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S T R AT E G I C M A N A G E M E N T
O F H E A LT H CA R E
ORGANIZATIONS

SEVENTH EDITION
STRATEGIC MANAGEMENT
OF HEALTH CARE
ORGANIZATIONS
PETER M. GINTER
University of Alabama at Birmingham
W. JACK DUNCAN
University of Alabama at Birmingham
LINDA E. SWAYNE
University of North Carolina at Charlotte
2013 Peter M. Ginter, W. Jack Duncan, Linda E. Swayne
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Library of Congress Cataloging-in-Publication Data
Ginter, Peter M.
Strategic management of health care organizations / Peter M. Ginter, W. Jack Duncan,
Linda E. Swayne. 7th ed.
p. cm.
Rev. ed. of: Strategic management of health care organizations / Linda E. Swayne,
W. Jack Duncan, Peter M. Ginter. 6th ed. c2008.
Includes bibliographical references and index.
ISBN 978-1-118-46646-9 (hardback) ISBN 978-1-118-46674-2 (ebk) ISBN 978-1-118-46672-8
(ebk) ISBN 978-1-118-46673-5 (ebk)
I. Duncan, W. Jack (Walter Jack) II. Swayne, Linda E. Strategic management of health care
organizations. III. Title.
[DNLM: 1. Health Services Administration. 2. Health Planningorganization & administration.
3. Organizational Innovation. W 84.1]
362.1068dc23 2012043408
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-44646-9 (hardback) ISBN 978-1-118-46674-2 (ebk)
ISBN 978-1-118-46672-8 (ebk) ISBN 978-1-118-46673-5 (ebk)
Cover design: Cylinder
Set in 10/12 pt ITC Garamond Std by MPS Limited, Chennai, India
Printed in the USA by Malloy Lithography, Ann Arbor, MI, USA
v
CONTENTS
Preface vii
Chapter 1 The Nature of Strategic Management 1
Chapter 2 Understanding and Analyzing the General
Environment and the Health Care Environment 33
Chapter 3 Service Area Competitor Analysis 75
Chapter 4 Internal Environmental Analysis and Competitive
Advantage 127
Chapter 5 Directional Strategies 165
Chapter 6 Developing Strategic Alternatives 205
Chapter 7 Evaluation of Alternatives and Strategic Choice 255
Chapter 8 Value-Adding Service Delivery Strategies 307
Chapter 9 Value-Adding Support Strategies 345
Chapter 10 Communicating the Strategy and Developing
Action Plans 383
Appendix A Analyzing Strategic Health Care Cases 411
Appendix B Health Care Organization Accounting,
Finance, and Performance Analysis 423
Appendix C Health Care Acronyms 443
Index 451

vii
More than two decades ago, the three of us agreed that health care was experiencing evolutionary, and in some segments revolutionary, change. At that time,
we wrote in the Preface of the fi rst edition that clearly health care organizations
have had diffi culty in dealing with a dynamic environment, holding down costs,
diversifying wisely, and balancing capacity and demand. Our conclusion was
that only a structured strategic management approach that recognized the value
of emergent thinking could make sense of such a rapidly changing environment.
Our only surprise has been that the rate of change in the health care environment has been even greater than we imagined.
Today, health care organizations have almost universally embraced strategic
management as fi rst developed in the business sector and now have developed
strategic management processes that are uniquely their own. Health care leaders
have found that strategic thinking, planning, and managing strategic momentum are essential for coping with the dynamics of the health care industry and
strategic management has become the single clearest manifestation of effective
leadership in health care organizations.
In the broadest terms, this text is about leadership; more narrowly, it concerns
the essential strategic tasks of leading and managing health care organizations.
As a result, the seventh edition continues to advocate the importance of strategic thinking and clearly differentiates strategic thinking, strategic planning, and
managing strategic momentum. These concepts represent the central elements
of a complete strategic management process that we believe refl ects the realities of
conceptualizing, developing, and managing strategies.
Specifi cally, our approach depicts strategic management as the processes of
strategic thinking, consensus building and documentation of that thinking into
a strategic plan, and managing strategic momentum. Through the management
of the strategic plan, new insights and perspectives emerge and strategic thinking, planning, and managing are reinitiated. Therefore, strategic managers must
become strategic thinkers with the ability to evaluate the changing environment,
analyze data, question assumptions, and develop new ideas. Additionally, strategic managers must be able to develop and document a plan of action through
strategic planning. Once a strategic plan is developed, managers maintain the
strategic momentum of the organization. As strategic managers attempt to carry
out the strategic plan, they evaluate its success, learn more about what works,
and incorporate new strategic thinking.
It is our view that strategic control is integral to managing strategic momentum and cannot be thought of or taught as a separate process. Therefore, traditional strategic control concepts are integrated into the strategy development
chapters under the heading of Managing Strategic Momentum. We believe that
P R E F A C E
viii PREFACE
this approach better refl ects how strategic control works in organizations as a
part of managing the strategy, not as an afterthought or add on.
Although we present a structured strategic management process, we believe
that strategic management is highly subjective, often requiring signifi cant intuition and even well-informed guesswork. However, intuition and the development
of well-informed opinions are not easily learned (or taught). Therefore, a major
task of the future strategic thinker is to fi rst develop a thorough understanding
of analytic strategic management processes and then through experience
develop the intuition, perspective, and insight to consider previously uncharted
strategic issues. Our map and compass metaphor provides a framework for
blending rational, analytical planning with learning and responsiveness to new
realities. We believe this text provides that foundation for effective strategic
thinking, planning, and managing strategic momentum.
Features of the Text
Feedback from users of previous editions of Strategic Management of Health
Care Organizations has reinforced our belief that these features aid in providing
an informative, interesting, and pedagogically sound foundation for understanding and embracing strategic management of health care organizations.
Each chapter begins with an Introductory Incident to provide a practical
example of the concepts discussed in the chapter.
Learning Objectives direct attention to the important points or skills introduced in the chapter.
Models, examples, and exhibits are included to assist in learning chapter
material.
The Map and Compass provides a useful metaphor for conveying the
view that strategic leaders must both plan as best they can but also learn,
adjust, and establish new direction (develop a new plan) as they progress.
Perspectives in each chapter are drawn from actual health care organizations experiences or emphasize recurring themes and abiding truths and
are useful to augment the content of each chapter. These sidebars are
designed to enable the student to relate to particular concepts presented
in the chapter.
Lessons for Health Care Managers serve as chapter summaries and highlight the most important lessons to be taken away from each chapter.
Health Care Managers Bookshelf introduces classic and popular books
that have particular relevance to the strategy topic discussed in the text.
Books were selected on the basis of their importance to present and
future health care managers and included because they either represent a
classic contribution to the fi eld or provide potentially trend-setting information for strategic health care managers.
Key Terms and Concepts present the essential vocabulary and terminology
relative to the chapter s material.
PREFACE ix
Questions for Class Discussion aid the reader in reviewing the important
material and thinking about the implications of the ideas presented.
Notes contain the references used in development of the chapter
materials.
Three Appendices to assist readers Analyzing Strategic Health Care
Cases, Health Care Organization Accounting, Finance, and Performance
Analysis, and Health Care Acronyms.
A Web-based Instructors Support site is available to verifi ed course instructors using the text. The support material includes PowerPoint slides for
each chapter, chapter lecture notes that include suggestions for effective
teaching, and answers to the end-of-chapter questions. The Instructors
Support also contains a true/false, multiple choice, and discussion question
test bank and can be found at www.wiley.com/go/ginter7e.
Through our own teaching, research, and consulting in the health care fi eld,
we have applied the process outlined in this text to physician practices, hospitals, local and state public health departments, long-term care facilities, social
service organizations, and physical therapy practices. We have students who
report back to us saying that they lead strategic planning in their organizations
using the process with great success. The process works.
Organization of the Text
The text contains 10 chapters and three appendices addressing the philosophy
and activities of strategic management. Chapter 1introduces defi nitions for strategic management and its activities strategic thinking, strategic planning, and
managing strategic momentum. The chapter discusses the need and rationale for
strategic management in today s turbulent health care environment and briefl y
traces its historical foundations. In addition, Chapter 1presents a conceptual
model or map that guides strategic thinking, focuses on important areas for strategic planning, and provides the constructs for managing strategic momentum.
Chapter 2contains strategic thinking and planning maps for investigating the
external environment both the general environment and the health care industry
environment. Chapter 3narrows the external environmental focus by providing strategic thinking maps for conducting service area and competitor analysis for a specifi c
health care organization. Assessment of the internal environment is accomplished
through strategic thinking maps for a health care value chain and analysis of the
organization s resources, capabilities, and competencies, as examined in Chapter 4 .
The directional strategies mission, vision, values, and strategic goals are
examined in Chapter 5 . Developing a mission asks members of an organization
to strategically think about its distinctiveness; developing a vision allows them to
think about their hopes for the organization s future; and building awareness
of organizational values makes members aware of the principles that should be
cherished and not compromised as the mission and vision are pursued. Strategic
goals establish clear targets and help focus activities. Chapters 2 5 collectively
constitute situation analysis.
x PREFACE
Strategy formulation is concerned with making strategic decisions using the
information gathered during situational analysis. Chapter 6provides the decision
logic for strategy formulation and demonstrates that strategic decisions are connected in an endsmeans chain. Each decision along the decision chain more
explicitly defi nes the strategy and must be consistent with upstream and downstream decisions. Chapter 7discusses how to evaluate the strategic alternatives
within each strategy type in the decision chain. These evaluation methods do
not make the strategy decision. Rather, they are constructs or maps for helping
strategists to think about the organization and its relative situation, thus enabling
them to understand the potential risks and rewards of their strategic choices.
Managing strategic momentum entails putting strategies to work (managerial actions that accomplish the strategy), incorporating strategy evaluation and
control, and building strategic awareness. Implementation requires that strategic
managers shape and coordinate the value chain components and ensure that
the organization s action plans are directly tied to selected strategies. Chapter
8addresses the development of implementation plans through either maintaining or changing the pre-service, point-of-service, and after-service strategies.
Strategic managers should determine the essential characteristics of service
delivery to ensure it best contributes to accomplishment of the strategy. Chapter 9
examines the role of organizational culture, organizational structure, and
strategic resources in implementing strategy. These value chain components
determine the organizational context and are vital in effective strategy implementation. Chapter 10demonstrates how strategy may be translated into organizational unit objectives and action plans. It is the organizational units that must
carry out strategy and strategic managers must review objectives and action
plans to ensure that they are coordinated and make best use of human, physical,
and fi nancial resources. Each of these chapters points out the need to manage
strategic momentum by thinking, planning, and doing, and then rethinking, new
planning, and doing.
Finally there are three appendices as a reference for users of the text.
Appendix A, Analyzing Strategic Health Care Cases, presents a methodology
for case analysis for those using case studies to practice strategic thinking
and planning; Appendix B, Health Care Organization Accounting, Finance, and
Performance Analysis, as an accounting and fi nance refresher and reference;
and fi nally, Appendix C, Health Care Acronyms, is a quick source for defi nitions
of the short-hand language of health care.
The Author Team
In developing and writing this book, as with all our collaborative projects, we
have created a team in its truest sense. Recognizing that each of us makes a
unique contribution and provides leadership, we have changed the order in
which the authors are listed every two editions. For the fi rst and second editions,
the authors were listed as Duncan, Ginter, and Swayne; for the third and fourth
editions, the authors were listed as Ginter, Swayne, and Duncan. In the fi fth and
sixth editions, the order was Swayne, Duncan, and Ginter.
PREFACE xi
Acknowledgments
A number of people have provided inspiration, ideas, and considerable effort to
produce the seventh edition. We are indebted to many individuals for their assistance and encouragement. A special note of thanks to Sunil Erevelles, Chair of the
Department of Marketing at the Belk College of Business at the University of North
Carolina at Charlotte, and to Dean Max Michael, MD of the School of Public Health
at the University of Alabama at Birmingham, who have continuously been supportive of our efforts. Also, a special thanks to Andrew C. Rucks for his Appendix
B, Health Care Organization Accounting, Finance, and Performance Analysis and
his invaluable contribution to the text s Web-based Instructor s Support. Thank you
Rongbing (Bing) Xie, our teaching assistant at UAB, who tirelessly supported our
in-class and on-line teaching.
We must also thank our many students (many of whom became strategic management course instructors), who have provided feedback, made contributions,
used the book in their professional careers, and kept in contact to tell us of the
value of the book that remains on their bookshelves.
Finally, but most importantly, we thank our families who have supported and
encouraged us as we worked on still another writing project. Thank you all for
your understanding.

1 The Nature of Strategic
Management
Introductory Incident
It Can Be Done: Premier Healthcare Alliance Accountable Care
Collaboratives Are Saving Lives and Saving Costs
Statistics show that health care costs have been growing at an unsustainable rate, reaching an
estimated 17.3 percent of gross domestic product (GDP) in 2009, according to the Centers for
Medicare and Medicaid Services (CMS), representing the largest one-year increase in history
when the nation itself was in the midst of the great recession. Predictions are for health care
costs to be 19.3 percent of GDP in 2019 (four times the 5.1 percent of GDP in 1960). Despite the
high cost of health care, gaps and inequities persisted, leading to health care reform. The 2010
Patient Protection and Aff ordable Care Act (PPACA), or commonly Aff ordable Care Act (ACA) is
attempting to change the US health care system from a volume-based to a value-based model.
It is not the strongest of the species that survive, nor the most intelligent, but the one most
responsive to change.
CHARLES DARWIN
2 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Premier Healthcare Alliance believes that accountable care organizations (ACOs) are the
way to better align the incentives and needs of all stakeholders. Premier s components to
the ACO model include:
People-centered health homes that deliver primary care and coordinate with other
providers as needed.
New approaches to primary, specialty, and hospital care that reward care coordination,
effi ciency, and productivity.
Tightly integrated relationships with specialists, ancillary providers, and hospitals to provide
focus and alignment on achieving high-value outcomes.
Provider/payer partnerships and reimbursement models that reward improved outcomes
(value over volume).
Population health information infrastructure, including health information exchanges to
enable care across a designated population.
The goal is to incentivize health and wellness, rather than paying for treating disease. ACOs
actually began in 2005, when CMS began the Physician Group Practice demonstration. Its success in developing incentives based on the quality of care provided and the estimated savings
generated for the Medicare population served, led to the formation of the Medicare Payment
Advisory Commission (MedPAC) to begin looking for real ways to reduce costs, while improving
quality of care and patient satisfaction. ACOs were incorporated into the Aff ordable Care Act
legislated in March 2010.
Premier Healthcare Alliance has developed a proven model for ACOs based on the following
key elements:
Establish goals and mission create a defi nition of areas to address and what the
collaborative will do to fulfi ll its mission.
Defi ne consistent measures of success common measures that will be used to improve
defi ned outcomes.
Data collection and normalization use standardized data sets to meaningfully compare
results across participants.
Transparency participants commit to open sharing of performance data across the
collaborative to identify the top performers and learn from them.
Driver analysis and collaborative execution using transparent data, the collaborative can
set performance targets, identify opportunities for improvement, and establish areas of
focus.
Share best practices share across the collaborative to realize improvement gains.
Performance improvement analysis analyze data from the cohort and individuals to
highlight trends/opportunities that will drive performance and achieve goals.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 3
Premier established QUEST: High-Performing Hospitals collaborative (200 not-for-profi t
hospitals in 31 states) for hospitals to learn from the top performers and develop and implement systemic improvements across their organizations. Three goals drove the process: save
lives, safely reduce the cost of care, and deliver the most reliable and eff ective care. In three
years, QUEST hospitals saved an estimated 22,164 lives and reduced health care spending by
$2.13 billion (national translation would be more than 86,000 lives and $25 billion saved).
Source: Premier Healthcare Alliance, Inc.
Learning Objectives
After completing the chapter you will be able to:
1. Explain why strategic management has become crucial in todays dynamic
health care environment.
2. Trace the evolution of strategic management and discuss its conceptual
foundations.
3. Describe and explain the concept of strategic thinking maps.
4. Defi ne and diff erentiate between strategic management, strategic thinking,
strategic planning, and managing strategic momentum.
5. Understand the necessity for both the analytic and emergent models of strategic
management.
6. Understand how an organization may realize a strategy that it never intended.
7. Understand the benefi ts of strategic management for health care organizations.
8. Understand the importance of systems approaches.
9. Explain the links between the diff erent levels of strategy within an organization.
10. Describe the various leadership roles of strategic management.
Managing in a Dynamic Environment
The dramatic changes in the health care industry that began in the 1980s, marked
by the implementation of Medicare s prospective payment system in 1983, continue today (see Perspective 11for an overview of the Patient Protection and
Affordable Care Act the most signifi cant change for health care since the passage of Medicare and Medicaid in the 1960s, and still changing as components
are tested in courts and in its phased-in implementation). As a result, health
care institutions continue to face a turbulent, confusing, and often threatening
4 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
environment. Signifi cant change comes from many sources, including: legislative
and policy initiatives; international as well as domestic economic and market
forces; demographic shifts and lifestyle changes; technological advances; and
fundamental health care delivery changes. Certainly, health care systems, as
well as other domestic and international health care organizations, have had to
continuously adapt to these and other changes. As suggested in the introductory
quote, health care organizations will have to be responsive to and effectively
manage change in this dynamic environment.
PERSPECTIVE 11
The Patient Protection and Affordable Care Act (PPACA)
The PPACA was enacted in March of 2010; most
of its provisions go into eff ect in 2014. This complex law has many provisions; some of the more
important ones are summarized here.
First, the law requires most US citizens and
legal residents under age 65 to have health
insurance; this is the insurance mandate. The
law provides fi nancial penalties, if one does not
obtain coverage, and it provides subsidies, if one
has suffi ciently low household income.
Second, the law requires large employers,
those with 50 or more employees, to provide
health insurance to their workers who work 30 or
more hours per week. Failure to do so results in
fi nancial penalties on the employer. The most signifi cant of these is a fi ne of $2,000 per uninsured
worker. Firms with less than 50 workers are not
required to off er coverage, but receive short-term
(two-year) subsidies if they choose to do so.
Third, the law requires the establishment of
health insurance exchanges in each state. The
states have discretion in how these organizations operate, but if a state fails to establish an
exchange, the federal government will operate
one in the state. Exchanges are virtual marketplaces where individuals and small employers
can compare coverage from diff erent insurers,
obtain subsidies if they are eligible, and buy
insurance. The state exchange has to be selfsuffi cient, covering the administrative costs by
taxes or fees.
Fourth, within the exchanges individuals
and small fi rms may buy platinum, gold, silver, and bronze coverage. Each of these tiers
refl ects coverage of the same essential health
benefi ts at a diff erent expenditure level. A silver
plan, for example, must cover 70 percent of the
costs of the benefi t package, with the subscriber
paying the other 30 percent out of pocket.
Each insurer may off er several combinations of
deductibles, copays, and coinsurance features to
meet the spending level in each tier. The states,
with strong guidance from the federal government, determine what constitutes essential
health benefi ts.
Fifth, the law required the states to expand
the Medicaid programs to include citizens and
legal residents between ages 19 and 64, inclusive, if their income was below 139 percent of
the federal poverty line. The Supreme Court
found the provision enforcing this expansion to
be unconstitutional. As a result, the states now
have the option to expand Medicaid. If they do
so, the federal government will initially pay 100
percent of the costs of the expansion, declining
to 90 percent by 2019.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 5
This legislation poses a number of issues for
states, for employers, and for health care providers. The challenges include:
Should a state undertake the Medicaid
expansion? The expansion provides coverage to many uninsured people in the state
and is largely paid for with federal dollars. However, state Medicaid budgets are
already strapped.
Should the state create an insurance
exchange tailored, to the extent
possible, to the preferences of the state, or
should it simply let the federal government
do it? Exchanges are to be self-sustaining;
how will the administrative functions be
funded?
Should a smaller employer who currently
off ers coverage, drop the coverage, raise
wages, and encourage her employees to
buy coverage through the exchange?
Large employers are required to off er
coverage or pay a fi ne. Should they
drop coverage, forget the headaches of
employer-sponsored coverage, and just pay
the fi ne?
How is a hospital aff ected by PPACA?
There will be fewer uninsured, but
patient copays and deductibles may
be larger and government payments
(i.e., Disproportionate Share payments)
to care for the poor and uninsured
will be reduced.
SUGGESTED READING
J. P. Newhouse, Assessing Health Reform s Impact
on Four Key Groups of Americans, Health
Aff airs 29, no. 9 (2010), pp. 17141724.
Sources: Michael A. Morrisey, PhD, Director, Lister Hill Center for
Health Policy and Department of Health Care Organization and
Policy, University of Alabama at Birmingham.
Coping with Change
How can health care leaders deal with change? Which issues are most important or most pressing? Furthermore, what new issues will emerge? It is likely
that there will be new issues for health care organizations that have yet to be
identifi ed or fully assessed. Even more sobering, it seems certain that there will
be more change in the health care industry in the next 10 years than there has
been in the past 10 years.
Dealing with rapid, complex, and often discontinuous change requires leadership. Successful health care organizations have leaders who understand the
nature and implications of external change, the ability to develop effective
strategies that account for change, and the will as well as the ability to actively
manage the momentum of the organization. These activities are collectively
referred to as strategic management. The clearest manifestation of leadership in
organizations is the presence of strategic management and its activities. Strategic
management is fundamental in leading organizations in dynamic environments.
Strategic management provides direction and momentum for change.
Organizational change is a fundamental part of success. As health care leaders chart new courses into the future, in effect, they create new beginnings, new
6 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
chances for success, new challenges for employees, and new hopes for patients.
Therefore, it is imperative that health care managers understand the changes taking place in their environment; they should not simply be responsive to them,
they must create the future. Health care leaders must see into the future, create
new visions for success, and be prepared to make signifi cant improvements.
The Foundations of Strategic Management
In political and military contexts, the concept of strategy has a long history.
For instance, the underlying principles of strategy were discussed by Sun Tzu,
Homer, Euripides, and many other early strategists and writers. The English word
strategy comes from the Greek strat
eg
os, meaning a general, which in turn
comes from roots meaning army and lead. 1 The Greek verb strat
eg
e
o means
to plan the destruction of one s enemies through effective use of resources. 2
Similarly, many of the terms commonly used in relation to strategy objectives,
strategy, mission, strengths, weaknesses were developed by the military.
Long-Range Planning to Strategic Planning
The development of strategic management began with much of the business
sector adopting long-range planning. Long-range planning was developed in the
1950s in many organizations because operating budgets were diffi cult to prepare
without some idea of future sales and the fl ow of funds. Post-WWII economies
were growing and the demand for many products and services was accelerating.
Long-range forecasts of demand enabled managers to develop detailed marketing and distribution, production, human resources, and fi nancial plans for
their growing organizations. The objective of long-range planning is to predict
for some specifi ed time in the future the size of demand for an organization s
products and services and to determine where demand will occur. Many organizations have used long-range planning to determine facilities expansion, hiring
forecasts, capital needs, and so on.
As industries became more volatile, long-range planning was replaced by strategic planning because the assumption underlying long-range planning is that
the organization will continue to produce its present products and services
thus, matching production capacity to demand is the critical issue. However, the
assumption underlying strategic planning is that there is so much economic,
social, political, technological, and competitive change taking place that the
leadership of the organization must periodically evaluate whether it should even
be offering its present products and services, whether it should start offering
different products and services, or whether it should be operating and marketing
in a fundamentally different way.
Although strategies typically take considerable time to implement, and thus
are generally long range in nature, the time span is not the principal focus of
strategic planning. In fact, strategic planning, supported by the management
of the strategy, compresses time. Competitive shifts that might take generations
to evolve instead occur in a few short years. 3 In a survey of senior executives, 80
percent indicated that the productive lives of their strategies were getting shorter
and 75 percent believed that their leading competitor would be different within
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 7
fi ve years. 4 Therefore, it is preferable to use long range and short range to
describe the time it will take to accomplish a strategy rather than to indicate a
type of planning.
Strategic Planning to Strategic Management
The 1960s and 1970s were decades of major growth for strategic planning in
business organizations. Leading companies such as General Electric were not
only engaged in strategic planning but also actively promoted its merits in
the business press. The process provided these fi rms with a more systematic
approach to managing business units and extended the planning and budgeting
horizon beyond the traditional 12-month operating period. In addition, business
managers learned that fi nancial planning alone was not an adequate framework. 5 In the 1980s the concept of strategic planning was broadened to strategic management. This evolution acknowledged not only the importance of the
dynamics of the environment and that organizations may have to totally reinvent
themselves, but also that continuously managing and evaluating the strategy are
keys to success. Thus, strategic management was established as an approach or
philosophy for managing complex enterprises and, as discussed in Perspective
12 , should not be viewed as a passing fad.
Strategic Management in the Health Care Industry
Strategic management concepts have been employed within health care organizations only in the past 30 to 35 years. Prior to this time, individual health care
organizations had few incentives to employ strategic management because typically they were independent, freestanding, not-for-profi t institutions, and health
services reimbursement was on a cost-plus basis. In many respects health care
has become a complex business using many of the same processes and much
of the same language as the most sophisticated business corporations. Certainly,
in the late 1980s and 1990s many health care organizations had much to learn
from strategically managed businesses. As a result, many of the management
methods adopted by health care organizations, both public and private, initially
were developed in the business sector.
PERSPECTIVE 12
Are the Following Management Approaches Fads?
Management fads? Management techniques?
Management fads is usually the fl ippant
answer. However, each of these management
approaches was a genuine attempt to change
and improve the organization to focus eff orts,
to improve the quality of the products and
services, to improve employee morale, to do
more with less, to put meaning into work, and so
on. Some of the approaches worked better than
others; some stood the test of time and others
did not. Yet, it would be too harsh to simply
dismiss them as fads or techniques. The goals
8 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
for all of these management approaches were to
manage and shape the organization to make it
better, to make it an excellent organization. One
of the things that has distinguished all of these
fads is the enthusiasm and commitment they
have engendered among managers and workers. For many, these approaches have signifi –
cantly increased the meaning of work no small
accomplishment in an era in which people are
increasingly hungry for meaning. And certainly
organizations need to create meaning. 1
1950s
Theories X and Y
Management by Objectives
Quantitative Management
Diversifi cation
1960s
Managerial Grid
T-Groups
Matrix Management
Conglomeration
Centralization/
Decentralization
1970s
Zero-Based Budgets
Participative Management
Portfolio Management
Quantitative MBAs
1980s
Theory Z
One-Minute Managing
Organization Culture
Intrapreneuring
Downsizing
MBWA (Management by
Wandering Around)
TQM/CQI
1990s
Customer Focus
Quality Improvement
Reengineering
Benchmarking
Resource-Based View
2000s
Six Sigma
Balanced Score Card
Transformational
Leadership
Self-Managed Teams
Dynamic Capabilities
Virtual Organizations
Blue Oceans
The Learning Organization
2010s
Knowledge Management
LEAN Six Sigma
Strategic Mapping
Black Swan
Disruptive Innovation
Predictable Surprises
When management approaches such as
these fail, it is usually because they become an
end in themselves. Managers lose sight of the
real purpose of the approach and the process
becomes more important than the product.
Managers start working for the approach rather
than letting the approach work for them.
What will be the management fads of the next
decade? 2 Will you be a part of these or past attempts
to make the organization better or will you simply dismiss them as fads? Perhaps benchmarking,
quality improvement, the learning organization, or
LEAN Six Sigma will turn your organization around.
One of these approaches may help to make your
organization truly excellent or save it from decline.
Is strategic management just another fad? Will
it stand the test of time? If strategic management
becomes an end in itself, if its activities do not
foster and facilitate thinking, it will not be useful.
However, if strategic management helps managers to think about the future and guide their
organizations through turbulent environments,
strategic management will have succeeded.
REFERENCES
1. J. Daniel Beckham, The Longest Wave,
Healthcare Forum Journal 36, no. 6 (November/
December 1993), pp. 78, 8082.
2. Rethinking the Cause of Management Fads,
Strategic Direction 21, no. 4 (2005), p. 28.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 9
Although the values and practices of for-profi t business enterprises in the private sector have been advocated as the appropriate model of managing health
care organizations, a legitimate question arises concerning the appropriateness
of the assumption that business practices may always be relevant to the health
care industry. Certainly, not all the big ideas have delivered what was promised,
even in business. 6 It has been pointed out that:
1. Some strategic alternatives available to non-health care organizations may
not be realistic for many health care organizations.
2. Health care organizations have unique cultures that infl uence the style of
and participation in strategic planning.
3. Health care has always been subject to considerable outside control.
4. Society and its values place special demands on health care organi zations. 7
However, strategic management, especially when customized to health care,
does seem to provide the necessary processes for health care organizations to
cope with the vast changes that have been occurring. Over time these business
approaches increasingly have been modifi ed to fi t the unique aspects of health
care organizations.
Strategic Management Versus Health
Policy Planning
There has been and continues to be substantial health planning (policy) in the
United States. Efforts at health planning are initiated by either state or local governments and the resulting health policies are implemented through legislation
or private or non-governmental agencies. Many of these planning efforts are
disease specifi c; that is, they are categorical approaches directed toward specifi c
health problems (e.g., the work of the National Tuberculosis Association that
stimulated the development of state and local government tuberculosis prevention and treatment programs). 8 As a result, a variety of state and federal health
planning or policy initiatives have been designed to: (1) enhance quality of
care and reduce medical errors; (2) provide or control access to care; and (3)
contain costs.
These health-planning efforts are not strategic management. Health planning
is the implementation of local, state, and federal health policy and affects a
variety of health care organizations. As explained in Perspective 13 , the intent
of health policy is to provide the context for the development of the health care
infrastructure as a whole. In contrast, strategic management is organization specifi c. Strategic management helps an individual organization to respond to state
and federal policy and planning efforts, as well as to a variety of other external
forces.
10 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 13
What is Health Policy?
Health policy determines the rules of the game
that apply to all consumers and providers in the
fi eld. It is the development and maintenance
of an infrastructure to effi ciently enhance the
health of the public.
An infrastructure need not imply a governmentally fi nanced health care system nor the
delivery of services by a governmental entity.
What it does imply is a set of institutions that
meet the preferences of most of the society.
These institutions can take many forms, ranging from unfettered markets to the provision of
services by governments.
The role of health policy is to determine the
preferences of the society and to develop and fi ne
tune institutions that can effi ciently meet those
preferences. Meeting preferences may mean
defi ning the ground rules under which insurers
and providers compete. It may mean defi ning
those services that will be provided by only a single provider, and then deciding whether that provider will be a public or private organization. It will
certainly mean revisiting these decisions as new
ways of doing things and new problems emerge.
The Congress and the state legislatures set
health policy. In addition, the administrative
authority given to executive branches and
their agencies sets policy. Therefore, the Center
for Medicare and Medicaid Services determines much of the health policy for federal
Medicare and Medicaid. The Centers for Disease
Control and Prevention, the Food and Drug
Administration, and the Occupational Health and
Safety Administration set and enforce health and
safety standards. State departments of health,
insurance, and environmental quality set health
policy within their own spheres of infl uence.
There are many analytic tools that come into
play in helping to determine the rules that are
adopted. These include economics, law, political
science, epidemiology, medicine, and health services research. Health policy questions are sometimes very broad and at other times very specifi c.
Some important questions include:
Is health care a right or an individual
responsibility?
Can the human costs of poor health be
quantifi ed?
Can higher taxes on saturated fats reduce
the prevalence of obesity?
Would a refundable tax credit encourage
the uninsured to buy coverage?
Would higher incomes or more health
services do more to improve health status?
Who pays if employers are required to
provide health insurance?
Source: Michael A. Morrisey, PhD, Director, Lister Hill Center for
Health Policy and Department of Health Care Organization and
Policy, University of Alabama at Birmingham.
The Dimensions of Strategic Management
There are many ways to think about strategic management in organizations. In
fact, Henry Mintzberg identifi ed ten distinct schools of thought concerning organizational strategy. 9 Three of these approaches were prescriptive and analytical:
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 11
the design school, the planning school, and the positioning school. Six schools
of thought were descriptive and emergent: the entrepreneurial school, the cognitive school, the learning school, the political school, the cultural school, and the
environmental school. The fi nal school of thought, the confi gurational school,
specifi es the stages and sequence of the process and attempts to place the fi ndings of the other schools in context. 10
Analytical Versus Emergent Approaches
Given the careful reasoning of the proponents of these various approaches
to strategic management, it is safe to assume that there is no one best way to
think or learn about strategy making in complex organizations. Analytical or
rational approaches to strategic management rely on the development of a logical sequence of steps or processes (linear thinking). Emergent models, on the
other hand, rely on intuitive thinking, leadership, and learning and are viewed
as being a part of managing. Both approaches are valid and useful in explaining an organization s strategy. However, neither the analytical approach nor the
emergent view, by itself, is enough. David K. Hurst explains:
The key question is not which of these approaches of action is right, or
even which is better, but when and under what circumstances they are useful to understand what managers should do. Modern organizational life is
characterized by oscillations between periods of calm, when prospective
rationality seems to work, and periods of turmoil, when nothing seems to
work. At some times, analysis is possible; at other times, only on-theground experiences will do. 11
As a result, both approaches are required. It is diffi cult to initiate and sustain
organizational action without some predetermined logical plan. Yet in a dynamic
environment, such as health care, managers must expect to learn and establish
new directions as they progress. The analytical approach is similar to a map,
whereas the emergent model is similar to a compass. Both may be used to guide
one to a destination. Maps are better in known worlds worlds that have been
charted before. Compasses are helpful when leaders are not sure where they are
and have only a general sense of direction. 12
Managers may use the analytical approach to develop a strategy (map) as
best they can from their understanding of the external environment and by
interpreting the capabilities of the organization. Once they begin pursuing the
strategy, new understandings and strategies may emerge and old maps (plans)
must be modifi ed. Harvard Professor Rosabeth Moss Kanter concluded from
her research that pacesetter organizations did not wait to act until they had a
perfectly conceived plan; instead, they create the plan by acting. 13 Therefore,
managers must remain fl exible and responsive to new realities they must
learn. However, the direction must not be random or haphazard. It must be
guided by some form of strategic sense an intuitive, entrepreneurial sensing of the shape of the future that transcends ordinary logic. The concept of
the compass provides a unique blend of thinking, performance, analysis, and
intuition. 14
12 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
What is needed is some type of model that provides guidance or direction to
strategic managers, yet incorporates learning and change. If strategy making can
be approached in a disciplined way, then there will be an increased likelihood
of its successful implementation. A model or map of how strategy may be developed will help organizations to view their strategies in a cohesive, integrated,
and systematic way. 15 Without a model or map, managers run the risk of becoming totally incoherent, confused in perception, and muddled in practice. 16
Combining the Analytical and Emergent Views
In this text, a series of strategic thinking maps are presented. These maps are
designed to ignite strategic thinking as well as strategic planning and foster new
thinking and planning when required. The strategic thinking maps will start the
journey to develop a comprehensive strategy for the organization, yet the maps
cannot anticipate every contingency. Managers will learn a great deal about their
strategic plans as they manage them. Therefore, strategic managers will have to
think, analyze, use intuition, and reinvent the strategy as they go. As the physicist David Bohm observed, the purpose of science is not the accumulation of
knowledge but rather the creation of mental maps that guide and shape our
perception and action. 17
A model or map that accounts for both the analytical and the emergent views
of strategic management is presented in Exhibit 11 . This strategic thinking map
serves as a general model for health care strategic managers, illustrates the interrelationships and organizes the major components, and provides the framework
for much of the discussion in this book. As illustrated in Exhibit 11 , strategic
management has three elements strategic thinking, strategic planning, and
managing strategic momentum. These activities are interdependent; activities in
each element affect, and are affected by, the others.
Strategic Planning
Situational Analysis
External Analysis
Internal Analysis
Directional Strategies
External
Environment
External
Environment
Strategic Thinking
External Orientation
Analyze Data
Question Assumptions
Generate New Ideas
Strategy Formulation
Directional Strategies
Adaptive Strategies
Market Entry Strategies
Competitive Strategies
Planning the Implementation
Service Delivery Strategies
Support Strategies
Action Plans
Managing
Strategic
Momentum
Managerial Action
Strategy Evaluation
Emergent Learning
Re-initiate Strategic
Thinking
External Environment
EXHIBIT11 Strategic Thinking Map of Strategic Management
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 13
Strategic managers must become strategic thinkers with the ability to evaluate the changing environment, analyze data, question assumptions, and develop
new ideas. Additionally, they must be able to develop and document a plan of
action through strategic planning. Strategic planning is a decision-making and
documentation process that creates the strategic plan. Once a strategic plan is
developed, strategic managers must manage the strategic momentum of the
organization. As strategic managers attempt to carry out the strategic plan they
evaluate its success, learn more about what works, and incorporate new strategic thinking. As indicated by the double-headed arrows in Exhibit 11 , any
one element of the model may initiate a rethinking of another element. For
example, planning the implementation may provide new information that necessitates taking another look at strategy formulation. Similarly, managing strategic
momentum may provide new insights for implementation planning, strategy
formulation, or the situational analysis.
The distinction among the terms strategic thinking, strategic planning, and
managing strategic momentum is important and all three activities must occur
in truly strategically managed organizations. Therefore, each stage of the model
is explored in more depth.
Strategic Thinking
The fi rst stage depicted in Exhibit 11is strategic thinking and is the fundamental intellectual activity underlying strategic management. It has been observed
that leaders, similar to great athletes, must simultaneously play the game and
observe it as a whole. 18 Mired in a complex situation, the leader must rise above
it to understand it. Preserving distance may be the only way to see the full picture. 19 This skill is similar to leaving the playing fi eld and going to the press box
to observe the game and see its broader context. Thus, strategic managers must
be able to keep perspective and see the big picture not get lost in the action.
But to truly understand the big picture, one must not only go to the press box
to observe the game, but must also have a quiet room to periodically think
about it, to understand it, and perhaps to change the strategy or players.
Strategic thinking is an individual intellectual process, a mindset, or method
of intellectual analysis that asks people to position themselves as leaders and
see the big picture. Vision and a sense of the future are inherent parts of strategic thinking. Strategic thinkers are constantly reinventing the future creating
windows on the world of tomorrow. James Kouzes and Barry Posner in The
Leadership Challenge have indicated: All enterprises or projects, big or small,
begin in the mind s eye; they begin with imagination and with the belief that
what is merely an image can one day be made real. 20 Strategic thinkers draw
upon the past, understand the present, and envision an even better future.
Strategic thinking requires a mindset a way of thinking or intellectual process
that accepts change, analyzes the causes and outcomes of change, and attempts
to direct an organization s future to capitalize on the changes. More specifi cally,
strategic thinking:
acknowledges the reality of change,
questions current assumptions and activities,
14 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
builds on an understanding of systems,
envisions possible futures,
generates new ideas, and
considers the organizational fi t with the external environment.
Strategic thinking generates ideas about the future of an organization and
ways to make it more relevant more in tune with the world. Strategic thinking
assesses the changing needs of the organization s stakeholders and the changing technological, social and demographic, economic, legislative/political, and
competitive demands of its world.
Strategic thinkers are always questioning: What are we doing now that we
should stop doing? What are we not doing now, but should start doing? and
What are we doing now that we should continue to do but perhaps in a fundamentally different way? For the strategic thinker, these questions are applicable
to everything the organization does its products and services, internal processes,
policies and procedures, strategies, and so on. Successful strategies often require
being what you haven t been, thinking as you haven t thought, and acting as you
haven t acted. 21 Strategic thinkers examine assumptions, understand systems and
their interrelationships, and develop alternative scenarios of the future. Strategic
thinkers forecast external technological, social and demographic changes, as well
as critical changes in the legislative and political arenas. Strategic thinking is very
much a leadership activity and quite different from what subject matter experts
do. For example, strategic thinkers specialize in relationships and context whereas
expert thinkers specialize in well-defi ned disciplines and functions. Strategic thinkers act on intuition and gut feel when data is incomplete focus on action and
moving forward where as experts pay rigorous attention to knowledge, evidence,
and data focus on understanding.
Everyone a Strategic Thinker Strategic thinking provides the foundation for
strategic management. However, strategic thinking is not just the task of the CEO,
health offi cer, or top administrator of the organization. For strategic management
to be successful, everyone must be encouraged to think strategically think as a
leader. Leadership is a performing art a collection of practices and behaviors
not a position. 22 Everyone, even the lowest paid employees, should be encouraged to think strategically and consider how to reinvent what he or she does. For
example, understanding that a nursing home s image is based on the customers
perception of cleanliness can motivate custodians to think strategically and reinvent the way the nursing home is cleaned. Strategic thinking is supported by the
continuous management of the strategy and documented through the periodic
process of strategic planning.
Strategic Planning
Strategic planning is the next activity in the general model of strategic management illustrated in Exhibit 11 . Strategic planning is the periodic process of
developing a set of steps for an organization to accomplish its mission and vision
using strategic thinking. Therefore, periodically, strategic thinkers come together
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 15
to reach consensus on the desired future of the organization and develop decision rules for achieving that future. The result of the strategic planning process
is a plan or strategy. More specifi cally, strategic planning:
provides a sequential, step-by-step process for creating a strategy,
involves periodic group strategic thinking (brainstorming) sessions,
requires data/information, but incorporates consensus and judgment,
establishes organizational focus,
facilitates consistent decision making,
reaches consensus on what is required to fi t the organization with the
external environment, and
results in a documented strategic plan.
The process of strategic planning defi nes where the organization is going,
sometimes where it is not going, and provides focus. The plan sets direction for
the organization and through a common understanding of the vision and broad
strategic goals provides a template for everyone in the organization to make
consistent decisions that move the organization toward its envisioned future.
Strategic planning, in large part, is a decision-making activity. Although these
decisions are often supported by a great deal of quantifi able data, strategic decisions are fundamental judgments. Because strategic decisions cannot always
be quantifi ed, managers must rely on informed judgment in making this type
of decision. As in our own lives, generally the more important the decision,
the less quantifi able it is and the more we will have to rely on the opinions of
others and our own best judgment. For example, our most important personal
decisions where to attend college, whether or not to get married, where to
live, and so on are largely informed judgments. Similarly, the most important
organizational decisions, such as entering a market, introducing a new service,
or acquiring a competitor, although based on information and analysis, are
essentially judgments.
Decision consistency is central to strategy; when an organization exhibits a
consistent behavior it has a strategy. Strategy is the set of guidelines or plan an
organization chooses to ensure decision consistency and move it from where it
is today to a desired state some time in the future it is the road map to that
future. Developing the road map (strategic plan) requires situational analysis,
strategy formulation, and planning the implementation of the strategy.
Analyzing and understanding the situation is accomplished by three separate
strategic thinking activities: (1) external environmental analysis; (2) internal
environmental analysis; and (3) the development or refi nement of the organization s directional strategies. The interaction and results of these activities
form the basis for the development of strategy. These three interrelated activities drive the strategy. Forces in the external environment suggest what the
organization should do. That is, success is a matter of being effective in the
environment doing the right thing. Strategy is additionally infl uenced by
the internal resources, competencies, and capabilities of the organization and
represents what the organization can do. Finally, strategy is driven by a
16 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
common mission, common vision, and common set of organizational values and
goals the directional strategies.
The directional strategies are the result of considerable thought and analysis
by top management and indicate what the organization wants to do. Together,
these forces are the essential input to strategy formulation. They are not completely distinct and separate; they overlap, interact with, and infl uence one
another. Chapter 2 provides strategic thinking maps for examining the general
and health care external environment and Chapter 3 addresses service area
competitor analysis. Chapter 4 discusses the internal environment and provides
strategic thinking maps for evaluating the organization s strengths and weaknesses and the creation of competitive advantage. The development of the
directional strategies through strategic thinking maps is explored in more detail
in Chapter 5.
Whereas situational analysis involves a great deal of strategic thinking
gathering, classifying, and understanding information strategy formulation
involves decision making that uses the information to create a plan. Hence,
strategy formulation involves directional, adaptive, market entry, and competitive
strategy decisions and, typically, these decisions are made in strategic planning
sessions. Strategic maps for strategy formulation are presented in Chapters 6 and 7.
Once the strategy for the organization has been formulated (including directional, adaptive, market entry, and competitive), implementation plans that
accomplish the organizational strategy are developed. These implementation
plans are made up of strategies developed in the key areas that create value
for an organization service delivery and support activities and are typically
discussed as part of strategic planning. Strategies must be developed that best
deliver the products or services to the customers through pre-service, pointof-service, and after-service activities. In addition to service delivery strategies,
strategies must be developed for value-adding support areas such as the organization s culture, structure, and strategic resources. Strategy implementation is
discussed further in Chapters 8 through 10.
A Group Process of Key Players The CEO can develop a strategy. A separate
planning department can develop a strategy. However, such approaches run into
trouble during implementation, as there is no common ownership of the plan
or the tasks associated with it. Therefore, strategic planning for organizations
is typically a group process. It involves a number of key participants working
together to develop a strategy. Although strategic planning provides the structure for thinking about strategic issues, effective strategic planning also requires
an exchange of ideas, sharing perspectives, developing new insights, critical
analysis, as well as give-and-take discussion. Strategic planning efforts will be
diminished without future-oriented highly provocative thinking and dialog. 23
For most organizations, it is not possible for everyone to be a full participant
in the strategic planning process. Decision making is protracted if everyone must
have a say and a consensus may never be reached. A few key players senior
staff, top management, or a leadership team are needed to provide balanced
and informed points of view. Often, representatives of important functional areas
are included as well. An effective leader will incorporate a variety of individuals
with different backgrounds and perspectives to provide input to the process. Some
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 17
participants may be mavericks and nudge the group in new ways. If everyone is
pre-programmed to agree with the leader, participation is not required but neither will an actionable plan be realized.
The key to successful strategic planning is to have a recurring group process.
Having a periodic structured process initiates a reconsideration, discussion, and
documentation of all the assumptions. Without a planned process, managers
never quite get to it. Without a process, ideas are not discussed, conclusions are
not reached, decisions are not made, strategies are not adopted, and strategic
thinking is not documented. The nature of the group and the process are often
the keys to success.
Managing Strategic Momentum
Sometimes a strategic plan is created but nothing really changes, strategic
momentum is lost, and plans are never implemented. As the next year rolls
around, it is once again time for the annual strategic planning retreat and the
cycle repeats itself. This example is one of strategic planning without managing
strategic momentum. Alan Weiss, in his irreverent book, Our Emperors Have No
Clothes, explains that in these situations the problem is that, Strategy is usually
viewed as an annual exercise at best, an event that creates a product, and not a
process to be used to actually run the business. 24
The third element of strategic management shown in Exhibit 11 , managing
strategic momentum, concerns the day-to-day activities of managing the strategy
to achieve the strategic goals of the organization. Once plans are developed,
they must be actively managed and implemented to maintain the momentum of
the strategy. Strategic thinking and periodic planning should never stop; they
become ingrained in the culture and philosophy of a strategically managed
organization. Managing strategic momentum:
is the actual work to accomplish specifi c objectives,
concerns decision-making processes and their consequences,
provides the style and culture,
evaluates strategy performance,
is a learning process, and
relies on and initiates new strategic thinking and new periodic strategic
planning.
For many organizations, strategic planning is the easiest part of strategic
management and the planning process receives the greatest attention. However,
plans must be implemented to create momentum and to realize strategic intent.
Poor implementation or lack of implementation has rendered many strategic
plans worthless. Whereas the strategic plan and its underlying strategic thinking
must be viewed as important, they fall apart without implementation and the
decision-making guidelines provided for managers at all levels in the organization. If the strategy is not actively managed, it will not happen.
At the same time, managers often need to react to unanticipated developments and new competitive pressures. Such environmental shifts may be subtle,
18 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
other times they can be discontinuous and extremely disruptive. When external
changes occur, new opportunities emerge and new competencies are born,
while others die or are rendered inconsequential. Inevitably, the basic rules of
competing and survival will change. 25 Managing strategic momentum is how an
organization constructively manages change, evaluates strategy, and reinvents
or renews the organization. As Henry Mintzberg has indicated, . . . a key to
managing strategy is the ability to detect emerging patterns and help them take
shape. 26
Different environmental characteristics and different organizational forms
require new and different ways of defi ning strategy. 27 Strategy may be an intuitive, entrepreneurial, political, culture-based, or learning process. In these cases,
maps are of limited value. Managers must create and discover an unfolding
future, using their ability to learn together in groups and interact politically in a
spontaneous, self-organizing manner. However, learning is diffi cult in organizations. Learning requires engagement, mastering unfamiliar ideas, and adopting
new behaviors. Engaged learning demands that executives share leadership, face
harsh truths, and take learning personally. It requires them to fundamentally
change the way they manage. 28 It requires managing strategic momentum.
Clearly, rational strategies do not always work out as planned (an unrealized strategy). In other cases, an organization may end up with a strategy that
was quite unexpected as a result of having been swept away by events (an
emergent strategy). Leadership, vision, and feeling our way along (learning)
often provide a general direction without a real sense of specifi c objectives or
long-term outcomes. It is quite possible that a strategy may be developed and
subsequently realized. However, we must be realistic enough to understand that
when we engage in strategic management the theoretical ideal (strategy developed, then realized) may not, and in all probability will not, be the case. A great
deal may change. The possibilities include:
1. There is a reformulation of the strategy during implementation as the
organization gains new information and feeds that information back to
the formulation process, thus modifying intentions en route.
2. The external environment is in a period of fl ux and strategists are unable
to accurately predict conditions; the organization may therefore fi nd itself
unable to respond appropriately to a powerful external momentum. 29
3. Organizations in the external environment implementing their own strategies may block a strategic initiative, forcing the activation of a contingency
strategy or a period of groping.
Obviously, health care organizations formulate strategies and realize them to
varying degrees. For instance, as a part of a deliberate strategy to broaden their
market, improve service to the community, and retain referral patients, many
community hospitals began offering cardiac services such as catheterization
and open heart surgery. As a result, some of these hospitals have built market
share and increased profi tability. Other community hospitals have not fared as
well. Their managers had unrealistic expectations concerning the profi tability
of cardiac services and the number of procedures required. A large volume is
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 19
crucial to cardiac services because it allows the hospital to order supplies in bulk
and provides physician experience that produces better outcomes and shorter
lengths of stay. In addition, some community hospital managers misjudged the
level of reimbursement from Medicare, thereby further squeezing profi tability.
The strategies of those community hospitals that left the cardiac services market
were not realized.
Still other community hospitals seemed to move into a full range of cardiac
services without an explicit strategy to do so. In an effort to retain patients and
enhance their images, these hospitals began by offering limited cardiac services
but shortly found that they were not performing enough procedures to be world
class. They added services, equipment, and facilities to help create the required
volume and, without really intending to at the outset, ended up with emergent
strategies that resulted in signifi cant market share in cardiac services.
Everyone Must Manage the Strategic Momentum As with strategic thinking, everyone plays a role in managing strategic momentum. Everyone in the
organization should be working for the strategy and understand how their work
contributes to the accomplishment of the strategic goals. As Max DePree has
suggested, Leaders are obligated to provide and maintain momentum. 30 The
only legitimate work in an organization is work that contributes to the accomplishment of the strategic plan. Although organizations may accomplish superior
results for a brief period of time, it takes the orchestration of management as
well as leadership to perpetuate these capabilities far into the future. 31
The Benefi ts of Strategic Management
The three stages of strategic management strategic thinking, strategic planning,
and managing strategic momentum will provide many benefi ts to health care
organizations. However, because strategic management is a philosophy or way
of managing an organization, its benefi ts are not always quantifi able. Overall,
strategic management:
ties the organization together with a common sense of purpose and
shared values;
improves fi nancial performance in many cases; 32
provides the organization with a clear self-concept, specifi c goals, and
guidance as well as consistency in decision making;
helps managers to understand the present, think about the future, and
recognize the signals that suggest change;
requires managers to communicate both vertically and horizontally;
improves overall coordination within the organization; and
encourages innovation and change within the organization to meet the
needs of dynamic situations.
20 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Strategic management is a unique perspective that requires everyone in the
organization to cease thinking solely in terms of internal functions and operational responsibilities. It insists that everyone adopts what may be a fundamentally new attitude an external orientation and a concern for the big picture. It is
basically optimistic in that it integrates what is with what can be. Perspective
14illustrates an application of Jim Collins book, Good to Great, to health care
organizations.
PERSPECTIVE 14
Good to Great in Health Care
Several years ago Jim Collins book, Good to Great:
Why Some Companies Make the Leap . . . and
Others Don’t , made an impact on the business
scene. Collins studied 1,435 good companies and
then analyzed why 11 of the companies became
great (see Health Care Manager s Bookshelf in
Chapter 8). Chip Caldwell & Associates began
a good to great project in health care and
studied 44 health care organizations ranging in
size from 15 to 854 beds. An additional project
conducted by the group assessed 226 healthrelated organizations in Los Angeles County,
California. For each organization they measured changes in cost per case mix adjusted discharge. Those organizations that fi nished in the
75th percentile or higher were labeled quantum
improvers and those in the bottom quartile were
labeled non-starters.
About 20 percent of the quantum improvers were already in a favorable cost position
and about 20 percent of the non-starters were
already in an unfavorable cost position. The
researchers observed that this meant the quantum improvers were becoming better faster and
the non-starters were becoming worse faster. In
other words, the performance gap was growing
and health care fi rms not applying quantum
improver strategies risked being left behind
by organizations that were raising the bar and
redefi ning the playing fi eld. Some important
principles of the quantum improvers:
1. Set non-negotiable goals. Quantum
improvers perform a gap analysis and
determine areas where improvement is
possible and necessary. They determine
where the biggest diff erences are from
established benchmarks and focus on the
vital few areas that will make the biggest
positive diff erence to the organization.
Non-starters receive gap information,
debate it for six months, seek more data,
and agree to talk some more. Quantum
improvers interpret the results as an
immediate call for action. Strategic leaders step up at defi ning moments, keep
the organization on path, and demonstrate that failure to act is not an option.
2. Focus on key businesses. Health care
organizations cannot be all things to all
people. Organizations have to develop a
stop doing list to include those services
that are least profi table and must be eliminated. Doing away with any service is very
hard in health care because no one wants
to eliminate a service that is helping people
even if it is very expensive. Focusing on
those services that support the core mission
and separating fi nancial issues from emotional issues may make the decision to eliminate a service easier and more objective.
3. Use a tightloosetight approach.
Begin with a tight understanding of the
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 21
Health care leaders require a comprehensive strategic management approach
to guiding their organizations through societal and health care industry changes
that will occur in the future. Strategic management concepts, activities, and
methods presented in this text will prove to be valuable in coping with these
changes. In addition, the internal, non-quantifi able benefi ts of strategic management will aid health care organizations in better integrating functional areas to
strategically utilize limited resources and to satisfy the various publics served.
Strategic management is the exciting future of effective health care leadership.
What Strategic Management is Not
Strategic management should not be regarded as a technique that will provide
a quick fi x for an organization that has fundamental problems. Quick fi xes
for organizations are rare; it often takes years to successfully integrate strategic
management into the values and culture of an organization. If strategic management is regarded as a technique or gimmick, it is doomed to failure. Similarly,
strategic management is not just strategic planning or a yearly retreat where the
leadership of an organization meets to talk about key issues only to return to
business as usual. Although retreats can be effective in refocusing management
and for generating new thinking, strategic management must be adopted as a
philosophy of leading and managing the organization.
Strategic management is not a process of completing paperwork. If strategic
management has reached a point where it has become simply a process of fi lling in endless forms, meeting deadlines, drawing milestone charts, or changing
the dates of last year s goals and plans, it is not strategic management. Effective
strategic management requires little paperwork. It is an attitude, not a series of
documents. Similarly, strategic management should not be initiated merely to
satisfy a regulatory body s or an accrediting agency s requirement for a plan.
In these situations, no commitment is made on the part of key leadership, no
participation is expected from those in the organization, and the plan may or
may not be implemented. 33
preferred direction for the organization,
then delegate the understanding to a
group of leaders who have fl exibility in
determining how they will achieve the
direction, and fi nally, monitor with tight
accountability to make sure that the
selected approach is working.
Quantum improvers have a culture of
accountability but not a punitive culture. They
are not threat driven. Rather than punish those
who do not achieve, assistance is provided by
upper leadership until the desired results are
accomplished. As Collins notes, great organizations do not have miracle moments of
change; instead they emphasize committed,
controlled, and practical leadership.
Source: Shannon K. Pieper, Good to Great in Healthcare: How
Some Organizations Are Elevating Their Performance, Healthcare
Executive 19, no. 3 (2004), pp. 2026.
22 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Strategic management is not a process of simply extending the organization s
current activities into the future. It is not based solely on a forecast of present
trends. Strategic management attempts to identify the issues that will be important in the future. Health care strategic managers should not simply ask the
question, How will we provide this service in the future? Rather, they should be
asking questions such as, Should we provide this service in the future? What
new services will be needed? What services are we providing now that are no
longer needed?
A Systems Perspective
The problems facing organizations are so complex that they defy simple solutions. Understanding the nature of the health care environment, the relationship
of the organization to that environment, and the often-confl icting interests of
internal functional departments requires a broad conceptual paradigm. Yet, it is
diffi cult to comprehend so many complex and important relationships. Strategic
managers have found general systems theory or a systems approach to be a useful perspective for organizing strategic thinking.
A system may be defi ned as a perceived whole whose elements hang together
because they continually affect each other over time and operate toward a common purpose. 34 More simply, a system is a set of interrelated elements. Each
element connects to every other element, directly or indirectly, and no subset of
elements is unrelated to any other subset. Further, a system must have a unity
of purpose in the accomplishment of its goals, functions, or desired outputs. 35
Understanding the complex whole through a systems approach:
aids in identifying and understanding the big picture;
facilitates the identifi cation of major components;
helps to identify important relationships and provides proper perspective;
avoids excessive attention to a single part;
allows for a broad scope solution;
fosters integration; and
provides a basis for redesign.
The use of the systems approach requires strategic managers to defi ne the
organization in broad terms and to identify the important variables and interrelationships that will affect decisions. By defi ning systems, strategic managers are
able to see the big picture in proper perspective and avoid devoting excessive
attention to relatively minor aspects of the total system. 36 A systems approach
permits strategic managers to concentrate on those aspects of the problem that
most deserve attention and allows a more focused attempt at resolution. As Peter
Senge has indicated, systems approaches help us to see the total system and
how to change the pieces within the system more effectively and intelligently. 37
Perspective 15provides additional insight into the use of systems approaches
to see the big picture.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 23
PERSPECTIVE 15
To Manage is to Control To Control is to Manage
To control means to regulate, guide, or direct. To
manage means to control, handle, or direct.
Therefore, management is control and control is
management. The very act of managing suggests
controlling the behavior or outcome of some
process, program, or plan. Vision, mission, values,
and strategies are types of controls. Similarly,
policies, procedures, rules, and performance
evaluations are clearly organizational controls.
All of these are attempts to focus organizational
eff orts toward a defi ned end. Yet, if these tools
are improperly used, employees may perceive
control to be dominating, overpowering, dictatorial, or manipulative.
When processes are poorly managed, control
runs afoul as well. It is interpreted as domination when management enforces too much
control and manages too closely by controlling
subprocesses or too many details. Management
requires the right touch. If control is too great,
we create hopeless bureaucracy. If control is
too weak, we have a lack of direction causing
diffi culty in accomplishing organizational goals.
When there is too much management (control),
then innovation, creativity, and individual initiative will be stifl ed; when there is too little, chaos
ensues. Management should focus eff orts but
not be dictatorial or manipulative.
Given how easy it is to overdo management
(control), a general rule of thumb is that less is
best. Setting direction and empowering people
to make their own decisions on how best to
achieve the vision seems to work. Eff ective management (control) is essential if organizations
are to renew themselves; however, overmanaging (overcontrolling) can destroy initiative and
be viewed as meddling, often reducing motivation as well.
Recognizing the importance of a systems framework, health care managers
commonly refer to the health care system or the health care delivery system
and strive to develop logical internal organizational systems to deal with the
environment. In a similar manner, health care strategic managers must use systems to aid in strategic thinking about the external environment. The community
and region may be thought of as an integrated system with each part of the
system (subsystem) providing a unique interdependent contribution.
The Level and Orientation of the Strategy
A systems perspective will be required to specify the level of the strategy and
the relationship of the strategy to the other strategic management activities.
Therefore, the organizational level and orientation should be carefully considered and specifi ed before strategic planning begins. For example, strategies may
be developed for large, complex organizations or small, well-focused units. The
range of the strategic decisions that are considered in these two organizations is
quite different, but both can benefi t from strategic management.
24 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
A clear specifi cation of the level of thinking will determine the type and
range of decision to be made in strategic planning. For example, a large integrated health care system may develop strategy for a number of levels a
corporate level, a divisional level, an organizational level, and a unit level. As
illustrated in Exhibit 12 , when considered together these strategic perspectives
create a hierarchy of strategies that must be consistent and support one another.
Each strategy provides the means for accomplishing the ends of the next
higher level. Thus, the unit level provides the means for accomplishing the ends
of the organizational level. The organizational level, in turn, provides the means
for accomplishing the ends of the divisional level. Finally, the divisional level is
the means to the ends established at the corporate level. As illustrated in Exhibit
12 , part of the context for lower-order strategy is provided by the strategic planning of higher-order strategies.
Corporate Level
Strategic
Thinking
Strategic
Planning
Strategic
Thinking Divisional Level
Strategic
Planning
Strategic
Thinking Organizational
Level
Strategic
Planning
Strategic
Thinking
Unit Level
Strategic
Planning
Managing
Strategic
Momentum
Managing
Strategic
Momentum
Managing
Strategic
Momentum
Managing
Strategic
Momentum
EXHIBIT 12 The Link between Levels of Strategic Management
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 25
Trinity Health is the tenth largest health system and fourth largest Catholic
health system in the United States and is an example of a health care organization that should develop strategy for all four organizational levels. As of the
beginning of 2013, Trinity had over $11.3 billion in assets, $9 billion in revenues,
and was comprised of 49 acute-care hospitals, 432 outpatient facilities, 33 longterm care facilities, and numerous home health offi ces and hospice programs
located in ten US states. Clearly, strategies should be developed for the corporate
level Trinity Health, for each major division such as Saint Joseph Mercy Health
System, for each distinct organization within the division such as Saint Joseph
Mercy Saline Hospital, and within the various units (clinical operations).
Corporate-Level Strategy Corporate-level strategies address the question, What business(es) should we be in? Such strategies consider multiple,
sometimes unrelated, markets and typically are based on return on investment,
market share or potential market share, and system integration. For Trinity
Health, clearly the corporate perspective is an important one. The question of
What businesses should we be in? has resulted in several semi-autonomous
businesses operating in a number of different markets, including hospitals,
outpatient facilities, long-term care, home health, and hospices. Key strategic
questions might include, What other types of businesses should Trinity consider? For example, would wellness or mental health centers be an appropriate
strategic move?
Divisional-Level Strategy Divisional-level strategies are more focused and
provide direction for a single business type. Divisional strategies are most often
concerned with positioning the division to compete. These semi-autonomous
organizations are often referred to as SBUs ( strategic business units) or SSUs
( strategic service units). Therefore, strategic managers for these units are most
concerned with a specifi ed set of competitors and well-defi ned markets (service
areas).
For Trinity Health, strategies must be developed for the hospital division,
outpatient facilities division, long-term care division, and so on. For the hospital
division key strategic questions may include, How many hospitals are optimal?
or Which markets should Trinity enter with a new hospital? This perspective
concerns a single business type and its markets. Therefore, it is quite different
from the corporate perspective of what businesses Trinity should be in.
Organizational-Level Strategy Within a division, individual organizational
units may develop strategies as well. These organizational-level strategies typically concern one organization competing within a specifi c well-defi ned service
area. For example, each hospital in Trinity s hospital division may develop a
strategic plan to address its own particular market conditions. Key strategic
questions for this level of strategy may include, What combination of hospital
services is most appropriate for this market? and What strategies are the competitors using to increase market share?
Unit-Level Strategy Unit-level strategies support organizational strategies
through accomplishing specifi c objectives. Unit operational strategies may be
26 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
developed within departments of an organization such as clinical operations,
marketing, fi nance, information systems, human resources, and so on. Unit strategies address two issues. First, they are intended to integrate the various subfunctional activities. Second, they are designed to relate the various functional
area policies with any changes in the functional area environment. 38 In addition,
linkage strategies are directed toward integrating the functions themselves and
creating internal capabilities across functions (for example, quality programs or
changing the organization s culture).
Strategy Hierarchy Strategic management may be employed independently
at any organizational level. However, it is much more effective if there is topdown support and strategies are integrated from one level to the next. For some
organizations, of course, there is no corporate or divisional level, such as with
a free-standing community hospital or independent long-term care organization.
For these organizations the question of scope and perspective and integration of
the strategy is much more straightforward.
The Importance of Leadership
Ultimately, strategic decision making for health care organizations is the responsibility of top management. The CEO is a strategic manager with the pre-eminent
responsibility for positioning the organization for the future. The leader must
be able to inspire, organize, and implement effective pursuit of a vision and
maintain it even when sacrifi ces are required. 39 As a result, the leader must
have an ability to identify what needs to be done today and what can wait. They
prioritize constantly; aware that wars are lost by fi ghting on too many fronts.
They know the key messages to communicate from day to day, from audience to
audience. 40 If the CEO does not fully understand or faithfully support strategic
management, it will not happen.
Leadership Roles throughout the Organization
In the past, strategy development was primarily a staff activity. The planning staff
would create the strategy and submit it for approval to top management. This
process resulted in plans that were often unrealistic, did not fully consider the
realities and resources of the divisions or departments, and separated planning
from leadership.
Over the past two decades, many large formal planning staffs have been
dissolved as organizations learned that strategy development cannot take
place in relative isolation. Therefore, the development of the strategy has
become the responsibility of key managers. The coordination and facilitation
of strategic planning typically may be designated as the responsibility of a single key manager (often the CEO), but the entire leadership team is responsible
for strategy development and its management. The rationale underlying this
approach is that no one is more in touch with the external environment (regulations, technology, competition, social change, and so on) than the managers
who must deal with it every day and lead change. The leadership team must
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 27
coordinate the organization s overall strategy and facilitate strategic thinking
throughout the organization. As a result, the organization s key top managers
act as an extension of the CEO to ensure that an organized and used planning
process ensues. 41
Lessons for Health Care Managers
Strategic management is an often complex and diffi cult task. A model of strategic management provides a useful framework or intellectual map for conceptualizing and developing strategies for an organization. Strategic management
includes strategic thinking, strategic planning, and managing strategic momentum. In reality, these elements are blended together as the strategy is formed
and reformed through leadership, intuition, and organizational learning. Indeed,
implementing the strategy may actually create an entirely new, unintended
strategy.
The concept of strategic management has been successfully used by business
organizations, the military, and in government agencies; health care managers
are fi nding it essential for their organizations as well. The strategic management
model presented and discussed in this chapter may be applied to a variety of
types of health care organizations operating in dramatically different environments, is useful for both large and small organizations, and facilitates strategic
thinking at all levels of the organization.
The strategic planning portion of the model incorporates situational analysis,
strategy formulation, and strategy implementation. The strategic thinking activities within situational analysis combine to infl uence strategy formulation.
Strategy formulation in turn affects planning the implementation. Finally, the
strategy must be managed, evaluated, and modifi ed as needed. Managing strategic momentum is an iterative process that may incorporate new understandings
of the situation, change the fundamental strategy, or modify strategy implementation. Managing strategic momentum essentially continues strategic thinking
and strategic planning.
The strategic thinking map presented in this text is designed to provide the
essential logic of the activities involved in strategic management and therefore is
based on both analytical (rational) as well as emergent (learning) approaches for
understanding strategy making in organizations. The analytical model provides
an excellent starting point for understanding the concept of strategy and a foundation for comparing and contrasting strategies. However, the strategic thinking
map does not perfectly represent reality and must not be applied blindly or with
the belief that life always works that way. Strategic management is not always a
structured, well-thought-out exercise. In reality, thought does not always precede
action, perfect information concerning the environment and organization never
exists, and rationality and logic are not always superior to intuition and luck.
Sometimes organizations do before they know. For instance, the intended
strategies are often not the realized strategies. Sometimes managers are able
to just muddle through. Or, managers may have a broad master plan or logic
underlying strategic decisions, but, because of the complexity of the external
28 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
and internal environments, incremental adjustments or guided evolution is the
best they can do. 45
Managers must realize that, once introduced, strategies are subject to a variety of forces, both within and outside the organization. Sometimes we learn by
doing. Yet, without a plan (a map) it is diffi cult to start the journey, diffi cult to
create any type of momentum for the organization, and diffi cult to have consistent decision making. Thus, strategic managers begin with the most rational plan
that can be developed and continue to engage in strategic thinking. Effective
strategic managers become adept at freezing and unfreezing their thinking
and strategic plans as the situation changes.
Health Care Manager s Bookshelf
H. Igor Ansoff, Corporate Strategy:
An Analytical Approach to Business
Policy for Growth and Expansion
(New York: McGraw-Hill, 1965)
Henry Mintzberg declared that the publication
of Corporate Strategy: An Analytical Approach
to Business Policy for Growth and Expansion by
H. Igor Ansoff was a major event in the world
of management. The book represented a kind
of crescendo in the development of strategic
planning theory, off ering a degree of elaboration
seldom attempted since. 1
Corporate Strategy is considered by many to
be the fi rst book devoted exclusively to business
strategy. 2 Ansoff uses the term strategic to mean
pertaining to the relationship between the fi rm
[organization] and its environment. 3 Hussey
noted that with the publication of Corporate
Strategy managers were off ered, for the fi rst
time, a book which took them through all the
steps of a formal approach to strategic decision
making and provided a number of analytical
tools for aiding strategic thinking. 4
Ansoff introduced the concept of synergy or
the familiar business rule of 2 + 2 = 5. Gilmore
and Brandenburg acknowledge their debt to
Ansoff for introducing this important concept,
which Ansoff developed while employed at
Lockheed Aircraft Corporation and continues to
be an essential part of much strategy formulation. 5 Synergy is a critical concept as strategists evaluate the fi nancial wisdom of entering
into strategies such as vertical integration and
diff erentiation.
Ansoff argued that an organization cannot defi ne itself as simply being in the health
care, transportation, or energy business. These
defi nitions are too broad to defi ne the common
thread. The common thread is the relationship
between present and future services, products, and markets which enable outsiders to
perceive where the organization is heading,
and inside management to give it guidance
(p. 105). It was with regard to this common
thread that Ansoff developed and introduced
the productmarket matrix. This matrix became
so popular that even 30 years later Ansoff
received a request to reprint the matrix every
three or four months. 6
Ansoff s Corporate Strategy is an important milestone in the evolution of strategic
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 29
management. Strategic managers will appreciate the care with which Ansoff related his
innovative concepts to leading organizations.
Melvin Anshen emphasizes the value the book
has to managers and scholars because it identifi es and precisely orders the discrete, sequential
building blocks of logical analysis as applied to
the design of planning for strategy growth. 7
Walter Schaffi r underscored the importance of
Corporate Strategy stating that it is one of the
fi rst attempts to off er a professional, technical, and comprehensive approach to the problem of selecting long-range direction for an
organization. 8
Perhaps the best summary of Ansoff s contributions is given by one who knew him well.
Gen-Ichi Nakamura stated that Ansoff s construction of a coherent and dynamic conceptual
framework for strategic management could be
described as Ansoff s mountains. He suggests
that people try to climb the Ansoff mountains.
At the outset, you may fi nd it diffi cult and
tiresome. After some trial, however, you will
fi nd your eff ort most enjoyable, enriching, and
rewarding. 9
REFERENCES
1. Henry Mintzberg, The Rise and Fall of Strategic
Planning (New York: Free Press, 1994), p. 43.
2. H. Igor Ansoff , Corporate Strategy: An Analytical
Approach to Business Policy for Growth and
Expansion (New York: McGraw-Hill, 1965).
3. Ibid. p. 5.
4. David Hussey, Igor Ansoff s Continuing
Contribution to Strategic Management,
Strategic Change 8, no. 7 (1999), p. 379.
5. E. E. Gilmore and R. G. Brandenburg, Anatomy
of Corporate Planning, Harvard Business Review
40, no. 6 (1962).
6. H. Igor Ansoff , A Profi le in Intellectual Growth,
in Arthur G. Bedeian (ed.), Management
Laureates: A Collection of Autobiographical
Essays (Greenwich, CN: JAI Press, 1992), p. 14.
7. Melvin Anshen, Corporate Strategy: A Review,
Journal of Business 39, no. 3 (1965), pp. 426427.
8. Walter B. Schaffi r, Corporate Strategy,
Management Review 54, no. 4 (1965),
pp. 7879.
9. G. I. Nakamura, quoted in Hussey (1999),
p. 387.
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
Analytical/Rational Approach
Corporate-Level Strategy
Directional Strategies
Divisional-Level Strategy
Emergent Strategy
Health Policy
Implementation Plans
Managing Strategic Momentum
Map/Compass
Organizational-Level Strategy
Rational Approach
Situational Analysis
Strategic Business Unit (SBU)
Strategic Management
Strategic Planning
Strategic Service Unit (SSU)
Strategic Thinking
Strategic Thinking Map
Strategy
Strategy Formulation
Systems Approach
Unit-Level Strategies
Unrealized Strategies
30 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Questions for Class Discussion
1. Explain why strategic management has become crucial in today s dynamic health care
environment.
2. What is the rationale for health care organizations adoption of strategic management?
3. Trace the evolution of strategic management. Have the objectives of strategic management changed dramatically over its development?
4. How is strategic management different from health policy?
5. Compare and contrast the analytical view of strategic management with the emergent,
learning approach. Which is most appropriate for health care managers?
6. Why are conceptual models of management processes useful for practicing managers?
7. What is a strategic thinking map? How are strategic thinking maps useful? What are
their limitations?
8. What are the major activities of strategic management? How are they linked together?
9. Differentiate among the terms strategic management, strategic thinking, strategic
planning, and managing strategic momentum.
10. Who should be doing strategic thinking? Strategic planning? Managing strategic
momentum?
11. Is strategic thinking enough? Why do we engage in strategic planning? What are the
elements of strategic planning?
12. What is meant by realized strategies? How can strategies be realized if they were
never intended?
13. What can change well-thought-out strategies that were developed using all the steps
in strategic planning?
14. Explain and illustrate the possible benefi ts of strategic management. What types of
health care institutions may benefi t most from strategic management?
15. Why is a systems approach helpful to strategic managers?
16. At what organizational level(s) may a strategy be developed? If at more than one
level, how are these levels linked by the planning process?
17. How has the role of the strategic planner changed over the past several decades?
What new skills will be essential for the strategic planner?
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 31
Notes
1. Jeffrey Bracker, The Historical Development of
the Strategic Management Concept, Academy of
Management Review 5, no. 2 (1980), pp. 219224.
2. Ibid.
3. Bruce D. Henderson, The Origin of Strategy, Harvard
Business Review 67, no. 6 (NovemberDecember 1989),
p. 142. See also Peer C. Fiss and Edward J. Zajac, The
Symbolic Management of Strategic Change: Sensegiving
via Framing and Decoupling, Academy of Management
Journal 49, no. 6 (2006), pp. 11871190.
4. Chris Zook, Finding Your Next Core Business,
Harvard Business Review 85, no. 4 (April 2007), p. 75.
5. Bracker, The Historical Development of the Strategic
Management Concept, pp. 219224.
6. Margarete Arndt and Barbara Bigelow, The Transfer
of Business Practices into Hospitals: History and
Implications, in John D. Blair, Myron D. Fottler,
and Grant T. Savage (eds) Advances in Health Care
Management (New York: Elsevier Science, 2000), pp.
339368.
7. Peter M. Ginter and Linda E. Swayne, Moving Toward
Strategic Planning Unique to Healthcare, Frontiers of
Health Services Management 23, no. 2 (winter 2006),
pp. 3334.
8. Ernest L. Stebbins and Kathleen N. Williams, History and
Background of Health Planning in the United States, in
William A. Reinke (ed.), Health Planning: Qualitative
Aspects and Quantitative Techniques (Baltimore: Johns
Hopkins University, School of Hygiene and Public
Health, Department of International Health, 1972), p. 3.
9. Henry Mintzberg, The Design School: Reconsidering
the Basic Premises of Strategic Management, Strategic
Management Journal 11, no. 3 (1990), pp. 171195.
10. Henry Mintzberg, The Rise and Fall of Strategic
Planning: Reconceiving Roles for Planning, Plans,
Planners (New York: Free Press, 1994).
11. David K. Hurst, Crisis and Renewal: Meeting the
Challenge of Organizational Change (Boston: Harvard
Business School Press, 1995), pp. 167168.
12. Ibid. See also Eric Dane and Michael G. Pratt, Exploring
Intuition and Its Role in Managerial Decision Making,
Academy of Management Review 32, no. 1 (2007), p. 49.
13. Rosabeth Moss Kanter, Strategy as Improvisational
Theater, MIT Sloan Management Review (winter 2002),
p. 76.
14. Ian H. Wilson, The 5 Compasses of Strategic
Leadership, Strategy & Leadership 24, no. 4 (1996),
pp. 2631 and Dusya Vera and Mary Crossan, Strategic
Leadership and Organizational Learning, Academy of
Management Review 29, no. 2 (2004), pp. 222240.
15. Robert S. Kaplan and David P. Norton, Having Trouble
with Your Strategy? Then Map It, Harvard Business
Review 78, no. 5 (SeptemberOctober 2000), pp. 167
176. See also Robert S. Kaplan and David P. Norton,
Strategy Maps: Converting Intangible Assets into
Tangible Outcomes (Boston, MA: Harvard Business
School Press, 2004).
16. Hurst, Crisis and Renewal , p. 7.
17. Peter M. Senge, The Fifth Discipline: The Art & Practice
of The Learning Organization (New York: Currency
Doubleday, 1990), pp. 239240.
18. Ronald A. Heifetz and Marty Linsky, A Survival Guide
for Leaders, Harvard Business Review (June 2002), pp.
6574.
19. Keven Kelly, Roller Coaster Leadership, Business
Strategy Review 18, no. 1 (spring 2007), p. 26.
20. James M. Kouzes and Barry Z. Posner, The Leadership
Challenge: How to Keep Getting Extraordinary Things
Done in Organizations (San Francisco: Jossey-Bass
Publishers, 1995), p. 93.
21. Kathleen K. Reardon, Courage as a Skill, Harvard
Business Review 85, no. 1 (January 2007), p. 63.
22. Kouzes and Posner, The Leadership Challenge , p. 30.
23. Alan M. Zuckerman, Advancing the State of the Art
in Healthcare Strategic Planning, Frontiers of Health
Services Management 23, no. 2 (winter 2006), p. 7.
24. Alan Weiss, Our Emperors Have No Clothes (Franklin
Lakes, NJ: Career Press, 1995), p. 20.
25. Michael A. Mische, Strategic Renewal: Becoming
a High-Performance Organization (Upper Saddle
River, NJ: Prentice Hall, 2001), p. 21 and Cynthia A.
Lengnick-Hall and Tammy E. Beck, Adaptive Fit Versus
Robust Transformation: How Organizations Respond
to Environmental Change, Journal of Management 31,
no. 5 (2005), p. 739.
26. Henry Mintzberg, Mintzberg on Management (New
York: Free Press, 1989), p. 41.
27. John C. Camillus, Reinventing Strategic Planning,
Strategy & Leadership 24, no. 3 (1996), pp. 612. See
also Clayton M. Christensen, Scott D. Anthony, and
Eric A. Roth, Seeing Whats Next: Using Theories of
Innovation to Predict Industry Change (Boston, MA:
Harvard Business School Press, 2004).
28. Jane Linder, Paying the Personal Price for Performance,
Strategy & Leadership 28, no. 2 (MarchApril 2000), pp.
2225.
29. Mintzberg, Patterns in Strategy Formation, p. 946.
30. Max DePree, Leadership Is An Art (New York:
Doubleday, 1989), p. 14.
31. Craig R. Hickman, Mind of a Manager, Soul of a Leader
(New York: John Wiley & Sons, 1992), p. 261.
32. After almost four decades of research, the effects of
strategic planning on an organization s performance
are still unclear. Some studies have found signifi cant
benefi ts from planning, although others have found
no relationship, or even small negative effects. For
an extensive survey of the strategic planning/fi nancial performance literature, see Lawrence C. Rhyne,
The Relationship of Strategic Planning to Financial
Performance, Strategic Management Journal 7, no. 5
32 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
(SeptemberOctober 1986), pp. 423436 and Brian K.
Boyd, Strategic Planning and Financial Performance: A
Meta-analytic Review, Journal of Management Studies
28, no. 4 (July 1991), pp. 353374.
33. Jim Begun and Kathleen B. Heatwole, Strategic
Cycling: Shaking Complacency in Healthcare Strategic
Planning, Journal of Healthcare Management 44, no. 5
(SeptemberOctober 1999), pp. 339351.
34. Peter M. Senge, Charlotte Roberts, Richard B. Ross,
Bryan J. Smith, and Art Kleiner, The Fifth Discipline
Fieldbook: Strategies and Tools for Building A Learning
Organization (New York: Currency Doubleday, 1994),
p. 90.
35. Joseph K. H. Tan, Health Management Information
Systems: Methods and Practical Applications, 2nd edn
(Gaithersburg, MD: Aspen Publishers, 2001), p. 25.
36. Michael P. Dumler and Steven J. Skinner, A Primer for
Management (Mason, OH: Thomson South-Western,
2005), pp. A10A11.
37. Senge, The Fifth Discipline , p. 7.
38. Dan E. Schendel and Charles W. Hofer, Introduction,
in D. E. Schendel and C. W. Hofer (eds), Strategic
Management: A New View of Business Policy and
Planning (Boston: Little, Brown, 1979), p. 12.
39. Russell L. Ackoff, Transformational Leadership,
Strategy & Leadership 27, no. 1 (1999), pp. 2025.
40. Kelly, Roller Coaster Leadership, p. 26.
41. Donald L. Bates and John E. Dillard Jr., Wanted: A
Strategic Planner for the 1990s, Journal of General
Management 18, no. 1 (1992), pp. 5162.
42. Henry Mintzberg, The Fall and Rise of Strategic
Planning, Harvard Business Review 72, no. 1 (January
February 1994), pp. 107114.
43. Ibid.
44. Horst Bergmann, Kathleen Hurson, and Darlene RussEft, Introducing a Grass-roots Model of Leadership,
Strategy & Leadership 27, no. 6 (1999), pp. 1520.
45. Bjorn Lovas and Sumantra Ghoshal, Strategy as
Guided Evolution, Strategic Management Journal 21,
no. 9 (2000), pp. 875896.
2 Understanding and
Analyzing the General
Environment and the Health
Care Environment
Whether you think you can or whether you think you can ‘t, you ‘re right!
HENRY FORD
Introductory Incident
Not-for-profi t Status for Hospitals: Is Community Benefi t
Equal to Lost Tax Revenue?
Because of the Great Recession, local and state governments have cut school budgets, personnel, and infrastructure items noticed by taxpayers/voters. Cash-strapped states are looking
for ways to fi nd funds. One area that has been increasingly targeted is the tax-exempt status
of not-for-profi t hospitals that often are taking in huge amounts of revenue and not paying any
kind of taxes. Prior to 1969, hospitals were exempt from taxes because they serve the public
good by caring for patients in the community who cannot aff ord the medical care they need.
34 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
As communities watch hospitals build new buildings, pay CEOs high salaries, and purchase
the latest technologies, the question arises: What percent of the hospital ‘s revenues goes
toward uncompensated medical care? For some hospitals, it is less than 1 percent; nevertheless, the hospital pays no property tax (local), income tax (state and federal), sales tax (local,
county, state), or capital gains/earnings tax on investments. For example, BJC Hospital in
St. Louis made $372 million in investments this past year (not taxed), plus issued tax-free bonds
(an additional tax loss).
The Illinois Department of Revenue revoked the not-for-profi t status of Provena Covenant
Medical Center in 2004 because it did not provide suffi cient charity care ($800,000 on $113
million in revenue). Appeals were denied as the court found that the Urbana hospital failed to
justify its exemption by providing charity care to less than one-half of 1 percent of the patients
it served in 2002. Three additional Illinois hospitals, Northwestern Memorial Hospital ‘s Prentice
Women ‘s Hospital in Chicago (1.85 percent charity care), Edward Hospital in Naperville (1.04
percent charity care), and Decatur Memorial Hospital in Decatur (0.99 percent charity care), were
denied renewal of not-for-profi t status in 2011 and 15 others were under investigation when
the Governor asked for new legislation that would defi ne criteria for hospitals to qualify for taxexempt status. In a press release dated January 11, 2012, the Illinois Hospital Association (IHA)
announced that non-profi t hospitals in the state contributed $4.6 billion in community benefi ts
($561 million for free or discounted care at cost) in the 200910 fi scal year a 124 percent
increase over 2005. IHA proposed that the new legislation expand the defi nition of charity in
the tax code to include not only free medical care to the indigent but also programs and losses
that hospitals incur under Medicaid, with reimbursement rates are well below market rates
(an issue of hospitals wanting to look at charges versus costs in determining charity care).
The Illinois State Supreme Court ruled in 2010 that discounts given to the state ‘s Medicaid program could not be considered charity care.
Since 1969, the IRS has not specifi cally required hospitals to provide charity care in order to
be exempt from federal taxation and have access to tax-exempt bond fi nancing and charitable
donations, as long as the hospital provides benefi ts to the community in other ways (an IRS ruling brought about this change in response to the mandate that emergency rooms had to be
open to all members of the community without regard for ability to pay). The 1969 ruling identifi ed other factors that might support a hospital ‘s tax-exempt status, such as having a governance board composed of community members and using surplus revenue to improve facilities,
patient care, medical training, education, and research.
Perhaps Boston Children ‘s Hospital has the right approach. To demonstrate the value
that Boston Children ‘s provides to the community, it hired Ernst & Young to calculate what
it would owe in local, state, and federal taxes if it were a for-profi t hospital. According to
the accounting fi rm ‘s calculation, in FY 2010, Boston Children ‘s would owe $43.8 million in
taxes as a for-profi t hospital (and Ernst & Young included every possible tax). Children ‘s then
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 35
calculated the community benefi ts it has delivered as defi ned by the new IRS guidelines,
using a conservative projection: $244.6 million in benefi ts to taxpayers in exchange for its
tax-exempt status.
REFERENCES
1. GAO, Nonprofi t, For-profi t, and Government Hospitals: Uncompensated Care and Other Community
Benefi ts, GAO-05-743T, May 26, 2005.
2. Internal Revenue Service, IRS Exempt Organizations (TE/GE) Hospital Compliance Project, Final Report,
February 10, 2009.
3. Kathy Bergen, Illinois Department of Revenue Denies Tax Exemption for 3 Hospitals, Chicago Tribune ,
August 17, 2011, Business p. 1.
4. www.childrenshospital.org
Learning Objectives
After completing the chapter you will be able to:
1. Appreciate the signifi cance of the external environment’s impact on health care
organizations.
2. Understand and discuss the specifi c goals of external environmental
analysis.
3. Point out some limitations of external environmental analysis.
4. Describe the various types of organizations in the general and health care
environments and how they create issues that are of importance to other
organizations.
5. Identify major general and industry environmental trends aff ecting health care
organizations.
6. Identify key sources of environmental information.
7. Discuss important techniques used in analyzing the general and health care
environments.
8. Conduct an analysis of the general and industry external environments for a
health care organization.
9. Suggest several questions to initiate strategic thinking concerning the
general and industry environments as a part of managing strategic momentum.
36 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
The Importance of Environmental Infl uences
Fifty years ago the delivery of health care was a relatively uncomplicated relationship of facilities, physicians, and patients working together. Government and
business stood weakly on the fringes, having little signifi cant infl uence. Today,
a multitude of interests are directly or indirectly involved in the delivery of
health care. For instance, the for-profi t provider segment has grown dramatically;
private-sector businesses are largely responsible for the development and delivery of drugs, medical supplies, and many technical innovations; and government
agencies regulate much of the actual delivery of health care services. As a result,
in their quest for competitive advantage, organizations are investing increasingly
more time and money in collecting and organizing information about the world
in which they operate. 1
Ultimately, strategic thinking is directed toward positioning the organization
most effectively within its changing external environment. Peter Drucker writes,
The most important task of an organization ‘s leader is to anticipate crisis.
Perhaps not to avert it, but to anticipate it. To wait until the crisis hits is already
abdication. One has to make the organization capable of anticipating the storm,
weathering it, and in fact, being ahead of it. 2 Therefore, to be successful, health
care organization leaders must have an understanding of the external environment in which they operate; they must anticipate and respond to the signifi cant
shifts taking place within that environment. Strategic thinking, and the incorporation of that thinking into the strategic plans for the organization, is now more
important than ever. Futurist Joel Barker has suggested that in times of turbulence the ability to anticipate dramatically enhances your chances of success.
Good anticipation is the result of good strategic exploration. 3 Organizations
that fail to anticipate change, ignore external forces, or resist change will fi nd
themselves out of touch with the needs of the market, especially because of antiquated technologies, ineffective delivery systems, and outmoded management.
Institutions that anticipate and recognize signifi cant external forces and modify
their strategies and operations accordingly will prosper.
Evolving External Issues
One of the greatest challenges for health care organizations is identifying the
changes that are most likely to occur and then planning for that future. Interviews
with health care professionals and a review of the health care literature suggest
that health care organizations will have to cope with change in some or all of
the following areas: legislative/political, economic, social/demographic, technological, and competitive. 4
Legislative/Political Changes
Passage of the Affordable Care Act (ACA) in 2010: major reform legislation
is in place and in 2012 was generally supported by the Supreme Court
(only the mandate/penalty for Medicaid was disallowed, resulting in the
right of states to opt out of that requirement). Different parts of the legislation are being phased in, a few began immediately (for example, coverage
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 37
of children to age 26), others begin in as late as 2014 (use of electronic
health records by any provider that interacts with the US government,
although in 2012 many players in the health care system were asking for
an extension). The results of the 2012 presidential election suggest that the
PPACA will remain in tact and further revisions are likely.
Increased accountability for corporate governance (e.g., SarbanesOxley).
Employer-based insurance may diminish as the penalties to be paid under
ACA for not providing insurance for employees are less than the cost of
health insurance; more employees will likely shift to government accounts.
Economic Changes
Health care by most measures is the US ‘s largest industry and biggest private employer. 6
Procedure costs may be falling while total spending is rising. 7
Employers will become more unwilling to shoulder the entire burden
of increasing costs for health care insurance and health care for their
employees and retirees.
Over 49.9 million Americans are without health insurance in 2011 a
number that has been predicted to increase, but with ACA the number
is unpredictable. Those previously uncovered may become insured
through government programs, but the number of people already insured
by employers may decrease, causing the total number of uninsured to
increase. Or, if all the uninsured roll-over to government programs, will
the cost be lowered or increased?
Social/Demographic Changes
Without a truly radical adjustment in health care spending, which there is
no reason to expect, demographics alone will drive health care ‘s share of
GDP (gross domestic product) from the current 16 percent to as high as
25 percent. 8
An aging population and increased average life span will place capacity
burdens on some health care organizations while a lessening of demand
threatens the survival of others. By 2020, the US population over the age
of 65 is expected to reach 53.7 million.
The Hispanic population, many of whom do not speak English or speak
it poorly, will continue to grow. Hispanics have become the largest minority population. By 2050, one out of four Americans will be Hispanic.
A more ethnically diverse population will continue to develop.
An increase in income disparity is expected a critical factor in determining health care delivery.
Tiered access to health care is anticipated, with the division between
the tiers becoming more extreme.
There are predictions of critical shortages of non-physician health care
professionals and primary care physicians, yet a surplus of physicians
within some specialties and in some geographic regions.
38 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Technological Changes
The high costs of purchasing new, sophisticated, largely computer-based
technologies to meet the demand for high-quality health care will continue to rise.
The ACA requirement for an electronic health record will supply copious
amounts of data and many will struggle to turn it into information that
will improve the quality of care, which will be used to determine payments for hospitals and physicians (see Perspective 21 ).
Signifi cant advances in medical information technology are anticipated,
such as automation of basic business processes, clinical information interfaces, data analysis, and telehealth.
New technologies will emerge in the areas of drug design, imaging, minimally invasive surgery, genetic mapping and testing, gene therapy, vaccines, artifi cial blood, and xenotransplantation (transplantation of tissues
and organs from animals into humans).
Competitive Changes
Further consolidation will be seen within the health care industry because
of cost pressures and intensifi ed competition.
The disintegration of some health care networks can be expected.
Health care corporations will continue to expand into segments that have less
regulation and into businesses outside the traditional health care industry.
The importance of market niche strategies and services marketing will increase.
Outpatient care and the development of innovative alternative health care
delivery systems will continue to grow.
The decreasing viability of many of the nation ‘s small, rural, and public
hospitals means that there will be a reconfi guration of the rural health
care delivery system.
Increasing numbers of physician executives will have leadership roles in
health care organizations.
More emphasis will be on preventive care through wellness programs and
healthy behaviors.
An increased emphasis will be placed on cost containment and measurement of outcomes of care (cost/benefi t).
A changing role for public health is expected, moving back to core
activities (prevention, surveillance, disease control, assurance) and away
from the delivery of primary care.
A shortage of 800,000 nurses will occur by 2020. The Southern Regional
Education Board, for example, estimates that in its 16-state region and
the District of Columbia there will be 40,000 job openings for Registered
Nurses every year until 2014. This, in spite of the fact that 26,000 qualifi ed applicants were denied admission to nursing programs in the region
due to shortages of the faculty and facilities necessary to train them.
Pressure to reduce the costs of administration of health care will increase.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 39
PERSPECTIVE 21
Physicians as Data Analysts?
In the past physicians kept a few statistics, especially if they operated in a group practice. Patient
deaths and, if the MD were an obstetrician,
number of births, were the main activities they
counted. That is about to change and rather
signifi cantly as data sharing with the government is becoming essential and will impact
how physicians are paid, receive bonuses, or
are penalized as our health care system moves
from a fee-for-service world to one that is value
based.
Medicare is required to phase a valuebased modifi er into physicians’ groups of 25
or more in 2015. The value-based modifi er
payments would apply to all physicians in
2017. The Aff ordable Care Act has authorized
CMS to penalize physicians who do not participate; up to 2 percent of allowable Medicare
charges, with the same amount as incentive
payments.
The American Medical Association (AMA) and
more than 60 other organizations (academies,
such as the American Academy of Orthopedic
Surgeons; colleges, such as the College of
Pathologists; societies, such as the Medical
Society of the State of New York; associations,
such as the Renal Association; and others)
pledged to help physicians better improve use of
the data, which includes insurer information, to
enhance the quality and value of patient care.
Failure by physicians to embrace data sharing will be counterproductive. Eventually, every
physician will be evaluated by quality resources
based on their information that would result
in bonuses or not, according to Niall Berman,
director of the CMS Offi ce of Information
Products and Analysis. We ‘re harnessing raw
data into actionable information at the point
of care. CMS hasn ‘t much choice, Brennan said.
The organization can ‘t say a physician is good
or bad without data.
A specifi c area of concern for physicians
is the complexities of the reporting and the
methods CMS will use to evaluate quality to
determine pay scales when there are so many
diff erences in an individual service line with
many subspecialties. For example, an orthopedics practice refl ects many areas where there
may seem to be quality diff erences, but because
of variations in patient conditions not how the
work is performed. A sports-medicine physician may have lower costs because he/she sees
sports-minded people as opposed to a foot
and ankle surgeon who sees patients who have
uncontrolled diabetes that may cost more, but
it is not because of patient treatment but rather
due to the uncontrolled diabetes. Thus, the
physician quality reports may diff er dramatically
without a true refl ection of the quality of the
doctor ‘s work.
CMS offi cials acknowledge that they are still
sorting out the role of subspecialties, but they
believe a tiered structure would be implemented to take into account such quality diff erences among patient conditions.
Source: Joe Cantlupe, Data Changes the Doctors’ Game,
HealthLeaders Media , August 23, 2012, online.
40 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
The External Nature of Strategic Management
Strategic thinking, strategic planning, and managing strategic momentum
should be directed toward positioning the organization most effectively within
its changing environment. Environmental analysis is a part of the situational
analysis section of the strategic thinking map presented in Exhibit 11 . The
conclusions reached in environmental analysis will affect the directional strategies and internal analysis. Environmental analysis is largely strategic thinking
and strategic planning, and consists of understanding the issues in the external
environment to determine the implications of those issues for the organization.
Environmental analysis requires externally oriented strategic managers who
search for ways to radically alter the status quo, create something totally new, or
revolutionize processes. They search for opportunities to do what has never been
done previously or to do known things in a new way. Therefore, the fundamental nature of strategic management requires the awareness and understanding
of outside forces. Strategic managers encourage adoption of new ideas in the
system, maintain receptivity to new ways of doing things, and expose themselves
to broad views. Environmental analysis can remove the protective covering in
which organizations often seal themselves. 9 Effective environmental analysis
occurs through strategic thinking. This chapter concerns methods to assess the
general environment and the health care environment, and Chapter 3 focuses on
analysis methods to evaluate the service area and competitors within it.
Determining the Need for Environmental Analysis
Based on extensive experience in the business sector, A. H. Mesch developed
a series of questions to determine if an organization needs environmental
analysis. 10 The questions are equally relevant to health care organizations and
include:
1. Does the external environment infl uence capital allocation and decisionmaking processes?
2. Have previous strategic plans been scrapped because of unexpected
changes in the environment?
3. Has there been an unpleasant surprise in the external environment?
4. Is competition growing in the industry?
5. Is the organization or industry becoming more marketing oriented?
6. Do more and different kinds of external forces seem to be infl uencing
decisions, and does there seem to be more interplay between them?
7. Is management unhappy with past forecasting and planning efforts?
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 41
These questions concern the general and health care industry environments
as well as the service area. Answering yes to any of the questions suggests that
management should consider some form of environmental analysis. Answering
yes to fi ve or more of the questions indicates that environmental analysis
is imperative. In today ‘s dynamic environment, most health care managers
would probably answer yes to more than one of these questions and should
therefore be performing environmental analysis assessing trends, events, and
issues in the general environment, the health care industry environment,
and the service area.
External environmental analysis attempts to identify, aggregate, and interpret
environmental issues as well as provide information for the analysis of the internal environment and the development of the directional strategies. Therefore,
environmental analysis seeks to eliminate many of the surprises in the external
environment. Organizations cannot afford to be surprised. As one writer has
pointed out, to the blind all things are sudden. The elimination of surprises
is an appropriate goal because even in periods of dynamic, rapid transformation, there are vastly more elements that do not change than new things that
emerge. 11
Strategic managers who practice environmental analysis are so close to the
environment that by the time change becomes apparent to others, they have
already detected the signals of change and have explored the signifi cance of the
changes. These managers are often called visionaries; however, vision is often
the result of their strategic awareness thoughtful detection and interpretation of subtle signals of change. Such strategic managers are able to eliminate
predictable surprises for the organization surprises that shouldn ‘t have
been. These managers are able to avoid disasters by recognizing the issue,
making it a priority in the organization, and mobilizing the resources required
to address it. 12
The lack of forecasting and planning success is sometimes the result of
directing processes internally toward effi ciency rather than externally toward
effectiveness. Such planning systems have not considered the growing number and diversity of environmental infl uences. Early identifi cation of external
changes through environmental analysis will greatly enhance the planning
efforts in health care organizations. For example, according to the Nashville
Business Journal (September 14, 2012), HCA Holdings, Community Health
Systems, and LifePoint Hospitals are attempting to anticipate whether or not
Tennessee will participate in the Medicaid expansion allowed under the Patient
Protection and Affordable Care Act (PPACA). If Tennessee opts out, Nashville ‘s
for-profi t hospitals could miss out on $22.7 billion in Medicaid reimbursements
in 2014 alone. The problem is more complex. In addition, Nashville companies
operate 51 hospitals in Texas. If Texas opts out, Nashville health care organizations could miss out on their share of the $9.3 billion that would go to Texas
during the fi rst year. As discussed in Perspective 22 , another shift in the external environment to which health care organizations must successfully respond
is emergency and disaster preparedness.
42 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 22
Preparedness: An Evolving External Issue for Health Care
Organizations in the 21st Century
Public health threats are always present.
Whether caused by natural, accidental, or
intentional means, these threats can lead
to the onset of public health incidents.
Being prepared to prevent, respond to,
and rapidly recover from public health
threats is critical for protecting and securing our nation ‘s public health. 1
Following September 11, 2001, a signifi cant
increased emphasis was directed by the US government to improve the capability and capacity
of health care organizations to deal with largescale disasters of all types. Although it is widely
accepted that all responses are local, the strategy
for preparing for and planning local responses has
been infl uenced by national mandates from both
the Department of Health and Human Services
(HHS) and the Centers for Disease Control and
Prevention (CDC). Both agencies provide funding and technical assistance to state, local, and
territorial public health departments through
the Hospital Preparedness Program (HPP) and
Public Health Emergency Preparedness (PHEP)
Cooperative Agreements. These agreements provide resources that facilitate preparing hospitals,
health care systems, and their community partners to prevent, respond to, and rapidly recover
from mass casualty incidents (MCIs) and medical
surges to the nation ‘s hospital and health care
system. 2 Legislative resource commitments are
provided through the Pandemic and All-Hazards
Preparedness Act (PAHPA).
The primary role of the federal government
is the coordination of interagency response
to a disaster incident. The National Response
Framework organizes interagency response into
15 essential support functions (ESFs), which are
groupings of functions most frequently used to
provide federal support to states. The ESF focusing on public health and the one of primary
interest to health care organizations is ESF#8
Public Health and Medical Services. The scope of
ESF#8 is broad, with responsibility for providing
supplemental assistance in the following core
functions:
Assessment of public health/medical needs.
Health surveillance.
Medical care personnel.
Health/medical/veterinary equipment and
supplies.
Patient evacuation.
Patient care.
Safety and security of drugs, biologics, and
medical devices.
Blood and blood products.
Food safety and security.
Agriculture safety and security.
All-hazard public health and medical consultation, technical assistance, and support.
Behavioral health care.
Public health and medical information.
Vector control.
Potable water/wastewater and solid waste
disposal.
Mass fatality management, victim identifi cation, and decontaminating remains.
Veterinary medical support.
The PHEP and HPP cooperative agreements
translate into new demands and interactions
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 43
for health care organizations. For example,
health care organizations may be required or
requested to participate in the development of
health care coalitions with other ESF#8 partners.
Some states may require that in order to be
licensed, hospitals must participate in the state ‘s
hospital preparedness program while in other
states, participation is voluntary. Participation
in preparedness activities may involve fi nancial,
human, and facilities resources. It is important
for health care organizations to understand the
requirements and expectations of state and
local authorities concerning preparedness
and to incorporate these expectations into the
environmental assessment.
In addition, health care organizations
must consider stakeholders such as the Joint
Commission, the Association of State and
Territorial Health Offi cials (ASTHO), the National
Association of County and City Officials
(NACCHO), the American Hospital Association
(AHA), the American Academy of Pediatrics (AAP),
the Federal Emergency Management Agency
(FEMA), and state and local emergency management agencies and health departments.
These stakeholders collaborate to defi ne and
operationalize public health preparedness
capabilities. 3
Natural and human-initiated disaster preparedness will continue to infl uence health
care organization strategy. Planning and preparing for hurricanes, earthquakes, tornados,
human-initiated incidents, and other types of
disaster is now a part of health care organization strategy. In addition, as new preparedness
approaches, directives, and laws are created,
health care organizations will have to respond
accordingly.
Source: Andrew C. Rucks and Lisa C. McCormick, Department of
Health Care Organization and Policy, University of Alabama at
Birmingham.
1 US Department of Health and Human Services, Centers for
Disease Control and Prevention (2011) Public Health Preparedness
Capabilities: National Standards for State and Local
Planning. Available at: http://www.ndhealth.gov/epr/php/
PHEP%20Capabilities%202011.pdf
2 US Department of Health and Human Services, Offi ce of the
Assistant Secretary for Preparedness and Response (2012)
Healthcare Preparedness Capabilities: National Guidance for
Healthcare System Preparedness. Available at: http://www.phe.gov/
preparedness/planning/hpp/reports/documents/capabilities.pdf
3 FEMA (2008). Emergency Support Function Annexes:
Introduction. Available at: http://www.fema.gov/pdf/emergency/
nrf/nrf-esf-all.pdf
The Goals of Environmental Analysis
Although the overall intent of environmental analysis is to position the organization within its environment, more specifi c goals may be identifi ed. The specifi c
goals of environmental analysis are:
to identify and analyze current important issues and changes that will
affect the organization;
to detect and analyze early or weak signals of emerging issues and
changes that will affect the organization;
to speculate on the likely future issues and changes that will have signifi –
cant impact on the organization;
to classify and order issues and changes generated by outside organizations;
44 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
to provide organized information for the development of the
organization ‘s internal analysis, mission, vision, values, goals, and
strategy; and
to foster further strategic thinking throughout the organization.
In addition to the identifi cation of current issues, environmental analysis
attempts to detect early or weak signals within the external environment that
may portend a future issue. Sometimes based on little hard data, managers
attempt to identify patterns that suggest emerging issues that will be signifi cant
for the organization. Such issues, if they continue or actually do occur, may
represent signifi cant challenges. Early identifi cation aids in developing strategy.
Strategic managers must go beyond what is known and speculate on the
nature of the industry, as well as the organization, in the future. This process
often stimulates creative thinking concerning the organization ‘s present and
future products and services. Such speculation is valuable in the formulation of
a guiding vision and the development of mission and strategy. The bulleted list
of evolving external issues at the beginning of this chapter provides some of the
emerging and speculative forces that strategic managers will begin to incorporate into their thinking today.
There is an abundance of data in the external environment. For it to be
meaningful, managers must identify the sources as well as aggregate and classify the data into information. Once classifi ed, important issues that will affect
the organization may be identifi ed and evaluated. This process encourages
managers to view environmental changes as external issues that may affect the
organization.
When strategic managers top managers, middle managers, and front-line
supervisors throughout the organization are considering the relationship of
the organization to its environment, innovation and a high level of service are
likely. Strategic thinking within an organization fosters adaptability, and those
organizations that adapt best will ultimately displace the rest.
The Limitations of Environmental Analysis
Environmental analysis is important for understanding the external environment,
but it provides no guarantees for success. The process has some practical limitations that the organization must recognize. These limitations include:
Environmental analysis cannot foretell the future.
Managers cannot see everything.
Sometimes pertinent and timely information is diffi cult or impossible to
obtain.
There may be delays between the occurrence of external events and management ‘s ability to interpret them.
Sometimes there is a general inability on the part of the organization to
respond quickly enough to take advantage of the issue detected.
Managers’ strongly held beliefs sometimes inhibit them from detecting
issues or interpreting them rationally. 13
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 45
Even the most comprehensive and well-organized environmental analysis processes will not detect all the changes taking place. Sometimes events occur that
are signifi cant to the organization but were preceded by few, if any, signals. Or
the signals may be too weak to be discerned.
Perhaps the greatest limiting factor in external environmental analysis is the
preconceived beliefs of management. In many cases, what leaders already believe
about the industry, important competitive factors, or social issues inhibits their
ability to perceive or accept signals for change. Because of managers’ beliefs, signals that do not conform to what they believe may be ignored. What an individual
actually perceives is dramatically determined by paradigms (ways of thinking and
beliefs). And any data that exist in the real world which do not fi t the paradigm
will have a diffi cult time permeating the individual ‘s fi lters he or she will simply not see it. 14 As creativity expert Edward De Bono explains, We are unable
to make full use of the information and experience that is already available to
us and is locked up in old structures, old patterns, old concepts, and old perceptions. 15 Despite long and loud signals for change, in some cases organizations
do not change until it is too late.
The External Environment
Organizations and individuals create change. Therefore, if health care managers
are to become aware of the changes taking place outside their own organization,
they must have an understanding of the types of organizations that are creating change and the nature of the change. Exhibit 21illustrates the concept of
the external environment for health care organizations. In this chapter we will
explore the types of change initiated in the general environment and the health
care industry environment.
Components of the General Environment
All types of organizations and independent individuals generate important
issues and subsequently change within the general environment. For example, a research fi rm that is developing imaging equipment may introduce a new
technology that could be used by a variety of other organizations in very diverse
industries such as hospitals (magnetic resonance imaging) and manufacturing
(robotics). The members of the general environment may be broadly classifi ed in
a variety of ways depending on the strategic management needs of the organization analyzing the environment. These groups of organizations and individuals
make up the broad context of the general environment:
government institutions,
business organizations,
educational institutions,
religious institutions,
research organizations and foundations, and
individuals and consumers.
46 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Organizations and individuals in the general environment, acting alone or
in concert with others, initiate and foster the macroenvironmental changes
within society. These organizations and individuals generate legislative/political,
economic, social/demographic, technological, and competitive change that will,
in the long run, affect many different industries (including health care) and may
even directly affect individual organizations. Therefore, external organizations
engaged in their own processes and pursuing their own missions and strategic
goals will affect other industries, organizations, and individuals.
In the general environment, changes usually affect a number of different
sectors of the economy (industry environments). For example, passage of the
prescription drug bill during the George W. Bush presidency affected a variety
of organizations as well as individuals including insurance companies, organizations representing the elderly, and retirees. Similarly, the early health care reform
initiatives of the Obama administration resulted in the passage of ACA, however,
its implementation was spread over a number of years and affected virtually all
institutions in the general environment, not just health care organizations.
The General Environment
Government Institutions
Business Organizations
Educational Institutions
Religious Institutions
Research Organizations/
Foundations
Individuals/Consumers
The Health Care Environment
Planning/Regulatory
Organizations
Primary Providers
Secondary Providers
Provider Representatives
Individuals/Patients
Competitors
Government Services
Business Organizations
Non-profit Organizations
Other Local Organizations
Individuals/Consumers
Demographics
Psychographics
Health Status
Impact
the
Organization
The Service Area
Impact
the
Organization
Impact
the
Organization
EXHIBIT 21 The External Environment of a Health Care Organization
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 47
The organization itself may be affected directly by the legislative/political,
economic, social/demographic, technological, and competitive change initiated
and fostered by organizations in the general environment. In the aggregate,
these alterations represent the general direction of societal change that may
affect the success or failure of any organization. Therefore, an organization
engaging in strategic management must try to sort out the fundamental changes
being generated in the external environment and detect the major shifts taking
place. A shift in consumer attitudes and expectations about health care is an
example of a societal change that may affect the success or failure of health care
organizations. Demographic changes are somewhat more predictable and the
growing number of seniors in the US population will impact every aspect of
the environment as well as the health care environment. However, sometimes
the demographics of the general environment can provide leading health care
trends, as illustrated in Perspective 23 .
Typically, as information is accumulated and evaluated by the organization, it
will be summarized as environmental issues affecting the industry or organization. The identifi cation and evaluation of the issues in the general environment
are important because the issues will accelerate or retard changes taking place
within the industry yet may affect the organization directly as well.
Components of the Health Care Environment
Organizations and individuals within the health care environment develop and
employ new technologies, deal with changing social and demographic issues,
address legislative and political change, compete with other health care organizations, and participate in the health care economy. Therefore, strategic managers
should view the health care environment with the intent of understanding the nature
of all these issues and changes. Focusing attention on major change areas facilitates
the early identifi cation and analysis of industry-specifi c environmental issues and
trends that will affect the organization. However, in today ‘s environment a more
focused service area competitor analysis is typically required as well (see Chapter 3).
PERSPECTIVE 23
The Largest Minority Impacting Health Care Delivery
As of mid-year 2009, Hispanics became the largest and fastest-growing ethnic or race minority
in the United States, with more than 48.4 million people. Hispanics constitute 16 percent
of the nation ‘s total population, with a median
age of 27.4 years (compared with 36.8 years
for the US population as a whole). Factors that
contribute to poor health outcomes among
Hispanics include language (unwillingness to
try to speak with a health care provider and
confusion over medical information provided),
cultural barriers, lack of access to preventive
care, and lack of health insurance (especially
illegal immigrants).
48 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Access to care is uneven for many Hispanics.
In one study comparing a group of Hispanics
living in Minnesota where they were a small
percentage of the population to a group living
in Texas where they were the largest minority
population, found those living in Minnesota
had access and good quality care whereas those
living in Texas felt they had limited access and
inferior quality care to that they could receive in
Mexico. Many (who were in the US legally and
could do so) travelled to Mexico for care and
especially for medications that were much less
expensive. In Minnesota the burden is not great
(lowest uninsured population in the USA at
8.42 percent and lowest uninsured Latinos
at 18 percent) compared with Texas (highest
uninsured population in the USA at 24.2 percent
and highest uninsured Latinos at 60 percent).
One way that the health care needs of
Hispanics are being met is in-store medical
clinics that off er aff ordable health care targeted
at Hispanic customers. This growing trend of
retail-based medical clinics could be particularly
benefi cial to retailers catering for Hispanics.
For example, Minyard Food Stores operates its
Carnival-banner as a Hispanic format, incorporating in-store medical centers called MedBasics.
Started in Texas locations, the in-store clinics
are staff ed by nurse practitioners and physician
assistants and charge about $49 for most nonurgent services.
The clinics range from about 400 to 600
square feet. Although Carnival loses that footprint as retail space, it benefi ts from additional
store traffi c 98 percent of MedBasics patients
use the Carnival pharmacy to fi ll their prescriptions and while there customers often buy other
health-related items, such as over-the-counter
medications and Band-Aids. MedBasics centers
reach out to Hispanics with a range of services
including bilingual staff and paperwork, signage, and brochures in Spanish. In addition,
MedBasics partnered with several insurance
companies so that insured patients are typically
charged just a copay.
A similar concept has been eff ective at
Bashas ‘s Food City-banner stores in Phoenix,
Arizona. Its MediMin health care clinics employ
a bilingual staff and all communications are
in Spanish. The basic offi ce visit is $50 (or the
patient ‘s insurance copay). MediMin centers
are located at the front of the store, near the
pharmacy, in approximately 450 square feet of
space. A small patient waiting area, two exam
rooms, a small lab, and a bathroom provide the
look and feel of a doctor ‘s offi ce, but it ‘s better
because the clinics are staff ed seven days a week
with a nurse practitioner or physician ‘s assistant
plus an administrator who is fl uent in Spanish.
Bashas ‘s research revealed that all socioeconomic
groups from blue-color workers to high-end
households are using the clinics. The hospital
ERs like the concept as well.
Source: www.cdc.gov/nchs/fastats/hispanic_health.htm and www
.census.gov/hhes/www/hlthins/data/incpovhlth/2010/tables.html.
Carolyn Garcia, Jos A. Pagn, and Rachel Hardeman, Context
Matters: Where Would You be the Least Worse Off in the US if You
Were Uninsured? Journal of Health Policy 94, no. 1 (2010), pp. 7683.
The wide variety of health care organizations makes categorization diffi cult.
However, the health care system may generally be grouped into fi ve segments:
Organizations that regulate primary and secondary providers.
Organizations that provide health services ( primary providers ).
Organizations that provide resources for the health care system ( secondary providers ).
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 49
Organizations that represent the primary and secondary providers.
Individuals involved in health care and patients (consumers of health care
services). 16
Exhibit 22lists the types of organizations and individuals within each segment and provides examples. The categories of health care organizations listed
under each of the health care segments are not meant to be all-inclusive, but
EXHIBIT 22
Organizations that Regulate Primary and Secondary Providers
Federal regulating agencies:
Department of Health and Human Services (DHHS)
Center for Medicare and Medicaid Services (CMS)
State regulating agencies:
Public Health Department
State Health Planning Agency (e.g., certifi cate of need [CON, see Perspective 33 ])
Voluntary regulating groups:
Joint Commission on Accreditation of Healthcare Organizations (JCAHO)
Other accrediting agencies:
Council on Education for Public Health (CEPH)
Primary Providers (Organizations that Provide Health Services)
Hospitals:
Voluntary (e.g., Barnes/Jewish/Hospital)
Governmental (e.g., Veteran ‘s Administration Hospitals)
Investor-owned (e.g., HCA The Healthcare Company, Tenet)
State public health departments
Long-term care facilities
Skilled nursing facilities (e.g., HCR ManorCare)
Intermediate care facilities
HMOs and IPAs (e.g., United Healthcare)
Ambulatory care institutions (e.g., Ambulatory Care Centers)
Hospices (e.g., Hospice Care & Palliative Care, Inc.)
Physicians’ offi ces
Home health care institutions (e.g., CareGivers Home Health)
Secondary Providers (Organizations that Provide Resources)
Educational institutions:
Medical schools (e.g., Johns Hopkins, University of Alabama at Birmingham [UAB])
Schools of public health (e.g., The University of North Carolina at Chapel Hill, Harvard)
Schools of nursing (Presbyterian School of Nursing)
Health administration programs (University of Washington, The Ohio State University)
Organizations in the Health Care Environment
(Continued)
50 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Organizations that pay for care (third-party payers):
Government (e.g., Medicaid, Medicare)
Insurance companies (e.g., Prudential, Metropolitan)
Businesses (e.g., Microsoft, Ford Motor Company)
Social organizations (e.g., Shriners, Rotary Clubs)
Pharmaceutical and medical supply companies:
Drug distributors (e.g., McKesson)
Drug and research companies (e.g., Bristol Myers Squibb)
Medical products companies (e.g., Johnson & Johnson)
Organizations that Represent Primary and Secondary Providers
American Medical Association (AMA)
American Hospital Association (AHA)
State associations (e.g., Illinois Hospital Association, New York Medical Society)
Professional associations (e.g., Pharmaceutical Manufacturers Association [PMA],
American College of Healthcare Executives [ACHE], American College of Physician
Executives [ACPE], Medical Group Management Association [MGMA])
Individuals and Patients (Consumers)
Independent physicians
Nurses
Non-physician professionals
Non-professionals
Patients and consumer groups
Source: Adapted from Beaufort B. Longest Jr., Management Practices for the Health Professional , 4th edn
(Norwalk, CT: Appleton & Lange, 1990).
rather to provide a starting point for understanding the wide diversity and complexity of the industry.
The Process of Environmental Analysis
There are a variety of approaches to conducting an environmental analysis.
Regardless of the approach, four fundamental processes are common to environmental analysis efforts (see Exhibit 23 ): (1) scanning to identify signals
of environmental change, (2) monitoring identifi ed issues, (3) forecasting the
future direction of the issues, and (4) assessing the organizational implications
of the issues. 17
EXHIBIT 22 (Continued)
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 51
Scanning the External Environment
As suggested earlier in this chapter, the external environment is composed of a
number of organizations and individuals in the general and health care environments. Some of the organizations and individuals in the external environment
have little direct involvement with the health care industry while others are
directly involved. The distinction is not always clear. These organizations and individuals, through their normal operations and activities, are generating changes
that may be important to the future of other organizations. Changes in the general environment are always breaking through to the health care environment.
For example, health care often advances hand in hand with technology, as is the
case with the convergence of imaging technology and biotechnology enabled
by advanced health care information technology which promises to radically
change diagnosis and treatment for many chronic diseases. 18
View external environmental information
Organize information into desired categories
Identify issues within each category
Scanning
Specify the sources of data (organizations, individuals,
or publications)
Add to the environmental database
Confirm or disprove issues (trends, developments,
dilemmas, and possibility of events)
Determine the rate of change within issues
Monitoring
Extend the trends, developments, dilemmas, or occurrence
of an event
Identify the interrelationships between issues and between
environmental categories
Develop alternative projections
Forecasting
Evaluate the significance of the extended (forecasted) issues
to the organization
Identify the forces that must be considered in the formulation
of the vision, mission, internal analysis, and strategic plan
Assessing
EXHIBIT 23 Strategic Thinking Map of the Environmental Analysis
Process
52 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
The environmental scanning process acts as a window to these organizations. These organizations and individuals are generating strategic issues that
may shape the entire health care industry or have a direct impact on any one
health care organization. Managers engaged in environmental scanning carry out
three functions. They:
view external environmental data;
organize external information into several desired categories; and
identify issues within each category.
Strategic issues are trends, developments, dilemmas, and possible events that
affect an organization and its position within its environment. Strategic issues
are often ill-structured and ambiguous and require an interpretation effort (forecasting and assessment). 19 Often, in attempting to identify important external
issues, general labels such as opportunities or threats are used to classify issues.
However, the use of these labels leads strategists to think in terms of potential
strategies to address the issue rather than the impact of the issue. Therefore, at
this stage in strategic planning, it is benefi cial to avoid using the terms opportunities/threats, positive/negative, gain/loss, or controllable/uncontrollable and
instead consider the consequences of the issue itself. Strategies can be worked
out later, after leaders have a better understanding of external issues as well as
internal resources, competencies, and capabilities.
The scanning function serves as the organization ‘s window or lens on the
external world. The scanning function is a process of viewing a number of external organizations either in the general or health care environment in search of
current and emerging trends or issues. In the scanning process, planners focus
on data generated by external organizations and individuals, and compile and
organize it into meaningful categories. As a result, issues found in the external
environment are organized through the scanning process. Prior to this interpretation process, issues are diverse, unorganized, sporadic, mixed, and undefi ned.
The scanning process categorizes, organizes, accumulates, and, to some extent,
evaluates issues.
Information Categories To effectively monitor and further analyze issues,
they should be organized into logical categories. Categories not only aid in tracking but also facilitate the subsequent assessment of the issues. The categories
most used to classify issues are legislative/political, economic, social/demographic, technological, and competitive. Issues, of course, are not inherently
technological, social, and so on. However, using this approach helps managers
to understand the nature of the issues and aggregate information and organize
it. Through the aggregation and organization process, patterns may be identifi ed
and evidence accumulated on an issue.
Information Sources There are a variety of sources for environmental
information. Although organizations create change, they are often diffi cult to
monitor directly. However, various secondary sources (published information)
are readily available. Essentially, people and publications both outside and inside
the organization serve as the lens to the external world. Typically, within the
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 53
organization, there are a variety of experts who are familiar with external issues
and who may be the best sources of such information. In addition, many organizations collect patient and consumer information and subscribe to and archive
industry, technical reports, and databases. Outside the health care organization,
patients, physicians, nurses, suppliers, third-party payers, pharmaceutical representatives, and managed care companies may be considered important direct
sources. Indirect sources are mostly newspapers and journals, the Internet, television, libraries, and public and private databases.
Environmental scanning is perhaps the most important part of environmental analysis because it forms the basis for the other processes. In the scanning
activity, issues and changes are specifi ed and sources identifi ed. It is from this
beginning that a database for decision making will be built. It is crucial that
managers understand the thinking that led to the development and selection of
strategic and tactical issues from among those identifi ed in the scanning process.
It is therefore advantageous if as many managers as possible take part in scanning. An important aspect of environmental scanning is that it focuses leaders’
attention on what lies outside the organization and enables them to create an
organization that can adapt to and learn from that environment.
Monitoring the External Environment
The monitoring function is the tracking of issues identifi ed in the scanning process. Monitoring accomplishes four important functions:
1. It researches and identifi es additional sources of information for specifi c
issues delineated in the scanning process that were determined to be
important or potentially important to the organization.
2. It adds to the environmental database.
3. It attempts to confi rm or disprove issues (trends, developments, dilemmas, and the possibility of events).
4. It attempts to determine the rate of change within issues.
The monitoring process investigates the sources of the information obtained
in the scanning process and attempts to identify the organization or organizations creating change and the sources reporting change. Once the organizations
creating change and the publications or other information sources reporting
change have been identifi ed, special attention should be given to these sources.
The monitoring function has a much narrower focus than scanning; the
objective is to accumulate a database around an identifi ed issue. The database
will be used to confi rm or disconfi rm the trend, development, dilemma, or possibility of an event and to determine the rate of change taking place within the
environment.
The intensity of monitoring is refl ected in management ‘s understanding of
the issue. When managers believe they understand the issue well, less monitoring will be done. However, when environmental issues appear ill-structured,
vague, or complex, the issues will require a larger amount of data to arrive at
an interpretation. 20
54 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Forecasting Environmental Change
Forecasting environmental change is a process of extending the trends, developments, dilemmas, and events that the organization is monitoring. Further, forecasting looks at how hidden currents in the present signal possible changes in
direction for organizations and societies. Thus, the primary goal of forecasting
is to identify the full range of possibilities. 21 Therefore, the forecasting function
attempts to answer the question, If these trends continue, or if issues accelerate
beyond their present rate, or if this event occurs, what will the issues and trends
‘look like’ in the future?
Three processes are involved in the forecasting function:
1. Extending the issues (trends, developments, dilemmas, or occurrences of
an event).
2. Identifying the interrelationships between the issues and environmental
categories.
3. Developing alternative projections.
Assessing Environmental Change
Information concerning the environment, though abundant, is seldom obvious in its implications. Strategic managers must interpret the data they receive.
After all, facts do not speak for themselves; one has to make sense of the facts,
not just get them straight. 22 Assessing environmental change is a process that
is largely non-quantifi able and therefore judgmental. The assessment process
includes evaluation of the signifi cance of the extended (forecasted) issue on
the organization; identifi cation of the issues that must be considered in the
internal analysis; development of the vision and mission; and formulation of
the strategic plan. However, even when exposed to identical issues, different
managers may interpret their meaning quite differently. Interpretations are a
result of a variety of factors, including perceptions, values, past experiences,
and context.
Strategic decisions are made in the context of changing fi nancial, social,
political, technical, and environmental forces understanding the context in
which an organization operates is, therefore, fundamental. Understanding
context is called sensemaking, a term coined by organizational psychologist Karl Weick. 23 Strategic leaders who have a sense of context know
how to quickly capture the complexities of their environment and explain
them to others in simple terms. This explanation helps to ensure that everyone
is working from the same map, which makes it far easier to discuss and plan for
the journey. 24
Sensemaking is a dynamic challenge, however, as Perspective 24illustrates.
PricewaterhouseCooper ‘s annual Medical Cost Trend: Behind the Numbers 2013
provides data that individual health care organizations will have to make sense
of for their individual situation.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 55
PERSPECTIVE 24
A New Normal for Medical Costs?
Health care spending in the United States
has slowed over the past three years. Despite
expectations that costs would resume previous high growth rates in 2012, they did not.
PricewaterhouseCooper (PwC) Health Research
Institute ‘s Medical Cost Trend: Behind the Numbers
2013 report projected medical costs to grow at
a historically low rate of 7.5 percent in 2013.
Previous history carried forward would indicate
that the slowdown is simply a dip refl ecting the
current economic situation and that medical
cost growth will return to normal a much
higher infl ation rate than that of GDP as the
economy recovers.
There may be more to the slower growth rate
of medical costs than the economy; however,
behaviors are beginning to change: employers are pushing wellness programs and trying
to keep their health insurance expenses down
with higher out-of-pocket costs for employees; health care providers and drug manufacturers are embracing value; and patients are
becoming more cost conscious and beginning
to shop for medical care.
The focus on medical cost containment is continuing, aided by the sluggish economy, reforms
in the health care industry, and eff orts by employers to keep costs down. Four factors will defl ate
the medical cost trend. (1) Market pressures on
medical supply and equipment costs will reduce
prices. Supplies can amount to 40 percent of the
cost of some procedures; physician preferences
will be less of an infl uencer as practices become
part of group purchasing plans where negotiated lower prices lead to fewer choices. (2) New
methods of delivering primary care are becoming
more accepted. Alternatives to the traditional
offi ce visit include workplace and retail health
clinics, telemedicine, and mobile health tools. (3)
Comparative cost information is becoming more
widely available. Purchasers including employers and consumers are shopping for lower
cost alternatives. (4) Cost-saving generics are on
the rise. Consumers have greater awareness and
preference for generics driven by cost savings.
Both 2011 and 2012 set records for the number
of drugs going off patent; therefore, 2012 and
2013 set records for the number of generics now
up to 80 percent of all prescriptions in the United
States.
Two factors will infl ate medical costs: (1) As
more jobs are added in the economy, those
newly hired workers will likely tap into their new
health care benefi ts, plus an uptick will occur in
utilization by those who have postponed medical treatment while the economy has been in
recession. (2) New technologies such as robotic
surgery and positron emission tomography
(PET) services have grown; although more comfortable for patients, they are more expensive.
During 2010, 36 percent of hospitals performed
robotic surgery.
The Medical Cost Trend: Behind the Numbers
2013 report incorporated a survey that found:
More than half (57 percent) of employers are
considering increasing employee contributions to health plans.
Half of employers are considering increasing
cost sharing through plan design, such as
higher deductibles. The average emergency
room copay is now $125 or more.
56 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
The assessment process is not an exact science, and sound human judgment
and creativity may be bottom-line techniques for sensemaking a process without
much structure. The fundamental challenge is to make sense out of vague, ambiguous, and unconnected data. Strategic leaders have to infuse meaning into data;
they have to make the connections among discordant data such that signals of
future events are created. Sensemaking involves acts of perception and intuition.
It requires the capacity to suspend beliefs, preconceptions, and judgments that
may inhibit connections being made among ambiguous and disconnected data. 25
Environmental Analysis Tools and Techniques
Several different strategic thinking frameworks and techniques may be used to
examine the general and health care environments. These frameworks, which are
informal and generally not overly sophisticated, have been variously described
as judgmental, speculative, or conjectural. 26 Indeed, environmental analysis
is largely an individual effort and is directed to person-specifi c interests. Further,
environmental analysis usually is not limited to just one of the environmental
analysis tools and techniques. The remainder of this chapter will discuss environmental analysis frameworks that identify issues in the general and health care
More than half of employers are considering
raising employee prescription drug plan costs.
Average enrollment in high deductible
plans coupled with a Health Reimbursement
Account have increased to 43.2 percent in
2012 from 34.2 percent in 2010.
Nearly three-quarters (72 percent) of
employers off er wellness programs, and half
say they are considering expanding those
programs next year.
Forced to do more with less, health care providers and consumers have begun to embrace
new strategies and habits that have the potential
to be long lasting. Hospitals are adopting use
of information technology (IT) to have greater
access to information and using analytics to
make more cost-eff ective decisions with the
information gathered. In addition, they are developing new relationships with physicians to pressure suppliers for lower prices and because more
physicians are managed by hospitals, restricting
supply choice allows for better contracted prices
for those supplies. Employers and insurers are
encouraging comparison shopping by patients,
coordinated care that pays for better outcomes,
and promotion of healthier lifestyles. As consumers are beginning to understand the high
costs (they have seen copays and deductibles
increase), they are open to alternatives; we seem
to be entering a new normal for health care.
Source: Health Research Institute, Medical Cost Trend: Behind the
Numbers 2013 , report by PricewaterhouseCoopers (May, 2012),
pp. 122.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 57
environments. An approach and techniques for more specifi c market segmentation and competitive analysis will be discussed in Chapter 3.
Simple Issue Identifi cation and Extrapolation
Issue identifi cation and extrapolation is a matter of identifying issues and then,
from the existing data, anticipating the importance of the issue and likelihood
that it will remain an issue. Perhaps because of its relative simplicity, issue identifi cation and extrapolation is a widely practiced analysis method. Unfortunately,
environmental issues are rarely presented as a neat set of quantifi able data;
rather, environmental issues are ill-structured and conjectural. Thus, in many
cases, issue identifi cation and extrapolation in environmental analysis is a matter of reaching consensus on the existence of an issue and speculating on the
likelihood of its continuance.
As illustrated in Exhibit 24 , the issue identifi cation and extrapolation process for a nursing home includes the identifi cation of issues by environmental
category and the determination of its probable impact on the organization.
Additionally, managers may assess the likelihood that the trend, development, or
dilemma will continue or that the event will occur, and then identify the sources
for additional information.
These issues may then be plotted on the chart shown in Exhibit 25 . The
assumption is that the issues to the right of the curved line in the exhibit have
a signifi cant impact (high impact) on the organization and are likely to continue
or occur (high probability) and should be addressed in the strategic plan.
The formats illustrated in Exhibits 24and 25are useful for organizing environmental data and providing a starting point for speculating on the direction
and rate of change for identifi ed trends. However, trend extrapolation of environmental issues requires extensive familiarity with the external environment
(the issues) and a great deal of sound judgment.
EXHIBIT 24 Issue Identifi cation and Evaluation by a Nursing Home
Trend/Issue Evidence
Impact on Our
Organization
(110)
Probability of
Trend Continuing
(110)
Aging population 1 in 5 Americans will be at
least 65 by 2030
9 9
Wealthier elderly Income of those 60+ has
increased 10 percent faster
than any other group
7 6
Local competition Over past 5 years, number of
nursing homes in the service
area has increased from
5 to 7
7 9
10 = High impact or probability
1 = Low impact or probability
58 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Solicitation of Expert Opinion
Expert opinion is often used to identify, monitor, forecast, and assess environmental trends. Experts play a key role in shaping and extending the thinking of
leaders. Health care leaders can use these opinions to stimulate their strategic
thinking and begin developing human resources strategies. To further focus
leaders’ thinking and generate additional perspectives concerning the issues
in the external environment, there are a number of more formal expert-based
environmental analysis techniques. These strategic thinking frameworks help to
solicit and synthesize the opinions and best judgments of experts within various
fi elds.
The Delphi Method The Delphi method is a popular, practical, and useful
approach for analyzing environmental data. The Delphi method may be used to
identify and study current and emerging trends within each environmental category (technological, social/demographic, economic, and so on). More specifi cally,
the Delphi method is the development, evaluation, and synthesis of individual
points of view through the systematic solicitation and collation of individual judgments on a particular topic. In the fi rst round, individuals are asked their opinions on the selected topic. Opinions are summarized and then sent back to the
Low Impact
Low Probability
Impact
on the
Organization
Critical
issues to
the right of
the line
should be
addressed in
the strategic
plan
10
5
0
Low High
5 10
Low Impact
High Probability
High Impact
Low Probability
High Impact
High Probability
Wealthier
Elderly
Local Competition
Aging
Population
High
Critical issues to the
right of the line should be
addressed in the strategic plan
Probability of Trend Continuing
EXHIBIT 25 Environmental Trends/Issues Plot
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 59
participating individuals for the development of new judgments concerning the
topic. After several rounds of solicitation and summary, a synthesis of opinion is
formulated. 27
The traditional Delphi method has undergone a great deal of change in the
context of environmental analysis. The salient features of the revised Delphi
method are to:
identify recognized experts in the fi eld of interest;
seek their cooperation and send them a summary paper (based on a literature search); and
conduct personal interviews with each expert based on a structured
questionnaire. 28
In contrast to traditional Delphi methods, there is no further feedback or
repeated rounds of questioning. The major advantage is that it is easier to recruit
recognized experts because they do not need to commit as much of their time.
The Delphi method is particularly helpful when health care managers want
to understand a specifi c environmental issue. For example, a Delphi study was
designed to defi ne the role and responsibilities of sports medicine specialists in
the United Kingdom. A mail questionnaire was sent to a random sample of 300
members of the British Association of Sport and Exercise Medicine. The original
questionnaire contained 300 attributes and allowed participants to modify their
responses based on feedback from other participants. The study was recognized
as the fi rst systematic attempt to defi ne the role and responsibilities of the sports
medicine specialist and concluded that sports medicine was an evolving specialty in the United Kingdom. 29 More recently, methods and experts from other
disciplines have been applied to health care issues such as the forecasting of
infectious diseases.
Nominal Group Technique, Brainstorming, and Focus Groups The
nominal group technique (NGT), brainstorming, and focus groups are interactive
group problem identifi cation and solving techniques. In the nominal group technique, a group is convened to address an issue, such as the impact of consolidation within the health care industry or the impact of an aging population on
hospital facilities. Each individual independently generates a written list of ideas
surrounding the issue. Following the idea-generation period, group members
take turns reporting one idea at a time to the group. Typically, each new idea is
recorded on a large fl ip chart for everyone to consider. Members are encouraged
to build on the ideas of others in the group. After all the ideas have been listed,
the group discusses the ideas. After the discussion, members privately vote or
rank the ideas. After voting, further discussion and group generation of ideas
continue. Typically, additional voting continues until a reasonable consensus is
reached. 30
A brainstorming group is convened for the purpose of understanding an
issue, assessing the impact of an issue on the organization, or generating strategic alternatives. In this process, members present ideas and are allowed to clarify
them with brief explanations. Each idea is recorded, but evaluation is generally
60 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
not allowed. The intent of brainstorming is to generate fresh ideas or new ways
of thinking. Members are encouraged to present any ideas that occur to them,
even apparently risky or impossible ideas. Such a process often stimulates creativity and sparks new approaches that are not as risky, crazy, or impossible as
fi rst thought. 31
NGT and brainstorming could be used to understand and respond to the
increasing competition for ambulatory surgery. The outpatient surgery center
is a rapidly growing trend and hospitals are very concerned about the impact
this growth could have on their bottom line. In 1980, for example, only 15 percent of all surgeries were performed on an ambulatory basis. Today, more than
75 percent are outpatient. Inpatient surgeries requiring a one-day or longer
length of stay now constitute only about 18 to 20 percent of hospital surgery
profi ts and the percentage is dropping each year. The most popular outpatient
areas are gastroenterology, orthopedics, gynecology, ophthalmology, as well as
podiatry, ENT, and general surgery. However, increasingly there are signs that
angioplasty, peripheral vascular surgery, and low-risk coronary interventions
such as pacemakers and cardiac defi brillators may be next.
These changes and the prospect of even greater changes offer an opportunity
for hospital managers to employ brainstorming groups to plan for the future.
Some of the major uncertainties that could be addressed by the groups include
the PPACA. Brainstorming groups could provide serious insights into how willing physicians are to continue performing their procedures in hospitals and turn
away from investments in outpatient facilities that could provide a 25 percent
return on invested capital. Moreover, outpatient surgeries are easier for physicians to schedule without the aggravation of sharing operating rooms with inpatient and emergency services. Brainstorming groups might also be used to project
the future direction of hospital reimbursement. Although both of these factors
represent major uncertainties, informed groups could be very useful in preparing
for the increasingly competitive health care environment. 32
Similar to the process of brainstorming, focus groups bring together 10 to 15
key individuals to develop, evaluate, and reach conclusions regarding environmental issues. Focus groups provide an opportunity for management to discuss
particularly important organizational issues with qualifi ed individuals. Hospitals
and large group practices have used focus groups of patients to better understand the perceived strengths and weaknesses of the organization from the
patient ‘s view. For example, Johns Hopkins was considering the establishment
of an integrated delivery system under one umbrella name. Focus groups of
physicians, present and past patients, non-patients, and others convinced them
to change plans. Focus groups can provide new insights for understanding issues
and suggest fresh alternatives for their resolution.
Dialectic Inquiry
Dialectic inquiry is a point and counterpoint process of argumentation. The
19th-century German philosopher Hegel suggested that the surest path to truth
was the use of a dialectic process an intellectual exchange in which a thesis is
pitted against an antithesis. According to this principle, truth emerges from the
search for synthesis of apparently contradictory views. 33
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 61
More specifi cally, in environmental analysis, dialectic inquiry is the development, evaluation, and synthesis of confl icting points of view (environmental
issues) through separate formulation and refi nement of each point of view. 34 For
instance, one group may argue that health care costs will be declining between
2014 and 2020 (thesis) because of the Patient Protection and the Accountable
Care Act. Another group may present a case that the trend toward rising health
care costs will continue (antithesis) because of hospital failures, the high cost of
new technology, shortage of primary care providers, and so on. Debating this
issue will unearth the major factors infl uencing health care costs and the implications for the future.
Any health care provider can utilize this technique by assigning groups to
debate specifi c external issues. The groups make presentations and debate confl icting points of view concerning the environment. After the debate, the groups
attempt to form a synthesis of ideas concerning the likely future. 35
Stakeholder Analysis
Stakeholder analysis is based on the belief that there is a reciprocal relationship between an organization and certain other organizations, groups, and individuals. They are referred to as stakeholders: that is, organizations, groups, and
individuals that have an interest or stake in the success of the organization.
Examples of possible health care stakeholders, shown as a stakeholder map,
are presented in Exhibit 26 .
Stakeholders may be categorized as internal, interface, and external.
Internal stakeholders are those who operate primarily within the bounds of
the organization, such as managers and other employees. Interface stakeholders are those who function both internally and externally, such as the
medical staff and the corporate offi cers of the parent company. External
stakeholders operate outside the organization and include such entities as
suppliers, third-party payers, competitors, regulatory agencies, the media,
the local community, and so on. 36 Such stakeholders have been referred to
as the organization ecosystem organizations that affect and are affected
by the creation and delivery of the organization ‘s product or service. Part of
stakeholder analysis is to systematically identify the organizations with which
their future is most closely intertwined and determine the dependencies that
are most critical. 37
Some of these stakeholders are almost always powerful or infl uential; others are infl uential regarding only certain issues; still others have little infl uence
or power. If the stakeholders can be identifi ed and evaluated, then the forces
affecting the organization may be specifi ed. The needs and wants of these constituencies may dramatically affect the strategy of an organization. 38
Typically, managers tend to focus attention on known, salient, or powerful
stakeholders to help protect existing competitive advantages. However, there is
growing evidence that fringe stakeholders are important as well particularly
for developing new ways of thinking. Stuart Hart and Sanjay Sharma suggest
that the knowledge needed to generate competitive imagination and to manage
disruptive change increasingly lies outside the organization, at the periphery
of the organization ‘s established stakeholder network. 39 Therefore, strategic
62 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
thinkers must be open to fringe ideas and non-traditional thinking developed
by fringe players. At fi rst, these stakeholders may appear to be poor, weak,
isolated, non-legitimate, or radical. 40 In reality, they may be strong purveyors
of change.
Scenario Writing and Future Studies
Many businesses regularly use scenarios. The popularity of scenario analysis is
due in large part to the inability of other, more quantitative forecasting methods
to predict and incorporate major shifts in the environment and provide a context for strategic thinking. Scenarios avoid the need for single-point forecasts by
allowing users to explore several alternative futures. 41 Scenario analysis is an
alternative to conventional forecasting that is better suited to an environment
with numerous uncertainties or imponderables where there is no map.
Specialty
physician
referrals
Nonspecialty
physician
referrals
Competing
physicians
Third-party
payors
Self-insured
employers
Local paying
patients
Organizations
managing
care
Nonlocal
patients
Professional
associations
Federal, state,
and local
regulators
Federal
Medicare
State
Medicaid
Indigent
patients
Professional
employees
Practice
administrative
services
Multispecialty
group medical
practice
Nonlocal
physicians
Hospital
Governing
board
EXHIBIT 26 A Stakeholder Map for a Large Multispecialty
Group Practice
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 63
A scenario is a coherent story about the future, using the world of today as
a starting point. Based on data accumulated in the scanning and monitoring
processes, a scenario or narrative that describes an assumed future is developed.
The objective of scenarios and future studies is to describe a point of time in the
future as a sequence of time-frames or periods of time. Scenario writing often
requires generous assumptions. Few guidelines indicate what to include in the
scenario. In most cases several plausible scenarios should be written. It is an
all-too-common mistake to envision only one scenario as the true picture of
the future. 42 Most authorities advocate the development of multiple scenarios.
However, to avoid decision makers focusing only on the most likely or most
probable scenario, each scenario should be given a distinctive theme name,
such that they appear equally likely.
Multiple scenarios allow the future to be represented by different causeeffect
relationships, different key events and their consequences, different variables,
and different assumptions. The key question is: If this environmental event happens (or does not happen), what will be the effect on the organization? The use
of multiple scenarios was particularly helpful as organizations considered the
probable impact of health care reform legislation (PPACA) on their organizations.
Perspective 25presents a brief summary of four scenarios or alternative futures
for primary health care between now and 2025. The scenarios were developed
by the Institute for the Future to provide a description of critical factors that will
infl uence health and health care in the 21st century.
PERSPECTIVE 25
Primary Care 2025: A Scenario Exploration
With signifi cant uncertainty facing health care
in 2012, the Institute for Alternative Futures
(IAF) used its aspirational futures technique
to develop four primary care scenarios. The
technique develops scenarios in three zones: a
zone of conventional expectation (the expected
future by extrapolating known trends), a zone
of growing desperation (a challenging future
based on plausible issues to be faced), and a
zone of high aspiration (visionary strategies
pursued by a critical mass of stakeholders that
achieve surprising success). An advisory committee of seven experienced health care leaders
from provider organizations, health professionals, policy makers, and academics was recruited
to inform the development of the scenarios.
Next a workshop was held with 26 knowledgeable participants. Then 56 leading experts in the
health care fi eld were interviewed, followed by
ten focus groups held around the country. The
collaboration of all these innovative thinkers led
to the development of the following scenarios
for Primary Care 2025.
SCENARIO 1: MANY NEEDS,
MANY MODELS
Primary care improves as the payment system
changes to the patient-centered medical home
(PCMH) model and the use of electronic medical
64 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
records (EMRs) improves the quality of care.
Reductions in payment rates for health care
providers force providers to reduce costs, accomplished in part by focusing on prevention, shifting/sharing tasks with non-physician providers,
and increasing patient contact by phone or
online. Based on the Patient Protection and
Aff ordable Care Act (ACA) of 2010, many employers quit providing health insurance benefi ts and
employees move to health insurance exchanges
mandated by ACA, although the access and
aff ordability vary widely from state to state. A
signifi cant portion of Americans purchase the
mandated individual coverage consisting of
high-deductible, catastrophic care plans requiring them to pay for primary care out-of-pocket.
The primary care physician shortage increases the
use of teams including nurse practitioners, social
workers, community health workers, and pharmacists who increasingly use phones and email
to interact with patients; patients use support
technologies similar to IBM ‘s Dr. Watson as
digital health agents to guide their own healthy
behaviors in a social, fun way. Payment is through
integrated systems including HMOs and ACOs
(40 percent), semi-integrated systems such as
community health centers and others using the
PCMH model (30 percent), and fee-for-service
from concierge services at one end to minute
clinics at the other (30 percent). Primary care
improves in the aggregate; however, disparities
continue among some poor, minority, and rural
populations. Health care accounts for 19 percent
of GDP in 2025.
SCENARIO 2: LOST DECADE,
LOST HEALTH
Recurring economic challenges prompt signifi –
cant cuts in federal health care spending. The
global debt crisis pushes the world into an enduring recession; health care is especially hard hit.
When payments on the national debt increased
to the point of being the same as Medicare costs,
international creditors raised interest rates and
the federal government instituted a 10 percent
across the board spending cut. Health insurance
exchanges were successful in only a few states;
they were either underfunded or unable to
provide aff ordable, high quality care. Moreover,
businesses opted out of providing insurance for
employees. Because of the unaff ordability of care
for many, Congress enacted a series of postponements that eventually acted as a de facto repeal
of the ACA.
Estimates of medical shortages did not take
into consideration the number of baby boomer
physicians who would retire early because of
deep cuts in reimbursements for Medicare and
Medicaid. The aging boomer cohort stressed the
system, resulting in many health care providers
operating beyond the scope of their licenses,
leading to a black market for care.
In 2025 most primary care is provided in one
of three settings. (1) Premium fee-for-service
(15 percent): concierge services off ering more
sophisticated services. (2) Low-cost fee-forservice (35 percent): high-deductible catastrophic care health plans requiring individuals
and families to pay out-of-pocket for most primary care retail clinics in pharmacies and big
box stores grow to fi ll the gap. (3) Integrated
(30 percent) and semi-integrated systems (20
percent): care takes place in integrated systems
using single payments to cover all care (Kaiser
Permanente-type) with higher costs but better
quality care or in semi-integrated settings
that have a mix of fee-for-service and pay-forperformance as off ered in many group practices and community health centers.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 65
SCENARIO 3: PRIMARY CARE THAT
WORKS FOR ALL
US policy makers actively pursue the triple
aim in health care initiatives: enhancing patient
care, reducing per capita health care costs, and
improving health of the population. Provider
teams receive a single capitated payment based
on population data that considers relative health
care risks of the patient, causing the provider
to optimize health outcomes while reducing
costs. With the development of health insurance exchanges, employers no longer provide
health insurance as an employee benefi t but do
off er support systems and rewards for healthy
behaviors that reduce medical care demands.
Community care health homes (CCHHs) provide
primary care for 85 percent of the population;
fee-for-service/concierge service for 10 percent;
and 5 percent of the population remains uninsured and seeks care at emergency rooms and
community health centers.
CCHHs deliver primary care and work at creating the social and economic foundations for a
healthier community by improving the primary
care delivered and the use of electronic medical
records that collect health and lifestyle data to
provide a patient ‘s health status and prospects.
The team interacts via phone, email, and virtual
reality as well as health advocate avatars (digital health coaches). Providers delivering better
outcomes at lower costs keep the savings, an
approach that proves to reorient primary care
toward value and moving upstream to aff ect the
social determinants of health.
SCENARIO 4: I AM MY OWN
MEDICAL HOME
Advanced medical technologies allow individuals using self-care to take over many functions
of primary care. New smartphone apps monitor diet, physical activity, sleep, and collect the
data in personal health records. New monitoring devices record blood pressure, blood
chemistry, blood fl ow, and alert the individual
to changes in health; new technology provides lab tests at home or sends data to a lab.
Consumers have much information available to
them, including advice tailored to their health
care needs.
A signifi cant segment of the population
(40 percent) relies on consumer-directed health
plans and uses advanced self-care tools. Data
is collected, aggregated, and used for tracking population health and producing rapid
comparative eff ectiveness and safety studies.
A second signifi cant segment (40 percent)
wants more traditional providers and personal
relationships as in integrated health care systems or ACOs. They can aff ord more costly
insurance premiums; however, their buying
decisions are based on transparency of available cost and quality data on nearly every provider. Concierge practices (10 percent) provide
high-value services such as physiome models
and simulations for predicting health. These
physicians have to be charismatic, high energy,
and well recognized as excellent to maintain
the patients in the panel that they serve. The
remaining 10 percent of the population are
near poor individuals removed from Medicaid
or individuals who choose to avoid insurance
and have the income to pay for care (which they
choose wisely). Because of the self-care tools
as well as the health care avatars and coaches,
much less in-person interaction with providers
occurs and the demand for primary care physicians diminishes.
Source: Primary Care 2025: A Scenario Exploration (Alexandria,
VA: Institute for Alternative Futures, January, 2012, 43 pages).
66 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 27 Primary Focus, Advantages, and Disadvantages of
Environmental Techniques
Technique Primary Focus Advantage Disadvantage
Simple Trend
Identifi cation and
Extrapolation
Scanning
Monitoring
Forecasting
Assessing
Simple
Logical
Easy to communicate
Need a good deal of data
in order to extend trend
Limited to existing trends
May not foster creative
thinking
Delphi Method Scanning
Monitoring
Forecasting
Assessing
Use of fi eld experts
Avoids intimidation
problems
Eliminates management ‘s
biases
Members are physically
dispersed
No direct interaction of
participants
May take a long time to
complete
Nominal Group
Technique
Scanning
Monitoring
Forecasting
Assessing
Everyone has equal
status and power
Wide participation
Ensures representation
Eliminates management ‘s
biases
Structure may limit
creativity
Time consuming
Brainstorming Forecasting
Assessing
Fosters creativity
Develops many ideas,
alternatives
Encourages
communication
No process for making
decisions
Sometimes gets off track
Focus Groups Forecasting
Assessing
Uses experts
Management/expert
interaction
New viewpoints
Finding experts
No specifi c structure for
reaching conclusions
Selecting the Strategic Thinking Framework
The purpose of analyzing the general and health care environments is to identify
and understand the signifi cant shifts taking place in the external environment.
Exhibit 27summarizes the primary focus, advantages, and disadvantages of
each strategic thinking framework.
The approach selected for evaluating the general and health care environments will depend on such factors as the size of the organization, the diversity
of the products and services, and the complexity and size of the markets (service
areas). Organizations that are relatively small, do not have a great deal of diversity, and have well-defi ned service areas may opt for a simple strategic thinking
framework that may be carried out in-house, such as trend identifi cation and
extrapolation, in-house nominal group technique or brainstorming, or stakeholder analysis. Such organizations may include independent hospitals, HMOs,
rural and community hospitals, large group practices, long-term care facilities,
hospices, and county public health departments.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 67
Technique Primary Focus Advantage Disadvantage
Dialectic Inquiry Forecasting
Assessing
Surfaces many
subissues and factors
Conclusions are reached
on issues
Based on analysis
Does not provide a set of
procedures for deciding
what is important
Considers only a single
issue at a time
Time consuming
Stakeholder
Analysis
Scanning
Monitoring
Considers major
independent groups and
individuals
Ensures major needs and
wants of outside organizations are taken into
account
Emerging issues generated
by other organizations
may not be considered
Does not consider the
broader issues of the
general environment
Scenario Writing Forecasting
Assessing
Portrays alternative futures
Considers interrelated
external variables
Gives a complete picture
of the future
Requires generous
assumptions
Always a question as to
what to include
Diffi cult to write
Health care organizations that are large, have diverse products and services,
and have ill-defi ned or extensive service areas may want to use a strategic thinking framework that draws on the knowledge of a wide range of experts. As a
result, these organizations are more likely to set up Delphi panels and outside
nominal groups or brainstorming sessions. In addition, these organizations may
have the resources to conduct dialectics concerning environmental issues and
engage in scenario writing. Such approaches are usually more time consuming,
fairly expensive, and require extensive coordination. Organizations using these
approaches may include national and regional for-profi t health care chains,
regional health care systems, large federations and alliances, and state public
health departments. Ultimately, the strategic thinking framework selected for
environmental analysis may depend primarily on the style and preferences of
management. If used properly, any of the frameworks can be a powerful tool
for identifying, monitoring, forecasting, and assessing issues in the general and
health care environments.
Managing Strategic Momentum Validating the
Strategic Assumptions
The strategic plan is based in part on an analysis of the external environment. Initially this analysis provides the basic beliefs or assumptions that
EXHIBIT 27 (Continued)
68 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 28 Strategic Thinking Questions for Validation of the
Strategic Assumptions
1. Has the organization ‘s performance been adversely aff ected by unexpected or new
trends or issues in the general environment?
2. Has the organization ‘s performance been adversely aff ected by unexpected or new
trends or issues in the health care environment?
3. Have new opportunities emerged as a result of new trends, issues, or events in the external environment?
4. Is the strategy acceptable to the major stakeholders?
5. Are there new technological developments that will aff ect the organization?
6. Have there been social or demographic changes that aff ect the market or strategy?
Changes in ethnic mix? Language barriers? Family structure?
7. Has the legislative/political environment changed?
8. Are there new local, state, or federal regulations or laws being introduced, debated, or
passed that will aff ect operations or performance?
9. Are there new economic issues?
10. Have new competitors outside the industry considered entering or actually entered into
health-related areas?
11. Is the strategy subject to government response?
12. Is the strategy in conformance with the society ‘s moral and ethical codes of conduct?
management holds concerning various issues in the external environment.
Once strategic management is adopted as the operating philosophy of
managing, strategic thinking, strategic planning, and managing the strategic momentum require frequent validation of the strategic assumptions to
determine whether issues in the external environment have changed and
to what extent. Continued strategic thinking is vital to maintaining strategic
momentum.
The strategic thinking map presented in Exhibit 28provides a series of questions designed to detect signals of new perspectives regarding these assumptions.
The questions examine management ‘s understanding of the external environment
and the effectiveness of the strategy. The board of directors, strategic managers,
or others may use these questions as a beginning point to confi rm the assumptions underlying the strategy. Such strategic thinking questions may indicate the
emergence of new external opportunities or threats that will affect the organization and may suggest areas where additional information will be required in
future planning efforts. Current, accurate information may mean survival for
many health care organizations. Questions concerning the external environment may reveal that a group practice knows far too little about the views of its
major constituents (stakeholders) or the existence of new technologies or social
trends. A validation (or invalidation) of the strategic assumptions reinvigorates
strategic thinking and provides a basis for investigating whether to change the
strategy.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 69
Lessons for Health Care Managers
Health care managers must be able to understand and analyze the general and
health care industry environments. To be successful, organizations must be effectively positioned within their environment. Organizations involved in making
capital allocations, experiencing unexpected environmental changes or surprises
from different kinds of external forces, facing increasing competition, becoming
more marketing oriented, or experiencing dissatisfaction with their present planning results should engage in environmental analysis.
The goal of environmental analysis is to classify and organize the general and
health care industry issues and changes generated outside the organization. In
the process, the organization attempts to detect and analyze current, emerging,
and likely future issues. The gathered information is used for internal analysis;
development of the vision and mission; and formulation of the strategy for the
organization. In addition, the process should foster strategic thinking throughout
the organization.
Although the benefi ts of environmental analysis are clear, there are several
limitations. Environmental analysis cannot foretell the future; nor can managers
hope to detect every change. Moreover, the information needed may be impossible to obtain or diffi cult to interpret, or the organization may not be able to
respond quickly enough. The most signifi cant limitation may be managers’ preconceived beliefs about the environment.
The external environment includes organizations and individuals in the general environment (government institutions and agencies, business fi rms, educational institutions, research organizations and foundations, and individuals and
consumers), and organizations and individuals in the health care environment
(organizations that regulate, primary providers, secondary providers, organizations that represent providers, and individuals and patients).
Organizations and individuals in both the general and health care environments generate changes that may be important to health care organizations.
Typically, such change is classifi ed as legislative/political, economic, social/
demographic, technological, or competitive. Such a classifi cation system aids in
aggregating information concerning the issues and in determining their impact.
Sources for environmental issues are found both inside and outside the organization and are direct as well as indirect.
The steps in environmental analysis include scanning to identify signals of
environmental change, monitoring identifi ed issues, forecasting the future direction of issues, and assessing organizational implications. Scanning is the process
of viewing and organizing external information in an attempt to detect relevant
issues that will affect the organization. Monitoring is the process of searching
for additional information to confi rm or disprove the issue (trend, development,
dilemma, or likelihood of the occurrence of an event). Forecasting is the process
of extending issues, identifying their interrelationships, and developing alternative projections. Finally, assessing is the process of evaluating the signifi cance
of the issues. The information garnered from external environmental analysis
infl uences internal analysis, the development of the vision and mission, and
formulation of the strategy for the organization.
70 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
There are several strategic thinking frameworks to conduct the scanning,
monitoring, forecasting, and assessing processes. These methods include simple
issue identifi cation and extension, solicitation of expert opinion, dialectic inquiry,
stakeholder analysis, and scenario writing. Finally, as part of managing the strategic momentum, evaluation of the strategic assumptions (external issues) should
periodically take place. The next chapter focuses on service area competitive
analysis.
Health Care Manager s Bookshelf
Peter Schwartz, The Art of the Long
View: Planning for the Future in An
Uncertain World (New York: Currency
Doubleday, 1991)
Peter Schwartz was working as a futurist
at the Stanford Research Institute in 1975
when he met Pierre Wack of Royal/Dutch
Shell. Later, in 1982, he replaced Wack as
head of Shell Group Planning. This position
provided a unique opportunity to perfect the
scenario-building skills he had practiced for
years. In his book, The Art of the Long View:
Planning for the Future in An Uncertain World ,
Schwartz presents the fundamental nature
of scenarios, how to build them, and how to
use them. 1
One way to avoid becoming a victim
of surprise is to create diff erent stories of
equally likely futures. These stories are called
scenarios, an important objective of which is
to aid strategists in creating a fi t between
their organization and its environment. 2
Scenarios are not about predicting the future
but are about perceiving futures in the present (p. 36). They are vehicles for helping
people learn. 3 In a sense, scenario planning
is about freeing the mind of the health care
strategist to admit that tomorrow may not be
like today. 4
Schwartz extended his work in The Art
of the Long View and introduced the concept of inevitable surprises . Even though
we do not like surprises, they are inevitable because they have already started
taking place through predetermined events
forces we can anticipate with certainty. 5
If we can identify these events, why will there
be surprises? The answer is simple while the
events are predetermined, the timing, results,
and consequences are not (p. 6).
The Art of the Long View provides planners with a uniform process for developing
scenarios. Schwartz suggests an eight-step
process: step 1 identify a focal decision; step
2 list key factors infl uencing the success or
failure of the decision; step 3 list the driving
forces in the environment that infl uence the
key factors; step 4 rank the key factors and
driving forces in terms of their importance
and the uncertainty associated with each;
step 5 select the scenario logic, involving
determining the dimensions along which the
eventual scenarios will diff er; step 6 fl esh
out the scenarios; step 7 return to the focal
decision and rehearse implications for the
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 71
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
Assessing
Brainstorming
Delphi Method
Dialectic Inquiry
Expert Opinion
External Environmental
Analysis
Focus Groups
Forecasting
General Environment
Health Care Environment
Issue Identifi cation and
Extrapolation
Monitoring
Nominal Group Technique
(NGT)
Primary Provider
Scanning
Scenarios
Secondary Provider
Sensemaking
Stakeholder Analysis
Strategic Issues
Questions for Class Discussion
1. What types of changes are likely to occur in the health care environment in the next
several years?
2. Why is environmental analysis important for an organization?
3. Describe the setting for health care management. Is the setting too complex or
changing too rapidly to accurately predict future conditions?
future; and step 8 select leading indicators
and signposts and determine the indicators
necessary to monitor each scenario in an
ongoing manner.
One writer stated that The Art of the
Long View is destined to become a milestone in long-range planning and strategic
thinking. Understanding the lessons in this
book should provide decision makers with
the ability to act confi dently because of
the knowledge they have of where the
uncertainties of the future in health care
will lie. 6 Surprises will never be eliminated.
However, futurists such as Schwartz have
provided strategic thinkers with the tools
to at least minimize the ill eff ects of those
surprises that are predictable, even if they
are inevitable.
REFERENCES
1. Peter Schwartz, The Art of the Long View:
Planning for the Future in An Uncertain World
(New York: Currency Doubleday, 1991).
2. Edward Desmarais, The Art of Scenario
Planning: A Review of Two Books, Journal of
Business and Economic Studies 6, no. 1 (2000),
pp. 8185.
3. The Art of the Long View, The Futurist 26, no. 1
(1992), p. 35.
4. The Future is Tricky, Economist 320, no. 7726
(1991), p. 10.
5. Peter Schwartz, Inevitable Surprises: Thinking
Ahead in a Time of Turbulence (New York:
Gotham Books, 2003).
6. James Wilk, A Shimmering View of the Logic of
Unfolding Futures: Book Review, Long Range
Planning 24, no. 6 (1991), pp. 110121.
72 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Notes
4. Most health care managers would answer yes to many of A. H. Mesch ‘s questions
to determine whether an organization needs environmental analysis. Are there other
questions that seem to indicate that health care organizations should be performing
environmental analysis?
5. What are the specifi c goals of environmental analysis?
6. What are the limitations of environmental analysis? Given these limitations, is environmental analysis worth the effort required? Why?
7. What four processes are involved in environmental analysis? What are their
subprocesses?
8. How does the scanning process create a window to the external environment? How
does the window concept help in understanding organizations and the types of information they produce?
9. Why is the process of environmental analysis as important as the product?
10. Which of the environmental analysis strategic thinking frameworks are most useful?
Why?
11. Using Exhibit 26as an example, develop a stakeholder map for a health care
organization in your metropolitan area or state. On this map show the important
health care organizations and indicate what impact they may have on the industry.
12. Which of the scenarios in Perspective 25do you think is most likely? Why? Based on
today ‘s issues, develop your own scenario of health care in 2025.
13. What are an organization ‘s strategic assumptions? How may the strategic assumptions
be evaluated as part of managing strategic momentum?
1. Kathleen M. Sutcliffe and Klaus Weber, The High Cost
of Accurate Knowledge, Harvard Business Review 81,
no. 5 (2003), p. 75.
2. Peter F. Drucker, Managing the Nonprofi t Organization:
Principles and Practices (New York: HarperCollins
Publishers, 1990), p. 9.
3. Joel A. Barker, Future Edge: Discovering the New
Paradigms of Success (New York: William Morrow,
1992), p. 28.
4. This partial list of issues in the health care industry results
from tracking the strategic issues in health care in the
professional and trade literature, government and foundation reports, and numerous interviews with both public and private health care professionals by the authors.
5. Charles R. Morris, Why U.S. Health Care Costs Aren ‘t
Too High, Harvard Business Review 85, no. 2 (February
2007), p. 52.
6. Ibid., p. 50.
7. Ibid.
8. Ibid., pp. 50, 52.
9. James M. Kouzes and Barry Z. Posner, The Leadership
Challenge: How to Keep Getting Extraordinary Things
Done in Organizations (San Francisco: Jossey-Bass
Publishers, 1995), pp. 4748 and Ross Dawson, Living
Networks: Leading Your Company, Customers, and
Partners in the Hyper-Connected Economy (Upper
Saddle River, NJ: Prentice Hall/Financial Times, 2003),
see especially Chapter 9.
10. A. H. Mesch, Developing an Effective Environmental
Assessment Function, Managerial Planning 32 (1984),
pp. 1722.
11. Paul Saffo, Six Rules for Effective Forecasting, Harvard
Business Review 85, no. 7/8 (July/August 2007), p. 130.
12. Michael D. Watkins and Max H. Bazerman, Predictable
Surprises: The Disasters You Should Have Seen Coming,
Harvard Business Review 81, no. 3 (2003), pp. 7280.
CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT 73
For a comprehensive assessment see Max H. Bazerman
and Michael D. Watkins, Predictable Surprises: The
Disasters You Should Have Seen Coming and How to
Prevent Them (Boston, MA: Harvard Business School
Press, 2004).
13. J. O ‘Connell and J. W. Zimmerman, Scanning the
International Environment, California Management
Review 22 (1979), pp. 1522 and Bradley J. Olson,
Satyanarayana Parayitam, and Yongjian Bao, Strategic
Decision Making: The Effects of Cognitive Diversity,
Confl ict, and Trust on Decision Outcomes, Journal of
Management 33, no. 2 (2007), pp. 196222.
14. Barker, Future Edge , p. 86.
15. Edward De Bono, Serious Creativity: Using the Power
of Lateral Thinking to Create New Ideas (New York:
HarperBusiness, 1992), p. 17. See also Bradley L.
Kirkman, Benson Rosen, Paul E. Tesluk, and Christina B.
Gibson, The Impact of Team Empowerment on Virtual
Team Performance: The Moderating Role of Face-toFace Interaction, Academy of Management Journal 47,
no. 2 (2004), pp. 175192.
16. Beaufort B. Longest Jr., Management Practices for the
Health Professional, 4th edn (Norwalk, CT: Appleton &
Lange, 1990), pp. 1228.
17. Liam Fahey and V. K. Narayanan, Macroenvironmental
Analysis for Strategic Management (St. Paul: West
Publishing, 1986).
18. Klaus Kleinfeld, Seeing is Treating, Harvard Business
Review 85, no. 2 (February 2007), p. 47.
19. James B. Thomas and Reuben R. McDaniel Jr.,
Interpreting Strategic Issues: Effects of Strategy and the
Information-Processing Structure of Top Management
Teams, Academy of Management Journal 33, no. 2
(1990), p. 288. See also Peer C. Fiess and Edward J.
Zajac, The Symbolic Management of Strategic Change:
Sensegiving via Framing and Decoupling, Academy of
Management Journal 49, no. 6 (2006), pp. 11731193.
20. Thomas and McDaniel, Interpreting Strategic Issues,
pp. 289290.
21. Saffo, Six Rules for Effective Forecasting, p. 124.
22. Sutcliffe and Weber, The High Cost of Accurate
Knowledge, p. 75.
23. Karl E. Weick, Sensemaking in Organizations (Thousand
Oaks, CA: Sage Publications, 1995); Deborah Ancona,
Thomas W. Malone, Wanda Orlikowski, and Peter M.
Senge, In Praise of the Incomplete Leader, Harvard
Business Review 85, no. 2 (February 2007), pp. 9495.
24. Ibid., p. 95.
25. Fahey and Narayanan, Macroenvironmental Analysis,
p. 39.
26. H. E. Klein and R. E. Linneman, Environmental Assessment:
An International Study of Corporate Practice, Journal of
Business Strategy 5 (1984), pp. 6675. See also Jonathan
Parry, Making Sense of Executive Sensemaking, Journal
of Health Organization & Management 17, no. 4 (2003),
pp. 240263 and Linda Rouleau, Micro-Practices of
Strategic Sensemaking and Sensegiving: How Middle
Managers Interpret and Sell Change Every Day, Journal
of Management Studies 42, no. 7 (2005), pp. 14131441.
27. James L. Webster, William E. Reif, and Jeffery S. Bracker,
The Manager ‘s Guide to Strategic Planning Tools
and Techniques, Planning Review 17, no. 6 (1989),
pp. 413; Pamela Tierney and Steven M. Farmer, The
Pygmalion Process and Employee Creativity, Journal
of Management 30, no. 3 (2004), pp. 413432.
28. S. C. Jain, Environmental Scanning in US Corporations,
Long Range Planning 17 (1984), p. 125. See also Dovev
Lavie, Capability Reconfi guration: An Analysis of
Incumbent Responses to Technological Change, Academy
of Management Review 31, no. 1 (2006), pp. 153174.
29. B. Thompson, D. MacAuley, O. McNally, and S. O ‘Neill,
Defi ning Sports Medicine Specialist in the United
Kingdom: A Delphi Study, British Journal of Sports
Medicine 38, no. 2 (2004), pp. 1418.
30. Craig S. Fleisher and Babette E. Bensoussan, Strategic
and Competitive Analysis: Methods and Techniques for
Analyzing Business Competition (Upper Saddle River, NJ:
Prentice Hall, 2003), p. 287; Lucy L. Gilson and Christina E.
Shalley, A Little Creativity Goes A Long Way: An
Examination of Teams’ Engagement in Creative Processes,
Journal of Management 30, no. 4 (2004), pp. 453470.
31. Fleisher and Bensoussan, op. cit. , p. 257.
32. Information for this example was adapted from
Richard Haugh, Competition Keeps Getting Hotter for
Ambulatory Surgery, Hospitals & Health Networks 80,
no. 10 (2006), pp. 6872.
33. Barbara Karmel, Point and Counterpoint in
Organizational Behavior (Hinsdale, IL: Dryden Press,
1980), p. 11; W. Jack Duncan, Peter M. Ginter, and Linda E.
Swayne, Strategic Issues in Health Care Management
(Boston, MA: PWS-Kent Publishing, 1992), p. 6.
34. Webster, Reif, and Bracker, The Manager ‘s Guide, p. 13.
35. Ibid.
36. Myron D. Fottler, John D. Blair, Carlton J. Whitehead,
Michael D. Laus, and G. T. Savage, Assessing Key
Stakeholders: Who Matters to Hospitals and Why?
Hospital and Health Services Administration 34, no. 4
(1989), p. 527.
37. Marco Iansiti and Roy Levien, Strategy as Ecology,
Harvard Business Review 82, no. 3 (2004), pp. 6878.
38. Fottler, Blair, Whitehead, Laus, and Savage, Assessing
Key Stakeholders, p. 532.
39. Stuart L. Hart and Sanjay Sharma, Engaging Fringe
Stakeholders for Competitive Imagination, The Academy
of Management Executive 18, no. 1 (2004), pp. 718.
40. Ibid.
41. Audrey Schriefer, Getting the Most Out of Scenarios:
Advice from the Experts, Planning Review 23, no. 5
(1995), pp. 3335; J. Alberto Aragn-Correa and Sanjay
Sharma, The Social Side of Creativity: A Static and
Dynamic Social Network Perspective, Academy of
Management Review 28, no. 1 (2003), pp. 89106; Mats
Lindgren and Hans Bandhold, Scenario Planning: The
Link between Future and Strategy (Houndsmills, UK:
Palgrave Macmillan, 2003).
42. Peter Schwartz, The Art of the Long View: Planning for
the Future in An Uncertain World (New York: Currency
Doubleday Publishers, 1991).

3 Service Area Competitor
Analysis
Natural competition is evolutionary.
Strategic competition is revolutionary.
Natural competition is wildly expedient in its moment-to-moment interaction, but is
inherently extremely conservative in its change.
Strategic competition is deliberate, carefully considered, and tightly reasoned in its
commitments but the consequences may be radical change in a relatively short time.
BRUCE D. HENDERSON
Introductory Incident
Medical Tourism Complicates Service Area Analysis
Nearly a half-million people were medical tourists in 2012, according to Patients without Borders,
a consumer advisory service that expects the number to grow about 25 to 35 percent next year. 1
Medical tourism is the practice of travelling to another country with the purpose of obtaining
76 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
health care (elective surgery, dental treatment, reproductive treatment, organ transplantation,
medical check-ups, and so on). Medical tourism is estimated to be 2 percent of world tourism
and about 4 percent of hospital admissions in the world. 2 The term medical tourism is evolving
based on increasing specialization and heterogeneity in services, thereby leading to the use of
more specifi c terms such as reproductive tourism, organ transplant tourism, abortion tourism,
and so on. It excludes health or wellness tourism which generally refers to all the non-invasive
(external) treatments including visits to spas, homeopathy treatments, or traditional therapies
that improve the health or the mind of the patient. 3
Health care consumers today are concerned with the cost of medical treatment because of
high copays, percentage of cost to be paid by an employee, and in some cases, loss of insurance through unemployment. Bumrungrad International Hospital (Bangkok), one of the largest
facilities, attracts more than 400,000 international patients per year, primarily because many of
its 900 doctors completed US fellowships or residencies, around 200 are US board-certifi ed, and
nearly all speak English. At Bumrungrad a laminectomy (spinal surgery to relieve the pressure on
a nerve) costs $4,700 (including a 5-day stay in a private room) versus a US quote of $70,000 and
higher. A coronary valve replacement and bypass surgery in Taiwan is $18,000 compared with
the US cost of $85,000. India is a top destination for orthopedic and heart surgeries (16 hospitals
have already received International Joint Commission accreditation and the Indian government
has introduced the M visa for those engaged in medical tourism). In Singapore English is widely
spoken, many medical professionals are US- or UK-trained, and a number of hospitals are accredited by US agencies. Singapore is known for cancer diagnosis and treatment. Israel is emerging
as a popular destination for in vitro fertilization and Latin America (already the cosmetic surgery
destination of choice) is becoming known for its dentistry. 4
The primary factors driving the cost diff erential in many medical tourism destinations are
lower labor costs, no malpractice insurance costs, and lower pharmaceutical costs. Of course,
each of these factors suggests additional risks such as quality of care, counterfeit medications,
and security and purity of blood supplies. The main risk is quality of care (being alleviated
increasingly by the number of global hospitals, centers, and clinics being accredited by the Joint
Commission International, JCI). Although hospitals may be accredited by the JCI, other critical
activities such as clinical analysis laboratories, radiology centers/departments, medical imaging
and interpretation, plus the diff erences in malpractice laws and lack of follow-up care (including
handling complications at home) may cause problems.
In the past, wealthy individuals from developing nations have tended to seek care in North
American or Western European nations, but that is changing to preferences for other developing
countries that have increasingly sophisticated medical technology and training but lower comparable costs. How rapidly medical tourism grows for US citizens will depend on whether insurers, employers, and the US government encourage treatment abroad. Blue Cross & Blue Shield
of South Carolina was one of the fi rst insurers to launch an initiative to allow overseas medical
coverage for enrollees. 5 It has alliances with Bumrungrad International Hospital Parkway Group
Healthcare (owner of three hospitals in Singapore), as well as other hospitals in Turkey, Ireland, and
Costa Rica. The International Medical Travel Association ( www.intlmta.org ) president identifi ed
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 77
three areas of concern that limit greater adoption of medical tourism: quality (do these hospitals
off er the same quality I would receive in the USA?), liability (what happens if something goes
wrong?), and continuity of care (who will be responsible for care once I return home?). 6
What are the implications for service area competitor analysis in the case of medical tourism? The most obvious strategic impact of medical tourism is the complications it presents in
determining service area boundaries. Clearly the boundaries for categories such as gall bladder surgery, orthopedic surgery such as full hip replacement surgery, and numerous other
procedures extends well beyond the boundaries of the United States to Thailand, India, Mexico,
Hungary, and Singapore.
REFERENCES
1. Anne K. Smith, Health Care Bargains Abroad, Kiplingers Personal Finance 66, no. 1 (2012), pp. 6568.
2. Delotte Center for Health Solutions, Medical Tourism: Consumers in Search of Value (Washington,
DC: Deloitte LLC, 2012).
3. Naiade Anido Freire, The Emergent Medical Tourism: Advantages and Disadvantages of the Medical
Treatments Abroad, International Business Research 5, no. 2 (2012), pp. 4150.
4. Smith, Health Care Bargains Abroad, p. 66.
5. Richard K. Miller and Kelli Washington, Chapter 33: Medical Tourism, in Healthcare Business Market
Research Handbook , 16th edn (Loganville, GA: RKMA Publications, April 2012), pp. 169171.
6. Ibid., p.169.
Learning Objectives
After completing the chapter you will be able to:
1. Understand the importance of service area competitor analysis as well as its
purpose.
2. Understand the relationship between general and health care environmental
issue identifi cation and analysis and service area competitor analysis.
3. Defi ne and analyze the service area for a health care organization or specifi c
health service.
4. Conduct a service area structure analysis for a health care organization.
5. Understand strategic groups and be able to map competitors strategies along
important service and market dimensions.
6. Understand the elements of service area competitor analysis and assess likely
competitor strategies.
7. Aggregate general environmental and health care industry issues with service
area and competitor issues and synthesize specifi c strategy implications.
8. Suggest several questions to initiate strategic thinking concerning the service
area and competitors as a part of managing the strategic momentum.
78 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Further Focus within External
Environmental Analysis
Environmental analysis involves strategic thinking and strategic planning, focusing on increasingly more specifi c issues. Chapter 2 provided the fundamental
approach and strategic thinking frameworks for scanning, monitoring, forecasting, and assessing trends and issues in the general and health care environments.
However, once these trends and issues have been identifi ed and assessed, a more
focused analysis is required. As shown in Exhibit 21 , service area competitor
analysis is the third part of a comprehensive environmental analysis. Service area
competitor analysis attempts to further defi ne and understand an organization s
environment through identifying specifi c service area and service category issues,
identifying competitors, determining the strengths and weaknesses of these rivals,
and anticipating their strategic moves. It involves collecting data concerning the
service area and competitors as a part of strategic thinking and strategic planning.
Strategic Signifi cance of Service Area Competitor Analysis
Within the health care community there is an understanding that health
care organizations must be positioned effectively vis–vis their competitors.
Competitor information is essential for selecting viable strategies that position
the organization strongly within the market. Many health care managers agree
that an organized competitor intelligence system is necessary for survival. The
system acts like a radar grid constantly monitoring consumer and competitor
activity, fi ltering the raw information picked up by external and internal sources,
processing it for strategic signifi cance, and effi ciently communicating actionable
intelligence to those who need it. 1
The Focus of Service Area Competitor Analysis
An organization engages in service area competitor analysis to determine the service
area (geographically), gain an understanding of the competitors in that service area,
identify any vulnerabilities of the competitors, assess the impact of its own strategic actions against specifi c competitors, and identify potential moves that a competitor might make that would endanger the organization s position in the market.
Analyzing competitors assists organizations in identifying the context for creating
competitive advantage a basis on which they are willing to compete with anyone.
Competitive advantage is the means by which the organization seeks to develop
cost advantage or to differentiate itself from other organizations. Organizations constantly take offensive and defensive actions in their quests for competitive advantage
vis–vis competitors. 2 Competitive advantage might be centered on image, highquality services, an excellent and widely recognized staff, or effi ciency and low cost,
among others. Competitor information is important for an organization to:
avoid surprises in the marketplace;
provide a forum for leaders to discuss and evaluate their assumptions
about the organization s capabilities, market position, and competition;
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 79
make everyone aware of signifi cant and formidable competitors to whom
the organization must respond;
help the organization to learn from rivals through benchmarking (specifi c
measures comparing the organization with its competitors on a set of key
variables);
build consensus among executives concerning the organization s goals
and capabilities, thus increasing their commitment to the chosen strategy;
foster strategic thinking throughout the organization;
identify market niches and discontinuities;
select a viable strategy;
contribute to the successful implementation of the strategy;
anticipate competitors moves; and
shorten the time required to respond (countermoves) to a competitor s
moves.
Depending on the intent of the competitor analysis, an organization might
engage in service area competitor analysis for all of these reasons or just one
or two. For example, in the early stages of competitor analysis, the organization
may seek only to provide a forum for discussion or to make everyone aware of
a formidable competitor. As an organization plans to enter new markets, offensive information may be the primary focus of the competitor analysis and an
identifi cation of market niches might be the goal. In the face of strategic moves
by a powerful competitor, anticipating the competitor s moves and shortening
the time required to respond may take precedence. In large, complex markets,
all of these information categories are appropriate and essential for positioning
the organization.
Obstacles to Effective Service Area Competitor Analysis
Monitoring the actions and understanding the intentions of competitors is
often diffi cult. Health care executives agree that it is necessary and growing in
importance, yet many are still not engaged in effective competitor analysis. Six
common obstacles have been identifi ed that slow an organization s response
to its competitors moves or even cause the selection of the wrong competitive
approach. Flawed competitor analysis, resulting from these blind spots, weakens
an organization s capacity to seize opportunities or interact effectively with its
rivals, ultimately leading to erosion in the organization s market position and
profi tability. 3 Obstacles to effective competitor analysis include:
misjudging industry and service area boundaries,
poor identifi cation of the competitors,
overemphasis on competitors visible competencies,
overemphasis on where, rather than how, to compete,
faulty assumptions about the competition, and
paralysis by analysis. 4
80 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
A major contribution of competitor analysis is the development of a clear
defi nition of the industry, industry segment, or service area. Traditionally, health
care managers have focused their analysis on locally served markets. Patients
were treated by the local doctor, in a local hospital (or the closest one available).
There was little travel for medical or health care. Thus, doctors and hospitals
were insulated from other health care organizations outside their geographic
service area; however, that is no longer the case. Market entry by competitors
from outside the metropolitan area, the region, the state, and as illustrated in the
Introductory Incident, from around the world, is now quite common. To avoid a
focus that is too narrow, the industry, industry segment, and service area must
be defi ned in the broadest terms that are useful. In addition, in today s health
care environment, competition may come from non-traditional competitors (outside the health care industry). As competition increases from non-traditional
competitors, social activities, dcor, meals, and housekeeping may become more
important competitive factors.
In the past, only cursory attention has been given to other segments of the
health care industry. For example, hospitals traditionally focused on acute care.
Management was not concerned with intermediate care or home care or hospice care as a competing segment. Today, all of those segments are commonly
incorporated into the continuum of care. With length-of-stay issues, and the
increasing emphasis on unnecessary readmissions, hospitals want to control
the patients (integrated delivery systems) and assure the care is appropriate
(continuum of care) to increase revenues and provide seamless care. As a result
there are fewer but more direct competitors in many market areas. Clearly, misjudging how the industry, industry segments, or service area is defi ned will lead
to poor competitor analysis.
Another possible fl aw of competitor analysis is the improper or poor identifi cation of precisely which organizations are the competitors. In many cases,
health care executives focus on a single established major competitor and ignore
emerging or lesser-known potential competitors. Such myopia is especially true
when the perceived strengths of competitor organizations do not fi t traditional
measures or there is an infl exible commitment to historical critical success
factors (traditional inpatient services instead of outpatient approaches).
Academic medical centers (AMCs), with their focus on research, have traditionally viewed only other academic medical centers as competitors; however, with
lowered reimbursements and increased numbers of charity care from the loss
of jobs during the great recession beginning in 2008, AMCs are struggling to
increase revenues and have had to realize changes in their business model. For
example, the Louisiana State University (LSU) hospitals and its medical clinics
are the state s predominant provider of health care for the poor and uninsured.
Because of reduced fi nancial allocations, LSU is seeking publicprivate partnerships to deliver care. The discussions with community hospitals in several areas
are coming down to dollars and cents and how to preserve uninsured care.
The talks are just the beginning of LSU s exploration of potential cooperative
endeavor agreements, leases, or the possible sale of some facilities in the system
of ten public hospitals. 5
Another problem in performing competitor analysis is the tendency to be
concerned only with the visible activities of competitors. Less visible attributes
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 81
and capabilities such as organizational structure, culture, human resources,
service features, intellectual capital, management acumen, and strategy may
cause misinterpretation of a competitor s strengths or strategic intent. Certainly
the Mayo Clinic s strong culture of excellence has played an important role in
shaping its strategic decisions. Operating from only one location for 135 years,
Mayo expanded carefully fi rst to Scottsdale/Phoenix, Arizona (1998) and then to
Jacksonville, Florida (2008) to make sure the Mayo culture could be maintained
in dispersed locations. Similarly, in an environment of rapid change, intellectual
capital represents a primary value-creation asset for the organization. 6 In addition, effective competitor analysis requires predicting how competitors plan to
position themselves. Although diffi cult, determining competitors strategic intent
is at the heart of competitor analysis. An effective competitor analysis should
focus on what rivals can do with their resources, capabilities, and competencies
an extension of what competitors are currently doing and include possible
radical departures from existing strategies. 7
Accurate and timely information concerning competitors is extremely
important in competitor analysis. Misjudging or underestimating competitors
resources, capabilities, or competencies is a serious misstep. Faulty assumptions
can suggest inappropriate strategies for an organization. Poor environmental
scanning perpetuates faulty assumptions.
Because of the sheer volume of data that can be collected concerning the
external environment and competition, paralysis by analysis can occur. In environments undergoing profound change, huge quantities of data are generated
and access to it becomes easier. Under such conditions, information overload is
possible and separating the essential from the non-essential is often diffi cult. As a
result, it should be emphasized that the intent of competitor analysis is to support
strategic decision making; over-analysis or endless analysis should be avoided.
Competitor information must be focused and contribute to strategy formulation.
A Process for Service Area Competitor Analysis
Service area competitor analysis is a process of understanding the market and identifying and evaluating competitors. Together with general and health care trends
and issues, service area competitor analysis must be synthesized into the strategic
issues facing the organization. The synthesis is an explicit input into the formulation of the organization s strategy.
As illustrated in the strategic thinking map in Exhibit 31 , service area competitor analysis begins with an understanding of specifi c services or service
categories the organization provides to its customers. Next, the service area
must be specifi ed for the various service categories. Then the service area
structure or competitive dynamics should be assessed. Competitors providing
services in the same category in the service area must be analyzed for positioning against the important dimensions of the market and assessed as to their
likely strategic moves. Finally, the results of the analysis must be synthesized
and implications drawn. These conclusions will provide important information
for strategy formulation.
82 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT31 Service Area Competitor Analysis
With the use of an actual service category (plastic surgery) and services area
(Charlotte, North Carolina), each step of the service area competitor analysis process will be illustrated. Plastic surgery represents a highly competitive and low
market share industry, especially for cosmetic procedures that are rarely covered
by health insurance. Reconstructive plastic surgery (required because of accidents
and disfi gurements, birth defects, ravages of disease, and so on) is often covered
by insurance; however, reimbursement rates have been declining. Typically there
are a number of board-certifi ed plastic surgeons in any given service area. These
physicians compete not only among themselves but also against emergent niche
providers physicians in ophthalmology (eye), dermatology (skin), EENT (eye,
ear, nose, and throat), dental (teeth and jaw), and OB/GYN (women s reproductive system), as well as laser centers and medi-spas. The competition seeks to
capture the lucrative and expanding, less invasive sectors of the cosmetic plastic
surgery market such as Botox , injectables, laser peels, cool sculpting, and so on.
If a plastic surgeon were to consider establishing a practice in Charlotte, North
Carolina, the completion of a service area competitor analysis would be essential
to evaluate whether the area represents a potentially profi table location. Cosmetic
plastic surgery requires a reputation for excellent work that takes some time to
establish; selecting the wrong service area could force relocation, causing the
surgeon to have to begin anew in establishing a reputation. Similarly, already
established competitors in an existing service area should re-evaluate the competition as a part of developing an effective strategy. Perspective 31provides an
overview of the nature of plastic surgery and serves as background for a service
area competitor analysis.
Synthesize Analyses
Map Strategic Groups
Conduct Competitor Analysis
Conduct Service Area Structure Analysis
Create a Service Area Profile
Define the Service Categories
Define the Service Area
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 83
PERSPECTIVE 31
Plastic Surgery
Plastic surgery is a medical specialty that entails
two major subspecialties: cosmetic plastic surgery and reconstructive plastic surgery. A simple
defi nition of cosmetic plastic surgery is that it
entails procedures to improve on a person s natural appearance. Reconstructive plastic surgery is
to return someone to a natural appearance when
an accident, disease, or congenital defect has
occurred. Although cosmetic procedures are not
covered by insurance; most reconstructive procedures are covered by insurance. In many states,
legislation exists to require insurance companies
to provide coverage for reconstructive plastic
surgery for congenital (birth) defects and breast
reconstruction after mastectomies for women
who are dealing with cancer.
To become a plastic surgeon, one must be
awarded an MD (Medical Doctor) degree from
an accredited medical school or college, of which
there are 126 in the United States. Slightly more
than 17,300 students graduated with an MD
degree in June 2012. At graduation, 0.9 percent
planned to become board-certifi ed in plastic
surgery (156 students); however, 450 applied for
plastic surgery residencies. The 2011 National
Residency Match Program reported that there
were 70 positions for fi rst-year postgraduates
and all 70 were fi lled and there were 35 positions
for second-year postgraduates and all of them
were fi lled as well.
Most plastic surgeons have residency and fellowships before board certifi cation. Members of
the American Society of Plastic Surgeons (ASPS)
are certifi ed by the American Board of Plastic
Surgery or the Royal College of Physicians and
Surgeons of Canada. An ASPS Member Surgeon
has at least six years of training and experience
in surgery, with three years specifi cally in plastic
surgery; is certifi ed by the American Board of
Plastic Surgery; operates only in accredited
medical facilities; adheres to a strict code of
ethics; fulfi lls continuing education requirements, including patient safety techniques; and
works as a partner, to achieve the patient s goals.
The American Society for Aesthetic Plastic
Surgery (ASAPS) is the leading referral source
of board-certifi ed plastic surgeons specializing
in cosmetic procedures of the face and body.
Active Membership in the American Society for
Aesthetic Plastic Surgery is reserved for American
Board of Plastic Surgery certifi ed physicians (or in
Canada, physicians certifi ed in plastic surgery by
the Royal College of Physicians and Surgeons
of Canada), with wide experience in cosmetic
surgery and demonstrated commitment to aesthetic surgery continuing education.
Plastic surgeons often establish solo practices. Nationally, 47 percent of plastic surgeons
are in solo practices with another 6 percent in
solo practices that share facilities. Small group
practices (25 physicians) represent 14 percent of
plastic surgery practices; medium multispecialty
group practices (620 physicians) represent 1
percent; and large multispecialty group practices
(more than 20 physicians) represent 4 percent.
Other practices are military and academic (with
and without private practice). In Charlotte, solo
practitioners (16 in number) represent 67 percent of those who are board certifi ed and all of
the other board-certifi ed plastic surgeons are in
small group practices having no more than fi ve
physicians (8 practices or 33 percent). The current environment may make individual practices
more challenging because the cost to purchase
health care IT plus the amount of time to learn
how to use it will be signifi cant.
84 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Defi ning the Service Categories
The fi rst step in service area competitor analysis is to specify the service category
to be analyzed. Many health care organizations have several service categories or
products, and each may have different geographic and demographic service areas.
For a multihospital chain deciding to enter a new market, the service category
may be defi ned as acute hospital care, but for a rehabilitation hospital, the service
category might be defi ned as physical therapy or occupational therapy or orthopedic surgery. In addition, because many health care services can be broken down
into more specifi c subservices, the level of service category specifi city should be
agreed on before analysis begins. For example, pediatric care may be broken
down into well-baby care, infectious diseases, developmental pediatrics, pediatric
hematologyoncology, and so on. Certainly pediatric hematology oncology as a
service category would have a far larger service area than well-baby care. A parent
with a child who has cancer would travel farther for care from a specialist than a
parent who sought well-baby care available from nurse practitioners.
Similar to cosmetic plastic surgery, cosmetic dentistry is a dental specialty that
can be defi ned as a service category; however, many general dentists do not
consider it a separate specialty. Improvements in dental hygiene along with the
fl uoridation of community water supplies has dramatically enhanced the general
dental health of Americans, resulting in fewer general dentistry procedures. A shift
in practice focus and the accompanying expansion of dental specialties such as
public health, pediatric dentistry, endodontics, oral/maxillofacial pathology, oral/
maxillofacial radiology, oral/maxillofacial surgery, peridontics, orthodontics, prosthodontics, plus an emerging area of cosmetic dentistry has occurred as dentists
attempt to make up for lost revenue.
Cosmetic dentistry is not a traditional dental specialty. Its closest specialty,
prosthodontics, focuses on the treatment, rehabilitation, and maintenance of the
teeth with respect to function, comfort, and appearance when associated with a
Nearly three-quarters (74 percent) of plastic surgeons who participated in a recent
survey reported that they did not off er spa
services (e.g., wraps, facials, massages) in conjunction with their medical practices. Further,
86 percent of the doctors said they did not
work in conjunction with medical spas where
non-surgical procedures, such as injections
and laser procedures, were performed. Many
plastic surgeons consider medical spas to be
less professional and potentially dangerous if
someone other than the surgeon is performing procedures where harm can come to the
patient.
The top fi ve reconstructive procedures are
tumor removal, laceration repair, maxillofacial
surgery, scar revision, and hand surgery. The
top fi ve cosmetic plastic surgical procedures
are breast augmentation, lipoplasty (liposuction), blepharoplasty (cosmetic eyelid surgery),
abdominoplasty (tummy tuck), and breast
reduction. The top fi ve cosmetic minimally invasive procedures are Botulinum Toxin Type A
(Botox
), soft tissue fi llers, chemical peels, laser
hair removal, and microdermabrasion.
Sources: ASPS and ASAPS websites; National Match Registry
website; Association for American Medical Colleges website.
Accessed August 2012.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 85
clinical condition. Cosmetic dentistry, on the other hand, has no such limiting
parameters and its practitioners typically engage in its delivery entrepreneurially,
at the request of their patients, or from external market pressures. The business of
cosmetic teeth bleaching/whitening is not restricted to the dental practice, as seen
by its extension into the retail market (teeth whitening in the mall and over-thecounter whitening products for do-it-yourselfers to use at home). To focus on those
dentists who identify themselves as specializing in cosmetic dentistry is likely to
substantially underestimate the number of competitors in the service category. 8
Thus, an important determination for a service area competitor analysis is how
customers perceive the service category.
Service Category Plastic Surgery A national obsession with exterior
beauty and appearance, extensive media attention, and the availability of information from the Internet have contributed to the emergence of the service category of plastic surgery. Once only available to Hollywood stars who could afford
it and needed to always look great for the camera, or those with serious deformities/injuries whose surgery was paid for by insurance, plastic surgery today is
increasingly popular among business executives, twenty- and thirty-somethings,
and baby boomers to look good and feel younger and more confi dent about
their personal appearance.
Plastic surgery can be defi ned as a service category as it is recognized as a
board-certifi ed specialty within medicine; however, there are additional service
categories that need to be explored to determine direct and indirect competitors for a given practice. For instance, plastic surgeons may offer a full range
of services including reconstructive surgery or they may specialize on the face,
dealing with congenital deformities and injuries due to trauma or they may
focus on cosmetic procedures for the face, breast, or other body parts for purely
aesthetic reasons. Eye, ear, nose, and throat physicians as well as oral surgeons
are performing some of the same procedures. Furthermore, plastic surgeons may
specialize on the basis of procedures they use, such as laser or liposuction. As
they often deal with skin, dermatologists may become competitors, especially
in terms of some of the less invasive procedures, such as Botox injections that
may be administered by any physician, not necessarily a plastic surgeon, and in
many instances by nurses (RNs) with physician supervision. Thus, the service
category is important to identify and understand because it affects the service
area as well.
Determining Service Area Boundaries
The service area is considered to be the geographic area surrounding the health
care provider from which it pulls the majority of its customers/patients. It is usually limited by sometimes ill-defi ned geographic borders. Beyond these borders,
services may be diffi cult to render because of distance, cost, time, and so on.
However, as illustrated in the Introductory Incident, in some circumstances the
service area might be worldwide. Nevertheless, a health care organization must
not only defi ne its service area, but also analyze in detail all relevant and important aspects of the service area, including geography, economic, demographic,
psychographic (lifestyle), disease pattern characteristics, and technology.
The service area is defi ned by customers preferences and the health care
providers that are available. Certainly, the consumer has become empowered
86 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
by the amount of information available concerning disease conditions and providers (see Perspective 32 ). Exhibit 32shows the determinants of a service
area including the consumer variables and the market (provider) variables. For
the consumer, the services needed could include health care that is preventive,
diagnostic, alternative, routine, episodic, acute, chronic, or cosmetic. Usage rates
would be related to a variety of economic, demographic, psychographic, and
disease pattern variables.
Brand predisposition indicates the consumer has a preference for some health
care providers over others. For example, if there is only one hospital in town, and
the consumer does not like its looks, location, or perceived quality of care, he
or she may prefer to drive to the nearest larger city. For routine medical care,
some consumers prefer to go to specialists; others prefer a primary care doctor;
still others prefer clinics that have primary care physicians and specialists; and,
fi nally, some consumers prefer physician assistants or nurse practitioners. These
different consumer preferences will be determinants in defi ning the service area.
Another group of consumer determinants will be related to personal factors
such as personal and social values, epistemic (knowledge) values, past experiences, and the individual s personal state of health. In concert, these variables
develop the individual s preferences for health care providers. However, if providers are not available in that there are limited or no options in the immediate area,
the consumer will travel greater distances to gain the desired care. For example,
Mayo Clinic treats more than 1 million patients each year, from more than 135
countries.9
PERSPECTIVE 32
The Empowered Patient Wants Shared Decision Making
The empowered patient has become a signifi –
cant presence in the health care environment
and a challenge for health care organizations.
When patients participate in medical decisions
along with their physicians they feel more comfortable with their decisions, more satisfi ed with
their treatment, and more engaged in their care.
That engagement increases adherence, improves
health outcomes, and may even save lives,
according to a study team s published research
in the Journal of General Internal Medicine .
The study did not look at whether physicians
actually covered the topics of preference for different procedures to resolve the medical issue
or the pros and cons of particular procedures
in their discussions with patients, but what
patients remembered about the discussion. Only
1 in 10 reported that they were presented with
serious options for stenting for coronary artery
disease. Although 77 percent reported their
doctors talked about the reasons to undergo the
procedure, only 19 remembered talking about
the cons. Only 16 percent said they were asked
about their preferences for treatment.
Shared decision making is viewed favorably by physicians and patients, but actual
communication about the decision does not
seem to be occurring. The American Medical
Association defi nes shared decision making as
a formal process or tool that helps physicians
and patients work together to choose the treatment option that best refl ects medical evidence
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 87
and the individual patient s priorities and goals
for his or her care.
We have known for some time that boomers resist the paternalistic doctor knows best
approach that worked well with their parents.
Shared decision making has gained increased
attention for several reasons: boomers want to
be involved in their care, they are getting older
and require more medical attention, and medical
technology has provided more but not always
better treatment options. With more than one
medical treatment as a reasonable option for a
patient s given circumstances, the person whose
preference matters most is the patient s.
Shared decision making is associated with
better decision quality and more effi cient care,
improved patient knowledge, and increased
patient feelings of comfort with their decision.
Shared decision making becomes even more
important in the management of chronic conditions, such as diabetes and heart disease.
The more patients understand about their condition and their treatment choices, the more
likely they are to follow the treatment plan.
Enhanced patient compliance leads to improved
outcomes.
Shared decision making relates to patient
safety, as a procedure that a patient would not
want if he or she understood the treatment
options can never be done safely enough. The
lack of shared decision making may account
for the variations in medical practice in diff erent regions of the country. Clinical preferences
rather than patient desires could explain why
there are more mastectomies versus lumpectomies depending on where a woman lives.
Some evidence exists that when presented
with all the information about clinical alternatives,
some patients will choose the more conservative,
less expensive alternative. Patients then feel that
they are receiving care that incorporates their values and personal preferences, leading to greater
satisfaction with care (and possibly avoidance of
malpractice issues as patients have more realistic expectations for outcomes). Shared decision
making is really perfected informed consent.
Medical providers are supportive of shared
decision making but are concerned about the
time it takes as the current reimbursement system has codes only for procedures. Decision
aids have been created that can assist with the
patient s involvement in the selection of a treatment program. A number of states have incorporated shared decision making into legislation
and the Aff ordable Care Act includes provisions
to encourage shared decision making. A number
of medical associations, such as the American
Board of Internal Medicine Foundation, have
joined the eff ort to enhance patients abilities to
provide informed consent.
A patient decision aid is a tool designed to
help patients understand their medical conditions, available screening and procedure options,
and the possible outcomes of the options.
Information is presented in an unbiased manner
that emphasizes the patient s preferences as well
as clinical evidence involved in making a decision. Technology, such as a tablet computer, can
be used to provide step-by-step explanations
though voice, animation, charts and graphs, and
question/answer between doctor and patient.
The study found that, with the decision aid, the
clinician generally did not have to take more
time than he or she normally would with a
patient. The entire process can be recorded and
shared with other family members, providing
them with more and better information, and
relieving the physician of that burden. In addition, the recording, including the completed
informed consent form, becomes part of the
medical record documenting the entire process.
Source: F. J. Fowler, P. M. Gallagher, P. B. Bynum, M. J. Barry,
L. L. Lucas, and J. S. Skinner, Decision Making Process Reported
by Medicare Patients Who Have Had Coronary Artery Stenting or
Surgery for Prostate Cancer, Journal of General Internal Medicine
(February 28, 2012), pp. 911916.
88 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Options or choices are controlled by the health care structure. The market and
organizations within it determine what will be offered or made available to the
consumer. The market contains health care providers in a variety of locations
that bear on convenience and image. Location includes drive time from home (or,
increasingly, work), availability of transportation, as well as access and parking
ease. Convenience may be hours of operation, safety, availability of food, signs
to assist in fi nding the way, and so on. Image for the market entails positioning
among the various providers. The health care provider might have the image of
being more caring, friendlier, or more high-tech; or it may be perceived as attracting desirable or undesirable demographic, socioeconomic, or ethnic groups. The
organization itself has an image of the services (health care provided) as well as
the service and the quality of information provided. Location, convenience, and
image are all in relationship to the other providers in the area, including those
within driving distance and those that are remote but perceived as providing better quality, further services, or other desirable characteristics. Health care providers make these decisions, in part, based on their understanding of consumers
needs and wants.
Managed care interrupts the normal decision making by consumers. An employed
individual today usually has some choice in health care insurance. The employer
may offer one or more different health plans. However, once the consumer has
EXHIBIT 32 Service Area Determinants
Services Type Personal Values
Usage Rates Social Values
Brand Predisposition Epistemic Values
Preferred Image Past Experiences
Personal State of Health
Consumer Determinants
Location
Drive Time
Transportation
Parking Ease/Access
Convenience
Hours of Operation
Safety
Wayfinding
Price Level
Image
Services Available
Service
Friendliness
Caring
Wait Time
Quality of Information
Website
Phone Consults
Brochures and Advertisements
Instructions
Demonstrations
Service Area
Market/Organization Determinants
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 89
selected a managed care plan, the ability to choose providers both hospitals and
physicians becomes more restrictive. And, in fact, the more the HMO attempts
to control health care costs by further structuring health care delivery, the more
restricted the choice becomes for consumers. Restricted choice is not favored by
most Americans and they have been quite vocal about it with their employers. The
result is that many employers are only willing to commit to a health plan that offers
choice (and thereby removes the quantity discounts previously offered) and, hence,
organizations have seen health care cost increases in double digits.
Multiple Service Areas Understanding the geographic boundaries is
important in defi ning the service area, but is often diffi cult because of the variety
of services offered. In an acute care hospital, the service area for cardiac services
may be the entire state or region, whereas the service area for the emergency
room might be only a few blocks. Thus, for a health care organization that
offers several service categories, it may be necessary to conduct several service
area analyses. For example, the Des Moines, Iowa market has two geographic
components: the metropolitan area of the city as well as the suburbs of Polk
County (population approximately 437,000) and the 43 primarily rural counties
of central Iowa that surround the capital (population of over 1 million). The
issues for each of these multiple service areas may be quite different; therefore,
considerable effort is directed toward understanding and analyzing the nature of
the health care organization s various service areas. At the same time, for some
organizations, defi ning only one service category may suffi ce (such as in the case
of a long-term care facility in a major metropolitan area).
Service areas will be different for different organizations. A national for-profi t
hospital chain may defi ne its service area quite generally, but even then there
may be different strategies in place. As illustrated in the Introductory Incident,
hospital strategy often defi nes the service area. Similarly, HCA Holdings Inc.
(HCA) is a holding company that owns and operates hospitals and related health
care entities. As of December 2011 it operated 157 general, acute care hospitals, fi ve psychiatric hospitals, and one rehabilitation hospital. HCA s strategy is
to become a major health care presence in highly concentrated markets in the
nation. On the other hand, Health Management Associates owns 70 hospitals in
non-urban areas of 15 states. Its strategy is to only enter local markets to partner
with mid-sized communities and local hospital leaders, primarily in non-urban
markets in the Southeast and Southwest.
An individual hospital, home health care organization, or HMO may defi ne its
service area much more specifi cally. In general, health services are provided and
received within a well-defi ned service area, where the competition is clearly identifi ed and critical forces for the survival of the organization originate. For instance,
hospitals in rural areas have well-defi ned service areas for their particular services. These hospitals must be familiar with the needs of the population and with
other organizations providing competing services. Similarly, the service areas for
public health departments vary within a state, depending on whether they are
metropolitan or rural, and may suggest quite different opportunities and threats.
Determining the geographic boundaries of the service area may be highly
subjective and is usually based on patient histories, the reputation of the organization, available technology, physician recognition, and so on. In addition, geographic impediments such as a river, mountains, and limited access highways
90 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
can infl uence how the service area is defi ned. The defi nition of communities
(see Perspective 33 ) is often helpful in determining a service area.
Service Area Charlotte, North Carolina The general service area for
plastic surgery example has been determined to be Charlotte, North Carolina.
Charlotte is the largest city within North Carolina and resides on the border
with South Carolina. Charlotte (also known as the Queen City as it was named
after King George III s wife who was born in Mecklenburg, Germany) has grown
to be a top-25 major city and hosted the Democratic National Convention in
2012. Charlotte s population is younger, upwardly mobile, educated, and relatively affl uent and increasing in number. There are approximately 28 active,
board-certifi ed plastic surgeons in the Charlotte metropolitan area; there is little need to travel outside the city for medical or health care services. The city
is suffi ciently large at 730,000 that the people in the 7-county, nearly 2 million
metropolitan statistical area are pulled to Charlotte for medical and health care.
PERSPECTIVE 33
What Is a Community?
Community is a very important concept in public
health as well as health care policy, planning, and
management. In general parlance, a community
refers to a group of people living together in a
defi ned place; the place could be a neighborhood, a rural village, an urban area, or an entire
country. In addition, community implies a collective group of individuals who share some feature
in common, be it a profession (the scientifi c
community), a religion (the Jewish community),
or some other characteristic (the gay community,
the Hispanic community).
The public health community (a group of professionals who share a common purpose) spends
considerable eff ort monitoring the health of communities (groups of people living together in geographic areas within states and nations) because
of its interest in promoting and preserving the
health of entire populations. Issues relating to
the larger community within which health care
organizations do business must be critically examined and either accommodated or exploited to
promote successful health care outcomes.
In this context, the community represents
the competitive environment within which
health care organizations function, while also
representing a set of community factors
values, needs, resources, and constraints that
may suggest modifi cations to a typical health
care structure or a usual set of services off ered
and delivered. The competitive environment as
community would include such factors as availability of and access to care, available fi nancing
strategies, the ways in which resources are allocated, and systems of accountability.
Examples of community factors that can
aff ect health care organizations include:
1. The level and scope (federal, state, regional,
local) of governmental entities that regulate
the health system and the extent of regulation directed at health care organizations.
2. The nature and scope of professional
organizations that set standards, accredit,
or otherwise engage in accountability
functions for health care organizations.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 91
3. The nature and scope of health care
fi nancing agencies, including purchasers
and private and public insurers, that
participate in the health care marketplace
in the community.
4. The availability of health care providers,
facilities, supplies, and ancillary services
across the community.
5. The characteristics of the populations
ultimately paying for and receiving health
care services. These characteristics could
include socioeconomic status (education, occupation and income), race and
ethnicity, family structure, health status,
health risk, and health-seeking behaviors.
A community, then, in this context, can refer
to the health care community, the community
of individuals served by a health care system,
the physical community within which the individuals reside and the health system functions,
and the competitive environment within which
any given health care organization operates.
Identifying and considering the community of
interest (service area) facilitates strategic planning and strategic management of health care
organizations.
Source: Donna J. Petersen, MHS, ScD, Dean, College of Public
Health, University of South Florida.
Service Area Profi le
Once the geographic boundaries of the service area have been defi ned, a general
service area profi le should be developed. Capturing the dimensions of a service
area requires gathering and synthesizing information from various sources:
both quantitative and qualitative data for framing and understanding a
service area;
population-based health status data (specifi cs of the various health dimensions of an entire population and its subgroups); and
health services utilization data (specifi cs on the patterns and frequency
of health service use for various health conditions by different groups of
individuals in the population). 10
The service area profi le includes key competitively relevant economic, demographic, psychographic (lifestyle), and community health status indicators. Relevant
economic indicators may include income distribution, major industries and employers, types of businesses and institutions, economic growth rate, seasonality of
businesses, unemployment statistics, and so on. Demographic indicators most commonly used in describing the service area include age, gender, race, marital status,
education level, mobility, religious affi liation, and occupation.
Psychographic indicators are often better predictors of consumer behavior
than demographic indicators and include values, attitudes, lifestyle, social class,
or personality. For example, consumers in the service area might be classifi ed
as medically conservative or medically innovative. Medical conservatives are
only interested in traditional health care drugs, therapies, and diagnostics
they are familiar with whereas medically innovative individuals are willing
(often eager) to try new alternative drugs, therapies, or diagnostics. Although
92 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
medically independent individuals are high in self-esteem and assertiveness,
often questioning one physician s diagnosis and seeking a second opinion, medically dependent individuals follow what the doctor prescribes exactly and would
never think of questioning doctor s orders.
Health status of the service area is also important in considering its viability,
as disease may be related to age, occupation, environment, or economics. Health
status includes all types of data normally considered to represent the physical and
mental well-being of a population. Demographic, psychographic, and health status
information should be included in the analysis only if it is competitively relevant.
Possible variables in developing a service area profi le are summarized in Exhibit
33 .
11 Bear in mind that not every one of these possible variables will be competitively relevant. For example, cosmetic dentistry (teeth-whitening) service area
competitor analysis would be improved by analyzing most economic factors (price
vs. substitutes), some geographic factors (distance to travel for a short procedure),
at least one psychographic factor (youthfulness), and very few of the health status
factors (diseases requiring drugs that affect coloration of the teeth). The specifi c,
selected variables are analyzed to identify issues that must be integrated and
considered in conjunction with the general and health care environmental issues.
EXHIBIT 33 Examples of Possible Service Area Profi le Variables
Economic
Income Distribution
Foundation of the Economy
Major Employers
Types of Business
Growth Rate
Seasonality
Unemployment
Demographic
Age Profi le
Gender Distribution
Average Income
Race Distribution
Marital Status
Education Level
Religious Affi liation
Population Mobility
Stage in Family Life Cycle
Occupational Mix
Residence Locations
Psychographic
Medical Conservatives
Medical Innovators
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 93
Medical Dependents
Personal Health Controllers
Youthfulness
Sociability
Health Status Indicators
Mortality
Deaths from all causes per 100,000 population
Motor vehicle crash deaths per 100,000 population
Suicides per 100,000 population
Female breast cancer deaths per 100,000 population
Stroke deaths per 100,000 population
Cardiovascular deaths per 100,000 population
Work-related injury/deaths per 100,000 population
Lung cancer deaths per 100,000 population
Heart disease deaths per 100,000 population
Homicides per 100,000 population
Infant deaths per 1,000 live births
Notifi able Disease Incidence
AIDS incidence per 100,000 population
Tuberculosis incidence per 100,000 population
Measles incidence per 100,000 population
STD incidence per 100,000 population
Risk Indicators
Percentage of live-born infants weighing under 2,500 g at birth
Births to adolescents as a percentage of live births
Percentage of mothers delivering infants who received no prenatal care in fi rst trimester of
pregnancy
Percentage of children under 15 years of age living in families at or below the poverty level
Percentage of children under 15 years of age without all childhood inoculations
Percentage of women over 50 without a mammogram
Percentage of population more than 50 pounds overweight
Percentage of persons living in areas exceeding the US EPA air quality standards
Percentage of persons who do not wear seatbelts
Service Area Profi le Charlotte, North Carolina For the service category plastic surgery example in the Charlotte, North Carolina service area, a
service area profi le will be helpful in understanding the unique characteristics of
the service area likely to affect competition and provider strategies. A profi le
of the Charlotte service area is presented in Exhibit 34 . The comments column
is used to indicate the relevancy of each selected issue.
EXHIBIT 33 (Continued)
94 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 34 Analysis of the Charlotte, North Carolina, Plastic Surgery Service Area
Service category Plastic surgery
Service area Charlotte, Mecklenburg County, North Carolina
Service Area General
Competitively Relevant Issues Comments
The largest city in either of the Carolinas (19th largest
in the USA, 7.3 million people living within a 100-mile
radius), located on the border of North Carolina and South
Carolina. The nearest city, Winston-Salem, is more than
90 miles away. As a result, Charlotte has emerged as a
fi nancial, distribution, and transportation center for the
entire urban region.
Not much need for residents to travel outside
Charlotte for health care; many in the greater
Charlotte MSA travel to Charlotte for health care.
Charlotte is renowned for its vibrant banking sector.
Bank of America, the nation s largest bank, is headquartered here. In total, 26 banks with more than 226 local
branches, as well as a Federal Reserve Branch, are located
in Charlotte.
Banking has taken the biggest hit in the Great
Recession; Wachovia Bank was purchased by Wells
Fargo and one of Charlotte s banking headquarters
companies no longer exists.
Insurance typically covers reconstructive
surgery for injuries from accidents, correcting birth
defects, and ravages from disease but rarely covers
aesthetic/cosmetic surgery.
Coverage for reconstructive breast surgery and
reconstructive congenital defects surgery is legislated. The North Carolina General Statute citation
closely mirrors the federal legislation that requires
coverage.
Charlotte/Mecklenburg has nearly 15,800 automobile
accidents annually, with more than 36 percent of them
having injuries (5,824); Charlotte/Mecklenburg has 9.2
deaths/100,000 population from auto accidents (NC has
16.7 deaths/100,000 population); 90 percent of residents
in Charlotte/Mecklenburg report they always use seatbelts
(88 percent in NC).
Some injuries require plastic surgery; Charlotte
drivers and their passengers wear seatbelts and are
safer.
FDI Magazine (2011) ranked Charlotte #1 large city in the
Americas to attract foreign investment; 950 foreign fi rms
operate in the Charlotte area.
Plastic surgery is less available in a number of
countries in the world.
Charlotte is a major transportation center; from the city
it is possible to reach 50 percent of the US population in
2 hours by air, 24 hours by truck. Charlotte s airport
received the IATA Best Airport award in 2011, 7th most
active air transportation center in the world.
It is quite easy to travel direct from Charlotte to
most any place in the USA and many foreign destinations, including those with known successes with
plastic surgery at very reasonable costs.
Service Area Economic
Competitively Relevant Issues Comments
Median household income in Charlotte is $55,666. Charlotte has a population that can aff ord cosmetic
procedures.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 95
Service Area Economic
Competitively Relevant Issues Comments
Cost-of-living index for the top 40 largest cities ranks
Charlotte as 8th at 93.3 (Houston is the lowest at 89.3
and New York City is the highest at 218.5).
A low cost-of-living allows for greater discretionary
spending.
Percentage below poverty at 13.6 percent in Charlotte/
Mecklenburg is less than the national percentage of 14.2
percent; the state has a higher rate of 16.3 percent below
the poverty level.
People with a higher standard of living are interested
in and can more likely aff ord the out-of-pocket cost
of cosmetic plastic surgery.
Retail sales per capita $15,084 (NC: $12,641 and
US: $12,990).
People in Charlotte spend more at retail than the
averages for the state and the nation.
Economy improving and number of jobs increasing
however, unemployment is still considerably higher than
pre-2008 beginning of the Great Recession at 7.9 percent for Charlotte (NC: 9.6 percent, US: 7.9 percent).
Unemployed postpone the purchase of plastic surgery
because it is an out-of-pocket expense (not covered
by insurance); those who are employed have been
conservative in their spending because they fear they
may lose their job (especially if they work in banking).
Identifi ed as one of the top cities for entrepreneurs. Entrepreneurs are often innovators and early
adopters.
Over 58 percent of Charlotte s workforce is white collar. White collar workers are most likely to be concerned
with appearance.
Nearly 60 percent of Charlotte s employed residents work
in businesses of less than 100 employees.
Sometimes lower wages, fewer co-workers, less pressure to look younger.
Service Area Demographic
Competitively Relevant Issues Comments
In 2010, more than 730,000 people lived within
Charlotte s city limits (an increase of 35 percent over
2000); 920,000 in Mecklenburg County (an increase of
32 percent over 2000); 1.8 million in the Charlotte MSA.
Generally, one plastic surgeon is needed for every
50,00075,000 in population (compared with a
national average of 88 primary care doctors per
100,000). a
Charlotte, Mecklenburg County, and surrounding areas
have continuing population growth: about 50,000 move
to the area each year (3 percent growth rate).
A growing population may mean there s more room
for a new provider of plastic surgery; increasing population growth typically equates to more accidents.
Population over 65 at 8.0 percent is lower than the state
and nation (NC: 12.2 percent and US: 18.6 percent);
median age in Charlotte is 35.3 years (NC: 37.3 years and
US: 37.2); the largest population cohort in Charlotte is
residents aged 2544 (33 percent), followed by residents
aged 4564 (23.1 percent); the largest population cohort
in NC is aged 2544 (27.2 percent) with those aged
4564 close (25.4 percent).
A younger population is more likely to adopt the
new surgery; Charlotte has younger residents and
greater numbers in those ages most likely to purchase plastic surgery.
Population over 25 with college degree in Charlotte:
39.9 percent (NC: 26.0 percent and US: 24.4 percent);
11.6 percent in Charlotte have advanced degrees; Charlotte/
Mecklenburg School System was named top urban school
district in 2011; 35 colleges and universities in the area.
Better educated consumers are more likely to have
the income to pay for cosmetic plastic surgery.
EXHIBIT 34 (Continued)
(Continued)
96 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Service Area Demographic
Competitively Relevant Issues Comments
Ethnic mix is 58.3 percent white (NC: 68.5 percent and
US: 72.4 percent), black 32.7 percent (NC: 21.5 percent
and US: 12.6 percent), Native American 0.3 percent
(NC: 1.3 percent and US 0.9 percent), Asian 3.4 percent
(NC: 2.2 percent and US 4.8 percent), Hispanic 8.4 percent
(NC 8.4 percent and US 16.3 percent); Hispanic growth
has been 1,572 percent between 1990 and 2010.
The black population has been slower to adopt
plastic surgery; only one of the plastic surgery physicians in Charlotte is black; two Hispanic plastic
surgeons are in the area and multiple practices off er
Spanish-speaking providers (physicians, nurses,
administrative staff ).
Service Area Psychographic
Competitively Relevant Issues Comments
Younger, upwardly mobile population, youthful orientation; ranked 5th among US large cities attracting this
segment.
Plastic surgery is often for lifestyle (confi dence) and
cosmetic reasons.
Business-oriented community: 2nd largest banking center
(behind New York City); 6th largest in wholesaling; 6th in
number of Fortune 500 company headquarters (9 in the
area); 274 Fortune 500 companies have facilities.
City is business dominated; big business tends to
require the corporate look that includes youthful
appearance and a strong chin.
Bible belt 73 percent church or synagogue members. Religious question: Is surgery for cosmetic reasons
the right thing to do?
Outdoor activities year round at the beach or mountains;
both within easy driving distance.
Summer outdoor activities often require less
clothing.
Service Area Health Status
Competitively Relevant Issues Comments
Generally healthy population. Healthy candidates required for this elective procedure.
New cancer cases: 7,390 for 2011 in NC. b Breast cancer, skin cancer, and so on may require
reconstructive plastic surgery.
NC Health Statistics report 210 orofacial birth defects
(cleft palate with/without cleft lip) for North Carolina
in 2007 (190 in 2006 and 167 in 2005); in Mecklenburg
County, 8 babies were born with orofacial defects in
2007 (10 in 2006 and 11 in 2005). c
The number of birth defects are increasing for the
state, but decreasing in the Charlotte/Mecklenburg
area.
Information in this exhibit is based on secondary data from the US Census (2010), the Charlotte Chamber, and websites in addition to personal interviews with
Charlotte area plastic surgeons unless otherwise noted. Opinions and conclusions presented are those of the authors and intended to be used as a basis for class
discussion rather than to illustrate eff ective or ineff ective business practices.
a Ashley Halsey III, Primary-Care Doctor Shortage May Undermine Health Reform Eff orts, The Washington Post , June 20, 2009, p. 1.
bCancer Facts & Figures 2011 , American Cancer Society.
c Birth Defects Monitoring Program , North Carolina: State Center for Health Statistics.
EXHIBIT 34 (Continued)
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 97
Service Area Structural Analysis
Harvard s Michael E. Porter developed a fi ve forces framework for analyzing the external environment through an examination of the competitive
nature of the industry. Service area structural analysis provides considerable
insight into the attractiveness of an industry and provides a framework for
understanding the competitive dynamics (the future viability of an industry).
Porter s fi ve forces framework has been applied to industry analysis for many
industries however, because of the nature of competition in health care, it is
more appropriate to apply the framework to the service category/service area.
Use of Porter s fi ve forces in health care can be referred to as service area
structural analysis.
Porter suggested that the level of competitive intensity within the industry
is the most critical factor in an organization s environment. In Porter s model,
intensity is a function of the threat of new entrants to the market, the level
of rivalry among existing organizations, the threat of substitute products
and services, the bargaining power of buyers (customers), and the bargaining power of suppliers. 12 The strength and impact of these fi ve forces must
be carefully monitored and assessed to determine the viability of the service
category today and may be used to assess the changes likely to occur in the
future. As illustrated in Exhibit 35 , Porter s industry structural analysis may
be adapted to service areas to understand the competitive forces for health
care organizations.
Threat of New Entrants New entrants into a market are typically a threat
to existing organizations because they increase the intensity of competition.
New entrants may have substantial resources and often attempt to rapidly gain
market share. Such actions may force prices and profi ts down. The threat of a
new competitor entering into a market depends on the industry or service area
barriers. If the barriers are substantial, the threat of entry is low. Porter identifi ed
several barriers to entry that may protect organizations already serving a market:
Existing organizations economies of scale.
Existing product or service differentiation.
Capital requirements needed to compete.
Switching costs the one-time costs for buyers to switch from one
provider to another.
Access to distribution channels.
Cost advantages (independent of scale) of established competitors.
Government and legal constraints.
These barriers may be assessed to determine the current or expected level of
competition within an industry or service area. In health care markets, the barriers to entry for new players may be substantial. Consolidation (creation of large
health care systems) and system integration (control of physicians and insurers)
may make entry into a particular service area diffi cult because of economies and
cost advantages. In an effort to create cost effi ciencies, managed care has had
98 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
the effect of limiting the ease of market entry. Where managed care penetration
is high, market entry by new competitors will be more diffi cult because switching costs for some populations are high. However, the diffi culty of adding new
service categories for existing organizations in a managed care market may be
lessened. Service categories may be added to better serve a captured (managed
care) market.
Certifi cate of Need (CON) laws and regulations can present signifi cant barriers to entry in those states that have them (see Perspective 34 ). For example,
CON laws are the reason some specialty hospitals in cardiology and orthopedics
were built in states in the southwestern USA and the Midwest, where there were
no CON barriers or the CON laws were much less restrictive than other areas
of the nation.
Intensity of Rivalry Among Existing Organizations Organizations
within an industry are mutually dependent because the strategy of one organization affects the others. Rivalry occurs because competitors attempt to improve their
Potential
Entrants
Threat
of New
Entrants
Service Area
Competitors
Rivalry Among
Existing Firms
Threat of
Substitute
Products
or Services
Substitutes
Suppliers Buyers
Bargaining
Power
of Suppliers
Bargaining
Power
of Buyers
EXHIBIT 35 Service Area Structural Analysis: Forces Driving Service
Area Competition
Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors .
Copyright 1980 by the Free Press. All rights Reserved. Adapted with the permission of the Free Press,
a division of Simon & Schuster Adult Publishing Group.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 99
PERSPECTIVE 34
CON: Defi nite Need or a Dinosaur?
As of June 2012, 36 states retain some type of
certifi cate of need (CON) program, law, or agency.
CON programs originated to regulate the number of beds in hospitals and nursing homes, and
to prevent overbuying of expensive equipment.
In 1964, New York became the fi rst state to enact
a statute granting the state government power
to determine whether there was a need for a
new hospital or nursing home before it was
approved for construction. In 1972, an amendment to the Public Health Service Act included
withholding of Medicare and Medicaid funds for
facilities and projects (which in eff ect became the
fi rst CON legislation, although a version of a CON
process was incorporated into the Hill-Burton
Act in 1946 that provided federal funds for new
hospital construction completed through state
planning and evaluation). The National Health
Planning and Resources Development Act in
1974 strengthened certifi cate-of-need regulations by requiring all 50 states to implement such
regulations to receive funds through the Public
Health Service Act; however, sanctions from this
law were not imposed.
Statutory criteria were often created to help
planning agencies determine what was necessary for a given location (number of new beds,
new technologies, etc.). By reviewing the activities and resources of hospitals, the agencies
made judgments about what needed to be
improved. Once need was established, the applicant (corporation, not-for-profi t, partnership, or
public entity) was granted permission to begin a
project. These approvals are generally known as
Certifi cates of Need. Many states implemented
CON programs in part because of the incentive of
receiving federal funds.
In 1986, Congress repealed the mandate for
states to have CON programs, along with federal
funding. In the decade that followed, Arizona,
California, Colorado, Idaho, Indiana, Kansas,
New Mexico, North Dakota, Pennsylvania, South
Dakota, Texas, Utah, Wisconsin, and Wyoming (14
states) no longer have CON requirements; other
states maintain CONs for various types of facilities
and dollar amounts for technology. Although the
CON process across states that still have it is similar, no two states are exactly alike, with the scope
of regulation varying a great deal by state. Some
states require providers to document the community need for all regulated services regardless
of cost, while others do not require CON approval
for any project under certain cost thresholds;
however, the capital expenditure thresholds vary
widely in amounts from hundreds of thousands
to millions of dollars ($1 million in Georgia, $6.5
million in Illinois). More than 25 states have CONs
for acute care hospital beds (28), ambulatory
surgical centers (27), cardiac catheterization (26),
long-term acute care (28), nursing home beds
(36), open-heart surgery (25), psychiatric services
(26), and rehabilitation (25).
Some CON regulations attempt to protect
access to safety net hospitals in urban areas
and access to care in rural areas, either by requiring the provision of a specifi ed amount of charity care or by having applicants address the
potential impact of the CON on charity care.
Enforcement is challenging because penalties
for not meeting the standard are frequently not
included; however, in a few states an organization s failure to meet its charity care commitment
requires it to make up the shortfall by paying the
diff erence to the state.
100 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
CONs have been plagued in recent years
by providers attempting to game the process,
a deterioration of state health planning over
time because of inadequate funding, reduction
of public interest, and a broader move toward
deregulation. When the federal mandate for
CON programs was repealed in 1986, funding
for state health planning dropped substantially.
State agencies responsible for issuing CONs cite
insuffi cient staffi ng and training and an often
overwhelming workload. An enduring challenge
for CON review boards is meaningful competition while maintaining access to care without
allowing excess capacity.
CONs have been used as a way to claim territory. For example, in Fort Mill, SC, three provider
groups submitted competing CON applications
to secure the right to build a hospital in the
same suburban bedroom community outside
Charlotte, NC (one from Rock Hill, SC and two
from Charlotte, NC; the largest health care
system from Charlotte was awarded the CON;
appeals are in process). Such situations are typically contentious and require a signifi cant amount
of time to resolve and fi nalize. Applications can
be challenged at various stages, and decisions
can be overturned by hearing offi cers, courts, or
sometimes state legislatures. CON boards generally include appointed state offi cials, physicians,
hospital representatives, and other stakeholders.
This scrutiny, coupled with a lack of enforcement
power to uphold decisions, has made the role of
CON boards increasingly challenging.
Hospitals use the process to protect existing
market share either geographic or by service
line and block competitors. Certifi cate-of-need
approval from the hospital perspective is usually viewed as a license to claim ownership of a
service line or geographic area. In addition, hospitals track CON applications as a way to keep
tabs on current competitors and block new
entrants. Smaller community hospitals often
lack the fi nancial resources to go through an
extended CON process. Large hospitals, which
often have ample fi nancial resources and political clout, have kept smaller hospitals out of a
market by simply tying them up in CON litigation
for years.
CON has been used by hospitals to block
new physician-owned facilities. Physicians interested in establishing for-profi t facilities (especially surgery centers) view CON programs as
overly restrictive and support repeal of the
regulations. Refl ecting physician views, medical societies tend to support repeal of CONs
as well. Physicians view CONs as barriers to
innovation, since the process may take up
to 18 months, delaying facilities from off ering the most-advanced equipment to patients
and limiting providers ability in some states
to recruit top-tier specialist physicians who are
attracted to work in facilities with the newest
technologies.
Originally, the rationale for CON in the 1970s
was policymakers beliefs that market forces
could not be trusted to discourage overinvestment in health care facilities. Cost-plus reimburse ment did encourage constant additions
to hospitals, nursing homes, etc.; however, the
introduction of the prospective payment system
(PPS) in the 1980s removed the major reason for
the overinvestment that brought about CON.
Payment reforms have probably had more impact
on containing health care costs than CON laws.
CONs may be less necessary as Medicare and
other payers move away from fee-for-service payments that rewarded volume. The 2010 Patient
Protection and Aff ordable Care Act incorporates
two provisions that may impact CON programs:
An increase in the insured population
who will in turn increase demand for services (may increase the need for provider
capacity).
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 101
Payment reforms that focus on increasing effi ciency may encourage providers to
determine that they have adequate capacity
and can absorb increased demand without
diffi culty.
According to Clark Havighurst, Resources too
easily gained may easily be wasted in ineffi cient
operations and spent on things not clearly worthy of public support. A number of major US hospitals are largely unaccountable for the amounts
of money they raise and the ways they spend it.
SUGGESTED READING
Grant Bosse, CON: A Failed Health Care Diet,
Business NH Magazine 29, no. 5 (2012), p. 19.
Joe Carlson, Trump Card? Appeals Court Ruling
Could Aff ect CON Laws, Modern Healthcare
41, no. 35 (2011), pp. 1213.
Clark C. Havighurst, Monopoly Is Not the Answer,
Health Aff airs (August 5 2005), pp. 373375.
National Conference of State Legislatures
(January 2011; material added March 2012).
Website: www.ncsl.org/issues-research/
health/con-certifi cate-of-need-state-laws.aspx
Section: Certifi cate of Need State Health Laws
and Programs.
Tracy Yee, Lucy B. Stark, Amelia M. Bond, and
Emily Carrier, Health Care Certifi cate-of-Need
Laws: Policy or Politics? National Institute for
Health Care Reform Research Brief Number
4 (May 2011).
position. Typically, actions by one competitor foster reactions by others. Intense
rivalry is the result of the following factors:
Numerous or equally balanced competitors.
Slow industry (service area) growth.
High fi xed or storage costs.
A lack of differentiation or switching costs.
Capacity augmented in large increments.
Diverse competitors diverse objectives, personalities, strategies, and so on.
High strategic stakes competitors place great importance on achieving
success within the industry.
High exit barriers.
Often, consolidation has created several balanced large health care systems in
a service area. For example, in the Cleveland market, consolidation has resulted
in two large integrated systems with high fi xed costs and extremely high strategic stakes. For some markets, consolidation has resulted in competition between
large for-profi t and not-for-profi t systems. Additionally, because of managed
care, switching costs for consumers are high. Because many markets have supported too many providers in the past, the strategic stakes are extremely high.
102 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Most experts agree that further consolidations are likely, rivalry will intensify,
and still more providers will not survive.
Threat of Substitute Products and Services For many products and
services there are various substitutes that perform the same function as the
established products. Substitute products limit returns to an industry because
at some price point consumers will switch to alternative products and services.
Usually, the more diverse the industry, the more likely there will be substitute
products and services. A major substitution taking place in health care has
been the switch from inpatient care to outpatient alternatives. In addition,
alternative therapies such as chiropractic, massage therapy, acupuncture, biofeedback, and so on are increasingly substituted for traditional health care
(see Perspective 35 ).
PERSPECTIVE 35
Complementary + Alternative Medicine = Integrative
Medicine: Are We There Yet?
Americans are frustrated with the inability of
traditional medicine to meet their expectations
and needs. In addition, US society has a growing
interest in generally better health and wellness.
Further, individuals have access to more health
care information than ever before through the
Internet. Discontent and the search for more
have led many Americans to explore complementary and alternative medicine (CAM). CAM is a
group of diverse medical and health care systems,
practices, and products that are not presently
considered to be part of conventional medicine
(that practiced by medical doctors). CAM includes
acupuncture, herbal medicine, homeopathy,
message, osteopathy, biofeedback, chiropractic, hypnotherapy, meditation, and naturopathy.
CAM systems are characterized by a holistic and
highly individualized approach to patient care
with an emphasis on using the body s inherent
healing ability and involving patients as active
participants in their own care. A 2007 study of
CAM use by the general population reported that
38.3 percent of US adults used some form of CAM
within the past year, up from 36 percent in 2002.
Integrative medicine incorporates elements
of CAM with traditional western (allopathic)
medicine. The model of integration has resulted
in some CAM therapies becoming mainstream.
Integrative medicine is an attempt to provide
a new paradigm that incorporates core CAM
values in contemporary medicine; however, the
extent to which integration occurs will depend
on attitudes of physicians. A 2011 study of medical students found that 84 percent agreed to
some extent that CAM contains beliefs, ideas,
and therapies from which conventional medicine
could benefi t; 74 percent agreed that a system of
medicine that integrates benefi ts of both conventional medicine and CAM would be more eff ective than either one provided independently;
and 98 percent agreed that a patient s treatment
should take into consideration all aspects of his/
her physical, mental, or spiritual health. Study
respondents reported that they had used CAM
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 103
to treat themselves (49 percent), used another
CAM provider (acupuncturist, chiropractor, and
so on) for themselves (38 percent), and used CAM
to treat someone else (14 percent). The authors
concluded that although medical students as
future physicians are willing to use complementary, alternative, and integrated medicine (CAIM)
themselves, many are not yet willing to recommend or use CAIM in their practices.
A national survey of hospitals that off er complementary services found a number of signifi cant barriers for CAIM therapies: lack of
evidence-based research (39 percent), physician
resistance (44 percent), and budgetary constraints (65 percent). In addition, hospitals that
are considering use of integrative medicine have
a number of legal/liability hurdles to overcome.
A hospital s basic duty is to ensure that those
who treat patients within its facilities are qualifi ed
and competent to do so. Reasonable steps must
be taken to control and supervise practitioners
by appropriate credentialing (licensure, passing
examinations, and so on). In addition, the hospital has a duty to create a safe environment for
patients that should include going to reasonable
lengths to allow CAIM at least those therapies
that current evidence indicates could improve
patients health or help manage their symptoms.
In 1998, cognizant of society s changing perspectives on health care and well-being, Congress
expanded the Offi ce of Alternative Medicine
(started in 1993) by creating the National Center
for Complementary and Alternative Medicine
(NCCAM). NCCAM is the federal government s
lead agency for scientifi c research on complementary and alternative medicine and is one of
the 27 institutes and centers that make up the
National Institutes of Health (NIH). On February
4, 2011, NCCAM released its third strategic
plan, Exploring the Science of Complementary
and Alternative Medicine: Third Strategic Plan
20112015 . With a budget of $127.7 million
in 2011, NCCAM s mission is: to defi ne,
through rigorous scientifi c investigation, the
usefulness and safety of complementary and
alternative medicine interventions and their
roles in improving health and health care. Its
vision states: Scientifi c evidence informs decision making by the public, by health care
professionals, and by health policymakers
regarding use and integration of complementary and alternative medicine.
The 20112015 strategic plan presents a
series of goals and objectives to guide NCCAM
in determining priorities for future research in
complementary and alternative medicine:
1. Advance research on mind and body
interventions, practices, and disciplines.
2. Advance research on CAM natural products.
3. Increase understanding of real-world
patterns and outcomes of CAM use and
its integration into health care and health
promotion.
4. Improve the capacity of the fi eld to carry
out rigorous research.
5. Develop and disseminate objective,
evidence-based information on CAM
interventions.
As predicted by the fi rst Director of NCCAM:
As CAM interventions are incorporated
into conventional medical education and
practice, the exclusionary terms complementary and alternative medicine,
will be superseded by the more inclusive, integrative medicine. Integrative
medicine will be seen as providing novel
insights and tools for human health,
practiced by health care providers skilled
and knowledgeable in the multiple traditions and disciplines that contribute to
the healing arts.
104 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Bargaining Power of Customers Buyers of products and services attempt
to obtain the lowest price possible while demanding high quality and better service. If buyers are powerful, then the competitive rivalry will be high. A buyer
group is powerful if it:
purchases large volumes;
concentrates purchases in an industry (service area);
purchases products that are standard or undifferentiated;
has low switching costs;
earns low profi ts (low profi ts force lower purchasing costs);
poses a threat of backward integration;
has low quality requirements (the quality of the products purchased by
the buyer is unimportant to the fi nal product s quality); and
has enough information to gain bargaining leverage.
Perhaps the greatest change in the nature of the health care industry in
the past decade has been the growing power of the buyers. Managed care
organizations purchase services in large volume and control provider choices.
CAM is expected to increase substantially
in the future. It is estimated that this sector
will grow at a rate of 38 percent over the next
5 years; Americans spend between $36 and
$50 billion annually on alternative medicine.
About $20 billion of this amount was paid outof-pocket to massage therapists, chiropractors,
and acupuncturists. More than 60 percent of
adults state that they have tried some form
of integrative medicine. Involvement in integrative medicine has become so widespread that
the Food and Drug Administration is preparing
new guidelines that threaten new, costly regulation of complementary and alternative medicine.
SUGGESTED READING
R. B. Abbott, K.-K. Hui, R. D. Hays, J. Mandel,
M. Goldstein, B. Winegarden, D. Glaser, and
L. Brunton, Medical Student Attitudes toward
Complementary, Alternative and Integrative
Medicine, Evidence-Based Complementary and
Alternative Medicine (2011), pp. 114.
FDA Seeks to Regulate Complementary and
Alternative Medicine: Products Such As
Vegetable Juice Could Be Restricted for
Medical Use, PR Newswire (September 5, 2007),
pp. 34.
J. Gilmour, C. Harrison, L. Asadi, M.H. Cohen, and
S. Vohra, Hospitals and Complementary
and Alternative Medicine: Managing
Responsibilities, Risk, and Potential Liability,
Pediatrics 128, no. 4 (November 2011),
pp. S193199.
National Center for Complementary and
Alternative Medicine website ( http://nccam.
nih.gov/ ) and its strategic plan, Exploring the
Science of Complementary and Alternative
Medicine: Third Strategic Plan 20112015.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 105
The increasing power of the buyers has fueled system integration as well as
blurring of providers and insurers. Large employers as buyers have power over
managed care organizations, because they determine whether the MCO will be
on the list that employees have to choose from for their health care.
Bargaining Power of Suppliers Much like the power of buyers,
suppliers can affect the intensity of competition through their ability to control prices and the quality of materials they supply. Through these mechanisms, suppliers can exert considerable pressure on an industry. Factors that
make suppliers powerful tend to mirror those making buyers powerful.
Suppliers tend to be powerful if:
there are few suppliers;
there are few substitutes;
the suppliers products are differentiated;
the product or service supplied is important to the buyer s business;
the buyer s industry is not considered an important customer; and
the suppliers pose a threat of forward integration (entering the
industry).
Traditionally, physicians and other health care professionals have been important and powerful suppliers to the industry because of their importance to
health care institutions. The physician or the insurance plan remains the gatekeeper to the system and plays a crucial role in controlling consumer choice.
This supplier power has added pressure to purchase primary care individual and
group practices by hospital systems. Other suppliers, such as those who supply
general medical needs (e.g., bandages, suture materials, thermometers, and so
on), have tended not to exercise a great deal of control over the industry. Still
others who supply equipment with new, patented technology (e.g., software,
new type scanner, and so on) could have moderate to high supplier power,
especially in the short run.
Service Area Structural Analysis Plastic Surgery Michael Porter s
fi ve forces analysis is used to evaluate the viability of cosmetic plastic surgery within the Charlotte service area. Competitive intensity and ultimately
the profi tability of the service category in the service area is determined by
a number of favorable factors. As described in Exhibit 36 , the fi ve forces
model suggests that it would be somewhat challenging to enter this market of
24 board-certifi ed plastic surgery practices when these existing competitors
face increased competitive pressure. The cosmetic plastic surgery segment will
remain competitive because there are barriers to entry for new competitors;
however, one barrier to entry is higher: participants generally have some form
of medical or dental degree and most of the physicians practicing plastic surgery in Charlotte are board-certifi ed plastic surgeons. However, there are 21
plastic surgery practices listed with the North Carolina Medical Board where
106 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 36 Service Area Structural Analysis Plastic Surgery, Charlotte, NC
Five Forces Forces Driving Service Area Competition Conclusion
Intensity of
Rivalry
Approximately 45 practices (24 with boardcertifi ed plastic surgeons) actively advertise that
they have physicians who perform procedures
or provide products for plastic surgery in the
Charlotte, NC area.
Diverse competitors mostly solo and a few small
group practices employing distinctly diff erent
strategies (also diverse personalities).
All strategic competitors are plastic surgeons
and members of one of the professional plastic
surgery associations: the American Plastic Surgery
Association (APSA), the American Cosmetic Plastic
Surgery Association, or the American Board of
Plastic Surgery; however, not all patients know to
look for board-certifi ed surgeons.
Other competitors are in diff erent specialties:
ophthalmology (eye), dermatology (skin), dentistry (oral-maxillofacial surgery), etc. and are willing to perform plastic surgery on patients.
Still others like to state they are board eligible,
meaning they have training or experience in
plastic surgery but have not passed the boards or
have not bothered to attempt board certifi cation.
High
Rivalry is likely to remain intense in
this market as the competitors are
more numerous relative to the need
for plastic surgeons, strategic stakes
are high, and it is moderately diffi cult to exit the market (hard to fi nd
and establish a practice in a new,
better market; establishing referral
relationships and credentialing at
new hospital(s); some investment in
equipment).
Threat of New
Entrants
Existing providers have established reputations
and been in practice in the Charlotte area for
a number of years. Experience, artistic ability,
good hands, and great personality to easily and
confi dently interact with patients are important
in maintaining a successful cosmetic plastic
surgery practice.
Board certifi cation is a major hurdle; however,
many consumers do not understand that when
Medium
Threat of new entrants (new plastic
surgeons) into the Charlotte market
is presently mediumlow, primarily
because of the poor economy
(consumers abandon elective procedures when they are uncertain about
employment), and the existing service
area already has numerous competitors.
an MD states on his/her website that they are
board certifi ed it does not necessarily mean that
it is in the plastic surgery specialty.
To obtain board certifi cation in plastic
surgery is a major hurdle to accomplish by the physician; however,
consumers lack of awareness of the
meaning of certifi cation in plastic surgery dilutes it as a hurdle. In Charlotte,
24 practices (38 physicians) are board
certifi ed; 21 practices identify plastic
surgery as their medical specialty
using non-certifi ed plastic surgeons.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 107
Five Forces Forces Driving Service Area Competition Conclusion
Capital requirements are not high. For example, the
cost of equipment that may be used in the offi ce is
less than $50,000 new; however, used equipment
is readily available to purchase or lease. Equipment
is generally upgraded before it becomes obsolete
to maintain cutting-edge technology.
Financial barriers for setting up an
offi ce are low.
Most single practices operate on a 3+1 offi ce:
one doctor and three staff (operating room nurse,
offi ce administrator, offi ce nurse).
Many of the procedures are performed in a hospital or surgery center setting that can be used by
physicians who are credentialed by that hospital or
surgery center (costs are passed on to the patient).
Existing service diff erentiation perceived differentiation (high image) for high-end providers
through referral from stars who freely discuss
the procedures they have had.
Market leaders have a strong market position
given their experience and consistency in providing great outcomes.
Threat of
Substitutes
Cosmetics that can enhance appearance at a
fraction of the cost.
Injectables, face peels, etc. by any MD internist,
general practitioner, primary care physician, or
other non-certifi ed plastic surgeons.
New, strong chins by oral-maxillofacial surgeons.
Patients do not need to have cosmetic plastic
surgery and it is quite expensive.
High
Currently there are a number of
low-cost, non-surgical substitutes
provided over-the-counter (OTC).
Less invasive procedures are considerably less expensive, less painful, less
time (to no time) for recovery, and less
intimidating.
Bargaining
Power of
Customers
The elective procedure of cosmetic plastic surgery is rarely covered by insurance, rather it is
a cash business (some credit is off ered using
MasterCard, VISA, or a medical procedure credit
card, CareCredit
).
Consumers can easily defer purchase to a later
time or never after numerous sessions with a
number of surgeons.
Patients/consumers have the ability to negotiate
the price, but many of them are embarrassed to
do so; most physicians are uncomfortable with a
negotiation.
High
Consumers have high bargaining
power because of the elective nature
of the procedure and its out-of-pocket
cost.
Consumers can opt for a much less
expensive substitute, shop price, wait
for prices to decline, or forego the
procedure.
EXHIBIT 36 (Continued)
(Continued)
108 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
the physician is either board certifi ed in a specialty other than plastic surgery
or not board certifi ed (all but one are solo practices). Many of these doctors
have performed plastic surgery for many years and tout their experience,
expertise, and great outcomes over paper credentials. For the less invasive
plastic surgery procedures, such as Botox and other injectables, face peels,
etc., barriers to entry are not very high as they are often administered by RNs
under physician supervision.
Competitive rivalry is high as more board-certifi ed plastic surgeons than
would be expected are located in Charlotte and are already established
in practice in the service area. Given the rule-of-thumb of one plastic surgeon
for every 50,00075,000 in population, Charlotte exceeds the number of plastic surgeons needed (and is considerably over the number when both boardcertifi ed and non-board-certifi ed physicians with practices in this medical
specialty are considered). In addition, most of the board-certifi ed physicians
have been in the area and have practices that are long established (average: 15
years, only fi ve physicians have been in the area for 5 years or less).
Consumers (buyers) wield a great deal of choice power because aesthetic
plastic surgery in particular is a cash business (no insurance company to dictate
choices, little to no integration of these services in a health care system) and a
number of substitutes exist the most important of which is to choose not to
elect any of the procedures. Suppliers of medical devices, such as lasers and
cellulite reduction (liposuction) machines, are relatively stable with few new
entrants and quite a number of manufacturers. Laser manufacturers include:
Cutera, Lumenis, Cynosure, Syneron, Focus Medical, Aesthera, Alderm, and Alma
Lasers. Cellulite reduction machine manufacturers include: Bausch Instruments,
WellsJohnson, Syneron, Alma Lasers, Cynosure/Deka, Argon, DRE, Derma Sense,
Alderm, Erchonia, Sharp & Botanica, Pollogen, and LPG Systems). The power of
these suppliers has decreased somewhat because of lack of exclusivity in choice
of product lines from the market leaders by plastic surgeons. Thus, for cosmetic
Five Forces Forces Driving Service Area Competition Conclusion
Patients/consumers may prefer to travel away
from Charlotte to keep the procedures confi –
dential; others may travel to exotic destinations
where the costs for cosmetic surgery are considerably lower and a vacation recovery period is
enjoyable.
Word-of-mouth referral is very powerful.
Brazil has an international reputation
for excellent outcomes with plastic
surgery and off ers a more aff ordable
price (including air fare and top-tier
hotels for recovery).
Bargaining
Power of
Suppliers
Quite a number of suppliers of laser, liposuction,
etc. equipment compete in the market space.
Rent-to-own, purchase, or lease equipment is
essential to the business. Many procedures can be
performed in the offi ce or in surgery centers.
Low
Currently there are multiple major
suppliers of professional-grade equipment for cellulite reduction and more
than ten suppliers of laser equipment.
EXHIBIT 36 (Continued)
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 109
plastic surgery in the Charlotte service area, only one of Porter s fi ve forces is
favorable (power of suppliers) and four are unfavorable, resulting in thin profi t
margins and intense competition.
In the future, the fi ve forces for this service category, in this service area,
are not likely to change dramatically. Barriers to entry for new competitors will
remain consistent, rivalry will remain high, the consumer will be able to shop on
price and defer purchase, and substitutes will likely increase. At the same time,
the reconstructive plastic surgery market overall remains stable and not greatly
affected by swings in the economy; however, the cosmetic plastic surgery market is subject to swings in the economy as the consumer pays out-of-pocket for
nearly all procedures.
Conducting Competitor Analysis and Mapping
Strategic Groups
The next step in service area competitor analysis (refer to Exhibit 31 ) is to evaluate the strengths and weaknesses of competitors, characterize their strategies,
group competitors by the types of strategies they have exhibited, and predict
competitive future moves or likely responses to strategic issues and initiatives
by other organizations.
Competitor Strengths and Weaknesses In assessing the rivalry of the
service area, the competitors are identifi ed. Next, the strengths and weaknesses
of each competitor should be specifi ed and evaluated. Organizations have a
unique resource endowment and a comparison with a given competitor will
help to illuminate the relationship between them and to predict how they compete with (or respond to) each other in the market. 13 Evaluation of competitors
strengths and weaknesses provides clues as to their future strategies and to areas
where competitive advantage might be achieved.
Both quantitative and qualitative information may be used to identify strengths
and weaknesses. Competitor information is not always easy to obtain, and it is
often necessary to draw conclusions from sketchy information. A list of possible
competitor strengths and weaknesses is presented in Exhibit 37 .
Such information may be obtained through local newspapers, trade journals,
websites, focus groups with customers and stakeholders, consultants who specialize in the industry, securities analysts, outside health care professionals, and
so on. Identifi cation of competitor strengths and weaknesses will aid in speculating on competitor strategic moves. The range of possible competitive actions
available to organizations varies from tactical moves, such as price cuts, promotions, and service improvements that require few resources, to strategic moves,
such as service category/area changes, facilities expansions, strategic alliances,
and new product or service introductions that require more substantial commitments of resources and are more diffi cult to reverse. Such competitive actions
represent clear, offensive challenges that invite competitor responses. 14
Competitor Strengths and Weaknesses Plastic Surgery The
strengths and weaknesses may be assessed for providers of plastic surgery
procedures. For this analysis, a few representative plastic surgery providers
110 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 37 Potential Competitor Strengths and Weaknesses
Potential Strengths Potential Weaknesses
Distinctive competence
Financial resources
Good competitive skills
Positive image
Acknowledged market leader
Well-conceived functional area strategies
Achievement of economies of scale
Insulated from strong competitive
pressures
Proprietary technology
Cost advantages
Competitive advantages
Product/service innovation abilities
Proven management
Ahead on experience curve
Lack of clear strategic direction
Deteriorating competitive position
Obsolete facilities
Subpar profi tability
Lack of managerial depth and talent
Missing key skills or competencies
Poor track record in implementing
strategies
Plagued with internal operating problems
Vulnerable to competitive pressures
Falling behind in R&D
Too narrow a product/service line
Weak market image
Below-average marketing skills
Unable to fi nance needed changes in
strategy
Higher overall costs relative to key
competitors
are profi led in Exhibit 38 . Assessing strengths and weaknesses of competitors is often diffi cult for outsiders and, as suggested in the exhibit, weaknesses
(in particular those not manifest in the market) are often diffi cult to identify
and assess. However, careful observation, data gathering through websites and
media, and a local resource can make this somewhat speculative process fairly
accurate. In addition, over time the understanding of competitors strengths and
weaknesses can be refi ned and improved, and used to update the competitive
analysis.
Service Category Critical Success Factor Analysis Critical success
factor analysis involves the identifi cation of a limited number of activities for a
service category within a service area for which the organization must achieve
a high level of performance if it is to be successful. The rationale behind critical
success factor analysis is that there are fi ve or six areas in which the organization
must perform well and that it is possible to identify them through careful analysis of the environment. In addition, critical success factor analysis may be used
to examine new market opportunities by matching an organization s strengths
with critical success factors.
Typically, once the service category critical success factors have been identifi ed, several goals may be developed for each success factor. At that point,
a strategy may be developed around the goals. Important in critical success
factor analysis is the establishment of linkages among the environment, the
critical success factors, the goals, and the strategy. In addition, it is important
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 111
EXHIBIT 38 Competitor Strengths and Weaknesses **
Competitor * Strengths Weaknesses
Abner Center for
Plastic Surgery
Only female African-American boardcertifi ed plastic surgeon in the service
area.
Practicing for 14+ years.
Website has a great opening page but the
tabs for photos have no content.
Limited to fewer types of reconstructive
and cosmetic surgeries than others.
Cash basis, except reconstructive.
Criswell &
Criswell
Husband/wife team allowing choice of
male or female surgeon.
15 percent off skin care products and
sunscreens during July.
Opening second offi ce in upscale area of
the city.
Website suggests artistry; they state talented, passionate, artistic, and experienced
physicians. Both doctors have art backgrounds (undergraduate major/minor).
Speak Spanish.
Committed to both cosmetic and reconstructive surgery. Many research papers
and lectures on reconstructive surgery.
Both are children of physician parents.
New to Charlotte relative to nearly all
other practices (established in 2009).
Consultation fee is applied to surgical
procedures.
Use CareCredit
.
Matthews Plastic
Surgery
In practice for over 20 years.
Cosmetic and signifi cant reconstructive
surgery.
Serves on the local hospital ethics board.
Performs medical mission trips every year
to Third World countries to perform reconstructive surgery; donates supplies as well.
Board certifi ed in cosmetic and reconstructive plastic surgery.
Informative website.
Initial consultation fee will be credited
to patient s bill if procedure is performed
within 6 months.
Cosmetic is cash basis; however, major
credit cards accepted, fi nancing provided
by CareCredit
, a subsidiary of GE Capital
which has a reputation for aggressive collections; reconstructive is private or public
insurance.
Premier Plastic
Surgery Center
Discount pricing specials ($500 off Mommy
Makeover or $400 off Tummy Tuck).
Informative website.
SurgeryMorph
an online tool using a
user-supplied photo to preview what certain plastic surgery procedures would look
like for the individual (breast, body, face,
or skin can be selected with variations for
each).
Free consultation.
Dense website; somewhat diffi cult to navigate. Uses CareCredit
for fi nancing. Many
(too many?) marketing eff orts (advertising,
coupons, promotions, etc.).
(Continued)
112 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
to evaluate competitors on these critical success factors. Indeed, excellence
in any (or several) of these factors may be the basis of competitive advantage. Further, these factors form the fundamental dimensions of strategy.
Organizational strategies may differ in a wide variety of ways. Michael Porter
identifi ed several strategic dimensions that capture the possible differences
among an organization s strategic options in a given service area.
Specialization: the degree to which the organization focuses its efforts in
terms of the number of product categories, the target market, and size of
its service area.
Reputation: the degree to which it seeks name recognition rather than
competition based on other variables.
Competitor * Strengths Weaknesses
Lifestyle Lift
Center
Dedicated to facial cosmetic plastic
surgery.
Uses social media and has impressive
website.
Uses EPIC: every patient interaction
counts.
Included on www.realself.com .
Offi cial physician trainer for Lumenis
Corporation, manufacturer of cosmetic
laser equipment.
Fluent in Spanish.
National organization, Lifestyle Lift
Centers, does the marketing.
Additional surgeon is not in the Charlotte
area.
Practices in North Florida and Mississippi
Gulf Coast in addition to Charlotte.
Has two websites confusing.
Voci Center Upscale spa services aromatherapy,
soothing organic candles, calming essential oils, fi ne lip balms, facial moisturizers,
and massage. Also supply an assortment
of herbal teas, juices, and purifi ed water.
Private offi ce operating room suites,
accredited for general anesthesia by
the AAAASF (American Association of
Accredited Ambulatory Surgical Facilities)
with a board-certifi ed anesthesiologist.
Private overnight rooms for patients after
surgery are staff ed all night by an RN with
ACLS training.
More than 27 years of experience.
Website is text dense and has no pictures
of the spa or operating room.
Consultation fee of $50; however, four
open houses per year.
*
All physicians are board-certifi ed plastic surgeons.
** The Charlotte, North Carolina plastic surgery service area competitor analysis is based on secondary sources and interviews with plastic surgery practices in the
Charlotte area. Opinions and conclusions presented are those of the authors and are intended to be used as a basis for class discussion rather than to illustrate
eff ective or ineff ective business practices.
EXHIBIT 38 (Continued)
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 113
Service/product quality: the level of emphasis on the quality of its offering
to the marketplace.
Technological leadership: the degree to which it seeks superiority in
diagnostic and therapeutic equipment and procedures.
Vertical integration: the extent of value added as refl ected in the level of
forward and backward integration.
Cost position: the extent to which it seeks the low-cost position through
effi ciency programs and cost-minimizing facilities and equipment.
Service: the degree to which it provides ancillary services in addition to
its main services.
Price policy: its relative price position in the market (although price
positioning will usually be related to other variables such as cost position and product quality, price is a distinct strategic variable that must be
treated separately).
Relationship with the parent company: requirements concerning the
behavior of the unit based on the relationship between a unit and its parent company. (The nature of the relationship with the parent will infl uence the objectives by which the organization is managed, the resources
available to it, and perhaps determine some operations or functions that
it shares with other units.) 15
The organization can determine the strategic dimension or dimensions that
it will use to compete however, these decisions cannot be made in a vacuum.
Consideration must be given to which of the dimensions competitors have
selected and how well they are meeting the needs of customers.
Critical Success Factors Plastic Surgery From the service areas competitor analysis conducted thus far, the critical success factors may be inferred.
The critical success factors for plastic surgery in Charlotte include the following:
1. Surgical and aesthetic expertise in procedures performed.
Expertise in initial consultation to set expectations and build a good
relationship with the consumer (personality, time investment in a
potential patient, bedside manner).
Good hands to perform intricate surgeries with minimal scarring.
Medical service pre-screening, pre-op, post-op.
2. Competitive pricing (secondary to #1) for cosmetic plastic surgery
procedures. Free consultation is expected by consumers but this is
very time consuming and often not productive. Some doctors require
an upfront consultation fee and then apply it to the cost of the
procedure(s) if the consumer chooses his/her practice.
3. Managing and meeting consumers expectations with no complications,
whether from surgery or less invasive techniques.
Patient s satisfaction with the new look.
No complications (infections, scarring that calls for further procedures,
and so on).
114 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
4. Positive word-of-mouth (estimates are that a satisfi ed patient refers an
average of fi ve others, limited for cosmetic plastic surgery by some
patients wanting to keep procedures secret).
Satisfaction of the clients.
Latest procedures and products, newest technologies.
5. Non-surgical products for surgical after care/appearance.
6. Use of less invasive cosmetic plastic surgery as a gateway to more intense
surgical procedures.
Botox and other injectables.
Medical spa.
7. Knowledge and profi le development of desired specifi c target market
(whether female/male, young/older, single/multiple procedures, cosmetic/
reconstructive, etc.).
8. Offi ce environment.
Aesthetically attractive physical space; appropriate look and feel for the
target market identifi ed.
Adoption of new offi ce technologies: computers, practice management
software, cameras with ability to create the new look based on the
individual s own photograph.
Three-person staff (minimum) for solo practitioner.
Strategic Groups Service area analysis concentrates on the characteristics of
the specifi c geographic market, whereas strategic group analysis concentrates on
the characteristics of the strategies of the organizations competing within a given
service area. Strategic groups have been studied in many different industries and
there are often several strategic groups within a service area. A strategic group is
a number of organizations within the same service category making similar strategic decisions. Members of a strategic group have similar recipes for success
or core strategies. 16 Therefore, members of a strategic group primarily compete
with each other and do not compete with organizations outside their strategic
group even though there are other competitors outside the group that may
offer similar products or services.
External stakeholders have an image of the strategic group and develop an
idea of the group s reputation. The reputation of each strategic group differs
because the identity and strategy of each group differ. 17 Organizations within a
strategic group use similar resources to serve similar markets. However, leadership in an individual organization must fi nd ways (sometimes subtle) to have its
organization stand out from the group (differentiation) to develop competitive
advantage over other group members. 18
Reputation has been defi ned as an organization s true character and the emotions toward the organization held by its stakeholders. Strategic group reputation may be a mobility barrier leading to increased performance. If reputation
does lead to increased performance, individual organizations within the strategic group may need to consider the impact of their actions on the collective
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 115
reputation of the group. 19 Thus, if several nursing home organizations in a
service area are in the same strategic group, the actions of one infl uence the
reputation of them all. The grouping of organizations according to strategic similarities and differences among competitors can aid in understanding the nature
of competition and facilitate strategic decision making. There are four major
implications for the strategic group concept:
1. Organizations pursue different strategies within service categories and
service areas. Creating competitive advantage is often a matter of selecting an appropriate basis on which to compete.
2. Organizations within a strategic group are each other s primary or direct
competitors. As Bruce Henderson, founder of Boston Consulting Group,
has noted, Organizations most like yours are the most dangerous.
3. Strategic group analysis can indicate other formulas for success for a
service category. Such insight may broaden a manager s view of important
market needs.
4. Strategic group analysis may indicate important market dimensions or
niches that are not being capitalized on by the existing competitors. Lack
of attention to critical success factors by other competitive organizations
offering the same or a similar service may provide an opportunity for
management to differentiate its services.
Organizations within a group follow the same or similar strategy along the
strategic dimensions. Group membership defi nes the essential characteristics of
an organization s strategy. Within a service category or service area there may
be only one strategic group (if all the organizations follow the same strategy) or
there may be many different groups. Usually, however, there are a small number
of strategic groups that capture the essential strategic differences among organizations in the service area. 20
The analysis of competitors along key strategic dimensions can provide considerable insight into the nature of competition within the service area. Such an
analysis complements Porter s structural analysis but provides some additional
insights. As a means of gaining a broad picture of the types of organization
within a service area and the kinds of strategy that have proven viable, strategic group analysis can contribute to understanding the structure, competitive
dynamics, and evolution of a service area as well as the issues of strategic management within it. 21 More specifi cally, the usefulness of strategic group analysis
is that it:
can be used to preserve information characterizing individual competitors
that may be lost in studies using averaged and aggregated data;
allows for the investigation of multiple competitors concurrently;
allows assessment of the effectiveness of competitors strategies over a
wider range of variation than a single organization s experience affords; and
captures the intuitive notion that within-group rivalry and betweengroup rivalry differ. 22
116 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
When analyzing strategic groups, care must be taken to ensure that they are
engaging in market-based competition. Many organizations may not be direct
or primary competitors because of a different market focus. Organizations will
have little motivation to engage each other competitively if they have limited
markets in common. It is not unusual for organizations that serve completely
different markets yet have similar strategic postures to be grouped together
and assumed by analysts to be direct competitors when in fact they are not. 23
For example, a pediatric group practice affi liated with a children s hospital
and a community health clinic emphasizing preventive and well care may
serve the same population but not be direct competitors because of a different market focus.
Strategic Groups Plastic Surgery All plastic surgery practices within
the Charlotte service area are not the same products/services offered, emphasis, and patient focus differ greatly. For example, there are numerous single
practice surgeons who have built their practices on word-of-mouth referrals
and reputation focusing on certain segments of the service category (noses,
breasts, eyelids, and so on). These practices may offer other services to their primary patients but undertake little new patient promotion. In contrast, there are
also practices within the service area that offer specialty cosmetic treatments,
patient pampering, and luxurious surroundings in full-scale medical spas and
focus on recruiting new patients seeking a beautiful nose, face, or body. These
two types of practices are generally not competing for the same patients.
A number of characteristics differentiate plastic surgeons in the Charlotte
service area practice size, number of ancillary procedures offered, medical spa
incorporated with the practice, and focus purely on reconstructive or cosmetic
plastic surgery. In addition, plastic surgery credentialing (board certifi cation)
identifi es surgeons who have specifi c, additional training in the fi eld. However,
many consumers are not aware of the meaning of board certifi cation and will
allow eye, ear, nose and throat (EENT) physicians, dermatologists, dentists, and
so on to perform the desired plastic surgery. It may be the comfort level they
have with a specifi c doctor (I love my EENT doctor and he/she takes great care
of me . . .) or it may be price that causes them to use a non-board-certifi ed
surgeon.
There are nearly 30 physicians in 21 practices in Charlotte who promote plastic surgery as their area of specialization who are not board certifi ed in plastic
(cosmetic or reconstructive) surgery. Some of them are board certifi ed in other
specialties such as dermatology, general surgery, obstetrics/gynecology, or EENT,
and some of them have had residencies or fellowships in plastic surgery, but they
are not board certifi ed. This analysis only considers the board-certifi ed plastic
surgeons in the service area.
Four major strategic groups make up the competitive landscape in plastic
surgery in the Charlotte service area. Considering practice size, costs, number
and types of procedures, extent of marketing procedures, and other provider
information, the strategic groups are:
Strategic Group One Single practitioners who focus on cosmetic
plastic surgery. This strategic group comprises providers that only offer
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 117
cosmetic procedures and are paid out-of-pocket (they do not accept medical insurance). These practices provide traditional cosmetic plastic surgery
procedures, many within their own offi ce but also in hospitals or surgery
centers. If they advertise, it is primarily through the Internet and the
Yellow Pages. Word-of-mouth communication patients recommending a
surgeon based on the great experience and outcome they had is most
common.
Strategic Group Two Single practitioners who perform both
reconstructive and cosmetic plastic surgery. Members of this strategic
group provide cosmetic procedures as well as reconstructive procedures.
Members of this strategic group are typically reimbursed from insurance
for the reconstructive portion of their practice and often accept Medicare
and Medicaid patients as a result. Reimbursement rates have declined
signifi cantly over the past few years; yet, for some of the physicians their
cosmetic surgeries (cash business) have declined even more as the great
recession drags on. These practices often work call and are provided
emergency cases or patients are referred by other physicians. A number
of the physicians in this group are dedicated to maintaining reconstructive surgery in their practice despite the low reimbursement. For the
cosmetic portion of their practice, they rely on some advertising, a web
page, and word-of-mouth. The cosmetic portion of the practice is similar
to group one; however, these surgeons do not have to rely solely on a
cash business.
Strategic Group Three Cosmetic Medical Spas. Members of this
strategic group provide full-service cosmetic plastic surgery as well as
medical spas with luxurious surroundings and a wide variety of procedure
and product options, ancillary services to support patient convenience,
high prices, and word-of-mouth referral as well as sophisticated marketing
campaigns that include advertising in newspapers and other paid media
as well as excellent web pages. More attention is paid to the details of
product and procedure offerings, as well as offi ce aesthetics and holistic
care. Prices of the procedures and products for members of this strategic
group are higher than those in the other strategic groups, but pampering is desired by this target market. In addition, these practices may offer
specials such as $500 off a Mommy Makeover, $400 off a Tummy Tuck,
complementary fat grafting, $75 off Botox , or 25 percent off Latisse .
Competitive rivalry is most intense within this group and members compete primarily on reputation, hours of operation, website information, and
a great deal of advertising.
Strategic Group Four Multispecialty Practices. Only three practices
have more than two plastic surgeons in the Charlotte area. They offer fullservice plastic surgery both reconstructive and cosmetic using a variety
of technologies. One of them is associated with a teaching hospital.
There is little movement of providers from strategic group one or two to strategic group three; however, occasionally there is movement of a practice from group
one to group two. Although multispecialty group practices or even single-focus,
118 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
multiphysician group practices are not common in plastic surgery that may change
because of the pressures to have IT systems and electronic health care records.
This new technology is costly and physicians may need to share the expenses.
Outliers to this strategic map are one plastic surgeon who devotes his practice
to reconstructive surgery; two physicians who are board certifi ed in both otolaryngology and plastic surgery and work at Charlotte Eye, Ear, Nose, and Throat;
and one physician who is board certifi ed in both ophthalmology and plastic
surgery and markets his practice continuously.
Mapping Competitors Mapping competitors for any service category
(broadly or narrowly defi ned) within a service area may be based on the critical
success factors or important strategy dimensions. The mapping of competitors
helps to identify competitors that are most similar and therefore most dangerous
to each other. Competitors in the same strategic group are competing directly
with each other and only indirectly with members of other strategic groups.
The best approach to mapping competitors is to select two critical factors for
success and evaluate each competitor as to whether it is high or low on these
dimensions. Competitors may then be plotted on the basis of these two dimensions (see Exhibit 39 ). Competitors that are similar on these dimensions will
cluster together (strategic groups) and are thus competing directly against each
other. Several strategic maps may be constructed demonstrating different strategic
views of the service area. In addition, a single dimension may be so important as
a critical factor for success that it may appear on several strategic maps.
Mapping Competitors Plastic Surgery Exhibit 39shows a map of
the strategic groups with 24 practices in the Charlotte plastic surgery market.
1
Cosmetic
2
3
4
5
Range of Procedures/Services
Reconstructive
Practice Size
CMC Cosmetic
& Plastic Surgery
Piedmont Plastic
Surgery
Charlotte
Plastic
Surgery
Christenbury
Eye Center
Criswell
& Criswell
Hunstad Diaz
Ferrari
Graper Kulbersh Voci
Lifestyle
Lift Center
Matthews

Charlotte
EENT
Calabrella
Nowicky
Bednar Liszke
Ditesheim
Freeman
Bullard Abner
Bickett Capizzi
Hennessy
Group 2 Group 1
Group 4
Group 3
EXHIBIT 39 Competitor Analysis Mapping Competitors
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 119
The market has split into four distinctive groups that, for the most part, do
not engage in between-group competition. Strategic group one and two have
some overlap, but the commitment to perform reconstructive plastic surgery
is such that a number of the physicians in group two participate in medical
missionary trips to Third World countries to perform surgery on cleft palates
and other congenital deformities as well as ravages of diseases such as cancer.
They tackle some of the most challenging plastic surgery work.
Considerable within-group competition occurs in all the groups but particularly within strategic group three where a number of non-surgical procedures
are offered in luxurious surroundings with a great deal of personal attention to attract consumers to the practice along with extensive marketing and
advertising to build awareness of the procedures offered at the medical spas.
The practices without board-certifi ed plastic surgeons are in different strategic
groups (not shown on this map) and tend to engage in signifi cantly more
marketing.
Likely Competitor Actions or Responses
Strategy formulation is future oriented, requiring that management anticipate
the next strategic moves of competitors. These moves may be projected through
an evaluation of competitor strengths and weaknesses, membership in strategic
groups, and the characterization of past strategies. In many cases competitor strategic goals are not diffi cult to project, given past behaviors of the organization.
Strategic thinking is a matter of anticipating what is next in a stream of consistent
decisions. Strategic behavior is the result of consistency in decision making, and
decision consistency is central to strategy. Therefore, in determining competitors
future strategies, strategic managers must look for the behavioral patterns that
emerge from a stream of consistent decisions concerning the positioning of the
organization in the past.
A thorough analysis of the key strategic decisions of competitors may reveal
their strategic intent. A strategic decision timeline can be helpful in showing the
stream of decisions. Strategic response includes the likely strategic objectives and
next strategic moves of competitors. These may be anticipated because of their
perceived strengths and weaknesses, past strategies, or strategic group membership. If an organization is planning an offensive move within a service area, an
evaluation of competitor strengths and weaknesses, past strategies, strategic group
membership, and assumed strategic objectives can anticipate the likely strategic
response. For example, HCA s analysis of the strategic response of competitors for
a new market it is considering is an important variable in its expansion strategy.
Likely Response Plastic Surgery A new competitor or any of the existing competitors must realize the following:
Price decreases will likely be matched by competitors, particularly within
strategic groups. Consumers do some shopping for a cosmetic plastic
surgeon.
Competition within strategic group one is likely to remain based on
cosmetic plastic surgery. If the great recession continues, the trend will
120 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
move this group to offer more spa-like products and services, putting
them into greater competition with strategic group three.
Competition within strategic group three is likely to remain intense. The practices within this group will continue to invest resources in better and more
upscale facilities to try to maintain differentiation from strategic group one.
Members of strategic group two will continue to be the early adopters
of new products and procedures and will compete on the basis of
cutting-edge procedures and products with an increasing emphasis on
reconstructive surgery. Members of this strategic group will likely match
competitors upgrades in procedures and products very quickly so as to
maintain focus on doing good.
Strategic group four will continue its intergroup competition and its
members will focus on maintaining parity within the group. Practice size
is not likely to change very much, despite the national data that verifi es a
number of larger, multispecialty practices.
The wild card in trying to forecast likely response to a new competitor
in the service area is the potential retirement of a number of currently
practicing plastic surgeons. As in other specialties and subspecialties,
physicians may decide to retire rather than adopt more aggressive activities to have enough patients to remain profi table, opening the door to
additional young physicians. Skill in plastic surgery comes with practice;
however, most consumers do not want to be the patient who provides the
practice! Providers have to gain enough experience to avoid complications and generate positive word-of-mouth.
Synthesizing the Analyses
To be useful for strategy formulation, general and health care external environmental analysis (see Chapter 2) and service area competitor analysis (as covered
in this chapter) must be synthesized and then conclusions drawn. It is easy for
strategic decision makers to become overwhelmed by information. To avoid
paralysis by analysis, external environmental analysis should be summarized
into key issues and trends, including their likely impact, and then service area
competitor analysis summarized.
Synthesizing the Analyses Plastic Surgery Although once the domain
of the rich and famous, plastic surgery today is more accessible to the public. A
website, appropriately named realself.com , provides feedback from ordinary
people (who personally feel they have benefi tted from plastic surgery) concerning various physicians by specialty and by city. The out-of-pocket costs for plastic surgery are high and a deterrent to many; however, fi nancing by CareCredit ,
a subsidiary of GE Capital, has enabled many middle-class Charlotteans to fi nd
their real self through cosmetic plastic surgery. CareCredit works as a healthcare credit card enabling patients to pay off the cost of plastic surgery over time.
The Charlotte plastic surgery service area is saturated with a number of providers offering a wide range of procedures, products, and prices. The number
of plastic surgeons needed is generally estimated to be 1 to 50,00075,000 in
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 121
population. Given the Charlotte region s population, about 20 plastic surgeons
are needed; 28 board-certifi ed plastic surgeons have offi ces in the area plus there
are another 30 practitioners who present themselves as plastic surgeons. Thus,
signifi cant competition exists for patients.
There are four distinct strategic groups, all of which achieved the hurdle
of board certifi cation in plastic surgery to enter the market, high competitive
rivalry, high customer power, and some substitutes. Therefore, competition in all
four strategic groups is intense and providing excellent service and maintaining
the latest technology is always an issue.
There is limited competition across strategic groups and members of one
strategic group do not view members of other strategic groups as serious competitors. The surgical practices of each group tend to be distinct to the group,
with strategic group one increasing its focus on a more upscale, well-appointed
offi ce; strategic group two maintaining more traditional practices and offi ce
environments; and strategic group three focusing on elite surroundings with
an extremely upscale spa environment that exudes personal attention. Strategic
group four represents more traditional medical practices today with multiple
physicians: offi ce space is more limited and a budget set by the group is followed.
Market share is dominated by strategic groups one and three that more
aggressively market their cosmetic surgery services. The basis for competition
for strategic groups one and three is cosmetic plastic surgery services whereas
groups two and four incorporate reconstructive surgery into their product
mix. Members of strategic group four focus on offering any type of plastic or
reconstructive surgery needed by having specialists on various body parts. If a
hand specialist is needed, one is available down the hall in the offi ce. If a hand
and face specialist is needed, the practice covers those subspecialties, also.
The market is covered and any new entrant is very likely to have a challenging
time carving out much market share; most new entrants will probably do so as
junior members of someone else s practice. A new provider would have to have
some experience with the various plastic surgery procedures, be willing to invest
heavily in advertising to develop awareness, use the latest technology (which is
typically the most expensive), and be willing (and able) to have low volume for
some time. Given the risks, high barriers to entry, competitive rivalry, and so on,
it appears that Charlotte would not be a new plastic surgeon s fi rst choice to set
up a practice. On the other hand, the Charlotte market is growing, its population
is younger than average, and it possesses higher discretionary spending ability.
Managing Strategic Momentum Validating the
Strategic Assumptions
As with the general and health care environments, the initial analysis of the service
area provides the basic beliefs or assumptions underlying the strategy. Once the
strategic plan has been developed, managers will attempt to carry it out; however,
as implementation proceeds, new insights will emerge and new understanding
of the competitive services will become apparent. Changes within (and perhaps
outside) the service area or from new competitor strategies will directly affect
122 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 310 Strategic Thinking Questions Validating the Strategic
Assumptions
1. Is the strategy consonant with the competitive environment?
2. Do we have an honest and accurate appraisal of the competition?
3. Have we underestimated the competition?
4. Has the rivalry in the service category/service area changed?
5. Have the barriers to entering the service category/service area changed?
6. Does the strategy leave us vulnerable to the power of a few major customers?
7. Has there been any change in the number or attractiveness of substitute products or
services?
8. Is the strategy vulnerable to a successful strategic counterattack by competitors?
9. Does the strategy follow that of a strong competitor?
10. Does the strategy pit us against a powerful competitor?
11. Is our market share suffi cient to be competitive and generate an acceptable profi t?
performance of the organization and therefore must be monitored and understood. Competitive awareness and analysis are ongoing activities. The strategic
thinking map presented in Exhibit 310provides a series of questions designed
to surface signals of new perspectives regarding the service area assumptions.
The Use of General Environmental
and Competitor Analysis
In health care organizations today there is a real understanding that not every
organization will survive; that no one health care organization can be everything
to everybody. Understanding the external environment including the general,
health care, and service area/competitor environments is fundamental to strategic
management and survival. A comprehensive general and health care environmental analysis and service area competitor analysis, combined with an assessment of
competitive advantages and disadvantages (Chapter 4), and establishment of the
directional strategies (Chapter 5) provide the basis for strategy formulation.
Lessons for Health Care Managers
Service area competitor analysis is the third element of environmental analysis
and increases the focus. Service area competitor analysis is an increasingly important aspect of environmental analysis because of the changes that have taken
place in the health care industry throughout the past decade. Specifi cally, service
area competitor analysis is the process of assessing service category/service
area issues, identifying competitors, determining the strengths and weaknesses
of rivals, and anticipating their moves. It provides a foundation for determining
competitive advantage and subsequent strategy formulation.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 123
Health care organizations engage in service area competitor analysis to obtain
competitor information and for offensive and defensive reasons. However, analysts must be careful not to misjudge the service area boundaries, do a poor job
of competitor identifi cation, overemphasize visible competence, overemphasize
where rather than how to compete, create faulty assumptions, or be paralyzed
by analysis.
The process of service area competitor analysis includes an identifi cation of
the service category for analysis, assessment of the service area conditions, service area structure analysis, competitor analysis, and a synthesis of the information collected and analyzed. Identifi cation of the service category provides the
basis for the analysis. Service categories may be defi ned very broadly or quite
specifi cally and will vary with the intent of the analysis. An identifi cation of the
service area will include establishing geographic boundaries and developing a
service area profi le that might include economic, demographic, psychographic,
and disease pattern information.
Service area structural analysis may be accomplished through a Porter fi ve
forces analysis: evaluating the threat of new entrants into the market, the service
area rivalry, the power of the buyers, the power of the suppliers, and the threat of
substitute products or services. Next, competitor analysis should be undertaken.
Comprehensive competitor analysis would include an identifi cation and evaluation
of competitor strengths and weaknesses, competitor strategy, strategic groups, critical success factors, and likely competitor actions and responses. Finally, service
area and competitor information should be synthesized and strategic conclusions
drawn to allow recommendations to be made.
Chapter 4 explores how an organization examines its own strengths and
weaknesses to understand competitive advantages and disadvantages as a basis
for strategy formulation.
Health Care Manager s Bookshelf
W. Chan Kim and Rene Mauborgne,
Blue Ocean Strategy: How to Create
Uncontested Market Space and Make
the Competition Irrelevant (Boston, MA:
Harvard Business School Press, 2005)
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 boundaries are defi ned, and the competitive rules are
understood. Products become commodities
and cutthroat competition turns the red oceans
bloody (p. 4). Blue oceans, on the other hand,
are defi ned by untapped market space and the
opportunity for high growth and profi ts.
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 which is the cornerstone of blue oceans. 2 These fi rms do not try
to beat the competition but focus on creating
leaps in value thereby opening up new and
uncontested market spaces (p. 12).
124 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
There are three characteristics of a sound
blue ocean strategy focus, divergence, and
compelling tagline. First, strategies have
focus and concentrate on a relatively few things
that are done very well. Curves, a women s fi tness company, entered the red ocean of fi tness
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 diff erentiated its services by getting
rid of special machines, juice bars, and saunas
and arranged a limited number of simple-tooperate hydraulic machines in a circle to facilitate interactions among members, making the
exercise experience fun. In blue oceans, organizations diff erentiate themselves from the average industry profi le. Finally, a compelling and
truthful tagline eff ectively communicates the
value innovation of blue ocean fi rms. 3 Curves
tagline could be for the price of a cup of coff ee
a day you can obtain the gift of health through
proper exercise (p. 58).
There is an interesting paradox in blue ocean
strategies. The more successful a fi rm is in value
innovation, the more likely other fi rms are to
imitate it. 4 The easier it is to imitate the blue
ocean strategy, the less likely the strategy can
be sustained. The blue ocean turns red. Blue
ocean creators then become conventional competitors in a bloody sea or must innovate again.
Look, for example, at Pfi zer s success with Viagra.
Pfi zer successfully reconstructed the market
boundaries by shifting the focus from medical
treatment to lifestyle enhancement. Pfi zer was
incredibly successful and today there is a long
list of FDA-approved erectile dysfunction products including Alprostadil, Caverject, CIALIS,
Endex, LEVITRA, Muse, Sildenafi l, Tadalafi l, and
Vardenafi l.
The authors conclude the book with the recognition that 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. This book is dedicated to building a balance by outlining how successful organizations
formulate and execute blue ocean strategies
(p. 190). One reviewer indicated that adding this
balance was a major stride in a central void in
the fi eld of strategy. 5
REFERENCES
1. W. Chan Kim and Rene Mauborgne, Blue
Ocean Strategy: How to Create Uncontested
Market Space and Make the Competition
Irrelevant (Boston, MA: Harvard Business School
Press, 2005).
2. Brian Leavy, Value Pioneering How to
Discover Your Own Blue Ocean: Interview with
W. Chan Kim and Rene Mauborgne, Strategy &
Leadership 33, no. 6 (2005), pp. 1321.
3. Kyle Bruce, Blue Ocean Strategy: How to
Create Uncontested Market Space and
Make the Competition Irrelevant, Journal of
Management and Entrepreneurship 10, no. 3
(2005), pp. 106108.
4. John S. McClenahen, Sailing the Ocean Blue,
Industry Week 254, no. 3 (2005), pp. 2021.
5. W. Chan Kim and Rene Mauborgne, Value
Innovation: A Leap into the Blue Ocean,
Journal of Business Strategy 26, no. 4 (2005),
pp. 2229.
CHAPTER 3 SERVICE AREA COMPETITOR ANALYSIS 125
Competitive Advantage
Competitor Analysis
Critical Success Factor
Analysis
Mapping Competitors
Service Area
Service Area Competitor
Analysis
Service Area Profi le
Service Area Structural
Analysis
Service Category
Strategic Group
Strategic Response
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
Questions for Class Discussion
1. What is entailed in service area competitor analysis? Why should health care
organizations engage in competitor analysis? Should not-for-profi t organizations
perform competitor analysis?
2. What is the relationship between general and health care environmental analysis
versus service area competitor analysis?
3. What competitor information categories are useful in competitor analysis? Are
these categories appropriate for health care organizations? How can these information categories provide a focus for information gathering and strategic decision
making?
4. What are some obstacles to effective competitor analysis? How may these obstacles
be overcome?
5. Explain the steps or logic of service area competitor analysis.
6. Why must the service categories be defi ned fi rst in service area competitor analysis
for health care organizations?
7. Why is it important to clearly defi ne the service area? How does managed care
penetration affect service area defi nition?
8. How does the use of Porter s fi ve forces framework help to identify the major
competitive forces in the service area?
9. Why is an identifi cation and evaluation of competitor strengths and weaknesses and
the determination of strategy essential in service area competitor analysis?
10. What are the benefi ts of strategic group analysis and strategic mapping?
11. Why should a health care organization attempt to determine competitors strategies
and likely strategic responses?
12. What is the purpose of the synthesis stage of service area competitor analysis?
126 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Notes
1. Sumantra Ghoshal and D. Eleanor Westney, Organizing
Competitor Analysis Systems, Strategic Management
Journal 12, no. 1 (1991), pp. 1731.
2. Joel A. C. Baum and Helaine J. Korn, Competitive
Dynamics of Interfi rm Rivalry, Academy of Management
Journal 39, no. 2 (1996), p. 256.
3. Shaker A. Zahra and Sherry S. Chaples, Blind Spots
in Competitive Analysis, Academy of Management
Executive 7, no. 2 (1993), pp. 728; Witold J. Henisz and
Bennet A. Zelner, The Strategic Organization of Political
Risks and Opportunities, Strategic Organization 1,
no. 4 (2003), p. 9.
4. Zahra and Chaples, Blind Spots in Competitive
Analysis, pp. 728.
5. Marsha Shuler, LSU Seeks Hospital Partners, The
Advocate (August 14, 2012), p. 1.
6. Hubert Saint-Onge, Tacit Knowledge: The Key to the
Strategic Alignment of Intellectual Capital, Strategy &
Leadership 24, no. 2 (1996), pp. 1014.
7. Zahra and Chaples, Blind Spots in Competitive
Analysis, pp. 1920.
8. Katrina M. Graham and Christopher C. Tsavatewa,
doctoral students, University of Alabama Birmingham,
Strategic Management of Health Care Organizations,
6e, 2009.
9. Mayo Clinic Annual Report 2011, p. 34.
10. Voluntary Hospitals of America, Inc., Community
Health Assessment: A Process for Positive Change
(Irving, TX: Voluntary Hospitals of America, Inc., 1993),
p. 49.
11. There are several community assessment approaches
available, such as Advancing Community Public Health
Systems in the Twenty-First Century (Washington,
DC: National Association of County and City Health
Offi cials, 2001); Voluntary Hospitals of America, Inc.,
Community Health Assessment: A Process for Positive
Change (Irving, TX: Voluntary Hospitals of America,
Inc., 1993); The Hospital Association of Pennsylvania,
A Guide for Assessing and Improving Health Status:
Community . . . Planting the Seeds for Good Health (The
Hospital Association of Pennsylvania, 1993); and James
A. Rice, Community Health Assessment: The First Step
in Community Health Planning (Chicago: American
Hospital Association Technology Series, 1993). Perhaps
the best known is Assessment Protocol for Excellence
in Public Health (APEX PH), a collaborative project of
the American Public Health Association, the Association
of Schools of Public Health, the Association of State
and Territorial Health Offi cials, the Centers for Disease
Control and Prevention, the National Association
of County Health Offi cials, and the United States
Conference of Local Health Offi cers funded through a
cooperative agreement between the Centers for Disease
Control and Prevention and the National Association of
County Health Offi cials, 1991.
12. Michael E. Porter, Competitive Strategy: Techniques for
Analyzing Industries and Competitors (New York: Free
Press, 1980), pp. 333; Benoit Mandelbrot and Richard
L. Hudson, The (Mis) Behavior of Markets (New York:
Basic Books, 2004).
13. Ming-Jer Chen, Competitor Analysis and Interfi rm
Rivalry: Toward a Theoretical Integration, Academy of
Management Review 21, no. 1 (1996), p. 101.
14. Baum and Korn, Competitive Dynamics of Interfi rm
Rivalry, p. 257.
15. Adapted from Porter, Competitive Strategy, pp. 127128.
16. R. K. Reger and A. S. Huff, Strategic Groups: A
Cognitive Perspective, Strategic Management Journal
14, no. 2 (1993), pp. 103123.
17. Tamela D. Ferguson, David L. Deephouse, and William
L. Ferguson, Do Strategic Groups Differ in Reputation?
Strategic Management Journal 21, no. 12 (December
2000), pp. 11951214.
18. M. Peteraf and M. Shanley, Getting to Know You:
A Theory of Strategic Group Identity, Strategic
Management Journal 18, Special Summer Issue (1997),
pp. 165186.
19. C. J. Fombrun, Reputation (Boston, MA: Harvard
Business School Press, 1997).
20. Porter, Competitive Strategy , p. 129.
21. Robert M. Grant, Contemporary Strategy Analysis,
5th edn (Malden, MA: Blackwell Publishing, 2005),
pp. 124126.
22. Karel Cool and Ingemar Dierickx, Rivalry, Strategic
Groups and Firm Profi tability, Strategic Management
Journal 14, no. 1 (1993), pp. 4759.
23. Chen, Competitor Analysis and Interfi rm Rivalry,
p. 102.
4 Internal Environmental
Analysis and Competitive
Advantage
The biggest problem with health care isn t with insurance or politics. It s that we re measuring the wrong things the wrong way.
ROBERT S. KAPLAN AND MICHAEL PORTER
Introductory Incident
Two-Way Communication and Competitive Advantage
Health care organizations are notorious for one-way communication. When communicating with
patients and communities, health care organizations typically employ traditional techniques
such as broadcast advertising, distribution of educational materials prepared for a variety of
audiences, and similar methods.
A few organizations, however, have recognized the possibilities created by social media and
understand that health is extremely personal and materials prepared for mass audiences rarely
address the unique concerns of individual patients. Moreover, when patients must access the
128 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
health care system they are unprepared for the experience, lost in the confusion of the hightechnology environment of health care, and grasping for information. Social media has done
much to change this situation. Patients can easily communicate with people across the globe,
share common experiences and fears, discover the personal experiences faced by others, and
access all types of medical information.
Unfortunately, many health care organizations choose to use social media as just another
means of one-way communication. In some cases most of the organization s posts are designed
to promote the hospital or medical practice rather than address patient issues and concerns.
A few organizations, recognizing this temptation, develop policies that no more than a certain
percentage of posts can be used for promotion purposes. At Inova Health System an eff ort is
made to ensure that 8090 percent of its posts address patient health rather than promoting
the System.
Inova has made serious attempts to use social media eff ectively. It has created Facebook
communities in specifi c areas such as wellness, pediatric care, bariatric surgery, and so on.
Attempts are made to encourage users to trust Inova as a supplier of valuable health information.
Information can be shared about the System but only after trust is built and the interests of the
organization are consistent with the interests of the communities.
It is essential to remember why social media is important. The goal is to connect with friends
and build communities around common interests and to share information better and faster.
Furthermore, communicating poorly is almost as bad as not communicating. The quality of
posts is more important than the quantity. Because real-time communication is so exciting we
frequently confuse social media overuse with proper use. Designing social media that is honest
and transparent is the important determinant of how likely individuals are to follow and participate in an organization s communication eff orts.
Some general recommendations for health care organizations to make the most of social media:
1. Be helpful. Patients usually turn to social media because they are afraid and need support
or are confused because they cannot get what they need from the organization s website or
other informational eff orts.
2. Give patients the opportunity to weigh in on their experiences. If patients complain, listen
and try to address the complaint directly and quickly. Intercede in a compassionate and
helpful way rather than as a know it all expert.
3. Refrain from traditional communication techniques (e.g., advertising, etc.). Avoid confusing
clinical speak.
4. Listen to your instincts. Social media sites grow and thrive organically. You will likely know
when they are working and when they are not. Do not be afraid to fail. Friends do not
expect perfection, the cost of entry into social media is low, and the fi nancial risks of failure
are small.
Source: Chris Boyer, Social Media for Healthcare Makes Sense, Frontiers of Health Services Administration 28, no. 2 (2011), pp. 3541.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 129
Identifying Competitive Advantage
To this point, situational analysis has concentrated on factors in the external
environment of the health care organization in an attempt to answer the fi rst
of three strategic questions concerning situational analysis What should the
organization do? After assessing the external issues including competitors, the
emphasis of situational analysis shifts to the organization and the ways in which
competitive advantage may be established. As described in the Introductory
Incident, even actions as simple as how we communicate with relevant stakeholders can create value and distinguish the organization, at least in the short run.
The creation of some type of competitive advantage is essential. Experts writing
on competitive advantage have concluded that successful organizations focus
relentlessly on competitive advantage . . . [they] strive to widen the performance
gap between themselves and competitors. They are not satisfi ed with today s
competitive advantage they want tomorrow s. 1 As discussed in Perspective 41 ,
an increasing number of hospitals are attempting to obtain a competitive edge by
making public their quality data.
The task of establishing competitive advantage is sometimes perplexing, and
not always successful. Developing a better product, charging a lower price, or
delivering a better service does not guarantee success. Competitive advantage
requires an organization to develop a distinctiveness that competitors do not
have and cannot easily imitate. Identifying this distinctiveness requires a shift
in focus to the internal environment and an introspective view that allows the
organization to answer the second strategically relevant question of situational
analysis What can the organization do?
Learning Objectives
After completing the chapter you will be able to:
1. Understand the role of internal environmental analysis in identifying the basis for
sustained competitive advantage.
2. Describe the organizational value chain, including the components of the service delivery and support activities.
3. Understand the ways in which value can be created at various places in the
organization with the aid of the value chain.
4. Use the value chain to identify organizational strengths and weaknesses.
5. Determine the competitive relevance of each strength and weakness with the
aid of a series of carefully formulated questions.
6. Describe how competitively relevant strengths and weaknesses can be used to
suggest appropriate strategic actions.
130 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 41
Reporting Quality Data on Hospital Websites
Public reporting of hospital quality data is
intended to address two strategic goals:
1. Empower patients, referring doctors, and
other purchasers of health care with information needed to make informed choices
regarding their health care.
2. Encourage hospitals and doctors to
participate in continuous performance
improvement by creating a healthy and
competitive environment for better
patient outcomes.
Although the process is often seen as overly
burdensome, there are some potential advantages for making hospital quality data public.
Some of the more important are: better control of the messaging/interpretation of complex
clinical data, opportunity to communicate
best practices, and quality data used as a marketing tool.
The value of public reporting of hospital
quality data is still evolving. To date, comprehensive case studies have not demonstrated
that posting of quality data has increased
eff ectiveness, safety, or patient-centered care.
Some of the likely reasons for this failure are:
(1) metrics for processes of care and clinical
outcomes continue to mature; (2) quality of care
data are diffi cult to access and the data are often
outdated; (3) much of the data are aggregated
or averaged, making it more diffi cult for patients
to distinguish among providers; and (4) quality data are presented using complex medical
terminology making it a challenge for consumers to understand and use the data.
Some experts think that in addition to quality
data, information on topics such as out-of-pocket
costs, days to fi rst appointment, and physician
qualifi cations would be especially useful in aiding consumer choice. After all, a consumer s
concept of quality care may diff er signifi cantly
from the quality data presented by the hospital.
Most consumers support the idea of public disclosure of quality data. However, medical malpractice concerns and the fear of unfair
judgments about the quality of clinical practice
make many hospitals hesitant to make their data
public. Health care providers are skeptical about
unintended consequences of public disclosure.
Some providers, for example, might attempt to
game the system by not accepting high-risk
patients so as to not adversely aff ect their outcomes.
It has been suggested that any initiative to
publically report quality data should accomplish
the following:
Enhance quality and cost eff ectiveness
through a physician-driven, consumeroriented approach to public reporting.
Incorporate measurement tools that drive
overall strategy and vision and aid in
alignment of the interests of all parties
physicians, consumers, insurance companies,
and so on.
Present the data in an easy-to-understand
format and avoid technical terminology.
Include supplemental data (e.g., out-ofpocket costs, time to fi rst appointment) in
addition to standard quality metrics.
Achieve physician support by providing
fi nancial and reputational incentives.
Partner with insurance plans to integrate
databases for better reporting.
Use accurate, fair, and reliable data that have
undergone rigorous scientifi c validation.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 131
Analyzing the Internal Environment
Internal environmental analysis is sometimes accomplished by evaluating functional
areas such as clinical operations, information systems, marketing, clinical support,
human resources, fi nancial administration, and so on. With such an approach, each
function or organizational subsystem is carefully analyzed and a list of strengths
and weaknesses is developed and evaluated. Although this approach has been successful in some instances, by itself it does not adequately address strategic issues.
A better approach is to evaluate the various ways that organizations create value
for present and prospective customers (patients) and other stakeholders. The
organizational value chain is a useful tool for identifying and assessing how health
care organizations create value.
Value Creation in Health Care Organizations
Organizations are successful when they create value for their customers. Similarly,
health care organizations are successful to the extent that they create value for
the patients, physicians, and other stakeholders that rely on their services. Value
is defi ned as the amount of satisfaction received relative to the price and the
expected outcome or results. 2 For example, a patient may go to a cosmetic surgeon and pay an extremely high price. Despite the high price, the perception of
social acceptance, increased feeling of self-esteem, and improved self-confi dence
may provide so much satisfaction that the patient perceives a very high value.
By contrast, patients may go to a free family practice clinic where services
are provided in a rude and disrespectful manner and perceive that they have
received little or no value. Value is the perceived relationship between satisfaction and price, it is not based solely on price. 3
Organizational Value Chain
Health care organizations have numerous opportunities to create value for
patients and other stakeholders. 4 For example, effi cient appointment systems,
courteous doctors and nurses, patient-friendly billing systems, easy-to-navigate
Use risk-adjusted performance data that
allow for severity of illness.
Cultivate metrics that are actionable and can
be used to improve performance, patient
safety, and quality of care.
Ensure reasonable protections against
medical malpractice litigation and unfair
retribution.
Source: Robert A. Cherry and Gregory M. Caputo, Reporting
Quality Data on Your Hospital Website: What? Why? And How?
Physician Executive 37, no. 3 (2011), pp. 2428.
132 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
physical facilities, and the absence of bureaucratic red tape can greatly increase
satisfaction. 5 The organizational value chain is an effective means of illustrating
how and where value may be created. 6
The value chain illustrated in Exhibit 41has been adapted from the value
chain used in business organizations to more closely refl ect the value-adding components for health care organizations. The value chain utilizes a systems approach;
value may be created in the service delivery subsystem (upper portion of the value
chain) and by effective use of the support subsystem (lower portion). Service
delivery activities (pre-service, point-of-service, and after-service) are placed
above the support activities as they are the fundamental value creation activities;
however, they are buttressed by, or supported by, activities that facilitate and
improve service delivery. The three elements of service delivery pre-service,
point-of-service, and after-service incorporate the production or creation of the
service (product) of health care and include primarily operational processes and
marketing activities. Organizational culture, organizational structure, and strategic
resources are the subsystems that support service delivery by ensuring an inviting and supportive atmosphere, an effective organization, and suffi cient resources
such as fi nances, highly qualifi ed staff, information systems, and appropriate facilities and equipment. Although not always apparent, such support systems and the
value they add are critical for an effective and effi cient organization.
The value chain as a strategic thinking map provides the health care strategist with a framework for assessing the internal environment of the organization
(see Exhibit 42 ). Additionally, the value chain as a framework for developing
implementation strategies will be discussed in Chapters 8 through 10.
PRE-SERVICE
Market/Marketing Research
Target Market
Services Offered/Branding
Pricing
Distribution/Logistics
Promotion
POINT-OF-SERVICE
Clinical Operations
Quality
Process Innovation
Marketing
Patient Satisfaction
AFTER-SERVICE
Follow-up
Clinical
Marketing
Billing
Follow-on
Clinical
Marketing
ORGANIZATIONAL CULTURE
Shared Assumptions Shared Values Behavioral Norms
ORGANIZATIONAL STRUCTURE
Function Division Matrix
STRATEGIC RESOURCES
Financial Human Information Technology
Add Value
Add Value
Support Activities
Service Delivery
EXHIBIT 41 The Value Chain
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free
Press, 1985), p. 37.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 133
EXHIBIT 42 Description of Value Chain Components
Value Chain Component Description
Service Delivery Creation of value that is directly involved in ensuring access to, provision of, and
follow-up of health care services.
Pre-Service Activities
Market/Marketing
Research
Target Market
Services Off ered/
Branding
Pricing
Distribution/Logistics
Promotion
Creation of value prior to the actual delivery of health care.
Identifi cation of recognizable groups (segments) that make up the market;
information gathering to improve quality.
Determination of the appropriate segment to satisfy with health care services.
Dissemination of information to prospective patients and other stakeholders
regarding the prices, range of products, and location of available services by an
identifi ed health care organization.
Determination of the charge schedule for available services.
Actions that aid patient/customer entry into the health care delivery system,
including appointments, registration, and parking.
Communication of information to customers concerning the health care off ering;
includes advertising, events, social media, and so on.
Point-of-Service Activities
Clinical Operations
Quality
Process Innovation
Marketing
Patient Satisfaction
Creation of value at the point where health care is actually delivered to
the patient.
Actions related to the actual delivery of health care to patients.
Improvements in the effi ciency and eff ectiveness of health care services .
Improvements in existing or new operational processes.
Determination of new products, prices; identifi cation of new customers, provision
of information to customers.
Enhancement of the patient/customer health care experience.
After-Service Activities
Follow-up
Clinical
Marketing
Billing
Follow-on
Clinical
Marketing
Creation of value after the patient/customer has received the initial
health care.
Determination of additional services needed to supplement the initial
health care.
Additional procedures, appointments, tracking.
Actions that provide information, assessment of patient/customer satisfaction,
and continuation of quality of care.
Implementation of clear, easy to understand billing procedures and documents.
Facilitation of patient/customer entry into another health care
setting.
Referrals to the proper clinical settings.
Provision of information concerning follow-on clinical settings for further
(extended) care, tracking of outcomes of care.
(Continued)
Service Delivery Activities Health care organizations can create value and
signifi cant advantages over competitors in all three of the service delivery subsystems. For example, in late summer and early fall, public health offi cials begin
to remind citizens that it is time for immunization against infl uenza. There are
numerous ways for a provider to create value even before the patients arrive
134 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
for their fl u shot pre-service activities. A provider that views administering
fl u shots as an effective way to build a caring, quality image might do considerable research to determine which patients need fl u shots (or would benefi t
from having fl u shots); where those patients live or work and where they
might fi nd it convenient to go for the immunization; how much they might be
willing to pay; and how they might best fi nd out about the benefi ts, convenience, and affordability (promotion). The provider s research discovered that
Value Chain Component Description
Support Activities The activities in the value chain that are designed to aid in the effi cient and
eff ective delivery of health services.
Organizational Culture
Shared Assumptions
Shared Values
Behavioral Norms
The overarching environment within which the health services organization
operates.
The assumptions employees and others share in the organization regarding all aspects of service delivery (e.g., needs of patients, goals of the
organization).
The guiding principles of the organization and its employees. The understandings
people in the organization have regarding excellence, risk taking, etc.
Understandings about behavior in the organization that can create value for patients.
Organizational Structure
Function
Division
Matrix
Those aspects of organization structure that are capable of creating value for
customers/patients.
Structure based on process or activities used by employees (e.g., surgery, fi nance,
human resources).
Major units operate relatively autonomously subject to overarching policy guidelines (e.g., hospital division; outpatient division; northwest division).
Two-dimensional structure where more than a single authority structure
operates simultaneously (e.g., interdisciplinary team with representatives
from medicine, nursing, administration).
Strategic Resources
Financial
Human
Information
Technology
Value-creating fi nancial, human, information resources, and technology
necessary for the delivery of health services.
Financial resources required to provide the facilities, equipment, and specialized
competencies demanded by the delivery of health services.
Individuals with the specialized skills and commitment to deliver health
services.
Hardware, software, and information-processing systems needed to support the
delivery of health services.
The facilities and equipment required to provide health services.
EXHIBIT 42 (Continued)
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 135
consumers want to get fl u shots, but making an appointment, waiting, and so
on, is too inconvenient. Thus, the provider rented space at the mall to enable
consumers to receive shots conveniently and easily. Additional information is
provided on the price of the shot at the mall compared with other providers
(promotion/pricing). In this manner the clinic developed a distinctive market
orientation that is not common in public health and many private health care
organizations. 7
Once the patient arrives, point-of-service activities occur; multiple ways are
available to create value for the customer. The environment is clean and attractive. There is no waiting time. The nurse is courteous, and provides information
about possible side-effects of the services to be provided. Numerous public and
private organizations have attempted to improve point-of-service by ensuring
the delivery of higher-quality services. However, there continues to be considerable controversy as to how effective service improvements alone can lead to a
sustainable competitive advantage. 8 At the same time, when patient services are
enhanced through innovation that results in an improvement in perceived outcomes, a competitive advantage may result at least in the short run. 9
Finally, value can be created through effective after-service activities, such as
providing assistance in fi ling the necessary insurance papers or ensuring that
credit cards are accepted as a payment alternative in addition to cash or personal
checks. Finally, a friendly call (follow-up) from someone the next day to check
that there were no adverse side-effects of the treatment is a thoughtful gesture
and can create considerable satisfaction for the consumer. Patient satisfaction
studies at a later date can serve to remind the consumer of the outstanding care
received or, if the consumer was not delighted with the care, the study can identify areas that need improvement.
Support Activities Value creation in service delivery can be greatly enhanced
by support activities. If the organizational culture is service oriented, patients feel it
when they walk through the door. 10 The organizational structure increases patient
satisfaction by effectively and effi ciently facilitating the service delivery. The structure
should have enough standardization to ensure consistent quality and enough fl exibility to allow for responding to special needs. Strategic resources are important to
the overall perception of value received at the health care organization. Employees
with the proper skills, an up-to-date information system, an accessible parking lot,
well-maintained buildings and grounds, and up-to-date diagnostic and treatment
equipment will have a positive impact on a patient s satisfaction with the visit. It is
also important to have modern responsive administrative and fi nancial management
systems. 11 Financial systems that are too complex for patients to understand and
lost patient records may imply to some that the entire clinic is disorganized and its
technology is out of date.
There are a number of opportunities for health care organizations to create
value when patients come for a service as simple as immunizations. It is important to recognize that opportunities for value creation may be lost or destroyed
within each subsystem just as it can be created. 12 Therefore, the goals, values, and
behaviors of all employees must be integrated toward the common objective of
patient satisfaction and service.
136 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Identifying Current and Potential
Competitive Advantage
Assessing an organization s current and potential competitively relevant strengths
and weaknesses is the goal of internal environmental analysis. Competitively
relevant strengths are the pathways to sustained competitive advantage. 13
Competitive advantage is created within the organization in the form of strengths
that are important in the external environment. As illustrated in Perspective 42 ,
there are a variety of ways competitively relevant strengths can affect an organization s ability to build and sustain a competitive advantage.
Identifying Strengths and Weaknesses
Identifying an organization s internal strengths and internal weaknesses is a
challenging yet essential task of health care strategists as they assess the internal
environment. However, organizational characteristics that appear to represent
key strengths to strategists may have little importance to patients and other
stakeholders or may be strengths of competitors.
In the past, a stable environment allowed static strategies based on one or two
strengths to be successful for years, particularly for large, dominant organizations. Competitive advantage for many health care organizations was primarily
a matter of position where the physician s offi ce, hospital, or sales offi ce occupied a well-defi ned competitive niche. 14 In today s environment, strengths can
quickly become weaknesses as successful strategies are challenged by competitors. A critical component of strategic momentum is continuous evaluation of the
organization s strengths and weaknesses relative to the environment.
Some strengths that health care organizations possess are clear and easily
recognizable. For example, a particular location may be a strategic strength
because it prohibits other organizations from occupying that specifi c location.
Weaknesses may be easy to recognize as well. When an organization assumes
excessive debt fi nancing for its facilities, it may not be able to fi nance emerging
technology. Other strengths are subjective in that they represent the opinions of
the people who are doing the evaluating. For example, employees stating that
the long-term care facility offers a caring environment would be a subjective
strength. Employees may believe they provide a caring environment, but do the
patients?
Still other strengths and weaknesses are not so obvious and can only be determined in relationship to the strengths and weaknesses of primary competitors
(relative strength or weakness). For example, a world-renowned academic health
center may lose a famous surgeon to a local hospital that is attempting to build
more strength in the clinical area of the surgeon s specialty. The health center
may remain very strong in terms of the services it provides but have a relative
weakness with regard to the facility where the surgeon is now located.
Competitive advantages of an organization may be based on having rare or
abundant resources, special competencies or skills, or management or logistical capabilities. Similarly, competitive disadvantages may result from a lack of
resources, competencies, or capabilities. Therefore, strengths and weaknesses
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 137
are easier to identify if one thinks in terms of organizational resources, competencies, and capabilities. 15
Resources The resource-based view of strategy argues that valuable, expensive, or diffi cult-to-copy resources provide a key to sustainable competitive
advantage. 16 Even though the resource-based view has been an integral part of
strategic thinking for more than two decades, it has consistently evolved and
PERSPECTIVE 42
Alternative Views of Competitive Advantage
Achieving and maintaining a competitive advantage is the goal of strategy. Organizations attempt
diff erent strategies for achieving advantage over
competitors depending on what they perceive
to be their competitively relevant strengths and
weaknesses.
Although, competitive advantage is often
discussed at three levels global, industry, and
fi rm, for health care strategists, the fi rm level is
the most important as health care is delivered
locally. Firm-level competitive advantage is the
ability of an organization to design, produce,
and market products/services that are superior
to those off ered by competitors, considering
price and non-price qualities. Sources of competitive advantage are those tangible and intangible assets (resources and competencies) and
processes (capabilities) in the organization that
provide an advantage over competitors in the
mind of customers.
Traditionally in health care, factors such as
location and facilities have been thought of
as the primary sources of competitive advantage. Competitiveness has been associated with
an organization s resource base which is an
important factor in fi rm-level competitiveness.
Unfortunately, focusing on resources alone may
overlook other important factors such as patient
orientation and positioning in the marketplace.
In the dynamic environment of health care,
capabilities such as fl exibility, agility, speed, and
adaptability may be even more important than
resources in achieving and maintaining competitive advantage.
Perhaps the most promising views of competitiveness integrate the importance of resources and
capabilities in achieving competitive advantage.
These approaches are sometimes referred to as
APP (assetprocessperformance) models. These
models help managers to consider how tangible
and intangible assets of the organization are combined to achieve desired outcomes (performance)
and have the potential for assisting health care
leaders in thinking about competitive advantage.
Such models discourage functional-centric silo
thinking and encourage strategists to think in
terms of the entire organizational system, often
generating advantages that do not reside within
a single organizational subsystem. These models
are particularly valuable for health care organizations that have often relied on a single area (for
example, clinical excellence) to achieve competitive advantage only to discover that excellence in
a single area of the value chain is not suffi cient to
overcome weaknesses in other areas such as lack
of accessibility, stubbornness of bureaucracy, and
reluctance to change.
Source: Ajitabh Ambastha and K. Momaya, Competitiveness of
Firms: Review of Theory, Frameworks, and Models, Singapore
Management Review 26, no. 1 (2004), pp. 4556.
138 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
matured into a comprehensive theory in recent years. 17 The basic assumption is
that resource bundles used by health care organizations to create and distribute
services are unevenly developed and distributed, explaining at least to some
extent the ability of each organization to compete effectively. Organizations
with marginal resources may break even; those with inferior resources might
disappear; and those with superior resources typically generate profi ts. 18
Basing strategy on the resource differences between organizations should be
automatic rather than noteworthy. 19 However, the argument is far from evident,
especially in light of the overwhelming attention given to the external environment
in strategy formulation. In addition, there are many different types of resources.
More recently the issue of resource orchestration has emerged and focuses not
only the amount of resources an organization possesses but the effectiveness of
health care managers in structuring, bundling, and leveraging resources. 20
Resources are the stocks of non-human factors that are available for use in
producing goods and services. Resources may be tangible, as in the case of land,
labor, and capital, or they may be intangible, as in the case of intellectual property, reputation, and goodwill. 21 The importance of intangible resources should
not be underestimated. Robert Kaplan and David Norton point out that unlike
fi nancial and physical resources, intangible resources are hard for competitors to
imitate, making them a powerful source of sustainable competitive advantage. 22
Furthermore, according to a Harris Interactive Health Care Poll, a good reputation
and a trusted physician s recommendation are two of the most important indicators
of the quality of medical care. These factors ranked above more tangible indicators
of resources, including location, appearance, and condition of physical plant. 23
Competencies Competency is knowledge and skill based and, therefore, inherently human and may be a powerful source of sustained competitive advantage.
For a growing number of health care organizations, competitive advantage lies in
the ability to create an economy driven not by cost effi ciencies but by ideas and
intellectual know-how. 24 For example, for many years organizations within the
pharmaceutical industry have relied on intellectual know-how and the industry is
more innovative today than during its rapid post-World War II growth period. 25
In many cases, competencies are socially complex and require large numbers of people engaged in coordinated activities. 26 For example, to enter a particular market or offer specifi c services the organization must possess threshold
competencies the minimally required knowledge and skills necessary to compete
in a particular area. To offer cardiac services, an acute care hospital must have a
minimum number of clinical personnel with specifi c knowledge and skill in cardiac care. Although all organizations offering cardiac services presumably possess
threshold competencies, only one or two will develop the knowledge and skills to
the point that it becomes a distinctive competency. This type of competency is a
highly developed strength that can be critical in developing a sustained competitive advantage.
Capabilities A health care organization s ability to deploy resources and competencies, usually in combination, to produce desired services is known as its
capability. The purposeful coordination of resources and competencies is another
potential source of sustained competitive advantage. 27 The ability to effectively and
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 139
effi ciently coordinate resources and competencies to achieve integrative synergies
through leadership and management represents strategic capability.
28 For example,
some assets almost never create value by themselves, they need to be combined
with other assets investments in IT (a resource) have little value unless complemented with effective HR training (competencies). Conversely, many HR training
programs have little value unless complemented with modern technology and
managerial tools. Another example involves the effective management of the health
care organization s supply chain. 29 Individuals who are capable of building and
maintaining relationships with suppliers can develop signifi cant advantages over
competitors. 30 As discussed in Perspective 43 , one managerial tool to better utilize
resources and competencies to reduce errors in health care is LEAN Six Sigma.
Capabilities fall into one of the two following categories:
1. The ability to make dynamic improvements to the organization s activities
through learning, renewal, and change over time.
2. The ability to develop strategic insights and recognize and arrange
resources and competencies to develop novel strategies before or better
than competitors. 31
Capabilities are architectural 32 or bonding mechanisms whereby leaders make
use of resources and competencies and integrate them in new and fl exible ways to
develop new resources and competencies as they learn, change, and continually
renew themselves and their organizations. 33 Capabilities, therefore, are integrating and coordinating abilities of managers and leaders to bring together resources
and competencies in ways that may be superior to those of competitors. 34
The stock of resources, knowledge, and integrative skills contained in a health
care organization may not be suffi cient to ensure a sustained competitive advantage. It is likely that two or more organizations competing in the same health
care market could have essentially the same resources and similar competencies. When this is the case, the competitive advantage is likely to be the result
of different capabilities a unique culture, strategic leadership, or a set of processes strategically understood. 35 In other words, capabilities are best thought
of as processes or ways of bringing together and organizing competencies and
resources so as to obtain competitive advantage. Capabilities represent an ability
to muster resources, skills, and knowledge in unique ways, coordinate diverse
operational skills, and integrate multiple streams of technologies. 36
Health care organizations that do not have superior resources or unique competencies may still develop sustainable competitive advantages if they are extraordinarily competent at converting ordinary resources and skills into genuine strategic
assets. 37 For example, effective management of technology is more important than
new computers and software. Effective IT management results in services that
respond uniquely to customer needs and, thereby, provide a competitive advantage.
The development of this type of capability is based on four interrelated principles:
1. The building blocks of strategy may be processes as well as people, products, services, and markets.
2. Competitive success depends on transforming an organization s key processes into services that consistently provide superior value to customers.
140 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 43
LEAN Six Sigma
The possibility of errors lurks in all facets of
organizations and many organizations have
turned to the techniques of Six Sigma to fi nd
them. Developed in the 1980s by Motorola to
defi ne, identify, and control defects, Six Sigma
has since been used with great success by manufacturing companies such as General Electric,
Microsoft, and 3M as well as a number of health
care organizations. Although it took health care
organizations two decades to pick up on the
trend, an increasing number are adopting Six
Sigma and its extension LEAN Six Sigma.
Sigma is a notation employed by statisticians to
represent one standard deviation from the mean
(a measure of variation). A key goal of Six Sigma
is to eliminate variation or defects. Although most
companies are estimated to be operating at the
four-sigma level tolerating 6,210 defects per
million units the goal of Six sigma is to reduce
defects to only 3.4 defects per million units. This
aggressive, but attainable, goal is accomplished
through a fi ve-phase approach: defi ning goals,
measuring current performance, determining root
causes of defects, improving processes to eliminate
defects, and controlling ongoing performance.
More recently, Six Sigma has been combined with
a concept called LEAN organization. The primary
focus of LEAN is to eliminate waste and streamline
processes based on the following principles:
Value create value by examining what is
important to the end-user.
Value stream understand and determine
which steps in the process add value and
which ones do not.
Flow maintain momentum throughout the
process and eliminate waste and delays.
Pull avoid surplus and allow customer
demand to pull the product or service to
determine the supply.
Strive for perfection determine the optimum level of performance the level of perfected services that requires the continuous
pursuit of improvements.
One example of the goal of LEAN Six Sigma
in health care is the Ottawa Ankle Rules used in
the diagnosis of ankle sprain. Twenty years ago
every patient presenting with an ankle sprain
received an X-ray. Today only a moderate percentage of patients receive an X-ray because
evidence-based medicine demonstrated that
in many cases an X-ray was not necessary. In
this manner an expensive, time-consuming element was eliminated from the treatment of
ankle sprains and it has been done without the
introduction of new technologies. Instead,
the application of the Ottawa Ankle Rules by
all physicians in the emergency department
by means of clinical practice guidelines illustrates
the importance of standardization of clinical
practices and is at the heart of LEAN Six Sigma.
As this example illustrates, LEAN Six Sigma
incorporates processes heavily focused on
data not opinions or anecdotal evidence that
aims to improve both fi nancial performance
and customer satisfaction. A basic premise of
LEAN Six Sigma is that even the most complex
processes can be broken down into a relatively
small number of key factors that are responsible
for the majority of defects. LEAN Six Sigma is
being used increasingly in health care.
Sources: Adapted from Paul Murphree, Richard Robert Vath, and
Larry Daigle, Sustaining Lean Six Sigma Projects in Health Care,
Physician Executive 37, no. 1 (2011), pp. 4449; J. D. Polk, Lean
Six Sigma, Innovation, and the Change Acceleration Process Can
Work Together, Physician Executive 37, no. 1 (2011), pp. 3843;
Greg Brue, Six Sigma for Managers (New York: McGraw-Hill, 2002),
pp. 120; Clyde M. Creveling, Six Sigma for Technical Processes
(Upper Saddle River, NJ: Prentice Hall, 2006).
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 141
3. Organizations create these capabilities by making strategic investments
in a support infrastructure that link together and transcend traditional
functions and any single component of the value chain.
4. Because capabilities necessarily cross functions and value chain
components, the champion of capabilities-based strategy must be the
chief executive. 38
The Importance of Context
In today s competitive and dynamic environment, the ability to develop a sustained competitive advantage is increasingly diffi cult. A health care organization
enjoys a sustained competitive advantage only so long as the services it delivers have attributes that correspond to the key buying criteria of a substantial
number of customers in the target market. Sustained competitive advantage
is the result of an enduring value differential between the services of one organization and that of its competitors in the minds of patients, physicians, and so on. 39
This differential makes an understanding of internal factors extremely important.
Health care organizations must consider how their resources, competencies, and
capabilities strengths and weaknesses relate to those of competitors.
The strategic thinking map shown in Exhibit 43illustrates the process for
determining an organization s sources of competitive advantage. With the use
of an actual organization, Medtronic, Inc., each step in the process of determining competitive advantage will be illustrated. The fi rst step is to carefully assess
the activities that Medtronic does well and the activities it does not do as well
within each component of the value chain. After the organization s strengths
PRESERVICE
POINT-OFSERVICE
AFTERSERVICE
STRUCTURE
STRATEGIC RESOURCES
Service Delivery
Strengths &
Weaknesses
Support
Activities
Strengths &
Weaknesses
Value
Competitively
Relevant
Weaknesses
Competitive
Advantages
Step 3
Focus on Competitive
Strengths and Competitive
Weaknesses
Step 2
Evaluate Competitive
Relevance of Strengths
and Weaknesses
Step 1
Identify Strengths
and Weaknesses
Competitively
Relevant
Strengths
Competitive
Disadvantages
Rare
Imitable
Sustainable
CULTURE or and
EXHIBIT 43 Strategic Thinking Map for Discovering Competitive Advantages
and Disadvantages
142 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 44
Medtronic, Inc.
Medtronic, Inc., founded in 1949 as a partnership by Earl Bakken and his brother-in-law
Palmer Hermundslie, had a modest beginning. The two men came up with an idea for
a business while talking about Earl s part-time
work at Northwestern Hospital in Minneapolis,
Minnesota. The staff learned that Earl was a graduate electrical engineering student and began
asking him to repair medical equipment. The
partners recognized the opportunity, formed
their partnership, and named it Medtronic.
The new company had a slow start; in its fi rst
month in business, Medtronic grossed exactly
$8 for the repair of a centrifuge. During the
second year, Earl and Palmer began representing several medical equipment manufacturers
in the Midwest and Medtronic began to grow.
The service business increased as doctors and
nurses asked the partners to modify equipment,
and to design and produce new devices needed
for specialized tests. Although Medtronic built
nearly 100 diff erent custom devices during the
1950s, only 10 were actually part of the product line. These included two external defi brillators, forceps, an animal respirator, a cardiac rate
monitor, and a physiologic stimulator.
Medtronic trades on the New York Stock
Exchange under the ticker symbol MDT. Today,
Medtronic is the world s leading medical technology company with operations primarily
focused on providing therapeutic, diagnostic,
and monitoring systems for cardiovascular, neurological, diabetes, spinal, and ear, nose, and
throat markets. Since developing the fi rst
wearable external cardiac pacemaker in 1957
and manufacturing the fi rst reliable long-term
implantable pacing system in 1960, Medtronic
has been the world s leading producer of pacing
technology.
Medtronic has six operating segments organized under two major groups that manufacture
and sell the company s products and medical
technologies. These segments and their respective percentages of sales are:
and weaknesses have been identifi ed, each is assessed to determine whether it
is or could become a competitive advantage or competitive disadvantage.
Perspective 44provides an overview of Medtronic, Inc. 40
Cardiac and vascular group
Cardiac rhythm disease management (CRDM)
Cardiovascular
Physio-control restorative therapies group
Spinal & biologics
Neuromodulation
Diabetes
Surgical technologies
Other
31 percent
20 percent
21 percent
10 percent
8 percent
7 percent
3 percent
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 143
Service Delivery Activities
Medtronic, Inc. possesses important value-creating strengths and value-reducing
weaknesses in service delivery. Many of Medtronic s strengths are built around
the company s reputation for innovativeness as a biomedical engineering company. Medtronic made history when it developed the fi rst wearable external cardiac pacemaker in 1957 and manufactured the fi rst long-term implantable pacing
system in 1960. In 1984, the National Society for Professional Engineers selected
the wearable pacemaker as one of the 10 outstanding engineering accomplishments of the previous half-century. Since that time Medtronic has accomplished
a long list of fi rsts in the area of biomedical engineering.
Another service delivery strength of Medtronic is its worldwide market presence, with 45,000 employees. The company is a market leader in its integrated
product line that focuses device-based medical therapies in the areas of cardiac
rhythm disease management, spinal and navigation, neurological, vascular, cardiac surgery, and diabetes. Company products have relevance to both the treatment of acute conditions and chronic diseases. In this sense, it is well positioned
for the future.
Medtronic deals with products that require high reliability and constant
monitoring. As a result it has developed effective systems for early warning of
possible quality problems. An example was the speed with which the company
notifi ed clinicians when there were suspected shorting problems with the batteries in implantable cardiac defi brillators.
In addition to the service activity strengths, Medtronic has some apparent
weaknesses. The worldwide presence makes the company subject to diverse cultural mores and governmental regulations. In addition, its global presence creates
additional challenges to quality control and delivery interruptions. Moreover, the
nature of the company s product lines, many of which require invasive medical
The cardiac and vascular group s revenues
were the same in 2010 and 2011 where as the
restorative therapies group increased its revenue by 2 percent during the same period. The
company recorded revenue of almost $16 billion
in 2011, a 1 percent increase over the previous
year. Non-US sales accounted for approximately
43 percent of total sales.
Research and development continued to
be a major priority of Medtronic with more
than 350 R&D projects underway in 2011 using
the talents of more than 9,000 scientists and
engineers. More than 2,000 new patents were
awarded and 60 new products were introduced
during 2011. Medtronic continued to spend
large amounts on R&D (approximately 9.5
percent of sales). Medtronic employs approximately 45,000 people who serve physicians, clinicians, and patients in more than 120 countries
worldwide.
Sources: Medtronic, Inc. Form 10-K fi led with the Securities and
Exchange Commission for fi scal year 2011. Medtronic, Inc. Form
10-Q fi led with the Securities and Exchange Commission for fi scal
year ended 2011. Medtronic, Inc. Annual Report, 2011. Medtronic
website: www.Medtronic.com .
144 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
procedures, are particularly at risk for product liability and intellectual property
suits. Even in the United States, the company is faced with diffi culty bringing new
technologies to market in light of the FDA approval process. Distribution of biomedically engineered products is complex and costly. The decision to self-insure
and grow through acquisitions as well as internal development presents a variety
of fi nancial risks. Self-insurance might not be adequate for large product liability
claims. As with all knowledge-based fi rms, Medtronic is frequently challenged
relative to the use of intellectual properties.
Support Activities
One of Medtronic s greatest strengths lies in the entrepreneurial culture that led
to its establishment and has been sustained throughout its history. This culture
requires employees who are motivated and creative. In an effort to retain committed professionals, employees have available a variety of benefi ts including a
defi ned benefi t retirement plan, ability to participate in a defi ned contribution
savings plan, and post-retirement medical insurance.
The company is pioneering efforts to combine multiple technologies into its
products. Sometimes the technologies are developed by Medtronic and sometimes they are acquired from outside. Increasingly, Medtronic products are incorporating computational, sensing, and communication technologies.
Medtronic has routinely devoted 9 to 10 percent of its net sales to research and
development. In addition to internal development, Medtronic has aggressively
sought attractive acquisitions. Recently Medtronic acquired ATS Medical with its
expertise in the area of cardiac surgery; Ardian, Inc. with its high-technology
therapies for high blood pressure; and Osteotech, a company with expertise
in the area of biologic products for regenerative medicine. Strong intellectual
capital underlies most of Medtronic s key products.
The company has some weaknesses in its support activities. Acquisitions,
although potentially valuable, present signifi cant risks of culture clash. With
more than 40 percent of the company s sales coming from global operations,
many complications and some dangers in dealing with different cultural mores
and government regulations arise.
Although Medtronic has a strong market presence in most of its markets, it is
facing competition from powerful companies such as Boston Scientifi c, Johnson
& Johnson, Roche Ltd, Stryker, and others. Finally, the company faces increased
pricing pressure as more customers form purchasing groups to contain their costs.
After carefully searching through the value chain of an organization and
refl ecting on its resources, competencies, and capabilities in developing value,
Step 2 may be undertaken to and evaluate the competitive relevance of the
strengths and weaknesses discovered in Step 1 (see Exhibit 43 ). Exhibit 44
summarizes some important value-creating strengths and value-reducing weaknesses of Medtronic, Inc.
Evaluating Competitive Relevance at Medtronic
Identifi cation of the strengths and weaknesses in the various components of the
value chain in an organization such as Medtronic inevitably results in a lengthy
list of things we do pretty well and things we do not do so well. However,
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 145
EXHIBIT 44 Value Creating Strengths and Value Reducing Weaknesses for Medtronic, Inc.
Value Chain
Component Value-Creating Strength Value-Reducing Weakness
Service Delivery,
Pre-Service
Reputation as leading biomedical engineering company.
Presence in the market. Founded in 1949.
Leader in selected market segments (e.g.,
implantable cardiac rhythm devices).
Operations in more than 120 countries
worldwide.
Vulnerability to diverse cultural
mores and regulatory constraints.
Subject to high risk of litigation
over patents, trademarks, and
product liability claims.
Service Delivery,
Point-of-Service
Integrated product line focused on devicebased medical therapies.
State-of-the-art facilities with convenient
access to customers.
Quality control and delivery challenges because of worldwide
operations.
Challenges in bringing new technologies to market in a timely
manner because of FDA approval
process.
Distribution of biomedically engineered products costly.
Service Delivery,
After-Service
System for notifi cation of possible service/
quality issues.
After -sale service system with convenient
access.
Ongoing legal claims pose continuous threat to fi nancial viability.
Self-insurance involves signifi cant
fi nancial risk.
Support Activities,
Culture
Entrepreneurial culture.
Commitment to community through
Medtronic Foundation.
Defi ned benefi t, defi ned contribution, and
post-retirement insurance encourages employees to remain with company.
Aggressive growth strategy based on internal
development and acquisitions.
Acquisitions present risk of culture
clash with acquired companies.
Global operations has grown to
about 43 percent of sales.
Support Activities
Structure
None None
Support Activities,
Strategic Resources
Numerous patents, trademarks, and trade
names.
Strong intellectual capital underlying key
products.
Healthy level of working capital and liquidity.
Experienced management team and directors.
R&D expenditures consistently 910 percent
of net sales.
Powerful competitors/trademarks
in most product lines.
Some growth fueled by risky
acquisitions.
Pricing pressures from increasing
number of purchasing groups.
Signifi cant increase in short-term
borrowing.
146 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
not all of the strengths will necessarily be sources of competitive advantage for
the organization. For example, executives often believe that our reputation is
our greatest asset. However, in the medical device industry there are numerous
fi rms with excellent reputations (e.g., Boston Scientifi c and General Electric),
so it is unlikely that reputation alone would constitute a signifi cant competitive
advantage. Similarly, an identifi ed weakness may not necessarily be a competitive disadvantage if it is not competitively relevant or all competitors have the
same weakness (such as a shortage of nurses).
Organizational Strengths Strengths must have value, be rare, be diffi cult to
imitate, and be sustainable in order to create competitive advantage. 41 Strengths
that are merely present do not represent competitive advantages in themselves.
To be competitively signifi cant, the specialized resources and competencies
must be marshaled in a way that allows them to become genuine strategic
assets, resulting in the accumulation of economic returns greater than could be
achieved in any alternative use. 42
Competitive relevance is determined by critically considering four important
questions:
1. Question of value. Is the resource, competency, or capability of value to
customers?
2. Question of rareness. Is this organization the only one that possesses the
resource, competency, or capability or do many or all of its competitors
possess it?
3. Question of imitability. Is it easy or diffi cult to duplicate the resource,
competency, or capability?
4. Question of sustainability. Can the resource, competency, or capability be
maintained over time?43
A judgment must be made as to whether the strength is of high (H) or low
(L) value in the marketplace. Value is a critically important question because if a
strength does not have high value in the marketplace there is no reason to ask the
other three questions. A strength that does not have value is simply not relevant
in a competitive sense.
The second question requires that a judgment be made as to whether the
strength is rare or commonly found among competitors. If the strength is rare, an
answer of yes (Y) is appropriate. If it is possessed by many or all competitors,
the answer is no (N). Combined with value, the relative rareness of a strength
is key to competitive advantage. Even critically valuable strengths that are not
rare among competitors do not create a competitive advantage.
Question 3 attempts to determine whether it would be diffi cult (D) or easy
(E) for competitors to obtain or imitate the strength. The rareness of a strength
becomes even more important the more diffi cult the strength is to imitate. If a
valuable and rare strength is easy to imitate, it may be the basis for a competitive
advantage in the short run but is not a good bet for long-term strategy formulation. Competitors will likely imitate any resource, competency, or capability that
is valuable, rare, and easy to imitate as soon as possible.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 147
Finally, the fourth question involves a judgment as to whether the organization can sustain the resource, competency, or capability. A yes (Y) or no (N)
answer is required to this question. If the strength cannot be sustained it will
provide, at best, only a short-term advantage over competitors. Strengths are
competitively relevant if they are valuable to customers and rare in the marketplace. The diffi culty or ease with which competitors can imitate the strengths
and the organization s ability to sustain them determines the extent of its longterm or short-term advantage. Exhibit 45provides a strategic thinking map for
EXHIBIT 45 Strategic Thinking Map of Competitive Advantages Relative to Strengths
in General
Is the Value of
the Strength
High or Low?
(H/L)
Is the
Strength
Rare ?
(Y/N)
Is the
Strength Easy
or Diffi cult to
Imitate ? (E/D)
Can the
Strength be
Sustained ?
(Y/N) Implications
H N E Y No competitive advantage. Most competitors have
the strength and those that do not can develop it
easily and sustain it. Because the strength is widely
possessed and can be sustained, it is likely that it
already has become a minimum condition for longterm success.
H N E N No competitive advantage. Most competitors have
the strength and it is easy to develop. However, the
strength generally is not sustainable. If the organization is the only organization in the service area that
cannot sustain the strength, it will become a shortterm competitive disadvantage.
H N D Y No competitive advantage. Many competitors possess the strength but it is diffi cult to develop, so care
should be taken to maintain this strength. Because
the strength is widely possessed and can be sustained, it is likely that it already has become a minimum condition for long-term success.
H N D N No competitive advantage. Many competitors possess the strength yet it is diffi cult to develop, and
those who do possess it will not be able to sustain
the strength. If the organization is the only organization that cannot sustain the strength, it will become
a long-term competitive disadvantage.
H Y E Y Short-term competitive advantage. Because the
strength is valuable and rare, competitors will do
what is necessary to develop this easy-to-imitate
strength. The organization should exploit this shortterm advantage but should not base long-term
strategies on this type of strength. Over time, this
strength may become a minimum condition for
long-term success.
(Continued)
148 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
the possible combinations of the four questions regarding strengths and the
implications for strategic leaders.
To further illustrate how this process may be used, the strengths of Medtronic,
Inc. (identifi ed in Step 1) are evaluated with regard to the four questions (Exhibit
46 ). From the initial assessment, Medtronic, Inc. appears to have a number of
potentially important strengths (those strengths that have a high value in the
marketplace). These are: (1) reputation; (2) established presence in market; (3)
market leader in selected business segments (e.g., cardiac rhythm devices); (4)
operations in more than 120 countries; (5) integrated product lines; (6) state-ofthe-art facilities; (7) established service issue notifi cation system; (8) established
after-sale service system; (9) entrepreneurial culture; (10) commitment to community; (11) aggressive growth strategy; (12) numerous patents and trademarks;
(13) strong intellectual capital behind key products; (14) healthy level of working capital and liquidity; (15) experienced management team and directors; and
(16) R&D expenditures at a consistently high rate.
Consider, for example, the profi les of various combinations of Medtronic s
strengths listed in Exhibit 46 . The high-value strengths are examined relative
to the three additional questions. Strengths such as number 7 established
system of service issue notifi cation, number 8 established after-sale service
program, number 10 commitment to community, and number 14 healthy
level of working capital and liquidity are valuable, not rare, easy to imitate, and
can be sustained (HNEY). These strengths should be maintained because they
are widely possessed and are most likely a minimum condition for success.
Is the Value of
the Strength
High or Low?
(H/L)
Is the
Strength
Rare ?
(Y/N)
Is the
Strength Easy
or Diffi cult to
Imitate ? (E/D)
Can the
Strength be
Sustained ?
(Y/N) Implications
H Y E N Short-term advantage but not a source of longterm competitive advantage. The strength is easy to
imitate but cannot be sustained. The organization
should not base long-term strategies on this type of
strength but may obtain benefi ts for a short-term
advantage.
H Y D Y Long-term competitive advantage. This strength
is rare in the service area, diffi cult to imitate by
competitors, and can be sustained by the organization. If the value is very high, it may be worth betting
the organization on this strength.
H Y D N Short-term competitive advantage but not a
strength that can be sustained over the long run.
Although rare and diffi cult to imitate, the strength
cannot be sustained. This strength should be
exploited for as long as possible.
EXHIBIT 45 (Continued)
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 149
EXHIBIT 46 Competitive Relevance of the Strengths of Medtronic, Inc.
Strengths
Is the Value of
the Strength
High or Low?
(H/L)
Is the
Strength
Rare ?
(Y/N)
Is the
Strength Easy
or Diffi cult to
Imitate ? (E/D)
Can the
Strength be
Sustained ?
(Y/N)
Service Delivery
1. Reputation as biomedical
engineering company.
H N D Y
2. Established presence in the market. H N D Y
3. Market leader in selected business
segments.
H Y D Y
4. Operations in more than 120
countries worldwide.
H N D Y
5. Integrated product line focused
on manufacture and sales of
device-based medical therapies.
H Y D Y
6. State-of-the-art facilities with
convenient customer access.
H Y E Y
7. Established system of service issue
notifi cation.
H N E Y
8. Established after-sales service
system.
H N E Y
Culture
9. Entrepreneurial culture. H Y D Y
10. Commitment to community
through Medtronic Foundation.
H N E Y
11. Aggressive growth strategy based
on internal development and
acquisitions.
H N D Y
Strategic Resources
12. Numerous patents, trademarks,
and trade names.
H Y D Y
13. Strong intellectual capital behind
key products.
H Y D Y
14. Healthy level of working capital
and liquidity.
H N E Y
15. Experienced management team
and directors.
H N D Y
16. R&D expenditures consistently
910 percent net sales.
H N D Y
Opinions and conclusions presented are those of the authors and are intended to be used as a basis for class discussion rather than to illustrate
eff ective or ineff ective business practices.
150 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
If Medtronic does not maintain them, it will be at a disadvantage relative to
competitors.
Medtronic does not have any strengths that are valuable but not rare (are
common), are easy to imitate, and cannot be sustained (HNEN). However, strengths,
such as number 1 reputation, number 2 established market presence, number
4 worldwide operations, number 11 aggressive growth strategy, number 15
experienced management team, and number 16 R&D expenditures at consistent levels are valuable, not rare among competitors, diffi cult to imitate, and
can be sustained by Medtronic (HNDY). These strengths should be maintained
because most likely they have become minimum conditions for long-term success. Medtronic has no strengths that are not rare, are diffi cult to imitate, and
cannot be sustained (HNDN).
Strengths such as number 6 state-of-the-art facilities with convenient customer access are valuable, rare, easy to imitate, and can be sustained (HYEY).
These strengths may be a source of short-term advantage and should be
exploited for as long as possible. However, long-term strategies should not be
based on this type of strength. Medtronic has no strengths that are highly valued,
rare, easily imitated, and not sustainable (HYEN) or valued strengths that are
rare, diffi cult to imitate, and cannot be sustained (HYDN). Finally, highly valued
strengths that are rare, diffi cult to imitate, and sustainable (HYDY) provide the
basis for a long-term competitive advantage and should be developed as much
as possible. In the case of Medtronic, the company s number 3 leadership in
selected business segments, number 5 integrated product line focused devicebased medical therapies, number 9 entrepreneurial culture, number 12 patents and trademarks, and the related strength number 13 strong intellectual
capital underlying key products represent long-term sustainable competitive
advantages.
Organizational Weaknesses The strategic relevancy of each weakness can
be determined by asking questions similar to those used to evaluate strengths.
Weaknesses are serious competitive disadvantages if they have high value to
patients and other stakeholders (H), are not possessed by competitors (N),
cannot be easily eliminated or corrected (D), and competitors can sustain their
strengths (Y). Exhibit 47provides a strategic thinking map listing the suggested
actions of strategic leaders relative to possible combinations of weaknesses.
An assessment of the value chain for Medtronic, Inc. revealed a number of
weaknesses (Exhibit 48 ). These are: (1) vulnerability to diverse cultural mores
and regulations; (2) high risk of litigation over patents, trademarks, and product liability; (3) quality and delivery challenges due to worldwide operations;
(4) delays in bringing new technologies to market because of FDA regulations;
(5) costly distribution of biomedical products; (6) legal threats to fi nancial viability;
(7) self-insurance may be inadequate; (8) acquisitions risk culture clash; (9) over
40 percent of sales from global operations involves signifi cant risk; (10) powerful
competitors in most product lines; (11) some growth fueled by risky investments;
(12) pricing pressures from increasing number of purchasing groups; and (13) signifi cant short-term borrowing.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 151
EXHIBIT 47 Strategic Thinking Map of Competitive Disadvantages Relative to
Weaknesses
Is the Weakness
of High or Low
Value ? (H/L)
Is the Weakness
Common (Not
Rare) Among
Competitors?
(Y/N)
Is the
Weakness
Easy or
Diffi cult to
Correct ? (E/D)
Can
Competitors
Sustain their
Advantage ?
(Y/N) Implications
H Y E Y No competitive disadvantage. Although a
weakness of the organization, most other
competitors are also weak in this area.
However, the weakness is easy to correct
and competitors will likely work to correct
the weakness. If the organization fails to
correct the weakness, competitors could
achieve a short-term competitive advantage. Over time, correcting this weakness
is likely to become a minimum condition
for long-term success.
H Y E N No competitive disadvantage. Although a
weakness of the organization, most other
competitors are also weak in this area.
However, the weakness is easy to correct.
It is likely that most competitors will work
to correct the weakness and therefore no
organization will be able to sustain an
advantage.
H Y D Y No competitive disadvantage. Although
a weakness of the organization, most
other competitors are also weak in this
area and it is diffi cult to correct. However,
this situation is dangerous and should be
addressed to ensure that competitors do
not overcome this diffi culty and correct it
fi rst. If competitors correct the weakness
and continue to sustain their advantage
the weakness could become a long-term
competitive disadvantage.
H Y D N No competitive disadvantage. Although a
weakness of the organization, most other
competitors are also weak in this area
and it is diffi cult to correct. It is likely this
weakness is chronic among competitors
in the service area as corrections in the
weakness tend to erode over time.
(Continued)
152 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Is the Weakness
of High or Low
Value ? (H/L)
Is the Weakness
Common (Not
Rare) Among
Competitors?
(Y/N)
Is the
Weakness
Easy or
Diffi cult to
Correct ? (E/D)
Can
Competitors
Sustain their
Advantage ?
(Y/N) Implications
H N E Y Short-term competitive disadvantage.
Most competitors are not weak in this
area; however, the weakness is easy to
correct. The organization should move
quickly to correct this type of weakness. Correcting this weakness is likely to
become a minimum condition for longterm success.
H N E N Short-term competitive disadvantage.
Competitors are not weak in this area;
however, the weakness is easy to correct.
The organization should move quickly to
correct the weakness. It is likely that all
competitors will correct the weakness and
therefore cannot sustain any advantage.
H N D Y Serious competitive disadvantage. The
weakness is valuable, most competitors
do not have it, it is diffi cult for the organization to correct, and competitors can
sustain their advantage. If the weakness
is of very high value, it may threaten the
survival of the organization.
H N D N Short-term competitive disadvantage. The
weakness is valuable, most competitors
do not have it, it is diffi cult for the organization to correct; however, competitors
cannot sustain their advantage. Until this
area becomes a weakness for most competitors in the service area or the weakness corrected by the organization, it will
continue to be a serious disadvantage.
As presented in Exhibit 48 , Medtronic, Inc. possesses one serious strategic
weakness (HNDY) that could represent a long-term competitive disadvantage,
that is number 6 ongoing legal claims. This weakness is valuable to customers,
most competitors do not possess the same degree of exposure, it is diffi cult to
correct, and competitors that do not have the weakness can sustain their advantage. This weakness requires attention.
The company faces some weaknesses that are not competitive disadvantages
but are dangerous in the sense that care must be taken to ensure that competitors do not overcome their own weaknesses in these areas and turn them into an
EXHIBIT 47 (Continued)
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 153
EXHIBIT 48 Competitive Relevance of the Weaknesses of Medtronic, Inc.
Weaknesses
Is the Weakness
of High or Low
Value ? (H/L)
Is the Weakness
Common (Not
Rare) Among
Competitors?
(Y/N)
Is the Weakness
Easy or Diffi cult
to Correct ? (E/D)
Can Competitors
Sustain Their
Advantage ? (Y/N)
Service Delivery
1. Vulnerability to diverse culture
mores and regulations.
H Y D Y
2. High risk of litigation from patents,
trademarks, and product liability.
H Y D Y
3. Quality and delivery challenges
from worldwide operations.
H Y D N
4. Diffi cult to bring new technologies to market because of FDA
regulations.
H Y D N
5. Distribution of biomedical
products costly.
H Y D N
6. Ongoing legal claims represent
serious fi nancial threat.
H N D Y
7. Self-insurance risks inadequate
coverage.
H Y D Y
Culture
8. Acquisitions risk culture clash. H Y D N
9. Large commitment to global
operations (one-third of net sales)
involves considerable risk.
H Y D N
Strategic Resources
10. Powerful competitors in most
product lines.
H Y D N
11. Some growth fueled by risky
acquisitions.
H Y D N
12. Pricing pressure for purchasing
groups.
H Y D N
13. Signifi cant increases in
short-term borrowing.
H N E N
Opinions and conclusions presented are those of the authors and are intended to be used as a basis for class discussion rather than to illustrate eff ective or
ineff ective business practices.
advantage they can sustain (HYDY). These weaknesses are number 1 vulnerability to cultural mores and regulations, number 2 high risk of litigation from
patents, trademarks, and product liability, and number 7 self-insurance risk.
Many of Medtronics weaknesses (HYDN) are not competitive disadvantages.
The weaknesses are common in the industry and no advantage can be sustained by competitors. These weaknesses are number 3 quality and delivery
154 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
challenges from worldwide operations, number 4 diffi culty in bringing technologies to market because of FDA regulations, number 5 costly distribution
of biomedical products, number 8 risk of culture clash in acquisitions, number
9 large commitment to global operations, number 10 powerful competitors,
number 11 growth fueled by risky acquisitions and number 12 pricing pressure from purchasing groups. Should Medtronic correct these weaknesses and
sustain them, they could create a long-term competitive advantage.
Medtronic does not appear to have a long-term disadvantage in an area where
the weakness is highly valued, rare among competitors, diffi cult for the company to correct, and cannot be sustained (HNDN). Should Medtronic possess
this type of weakness it would be a competitive disadvantage until the company
could correct the diffi cult problem or eliminate competitors ability to sustain
the advantage. Similarly, there are no apparent weaknesses where the weakness
relates to something that is highly valued, common among competitors, easy
to correct and can be sustained (HYEY). The same is true with regard to areas
where the weakness relates to something valued, common among competitors,
easy to correct, and cannot be sustained (HYEN). Neither of these areas presents
a short- or long-term disadvantage. Further, Medtronic does have one weakness
(number 13) that relates to something valued, rare among competitors, easy to
correct, and cannot be sustained (HNEN) but has no weakness that is valued,
rare among competitors, easy to correct, and can be sustained (HNEY). Although
these weaknesses would not present a short- or long-term disadvantage, the fact
that they are rare among competitors would be a reason for concern since competitors do not possess the same weaknesses.
Focusing on Competitive Advantage
As illustrated in Exhibit 43 , the fi nal step in exploiting competitive advantage
is to determine how each competitively relevant strength and weakness is likely
to affect an organization s ability to compete in the marketplace. Competitively
relevant strengths are those that are valued in the marketplace, are rare, are diffi cult to imitate, and can be sustained. Competitively relevant weaknesses relate
to areas that are valued in the marketplace, are not common weaknesses among
competitors, are diffi cult for organizations to correct, and offer advantages that
can be sustained by others. Exhibit 49lists each of Medtronic s competitively
relevant strengths and weaknesses that have been identifi ed (those displaying
the pattern HYDY for strengths and HNDY for weaknesses from Exhibit 46and
Exhibit 48 ) and speculates as to whether or not Medtronic has the potential
to differentiate itself from its competitors or provide a cost advantage over its
competitors.
Note that the assessment indicates that Medtronic s strategic leadership has
the ability to differentiate the organization and its services through the breadth
of its service line and quality image as supported by its focus on device-based
medical therapies. In other words, the organization has the potential to create a
value-added image in the minds of patients and other stakeholders. Leaders must
be careful, however, because competitors have an advantage in that they have
fewer services in their service line and may be able to maintain more consistent
quality with a more narrow focus.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 155
Careful analysis of the internal environment provides a better understanding
of where strategic leaders should focus their efforts to compete effectively and
where they should be careful to avoid vulnerability relative to competitors. It is
not possible to be everything to everyone; an organization must focus its efforts
on what it does best.
A Final Challenge
The basic endowment of resources, competencies, and capabilities in a health
care organization and the way they are allocated are critical determinants of
the organization s ability to compete effectively. Medtronic has strategically
developed a position of market leadership in selected segments such as cardiac
rhythm devices, has carefully developed an integrated product line around the
manufacture and sales of device-based medical therapies, and has maintained
its entrepreneurial culture which is manifested by its intellectual capital, patents, and trademarks in key product areas. However, the organization must
remain proactive to new and challenging opportunities if it is to remain competitive. Indeed, it has formidable competitors in companies such as Boston
Scientifi c, Johnson & Johnson, and others. To be complacent in the medical
EXHIBIT 49 Strategic Implications of Medtronic s Competitively Relevant
Strengths and Weaknesses
Competitively Relevant Strength or Weakness Strategic Implications
Strengths
Market leader in selected business segments. Economies of scale could be leveraged over
competitors with smaller market shares
Integrated product line focused on device-based
medical therapies.
Although competitors are strong and have
comprehensive product lines, Medtronic
appears more focused on manufacture and sale
of an integrated line of device-based medical
therapies.
Entrepreneurial culture. History and performance has established fi rms
reputation for innovation.
Numerous patents, trademarks, and trade names. Legal protection of products and product
names can constitute important aspect of
diff erentiation.
Strong intellectual capital underlying key products. Same as for patents and trademarks.
Weaknesses
Ongoing legal claims that could prove a threat to
fi nancial viability.
Settlements against the company could result
in serious fi nancial consequences.
Opinions and conclusions presented are those of the authors and are intended to be used as a basis for class discussion rather than to illustrate
eff ective or ineff ective business practices.
156 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
device industry would be fatal. Arguably, the essential character of strategic
thinking is the acceptance of an aspiration that creates, by design, a chasm
between ambitions and resources. It is further argued that spanning the chasm
and encouraging stretch is the single most important task senior management
faces. 44
Stretch is accomplished through resource leveraging or systematically achieving the most products and services possible from the available resources.
Stretch enables smaller health care organizations that are less rich in resources,
competencies, and capabilities to compete against large, powerful, national and
regional health networks and managed care organizations. Leveraging is usually
thought of in terms of fi nancial leveraging through the use of debt; however,
other resources may be leveraged as well.
Leveraging may be accomplished by concentrating, accumulating, complementing, conserving, and recovering resources. 45 Resources, competencies, and
capabilities are more effectively directed toward strategic goals when they are
concentrated. Prioritizing goals and focusing on relatively few things at one
time aids the concentration of limited resources. Successful concentration of
resources, competencies, and capabilities requires not only focusing on relatively
few things but also focusing on the right things those activities that make
the greatest impact on patients perceived value. Nurses, receptionists, therapists, maintenance employees, and others come into contact with patients and
observe organizational realities in ways that are different from physicians, CEOs,
and management personnel. The stockpiles of experience accumulated by the
individuals with extensive patient contact are valuable competitive resources if
properly mined and extracted.
Complementary resources, competencies, and capabilities can be combined
to create synergy or higher-order value. In the value chain, linking activities will
provide unique opportunities to integrate functions such as service delivery,
organizational culture, and strategic resources. In other words, there is a creative interweaving of different types of skills that assists in creating competitive
advantage.
The more often that a particular resource, competency, or capability is used,
the greater the potential for leveraging. The ability to quickly switch knowledge
from delivering one service to another conserves service development resources
and reduces the learning curve in introducing and perfecting service delivery.
Conserving and recovering resources by restricting their exposure to unnecessary risks is essential to the conservation of limited resources. An aspiring
competitor in a health care market should think carefully before attacking the
dominant player at the point of the competitor s greatest strength. Competing
directly with a powerful competitor might subject limited resources, competencies, and capabilities to excessive risks and would likely be unsuccessful.
Challenging a stronger competitor requires creativity and innovation.
Expediting success increasing the resource multiplier by reducing the
time between expenditure of resources and their recovery through revenue
generation is an important means to leverage resources. Reducing the payback period of technological improvements in health care organizations is a
substantial resource recovery challenge. On the one hand, high-quality service
delivery depends on state-of-the-art technology. On the other hand, this type of
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 157
technology is expensive and usually has a relatively short economic life. Careful
planning is required to ensure that paybacks are evaluated and accelerated in
every possible way.
Interestingly, as illustrated in Perspective 45 , even in public sector organizations, a great deal of resource leveraging is a matter of attitude and willingness to take reasonable risks, to do things in new and innovative ways,
PERSPECTIVE 45
Building an Entrepreneurial Culture in Public Health
Most informed observers will admit that a primary reason why private sector health care
organizations are more effi cient and often more
eff ective in achieving their goals than public
sector organizations is a result of the culture
of the respective organizations. Private sector
organizations are particularly skilled at acting quickly and creatively to build and sustain
revenue-generating enterprises and programs.
Public sector organizations, by contrast, are more
often cautious and react slowly to opportunities. Frequently, caution is the result of justifi ed
concern about the stewardship of public funds.
As public funds become more scarce and
public needs continue to expand, public health
managers are increasingly concerned about
seeking non-traditional sources of funds. New
programs are expected to contribute revenue
streams that support and sustain new program
initiatives. Obtaining non-traditional funds and
maintaining revenue streams will require a new
organizational culture.
The Centers for Disease Control, the Health
Resources Services Administration, the W.
K. Kellogg Foundation, and the Robert Wood
Johnson Foundation entered into an experiment
with the School of Public Health and the Kenan
Flagler School of Business at the University of
North Carolina at Chapel Hill, establishing the
Management Academy for Public Health. One of
the goals of the Academy was to assist in developing civic entrepreneurs who could improve
both the effi ciency and eff ectiveness of public
health organizations. Within the public health
context, civic entrepreneurship is the ability
to combine skills, including assessing needs,
marshaling human and other resources, building strategic alliances, using evidence-based
planning processes, attracting start-up funds,
identifying revenue streams, and planning for
post-grant sustainability.
The civic entrepreneurship goal of the
Academy is important because traditionally
public health organizations have depended
upon state or grant funding and have not developed an entrepreneurial culture. Rarely are considerations given to building revenue streams
that could sustain programs when the grant
funds were expended. An integral part of the
team project of the Management Academy for
Public Health is a business plan that contains a
revenue-generating component. The business
plan is intended to address real health issues in
communities. The Academy teams use the plans
to attract start-up funds and to implement new
programs. Evaluators track enhanced revenue as
a measure of success. A critical question in evaluating the success of the business plan is How
much money did locally implemented business
plans generate from grants, contracts, and fees?
158 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
to learn from the experiences of others, and generally pursue excellence in
all aspects of organizational performance. In fact, Hamel and Prahalad note
that traditional strategic as well as behavioral factors may lead to competitive
advantage: Cross-functioning teams, focusing on a few core competencies,
strategic alliances, programs of employee involvement, and consensus are all
parts of stretch. 46 In the end, determination of competitive advantage requires
an integration of what health care strategists know about the external environment with a sophisticated understanding of competitively relevant strengths
and weaknesses.
Managing Strategic Momentum
For sustained competitive advantage, strategic momentum must be maintained.
After the strategy has been initiated, the internal environment must be continuously evaluated to stay informed and current about the organization s competitively relevant strengths and weaknesses. Sustaining a competitive advantage is
diffi cult in a dynamic market and what might be a competitive advantage today
may not be an advantage tomorrow. Carefully evaluating the strengths and weaknesses relative to the four critical questions allows the strategist to focus on the
relatively few aspects of the value chain that have the potential for building and
sustaining competitive advantage. Care must be exercised, however, to ensure
that new and emerging strengths or weaknesses are adequately considered in
the continuous assessment of the internal environment.
An example of a successful business plan is
that of a team from Dare County, North Carolina.
The team developed a business plan to provide
dental care to under-served school-age children
in a mobile unit that could serve two patients at
a time. The plan forecasted a break-even point for
the mobile clinic on the basis of such factors as
payer mix, case mix, and capacity. The plan was
submitted to the Kate B. Reynolds Charitable Trust
which provided most of the $277,000 in start-up
funds to purchase the van. Program revenue covered ongoing personnel and supply costs.
During the first three years of the
Management Academy program, the Academy
spent roughly $2 million on training. The business plans implemented during this same
period generated more than $6 million in
start-up funds and revenue. Interviews with
participants after completion of the program indicated that many had become more
entrepreneurial in their approach to
public health. Civic entrepreneurship is
becoming an important part of public health
management.
Source: Stephen Orton, Karl Umble, Sue Zelt, Janet Porter, and
Jim Johnson, Management Academy for Public Health: Creating
Entrepreneurial Managers, American Journal of Public Health 97,
no. 4 (2007), pp. 601605.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 159
EXHIBIT 410 Questions for Evaluating the Internal Strategic Assumptions
1. Have the strengths and weaknesses been correctly identifi ed?
2. Is there a clear basis on which to compete?
3. Does the strategy exploit the strengths and avoid the major weaknesses of the organization?
4. Are the competitive advantages related to the critical success factors in the service area?
5. Have we protected our short- and long-term competitive advantages?
6. Has the competition made strategic moves that have weakened our competitive advantages?
7. Are we creating new competitive advantages?
The questions presented in Exhibit 410provide for such an ongoing evaluation of the effectiveness of the internal environmental assessment. Ensuring
appropriate strategic fi t requires that the internal as well as the external environments be continuously assessed and evaluated.
Lessons for Health Care Managers
Competitive advantage resides within the organization, whether it is a hospital, physician s offi ce, or health maintenance organization. Understanding
competitive advantage requires a careful analysis of the internal organizational
environment through the organization s value chain. The value chain provides
an analysis framework for identifying and focusing on areas in a health care
organization where value may be added. The value chain is divided into two
major components the delivery of health services and support activities.
Service delivery includes pre-service activities, point-of-service activities, and
after-service activities. Support activities include organizational culture, organizational structure, and strategic resources.
By investigating all systems and subsystems of the value chain and evaluating
the resources, competencies, and capabilities, strategic thinkers are better able to
identify possible strengths and weaknesses. Each strength and weakness is evaluated in terms of its value, rareness, imitability, and sustainability to determine those
that are competitively relevant. Competitively relevant strengths and weaknesses
provide the bases for developing strategies and competitive advantages.
Understanding competitive advantage is important to health care strategists
but often more is required of successful organizations. Successful health care
organizations must always insist on stretching their resources, competencies,
and capabilities to the limit while creatively looking for new opportunities.
Sustaining competitive advantage, requires that leaders understand what the
environment demands of successful health care organizations, confi guring competitively relevant strengths to the organization s greatest advantage, eliminating
or minimizing the adverse effects of competitively relevant weaknesses, and
establishing demanding aspirations that require strategic assets to be pushed to
their limits while constantly searching for new opportunities. Chapter 5 examines the development of directional strategies.
160 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Health Care Manager s Bookshelf
Jay B. Barney and Delwyn N. Clark,
Resource-Based Theory: Creating and
Sustaining Competitive Advantage
(New York: Oxford University Press,
2007)
In strategic management there are essentially
two explanations of why some organizations
are able to consistently outperform others
in their industries (enjoy sustained competitive advantage). The fi rst was advocated by
Porter and is based to a great extent on
industrial organization economics. This view
proposes it is the impact of an organization s
market power and its ability to charge prices
above market levels that leads to competitive
advantage. When barriers to entry are high,
the organizations with the market power can
consistently outperform competitors (p. 3).
The second explanation suggests more
effi cient and eff ective organizations can consistently outperform competitors if it is too
costly for less effi cient and eff ective organizations to emulate the more effi cient and eff ective organizations. The two explanations are
not mutually exclusive since market power
may apply in some situations and what has
become known as resource-based theory
may apply to other situations (p. 4).
In resource-based theory, the term
resource has evolved to include not only
production, physical facilities, capital, human,
and informational resources but invisible
resources such as professional competence,
organizational capabilities, and organizational culture. Sometimes, as resource-based
theory argues, one or more organizations
possess a competitive advantage because
of the resources they possess or the manner
in which they confi gure and manage their
resources. The competitive advantage may
be temporary or sustained depending on
whether or not competitors can replicate
the resources generating the competitive
advantage.
The authors develop the VRIO framework
for competitive analysis which we modify
slightly and use in this chapter. The VRIO
framework expresses four key parameters for
resource-based analysis based on a series of
questions. These are value, rarity, imitability,
and organization. We substitute sustainability
for organization (p. 69).
Barney and Clark provide a comprehensive
overview of the evolution of resource-based
theory and focuses a great deal on classical
microeconomic price theory. The second part
of the book details at a variety of specifi c
resources that may lead to sustained competitive advantage. These potential sources of
competitive advantage are:
Culture . An organization s culture can be a
source of sustained competitive advantage if it
is valuable, rare, and cannot easily be imitated.
However, it is diffi cult to sustain a competitive
advantage based on culture because if one
organization can change its culture to provide
for superior fi nancial performance, competitors can likely change their culture as well and
neutralize the advantage. However, a very few
organizations with extremely unique and valuable cultures may enjoy a competitive advantage
in particular environments (Chapter 4).
Trust . The authors adopt a defi nition of trust
that states, trust is the mutual confi dence that
no party to an exchange will exploit another s
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 161
vulnerabilities. A variety of trust relationships
are examined (e.g., strong, weak); however, it
is ultimately concluded that the trustworthiness of exchange partners will vary and it is in
this variance that the possibility of competitive
advantage may exist (Chapter 5).
Human resources . Organizations create value
and ultimately competitive advantage by either
decreasing the costs of products/services or differentiating the products/services in a way that
allows them to charge a higher price. The authors
conclude that organizations should seek employees who are skilled and motivated to deliver highquality products/services and manage the culture
to encourage teamwork and trust (Chapter 6).
Information resources . Increasingly, organizations rely on information resources to smooth
out the most basic operations. After examining
a series of information technology attributes,
the authors conclude that the only likely source
of competitive advantage from information
resources is the managerial skills of those managing these resources. These skills are frequently
diff erentially distributed among organizations
in the same market (Chapter 7).
The last major section of the book moves
from a focus on the organization s internal
resources and capabilities to the resources and
capabilities of other fi rms and the boundary
decisions managers make regarding exchange
partners. At times an organization may pursue
a sustained competitive advantage by entering
into competitive alliances, vertically integrating, diversifying, and doing so by mergers and
acquisitions. Each of these topics is discussed
in detail.
The fi nal section of the book deals with the
future of research and theory relating to the
resource-based view of competitive advantage. This book represents a defi nitive work
for those interested in learning more about
potential ways of building and sustaining
competitive advantage.
REFERENCE
Jay B. Barney and Delwyn N. Clark, Resource-Based
Theory: Creating and Sustaining Competitive
Advantage (New York: Oxford University
Press, 2007).
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
After-Service
Capability
Competency
Competitive Advantage
Competitively Relevant
Strength
Competitively Relevant
Weakness
Point-of-Service
Pre-Service
Resource-Based View
Resources
Service Delivery
Strategic Capability
Strength
Stretch
Support Activities
Sustained Competitive
Advantage
Value
Value Chain
Weakness
162 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Questions for Class Discussion
1. It has been said that the rules for success are written outside the organization but competitive advantage must be found within the organization. Explain this statement.
2. Why is value creation an important concept to health care organizations? Is value
creation more or less important in health care than in other industries?
3. Which activities, service delivery or support, are more important in the organizational
value chain? Explain your answer.
4. Why is the value chain consistent with systems concepts discussed in Chapter 1? Why
is a systems approach to internal environmental analysis important?
5. Why is the concept of competitively relevant strengths and weaknesses so important
to internal environmental analysis?
6. What is the difference between an objective and subjective strength and weakness?
Give examples of each type of strength and weakness in a health care organization.
7. Discuss the resource-based view of competitive advantage. Why is it important to
understand organizational differences in order to use this approach?
8. Briefl y defi ne what is meant by competitive advantage. Are competitive advantage
and sustained competitive advantage identical concepts? Why or why not?
9. What are the differences between capabilities and competencies? How are capabilities
related to both resources and competencies?
10. Why are capabilities referred to as architectural competencies? Would you consider
management a capability or a competency? Explain your answer.
11. When searching for competitive advantage, which characteristic of a strength or
weakness (value, rareness, imitability, sustainability) is the most important in health
care organizations? Discuss your response.
12. Why are some strengths and weaknesses that are not competitively relevant deserving
of attention by health care strategists? Provide one example of a strength and weakness that are not competitively relevant but deserve attention.
13. Why is resource leveraging an important concept in internal environmental analysis?
Notes
1. George Stalk Jr. and Rob Lachenauer, Hardball: Five
Killer Strategies for Trouncing the Competition,
Harvard Business Review 82, no. 4 (2004), p. 64.
2. David Bovet and Joseph Martha, Value Nets: Breaking
the Supply Chain to Unlock Profi ts (New York: John
Wiley & Sons, 2000).
3. Stuart L. Hart and Mark B. Milstein, Creating
Sustainable Value, Academy of Management Executive
17, no. 2 (2003), pp. 5669.
4. Dennis Gioia, Majken Schultz, and Kevin C. Corley,
Organizational Identity, Image, and Adaptive Strategy,
Academy of Management Review 25, no. 1 (2000),
pp. 6381.
5. Stephen D. Mallard, Terri Leakeas, W. Jack Duncan,
Michael E. Fleenor, and Richard J. Sinsky, Same-Day
Scheduling in a Public Health Clinic: A Pilot Study,
Journal of Public Health Management and Practice 10,
no. 2 (2004), pp. 152157.
CHAPTER 4 INTERNAL ENVIRONMENTAL ANALYSIS AND COMPETITIVE ADVANTAGE 163
6. Michael E. Porter, Competitive Advantage: Creating
and Sustaining Superior Performance (New York: Free
Press, 1985), Chapter. 2. For some limitations of the
conventional linear value chain, see Frits K. Phil and
Mattias Holweg, Evolving from Value Chain to Value
Grid, MIT Sloan Management Review 47, no. 4 (2006),
pp. 7280.
7. V. Kumar, Eli Jones, Rajkumar Venkatesan, and
Robert P. Leone, Is Market Orientation a Source of
Sustained Competitive Advantage or Simply the Cost of
Competing? Journal of Marketing 75, no. 1 (2011), pp.
1630.
8. Heiko Gebauer, Anders Gustafsson, and Lars Witell,
Competitive Advantage through Service Differentiation
by Manufacturing Companies, Journal of Business
Research 64, no. 12 (2011), pp. 12701280; Daniel I.
Prajogo and Peggy McDemott, Examining Competitive
Priorities and Competitive Advantage in Service
Organizations Using ImportancePerformance Analysis
Matrix, Managing Service Quality 21, no. 5 (2011),
p. 465.
9. Ing-Long Wu and Pi-Jung Hsieh, Understanding
Hospital Innovation Enabled Customer-Perceived
Quality of Structure, Process, and Outcome Care, Total
Quality Management and Business Excellence 22, no. 2
(2011), pp. 227235.
10. Laurence D. Ackerman, Identity Is Destiny: Leadership
and the Roots of Value Creation (San Francisco: BerrettKoehler Publishing, 2000).
11. Michael E. Nugent, Managing Your Margin after Reform
with the Strategic Margin Plan, Healthcare Financial
Management 65, no. 1 (2011), pp. 4045.
12. Stan Galser, The Value of the Manager in the Value
Chain, Management Decision 44, no. 3 (2006), pp.
442447.
13. Manuel Espinoza, Turning Diversity into a Competitive
Advantage, Financial Executive 23, no. 3 (2007), pp.
4346.
14. George Stalk, Philip Evans, and Lawrence Shulman,
Competing on Capabilities: The New Rules of
Corporate Strategy, Harvard Business Review 70, no. 2
(MarchApril 1992), p. 62.
15. Michael A. Hitt, Leonard Bierman, Klaus Uhlenbruch,
and Katsuhiko Skimiju, The Importance of Resources
in the Internationalization of Professional Service
Firms: The Good, the Bad, and the Ugly, Academy of
Management Journal 49, no. 6 (2006), pp. 11371157.
16. Glen R. Carroll, A Sociological View on Why Firms
Differ, Strategic Management Journal 14, no. 4 (1993),
pp. 237249; Giovanni Azzone and Umberto Bertele,
Measuring Resources for Supporting Resource-Based
Competencies, Management Decision 33, no. 9 (1995),
pp. 5758; Richard L. Priem and John E. Butler, Is the
Resource-Based View a Useful Perspective for Strategic
Management Research? Academy of Management
Review 26, no. 1 (2001), pp. 2240.
17. Jay Barney, The Future of Resource-Based Theory,
Journal of Management 37, no. 5 (2011), pp. 12991315.
18. Richard Hall, A Framework for Linking Intangible
Resources and Capabilities to Sustainable Competitive
Advantage, Strategic Management Journal 14, no. 6
(1993), pp. 607618. See also T. K. Das and Bing-Sheng
Teng, A Resource-Based Theory of Strategic Alliances,
Journal of Management 26, no. 1 (2000), pp. 3162.
19. Birger Wernerfelt, The Resource-Based View of the
Firm: Ten Years After, Strategic Management Journal
16, no. 3 (1995), p. 173. See also Augustine A. Lado,
Nancy G. Boyd, Peter Wright, and Mark Kroll, Paradox
and Theorizing within the Resource-Based View,
Academy of Management Review 32, no. 2 (2007), pp.
115131.
20. David G. Sirmon, Michael A. Hitt, R. Duane Ireland, and
Brett Anitra Gilbert, Resource Orchestration to Create
Competitive Advantage: Breadth, Depth, and Life Cycle
Effects, Journal of Management 37, no. 5 (2011), pp.
13901412.
21. Allison Dean and Martin Kretschmer, Can Ideas Be
Capital? Factors of Production in the Postindustrial
Economy: A Review and Critique, Academy of
Management Review 32, no. 2 (2007), pp. 573594.
22. Robert S. Kaplan and David P. Norton, Measuring
the Strategic Readiness of Intangible Assets, Harvard
Business Review 82, no. 2 (2004), pp. 5264.
23. Anonymous, Americans Rank Good Reputation,
Doctor s Recommendation as Top Indicators of Quality
Care, Health Care Strategic Management 21, no. 11
(2003), p. 8.
24. Rob Goffee and Gareth Jones, Leading Clever People,
Harvard Business Review 85, no. 3 (March 2007), p. 72.
25. Ester F. Schmid and Dennis A. Smith, Managing
Innovation in the Pharmaceutical Industry, Journal of
Commercial Biochemistry 12, no. 1 (2005), pp. 5057.
26. Raphael Amit and Paul J. H. Schoemaker, Strategic
Assets and Organizational Rent, Strategic Management
Journal 14, no. 1 (1993), pp. 3346; Juan Florin, Michael
Lubatkin, and William Schulze, A Social Capital Model
of High-Growth Firms, Academy of Management
Journal 46, no. 3 (2003), pp. 374386.
27. Stephen Orton, Karl Umble, Sue Zelt, Janet Porter, and
Jim Johnson, Management Academy for Public Health:
Creating Entrepreneurial Managers, American Journal
of Public Health 97, no. 4 (2007), pp. 601605.
28. Richard Makadok, Doing the Right Thing and Knowing
the Right Thing to Do: Why the Whole Is Greater than the
Sum of the Parts, Academy of Management Journal 24,
no. 10 (2003), pp. 10431052.
29. Hakan Aronsson, Mats Abrahamsson, and Karen
Spens, Developing Lean and Agile Health Care Supply
Chains, Supply Chain Management 16, no. 3 (2011),
pp. 176185.
30. Gilbert N. Nyaga and Judith M. Whipple, Relationships
Quality and Performance Outcomes: Achieving a
Sustainable Competitive Advantage, Journal of
Business Logistics 32, no. 4 (2011), pp. 345360.
31. Kaplan and Norton, Measuring the Strategic Readiness,
p. 54.
164 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
32. Dave Ulrich and Dale Lake, Organizational Capability:
Creating Competitive Advantage, Academy of
Management Executive 5, no. 1 (1991), pp. 7785.
33. David J. Collis, Research Note: How Valuable Are
Organizational Capabilities? Strategic Management
Journal 15, no. 2 (1994), pp. 143152.
34. Isabelle Bouty, Interpersonal and Interaction
Infl uences on Informal Resource Exchanges between
R&D Researchers across Organizational Boundaries,
Academy of Management Journal 43, no. 1 (2000), pp.
5065.
35. Stalk, Evans, and Shulman, Competing on Capabilities,
p. 62.
36. C. K. Prahalad and Gary Hamel, The Core Competency
of the Corporation, Harvard Business Review 68, no. 3
(MayJune 1990), p. 82; David Lei, John W. Slocum, and
Robert A. Pitts, Designing Organizations for Competitive
Advantage: The Power of Unlearning and Learning,
Organizational Dynamics 27, no. 3 (1999), pp. 2438.
37. Ray Gautam, Jay B. Barney, and Waleed A. Muhanna,
Capabilities, Business Processes, and Competitive
Advantage: Choosing the Dependent Variable in
Empirical Tests of the Resource-Based View, Strategic
Management Journal 25, no. 1 (2004), pp. 2331;
Dovev Lavie, Capability Reconfi guration: An Analysis
of Incumbent Responses to Technological Change,
Academy of Management Review 31, no. 1 (2006), pp.
153174.
38. Stalk, Evans, and Shulman, Competing on Capabilities,
p. 62.
39. See Linda Argote, Refl ections on Two Views of
Learning and Knowledge in Organizations, Journal of
Management Inquiry 14, no. 1 (2005), pp. 4348.
40. Descriptive and fi nancial information on Medtronic,
Inc. taken from the company s Form 10-K for fi scal
2011 and Form 10-Q for 2011 fi led with the Securities
and Exchange Commission and Medtronic s 20011
Annual Report to shareholders.
41. Amit and Schoemaker, Strategic Assets and Organizational
Rent, p. 35. See also Danny Miller, An Asymmetry-Based
View of Advantage: Towards an Attainable Sustainability,
Strategic Management Journal 24, no. 10 (2003), pp. 961
972; Margaret A. Peteraf and Mark E. Bergen, Scanning
Dynamic Competitive Landscapes: A Market-Based and
Resource-Based Framework, Strategic Management
Journal 24, no. 10 (2003), pp. 10271035.
42. Amit and Schoemaker, ibid. p. 37. See, in addition,
Constantine Kontoghiorghes, Identifi cation of Key
Predictors of Organizational Competitiveness in a
Service Organization, Organizational Development
Journal 21, no. 2 (2003), pp. 2836.
43. Jay B. Barney, Looking Inside for Competitive
Advantage, Academy of Management Executive 9,
no. 4 (1995), pp. 4961. Note that Barney added an
additional question, that of organization, that was
not included in this discussion. See also Marvin B.
Lieberman and Shigeru Asaba, Why Do Firms Imitate
Each Other? Academy of Management Review 31, no. 2
(2006), pp. 366385.
44. Gary Hamel and C. K. Prahalad, Strategy as Stretch and
Leverage, Harvard Business Review 71, no. 3 (1993),
pp. 7584.
45. This discussion has been adapted from Gary Hamel
and C. K. Prahalad, Competing for the Future
(Boston, MA: Harvard Business School Press, 1994),
Chapter 7.
46. Gary Hamel and C. K. Prahalad, Competing in the
New Economy: Managing Out of Bounds, Strategic
Management Journal 17, no. 1 (1996), pp. 237242.
Introductory Incident
Relentlessly Pursuing the Vision
It could have gone either way. On June 4, 2007 the deal was struck and Rite Aid formally acquired
Brooks-Eckerd. At the September 2006 annual senior management meeting of Rite Aid, excitement over the proposed Rite Aid acquisition of BrooksEckerd was building, as was the insecurity
among some BrooksEckerd associates. The acquisition created an industry leader with combined revenue of almost $27 billion and made Rite Aid the largest pharmacy chain on the East
Coast. Then CEO (now Chairman of the Board) Mary Sammons challenged Rite Aid s associates
5 Directional Strategies
CEOs and boards love a good mission statement that is, after the pain of writing it is
over. They should. A mission statement is literally a defi ning moment and something you
would proudly show your mom.
MARY GRAYSON
166 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
to make the company bigger, better, and faster. Others were not so optimistic and cautioned
that success of the consolidation would not be just fi nancial.
At the BrooksEckerd managers meeting in 2007, Sammons stated that I feel so fortunate
to share with you Rite Aid s vision and how we can make this vision a reality. The guiding force,
simply stated is With Us, It s Personal. The goal was to close the gap between Rite Aid and its
national competitors, CVS and Walgreens, and make the company the customer s fi rst and only
choice when it comes to health and wellness. As worthy as the goal was, some insiders cautioned
Rite Aid that talk is cheap; it s action that delivers results. Vision, is nothing without execution.
Ultimately, success depends on the associates. Sammons agreed, stating that great vision without great people simply doesn t matter.
The BrooksEckerd acquisition was a turning point in Rite Aid s history. At the time of the
acquisition, Rite Aid operated about 5,000 stores in 31 states and the District of Columbia.
Although the sales growth in the pharmacy industry has slowed signifi cantly in recent years,
Rite Aid has maintained its competitive position and currently operates 4,700 stores with a
substantial increase in its West Coast operations. Almost 68 percent of its revenues come from
prescriptions, with the other 32 percent accounted for by front-end products such as over-thecounter medications, cosmetics, health and beauty aids, and so on. The challenge is to continue
to gain acceptance of the Rite Aid vision and transfer it to the new and larger organization.
According to Mary Sammons, it stopped being about survival a long time ago and started being
about growth. We are in the best fi nancial shape we ve ever been in. It is true that the success or
failure of the combination will not be in the numbers fi nancial or growth. The key to success,
according to Rite Aid s COO at the time, will be in everyday actions that make the numbers come
to life. Our business is only as strong as we make it. The new Rite Aid is solidly in third place in
the retail pharmacy and wellness business. Integrating the existing cultures and building a
mutually challenging vision of the future will be the deciding factor.
In 2003, Rite Aid is working hard to distinguish itself from the competition. The company s
strategic alliance with GNC, a leading retailer of vitamin and mineral supplements, provides
greater opportunities for front-end sales. In 2010 Rite Aid rolled out its wellness+ card-based
loyalty program that provides benefi ts to cardholders based on the points they accumulate for
purchases of prescriptions and front-end products. Currently, wellness+ cardholders account for
about 67 percent of front-end sales and 58 percent of fi lled prescriptions.
Rite Aid s mission is clear:
To be a successful chain of friendly, neighborhood drugstores. Our knowledgeable, caring
associates work together to provide a superior pharmacy experience, and off er everyday
products and services that help our valued customers lead healthier, happier lives.
In 2003, Rite Aid continues to face challenges in assuring the success of the acquisition.
Experts indicated that the 2007 acquisition of BrooksEckerd bogged the company down, with
debt accounting for much of the $2.9 billion loss in fi scal 2009. First-quarter losses in 2012 were
CHAPTER 5 DIRECTIONAL STRATEGIES 167
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 attempts to capture the organization s distinctive purpose
or reason for being. The vision creates a mental image of what leaders want
the organization to achieve when it is accomplishing its purpose or mission. It
is the organization s hope for the future. Values are the principles that are held
dear by members of the organization. These are guiding principles the managers
still at $28 million but projections indicated the company expected a 1 percent increase in 2013
sales. Rite Aid continues to struggle but has done well to maintain its market position during
extremely diffi cult conditions. It is well positioned for the future challenges it and the pharmacy
industry, in general, face.
Source: Rite Aid website, 2011 Annual Report, SEC Form 10-K, and Michael Johnsen and Antoinette Alexander, Rite Aid and BrooksEckerd
Meetings Set the Vision, Spirit of the Future, Drug Store News 28, no. 12 (September 25, 2006), pp. 13.
Learning Objectives
After completing the chapter you will be able to:
1. Understand the roles of and relationships among organizational mission, vision,
values, and strategic goals and why they are called directional strategies.
2. Recognize the important characteristics and components of organizational mission and be able to write a mission statement.
3. Recognize the important characteristics and components of vision and be able
to write an organizational vision statement.
4. Recognize the important characteristics and components and be able to write a
values statement.
5. Recognize the important characteristics and components and be able to write
strategic goals.
6. Identify service category critical success factors.
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 organizations values.
8. Recognize the important issues in the governance of health care organizations
and the role of boards of directors in maintaining policy-making direction.
168 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 those
overarching end results that the organization pursues to accomplish its mission
and achieve its 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
though the statements are clearly labeled there is a wide variety of terms used
to express the ideas contained in them. 1
Organizational Purpose and Mission
Chester Barnard, in 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 (for more detail, see the Health Care
Manager s Bookshelf at the end of this chapter). The inculcation of the belief in
the real existence of a common purpose is, according to Barnard, the essential
executive function. 2 Purpose, among other things, helps managers make sense
of the environment. When the purpose of an organization is clearly understood,
the complexity of the environment can be reduced and organized in a way that
can be analyzed in light of the goals the organization wishes to achieve. The
complex environment is no longer a mere mess of things. 3 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 simultaneously considers all the turbulence in the organization s environment, the environment will
appear confusing and 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 organization, the task becomes more
manageable.
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 in as convenient a way as possible or
to provide the care needed by groups of individuals 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 general, it is more concrete than vision. An organizational mission is not an expression of hope. On the contrary, it is an attempt
to capture the essence of the organizational purpose and commit it to writing.
CHAPTER 5 DIRECTIONAL STRATEGIES 169
DaVita Inc., a Fortune 500 company, is a leading provider of kidney care. In its
mission statement, DaVita states that the company is committed To be the provider, partner, and employer of choice. 4 In this case DaVita chooses to emphasize the way it does business rather than the services it provides. The company
attempts to differentiate itself from other kidney care companies by focusing
on quality outcomes, building a diverse community as a provider of services,
partnering with other organizations, and becoming a good place to work for its
almost 37,000 teammates.
An organizational mission is a broadly defi ned and enduring statement of
purpose that distinguishes a health care organization from other organizations
of its type and identifi es the scope of its operations in product, service, and
market (competitive) terms. 5 The mission statement of the University of Texas M.
D. Anderson Cancer Center in Exhibit 51 , 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 specifi c disease (cancer); and its commitment 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. M. D. Anderson employs an effective logo on its
website that states it is the M. D. Anderson Cancer Center with a bold red line
through the word cancer, thus emphasizing its commitment to eliminating
cancer. Although mission statements are relatively enduring, they must be fl exible in light of changing conditions. The changes facing academic medicine will
continue to impose pressures on specialized centers of excellence such as M. D.
Anderson because of the substantial costs involved in integrating patient care
with the teaching and research mission and the increasing reluctance of payers
to reimburse for educational costs.
Mission statements are sometimes not the true living documents that are
capable of encouraging high performance. Studies of mission statements confi rm
that the full potential of this directional strategy is rarely achieved. 6 Often mission statements appear to be obligated to make reference to specifi c 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, service delivery and support strategies must be designed
to contribute to mission accomplishment.
One study of hospital mission statements found that almost 85 percent of the
respondents had mission statements; however, some of the executives who completed the survey did not perceive a high level of commitment to the statement
by employees or that specifi c actions were infl uenced very much by the mission. 8
EXHIBIT 51 Mission Statement of the University of Texas
M. D. Anderson Cancer Center
The mission of the University of Texas M. D. 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 M. D. Anderson Cancer Center.
170 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 infl uence that these statements actually
have on behavior within organizations. 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. 9 Moreover,
a sense of mission is not a guarantee of success. As illustrated in Perspective
51 , a nice sounding mission statement is not enough. The organization has to
adhere to the mission and regularly review it to be sure that it remains relevant
in changing times. When the mission is carefully crafted, mission fulfi llment
infl uences a variety of key psychological states related to employee motivation
(e.g., employment engagement, organizational identifi cation, and so on). 10 It
has also 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. 11
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:
1. 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 referred 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.
2. 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.
3. 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 diffi cult and often
impossible. Recently, 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. 12
An organization should carefully evaluate strategic decisions with the use of
its mission statement. When new opportunities are presented it can use the three
key questions to determine whether or not the new opportunity is consistent
CHAPTER 5 DIRECTIONAL STRATEGIES 171
with its essential distinctiveness. Moreover, these three questions are important
guards against mission drift, which tempts many health care organizations to go
into businesses and programs that are not in line with their stated mission. 13
As an example, Express Scripts mission statement (see Exhibit 52 ) provides
guidance for its strategic leaders and 13,000 employees in determining whether
or not new opportunities should be pursued. To be consistent with the mission,
opportunities need to involve services or processes that make prescription drugs
safer and more affordable to the members of the health plans. Adherence to the
mission has led the company to be an industry leader striving for the lowest
net cost to provide better health and value at the consumer level. The company
notes that its generic fi ll rate leads the industry.
PERSPECTIVE 51
Do Mission Statements Matter?
Prominent displays of mission statements in
the elevator, on employees name badges, and
business cards are not enough to ensure that
the message is taken to heart. Some managers
wonder why organizations spend so much time
talking about mission statements when they
are often not taken seriously. Do organizations
actually plan their future based on the mission
(directional strategy) or do they simply respond
to changing conditions?
Undoubtedly, some mission statements are
not very good. They may sound fi ne and even
have been crafted by an astute consultant or
public relations fi rm; however, if they do not
speak the language of employees and stakeholders they will not have much infl uence on
behavior or performance. Organizations must
think seriously about the future of their industry and their unique role in capitalizing on the
opportunities created by changing times. This
distinctiveness must then be captured in the
mission statement.
Mission statements sometimes suff er from
the following problems:
Mission statements are written solely for
their public relations value.
Mission statements describe the purpose of
all the organizations in the service category.
Mission statements may have more time
invested in their crafting than in their
implementation.
Mission statements, if they are to be useful,
must state the purpose of the organization and
provide a good sense of what makes the organization diff erent and what it is devoted to accomplish. A mission statement should help the
organization focus on its uniqueness. Writing a
mission statement is important; however, living
it is more important. Whatever is incorporated
into the mission statement must be credible,
realistic, attainable, and assist in diff erentiating
the organization from all its competitors.
Sources: Greg Kitzmiller, Do Mission Statements Matter?
Reviewing the Importance of a Mission Statement and, More
Importantly, Sticking to It, Nutraceuticals World 6, no. 10 (October
2003), p. 22; Tracy Turner, Mission Statement Useful, Expert Says
Companies Benefi t by Defi ning, Acting on Their Goals, Knight
Ridder Tribune Business News (May 13, 2007), p. 1.
172 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Characteristics of Mission Statements
The mission statement of St. Jude Medical in St. Paul, Minnesota (Exhibit 53)
illustrates some of the important characteristics of an effective mission statement. St. Jude Medical produces implantable cardioverter defi brillators, cardiac
resynchronization therapy devices, pacemakers, spinal cord stimulation, deep
pain stimulation devices, and so on. The product portfolio is carefully stated in
the mission statement so the interested individuals can see immediately that St.
Jude Medical competes with companies such as Medtronic in selected product
lines. St. Jude Medical attempts to lessen risk and increase control by collaborating with physicians on product design, seeking simpler solutions to complex
problems, designing products that help lessen procedural risks, expanding
education and product training, and developing expertise in all employees that
assists them in fulfi lling the mission. Four important characteristics of effective
mission statements are:
1. Missions are broadly defi ned 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,
specifi c. The St. Jude Medical mission makes it clear that the company s
focus is on selected medical products and technologies but at the same
time outlines a number of ways the mission can be accomplished. That is,
mission statements should be general enough to allow for innovation and
expansion into new activities when advisable, yet narrow enough to provide direction. 14
2. Mission statements are enduring. The purpose, and consequently the mission, of an organization does not change often and should be enduring.
People are committed to ideas and causes that remain relatively stable
over time.
3. Mission statements should underscore the uniqueness of the organization.
Mission statements distinguish the organization from all others of its type.
The important uniqueness for St. Jude Medical is the focus on selected
EXHIBIT 52 Mission Statement of Express Scripts
Express Scripts makes the use of prescription drugs safer and more aff ordable for tens of millions
of consumers through thousands of employers, government, union, and health plans.
Source: Express Scripts.
EXHIBIT 53 Mission Statement of St. Jude Medical
It is our mission to develop medical technology and services that put more control into the
hands of those who treat cardiac, neurological, and chronic pain patients worldwide. We do this
because we are dedicated to advancing the practice of medicine by reducing risk wherever possible and contributing to successful outcomes for every patient.
Source: St. Jude Medical.
CHAPTER 5 DIRECTIONAL STRATEGIES 173
medical technologies, increased control by those who treat cardiac, neurological, and chronic pain patients.
4. Mission statements should identify the scope of operations in terms of
service and market. 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. Note that St. Jude Medical is specifi c in its commitment to physicians that use its products.
Although missions are enduring, this should not imply that the mission will
never, or should never, change. New technologies, demographic trends, and so
on might be very good reasons to rethink the mission of an organization. For
example, a number of hospitals have incorporated the desire to be an independent provider of health care in their mission statement. In today s managedcare-oriented health care environment, that aspect of mission may need to be
revisited. In some markets, alignment with managed care organizations might
become a necessity for survival and the mission statement should not stand in
the way.
These characteristics illustrate the essential properties of well-conceived and
communicated mission statements. 15 They outline worthy ideals that are always
in the process of being achieved by strategic leaders in health care institutions.
The mission provides direction. Mission statements are not easy to write, but
fortunately there is general agreement on what they should include.
Components of Mission Statements
There is no single way to develop and write mission statements. Studies of
Canadian not-for-profi t hospitals indicate that they emphasize a variety of factors in their mission statements. 16 To defi ne the distinctiveness of an organization, mission statements must highlight those things that constitute 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. 17
1. 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. The mission statement of the Little Clinic states that it will offer
America s most convenient and accessible delivery of affordable nonemergency health and wellness care for the whole family. To this end
the clinic diagnoses and treats minor illnesses for patients 18 months of
age (24 months in Kentucky) and up with certifi ed nurse practitioners or
physician assistants in its 80 locations in select Kroger, Fry s, and King
Sooper stores in Ohio, Kentucky, Tennessee, Arizona, Georgia, and Colorado.
Exhibit 54provides the mission statement of St. Jude Children s Research
Hospital. This mission statement clearly states the target patients served
by this prestigious health care organization.
2. Mission statements indicate the principal services delivered or products
provided by the organization. A specialized health care organization might
174 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
highlight the special services it provides in its mission statement. The mission statement of Alcon illustrates a statement built around innovative primary services designed to enhance the quality of life by helping people
see better and hopefully one day to eliminate blindness (see Exhibit 55).
3. 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. Aurora Health System, for example, specifi cally mentions
that it is a Wisconsin not-for-profi t health care system in its mission statement (see Exhibit 56).
4. Mission statements identify the organization s philosophy. Frequently the
mission of an organization will include statements about unique beliefs,
values, aspirations, and priorities. Beliefs and values are often included in
mission statements for health facilities operated by religious denominations. The mission statement of Resurrection Health Care in Exhibit 57
illustrates the faith-based philosophy of this health services organization.
5. Mission statements include confi rmation of the organization s preferred
self-image. The manner in which a health care organization views itself
may constitute a uniqueness that should be included in the mission. The
mission statement of Unitedhealth Group emphasizes the organization s
desire to help people live happier lives and make better health care decisions (see Exhibit 58).
EXHIBIT 54 Mission Statement of St. Jude Children s Research Hospital
The mission of St. Jude Children s Research Hospital is to advance cures, and means of prevention,
for pediatric catastrophic diseases through research and treatment. Consistent with the vision
of our founder Danny Thomas, no child is denied treatment based on race, religion, or a family s
ability to pay.
Source: St. Jude Children s Research Hospital.
EXHIBIT 55 Mission Statement of Alcon
To provide innovative products that enhance quality of life by helping people see better. As the
global leader in eye care, this mission means that we strive to make signifi cant contributions in
the fi ght to prevent and, one day, eliminate blindness.
Source: Alcon.
EXHIBIT 56 Mission Statement of Aurora Health Care
The mission of Aurora Health Care, as a not-for-profi t Wisconsin health care system, is to promote
health, prevent illness, and provide state-of-the-art diagnosis and treatment, whenever and
wherever we can best meet people s individual and family needs.
Source: Aurora Health Care.
CHAPTER 5 DIRECTIONAL STRATEGIES 175
6. 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
unique approach or focus that they want to communicate to the public. The
mission statement of Universal Health Services, Inc. clarifi es the organization s commitment to its multiple stakeholders (see Exhibit 59).
Not every one of the characteristics can or should be included in the mission
statement. Any particular statement will likely include one or several of these
characteristics but seldom will all of the components be included. 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 mission statements. Moreover, it seems that components such as
EXHIBIT 57 Mission Statement of Resurrection Health Care
Faithful to the spirit of our sponsors, Resurrection Health Care exists to witness God s sustaining
love, through compassionate, family-centered care. Motivated by a reverence for life and respect
for those we serve, we are committed to improving the health and well-being of our community.
We promote a climate that empowers all of us to eff ectively steward our human and fi nancial
resources.
Source: Resurrection Health Care.
EXHIBIT 58 Mission Statement of Unitedhealth Group
Our mission is to help people live happier lives. Our role is to help make health care work for
everyone.
We seek to enhance the performance of the health system and improve the overall health
and well-being of the people we serve and their communities.
We work with health care professionals and other key partners to expand access to quality
health care so people get the care they need at an aff ordable price.
We support the physician/patient relationship with the information, guidance and tools they
need to make personal health choices and decisions.
Source: UnitedHealth Group.
EXHIBIT 59 Mission Statement of Universal Health Services, Inc.
To provide superior healthcare services that patients recommend to families and friends, physicians prefer for their patients, purchasers select for their clients, and investors seek for long-term
returns.
Source: Universal Health Services, Inc.
176 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
organizational philosophy, self-concept, and desired public image were particularly associated with higher-performing organizations in the sample studied. 18
Building a Mission Statement
For a mission statement to be useful there has to be a leader who begins 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 has been useful in building mission statements is to convene a group of interested employees (administrative and non-administrative) to begin the task of developing or
rethinking a mission statement. This group should be composed of individuals who understand the issues facing the health care industry as well as the
strengths and weaknesses of the organization.
Prior to actually writing the mission statement, a series of meetings should be
held to ensure that there is a desire for a well-understood and widely communicated
statement of organizational distinctiveness. 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 these perceptions of success would likely be in the future.
After the group has been given time to think about the organization, its distinctiveness in its environment, and the likely future it will face, the group may
meet in a planning retreat. Often it is useful to remove the participants from the
offi ce, phones, and beepers to have the opportunity to truly focus on the organization s mission. To stimulate strategic thinking, each person should be asked to
refl ect on the mission statement components listed in Exhibit 510 . 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 components. The key words should
be recorded and eventually used as the raw material for the mission statement.
Participants are encouraged to generate the key words through a series of fi ll-inthe-blank statements listed under each mission statement component.
After discussion and fi ne-tuning the language, a draft of the mission statement can be developed. The draft should be refi ned and rewritten by the group
until there is consensus on the wording and meaning of the mission statement.
Once the group is satisfi ed with the statement, it should be circulated among
key individuals to gain their input and eventually their support for the mission.
Moreover, as illustrated by Perspective 52, the mission must be continuously
re-examined to ensure it remains relevant.
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. For this
reason, employees should be involved in the development and communication
of the mission. However, top-level leadership must be committed if the process
is to actually begin. Top-level management must stay engaged in the mission
CHAPTER 5 DIRECTIONAL STRATEGIES 177
development process but not dominate it. Board rooms and executive suites can
be places where great ideas for mission development originate but people at all
levels must be involved if commitment to the mission is to be obtained. 19
Developing a mission statement is a challenging task. Frequently, attempts
are made to formulate blue sky statements of environmental and competitive
constraints 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 benefi ts 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 benefi ts must be competitive.
The role of the chief executive offi cer in formulating the mission should not
be underestimated. Mission statement development is not a task that should
be delegated to a planning staff. The CEO, the leadership team, and other key
individuals who will be instrumental in accomplishing the mission should have
input into the document.
Although the process appears to be simple, the actual work of writing a mission statement is time consuming and complex, with many drafts before the
fi nal document is produced. The strategic thinking map (Exhibit 510 ) is a useful
EXHIBIT 510 Strategic Thinking Map for Writing a Mission Statement
Component Key Words Refl ecting 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 specifi c 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 our services to our customers are
4. Specifi c values:
Specifi c 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:
Any other factors that make us unique among
competitors are
178 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 52
Redefi ning the Organization s Purpose
Threats often create opportunities and sometimes the greater the threat, the greater the
opportunity. Some people believe that scandals, although a threat to the competitive enterprise system, create an opportunity to carefully
re-evaluate and redefi ne the purpose of the
organization. An important competitive advantage may be gained for those who redefi ne
themselves and become more responsive to
the environment. Self-reform is almost certain to eff ect more fundamental change than
externally imposed regulations. The agenda
for self-reform consists of fi ve important
actions:
1. Develop consensus on a revised statement of purpose and values. The terms
profi t making and creating shareholder
value do not refl ect the reality of today s
environment. The function of the profi toriented concern is economic but its
purpose is social. Profi t-oriented fi rms in
health care or any other industry exist at
the discretion of society and must serve
society s needs.
2. Clarify the true role of profi t. Organizations
must have profi ts (revenues in excess of
expenses). If they do not generate a profi t,
they cease to exist (over the long run).
Profi t is a means, a motivator, and a measure of performance. Moreover, profi t is an
important incentive for entrepreneurial
action and innovation. It provides the
reward for taking the risks that are critical
to success.
3. Articulate and communicate the distinctions between the old purpose, values, and
behaviors, and the new. Once the new mission and values are crafted, they require
a cheerleader and advocate to emphasize the importance of the value shift.
Strategic leaders must use every opportunity to explain and, if necessary, defend
the importance of the culture and value
shifts.
4. Set a strong personal example. A culture
balances the interests of employees,
customers, the community, and other
relevant stakeholders; it also requires that
leaders embody in action, as well as in
pronouncements, the qualities of the new
culture.
5. Revise the management measurement and
reward system. If the purpose is defi ned
broadly and responsibly, measures have to
be refi ned and utilized. The triple-bottomline approach focusing on economic
performance as well as on social and
environmental outcomes is a step in the
right direction.
George Merck, founder of the pharmaceutical
giant, stated, We try never to forget that medicine is for people. It is not for profi ts. The profi ts
follow, and we have to remember that they
have never failed to appear. The better we have
remembered that, the larger they have been.
Source: Ian Wilson, The Agenda for Redefi ning Corporate
Purpose: Five Key Executive Actions, Strategy & Leadership 32, no.
1 (2004), pp. 2127.
CHAPTER 5 DIRECTIONAL STRATEGIES 179
aid to thinking about clients, services, and domain; however, the development
and communication of a well-conceived mission statement requires use of the
compass (leadership) as well. Although developing a mission statement is not an
easy task, it is a necessary one. Missions must be relevant not only to the present
but also to the future.
Vision: Hope for the Future
The mission is developed from the needs of all the 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 fulfi lling its purpose. 20 Vision involves creating compelling images of
the future and produces a picture of what could be and, more important, what
a leader wants the future to be. 21
Effective visions possess four important attributes: idealism, uniqueness,
future orientation, and imagery. 22 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. 23 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 are statements of destination that provide a compass
heading 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. Rarely do
they focus on tangible outcomes. Images motivate people to pursue the seemingly impossible.
Origins of Vision
Health care leaders acquire 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 that affect the development of vision. For example, the founder s
philosophy might be important. The Mayo Clinic in Rochester, Minnesota, is an
organization that is rich in history and tradition. Children s books tell successive generations how a destructive tornado in Rochester one night caused the
Sisters of Saint Francis to aid the elder Dr. Mayo in caring for storm victims and
encouraged his two sons, Will and Charlie, to follow in their father s footsteps.
Mayo Clinic s website presents the story as well in rich and passionate terms.
The result is a world-famous research, teaching, and patient care facility that
continues to thrive and expand far beyond the boundaries of Minnesota. Anyone
180 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
who hopes to succeed at the Mayo Clinic and understand its unique vision must
be aware of the founders and the past. The history of an organization is instrumental in the formation of its image and its vision or hope for what it is capable
of becoming. 24
Vision and the Environment Another important determinant of an organization s vision is the leader s view of the environment. Some organizations have
negative experiences with environmental forces such as the government. Many
private physicians and health care managers look at government attempts to
set rates, regulate quality, and so on as unnecessary and unwarranted interventions in private enterprise. When this view is adopted, adversaries are seen in
the environment and the vision becomes altered accordingly. 25 The vision is
compromised and lack of accomplishment is blamed on these external forces.
Sometimes the past experiences of organizations and the uncontrollable nature
of environmental forces cause managers to either over- or under-react.
The vision must bear a relevant relationship to the larger system in that it
must be sensitive to the changes taking place in the general and health care
environments. As illustrated in Perspective 53, future trends of health systems
are key considerations in formulating the health care strategist s vision.
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. 26 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 present internal
capacity and how this capacity relates to its aspirations.
Organizations deal with this creative tension in different ways. If the organization 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 current
reality.
Leaders have visions; organizations gain and lose competitive advantage
based on how the vision fi ts the environment and the strategic capability of
the organization to capitalize on opportunities. However, developing a vision is
messy work, and for this reason it is necessary to examine more closely what
organizational vision actually means. 27
Health Care Strategists as Pathfi nders
The job of building a vision for an organization is frequently referred to as
pathfi nding. 28 When the leader of a health care organization functions as a
pathfi nder, the focus is on the long run. The goal of the pathfi nder is to provide
a vision, fi nd the paths the organization should pursue, and provide a clearly
marked trail for those who will follow. As Senge notes, pathfi nders have an ability to create a natural energy for changing reality by holding a picture of what
might be that is more important to people than what is. 29
CHAPTER 5 DIRECTIONAL STRATEGIES 181
Strategic leaders are the key to establishing a vision for an organization. A
vision-led organization is guided by a philosophy to which leaders are committed but has not yet become obvious in the daily life of the organization. The
vision-led approach hopes for higher levels of performance that are inspiring
PERSPECTIVE 53
If You Want to Be a Visionary, Be Sensitive to Trends
Formulating a vision requires one to be sensitive to trends. However, predicting the future of
health care is a risky business. Some major trends
or changes predicted by health care experts contacted by Hospitals & Health Networks are listed
below. These experts envision a health care
future with larger, more integrated systems, more
patient-centered care, new relationships between
hospitals and physicians, and a shift of many inpatient procedures to outpatient or home settings.
Financing the future. Paying for technological and procedural improvements will not be
cheap. But the investments will be worth the
cost. The impact of potentially high-value technologies on operating costs, staffi ng capacity,
physician relations, infrastructure and support
requirements, and quality and safety will far
outstrip the cost of capital investments.
Fewer, larger, better systems. Larger organizations will likely be able to cope better with
future demands because of their resource base.
Smaller systems are likely to fi nd it more diffi cult
to attract needed capital. Larger organizations
with stronger balance sheets will be preferred
by lenders and investors. Moreover, these larger
systems could do a better job of overhauling the
currently fragmented delivery system.
Hospitalphysician relationships. Reimbursement trends, technological changes, and physician entrepreneurship are causing changes
in hospitalphysician relationships and could
even pose competitive threats to hospitals.
A specifi c challenge is the extent to which physicians set up large practices independent of
hospitals and duplicate services off ered in the
hospital. Some experts see physician competition for outpatient services as a bigger threat
than the creation of specialty hospitals.
Patient-centered. Health care organizations are paying more attention to the needs
of patients and their families, especially the
elderly. This segment of the population is
becoming ever more important as the fi rst of
America s baby boomers are reaching retirement age. There are approximately 78 million
baby boomers.
Cost and collaboration. According to the
Centers for Medicare and Medicaid Services,
the cost of health insurance will increase about
6.4 percent annually for the next decade. Cost
containment will continue to be at the top of the
list for politicians and policy makers. Pressure
from baby boomers, continuation of the cost
squeeze, and increased numbers of uninsured
seem certain to be part of the health care future.
What does all this have to do with vision?
Visions need to take into account the reality of
the health care environment and its evolution.
Regardless of the type of health care organization, leaders should formulate their vision based
on a likely health care future.
Source: Dave Carpenter, Visions of Health Care s Future: Bigger,
More Patient-Focused Systems? Hospitals & Health Networks 81,
no. 5 (May 2007), pp. S4S7.
182 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
although they cannot yet be achieved. 30 A primary role of management under
this approach is to clarify goals and priorities and to ensure that they are
understood and accepted by employees. 31 Individuals become engaged in the
organization when they see a clear line of sight between vision, performance
objectives, and personal contributions to the purpose of the organization. 32
The role of the strategic leader, however, is more than pathfi nding. As Barnard
noted, because executives are responsible for inculcating the purpose into every
employee, the leader must also be the keeper of the vision a cheerleader who
holds on to the vision even when others lose hope. 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 keeps the inspirational vision
before them (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 infl uencing the environment, developing adaptive strategies, and managing
key constituencies. 33 Unfortunately, the exclusive focus on the CEO s role in
strategic leadership has implied that middle management has little or no involvement in determining the strategic direction of the organization. Admittedly, the
primary responsibility of middle management is strategy implementation; however, certain strategic directions require middle-management involvement. 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. 34 Quality has
become an important value to which employees at all levels can be committed; middle managers are in the best position to encourage and reinforce this
commitment.
Another important area in which middle management should be involved is
in the redefi nition of organizational vision. Grand strategies and futuristic visions
are important for health care organizations. If the vision is to become meaningful
to nurses, pharmacists, medical laboratory technicians, and others, middle and
fi rst-line managers must take the lead in helping to redefi ne the organizational
vision in terms that are meaningful to departments and work groups. Finally,
with regard to building involvement and commitment to service and quality,
middle managers are in the best position to appeal to the social and economic
motives important to health care employees.
Characteristics of Effective Vision
If vision is based on hope, it is in reality a snapshot of the future that the
health care leader desires to create. It has been said that for an organizational
vision to be successful it must be clear, coherent, consistent, have communicative
power, and be fl exible. 35
A clear vision is simple. Basic directions and commitments should be the
driving forces of a vision, not complex analysis beyond the understanding of
most employees. 36 A vision is coherent when it fi ts with other statements,
including the mission and values. It is consistent when it is refl ected in decision-making behavior throughout the organization. 37 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 meaningful, a vision must be fl exible. The future, by defi nition,
CHAPTER 5 DIRECTIONAL STRATEGIES 183
is uncertain. Therefore, an effective vision must remain open to change as the
picture of the future changes and as the strategic capabilities of the organization evolve over time.
According to Tom Peters, to effectively outline the future and facilitate the
pursuit of organizational and individual excellence, visions should possess certain characteristics:
1. Visions should be inspiring, not merely quantitative goals to be achieved
in the next performance evaluation period. In fact, visions are rarely
stated in quantitative terms. They are, however, nothing less than revolutionary in character and in terms of their potential impact on behavior.
The vision of Tenet Healthcare, for example, states the lofty vision to
redefi ne health care delivery. It also speaks to the passion of Tenet s
people and partners (Exhibit 511).
2. Visions should be clear, challenging, and about excellence. There must be
no doubt in the manager s mind about the importance of the vision. If the
keeper of the vision has doubts, those who follow will have even more.
The vision statement of Princeton HealthCare System provides a great
deal of specifi cs in its guidance for executive decision makers. It makes
it clear the Princeton HealthCare is an integrated system that is dedicated
not only to responding to the lifelong needs of residents; however, providing leadership in anticipating these needs (see Exhibit 512).
3. Visions must make sense in the relevant community, be fl exible, and
stand the test of time. If the vision is pragmatically irrelevant, it will not
inspire high performance.
4. Visions must be stable, but constantly challenged and changed when necessary. The vision statement of Hebrew Health Care illustrates the manner
in which a vision can be formulated so as to provide focus but remain
broad enough to allow for changing conditions and developments (see
EXHIBIT 511 Vision of Tenet Healthcare
Tenet will distinguish itself as a leader in redefi ning health care delivery and will be recognized
for the passion of its people and partners in providing quality, innovative care to the patients it
serves in each community.
Source: Tenet Healthcare.
EXHIBIT 512 Vision Statement of Princeton HealthCare System
Princeton HealthCare System is a premier, integrated healthcare system that strives to anticipate and respond to the lifelong needs of the residents of Central New Jersey and beyond by
providing excellent clinical care. Princeton HealthCare System is recognized for its commitment
to enhancing the health of its community; providing superior services to its patients, delivering
outstanding value, embracing clinical innovations; providing exceptional medical and health
education; and supporting a knowledgeable, skilled and caring medical and employee staff .
Source: Princeton HealthCare System.
184 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Exhibit 513 ). Future advances in health care can easily be accommodated with only minor changes in the vision statement.
5. Visions are beacons and controls when everything else seems up for
grabs. A vision is important to provide interested people with a sense
of direction. A well-formulated vision statement guides decision making because it provides inspiration for success in the future. More than
three-quarters of a century ago, the founders of the Cleveland Clinic
Foundation set out to develop an institution where diverse specialists
would be able to think and act as a unit. This can only be realized when
everyone understands the vision and accepts the legitimacy of the direction it offers.
6. Visions empower employees (the organization s own people) fi rst and
then the clients, patients, or others to be served. Because visions are
about inspiration and excellence, it is critical to recognize that employees are the ones who must be inspired fi rst. Employees must ultimately
be inspired to achieve excellence. Many health care organizations make
a mistake by 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 vision
statement of Optima Healthcare Insurance Services is simple and to the
point. It states that our vision is To make a positive difference in health
care. With proper orientation this simple vision statement can convey to
employees the importance of making a positive difference individually if
the organization is to achieve its vision of making a positive difference in
health care.
7. Visions prepare for the future 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
University of Texas M. D. Anderson Cancer Center acknowledges its commitment to making history using a play on words: 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. Not only is Anderson making history through its continued
EXHIBIT 513 Vision Statement of Hebrew Health Care
In all of our programs and services, we will strive to be the provider of choice.
We will collaborate with educational, medical institutions and other providers with similar goals
and philosophies to establish model centers of excellence.
We will seek recognition as a progressive system of quality services.
We will pursue creative means to enhance the organization s fi nancial health so that we may fulfi ll
our mission.
Source: Hebrew Health Care.
CHAPTER 5 DIRECTIONAL STRATEGIES 185
commitment to cancer research, but, as noted earlier, the center also
expects to eliminate cancer. This is an example of an ambitious and
industry-changing vision.
8. Visions come alive in details, not in broad generalities. The accomplishment of the vision eventually has to lead to tangible results, whether in
health care, business, government, or education. 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 accepts. Details should be provided in words that
relevant parties understand. 38
In the past decade more and more attention has been given to written vision
statements. Vision statements are diffi cult to write because they require insights into
the future. However, there are some useful aids that can assist managers in thinking
about their vision and the direction they desire for the future. Exhibit 514provides
a strategic thinking map to assist in developing a vision statement and provides
a series of questions that are a useful aid in thinking about the vision statement.
EXHIBIT 514 Strategic Thinking Map for Writing a Vision Statement
Component Key Words Refl ecting Component
1. Clear hope for the future:
If everything went as we would like it to go,
what would our organization look like fi ve
years from now? How would we be diff erent/
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 fi rst:
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?
186 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 fl exible and able to enter new markets, disengage from
old ones, and experiment with new ideas. By entering into a new market fi rst,
organizations may achieve fi rst-mover advantages. Pioneering organizations
seek fi rst-mover advantages. A reputation for pioneering can be generated and
market position can be more easily established 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 disadvantages. This has been referred to as the liability of newness .
39
Innovators often experience pioneering costs. Pioneers 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 fi rst mover may be left with expensive equipment and little
demand. Therefore, it is important that the demand for visionary management be
tempered with realistic knowledge of the market, consumers, and other factors
that will affect the organization. The rewards often go to the fi rst mover, but the
risks are greater.
Research confi rms some of the dangers of being the fi rst mover. Studies of
companies that were fi rst in their markets exclude those fi rms that failed by
focusing only on those that survived, prospered, and eventually dominated their
markets. 40
Arguably, market pioneers rarely endure as market leaders. Market leadership
has less to do with an organization s entry into the market and more to do with
will and vision. Enduring leaders seem to have inspiring visions and the will to
realize the vision. These enduring leaders are persistent in the pursuit of their
vision, innovative, committed fi nancially to the vision, and know how to leverage their assets.
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 responsible decision making. Ethical and social responsibility values are
extremely important, not just to a single hospital, HMO, or long-term care facility, but to all citizens. There are, however, other values that may be specifi c to an
organization and characterize its members behavior in the past or the behavior
CHAPTER 5 DIRECTIONAL STRATEGIES 187
to which members collectively aspire. For example, total quality management
or continuous improvement is a value, as is entrepreneurial spirit, teamwork,
innovation, and so on. 41 It is important that managers, employees, and key stakeholders understand the values that are expected in an organization. It is also
important, as Perspective 54makes clear, that values be more than slick public
relations statements. Talking the talk is insuffi cient, walking the walk is what
matters when it comes to values.
PERSPECTIVE 54
Organizational Values Statements
Ethics and values are fundamental aspects of
the culture of health care organizations. Ethically
driven organizations have a shared mission and
vision and strong core values in their culture.
Health care organizations are extremely complex and it is impossible to provide policies and
guidelines to direct all clinical and administrative
behaviors. An organization s core values can set
the standards of conduct that are considered
important. Unfortunately, the importance of mission, vision, and values receives less attention
from most leaders than other topics such as
strategy, operations, and structure.
Eff ective values statements clarify how the
organization will conduct its activities to achieve
its mission and vision. Values statements frequently refl ect common morality, and emphasize
respect, integrity, trust, caring, and excellence.
These statements represent the core principles
within the organization s culture. All staff should
be aware of, accept, and integrate the organization s values into their decision making and
behavior. Values statements are particularly
useful when an organization faces trade-off s
among goals such as profi ts or quality. The
organization s values will drive the choice.
Although some organizations develop and
live by eff ective values statements, in other
organizations the statement is carefully crafted
and adopted, yet set aside and generally
ignored. The worst statements are those that
clearly confl ict with the organization s practices
and behaviors. These statements undermine
staff morale, breed cynicism, and sometimes
lead to the acceptance of unethical practices.
Similar to other documents, values statements should be reviewed regularly to ensure
they are eff ectively assimilated into the organization s day-to-day activities. The object of the
review is not to change or modify the statement, but to ensure an in-depth assessment of
the organization s values. The most eff ective
reviews are undertaken by work groups of individuals within the organization. Participation in
the review process not only ensures appropriate guidelines for behavior but also involves
individuals in better understanding and thereby
encouraging ownership of the values.
In the same way, top leadership must own
and participate in the values review process. The
values statement should be a living document
that is frequently referred to and referenced.
The educational aspect of the review is more
than merely handing out copies of the core
values. Individuals at all levels should foster
discussion of the values and illustrate how they
apply to behaviors and decisions throughout
the organization.
Source: William A. Nelson and Paul B. Gardent, Organizational
Values Statements, Healthcare Executive 26, no. 2 (2011), pp. 5659.
188 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Core values, beliefs, and philosophy seem to be clear during the early stages
of an organization s development but become less clear as the organization
matures. 42 Therefore, statements such as Universal Health Services perpetuate
important values such as service excellence, continuous improvement, employee
development, ethical and fair treatment, teamwork, and service innovation. Its
statement of values (principles) makes explicit how the organization intends to
conduct its business (see Exhibit 515).
Exhibit 516illustrates American Dental Partners (a provider of services to
multidisciplinary dental practices) well-developed and articulated set of organizational values. These values focus on what the organization believes are its key
responsibilities to people, communities, shareholders, and so on. Throughout
the values statement are references to ideals such as honesty, respect, dignity,
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 consumers.
EXHIBIT 515 Statement of Principles of Universal Health Services, Inc.
Service excellence
Provide timely, professional, eff ective, and effi cient services to our customers.
Continuous improvement in measurable ways
Identify key needs and assess how well we meet those needs.
Continuously improve services and measure progress.
Employee development
Hire talented and driven people.
Increase skills through training and development.
Provide opportunities for growth within UHS.
Ethical and fair treatment of all
We are committed to fairness and trust with our patients, the physicians, purchasers of our
services, and employees.
We conduct our business according to the highest ethical standards.
Teamwork
Work together to provide ever-improving customer service.
Our team approach supersedes traditional departmental organization and creates a true
customer focus.
People at all levels of the organization participate in decision making and process
improvements.
Compassion
Never lose sight of the fact that we provide care and comfort for people in need.
Patients and families who rely on us receive respectful and dignifi ed treatment at all times.
Innovation in service delivery
Invest in the development of new and better ways of delivering our services.
Source: Universal Health Services, Inc.
CHAPTER 5 DIRECTIONAL STRATEGIES 189
Not all statements of values or guiding principles are as elaborate as that of
American Dental Partners, however, they need to be as well conceived. Values
statements can be useful in clarifying to employees the specifi c behavioral norms
that are expected of them as members of the organization. This clarifi cation
is effectively accomplished in the values of Becton, Dickinson, and Company,
a medical technology company serving health care institutions, life science
researchers, clinical laboratories, and the general public with offi ces in more
than 50 countries. This statement of core values focuses specifi cally on how
organizational members are expected to behave and conduct the companys
business (see Exhibit 517).
Mission, vision, and value statements are tools for becoming better at what
we do. The usefulness of any of these statements is through the ownership
taken by employees and their 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. 43 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.
Values and beliefs are directional strategies that provide the focus and parameters for strategic goals. In addition, directional strategies provide a means of
EXHIBIT 516 Core Values of American Dental Partners
We believe in fi ve core values which provide the foundation on which our American Dental
Partners is built. These values represent the way we intend to do business, and we endeavor to
uphold them at all times.
Ethical A promise to conduct business in an honest, fair manner and with the utmost integrity.
Relationship Put people fi rst. A commitment to treat all people with respect and human
decency.
Social responsibility A commitment to act in a responsible manner with total regard for our
families, communities, and environment.
Fiscal responsibility An obligation to act in a fi nancially prudent manner for the benefi t of our
patients, shareholders, affi liates, and employees.
Excellence In all we do, commitment to achieving the best results.
Source: American Dental Partners.
EXHIBIT 517 Core Values of Becton, Dickinson, and Company
We treat each other with respect.
We do what is right.
We always seek to improve.
We accept personal responsibility.
Source: Becton, Dickinson, and Company.
190 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
determining the essentials that must be accomplished if the organization is to be
effective. To be most effective, the values statement for an organization should
capture the guiding principles by which the staff is expected to function while
achieving the organization s mission. 44
From Mission, Vision, and Values to Strategic Goals
Once strategic leaders are confi dent 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
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 accomplishment. Steven Hillestad and Eric Berkowitz recommend
the following questions when attempting to ensure that mission statements and
strategic goals are consistent:
1. Does the mission of the organization refl ect a broad enough orientation and
provide fl exibility to make required changes?
2. Did all important constituencies have an opportunity to provide input or
comment on the mission?
3. Did the organization work through possible alternative operations scenarios to see how the mission might be applied?
4. Does the mission provide for the formulation of a set of goals that are
specifi c enough to give guidance to the organization yet broad enough to
provide for the necessary fl exibility? 45
Critical success factors provide the foundation for strategic goal setting. The
strategic goals, in turn, become the anchors for objectives and action plans.
Critical Success Factors for the Service Category
Critical success factors are those things that organizations must accomplish if
they are to achieve high performance. 46 Critical success factors for the service
category, as the term implies, 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. 47 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, Alex. Brown & Sons, Inc., an investment research service, indicated that there are fi ve critical success factors for providers of health care services: (1) ability to serve a market; (2) strong information systems; (3) low-cost
structure; (4) ability to replicate its services in other geographical markets; and
(5) ability to accept near-term risks. The critical success factors for the service
category provide an important bridge between external and internal environmental analysis. 48 Strategic leaders must continually ask themselves whether the
CHAPTER 5 DIRECTIONAL STRATEGIES 191
mission, vision, and values of the organization are compatible with the critical
success factors. Once compatibility is ensured, leaders must identify a relatively
small number of activities that are absolutely essential to accomplish the mission
and build momentum to realize the vision.
Additional detail is provided on the requirements for health care organizations
competing in a given service category (as identifi ed by Alex. Brown & Sons, Inc.)
in Exhibit 518 . The application of the critical success factors relative to individual
organizations is briefl y 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 relate to critical success factor activities, providing more
specifi c direction in accomplishing the mission and vision. At the same time,
strategic goals should be broad enough to allow considerable discretion for managers to formulate their objectives for individual units. 49 The most appropriate
strategic goals possess the following characteristics:
1. Strategic goals should relate specifi cally to activities that are critical to
accomplish the mission. Strategic goals that focus on activities that are
not mission critical have the potential to divert leadership attention and
employee energy.
2. Strategic goals should be the link between critical success factors and
strategic momentum (carrying out unit objectives).
EXHIBIT 518 Critical Success Factors Related to a Service Category
Critical Success Factors Related to Individual Organizations
Ability to serve entire market Complete range of services demanded in a
given market. One-stop shopping for health
services provides an important advantage.
Strong information systems State-of-the-art, integrated administrative
and clinical information systems are required
to manage a network of health care organizations (underscores the importance of electronic medical records).
Lowest cost structure Specialized service categories ensure low
cost relative to the competition to be successful, especially true in specialty areas.
Ability to replicate services in other
geographical markets
Successful competitors are able to develop
business models that apply to diverse
markets.
Ability to accept near-term risks Financially conservative leadership maintains
liquidity and allows for resources to pursue
new opportunities.
192 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
3. Strategic goals should be limited in number. When too many goals are
pursued, the trivial many rather than the critical few activities are
accomplished.
4. 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.
American Dental Partners developed a set of seven strategic goals that address
the company s mission and are consistent with its core values. These goals concern partnerships in management, operating excellence, integration of technology, continuous growth, fi nancial performance, quality of work life, and quality of
care and service. More specifi cally, American Dental Partners goals are as follows:
1. Partnership in management. To ensure the appropriate sharing of operating governance and fi nancial risk and reward in the organization and
operation of each affi liate.
2. Operating excellence. To pursue continuous improvements in the performance and profi tability in each affi liate.
3. Integration of technology. To optimize the provision of dental care and
service through the integration of technology.
4. Continuous growth. To progressively increase the market share and geographic presence of each affi liate.
5. Financial performance. To achieve attractive returns on capital, which
will allow continuous reinvestment.
6. Quality of worklife. To foster a work environment that is rewarding and
motivating to team members.
7. Quality care and service. To ensure the provision of high-quality, highvalue dental care and service.
American Dental Partners has maintained its strategic focus through its goals.
Governing Boards and Directional Strategies
The discussion of directional strategies has emphasized the importance of the
involvement and participation of as many people as practical. The governing
board 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
HEALTHSOUTH and the stock option scandal at United Health Care. Increasingly,
the question of the role and responsibility of governing boards is discussed in
health care management.
CHAPTER 5 DIRECTIONAL STRATEGIES 193
Historically, three modes of governance have been applied to boards of
directors. The fi rst is the fi duciary responsibility mode or stewardship of
assets; the second is the strategic mode which involves collaboration with
management to develop a vision for the future; and the third is the generative mode where the board engages in shared creative thinking to make sense
of data available to decision makers. More recently, the idea of the progressive board has been added. Here the focus is 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. 50
In the strategic mode, boards of directors or boards of trustees are responsible for making policies providing general guidelines under which the
organization will operate. Therefore, boards are important in formulating the
mission, vision, and value statements of the organization (see Perspective 55 ).
Board members are not likely to be directly involved in the process 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. The board should be informed about the
statements and involved in the strategic thinking that results in their formulation; therefore, the selection and composition of board members is a critical
strategic decision. 51
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. 52 Primary attention has been
given to questioning how these usual suspects infl uence the fi nancial 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 simultaneously functioning as the chief executive and board chair). 53
An issue of particular interest has been board size. A comparative study of
board composition by the executive search fi rm Spencer Stuart looked at the
boards of the S&P 500. The results were reported in the Harvard Business
Review. The authors noted that today boards of these leading corporations are
smaller in size and composed of older members, and are more independent
compared with 1987. Board independence has been particularly infl uenced by
the SarbanesOxley Act. 54
Generally two different types of governing boards philanthropic governing
boards (those that are service oriented and concerned primarily with fundraising) and corporate governing boards (those that are more involved in strategic
planning as well as 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 composed
of individuals who possess expertise that will aid the organization in accomplishing its strategic goals. 55 Membership diversity is important, but less so than
the actual skills or expertise possessed by the members.
194 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 55
Board s Role in Strategy
Boards of trustees and executive teams share
greater responsibility in building more robust
and adaptive strategies that support strategic
planning and decision making. Health care as
an industry is aff ected by many changes that
are of direct relevance to governing boards. The
contemporary agenda embraces a more focused
board mindset for guiding growth, improving
performance, and leading change.
A strategic agenda is a narrative that provides
the context for purpose, vision, and mission. It
creates a process for developing a culture that
refl ects the organization s values and beliefs.
Moreover, it provides a protocol for the ongoing direction, integration, and execution of the
system s priorities.
The board s role is that of a navigator that
organization into focus with regard to short- and
long-term realities of the marketplace. Strategic
leadership brings together three elements
that boards govern and executives manage.
These are:
1. Strategic direction provides focus for the
organization as it makes strategic choices.
Strategic direction provides the platform
for short- and long-term planning and
decision making. It represents the ideas
that shape an organization s values.
2. Strategic integration involves matching
programs and resources with processes
and priorities and is instrumental in making things happen. Health care delivery
presents a number of integration challenges such as quality, cost management,
care coordination, and so on.
3. Strategy execution links specifi c actions
with outcomes and adapts to external
conditions. Strategy execution connects
the dots between board and executive
team intentions and the capacity to provide outstanding patient care.
The strategic agenda encourages deeper
thinking about key issues and problems and
provides a bridge among assumptions, options,
and preferences. Boards need to have a major
role in strategic direction because it sets the
focus for all major decisions. In addition, boards
must be confi dent that the executive leadership
has the ability, assets, and urgency to eff ectively
manage strategic integration. Finally, boards
must leave leaders free to manage while ensuring their support and engagement.
The ultimate goal of the strategic agenda
is to drive economic and strategic value for
a system. Strategic value is the composite of
the system s reputation, operating competence,
innovative capacity, and key resources. Boards
have an appetite for strategy and oversight of
the strategy is one of the board s primary responsibilities. Involving the board in strategic direction, integration, and execution is a fundamental
challenge of executive leadership.
Source: Daniel Wolf, The Board s Role in Strategy, Trustee 64, no.
10 (2011), pp. 2123.
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. 56 However, it should be noted
CHAPTER 5 DIRECTIONAL STRATEGIES 195
that virtually no research confi rms any positive relationship between the size
and nature of board membership and organizational fi nancial performance. 57
Research fi ndings on boards of directors suggest that when profound or
radical organizational change confronts a health care organization, the corporate 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. 58 Boards of directors in
health care organizations undergoing corporate restructuring (defi ned as the
segmentation of the organization s assets and functions into separate corporations to refl ect specifi c profi t, regulatory, or market objectives) tend to become
less philanthropic and more corporate, not only in composition but also in the
way they operate. 59
Other research provides additional information about various types of governing boards in health care organizations. When compared with boards of directors
of successful high-technology fi rms, for example, governing boards in a sample
of multihospital health care systems were almost twice as large (11 to 15 members). 60 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.
Another study examined the issue of outside directors in large investor-owned
health care organizations. Four major subsamples were examined, including
hospitals, elder care organizations, HMOs, and alternative care facilities such
as psychiatric clinics and ambulatory care centers. 61 This study found that, in
general, governing boards of health care organizations were composed of more
members from outside, rather than inside, the organization. Outside representatives were primarily physicians, fi nancial professionals, attorneys, and academics. The inclusion of physicians was found to be particularly signifi cant in terms
of bottom-line performance. The presence of physicians on governing boards
enhanced the support of the medical community, improving the organization s
market share and quality.
The evidence to date is underwhelming with regard to the usual topics of
board independence (percentage of outside members), board size, CEO duality, and so on. 62 Although it is dangerous to generalize, some inferences can
be drawn from the research on governing boards in health care organizations.
In not-for-profi t 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 profi t oriented, their boards take on more corporate characteristics. They
tend to be smaller, compensate members for service, select members for specifi c expertise, involve the CEO as a voting member, make him or her formally
accountable to the board, and require the participation of board members in
strategic decision making. From the perspective of the individual board member,
the motivation to be on the hospital s board may be to provide a valuable service
to the community, but board membership may be a source of income as well.
196 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Primarily because of corporate scandals of recent years and the passage of the
Public Company Accounting Reform and Investor Protection Act of 2002 (Public
Law 107-240), also known as the SarbanesOxley Act, board of director research
has been reignited. 63 This law, which applies to publicly traded corporations,
dramatically impacts the fi duciary responsibility of chief executive offi cers and
boards of directors. Some states have considered enacting similar legislation that
would apply to not-for-profi t organizations.
Board Process: Missing Link?
The lack of consistent association between factors such as board size, independence, CEO duality, member expertise, and organizational performance on
fi nancial 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. 64
Interviews with experienced board members indicate that several behaviors
lead to more effective boards:
1. Engage in constructive confl icts (especially with the CEO). It is important
that board members hold and debate diverse views among themselves and
with the CEO. An overabundance of insiders on a board may diminish the
presence of constructive confl ict since debate with the CEO amounts to
debate with the boss.
2. Avoid destructive confl ict. Personal friction and tension in the boardroom
should be minimized. There must be a clear distinction between constructive debate and destructive confl ict.
3. Work together as a team. The most important component of board process
is teamwork and is the primary characteristic of the progressive board.
The development of strong team norms, however, is hard to accomplish
because board members are busy and spend little time together. Given
the often limited time available, 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 suffi cient depth to make sound decisions.
Too often, time demands and confl icting priorities tempt boards to deal
superfi cially with important issues. Effective boards fi nd the time needed
for important strategic decisions. 65
The work of boards of directors is extremely important. 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.
CHAPTER 5 DIRECTIONAL STRATEGIES 197
Managing 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. Palliative care (end-of-life
and comfort care) has become so important that hospitals and other providers
have seized opportunities in this area. One hospice states that its mission is to
provide care for dying patients and their families in their homes. The second
hospice, aware of the changes in the environment and concerned with managing
strategic momentum, has slightly revised its mission to refl ect the change in the
competitive environment. Its new mission is to provide end-of-life and palliative
care services. If both organizations should decide to offer services to Alzheimer s
patients living in nursing homes, only the second hospice would be acting in
accordance with its mission. 66
Decisions to change an organization s mission, vision, values, and goals are
complex and involve many variables. To manage strategic momentum, questions
should be asked that concern the fundamental activities and direction of the
organization. Exhibit 519provides guidance through several questions that will
aid managers in their strategic thinking concerning the appropriateness 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 519and ask the board of directors/trustees and the strategic
EXHIBIT 519 Managing Strategic Momentum Evaluating Directional
Strategies
Are we not doing some things now that we should be doing?
Are we doing some things now that we should not be doing?
Are we doing some things now that we should do but in a diff erent way?
Are our organization s mission and vision unique in some way?
Is our mission relatively enduring?
Do our mission and vision allow for innovation?
Do our mission and vision allow for expansion?
Is our scope of operations clear (market, products/services, customers, geographic
coverage)?
Do our mission, vision, and values fi t the needs of our stakeholders?
Do our fundamental values make sense?
Are our strategic goals moving us toward achievement of our mission?
Are our strategic goals moving us toward achievement of our vision?
Have we addressed the critical success factors?
Based on the mission, vision, and values, is the image of the organization what it should be?
198 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 clarifi cation, understanding, and reinforcement of exactly what
this organization is all about or what this organization should be about.
Lessons for Health Care Managers
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. Strategic leaders should recognize that
strategic planning 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
specifi cally 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 physicians to research as well as to healing, or any other factor that is important in
the minds of those served, is only the fi rst step. The mission may motivate a few
physicians and department managers, but real motivation comes from visionary
leadership.
The vision is a hope that says what key stakeholders think the organization
should look like and be like 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 identifi ed 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 extremely
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
unappreciated. In the end, however, setting directional strategies is a major
responsibility for all strategic leaders.
Engaging as many groups as practical in the process of developing directional
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,
CHAPTER 5 DIRECTIONAL STRATEGIES 199
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 confi rms 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 manageable, will not
ensure its effectiveness. The board must also be willing to engage in constructive
confl ict, minimize destructive interpersonal tensions, avoid micromanagement,
and devote the time required to make important strategic decisions. Chapter 6
addresses strategy formulation and the strategic alternatives available to health
care organizations.
Health Care Manager s Bookshelf
Chester I. Barnard, The Functions of
the Executive (Cambridge, MA:
Harvard University Press, 1938)
Some people might think that the discussion of
directional strategies is something new. Actually,
there is a rich history of concern for the purpose
and mission of organizations that dates at least
to 1938. Chester Barnard in The Functions of the
Executive (1938) made no less than 45 references
to the topic of purpose in this classic work and
set the stage for much of our modern thinking
on the subject. 1
Barnard s most cited reference concerning
purpose has to do with the essence of organizations themselves. He contends that an
organization exists when there are people who
communicate with one another and are willing
to contribute action to accomplish a common
purpose (p. 83). He concludes that the three
essential components of organization are communication, willingness to serve, and purpose.
At a practical level the most important role
of the purpose, objective, or aim relates to
the nature of cooperative systems or complex
organizations made up of specialized parts. 2
Complex organizations necessarily specialize to
accomplish their purpose. 3 The primary function
of the purpose is to coordinate the eff orts of
individuals and functional units so that the purpose of the whole or the general purpose [mission] may be accomplished (p. 136). When the
purpose of the cooperative system is attained,
the organization is eff ective. When the purpose
is not attained, the organization is ineff ective.
Thus, Barnard gave us one of our earliest defi nitions of eff ectiveness as goal accomplishment
(p. 43).
Organizations progress toward the accomplishment of their missions by redefi ning the
general purpose into purposes for specialized
units such as medicine, nursing, pharmacy, and
so on (in the case of a hospital). The purpose
is the unifying element of formal organizations
and provides an endsmeans chain (p. 137) (discussed in Chapter 6).
Barnard provides an exceptionally interesting observation by pointing out that it is not
essential for the specialized units to understand completely the general purpose of the
200 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
complex or corporate-level organization. 4 Each
unit must, however, understand and accept its
own purpose as derived from the general purpose. The more complete the understanding of
the general purpose, the more likely the unit will
enthusiastically pursue the organization s mission. When a specialized unit believes the whole
organization depends on the achievement of its
unit s purpose, the intensity of its actions will
ordinarily be increased (p. 138).
Barnard argues that the most important
inherent diffi culty in operating complex organizations is the necessity for indoctrinating those
at lower levels (in specialized units) with the
general purpose of the organization so they
can remain cohesive and make decisions consistent with the purpose of the larger system
(p. 233). This is a primary responsibility of strategic leaders.
The Functions of the Executive remains a genuine classic of management and, as such, it is not
surprising that a major portion is devoted to
the role of the purpose or, in today s terms, the
mission of the organization. Its message is as
relevant today as it was the day it was published.
It is signifi cant to note that the publisher distributed almost four times as many copies annually
30 years after its original publication as it did
during the fi rst year of its publication.
REFERENCES
1. Chester I. Barnard, The Functions of the
Executive (Cambridge, MA: Harvard University
Press, 1938).
2. Dave McMahon and Jon C. Carr, The
Contributions of Chester Barnard to Strategic
Management, Journal of Management History
5, no. 5 (1999), pp. 228232.
3. William G. Scott and Chester I. Barnard, The
Guardians of the Managerial State (Lawrence,
KS: University of Kansas Press, 1992).
4. Steven P. Feldman, Incorporating the
Contrary Politics of Dichotomy in Chester
Barnard s Organizational Sociology, Journal of
Management History 2, no. 2 (1996),
pp. 2630.
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
Corporate Governing Boards
Critical Success Factor
First-Mover Advantage
Liability of Newness
Mission
Mission Drift
Philanthropic Governing
Boards
Pioneering
Strategic Goals
Values
Vision
Vision-Led Approach
Questions for Class Discussion
1. Is it necessary for organizational mission statements to include all the components discussed 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
mission statement in light of the components of missions discussed in this chapter.
CHAPTER 5 DIRECTIONAL STRATEGIES 201
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. 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?
11. What is the best way to involve the board in the development of directional strategies? Explain your answer.
12. What are critical success factors for an organization? How are they developed? How
may they be used?
13. List three reasons why boards of directors or trustees have become increasingly important 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. 6379.
2. Chester I. Barnard, Functions of the Executive
(Cambridge, MA: Harvard University Press, 1938), p. 87.
3. W. Jack Duncan, Management: Ideas and Actions (New
York: Oxford University Press, 1999), pp. 122123.
4. Website of DaVita, Inc.
5. Perry Pascarella and Mark A. Frohman, The Purpose
Driven Organization (San Francisco: Jossey-Bass
Publishers, 1989), p. 23.
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. 1114; Marshall B. Jones, Multiple
Sources of Mission Drift, Nonprofi t and Voluntary
Sector Quarterly 36, no. 2 (2007), p. 229.
7. 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. 207217.
8. 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. 3546; 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. 1127.
9. Thomas T. Brown, Noble Purpose, Executive Excellence
21, no. 1 (January 2004), p. 7; Robert E. McDonald, An
Investigation of Innovation in Nonprofi t Organizations:
The Role of Organizational Mission, Nonprofi t
and Voluntary Sector Quarterly 36, no. 2 (2007),
pp. 256258.
10. Teewon Suh, Mark B. Houston, Steven M. Barney, and
Ik-Whan G. Kwon, The Impact of Mission Fulfi llment
202 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
on the Internal Audience: Psychological Job Outcomes
in A Service Setting, Journal of Service Research 14,
no. 1 (2011), pp. 7687.
11. Chip Jarnagin and John Slocum Jr., Creating
Corporate Cultures through Mythopoetic Leadership,
Organizational Dynamics 36, no. 3 (2007), pp. 288295.
12. R. Duane Ireland and Michael A. Hitt, Mission Statements:
Importance, Challenge, and Recommendations,
Business Horizons 35, no. 3 (1992), pp. 3442. See also
David J. Forbes and Siju Seena, The Value of a Mission
Statement in an Association of Not-for-Profi t Hospitals,
International Journal of Health Care Quality Assurance
19, no. 5 (2006), pp. 409419.
13. Roger Bennett and Sharmila Savani, Surviving
Mission Drift: How Charities Can Turn Dependence
on Government Contract Funding to Their Own
Advantage, Nonprofi t Management and Leadership 22,
no. 2 (2011), pp. 217228.
14. Darrell Rigby, Management Tools Survey 2003: Usage
Up As Companies Strive to Make Headway in Tough
Times, Strategy & Leadership 31, no. 5 (2003), pp. 47.
15. Aimee Forehand, Mission and Organizational
Performance in the Healthcare Industry, Journal of
Healthcare Management 45, no. 4 (2000), pp. 267275.
See also Joseph Peyrefi tte 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. 296301.
16. Christopher K. Bart and John C. Tabone, Mission
Statement Content and Hospital Performance in
the Canadian Not-for-Profi t Health Care Sector,
Health Care Management Review 24, no. 2 (1999),
pp. 1826; Christopher K. Bart and J. C. Tabone, Mission
Statement Rationales and Organizational Alignment
in the Not-for-Profi t Health Care Sector, Health Care
Management Review 23, no. 1 (1998), pp. 5470.
17. 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. 109116.
18. Ibid.
19. Mary Grayson, Whose Mission Is It Anyway? Hospital
& Health Networks 85, no. 1 (2011), p. 6.
20. Cecilia Falbe, Mark Driger, Lauri Larwood, and Paul
Miesing, Structure and Meaning of Organizational
Vision, Academy of Management Journal 38, no. 3
(1995), pp. 740767.
21. 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.
22. James M. Kouzes and Barry Z. Posner, Envisioning
Your Future: Imagining Ideal Scenarios, Futurist 30,
no. 3 (1996), pp. 1419. 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. 139151.
23. Ancona, Malone, Orlikowski, and Senge, In Praise of
the Incomplete Leader, p. 97.
24. See Alan M. Zuckerman, Creating a Vision for the
Twenty-First Century Health Care Organization,
Journal of Healthcare Management 45, no. 5 (2000),
pp. 294306; Stanley Harris, Kevin W. Mossholder,
and Sharon Oswald, Vision Salience and Strategic
Involvement: Implications for Psychological Attachment
to Organization and Job, Strategic Management
Journal 15, no. 3 (1994), pp. 477489; Terrence
Femsler, Build Mission and Vision Statements Step by
Step: Book Review, Nonprofi t World 21, no. 2 (2003),
p. 32; Anonymous, Preparing A Vision Statement:
Book Review, Futurist 36, no. 4 (2002), p. 59.
25. Manfred F. R. Kets de Vries, The Leadership Mystique,
Academy of Management Executive 8, no. 3 (1994),
pp. 7383. See also T. C. Reeves, W. J. Duncan, and P.
M. Ginter, Leading Change by Managing Paradoxes,
Journal of Leadership Studies 7, no. 1 (2000), pp. 1330.
26. Peter M. Senge, The Leader s New Work: Building
Learning Organizations, Sloan Management Review
31, no. 1 (1990), pp. 1314.
27. Montgomery Van Wart, The First Step in the Reinvention
Process: Assessment, Public Administration Review
55, no. 5 (1995), pp. 429438. See also John J. Sosik and
Sandi L. Dinger, Relationships between Leadership
Style and Vision Content: The Moderating Role of Need
for Social Approval, Self-Monitoring, and Need for
Social Power, Leadership Quarterly 18, no. 1 (2007),
pp. 134153.
28. G. B. Morris, The Executive: A Pathfi nder,
Organizational Dynamics 16, no. 2 (1988), pp. 6277.
29. Senge, The Leader s New Work, p. 8.
30. James C. Collins and Jerry I. Porras, Organizational
Vision and Visionary Organizations, California
Management Review 34, no. 1 (1991), pp. 3052.
31. 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. 155188.
32. Anonymous, Clear Vision, Dialogue Help Align
Employee Actions to Business Goals, PR News 67,
no. 25 (2011), p. 2.
33. Howard S. Zuckerman, Redefi ning the Role of the
CEO: Challenges and Confl icts, Hospital & Health
Services Administration 34, no. 1 (1989), pp. 2538. See
also Stephen C. Harper, The Challenges Facing CEOs:
Past, Present, and Future, Academy of Management
Executive 6, no. 3 (1992), pp. 725.
34. Arnold D. Kaluzny, Revitalizing Decision Making at the
Middle Management Level, Hospital & Health Services
Administration 34, no. 1 (1989), pp. 3951. See also S.
W. Floyd and Bill Wooldridge, Dinosaurs or Dynamos?
Recognizing Middle Management s Strategic Role,
CHAPTER 5 DIRECTIONAL STRATEGIES 203
Academy of Management Executive 8, no. 4 (1994),
pp. 4757.
35. Ian Wilson, Realizing the Power of Strategic Vision,
Long Range Planning 25, no. 5 (1992), pp. 1828.
36. James R. Lucas, Anatomy of a Vision Statement,
Management Review 87, no. 2 (1998), pp. 2226.
37. David Silvers, Vision Not Just for CEOs, Management
Quarterly 35, no. 2 (1994), pp. 1015.
38. Tom Peters, Thriving on Chaos (New York: Alfred A.
Knopf, 1988), pp. 401404.
39. The term liability of newness was suggested by James
March. However, the most extensive treatment of fi rstmover advantages and disadvantages is presented in
Michael E. Porter, Competitive Advantage (New York:
Free Press, 1986), pp. 186191.
40. Gerald J. Tellis and Peter N. Golder, Will and Vision:
How Latecomers Grow to Dominate Markets (New York:
McGraw-Hill, 2002).
41. L. D. DeSimone, How Can Big Companies Keep the
Entrepreneurial Spirit Alive? Harvard Business Review
73, no. 5 (1995), pp. 183186; I. Morrison, Creating a
Vision from Our Values, Modern Healthcare 29, no. 39
(2000), p. 30.
42. Gerald E. Ledford, James T. Strahley, and Jon R.
Wendenhof, Realizing a Corporate Philosophy,
Organizational Dynamics 23, no. 3 (1995), pp. 419.
See also D. P. Ashmos and Dennis Duchon, Spirituality
at Work: A Conceptualization and Measure, Journal of
Management Inquiry 9, no. 2 (2000), pp. 134145; 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. 1732; Fred
Wenstp and Arild Myrmel, Structuring Organizational
Value Statements, Management Research News 29, no.
1 (2006), pp. 673685.
43. For some criticisms of these tools see Colin CoulsonThomas, Strategic Vision or Strategic Con: Rhetoric
or Reality, Long Range Planning 25, no. 1 (1992),
pp. 8189; Lee D. Parker, Financial Management
Strategy in a Community Welfare Organization: A
Boardroom Perspective, Financial Accountability and
Management 19, no. 4 (2003), pp. 341374.
44. William A. Nelson and Paul B. Bardent, Organizational
Values Statements, Healthcare Executive 26, no. 2
(2011), pp. 5659.
45. Steven G. Hillestad and Eric N. Berkowitz, Health Care
Marketing Strategy: From Planning to Action (Boston:
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.
46. 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 Robert S. Kaplan and David P. Norton, How
Strategy Maps Frame An Organization s Objectives,
Financial Executive 20, no. 2 (2004), pp. 4046; Vincent
R. Kaval and Lawrence J. Voyten, Executive Decision
Making, Healthcare Executive 21, no. 6 (2006),
pp. 1621.
47. Lavagnon A. Ika, Amadou Diallo, and Denis Thuillier,
Critical Success Factors for World Bank Projects:
An Empirical Investigation, International Journal
of Project Management 30, no. 1 (2012), pp. 105
118; 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. 714.
48. 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. 518.
49. John Karlewski, Profi t Versus Public Welfare Goals in
Investor-Owned and Not-for-Profi t Hospitals, Hospital
& Health Services Administration 33, no. 3 (1988), pp.
312329. See also David P. Tarantino, Using Simple
Rules to Achieve Strategic Objectives, Physician
Executive 29, no. 3 (May 2003), pp. 5657; 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. 4557. The discussion of American Dental
Partners goals is adapted from information on the
ADP website.
50. R. P. Chait, W. P. Ryan, and B. E. Taylor, Governance
as Leadership: Reframing the Work of Nonprofi t
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), pp. 312; 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. 377391.
51. 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. 3132.
52. 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. 101113.
53. Wayne F. Cascio, Board Governance: A Social Systems
Perspective, Academy of Management Executive 18,
no. 1 (2004), pp. 97100.
54. Idea Watch, Corporate Boards: Now and Then,
Harvard Business Review 89, no. 11 (2011), pp. 3839.
55. J. A. Alexander, L. L. Morlock, and B. D. Gifford,
The Effects of Corporate Restructuring on Hospital
204 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Policymaking, Health Services Research 23, no. 2
(1988), pp. 311338; A. R. Kovner, Improving Hospital
Board Effectiveness: An Update, Frontiers in Health
Services Management 6, no. 2 (1990), pp. 327.
56. S. M. Shortell, New Directions in Hospital Governance,
Hospital & Health Services Administration 34, no. 1
(1989), pp. 723. See also M. J. Conyon and Simon
I. Peck, Board Control, Remuneration Committees,
and Top Management Compensation, Academy of
Management Journal 41, no. 2 (1998), pp. 158178.
57. 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. 151158.
58. M. L. Fennell and J. A. Alexander, Governing Boards
and Profound Organizational Change, Medical Care
Review 46, no. 2 (1989), pp. 157187.
59. J. A. Alexander and L. L. Morlock, CEOBoard Relations
Under Hospital Corporate Restructuring, Hospital &
Health Services Administration 33, no. 3 (1988), p. 436.
60. A. L. Delbecq and S. L. Gill, Developing Strategic
Direction for Governing Boards, Hospital & Health
Services Administration 33, no. 1 (1988), pp. 2535.
61. R. A. McLean, Outside Directors: Stakeholder
Representation in Investor-Owned Health Care Organizations, Hospital & Health Services Administration 34,
no. 1 (1989), pp. 2538. 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. 6266;
Bruce Walters, CEO Tenure, Boards of Directors, and
Acquisition Performance, Journal of Business Research
60, no. 4 (2007), pp. 331338.
62. 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. 371382; 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. 416431.
63. James E. Orlikoff, Building Better Boards in the New
Era of Accountability, Frontiers of Health Service
Management 21, no. 3 (2005), pp. 312; 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. 747775.
64. See Jeffrey Sonnenfeld, Good Governance and
the Misleading Myths of Bad Metrics, Academy of
Management Executive 18, no. 1 (2004), pp. 108113;
Jeffrey Sonnenfeld, What Makes Great Boards Great?
Harvard Business Review 80, no. 9 (2002), pp. 106113.
65. Finkelstein and Mooney, Not the Usual Suspects,
pp. 103106.
66. Mission Statement is Key to a Good Marketing Plan,
Hospice Management Advisor, February 1 (2003),
pp. 1819.
Introductory Incident
The Leapfrog Group
Private employers understood that frequent and systemic errors in hospitals were placing a
signifi cant number of employees at risk. They recognized that dysfunction existed in the health
care marketplace they were spending billions of dollars on health care for their employees with
no way of assessing its quality or comparing health care providers. In addition, years of experience with total quality management had provided these leaders with a sense that low-quality
and high-practice variance were contributing to continued infl ation in health insurance premiums. As a result, the 1998 Business Roundtable an association of CEOs from 200 of the Fortune
6 Developing Strategic
Alternatives
The most serious mistakes are not being made as a result of wrong answers. The truly
dangerous thing is asking the wrong question.
PETER F. DRUCKER
206 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
500 companies came together to discuss how they could work together to use the way they
purchased health care to have an infl uence on its quality and aff ordability.
A year later, the 1999 Institute of Medicine report, To Err Is Human: Building a Safer Health
System, gave Leapfrog its initial focus reducing preventable medical mistakes. The report
found that up to 98,000 Americans die every year from preventable medical errors made in
hospitals alone. In fact, there are more deaths in hospitals each year from preventable medical
mistakes than there are from vehicle accidents, breast cancer, and AIDS combined. The report
actually recommended that large employers provide more market reinforcement for the quality and safety of health care. The Business Roundtable founders realized that they could take
leaps forward with their employees, retirees, and covered families by rewarding hospitals that
implemented signifi cant improvements in quality and safety. The Leapfrog Group was offi cially
launched in November 2000.
The Leapfrog Hospital Survey compares hospitals performance on national standards of
safety, quality, and effi ciency that are most relevant to consumers and purchasers of care.
Hospitals that participate in The Leapfrog Hospital Survey achieve hospital-wide improvements
that translate into millions of lives and dollars saved. Leapfrog s purchaser members use survey
results to inform their employees and purchasing strategies. In 2012, more than 2,650 hospitals
across the country were surveyed. Leapfrog ratings are posted on its website and are free to the
public at www.leapfroggroup.org/cp .
Endorsed by the National Quality Forum (NQF), the practices (or leaps) are:
1. Computerized Physician Order Entry (CPOE). With CPOE systems, hospital staff enter
medication orders via computers linked to software designed to prevent prescribing errors
that occur because of illegible handwriting, decimal point errors, wrong medicine for the
patient, overlooked drug interactions, and patient allergies. CPOE has been shown to reduce
serious prescribing errors by more than 50 percent.
2. Evidence-Based Hospital Referral (EHR). Consumers and health care purchasers should
choose hospitals with the best track records. By referring patients needing certain complex
medical procedures to hospitals off ering the best survival odds based on scientifi cally valid
criteria such as the number of times a hospital performs a procedure each year or other
process or outcomes data studies indicate that a patient s risk of dying could be signifi –
cantly reduced.
3. Intensive Care Unit (ICU) Physician Staffi ng. Staffi ng ICUs with intensivists doctors
who have special training in critical care medicine has been shown to reduce the risk of
patients dying in the ICU by 40 percent.
4. Leapfrog Safe Practices Score. The National Quality Forum is a not-for-profi t organization
created to develop and implement a national strategy for health care quality measurement
and reporting. Leap 4 is based on the National Quality Forum s (NQF) Safe Practices for Better
Healthcare: A Consensus Report . The NQF published Safe Practices in May 2003, and updated
the report in 2006, 2009, and 2010. The most recent version of the report endorsed
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 207
34 practices that should be universally used in applicable clinical care settings to reduce the
risk of harm to patients. Included in the 34 practices are the three Leapfrog leaps; leap 4
incorporates hospitals progress on a targeted subset of 17 of the 34 safe practices.
All of the leaps adhere to four criteria. (1) There is scientifi c evidence that their implementation would signifi cantly reduce preventable mistakes. (2) Implementation by the health industry
is feasible in the near term. (3) Consumers can appreciate their value. (4) Health plans, purchasers, and/or consumers can easily ascertain their presence or absence when assessing health care
providers. Because the health care industry needs time to meet these standards, Leapfrog works
with the provider community to arrive at aggressive but feasible target dates for implementation
of Leapfrog s recommended quality practices.
Continuing to make hospital results available on the level of implementation of the safe practices will provide important information to consumers, enabling them to make more informed
hospital choices. Purchasers and health plans can promote the Safe Practices Score by educating employees and consumers and calling attention to the importance of choosing the right
hospital. Purchasers, through their community involvement in health care settings (as board
members, volunteers, donors), can also be persuasive with health care providers about the need
to extend their eff orts in safety and quality.
REFERENCES
National Quality Forum, Safe Practices for Better Healthcare: A Consensus Report Updated (2011).
Robert Wachter, Patient Safety At Ten: Unmistakable Progress, Troubling Gaps, Health Aff airs 29, no. 1
(2010), pp. 165173.
Learning Objectives
After completing the chapter you will be able to:
1. Understand and discuss the steps involved in the decision logic of strategy
development.
2. Synthesize and integrate strategic thinking accomplished in situational analysis
into a strategic plan for an organization.
3. Identify the hierarchy of strategies and strategic decisions required in strategic
planning.
4. Understand the nature of directional strategies, adaptive strategies, market entry
strategies, and competitive strategies.
5. Identify strategic alternatives available to health care organizations.
208 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Developing a Strategy
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 about the information, setting a course of action, and documenting the plan.
Therefore, strategic planning is essentially decision making determining which
strategy from among the many available alternatives the organization will pursue.
There are many strategic alternatives available to a health care organization
and a particular organization may pursue several different types of strategies
simultaneously or sequentially. Therefore, decision logic is required for strategy
development. For instance, hospitals selecting to pursue various Leapfrog leaps,
as discussed in the Introductory Incident, are making strategic choices that will
both limit and create opportunities to pursue several different strategies. Similarly,
the decision to adopt telehealth or telemonitoring is a strategic choice (see
Perspective 61 ). In what order should strategic decisions be made? A merger or
affi liation decision is part of a series of decisions rather than a single decision or
an end in itself. In other words, there is a broader strategy that precipitated the
merger or affi liation decision; and there will be subsequent strategic decisions
that will have to be made to support the decision and make it successful.
Strategy formulation includes development of strategic alternatives, evaluation of alternatives, and strategic choice. This chapter classifi es the types of strategies and develops a hierarchy of strategic alternatives. The hierarchy provides
a strategic thinking map as guidance in decision making and strategic planning.
Chapter 7 discusses strategic thinking methods for analyzing these alternatives
to make a strategic choice.
6. Provide the rationale as well as advantages and disadvantages for each of the
strategic alternatives.
7. Understand that strategies may have to be used in combination to accomplish
the organization’s goals.
8. Map strategic decisions showing how they are linked as an endsmeans chain.
PERSPECTIVE 61
Telehealth and Telemonitoring
The Centers for Medicare and Medicaid
Studies defi ne telehealth as remote health
care delivery via monitoring. Telehealth is specifi cally defi ned as phone monitoring of the
implementation of scheduled and prescribed
encounters. Telemonitoring relates to the collection and transmission of vital signs and clinical
data through electronic information-processing
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 209
technologies. Quality improvement organizations have been particularly supportive of home
health agencies in implementing telehealth tools
to reduce acute care and hospitalization. Using
these techniques, a health care provider can stay
in contact with patients and monitor via telephone the extent to which recommendations are
being followed and track compliance rates. These
techniques support the assumption that proactively reaching out to patients with chronic disease will encourage people to change unhealthy
behaviors and adopt more healthy lifestyles.
In many cases patients make poor or lessinformed decisions about their personal health.
The ability to accurately access a patient s condition via telemonitoring makes it possible to
intervene when appropriate and provide equally
important education regarding healthy living in
a manner that is more convenient for both provider and patient.
Research has shown that the primary advantage of telemonitoring is that it increases patient
compliance. Often, changes in a patient s condition can be detected at or before the onset
of a serious event in much the same way as
nurses monitor patients in an inpatient setting. Of course, real-time monitoring of data,
direct patient feedback, and high levels of provider/patient interaction depends on digital
profi ciency on the part of both parties as well as
eff ective multimodal communication.
Home patient monitoring assumes two
things: (1) the rise of the responsible patient
who can self-manage her/his long-term medical
condition and (2) availability of mobile devices
as eff ective go-betweens for clinicians and
patients. Telemonitoring congestive heart failure patients, for example, has been shown to be
successful in reducing hospitalizations and trips
to the emergency department.
Telemonitoring allows patients more choices
about how and when to react to changes in
medical conditions before a genuine emergency
occurs. Regardless of where a patient may be,
wireless monitoring supports a more mobile
lifestyle. Providers have made eff ective use of
digital monitoring in home health by reducing the frequency of nursing visits and thereby
reducing the cost of home health care. Because
health care costs are growing so rapidly, the
telehealth equipment market is growing as well.
Many experts see great promise in the ability of
telehealth to decrease the cost of health care
delivery and possibly improve quality as compliance rates increase. There is little debate that
telemonitoring has and will continue to improve
the quality of life available to large numbers of
patients worldwide.
Source: Research and Markets: Tele-Health Monitoring: Market
Shares, Strategies, and Forecasts Worldwide, 20112017,
Telemedicine Business Week (June 29, 2011), pp. 8283.
Linking Strategy with Situational Analysis
As demonstrated by the check list in Exhibit 61 , the strategies selected
by an organization should address external issues, draw on competitive
advantages or fi x competitive disadvantages, 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 the organization s
strategic goals. This check-list procedure is an important part of the strategic
210 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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
justifi cation.
The Decision Logic of Strategy Development
The decision logic of strategy formulation is illustrated in Exhibit 62 . Decisions
concerning fi ve categories of strategies directional strategies, adaptive strategies,
market entry strategies, competitive strategies, and implementation strategies
should be addressed sequentially with each subsequent decision more specifi –
cally defi ning the activities of the organization. The fi rst four of these strategy
types make up strategy formulation and specify how the organization will defi ne
and attempt to achieve its mission and vision. Implementation strategies include
objectives and plans for the organizational units to accomplish the strategies
(managing strategic momentum).
As demonstrated in Exhibit 62 , strategies form an endsmeans chain. Thus,
the organization must fi rst establish or reaffi rm and reach consensus on its mission, vision, values, and strategic goals (directional strategies) the ends. Next,
the adaptive strategies must be identifi ed and are the means to accomplishing the
directional strategies. Adaptive strategies are concerned with the type and
scope of operations and specify how the organization will expand, reduce,
EXHIBIT 61 Check List 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
Directional
Strategies
Adaptive
Strategies
Market Entry
Strategies
Competitive
Strategies
Implementation
Strategies
Strategy
Implementation
Strategy
Formulation
Ends Means
Ends
Ends
Means
Means
Ends Means
EXHIBIT 62 The Decision Logic of Strategy Formulation
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 211
EXHIBIT 63 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 the strategic goals.
Adaptive Strategies These strategies are more specifi c 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 scope, reduce scope, or
maintain scope.
Market Entry Strategies These strategies provide the method of carrying out the
adaptive strategies (expansion of scope and the maintenance of scope strategies) through purchase, cooperation,
or internal development. Market entry strategies are not
used for reduction of scope strategies.
Competitive Strategies Two types of strategies, one that determines an organization s strategic posture and one that positions the organization vis–vis other organizations within the market.
These strategies are market oriented and best articulate
competitive advantage.
Implementation Strategies These strategies are the most specifi c strategies 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
carry out the value-added service delivery and valueadded support strategies.
or maintain operations. Third, market entry strategies must be selected and
are the means to accomplish the adaptive strategies. Market entry strategies
indicate the method for carrying out the adaptive strategies. Fourth, competitive strategies must be determined and are the means to carrying out the
market entry strategies. Competitive strategies determine the organization s
strategic posture and identify the basis for competing in the market. Finally,
implementation strategies (value-adding service delivery strategies, valueadding support strategies, and action plans) must be developed to carry out
the adaptive, market entry, and competitive strategies. The scope and role
of the four strategy formulation types and the implementation strategies are
summarized in Exhibit 63 .
At each stage in the endsmeans decision chain, previous upstream decisions
and the implications for subsequent downstream decisions must be considered and
perhaps reconsidered. As strategic managers work through strategic decisions,
new insights and perspectives may emerge (strategic thinking) that suggest
reconsideration of previous strategic decisions. Therefore, although the decision
212 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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. Where mission
and vision are ignored, or where there is no endsmeans linkage between vision
and strategy, strategy has no end object. 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 organization s mission and vision. 1
Strategic decisions should be based on as much information and strategic
thinking as possible. Sometimes strategic thinking occurs in situational analysis and at other times it occurs when managing strategic momentum. Before
the strategic plan is adopted, it is important to remember that organizationwide understanding of, and commitment to, the strategies must be developed
if they are to be managed successfully (strategic momentum). The choice of
a strategic alternative creates additional direction for an organization and
subsequently shapes its internal systems (organization, technology, information systems, culture, policies, skills, and so on). Strategic momentum is
reinforced as managers understand, commit, and make decisions according
to the strategy.
Exhibit 64presents a comprehensive strategic thinking map of the hierarchy of strategic alternatives. The hierarchy represents a number of strategic
alternatives available to health care organizations. This map not only identifi es the alternatives but also the general sequential relationships among them.
Using this organizing framework or decision logic in strategy formulation
keeps it from becoming overwhelming and focuses strategic thinking. As
strategic managers work through the strategic decisions, new understandings,
EXHIBIT 64 Strategic Thinking Map Hierarchy of Strategic Decisions and Alternatives
Directional
Strategies Adaptive Strategies
Market Entry
Strategies
Competitive
Strategies
Implementation
Strategies
Expansion of Scope Purchase Strategic Posture Service Delivery
Mission
Vision
Values
Goals
Diversifi cation
Vertical Integration
Market Development
Product Development
Penetration
Reduction of Scope
Divestiture
Liquidation
Harvesting
Retrenchment
Maintenance of Scope
Enhancement
Status Quo
Acquisition
Licensing
Venture Capital
Investment
Cooperation
Merger
Alliance
Joint Venture
Development
Internal Development
Internal Venture
Reconfi gure the Value
Chain
Defender
Prospector
Analyzer
Positioning
Marketwide
Cost Leadership
Diff erentiation
Market Segment
Focus/Cost Leadership
Focus/Diff erentiation
Pre-service
Point-of-service
After-service
Support
Culture
Structure
Strategic Resources
Unit Action Plans
Objectives
Actions
Timelines
Responsibilities
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 213
insights, and strategies may (and in fact, should) emerge. Therefore, decision
makers must work through the decision logic and back again, ensuring 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 refi ne earlier decisions in the decision logic as they make downstream
decisions.
How-to formulas, techniques, or a linear process, of course, can never replace
strategic thinking. Many of the greatest achievements in science, law, government, medicine, or 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 and generate new options and solutions. 4 In
addition, strategy development cannot ignore the entrepreneurial spirit, politics,
ethical considerations, and culture in an organization. The strategy 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.
Directional Strategies: Mission, Vision,
Values, and Goals
Chapter 5 explored mission, vision, values, and strategic goals and indicated
that these elements are part of both situational analysis and strategy formulation. 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, it provides the context for the organization to operate and includes its
leaders ethical and moral framework (see Perspective 62 ). In addition, these
directional strategies are a part of strategy formulation because they set the
boundaries and indicate the broadest direction for the organization. The directional strategies should provide a sensible and realistic planning framework for
the organization.
Because formulation of the mission, vision, values, and strategic goals provides the broad direction for the organization, directional strategic decisions
must be made fi rst. Then the adaptive strategies provide further progression
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 refi nements to either or both. This broader perspective is essential in
strategic thinking.
214 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Ethics are guidelines for action that are based
on values, moral principles, or moral rights and
duties, such as honesty, respect, and compassion. Some ethical guidelines are refl ected in
laws, whereas others are norms, customs, and
social expectations that develop and are maintained by mutual consent.
It is useful to distinguish two categories of
ethics 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 refl ect the expectations that society has for people who perform
specifi c roles. We expect physicians and nurses
to help rather than harm patients. We expect
administrators and business offi cers to accept
fi duciary responsibility (act for the benefi t 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 for their health benefi t to
the expectation that they will provide all relevant
information to patients and families and help
them to make 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 healthrelated information on patients will be kept
strictly confi dential; 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 refl ect the priority that members of society
placed on confi dentiality.
Health care organizations involve the interaction of many sets of health professionals who,
by defi nition, are bound by diff ering sets of
ethics 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 organizations that are fi nancially sound.
Organizations are best served when professionals
are able both to represent their own guiding values and principles and to comprehend the values
and principles that guide their colleagues.
In contrast to professional ethics, applied
ethics is the application of values, principles,
and expectations to broader social choices, such
as whether all residents of a society have a right
to some basic level of health care, or whether
health care is a commodity that individuals can
choose to purchase or not. 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 confl ict, even when one
set of values or expectations has been codifi ed into laws. The rights of individuals to have
abortions or to enforce their preferences on
care at the end of life are examples of areas of
ethical confl ict that impact health care organizations. Organizations whose decision-making
processes are aff ected by social choices that
PERSPECTIVE 62
Ethics, Strategy, and a Changing Health Care Environment
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 215
Adaptive Strategies
From a practical standpoint, whether the organization should expand, reduce,
or maintain scope is the fi rst decision that must be made once the direction of
the organization has been set (or reaffi rmed). As shown in Exhibit 65 , several
alternatives are available to expand, reduce, or maintain the scope of operations.
These alternatives provide 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 include:
diversifi cation,
vertical integration,
market development,
product development, and
penetration.
Diversifi cation Diversifi cation strategies, in many cases, are selected
because markets have been identifi ed outside the organization s core business
that offer potential for substantial growth. Often, an organization that selects a
diversifi cation strategy is not achieving its growth or revenue goals within its
are the basis of ethical confl icts must consider
carefully the values and norms that guide their
constituents and the laws that represent the current societal consensus on the issue.
All actions have an ethical component, but
often the underlying values for a decision are
so widely shared that we do not recognize the
ethical choices that we make. For example,
we do not question the principle that health
care is meant to benefi t those who are sick.
When faced with a decision about whether
to provide eff ective 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
refl ect contrasting values. For example, we value
individuals autonomy 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.
216 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 offi ce buildings, long-term
care facilities, or outpatient care.
Diversifi cation is generally seen as a risky alternative because the organization is entering relatively unfamiliar markets or new businesses that are different
from its current activities. Organizations have found that the risk of diversifi cation can be reduced if markets and products are selected that complement one
another. Therefore, managers engaging in diversifi cation seek synergy between
corporate divisions (SBUs).
There are two types of diversifi cation: related (concentric) and unrelated (conglomerate) diversifi cation. Exhibit 66illustrates possible related and unrelated
diversifi cation strategies for one type of primary health care organization.
Adaptive Strategies
Expansion of Scope
Diversification
Vertical Integration
Market Development
Product Development
Penetration
Contraction of Scope
Divestiture
Liquidation
Harvesting
Retrenchment
Maintenance of Scope
Enhancement
Status Quo
Types
Related
Unrelated
Forward
Backward
Geographic
Segment
Product Line
Product Enhancements
Promotion
Distribution
Pricing
Total
Partial
Operations
Assets
Fast
Slow
Markets
Products
Quality
Efficiency
Innovation
Speed
Flexibility
EXHIBIT 65 Strategic Thinking Map of Adaptive Strategic Alternatives
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 217
In related diversifi cation, an organization chooses to enter a market that is
similar or related to its present operations. This form of diversifi cation is sometimes called concentric diversifi cation because the organization develops a circle of related businesses (products/services). Exhibit 67illustrates the circle
of related products for a hospital that is interested in diversifying into another
segment of the health care market, the long-term care market.
The general assumption underlying related diversifi cation is that the organization will be able to obtain some level of synergy (a complementary relationship
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
product or service. For hospitals, the two primary reasons for diversifying 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. 5 The movement of acute care hospitals into skillednursing care is an example of related diversifi cation.
Hospice
Diagnostic Lab
Radiation
Treatment
Physician
Group
Ambulatory
Care
Long-Term Care
Home Health
Hospital
Related Diversification
Unrelated Diversification
Health Care Environment
Pharmaceuticals
Medical Supplies
Insurance
Managed Care
Medical Schools
Others
General Environment
Restaurants
Health and Fitness
Parking Lots
Shopping Centers
Office Buildings
Laundry
Within the Health
Care Industry
Outside the Health
Care Industry
EXHIBIT66 Related and Unrelated Diversifi cation by a Primary
Provider
218 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
On the other hand, in unrelated diversifi cation, an organization enters a
market that is unlike its present operations. This action creates a portfolio of
separate products/services. Unrelated diversifi cation, or conglomerate diversifi –
cation, generally involves semi-autonomous divisions or strategic service units.
An example of unrelated diversifi cation would be a hospital diversifying into the
operation of a restaurant, parking lot, or medical offi ce 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 diversifi cation indicates that fi nancial performance increases as
organizations shift from single-business strategies to related diversifi cation, but
performance decreases as organizations change from related diversifi cation to
unrelated diversifi cation. 6 Single-business organizations may suffer from limited
economies of scope whereas organizations using related diversifi cation can convert underutilized assets and achieve economics of scope by sharing resources
and combining activities along the value chain. Unrelated diversifi cation has
been found to increase strain on top management in the areas of decision
making, control, and governance. In addition, unrelated diversifi cation makes
it diffi cult to share activities and transfer competencies between units. Sharing
Illness
or
injury
Acute-care hospital
Medical-surgical
Geriatric
Psychiatric
Alcohol/substance
abuse
Rehabilitation
Health-promotion programs
Wellness promotion
Exercise classes
Community education
Nutrition classes
Meal program
Volunteer program
Swing
bed
Outpatient clinics
Geriatric
Psychosocial
counseling
Rehabilitation
Adult day care
Home-health care
Medicare-certified
home health
Hospice
Homemaker
Nursing home
Skilled-nursing facility
Intermediate-care facility
Housing
Domiciliary
Senior apartments
Foster care
Life-care community
Outreach
Screening clinic
Mobile vans
Transportation
Emergency
response system
Less
Acute
More
Acute
EXHIBIT 67 Long-Term Care Options for Hospital Diversifi cation
Source: Health Care Management Review 15, no. 1, p. 73. Copyright 1990. Reprinted by permission of Aspen Publishers, Inc.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 219
activities and transferring competencies has been particularly diffi cult in hospital diversifi cation. 7 Unrelated diversifi cation has been generally unsuccessful in
generating revenue for acute care hospitals.
Vertical Integration A vertical integration strategy is a decision to grow
along the channel of distribution of the 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 suppliers (upstream), it
is called backward vertical integration. When an organization grows toward the
consumer or patient (downstream), it is called forward vertical integration.
A vertically integrated health care system offers a range of patient care and
support services operated in a functionally unifi ed manner. The expansion of
services may be arranged around an acute care hospital and include pre-acute,
acute, and post-acute services or might be organized around specialized services
related solely to long-term care, mental health care, or some other specialized
area. 8 The purpose of vertical integration is to increase the comprehensiveness
and continuity of care, while simultaneously controlling the channel of demand
for health care services. 9
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.
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 benefi ts of other strategic alternatives
such as diversifi cation 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
diversifi cation may depend on the objective or intent of the alternative. For
instance, when the primary intent is to enter a new market in order to grow, the
decision is to diversify. However, if the intent is to control the fl ow 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
diversifi cation (entering a new growth market) or vertical integration (controlling downstream patient fl ow). 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.
One study showed that over 89 percent of US hospitals belong to health networks or systems. 10 The major reason that hospitals join networks and systems
is to help to secure needed resources (fi nancial, human, information systems,
and technologies), increase capabilities (management and marketing), and
220 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
gain greater bargaining power with purchasers and health plans. 11 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, physician groups, home health care companies, as well as selling or closing hospitals
and divesting themselves of skilled care services or facilities. 12
To expand the supply of patients to various health care units, several patterns
of vertical integration may be identifi ed. 13 In Exhibit 68 , an inpatient acute
care facility is the strategic service unit or core technology that decides to vertically integrate. Example 1 represents a hospital that is not vertically integrated.
The hospital admits and discharges patients from and to other units outside
the organization. Example 2 illustrates a totally integrated system in which
1
2
3
4
5
Upstream Downstream
Strategic
Business Unit
ABCDEFG
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
EXHIBIT 68 Patterns of Vertical Integration Among Health Care
Organizations
Sources: Adapted in part from K. R. Harrigan, Formulating Vertical Integration Strategies, Academy of
Management Review 9, no. 4 (1984), pp. 638652. 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.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 221
integration occurs both upstream and downstream. In this case, patients fl ow
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 in vertical integration. Three hospitals form the core of the system, which also contains 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 benefi ts for patients (effectiveness) and cost savings (effi ciency).
Finally, some health care systems are closed systems with fi xed patient populations 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 system. This insurance function is shown as an additional unit and identifi ed by the letter i in the example.
Market Development Market development is a divisional strategy used to
enter new markets with present products or services. Specifi cally, 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 development
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, fi nancial, information systems, organizational, and human resources
functions. An example of a market development strategy would be a chain of
outpatient clinics opening a new clinic in a new geographic area (present 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 by acquiring or affi liating with direct competitors rather than using internal operational/functional
strategies to take market share from them. Many hospitals and medical practices
engaged in horizontal integration, creating multihospital 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 effi ciencies, access to management expertise, increased personnel
benefi ts, improved patient access, improvement in quality, and increased political power. 14 However, many of these benefi ts did not materialize and the growth
of horizontal integration strategies slowed.
Another special type of market development is a market-driven or focused
factory strategy. 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. This strategy involves providing comprehensive
222 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
services across multiple markets (horizontal integration) for one specifi c disease
such as diabetes, renal disease, asthma, or cardiac disease. Such focus allows an
organization to achieve very high levels of effectiveness and effi ciency. Regina
E. Herzlinger explains the shift as:
. . . replacing giant providers and huge managed care networks, located in
hard-to-reach sites with what I call focused factories (a nomenclature borrowed from the manufacturing sector) that provide convenient, specialized
care for victims of a certain chronic disease, or for those who need a particular form of surgery, or for those who require a diagnosis, checkup, or
treatment for a routine problem. 15
Focused factories become so effective (high quality, convenient, and so on)
and effi cient (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. Herzlinger s focused factory tools for providers of health
care services are outlined in Perspective 63 .
The health care providers who fl ourish in this
market-driven environment will give customers
the mastery and convenience as well as the focused,
cost-eff ective services they want by following the
rules of successful service entrepreneurs:
Pay Attention to the Customer don t call
them patients, don t fi ght their assertiveness, don t give them hype, give them real
convenience and quality.
Focus , Focus , Focus throw out the generalpurpose, everything-for-everybody model;
focus on your strengths; design the system
that will lower costs and optimize 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 Edifi ce Complex bricks and mortar
are distractions; fi xed 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 diff erent ways of thinking; don t
PERSPECTIVE 63
Focused Factory Tools for Providers of Health Care Services
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 223
In health care, focused factories have not escaped criticism. The success of
some focused factories (cardiac surgery and treatment) has led some states to
propose legislation 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. Specifi cally identifi ed were cardiac, orthopedic, surgical, and other
hospitals owned by physicians. The focused factories have targeted profi table
procedures from insured patients, requiring local not-for-profi ts to care for less
profi table diseases/treatments without being able to offset the costs through
the more profi table procedures being captured by focused factories. Therefore,
many politicians are opposed to specialty hospitals and advocated for the federal
legislation to become permanent.
There has also been concern as to whether health care-focused factories really
reduce costs and in turn prices. Some experts suggest that price reductions are
offset by the tendency of physicians with fi nancial 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 suggest that physicians referred
easy cases to specialty hospitals and more complex patients to general hospitals, but there is no data to support the 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. 16
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.
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’s 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 fi le 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 fl attering.
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.
283287.
224 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Product Development Product development is the introduction of new
products/services to present markets (geographic and segments). Typically,
product development takes the form of product enhancements and product line
extension. Product development should not be confused with related diversifi cation. Related diversifi cation introduces a new product category (though it may
be related to present operations), whereas product development may be viewed
as refi nements, complements, or natural extensions of present products. Product
development strategies are common in large metropolitan areas where hospitals
vie for increased market share within particular segments of the market, such
as cancer treatment and open heart surgery. Another good example of product
development is in the area of women s health. Many hospitals have opened clinics designed to serve the special needs of women in the present market area.
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 marketing strategies such as promotional, distribution, and pricing strategies, and often
includes increasing advertising, offering sales promotions, increasing publicity
efforts, or increasing the number of salespersons.
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 penetration
strategies. The use of e-detailing by pharmaceutical companies is on the rise
because increasingly physicians prefer to replace sales calls with other forms
of communication and are accessing physician-only websites, online sources of
information, and other interactive communication formats. For example, one
study of health physicians and other medical professionals found that when
e-detailing was used in combination with occasional visits by professional service representatives the results were particularly effective. The argument was
made that e-detailing and periodic, in-person visits are complimentary in nature,
less expensive, and using them in combination multiplied the effects of either
approach on its own. 17
Reduction of Scope Strategies
Reduction of scope strategies decrease the size and scope of operations.
Reduction strategies include:
divestiture,
liquidation,
harvesting, and
retrenchment.
Divestiture Divestiture is a contraction strategy in which an operating
strategic service unit is sold off as a result of a decision to permanently and
completely leave the market despite its current viability. Generally, the business
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 225
to be divested has value and will continue to be operated by the purchasing
organization.
Within the past decade, the strategy of unbundling (divesting by a hospital
of one or more of its services) has become common. Thus, 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. 18 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. See Perspective 63 .
An organization may need cash to fund more important operations for long-term
growth or the division/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 diversifi cation. Although the strategy
appears logical and synergistic, managed care businesses are diffi cult to manage
and there is little skill transfer from managing provider organizations.
Liquidation Liquidation involves selling the assets of an organization. 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, of course, 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.
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 operations, 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.
Harvesting 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. However,
little in terms of new resources will be invested.
In a harvesting strategy, the organization attempts to reap maximum short-term
benefi ts before the product or service is eliminated. Such a strategy allows the
226 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
organization an orderly exit from a declining segment 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 experienced diffi culty in maintaining their commitment to
health care in small communities. The 20-bed hospitals frequently found in rural
networks tend to struggle fi nancially because of a lack of support from specialists and primary care physicians, an aging population, and fl ight 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 fi nancial position because of effective physician
recruitment, good community image, and the continued viability of the communities themselves. Therefore, regional hospitals with rural networks may have to
employ a harvesting strategy for the 20-bed hospitals while using development or
maintenance of scope strategies for the 50-bed and larger hospitals.
Retrenchment A retrenchment strategy is a response to declining profi tability,
usually brought about by increasing 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 percentage of revenue, placing pressure on profi tability.
Retrenchment typically involves a redefi nition of the target market and selective
cost elimination or asset reduction. Retrenchment is directed toward reduction in
personnel, the range of products/services, or the geographic market served and
represents an effort to reduce the scope of operations.
Over time, organizations may fi nd 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 superfl uous 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
the products account for more than 80 percent of the revenue. In these circumstances, 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 appropriate. 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 maintenance of scope strategies 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
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 227
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 When management believes that the organization is progressing toward its vision and goals but needs to do things better, an enhancement
strategy 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 (CQI, TQM) directed toward improving organizational
processes or cost-reduction programs designed to render the organization more
effi cient. In addition to quality and effi ciency, enhancement strategies may be
directed toward innovative management processes, speeding up the delivery of
the products/services to the customer, and adding fl exibility to the design of the
products or services (marketwide customization).
Many times after an expansion strategy, an organization engages in maintenance/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 often based on the assumption that
the market has matured and periods of high growth are over. In this situation,
the organization has secured an acceptable market share and managers believe the
position 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 fi nancial
reserves, and be ready to make strategic changes. 19
In a status quo strategy, the goal is to maintain market share and keep services
at their current level. Environmental infl uences affecting the products or services
should be carefully analyzed to determine when signifi cant change is imminent.
Typically, organizations attempt a status quo strategy in some areas while engaging in market development, product development, or penetration in others to better 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, shortterm rehabilitation care, renal dialysis, ophthalmology, or intravenous therapy.
In mature markets, industry consolidation occurs as fi rms attempt to add volume and reduce costs. Therefore, managers must be wary of the emergence of
a single dominant competitor that has achieved a signifi cant cost differential. A
status quo strategy is appropriate when there are two or three dominant providers in a stable market segment because, in this situation, market development or
product development may be quite diffi cult and extremely expensive.
A brief defi nition of the adaptive strategies and their rationales for selection
are summarized in Exhibit 69 .
228 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 69 Defi nition and Rationales of the Adaptive Strategies
Adaptive
Strategy Defi nition Rationale
Related
Diversifi cation
Adding new related product or service categories. Often requires the
establishment of a new division.
Pursuit of high-growth markets.
Entering less-regulated segments.
Cannot achieve current objectives.
Synergy is possible from new business.
Off set seasonal or cyclical infl uences.
Unrelated
Diversifi cation
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.
Backward
Vertical
Integration
Adding new members along the
distribution channel (toward a later
stage) for present products and
services or controlling the fl ow of
patients from one institution to
another.
Control the fl ow 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 profi table 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 fl ow
of patients from one institution to
another.
Control the fl ow 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 profi table 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 effi ciently.
Expected high revenues.
Organization has cost leadership advantage.
Organization has diff erentiation 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 diff erentiation advantage.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 229
Adaptive
Strategy Defi nition Rationale
Penetration Seeking to increase market share
for present products or services in
present markets through marketing
eff orts (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 diff erentiation advantage.
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.
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,
redefi ning 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.
Enhancement Seeking to improve operations
within present product or service
categories through quality programs,
increasing fl exibility, increasing effi –
ciency, speed of delivery, and so on.
Organization has operational ineffi ciencies.
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 69 (Continued)
230 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Market Entry Strategies
The expansion adaptive strategies specify entering or gaining access to a new market and the maintenance of scope strategies may call for obtaining new resources.
Therefore, the next important decision that must be made for these strategies concerns how the organization will enter or develop the market the market entry
strategies. If a reduction adaptive strategy is selected, normally there is no market
entry decision and market entry strategies are not used.
There are three major methods to enter a market. As illustrated in Exhibit 64 ,
an organization can use its fi nancial 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 adaptive strategies. Any of the adaptive strategies
may be carried out using any of the market entry strategies but each one places
different demands on the organization.
Purchase Strategies
Purchase strategies allow an organization to use its fi nancial resources to
enter a market quickly, thereby initiating the adaptive strategy. 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 diversifi cation, 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. 20
The acquiring organization may integrate the operations of the newly acquired
organization into its present operations or may run it as a separate business/
service unit. Acquisitions offer a method for quickly entering a market, obtaining
a technology, or gaining a needed channel member to improve or secure distribution. 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 benefi ts of ownership justify the costs and whether
the acquiring organization has the product and process knowledge to capitalize on an opportunity quickly. If the acquiring organization does not have the
expertise or capability and there is an organization that provides a good strategic
fi t that does have such expertise then purchase may be warranted. 21 However,
even a small acquired organization can be diffi cult 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 diffi culties of combining organizational cultures, the creation of
health systems with unifi ed ownership has been an effective strategy. Health
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 231
systems have been better able than health networks (looser contractual- or
alliance-based strategies) to provide needed resources, competencies, and capabilities. Direct ownership of assets enables systems to achieve greater unity of
purpose and develop more focused strategies, on average, than more loosely
organized networks. In addition, hospitals in health systems that have unifi ed
ownership generally have better fi nancial performance than hospitals in contractually based health networks. 22
Much of the growth of the for-profi t hospital chains has been via a market
development acquisition strategy (also called horizontal integration or buying
market share). Aggressive market development through acquisition of independent hospitals has been used to build the nation s largest private for-profi t 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. 23 In the past
two decades, horizontal integration and vertical integration through acquisitions
and alliances have been key entry strategies for initiating rapid market growth
by health care organizations.
Licensing Acquiring a technology or product through licensing may be
viewed as an alternative to acquiring a complete company. License agreements
obviate the need for costly and time-consuming product development and
provide rapid access to proven technologies, generally with reduced fi nancial
and marketing risk to the organization. However, the licensee usually does not
receive proprietary technology and is dependent on the licensor for support and
upgrade. In addition, the up-front dollar costs may be high.
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 defi ned activity. 24 This practice is most commonly found in the fi eld
of trademark licensing. Franchisees benefi t from exploitation of the goodwill,
uniform format, and uniform quality standards symbolized by the franchisor s
trademark. The license agreement by and between Blue Cross and Blue Shield
Association and the various regional Blue Cross and Blue Shield Plans provides
an example. Blue Shield Plans are granted the right to use the Blue Cross and
Blue Shield names and trademarks in its 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 upon the Plans license under the
Blue Cross and Blue Shield name within the stated territory. 25
Venture Capital Investment Venture capital investments offer an opportunity to enter or try out a market while keeping 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. 26
In addition, venture capital investments are a way for new health care organizations to grow. Venture capital investments in health care companies (including biotechnology, pharmaceuticals, medical devices, and health care) in early
232 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
2012 fell to its lowest level since 2010; however, the number of deals remains
relatively high. Venture capital investment in health care technology fi rms was
strong throughout the decade of the 1990s but e-health (Internet-related) companies began receiving a large share of health care venture capital beginning in
2000. During 2012 most of the venture capital investments were made in fi rms
located in California and Massachusetts. By far most investments were in mature
companies rather than seed money for start-ups. Unlike the 1990s, 2010s venture
capital investments involved fi rms in genomic research (Warp Drive Bio), noninvasive prenatal testing (Ariosa Diagnostics), radiation therapy (Mevion Medical
Systems), and endoscopic surgery (Apollo Endosurgery). 27
Cooperation Strategies
Probably the most used and certainly the most talked about strategies of the
late 1990s and early 2000s were cooperation strategies. Since 2006, cooperation
strategies have slowed; however, with ACA supported (mostly) by the Supreme
Court in 2012 more activity is expected. Many organizations have carried out
adaptive strategies particularly diversifi cation, vertical integration, product
development, and market development strategies through cooperation strategies. They include mergers, alliances, and joint ventures.
Mergers Mergers are similar to acquisitions. In mergers, however, the
two organizations combine through mutual agreement to form a single new
organization, 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 effi ciency in the delivery of health care
services, reduction in duplication of services, improved geographic dispersion,
increased service scope, restraint in pricing increases, and improved fi nancial
performance. 28 See Perspective 64 . 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 effi ciency 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 fi nancial 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, marketdriven environment where huge and powerful networks are experiencing
cutbacks in managed care, Medicare, and Medicaid reimbursement. 29
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 233
Hospital mergers and acquisitions declined
throughout the decade of the 1990s and continued through the fi rst decade of the 21st century
both in terms of the number of deals and number of hospitals involved. Despite the decline,
the hospital sector has had more mergers and
acquisitions than any other health care services
sector that includes hospitals, physician groups,
and managed care (but does not include health
care technology, a separate sector in the health
care industry).
The number of hospital merger and acquisition deals declined by 60 percent from 1998 to
2006. However, the period 2004 through 2006
saw the number of deals rise slightly and level
off through 2006 with fewer than 60 deals but
with a dramatic increase in the number of hospitals involved. In the fi rst quarter of 2012, the dollar value of hospital mergers was $600 million
for 21 transactions, the largest being Highmark
Blue Cross Blue Shield s $245 million acquisition
of controlling interest in Pittsburgh s Jeff erson
Regional Medical Center. The quarter was off the
record pace set in the second quarter of 2010
when 32 transactions valued at $3.5 billion was
reported. The two large deals reported in 2010
were the acquisition of West Penn Alleghaney
Health Systems by Highmark ($1.5 billion value)
and HCA Holdings acquisition of the remaining
interest in HealthOne ($1.4 billion).
Levin Associates expects an uptick in M&A
activity by the end of 2012 since the Supreme
Court upheld the individual mandate and most
of the rest of the ACA. Cost of capital is low and
the potential for tax increases could spur end-ofyear activity, especially in the long-term care category which is dominated by small, private fi rms
and individuals who may be more interested in
cashing in rather than taking a big tax hit.
Hospitals are not the only health care organizations involved in mergers. Physicians group
deals were increased to $4.2 billion from 21
transactions during fi rst-quarter 2012. The largest deal was the $3.7 billion agreement between
DaVita, a Denver-based dialysis chain with 1,800
locations, and HealthCare Partners that operates medical groups and physician networks
with more than 2,500 employed or affi liated
physicians in California, Florida, and Nevada. The
DaVitaHealthcare Partners acquisition refl ects
the continuing eff orts by providers to position
themselves to rein in costs and to create alignments that enable greater control across the
continuum of care.
Managed care posted nine deals valued at
$730 million during second-quarter 2012 with
the largest valued at $435 million for Towers
Watson s acquisition of Extend Health, operator of
a private Medicare exchange. The deal positions
Towers Watson, a consulting fi rm primarily for
employee benefi ts, to capitalize on the growing
interest in private health exchanges. Managed
care deals in 2011 were bigger with Wellpoint
acquiring CareMore for $800 million and Aetna s
acquisition of Prodigy Health for $600 million.
Source: Based on Irving Levin Associates, Inc., The Health Care
Acquisition Report , 17th edn, 2011 and Dick Tocknell, Healthcare
M&A Activity Surges in Q2, HealthLeaders Media , July 26, 2012.
PERSPECTIVE 6 4
Mergers and Acquisitions
234 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
However, managing organizations that merge to create integrated systems has
been diffi cult. There are several reasons why integrated health systems encounter signifi cant obstacles in realizing the proposed benefi ts. The most frequently
cited relate to the diffi culty of creating an effective strategic fi t, giving away
too much money and power with respect to governance to the local governing
board, inability to achieve operating effi ciencies, and experiencing diffi culties in
realigning resources. 30
As in acquisitions, a major diffi culty in a merger is the integration of two
separate organizational cultures. Mergers offer a more diffi cult challenge than
acquisitions because a totally new organization must be forged. In an acquisition, 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 signifi cant 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 time to be spent in communications at all levels in the organization.
Medical staff and employees should engage in a reformulation of the vision, mission, and statement of the shared values of the new organization. Work groups
must be formed to address how to effectively and effi ciently meet the needs of
patients. As well as communicating internally, external communications must be
given top priority. Even with such efforts, truly merging the two organizational
cultures into one will take years to complete.
Mergers and acquisitions and other forms of combination continue to be important market entry strategies for health care organizations. An environment conducive to large health care combinations, institutional coordination, demands for
effi ciency, and the continuum of care (seamless care) has fostered many of these
mergers and acquisitions. In the early 2010s, low interest rates and the uncertainty
of going it alone in the ACA future may increase cooperation strategies.
Alliances Alliances are loosely coupled arrangements among existing
organizations that are designed to achieve some long-term strategic purpose
not possible by any single organization. Alliances include confi gurations such as
federations, consortiums, networks, and systems. 31 Strategic alliances are cooperative contractual agreements that go beyond normal company-to-company
dealings but fall short of merger or full partnership. 32 Alliances have been used
to create health networks loosely coupled or organized delivery systems. They
are an attempt to strengthen competitive position while maintaining the independence of the organizations involved.
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. 33 For example, two
organizations may establish an alliance when each one possesses strength in a
different stage of the service category value chain one organization has expertise in service delivery and another controls the distribution channel. Further,
organizations may form coalitions to defray costs and share risk when they
undertake high-cost capital or development-intensive initiatives. Finally, it has
been suggested that the resources available from an alliance partner can facilitate an organization s effort to alter its strategic position. 34 For instance, research
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 235
indicates that biotechnology start-up organizations could enhance their initial
performance and strategic position by establishing upstream and downstream
alliances. 35
In health care, the term alliance is sometimes used to refer to the voluntary
organizations that hospitals join primarily to achieve economies of scale in purchasing. For some, this type of alliance provides the benefi t of being part of a
large system, yet allows them to exist as free-standing, self-governing institutions.
Examples of some major hospital alliances include Premier, Voluntary Hospitals
of America (VHA), and University HealthSystem Consortium. Purchasing alliances are a different type of alliance from that based on an expansion/cooperation strategy.
Strategic alliances, although not mergers, 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 a loose 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 others instead of
each other. In addition, one of the advantages of integrated networks 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 infl ation. 36 In some cases, an alliance can lead to a merger. For
example, Breech Medical Center in Lebanon, Missouri moved its affi liation agreement with St. John s Health System of Springfi eld, Missouri to a full-asset merger
over a several-year period (now St. Johns 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. 37 Hospitals appear to form alliances
with physicians for several reasons. Alliances serve to contract with the growing
number of HMOs, to pose a countervailing bargaining force of providers in the
face of HMO consolidation, and to accompany hospital downsizing and restructuring efforts. 38 However, strategic alliances between physicians and hospitals
should be anchored in their common purpose improving patient care. The physicians involved may not concur with the hospital in its management of facilities,
staffi ng, and so forth. In addition, confl ict may emerge as hospitals diversify into
areas that compete more directly with the physicians own clinics, ambulatory
care centers, and diagnostic centers. Finally, although the hospital would prefer
to have many qualifi ed physicians admitted to the staff (who could refer more
patients), allied physicians would prefer to limit credentialing of outside physicians (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. 39 A
joint venture (JV) is the combination of the resources of two or more separate
236 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
organizations to accomplish a designated task. A joint venture may involve a
pooling of assets or a combination of the specialized talents or skills of 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 agreeing to work together toward a specifi c 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
parties engage in activities of mutual benefi t.
4. Not-for-profi t title-holding corporations. Tax legislation enacted in 1986
allowed not-for-profi t organizations to form tax-exempt title-holding corporations (providing signifi cant benefi ts to health care organizations engaged
in real estate ventures). 40
Because of the dynamic 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. 41 Through the fi rst 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 profi tability. 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 infl uence 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. 42
Although there are benefi ts 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
organizations may hold different strategic interests and maintaining strategic
alignment across separate organizations with different goals, market pressures,
and stakeholders can be diffi cult. In addition, sharing governance can complicate
decision making, particularly with separate reporting systems and methods for
measuring success. Further, problems develop in providing services, staffi ng, and
other resources. Finally, building a cohesive, high-performing organization with
a unique culture has proven diffi cult for many joint ventures. 43
Development Strategies
Organizations may enter new markets by using internal resources in what are
called development strategies. This entry strategy takes the form of internal
development, internal ventures, or reconfi guring the value chain. Diversifi cation
and vertical integration through internal development or internal ventures usually take considerably longer to achieve than through acquisition (although the
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 237
costs may be lower). Reconfi guring the value chain fi nds new ways to deliver
value to customers and changes the business model.
Internal Development Internal development uses the existing organizational structure, personnel, and capital to generate new products/services or
distribution strategies. Internal development may be most appropriate for products or services that are closely related to existing products or services. Internal
development is common for growing organizations, particularly when they can
exploit existing resources, competencies, and capabilities (leveraging existing
resources and other assets).
Internal Ventures Internal ventures typically set up separate, relatively
independent entities (businesses) within the organization. Internal ventures
may be most appropriate for products or services that are unrelated to the
current products or services. 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.
Reconfi guring the Value Chain An organization may reconfi gure the
value chain by changing the activities or sequence of activities it performs and
therefore change how value is delivered to the customer. 44 Value chain reconfi guration requires rethinking the ways in which existing organizations serve
customers. For the most part, reconfi guration takes place in the service delivery
components of the values chain (pre-service, service delivery, after-service) and
thus is marketing and operations focused.
In many cases reconfi guring the value chain involves using new technology or
organizations to perform activities in ways that were not possible in the past. 45
For example, using pod casts for physician education by pharmaceutical companies might create a whole new way to provide value to physicians. Therefore,
reconfi guration of the value chain is the development of a completely new business model, applying a business model from another industry, or in some cases,
a dramatic modifi cation of the existing value chain creating an entirely new way
of producing value or lowering costs.
Market entry and penetration strategies coupled with reconfi guring the value
chain can be powerful combinations for creating new business models and
effectively entering the market. For example, when an organization bypasses
brick-and-mortar outlets and sells its products (penetration strategy channel of
distribution) through a website, it is reconfi guring the value chain. 46
Market Entry Strategy Linkage
The defi nition, major advantages, and disadvantages of the market entry strategies are summarized in Exhibit 610 . The adaptive and market entry strategies
work in combination. The market entry strategies are the means for accomplishing the adaptive strategies. This relationship is demonstrated as organizations
struggle with cost containment and their managed care strategies. Health care
organizations are opting for a variety of adaptive and market entry strategies to
238 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 610 Defi nition, Advantages, and Disadvantages of Market Entry Strategies
Market Entry
Strategy Defi nition Major Advantages Major Disadvantages
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 an
asset (technology, market,
equipment, etc.) through
contract.
Rapid access to proven
technology.
Reduced fi nancial
exposure.
Access to brand name.
Exclusive territory.
Not a substitute for internal technical competence.
Not proprietary technology.
Dependent on licensor.
Rules and regulations.
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.
Low risk.
Alone, unlikely to be a major
stimulus of growth.
Extended time to profi tability.
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 diffi cult to
fi nd.
Alliance Formation of a formal
partnership.
Fills in gaps in product line.
Creates effi ciencies (e.g.,
bargaining power).
Reduces competition in
weak markets.
Stabilizes referral base.
Shared risk.
Potential for confl ict between
members.
Limits potential markets/
products.
Diffi cult 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 distribution risks.
Potential for confl ict between
partners (shared vs. proprietary).
Objectives of partners may not
be compatible.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 239
Market Entry
Strategy Defi nition Major Advantages Major Disadvantages
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 signifi cant gains in
market shares against strong
competitors may be diffi cult.
Internal
Venture
Establishment of an independent entity within an
organization to develop
products or services.
Uses existing resources.
May enable organization to hold a talented
entrepreneur.
Isolates development from
organization s bureaucracy.
Mixed record of success.
Organization s internal climate
(culture) often unsuitable.
Reconfi gure
the Value
Chain
Changing the activities or
sequence of activities in
the value chain and therefore 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 fi rst to recognize the
new business model.
deal with the changing health care environment. Together the adaptive (scope
of the organization) and market entry strategies (means to achieve that scope)
are shaping the health care landscape.
Competitive Strategies
Having selected the adaptive strategies and market entry strategies, managers must
decide the strategic posture of the organization and how the products and services
will be positioned vis–vis those of competitors. 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).
Strategic Posture
Organizations may be classifi ed by how they behave within their market segments or industry their strategic posture. Research by Miles, Snow, Meyer, and
EXHIBIT 610 (Continued)
240 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Coleman has shown that there are at least four typical strategic postures for
organizations defenders, prospectors, 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 demonstrate inconsistent behavior; however, unless an organization exists in a protected
environment, such as a monopolistic or highly regulated market segment, it cannot continue to behave as a reactor indefi nitely. 47 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. 48 Therefore, strategic decision makers
should examine the current market behavior, explicitly 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 defend this market segment through pricing or differentiation
strategies.
Defenders are organizations that engage in little search for additional opportunities for growth and seldom make adjustments in existing technologies, structures, or strategies. They devote primary attention to improving the effi ciencies
of existing operations. Thus, cost effi ciency is central to the defender s success.
In addition, defenders often engage in vertical integration to protect their market, control patient fl ow, and create stability. Defenders grow through penetration strategies and limited product development strategies.
Prospector Strategic Posture Prospectors are organizations that frequently
search for new market opportunities and regularly engage in experimentation
and innovation. A prospector s major capability is that of fi nding 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 diversifi cation 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.
Analyzer Strategic Posture The analyzer posture is a combination of the
prospector and defender strategic postures. The analyzer tries to balance stability and change. Analyzers are organizations that maintain stable operations in
some areas, usually their core products or businesses, but also search for new
opportunities and engage in market innovations. Characteristically they watch
competitors and rapidly adopt those strategic ideas that appear to have the
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 241
greatest potential. Analyzers tend to use penetration strategies in their stable core
products and markets whereas related diversifi cation, product development, and
market development are used to enter new promising areas.
Reactor Strategic Posture The defender, prospector, and analyzer postures are all proactive strategies. However, the reactors really do not have a strategy or plan and therefore such organizations are both inconsistent and unstable
in their response to the environment. Reactors are organizations that perceive
opportunities and turbulence but are not able to adapt effectively. They lack
consistent approaches to strategy and structure and make changes primarily in
response to environmental pressures. Miles, Snow, Meyer, and Coleman identifi ed three major reasons that organizations become reactors:
1. Top management may not have clearly articulated the organization s
strategy.
2. Management does not fully shape the organization s structure and processes to fi t a chosen strategy.
3. Management tends to maintain the organization s current strategystructure
relationship despite overwhelming changes in environmental conditions. 49
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 implementation, changes will have to be made to move the organization toward a more
effective 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. 50
Understanding the organization s preferred strategic posture and communicating 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, and positioning strategies.
The defi nition, major advantages, and disadvantages of the strategic posture
strategies are summarized in Exhibit 611 .
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. 51 For both marketwide and market segment focus there are two fundamental positioning strategies cost leadership and differentiation. 52
Marketwide strategies determine a product or services place in the market
vis–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
242 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 611 Defi nition, Advantages, and Disadvantages of Strategic Postures
Strategic Posture Defi nition 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 diff erentiation.
Focus on limited set of
products and services.
Focus is on narrow market segment.
Stable environment.
Diffi cult 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.
Diffi cult 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 effi ciency.
Tend to have lower profi ts
because of continuous
change.
Tend to overextend
resources.
Tend to underutilize fi nancial, human, and physical
resources.
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.
Diffi cult strategy to pursue.
Must respond quickly to follow lead of key prospectors
while maintaining effi ciency
in core products/services.
Complex structure (matrix).
Management of both stable
and dynamic products and
markets.
Communication is often
diffi cult.
Reactor Reacts to the strategies
of competitors.
Little strategic planning
required (monopolistic or highly regulated
environment).
Inconsistency in response to
environmental change.
Instability in organization.
Organization becomes both
ineff ective and ineffi cient.
No eff ective guide for decision making.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 243
as children or the aged. As shown in Exhibit 612 , marketwide positioning strategies can be based on differentiation or cost leadership. Thus, the community
hospital may try to 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-defi ned market segment, such as pediatric oncology or women s health,
and often are called focus strategies. Thus, a focus strategy identifi es a specifi c,
well-defi ned 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 niche within the market. Similar to marketwide
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 industry,
focus strategies are quite common. Just as physicians have specialized, the institutions within the fi eld have tended to focus on specialized segments. Examples
of focus strategies are rehabilitation hospitals, psychiatric hospitals, ambulatory
care centers, 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 than competitors offerings. The product or service is often highly
standardized to keep costs low. Cost leadership allows for more fl exibility in
pricing and relatively greater profi t margins.
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
EXHIBIT 612 Porter s Matrix
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 division of Simon & Schuster Adult Publishing Group.
244 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 particularly applicable to the primary providers segment of the health
care industry. As Porter suggests:
Cost leadership requires aggressive construction of effi cient-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. 53
Therefore, in order to use cost leadership effectively, an organization must be
able to develop a signifi cant cost advantage and have a reasonably large market
share. However, low cost is only an advantage if the organization has the lowest cost and competitors know they cannot match it. Sustaining lowest cost is
extremely diffi cult to achieve without extraordinary scale or market share advantages or unique factor cost benefi ts. 54 Such a strategy must be used cautiously
within health care because consumers often perceive low price as meaning low
quality. However, cost leadership allows the organization the greatest fl exibility
in pricing.
An industry segment where cost leadership is being used successfully is in
the area of long-term care. Long-term care facilities are a thin-margin business
in which profi t 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 effi cient 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 profi table.
Differentiation Differentiation is a strategy to make the product or service different (or appear so in the mind of the buyer) from competitors products or services. Thus, consumers see the service as unique among a group
of similar competing services. Differentiation is of no benefi t unless that
difference is both valuable to buyers and capable of being sustained against
competitors. 55
The product or service may be differentiated by emphasizing quality, a high
level of service, ease of access, convenience, reputation, and so on. There
are a number of ways to differentiate a product or service, but 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 industry have
been based on quality and image. Many acute care hospitals emphasize and
promote quality care to differentiate them from other hospitals in their service
area. However, consumers expect to receive high-quality care at every hospital,
making quality a diffi cult differentiating factor. A high-tech image is another
basis for differentiation among health care organizations. Affi liation with a medical
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 245
school which performs the most sophisticated procedures or uses the latest
(often expensive) technology may promote the image of the best possible
care. Exhibit 613presents the defi nition, advantages, and disadvantages of
each of the positioning strategies.
Combination Strategies
Combination strategies are often used, especially in larger complex organizations, because no single strategy alone may be suffi cient. Zook and Allen have
observed that profi table growth comes when a company pushes out the
boundaries of its core business into adjacent space. 56 They identifi ed several
ways to grow into an adjacent space expand along the external value chain
(penetration), grow new products and services (product development), enter
new geographies (market development), and address new customer segments
(market development). Therefore, successful strategies often mix and match
approaches, deploying strategies simultaneously or sequentially. For example, an
organization may concurrently divest itself of one of its divisions and engage in
market development in another. Perhaps the most frequent combination strategy
EXHIBIT 613 Defi nition, Advantages, and Disadvantages of Positioning Strategies
Positioning Strategy Defi nition 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.
Diff erentiation Development of
unique product/
service features
directed toward
entire market.
Product/service viewed as
unique.
Often viewed as high
quality.
Greater control over
pricing.
Often diffi cult to adequately
diff erentiate 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 may be
diffi cult.
Focus Diff erentiation Development of
unique product/
service features
directed toward a
particular market
segment.
Product/service may be
customized to the special
needs of the segment.
May develop close relationship with market segment.
Market segment may remain
small.
Price will probably be high.
246 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 65
Integration at Carolinas Healthcare System
Carolinas Healthcare System (CHS), the largest
system in the Carolinas and the second largest
system in the nation, is overseen by the Charlotte/
Mecklenburg Hospital Authority. An outgrowth of
a lone community hospital originally founded in
1940, CHS provides a full spectrum of health care
and wellness programs throughout North and
South Carolina (and one hospital in Georgia). It
is a diverse network including academic medical
centers, hospitals, health care pavilions, physician
practices, destination centers (such as cancer, outpatient surgery, imaging, endoscopy, and so on),
surgical and rehabilitation centers, home health
agencies, nursing homes, and hospice and palliative care. In 2011, CHS had 29 disease-specifi c
certifi cations awarded by the Joint Commission.
CHS s fl agship facility is the 874-bed Carolinas
Medical Center (CMC), which includes a Level 1
trauma center, a research institute, the Levine
Children s Hospital, a rehabilitation facility, and a
large number of special treatment units including heart, cancer, and organ transplant. CMC
serves as one of North Carolina s fi ve Academic
Medical Center Teaching Hospitals providing
residency training and fellowships for 377 physicians in 15 specialties.
Carolinas Healthcare System s total revenue
grew 500 percent between 2000 and 2012. In
2011, CHS built six new free-standing emergency departments, a new replacement hospital
in Wadesboro, NC, and spent $12.3 million on
the fi rst phase of a virtual critical care program.
CHS has 457 intensive care unit (ICU) beds and
52 board-certifi ed critical care physicians (28
of them located at the main CMC hospital in
Charlotte). With this new system, critical care
specialists will be able to monitor ICU patients
at any of the CHS facilities.
CMC is the fi rst hospital in North Carolina to be
recognized by J. D. Power and Associates for excellence in maternity care, and has been recognized
for emergency services and women s services as
well. CMC has been named the Consumer Choice
Preferred Hospital in the Charlotte market by the
National Research Corporation 14 times, and US
News & World Report named CMC in its ranking of
America s Best Hospitals for urology and orthopedics in 2008. In 2011, US News & World Report
listed Levine Children s Hospital among America s
Best Children s Hospitals for kidney care. In 2008,
CMC won the Joint Commission s Ernest Amory
Codman Award (hospital category) because of its
achievement in the use of process and outcomes
measures to improve organization performance
and, ultimately, the quality and safety of care.
In 2009, CMC received the Joint Commission s
Franklin Award of Distinction for Clinical Care
Management.
As of July 1, 2012 (when a management
agreement with Cone Health became eff ective), CHS owned or managed nearly 40 hospitals, garnered about $8 billion in annual
revenue, employed or managed more than
57,400 employees, and owned or managed
7,200 licensed beds. Further, CHS employed
or managed more than 2,000 physicians and
served patients from more than 700 care
locations.
Over the past 70-plus years, CHS has incorporated every type of growth strategy and most of
the maintenance of scope strategies; however,
they have rarely used any of the reduction of
scope strategies.
Source: Carolinas Healthcare Systems Annual Report 2011, its
website, and news releases.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 247
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 providing the continuum of care).
As illustrated in Perspective 65 , Carolinas Healthcare System, previously
known as Charlotte/Mecklenburg Hospital Authority, demonstrates the successful use of combination strategies. Beginning with a single county hospital as the
base, Carolinas Healthcare System used practically every type of adaptive and
market entry strategy to achieve its vision of a fully integrated regional health
system with Carolinas Medical Center as its foundation.
In addition to an organization using several different strategies at once, a
strategy may have several phases. It may be necessary to string together several
strategic alternatives as phases or elements to implement a broader strategic shift.
In a two-phase strategy, an organization may employ a retrenchment strategy in
phase one and an enhancement strategy in phase two. As illustrated in Exhibit
614 , the strategic manager s vision often extends through several strategic
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 modifi ed 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 62 . At this point, it would be useful to return to Exhibits 62and 64
SSU 1
TIME
SSU 2
SSU 3
Boundary Set by
Mission/Vision
External Environment
Boundary Set by
Mission/Vision
Market
Vertical Integration (forward) Development
Market
Development
Harvesting/Divest
Market Development Retrenchment (Product)
Today Year 1 5 Year 2 Year 3 Year 4 Year
External Environment
Cash
EXHIBIT 614 Vision of Strategy Combinations and Phases
248 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
to review the complete strategy formulation process. After all the strategy formulation alternatives have been selected, creation of a strategy map showing the
selected directional, adaptive, market entry, and competitive strategies together
will help to ensure their consistency and fi t. 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.
Lessons for Health Care Managers
To understand the decisions that have to be made in strategy formulation, a
strategic thinking map depicting a hierarchy of strategic alternatives is useful.
There are several types of strategies, and within each type, several strategic alternatives are available to health care organizations. In addition, there is a general
sequential 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 identifi ed, 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 diversifi cation, vertical integration, market development, product development, and penetration. Reduction strategies include divestiture, liquidation, harvesting, and retrenchment. Finally, maintenance of scope strategies
includes enhancement and status quo.
The third type of strategic decision concerns the market entry strategies.
Expansion and maintenance of scope strategies call for a method to carry out
the strategy in the marketplace. Therefore, some method for entering or gaining
access to that market is required. Market entry strategies include acquisitions
and mergers, internal development, internal ventures, reconfi guring 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.
The fourth category of strategy includes the competitive strategies. Competitive
strategies specify strategic posture of the organization and position the products
and services vis–vis competitors. The strategic posture should be well thought
through by strategic leadership. Strategic posture specifi es 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, there are the positioning strategies (often called generic
strategies). These 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 different demands on the organization
and requires unique resources, competencies, and capabilities.
The strategy formulation decision logic provides a sequence for making the
strategic decisions. However, the selected strategic alternatives must be viewed
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 249
together to ensure their fi t and consistency. In addition, it is unlikely that a
single strategy will suffi ce 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 which strategic alternatives are most appropriate given the organization s
external environmental issues, competitive advantages and disadvantages, and
directional strategies.
Health Care Manager s Bookshelf
Jack Trout with Steve Rivkin,
Differentiate or Die: Survival in Our
Era of Killer Competition (New York:
John Wiley & Sons, 2001)
Customers have more choices than ever
before. For example, in 1970 there were less
than 20 over-the-counter pain relievers. Today
there are more than 140. In 1970 there were
no websites. Today there are almost 5 million. 1
The story is not so diff erent in health care. In
the early 1970s there was one type of contact
lens. Today there are 36. In the old days when
considering health care, the typical patient
thought about a doctor, the local hospital,
and a single insurer such as Blue Cross. Today,
Cigna, Kaiser, Medicare, and Medicaid may
be important parts of the health care equation. Despite the concentration in pharmaceuticals, doctors also have a greater number
of choices, generic and brand name, when
prescribing drugs for high blood pressure,
high cholesterol, or chronic headaches (p. 6).
In 1970 there were about 6,000 prescription
drugs. Now there are more than 7,500. How
do organizations and individuals survive and
prosper in an era of killer competition with
all these choices? One way is to create blue
oceans and simply not compete or make the
competition irrelevant. More often there are a
group of competitors who cannot be ignored
or marginalized.
A strategy for surviving in an era of killer
competition, according to these authors, is
to overcome the temptation to be everything
to everyone. Being diff erent is much more
important today than it was 30 years ago
(p. 13). Strategic leaders cannot ignore the
importance of uniqueness. Chevrolet tried to
appeal to everyone and, as a result, the company lost its diff erence along with its loyal
customers.
The central thesis of Diff erentiate or Die
is that anything can be diff erentiated, even
health services. However, be careful not to
try to diff erentiate by just being creative,
cheap, patient-oriented, or quality-driven.
Competitors read the same books you do and
can learn to do these things equally well. 2 The
real key is to create uniqueness.
Consider, for example, boutique doctor practices. Many affl uent health care
250 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
consumers have lost patience with mass production medicine where people travel to the
doctor s offi ce only to fi nd a crowded waiting
room or call the doctor s answering service at
night and hope in vain for a follow-up phone
call. A solution, for those who can aff ord it, is
to purchase concierge care and retain their
physician by paying an annual fee in addition
to fees for services to ensure that their doctor
has a limited number of patients they agree
to see on an as-needed basis. These retainers
range from $1,000 to $20,000 per year.
Concierge care can be used to demonstrate
the steps to diff erentiation. First, the concept
must make sense in the business context
(p. 67). As personal health services become
more bureaucratic and cumbersome people
begin to look for alternatives. Personalized
health service rings a bell with frustrated
health care consumers. Second, the impersonality of the practice of medicine that
accompanies patient panels of 2,500 to
3,000 patients begins to stimulate an entrepreneurial search for a diff erentiating idea
(p. 67). Third, a select number of qualifi ed providers with appropriate credentials propose
to limit their practice to 600 to 800 patients
and provide personalized services to those
willing to pay an annual fee in addition to
normal charges for services provided. Finally,
the providers eff ectively communicate the
merits of boutique medicine to the market
segment with the fi nancial resources necessary to aff ord these services. The bottom line
is that you cannot over communicate your
diff erence (p. 69).
Making a service diff erent involves sacrifi ce. To target a particular market segment it
is necessary to sacrifi ce other market segments (p. 179). A physician s practice cannot
be both a concierge provider and a highvolume producer. If it tries, it is likely to be
unsuccessful in both undertakings.
REFERENCES
1. Jack Trout with Steve Rivkin, Diff erentiate or
Die: Survival in Our Era of Killer Competition
(New York: John Wiley & Sons, 2001).
2. Rhiema Acosta, Diff erentiate or Die: Survival
in Our Era of Killer Competition, Quality
Management Journal 9, no. 4 (2002), pp. 7576.
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
Acquisition
Adaptive Strategy
Alliance
Analyzer Strategic Posture
Backward Vertical Integration
Combination Strategy
Competitive Strategy
Concentric Diversifi cation
Conglomerate Diversifi cation
Cooperation Strategy
Cost Leadership
Defender Strategic Posture
Development Strategy
Differentiation
Diversifi cation
Divestiture
EndsMeans Chain
Enhancement
Expansion of Scope Strategy
Focused Factory
Focus Strategy
Forward Vertical Integration
Generic Strategy
Harvesting
Horizontal Integration
Implementation Strategy
Internal Development
Internal Venture
Joint Venture
Licensing
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 251
Liquidation
Maintenance of Scope Strategy
Market Development
Market Entry Strategy
Marketwide Strategy
Merger
Penetration Strategy
Positioning Strategy
Product Development
Prospector Strategic
Posture
Purchase Strategy
Reactor Strategic Posture
Reconfi gure the Value
Chain
Reduction of Scope Strategy
Related Diversifi cation
Retrenchment
Status Quo
Strategic Posture
Strategy Formulation
Unrelated Diversifi cation
Venture Capital Investment
Vertical Integration
Questions for Class Discussion
1. What four types of strategy 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
strategy 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. Why does the selection of the strategic alternatives create direction for the organization?
6. What is the difference between related diversifi cation 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 fl ow.
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.
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?
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?
252 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Notes
1. Warnock Davies, Understanding Strategy, Strategy
& Leadership 28, no. 5 (SeptemberOctober 2000),
pp. 2530.
2. Richard Farson, Management of the Absurd (New York:
Simon & Schuster, 1996), p. 21.
3. For example, see John C. Peirce, The Paradox
of Physicians and Administrators in Health Care
Organizations, Health Care Management Review 25,
no. 1 (winter 2000), pp. 728; John D. Blair and G. Tyge
Payne, The Paradox Prescription: Leading the Medical
Group of the Future, Health Care Management Review
25, no. 1 (winter 2000), pp. 4458; G. Tyge Payne, John
D. Blair, and Myron D. Fottler, The Role of Paradox
in Integrated Strategy and Structure Confi gurations:
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. 109141.
4. Roger Martin, How Successful Leaders Think, Harvard
Business Review 85, no 6 (June 2007), pp. 6067.
5. Jay Greene, Diversifi cation, Take Two, Modern
Healthcare 23, no. 28 (1993), pp. 2832. See also ShaoChi Chang and Chi-Feng Wang., The Effect of Product
Diversifi cation Strategies on the Relationship between
International Diversifi cation and Firm Performance,
Journal of World Business , 42, no. 1 (2007), pp. 6179.
6. Leslie E. Palich, Laura B. Cardinal, and C. Chet Miller,
Curvilinearity in the Diversifi cationPerformance
Linkage: An Examination of Over Three Decades of
Research, Strategic Management Journal 21, no. 2
(February 2000), pp. 155174.
7. Palich, Cardinal, and Miller, op. cit. and Michael S. Gary,
Implementation Strategy and Performance Outcomes
in Related Diversifi cation, Strategic Management
Journal 262 (2005), pp. 643664.
8. 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. 1532.
9. Ibid.
10. http://www.aha.org/research/rc/statstudies/fast, 2012.
11. 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. 234252; Manohar Singh,
Ali Nejadmalayeri, and Ike Mathur, Performance
Impact of Business Group Affi liation: An Analysis of
the Diversifi cationPerformance Link in a Developing
Economy, Journal of Business Research 60, no. 4
(2007), pp. 339347.
12. VHA, Inc. and Deloitte & Touche LLP, Provider
2020: Strategies for Differentiation in an Uncertain
Environment (Irving, TX and Detroit, MI: VHA, Inc. and
Deloitte & Touche, LLP, 2012), pp. 19.
13. 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. 10331056.
14. Fottler, Savage, and Blair, The Future of Integrated
Delivery Systems, p. 18.
15. 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.
16. Do Specialty Hospitals Promote Price Competition?
Medical Benefi ts 23, no. 3 (2006), pp. 34.
17. http://www.pharmaceutical-market-research.com/publications/sales_marketing/e_detailing_trends.html and
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. 204214.
18. Mick and Conrad, The Decision to Integrate Vertically,
p. 348.
19. 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.
20. Larry Selden and Geoffrey Colvin, M&A Needn t Be
a Loser s Game, Harvard Business Review 81, no. 6
(2003), p. 75.
21. Dennis Carey (Moderator), A CEO Roundtable on
Making Mergers Succeed, Harvard Business Review
78, no. 3 (MayJune 2000), pp. 145154.
22. Bazzoli, Chan, Shortell, and D Aunno, The Financial
Performance of Hospitals Belonging to Health
Networks and Systems, pp. 234252.
23. California Health Care Foundation, http://www.chcf.
org/California Facts and Figures, 2012.
24. Jeffrey F. Allen, Franchise Issues Exclusivity of
Territory, Inquiry 39, no. 1 (2000), pp. 811.
25. Ibid.
26. Edward B. Roberts and Charles A. Berry, Entering New
Businesses: Selecting Strategies for Success, Sloan
Management Review 25 (spring 1985), p. 7.
27. http://www.entrepreneurship.org/en/resoursecenter/
venture capital investment in health care and http://
www.medcitynews.com/2011.
28. Sharon Roggy and Ron Gority, Bridging the Visions
of Competing Catholic Health Care Systems,
Health Care Strategic Management 11, no. 7 (1993),
pp. 1619.
CHAPTER 6 DEVELOPING STRATEGIC ALTERNATIVES 253
29. Thomas P. Weil, Management of Integrated Delivery
Systems in the Next Decade, Health Care Management
Review 25, no. 3 (summer 2000), pp. 923.
30. Ibid.
31. 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.
32. Michael E. Porter, The Competitive Advantage of Nations
(New York: Free Press, 1990), p. 65.
33. 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. 122.
34. 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. 791811.
35. 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. 276294.
36. 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 (SeptemberOctober
2000), pp. 317330.
37. Sandra Pelfrey and Barbara A. Theisen, Joint Ventures
in Health Care, Journal of Nursing Administration 19,
no. 4 (April 1989), p. 39.
38. Lawton R. Burns, Gloria J. Bazzoli, Linda Dynan, and
Douglas R. Wholey, Impact of HMO Market Structure
on PhysicianHospital Strategic Alliances, Health
Services Research 35, no. 1 (April 2000), pp. 101132;
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. 350361.
39. Roberts and Berry, Entering New Businesses, p. 6.
40. Pelfrey and Theisen, Joint Ventures in Health Care,
pp. 3941.
41. Ibid., p. 42.
42. Robert Pitts and David Lei, Strategic Management:
Building and Sustaining Competitive Advantage,
3rd edn (Mason, OH: Thomson Southwestern, 2003),
p. 346.
43. James Bamford, David Ernst, and David G. Fubini,
Launching a World-Class Joint Venture, Harvard
Business Review 82, no. 2 (2004), pp. 90100.
44. David J. Bryce and Jeffrey H. Dyer, Strategies to Crack
Well-guarded Markets, Harvard Business Review 85,
no. 5 (May 2007), pp. 8492.
45. Ibid., p. 91.
46. Ibid., pp. 8788.
47. 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. 546562.
48. Monique Forte, James J. Hoffman, Bruce T. Lamont,
and Erich N. Brockmann, Organizational Form and
Environment: An Analysis of Between-Form and WithinForm Responses to Environmental Change, Strategic
Management Journal 21, no. 7 (July 2000), pp. 753773.
49. Miles, Snow, Meyer, and Coleman Jr., Organizational
Strategy, Structure, and Process, pp. 546562.
50. Forte, Hoffman, Lamont, and Brockmann, Organizational Form and Environment, pp. 753773.
51. 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. 127154.
52. Michael E. Porter, Competitive Strategy (New York: Free
Press, 1980), p. 35.
53. Ibid.
54. George Yip and Gerry Johnson, Transforming Strategy,
Business Strategy Review 18, no. 1 (spring 2007), p. 12.
55. Ibid., p. 13.
56. Chris Zook and James Allen, Growth Outside the Core,
Harvard Business Review 81, no. 12 (2003), pp. 6673.

Introductory Incident
Analytical Tools for Strategic Managers
In 1993, Bain & Company began surveying executives around the world concerning the analytical management tools they use and how eff ective the tools are in delivering the desired results.
To be included in the survey, the tools have to be relevant to senior management, topical, and
measurable. Bain & Company has now completed its 13th survey and has a database of more
than 11,000 respondents. Bain research identifi es 25 of the most popular and pertinent management tools and conducts one-on-one follow-up interviews to learn the circumstances in which
7 Evaluation of Alternatives
and Strategic Choice
One does not plan and then try to make the circumstances fi t these plans. One tries to
make plans fi t the circumstances.
GEORGE PATTON
256 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
each tool is most likely to produce the desired results. Bain & Company added four tools to its
2011 survey: change management programs, enterprise risk management, rapid prototyping,
and social media programs.
The three tools that managers say they will start using in 2011 include open innovation, scenario and contingency planning, and price optimization. Open innovation allows companies to
expand the sources of breakthrough products; scenario and contingency planning helps managers test what ifs to prepare for the future and minimize risks; and price optimization addresses
future concerns about rising commodity prices. Used correctly, price optimization models will
help identify optimal price points that consumers are willing to pay for products.
Although just 29 percent of executives in the survey reported that they had used social media
in 2010, 56 percent expected to use it in 2011. Bain cautions that using a tool simply because
competitors are using it can be risky, especially if the tool is not fully understood, causing the
experience to be a failure. Social media is very new and challenging to measure; therefore, Bain
advises organizations to be thoughtful about why they are using it, to invest enough to make it
successful, and to measure whether they are receiving the desired return.
Although it was not unexpected because during tough times companies cut back on everything (including tools), worldwide tool usage was an average of just 10 tools the lowest
number since Bain began its survey in 1993. The most widely used tools were benchmarking,
strategic planning, and mission and vision statements all top 10 rated tools over the years
regardless of the economic climate. Strategic planning is the tool with the highest satisfaction
rating; others with above-average satisfaction ratings include mission and vision statements,
total quality management, customer segmentation, and strategic alliances.
The least used tools for 2011 include open innovation, price optimization models, decision
rights tools, rapid prototyping, and the surprise mergers and acquisitions. Only 35 percent of
executives took advantage of M&As in 2010; however, more than half say they expect to use
M&As in 2011. The tools with the lowest satisfaction rating were downsizing, outsourcing, shared
service centers, knowledge management, and social media programs.
Based on more than a decade of experience, Bain & Company off ers four suggestions for the
use of analytical management tools:
1. Get the facts . Every management tool has unique strengths and weaknesses. To be used
successfully, executives have to understand the eff ects and side-eff ects of each tool to
combine the right tools in the right ways at the right times.
2. Champion enduring strategies, not fl eeting fads . Managers who promote fads undermine employees confi dence that they can create change when needed. Executives are better served by championing realistic strategic directions.
3. Choose the best tools for the job . Use a rational system for selecting, implementing, and
integrating tools that are appropriate. A tool will improve results only to the extent that it
helps to discover unmet needs, build distinctive capabilities, exploit the vulnerabilities of
competitors.
4. Adapt tools to the system . No tool comes with a guarantee. Every tool must be adapted to
an organization s particular circumstance.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 257
Over the past three decades, management tools have become a common part of executives
lives. Whether trying to boost revenues, innovate, improve quality, increase effi ciencies, or plan for
the future, executives have looked for tools to help them. The current environment of globalization
and economic turbulence has increased the challenges executives face and, therefore, the need to
fi nd the right tools to meet these challenges. They must choose the tools that will best help them
make the business decisions that lead to enhanced processes, products, and services and result
in superior performance and profi ts.
Over time, Bain believes its research has provided a number of important insights.
Among them:
Overall satisfaction with tools is moderately positive, but the rates of usage, ease of
implementation, eff ectiveness, strengths, and weaknesses vary widely.
Management tools are more eff ective when they are part of a major organizational eff ort.
Managers who switch from tool to tool undermine employees confi dence.
Decision makers achieve better results by championing realistic strategies and viewing tools
simply as a means to a strategic goal.
No tool is a cure-all.
Source: Darrell Rigby and Barbara Bilodeau, Management Tools & Trends 2011 (Bain & Company, 2011).
Learning Objectives
After completing the chapter you will be able to:
1. Understand the rationale underlying the various strategic thinking maps used to
evaluate strategic alternatives.
2. Discuss, evaluate, and select appropriate adaptive strategic alternatives for a
health care organization.
3. Discuss, evaluate, and select appropriate market entry strategic alternatives.
4. Discuss, evaluate, and select appropriate strategic posture and generic positioning alternatives.
5. Determine whether selected strategies are consistent, coordinated, and fi t the
situation.
6. Understand the role of the service delivery and support strategies.
258 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Evaluation of the Alternatives
Fundamental to strategic management is the need to change strategies over
time. 1 There are several frameworks or maps that may be used to guide strategic
thinking about the appropriate strategic alternatives for an organization. These
strategic thinking maps incorporate the results of external and internal analyses, as well as the development of directional strategies. Thoughtful analysis to
understand the internal requirements and external conditions of the strategic
alternatives is essential to assure a coherent and integrated strategy.
Although the evaluation of strategic thinking maps fi ne-tunes the manager s
perspective and organizes thinking, ultimately, the strategic manager must make
the decision. Strategic managers need to understand the risks, make judgments,
and commit the organization to some course of action. Therefore, the strategic
thinking maps cannot be used to obtain answers, but they can be used to gain
perspective and insight into a complex relationship between organization and
environment. There is often no right answer. As 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 The various strategic thinking maps help to
structure the thought processes of decision makers. It is important that managers
think strategically and, almost as important, have some imagination and employ
sound judgment. As suggested in Perspective 71 , in order to have the proper
perspective, it is important that strategic managers be involved with customers,
vendors, and the organization and talk to people to get a real feel for the culture,
competitive advantage, and organizational opportunities and threats.
PERSPECTIVE 71
Creating a Productive Organizational Culture
Although understanding the external environment is profoundly important in strategic thinking, leaders must also understand and actively
manage their organizations. Leadership and
management are not practiced from a distance
but rather are hands-on activities. An understanding of the resources, competencies, and
capabilities of the organization as an input to
strategic thinking comes through listening,
empathizing, staying in touch, communicating,
and personal problem solving developing and
managing the organization culture. Therefore, in
developing a collegial culture without excessive
barriers to communication, it is important for
leaders to remember:
Less management is generally better than
more management
Develop self-managed teams ask folks to
think.
Develop fewer rules, policies, procedures,
rather than more and don t try to fi x everything with a new rule or policy.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 259
Don t try to control the small stuff tracking
costs more than it saves.
Routines and rules drive out innovation and
fl exible thinking.
Avoid micro-management.
Strive for broad strokes rather than
narrow strokes
Dream and think big leadership is more
about the big picture.
Vision and a future orientation are
essential.
Seek eff ectiveness before effi ciency.
It s called leadership management without
leadership is called bureaucracy.
Simple systems are preferable to complex
systems
Always strive to simplify.
Make no system more complex than it has
to be.
Complex systems deteriorate faster than
simple systems and need constant (much
more) maintenance.
In complex systems small disruptions can
create big disruptions, even systems failure
(the butterfl y eff ect).
All solutions are temporary
Don t work so hard for closure to a problem
there is too much change for a solution to
last very long.
One of the lessons of strategic management is that to be successful, you must
change.
Don t always seek perfection perfection
may be the enemy of change.
Processes are not ends in themselves
but tend to be viewed that way
over time
People often focus on process elements
rather than the objectives of the process
(particularly after they ve done it for a
while).
Too much focus on the process prevents
change/adaptability.
Process orientation inhibits innovation and,
ultimately, survival.
Be open to changing the process (challenge
the current thinking/process).
Manage the objective(s) not the
process(es).
Practice one-level leadership
Everyone in an organization should be
treated as a peer (equality). Peers can and
will share and discuss ideas, opinions, and
solutions.
Folks deserve respect and simple courtesies
are important (be polite and always say
hello).
Casual is better than formal casual reduces
barriers; formal raises barriers.
Organizational culture is the key
Organizations are mostly about people and
not about things.
Shape the organization s habits, customs,
values, and mores.
Inspire and motivate.
Be the keeper and communicator of the
vision.
Make it interesting and fun.
Make sure everyone learns something.
260 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Organize for fl exibility
Most workers expect a formal organization;
use these building blocks to create ad hoc
structures as needs dictate.
Job designs should be as broad as
possible.
Small is better than large organize into
small units.
Measure only those things that are
important
Identify the few important acceptance
criteria of customers (internal as well as
external).
Establish precise, accurate, easy-toaccomplish measurements of these
criteria.
Enable those whose judgment, skill, and
craft determine the outcomes to act on
the measurements.
Reward behaviors that improve process
characteristics to achieve the criteria.
Manage the measures.
Personal touches are better than
impersonal touches
Personal notes are better than formal
memos/letters.
Hand-written notes are better than typed
letters.
Personal contact (face-to-face) is better than
email.
Talk to people and visit them in their space.
Thank people.
Allow folks to fail forward
Change, creativity, and innovation require
some risk taking.
Press for innovation until failure.
Promote and deliver on life-long learning for
everyone.
Evaluation of the Adaptive Strategies
As discussed throughout Chapter 6, once the directional strategies have been
developed, consideration is given to the adaptive strategies. The adaptive strategies are central to strategy formulation and are the broadest interpretation
of the directional strategies. This level of strategic decision making specifi es
whether the organization wants to grow (expansion of scope), become smaller
(contraction of scope), or remain about the same (maintenance of scope).
Once the decision has been made to grow, contract, or remain the same,
the methods to accomplish expansion, contraction, or maintenance of scope
(diversifi cation, divestiture, enhancement, and so on) must be formulated. New
environmental forces may dictate the need to re-evaluate the adaptive strategies. Academic Health Centers (AHCs), although able to maintain their unique
research focus for decades, increasingly have felt the pressures of a paradigm
shift (see Perspective 72 ).
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 261
PERSPECTIVE 72
Health Care Reform: A New Paradigm for AHCs
Academic health centers (or academic medical
centers) typically have been independent, notfor-profi t institutions of higher learning, research,
and patient care with most being state supported or private university affi liated. AHCs have
multiple missions that are diff erent from other
hospitals, including research, teaching, patient
care, and providing more than 40 percent of the
indigent care in the United States. Accustomed
to having the most diffi cult cases referred to
them for treatment, they have not been a major
part of managed care but rather dealt with
these high-cost patients to further their unique
mission. Additionally, they only saw other AHCs
as competitors. With the changing reimbursement landscape from the Aff ordable Care Act
of 2010 (ACA) health care reform, AHCs must
engage in a paradigm shift.
According to Larry Shapiro, MD chair of
the board of directors of the Association
of Academic Health Centers, AHCs are among
the largest employers in their regions, creating
signifi cant economic impact as an employer
but also as a purchaser of goods and services
and delivering the highest-quality health care
services. In addition, ACHs develop intellectual
property through research and educate the
next generation of physicians, scientists, and
other allied health professionals. He acknowledged that the next decade was going to provide major challenges for AHCs because of
legislative change and policy uncertainty, economic pressures from constrained resources,
and workforce challenges including changes
in medical education, biomedical and clinical
research, and changing priorities to develop
and replicate best practices to provide quality
care at lower costs.
Ten recommendations for AHCs to make this
shift were off ered by Dr. Samuel Shomaker:
1. Train the workforce needed in their own
service area rather than selecting medical
students based on faculty preferences or
hospital service needs. They must be
creative to inspire physicians to enter
primary care to meet the needs in rural
and urban areas.
2. Expand the number of physicians that
are being trained and shorten the time
needed to educate fully certifi ed doctors.
3. Commit to training more mid-level providers to manage the huge infl ux of new
patients (approximately 32 million new
benefi ciaries will result from the ACA,
of which more than half will be new
Medicaid enrollees requiring more intense
care as they enter the system). Before the
passage of ACA, predictions were for a
shortage of between 100,000 and 200,000
primary care physicians.
4. Work harder to improve the diversity of
medical school classes to enhance the
training and composition of the physician
workforce.
5. Revise their medical school and residency
curricula to provide trainees with the skills
they will need to successfully practice in
tomorrow s health care environment. Poor
performance in safety requires educating new physicians in quality improvement; poor performance in health status
requires students to understand public
health and prevention; poor performance
in cost containment means that students
need to be able to work in teams to
262 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Several constructs help strategic managers to think about adaptive strategic
decisions. However, as expressed previously, these constructs help to show relationships of the organization to its markets and competitors; they do not make the
decision. Methods to evaluate the adaptive strategies include:
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); and
program evaluation.
External/Internal Strategy Matrix
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 involves listing the organization s strengths and weaknesses as well as perceived external opportunities and threats. SWOT, however,
does not provide much insight into what strategy decisions might result from the
generate eff ective and cost-effi cient care
(central features of the medical home
model of care).
6. Explore new partnerships or shore up
existing ones with safety net providers,
particularly Federally Qualifi ed Health
Centers.
7. Create actual or virtual integrated care
networks with community providers in
their regions to improve cost efficiency.
ACA mandates Medicare pilot programs
around accountable care organizations,
medical homes, and bundled reimbursement programs. Strong relationships
with regional health care payors, physicians, and health systems will enable
AHCs to be early adopters of such
reforms and to position themselves
to establish integrated care networks
(actual or virtual).
8. Maximize revenues and reduce expenses
to survive fi nancial challenges.
9. Move aggressively to improve clinical
quality and safety. Preventing avoidable
readmissions and medical errors will be
rewarded under ACA.
10. Lead the way in bench-to-bedside
research.
Investigating the last recommendation illustrates to a small extent the magnitude of the paradigm shift facing AHCs. As research institutions,
AHCs seek medical faculty that have the ability to
attract research dollars to push medical science
and AHCs have the infrastructure to support largescale research; however, these faculty are not
trained in the economics of health care delivery.
Sources: Association of Academic Health Centers 2011 Annual
Report; T. Shomaker and M. D. Samuel, Preparing for Health Care
Reform: Ten Recommendations for Academic Health Centers,
Academic Medicine 86, no. 5 (2011), pp. 555558.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 263
list of strengths and weaknesses and opportunities and threats. As a result, the
TOWS (threats, opportunities, weaknesses, and strengths) matrix was developed
to provide a better way to develop and evaluate specifi c adaptive strategic alternatives. 3 In the TOWS approach, internal strengths and weaknesses are matched
against external environmental opportunities and threats to foster strategic thinking concerning adaptive strategy alternatives. However, both SWOT analysis and
the TOWS matrix approach required strategic managers to classify external issues
as opportunities or threats.
As discussed in Chapter 2, the designation of external issues as opportunities
or threats is often arbitrary and opportunities are often presented as strategic
alternatives rather than independent external issues affecting the organization.
Further, many external issues may be both opportunities and threats. Therefore,
a better approach is to match the external issues identifi ed in the three external
environments (general, health care, and service area) discussed in Chapters 2
and 3 with long-term and short-term competitive advantages and disadvantages
(discussed in Chapter 4). Exhibit 71shows the strategic thinking map for matching external issues with internal competitive advantages and disadvantages.
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 general,
health care, and competitive issues). In this example, the primary concern 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, competitive, or value-adding service delivery and support strategies.
Long-Term
Competitive
Advantages
Internal Advantages
& Disadvantages
External Issues
General
Environment
Issues
1.
2.
3.
Short-Term
Competitive
Advantages
1.
2.
3.
Short-Term
Competitive
Disadvantages
1.
2.
3.
Long-Term
Competitive
Disadvantages
1.
2.
3.
1.
2.
3.
Health Care
Environment
Issues
1.
2.
3.
Service Area &
Competitive
Issues
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
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3.
Strategies
1.
2.
3.
Strategies
1.
2.
3.
Strategies
1.
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Strategies
1.
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Strategies
1.
2.
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Strategies
1.
2.
3.
EXHIBIT 71 External/Internal Strategy Matrix
264 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
The strategies developed by matching the long-term competitive advantages
with issues from the three external environments general, health care, and
service area and competitive represents the primary adaptive strategies of an
organization. The long-term competitive advantages are valuable, rare among
competitors, diffi cult 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 still be maintained.
The long-term competitive disadvantages represent areas where internal fi x-it
strategies will have to be addressed because they are valuable in the external environments. The short-term competitive disadvantages are fi xable but still represent
a signifi cant impediment to success.
Product Life Cycle Analysis
Product life cycle (PLC) analysis can be useful in selecting strategic alternatives
based on the principle that all products and services go through several distinct
stages. These stages relate primarily to the changing nature of the marketplace,
the product development process, and the types of demands made on management. In evaluating product life cycles, the evolution of service category sales
and profi ts (or a surrogate for sales such as the number of subscribers, hospital
visits, or competitors) is tracked over time. This evolution will have strategic
implications for the organization. A typical PLC and the attributes of each stage
are presented in Exhibit 72 .
Products and services have an introductory stage during which sales are increasing yet profi ts are negative. In this stage, there are few competitors (prospectors),
prices are usually high, promotion is informative about the product category, and
there are limited distribution outlets. In the growth stage, sales and profi ts 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 specifi c 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 beginning
of consolidation. In addition, market segmentation (defi ning narrower and 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 profi ts 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) illustrates the PLC. HMOs had an extended introductory period. The fi rst 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-profi t, HMOs
in the United States, serving approximately 3 million enrollees. 4 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-profi t
to a for-profi t HMO.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 265
Stage 1
Introduction
Stage 2
Growth
Stage 3
Maturity
Stage 4
Decline
Sales/Revenue
Profit
0 Time
Dollars
PLC Stage Characteristics
Introduction Growth Maturity Decline
Sales/Revenue Low Rapid growth Slow growth Declining
Profits Negative Peak levels High Low
Competitors Few Growing Many Declining
Cost/Customer High Average Low Low
Capital Access Venture Equity/debt Debt/internal Minimal
EXHIBIT 72 The Product Life Cycle
Source: Adapted from Philip Kotler and Kevin Lane Keller, Marketing Management, 12th edn (2006), p. 332. Reprinted by permission
of Simon & Schuster.
Exhibit 73shows the national HMO enrollment from 1987 through 2011.
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 continued and company strategies were typical of market maturity price
competition, 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 insuffi cient number of providers. In addition, few new players are
entering the market in these areas. Overall enrollment shows some growth, 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.
Despite its limitations, PLC analysis is a useful tool for strategic planning.
It provides a framework for assessing existing activities as well as new
266 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
products/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.
In the consideration of new product/service lines, a PLC analysis can help
to answer questions not only about whether an activity is attractive for the
organization, but also what might be the best market entry strategy. Historically,
hospitals have developed the businesses or services that they offer. However,
development 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 provider. Introducing new product variations during late maturity or
decline carries great risk unless the variations are suffi cient to create an entirely
new life cycle.
There are two important questions for strategy formulation when using product 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 profi ts may be monitored as an initial
indicator. In addition, information obtained in external environmental analysis
concerning technological, social, political, regulatory, economic, and competitive
change is valuable in assessing both the current stage and the expected length
of the cycle.
National HMO Entrollment
Millions
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
10
20
30
40
50
60
70
80
90
EXHIBIT 73 National HMO Enrollment
Source: http://www.mcareol.com/factshts/factnati.htm
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 267
The stage in the product life cycle for a product or service indicates a likely
strategic response and the level of resources that might be committed to a particular product or service. Exhibit 74shows logical strategic alternatives for each
stage of the PLC.
The relevance of the strategies shown in Exhibit 74depends 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 justifi ed 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 justifi ed 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. 5 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 75 , traditional BCG portfolio analysis graphically
portrays differences among the various products/services (stars, cash cows, problem children, and dogs) in terms of relative market share and market growth rate.
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). Classifi cation as high, medium, or low may be determined
EXHIBIT 74 Strategic Choices for Stages of the Product Life Cycle
Stage 1
Introduction
Market Development
Product Development
Stage 3
Maturity
Market Development
Product Development
Penetration
Enhancement
Status Quo
Retrenchment
Divestiture
Unrelated Diversifi cation
Stage 2
Growth
Market Development
Product Development
Penetration
Vertical Integration
Related Diversifi cation
Stage 4
Decline
Divestiture
Liquidation
Harvesting
Unrelated Diversifi cation
268 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
through comparison with national or regional health care growth fi gures, return
on alternative investments, or the stage in the product life cycle. 6
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 one corresponds to managing the current fi scal reporting period,
with short-term considerations. Horizon two might be concerned with ramping
up the next generation of growth opportunities, and horizon three 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. 7
An example of portfolio analysis for one institution is illustrated in Exhibit 76 .
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
EXHIBIT 75 BCG Portfolio Analysis
Stars
Products and services that fall in this quadrant (high market growth and high market share) represent the organization s best long-run opportunity for growth and profi tability. These products
and services should be provided resources. Market development, product development, penetration, vertical integration, and related diversifi cation 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 diversifi cation.
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 development or get out of the product/
service area 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 products or services in this quadrant are
often liquidated or divested or the organization engages in dramatic retrenchment.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 269
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 profi tability). These services 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. It is important
to nurture the services that will most likely move to the stars quadrant. Services
such as psychiatry, vascular surgery, pediatrics, and so on, have low growth rates
as well as a low relative market share (and most likely low profi tability) and may
be targets for contraction strategies. However, in health care some dog quadrant
services may be slated for maintenance of scope or even expansion because of
community needs.
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, that
make a strategic service unit (SSU) diffi cult to defi ne. Additionally, underlying the
Stars
Womens Services
Geriatrics
Cardiology/Cardiovascular
Oncology
Pulmonary
Orthopedics
Cash Cows Dogs
Psychiatry
Vascular Surgery
Pediatrics
E.N.T.
Ophthalmology
General Medicine
Problem Children
Neurology/Neurosurgery
GI/Urology
Emergency Services
Ambulatory Surgery, Adult
Ambulatory Surgery
High Medium Low
Relative Market Share Position
High
Medium
Low
Market
Growth
Rate
Plastic Surgery
Substance Abuse
EXHIBIT 76 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 , Health Care Management Review 18, no. 3, pp. 720.
Copyright 1993, Aspen Publishers, Inc. Adapted by permission.
270 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
BCG matrix is an assumption that high market share means high profi tability and
that profi ts may be milked to benefi t other programs with growth potential. In
health care organizations, however, it is quite possible to have a high market share
and no profi t. For example, because of reimbursement restrictions, a high number
of Medicaid patients may cause a physician practice to be unprofi table. Similarly,
programs such as obstetrics, pediatrics, neonatal intensive care, and psychiatry
may have high market share but be unprofi table for a hospital. 8
The profi tability issues suggest that portfolio analysis for health care organizations might better utilize an extended portfolio matrix analysis that includes
a profi tability dimension. The profi tability dimension is measured by high or low
profi tability according to positive or negative cash fl ow or return on invested
capital. The expanded matrix is presented in Exhibit 77 .
Shining Stars Shining stars have high market growth (typically in the early
stages of the PLC), a high market share, and high profi tability. This quadrant represents the best situation for a health care organization; however, it is likely that
high profi tability will attract competitors. Therefore, aggressive enhancement or
product development will be required, yet market development may be diffi cult
because of the already high market share. In addition, the organization will want
to consider vertical integration and related diversifi cation.
Cash Cows Cash cow products and services have low market growth but
a high market share and high profi tability. In this situation, the organization
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
High Low
Market Share
Profit
EXHIBIT 77 Expanded 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.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 271
has a dominant position in the market (perhaps 100 percent) and further
growth is unlikely. Again, the high profi tability 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 diversifi cation.
Healthy Children Healthy children products and services have high market growth, a low market share, and high profi tability. This quadrant demonstrates that there are situations in which it is possible to have a low share of the
market and be profi table (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, and vertical integration coupled with strong
functional support.
Faithful Dogs In this situation, the products and services have low market
growth and a low market share, but have been profi table. For example, many
hospital services involve less-dominant units showing slow growth. However, if
they are profi table, such units make a positive contribution to the overall health
of the hospital and provide a full service line. 9
For faithful dogs, managers must assess if increased market share will add to
profi tability. For instance, if profi table segments can be identifi ed, it may be more
advantageous to withdraw from broader markets, concentrate on a smaller segment, and maintain profi tability. In such situations, a status quo or retrenchment
strategy may be appropriate. If profi tability is likely to decline over time, a harvesting or divestiture strategy may be employed.
Black Holes Black hole products and services have high growth and a high
market share but low profi tability. Not all high-growth, high-share programs
are profi table in health care. For instance, costly technological equipment may
make an organization the sole provider of a service whose high cost cannot
be recovered from individual patients. However, such services may contribute
to the overall image of the organization and increase the profi tability of other
services.
Nevertheless, having a high share for a service with low or negative profi tability
is quite disturbing. There must be a concentrated effort to reduce costs (enhancement strategy) or to add revenue without adding costs to such a program. When
circumstances prevent a service from generating most of its own cash infl ow, it
becomes a black hole a collapsed star sucking in light (profi t or cash) rather
than shining and generating cash or profi ts. 10
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.
272 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Problem Children Problem children are low-share, high-growth, and lowprofi tability 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 fi nancial commitment is
appropriate. For products that management does not feel can become shining
stars, divestiture and liquidation are most appropriate.
Cash Pigs Cash pig products and services have a high or dominant share,
are experiencing low growth, and have low profi tability. 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. 11
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 fi nd smaller, more profi table segments and thus create a smaller cash cow.
Mangy Dogs Products and services with low growth, a low share, and
poor profi t have a debilitating effect on the organization and should be eliminated as soon as possible. In this situation, it appears that other providers
are better at serving the market. Probably the best strategy at this point is
liquidation, as it will be diffi cult to fi nd 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 profi le of
the organization. By using SPACE, the manager can incorporate a number of factors into the analysis and examine a particular strategic alternative from several
perspectives. 12
SPACE analysis suggests the appropriateness of strategic alternatives based
on factors relating to four dimensions: service category strength, environmental
stability, the organization s relative competitive advantage, and the organization s fi nancial strength. The SPACE chart and defi nitions of the four quadrants
are shown in Exhibit 78 . Listed under each of the four dimensions are factors
to which 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 environmental 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 79 , which has been fi lled in for a
regional hospital. The resulting shape of the polygon can be used to identify
four strategic profi les aggressive, competitive, conservative, and defensive.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 273
The quadrant with the largest area is the most appropriate general strategic
position.
The factor scales shown in Exhibit 79are 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 (environmental stability axis).
EXHIBIT 78 Strategic Position and Action Evaluation (SPACE) Matrix
Aggressive Profi le
This profi le is typical in an attractive service category with little environmental turbulence. The
organization enjoys a defi nite competitive advantage, which it can protect with fi nancial 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 defi nite competitive edge.
Competitive Profi le
This profi le is typical in an attractive service category. The organization enjoys a competitive advantage in a relatively unstable environment. The critical factor is fi nancial strength.
Organizations in this situation should acquire fi nancial resources to increase marketing 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 Profi le
This profi le is typical in a stable market with low growth. Here, the organization focuses on
fi nancial stability. The critical factor is product competitiveness. Organizations in this situation
should prune the product line, reduce costs, focus on improving cash fl ow, protect competitive
products, develop new products, and gain entry into more attractive markets.
Defensive Profi le
This profi le is typical of an unattractive service category in which the organization lacks a competitive product and fi nancial strength. The critical factor is competitiveness. Organizations in this
situation should prepare to retreat from the market, discontinue marginally profi table 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. 145150. Reprinted by permission of Pearson Education
Inc., Upper Saddle River, NJ.
274 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Factors Determining Environmental Stability
Technological changes Many 0 1 2 3 4 5 6 Few
Rate of inflation High 0 1 2 3 4 5 6 Low
Demand variability Large 0123456 Small
Price range of competing products/services Wide 0123456 Narrow
Barriers to entry into market Few 0123456 Many
Competitive pressure High 0 1 2 3 4 5 6 Low
Price elasticity of demand Elastic 0123456 Inelastic
Other: ______ 0123456 ________
Average 6
Critical factors
Comments
Factors Determining Service Category Strength
Growth potential Low 0123456 High
Profit potential Low 0123456 High
Financial stability Low 0123456 High
Technological know-how Simple 0123456 Complex
Resource utilization Inefficient 0123456 Efficient
Capital intensity High 0 1 2 3 4 5 6 Low
Ease of entry into market Easy 0123456 Difficult
Productivity, capacity utilization Low 0123456 High
Low 0123456 High
Critical factors
Comments
_________________________
EXHIBIT 79 Strategic Position and Action Evaluation Factors
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 275
Factors Determining Competitive Advantage
Market share Small 0123456 Large
Product quality Inferior 0123456 Superior
Product life cycle Late 0123456 Early
Product replacement cycle Variable 0 1 2 3 4 5 6 Fixed
Customer/patient loyalty Low 0123456 High
Competitions capacity utilization Low 0123456 High
Technological know-how Low 0123456 High
Vertical integration Low 0123456 High
Other: ______ 0123456 ______
Critical factors
Comments
Factors Determining Financial Strength
Return on investment Low 0123456 High
Leverage Imbalanced 0123456 Balanced
Liquidity Imbalanced 0123456 Balanced
Capital required/capital available High 0 1 2 3 4 5 6 Low
Cash flow Low 0123456 High
Ease of exit from market Difficult 0123456 Easy
Risk involved in business Much 0123456 Little
Slow 0123456 Fast
Critical factors
Comments
______________________
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. 148149. Reprinted by permission of Pearson Education
Inc., Upper Saddle River, NJ.
EXHIBIT 79 (Continued)
276 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
However, the hospital s service category segments show good growth potential that attracts strong competition. Increasing competition requires increased
investment in new facilities and technology. The hospital still has a competitive advantage (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 fi nancial position (fi nancial strength axis) is
weak because it fi nanced new facilities through a substantial amount of debt.
Its liquidity position has eroded and cash fl ow 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 710 , demonstrating that the hospital is competing fairly
well in an unstable but attractive service category segment. This organization
cannot be too aggressive because it has few fi nancial resources and the environment is a bit unstable. Therefore, it should adopt a competitive profi le.
It is important to remember that the SPACE chart is a summary display; each
factor should be analyzed individually as well. In particular, factors with very
high or very low scores should receive special attention. 13 Exhibit 711examines
various possible strategic profi les that may be obtained in a SPACE analysis and
Exhibit 712shows the adaptive alternatives for each strategic profi le.
The SPACE plot for the regional hospital system examined previously resulted
in a competitive profi le. Accordingly, the most appropriate strategic alternatives 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 fi nancial position because an
1
6
5
4
3
2
1
1
2
3
4
5
6
6 5 4 3 2 1 23456
Service Category
Strength
Conservative Aggressive
Defensive Competitive
Financial Strength
Environmental Stability
Competitive
Advantage
2.4 3.7
3.7
1.6
EXHIBIT 710 SPACE Profi le for a Regional Hospital System
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 277
FS
ES
CA SCS
A financially strong organization that has achieved major
competitive advantages in a growing and stable service
category
FS
ES
CA SCS
An organization that has achieved financial 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 financial 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 financial 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 financially troubled organization in a very
unstable and weak service category
Defensive Profiles
Aggressive Profiles
Conservative Profiles
Competitive Profiles
EXHIBIT 711 Space Strategy Profi les
Source: Adapted from Fred R. David, Strategic Management , 2nd edn (Columbus, OH: Merrill Publishing Co., 1989), p. 216.
278 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
unstable environment may place unanticipated demands on the organization that
will require an additional infusion of capital. In light of its fi nancial 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 an environment where health care systems,
continuums, and referral networks are the key to market development and
penetration. In the end, the adaptive and market entry strategic decisions are
inextricably linked.
Program Evaluation
Program evaluation is especially useful in organizations where market share,
service category strength, and competitive advantage are not particularly important or are not relevant. Such organizations are typically not-for-profi t, state- or
federally-funded institutions such as state and county public health departments,
state mental health departments, Medicaid agencies, community health centers,
and public community hospitals. Despite the fact that these organizations are
public and not-for-profi t, 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 to evaluate public
health programs, 14 evaluation methods that consider increasing revenue and
market share may be inappropriate or diffi cult to use. Perspective 73provides
an overview of the public health system and its essential services.
Conservative
Status Quo
Unrelated Diversification
Harvesting
Aggressive
Related Diversification
Market Development
Product Development
Vertical Integration
Competitive
Penetration
Enhancement
Product Development
Market Development
Status Quo
Defensive
Divestiture
Liquidation
Retrenchment
EXHIBIT 712 Strategic Alternatives for SPACE Quadrants
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 279
Public and not-for-profi t institutions typically maintain any number of programs funded through such sources as state appropriations, federal grants,
private 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 fi ll a health
care need within the community that has not been addressed through the private 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.
PERSPECTIVE 73
Overview of Public Health in the United States
The work of public health developed over time
in response to community need and is carried out at federal, state, and local levels. In
1988, after an intense study of public health
in six states, the Institute of Medicine defi ned
the basic functions of public health as assessment, policy development, and assurance. The
Centers for Disease Control and Prevention
(CDC) proposed organizational practices to
implement the three core functions. In spring
1994, a national working group composed of
representatives of the Public Health Services
Agencies and the major public health organizations developed a consensus list of the essential
services of public health. The new statement on
essential services provided a vision for public
health in America Healthy People in Healthy
Communities and stated the mission of public
health Promote physical and mental health
and prevent disease, injury, and disability. The
statement described what public health seeks to
accomplish in providing essential services to the
public and how it carries out these basic public
responsibilities.
THE ESSENTIAL SERVICES
The fundamental obligation or purpose of public
health agencies responsible for population-based
health is to:
prevent epidemics and the spread of
disease,
protect against environmental hazards,
prevent injuries,
promote and encourage healthy behaviors
and mental health,
respond to disasters and assist communities
in recovery, and
assure the quality and accessibility of health
services.
Part of the function of public health is to
assure the availability of quality health services.
Both distinct from and encompassing clinical
services, public health s role is to ensure the
conditions necessary for people to live healthy
lives, through community-wide prevention and
protection programs.
280 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Public health serves communities (and individuals within them) by providing an array of
essential services. Many of these services are
invisible to the public. Typically, the public only
becomes aware of the need for public health
services when a problem develops (for instance,
when an epidemic occurs). The practice of public health is articulated through the list of essential services.
Assessment services include:
Monitoring health status to identify community health problems.
Diagnosing and investigating health problems
and hazards in the community.
Researching for new insights and innovative
solutions to health problems.
Policy development services include:
Informing, educating, and empowering
people about health issues.
Mobilizing community partnerships
and actions to identify and solve health
problems.
Developing policies and plans that
support individual and community
health eff orts.
Assurance services include:
Enforcing laws and regulations that protect
health and ensure safety.
Linking people to needed personal
health services and ensuring the provision
of health care when otherwise
unavailable.
Assuring a competent public and personal
health care workforce.
Evaluating eff ectiveness, accessibility, and
quality of personal and population-based
health services.
Source: Ray M. Nicola, MD, MHSA, FACPM, Senior CDC Consultant
to the Turning Point National Program Offi ce.
Within the context provided by an understanding of the external environment,
internal environment, and directional strategies, these not-for-profi t 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 adaptive strategy. The degree to which they are changed (expansion of
scope, contraction of scope, maintenance of scope) represents a modifi cation
of the adaptive strategy. The fundamental question is, Does our current set of
programs effectively and effi ciently fulfi ll 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.
Needs/Capacity Assessment The set of programs in not-for-profi t organizations such as public health departments are determined by (1) community need
and (2) the organization s capacity to deliver the program to that community.
Of course, some programs may be mandated by law, such as disease control, disease surveillance, and the maintenance of vital records (birth and death records).
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 281
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 purpose). Therefore, in developing
a strategy for a public health organization or not-for-profi t organization serving
the community, a needs/capacity assessment must be undertaken community
needs must be assessed vis–vis the organization s ability (capacity) to address
those needs.
Community need is a function of (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) fi ll the
identifi ed health care gaps; and (3) public/community health objectives. Many
not-for-profi t 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
identifi ed 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 few private or public institutions positioned to fi ll the need. Where existing institutions are willing and
able to fi ll these gaps, public and not-for-profi t 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 objectives should be included as part
of a community needs assessment. 15
Organizational capacity is the organization s ability to initiate, maintain, and
enhance its set of adaptive strategy programs. Organizational capacity is composed of (1) funding to support programs, (2) other organizational resources
and skills, and (3) the program s fi t 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, however, local funds supplement federal- and state-funded
programs. For other programs, only community funding is available. Thus, funding availability is a major consideration in developing strategy for public and
not-for-profi t organizations. In addition, the organization must have the skills,
resources, facilities, management, and so on to initiate and effectively administer
the program. Finally, program strategy will be dependent upon the program s fi t
with the organization s mission and vision for the future. Programs outside the
mission and vision will be viewed as luxuries, superfl uous, or wasteful.
Exhibit 713presents the adaptive strategic alternatives indicated for public
organizations as they assess community needs and the organization s capacity to
fi ll the identifi ed needs. Where the community need is assessed as high (signifi –
cant health care gaps, few or no other institutions addressing the need, and the
program is part of the community s objectives) and the organization s capacity
is assessed as high (adequate funding, appropriate skills and resources, and fi t
with mission/vision), then the organization should adopt one of the expansion
of scope adaptive strategies (upper left quadrant). Appropriate strategies might
include vertical integration, related diversifi cation, product development, market
development, and penetration. When the community need assessment is low
282 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
(no real need, the need has abated, need is now being addressed by another
institution, or the need does not fi t with community objectives) but organization capacity is high (adequate funding, appropriate skills and resources, and
fi t with mission/vision), there should be an orderly redistribution of resources,
suggesting contraction and maintenance of scope adaptive strategies (lower left
quadrant). Contraction of scope strategies should be given priority as the community need diminishes. However, phasing out a program may take some time
or, alternatively, the uncertainty concerning the changing community needs may
dictate maintenance in the short term. Appropriate adaptive strategies might
include related diversifi cation, retrenchment, harvesting, and status quo.
Where community needs have been assessed as low (no real need, the need
has abated, need is now being addressed by another institution, or the need does
not fi t with community objectives) and the organization has few fi nancial or
other resources to commit to programs (low organization capacity), one of the
contraction 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 contraction of scope strategies are appropriate
(upper right quadrant). Maintenance of scope strategies should be given priority because of the high community need but, if resources dwindle or funding is
reduced, contraction may be required. Appropriate adaptive strategic alternatives
include enhancement or status quo (maintenance of scope) and retrenchment or
Expansion of Scope
Vertical Integration
Related Diversification
Product Development
Market Development
Penetration
Maintenance/Contraction
of Scope
Enhancement
Status Quo
Retrenchment
Harvesting
Contraction of Scope
Liquidation
Harvesting
Divestiture
Retrenchment
Contraction/Maintenance
of Scope
Related Diversification
Retrenchment
Harvesting
Status Quo
High
Community
Need
Low
High Low
Organizational Capacity
EXHIBIT 713 Public Health and Not-for-Profi t Adaptive Strategic Decisions
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 283
harvesting (contraction of scope). As resources become available, and organizational capacity increases, programs in this quadrant will move to the upper left
quadrant, enabling more aggressive (expansion) strategies to be selected.
Program Priority Setting The second method of developing adaptive
strategies for not-for-profi t or public programs involves ranking programs and
setting priorities. Program priority setting is signifi cant because community
needs (both the need itself and the severity of the need) are constantly changing and organizational 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 fi rst to be scaled back if funding is reduced or eliminated.
The nature and emphasis on programs is the central part of strategy formulation in many public and not-for-profi t organizations. However, a problem in
ranking these programs is that typically all of them are viewed as very important 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 separate
sheet of paper posted in different areas of the room. Use three different colors or
types of sticker, one for each of the adaptive strategies expand the scope, contract the scope, and maintain the scope. Each member of the management 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 importance of programs and setting priorities. 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 program Q-sort evaluation is particularly useful when
experts may 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).
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. Fred N. Kerlinger, in
Foundations of Behavioral Research, characterized Q-sort as a sophisticated
way of rank-ordering objects. 16 Once Q-sort has rank-ordered a series of objects
(programs), then numerals may be assigned to subsets of the objects for statistical
purposes.
284 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Q-sort focuses particularly on sorting decks of cards (in this case each card
representing a program) and the correlations among the responses of different
individuals to the Q-sorts. Kerlinger reports good results with as few as 40 items
(programs) that have been culled from a larger list. However, greater statistical stability and reliability usually results from at least 60 items, but not more than 100. 17
For ranking an organization s programs, only the fi rst step in using the
Q-methodology is used 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. 18 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 714 .
Notice that to create a normal distribution (or quasi-normal), 5 percent of the
programs are placed in the fi rst pile or group, 7.5 percent in the second group,
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
Mycobacteriology
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 714 Department of Public Health Q-Sort Results *
* Program name and mean score in each box.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 285
12.5 percent in the third, and so on. In this case, there are two programs in
the fi rst 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 highestranked programs. The score indicates an individual s perception of that program s
importance to the mission and vision of the organization. A program profi le is
developed by averaging individual members scores for each program.
Based on the results of the Q-sort, programs may be designated for expansion,
contraction, or maintenance of scope. For the public health programs in Exhibit
714 , 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 contraction.
The Q-sort procedure works well using 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.
Evaluation of the Market Entry 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. Contraction of scope
strategies are methods to either rapidly or slowly leave markets and therefore do
not require a market entry strategic decision.
The market entry strategies include acquisition, licensing, venture capital
investment, merger, alliance, joint venture, internal development, internal venture,
and reconfi guring the value chain. Although any one (or several) of these strategies may be used to enter the market, acquisitions, mergers and alliances 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.
The specifi c market entry 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 fi rst consideration in the selection of the market entry strategy is the evaluation of the environment. A review of the external environmental issues and
supporting documentation (see Chapters 2 and 3) should provide information to
determine which of the market entry strategies is most appropriate. Exhibit 715
provides a list of representative external conditions appropriate for each of the
market entry strategies.
286 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 715 External Conditions Appropriate for Market Entry Strategies
Market Entry Strategy Appropriate External Conditions
Acquisition Growing market.
Early stage of the product life cycle or long 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 eff ect).
High level of resource required to compete.
Alliance Alliance partner has complementary resources, competencies, 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.
Long learning curve in obtaining necessary expertise.
Internal Development High level of product control (quality) required.
Early stages of the product life cycle.
Internal Venture Product/service development stage.
Rapid development/market entry required.
New technical, marketing, production approach required.
Reconfi guring the Value Chain Competition dominated by a few traditional providers.
Specialized market niche identifi ed.
New technology, marketing, production approach required.
Resources, Competencies, and Capabilities
As illustrated in Exhibit 716 , each market entry strategy requires somewhat different resources, competencies, and capabilities. Before selecting the appropriate
market entry strategy, a review of the internal competitively relevant strengths and
weaknesses should be undertaken (see Chapter 4). A market entry strategy 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 fi rst phase would be
directed at correcting the weakness (competitive disadvantages) prohibiting selection of the desired strategy, and the second phase would be the initiation of the
desired market entry strategy. In some cases a total redesign, or re-engineering, of
a process may be required before a strategy can be implemented. Perspective 74
provides some insight into the requirements of re-engineering.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 287
EXHIBIT 716 Appropriate Internal Resources, Competencies, and Capabilities for the
Market Entry Strategies
Market Entry Strategy Appropriate Resources, Competencies, and Capabilities (Strengths)
Acquisition Financial resources.
Capability to manage new products and markets.
Capability to merge organizational cultures and organizational structures.
Rightsizing capability for combined organization.
Licensing Financial resources (licensing fees).
Support organization to carry out license.
Capability to integrate new product/market into 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 and organizational structures.
Alliance Lack of competitive skills/facilities/expertise.
Desire to create vertically integrated system.
Need to control patient fl ow.
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.
Internal Venture Financial resources.
Entrepreneurial organization.
Capability to isolate venture from the rest of the organization.
Technical expertise.
Marketing competency.
Operational capacity.
Reconfi guring the Value Chain New technology available.
Entrepreneurial organization.
Capability to rearrange value chain.
Capability to adapt business model.
288 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Organizational Goals
Along with the internal and external factors, organizational goals play an
important role in evaluating the appropriate market entry strategies. As shown
in Exhibit 717 , internal development, internal ventures, and reconfi guring 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 management in light of
organizational goals.
PERSPECTIVE 74
Re-engineering Rethinking Health Care Delivery
Re-engineering has been used as part of strategic planning to help organizations rethink
the way processes are managed in organizations. Many health care organizations are using
re-engineering to cut across departmental lines
to completely redesign a process. Its founders
and leading proponents, Michael Hammer and
James Champy, defi ne re-engineering as the
fundamental rethinking and radical redesign of
process to achieve dramatic improvements in
critical, contemporary measures of performance,
such as cost, quality, service, and speed. Key
words in this defi nition 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 throwit-all-out-and-start-again fl avor of re-engineering
has captured and excited the imagination of
managers from all industries. Radical redesign
requires creativity and a willingness to try new
things, questions the legitimacy of all tasks and
procedures, questions all assumptions, breaks
all the rules possible, and draws upon customer
desires and needs.
A process is a complete 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 of creating value
for the customer. In the past, organizations
have focused on improving the performance
of individual tasks in separate 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 for
the customer. Dramatic improvements can be
achieved only by improving the performance
of the entire process.
To be successful, management must be willing to destroy old ways of doing things and start
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 289
anew. Many changes take place in an organization or unit when re-engineering is initiated:
Work units change from functional
departments to process teams.
Jobs change from simple tasks to
multidimensional 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
performance to ability.
Attitudes change from protective to
productive.
Managers change from supervisors to coaches.
Organizational structure changes from
hierarchical to fl at.
Executives change from scorekeepers to
leaders.
Michael Hammer identifi ed 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 the information.
4. Treat geographically dispersed resources
as if they were centralized.
5. Link parallel activities rather than
integrate 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 (JulyAugust, 1990),
pp. 104112.
Evaluation of the Competitive Strategies
After the market entry strategies have been selected, the strategic posture must
be specifi ed and the products/services positioned within the market using the
generic strategies of cost leadership, differentiation, or focus. All the adaptive
strategies (expansion, contraction, and maintenance of scope) require explicit
strategic posture and positioning strategies.
Strategic Posture
Strategic posture concerns the relationship between the organization and the market and describes the pattern of strategic behavior. Appropriate strategic postures
include defender, prospector, and analyzer. Any of these may be appropriate, subject to: the external environment; the changing nature of the market; competition;
290 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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 fi ts the adaptive and market entry strategies.
External Conditions External conditions are very important in the selection
of strategic posture. Defender strategies tend to be successful when the external
environment is relatively stable (change is slow and reasonably predictable). In
such environments competitive rivalry is low and the barriers to entering the
market are high. Indeed, the cost-effi ciency 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 long product life cycles
are expected. In addition, long product life cycles allow the organization to commit to vertical integration, develop cost effi ciency, and create routine processes.
Defender strategies are most effective in the mature stage of the product life cycle.
The risks associated with the defender posture are that the product life cycle 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
environments change is coming so rapidly that there are few rewards for effi –
ciency. Rather, the ability to incorporate the latest technology, feature, or design
will reap the greatest rewards. In addition, prospectors are successful by utilizing
a technology across several markets (prospecting in new high-growth markets).
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
Reconfigure
The Value Chain
EXHIBIT 717 Market Entry Strategies and Organizational Goals
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 291
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 environments where there is moderate 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 new 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 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.
The external conditions appropriate for each of the strategic postures are
summarized in Exhibit 718 .
EXHIBIT 718 External Conditions Appropriate for Strategic Postures
Posture Strategy Appropriate External Conditions
Defender Stable external environment.
Predictable political/regulatory change.
Slow technological and competitive change.
Products or services in mature stage of PLC.
Relatively long 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, and competitive change 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.
292 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Internal Resources, Competencies, Capabilities As shown in
Exhibit 719 , there are certain strengths associated with each of the strategic postures. For the defender posture the organization must be able to develop a core
technology and be very cost effi cient. Defender organizations try to drive costs
down through vertical integration, specialization of labor, a well-defi ned organization structure, centralized control and 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 procedures that are fl exible. Prospectors
rely on decentralized control. These types of organizations do not concentrate on
developing effi ciency 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 diffi cult because they must mix high levels of standardization and routinization with fl exibility and adaptability.
EXHIBIT 719 Appropriate Internal Resources, Competencies, and Capabilities
for Strategic Postures
Posture Strategy Appropriate Resources, Competencies, and Capabilities (Strengths)
Defender Capability to develop a single core technology.
Capability to be very cost effi cient.
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-defi ned hierarchical communications channels.
Cost control expertise.
Well-defi ned procedures and methods.
High degree of formalization, centralization.
Prospector Capability to adjust organization to a variety of external forces.
Technological and administrative fl exibility.
Capability and competency to develop and use new technologies.
Capability to deploy and coordinate resources among numerous decentralized units.
Decentralized planning and control.
Flexible structure.
Marketing plus research and development expertise.
Low degree of formalization (few well-defi ned procedures and methods).
Analyzer Capability to mix high levels of standardization and routinization of core
products/markets with fl exibility and adaptation for new products/markets.
Structure accommodates both stable and dynamic areas of operation.
Eff ective lateral and vertical communication channels.
Many diff erent management skills required.
Eff ective strategy and planning team.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 293
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 specifi c segment of the market.
Presence in a market requires that the products and services be positioned
vis–vis competing products and services. Similar to the other strategy types,
positioning depends upon the strengths and weaknesses (competitive advantages and disadvantages) of the organization and the issues in the external environment. In other words, how a product or service is positioned depends on the
organization s competitive situation. Therefore, the positioning strategies must
be selected on the basis of resources, competencies, and capabilities (competitive relevant strengths), as well as environmental risks. For example, it would be
diffi cult for an urban public community hospital 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.
External Conditions Each of the generic positioning strategies has its
own external risks that must be evaluated by the organization (see Exhibit
720 ). 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/services may result in differentiation, making the cost leader s product less desirable.
The most signifi cant 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.
Internal Resources, Competencies, and Capabilities Exhibit 721
presents the appropriate internal strengths for each of the positioning 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 stateof-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,
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 leadership 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
294 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
EXHIBIT 720 External Risks Associated with Positioning Strategies
Generic Strategy External Risks
Cost Leadership Technological change that nullifi es 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 marketing change because of the attention
placed on cost.
Infl ation in costs that narrow the organization s ability to maintain suffi cient
price diff erential to off set competitors brand images or other approaches to
diff erentiation.
Diff erentiation The cost diff erential between low-cost competitors and the diff erentiated fi rm
is too great for diff erentiation to hold brand loyalty; buyers therefore sacrifi ce
some of the features, services, or image possessed by the diff erentiated organization for large cost savings.
Buyers need for the diff erentiating factor diminishes, which can occur as buyers
become more sophisticated.
Imitation narrows perceived diff erentiation, a common occurrence as the industry matures.
Focus Cost diff erential between broad-range competitors and the focused organization
widens to eliminate the cost advantages of serving a narrow target or to off set
the diff erentiation achieved by focus.
Diff erences in desired products or services between the strategic target and the
market as a whole narrows.
Competitors fi nd submarkets within the strategic target and outfocus the focuser.
Focuser grows the market to a suffi cient 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. 4041. Copyright 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster
Adult Publishing Group.
tracked. Otherwise, changes in the market may negate the differentiation or cost
leadership. Often benchmarking (see Perspective 75 ) can be used to assess current internal strengths for successfully implementing strategies.
Fit with Situational Analysis and Strategy Mapping
After all the strategy formulation decisions have been made, they should be
evaluated in combination to ensure that they are logical and fi t together. As suggested at the beginning of Chapter 6 and illustrated in Exhibit 61 , the strategies
selected must address an external issue, draw on an internal and competitively
relevant strength or fi x a competitively relevant weakness, maintain the organizational 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.
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 295
EXHIBIT 721 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.
Diff erentiation Strong marketing abilities.
Product/service engineering.
Creative fl air.
Capability and competency in basic research.
Reputation for quality or technological leadership.
Long tradition in the industry 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 preceding competencies and
resources directed at a particular strategic target.
Combination of the preceding
organizational requirements directed
at a particular strategic target.
Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), pp. 4041.
Copyright 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster Adult Publishing Group.
PERSPECTIVE 75
Benchmarking: A Valuable Tool for Health Care Managers
Benchmarking is a management process of
comparing one organization with a set of its
peers. Benchmarking is generally considered to
be part of an organization s learning or continuous improvement eff orts. In a sense, benchmarking is similar to taking a picture of one s
organization and comparing it with pictures of
other organizations. 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 management that is designed to gather
and disseminate both process and performance
information throughout an organization.
The benchmarking process begins with the
identifi cation 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 collaborative nature
of the process that will ensue. For example, a
large health care system might use a telecommunications company as a benchmarking peer
296 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
or a multifacility nursing home might seek a
hotel chain.
Senior management of the peer organizations 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, fi nancial data, personnel
data, and so on, as though the benchmarking
participants were part of the senior management 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 scheduled
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 protocol, 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, confi dentiality,
format of the meetings, processes for establishing the agenda for subsequent meetings, and the
process of choosing the locations for meetings.
It may be useful to hire a professional facilitator for the fi rst meeting and to determine
whether such a person would be helpful in
further meetings of the group. Each participant
should leave the fi rst 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, and how
customer billing is processed, or other activities
identifi ed as worthy of discussion by the group.
At each meeting, detailed minutes (perhaps
a transcript) of the meeting 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.
The formal agenda for subsequent meetings
should include reports from each of the participants. 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 greatest impact.
Source: Andrew C. Rucks, PhD, School of Public Health, University
of Alabama at Birmingham.
The strategies of the organization should be mapped and evaluated. Each
strategy endsmeans chain should be clearly shown. The interdependence of
strategies requires managers to evaluate them in concert for consistency and
compatibility. Evaluating all the strategic decisions together provides the big
picture of where the organization is going and helps to determine if the vision
is really being achieved. In the process of evaluating the strategic map, adjustments may be made and the strategies (each ends and means) reconsidered.
For example, a vertical integration adaptive strategy and a prospector strategic
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 297
posture may not work together well. Similarly, a product development or diversifi cation 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.
Strategic Map: An Example
A strategic map for a long-term care organization is shown in Exhibit 722 . This
long-term care organization has been a free-standing, independent institution
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 insurance), but management is willing to enter new
products and markets if the viability seems reasonable (analyzer). In addition,
management has selected market development directed toward entering into
the Medicare segment of the market and has decided that the organization
has the internal resources to accomplish Medicare certifi cation. Furthermore,
product development has been selected and management is planning to add
an independent living facility on the organization 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 posture. 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. The organization has committed to install a
Market Entry
Strategies
Adaptive
Strategies
Competitive
Strategies
Expansion of Scope Strategic Posture Cooperation
Vertical Integration
Product Development
Market Development
Penetration
Alliance
Joint Venture
Internal
Development
Analyzer
Positioning
Marketwide
Differentiation
Quality
Service
Maintenance of Scope Caring
Enhancement
Hospital Alliance
Independent Living Facility
Medicare
Advertising
Information System
Development
EXHIBIT 722 Map of Selected Strategies for Long-Term Care Organization
298 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
sophisticated information system including 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 complicated strategies built on detailed predictions of the
future; however, in complicated, fast-moving markets where signifi cant growth
can occur, unpredictability reigns. When business becomes complicated, strategy should be simple. 19
Managing Strategic Momentum Adaptive, Market
Entry, 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 the organization s fundamental strategies. 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
direction. The critical underlying assumptions that underpin the strategy
are no longer viable, and the rules that govern the strategy must be redefi ned. This situation involves a mental leap to defi ne 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 discontinuity. The question now is how to achieve a quantum leap
in one s strategy to capitalize on emerging environmental turbulence. One
must proceed by redefi ning the rules rather than by clinging to the unrealistic hope that the old rules are still valid. 20
Changes in one organization s adaptive strategy create signifi cant 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 723are helpful in
surfacing such signals, and they provide a starting point for discussion of the
appropriateness of the organization s adaptive strategy. The assumption underlying Exhibit 723is that the mission, vision, values, and goals are still appropriate
but that the organization s adaptive strategy should be questioned.
Changes in market entry strategies represent a new way of doing business for
an organization. For example, developing alliances as a means of accomplishing
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 299
EXHIBIT 723 Managing Strategic Momentum Adaptive Strategies
1. Are all the important assumptions on which the strategy is based realistic (external
environment, competitive environment, internal environment)?
2. Has the strategy been tested with appropriate strategic thinking tools?
3. Have the major stakeholders, inside and outside the organization, that will be most
infl uential in ensuring the success of the strategy been identifi ed and evaluated?
4. If the adaptive strategy is to fi ll a currently unfi lled niche in the market, has the organization investigated whether the niche will remain open long enough to return the capital
investment?
5. Has the adaptive strategy been tested with appropriate 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 environmental 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?
EXHIBIT 724 Managing Strategic Momentum Market Entry Strategies
1. Is the market entry strategy the most appropriate way to achieve the mission, vision, and
goals of the organization?
2. Is the market entry strategy consonant with the values of the organization?
3. Is the market entry strategy the best way to accomplish the adaptive strategy?
4. Is the market entry strategy compatible with the adaptive strategy?
5. Does management understand the unique requirements of the market entry strategy
(purchase, cooperation, development)?
6. Does management understand the important market forces?
7. Have adequate fi nancial resources been allocated to enter the market?
8. Does the selection of the market entry strategy aff ect the ability of the organization to
eff ectively position its products/services in the market?
9. Is the market entry strategy compatible with the competitive strategies?
10. Does the market entry strategy place unusual strains on any of the functional areas?
11. Have new stakeholder relationships developed as a result of the market entry strategy
(customers, vendors, channel institutions, and so on)?
12. Has the relationship between the desire and need for rapid market entry been properly
analyzed?
13. Has the relationship between the desire and need for control over the products and
services been achieved?
14. Have the trade-off s between costs and control been properly analyzed?
market development is quite different from an internal development strategy and
changes the whole orientation of the organization. Evaluation of the effectiveness
of the market entry strategies provides insight into how well the adaptive strategies are being carried out in the marketplace (see Exhibit 724 ). Similarly, a change
300 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
in an organization s strategic posture or positioning represents a revolutionary
change. For example, moving from a differentiation strategy to cost leadership initiates substantial change throughout the organization. The adaptive strategies and
market entry strategies may be appropriate, but if the product or service does not
have the appropriate strategic posture or is not positioned effectively, the organization may not achieve its goals (see Exhibit 725 ).
EXHIBIT 725 Managing Strategic Momentum Competitive Strategies
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 services?
3. Are there new market opportunities that suggest the organization should move more
toward a prospector posture? Analyzer strategy? Defender strategy?
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 fl exibility 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?
8. Has the level of vertical integration been appropriate for the strategic posture?
9. Has the organization been caught by surprise too often?
10. Are the overall strategy, strategic posture, and value-adding strategies compatible?
11. Does the organization need to evolve its strategic posture?
Positioning
1. Is the product or service positioning believable 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 and services unique in the
marketplace?
7. Is the positioning strategy defensible against new players trying to position themselves
in a similar fashion?
8. Is the positioning strategy compatible with the market entry strategy?
9. Does the positioning strategy provide the appropriate image for the organization?
10. Is the positioning strategy sustainable?
11. Is the appropriate distribution channel being used?
12. Is the current promotional strategy appropriate?
13. Is the pricing strategy appropriate?
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 301
Lessons for Health Care Managers
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 and external environments and methods
for evaluating strategic alternatives. There are several methods for deciding which
of the adaptive strategic alternatives is most appropriate for an organization,
including the 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 methods, managers can
classify internal and external factors to gain perspective on 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 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 reconfi guration 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.
After the market entry strategy has been selected, competitive strategies,
which include strategic posture and positioning strategies, should be evaluated 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,
capabilities, and competencies infl uence 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
organization and the external conditions.
Chapters 8 through 10 discuss implementation strategies. Chapter 8 will
address strategy implementation through value-adding service delivery strategies.
Health Care Manager s Bookshelf
Michael A. Mische, Strategic Renewal:
Becoming a High-Performance
Organization (Upper Saddle River,
NJ: Prentice-Hall, 2001)
Strategic choice is an important assumption
of strategic management. The idea of strategic
choice is that, although the environment is
highly infl uential on decision makers, it is not
deterministic. That is, strategic leaders make
the choices to grow or contract, to remain in
or gravitate to another environment, how to
design their organizational system to pursue
the strategy, and so on. 1 Often the decisions
302 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
of leaders reveal similar responses to similar
environments and sometimes they diff er signifi –
cantly. Therefore, the choices require evaluation
and analysis.
As discussed in Strategic Renewal: Becoming
a High-Performance Organization , highperforming organizations, regardless of the
industry, share fi ve strategic pillars. These are
information technology, innovation, leadership,
knowledge, operational excellence, and agility. 2 In order to be successful, strategic leaders
need to understand and anticipate what things
are changing in the environment, how they
are changing, how fast they are changing, the
extent (depth and breadth) of the changes, and
why things are changing (p. 3). Not all organizations are good at reading the environment
and understanding the changes, taking place
around them. When they fail to anticipate and
understand the changes they suff er severe consequences. To illustrate, based on market capitalization, in 1972 IBM was the largest company
in the world. In 2000 it ranked number 10. Kodak
was number 3 in 1972 and 206 in 2000. General
Motors was number 4 in 1972 and number 80 in
2000. Microsoft was not in existence in 1972 but
was number 1 in 2000 (p. 4). Great organizations
are ones that dictate the terms for others by
constantly introducing new factors into the marketspace [which either exist in multiple domains
or are waiting to be created] which others must
react and adjust to (p. 21).
In formulating a strategy for change and
achieving a competitive advantage, organizations have six strategic choices. Organizations
may choose to:
1. Innovate and reinvent. This is the most
demanding because it requires an entrepreneurial culture.
2. Withhold from competing. This is sometimes called the turtle strategy. This strategy
is chosen when, among other things, the
organization is abandoning the market, is
unsure of itself, does not have the leadership or resources to compete, and so on.
3. Substitute themselves for the competitors.
This choice is direct and confrontational.
The goal is to go head-to-head with rivals,
occupy their market space, and eliminate
them from the market.
4. Imitate competitors. The organization
that chooses to imitate does not aspire to
occupy the market space of competitors
but rather to obtain a share of it by copying the leaders. As followers, the best they
can hope for is parity.
5. Complement competitors. This is sometimes referred to as peaceful coexistence. The organization does not directly
challenge competitors and this choice
requires that the organization follow the
actions of the market leaders.
6. Collaborate with competitors.
Organizations come together to pursue a
mutually attractive project requiring trust
and coordination (pp. 3137).
Successful organizations employ any one
or a combination of these strategies [choices],
although priority is usually given to one or more
of the choices. The actual choices are infl uenced
by a number of factors such as industry dynamics, age of the organization, and so on.
The strategic choices that organizations make
are ultimately determined by their knowledge. The
president of Johnson & Johnson stated that we are
not in the product business. We are in the knowledge business (p. 163). This is an important recognition since the author argues that knowledge is
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 303
the only truly unique asset that any organization
has (p. 163). Virtually everything else it has can be
replicated by competitors. Knowledge, therefore,
is unique and can be strategic.
High performance requires constant renewal
and regeneration. Successfully competing in
today s health care market(s) is not just about
competing better. It is about competing to
be the best and, most importantly, competing
diff erently (p. 2).
REFERENCES
1. John Child, Organizational Structure,
Environment, and Performance The Role of
Strategic Choice, Sociology 6, no. 1 (1972),
pp. 122.
2. Michael A. Mische, Strategic Renewal:
Becoming a High-Performance Organization
(Upper Saddle River, NJ: Prentice-Hall,
2001).
KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT
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
Re-engineering
SPACE Analysis
Questions for Class Discussion
1. Explain the rationale underlying the external/internal strategy matrix.
2. Describe the product life cycle. How is it useful for thinking about the adaptive
strategy of a health care organization?
3. Why is the length of the product life cycle important for strategy formulation?
4. What adaptive strategic alternatives are indicated for each stage of the product life
cycle?
5. Is BCG portfolio analysis useful for developing adaptive strategic alternatives for
health care organizations?
6. Explain the rationale for expanding the traditional BCG portfolio matrix.
7. Identify appropriate adaptive strategic alternatives for each quadrant in the expanded
portfolio matrix.
304 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
8. Explain the strategic position and action evaluation (SPACE) matrix. How may
adaptive strategic alternatives be developed using SPACE?
9. Why should program evaluation be used for public health and not-for-profi t
institutions in the development of adaptive strategies?
10. What are the critical factors for determining the importance of programs within
a not-for-profi t organization?
11. Why should public health and not-for-profi t organizations set priorities for programs?
12. Describe program Q-sort. Why would an organization use program Q-sort?
13. How are market entry strategies evaluated? What role do speed of market entry and
control over the product or service play in the market entry decision?
14. How are the strategic postures and the product life cycle related?
15. How may the positioning strategic alternatives be evaluated?
16. Do health care organizations change directional and adaptive strategies often?
17. How can doing the strategy (managing the strategic momentum) provide information
about changing the strategy?
18. As managers learn by doing, what strategies are most likely to change: adaptive, market
entry, or competitive?
Notes
1. George Yip and Gerry Johnson, Transforming Strategy,
Business Strategy Review 18, no. 1 (spring, 2007),
pp. 1115.
2. Peter F. Drucker, Management: Tasks, Responsibilities,
Practices (New York: Harper & Row Publishers, 1974),
p. 470.
3. Heinz Weihrich, The TOWS Matrix: A Tool for
Situational Analysis, Long Range Planning 15, no. 2
(1982), pp. 5466.
4. 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. 4748.
5. 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.
6. Gary McCain, Black Holes, Cash Pigs, and Other
Hospital Portfolio Analysis Problems, Journal
of Health Care Marketing 7, no. 2 (June 1987),
pp. 5657.
7. Moore, To Succeed in the Long Term, p. 84.
8. 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. 340352.
9. Gary McCain, Black Holes, Cash Pigs, p. 56.
10. Ibid., p. 61.
11. Ibid., p. 62.
12. 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.
13. Ibid., p. 149.
14. 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. 492496.
15. US Department of Health and Human Services, Healthy
People 2012 (Washington, DC: US Government Printing
Offi ce, 2010). This publication presents the national
health objectives. US Department of Health and Human
Services, Tracking Healthy People 2020 (Washington, DC:
US Government Printing Offi ce, November, 2020). This
CHAPTER 7 EVALUATION OF ALTERNATIVES AND STRATEGIC CHOICE 305
publication is a statistical compendium that
provides information on measuring the 200
objectives, technical notes, and operational
defi nitions.
16. Fred N. Kerlinger, Foundations of Behavioral
Research (New York: Holt, Rinehart &
Winston, 1973), p. 582.
17. Ibid., p. 584.
18. J. Block, The Q-Sort Method in Personality
Assessment and Psychiatric Research
(Palo Alto, CA: Consulting Psychologist
Press, 1978), p. 137.
19. Kathleen M. Eisenhardt and Donald N. Sull,
Strategy as Simple Rules, Harvard Business
Review 79, no. 1 (January, 2001), pp. 107116;
William M. Trochim, Derek A. Cabrera, Bobby
Milstein, Rirchard 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. 538546.
20. Peter Lorange, Michael F. Scott Morton,
and Sumantra Ghoshal, Strategic Control
(St. Paul, MN: West Publishing, 1986), p. 11.

8 Value-Adding Service
Delivery Strategies
Strategy is like trying to ride a bicycle while youre inventing it.
IGOR ANSOFF
Introductory Incident
Using Dashboards to Improve Service
Dashboards in health care have been described as a wave everybody is jumping on. Dashboards
aggregate information from a variety of sources to provide a tool to detect performance trends
and solve small problems before they become big problems.
The Hartford Hospital uses a dashboard developed by CarePx. Information from the hospital s
electronic medical record and its fi nancial system are combined and used as a management tool.
Executives use the dashboard to track data in three key areas. These are:
Patient data including length of stay and percentage of early morning discharges.
308 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Bed availability including the types of beds open and the percentage of beds not available
for patients, which includes those being cleaned and those in a room occupied by a patient
in isolation.
Readmission rate for patients brought back to the hospital in less than 30 days from discharge.
These data are then broken down by individual groups of physicians quarterly to show the
group s length of stay and readmission rates. The goal is to take the high-performing groups,
see what is working for them, and model their behavior to others. Nursing managers receive the
same information so they can see how each unit is performing relative to the others.
Health First, a four-hospital system in Rockledge, Florida uses a dashboard from McKesson
to aggregate data from the clinical, fi nancial, and administrative systems. The dashboard has
aided in monitoring registration activities and upfront collections from patients for copays and
deductibles. One routine task is a registration audit which monitors the performance of 100 staff
handling patient registration. One of the primary goals of the audit is to encourage collecting as
much as possible before the service is actually rendered. This is no easy task, since most patients
prefer to be billed for what they owe. Delaying collection, unfortunately, increases the likelihood
that the bill will end up in bad debts. The system is working well. From 2009 to 2010, Health First
increased its point-of-service collections by 22 percent or about $1.1 million.
One of the major challenges of monitoring the revenue cycle in health care is the number of
payers. Legacy Health, a fi ve-hospital system in Portland, Oregon works with more than 600 payers. Legacy uses a dashboard, developed by Huron Consulting, to help track the primary payers
and show the cash fl ow for 24 key payers including Medicare, Medicaid, and larger commercial
contracts. One time the dashboard revealed a drop in payments from a Blues plan. The issue was
raised in a meeting with the payer. It was noted that the reason for the delay involved staffi ng
issues. A similar problem with Medicaid was caused by a system conversion. In each case the
dashboard was instrumental in resolving the issues. Legacy was able to present the payers with
objective data to illustrate the problems and secure faster resolutions.
A dashboard used at Concord (New Hampshire) Hospital has been eff ective in speeding up the
resolution of claim denials. The dashboard aggregates the claims status from 14 payers that constitute the majority of Concord s claims. Since implementation of the dashboard, Concord has signifi cantly decreased its billing write-off s that originated with missing or inaccurate information.
In Arlington, Texas, Northstar Anesthesia contracts with 42 hospitals in six states. Northstar
uses a dashboard to monitor the productivity and quality performance of the 460 physicians and
nurses it dispatches for assignments. Excel Eye Center in Provo, Utah uses a dashboard that displays data on the total number of claims submitted, rejections, claims pending, and claims paid.
Since switching to the dashboard, Excel Eye Center has reduced its average days in accounts
receivable from 45 to 29. Other health care organizations, such as the Seattle Children s Hospital,
have successfully used the dashboard as a tool to improve productivity and performance.
Source: Gary Baldwin, Dashboards in Action, Health Data Management 19, no. 10 (2011), pp. 3438.
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 309
Implementation Strategies
Once the directional, adaptive, market entry, and competitive strategies have been
planned, planning for implementation strategies commences. Further strategic
thinking is required to determine how to achieve the decisions previously made in
strategy formulation. A leader can announce a strategy but that strategy will only
be realized if it is in line with the pattern of resource allocation decisions made at
every level of the organization. 1 As introduced in Chapter 1 (refer to Exhibit 11 ),
the implementation strategies include two different sets of value-adding strategies
value-adding service delivery strategies and value-adding support strategies. In
addition, planning strategy implementation includes the setting of organizational
unit objectives, development of plans, and agreement on budgets that in concert,
translate the organization s overall strategy into specifi c action plans.
Strategies Based on the Value Chain
Chapter 4 presented strategic thinking maps for evaluating the strengths and
weaknesses of the organization. This approach focused on evaluating those components of the organization that create value and, ultimately, competitive advantage the value chain (see Exhibit 81 ). Recall that the upper portion of the
value chain focuses explicitly on the primary activities of the organization the
Learning Objectives
After completing the chapter you will be able to:
1. Understand the decision logic for developing implementation strategies.
2. Understand that the service delivery portion of the value chain is key in the
implementation of strategy.
3. Link the results of internal analysis and the development of service delivery
implementation strategies.
4. Understand how the pre-service, point-of-service, and after-service strategies of
an organization are the means to achieve directional, adaptive, market entry, and
competitive strategies.
5. Understand that competitive advantage may be created inside the organization
through implementation of the service delivery strategies.
6. Understand that through service delivery strategies the organization itself is
changed, strengthening competitive advantages and improving competitive
disadvantages.
7. Create service delivery strategies that carry out the directional, adaptive, market
entry, and competitive strategies.
310 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
delivery of services. The lower portion of the value chain contains the valueadding support activities that include the organization s culture, structure, and
strategic resources. The components depicted in the value chain are the principal
means of creating value for the organization and developing competitive advantages. 2 These activities are major elements of strategy implementation and are
shaped by strategic thinking and strategic planning.
Remember that service delivery strategies and support strategies are not
separate but, rather, interact and complement each other. The organization s culture, structure, and strategic resources are in reality an inherent part of the preservice, point-of-service, and after-service activities. Thus, a change in the culture
of the organization human competencies is refl ected in service delivery.
Further, an enhanced information system a resource can benefi t all aspects
of service delivery as well as other strategic resources.
Planning Logic for Implementation Strategies
As with strategy formulation, there is a planning logic for developing implementation strategies, as illustrated in Exhibit 82 . The value-adding strategies (service
delivery and support) must be developed fi rst, followed by unit action plans.
The value-adding strategies are planned fi rst because they are the broadest
of the implementation strategies, establishing the processes and context for
accomplishing the mission and achieving the vision and goals.
PRE-SERVICE
Market/Marketing Research
Target Market
Services Offered/Branding
Pricing
Distribution/Logistics
Promotion
POINT-OF-SERVICE
Clinical Operations
Quality
Process Innovation
Marketing
Patient Satisfaction
AFTER-SERVICE
Follow-up
Clinical
Marketing
Billing
Follow-on
Clinical
Marketing
ORGANIZATIONAL CULTURE
Shared Assumptions Shared Values Behavioral Norms
ORGANIZATIONAL STRUCTURE
Function Division Matrix
STRATEGIC RESOURCES
Financial Human Information Technology
Add
Va
ul e
Add
Value
Service
Del vi ery
Support Activities
EXHIBIT 81 The Value Chain
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance
(New York: Free Press, 1985), p. 37.
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 311
The value-adding service delivery strategies specify the pre-service activities, point-of-service confi gurations and processes, and after-service activities
required by the strategies developed during strategy formulation. These strategies must be coordinated and consistent. The value-adding support strategies
create and shape the working environment and behavioral norms, reporting relationships and structure, as well as information fl ows, fi nancial needs, and human
resource requirements for carrying out the selected strategies. Organizations
that do not have the appropriate culture, structure, or strategic resources cannot
implement effective plans. Finally, for the organizational units, specifi c objectives may be developed, activities necessary to accomplish the objectives established, and fi nancial resources committed to the activities. The culture, structure,
and strategic resources must be shaped and provided direction by strategic
managers developing the overall strategic plans of the organization.
As with the strategy formulation phase, implementation strategies form an
endsmeans relationship. The value-adding strategies must accomplish the directional, adaptive, market entry, and competitive strategies and the action plans
must accomplish the value-adding strategies. The action plans link the individual
organizational units to the overall strategy. Units are typically functional, such
as operations (e.g., surgical units, Alzheimer s units, well-baby care), marketing,
fi nance, human resources, and so on. Operations and marketing are the primary
work of the organization the value-adding service delivery activities because
providing a product/service and delivering it to customers are the central
activities of organizations. The major emphasis of human resources, fi nance,
facilities management, and information systems typically will be directed toward
Directional Strategies
Adaptive Strategies
Market Entry Strategies
Competitive Strategies
Value Adding
Strategies
Service Delivery
Strategies
Pre-Service
Point-of-Service
After-Service
Support Strategies
Organizational Culture
Organizational Structure
Strategic Resources
Action Plans
Objectives
Actions
Timelines
Responsibilities
Means Ends
Ends
Means
Ends Means
EXHIBIT 82 Planning Logic for the Value-Adding Strategies
312 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
achieving the support strategies. These functions support the accomplishment of
the primary work of the organization.
Developing Value-Adding Strategies
Each area of the value chain was evaluated during internal analysis as part of
situational analysis (Chapter 4) and the conclusions used as inputs to strategy
formulation. Each of the strategic decisions (directional, adaptive, market entry,
and competitive) made to this point moves the organization closer to accomplishing its mission and vision and at the same time makes special demands on the
organization that require explicit action. The requirements of directional, adaptive, market entry, and competitive strategies have been discussed in Chapters 5
through 7. Based on the results of the comparison of the current situation and
what strategic managers want the organization to be, value chain components
may need to be maintained or changed to carry out the strategy.
The logic of developing specifi c strategies for each component of the value
chain is illustrated in the strategic thinking map in Exhibit 83 . The resulting
decision matrix is shown in Exhibit 84 . As suggested by the decision matrix, for
each component of the value chain, a strategic decision must be made (maintain
or change) and general direction provided to the organizational units as to how
that decision is to be accomplished. Later, more specifi c organizational unit strategies (action plans) that carry out the value-adding strategies will be developed.
Implementation of a strategy is often the most diffi cult part of strategic management. New strategies may call for changes in service delivery, marketing,
organizational structure, or strategic resources. Such changes typically require
new systems and new ways of doing things. Therefore, successful change in
the value-adding strategies requires leaders to establish a sense of urgency
for change and to clearly articulate the connections between the new ways of
doing things and success of the selected strategies. 3 However, as pointed out
EXHIBIT 83 The Process of Developing Value-Adding Strategies
Compare Strategy
Requirements with
Internal Analysis
Maintain
Identify the Requirements
of the Selected:
Directional Strategies
Adaptive Strategies
Market Entry Strategies
Competitive Strategies
Results of Internal
Environmental Analysis:
Pre-Service
Point-of-Service
After-Service
Culture
Structure
Strategic Resources
Change
Guidance for
Organizational Units
to Maintain
Guidance for
Organizational Units
to Expand
Guidance for
Organizational Units
to Contract
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 313
in Perspective 81 , there still may be some resistance to change. This chapter
discusses the organizational requirements for the value-adding service delivery
strategies. Value-adding support strategies will be discussed in Chapter 9 and the
translation of the value-adding strategies into specifi c organizational objectives,
action plans, and budgets will be discussed in Chapter 10.
Value-Adding Service
Delivery Strategies
Results of
Internal
Analysis
Requirements
of Selected
Strategies
Comparison of
Strategy Requirements
and Internal Analysis
Maintain or
Change
Pre-service
Market/marketing research
Target market
Branding
Pricing
Distribution/logistics
Promotion
Point-of-service
Clinical operations
Marketing
After-service
Follow-up activities
Billing
Follow-on activities
Value-adding support strategies
EXHIBIT 84 Strategic Thinking Map for Developing Value-Adding Strategies
PERSPECTIVE 81
Stages of Resistance to Change
Often people do not like change and their fi rst
reaction may be to resist any changes management may wish to make. When instituting
changes in an organization, whether it is initiating the strategic planning process, changing the strategy, or attempting to change the
culture, managers fi nd people in various stages
of resistance. It is often necessary to pull people through these stages if the change is to be
successful.
STAGE ONE: RESISTANCE
Often the fi rst reaction to something new is to
resist the change. Because organizations have
frequent changes and in many instances management has tried several techniques before,
employees may see a new program or management eff ort as another fad that will soon
go away (as have the others). Therefore they
openly resist (or even sabotage) the proposed
change. Managers often hear such comments as
314 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Here we go again, new manager, new program,
new technique or This will never work and We
tried this ten years ago.
STAGE TWO: PASSIVENESS
In stage two, employees are not resistant; they
simply do not want to get involved. These people do not like change and believe that if they
bury their heads in the sand (go about their
usual work), the change will just go away. In
many cases these people do not understand the
vision for the future, or they have never been
told about it or how they fi t into it. In this stage,
managers often hear such comments as This is
just a job or I put in my eight hours or I ll be
here when they re gone.
STAGE THREE: CONVINCE ME
Some people in organizations are ready to
change and will work hard if they believe it will
really improve the organization; however, they
have been let down by the organization before.
Perhaps programs were started or promises were
made but management neither completed the
programs nor fulfi lled the promises. These people will give it their best if management can
show them that the result will be worth their
eff ort. In this stage, managers often hear such
comments as Show me that we can improve the
way we work and I ll be your biggest supporter
or Give me some indication that this can be an
interesting and challenging place to work, and
I ll give it a shot.
STAGE FOUR: HOPE
Many people, especially when they start their
careers, want to be a part of something important to make a diff erence. They have hope that
they can make the organization better and be a
part of something signifi cant. These people are
usually willing to try anything and want to be a
part of meaningful change. However, the managers should follow through because if previously
proposed changes have not occurred, these people will be diffi cult to convince the next time
management wants to change something. In
this stage, managers often hear such comments
as I don t know if we can succeed but look at the
possibilities if we do or Wouldn t it be great if
we actually pulled it off ?
STAGE FIVE: INVOLVEMENT
In this stage, people typically understand that
the organization must change and continually
renew itself if it is to succeed. They are willing to
get involved and be a part of any change that will
keep the organization viable. They understand
that some new things do not work very well and
therefore other change agents must be tried. In
this stage, managers often hear such comments
as I don t know if this will work, but we have to
try something or The world is changing and we
have to change with it.
STAGE SIX: ADVOCACY
People in this stage believe not only that change
is vital in a changing world but that this program
can really make an important diff erence. They
are ready for a long-term commitment to the
program or process and will lead and be responsible for its implementation and progress. These
people will convince others to be a part of the
change and will keep the process on track. In this
stage, managers often hear such comments as
This is our chance for real long-term success or
I m a believer; this can work if we stay committed over the long term.
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 315
Value-Adding Service Delivery Strategies
The value-adding service delivery strategies include pre-service, point-of-service,
and after-service strategies. Value-adding service activities are critical to the
success of the organization because they are the principal methods for creating
value. Therefore, explicit strategies must be developed for each. The components
must be coordinated and work in concert. It is the role of strategic managers
responsible for developing and managing the strategic plan to ensure the compatibility of pre-service, point-of-service, and after-service strategies.
Pre-Service Activities
Pre-service entails the planning and activities that enable the organization to
determine its customers and the services that will be offered to them as they enter
the system. Marketing is central in developing pre-service strategies. Pre-service
marketing entails market and marketing research that enables the organization
to determine the appropriate customer (target market), design services that will
satisfy that customer, identify the service through branding, price the service at a
level that is acceptable to the customer while allowing the organization to survive,
and offer the service where the customer wants it or is able to obtain it.
Market and Marketing Research
Market research is any data gathering about the market itself potential customers, their wants, needs, and habits in terms of health care, and the services an
organization could provide that would satisfy those wants and needs. Market
research aids in identifying the target market but must be done in conjunction
with identifying the services the organization will deliver. 4 For example, a group
of physicians in a medical clinic has internal resources, competencies, and capabilities to provide care. If all the physicians are board certifi ed in plastic surgery,
the group could decide to provide comprehensive care including reconstructive
and cosmetic surgery, or the physicians could decide to focus only on cosmetic
surgery to the stars with extreme confi dentiality in a remote but very comfortable location. The target market has to want or need the services and the
organization must have the resources, competencies, and capabilities to provide
the services. 5
Beyond information concerning potential customers, marketing research provides information concerning desired attributes of the product or service, appropriate price, the most convenient place to obtain the product or service, and
type of promotional activity to best inform potential customers (the four Ps of
marketing: product, price, place, and promotion). Therefore, once the internal
assessment has highlighted the organization s competitive relevant strengths and
weaknesses, the external analysis has identifi ed the issues in the marketplace,
and the organization has identifi ed the strategies it wants to pursue, pre-service
strategies attempt to identify the specifi c target market and defi ne the services
to be offered. 6
316 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Identifying the Health Care Customer Target Market
One of the diffi culties with health care marketing is that there are many, very
diverse customers to satisfy physicians, health care consumers (patients) and
their friends and families, other health care organizations, third-party payers,
and so on. In addition, there are multiple services categories long-term care,
emergency medicine, oncology, dermatology, and so on that determine who
the customer will be. 7 Furthermore, within these specializations are customers
with varying needs, wants, and desires.
Segmentation is the process of identifying recognizable groups that make up the
market and then selecting a group as the target market. Several groups may be targeted, but each one requires different marketing activities to achieve customer satisfaction. Exhibit 85illustrates the many customers for a hospital and the segments a
physician (one of the hospital s customers) may consider. The process of segmentation for a general medical practice service category would be more challenging than
for an oncology (cancer) practice, which is more specialized. However, many segments can be identifi ed among cancer patients those with leukemia, skin cancer,
lung cancer, and so on. Specialization of the hospital, nursing home, or physician s
practice would be a fi rst step in the segmentation process, but other demographic,
psychographic, geographic, and benefi ts factors must be considered as well.
Physicians, Patients, and as Customers
Physicians are a major target for marketing efforts because they recommend
other health care providers for their patients. Estimates are that physicians
control 80 percent of health care costs, as they prescribe pharmaceuticals and
medical equipment, and determine hospitalization, diagnostic, and surgical procedures. Physicians are an important customer base for hospitals because almost
EXHIBIT 85 Determining the Health Care Customer
Physicians
Patients
Hospital
Medicare/
Medicaid
Chronic
Condition
Acute
Condition Athletes
Males
Females
Children
Poor Elderly
Insured
Third-Party Payers
Businesses
Third-Party Payers
Insurance Companies Employees
Donors
Volunteers
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 317
all patients are admitted by physicians who have staff privileges at the hospital.
If physicians choose not to admit patients to a given hospital, the hospital will
have no patients.
The patients themselves are customers. However, the buyerseller relationship
of traditional exchange processes has to be modifi ed in much of health care
because the patient has a professional dependency on the doctor. Most people
have no knowledge of medical terminology, or the complexity of medical diagnosis or care, and cannot accurately evaluate the medical care provided.
At one time, patients would never have questioned their doctor s choice of
a hospital. Today, a patient whose physician does not have privileges at the
hospital of the patient s choice may change physicians. In a national study by
Professional Research Consultants and American Hospital Publishing, Inc., more
than 42 percent of the participants said they would change physicians to be
admitted to the hospital they preferred. 8 When considering maternity care, 58
percent of pregnant women select a hospital before choosing a physician. 9
Third-party payers (insurance companies and employers) are also customers.
These companies must be satisfi ed that the health care provider is effi ciently
treating patients or they will use their substantial fi nancial infl uence to dictate
that patients go elsewhere. Considerable insight concerning third-party payers
can be gained through quality monitoring organizations.
The National Committee for Quality Assurance (NCQA) is an independent,
not-for-profi t organization started by a number of large employers in 1991 with a
mission to improve health care quality everywhere. NCQA uses three different
methods to assess quality: (1) voluntary accreditation (currently about 50 percent
of HMOs are accredited); (2) Healthplan and Employer Data and Information Set
(HEDIS), a tool used to measure performance in key areas such as immunizations and mammograms; and (3) a comprehensive member satisfaction survey.
NCQA maintains an up-to-date website available to consumers and employers to
determine whether they want to use a specifi c plan. Because of NCQA s success
in the private sector it has expanded to the public sector as well Medicaid
HEDIS is being used in various states. 10 The rate of change in health care is
rapid and, therefore, health care employees must stand ready to adopt new
ways of doing things even if they feel threatened by the change. Often changing
conditions and ways of doing things require that value and quality have to be
viewed in entirely new ways. 11
To Brand or Not to Brand Services
A brand represents three things: what an organization offers to the market,
what an organization does, and what an organization is. 12 All three are critically
important for health care organizations because the brand is intangible it is
simply a set of promises. It implies trust, consistency, and a defi ned set of expectations. The strongest brands have a unique position in the mind of the buyers
and can usually be articulated. Mayo Clinic and Johns Hopkins are examples
of brands that have value for customers. Every person who has contact with a
patient at these clinics represents that brand as illustrated in Perspective 82 .
If housekeeping is poorly performed, it hurts the brand; if admitting is poorly
done, it hurts the brand; if clinical care is done less well than customers expect,
318 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
it hurts the brand. Thus, it is critical that every member of the organization
realizes that the brand is owned and should be managed by every employee.
Another way to defi ne brand is that it is every touch point the organization has
with its ultimate customer. 13
To develop a good branding strategy, answers to three questions have to be
understood:
1. How do consumers choose one brand over another?
2. How does your brand stack up against competition?
3. What possibilities exist for potential brand growth and expansion?
A brand is everything a service organization stands for but it does not have
any merit if customers do not value it. Customers evaluate every service experience by dividing quality by price to arrive at a sense of value. It may not be a
perfect method, or very accurate, but it is real as far as that consumer is concerned. For services the brand is more important than for tangible products,
especially because if performance falls short, the service brand s image and
positioning deteriorate rapidly. 14
PERSPECTIVE 82
Branding Begins at Home
How patients perceive a medical practice, hospital, or long-term care facility involves focus, hard
work, and lots of employee support. Brand identity can be of considerable value to a health care
organization. For example, the Millward Brown
consulting company stated that Apple, Inc. has
the world s most valuable brand. It estimated
that the Apple brand was worth more than $153
million. Many would argue that building a brand
for a company with a product is less complex
than building a brand identity for a service such
as health care. Arguably the greatest impact in
any service organization, particularly health care
organizations, comes through interactions that
patients and their families have with the staff .
Building a successful brand involves more
than a logo, website, or printed materials.
One branding consultant states that For a
brand to endure it must be easily understood,
internalized, and acted on by employees at all
levels. Words must be matched with deeds.
Employees at all levels must walk the walk.
In health care organizations it is important
to assist the staff to understand what the brand
represents in concrete terms. If the medical
practice says that extraordinary care is its key
brand attribute, what does that mean in terms
of day-to-day behavior? Employees have a
critical brand ambassador role as they interact with people who come to the health care
organization. The chair of the Public Relations
Society of America defi nes a brand ambassador
as employees or customers who advocate for
the company and its products or services.
The Chairman and CEO of Private Health
Management, a network of physician-led medical doctors, points out fi ve areas where primary
care practices can positively or negatively aff ect
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 319
Much branding activity in health care has centered on promoting and creating identities for health care systems. However, customers are not interested
in abstract systems, but rather the physician and nurses who care for them in
a hospital that they have been aware of and perhaps preferred for decades.
Although preference for a new brand can be built over time, in most cases it
is less expensive and more effective to leverage and extend the existing brand
name. HCA HCA Holdings, Inc. has used this strategy effectively.
Pre-Service Pricing Decisions
Pricing health care is extremely diffi cult because it is a service that consumers
would rather not have to purchase. Consumer perceptions of high price equals
high quality and low price means low quality and you get what you pay for
operate in health care, yet most consumers do not have the ability to judge
quality. In addition, consumers rarely know upfront pricing and payments must
be met regardless of outcomes making price and quality comparisons diffi cult.
Further, in many instances third-party payers separate consumers from the actual
costs of care. Finally, health care providers have a great deal of diffi culty determining their costs and then deciding on a price. Competitive negotiations with
third-party payers looking for lower prices have led some health care providers
to prices that are too low, thereby threatening the provider s long-term viability.
the brand perception of their practices. These
are:
1. Create a culture of service. Help callers
avoid voice mail by providing real people
when a patient calls.
2. Check in on sick patients. It is important
for doctors to stay updated on a patient s
progress.
3. Provide more information on specialists
to whom you refer patients. Preparing an
information sheet on the specialists with
biographical information, picture, and a
map to their offi ce can greatly reduce the
anxiety patients often feel when referred
to another doctor.
4. If you haven t already done so, convert
to an electronic medical record. This
greatly streamlines the experience of the
patient.
5. Consider evolving the practice to become
a patient-centered medical home. It is
valuable to be the medical practice people
seek to coordinate all their medical care.
Once the brand identity has been established,
the leader must ensure that every employee
who interacts with patients reinforces the brand
image. Even employee appearance can infl uence the brand image. One brand consultant
jokingly asked, Would you go to a dentist if the
receptionist had two front teeth missing?
Training and education are important in
ensuring employees eff ectively serve as brand
ambassadors. Employees must be provided
with the tools they need. Now is a particularly
good time for health care organizations to
explore and strengthen their brand images. Thinking about the desired brand image and how it
can be supported by employees is an essential
consideration for every medical practice.
Source: Lin Grensing-Pophal, Practice Branding Starts from
Inside, Medical Economics 88, no. 14 (2011), pp. 3638.
320 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Government reductions for Medicare and Medicaid patients have resulted in
reimbursements that are frequently below the cost of providing care. Thus, some
providers have opted not to serve Medicare or Medicaid patients.
In health care, low-price strategies must be selected carefully because
few people want to think that they are receiving cheap (poor-quality) care.
Although cost leadership strategies are generally associated with having low
costs that can be translated into low prices, a high-price strategy can effectively
position an organization as a high-quality health care provider; however, the
consumer must perceive that the benefi ts (esthetically pleasing surroundings,
attentive care, latest technology, and so on) are worth the high price.
Based on the services offered, the ability of the consumer to pay, and the cost
to deliver the service, the health care organization determines a price. No magic
formulas exist to determine prices and some government mandates about serving every patient that shows up at the emergency room door regardless of the
ability to pay, for example, make pricing an even more challenging task.
Pre-Service Distribution/Logistics
The location of the health care provider will impact the number of people who
seek its services. A location that is attractive because of its proximity to patients
homes and work is a valuable asset, especially if other health care providers cannot duplicate the location. Because people do not want to travel great distances
for most health care, demographic studies of population are an important part
of choosing a location for a facility. Satellite offi ces and hospital branches have
become increasingly important as busy patients value convenience. Although
satellite offi ces/hospitals do not typically cut costs for the organization, they
do cut costs for the patient, which can lead to an increased market share and
improved effi ciency for the health care provider.
Some hospitals are fi nding it worthwhile to establish education centers in shopping malls. Other health care organizations have established limited primary care
facilities in grocery stores. Furthermore, many hospitals have established urgent
care centers in multiple locations throughout a city; extended hours and a known
brand name from the local hospital are appealing to consumers. Urgent care
facilities have been used to draw people away from using the hospital emergency
room, a costly place to deliver primary care. In Louisville, Kentucky, for example,
FastCare (now The Little Clinic) began operating medical kiosks offering basic services in two Kroger grocery stores. According to the vice president for diagnostic
services, The convenience factor is what really drives people in. 15
Mobile units are another method of achieving the optimum in health care
delivery. Long practiced by the Red Cross to gain more blood donations, other
institutions are using movable diagnostic equipment to be closer to patients.
Numerous mobile mammography units are in operation in the United States to
increase women s use of this excellent but expensive tool. 16
Pre-Service Promotion
Promotion includes: advertising; public relations events (baby birthday parties,
health fairs, cancer survivor celebrations, and so on); personal selling; sales promotion (contests, participation in trade shows, and so on); and direct marketing
(internet, direct mail, and so on.) The promotional elements work in combination
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 321
to be able to communicate a message to various consumers and stakeholders
of health care organizations. For example, hospitals have learned that increased
amounts of advertising alone will not fi ll more beds and that great advertising
might set customer expectations higher than the organization could deliver.
Advertising works best when there is an identifi ed product or service that meets
consumers needs. Branding helps consumers to know the service to seek and
reminds them where they can obtain health care when they have a need for it.
Personal selling has been used more extensively in health care as various
organizations compete to be the provider of choice in managed care plans. In
addition, personal selling has come into play as health care providers compete
for employees that are in short supply. Direct marketing through social media
(Facebook, Twitter, LinkedIn, Pinterest, blogs, and so on) provides another touch
point for consumers to interact with a health care provider and each other, to
share experiences good and bad. Many potential consumers will check for
reviews and fi nd them a credible tool for information.
Matching Pre-Service to the Strategy
It is important that service characteristics and the target market are appropriate
for the selected strategy. In addition, the price, brand, promotional activities, and
logistics for services must contribute to the accomplishment of the directional,
adaptive, market entry, and competitive strategies. The services delivery activities
were assessed and classifi ed as competitive advantages or competitive disadvantages in the internal analysis phase of situational analysis. As shown earlier in
Exhibit 83 , the attributes of the current pre-service activities must be compared
with the service characteristics, target market, price, brand, promotional activities,
and services logistics that are required by the strategy. Results of this assessment
will determine whether the strategic managers need to create implementation
strategies to maintain or change the pre-service activities.
Maintaining Pre-Service Activities When the requirements of the strategy
match the current pre-service strengths and needs of the customers, then strategic
managers should focus on maintaining those strengths, giving particular attention
to those areas that have created competitive advantage. For example, if during
internal environmental analysis, a brand name was evaluated as a strength having
high value (H), was rare (Y), was diffi cult to imitate (D), and was sustainable (Y),
resulting in HYDY, maintaining the effectiveness of the brand name is particularly
important. Allowing such a strength to weaken may lead to the loss of an important
competitive advantage. Similarly, maintaining a strong brand name would be important when strong brand names are common (not rare) among competitors (HNDY).
In this situation, strong brands have likely become a minimum condition for success. Therefore, in maintaining pre-service activities, strategic managers should:
Engage in periodic customer focus groups and market research to understand the wants, needs, and desires of the organization s target markets
and whether they are or are not being satisfi ed.
Monitor the demographic, psychographic, and health status characteristics of the service area (with particular attention to trends in the target
markets).
322 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Continually communicate to physicians, patients, third-party payers, and others concerning the type and range of services offered, pricing, and branding.
Monitor promotional effectiveness.
Monitor customer ease of system entry (logistics).
Changing the Pre-Service Activities Pre-service activity changes can be
diffi cult and may require considerable market research as well as promotion.
In internal environmental analysis, where the requirements of the strategy call
for different services, a different or additional target market, changes in pricing,
branding, or promotional activities, change strategies should be initiated. In
addition, where signifi cant competitive disadvantages have resulted because of
ineffective pre-service activities, it is likely that change strategies will have to be
initiated. For example, where the promotional strategy was viewed in internal
analysis as a weakness, of high value, the weakness is common among competitors, diffi cult to correct, and competitors can sustain their advantage (HYDY),
change strategies should be initiated particularly where competitors may act to
develop an effective promotional strategy and achieve a signifi cant competitive
advantage. Similarly, where an organization has a weak promotional strategy and
other organizations have effective promotions that are diffi cult to imitate and can
be sustained (HNDY), strategic managers will need to initiate change. Strategic
managers who want to change pre-service activities should:
Change the services attributes to better match the expectations of the target market.
Train employees to better provide the new services.
Redefi ne the target market to match the changing demographic, psychographic, and health status characteristics of the service area.
Provide price discounts or price classes among members of the target market.
Change the balance among advertising, personal selling, and direct marketing (one-to-one marketing).
Brand individual products (as opposed to the organization s name as the
brand).
Redesign accommodations, dining experience, parking lots and signage.
Point-of-Service Activities
Point-of-service is a transformational process that incorporates an organization s
resources, competencies, and capabilities its assets into value-adding service
delivery. Health care was a cottage industry for centuries. Specialization, cost
pressures, and the actual work being done have taken health care from being
totally customized for the individual patient in his or her home to an attempt to
treat patients more similarly so as to develop economies of scale. Placing people in hospitals, outcomes measures, formularies, and so on, focus on treating
patients more alike the industrialization of health care. Most Americans and
their physicians do not like it. Moreover, the system has become so complex
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 323
and technical that it is diffi cult for providers to communicate effectively with
patients, as illustrated in Perspective 83 . The best service delivery differs for
each organization depending on their strategies developed during strategy
formulation.
PERSPECTIVE 83
Do Patients Really Understand What You Are Saying?
When researchers at Boston University Medical
Center (BUMC) redesigned their discharge process, they wanted to be absolutely sure every
detail in the written materials was clear to everyone patients with limited literacy skills to technically oriented clinicians. To ensure this, they
convened focus groups to vet the paperwork
for medical jargon and unclear instructions. The
researchers learned not to assume anything. One
staff person related that after observing several
focus groups he was horrifi ed when one participant stated I really like this stuff and I think it s
nice and understandable. But what part of the
body is this discharge coming from? Now the
discharge paperwork that patients receive has a
new title: After Hospital Care Plan.
The project director says this story illustrates
the sometimes hidden comprehension gaps that
can hamper optimal medical care. The federal
government estimates that 80 million Americans
navigate the complexities of the health care system without suffi cient literacy skills.
BUMC and numerous other hospitals are
assisting patients to navigate the complex health
care system removing jargon from informational
materials as well as revamping signs in the hospital. Clinicians are also being encouraged to
develop bilingual skills. Increasingly, research is
showing a relationship between health literacy
and an individual s health. Poor literacy skills are
associated with diffi culty taking medications
and overuse of emergency departments.
Experts emphasize that communication is
more than written and oral language. Skillful clinicians look beneath apparent issues and watch
for non-verbal cues and unasked questions.
Unfortunately, some literacy programs can be
expensive, especially if they involve numerous signs and written materials. Despite of the
potential costs, a number of health care organizations have developed programs to address
the literacy problem. Some examples include:
Twin Rivers Regional Medical Center in
Missouri launched an initiative to assist
patients in understanding medical instructions when they are sent home.
At Coney Island Hospital in Brooklyn, New
York clinicians are encouraged to wear
Ask Me 3 buttons, which is a program
developed by the National Patient Safety
Foundation. This program encourages
patients to ask doctors and nurses three
important questions. (1) What is my main
problem? (2) What do I need to do? (3) Why
is it important to do what you suggest?
Health care organizations cannot aff ord to
ignore the potential cost of confused patients. In
the future, Medicare s focus on readmissions may
convince even more hospitals, medical practices,
and long-term care organizations to devise ways
to increase the literacy skills of their patients.
Source: Charlotte Huff , Does Your Patient Really Understand?
Hospitals & Health Networks 85, no. 10 (2011), pp. 3538.
324 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Point-of-Service Clinical Operations
The appropriate model of health care delivery is based to a great degree on the
care required. If health care were divided into three sectors acute illnesses with
quick recovery, signifi cant illnesses (chronic but manageable), and catastrophic
illnesses (AIDS, cancer, and so on) each accounts for approximately one-third
of the health care dollar in America. However, the latter two represent 10 percent of the population. In other words, 90 percent of the population represents
short-term treatable illnesses where the volume is high, but costs are low per
episode and copayments and deductibles have a measurable impact. Technology
can improve effi ciencies in this sector. For signifi cant and catastrophic illnesses,
health care providers can increase effi ciencies through understanding the
choice of processes and selecting the one most suitable for patients care (mass
customization). 17
Mass Customization Mass customization may be the way to capture the
customer-friendly benefi ts of long-term physicianpatient relationships plus
the cost-careful benefi ts of capitation for survival in today s health care market.
Mass customization can be accomplished by a series of modular approaches to
prevention and care, highly articulated and well supported by information technology (Exhibit 86 ). Clinical pathways represent an example of mass customization. Pathways represent the best known way to treat the patient; however, the
path still has to be applied on the basis of the individual patient s background,
medical history, health status, and so on. 18 Recognizing that people are different,
this synchronization of the implementation of the modules or co-confi guration,
must be determined by the providers. 19
EXHIBIT 86 Increasing Quality through Mass Customization
Renewal
Networking
Mass Customization Co-configuration
Craft
Development
Linking Process
Enhancement
Integration
Development
Mass Production
Development
Renewal
ART SCIENCE
Modularization
Source: Reprinted from C. P. McLaughlin and A. D. Kaluzny, Defi ning Quality Improvement, Continuous Quality Improvement in
Health Care , 2nd edn (Sudbury, MA: Jones and Bartlett Publishers, 1999), p. 15. Reprinted with permission www.jbpub.com .
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 325
Mass customization requires that a suffi cient number of people have the same
disease or diagnosis. For example, Medco Health Solutions has effectively created mass customization through segmentation based on diagnosis. The mass
customization digs down another level to differentiate clinical needs among
people in a single disease category (diabetes) that is large enough to warrant
separate contact but not too small to present an administrative burden. In these
cases true customization is not cost justifi ed, but one-size fi ts all programs
standardized or mass programs are not effective either. Mass customization falls
somewhere in between and prevents therapy gaps within categories, such as the
gap between diabetics who have only a few health problems and diabetics who
require frequent medical attention. 20
Quality of Operations The trust in the health care system has diminished
because of reports in the media over managed care s failures as well as the
Institute of Medicine s study indicating that as many as 98,000 deaths per year
are because of medical errors. The greatest opportunity a health care organization has is the day-to-day interaction between caregivers and patients. 21 Every
person in a health care organization has some responsibility for its image.
Historically, hospitals have concentrated on meeting the expectations of physicians, and then more recently physicians and third-party payers. The structure
of the health care industry has enabled it to circumvent a customer orientation
that most other segments in the services industry have had to adopt. 22 Various
environmental changes are creating the need for health care to be more responsive to the wants, needs, expectations, and requirements of patients for information, convenience, and personal control. 23 Recently, attempts have been made
to rank health care organizations on the basis of clinical quality. However, as
suggested in Perspective 84 , rankings are diffi cult because there is a lack of
agreement over the assumptions underlying the ranking attributes and some
of the implications may be misleading.
PERSPECTIVE 84
To Err is Human But in the Hospital!
Hospitals are great places to be when you are
ill. Unfortunately, they are also plagued by daily
errors and mistakes. For example, it is estimated
that surgeons in the United States operate on
the wrong person or body part 40 times a week.
In 1999 the Institute of Medicine issued a report
with the startling fi nding that each year as
almost 100,000 Americans die in hospitals from
preventable medical mistakes. And, there is no
reason to expect that the situation has improved
much over the past decade. A report released
on Medicare patients found that hospital staff
did not report 86 percent of the mistakes that
adversely aff ected patients. Even more alarming
326 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
is a report by Health and Human Services stating that one in every seven Medicare patients
suff ered serious or long-term injury or died as a
result of hospital care. Mistakes take many forms
surgeons cut healthy blood vessels, nurses mistakenly administer a toxic dose of medicine, or
staff fail to disinfect a room. As a result, the number of patients who die each year from preventable hospital errors is equal to four full jumbo jets
crashing each week!
Many of the problems arise from the complexity of modern medicine. Some experts suggest that medical practitioners could learn from
the aviation industry s use of simple checklists.
This is not to suggest that no progress is
being made. For years it was thought that
bloodstream infections resulting from the insertion of a tube into a large vein near the heart to
deliver medications were largely unavoidable.
As a result, 30,000 deaths annually resulted
from these infections. However, a program
initiated in 2004 at more than 100 Michigan
intensive care units managed to reduce these
infections by two-thirds and save 1,500 lives
in just 18 months. Major improvements were
accomplished by using a short checklist for handling catheters and getting all staff on board.
Challenges remain. Only about half the hospital workers follow hand-washing guidelines
despite of intensive training and generous availability of hand sanitizer dispensers. Other measures for reducing problems have been more
eff ective.
For example, public reporting of hospital
performance was unheard of a decade ago.
Twenty-nine states now require public reporting of hospital infection rates and 28 require
some information on medical errors. The Health
and Human Services agency has added a key
catheter infection rate reporting. The debate
continues on what data should be reported.
In 2008, Medicare began restricting payments
to hospitals with extra costs associated with
10 hospital-acquired conditions and it will provide extra money to hospitals that score the
highest on a set of standards linked to better
patient outcomes.
It remains a diffi cult task to compare the
safety records of hospitals. Existing data does
not allow patients to be sure they selected the
safest hospital. Even within hospitals it is diffi cult if not impossible to compare the safety
record of one unit with another. Because one
unit is excellent with regard to patient safety
does not mean all units are equally safe.
Source: Katharine Greider, The Worst Place to Be If You re Sick,
AARP Bulletin 53, no. 2 (2011), pp. 1014.
The National Committee for Quality Assurance (NCQA) developed by large
employers provides the Healthplan Employer Data Information Set (HEDIS) to
compare individual managed care health plans. The intent was to create a database that the participants (consumers or employers) could use to compare the
performance of their health plans against other health plans on a consistently
measured and reported set of criteria.
Neither the Joint Commission (JCAHO) nor the HEDIS data can be correlated
with Consumer Report satisfaction studies. The fact that mammograms are done
(a HEDIS measure) does not mean women are happy with the way they are done (a
measure of patient satisfaction). Health care providers are more responsive to
patients, at Lakeland Regional Medical Center, a large multiservice facility in Florida.
CHAPTER 8 VALUE-ADDING SERVICE DELIVERY STRATEGIES 327
Lakeland Regional discovered during a planning retreat that the time allocated
to coordination and scheduling of procedures was almost the same as the time
spent in providing services. Red tape and increasingly specialized jobs made
relatively simple procedures seem overly complex to the patients. In addition,
customers had to repeat the same information to a variety of staff. A patient
might come into contact with as many as 60 different employees. 24 The quality
of clinical care received by patients was not perceived to be as good as it actually
was because of the way care was delivered (see Exhibit 87).
Labor-intensive services are diffi cult to automate, but not impossible. Blood pressure checks have been automated. Additionally, a fi nger stick for routine blood work
could be done by a machine; but would the public accept a machine instead of a
nurse? In a different but important service industry, many bankers held on to their
beliefs that consumers would want to talk to a real person when cashing checks or
depositing money. Those banks that were the fi rst to automate with teller machines
have been very profi table. Similar results may be achieved in health care.
Clinical Process Innovation Clinical process innovation (or CPI) is defi ned
as the generation, acceptance, and implementation of new ideas, tools, and/or
support systems aimed at improving clinical processes and, ultimately, patient
care. 25 It differs from continuous quality improvement (CQI) in that CQI focuses
on improving existing clinical processes for performance improvement. CPI is a
contextual and critical appraisal of current clinical processes to identify opportunities for more effectively providing care. As Michael Hammer explains, Operational
innovation should not be confused with operational improvement or operational
Trustees, administrators, and medical and nursing leaders should ask themselves the following key
questions to determine whether their organization s environment places patients and families fi rst:
Do the hospital s vision, mission, and philosophy of care statements refl ect the principles of
family-centered care?
Are the vision, mission, and philosophy communicated clearly throughout the hospital, to
patients and families, and others in the community?
Do patients and families serve as advisers to the hospital? In what ways are the patients and
families involved in the orientation and education of employees? In the design planning
process?
Are hospital policies, programs, and staff practices consistent with the view that families are allies
and important to patient well-being? Are families considered visitors?
What systems are in place to ensure that patients and families have access to complete, unbiased, and useful information?
Does the hospital s human resources system support the practice of family-centered care?
In academic medical centers, how do the education programs prepare students and professionals in training for family-centered practice?
Source: Institute for Family-Centered Care, Bethesda, Maryland.
EXHIBIT 87 Key Questions for Determining Patient- and FamilyOriented Care
328 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
excellence. Those terms refer to achieving high performance via existing modes of
operation Operational innovation means coming up with entirely new ways
of fi lling orders, developing products, providing customer service, or doing any
other activity that an enterprise performs. 26 In recent years a considerable amount
of interest has developed in operational innovation in the clinical setting. Research
has looked at the relationship between innovation and quality, improvements
related to information technology innovations, and a variety of other areas. 27
Through the fi rst decade of the 21st century, providers need to realize that
consumers who want more control over their health care will have it through
consumer advocacy groups, increased competition, and unprecedented access to
information. If customers do not receive the care they want, they will change
to another provider. Physicians have to be willing to listen to patients talk about
other treatments and how alternative therapies might blend with more traditional medicine to improve health. 28 Consumers who use alternative therapies
are middle- to upper-class, well-educated people with good jobs and money to
spend on whatever they believe to be important for their health care. 29
Point-of-Service Marketing
Physicians are an integral part of the health care system. As such, hospitals and
health systems have tried a variety of models to incorporate physicians into the
new systems. Thus far, none of the models (as depicted in Exhibit 88 ) has really
worked. Perhaps that is because none of these models focuses on the physician
patient relationship. A renewed patient focus is not only the best way to serve
our customers and patients, it is also a business imperative for any organization
that wishes to survive into the next era of health care. 30 Some strategies in
which physicians and health systems can work together to achieve patient goals
include redesigning service lines around enhancing the patient experience rather
than around fi nancial aspects of delivery of care, multispecialty physician care
teams based on consumers needs, physician outreach programs to determine
ways that physicians believe patient care can better be delivered, increasing
physicianpatient communications since physicians are frustrated by the lack of
time they can spend with patients, and agreeing on measurements for success.
Health care providers must understand their current situation in the market.
How well are