or uses the latest (often expensive) technology – may promote the image of “the

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

250 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

Step 6: Understand Combination Strategies Combination strategies are a number of different strategies used simultaneously to achieve goals/objectives for different products/services or service areas. Combination strategies are often used, especially in larger complex organizations, because no single strategy alone may be sufficient. in highly competitive markets, “…profitable growth comes when a company pushes out the boundaries of its core business into adjacent space.”76 Several ways have been identified to grow into an adjacent space – expand along the external value chain (penetration), grow new products and services (product development), enter new geographies

EXHIBIT 6–12 Definition, Advantages, and Disadvantages of Positioning Strategies

Positioning Strategy Definition Major Advantages Major Disadvantages

Cost Leadership Low-cost/price strategy directed toward entire market.

● Provides clear competitive advantage.

● Provides clear market position. ● Provides opportunities to

spend more than competition.

● Must obtain large volume. ● Product/service must be

standardized. ● Product/service may be viewed

as low quality. ● Relatively easy to copy in the

short run.

Differentiation Development of unique product/ service features directed toward entire market.

● Product/service viewed as unique.

● Often viewed as high quality. ● Greater control over pricing. ● Difficult to copy.

● Often difficult to adequately differentiate product or service.

● Product/service may be higher priced.

Focus – Cost Leadership

Low-cost/price strategy directed toward a particular market segment.

● Appeals to market segment seeking low price.

● May develop good relations with market.

● Low quality may be associated with low price.

● Expansion of market segment may be difficult.

Focus – Differentiation

Development of unique product/ service features directed toward a particular market segment.

● Product/service may be cus- tomized to the special needs of the segment.

● May develop close relationship with market segment.

● Market segment may remain small.

● Price will probably be high.

best possible care.” More recently, health care organizations are differentiat- ing through providing consumers with more choices – when selecting health insurance products, choosing clinicians, and facilities where they receive care.75 exhibit 6–12 presents the definition, advantages, and disadvantages of each of the positioning strategies.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 251

(market development), and address new customer segments (market develop- ment). therefore, successful strategies often mix and match approaches, deploy- ing strategies simultaneously or sequentially. For example, an organization may concurrently divest itself of one of its divisions and engage in market develop- ment in another. Perhaps the most frequent combination strategy for hospital- based systems has been vertical integration through acquisition and alliances combined with market development through acquisition (horizontal integration). the intent of these strategies has been to create regional, fully integrated systems with wide market coverage and a full range of services (often referred to as pro- viding the continuum of care).

in addition to an organization using several different strategies at once, a strat- egy may have several sequential phases. it may be necessary to “string together” several strategic alternatives as phases to implement a broader strategic shift. in a two-phase strategy, for example, an organization may employ a retrenchment strategy in phase one and an enhancement strategy in phase two. As illustrated in exhibit 6–13, the strategic manager’s vision often extends through several strate- gic alternatives or phases. Such vision helps to provide long-term continuity for the entire management team. however, the strategic manager must be aware that, in a dynamic environment, circumstances may change and later phases may have to be modified or revised to meet the needs of the unique and changing situation. Strategic management is a continuous process of assessment and decision making.

the decision logic for the formulation of the strategic plan was illustrated in exhibit 6–2. At this point, it would be useful to return to exhibits 6–1 to 6–4 to review the complete strategy formulation process. After all the strategic

EXHIBIT 6–13 Vision of Combination Strategies

SSU 1

TIME

SSU 2

SSU 3

Boundary Set by Mission/Vision

External Environment

Boundary Set by Mission/Vision

Market DevelopmentVertical Integration (forward)Market

Development

Harvesting/Divest

Market Development

Retrenchment (Product)

Year 1 5raeY4raeY3raeY2raeYyadoT

External Environment

Cash

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

252 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

alternatives have been considered, creation of a strategy map showing the desired directional, adaptive, market entry/exit, and competitive strategies together will help to ensure their consistency and fit. however, it is not enough to know the strategic logic and range of strategic alternatives. the strategic alternative (or set of alternatives) should be selected that best meets the requirements of the external environment, strengths and weaknesses of the organization, and the directional strategies. Chapter 7 will discuss methods for evaluating the strategic alternatives presented in this chapter and may lead to alterations or further refinements in strategy choice.

Chapter Summary

to understand the decisions that have to be made in strategy formulation, a stra- tegic thinking map depicting a hierarchy of strategic alternatives is useful. there are several types of strategies, and several strategic alternatives within each type are available to health care organizations. in addition, there is a general sequen- tial decision logic in the strategy formulation process. First, directional strategies must be articulated through the organization’s mission, vision, values, and goals. Second, adaptive strategies are identified, evaluated, and selected. the adaptive strategies are central to strategy formulation and delineate how the organization will expand, reduce, or maintain the scope of operations. expansion strategies include diversification, vertical integration, market development, product devel- opment, and penetration. reduction strategies include divestiture, liquidation, harvesting, and retrenchment. Finally, maintenance of scope strategies include enhancement strategies and maintaining the status quo.

the third type of strategic decision concerns the market entry/exit strategies. expansion and maintenance of scope strategies call for entering or gaining access to the desired market. Market entry strategies include acquisitions and mergers, internal development, internal ventures, reconfiguring the value chain, alliances and joint ventures, licensing, and venture capital investments. Any of the market entry strategies may be used to carry out an expansion or maintenance of scope adaptive strategy. Market exit may be quick or incremental or partial or complete depending upon the strategy and goals of the organization.

the fourth category of strategy includes the competitive strategies which are market-based strategies. Competitive strategies specify the strategic posture of the organization and position the products and services vis-à-vis competitors. the organization’s strategic posture should be carefully considered by its leadership. Strategic posture specifies the organization/market relationship and provides decision and culture guidelines for management. Strategic postures that may be adopted by an organization include defender, analyzer, prospector, or reactor (although the latter usually indicates the lack of a strategy). in addition, posi- tioning strategies (often called generic strategies) include cost leadership and differentiation, both of which can be applied as marketwide strategies or focus strategies (a market segment strategy). each of the generic strategies places dif- ferent demands on the organization and requires unique resources, competencies, and capabilities.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 253

the strategy formulation decision logic provides a sequence for making the strategic decisions. however, the selected strategic alternatives must be viewed together to ensure their fit and consistency. in addition, it is unlikely that a single strategy will suffice for an organization. Several strategic alternatives may have to be adopted and used in combination. For instance, one service category may require market development whereas a different service category may require harvesting. One division may be a defender, positioned as a cost leader and another may be a prospector, pursuing differentiation. Furthermore, several strategic alternatives may be seen as phases or sequences in a broader strategic shift. Chapter 7 presents several frameworks to help managers think about and evaluate strategic alternatives that are most appropriate given the organization’s external environment, competitive advantages and disadvantages, and direc- tional strategies.

Practical Lessons for Health Care Strategic Thinkers

1. there is a logical order to strategic decisions – directional, adaptive, market entry/exit, competitive, and implementation. these decisions range from very broad to very narrow. Planning logic (an analytical approach) suggests that making the broadest (directional strategies) first and working toward the most specific (implementation strategies) is best; however, strategy is rarely developed de novo for an organization. in reality strategic manag- ers may begin by focusing on an alternative anywhere along the decision continuum and work for decision consistency both backward and forward along the continuum (an emergent approach). in the end, alternative deci- sions for each category must be made; strategic thinking helps one see the “big picture” and the implications of the series of decisions.

2. unanticipated strategic opportunities and threats will no doubt present themselves. the hierarchy of strategic decisions can help determine the implications of these issues. knowing the alternatives, the underlying rationale, and the implications provides insight into the next strategic move.

3. Organizations rarely have just one strategy; rather they have multiple strat- egies in various stages of implementation.

THE LAngUAgE OF STRATEgIC MAnAgEMEnT: KEy TERMS AnD COnCEPTS

Acquisition Adaptive Strategy Alliance Analyzer Strategic Posture Backward Vertical integration Business Model

Combination Strategy Competitive Strategy Concentric Diversification Conglomerate Diversification Cooperation Strategy Cost leadership

Defender Strategic Posture Development Differentiation Diversification Divestiture enhancement

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

254 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

expansion of Scope Strategy Focus Focused Factory Forward Vertical integration Franchise generic Strategy harvesting horizontal integration implementation Strategy internal Development internal Venture Joint Venture

licensing liquidation Maintenance of Scope Strategy Market Development Market entry/exit Strategy Marketwide Strategy Merger Penetration Positioning Strategy Product Development Prospector Strategic Posture Purchase Strategy

reactor Strategic Posture reconfigure the Value Chain reduction of Scope Strategy related Diversification retrenchment Status Quo Strategic Posture Strategy Formulation unrelated Diversification Venture Capital investment Vertical integration

Questions for Class Discussion

1. What four types of strategies make up the strategy formulation process? Describe the role each plays in developing a strategic plan.

2. Why are the directional strategies both a part of situational analysis and a part of strat- egy formulation?

3. how is strategy formulation related to situational analysis?

4. name and describe the expansion, reduction, and maintenance of scope strategies. Which of the adaptive strategies are corporate and which are division level? under what conditions may each be appropriate?

5. explain how an understanding of an organization’s strategic alternatives provides structure for strategic thinking.

6. What is the difference between related diversification and product development? Provide examples of each.

7. What is a market-driven or focused factory strategy? identify some organizations that have employed this type of market development strategy.

8. Many health care organizations have engaged in vertical and horizontal integration. What is the rationale for these strategies?

9. Describe vertical integration in terms of patient flow.

10. explain the difference between an enhancement strategy and a status quo strategy.

11. how is market development different from product development? Penetration? Provide examples of each.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 255

notes 1. Warnock Davies, “understanding Strategy,” Strategy

& Leadership 28, no. 5 (September–October 2000), pp. 25–30.

2. richard Farson, Management of the Absurd (new York: Simon & Schuster, 1996), p. 21.

3. g. tyge Payne, John D. Blair, and Myron D. Fottler, “the role of Paradox in integrated Strategy and Structure Configurations: exploring integrated Delivery in health Care,” in John D. Blair, Myron D. Fottler, and grant t. Savage (eds), Advances in Health Care Management (new York: elsevier Science, 2000), pp. 109–141.

4. roger Martin, “how Successful leaders think,” Harvard Business Review 85, no. 6 (June 2007), pp. 60–67.

5. Bruce C. Vladeck, “Viewpoint: Paradigm lost: Provider Concentration and the Failure of Market theory,” Health Affairs 33, no. 6 (2014), pp. 1083–1087.

6. liyohiro Oki, “What is the ideal Diversification Strategy? reconsideration of Diversification Strategy research of rumelt,” Annals of Business and Administrative Science 12, no. 4 (2013), pp. 199–212.

7. Jay greene, “Diversification, take two,” Modern Healthcare 23, no. 28 (1993), pp. 28–32. See also Shao- Chi Chang and Chi-Feng Wang, “the effect of Product Diversification Strategies on the relationship between international Diversification and Firm Performance,” Journal of World Business 42, no. 1 (2007), pp. 61–79.

8. leslie e. Palich, laura B. Cardinal, and C. Chet Miller, “Curvilinearity in the Diversification–Performance linkage: An examination of over three Decades of research,” Strategic Management Journal 21, no. 2 (February 2000), pp. 155–174.

9. todd Creasy and Jerry kinard, “health Care Mergers and Acquisitions: implications of robbers Cave

realistic Conflict theory and Prisoner’s Dilemma game theory,” Health Care Manager 32, no. 1 (2013), pp. 58–62.

10. Palich, Cardinal, and Miller, “Curvilinearity,” and Michael S. gary, “implementation Strategy and Performance Outcomes in related Diversification,” Strategic Management Journal 262 (2005), pp. 643–664.

11. Myron D. Fottler, grant t. Savage, and John D. Blair, “the Future of integrated Delivery Systems: A Consumer Perspective,” in John D. Blair, Myron D. Fottler, and grant t. Savage (eds), Advances in Health Care Management (new York: elsevier Science, 2000), pp. 15–32.

12. ibid. 13. lawrence C. Baker, “Vertical integration: hospital

Ownership of Physician Practices is Associated with higher Prices and Spending,” Health Affairs 33, no. 6 (2014), pp. 756–763.

14. Miriam J. laugeson and george France, “integration: the Firm and the health Care Sector,” Health Economics, Policy and Law 9, no. 3 (2014), pp. 295–312.

15. Patrick D. Shay, Stephen S. Mick, and Craig garner, “Post-Acute Care and Vertical integration after the Patient Protection and Affordable Care Act,” Journal of Healthcare Management 58, no. 1 (2013), pp. 27–28.

16. Hospital Statistics, 2015 Edition (American hospital Association, Chicago, il, 2015).

17. gloria J. Bazzoli, Benjamin Chan, Stephen M. Shortell, and thomas D’Aunno, “the Financial Performance of hospitals Belonging to health networks and Systems,” Inquiry 37, no. 3 (2000), pp. 234–252.

18. VhA, inc. and Deloitte & touche llP, Provider 2020: Strategies for Differentiation in an Uncertain Environment (irving, tX and Detroit, Mi: VhA, inc. and Deloitte &

12. Compare and contrast a divestiture strategy with a liquidation strategy.

13. Which of the market entry strategies provides for the quickest entry into the market? the slowest?

14. What is strategic posture? how does a decision concerning the strategic posture help create decision guidelines for management and affect the organization’s culture?

15. explain Porter’s generic strategies. how do they position the organization’s products and services in the market?

16. how might a retrenchment strategy and a penetration strategy be linked together? What are some other logical combinations of strategies? how may a combination of strategies be related to vision?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

256 StrAtegIc mAnAgement of HeAltH cAre orgAnIzAtIonS

touche, llP, 2012), pp. 1–9. See also Fottler, Savage, and Blair, “the Future of integrated Delivery Systems,” p. 18.

19. Carey thaldorf and Aaron liberman, “integration of health Care Organizations: using the Power Strategies of horizontal and Vertical integration in Public and Private health Systems,” Health Care Manager 26, no. 2 (2007), pp. 116–127.

20. Stephen S. Mick and Douglas A. Conrad, “the Decision to integrate Vertically in health Care Organizations,” Hospital & Health Services Administration 33, no. 3 (Fall 1988), p. 352. See also Frank t. rothaermel, Michael A, hitt, and lloyd A. Jobe, “Balancing Vertical integration and Strategic Outsourcing: effects on Product Portfolio, Product Success, and Firm Performance,” Strategic Management Journal 27, no. 4 (2006), pp. 1033–1056.

21. leemore S. Dafny and thomas h. lee, “health Care needs real Competition,” Harvard Business Review 94, no. 12 (2016), p. 78.

22. regina e. herzlinger, Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America’s Largest Service Industry (reading, MA: Addison-Wesley Publishing Company, 1997), p. xxi.

23. “Do Specialty hospitals Promote Price Competition?” Medical Benefits 23, no. 3 (2006), pp. 3–4.

24. Banerjee and Sampada kumar Dash, “effectiveness of e-Detailing As An innovative Pharmaceutical Marketing tool in emerging economies: Views of health Care Professionals in india,” Journal of Medical Marketing: Device, Diagnostic, and Pharmaceutical Marketing 11, no. 3 (2011), pp. 204–214.

25. Caterina Moschieri and Johanna Mair, “research on Corporate Divestitures: A Synthesis,” Journal of Management and Organization 14, no. 4 (2008), pp. 399–422.

26. “Why ChS Cashed Out of home health,” Nashville Business Journal (October 21, 2016), p. 8 and “Struggling ChS Sells System,” Nashville Business Journal (november 25, 2016), p. 6.

27. Matthias Brauer and Markus Schimmer, “Performance effects of Corporate Divestiture Programs,” Journal of Strategy Management 3, no. 2 (2010), pp. 84–109.

28. Donald n. Sull, “Strategy as Active Waiting,” Harvard Business Review 83, no. 9 (2005) p. 129; Don Moyer, “Active Waiting,” Harvard Business Review 85, no. 7/8 (2007), p. 196.

29. larry Selden and geoffrey Colvin, “M&A needn’t Be a loser’s game,” Harvard Business Review 81, no. 6 (2003), p. 75.

30. Dennis Carey (Moderator), “A CeO roundtable on Making Mergers Succeed,” Harvard Business Review 78, no. 3 (May–June 2000), pp. 145–154.

31. Bazzoli et al., “the Financial Performance of hospitals Belonging to health networks and Systems,” pp. 234–252.

32. California health Care Foundation, www.chcf.org/ California Facts and Figures, 2012.

33. Jeffrey F. Allen, “Franchise issues – exclusivity of territory,” Inquiry 39, no. 1 (2000), pp. 8–11.

34. ibid. 35. edward B. roberts and Charles A. Berry, “entering

new Businesses: Selecting Strategies for Success,” Sloan Management Review 25 (Spring 1985), p. 7.

36. www.entrepreneurship.org and www.medcitynews. com/2011.

37. http://pitchbook.com/news/articles/record-41b-of- series-a-capital-invested-in-healthcare-in-2015.

38. “Venture Capital Dispatch: the Daily Startup: health Care Venture investment Sets records in 2015,” Wall Street Journal (January 25, 2016), p. 1.

39. Sharon roggy and ron gority, “Bridging the Visions of Competing Catholic health Care Systems,” Health Care Strategic Management 11, no. 7 (1993), pp. 16–19.

40. Dafny and lee, “health Care needs real Competition,” pp. 76–87. Data quoted from American hospital Association and irving levin Associates.

41. Danielle Fugazy, “Medical Devices Drive health Care M&A,” Mergers and Acquisitions 48, no. 6 (2013), pp. 26–32.

42. thomas P. Weil, “Management of integrated Delivery Systems in the next Decade,” Health Care Management Review 25, no. 3 (Summer 2000), pp. 9–23.

43. ibid. 44. howard S. Zuckerman and Arnold D. kaluzny,

“Strategic Alliances in health Care: the Challenges of Cooperation,” Frontiers of Health Services Management 7, no. 3 (1991), p. 4.

45. Michael e. Porter, The Competitive Advantage of Nations (new York: Free Press, 1990), p. 65.

46. Seungwha (Andy) Chung, harbir Singh, and kyungmook lee, “Complementarity, Status Similarity, and Social Capital as Drivers of Alliance Formation,” Strategic Management Journal 21, no. 1 (January 2000), pp. 1–22.

47. Mary helen McSweeney-Feld, Suzanne Discenza, and george DeFeis, “Strategic Alliances and Customer impact: A Case Study of Community hospitals,” Journal of Business and Economics Research 8, no. 9 (2010), pp. 13–21.

48. toby e. Stuart, “interorganizational Alliances and the Performance of Firms: A Study of growth and innovation rates in a high-technology industry,” Strategic Management Journal 21, no. 8 (August 2000), pp. 791–811.

49. Joel A. C. Baum, tony Calabrese, and Brian S. Silverman, “Don’t go it Alone: network Composition and Startups’ Performance in Canadian Biotechnology,” Strategic Management Journal 21, no. 3 (March 2000), pp. 276–294.

50. leonard h. Friedman and James B. goes, “the timing of Medical technology Acquisition: Strategic Decision Making in turbulent environments,” Journal of Healthcare Management 45, no. 5 (September–October 2000), pp. 317–330.

51. Sandra Pelfrey and Barbara A. theisen, “Joint Ventures in health Care,” Journal of Nursing Administration 19, no. 4 (April 1989), p. 39.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 6 IdentIfyIng StrategIC alternatIveS 257

52. lawton r. Burns, gloria J. Bazzoli, linda Dynan, and Douglas r. Wholey, “impact of hMO Market Structure on Physician–hospital Strategic Alliances,” Health Services Research 35, no. 1 (April 2000), pp. 101–132; Michael A. Morrisey, Jeffery Alexander, lawton r. Burns, and Victoria Johnson, “the effects of Managed Care on Physician and Clinical integration in hospitals,” Medical Care 37, no. 4 (1999), pp. 350–361.

53. roberts and Berry, “entering new Businesses,” p. 6. 54. Pelfrey and theisen, “Joint Ventures in health Care,”

pp. 39–41. 55. ibid., p. 42. 56. robert Pitts and David lei, Strategic Management:

Building and Sustaining Competitive Advantage, 3rd edn (Mason, Oh: thomson Southwestern, 2003), p. 346.

57. James Bamford, David ernst, and David g. Fubini, “launching a World-Class Joint Venture,” Harvard Business Review 82, no. 2 (2004), pp. 90–100.

58. Marshall W. Van Alstyne, geoffrey g. Parker, and Sangeet Paul Choudary, “Pipelines, Platforms, and the new rules of Strategy,” Harvard Business Review 94, no. 4 (2016), p. 56.

59. examples adapted from Beth kutscher, “hospitals Discover their inner Venture Capitalist,” Modern Healthcare (April 9, 2016) at www.modernhealthcare. com/.

60. Mary Jo Potter and rick Wesslund, “Provider Venture Capital Funds investing in innovation,” Healthcare Financial Management 70, no. 5 (2016), pp. 50–59. Data reported in this article obtained from thomson reuters published by PwC.

61. Van Alstyne et al., “Pipelines, Platforms, and the new rules of Strategy,” p. 56.

62. David J. Bryce and Jeffrey h. Dyer, “Strategies to Crack Well-guarded Markets,” Harvard Business Review 85, no. 5 (May 2007), p. 91.

63. Van Alstyne et al., “Pipelines, Platforms, and the new rules of Strategy,” p. 56.

64. Bryce and Dyer, “Strategies to Crack Well-guarded Markets,” pp. 87–88.

65. raymond e. Miles, Charles C. Snow, Alan D. Meyer, and henry J. Coleman Jr., “Organizational Strategy, Structure, and Process,” Academy of Management Review 3, no. 3 (1978), pp. 546–562.

66. Monique Forte, James J. hoffman, Bruce t. lamont, and erich n. Brockmann, “Organizational Form and environment: An Analysis of Between-Form and Within-Form responses to environmental Change,” Strategic Management Journal 21, no. 7 (July 2000), pp. 753–773.

67. Miles et al., “Organizational Strategy, Structure, and Process,” pp. 546–562.

68. Forte et al., “Organizational Form and environment,” pp. 753–773.

69. For a review of research on Porter’s generic strategies, see Colin Campbell-hunt, “What have We learned About generic Competitive Strategy? A Meta-Analysis,” Strategic Management Journal 21, no. 2 (February 2000), pp. 127–154.

70. Michael e. Porter, Competitive Strategy (new York: Free Press, 1980), p. 35.

71. ibid. 72. george Yip and gerry Johnson, “transforming Strategy,”

Business Strategy Review 18, no. 1 (Spring 2007), p. 12. 73. Dafny and lee, “health Care needs real Competition,”

pp. 76–87. 74. Yip and Johnson, “transforming Strategy,” p. 13. 75. Dafny and lee, “health Care needs real Competition,”

pp. 82–83. 76. Chris Zook and James Allen, “growth Outside the

Core,” Harvard Business Review 81, no. 12 (2003), pp. 66–73.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:03:21.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 Evaluation of Alternatives and Strategic Choice

Why Evaluation of Alternatives and Strategic Choice Are Important

The quote by Alvin Toffler is particularly relevant to those making strategic deci- sions. Quantitative as well as qualitative data help inform strategic decisions; how- ever, the most important decisions made in organizations, the strategic choices, are fundamentally judgments – informed opinions about what the data actually means.

Toffler further suggests that although managers may collect and analyze all the data they can to support the decision-making process, they still have to question underlying assumptions, see the larger context, and use their best judgment. For instance, one set of statistical data can often be used to make a case for either side of an issue. Similarly, there really are no facts, just interpretations. The same set of “facts”

“You can use all the quantitative data you can get but you still have to distrust it and use your own intelligence and judgment.”

—Alvin ToFFler, AMericAn AuThor AnD FuTuriST

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

260 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

may mean very different things depending on the interpretation – interpretation that is always colored by beliefs, values, and biases. Finally, by the time hard-data-driven information reaches the strategic decision maker, it is likely a day late and has been organized, summarized, sterilized, or otherwise manipulated by someone.

Many times a decision has to be made by the strategist despite a lack of data indicating that one alternative is clearly superior to another alternative. in these commonly occurring cases, no substitute exists that is better than using one’s intelligence, experience, and judgment. What will help strategic manag- ers make improved judgments are innovative ways to organize the data so that it better reveals its implications and, thus, better informs judgment and opinion. Data organization may be accomplished by arranging information into tables and strategic “thinking maps.” These constructs aid strategic man- agers by enabling them to see relationships, discern trends, derive meaning from conflicting data, brainstorm alternatives, and so on. it is not so much the data itself that guides decisions, rather the organization and presentation of the data informs judgment.

use concepts in this chapter to organize data and make judgments for better strategic choices!

Strategic Management Competency After completing this chapter you will be able to develop a comprehensive strat- egy for a health care organization.

A Process for the Evaluation of the Alternatives

Fundamental to strategic management is the need to change strategies over time.1 There are several analytical frameworks or maps that may be used to guide strate- gic thinking concerning the appropriate strategic alternatives for an organization.

learning objectives

After completing the chapter you will be able to: 1. Explain the rationale underlying the strategic thinking maps used to evaluate strate-

gic alternatives. 2. Discuss the methods for the evaluation of adaptive strategic alternatives for a health

care organization. 3. Discuss the external conditions and internal resources, competencies, and capabili-

ties most suited for the market entry/exit strategic alternatives. 4. Discuss the external conditions and internal resources, competencies, and capabili-

ties appropriate for the strategic posture and generic positioning alternatives. 5. Articulate the role of the service delivery and support strategies.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 261

These strategic thinking maps incorporate the results of external and internal analyses, as well as the directional strategies. contemplative strategic thinking to understand the internal requirements and external conditions of strategic alterna- tives is essential to assure a coherent and integrated strategy. exhibit 7–1 provides an organized five-step process for using the analytical strategic thinking maps to develop a complete strategy for a health care organization.

EXHIBIT 7–1 Process for Strategy Formulation

Step 1 – Link Strategy with Situational Analysis

Step 2 – Evaluate and Select Adaptive Strategies

Step 3 – Evaluate and Select Market Entry/Exit Strategies

Step 4 – Evaluate and Select Competitive Strategies

Step 5 – Synthesize and Identify Implications of Strategy Choices – Strategy Map

Although the evaluation of strategic thinking maps introduced in the process for strategy formulation fine-tunes the manager’s perspective and organizes thinking, ultimately, the strategic manager must make the decision. Strategic man- agers need to understand the risks, make judgments, and commit the organization to some course of action. Therefore, the analytical strategic thinking maps cannot be used to obtain “answers,” but they enable strategists to gain perspective and insight. often no one right answer emerges. As management philosopher and author Peter Drucker has pointed out, “it is a choice between alternatives. it is rarely a choice between right and wrong. it is at best a choice between ‘almost right’ and ‘probably wrong’ – but much more often a choice between two courses of action neither of which is probably more nearly right than the other.”2 Strategic thinking maps help to structure the thought processes of decision makers. it is important that managers think strategically and, almost as important, have

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

262 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

some imagination and employ sound judgment. To have the proper perspective, strategic managers must be involved with customers, vendors, and employees in the organization, talking to people to gain a real feel for the culture, competitive advantage, and organizational opportunities and threats.

Step 1: Link Strategy with Situational Analysis Situational analysis – external, service area competitor, and internal analyses, as well as the development of the directional strategies – provides a critical foun- dation for the development of strategy. conclusions of these analyses are criti- cal inputs to the analysis processes and must “drive” the strategy alternatives decisions. in fact, a final test of the strategic choices, as demonstrated by the checklist in exhibit 7–2, is that the strategies selected by an organization address external issues, draw on competitive advantages or fix competitive disadvan- tages, keep the organization within the parameters of the mission and values, move the organization toward the vision, and make progress toward achieving one or more of its strategic goals. This checklist procedure is a significant part of the strategic thinking process and helps to assure consistency of analysis and action. each selected strategy should be tested against these questions. Strategies that do not have a “yes” in each column should be subject to additional scrutiny and justification.

EXHIBIT 7–2 Checklist for Linking Strategic Alternatives with Situational Analysis

Strategic Alternative

Addresses an External Issue?

Draws on a Competitive Advantage or Fixes a Competitive Disadvantage?

Fits with Mission, Values?

Moves the Organization Toward the Vision?

Achieves One or More Strategic Goals?

Strategy 1 Yes Yes Yes Yes Yes

Strategy 2 Yes Yes Yes Yes Yes

Strategy 3 Yes Yes Yes Yes Yes

Step 2: Evaluate and Select Adaptive Strategies As discussed throughout chapter 6, once the directional strategies have been developed, consideration is given to the adaptive strategies. The adaptive strat- egies are central to strategy formulation and are the broadest interpretation of the directional strategies. This level of strategic decision making specifies whether the organization wants to grow (expansion of scope), become smaller (reduction of scope), or remain about the same (maintenance of scope). once the decision has been made to grow, reduce, or maintain scope, the methods to accomplish expan- sion, reduction, or maintenance of scope (diversification, divestiture, enhance- ment, and so on) must be formulated.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 263

re-evaluation of the adaptive strategies is an ongoing activity as new external forces emerge and provide fresh opportunities or threaten the viability of the current strategy. For example, Academic health centers (Ahcs), although able to maintain their unique research focus for decades, have increasingly felt the pressures of change. Ahcs, accustomed to having the most difficult cases referred to them for treatment, have not been a major part of “managed care” but rather dealt with these high-cost patients to further their unique mission. Ahcs are preparing to deal with an array of complicated issues as they look to the future. recently the Association of Academic health centers (AAhc) identified 10 “dis- rupters” its members must deal with in the future. These are: changing market forces, consumer empowerment, disease patterns, entrepreneurism, globalization, politics and policy, population demographics, science, societal needs and values, and technology.3

Several constructs help strategic managers to think about adaptive strategic decisions. As expressed previously, these constructs help to show relationships of the organization to its markets and competitors; they do not make the deci- sion. however, some methods are available to evaluate the adaptive strategies including:

● SWoT Analysis – Strengths, Weaknesses, opportunities, and Threats. ● external/internal Strategy Matrix. ● Product life cycle (Plc) Analysis. ● Boston consulting Group (BcG) Portfolio Analysis. ● extended Portfolio Matrix Analysis. ● Strategic Position and Action evaluation (SPAce). ● Program evaluation.

SWOT: Strengths, Weaknesses, Opportunities, Threats Analysis SWoT (strengths, weaknesses, opportunities, and threats) analysis has been popular as a way to display pertinent external issues and internal strengths and weaknesses. SWOT analysis is a systematic investigation to consider an organization’s internal (strengths and weaknesses) and external (opportunities and threats) issues and display them in a two-by-two matrix. SWoT is one of the most widely used stra- tegic planning tools. one study noted that SWoT is a part of virtually every case analysis used in the teaching of strategic management and  business policy.4 A SWoT analysis is typically displayed as illustrated in exhibit 7–3 and developed in brainstorming sessions of participants familiar with the organization and its situation. SWoT analysis can provide an initial overview of an organization’s external and internal situation.

Methods for identifying an organization’s opportunities and threats were dis- cussed in chapter 2, including trend identification and extrapolation, solicitation of expert opinion, dialectic inquiry, stakeholder analysis, scenario writing, and future studies. A method for determining organizational strengths and weak- nesses was discussed in chapter 4 and focused on identifying resources, com- petencies, and capabilities found in the organization’s value chain.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

264 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

A SWoT analysis is easy to develop; however, it does not provide much insight into what strategy decisions might result from the list of strengths, weaknesses, opportunities, and threats. it has even been suggested that in certain circum- stances, such as moving from a deregulated to a highly regulated (or vice versa) health system, where the future is uncertain, SWoT may be less applicable.5 As discussed in chapter 2, the designation of external issues as opportunities or threats is often arbitrary, and opportunities are commonly presented as strategic alternatives rather than independent external issues affecting the organization; however, those strategists that are able to identify true external opportunities (events/issues occurring in the external environment over which no one has control) prior to or earlier than others, have the possibility of seizing an issue and turning it into a competitive advantage. Additionally, it is important to note that external issues may be both opportunities and threats. Furthermore, SWoT analysis has no provision for prioritizing or evaluating the internal strengths or weaknesses as being competitively relevant – competitive advantages or competi- tive disadvantages. As a result, SWoT analysis should only be used as an initial overview of the organization’s situation or to provide a foundation for more in- depth analysis.

External/Internal Strategy Matrix rather than just listing strengths, weak- nesses, opportunities, and threats, decision makers should match the external issues identified in the general environment, health care system, and service area as discussed in chapters 2 and 3 with long-term and short-term competi- tive advantages and disadvantages (discussed in chapter 4). An external/internal strategy matrix juxtaposes external issues with internal competitive advantages and disadvantages. exhibit 7–4 shows such a strategic thinking map that is useful

EXHIBIT 7–3 SWOT Analysis

1. 2. 3. 4. 5. 6. 7. 8.

Strengths

Internal Analysis

External Analysis

1. 2. 3. 4. 5. 6. 7. 8.

Weaknesses

1. 2. 3. 4. 5. 6. 7. 8.

Opportunities 1. 2. 3. 4. 5. 6. 7. 8.

Threats

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 265

EXHIBIT 7–4 External/Internal Strategy Matrix EXTERNAL ISSUES

General Environmental Issues 1. Population over 65

expanding

2. Economy continues to grow

3. Decreasing regulations of business

Health Care System Issues 1. Declining

reimbursements

2. Industry continues to grow

3. Lack of trained health care workers

Service Area and Competitive Issues 1. Increasing number of

competitors

2. CON required

3. Increasing number of retirees

INTERNAL ADVANTAGES & DISADVANTAGES

Long-Term Competitive Advantages 1. Brand Name

2. Dominate Market Share

3. Financial Strength

Strategies 1. Product Development

– serving over 65 years of age market

2. Market Development – geographic

expansion

Strategies 1. Enhancement

– efficiency

2. Enhancement – increase training

Strategies 1. Penetration

– increase advertising

2. Alliance with existing provider

3. Product Development – serving over 65 years

of age market

Short-Term Competitive Advantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Long-Term Competitive Disadvantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Short-Term Competitive Disadvantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

for matching external issues with internal competitive advantages and disadvan- tages. This approach, utilizing the complete results of a comprehensive external and internal analysis, better fosters strategic thinking concerning adaptive strat- egy alternatives.6

in the external/internal strategy matrix, adaptive strategic alternatives are suggested by the interactions of the seven sets of variables (long- and short-term competitive advantages, long- and short-term competitive disadvantages, and

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

266 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

general, health care, and competitive issues). in this example, the primary focus is the adaptive strategic alternatives, but this analysis could also be applied to the development of any type of strategy. in practice, particularly in open discussion sessions, some of the alternatives developed through the strategy matrix may be adaptive, market entry/exit, competitive, or value-adding service delivery and support strategies.

The strategies developed by matching the long-term competitive advantages with the general environment, health care system, service area, and competitive issues represent the primary adaptive strategies of an organization. The long- term competitive advantages are valuable, rare among competitors, difficult to duplicate, and sustainable. The short-term competitive advantages may soon be duplicated, particularly if the service areas and competitors are undergoing change, but these advantages must be sustained for as long as possible. The long- term competitive disadvantages represent areas where internal “fix-it” strategies will have to be addressed because other organizations provide a competitive advantage that is valuable to stakeholders. The short-term competitive disad- vantages are fixable but still represent a significant impediment to success. The long-term competitive advantage row as well as some key factors in the general environment, health care system and service area have been completed to illus- trate the use of the external/internal strategy matrix (note that both the general environment and service area factors suggest product development serving those over 65 years of age).

Product Life Cycle Analysis Product life cycle (PLC) analysis is a method, and typically a graphic representation, used to develop strategy alternatives based on the principle that all products/services progress through distinct stages of introduction, growth, maturity, and decline. These stages relate pri- marily to the changing nature of the marketplace, the product development process, and the types of demands made on management. Moreover, the nature of the product/service and industry may influence the life cycle stages. For example, in the medical technology industry innovation is strongly influ- enced by product/service life cycle stages. in addition, individual curves can be influenced by factors such as patent protection and barriers to entry.7 in evaluating product life cycles, the evolution of service category sales and prof- its (or a surrogate for sales such as the number of subscribers, hospital visits, or competitors) is tracked over time. This evolution will have strategic impli- cations for the organization. A typical Plc and the attributes of each stage are presented in exhibit 7–5.

Products and services have an introductory stage during which sales are increasing yet profits are negative. in this stage, there are few competitors (pros- pectors), prices are usually high, promotion is informative about the product category, and there are limited distribution outlets. in the growth stage, sales and profits are both increasing and, as a result, competing organizations enter the market (analyzers) to participate in the growth. During this stage, prices are still high but may begin to decline, promotion is directed toward specific brands, and there is rapid growth in the number of outlets.

The maturity stage of the Plc marks the end of rapid growth and the begin- ning of consolidation. in addition, market segmentation (defining narrower and

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 267

narrower segments of the market) occurs. in this stage, prices have stabilized or declined, price promotion becomes common, distribution is widespread, and competitors are concerned with maintaining market share (defenders). in the decline stage, total revenues and profits for the product or service are declining and will likely continue to decline over the long term.

Tracking the enrollment of health maintenance organizations (hMos) illus- trates the Plc (see essentials for a Strategic Thinker 7–1, “What is Managed care?” for an overview of managed care). hMos had an extended introductory period. The first hMo prototype, the ross-loos clinic in los Angeles, became operational in 1929. Forty years later, in 1970, there were only 33, generally not- for-profit, hMos in the united States serving approximately 3 million enrollees.8 The boost that pushed hMos from introduction to growth included the passage of the health Maintenance organization and resources Act of 1974. in addition to the federal funding for development and growth, hMos sought additional capital in the early 1980s. one method to accomplish this was to convert from a not-for- profit to a for-profit hMo.

EXHIBIT 7–5 The Product Life Cycle

Source: Adapted from Philip Kotler and Kevin Lane Keller, Marketing Management, 15th edn (New York: Simon & Schuster, 2016), p. 349. Reprinted by permission of Simon & Schuster.

Stage 1 Introduction

Stage 2 Growth

Stage 3 Maturity

Stage 4 Decline

Sales/Revenue

Pro�t

Time0

Dollars

PLC Stage Characteristics

DeclineMaturityGrowthIntroduction

Sales/Revenue DecliningSlow growthRapid growthLow Pro�ts LowHighPeak levelsNegative Competitors DecliningManyGrowingFew Cost/Customer LowLowAverageHigh Capital Access MinimalDebt/internalEquity/debtVenture

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

268 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

ESSEnTIALS for A STrATEgIC THInkEr 7–1

What is managed Care?

Managed care refers to health insurance plans or organizations that contract with doctors, hospitals, clinics, pharmacies, and other health care providers to control and efficiently man- age the costs and quality of the health care of plan enrollees. The contracted providers (hospitals, physicians, and so on) are called the plan’s network.1 Managed care organizations control cost and quality by negotiating reim- bursement rates and standards of care with network providers (often controlling where plan members may receive care) and shar- ing some costs (deductibles, copay, etc.) with members.

Most Americans who have health insurance are enrolled in one of several types of managed care health insurance plans. The most com- mon types are Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and Point-of-Service Plans (POS). Over 60 percent of those in managed care plans are in PPOs and almost 36 percent are enrolled in HMOs.2 Managed care plan enrollees are spread across commercial plans, Medicaid managed care plans, Medicare Advantage plans, and the military. The largest major national health plans are United Health Group, Anthem, Aetna, CIGNA HealthCare, Health Care Services Corporation, and Humana.3

Types of plans:

HMOs

Although there are several types of HMOs, the commonality among them is that HMOs are insurance companies and therefore “under- write” the claims. Thus, they are ultimately

responsible for the cost of covered medical care expenses provided to an enrollee.4 HMOs typically require a primary care physician (PCP) to manage the care of individual enrollees, including providing referrals to specialists within the HMO network when necessary. PCPs are typically internal medicine or fam- ily physicians operating practices as a part of the HMO network. Medical costs incurred by enrollees outside of the HMO’s network are typically not covered.

PPOs

These organizations typically are not insurance companies and, therefore, do not underwrite the costs of care. Rather, PPOs are coordinating organizations primarily for employer-based health insurance. A PPO negotiates with pro- viders to create a network of “preferred pro- viders” that are willing to provide cost savings to members of the plan.5 These plans most often do not require a PCP to manage care and no refer- rals are required to see a specialist.

POSs

These plans have attributes of both HMOs and PPOs and usually provide wider provider choice options than HMOs (enrollees may seek care out-of-the-network); however, such plans frequently require more-out-of-pocket costs to the consumer for out-of-network services.6 Most often the plans require PCPs to manage care within the network; however, subscribers of the plan can choose to stay in the network or receive care out of the network with a PCP referral.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 269

REFERENCES

1. Michael Bihari, “What’s the Difference between HMO and PPO Health Insurance?” www.verywell.com/ understanding-managed-care-1739066.

2. www.mcol.com/major_plans.

3. Ibid.

4. Michael, A. Morrisey, Health Insurance (Chicago,

IL: Health Administration Press, 2008) pp. 15–16.

5. Ibid.

6. Ibid.

exhibit 7–6 shows the national hMo enrollment from 1987 through 2016. The hMo enrollment growth stage extends through 1999 and then enters the mature stage. By the late 1990s, many urban markets experienced high managed care penetration, signifying local maturity. hMo consolidation in major markets con- tinued and company strategies were typical of market maturity – price compe- tition, extensive distribution development, aggressive promotion, and product differentiation. in addition, few new players were entering the market in these areas. confusing the picture are the rural and non-urban markets that continue to adopt managed care very slowly because of a lack of economies of scale and an insufficient number of providers. in addition, few new players are entering the market in these areas. overall enrollment shows some growth. in fact by 2016 total hMo enrollment in the united States, according to the Kaiser Family Foundation, was just over 93.4 million indicating that the life cycle remains in the maturity

19 87

19 88

19 89

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

20 09

20 10

20 11

20 12

20 13

20 14

20 15

20 16

0

1

2

3

4

5

6

7

8

9

100 Millions National HMO Enrollment EXHIBIT 7–6 National HMO Enrollment

Source: MCOL Research compiled from historical Managed Care Fact Sheet National Managed Care Enrollment data for HMOs/.node/.blockUAT S 110—300×250(t,l)—Managed Care Executive/.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

270 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

stage, but the overall picture may hide two separate hMo life cycles that are in different stages – urban maturity, perhaps toward decline, along with rural/non- urban late-stage growth. efforts to control costs have resulted in health insurers, particularly in the individual market, offering fewer preferred provider organiza- tion (PPo) plans and more hMo plans.

Despite its limitations, Plc analysis is a useful tool for strategic planning. it provides a framework for assessing existing activities as well as new prod- ucts/services. The decomposition and critical review of market characteristics in conjunction with the Plc can serve as a guideline for strategy development. A Plc framework is particularly useful for product, marketing, and management strategies.

When considering new product/service lines, a Plc analysis can help answer questions not only about whether an activity is attractive for the organization, but also what might be the best market entry/exit strategy. historically, hospitals have developed the businesses or services that they already offer. however, devel- opment makes sense only if the business is in introductory or growth stages of the life cycle. if the hospital chooses to enter a mature business, it is usually better to joint-venture the business with an experienced party or acquire an existing pro- vider. introducing new product variations during late maturity or decline carries great risk unless the variations are sufficiently different such that an entirely new life cycle is created.

There are two important questions for strategy formulation when using prod- uct life cycles: “in what stage of the life cycle are the organization’s products and services?” and “how long are the stages (and the life cycle itself) likely to last?” To determine the stage of the Plc, management must use a great deal of judgment. Total service category revenues and profits may be monitored as an initial indi- cator. in addition, information obtained in external analysis concerning techno- logical, social, political, regulatory, economic, and competitive change is valuable in assessing both the current stage and the expected length of the cycle.

The stage in the Plc for a product or service indicates a likely strategic res- ponse and the level of resources that might be committed. exhibit 7–7 shows logi- cal strategic alternatives for each stage.

EXHIBIT 7–7 Strategic Choices for Stages of the Product Life Cycle

Stage 1: Introduction Stage 2: Growth Stage 3: Maturity Stage 4: Decline

Market Development Market Development Market Development Divestiture

Product Development Product Development Product Development Liquidation

Penetration Penetration Harvesting

Vertical Integration Enhancement Unrelated Diversification

Related Diversification Status Quo

Retrenchment

Divestiture

Unrelated Diversification

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 271

The relevance of the strategies shown in exhibit 7–7 depends on management’s perception of the timing of the cycle. Products and services that management determines have lengthy stages (or a long Plc) will require dramatically different strategies from those that management concludes have short stages or a short Plc. For instance, extensive vertical integration may be justified in the growth stage and even in the mature stage of the Plc if the cycle is judged to be a long one. however, the investment in and commitment to the product required in vertical integration may not be justified when the Plc is viewed as being relatively short.

Portfolio Analysis Strategic thinkers often think in portfolio terms because it is useful to have a framework for analyzing the mix of products and services.9 As a result, portfolio analysis, popularized by the Boston consulting Group (BcG), has become a fundamental tool for strategic analysis. Portfolio analysis allows for the assessment of the market position of the health care organization as a whole or its separate programs. As illustrated in exhibit 7–8, traditional BCG portfolio analysis is a graphic depiction and evaluation of an organization’s products and services in terms of relative market share and market growth rate. The products and ser- vices may then be characterized as stars, cash cows, problem children, or dogs and strategic alternatives generated.

EXHIBIT 7–8 BCG Portfolio Analysis

Stars Products and services that fall in this quadrant (high market growth and high mar- ket share) represent the organization’s best long-run opportunity for growth and profitability. These products and services are likely good investments and should be provided resources. Market development, product development, penetration, vertical integration, and related diversification are appropriate strategies for this quadrant.

Cash Cows Products and services in this quadrant have low market growth (probably in maturity and decline stages of the PLC) but the organization has a high relative market share. These products and services should be maintained but should consume few new resources. For strong cash cows, appropriate strategies are status quo, enhancement, penetration, and related diversification. For weak cash cows, strategies may include retrenchment, harvesting, divestiture, and perhaps liquidation.

Problem Children Problem children have a low relative market share position, yet compete in a high- growth market. Managers must decide whether to strengthen the products in this quadrant with increased investment through market development or product devel- opment or get out of the product/service category through harvesting, divestiture, or liquidation. A case may also be made for retrenchment into specialty niches.

Dogs These products and services have a low relative market share position and compete in a slow- or no-growth market. These products and services should consume fewer and fewer of the organization’s resources. Because of their weak position, the prod- ucts or services in this quadrant are often liquidated or divested or the organization engages in dramatic retrenchment.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

272 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

relative market share may be thought of as the market share held by the largest rival organization compared with the market share held by others in the service category. Growth rate can be measured by the changes in level of gross revenues or by population or service utilization growth (such as admissions or inpatient days). classification as high, medium, or low may be determined through com- parison with national or regional health care growth figures, return on alternative investments, or the stage in the Plc.10

The evaluation of products and services in portfolio analysis can be a dynamic process and used for the long-run planning of service and product life cycles. Therefore, portfolio management might be concerned with several time horizons. horizon 1 corresponds to managing the current fiscal reporting period, with short- term considerations. horizon 2 might be concerned with ramping up the next generation of growth opportunities, and horizon 3 with incubating new products and services that will sustain the organization far into the future. This time-horizon perspective is especially valuable for leaders trying to ensure that the organization will grow over the long term.11 See essentials for a Strategic Thinker 7–2, “What Are red ocean and Blue ocean Strategies?” that helps explain market positioning.

ESSEnTIALS for A STrATEgIC THInkEr 7–2

What Are red ocean and Blue ocean Strategies?

“The only way to beat the competition is to stop trying to beat the competition.”1 Red oceans are all the industries in existence today. The market space is known, the industry boun- daries are defined, and the competitive rules are understood. “Products become commodities and cutthroat competition turns the red oceans bloody.”2 Blue oceans, on the other hand, are defined by untapped market space and the opportunity for high growth and profits.

Organizations in red oceans try to beat the competition by building a defensible position in an existing industry. Creators of blue oceans engage in value innovation.3 These firms do not try to beat the competition but focus on creat- ing leaps in value, thereby opening up new and uncontested market spaces.

There are three characteristics of a sound blue ocean strategy – focus, divergence, and a compelling tagline. First, strategies have focus and concentrate on a relatively few things that

are done very well. Curves, a women’s fitness company, entered the red ocean of fitness companies by focusing on the most desirable aspects of traditional health clubs and home exercise programs. Next, competitors in red oceans react to rivals and lose their uniqueness. Curves differentiated its services by getting rid of special machines, juice bars, and saunas and arranged a limited number of simple-to-oper- ate hydraulic machines in a circle to facilitate interactions among members, making the exer- cise experience fun. In blue oceans, organiza- tions differentiate themselves from the average industry profile. Finally, a compelling and truth- ful tagline effectively communicates the value innovation of blue ocean firms.4 Curves’ tagline could be “for the price of a cup of coffee a day you can obtain the gift of health through proper exercise with friends.”

There is an interesting paradox in blue ocean strategies. The more successful a firm is in value

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 273

An example of portfolio analysis for a health care institution is illustrated in exhibit 7–9. cash cow services, such as plastic surgery and substance abuse (lower left quadrant), have achieved high market share but the growth rate has slowed. These services should generate excess cash that may be used to develop stars and problem children services. Service lines in the upper left quadrant, such as women’s services, geriatrics, cardiology, and so on, have high market growth and a relatively high market share (and most likely high profitability). These ser- vices are the most attractive for the institution and should be provided additional resources and encouraged to grow (and become cash cows). Services in the upper right quadrant (neurology/neurosurgery, Gi/urology, emergency services, and so on) over time will move into the stars quadrant or the dogs quadrant. nurturing the services that will most likely move to the stars quadrant is important. Services such as psychiatry, vascular surgery, and pediatrics have low growth rates as well as a low relative market share (and most likely low profitability) and may be targets for reduction of scope strategies. note however, that in health care some “dog” quadrant services may be slated for maintenance of scope or even expan- sion based on community needs.

innovation, the more likely other firms are to imitate it.5 The easier it is to imitate the blue ocean strategy, the less likely the strategy can be sustained; thus the blue ocean turns red. Blue ocean creators then become conventional competitors in a bloody sea or must innovate again. Consider for example, Pfizer’s success with Viagra. Pfizer successfully reconstructed the market boundaries by shifting the focus from medical treatment to lifestyle enhance- ment. Pfizer was incredibly successful and today a plethora of FDA-approved erectile dysfunction products including Alprostadil, Caverject, CIALIS, Endex, LEVITRA, Muse, Sildenafil, Tadalafil, and Vardenafil are available.

Blue and red oceans have always coexisted and successful organizations learn to navigate both types of sea. The penchant to imitate, however, makes it necessary for organizations to understand competition in red oceans and how to create and sustain blue oceans. Much is known about how to navigate red oceans; much is to be learned about blue oceans.6

REFERENCES

1. W. Chan Kim and Renée Mauborgne, Blue

Ocean Strategy: How to Create Uncontested

Market Space and Make the Competition

Irrelevant (Boston, MA: Harvard Business

School Press, 2005).

2. Ibid.

3. Brian Leavy, “Value Pioneering – How to

Discover Your Own ‘Blue Ocean’: Interview with

W. Chan Kim and Renée Mauborgne,” Strategy

& Leadership 33, no. 6 (2005), pp. 13–21.

4. Kyle Bruce, “A Review of Blue Ocean Strategy:

How to Create Uncontested Market Space and

Make the Competition Irrelevant,” Journal of

Management and Entrepreneurship 10, no. 3

(2005), pp. 106–108.

5. John S. McClenahen, “Sailing the Ocean Blue,”

Industry Week 254, no. 3 (2005), pp. 20–21.

6. W. Chan Kim and Renée Mauborgne, “Value

Innovation: A Leap into the Blue Ocean,”

Journal of Business Strategy 26, no. 4 (2005),

pp. 22–29.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

274 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–9 BCG Portfolio Analysis for a Health Care Institution

Source: Adapted from Doris C. Van Doren, Jane R. Durney, and Colleen M. Darby, “Key Decisions in Marketing Plan Formulation for Geriatric Services,” Health Care Management Review 18, no. 3, pp. 7–20. Copyright © 1993, Aspen Publishers, Inc. Adapted by permission.

Stars Women’s Services

Geriatrics Cardiology/Cardiovascular

Oncology Pulmonary

Orthopedics

DogsCash Cows Psychiatry

Vascular Surgery Pediatrics

ENT Ophthalmology

General Medicine

Problem Children Neurology/Neurosurgery

GI/Urology Emergency Services

Ambulatory Surgery, Adult Ambulatory Surgery

LowMediumHigh

Relative Market Share Position

High

Medium

Low

Market Growth Rate

Plastic Surgery Substance Abuse

Extended Portfolio Matrix Analysis Although the BcG matrix may be used by health care organizations, portfolio analysis must be applied with care. For example, health care organizations typically have interdependent programs, such as orthopedics and pediatrics, which make a strategic service unit (SSu) difficult to define. Additionally, underlying the BcG matrix is an assumption that high market share means high profitability and that profits may be “milked” to benefit other programs with growth potential. in health care organizations, however, it is quite possible to have a high market share and no profit. For example, because of reimbursement restrictions, a high number of Medicaid patients may cause a physician practice to be unprofitable. Similarly, programs such as obstetrics, pedi- atrics, neonatal intensive care, and psychiatry may have high market share but be unprofitable for a hospital.12

The profitability issues suggest that portfolio analysis for health care organiza- tions might better utilize an extended portfolio matrix analysis – an extension of the BcG Portfolio Matrix to account for profitability in situations where high market share does not necessarily mean high profitability. The profitability dimension is measured by high or low profitability according to positive or negative cash flow or return on invested capital. The expanded matrix is presented in exhibit 7–10.

Shining stars have high market growth (typically in the early stages of the Plc), a high market share, and high profitability. This quadrant represents the best situation for a health care organization; however, it is likely that high profit- ability will attract competitors. Therefore, aggressive enhancement or product development will be required, yet market development may be difficult because

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 275

of the already high market share. in addition, the organization will want to con- sider vertical integration and related diversification.

cash cow products and services have low market growth but a high market share and high profitability. in this situation, the organization has a dominant position in the market (perhaps 100 percent – not uncommon in a given health care service area) and further growth is unlikely. Again, the high profitability may attract competition, and the organization may have to defend its market share. Thus, strategies should be directed toward maintaining market dominance through enhancement. if the Plc is viewed as being long, the organization may want to engage in vertical integration or related diversification.

healthy children products and services have high market growth, a low market share, and high profitability. This quadrant demonstrates that there are situations in which it is possible to have a low share of the market and be profitable (at least in the short term or through segmentation). This situation is potentially attractive to the organization, which may be able to move the product or service into the shining star and, ultimately, cash cow quadrant. These products and services will require investment to nurture them and gain relative market share. Strategies may include market development, product development, penetration, or vertical inte- gration coupled with strong functional support.

For the faithful dog category, the products and services have low market growth and a low market share, but have been profitable. For example, many hospital services involve less-dominant units showing slow growth. however, if they are profitable, such units make a positive contribution to the overall health of the hospital and augment a full service line.13

EXHIBIT 7–10 Extended Product Portfolio Matrix

Source: Adapted from Gary McCain, “Black Holes, Cash Pigs, and Other Hospital Portfolio Analysis Problems,” Journal of Health Care Marketing, 7, no. 2 (June, 1987), p. 58. Reprinted by permission of the publisher, the American Marketing Association.

Black Hole

Cash Pig

Mangy Dog

Problem Child

Low

High Low Market Share

High

Market Growth Rate

Low

Shining Star

Cash Cow

Faithful Dog

Healthy Child High

Low

Market Growth Rate

High

LowHigh

Pro�t

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

276 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

For faithful dogs, managers must assess if increased market share will add to profitability. For instance, if profitable segments can be identified, it may be more advantageous to withdraw from broader markets, concentrate on a smaller seg- ment, and maintain profitability. in such situations, a status quo or retrenchment strategy may be appropriate. if profitability is likely to decline over time, a har- vesting or divestiture strategy may be best.

Black hole products and services have high growth and a high market share but low profitability. not all high-growth, high-share programs are profitable in health care. For instance, costly technological equipment may make an organiza- tion the sole provider of a service whose high cost cannot be recovered from indi- vidual patients. however, such services may contribute to the overall image of the organization and increase the profitability of other services.

nevertheless, having a high share for a service with low or negative profit- ability is quite disturbing. There must be a concentrated effort to reduce costs (enhancement strategy) or to add revenue without adding costs to such a pro- gram. “When circumstances prevent a service from generating most of its own cash inflow, it becomes a ‘black hole’ – a collapsed star sucking in light (profit or cash) – rather than shining and generating cash or profits.”14

if a black hole product or service cannot be made into a shining star, it is likely to become a cash pig. Therefore, enhancement and retrenchment strategies may be most appropriate. in addition, action plan strategies should be employed to reduce costs and increase revenue.

Problem children are low-share, high-growth, and low-profitability products and services that present both challenges and problems. Some of the products and services represent future shining stars and cash cows, although others represent future black holes and mangy dogs. Management must decide which products and services to support and which to eliminate. For supported products, market development with strong financial commitment is appropriate. For products that management does not feel can become shining stars, divestiture and liquidation are most fitting.

cash pig products and services have a high or dominant share, are experienc- ing low growth, and have low profitability. health care cash pigs are likely to be those well-established SSus with dominant shares that once were considered to be cash cows. Typically, they have well-entrenched advocates in the organizational hierarchy who support their continuance.15

A possible solution to the cash pig problem is to cut costs and raise prices. Therefore, aggressive retrenchment may be required. This strategy may allow the organization to give up the market share to find smaller, more profitable segments and thus create a smaller cash cow.

Products and services with low growth, a low share, and poor profit (mangy dogs) have a debilitating effect on the organization and should be eliminated as soon as possible. in this situation, other providers appear to better serve the market. Probably the best strategy at this point is liquidation, as it will be difficult to find a buyer for products and services in this quadrant.

Strategic Position and Action Evaluation Strategic position and action evaluation (SPAce), an extension of two-dimensional portfolio analysis (BcG), is used to determine the appropriate strategic profile of the organization. SPACE analysis is a method that includes a graphic depiction to indicate the applicability

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 277

of strategic alternatives based on factors relating to the service category strength, environmental stability, the organization’s relative competitive advantage, and the organization’s financial strength. By using SPAce, the manager can incorpor- ate a number of factors into the analysis and examine a particular strategic alter- native from several perspectives.16

The SPAce chart and definitions of the four quadrants are shown in exhibit 7–11. listed under each of the four dimensions are factors that individual numerical values ranging from 0 to 6 can be assigned. The numbers are then added together and divided by the number of factors to yield an average. The averages for environ- mental stability and competitive advantage each have the number 6 subtracted from them to produce a negative number. The average for each dimension is then plotted on the appropriate axis of the SPAce chart and connected to create a four- sided polygon. Factor scales for each dimension are presented in exhibit 7–12, which has been filled in for a regional hospital. The resulting shape of the polygon can be used to identify four strategic profiles – aggressive, competitive, conser- vative, and defensive. The quadrant with the largest area is the most appropriate general strategic position.

EXHIBIT 7–11 Strategic Position and Action Evaluation (SPACE) Matrix

Aggressive Profile Typical in an attractive service category with little turbulence in its environment. The organization enjoys a definite competitive advantage that can be protected with finan- cial strength. The critical factor is the entry of new competitors. Organizations in this situation should take full advantage of opportunities, look for acquisition candidates in their own or related areas, increase market share, and concentrate resources on products having a definite competitive edge.

Competitive Profile Typical in an attractive service category. The organization enjoys a competitive advan- tage in a relatively unstable environment. The critical factor is financial strength. Organizations in this situation should acquire financial resources to increase market- ing thrust, add to the sales force, extend or improve the product line, invest in productivity, reduce costs, protect competitive advantage in a declining market, and attempt to merge with a cash-rich organization.

Conservative Profile Typical in a stable market with low growth. Here, the organization focuses on financial stability. The critical factor is product competitiveness. Organizations in this situation should prune the product line, reduce costs, focus on improving cash flow, protect com- petitive products, develop new products, and gain entry into more attractive markets.

Defensive Profile Typical of an unattractive service category in which the organization lacks a competitive product and financial strength. The critical factor is competitiveness. Organizations in this situation should prepare to retreat from the market, discontinue marginally profitable products, aggressively reduce costs, cut capacity, and defer or minimize investments.

Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic Management: A Methodological Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp. 145–150. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

278 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–12 Strategic Position and Action Evaluation Factors for a California-based Regional Hospital

Factors Determining Environmental Stability

Technological changes Many 3210 654 Few

Rate of in�ation High 3210 654 Low

Demand variability Large 3210 654 Small

Price range of competing products/services Wide 3210 654 Narrow

Barriers to entry into market Few 3210 654 Many

Competitive pressure High 3210 654 Low

Price elasticity of demand Elastic 3210 654 Inelastic

Other: ______ 3210 654 ________

Average − 6 = −3.7

Critical factors

Fairly turbulent environment; strong competition: many technological changes.

Comments

Necessary to maintain financial stability because of turbulence in the environment; demand in market segments relatively stable; protect market niche against competition.

Factors Determining Service Category Strength

Growth potential Low 3210 654 High

Pro�t potential Low 3210 654 High

Financial stability Low 3210 654 High

Technological know-how Simple 3210 654 Complex

Resource utilization Inef�cient 3210 654 Ef�cient

Capital intensity High 3210 654 Low

Ease of entry into market Easy 3210 654 Dif�cult

Productivity, capacity utilization Low 3210 654 High

Other: Flexibility, adaptability Low 3210 654 High

Average = 3.7

Critical factors

Good growth and profit potential; strong competition.

Comments

Very attractive service category, but strong competition; degree of capital intensity increasing.

_________________________

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 279

Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic Management: A Methodological Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp. 148–149. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.

Factors Determining Competitive Advantage

Market share Small 0 1 2 3 4 5 6 Large

Product quality Inferior 0 1 2 3 4 5 6 Superior

Product life cycle Late 0 1 2 3 4 5 6 Early

Product replacement cycle Variable 0 1 2 3 4 5 6 Fixed

Customer/patient loyalty Low 0 1 2 3 4 5 6 High

Competition’s capacity utilization Low 0 1 2 3 4 5 6 High

Technological know-how Low 0 1 2 3 4 5 6 High

Vertical integration Low 0 1 2 3 4 5 6 High

Other: ______ 0 1 2 3 4 5 6 ______

Critical factors

Market share low; product/service quality very good.

Comments

The organization still enjoys slight competitive advantage because of quality and customer loyalty; can be expected to diminish, howeven, because of improving performance of competitive organizations.

Factors Determining Financial Strength

Return on investment Low 0 1 2 3 4 5 6 High

Leverage Imbalanced 0 1 2 3 4 5 6 Balanced

Liquidity Imbalanced 0 1 2 3 4 5 6 Balanced

Capital required/capital available High 0 1 2 3 4 5 6 Low

Cash �ow Low 0 1 2 3 4 5 6 High

Ease of exit from market Dif�cult 0 1 2 3 4 5 6 Easy

Risk involved in business Much 0 1 2 3 4 5 6 Little

Other: Inventory turnover Slow 0 1 2 3 4 5 6 Fast

Critical factors

Very little liquidity; too much debt.

Comments

Financial position very weak; cash inflow has to be increased in order to improve liguidity; outside financing difficult because of high leverage.

______________________

Average − 6 = −2.4

Average = 1.6

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

280 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

The factor scales shown in exhibit 7–12 are for a california-based regional hospital system specializing in health services for the elderly and chemically dependent. This hospital system is operating in a fairly turbulent environment with many competitive pressures and many technological changes (environ- mental stability axis).

Despite the turbulent environment, the hospital’s service category segments show good growth potential that attracts strong competition. increasing compe- tition requires increased investment in new facilities and technology. The hospi- tal still has a competitive advantage (as seen on the competitive advantage axis) derived from early entry into the market and it has been able to retain customer loyalty because of high-quality service. however, the hospital’s financial position (as seen on the financial strength axis) is weak because it financed new facilities through a substantial amount of debt. its liquidity position has eroded and cash flow continues to be a problem.

Which of the adaptive strategic alternatives is most appropriate for this regional system? The dimensions for this organization are plotted on the SPAce matrix shown in exhibit 7–13, demonstrating that the hospital is competing fairly well in an unstable but attractive service category segment. This organization can- not be too aggressive because it has few financial resources and the environment is a bit unstable. Therefore, it should adopt a competitive profile.

1

6

5

4

3

2

1

–1

–2

–3

–4

–5

–6

–6 –5 –4 –3 –2 –1 5432 6

Service Category Strength

AggressiveConservative

CompetitiveDefensive

Financial Strength

Environmental Stability

Competitive Advantage

3.7–2.4

–3.7

1.6

EXHIBIT 7–13 SPACE Profile for a California-based Regional Hospital System Specializing in Elderly and Chemically Dependent Care

The SPAce chart is a summary display; each factor should be analyzed indi- vidually as well. in particular, factors with very high or very low scores should receive special attention.17 exhibit 7–14 examines various strategic profiles that

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 281

EXHIBIT 7–14 Space Strategy Profiles

Source: Adapted from Fred R. David, Strategic Management, 2nd edn (Columbus, OH: Merrill Publishing Co., 1989), p. 216.

FS

ES

CA SCS

A �nancially strong organization that has achieved major competitive advantages in a growing and stable service category

FS

ES

CA SCS

An organization that has achieved �nancial strength in a stable service category that is not growing; the organization has no major competitive advantages

FS

ES

CA SCS

An organization with major competitive advantages but limited �nancial strength in a high-growth service category

FS

ES

CA SCS

An organization that has a very weak competitive position in a negative-growth, stable but weak service category

FS

ES

CA SCS

An organization whose �nancial strength is a dominating factor in the service category

FS

ES

CA SCS

An organization that suffers from major competitive disadvantages in a service category that is technologically stable but declining in revenue

FS

ES

CA SCS

An organization that is competing fairly well in a service category where there is substantial environmental uncertainty

FS

ES

CA SCS

A �nancially troubled organization in a very unstable and weak service category

Defensive Pro�les

Aggressive Pro�les

Conservative Pro�les

Competitive Pro�les

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

282 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

may be obtained in a SPAce analysis; exhibit 7–15 shows the adaptive alter- natives for each strategic profile. The SPAce plot for the regional hospital system resulted in a competitive profile. Accordingly, the most appropriate strategic alter- natives are penetration, market development, product development, status quo, or enhancement, with the most likely being enhancement. The hospital should continue to differentiate itself, but must rectify its financial position because an unstable environment may place unanticipated demands on the organization that will require an additional infusion of capital. in light of its financial problems, the hospital may have to pursue its goals (for example, market development) through a cooperation market entry strategy. A cooperation strategy – joining a network – may be important in a situation where health care systems, continuums, and refer- ral networks are the key to market development and penetration. in the end, the adaptive and market entry/exit strategic decisions are inextricably linked.

Conservative

• Status Quo • Unrelated Diversi�cation • Harvesting

Aggressive

• Related Diversi�cation • Market Development • Product Development • Vertical Integration

Competitive

• Penetration • Enhancement • Product Development • Market Development • Status Quo

Defensive

• Divestiture • Liquidation • Retrenchment

EXHIBIT 7–15 Strategic Alternatives for SPACE Quadrants

Program Evaluation Program evaluation is an analysis method used particularly by not-for-profit and public organizations for assessing their portfolio of programs and developing strategic alternatives in situations where market share, service category strength, and competitive advantage are not relevant. Program evaluation is particularly useful for state- or federally-funded institutions, such as state and county public health departments, state mental health departments, Medicaid agen- cies, community health centers, and public community hospitals. Despite the fact that these organizations are public and not-for-profit, they should develop explicit strategies and evaluate the adaptive strategic alternatives open to them. Although the internal/external strategy matrix and a form of portfolio analysis may be used

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 283

to evaluate public health programs,18 evaluation methods that consider increasing revenue and market share may be inappropriate or difficult to use.

Public and not-for-profit institutions typically maintain a number of pro- grams funded through such sources as state appropriations, federal grants, pri- vate donations, fee-for-service, and so on. in a public health department, such programs might include hiv/AiDS education, disease surveillance, disease control, immunizations, food sanitation inspection, on-site sewage inspection, and many more. usually, these programs have been initiated to fill a health care need within the community that has not been addressed through the pri- vate sector. These “health care gaps” have occurred because of federal or state requirements for coordination and control of community health and because of the large number of individuals without adequate health care insurance or means to pay for services.

Within the context provided by an understanding of the external environment, internal systems, and directional strategies, these not-for-profit institutions must chart a future through a set of externally and internally funded programs. The set of programs maintained and emphasized by the organization constitutes its adap- tive strategy. The degree to which they are changed (expansion of scope, reduction of scope, maintenance of scope) represents a modification of the adaptive strat- egy. The fundamental question is, “Does our current set of programs effectively and efficiently fulfill the mission and vision for the future?” This question may be addressed through a process of program evaluation. Two program evaluation methods that have been used successfully are needs/capacity assessment and program priority setting.

A needs/capacity assessment is an evaluation method for developing strategy alternatives for not-for-profit and public organizations based on community need and the organization’s capacity to deliver programs that meet the need. The set of programs in not-for-profit organizations are determined by the com- munity, although some programs may be mandated by law, such as disease con- trol, disease surveillance, and the maintenance of vital records (birth and death records). however, the assumption is that the legislation is a result of an important need and, typically, the mandate is supported by non-discretionary or categorical funding (funding that may be used for only one specific purpose as required by law). Therefore, in developing a strategy for a public health organization or not- for-profit organization serving the community, a needs/capacity assessment must be undertaken – community needs must be assessed vis-á-vis the organization’s ability (capacity) to address those needs.

Community need is one dimension for determining the strategy for a not- for-profit organization’s programs based on (1) clear community requirements (environmental, sanitation, disease control, and so on) and personal health care (primary care) gaps; (2) the degree to which other institutions (private and public) fill the identified health care gaps; and (3) public/community health objectives. Many not-for-profit institutions enter the health care market to provide services to those who otherwise would be left out of the system. Despite efforts to reform health care, these gaps are likely to remain for some time. health care gaps are identified through community involvement, political pressure, and community assessments such as those carried out by the centers for Disease control and Prevention (cDc). These gaps exist because there are too few private or public

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

284 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

institutions positioned to fill the need. Where existing institutions are willing and able to fill these gaps, public and not-for-profit organizations should probably resist entering the market. in addition, public and community health objectives must be considered when developing strategy. national, state, and community objectives such as the healthy People 2020 and healthy People 2030 objectives should be included as part of a community needs assessment.19

Organizational capacity is one dimension for determining the strategy for a not-for-profit organization’s programs based on its ability to initiate, maintain, and enhance its programs. organizational capacity is comprised of (1) funding to support programs, (2) other organizational resources and skills, and (3) the pro- gram’s fit with the mission and vision of the organization. Availability of funding is an important part of organizational capacity. Many programs are supported with categorical funding and accompanying mandates (program requirements dictated by a higher authority, usually federal or state government). often, how- ever, local funds supplement federal- and state-funded programs. For other pro- grams, only community funding is available. Thus, funding availability is a major consideration in developing strategy for public and not-for-profit organizations. in addition, the organization must have the skills, resources, facilities, manage- ment, and so on to initiate and effectively administer the program. Finally, pro- gram strategy will be dependent upon the program’s fit with the organization’s mission and vision for the future. Programs outside the mission and vision should be viewed as luxuries, superfluous, or wasteful. Similar needs assessment meth- odologies have been used extensively by public and not-for-profit organizations (see essentials for a Strategic Thinker 7–3, “What is needs Assessment?”).

ESSEnTIALS for A STrATEgIC THInkEr 7–3

What is needs Assessment?

Needs assessment is a systematic process for identifying gaps between two conditions: the current state of “what is” (real) and the desired state of “what should be” (ideal). Needs assess- ment is not intended to generate solutions; but rather, to assess the discrepancy between these two conditions. Conducting a needs assessment allows an organization to identify and prioritize needs; determine criteria for solutions; make data-informed decisions regarding human, financial, and other resources; and implement actions to improve programs, services, or organi- zational structure and operations.1

For example, if administrators at a local health clinic observe an increase in demand

for patient access based on the health-seek- ing behaviors of a specific target population, the clinic may conduct a needs assessment to determine the number of patients served (actual) as compared to patient demand for services (ideal). In doing so, these adminis- trators may discover that the clinic’s current capacity is 500 patients while patient demand for services is 1,000.

This example demonstrates that there is gap between “what is” and “what should be.” In other words, a discrepancy exists. When discrepancies are detected, organizational leaders may seek to identify the root cause(s) of this gap to craft effective and data-informed solutions. If there

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 285

exhibit 7–16 presents the adaptive strategic alternatives indicated for public organizations as they assess community needs and the organization’s capacity to fill them. Where the community need is assessed as high (significant health care gaps, few or no other institutions addressing the need, and the program is one of the community’s objectives) and the organization’s capacity is assessed as high (adequate funding, appropriate skills and resources, and fit with mission/ vision), then the organization should adopt one of the expansion of scope adap- tive strategies (upper left quadrant). Appropriate strategies might include vertical integration, related diversification, product development, market development, and penetration. When the community need assessment is low (no real need, the need has abated, the need is now being addressed by another institution, or the need does not fit with community objectives) but organization capacity is high (adequate funding, appropriate skills and resources, and fit with mission/vision), there should be an orderly redistribution of resources, suggesting reduction and maintenance of scope adaptive strategies (lower left quadrant). reduction of scope strategies should be given priority as the community need diminishes;

is little to no discrepancy, organizations may choose to direct resources to other priorities.

The needs assessment process is typically conducted in phases during which data are collected, analyzed, summarized, and pre- sented as a list of identified needs. Common data collection tools for conducting a needs assessment include surveys, focus groups, key informant interviews, document analysis, and observations. Irrespective of method, infor- mation is gathered from key stakeholders and others who have knowledge or experience with the issue. Decision-makers may then consider each need in the organization’s context to prior- itize issues for planning interventions.

In addition to assessing expressed needs based on supply and demand, as demonstrated in the previous clinic example, needs assess- ments can be used to identify other discrepancies between real and ideal states. For example, needs assessment can be used to evaluate:

● Prescribed or normative needs based on a target as defined by an expert.

● Relative needs between two groups in which differences are compared to one another.

● Perceived needs as defined by a specific group.

● Extrapolated needs or formula-driven esti- mates based on a standard.2

Rather than adopting an ill-fitting solution to a poorly defined problem, a rigorous needs assessment empowers organizational leaders to be thoughtful and strategic about how and when to deploy specific resources to address needs that are prioritized as the most important.

REFERENCES

1. J. W. Altschuld and D. D. Kumar, Needs

Assessment: An Overview (Thousand Oaks, CA:

SAGE, 2010).

2. M. J. Harris, Evaluating Public and Community

Health Programs (San Francisco, CA: Jossey

Bass, 2010).

Source: Matthew Fifolt, PhD, Assistant Professor, Department

of Health Care Organization and Policy, School of Public Health,

University of Alabama at Birmingham and Julie Preskitt, PhD,

Associate Professor, Department of Health Care Organization

and Policy, School of Public Health, University of Alabama at

Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

286 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

however, phasing out a program may take some time or, alternatively, the uncer- tainty concerning the changing community needs may dictate maintenance in the short term. Appropriate adaptive strategies might include related diversification, retrenchment, harvesting, and status quo.

Where community needs have been assessed as low (no real need, the need has abated, the need is now being addressed by another institution, or the need does not fit with community objectives) and the organization has few financial or other resources to commit to programs (low organization capacity), one of the reduction of scope adaptive strategies should be adopted (lower right quadrant). These strategies include liquidation, harvesting, divestiture, and retrenchment. When community needs have been assessed as high but organizational capacity is low, maintenance and reduction of scope strategies are appropriate (upper right quadrant). Maintenance of scope strategies should be given priority because of the high community need; however, if resources dwindle or funding is reduced, reduction of scope may be required. Appropriate adaptive strategic alternatives include enhancement or status quo (maintenance of scope) and retrenchment or harvesting (reduction of scope). As resources become available, and organiza- tional capacity increases, programs in this quadrant will move to the upper left quadrant, enabling more aggressive (expansion) strategies to be selected.

The second method of developing adaptive strategies for not-for-profit or pub- lic programs involves ranking programs and setting priorities. Program priority

EXHIBIT 7–16 Public Health and Not-for-Profit Adaptive Strategic Decisions

Expansion of Scope

Vertical Integration• • Related Diversi�cation • Product Development

M• arket Development • Penetration

Maintenance/Reduction of Scope

• Enhancement • Status Quo • Retrenchment • Harvesting

Reduction of Scope

Liquidation• • Harvesting

Divestiture• • Retrenchment

Reduction/Maintenance of Scope

• Related Diversi�cation • Retrenchment • Harvesting • Status Quo

High

Community Need

Low

High Low Organizational Capacity

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 287

setting is another analysis method used by not-for-profit and public organiza- tions for developing strategies that involves rank ordering programs when all programs are considered important but resources are limited. As the demand for health services has increased and the resources available for service delivery has contracted, evidence-based priority setting methods that are transparent and inclusive have been developed and improved. A study of five Primary care Trusts in england demonstrated the difficulty in achieving the dual goals of priority set- ting effectiveness and information accessibility, and consequently transparency, among the decision makers.20 other studies have demonstrated how different issues fail to reach the actual decision makers in priority setting activities. The result is often skepticism regarding the objectivity of program priority setting.21

Program priority setting is significant because community needs (both the need itself and the severity of the need) are constantly changing and organiza- tional resources, in terms of funding and organization capacity, are almost always limited. invariably, more programs have a higher community need than resources are available. Therefore, the most important programs (and perhaps those with categorical funding) may be expanded or maintained. The organization must have an understanding of which programs are the most important, which should be provided incremental funding, and which should be the first to be scaled back if funding is reduced or eliminated.

The nature and emphasis on programs is the central part of strategy formu- lation in many public and not-for-profit organizations. however, a problem in ranking these programs is that typically all of them are viewed as “very impor- tant” or “essential.” This is particularly true when using likert or semantic differential scales to evaluate the programs. Therefore, it is necessary to develop evaluation methods that further differentiate the programs. one method that can be used is to list all the programs of the agency or clinic, each on a separ- ate sheet of paper posted in different areas of the room. Then using different colors or types of sticker, one for each of the adaptive strategies – expand the scope, reduce the scope, and maintain the scope – each member of the manage- ment team is asked to sort the organization’s programs into categories – those that should be expanded, those that should be reduced, or those to remain the same – based on the perceived importance of each to the organization’s mission and vision. The group may agree on several programs. Discussions can then be focused on those programs where there is disagreement. After points have been raised and discussed, the programs can be ranked again, hopefully leading to greater consensus from the group.

The Q-sort method provides a more formal method of differentiating the impor- tance of programs and setting priorities and can be used to prioritize a variety of issues.22 Q-sort is a ranking procedure that forces choices along a continuum in situations where the difference between the choices may be quite small. The pro- gram Q-sort evaluation is a forced-choice ranking procedure for differentiating and reaching consensus on the importance of programs/issues and setting priorities. it is particularly useful when experts differ on what makes one choice preferable over another. By ranking the choices using a Q-sort procedure, participants see where there is wide consensus (for whatever reasons used by the experts) and have an opportunity to discuss the choices for which there is disagreement (and, hopefully, reach greater consensus).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

288 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

Q-sort is part of the Q-methodology, a set of philosophical, psychological, statistical, and psychometric ideas oriented to research on the individual. Q-sort evaluation helps overcome the problem of all programs being ranked as very important by forcing a ranking based on some set of assumptions.23 once Q-sort has rank-ordered a series of objects (programs), numerals may be assigned to sub- sets of the objects for statistical purposes. Q-sort focuses on sorting decks of cards (in this case each card representing a program) and displaying the correlations among the responses of different individuals to the Q-sorts.

For ranking an organization’s programs, only the first step in using the Q-methodology is used – the Q-sort. in the Q-sort procedure, each member of the management team is asked to sort the organization’s programs into categories based on their perceived importance to the organization’s mission and vision. To facilitate the task, the programs are printed on small cards that may be arranged (sorted) on a table. To force ranking of programs, managers are asked to arrange the programs in piles from most important to least important. The best approach is that the number of categories be limited to nine and the number of programs to be assigned to each category be determined in such a manner as to ensure a normal distribution.24 Therefore, if a public health department had 49 separate programs that management wished to rank (culled from a larger list of programs), they may be sorted as shown in exhibit 7–17. notice that to create a normal

Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

HIV/AIDS Planning and Control 7.0

Epidemiology 8.0

Solid Waste 6.33

Maternity 5.22

Myco- bacteriology

4.55 Serology

4.0

Public Health Social Work

3.44

Plumbing Inspection

2.55

Animal Control

1.44

Indoor Air Quality

3.66

Milk Sanitation

7.0

Food Sanitation

8.0

Health Statistics

6.44

Radiation Control

5.44 Hypertension

4.55

Vital Records

4.0

Adolescent Health 2.66

Hearing Aid Regulation

1.88

Diabetes 3.77

STD Control

7.22

Newborn Screening

6.62

Emergency Medicine

5.50

HMO Regulation

4.55 WIC 4.0

Swimming Pools 3.11

Dental Health 3.87

Sewage Regulation

7.22

Licensure and Certification

6.77

Child Health 5.55

Lead Assessment

4.62

School Health Education

4.0

Medicaid Waiver

3.33

Vector Control

3.99

Tuberculosis Control

6.88

Family Planning

5.66

Public Health Nursing

4.75

Primary-Care Support

4.11

Administrative Support

3.99 Immunization

6.99

Health Education

5.66

Disaster Preparedness

4.77

Quality Assurance

4.11

Infection Control

5.77

Injury Prevention

4.77 Home Health

4.22

Seafood Sanitation

6.11

Lodging/Jails Inspection

4.88 Microbiology

4.44

Cancer Prevention

4.88

5% 7.5% 12.5% 15% 20% 15% 12.5% 7.5% 5%

EXHIBIT 7–17 Department of Public Health Q-Sort Results*

*Program name and mean score in each box.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 289

distribution (or quasi-normal), 5 percent of the programs are placed in the first pile or group, 7.5 percent in the second group, 12.5 percent in the third, and so on. in this case, there are two programs in the first group, four programs in the second group, six in the third, and so on.

Depending on the group in which it is placed, each program is assigned a score ranging from 1 to 9, where 1 is for the lowest- and 9 is for the highest-ranked programs. The score indicates an individual’s perception of that program’s importance to the mission and vision of the organization. A program profile is developed by averaging individual members’ scores for each program.

Based on the results of the Q-sort, programs may be designated for expan- sion, reduction, or maintenance of scope. For the public health programs in exhibit 7–17, food sanitation and epidemiology, sewage planning and operation, sexually transmitted disease (STD) control, and so on, might be earmarked for expansion. cancer prevention, lodging/jail inspection, injury prevention, and so on might be slated for maintenance of scope, whereas plumbing inspection, hearing aid dealer board regulation, and animal control may be marked for reduction.

The Q-sort procedure works well when incorporating several different sets of strategic assumptions or scenarios. For example, the programs may be sorted several times, each based on a different scenario. Then the group can determine which of the scenarios is most likely and make decisions accordingly.

Priority setting is likely to increase in importance for health care organizations as the demand for services continues to increase and resources become even more scarce. Priority setting, by its nature, appears threatening especially to those whose programs are judged to be of a lower priority. For this reason transparency and communication from upper leadership are critical elements in any effective priority setting process.25

Step 3: Evaluate and Select Market Entry/Exit Strategies once expansion of scope or maintenance of scope through enhancement adaptive strategies are selected, one or more of the market entry strategies must be used to break into or capture more of the market. All of the expansion adaptive strategies require some activity to reach more consumers with the products and services. Similarly, enhancement strategies indicate that the organization must improve what it is already doing, which requires market entry analysis. reduction of scope and market exit strategies are directed toward offering fewer products and ser- vices and markets and may require identifying buyers, closing facilities, reducing the product line, internal cost cutting issues, and managing declining demand.

The market entry strategies include acquisition, licensing, venture capital invest- ment, merger, alliance, joint venture, internal development, internal venture, and reconfiguring the value chain. Although any one (or several) of these strategies may be used to enter the market, acquisitions, mergers, and alliances have received most of the media attention over the past decade. Acquisition is the principal purchase strategy and mergers and alliances are the principal cooperation strategies. Market exit strategies are methods to either rapidly or slowly, partially or completely leave markets and similar to market entry, divestiture (the other side of acquisition) has most obviously shaped the health care landscape.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

290 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

The specific market entry/exit strategy considered to be appropriate depends on (1) the external conditions; (2) the pertinent internal strengths and weaknesses based on the organization’s resources, competencies, and capabilities; and (3) the goals of the organization. each of these three areas should be scrupulously evaluated.

External Conditions The first consideration in the selection of the market entry/exit strategy is the evaluation of the external situation. A review of the external issues and supporting documentation (see chapters 2 and 3) should pro- vide information to determine which of the market entry/exit strategies is most appropriate. exhibit 7–18 provides a list of representative external conditions appropriate for each of the market entry/exit strategies.

EXHIBIT 7–18 External Conditions Appropriate for Market Entry/Exit Strategies

Market Entry Strategy Appropriate External Conditions

Acquisition ● Growing market. ● Early stage of the product life cycle or extended maturity

stage. ● Attractive acquisition candidate. ● High-volume economies of scale (horizontal integration). ● Distribution economies of scale (vertical integration).

Licensing ● High capital investment to enter market. ● High immediate demand for product/service. ● Early stages of the product life cycle.

Venture Capital Investment ● Rapidly changing technology. ● Product/service in the early development stage.

Merger ● Attractive merger candidate (synergistic effect). ● High level of resources required to compete.

Alliance ● Alliance partner has complementary resources, compe- tencies, capabilities.

● Alliance partner has similar status. ● Market demands complete line of products/services. ● Market is weak and continuum of services is desirable. ● Mature stage of product life cycle.

Joint Venture ● High capital requirements to obtain necessary skills/ expertise.

● Extended learning curve to ensure necessary expertise.

Internal Development ● High level of product control (quality) required. ● Early stages of the product life cycle.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 291

Market Entry Strategy Appropriate External Conditions

Internal Venture ● Product/service development stage. ● Rapid development/market entry required. ● New technical, marketing, production approach

required.

Reconfiguring the Value Chain ● Competition dominated by a few traditional providers. ● Specialized market niche identified. ● New technology, marketing, production approach

required.

Market Exit Strategy Appropriate External Conditions

Fast ● Declining market – late stages of the product life cycle. ● Available buyers for the business or assets. ● High level of resource required to compete. ● Liquidate before others recognize the change in the

market.

Slow ● Late stages of the product life cycle. ● Extended product life cycle, as others leave, greater share

possible. ● Product category likely to remain profitable for near

future.

Partial ● Specialized market segments provide opportunities to redefine the market.

● Extended product life cycle.

Complete ● End or decline stage of the product life cycle. ● External change renders product category obsolete.

Resources, Competencies, and Capabilities As illustrated in exhibit 7–19, each market entry/exit strategy requires somewhat different resources, competencies, and capabilities. Before selecting the appropriate market entry or exit strategy, a review of the internal competitively relevant strengths and weaknesses should be undertaken (see chapter 4). A market entry/exit strat- egy might be selected if the required skills and resources, competencies, and capabilities (competitive advantages) are possessed by the organization. on the other hand, if they are not present, another alternative should be selected or a combination strategy of two or more phases should be adopted. The first phase would be directed at correcting the weakness (competitive disadvantage) that is prohibiting selection of the desired strategy, and the second phase would be the initiation of the desired market entry/exit strategy. in some cases a total redesign, or re-engineering, of a process may be required before a strat- egy can be implemented (see essentials for a Strategic Thinker 7–4, “What is re-engineering?”).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

292 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–19 Appropriate Internal Resources, Competencies, and Capabilities for the Market Entry/Exit Strategies

Market Entry Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses) Affecting Choice

Acquisition ● Financial resources. ● Capability to manage new products and markets. ● Capability to merge organizational cultures/structures. ● Rightsizing capability for combined organization.

Licensing ● Financial resources (to pay licensing fees). ● Support organization to carry out license. ● Capability to integrate new product/market into the present

organization.

Venture Capital Investment ● Capital to invest in speculative projects. ● Capability to evaluate and select opportunities with a high

degree of success.

Merger ● Management willing to relinquish or share control. ● Rightsizing capacity. ● Complementary service/product line. ● Capability to merge organizational cultures/structures.

Alliance ● Lack of competitive skills/facilities/expertise. ● Desire to create vertically integrated system. ● Need to control patient flow. ● Capability to coordinate boards. ● Willing to relinquish some control.

Joint Venture ● Lack of a distinctive competency. ● Additional resources/capabilities are required. ● Not enough time to develop internal resources, competencies,

or capabilities. ● Venture is far removed from core competency. ● Lack required skills and expertise.

Internal Development ● Technical expertise. ● Marketing competency. ● Operational capacity. ● Research and development capability. ● Strong functional organization. ● Product/service management expertise. ● Financial resources.

Internal Venture ● Financial resources. ● Entrepreneurial organization. ● Capability to isolate venture from the rest of the organization. ● Technical expertise. ● Marketing competency. ● Operational capacity.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 293

Market Entry Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses) Affecting Choice

Reconfiguring the Value Chain

● New technology available. ● Entrepreneurial organization. ● Capability to rearrange value chain. ● Capability to adapt business model.

Market Exit Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses)

Fast ● Significant drain on resources. ● Decision to focus on other market segments. ● Lack of management expertise in the product category.

Slow ● Product category remains profitable. ● Decision to focus on other segments or to trim product line. ● Capability to manage decline.

Partial ● Specialized market segments provide opportunities to rede- fine the market.

● Prolong product life cycle. ● Managing sales decline by ramping production as competi-

tors leave the market; shutting down operations when too many customers leave the market.

Complete ● No resources to support product category or market. ● Lack of marketing expertise in the segment. ● Giving up on success (profitability) with the product category.

Organizational Goals Along with the internal and external factors, organi- zational goals play an important role in evaluating the appropriate market entry/ exit strategies. As shown in exhibit 7–20, internal development, internal ventures, and reconfiguring the value chain offer the greatest degree of control over the design, production, operations, marketing, and so on of the product or service. on the other hand, licensing, acquisition, mergers, and venture capital investment offer the quickest market entry but control over design, production, marketing, and so on is low in the short term (in the longer term the organization may take complete control). Alliances and joint ventures offer relatively quick entry with some degree of control. The trade-off between speed of entering the market and organizational control over the product or service must be assessed by manage- ment in light of organizational goals.

Similarly, speed of exiting the market can be an important strategic decision. if financial resources are limited, selling all or part of the business or retrench- ment may generate cash or substantially reduce costs and be the difference in survival or failure. harvesting, while a slow exit from the market, allows for the generation of revenue without new investments and may continue for a number of years.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

294 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–20 Market Entry Strategies and Organizational Goals

Licensing

Acquisition

Merger

Alliance

Joint Venture

Internal Venture

Venture Capital Investment

Internal Development

Slow Market Entry

Rapid Market Entry

Low Initial Control Over Design, Production, Marketing

High Initial Control Over Design, Production, Marketing

Recon�gure The Value Chain

ESSEnTIALS for A STrATEgIC THInkEr 7–4

What is re-engineering?

Re-engineering has been used as part of stra- tegic planning to help organizations rethink the way processes are managed in organi- zations. Many health care organizations are using re-engineering to cut across depart- mental lines to completely redesign a pro- cess. Its founders and leading proponents, Michael Hammer and James Champy, define re-engineering as “the fundamental rethinking and radical redesign of process to achieve dra- matic improvements in critical, contemporary measures of performance, such as cost, quality,

service, and speed.” Key words in this definition are radical and process.

Re-engineering goes beyond quality improvement programs that seek marginal improvements. It asks a team to “start over” and completely and radically redesign a process. It does not mean tinkering with what already exists or making incremental changes that leave basic structures intact. It ignores what is and concentrates on what should be. The clean sheet of paper, the breaking of assumptions, the throw-it-all-out-and-start-again flavor of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 295

re-engineering has captured and excited the imagination of managers across all industries. Radical redesign requires creativity and a will- ingness to try new things, questions the legit- imacy of all tasks and procedures, challenges all assumptions, breaks all the rules possible, and draws upon customer desires and needs.

The process is an end-to-end set of activities that together create value for a customer. Many organizations have become so specialized that few people understand the complete process. In the past, organizations have focused on improv- ing the performance of individual tasks in separ- ate functional units rather than on complete processes that typically cut across many functions. Everyone was watching out for task performance, but no one was watching to see whether all the tasks together produced the intended results of creating value for the customer. Dramatic improvements can be achieved only by improv- ing the performance of the entire process.

To be successful, management must be will- ing to destroy old ways of doing things and start anew. Many changes take place in an organiza- tion or unit when re-engineering is initiated:

● Work units change – from functional depart- ments to process teams.

● Jobs change – from simple tasks to multidi- mensional work.

● People’s roles change – from controlled to empowered.

● Job preparation changes – from training to education.

● The focus of performance measures and compensation change – from activity to results.

● Advancement criteria change – from perfor- mance to ability.

● Attitudes change – from protective to productive.

● Managers change – from supervisors to coaches.

● Organizational structure changes – from hierarchical to flat.

● Executives change – from scorekeepers to leaders.

Michael Hammer identified seven principles for organizational re-engineering: 1. Organize around outcomes, not tasks. By

focusing on the desired outcome, people consider new ways to accomplish the work.

2. People who use the output should perform the process.

3. Include information processing in the “real” work that produces useful information.

4. Treat geographically dispersed resources as if they were centralized.

5. Link parallel activities rather than inte- grate them. By coordinating similar kinds of work while it is in process rather than after completion, better cooperation can be fostered and the process accelerated.

6. Let “doers” be self-managing. By putting decisions where the work is performed and building in controls, organizations can eliminate layers of managers.

7. Capture information once and at its source.

SourceS

Michael Hammer and James Champy,

Reengineering the Corporation: A Manifesto

for Business Revolution (New York:

HarperBusiness, 1994).

Michael Hammer, Beyond Reengineering: How the

Process-Centered Organization Is Changing Our

Work and Lives (New York: HarperBusiness, 1996).

Michael Hammer, “Reengineering Work: Don’t

Automate, Obliterate,” Harvard Business Review

68, no. 4 (July–August, 1990), pp. 104–112.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

296 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

Step 4: Evaluate and Select Competitive Strategies After the market entry/exit strategies have been selected, the strategic posture must be specified and the products/services positioned within the market using the generic strategies of cost leadership, differentiation, or focus. All the adaptive strategies (expansion, reduction, and maintenance of scope) require explicit stra- tegic posture and positioning strategies.

Strategic Posture Strategic posture concerns the relationship between the organization and the market and describes the pattern of strategic behavior. Strategic postures include defender, prospector, analyzer, and reactor. Any of these may be suitable, subject to: the external situation; the changing nature of the market; competition; the resources, competencies, and capabilities (competitive advantages) of the organization; and its vision and values. it is important to make sure the strategic posture is linked to and fits the adaptive and market entry/exit strategies.

external conditions are very important in the selection of strategic posture. Defender strategies tend to be successful when the external environment is rela- tively stable (change is slow and reasonably predictable). in such situations com- petitive rivalry is low and the barriers to entering the market are high. indeed, the cost-efficiency strategy of the defender tends to push entry barriers even higher. Because defender organizations focus on a narrow product line, the strategy works best when relatively extended Plcs are expected. in addition, long Plcs enable the organization to commit to vertical integration, develop cost efficiency, and create routine processes. Defender strategies are most effective in the mature stage of the Plc. The risks associated with the defender posture are that the Plc will be dramatically shortened by external change (new technology, for instance) or that a competitor can somehow unexpectedly take away market share.

Prospectors operate well in rapidly changing, turbulent environments. in these situations change is coming so rapidly that there are few rewards for efficiency. rather, the ability to incorporate the latest technology, feature, or design will reap the greatest rewards. in addition, prospectors are successful by utilizing a technol- ogy across several markets (prospecting in new high-growth markets). Products are usually in the introductory and early growth stages of the Plc and the cycle tends to be relatively short. As a result, entry barriers may be low and the intensity of rivalry typically is low (there is room for everybody). As products or services mature, prospector organizations move on to new products and services, typically in introductory stages of the Plc. Prospectors divest their maturing products and services to successful defender organizations that are consolidating.

Analyzers operate well in conditions where there is moderate external change with some product categories that are quite stable and some that are changing. competitive rivalry tends to be relatively high and these organizations cannot afford to ignore new product developments, markets, or product categories. Plcs for their stable products are moderately long but there are periodic innovations and disruptions. Therefore, these organizations must enter new markets and product areas. Analyzers typically do not enter the market in the introductory stage of the Plc. instead, they carefully watch product and market developments (the prospectors) and enter the most promising ones in the early growth stage of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 297

the product life cycle (using one of the market entry strategies). Analyzers attempt to maintain balance with both mature- and growth-stage products or services and markets.

reactors tend to exit in protected or monopolistic markets or are legislatively restricted from moving into new markets or offering new products. like defend- ers, reactors often focus on efficiency rather than external changes. in addition, for products and markets in the decline stage of the product life cycle, a reactor strategy may be part of a harvesting strategy or a prelude to divestiture or liquidation.

The external conditions appropriate for each of the strategic postures are sum- marized in exhibit 7–21.

EXHIBIT 7–21 External Conditions Appropriate for Strategic Postures

Posture Strategy Appropriate External Conditions

Defender ● Stable external environments. ● Predictable political/regulatory change. ● Slow technological and competitive change. ● Products or services in mature stage of PLC. ● Relatively extended PLCs. ● High barriers to entry.

Prospector ● Turbulent environment. ● Rapid technological, political/regulatory, economic change. ● Introduction and early growth stages of PLC. ● Technology may be employed across markets. ● Low intensity of competitive rivalry. ● Numerous market and product opportunities. ● Fairly low barriers to market entry.

Analyzer ● Moderately changing environment. ● Technological, regulatory, economic, social, or competitive changes open

new opportunities. ● Some competitive rivalry in old and new markets. ● Some stable products and markets. ● Some new market and product opportunities. ● Growth and mature stage of PLC for existing products. ● Growth stage of PLC for new products.

Reactor ● Monopolistic or highly regulated market. ● Decline stage of PLC. ● Legislative restrictions to growth. ● New emerging technological change. ● Political/legislative uncertainty. ● “Game changing” moves by competitors.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

298 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

As shown in exhibit 7–22, there are certain strengths (or weaknesses) associ- ated with each of the strategic postures. For the defender posture the organization must be able to develop a core technology and be very cost efficient. Defender organizations try to drive costs down through vertical integration, specializa- tion of labor, a well-defined organization structure, centralized control and

EXHIBIT 7–22 Appropriate Internal Resources, Competencies, and Capabilities for Strategic Postures

Posture Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses)

Defender ● Capability to develop a single core technology. ● Capability to be very cost efficient. ● Capability to protect market from competitors. ● Capacity to engage in vertical integration strategy. ● Management emphasis on centralized control/stability. ● Structure characterized by division of labor. ● Well-defined hierarchical communications channels. ● Cost control expertise. ● Well-defined procedures and methods. ● High degree of formalization, centralization (where a single central group/person,

typically top management, makes key decisions for the entire organization).

Prospector ● Capability to adjust organization to a variety of external forces. ● Technological and administrative flexibility. ● Capability and competency to develop and use new technologies. ● Capability to deploy and coordinate resources among numerous decentralized units. ● Decentralized planning and control (where key organizational decisions are

distributed throughout the organization closer to the customer). ● Flexible structure. ● Marketing plus research and development expertise. ● Low degree of formalization (few well-defined procedures and methods).

Analyzer ● Capability to mix high levels of standardization and routinization of core products/markets with flexibility and adaptation for new products/markets.

● Capability to utilize structure to accommodate both stable and dynamic areas of operation.

● Capability to utilize many different management skills. ● Effective lateral and vertical communication channels. ● Effective strategy and planning team.

Reactor ● Lack of finances. ● Lack of technical expertise. ● Lack of management skill. ● Lack of new product/service development and marketing skills. ● Long-term strategy to leave the market.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 299

standardization, and cost reduction while maintaining quality. Prospectors, on the other hand, are continuously moving in and out of products and markets looking for high growth. Therefore, they need organization structures, systems, and pro- cedures that are flexible. Prospectors rely on decentralized control. These types of organizations do not concentrate on developing efficiency but, rather, focus on the development and early adoption of new products and services. Analyzers attempt to balance defender strategies in stable markets with some prospecting in selected developing markets. Managing these organizations is often difficult because they must mix high levels of standardization and routinization with flexibility and adaptability. reactors tend to be reactors because of weaknesses or have adopted a strategy to leave the market.

Positioning Strategies As discussed in chapter 6, products/services may be positioned marketwide or for a particular market segment. cost leadership and differentiation are used as marketwide strategies or they are used to focus on a specific segment of the market.

Presence in a market requires that the products and services be positioned vis-à- vis competing products and services. Similar to the other strategy types, positioning depends upon the strengths and weaknesses (competitive advantages and dis- advantages) of the organization and the issues externally in the service area. in other words, how a product or service is positioned depends on the organization’s competi- tive situation. Therefore, the positioning strategies must be selected on the basis of resources, competencies, and capabilities (competitive relevant strengths), as well as external risks. For example, it would be difficult for an urban public community hos- pital dependent on limited county funding to be positioned as the high-technology hospital in the region (differentiation strategy). conversely, a well-funded hospital using the latest technology is unlikely to be positioned as the cost leader.

each of the generic positioning strategies has its own external risks that must be evaluated by the organization (see exhibit 7–23). Perhaps the biggest risk for cost leadership is technological change. Technological change in processes may allow competitors to achieve cost advantages. Technological change in products/ser- vices may result in differentiation, making the cost leader’s product less desirable.

EXHIBIT 7–23 External Risks Associated with Positioning Strategies

Generic Strategy External Risks

Cost Leadership ● Technological change that nullifies past investments or learning.

● Low-cost learning by industry newcomers or followers, through imitation or through their ability to invest in state-of-the-art facilities.

● Inability to see required product or market changes because of the attention placed on cost.

● Inflation in costs that narrow the organization’s ability to maintain sufficient price differential to offset competitors’ brand images or other approaches to differentiation.

(Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

300 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

Generic Strategy External Risks

Differentiation ● The cost differential between low-cost competitors and the differentiated firm is too great for differentiation to hold brand loyalty; buyers sacrifice some of the features, services, or image possessed by the differentiated organi- zation for larger cost savings.

● Buyers’ need for the differentiating factor diminishes, which can occur as buyers become more sophisticated.

● Imitation narrows perceived differentiation, a common occurrence as the industry matures.

Focus ● Cost differential between broad-range competitors and the focused organization widens to eliminate the cost advantages of serving a narrow target or to offset the dif- ferentiation achieved by focus.

● Differences in desired products or services between the strategic target and the market as a whole narrows.

● Competitors find submarkets within the strategic target and out focus the focuser.

● Focuser grows the market to a sufficient size that it becomes attractive to competitors that previously ignored it.

Source: Adapted from Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), pp. 40–41. Copyright © 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster Adult Publishing Group.

The most significant risks for the organization that chooses a differentiation strategy are that emphasis on differentiation pushes costs too high for the market or that the market fails to see, understand, or appreciate the differentiation. in addition, there are risks for the organization adopting a focus strategy. often, the focusing organization is dependent on a small segment that may diminish in size, or purchasers may turn to the broader market for products or services. Movement toward marketwide products and services will occur if the differences in cost or differentiation become blurred.

exhibit 7–24 presents the appropriate internal strengths for each of the pos- itioning strategies. For an organization to use a cost leadership strategy, it must have or develop the ability to achieve a real cost advantage (not price) through state-of-the-art equipment and facilities and low-cost operations. This competitive advantage must be maintained through tight controls and emphasis on economies of scale.

Differentiation requires the ability to distinguish the product or service from other competitors. Typically, this requires technical expertise, strong marketing,

EXHIBIT 7–23 (Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 301

a high level of skill, and an emphasis on product development. A focus strategy is directed toward a particular segment of the market; however, either cost lead- ership or differentiation may be used. Therefore, the appropriate competencies are the same for either market segment or marketwide strategies. it is important that organizations adopting a focus strategy closely monitor their market so that specialized needs may be fully addressed and changes in the segment carefully tracked. otherwise, changes in the market may negate the differentiation or cost leadership. often benchmarking (see essentials for a Strategic Thinker 7–5, “What is Benchmarking?”) can be used to assess current internal strengths for success- fully implementing strategies.

EXHIBIT 7–24 Appropriate Internal Resources, Competencies, and Capabilities for the Positioning Strategies

Generic Strategy Resources and Competencies Organizational Capabilities

Cost leadership ● Sustained capital investment and access to capital.

● Process engineering skills. ● Intense supervision of labor. ● Products and services that

are simple to produce in volume.

● Low-cost delivery system.

● Tight cost control. ● Frequent, detailed control

reports. ● Structured organization and

responsibilities. ● Incentives based on meeting

strict quantitative targets.

Differentiation ● Strong marketing abilities. ● Product/service engineering. ● Creative flair. ● Capability and competency

in basic research. ● Reputation for quality or

technological leadership. ● Long tradition in the indus-

try or unique combination of skills.

● Strong cooperation from channels.

● Strong coordination among functions in R&D, product/ service development, and marketing.

● Subjective measurement and incentives instead of quantitative measures.

● Amenities to attract highly skilled labor, scientists, or creative people.

Focus ● Combination of the pre- ceding competencies and resources directed at a par- ticular strategic target.

● Combination of the pre- ceding organizational requirements directed at a particular strategic target.

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), pp. 40–41. Copyright © 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster Adult Publishing Group.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

302 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

ESSEnTIALS for A STrATEgIC THInkEr 7–5

What is Benchmarking?

Benchmarking is a management process of com- paring an organization against a set of its peers or top performers on critical metrics for suc- cess. Benchmarking is generally considered to be part of an organization’s “learning” or continuous improvement efforts. In a sense, benchmarking is similar to “taking a picture” of one’s organization and comparing it with pictures of other organiza- tions. Some organizations simply identify a peer organization and try to emulate it; however, a better approach is to view benchmarking as an ongoing, long-lived process for senior manage- ment that is designed to gather and dissemi- nate both process and performance information throughout an organization.

The benchmarking process begins with the identification of a set of peers. The peers should be organizations that are similar, but not necessarily identical, to the organization and should operate on a scale that will not distort the understandings. The peers should not be direct competitors because of the collabora- tive nature of the process that will ensue. For example, a large health care system might use a telecommunications company as a benchmark- ing peer or a multifacility nursing home might seek a hotel chain.

Senior management of the peer organiza- tions should be contacted to initiate a dialog. The initiator of the benchmarking process is seeking a group of senior managers with whom every intimate detail concerning the strategies of the organizations may be shared. In other words, the initiator should describe the desire to share strategies, financial data, personnel data, and so on, as though the benchmarking participants were part of the senior manage- ment team of each organization. The number of

participants in a benchmarking group probably should be limited to seven or fewer to allow all participants equal opportunities to participate and gain from the experience.

Once a set of willing participants has been recruited, an initial meeting should be sched- uled for the purpose of establishing protocol – a set of ground rules for the operation of the benchmarking group. Although there is no well-established standard for such a proto- col, it should focus on creating an atmosphere in which full disclosure and frank discussion is facilitated. The meeting can be held at the location of one of the participants or it can be at a neutral site. Ground rules should deal with frequency of meetings, confidentiality, format of the meetings, processes for establishing the agenda for subsequent meetings, and the pro- cess of choosing the locations for meetings.

It may be useful to hire a professional facilitator for the first meeting and to deter- mine whether such a person would be help- ful in further meetings of the group. Each participant should leave the first meeting with the agenda for the second meeting and a set of work assignments to be completed by the next meeting. Work assignments might include detailed descriptions of the handling of customer complaints, how supplies are inventoried, how customer billing is pro- cessed, or other activities identified as worthy of discussion by the group. At each meeting, detailed minutes (perhaps a transcript) should be taken, produced, and distributed to the participants in a timely manner. The purpose of the minutes is to formalize the process and to minimize misunderstandings that may arise from failed memories.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 303

Step 5: Synthesize and Identify Implications of Strategy Choices – Strategy Map

After all the strategy formulation decisions have been made, they should be eval- uated in combination to ensure that they are logical and fit together. As suggested at the beginning of this chapter and illustrated in exhibit 7–2, the strategies selected must address an external issue, draw on an internal and competitively relevant strength or fix a competitively relevant weakness, maintain the organi- zational mission, move the organization toward the vision, and make progress toward achieving one or more of the organization’s goals. each strategy should be checked to determine if it meets these criteria.

The strategies of the organization can be mapped and the interdependence of strategies evaluated in concert for consistency and compatibility. evaluating all the strategic decisions together provides the “big picture” of where the organiza- tion is going and helps to determine whether the vision is truly being achieved. in the process of evaluating the strategic map, adjustments may be made and the strategies reconsidered. For example, a vertical integration adaptive strat- egy and a prospector strategic posture may not work together well. Similarly, a product development or diversification adaptive strategy through an internal development market entry strategy may be inconsistent with an analyzer strategic posture. in addition, the map provides useful shorthand for communicating and discussing the strategy of the organization.

Strategy Map: An Example A strategy map for a long-term care organization is shown in exhibit 7–25. This long-term care organization has been a free-standing, independent institution pro- viding assisted living services for some time. however, because of the growth of integrated health systems in the area, the organization’s leadership has decided that it needs to be part of a system to provide a steady referral base. Therefore, vertical integration as an adaptive strategy was selected. To accomplish the vertical integration strategy, management decided to develop an alliance with a nearby local hospital. The strategic posture is one of aggressively defending the organization’s traditional market (private pay and long-term care insurance), but management is willing to enter new products and markets if the viability

The formal agenda for subsequent meetings should include reports from each of the partici- pants. The frequency of meetings should be such that they impact the practices and procedures of the participants. For the most positive impact, meetings should occur at least on a quarterly basis.

The benchmarking process is not completed when the meetings end. The lessons learned and the insight gained must be shared with

subordinates. Participants in the benchmarking process should schedule regular meetings with subordinates for dissemination of information. In other words, the lessons should be shared widely within the organization to gain the great- est impact.

Source: Andrew C. Rucks, PhD, School of Public Health, University

of Alabama at Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

304 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

seems reasonable (analyzer). in addition, management has selected market devel- opment directed toward entering into the Medicare segment of the market and has decided that the organization has the internal resources to accomplish Medicare certification. Furthermore, product development has been selected and management is planning to add an independent living facility on the organiza- tion’s campus to complement the current assisted living and nursing facilities. The product development strategy will be accomplished through a joint venture with a regional hotel chain. The organization’s leadership believes the market and product development strategies are consistent with their analyzer strategic pos- ture. The organization plans on developing an extensive advertising campaign (penetration strategy) aimed at communicating its highly effective differentiation strategy based on quality, high level of service, and caring. Additionally, the organization has committed to install a sophisticated information system includ- ing bedside terminals to further differentiate itself from its competition.

Such a strategy map provides a broad overview of the organization’s direction and a basis for the development of effective implementation strategies to carry out the organization’s overall strategy. These maps need not be complicated. indeed, at this level, simple is better. in stable markets, strategic managers can rely on compli- cated strategies built on detailed predictions of the future; however, in complicated, fast-moving markets where significant growth can occur, unpredictability reigns. When “business” becomes complicated, strategy should be simple.26

Strategic Momentum: Adaptive, Market Entry/Exit, and Competitive Strategies

Managing strategic momentum at this level is not a matter of keeping the organization on track: rather, it entails deciding if a completely new track or approach is warranted. Managers must decide if conditions require a change in

Market Entry/Exit Strategies

Adaptive Strategies

Competitive Strategies

CooperationExpansion of Scope Strategic Posture

Vertical Integration

Product Development

Market Development

Penetration

Alliance

Joint Venture

Internal Development

Analyzer

Positioning

Marketwide Differentiation

Quality Service CaringMaintenance of Scope

Enhancement

Hospital Alliance

Independent Living

Medicare Advertising

Information System

Development

• •

•

•

•

• • •

•

•

•

•

•

EXHIBIT 7–25 Map of Selected Strategies for a Long-Term Care Organization

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 305

the organization’s fundamental strategies. Authors of Strategic Control, lorange, Morton, and Ghoshal have called this decision “managing the strategic leap.” They suggest:

here the challenge is to reset the trajectory of the strategy as well as to decide on the relative levels of thrust and momentum for the new strategic direc- tion. The critical underlying assumptions that underpin the strategy are no longer viable, and the rules that govern the strategy must be redefined. This situation involves a mental leap to define the new rules and to cope with any emerging new environmental factors. Such a recalibrating of strategy requires a personal liberation from traditional thinking, an ability to change one’s mindset and confront the challenge of creating advantage out of dis- continuity. The question now is how to achieve a quantum leap in one’s strategy to capitalize on emerging environmental turbulence. one must pro- ceed by redefining the rules rather than by clinging to the unrealistic hope that the old rules are still valid.27

changes in one organization’s adaptive strategy create significant changes for other organizations, especially those in the same strategic group. Such dramatic change is relatively rare in stable environments but somewhat more frequent in dynamic environments. Signals that the basic strategy for the organization needs to be changed must be carefully monitored because the change will have serious long-term consequences. The questions presented in exhibit 7–26 are helpful in surfacing such signals, and they provide a start- ing point for discussion of the appropriateness of the organization’s adaptive strategy. The assumption underlying exhibit 7–26 is that the mission, vision, values, and goals are still appropriate but that the organization’s adaptive strategy should be questioned.

EXHIBIT 7–26 Managing Strategic Momentum – Adaptive Strategies

1. Are all the important assumptions on which the strategy is based realistic (external systems, competitive service areas, internal systems)?

2. Has the strategy been tested with appropriate strategic thinking tools?

3. Have the major stakeholders both inside and outside the organization that will be most influential in ensuring the success of the strategy been identified and evaluated?

4. If the adaptive strategy is to fill a currently unfilled niche in the market, has the organiza- tion investigated whether the niche will remain open long enough to return the capital investment?

5. Has the adaptive strategy been tested with appropriate financial analysis, such as return on investment and the organization’s ability and willingness to bear the risks?

6. Is the payback period acceptable in light of potential external change?

7. Does the strategy take the organization too far from its current products and markets?

8. Is the adaptive strategy appropriate for the organization’s present and prospective position in the market?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

306 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

changes in market entry/exit strategies represent a “new way of doing business” for an organization. For example, developing alliances as a means of accomplishing market development is quite different from an internal develop- ment strategy and changes the entire orientation of the organization. evaluation of the effectiveness of the market entry/exit strategies provides insight into how well the adaptive strategies are being carried out in the marketplace (see exhibit 7–27). Similarly, a change in an organization’s strategic posture or pos- itioning represents a revolutionary change. For example, moving from a differ- entiation strategy to cost leadership initiates substantial change throughout the organization. The adaptive strategies and market entry/exit strategies may be appropriate, but if the product or service does not have the appropriate stra- tegic posture or is not positioned effectively, the organization may not achieve its goals (see exhibit 7–28).

EXHIBIT 7–27 Managing Strategic Momentum – Market Entry/Exit Strategies

1. Is the market entry/exit strategy the most appropriate way to achieve the mission, vision, and goals of the organization?

2. Is the market entry/exit strategy consonant with the values of the organization?

3. Is the market entry/exit strategy the best way to accomplish the adaptive strategy?

4. Is the market entry/exit strategy compatible with the adaptive strategy?

5. Does management understand the unique requirements of the market entry/exit strategy (purchase, cooperation, development, market exit)?

6. Does management understand the important market forces?

7. Have adequate financial resources been allocated to enter the market?

8. Does the selection of the market entry/exit strategy affect the ability of the organization to effectively position its products/services in the market?

9. Does the market entry/exit strategy place unusual strains on any of the functional areas?

10. Have new stakeholder relationships developed as a result of the market entry/exit strategy (customers, vendors, channel institutions, and so on)?

11. Has the relationship between the desire and need for rapid market entry or exit been properly analyzed?

12. Has the relationship between the desire and need for control over the products and services been achieved?

13. Have the trade-offs between costs and control been properly analyzed?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 307

Strategic Posture

1. Is the strategic posture sustainable?

2. Have there been external developments (technological, social, regulatory, economic, or competitive) that have shortened product life cycles of important products/services?

3. Are there new market opportunities or challenges that suggest the organization should move more toward a prospector posture? Analyzer posture? Defender posture?

4. Has the organization developed the right mix of centralization and decentralization of decision making for the selected strategic posture?

5. Is the level of standardization and administrative flexibility appropriate for the strategic posture?

6. Is the level and type of communication appropriate for the strategic posture?

7. Is the strategic posture appropriate given the barriers to market entry/exit?

8. Has the level of vertical integration been appropriate for the strategic posture?

9. Has the organization been caught by surprise too often?

10. Does the organization need to evolve its strategic posture?

11. Are the overall strategy, strategic posture, and value-adding strategies compatible?

Positioning

1. Is the product/service positioning credible to the customer?

2. Can the organization use one of the other generic positioning strategies?

3. Is the positioning strategy appropriate considering the external opportunities and threats?

4. Will competitors allow the selected positioning?

5. Is the positioning strategy best suited to capitalize on the organization’s strengths and minimize its weaknesses?

6. Is the positioning of the organization’s products/services unique in the marketplace?

7. Is the positioning strategy defensible against new players trying to position themselves in a similar fashion?

8. Does the positioning strategy provide the appropriate image for the organization?

9. Is the positioning strategy sustainable?

10. Is the appropriate distribution channel being used?

11. Is the current promotional strategy appropriate?

12. Is the pricing strategy appropriate?

Chapter Summary

Several strategic alternatives are available to health care organizations. To initiate strategic thinking and planning, it is important that the organization has a process in place for understanding the internal systems, external conditions, and methods for evaluating strategic alternatives. There are several methods for deciding which of the adaptive strategic alternatives is most appropriate for an organization,

EXHIBIT 7–28 Managing Strategic Momentum – Competitive Strategies

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

308 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

including SWoT analysis, external/internal strategy matrix, product life cycle (Plc) analysis, portfolio analyses (BcG and extended), strategic position and action evaluation (SPAce) analysis, and program evaluation. using these meth- ods, managers can classify internal and external factors to gain perspective con- cerning which adaptive strategic alternative or combination of alternatives is most appropriate.

once the most appropriate adaptive strategy (or combination of adaptive strategies) has been determined, a market entry/exit strategy must be selected. expansion and maintenance of scope strategies are initiated through one or more of the market entry strategies. entry strategies include acquisition, licensing, venture capital investment, merger, alliance, joint venture, internal development, internal venture, and reconfiguration of the value chain. The organization’s internal resources, competencies, and capabilities (competitively relevant strengths), the external conditions, and the organization’s objectives will determine which of these strategies is most appropriate. if market exit is selected, it must be determined if the exit will occur fast or slowly and if the market exit will be partial or complete. Divestiture, liquidation, and retrench- ment can happen very quickly while harvesting usually occurs over a number of years. Divestiture and liquidation are generally decisions to completely leave the market. harvesting and retrenchment are seen as decisions to partially exit the market.

After the market entry/exit strategy has been selected, competitive strategies, which include strategic posture and positioning strategies, should be evalu- ated and selected. Strategic postures include defender, prospector, and analyzer strategies. Positioning strategies include marketwide or focus strategies of cost leadership or differentiation. The external conditions and internal resources, capa- bilities, and competencies influence strategic posture and positioning strategies. Therefore, the most appropriate strategic posture and positioning strategy may be selected through an evaluation of the internal skills and resources of the organiza- tion and the external conditions.

chapters 8 through 10 discuss implementation strategies. chapter 8 will address strategy implementation through value-adding service delivery strategies.

Practical Lessons for Health Care Strategic Thinkers

1. The strategy analysis methods are tools to help strategic managers gen- erate strategic alternatives and evaluate the appropriateness of strategies given the organization’s external conditions and internal strengths and weaknesses.

2. use several strategic thinking tools (analyses) to surface different perspec- tives and insights.

3. remember there are no definitive answers to strategic decisions; only informed judgment.

4. evaluation of strategic alternatives requires organization and structured thinking.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 309

THE LANGuAGE OF STRATEGIC MANAGEMENT: KEy TERMS AND CONCEPTS

Questions for Class Discussion

1. Why is the traditional SWoT Analysis a good place to begin? What are the problems with using SWoT?

2. explain the rationale underlying the external/internal strategy matrix.

3. Describe the product life cycle. how is it useful for thinking about the adaptive strat- egy of a health care organization?

4. Why is the length of the product life cycle important for strategy formulation?

5. What adaptive strategic alternatives are indicated for each stage of the product life cycle?

6. is BcG portfolio analysis useful for developing adaptive strategic alternatives for health care organizations?

7. explain the rationale for expanding the traditional BcG portfolio matrix.

8. identify appropriate adaptive strategic alternatives for each quadrant in the expanded portfolio matrix.

9. explain the strategic position and action evaluation (SPAce) matrix. how may adap- tive strategic alternatives can be developed using SPAce?

10. Why should program evaluation be used for public health and not-for-profit insti- tutions in the development of adaptive strategies?

11. What are the critical factors for determining the importance of programs within a not- for-profit organization?

12. Why should public health and not-for-profit organizations set priorities for programs?

13. Describe program Q-sort. Why would an organization use Q-sort?

14. how are market entry/exit strategies evaluated? What role do speed of market entry/ exit and control over the product or service play in the market entry/exit decision?

15. how are the strategic postures and the product life cycle related?

BcG Portfolio Analysis Benchmarking community need extended Portfolio Matrix Analysis external/internal Strategy Matrix

needs/capacity Assessment organizational capacity Product life cycle (Plc) Analysis Program evaluation Program Priority Setting

Program Q-Sort evaluation Q-sort re-engineering SPAce Analysis SWoT Analysis

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

310 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

notes

1. George Yip and Gerry Johnson, “Transforming Strategy,” Business Strategy Review 18, no. 1 (Spring 2007), pp. 11–15.

2. Peter F. Drucker, Management: Tasks, Responsibilities, Practices (new York: harper & row Publishers, 1974), p. 470.

3. Association of Academic health centers 2015 Annual Report, 1400 Sixteenth Street nW, Suite 720, Washington, Dc 20036, www.aahcdc.org. See also T. Shoemaker and M. D. Samuel, “Preparing for health care reform: Ten recommendations for Academic health centers,” Academic Medicine 86, no. 5 (2011), pp. 555–558.

4. Marilyn M. helms and Judy nixon, “exploring SWoT Analysis – Where Are We now?” A review of Academic research from the last Decade,” Journal of Strategy and Management 3, no. 3 (2010), pp. 215–251.

5. Jeroen D. h. van Wijngaarden, Gerald r. M. Scholten, and Kess P. van Wijk, “Strategic Analysis for health care organizations: The Suitability of SWoT,” International Journal of Health Planning and Management 27, no. 1 (2012), pp. 34–49.

6. This approach is a modified ToWS matrix analysis accounting for three levels of environmental analysis and determination of competitive advantages and dis- advantages. See heinz Weihrich, “The ToWS Matrix: A Tool for Situational Analysis,” Long Range Planning 15, no. 2 (1982), pp. 54–66.

7. Brian D. Smith, rosanna Tarricone, and vincenzo vella, “The role of Product life cycle in Medical Technology innovation,” Journal of Medical Marketing 13, no. 1 (2013), pp. 37–43.

8. Susanna e. Krentz and Suzanne M. Pilskaln, “Product life cycle: Still a valid Framework for Business Planning,” Topics in Health Care Financing 15, no. 1 (Fall 1988), pp. 47–48.

9. Geoffrey A. Moore, “To Succeed in the long Term, Focus on the Middle Term,” Harvard Business Review 85, no. 7/8 (July/August, 2007), p. 84.

10. Gary Mccain, “Black holes, cash Pigs, and other hospital Portfolio Analysis Problems,” Journal of Health Care Marketing 7, no. 2 (June 1987), pp. 56–57.

11. Moore, “To Succeed in the long Term,” p. 84.

12. robin e. Scott MacStravic, edward Mahn, and Deborah c. reedal, “Portfolio Analysis for hospitals,” Health Care Management Review 8, no. 4 (1983), p. 69. See also Margaret Brunton, “emotion in health care: The cost of caring,” Journal of Health Organization and Management 19, no. 4/5 (2005), pp. 340–352.

13. Gary Mccain, “Black holes, cash Pigs,” p. 56. 14. ibid., p. 61. 15. ibid., p. 62. 16. Alan J. rowe, richard o. Mason, Karl e. Dickel, and

neil h. Snyder, Strategic Management: A Methodological Approach, 4th edn (reading, MA: Addison-Wesley, 1994), p. 148.

17. ibid., p. 149. 18. Peter M. Ginter, W. Jack Duncan, Stuart A. capper, and

Melinda G. rowe, “evaluating Public health Programs using Portfolio Analysis,” Proceedings of the Southern Management Association, Atlanta (november 1993), pp. 492–496.

19. u.S. Department of health and human Services, Healthy People 2012 (Washington, Dc: u.S. Government Printing office, 2010). This publication presents the national health objectives. u.S. Department of health and human Services, Tracking Healthy People 2020 (Washington, Dc: u.S. Government Printing office, november, 2010). This publication is a statistical compendium that provides information on measuring 200 ten-year national objec- tives, technical notes, and operational definitions. every decade, the healthy People initiative develops a new set of science-based, 10-year objectives with the goal of improving the health of all Americans.

20. Suzanne robinson, lestlyn Williams, helen Dickinson, Tim Freeman, and Benedict rumbokl, “Priority-Setting and rationing in healthcare: evidence from the english experience,” Social Science and Medicine 75, no. 12 (2012), pp. 2386–2393.

21. Jacqueline Margaret cumming, “Priority-Setting Meets Multiple Streams: A Match to be Further examined,” International Journal of Health Policy and Management 5, no. 8 (2016), pp. 497–499.

16. how may the positioning strategic alternatives be evaluated?

17. Do health care organizations change directional and adaptive strategies often?

18. how can “doing the strategy” (managing the strategic momentum) provide infor- mation about changing the strategy?

19. As managers learn by doing, what strategies are most likely to change: adaptive, market entry/exit, or competitive?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Chapter 7 evaluation of alternatives and strategiC ChoiCe 311

22. See J. Preskitt, M. Fifolt, Peter M. Ginter, Andrew c. rucks, and M. S. Wingate, “identifying continuous Quality improvement Priorities in Maternal, infant and early childhood home visiting,” Journal of Public Health Management & Practice 22, no. 2 (2016), pp. e12– e20 and M. Fifolt, J. Preskitt, Andrew c. rucks, K. corvey, and e. c. Benton, “Promoting continuous Quality improvement in the Alabama child health improvement Alliance (AchiA) through Q-sort Methodology” Quality Management in Health Care 26, no. 1 (2017), pp. 33–39.

23. Fred n. Kerlinger and howard B. lee, Foundations of Behavioral Research, 4th edn (Fort Worth, TX: harcourt college Publishers, 2000), p. 722.

24. J. Block, The Q-Sort Method in Personality Assessment and Psychiatric Research (Palo Alto, cA: consulting Psychologist Press, 1978), p. 137.

25. neale Smith, craig Mitton, laura Dowling, Mary- Ann hiltz, Matthew campbell, and Shashi Ashok Gujar, “introducing new Priority Setting and resource Allocation Processes in A canadian healthcare organization: A case Study Analysis informed by Multiple Streams Theory,” International Journal of Health Policy and Management 5, no. 1 (2016), pp. 23–31.

26. Kathleen M. eisenhardt and Donald n. Sull, “Strategy as Simple rules,” Harvard Business Review 79, no. 1 (January, 2001), pp. 107–116; William M. Trochim, Derek A. cabrera, Bobby Milstein, richard S. Gallagher, and Scott J. leischow, “Practical challenges of Systems Thinking and Modeling in Public health,” American Journal of Public Health 96, no. 3 (2006), pp. 538–546.

27. Peter lorange, Michael F. Scott Morton, and Sumantra Ghoshal, Strategic Control (St. Paul, Mn: West Publishing, 1986), p. 11.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

C op

yr ig

ht ©

2 01

8. J

oh n

W ile

y &

S on

s, In

co rp

or at

ed . A

ll rig

ht s

re se

rv ed

.