Strategic Management of Health Care Organizations


Strategic Manageme n t
of Healt h Ca r e
Organization s

E i g h t h E dition
Strategic Management
of Health Care
Peter M. G inter
University of Alabama at Birmingham
W. Jack Du ncan
University of Alabama at Birmingham
L inda E . S wayne
University of North Carolina at Charlotte
Cover Design: Wiley
Cover Image: Jamie Grill/Getty Images
2018 Peter M. Ginter, W. Jack Duncan, Linda E. Swayne. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Previous editions published under the Jossey-Bass imprint by John Wiley & Sons, Ltd. Seventh edition
published 2013.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Names: Ginter, Peter M., author. | Duncan, W. Jack (Walter Jack), author. |
Swayne, Linda E., author.
Title: Strategic management of health care organizations / by Peter M.
Ginter, University of Alabama at Birmingham, W. Jack Duncan, University of
Alabama at Birmingham, Linda E. Swayne, University of North Carolina at
Description: Eighth edition. | Hoboken, New Jersey : Wiley, [2018] | Includes
bibliographical references and index. |
Identifiers: LCCN 2017051205 (print) | ISBN 9781119349709 (hbk)
Subjects: LCSH: Health facilitiesAdministration. | Strategic planning. |
Mission statements. | BISAC: MEDICAL / Nursing / Management & Leadership.
| HEALTH & FITNESS / Health Care Issues.
Classification: LCC RA971 .D78 2018 (print) | DDC 362.1068dc23
LC record available at
ISBN 978-1-119-34970-9 (hbk)
ISBN 978-1-119-34969-3 (ebk)
ISBN 978-1-119-34971-6 (ebk)
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
C ontent s
Preface xiii
Features of the Text xiv
Organization of the Text xvi
To the Students: Why This Book About Strategic Management Is Important xviii
The Author Team xviii
Acknowledgments xix
Chapter 1 The Nature of Strategic Management 1
Chapter 2 External Analysis 37
Chapter 3 Service Area Competitor Analysis 79
Chapter 4 Internal Analysis and Competitive Advantage 121
Chapter 5 Directional Strategies 163
Chapter 6 Identifying Strategic Alternatives 205
Chapter 7 Evaluation of Alternatives and Strategic Choice 259
Chapter 8 Value-Adding Service Delivery Strategies 313
Chapter 9 Value-Adding Support Strategies 359
Chapter 10 Communicating Strategy and Developing Action Plans 401
Resources for Strategic Thinkers
Resource 1 Analyzing Strategic Health Care Cases 431
Resource 2 Health Care Organization Accounting, Finance, and
Performance Analysis 443
Resource 3 Health Care Acronyms 463
Resource 4 Glossary of Strategic Management Terms 471
vi Contents
Cases in the Health Care Sector
Case 1 Cottage Senior Living
Case 2 Asian Health Services: Rediscovering a Blue Ocean
Case 3 Community Blood Center of the Carolinas: Building for a Better
Case 4 Navigating Change at Alaskas Southcentral Foundation
Case 5 LINET Americas: This Bed Is Just Right!
Case 6 West Kendall Baptist Hospital: Meeting the Demand of CommunityBased Health Care in the New (and Stormy) Regulatory Environment
Case 7 Humanas Bold Goal: 20 Percent Healthier by 2020
Case 8 Pricing the EpiPen: This Is Going to Sting
Case 9 Cavalier Hospital
Case 10 Pleasant Bluffs Hospital: Launching a Home-Based Hospital Program
Case 11 Kaiser Permanente: Creating a No-Wait Emergency Department
Case 12 ExAblate Neuro
Case 13 Huntington Hospital
Case 14 Valley Health
Index 495
C a s e s
For book adopters, the following cases from the health care sector are available on
the books website,
Case 1 Cottage Senior Living
Andrew C. Rucks, PhD
School of Public Health, University of Alabama Birmingham
Cottage Senior Living (CSL) was a family owned assisted-living company
headquartered in Huntsville, Alabama. CSL had developed or acquired nine
continuing care retirement communities (CCRCs) in seven locations in Alabama
and one each in Mississippi and Tennessee. CSL operated in a highly-controlled
environment with regulations stipulating staffing and building requirements.
The leadership team of CSL assembled at a strategic planning retreat to move
the business to the next level. The purpose of the retreat was to answer three
questions: (1) How to grow? (2) Where to grow? and (3) Do we have the organizational capacity to grow?
Case 2 Asian Health Services: Rediscovering a Blue Ocean
Ken Chung, PhD and Wendell N. Chin, MBA
California State University at Eastbay
Asian Health Services (AHS) is a not-for-profit community health care provider
that focuses on serving ethnic Asians in Oakland, California. With the advent
of the Affordable Care Act (ACA or Obamacare), AHS had been preparing
vigorously for significant changes. Now that the initial operational systems were
in place, AHSs CEO Sherry Hirota must decide what proposals to include in a
coherent blue ocean strategy presentation at the upcoming board meeting that
balanced AHSs dual mission of social benefit against generating more revenues
than costs. Looming threats included payments moving from pay-for-service to
pay-per-patient or even pay-for-value. As the original founders had identified a
blue ocean (i.e. uncontested markets) in the health care environment 40 years ago,
now Hirota must find another blue ocean.
Case 3 Community Blood Center of the Carolinas: Building for a
Better Community
Linda E. Swayne, PhD
Belk College of Business, The University of North Carolina at Charlotte
In early 2010, Martin Grable, President of the Community Blood Center of
the Carolinas (CBCC), was ready to move the first community blood center in
viii Cases
North Carolina to a new level. In a strategic planning retreat, he asked the Board
of Directors to evaluate seven strategic options for CBCC. Although all of the
alternatives were needed by the community, CBCC did not have unlimited
resources. Further, health care reform loomed on the horizon. Clearly, to serve
the community, CBCC needed not only to survive, but to thrive in the near term.
Which of the alternatives would allow achievement of that goal for the newest
FDA-licensed community blood center?
Case 4 Navigating Change at Alaskas Southcentral Foundation
Erin E. Sullivan, PhD, and Jessica L. Alpert
Center for Primary Care, Harvard Medical School
Long-time president and CEO Katherine Gottlieb reflected on a recent meeting
of Southcentral Foundations (SCF) board of directors where CEO succession
planning was discussed as she contemplated retirement. The case provides
background information about Alaska, the American Indian and Alaska Native
(AIAN) health care system, and reviews SCFs mission, vision, and key tenets of
the organizations culture: customer-ownership, core concepts, and continuous
improvement. SCFs approach to hiring and developing its workforce and its governance structure are highlighted as background for Gottliebs concerns in choosing the next CEO: maintaining SCFs culture, choosing an internal or external
CEO, and identifying the top three qualities that SCFs next leader must embody.
Case 5 LINET Americas: This Bed Is Just Right!
Linda E. Swayne, PhD
Belk College of Business, The University of North Carolina at Charlotte and Colin Bain,
President and CEO, LINET Americas
LINET was the leading manufacturer of ICU (intensive care unit) beds in Europe.
In 2010 LINET Americas began competing with the two largest U.S. bed manufacturers, Hill-Rom and Stryker, by marketing to smaller hospitals based on lower
prices and better safety features for caregivers. Hill-Rom and Stryker noticed and
head-to-head competition began. Hill-Rom lowered its prices and extended its
warranty to match two of LINET Americas competitive advantages; however,
the innovative design was much harder to match. President and CEO Colin Bain
needed to determine how he could continue to grow LINET Americas, especially
when the company was blocked out of the largest group purchasing organization
(GPO) that was offering Hill-Rom or Stryker ICU beds.
Case 6 West Kendall Baptist Hospital: Meeting the Demand of
Community-Based Health Care in the New (and Stormy)
Regulatory Environment
Miriam Weismann, PhD, and students Javier Hernandez Lichtl, Heather Pierce,
Denise Harris, Lourdes Boue, and Cathy Campbell
Florida International University
The first three years of operation of the West Kendall Baptist Hospital in Miami
provided a poster child for efficient and cost-effective health care delivery to
Cases ix
the West Kendall community. The 133-bed facilitys mission was to promote the
preservation of life by improving the health and well-being of its constituents.
WKBH exceeded every budget prediction and showed a profit in year 3; however,
with the passage of the Affordable Care Act, the situation changed almost overnight. By the first quarter 2016, WKBH started to lose money in excess of budget
predictions, despite its increased patient admissions, careful financial planning,
expense reductions, quality service, and excellence in patient care delivery. A
serious financial crisis loomed with little relief in sight; the management team was
searching for solutions.
Case 7 Humanas Bold Goal: 20 Percent Healthier by 2020
Nancy M. Kane, DBA with the assistance of Deborah Milstein
Harvard T.H. Chan School of Public Health
Humana, Inc., headquartered in Louisville, Kentucky, was the fourth largest
U.S. health insurance firm with annual revenues of $54.3 billion, membership
of 14.2 million, and 50,100 employees in 2015. The company served members in
17 states plus the military. Under the leadership of CEO Bruce Broussard, Humana
was attempting to shift its focus from paying claims to improving the health of
beneficiaries. Humana set an aspirational Bold Goal of improving the health
of the communities we serve by 20 percent by 2020 because we make it easy for
people to achieve their best health. Dr. Andrew Renda, hired as Director, Bold
Goal Measurement, knew that senior leaders understood that it would take time
to change population health, yet they wanted to see some results quickly.
Case 8 Pricing the EpiPen: This Is Going to Sting
Thomas J. Steenburgh, PhD
The Darden School of Business, University of Virginia
Mylan Inc., a generic drug manufacturer, bought the EpiPen product line from
Merck, invested in marketing, and dramatically increased the price from $100 to
$600 per two-pack, igniting consumer anger and provoking a media firestorm.
Congress was compelled to step in, demanding to know how Heather Bresch,
CEO of the company, could justify the high price of EpiPens. Such health care
companies face a tension between doing good in the world and making a profit.
Is it fair for drug prices to vary so dramatically across countries (as the EpiPen is
priced at $85 in France)? How should such a public controversy be resolved?
Case 9 Cavalier Hospital
Kenan W. Yount, MD MBA under the supervision of Michael J. Schill, PhD
The Darden School of Business, University of Virginia
A midsize (650-bed) community not-for-profit hospital, located in south central
Virginia, chose an expansion strategy in 2008 by bringing all its cardiology under
one roof in a new comprehensive care center. Impressive results drew the attention
of several insurers who approached Cavalier Hospital, each hoping to include the
hospital in its network of physician providers. In preparation for his first board
meeting, the physician director wanted to assess the hospitals overall financial
condition to determine which strategies should be pursued next: focusing on
acquiring patient volume, expanding investment into integrated care, setting the
reimbursement structure for revenue collection, or moving to a capitation-based
payment system. The evaluation of revenue models would help him understand
which alternatives could best be supported for the business strategy.
Case 10 Pleasant Bluffs: Launching a Home-Based Hospital
Laura Erskine, PhD
Ivey Business School, University of Western Ontario
Pleasant Bluffs Health System was a Level I Trauma Center with 400+ licensed
beds that provided outpatient care, acute and subacute care, biomedical research,
and graduate and undergraduate education. Pleasant Bluffs wanted to create a
pilot program for home-based hospital care. Graft Salot, as the director of the
hospitals Performance Improvement (PI) department, was asked to recommend
the pilot programs location, duration, eligible population, and possible changes
to the intake process. Salot must consider issues related to an educational program
about home-based care and an implementation strategy for it as well as a cost/
profit comparison for providing care in the hospital versus home-based care.
Case 11 Kaiser Permanente: Creating a No-Wait Emergency
Edward D. Arnheiter, PhD
Ivey Business School, University of Western Ontario
Kaiser Permanente, based in California, was a vertically integrated health care
system comprised of 38 hospitals, 619 medical offices, and 10.1 million members in eight western U.S. states. In 2007, the emergency department at South
Sacramento was experiencing long patient wait times; it became clear that a
better way was needed. Changes were made from 2007 until 2015 by Dr. Karen
Murrell, leader of the LEAN program, and her flow group, to significantly
improve many key performance measures of the emergency department. In
2016, she was wondering whether there were any additional ways to create
capacity in the ED.
Case 12 ExAblate Neuro
Matthew Thames, MBA/MD under the supervision of Robert E. Spekman, PhD
The Darden School of Business, University of Virginia
InSightec, a privately-held Israeli company, developed a new medical device,
ExAblate. Focused ultrasound provided precise concentration of sound waves to
act on a particular part of the body; the guidance of magnetic resonance imaging
(MRI) technology allowed for non-invasive, targeted destruction of diseased tissue. The company required a marketing strategy, navigating a number of barriers
that could impinge on its ability to successfully introduce the new technology. The
FDA approved its use for removing uterine fibroids and bone metastases. Yet the
holy grail of this technology was the application to the brain. InSightec needed to
x Cases
develop a go-to-market strategy for ExAblate Neuro, which was intended to treat
essential tremor (ET) and other diseases, such as Parkinsons, for which there was
no cure at present.
Case 13 Huntington Hospital
Davina Drabkin and Sarah Soule, PhD
Stanford Business Graduate School, Stanford University
Located in Pasadena, California, Huntington Hospital (HH) was a 625-bed notfor-profit organization named among the top-performing hospitals in 2012 by
U.S. News & World Report. To further HHs focus on high-quality, patient-centered
care, Jim Noble, Executive VP-COO/CFO, was looking for a change in direction,
particularly in the Business Services Office. Accounts Receivable (AR), a key billing metric, could be lower; Noble hired Kim Markey with the mandate to improve
performance. Markeys long-term vision involved re-examining the revenue
cycle and the hospitals processes to ensure that HH would become a stronger
performer. She needed to get her metrics under control as a first step before transforming the departments she oversaw into truly patient-focused business centers.
Case 14 Valley Health
S. Hughes Melton, MBA under the supervision of Alexander B. Horniman, PhD
The Darden School of Business, University of Virginia
Felton Wayne, MD, began his career in private practice with a friend. After
ten years of developing the practice, he sold his share and Dr. Wayne joined
the much larger practice of Valley Health (VH) that had recently merged with
Franklin Memorial Hospital (FMH). He was appointed Chief Medical Officer
(CMO) and was responsible for the North Carolina organization. The medical
staff was unhappy and many physicians left; two CMOs left before Dr. Wayne
took up the position. During a feedback session with John Richmond, from the
South Carolina division of VH, Dr. Wayne was stunned to discover that Richmond
considered him a cowboy! Dr. Wayne personally thought he was doing a good
job of developing a better working environment.

Almost three 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 for the first edition of this text (1992) that health care organizations
have had difficulty in dealing with a dynamic environment, holding down
costs, diversifying wisely, and balancing capacity and demand. Our conclusion
was that only health care organizations with 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 system
has been far greater than we imagined and now certainly exceeds the magnitude
of changes initiated with the passage of Medicare and Medicaid in the 1960s and
later in 1983 with the implementation of Medicares prospective payment system.
Significant change in health care continues as evidenced, first, by the passage of
the Patient Protection and Affordable Care Act (ACA) in 2010 and more recently
by the election of a new administration focusing once again on changing the
health insurance landscape and subsequently the rules for success for health
care organizations. Such regulatory changes, as well as significant economic,
technological, social, political, and competitive changes in health care are likely
to continue.
To cope with such alterations, by the late 1990s health care organizations
had universally embraced strategic management as the primary leadership philosophy and process for understanding and addressing change. The widespread
adoption of strategic management continues today as health care leaders have
found that strategic thinking, planning, and managing strategic momentum are
essential for coping with the dynamics of the health care system. We believe that
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 eighth edition continues to advocate the importance of strategic thinking and clearly differentiates strategic thinking, strategic planning, and strategic
momentum. These concepts represent the central elements of a complete strategic
management process that we believe reflect the realities of conceptualizing, developing, and managing strategies.
Specifically, our approach depicts strategic management as the processes of
strategic thinking, consensus building and documentation of that thinking into a
strategic plan, and maintaining 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
xiv Preface
become strategic thinkers with the ability to evaluate a changing industry, analyze data, question assumptions, and develop new ideas. Additionally, through
strategic planning, strategic managers must be able to create and document a plan
of action. 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 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 Strategic Momentum. We believe that this approach better reflects
how strategic control actually works in organizations as a part of managing the
strategy, not as an afterthought.
Although we present a structured strategic management process, we believe
that strategic management is highly subjective, often requiring significant 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 first 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 the foundation for effective strategic thinking, planning, and managing strategic momentum.
Features of the Text
We have incorporated some new features into this 8th edition of Strategic
Management of Health Care Organizations as well as retained features that users of
previous editions have said were informative, interesting, and a pedagogically
sound foundation for understanding and embracing strategic management of
health care organizations.
Retained Features
Retained from the 7th edition, Learning Objectives direct attention to the
important points or specific chapter elements that students should know
and be able to describe, explain, discuss, clarify, and justify.
We continue to emphasize analytical models, illustrative examples, and
informative exhibits to aid in learning chapter material.
As in the 7th edition, the Map and Compass provide a useful metaphor for
conveying the view that strategic leaders must both plan as best they are
able, but also learn, adjust, and establish new direction (develop a new
plan) as they progress.
Preface xv
Retained from the 7th edition, The Language of Strategic Management
Key Terms and Concepts, presents a list of the essential vocabulary and
terminology relative to the chapters material.
The Questions for Class Discussion focus on key chapter concepts and assist
the reader in reviewing the material and thinking about the implications of
the ideas presented.
We have retained our extensive end of chapter Notes, which contain the
references used in development of the chapter materials.
An even more extensive and easy to access Web-based Instructors Support
site is available to verified course instructors using the text. The support
material includes PowerPoint slides for each chapter, chapter lecture
notes that include suggestions for effective teaching, answers to the end
of chapter questions, example assignments and quizzes, the strategic
management case studies, and the instructors manual (teaching notes) for
the case studies. In addition, the Instructors Support contains a true/false,
multiple choice, and discussion question test bank and can be found at
New Features
Each chapter now begins with Why this Chapter Is Important, a brief chapter
introduction a call to action, providing a clear and compelling reason for
continuing to read and understand the concepts discussed in the chapter.
In addition to Learning Objectives, this edition identifies a Strategic
Management Competency that describes the overall applied skill that
students of strategic management should be able to demonstrate after
completing the chapter.
Each chapter now has a step-by-step process for accomplishing the
elements of strategic management discussed in the chapter. Thus, readers
are guided through a series of detailed steps for performing external
analysis, service area analysis, internal analysis, and so on through strategy
Newly introduced in the 8th edition, Essentials for a Strategic Thinker
are one-page sidebars that provide summaries of contextual concepts
important to understanding health care and the health care system. These
Essentials do not concern core strategic management concepts per se, but
rather provide concise descriptions of terms, institutions, or concepts in the
changing health care landscape that every strategic thinker should know.
New to this edition, Practical Lessons for Health Care Strategic Thinkers
provides bullet points (derived from the chapter content) containing
practical advice for those undertaking strategic thinking, strategic planning,
and managing strategic momentum.
For this edition we have eliminated the Introductory Incidents, which
provided a practical example of the concepts addressed in the chapter, and
instead included additional in-text examples more specific to the concepts
being discussed.
For this edition, four Resources for Strategic Thinkers are included at the end
of the text to assist readers:
Resource 1. Analyzing Strategic Health Care Cases
Resource 2. Health Care Organization Accounting, Finance, and
Performance Analysis
Resource 3. Health Care Acronyms
Resource 4. Glossary of Strategic Management Terms
The new Glossary of Strategic Management Terms (presented in alphabetic
order with the chapter noted) defines all the terms and concepts presented
in The Language of Strategic Management Key Terms and Concepts section
at the end of each chapter as well other terms referenced in the text that
students of strategic management should know.
Strategic Management Case Studies are returning to this edition in response
to user requests. These case studies, listed in the Table of Contents, are
unique to this edition and are available for download to verified course
instructors on the Web-based Instructors Support site (see
go/ginter8e). In addition, favorite case studies from the sixth edition of this
text as well as other selected cases written by the authors are available for
download from the support site.
Through our own teaching, research, and consulting in the health care field,
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. In addition, 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 ten chapters, four resources for strategic thinkers addressing the
philosophy and activities of strategic management, and 14 online case studies.
Chapter 1 introduces definitions for strategic management and its activities strategic thinking, strategic planning, and strategic momentum. The chapter discusses
the need and rationale for strategic management in todays turbulent health
care system and briefly traces its historical foundations. In addition, Chapter 1
presents 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 2 contains strategic thinking and planning maps for investigating the general environment, health care system, and service area. Chapter 3 narrows the external focus by providing strategic thinking maps for conducting service area competitor
analysis for a specific health care organization. Next in Chapter 4, an assessment of
the organizations internal situation is accomplished using the health care value chain
and an analysis of resources, capabilities, and competencies.
xvi Preface
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 encourages them
to think about their hopes for the organizations future; and building awareness
of organizational values makes members mindful 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 25 collectively
constitute situational analysis.
Strategy formulation is concerned with making strategic decisions using the
information gathered during situational analysis. Chapter 6 provides the decision
logic for strategy formulation and identifies an organizations strategic alternatives. The broadest decisions are made first and subsequent decisions more
explicitly define the strategy and must be consistent with previous decisions.
Chapter 7 discusses how to evaluate the strategic alternatives within each strategy type. These evaluation methods do not make the strategy decision; rather, the
constructs or maps help strategists think about the organization and its relative
situation, thus enabling them to understand the potential risks and rewards of
different 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 organizations action plans are directly tied to selected strategies. Chapter 8
addresses 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 they best contribute 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 10
demonstrates how strategy may be translated into organizational unit objectives,
timelines, 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 financial
resources. Each of these chapters reinforces the need to manage strategic momentum by thinking, planning, and doing, and then rethinking, new planning, and
Finally there are four Resources for Strategic Thinkers as a reference for users
of the text. The first resource, Analyzing Strategic Health Care Cases, presents
a methodology for case analysis for those using case studies to practice strategic thinking and planning. The second resource, Health Care Organization
Accounting, Finance, and Performance Analysis, serves as an accounting and
finance refresher and reference. The third resource, Health Care Acronyms, is a
quick source for definitions of the short-hand language of health care. Finally,
the fourth resource is a Glossary of Strategic Management Terms as used in
this text.
To the Students: Why This Book About Strategic
Management Is Important
Students often wonder about the relevance of various topics or courses they take.
They ask, How am I ever going to use this stuff? Well, if you are a part of a health
care organization, plan to join a health care organization, or even start your own
health care business, you almost certainly will be involved in strategic management
and particularly the strategic planning process in your organization you simply
cannot avoid it. Virtually all health care organizations, indeed, nearly all organizations, engage in some form of strategic planning. You may be asked to participate in
the strategic planning process by providing input, gathering data, or analyzing and
summarizing information. You may be asked to brainstorm changes in the industry
that will affect the organization. You may serve as team leader to produce a critical
part of the plan or you may even be asked to lead the process. Strategic thinking,
strategic planning, and managing strategic momentum are skills you simply have
to have if you are to be successful. Understanding strategic management and its
processes will give you a competitive advantage and possibly play a role in your
advancement in the organization. Additionally, strategic management and the concepts offered here can help you think about and plan for your personal life they
work equally well at a corporate, business, unit, or personal level.
Furthermore, effective leadership and management are inherently tied to strategic
management. After all, leadership is about setting direction and strategic goals for an
organization and management is about the effective and efficient use of resources to
pursue that direction and achieve those goals. When you understand strategic management you will have a better understanding of how to lead and manage organizations. This textbook will provide you with the necessary foundation for participating
in and leading a strategic planning process. In addition, you will understand why
organizations simply have to engage in strategic thinking, strategic planning, and
managing strategic momentum to develop and carry out effective plans. In doing so,
you will see why strategic management is so crucial in todays changing world.
We believe this textbook is essential for your long-term professional success
in a health care organization and will help you think about setting and achieving
your professional and personal goals.
The Author Team
Peter M. Ginter, PhD, is a Professor in the Department of Health Care
Organization and Policy in the School of Public Health at the University of
Alabama at Birmingham.
W. Jack Duncan, PhD, is Professor of Management and University Scholar
Emeritus in the School of Public Health and Graduate School of Management at
the University of Alabama at Birmingham.
Linda E. Swayne, PhD, is Professor of Marketing in the Belk College of Business
at The University of North Carolina at Charlotte.
xviii Preface
A number of people have provided inspiration, ideas, and considerable effort to
produce the eighth 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 in 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.
A special thanks to Andrew C. (Andy) Rucks for his Health Care Organization
Accounting, Finance, and Performance Analysis Resource; case study; and
Essentials for Strategic Thinkers as well as for his reviews of our draft chapters
and suggestions. In addition, we thank the case authors who crafted actual
organizational experiences into case studies for students to practice their strategic
management skills as well as a thanks to their subject organizations for their willingness to allow these case authors to document their experiences. Thanks to all
the Essentials for Strategic Thinkers authors and other contributors whose expertise greatly enriched the text and will further enhance the education of health
care strategic management students. Thank you to Lauren Wallace, our graduate
teaching and research assistant at UAB, who tirelessly worked with us on this text
and instructors materials, and supported our in-class and online teaching.
We must also thank our students (many of whom have become 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.
Without a map, one cannot begin the journey toward a dream, without a
compass one may not be able to find it.

Chapter 1
The Nature of Strategic
Why the Nature of Strategic Management
Is Important
Charles Darwins quote speaks to a core concept of strategic management
responsiveness to change. For organizations in a world where there is no change,
strategic management is unnecessary; however, for organizations in an everchanging world, strategic management is essential. Similar to biology, the organization that best adapts to the demands of its environment prospers and those
organizations that do not adapt become less and less relevant. Staying relevant
is the key to success. The rate of technological, social, economic, competitive,
and political change impacting organizations continues to accelerate. Although
change affects all industries, nowhere has greater change occurred than in the
It is not the strongest of the species that survive, nor the most intelligent, but the
one most responsive to change.
Charles Darwin, British Naturalist
2 strategic management of Health Care Organizations
health care sector. Strategic management enables leaders to make sense of change
and develop strategies to position organizations for success in the continuously
evolving health care environment.
More than simply being responsive to change, strategic management attempts
to create the future by envisioning what could be and charting a course toward
that dream. In addition to the processes underlying the pursuit of the dream,
strategic management provides the organization with structured thinking and
practices for translating dreams into effective visions, missions, strategies, and
plans that will move organizations toward their aspirations. Dreams, without
the enabling strategic management processes and direction, are just fantasies;
with the structure provided by strategic management, dreams can become
Strategic management is leadership responding to change, setting direction,
and focusing the organizations momentum. Strategic management is the clearest
manifestation of leadership in organizations. As a result, virtually all successful
health care organizations have embraced strategic management to cope with
change and translate their visions, missions, and strategic goals into actuality.
Learning about strategic management also means learning about leadership the
ability to utilize strategic thinking, strategic planning, and strategic momentum
in organizations.
Use concepts in this chapter to remain relevant!
Learning Objectives
After completing the chapter you will be able to:
1. Describe why strategic management is crucial in todays dynamic health care
2. Trace the evolution of strategic management.
3. Discuss the rationale and usefulness of strategic thinking maps.
4. Define and differentiate between strategic management, strategic thinking,
strategic planning, and strategic momentum.
5. Articulate the necessity for both the analytic and emergent models of strategic
6. Clarify whether an organization may realize a strategy that it never intended.
7. Discuss the benefits of strategic management for health care organizations.
8. Explain the links between the different levels of strategy within an organization.
9. Describe the various leadership roles of strategic managers.
Strategic Management Competency
After completing this chapter you will be able to create a process for developing
a strategic plan for a health care organization.
Chapter 1The Nature of Strategic Management 3
Managing in a Dynamic Industry
A major aspect of strategic management concerns responsiveness to change
to remain relevant. Significant change in the health care system 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.
Furthermore, a multitude of interests are directly or indirectly involved in the
delivery of health care. For instance, the for-profit 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 and payment for
health care services. 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 must be responsive to change and effectively manage that change in this
dynamic industry.
The Nature of Health Care Change
The health care system has experienced considerable change and will undoubtedly contend with even more intensive transformations in the future. Interviews
with health care professionals and a review of the health care literature suggest
that the types and magnitude of change for which health care organizations will
have to be responsive include some or all of the following areas: legislative/
political, economic, social/demographic, technological, and competitive.1 A few
illustrations are provided below.
Economic Changes
Continued growth in the industry health care by most measures is the
largest U.S. industry and non-government employer.2
Procedure costs may be falling while total spending is rising.3
Employers will become increasingly unwilling to shoulder the burden of
the costs of health care for their employees and retirees.
Over 27.3 million Americans were without health insurance in 2016.
However, the uninsured rate dropped to 8.6 percent, which is the first time
in recent history the rate has dropped below 9 percent.
Social/Demographic Changes
Without a truly radical reduction in health care spending, which there is no
reason to expect, demographics alone will drive health cares share of GDP
(gross domestic product) as high as 25 percent.4
The 2010 Affordable Care Act (ACA) resulted in 20 million people gaining health insurance coverage continuing evolution of health care legislation will no doubt further affect the number of people with health
4 strategic management of Health Care Organizations
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 U.S. population over the age
of 65 is expected to increase from 47.5 million to 53.7 million or approximately 20 percent of the U.S. population.
The U.S. population will become increasingly diverse.
The Hispanic population will continue to grow; some experience difficulty with health literacy. Hispanics have become the largest minority
group, representing about 18 percent of the U.S. population. By 2050,
it is estimated that as many as one out of every four Americans will be
Legislative/Political Changes
Legislative changes in health care regulation will become the new normal
in conjunction with changes in government administrations as policy makers try to balance costs and issues related to health care access.
The most significant external factor affecting health care may be how it
is financed. See Essentials for a Strategic Thinker 11, What Is Private
Health Insurance? and Essentials for a Strategic Thinker 21, What Is
Government Health Care Insurance? to understand why the health care
insurance market is so important for this industry.
Employer-based insurance may diminish as the penalties for not providing
insurance for employees are eliminated or are significantly less than the
cost of health insurance; more employees will likely shift to government
sponsored policies.
Technological Changes
Further growth in the adoption of electronic health records (EHRs)
will produce more data to improve the quality of care, that will be
used to determine payments for hospitals and physicians (value-based
Significant 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, artificial blood, and xenotransplantation (transplantation of tissues
and organs from animals into humans).
Competitive Changes
The disintegration of some health care networks can be expected. In 2016
Aetna and United Health, two of the largest U.S. insurance companies,
announced they could not sustain the losses and were significantly reducing their participation in government health care exchanges.
Chapter 1The Nature of Strategic Management 5
Essentials for a Strategic Thinker 11
What Is Private Health Insurance?
Private health insurance buys health care coverage offered by commercial and non-profit organizations that requires enrollment (membership)
and premiums (fees) usually paid monthly to
cover some or all costs of care. According to the
U.S. Census Bureau, over 214 million people had
private health insurance in the United States at
some time during 20151 representing twothirds of the population and over four times the
number of people that have Medicare coverage.
Private coverage is offered in three market
segments: the large-group, small-group, and
individually-purchased markets. The distinction between large and small groups varies
but is often defined as having more or less
than 500 covered lives; most such groups are
Virtually all private health plans are either
health maintenance organizations (HMOs) or
preferred provider organizations (PPOs). HMOs
typically have a relatively narrow set of hospital
and physician providers who are contracted
to provide health services for enrollees. PPOs
typically offer a broader panel of providers, but
some of these will require higher cost sharing on
the part of enrollees. HMOs usually bear underwriting risk (a guarantee made by an insurer that
will pay for losses incurred), while PPOs often do
not. Increasingly many private plans are highdeductible health plans; lower premiums are
offered for these PPO or HMO insurance plans
that require that the first few thousands of dollars of health care costs be paid by the enrollee
before insurer coverage begins.
In the large-group market virtually all
employers offer health insurance to employees
and their dependents, often sponsoring two or
more plans. In this market segment the PPOs
offered are almost always self-insured (meaning that the employer is effectively its own
insurer). It pays an administrative-services-only
fee to a traditional insurer or a third party to
manage the plan; however, the actual medical claims are paid from the employers funds.
The HMOs offered are usually simple insurance
products offered by insurers and paid for by
The small-group market is more diverse. Only
about half of firms with three to nine employees
offer coverage and about 70 percent of those
with 10 to 24 employees offer coverage. Nearly
all firms with more than 50 employees offer coverage, and did so even prior to the Affordable
Care Acts employer mandate. Most of these
employers offer a single health plan that is
purchased from a traditional insurer; however,
around 30 percent of the larger small employers
(more than 100 workers) are self-insured.
The individually-purchased market segment
is much smaller, covering only 18 to 24 million
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.
According to the Bureau of Labor Statistics, more than 1.2 million vacancies
will exist for registered nurses (the largest segment of the health care workforce) through 2022.
6 strategic management of Health Care Organizations
people. Individuals and families buy coverage
from an insurer licensed by their state. This segment tends to be dominated by a single insurer in
most states although multiple insurers often offer
coverage. This market segment has been most
affected by the ACA. The law established Health
Insurance Marketplaces or exchanges through
which people may buy coverage, although they
may buy coverage through an agent or directly
from an insurer. The exchanges, however, provide
access to subsidies for coverage. Prior to the ACA,
premiums in this market segment were often
determined, in part, by the health status of the
applicant; the ACA precluded the use of preexisting conditions to set premiums.
1. J. C. Barnett and M. S. Vornovitsky, Current
Population Reports, P60257(RV), Health
Insurance Coverage in the United States: 2015
(Washington, DC: U.S. Government Printing
Office, 2016).
Source: Michael A. Morrisey, PhD, Professor and Head, Department
of Health Policy & Management, School of Public Health, and
Adjunct Professor, Bush School of Government & Public Service,
Texas A&M University.
Coping with Change
How can leaders of health care organizations deal with the diversity and magnitude of change anticipated in the industry? Which issues are most important
or most pressing? Furthermore, what new issues will emerge? Undoubtedly,
issues that have yet to be identified or fully assessed will arise. Surviving rapid,
complex, and often discontinuous change requires strong leadership. Successful
health care organizations have leaders who understand the nature and implications of external change, possess the ability to develop effective strategies to
navigate change, and have the will as well as the ability to actively manage the
momentum of the organization. These activities are collectively referred to as
strategic management. More specifically, strategic management is the process of
strategic thinking, strategic planning, and managing the strategic momentum of
an organization to provide direction and achieve the organizations mission and
vision. Strategic management is essential for leading organizations in dynamic
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
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 industry; they should not simply be responsive to them, they
must envision and create the future. Health care leaders must be prospective,
construct new visions for success, and be prepared to make significant improvements. Such preparation may include educating staff concerning the necessity for
change. For example, the Jersey City Medical Center in Jersey City recognized that
moving from a paper system to electronic records would require helping doctors
understand the value of an EHR and assuring them that education and individual
mentoring would be available to assist in the implementation.5
Chapter 1The Nature of Strategic Management 7
This chapter provides a practical model for dealing with change, transforming an
assessment of the implications of that change into a workable plan, and managing
the plan. Coping with change requires leadership as well as careful management.
Therefore, the chapter examines the role of leadership and its relation to strategic
management. In addition, the foundations and evolution of strategic management
provide an excellent underpinning for understanding its nature and function.
The Foundations of Strategic Management
A strategy is a consistent, relatively enduring approach to achieve a goal or objective; a type of plan that provides a set of guidelines or a line of attack for an
organization to move from where it is today to a desired state sometime in the
future. 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 strate -go -s, meaning a general, which in turn
comes from roots meaning army and lead.6 The Greek verb strate -go – means
to plan the destruction of ones enemies through effective use of resources.7
Similarly, many of the terms commonly used in relation to strategy objectives,
strategy, mission, strengths, and 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 forecasts demand for current products/services to enable managers to develop marketing and distribution,
production, human resources, and financial plans, thereby matching production
capacity to demand. Long-range planning was developed in the 1950s in many
organizations because operating budgets were difficult to prepare without some
idea of future sales and the flow 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 financial plans for their growing organizations. The objective of long-range planning is to predict for some specified time
in the future the size of demand for an organizations products and services and
to determine where demand will occur. Many organizations have used long-range
planning to determine facilities expansion, hiring requirements, capital allocations, and other operational growth needs.
As industries became more volatile, long-range planning was replaced by strategic planning because the assumption underlying long-range planning that the
organization will continue to produce its present products and services was not
necessarily valid. In contrast, 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 in a fundamentally different way.
8 strategic management of Health Care Organizations
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.8 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 five years.9 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 firms 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 financial planning alone was not an adequate
framework.10 In the 1980s the concept of strategic planning was broadened
to strategic management. This evolution acknowledged not only the importance of the dynamics of industries 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 Essentials for a Strategic Thinker 12, What are These?, should not be
viewed as a passing fad.
Essentials for a Strategic Thinker 12
What Are These?
Management fads is usually the flippant answer.
However, each of these management approaches
was a genuine attempt to change and improve
the organization to focus efforts, 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 for all of these management approaches were to manage and shape the
organization to make it better and move it toward
excellence. One thing that has distinguished all
of these fads is the enthusiasm and commitment they have engendered among managers
and workers. For many, these approaches have
significantly increased the meaning of work no
small accomplishment in an era in which people
are increasingly hungry for purpose.1 A definition
Chapter 1The Nature of Strategic Management 9
for each of these management approaches may
be found in Resource 4 Glossary of Strategic
Management Terms at the end of this textbook.
Theories X and Y
Management by Objectives
Quantitative Management
Managerial Grid
Matrix Management
Zero-Based Budgets
Participative Management
Portfolio Management
Quantitative MBAs
Theory Z
One-Minute Managing
Organization Culture
MBWA (Management by
Wandering Around)
Customer Focus
Quality Improvement
Resource-Based View
Six Sigma
Balanced Score Card
Transformational Leadership
Self-Managed Teams
Dynamic Capabilities
Virtual Organizations
Blue Oceans
The Learning Organization
Knowledge Management
LEAN Six Sigma
Strategic Mapping
Black Swan
Disruptive Innovation
Predictable Surprises
Big Data Analytics
When management approaches such as
these fail, it is usually because they become
ends 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 method rather
than letting the method work for them.
What will be the management fads of
the next decade?2 Will you be an active participant in such efforts 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
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 turbulence, strategic management will have succeeded.
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.
10 strategic management of Health Care Organizations
Strategic Management in the Health Care System
Strategic management concepts have only been seriously employed within health
care organizations since the adoption of prospective payment in 1983. Prior to that
time, individual health care organizations had few incentives to employ strategic
management because typically they were independent, freestanding, not-forprofit institutions, and health services reimbursement was on a cost-plus basis.
The prospective payment system, established by Medicare (now the Centers for
Medicare and Medicaid Services, or CMS), was a result of the Social Security Act
of 1983 that created a fee structure (diagnosis-related groups or DRGs) for services
to determine reimbursements. The change in reimbursement policy forced health
care organizations to begin to develop strategies to deliver high-quality care and,
at the same time, become more efficient.
Strategic management provided the tools for health care leaders to think through
reimbursement and other changes taking place in the industry. As a result, in many
respects, health care became a complex business using many of the same processes
and much of the same language as the most sophisticated business corporations.
Certainly, as the health care system continued to evolve, 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, were originally developed in the business sector.
Although the values and practices of business enterprises in the private
sector have been advocated as appropriate models for managing health care
organizations, a legitimate question arises concerning the appropriateness of the
assumption that business practices are always relevant to the health care system.
Certainly, not all the big ideas have delivered what was promised, even in business.11 It has been pointed out that:
Some strategic alternatives available to non-health care organizations may
not be realistic for many health care organizations.
Health care organizations have unique cultures that influence the style of
and participation in strategic planning.
Health care has always been subject to considerable outside control.
Society and its values place special demands on health care organizations.12
Over time business approaches increasingly have been modified to fit the
unique aspects of health care organizations, and today health care organizations
have strategic management processes uniquely their own. Strategic management,
especially when customized to health care, provides the necessary processes for
health care organizations to cope with changes in health policy as well as other
changes that have been occurring in the industry. As can be observed world-wide,
referendums, elections, and changes in government can have a substantial impact
on organizations and a clear understanding of the difference in health policy and
strategic management is essential.
Strategic Management Versus Health Policy
There has been and continues to be substantial health planning (policy) in the
United States. Health planning is initiated by either state or local governments
Chapter 1The Nature of Strategic Management 11
and the resulting health policies are implemented through legislation or private
or non-governmental agencies. Generally, health policy sets the rules, regulations,
legislation, and executive actions that apply to consumers and providers of
health care. Many health policies are disease specific; that is, they are categorical approaches directed toward specific 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).13 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 Essentials for a Strategic Thinker 13,
What Is Health Policy? 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 concerns the activities of only one organization. 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.
Essentials for a Strategic Thinker 13
What Is Health Policy?
Formally, health policy is the development and
maintenance of an infrastructure to efficiently
enhance the health of the public. Informally,
health policy determines the rules that apply to
all consumers and providers.
An infrastructure need not imply a governmentally-financed 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
fine tune institutions that can efficiently meet
those preferences. Satisfying preferences may
mean defining the ground rules under which
insurers and providers compete. It may mean
defining 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.
Congress, the state legislatures, and the
administrative authority given to executive
branches and their agencies set health policy.
Therefore, the Center for Medicare and Medicaid
Services determines much of the health policy for federally funded Medicare and federal/
state funded 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 influence.
12 strategic management of Health Care Organizations
The Dimensions of Strategic Management
Many ways are possible to think about strategic management in organizations.14
These approaches can be broadly grouped into two distinct views those that assume
that with proper analysis a workable strategy can be prescribed in advance, then
carried out, versus those with the underlying assumption that too much complexity and change exists for a complete and viable plan to be worked out in advance,
thus the strategy will emerge over time. These two fundamental views of strategic
management are referred to as the analytical or rational approach and the emergent
approach.15 Specifically, analytical or rational approaches to strategic management rely
on a logical sequence of steps or processes (linear thinking) to develop a predetermined logical plan and carry it out without change. An emergent approach, on the other
hand, relies on intuitive thinking, leadership, and learning with the understanding
that because of external change, strategic plans evolve as strategy unfolds and the
organization learns what works and what does not. Both approaches are valid and
useful in explaining an organizations strategy and neither the analytical approach
nor the emergent view, by itself, is enough. As one author 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-the-ground experiences will do.16
As a result, both approaches are required. It is difficult to initiate and sustain
organizational action without some predetermined logical plan. Yet in a dynamic
industry, 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
Many analytic tools come into play to help in
determining 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 specific. Some
important questions include:
Is health care a right or an individual
Can the human costs of poor health be
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, Professor and Head, Department
of Health Policy & Management, School of Public Health, and
Adjunct Professor, Bush School of Government & Public Service,
Texas A&M University.
Chapter 1The Nature of Strategic Management 13
destination. A map is a convenient metaphor for a predetermined plan, guideline,
or method. Maps are better in known worlds worlds that have been charted
before. A compass serves as a useful metaphor for an intuitive sense of direction
and leadership. Compasses are helpful when leaders are not sure where they are
and have only a general sense of direction.17
Managers may use the analytical approach to develop a strategy (map) as best
they can from their understanding of the industry 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 modified. 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.18 Therefore, managers must remain flexible 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.19 Similar to the scientific method, which in theory has clear specific steps to be
followed, in reality strategy making is a messy process with many starts and stops.
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 view their strategies in a cohesive, integrated, and systematic way.20 Without a model or map, managers run the risk of becoming totally
incoherent, confused in perception, and muddled in practice.21
Combining the Analytical and Emergent Views
In this text, a series of strategic thinking maps are presented. A strategic thinking map
depicts an intellectual process guided by a logical plan of action (set of guidelines)
and is used to describe approaches, guidelines, or analytical methods leading to a
strategic plan or components of a strategic plan. These maps are designed to initiate
strategic thinking as well as strategic planning and foster new thinking and planning
when required. The strategic thinking maps start the journey to develop a comprehensive strategy for the organization, yet maps are not dynamic and cannot anticipate
every change or 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 proceed. As the physicist David Bohm
observed, the purpose of science is not the accumulation of knowledge but rather
the creation of mental maps that start our journey to further discovery.22
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, 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 interrelated components strategic thinking, strategic planning, and strategic momentum. These activities are interdependent; activities in
each element affect, and are affected by, the others.
14 strategic management of Health Care Organizations
Effective strategic managers are strategic thinkers with the ability to evaluate the changing industry, 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 and control 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 situational analysis.
The distinction among the terms strategic thinking, strategic planning, and
strategic momentum is important and all three activities must occur in true strategically managed organizations. Therefore, each element of the model is explored
in more depth.
Strategic Thinking
Strategic thinking is an intellectual activity underlying strategic management that
is perceptive to emerging changes, considers strategic implications, and develops transformative responses. At its most fundamental level, strategic thinking
includes the states of awareness, anticipation, analysis, interpretation, synthesis,
and reflection. The abilities and behaviors associated with and supportive of each
of the strategic thinking states are described in Exhibit 12.
Exhibit 11 Model of Strategic Management
Strategic Planning
Situational Analysis
External Analysis
Internal Analysis
Directional Strategies Strategic
Strategy Formulation
Directional Strategies
Adaptive Strategies
Market Entry/Exit Strategies
Competitive Strategies
Implementation Planning
Service Delivery Strategies
Support Strategies
Action Plans
Managerial Action
Strategy Evaluation
Strategic Control
Emergent Learning
Re-initiate Strategic
Chapter 1The Nature of Strategic Management 15
Exhibit 12 Strategic Thinking Activities
Strategic Thinking States Supporting Abilities and Behaviors
Awareness Mindfulness and external orientation; perception of and
hypersensitivity to change.
Anticipation Projects the present; keenly considers/envisions (imagines)
the future; links issues and finds new meanings; high level of
expectancy; conceptualization.
Analysis Systems perspectives and critical thinking to examine changing
issues; combining and assessing quantitative and qualitative data.
Interpretation Transformative, divergent, innovative, creative, and visionary
perspectives; accurate assessment and use of data; ability to
incorporate different perspectives.
Synthesis Links issues and summarizes their implications using systems
perspectives and vision grounded in reality.
Reflection Re-consideration of interpretation and synthesis; reality testing;
evaluation; and opinion seeking.
Strategic thinking may proceed as a linear process; however, most of the
time these are non-linear activities and may occur in any order and in combination with each other. Indeed, reflection may occur before interpretation or
with anticipation, and synthesis may occur simultaneously with all the states.
More broadly, although strategic thinking is depicted in the model of strategic
management in Exhibit 11 as a separate process from strategic planning and
strategic momentum, it is inherent to both. Strategic thinking does not necessarily come first or before strategic planning takes place; it is a part of every
step in the strategic planning process and managing strategic momentum.
Strategic thinking affects and is affected by strategic planning and strategic
Central to Leadership Strategic thinking asks people to position themselves
as leaders and see the big picture. It has been observed that leaders, similar to
great athletes, must simultaneously play the game and observe it as a whole.23
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.24 This skill is
similar to an athlete leaving the playing field 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. Continuing
the sports metaphor, 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 thinkers see the future. 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
16 strategic management of Health Care Organizations
in their book The Leadership Challenge indicated: All enterprises or projects, big
or small, begin in the minds eye; they begin with imagination and with the belief
that what is merely an image can one day be made real.25 Strategic thinkers
draw on 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 organizations future to capitalize on the changes. More specifically,
strategic thinking:
Acknowledges the reality of change.
Questions current assumptions and activities.
Builds on an understanding of systems.
Envisions possible futures.
Generates new ideas.
Considers context, organizational fit, and industry dynamics.
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 organizations stakeholders and the changing
technological, social and demographic, economic, legislative/political, and competitive demands of the world. In that assessment, strategic thinking includes and
employs several types of thinking or framing perspectives, including thinking
that is systems oriented, critical or logical, innovative, creative, transformative,
divergent, and visionary. The essential focus of these framing perspectives is
illustrated in Exhibit 13.
Exhibit 13 Strategic Thinking Framing Perspectives
Framing Perspectives Essential Focus
Creative Thinking Focuses on unique imaginative solutions that are new to the
organization for all types of issues or problems.
Critical Thinking Focuses on rationality; a logical, fact-based analysis and critique.
Divergent Thinking Focuses on non-traditional solutions; explores different innovative
responses rather than commonly accepted solutions.
Innovative Thinking Focuses on introducing something new, better, or different a
pioneering breakthrough in processes, product/services, or
solutions to issues.
Transformative Thinking Focuses on challenging accepted beliefs, assumptions,
perspectives, and premises; redefines issues using a different
Systems Thinking Focuses on understanding the whole and the relationships of its
components including interrelationships and interdependencies.
Visionary Thinking Focuses on the future and possible future states.
Chapter 1The Nature of Strategic Management 17
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 havent been, thinking as you havent thought, and acting as you havent
acted.26 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 the work of subject matter experts. For
example, strategic thinkers specialize in relationships and context, whereas expert
thinkers specialize in well-defined disciplines and functions. Strategic thinkers act
on intuition and gut feel when data is incomplete, whereas experts pay rigorous
attention to knowledge, evidence, and existing data. Strategic thinkers focus on
action and moving forward; experts 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 officer, 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.27 Everyone, at all levels, should be encouraged to think strategically and
consider how to reinvent what he or she does. For example, understanding that
a nursing homes 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 should come together
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 specifically, 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 how the organization fits within its industry.
Results in a documented strategic plan.
18 strategic management of Health Care Organizations
The process of strategic planning defines 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. Because strategic planning provides a platform for setting direction for
an organization, it is seen as essential for all types of organizations. Bain and
Company, a global consulting firm, tracks the trends in management concepts.
They accomplish this tracking by means of a survey of executives throughout the
world. In most years of the survey, strategic planning has ranked as the number
one management concept used by the responding executives. In its most recent
ranking, strategic planning was tied with benchmarking as the second most often
used management tool.28
Strategic planning, in large part, is a decision-making activity. Although these
decisions are often supported by a great deal of quantifiable data, strategic decisions are fundamentally judgments. Because strategic decisions cannot always
be quantified, 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 quantifiable 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
such as where to attend college, whether or not to get married, and where to
live are largely informed judgments or intuitions. 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 is, at least implicitly, manifesting a strategy. Therefore,
strategy is the consistent behavior of an organization in coping with technological,
social and demographic, economic, legislative/political, and competitive forces.
Optimally, the strategy is well thought out and moves the organization from
where it is today to a desired state in the future. The strategic plan is the set of
decision-making guidelines or road map for carrying out the strategy and helps
to ensure decision consistency. Developing the road map (strategic plan) requires
situational analysis, strategy formulation, and planning the implementation of
the strategy.
Situational analysis is a process of understanding and documenting an organizations: (1) external analysis; (2) internal analysis; and (3) the development or
refinement of the organizations directional strategies. The interaction and results
of these activities form the basis for the development of strategy. These three
interrelated activities drive the strategy (see Exhibit 14). External forces, such as
a change in health policy or an increase in competition, suggest what the organization should do. That is, success is a matter of being effective doing the right
thing. Strategy is additionally influenced by the internal resources, competencies,
and capabilities of the organization and represents what the organization can
do. Finally, strategy is driven by a common mission, common vision, and common set of organizational values and goals the directional strategies what the
organization wants to do.
Chapter 1The Nature of Strategic Management 19
The directional strategies are the result of considerable thought and analysis
by top management. Directional strategies are the broadest strategies, set the fundamental direction of the organization, and generally include the organizations
mission, vision, values, and strategic goals. Together, these forces are the essential
input to strategy formulation. They are not completely distinct and separate; they
overlap, interact with, and influence one another.
Whereas situational analysis involves a great deal of strategic thinking awareness, anticipation, analysis, interpretation, synthesis, and reflection strategy formulation involves decision making that uses the synthesis to create a plan. Hence,
strategy formulation is the process of developing strategic alternatives, evaluating
alternatives, and making strategic choices. Typically, these decisions are made in
strategic planning sessions.
Once the strategy for the organization has been formulated (including directional, adaptive, market entry/exit, and competitive), implementation plans that
accomplish the organizational strategy are developed. An implementation plan is
a series of steps/activities that are formulated to accomplish strategic goals and
are developed in the key areas that create value for an organization service
delivery and support activities. Strategies must be developed that best deliver the
products or services to the customers through pre-service, point-of-service, and
after-service activities. In addition to service delivery strategies, strategies must
be developed for value-adding support areas, such as the organizations culture,
structure, and strategic resources.
Exhibit 14 Interrelated Activities that Drive Strategy
Values, &
What an
wants to do
Basis for
Integration of what the organization should do,
wants to do, and can do
What an
should do
What an
can do
20 strategic management of Health Care Organizations
A Group Process of Key Players The CEO or 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 typically should be 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, and critical analysis. Strategic planning efforts will be
diminished without future-oriented highly provocative thinking and dialog.29
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
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 and exciting plan be realized.
The key to successful strategic planning is to have a recurring group process.
Having a periodic structured process initiates reflection, reconsideration, discussion, and documentation of all the assumptions. Without a planned process,
managers may 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 pivotal to achieve the best possible outcome.
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 [s]trategy 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.30
The third element of strategic management shown in Exhibit 11, strategic
momentum, concerns the day-to-day activities of managing the strategy directed
toward achieving the strategic goals of the organization. Once plans are developed, they must be actively managed, implemented, and controlled to maintain
the momentum of the strategy. Strategic thinking and periodic planning should
never stop; they should become ingrained in the culture and philosophy of a strategically managed organization. Strategic momentum:
Addresses the management of the actual work to accomplish specific
Concerns decision-making processes and their consequences.
Chapter 1The Nature of Strategic Management 21
Shapes the style and culture.
Evaluates strategy performance.
Controls strategy implementation by making necessary adjustments.
Is a learning process.
Relies on and initiates new strategic thinking and new periodic strategic
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 realize strategic intent. Poor
implementation or lack of adequate control has rendered many strategic plans
worthless. Whereas the strategic plan and its underlying strategic thinking must
be viewed as critical elements of the strategy-making process, without attentive
implementation and the decision-making guidelines provided for managers at
all levels in the organization, they become useless. If the strategy is not actively
controlled, it will not happen. See Essentials for a Strategic Thinker 14, What Is
Management Control? that examines the nature of management control.
Essentials for a Strategic Thinker 14
What Is Management Control?
To control means to regulate, guide, or direct.
To manage means to control, handle, or direct.
Therefore, management and control both focus
on guiding, influencing, and directing behavior;
indeed, 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 efforts toward a defined 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 far reaching, it can foster a hopeless bureaucracy. If control
is too weak, there may be a lack of direction causing difficulty in accomplishing organizational
goals. When there is too much management
(control), then innovation, creativity, and individual initiative will be stifled; when there is too
little, chaos ensues. Management should focus
efforts but not be tyrannical or overbearing.
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. Effective
management (control) is essential if organizations are to renew themselves; however, over
managing (over controlling) can destroy initiative and be viewed as meddling, often reducing
motivation as well.
22 strategic management of Health Care Organizations
At the same time, managers often need to react to unanticipated developments
and new competitive pressures. Such shifts may be subtle, 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.31 Managing strategic momentum is how an organization constructively
manages change, evaluates strategy, and reinvents or renews the organization.
As management expert Henry Mintzberg has indicated, a key to managing
strategy is the ability to detect emerging patterns and help them take shape.32
Learning as the Strategy Unfolds Changing societal and industry characteristics and evolving organizational forms require new and different ways
of defining strategy.33 Strategy may be an intuitive, entrepreneurial, political,
culture-based, or learning process. In these cases, past 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 difficult 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.34 It
requires a renewed concentration on managing strategic momentum.
Clearly, just because a strategy is rational does not mean that it will work out as
envisioned or planned (an unrealized strategy). In other cases, an organization may
end up with a strategy that was unexpected, developed as uncontrollable and
unanticipated external events unfolded 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 specific objectives or long-term outcomes. It is quite possible for a strategy to be developed
and subsequently work out successfully (a realized strategy); 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:
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.
Society or the industry is in a period of flux and strategists are unable to
accurately predict conditions; the organization may therefore find itself
unable to respond appropriately to powerful external forces.35
Other organizations implementing their own strategies may block a strategic initiative, forcing the activation of a contingency strategy or a period of
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 broadened their
Chapter 1The Nature of Strategic Management 23
market share and increased profitability. Other community hospitals have not
fared as well. Their managers had unrealistic expectations concerning the profitability of cardiac services and the number of procedures required. A large volume
is 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 profitability.
The strategies of those community hospitals that ultimately 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 significant 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 leadership author
Max DePree has suggested, Leaders are obligated to provide and maintain
momentum.36 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.37
The Benefits of Strategic Management
The three stages of strategic management strategic thinking, strategic planning,
and strategic momentum will provide many benefits to health care organizations.
However, because strategic management is a philosophy or way of managing an
organization, its benefits are not always quantifiable. Overall, strategic management:
Ties the organization together with a common sense of purpose and shared
Often improves financial performance.38
Provides the organization with a clear self-concept, specific 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.
Encourages innovation and change within the organization to meet the
needs of dynamic situations.
Strategic management is a unique perspective that requires everyone in the
organization to cease thinking solely in terms of internal functions and operational
24 strategic management of Health Care Organizations
responsibilities. It insists that everyone adopt 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.
Health care leaders require a comprehensive strategic management approach
to guide their organizations through general environment and health care system
changes. 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-quantifiable benefits of strategic management will aid health care
organizations in better integrating functional areas to strategically utilize limited
resources and satisfy the various populations 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 fix for an organization that has fundamental problems. Quick fixes 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 ideas, 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 filling
in endless forms, meeting deadlines, drawing milestone charts, or changing the
dates of last years goals and plans, it is not strategic management. Effective strategic management requires little paperwork. It is a process, not a series of documents. Similarly, strategic management should not be undertaken solely to satisfy
a regulatory bodys or an accrediting agencys 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
Strategic management is not simply extending the organizations 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
A system may be defined as a perceived whole whose elements hang together
because they continually affect each other over time and operate toward a common purpose.40 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. A system must have a unity of purpose
Chapter 1The Nature of Strategic Management 25
in the accomplishment of its goals, functions, or desired outputs. Further, biological as well as organizational systems must continually adapt to their environments to survive.
The problems facing organizations are often so complex that they defy simple
solutions. Understanding the nature of the health care system, the relationship
of the organization to that industry, and the often-conflicting interests of the
organizations internal departments requires a broad conceptual paradigm. Yet,
it is difficult to comprehend so many multifaceted and important relationships.
Strategic managers have found viewing organizations as complex adaptive systems
interacting structures evolving in response to change to be useful for organizing
their strategic thinking.41
A systems perspective is a way of understanding a phenomenon by perceiving
the whole as well as its interactive elements (subsystems). Understanding complicated adaptive systems through a systems perspective:
Aids in identifying and understanding the big picture.
Facilitates the identification 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.
Provides a basis for redesign.
Using a systems perspective and viewing organizations as complex adaptive
systems requires strategic managers to define the organization in broad terms
and to identify the relevant variables and interrelationships that will affect
decisions. By defining systems, strategic managers are able to accurately see
the big picture and avoid devoting excessive attention to relatively minor
aspects of the total system. A systems perspective permits strategic managers to
concentrate on those facets of the problem that deserve the most attention and
allows for a more focused attempt at resolution. As American systems scientist
and lecturer Peter Senge has indicated, systems perspectives help us to see the
total system and how to change the pieces within the system more effectively
and intelligently.42
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 succeed in the
industry.43 In a similar manner, health care strategic managers must use systems
to aid in strategically thinking about the external conditions. 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
26 strategic management of Health Care Organizations
and specified before strategic planning begins. For example, as illustrated in
Exhibit 15, strategies may be developed for large, complex organizations, divisions within a broader organization, individual organizations such as for a hospital, or for well-focused functional units. The range of the strategic decisions that
are considered at different organizational levels is quite different, but all entities
can benefit from strategic management and all engage in strategic thinking, strategic planning, and strategic momentum.
Ends Means
Hierarchy of Strategies
Organizational Levels
Surgery Orthopedics Pharmacy
Exhibit 15 The Link between Levels of Strategic Management
Chapter 1The Nature of Strategic Management 27
A large integrated health care system would likely develop strategy for a number of levels a corporate level, a divisional level, an organizational level, and a
unit level. 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 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 the hypothetical example
in Exhibit 15, the strategic planning of higher-order strategies provides part of
the context or input for lower-order strategy the corporate strategic plan is an
input to strategic thinking at the divisional level (Hospital Division). Similarly, the
divisional strategic plan is an input to the organizational level strategic thinking
(Hospital Central) and so on.
As a practical example, Trinity Health is an integrated health system that develops strategic plans at a number of organizational levels. Trinity Health is one of the
largest multi-institutional Catholic health systems in the United States and serves
people in 22 states. As of the beginning of 2017, Trinity had over $23.4 billion in
assets, $15.9 billion in revenues, and was comprised of 93 hospitals, and 120 continuing care facilities, home care agencies, and outpatient centers. 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 Ann Arbor Hospital, and within
the various hospital units (clinical operations).
Corporate-Level Strategy A corporate-level strategy is an overall plan for the
broadest organizational level that positions the organization in multiple markets
served with multiple products and addresses 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, such as wellness or mental health centers, should Trinity consider? Once consensus is reached regarding the corporate strategy, the process
continues at the next organizational level the divisional level.
Divisional-Level Strategy A divisional-level strategy is an overall plan for a
corporate division or a single product, single market organization. These strategies are more focused than corporate-level strategies 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 specified
set of competitors in well-defined markets.
28 strategic management of Health Care Organizations
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 considering different types of businesses. Once
divisional-level strategies have been developed, strategy making continues down
the organizational chain to the organizations within the division.
Organizational-Level Strategy Within a division, individual organizations
may develop strategies as well. An organizational-level strategy is an overall plan
for one organization competing within a specified well-defined market. For example, each hospital in Trinitys 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? After organizational strategies have been developed, the process
may continue within the departmental units of the organization.
Unit-Level Strategy A unit-level strategy is an overall plan for an individual
department within an organization that supports higher-level organizational
strategies through accomplishing specific objectives. Unit operational strategies
may be developed within departments of an organization such as clinical operations, marketing, finance, information systems, human resources, and so on. Unit
strategies are intended to integrate the various subfunctional activities as well as
creating internal capabilities across functions (for example, quality programs or
changing the organizations culture).44
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. At this level of
leadership, such an individual must be able to inspire, organize, and implement
effective pursuit of a vision and maintain it even when sacrifices are required.45 A
10-year study of CEO performance across all major industries found that the most
effective CEOs: (1) were able to be decisive, recognizing that they could not wait
for perfect information, (2) worked to understand the priorities of stakeholders
Chapter 1The Nature of Strategic Management 29
and incorporate those needs into goals of value creation, (3) were able to adjust to
rapidly changing conditions, and (4) reliably produced results over time.46
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
fighting on too many fronts. They know the key messages to communicate day
to day, from audience to audience.47 If the CEO, as the organizations leader, does
not fully understand or faithfully support strategic management, it will not happen. The Essentials for a Strategic Thinker 15 further answers the question What
is Leadership?
Essentials for a Strategic Thinker 15
What Is Leadership?
Leadership involves creating a vision and sharing
it, aligning individuals and building coalitions,
motivating and inspiring.1 Leadership is a choice,
not a rank or a position. It is a behavior, not a trait.
Behaviors can be learned and so can leadership.
Some have argued that leaders are born; but the
evidence suggests that anyone can become an
effective leader.
We, the authors of this textbook, think of
leaders as people who: (1) establish organizational direction and (2) shape organizational culture. Setting direction involves understanding
the organizations industry and developing and
communicating the mission, vision, values, and
goals for the future that make the organization
as relevant as possible. Internally, shaping culture is a matter of affecting the intrinsic habits,
customs, and norms of individuals as well as the
social, structural, and decision-making context
of the organization.
Establishing direction is accomplished by
shaping strategic consensus through the strategic management processes of strategic thinking,
strategic planning, and strategic momentum.
Shaping the organizations culture involves
instilling attributes such as teamwork, quality, trust, innovation, customer orientation, and
so on to make the organization adaptive to
change. In addition, leaders create an organizational context by creating an appropriate culture for adaptation and response to external
change while shaping internal organizational
practices, rules, procedures, decision making,
and views of risk.
Although they are equally important to create efficient and effective organizations, leadership and management are different in many
respects. Management is about efficiency and
order while leadership is about change. More
specifically, comparing managers and leaders
indicates that:2
Managers administer; leaders innovate.
Managers are copies; leaders are
Managers focus on systems and structure;
leaders focus on people.
Managers rely on control; leaders inspire
Managers have a short-term view; leaders
have a long-term perspective.
Managers ask how and when; leaders ask
what and why.
Managers have an eye on the bottom line;
leaders have an eye on the horizon.
Managers initiate; leaders originate.
30 strategic management of Health Care Organizations
Managers accept the status quo; leaders
challenge it.
Managers are classic good soldiers; leaders
are their own person.
Managers do things right; leaders do the
right things.
There are no honorary leaders. Leadership is
an art that must develop and evolve. Leadership is
an achievement that no organization can bestow.
It is something that must be earned through hard
work, enthusiasm, and commitment.
1. John Kotter, A Force for Change: How Leadership
Differs from Management (New York: Free Press,
2. Warren G. Bennis, On Becoming a Leader
(Reading, MA: Addison-Wesley, 1989).
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 all the
contingencies 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 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 conditions (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 coordinate
the organizations overall strategy and facilitate strategic thinking throughout
the organization. As a result, the organizations top managers act as an extension of the CEO to ensure that an organized and one that is used planning
process ensues.48
The remainder of this text provides processes for strategic management
presented in the model of strategic management (Exhibit 11). Chapter 2
provides strategic thinking maps for examining the general environment and
health care systems as well as the service area and Chapter 3 concentrates on
service area competitor analysis. Chapter 4 discusses internal analysis and
provides strategic thinking maps for evaluating the organizations 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. Strategic thinking maps for strategy formulation are
presented in Chapters 6 and 7. Strategy implementation is discussed further
in Chapters 8 through 10.
Chapter 1The Nature of Strategic Management 31
Chapter Summary
Strategic management is often a complex and difficult 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 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 government agencies; health care managers are
finding it essential for their organizations as well. The strategic management
model presented and discussed in this chapter is applicable to a variety of health
care organizations operating in dramatically different segments of the industry, 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 awareness, anticipation, analysis, interpretation, synthesis, and reflection
within situational analysis combine to influence strategy formulation. Strategy
formulation in turn affects planning the implementation. Finally, the strategy
must be managed, evaluated, controlled, and modified 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. Strategic momentum essentially continues strategic thinking and strategic
The model of strategic management (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 to understand 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 management model 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 industry and organization never exists, and rationality and logic are
not always superior to intuition and luck. Sometimes organizations do before
they know. For instance, intended strategies are often not 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 external and internal factors, incremental adjustments and guided
evolution are the best they can do.49
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 difficult to start the journey, challenging to create
any type of momentum for the organization, and hard to develop and maintain
32 strategic management of Health Care Organizations
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.
Practical Lessons for Health Care Strategic Thinkers
1. A conceptual model of strategic management is not just an academic
exercise nor is it a passing fad. If managers are going to engage in strategic
planning in an organization and be successful, they must understand how
strategic thinking, strategic planning, and strategic momentum fit together
and the nature of each.
2. The strategic management processes provide the road map for all the
activities and decisions in the organization. They create organizational
momentum and keep everyone informed one has to have a plan to start a
3. Even the best strategic plans may not work out; therefore, strategic
managers must be ready to learn what is working and what is not working
as the plan unfolds and adjust the implementation, the strategy itself, or
their understanding of the situation.
4. All strategies are temporary; there is just too much social, economic,
competitive, and political change for a strategy to be effective forever;
therefore, in the long term, to be successful the strategy has to change.
5. In organizations, strategic management and leadership are the same thing;
vision and a future orientation are essential.
6. Strategic managers should focus on keeping the organization relevant and
creating momentum.
The Language of Strategic Management: Key Terms and Concepts
Analytical/Rational Approach
Complex Adaptive System
Corporate-Level Strategy
Directional Strategies
Divisional-Level Strategy
Emergent Approach
Emergent Strategy
Health Policy
Implementation Plan
Long-Range Planning
Organizational-Level Strategy
Realized Strategy
Situational Analysis
Strategic Business Unit (SBU)
Strategic Management
Strategic Momentum
Strategic Planning
Strategic Service Unit (SSU)
Strategic Thinking
Strategic Thinking Map
Strategy Formulation
Systems Perspective
Unit-Level Strategy
Unrealized Strategy
Chapter 1The Nature of Strategic Management 33
1. This partial list of issues in the health care system 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.
2. Charles R. Morris, Why U.S. Health Care Costs Arent
Too High, Harvard Business Review 85, no. 2 (February
2007), p. 50.
3. Ibid.
4. Ibid., pp. 50, 52. Additional data obtained from Kaiser
Family Foundation based on U.S. Census Bureaus
Current Projections: Annual Social and Economic
Supplement, March, 2016.
5. Stuart M. Hochron and Paul Golfberg, Overcoming
Barriers to Physician Adoption of EHRs, Healthcare
Financial Management 68, no. 2 (2014), pp. 48 52.
Questions for Class Discussion
1. Explain why strategic management has become crucial in todays dynamic health care
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 strategic momentum.
10. In an organization, 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
13. What can cause well-thought-out strategies that were developed using all the steps in
strategic planning to change?
14. Explain and illustrate the possible benefits of strategic management. What types of
health care institutions may benefit most from strategic management?
15. 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?
34 strategic management of Health Care Organizations
6. Jeffrey Bracker, The Historical Development of
the Strategic Management Concept, Academy of
Management Review 5, no. 2 (1980), pp. 219224.
7. Ibid.
8. 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.
9. Chris Zook, Finding Your Next Core Business, Harvard
Business Review 85, no. 4 (April 2007), p. 75.
10. Bracker, The Historical Development of the Strategic
Management Concept, pp. 219224.
11. 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.
12. 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.
13. 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, MD:
Johns Hopkins University, School of Hygiene and Public
Health, Department of International Health, 1972), p. 3.
14. Henry Mintzberg, The Design School: Reconsidering
the Basic Premises of Strategic Management, Strategic
Management Journal 11, no. 3 (1990), pp. 171195.
15. Henry Mintzberg, The Rise and Fall of Strategic Planning:
Reconceiving Roles for Planning, Plans, Planners (New
York: Free Press, 1994).
16. David K. Hurst, Crisis and Renewal: Meeting the Challenge
of Organizational Change (Boston , MA: Harvard Business
School Press, 1995), pp. 167168.
17. 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.
18. Rosabeth Moss Kanter, Strategy as Improvisational
Theater, MIT Sloan Management Review (Winter 2002),
p. 76.
19. 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.
20. Robert S. Kaplan and David P. Norton, Having
Trouble with Your Strategy? Then Map It, Harvard
Business Review 78, no. 5 (SeptemberOctober 2000),
pp. 167176. See also Robert S. Kaplan and David P.
Norton, Strategy Maps: Converting Intangible Assets
into Tangible Outcomes (Boston, MA: Harvard Business
School Press, 2004).
21. Hurst, Crisis and Renewal, p. 7.
22. Peter M. Senge, The Fifth Discipline: The Art & Practice
of The Learning Organization (New York: Currency
Doubleday, 1990), pp. 239240.
23. Ronald A. Heifetz and Marty Linsky, A Survival Guide
for Leaders, Harvard Business Review (June 2002),
pp. 6574.
24. Kevin Kelly, Roller Coaster Leadership, Business
Strategy Review 18, no. 1 (Spring 2007), p. 26.
25. James M. Kouzes and Barry Z. Posner, The Leadership
Challenge: How to Keep Getting Extraordinary Things
Done in Organizations (San Francisco, CA: Jossey-Bass
Publishers, 1995), p. 93.
26. Kathleen K. Reardon, Courage as a Skill, Harvard
Business Review 85, no. 1 (January 2007), p. 63.
27. Kouzes and Posner, The Leadership Challenge, p. 30.
28. Darrell Rigby and Barbara Bilodeau, Management
Tools and Trends 2015, Boston, MA: Bain and Company.
29. 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.
30. Alan Weiss, Our Emperors Have No Clothes (Franklin
Lakes, NJ: Career Press, 1995), p. 20.
31. Michael A. Mische, Strategic Renewal: Becoming a HighPerformance Organization (Upper Saddle River, NJ:
Prentice Hall, 2001), p. 21 and Cynthia A. LengnickHall and Tammy E. Beck, Adaptive Fit Versus Robust
Transformation: How Organizations Respond to
Environmental Change, Journal of Management 31, no. 5
(2005), p. 739.
32. Henry Mintzberg, Mintzberg on Management (New York:
Free Press, 1989), p. 41.
33. 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).
34. Jane Linder, Paying the Personal Price for
Performance, Strategy & Leadership 28, no. 2 (March
April 2000), pp. 2225.
35. Henry Mintzberg, Patterns in Strategy Formation,
Management Science 24, no. 9 (1978), p. 946.
36. Max DePree, Leadership Is An Art (New York: Doubleday,
1989), p. 14.
37. Craig R. Hickman, Mind of a Manager, Soul of a Leader
(New York: John Wiley & Sons, 1992), p. 261.
38. After almost four decades of research, the effects of strategic planning on an organizations performance are still
unclear. Some studies have found significant benefits
from planning, although others have found no relationship, or even small negative effects. For an extensive
survey of the strategic planning/financial performance
literature, see Lawrence C. Rhyne, The Relationship of
Strategic Planning to Financial Performance, Strategic
Management Journal 7, no. 5 (SeptemberOctober 1986),
Chapter 1The Nature of Strategic Management 35
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.
39. 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.
40. 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.
41. Martin Reeves, Simon Levin, and Daichi Ueda, The
Biology of Corporate Survival, Harvard Business Review
94, no. 1/2 (2016), pp. 4655.
42. Senge, The Fifth Discipline, p. 7.
43. Michael P. Dumler and Steven J. Skinner, A Primer for
Management (Mason, OH: Thomson South-Western,
2005), pp. A10A11.
44. 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, MA: Little, Brown, 1979), p. 12.
45. Russell L. Ackoff, Transformational Leadership,
Strategy & Leadership 27, no. 1 (1999), pp. 2025.
46. Elena Lytkina Botelho, Kim Rosenkoetter Powell,
Stephen Kincaid, and Dina Wang, What Sets
Successful CEOs Apart: The Four Essential Behaviors
that Help Them Win the Top Job and Thrive Once
They Get It, Harvard Business Review 95, no. 3 (2017),
pp. 7077.
47. Kelly, Roller Coaster Leadership, p. 26.
48. Donald L. Bates and John E. Dillard, Jr., Wanted:
Strategic Planner for the 1990s, Journal of General
Management 18, no. 1 (1992), pp. 5162.
49. Henry Mintzberg, The Rise and Fall of Strategic
Planning, Harvard Business Review 72, no. 1 (1994),
pp. 107114.

Chapter 2
External Analysis
Why External Analysis Is Important
President Kennedys quote reminds us that organizational failure is often the
result of failing to look to the future. Organizations fail to anticipate significant
external changes and subsequently do not make the necessary adjustments in
strategy that might save them. Organizational success is predicated on tailoring
strategy not to the past or even the present but rather to well-informed, credible assumptions about the future.
Looking to the future is both an art and a science. The art involves strategic thinking and the science involves rigorous external analysis. Together, strategic thinking and external analysis processes enable the generation of realistic strategic
Change is the law of life. And those who look only to the past or present are certain
to miss the future.
John F. Kennedy, 35th President of the United States
38 strategic management of Health Care Organizations
assumptions about the future for strategy building. Both the art and science are
critical for envisioning the future.
The art of looking into the future requires a strategic manager who is informed
about and perceptive to an organizations external changes requiring an external
orientation and inquisitive awareness. Strategic managers must be able to see the
big picture, understand relationships, and use systems thinking. They have to use
critical thinking to determine the consequences and implications of what they see.
These leaders need creativity to transform change signals into actions as well as
create visions and strategic goals. As introduced in Chapter 1, strategic thinking is
an art made up of awareness, anticipation, analysis, interpretation, synthesis, and
reflection driven by a passion to know, understand, and succeed.
The science of anticipating the direction of change involves using structured
processes for understanding an organizations external conditions the general
(macro-environment), health care system, and service area changes utilizing the
processes of a number of external analysis tools and techniques. These processes
help organize and structure information, aid in focusing on what is important,
and provide a foundation for integrative strategic thinking. External analysis
coupled with strategic thinking will generate new perspectives and insights to
provide a plausible glimpse of tomorrow.
Use the concepts in this chapter to see into the future!
Learning Objectives
After completing the chapter you will be able to:
1. Discuss the significance of external analysis for health care organizations.
2. Articulate the specific goals of external analysis.
3. Point out some limitations of external analysis.
4. Describe how various types of organizations in society (the macro-environment),
the health care system, and the service area influence the delivery of health care.
5. Identify major general environment, health care system, and service area trends
affecting health care organizations.
6. Describe the utilization of key sources of external information.
7. Discuss important techniques used to identify and analyze external issues, trends,
and events.
8. Suggest several questions to initiate strategic thinking that focus on identifying
and responding to external change.
Strategic Management Competency
After completing this chapter you will be able to map and analyze external issues,
trends, and events in the general environment, the health care system, and the
service area for a health care organization.
Chapter 2External Analysis 39
The External Nature of Strategic Management
External analysis requires 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 or to do known
things in a new way. Therefore, the fundamental nature of strategic management
requires awareness and understanding of outside forces. Strategic managers
encourage adoption of new ideas in the system, maintain receptivity to new ways
of operating, and expose themselves to broad views. More specifically, leaders
must have an understanding of the current and potential external issues, trends,
and events that may impact the organization and be able to see new possibilities
that these changes may bring. This understanding is informed through the process of external analysis. External analysis is a strategic thinking activity directed
toward identifying, aggregating, and interpreting the issues outside an organization to determine the implications of those issues on the organization as well as
providing information for internal analysis and the development of the directional strategies. External analysis can remove the protective covering in which
organizations often seal themselves.1 External analysis is a part of the situational
analysis section of the strategic thinking map presented in Chapter 1 (Exhibit 11).
The Goals of External Analysis
Although the overall intent of external analysis is to position the organization
within its industry and service area, more specific goals may be identified. The
specific goals of external 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 significant impact on the organization.
To classify and order issues and changes generated by outside
To provide organized information for the development of the internal analysis, mission, vision, values, goals, and strategy of the organization.
To foster further strategic thinking throughout the organization.
In addition to the identification of current issues, external analysis attempts to
detect early or weak signals outside the organization that may portend a future
issue. Weak signals are early evidence of emerging trends from which it might
be possible to deduce important changes in demography, technology, customer
tastes, social, political or regulatory shifts, or economic patterns.2 Sometimes
based on little hard data, managers attempt to identify patterns that suggest
emerging issues that will be significant for the organization. Such issues, if they
continue or actually do occur, may represent significant challenges or opportunities. Timely identification of external issues aids in developing strategy.
40 strategic management of Health Care Organizations
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 organizations 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 Chapter 1 provided some of the emerging and speculative forces that strategic managers might incorporate into their thinking today.
There is an abundance of such external data. For it to be meaningful, managers
must identify the data sources and aggregate and classify the information. Once
classified, important issues that will affect the organization may be identified and
evaluated. This process encourages managers to view external changes as 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
external forces to the organization, innovation and improved customer satisfaction are likely. Strategic thinking within an organization fosters adaptability,
and those organizations that adapt best will ultimately displace the rest.
The Limitations of External Analysis
External analysis is critical for understanding external changes, but it provides no
guarantees for success. The process has some practical limitations that the organization must recognize. These limitations include:
External analysis cannot foretell the future.
Managers cannot see everything.
Sometimes pertinent and timely information is difficult or impossible to
There may be delays between the occurrence of external events and managements 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 detected issue.
Managers strongly held beliefs sometimes inhibit them from detecting
issues or interpreting them rationally.3
Even the most comprehensive and well-organized external analysis processes
will not detect all the changes taking place. Events may occur that are significant
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 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 often
determined by established paradigms (ways of thinking and beliefs). Thus, data
that exist in the real world that do not fit the paradigm will have a difficult time
permeating the individuals filters he or she will simply not see it.4 As creativity
Chapter 2External Analysis 41
expert Edward De Bono explains, [w]e 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.5 Despite long and loud signals for
change, some organizations do not change until it is too late.
The Process of External Analysis
External analysis often is a complex undertaking. Therefore, a step-by-step process
helps the identification and assessment of external issues likely to affect the organization. As illustrated in Exhibit 21, there are six steps to effective external analysis
efforts.6 The strategic thinking states of awareness, anticipation, analysis, interpretation, synthesis, and reflection are particularly important in external analysis.
Exhibit 21 Process for External Analysis
Step 1 Organize the External Analysis Process and Create an
Issue Map Template
Step 2 Scan the General Environment, Health Care System,
and Service Area
Step 3 Monitor and Conrm External Issues
Step 4 Forecast External Issues
Step 5 Assess External Issues
Step 6 Complete an Issue Map
42 strategic management of Health Care Organizations
Step 1: Organize the External Analysis Process
Engaging in strategic thinking and the process of external analysis can be overwhelming without some organization. Therefore, breaking the external analysis
process into logical components can help focus strategic thinking to engage in
the analysis process. In many respects organizations are similar to biological
species both are complex adaptive systems that are nested in broader systems.
For example, natural systems are nested in the ecosystem, which is nested in
the broader biological environment. Similarly, health care organizations are
nested in their service areas, the services areas are nested in the industry, and
the industry is nested in the broader general or macro-environment as conceptualized in Exhibit 22.7 In these nested systems, changes in one system will
initiate changes in another system. For example, a change in national health
policy, made in the macro-environment, will affect how the health industry
Exhibit 22 The Nested Environments of a Health Care Organization
General Environment
Health Care System
Service Area
Government Institutions
Business Organizations
Educational Institutions
Religious Institutions
Research Organizations/Foundations
Primary Providers
Secondary Providers
Provider Associations
Government Services
Business Organizations
Not-for-Profit Organizations
Other Local Organizations
Chapter 2External Analysis 43
works (the health care system). These changes in the health care system affect
the service areas in which health care organizations operate and ultimately
influence the way in which health care organizations operate in those service
areas. Reciprocally, actions by the organization will change the nature of the
service area, changes in service area will be a factor in determining the nature of
the health care system, and how the health care system will impact the general
Within these nested systems, 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. When systems are nested, change generally cascades from one system to another; however, similar to the natural environment, changes in any
one system may simultaneously affect the other systems as well as individual
In this chapter we will explore the types of change initiated in the general environment, health care system, and the service area. Chapter 3 will focus on service
area competitor analysis and Chapter 4 will examine the organization.
The General Environment All types of organizations and independent individuals generate important issues and subsequently change within the general
environment. For example, a research firm that is developing imaging equipment
may introduce a new technology that could be used by a variety of other organizations in diverse industries such as hospitals (magnetic resonance imaging) and
manufacturing (robotics). The general environment is the broadest system and
members may be broadly classified in a variety of ways depending on the strategic management needs of the organization but certainly include:
Government institutions.
Business organizations.
Educational institutions.
Religious institutions.
Research organizations and foundations.
Individuals and consumers.
Organizations and individuals in the general environment, acting alone or
in concert with others, initiate and foster the macro-environmental changes
within society. These organizations and individuals generate economic,
social/demographic, legislative/political, 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 general, external changes affect a number of different sectors of the
economy. For example, passage of the prescription drug bill during the George
W. Bush presidency affected a variety of organizations as well as individuals,
44 strategic management of Health Care Organizations
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 society, not just health
care organizations. As U.S. national health care legislation evolves during the
Trump administration, virtually all institutions and organizations will again be
The organization itself may be affected rather quickly by the economic, social/
demographic, legislative/political, 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 general environment
changes and detect major shifts taking place. A shift in consumer attitudes and
expectations concerning 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 U.S.
population will impact every aspect of society as well as the health care system.
Sometimes the demographics of the general environment provide leading indicators of health care trends.
Typically, as information is accumulated and evaluated by the organization, it
will be summarized as issues affecting the industry or organization. The identification and evaluation of the issues in society are important because the issues
will accelerate or retard changes taking place within the industry and may affect
the organization directly as well.
The Health Care System Events in the health care system typically impact
most significantly those organizations and individuals directly or indirectly
involved in health care. Organizations and individuals within the health care
system 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 system with the
intent of understanding the nature of all these issues and changes. Focusing
attention on major change areas facilitates the early identification and analysis
of industry-specific issues and trends that will affect the organization. In todays
health care system a more focused service area competitor analysis is typically
required as well (see Chapter 3).
The wide variety of health care organizations makes categorization difficult;
however, the health care system may generally be grouped into five segments:
1. Planning/Regulatory Organizations.
2. Organizations that provide health services (primary providers).
3. Organizations that provide resources for the health care system (secondary
4. Organizations that represent the primary and secondary providers.
5. Individuals involved in health care delivery and patients (consumers of
health care services).9
Chapter 2External Analysis 45
Exhibit 23 lists 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 rather to provide a
starting point for understanding the wide diversity and complexity of the industry.
Exhibit 23 Organizations in the Health Care System
Planning/Regulatory Organizations
Federal regulating agencies Department of Health and Human Services (DHHS)
Center for Medicare and Medicaid Services (CMS)
Centers for Disease Control and Prevention (CDC)
Food and Drug Administration (FDA)
U.S. Agency for Toxic Substances and Disease Registry (ATSDR)
Environmental Protection Agency (EPA)
State regulating agencies Public Health Departments State Health Planning Agency (e.g. Certificate of Need or CON)
Voluntary regulating groups The Joint Commission (accredits 21,000 health care organizations in the United States)
National Committee for Quality Assurance (NCQA)
Primary Providers (Organizations that Provide Health Services)
Hospitals Voluntary (e.g. Barnes/Jewish Hospital)
Governmental (e.g. Veterans Administration Hospitals)
Investor-owned (e.g. HCA The Healthcare Company, Tenet)
State public health departments
Non-hospital health care facilities Skilled nursing facilities (e.g. HCR ManorCare)
Assisted living facilities (e.g. Brookdale Senior Living Solutions)
Intermediate care facilities (e.g. Avalon Memory Care)
Ambulatory care institutions (e.g. Ambulatory Care Centers)
Hospices (e.g. Hospice Care & Palliative Care, Inc.)
Home health care institutions (e.g. CareGivers Home Health)
Physicians offices
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 that pay for care (third-party payers) Government (e.g. Medicaid, Medicare) (See Essentials for a Strategic Thinker 21, What is
Government Health Care Insurance? for an overview of public health insurance)
HMOs and IPAs (e.g. United Healthcare) Insurance companies (e.g. Prudential, Metropolitan)
46 strategic management of Health Care Organizations
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, 3M, GE)
Organizations that Represent Primary and Secondary Providers
National associations American Medical Association (AMA)
American Hospital Association (AHA)
State associations (e.g. Illinois Hospital Association, New York Medical Society)
Professional associations Health care (e.g. American College of Healthcare Executives [ACHE] or Medical Group
Management Association [MGMA])
Physicians (e.g. American College of Physician Executives [ACPE])
Medical products (e.g. Pharmaceutical Manufacturers Association [PMA])
Individuals and Patients (Consumers) Independent physicians
Non-physician professionals (Physician Assistants, X-ray Technicians)
Patients and consumer groups (American Heart Association)
Source: Adapted from Beaufort B. Longest Jr., Management Practices for the Health Professional, 4th edn
(Norwalk, CT: Appleton & Lange, 1990).
Exhibit 23 (Continued)
Essentials for a Strategic Thinker 21
What Is Government Health Care Insurance?
In the United States, there are several government programs that enhance access to health
care for specific groups of eligible beneficiaries. Some programs only provide health insurance coverage such as Medicare, Medicaid, and
Childrens Health Insurance Program (CHIP),
whereas others may also deliver services directly
to beneficiaries such as TRICARE (Military Health
Care System, formerly CHAMPUS), the Veterans
Administration (VA), and the Indian Health
Service (IHS).
Medicare is a federal program that provides
health insurance coverage to persons over the
age of 65, some disabled workers, and people
with end-stage renal disease (ESRD). Individuals
who are assessed a payroll tax for forty quarters
of employment and are over the age of 65 are
eligible for Medicare coverage. People over the
age of 65 may also buy into Part A. There is no
dependent coverage under Medicare, but an
individual that receives a spousal benefit under
Social Security is also eligible for Medicare.
Chapter 2External Analysis 47
The Medicare program consists of four parts:
Part A (Hospital Insurance), Part B (Medical
Insurance), Part C (Medicare Advantage), and
Part D (Prescription Drug Insurance). Although
Part A is funded by the Hospital Insurance Trust
Fund (tax revenues), Parts B and D are funded by
a combination of monthly premiums and general tax revenues. Part D coverage is provided
by private insurers (premiums). Many Medicare
beneficiaries purchase private Medigap policies
(sold by insurance companies such as Humana,
Blue Cross Blue Shield, and Aetna) to help with
cost-sharing and supplement coverage. Rather
than participating in traditional Medicare (i.e.
Parts A, B, and D), beneficiaries may enroll in
private Medicare Advantage Plans that typically provide more coverage than traditional
Medicare, but utilize narrower provider networks (e.g. HMOs, PPOs). Additional premiums for Medicare Advantage Plans may be
charged plus enrollees usually are required to
pay the government-funded Part B premiums.
For Medicare Advantage (Medicare beneficiaries
have had the option to receive their Medicare
benefits through managed capitated-fee health
plans), Medicare pays the health plan a set
amount every month (a per person set fee or
capitation) at a capitated rate that is 95 percent of expenditures for beneficiaries under
Medicare Parts A and B.
State Medicaid programs receive federal
matching funds from the Federal Matching
Funds Program (Maternal Health and Family
Planning Program) to provide coverage to
low-income pregnant women and children,
low income families, the elderly, persons on
Supplemental Security Income (SSI), and disabled persons. Medicaid eligibility standards for
the non-elderly vary greatly from state to state.
Under the ACA Medicaid expansion, all adults
with incomes below 138 percent of the Federal
Poverty Level (FPL) are eligible for Medicaid coverage, but a number of states refused to expand
Medicaid. A majority of states now contract
with Medicaid Management Care Organizations
(MCOs) to deliver services and most beneficiaries receive benefits through such plans. The
Childrens Health Insurance Plan (CHIP) provides
federal matching funds for coverage of children
in families with incomes up to 300 percent FPL.
TRICARE provides health care in accordance
with a group-priorities list to active duty/retired
military, National Guard/Reserve members, and
spouses and children through military facilities
and civilian networks. In addition, the VA may
pay for private care when wait times or commutes are excessive.
The Indian Health Services (IHS) provides
care to members of federally-recognized tribes
in the form of direct care (DC) and purchased/
referred care (PRC). Tribal members may receive
DC from any IHS facility, but the availability of
PRC care is geographically restricted to areas in
close proximity to the home reservation. In addition, tribal members are eligible to participate in
all government programs open to the general
Source: Leonard J. Nelson, III, Adjunct Professor at UAB School of
Public Health and Professor Emeritus at Samford University.
The Service Area The service area is the geographic space surrounding the
health care provider from which it pulls the majority of its customers/patients.
It is often limited by sometimes ill-defined geographic borders. Beyond these
borders, services may be difficult to render because of distance, cost, time,
and so on; however, in some circumstances the service area might be worldwide. Nevertheless, a health care organization must not only define its service
48 strategic management of Health Care Organizations
area, but also understand the changes taking place that will directly affect the
organization. Organizations generating change in the service area typically
Local government services.
Local business organizations.
Local not-for-profit organizations.
Other local organizations.
Individuals and patients.
Defining the Service Categories The first step in defining the service area is
to specify the service category to be analyzed because different service categories
may have vastly different service areas. A service category is a distinct product/
service that may be defined very broadly (hospital care) or very narrowly (pediatric hematology) depending on the level of analysis. 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 defined as acute hospital care,
but for a rehabilitation hospital, the service category might be defined as physical therapy, occupational therapy, or orthopedic surgery. In addition, because
many health care services can be broken down into more specific subservices, the
level of service category specificity 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 hematologyoncology 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 (to a larger service area) for care from a specialist than a parent who sought well-baby care available from nurse practitioners in the neighborhood (smaller service area).
The service area is further defined by customers preferences and the health care
providers that are available. The 21st-century consumer has become empowered
by the amount of information available concerning disease conditions. Exhibit 24
shows 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, finally, some consumers prefer physician assistants or nurse
practitioners. These different consumer preferences will be determinants in
defining the service area.
Chapter 2External Analysis 49
Another group of consumer determinants will be related to personal factors
such as personal and social values, epistemic (knowledge) values, past experiences, and the individuals personal state of health. In concert, these variables
develop the individuals preferences for health care providers; however, if providers are not available meaning that limited or no options are in the immediate
area, the consumer will travel greater distances to gain the desired care.
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 finding 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 the practice may be perceived
as attracting desirable or undesirable demographic, socioeconomic, or ethnic
groups. The organization itself has a perceived or self-image of its services (health
care) provided as well as its quality of service and the information provided.
Exhibit 24 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
Drive Time
Parking Ease/Access
Hours of Operation
Price Level
Services Available
Wait Time
Quality of Information
Phone Consults
Brochures and Advertisements
Service Area
Market/Organization Determinants
50 strategic management of Health Care Organizations
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, additional 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 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, these organizations have seen health care cost increases
in double digits.
Multiple Service Areas Understanding the geographic boundaries is important in defining the service area, but is often difficult 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 446,700) 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
organizations various service areas. At the same time, for certain organizations,
defining only one service category may suffice (such as in the case of a long-term
care facility in a major metropolitan area).
Service areas will be unique for each organization. A national for-profit hospital chain may define its service area quite generally, but even then, different
strategies may be in place. For example, HCA Holdings Inc. (HCA) is a holding
company that owns and operates hospitals and related health care entities. As of
2017, it operated 171 hospitals and 118 freestanding surgery centers in 20 states
and the United Kingdom.10 HCAs strategy is to become a major health care
presence in highly concentrated markets in the nation. On the other hand, the
Hospital Association of Southern California owns more than 184 hospitals, 40
hospital systems, and numerous related professional associations and associate
members.11 Its strategy is to improve the operating environment for member
hospitals and the health status of the communities they serve in Los Angeles,
Orange, Riverside, San Bernardino, Santa Barbara, and Ventura counties in
California (note that this six-county service area contains a population of over
19 million larger than the population of all states except California, Texas,
Florida, and New York).
Chapter 2External Analysis 51
Essentials for a Strategic Thinker 22
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 defined 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 scientific community), a religion
(the Jewish community), or some other characteristic (the LGBT community, the Hispanic
The public health community (a group of
professionals who share a common purpose)
spends considerable effort 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 service area within which health care
organizations function, while also representing a set of community factors values, needs,
resources, and constraints that may suggest
modifications to a typical health care structure
or the usual set of services offered/delivered.
Therefore, the service area would include such
factors as access to care, available financing
strategies, the ways in which resources are allocated, and systems of accountability.
Examples of community factors that can
affect health care organizations include:
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.
An individual hospital, home health care organization, or HMO may define its
service area much more specifically. In general, health services are provided and
received within a well-defined service area, where the competition is clearly identified and critical forces for the survival of the organization originate. For instance,
hospitals in rural areas have well-defined 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 factors such as patient histories, the reputation
of the organization, available technology, physician recognition, and so on. In
addition, geographic impediments such as rivers, mountains, and limited access
highways can influence how the service area is defined. The definition of communities (see Essentials for a Strategic Thinker 22, What Is a Community?) is
often helpful in determining a service area.
52 strategic management of Health Care Organizations
The nature and scope of professional
organizations that set standards,
accredit, or otherwise engage in
accountability functions for health care
The nature and scope of health care
financing agencies, including purchasers
and private and public insurers, that
participate in the health care marketplace
in the community.
The availability of health care providers,
facilities, supplies, and ancillary services
across the community.
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, language, 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 service area 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
Source: Donna J. Petersen, MHS, ScD, CPH, Dean, College of Public
Health, University of South Florida.
External Information Categories Breaking the external macro-environment
into the general environment, the health care system, and the service area components helps focus strategic thinking and external analysis. Similarly, categorizing
issues by type economic, social/demographic, legislative/political, technological, and competitive further aids in focusing on the identification of issues. Such
categories not only assist in tracking but also facilitate the subsequent assessment
of the issues. Issues are not inherently categorical; however, using these categories
helps managers to understand the nature of the issues and aggregate and organize
information. Through the aggregation and organization process, patterns may be
identified and evidence accumulated on an issue.
Combining the system components with these categories of issues results
in an issue map. More specifically, an issue map is a matrix of issues that combines the components of the external systems (general environment, health
care system, and service area) on one axis with categories of issues (economic,
social/demographic, legislative/political, technological, and competitive) on
the other axis. The format of the issue map that organizes the external analysis process is shown in Exhibit 25. The cells of the issue map may be filled
in with identified issues and their implications through the remaining steps
of the external analysis process the scanning, monitoring, forecasting, and
assessing stages. Additionally, the issue map will provide the foundation for
a more focused analysis of the organizations competitors in the service area
(Chapter 3).
Chapter 2External Analysis 53
Exhibit 25 External Issue Map
Issue Map
Environment Service Area
Health Care
Categories of
Step 2: Scan the General Environment, Health Care
System, and Service Area
Scanning is the process of identifying and documenting a number of external
organizations in the general environment, health care system, and service area
in search of pertinent, current, and emerging trends/issues. Scanning the external systems requires the strategic thinking states of awareness and anticipation.
Strategic managers who practice effective external analysis are so close to the
external issues that by the time change becomes apparent to others, they have
already detected the signals of change and have explored the significance 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 should not 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 most
important task of an organizations 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.13
To be successful, health care organization leaders must have an understanding
of the external systems in which they operate; they must anticipate and respond
54 strategic management of Health Care Organizations
to the significant shifts taking place within those systems. Strategic thinking, and
the incorporation of that thinking into the strategic plans for the organization, is
now more important than ever. In times of turbulence the ability to anticipate
dramatically enhances your chances of success. Good anticipation is the result
of good strategic exploration.14 Organizations that fail to anticipate change,
ignore external forces, or resist change will find themselves out of touch with
the needs of the market, especially because of antiquated technologies, ineffective delivery systems, or outmoded management. Institutions that anticipate
and recognize significant external forces and modify their strategies and operations accordingly will prosper. Essentials for a Strategic Thinker 23, What Are
Inevitable and Predictable Surprises and Gray Rhinos? examines the nature of
these surprises.
Essentials for a Strategic Thinker 23
What Are Inevitable and Predictable Surprises and
Gray Rhinos?
Inevitable surprises are events occurring in the
future that have discernable signs, patterns, or
signals of their occurrence today. By examining the dynamics at work, the strategist can
predict the inevitable surprises of tomorrow;
thus the future is foreseeable.1 Occurrence is
inevitable and prediction is possible because
many surprises are already taking place
through predetermined events forces that
can be anticipated with certainty. If these
events are identified, will there be surprises?
The answer is simple while the events are
predetermined, the timing, results, and consequences are not.
Predetermined events can be anticipated
because their early stages are already in motion
either they have already happened or they are
currently happening, and experienced strategists are able to characterize likely implications.
Leaders can increase the probability of successfully predicting future events and trends by
using a systems approach and incorporating
the elements of strategic thinking into the decision making process (awareness, anticipation,
analysis, interpretation, synthesis, reflection). By
training themselves to carefully consider external systems, analyze data, question assumptions,
and generate new ideas, decision makers can
develop the ability to forecast predetermined
events and even second- and third-degree
effects that will impact the organization.
A related concept, that of predictable
surprises, indicates that leaders may not be
able to anticipate crises because of their
cognitive, organizational, or political shortcomings.2 Such faults may include inherent biases (cognitive); faulty external scans
that do not identify threats or do not collect and analyze information appropriately
(organizational); or specialized interests that
invoke individuals or groups to act in their
own self-interest rather than the organization as a whole (political). Those in leadership
positions must champion the recognition of
threats that are emerging, the subsequent
prioritization of threats, and the activation of
effective response.
In contrast to inevitable and predictable
surprise, gray rhinos are high-probability, highimpact issues that everyone acknowledges
Chapter 2External Analysis 55
as threats because a series of signals and visible evidence has occurred. Leaders can see
them coming yet fail to address them (obvious
but neglected risks).3 These issues tend to
be significant social, economic, and political
issues or unsolved problems that threaten
a profound impact and yet are not typically
addressed until they create disaster. Such
issues might include growing income inequality, a deepening racial divide, global warming
(climate change), political gridlock, or lack of
access to health care for millions of people.
Charging gray rhinos may pose significant risks
to organizations; therefore, leaders must work
to induce momentum for positive change or
be flattened by inaction.4
Leaders can improve their organizations ability to anticipate and respond to events by learning to recognize behaviors that cloud judgment
(such as cognitive, organizational, and political imperfections) and incorporating lessons
learned into the organizational culture.
1. Peter Schwartz, Inevitable Surprises: Thinking
Ahead in a Time of Turbulence (New York:
Gotham Books, 2003).
2. Max 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,
3. Michele Wucker, The Gray Rhino (St. Martins
Press, 2016).
4. Ibid.
See also: Predictable Surprises: The Disasters
You Should Have Seen Coming and How to Prevent
Them (Parameters, 2006). Book Review by Mark
J. Eshelman, retrieved from www.thefreelibrary.
Source: Lauren Wallace MPH, MPA, DrPH Candidate, University of
Alabama at Birmingham.
Organizational and Individual Focus A number of organizations and
individuals comprise the general environment, health care system, and service
area. Some external organizations and individuals have little direct involvement
with the health care system while others are directly connected. 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 system. 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
The external scanning process acts as a window to these organizations. These
organizations and individuals are generating strategic issues that may shape the
entire health care system or have a direct impact on any one health care organization. Managers engaged in external scanning carry out three functions. They:
1. View external data.
2. Organize external information into several desired categories.
3. Identify issues within each category.
56 strategic management of Health Care Organizations
Strategic issues are external trends, developments, dilemmas, and possible
events that affect an organization and its position. Strategic issues are often
ill-structured and ambiguous and require effort in interpretation.16 Often, in
attempting to identify important external issues, general labels such as opportunities or threats are used to classify issues. However, signals are typically
neutral in their implications and their interpretation can only be assessed in
the context of strategy.17 Therefore, at this stage in strategic planning, it is beneficial 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 organizations window or lens on
the external world. The scanning function is a process of viewing a number of
external organizations either in the general environment, health care system,
or service area 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,
external issues are organized through the scanning process. Prior to this interpretation process, issues are diverse, unorganized, sporadic, mixed, and undefined.
The scanning process categorizes, organizes, accumulates, and, to some extent,
evaluates issues.
Information Sources There are a variety of sources for external information.
Although organizations create change, they are often difficult to monitor directly.
However, various secondary sources (published information) are readily available. Essentially, people and publications both outside and inside the organization serve as external information sources. Typically, within the 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.
External scanning is perhaps the most important part of external analysis
because it forms the basis for the subsequent processes. In the scanning activity,
issues and changes are specified and sources identified. 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 identified in the scanning process. It is
therefore advantageous if as many managers as possible take part in scanning. An
important aspect of external scanning is that it focuses leaders attention on what
lies outside the organization and enables them to create an organization that can
adapt and learn.
Chapter 2External Analysis 57
Step 3: Monitor and Confirm External Issues
Monitoring is the tracking of issues identified in the scanning process to add data
concerning the issue to confirm or deny its impact. This activity accomplishes four
important functions:
1. Researches and identifies additional sources of information for specific
issues delineated in the scanning process that were determined to be
important or potentially important to the organization.
2. Adds to the external issue database.
3. Attempts to confirm or disprove issues (trends, developments, dilemmas,
and the possibility of events).
4. Attempts to determine the rate of change within issues.
Once the organizations creating change and the publications or other information sources reporting change have been identified, 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 identified issue. The database will be
used to confirm or deny the trend, development, dilemma, or possibility of an
event and to determine the rate of external change taking place.
The intensity of monitoring is reflected in managements understanding of
the issue. When managers believe they understand the issue well, less monitoring will be done. However, when external issues appear ill-structured, vague,
or complex, the issues will require a larger amount of data to arrive at an
Step 4: Forecast External Issues
Forecasting external change is a process of extending the trends, developments,
dilemmas, and events that the organization is monitoring to predict the future
state. Further, forecasting looks at how hidden trends in the present signal possible changes in direction for organizations and societies in the future. 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? An organizations forecasting competence
(coupled with its assessment) can yield a competitive advantage.19
Three processes are involved in the forecasting function:
1. Extending the issues (trends, developments, dilemmas, or occurrences of an
2. Identifying the interrelationships among the issues.
3. Developing alternative projections.
Step 5: Assess External Issues
Information concerning external issues, though abundant, is seldom obvious
in its implications. Strategic managers must interpret the data they receive.
58 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 24
What Is Big Data Analytics?
Simplistically stated, Big Data means too much
disparate data from too many sources to process
with non-distributed techniques; thus analytics
are employed. Big Data actually comprise multiple large datasets that are analyzed in conjunction to uncover patterns and correlations among
the data that likely would not be apparent if the
datasets were analyzed independently. These
collections of datasets include structured, semistructured, and unstructured data extracted
from many public and private sources that contribute to understanding or solving a complex
problem. Such analyses are useful for operational
purposes such as improving work processes and
reducing cost, and for strategic purposes such as
making future market predictions based on past
sales behavior patterns.
Data Volume
Compiling Big Data is not the point Big Data
provide no competitive advantage without analytics (unless you are selling some exceptionally
important data to other users) it is about the
knowledge to be gleaned through expert exploration of the unique elements of the datasets in
their combined contexts.
Data mining, the process of extracting knowledge about previously unknown relationships
from massive datasets, is possible because of
technological innovations such as cost-effective
data storage options, high-speed distributed
processing capability, robust device connectivity with high-speed data transmission, and distributed data platforms. Despite these and other
technological capabilities available, Big Data still
present many challenges to optimal utilization
beyond the obvious challenge of volume.
Data Variety (disparate data
Significant data from source databases may take
many forms, including text, aggregated statistical
data, raw data transmitted from mobile devices,
video and graphic data, and other formats, that
After all, facts do not speak for themselves; one has to make sense of the facts,
not just get them straight.20 Assessing is a process for the evaluation of the
significance and impact of forecasted external issues on an organization that
is largely non-quantifiable and therefore judgmental. The assessment process
includes evaluation of the significance of the extended (forecasted) issue on
the organization; identification 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. Assessing may also initiate additional scanning, monitoring, and
forecasting as part of the assessment process. Today, organizations are increasingly turning to Big Data and analytics in the assessment process. Essentials
for a Strategic Thinker 24, What Is Big Data Analytics examines Big Data
and analytics in assessment.
Chapter 2External Analysis 59
require sophisticated data management and
analytical approaches. Data scientists with these
skills are scarce.
Data Velocity
In the current environment, large volumes
of data are captured and transmitted rapidly,
often in real-time at exceptionally high speeds.
Repositories of these data are dynamic or
moving targets from an analytics perspective.
Processing speed must be compatible with capture speed.
Data Veracity
The accuracy and reliability of data is a concern
with any data analysis, and is compounded
in Big Data rather than minimized, because
analysis is based on numerous highly variable
datasets, rather than a single constructed and
cleaned dataset. Errors in one component dataset may affect a conclusion drawn from a complex relationship involving multiple datasets.
Cleaning Big Data to enable analytics requires
skilled data scientists, specific data tools, and
much time.
Data Curation
The extreme volume of combined data, the
variation among the multiple source datasets,
and the velocity of data capture and processing
all contribute to the challenge of establishing
metadata for Big Data. Defining the logic model
underlying the metadata structure and crafting a
searchable data structure requires special technical skills and data tools. Again, data scientists
with these skills are scarce. Big Data, of necessity, are cloud-based, stored and processed on
multiple servers that may be subscription-based,
involve multiple vendors, and require comprehensive data sharing agreements.
Regulation and Oversight
Enforcement of consumer protection laws,
such as those regulated by the Federal Trade
Commission, as well as information security and
privacy regulations such as the Health Insurance
Portability and Accountability Act (HIPAA) are
evolving with regard to Big Data.
Source: Donna J. Slovensky, PhD, RHIA, FAHIMA, Professor and
Senior Associate Dean, School of Health Professions, University of
Alabama at Birmingham.
Strategic decisions are made in the context of changing financial, social, political, technical, and competitive forces understanding the context in which an
organization operates is, therefore, fundamental. Understanding the context of
a situation so that complexity can be better explained is called sensemaking.21
Strategic leaders who have a sense of context know how to quickly capture the
complexities of their situation 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.22
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. For example, assessing the commercial potential of drugs in
clinical trials requires not only an understanding of the science but also sound
business judgment.23 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
60 strategic management of Health Care Organizations
and intuition. It requires the capacity to suspend beliefs, preconceptions, and
judgments that may inhibit connections being made among unclear and disparate data.24
Several different strategic thinking frameworks and techniques may be used to
examine issues identified in the scanning, monitoring, and forecasting stages of
external analysis. These frameworks, which are informal and generally not overly
sophisticated, have been variously described as judgmental, speculative,
or conjectural.25 Indeed, external analysis is largely an individual effort and
is directed to person-specific interests. Further, external analysis usually is not
limited to just one of the external analysis tools and techniques. The remainder
of this chapter will discuss external analysis frameworks that identify and help
assess issues in the general environment, the health care system, and the service
area. An approach and techniques for more specific market segmentation and
competitive analysis will be discussed in Chapter 3.
Issue Impact and Probability Prioritization Issue impact and probability
prioritization is the classification of external issues based on an assessment of the
importance of the issue and the likelihood that the issue will continue to remain
an issue in the future. Perhaps because of its relative simplicity, issue prioritization is a widely practiced analysis method. Unfortunately, external issues are
rarely presented as a neat set of quantifiable data; rather, external issues are illstructured and conjectural. Thus, in many cases, external analysis is a matter of
reaching consensus on the existence and impact of an issue and speculating on the
likelihood of its continuance.
As illustrated in Exhibit 26, the issue impact and probability prioritization
process for a nursing home includes the identification of issues by external system 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.
Exhibit 26 Issue Impact and Probability Prioritization by a Nursing Home
Trend/Issue Evidence
Impact on Our
Probability of Trend
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 5 years, the 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
Chapter 2External Analysis 61
Exhibit 27 External Trends/Issues Plot
Low Impact
Low Probability
on the
issues to
the right of
the line
should be
addressed in
the strategic
Low High
5 10
Low Impact
High Probability
High Impact
Low Probability
High Impact
High Probability
Local Competition
Critical issues to the
right of the line should be
addressed in the strategic plan
Probability of Trend Continuing
The formats illustrated in Exhibit 26 and Exhibit 27 are useful for organizing
external data and providing a starting point for speculating on the direction and
rate of change for identified trends. However, trend extrapolation of external
issues requires extensive familiarity with the issues and a great deal of sound
Solicitation of Expert Opinion Expert opinion is well-informed individuals insight into an issue/trend/situation, typically used in external analysis to
identify, monitor, forecast, and assess external 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 external issues, there are a number of more formal
expert-based external analysis techniques. These strategic thinking frameworks
help to solicit and synthesize the opinions and best judgments of experts within
various fields.
These issues may then be plotted on the chart shown in Exhibit 27. The
assumption is that the issues to the right of the curved line in the exhibit have a
significant impact (high impact) on the organization and are likely to continue or
occur (high probability) and should be addressed in the strategic plan.
62 strategic management of Health Care Organizations
The Delphi Method The Delphi method is a process for the development,
evaluation, and synthesis of individual points of view through the systematic
solicitation and collation of individual judgments on a particular topic; it is a
popular, practical, and useful approach for identifying issues and analyzing
external data. The Delphi method may be used to identify and study current and
emerging trends within each issue category (technological, social/demographic,
economic, and so on). Opinions are summarized and then sent back to the participating individuals for the development of new judgments concerning the
topic. After several rounds of solicitation and summary, a synthesis of opinion
is formulated.26
The traditional Delphi method has undergone a great deal of change in the context of external analysis. The salient features of the revised Delphi method are to:
Identify recognized experts in the field of interest.
Seek their cooperation and send them a summary paper (based on a literature search).
Conduct personal interviews with each expert based on a structured
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 specific external issue. For example, a Delphi study was designed
to define 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 first systematic attempt to define the role and responsibilities of the sports medicine specialist and concluded that sports medicine was an evolving specialty in the United
Kingdom.28 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 identification and solving techniques. The nominal group
technique is a facilitated group discussion process for developing consensus on
an issue or problem where individuals present ideas, discussion occurs, and
consensus is reached through a voting process. In the nominal group technique,
a group is convened to address an issue, such as the impact of consolidation
within the health care system 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 flip 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
Chapter 2External Analysis 63
rank the ideas. After voting, further discussion and group generation of ideas
continue. Typically, additional voting continues until a reasonable consensus is
Brainstorming is a group process of free flowing idea generation and discussion, typically used in strategic management to better understand an issue, assess
the impact of an issue, or to generate alternatives. In this process, participants
present ideas and are allowed to clarify them with brief explanations. Each idea
is recorded, but evaluation is generally not allowed. The intent of brainstorming
is to generate fresh ideas or new ways of thinking. Participants 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 first thought.30
NGT and brainstorming could be used to understand and respond to the
increasing competition for ambulatory surgery. Non-hospital access points, such
as specialized ambulatory surgery centers, represent a rapidly growing trend
and hospitals are very concerned about the impact this growth could have on
their bottom line. Inpatient surgeries requiring a one-day or longer length of
stay constitute a small and decreasing percentage of hospital surgery profits.
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 defibrillators
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 future of Medicaid, Medicare, and other forms of government health care
insurance (see Essentials for a Strategic Thinker 21). 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 system.31
Similar to the process of brainstorming, focus groups bring together 10 to 15 key
individuals to surface issues and develop, evaluate, and reach conclusions. Focus
groups provide an opportunity for management to discuss particularly important organizational issues with qualified 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 patients 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.
64 strategic management of Health Care Organizations
Dialectic Inquiry Dialectic inquiry is a point and counterpoint process of
argumentation in which a thesis is argued against an antithesis to develop a synthesis of ideas or issues. 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
More specifically, in external analysis, dialectic inquiry is the development,
evaluation, and synthesis of conflicting points of view (concerning issues) through
separate formulation and refinement of each point of view.33 For instance, one
group may argue that health care costs will be declining between 2018 and 2025
(thesis) because of changes in health regulation. 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 influencing
health care costs and the implications for the future.
Any health care provider can utilize this technique by assigning groups to
debate specific external issues. The groups make presentations and debate conflicting points of view concerning the issues. After the debate, the groups attempt
to form a synthesis of ideas concerning the likely future.34
Stakeholder Analysis Stakeholder analysis is the systematic identification
and evaluation of external and internal individuals, groups, and organizations
that have an interest (or stake) in the success or failure of an organization. It is
based on the belief that there is a reciprocal relationship between an organization and certain other organizations, groups, and individuals. Examples of possible health care stakeholders, shown as a stakeholder map, are presented in
Exhibit 28.
Stakeholders are individuals, groups, and organizations that are directly or
indirectly impacted by the success or failure of the organization and 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 officers 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.35 Such stakeholders have been referred
to as the organization ecosystem organizations that affect and are affected by
the creation and delivery of the organizations 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
Some of these stakeholders are almost always powerful or influential; others are
influential regarding only certain issues; still others have little influence or power.
If the stakeholders can be identified and evaluated, then the forces affecting the
organization may be specified. The needs and wants of these constituencies may
dramatically affect the strategy of an organization.37
Chapter 2External Analysis 65
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. Researchers suggest that the knowledge
needed to generate competitive imagination and to manage disruptive change
increasingly lies outside the organization, at the periphery of the organizations
established stakeholder network.38 Therefore, strategic thinkers must be open to
fringe ideas and non-traditional thinking developed by fringe players. At first,
these stakeholders may appear to be poor, weak, isolated, non-legitimate, or radical.39 In reality, they may be strong purveyors of change.
Scenario Writing and Future Studies Many businesses regularly use scenarios when assessing the external trends. Scenarios are probable visions, stories,
or pictures of the future based on forecasting the impact of current trends, events,
and issues. The popularity of scenario analysis is due in large part to the inability
of other, more quantitative, forecasting methods to predict and incorporate major
Exhibit 28 A Stakeholder Map for a Large Multispecialty Group Practice
Local paying
Federal, state,
and local
group medical
66 strategic management of Health Care Organizations
external shifts and provide a context for strategic thinking. Scenarios avoid the
need for single-point forecasts by allowing users to explore several alternative
futures.40 Scenario analysis is an alternative to conventional forecasting that is
better suited to situations with numerous uncertainties or imponderables where
there is no map.
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 timeframes or periods of time. Scenario writing often requires generous assumptions. Few guidelines prescribe what to include in a 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.41 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 external event happens (or
does not happen), what will be the effect on the organization? The use of multiple scenarios is particularly helpful in considering the future of public health.
See Essentials for a Strategic Thinker 25 to answer the question What Is Public
Health in the United States? and Exhibit 29 to examine four scenarios or alternative futures for public health care through 2030. The scenarios were developed
by the Institute for the Future to provide a description of critical factors that will
influence public health in the 21st century.
Essentials for a Strategic Thinker 25
What Is 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 defined
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 comprised 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.
Chapter 2External Analysis 67
Exhibit 29 Public Health 2030: A Scenario Exploration
Scenario 1: One Step Forward, Half a Step Back
Amidst continued fiscal constraints, public health agencies and health care slowly advance their
capabilities. Many use automation and advanced analytics to improve services and community
and population health. However, climate change challenges continue to grow, and there is little progress in improving the social determinants of health. Great variations in technological
capabilities, funding, and approaches to prevention along with a continuous rise in health care
costs significantly limit public health gains.
The Essential Services
The fundamental obligation or purpose of public health agencies responsible for populationbased health is to:
Prevent epidemics and the spread of
Protect against environmental hazards.
Prevent injuries.
Promote and encourage healthy behaviors
and mental health.
Respond to disasters and assist communities
in recovery.
Assure the quality and accessibility of health
Part of the function of public health is to
assure the availability of quality health services.
Both distinct from and encompassing clinical
services, public healths role is to ensure the
conditions necessary for people to live healthy
lives, through community-wide prevention and
protection programs.
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
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
Informing, educating, and empowering people about health issues.
Mobilizing community partnerships
and actions to identify and solve health
Developing policies and plans that support
individual and community health efforts.
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 effectiveness, 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 Office.
68 strategic management of Health Care Organizations
Scenario 2: Overwhelmed, Under-Resourced
Funding cuts and a hostile political context undermine the role of public health agencies, which
subsequently fail to attract talented young people. Public health crises grow worse and more
frequent, largely due to climate change. Private sector initiatives produce significant innovations for health and wellness, but these primarily benefit the middle-class and affluent groups.
Technological, economic, educational, and health disparities grow, and the institutions of public
health have little capacity for doing anything about them.
Scenario 3: Sea Change for Health Equity
National and local economies gradually grow, and changes in values and demographics lead
to common sense policies and support for health equity. Public health agencies develop into
health development agencies that use advanced analytics, gamification, and diverse partnerships to identify problems and opportunities, and catalyze and incentivize action to improve
community health. While some disparities persist, in 2030 the vast majority of U.S. residents
have attained greater opportunity for good health through quality improvements in housing,
economic opportunity, education, and other social determinants of health.
Scenario 4: Community-Driven Health and Equity
Public health agencies, partners, and local health improvement initiatives coalesce via technology and social media into a national web of community-health enhancing networks. These
networks help communities exchange their innovations and best practices, and leverage
the expertise of public health agencies and others. The nation also strives to come to terms
with its racial and socioeconomic histories, and supports real changes and legislation to
create a more equitable society. This value shift to equity is accelerated by the proliferation
of new community economic models that help households sustain themselves and improve
health and well-being. Public health sheds many functions and facilitates these movements
to improved health.
Source: Institute for Alternative Futures. Public Health 2030: A Scenario Exploration. Alexandria, VA. May
2014. Available from
Select the Strategic Thinking Framework
The purpose of analyzing the general environment, the health care system, and
the service area is to identify and understand the significant shifts taking place.
Exhibit 210 summarizes the primary focus, advantages, and disadvantages of
each strategic thinking framework.
Exhibit 210 Primary Focus, Advantages, and Disadvantages of External
Analysis Techniques
Technique Primary Focus Advantage Disadvantage
Issue Impact
and Probability
Easy to communicate.
Need a good deal of data to
effectively extend a trend.
Limited to existing
May not foster creative
Exhibit 29 (Continued)
Chapter 2External Analysis 69
Technique Primary Focus Advantage Disadvantage
Delphi Method Scanning
Use of field experts.
Avoids intimidation
Eliminates managements
Members are physically
No direct interaction of
May take a long time to
Nominal Group
Everyone has equal status
and power.
Wide participation.
Ensures representation.
Eliminates managements
Structure may limit
Time consuming.
Brainstorming Forecasting
Fosters creativity.
Develops many ideas,
Encourages communication.
No process for making
Sometimes gets off track.
Focus Groups Forecasting
Uses experts.
New viewpoints.
Finding experts to
No specific structure for
reaching conclusions.
Multiple focus groups
needed to gain insight.
Dialectic Inquiry Forecasting
Surfaces many sub-issues
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.
Considers major
independent groups and
Ensures major needs
and wants of outside
organizations are taken
into account.
Emerging issues
generated by other
organizations may not be
Does not consider the
broader issues of the
general environment.
Scenario Writing Forecasting
Portrays alternative futures.
Considers interrelated
external variables.
Gives a complete picture
of the future.
Focus is on what might be.
Requires generous
Always a question as to
what to include.
Difficult to write.
70 strategic management of Health Care Organizations
The approach selected for evaluating the general environment, health care system, and service area 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-defined service areas may opt for a simple strategic thinking framework that may be carried out in-house, such as trend identification 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.
Health care organizations that are large, have diverse products and services,
and have ill-defined 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, outside nominal groups,
or brainstorming sessions. In addition, these organizations may have the resources
to conduct dialectics concerning external 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-profit health care chains, regional health care systems, large federations and alliances, and state public health departments. Ultimately, the strategic
thinking framework selected for external analysis may depend primarily on the
style and preferences of management. If used properly, any of the frameworks are
powerful tools for identifying, monitoring, forecasting, and assessing issues.
Step 6: Complete an Issue Map
Exhibit 211 shows the abbreviated results of a general environment, health care
system, and service area external analysis with the issues categorized as economic, social/demographic, legislative/political, technological, and competitive.
Exhibit 211 Example of a Completed Issue Map
Issue Categories
General Environment
United States
Health Care System
United States Service Area Charlotte, NC
Economic Economy experiencing
slow overall growth.
Decrease in regulations of
businesses and financial
Emphasis on keeping jobs
in the United States.
Economic fallout of Brexit.
Likely changes in
corporate/ individual tax
Continued growth in the
Procedure costs falling, total
spending is rising.
Many employers unwilling to
shoulder costs for health care.
Over 27.3 million Americans
still without health insurance.
Provisions of the Affordable
Care Act have resulted in an
estimated 20 million people
gaining health insurance
After 9.6 percent
unemployment during
the recession, Charlotte is
back to its norm of about
4.5 percent.
The focus on banking has
been broadened to include
energy and analytics
Cost of living is 96.2 percent
of the national average.
Top city for entrepreneurs.
Chapter 2External Analysis 71
Issue Categories
General Environment
United States
Health Care System
United States Service Area Charlotte, NC
By 2020, the U.S.
population over the
age of 65 is expected
to increase from 47.5
million to 53.7 million or
approximately 20 percent
of the U.S. population.
Hispanics are the largest
minority population
representing about
18 percent of the U.S.
population by 2050.
Rising social unrest/
The U.S. population
is becoming more
ethnically diverse; the
trend continues.
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
Charlotte is the 17th largest
city in the United States,
with a growing population
(842,051 in 2017); 2.4 million
in the area.
The city is diverse: African
American (31 percent),
Hispanics (12.8 percent).
More than 30 percent
increase in millennials (past
five years).
Year-round outdoor
Sports (professional and
college) are supported.
Philanthropic support for
the arts, education.
Changes to the Patient
Protection and Affordable
Care Act (ACA).
General deregulation
occurring, e.g.
Moves to stop corporate
inversion (moving funds
to foreign countries).
United States moves
more to the right
New concerns on
Passage of the ACA
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
Employer-based insurance
may diminish as the
penalties to be paid under
ACA are less than the cost of
health insurance.
NC rejected Medicaid
expansion under ACA.
HB2 limited LGBT rights;
partially repealed after 18
NC is conservative; Charlotte
is not.
Charlotte is a sanctuary
city for immigrants (cities/
counties in the United
States that chose not to
partner with the federal
government to enforce
immigration laws).
Technological Virtual reality.
Increasing use of
Increasing number of
on-demand services.
Robotics applications
continue to be
Electronic health records will
supply copious amounts of
data and many will struggle
to utilize the information to
improve the quality of care;
will be used to determine
payments for hospitals and
FinTech (financial services
technology) is growing
based on need for IT
security in banking.
Energy sector research,
especially solar and
72 strategic management of Health Care Organizations
Issue Categories
General Environment
United States
Health Care System
United States Service Area Charlotte, NC
Big Data and Analytics
increasingly being used.
Increased application of
3-D printer technology.
Increased applications of
artificial intelligence (AI).
Significant advances in
medical information, such
as automation of basic
business processes, clinical
information interfaces, data
analysis, and telehealth.
New technologies emerging
in drug design, imaging,
minimally invasive surgery,
genetic mapping and
testing, gene therapy,
vaccines, artificial blood,
and xenotransplantation
(transplantation of tissues
and organs from animals
into humans).
Google Fiber and AT&T
U-verse High Speed internet
Adoption of electronic
health records (EHRs) is
widespread in MD offices,
urgent care, hospitals.
Telemedicine and other
remote access medicine is
Competitive Global competition
threat of trade wars.
Increasing importance of
market niche strategies
and services marketing.
Increasing emphasis on
Increasing concerns for
data security (avoiding
hackers) for businesses.
The disintegration of some
health care networks.
In some markets this
significantly reduced the
options available to patients
insured under the ACA.
A changing role for public
health is expected, moving
back to core activities
(prevention, surveillance,
disease control, assurance).
Nurses, the largest segment
of the health care workforce
will be in short supply 1.2
million vacancies will emerge
for RNs between 20142022.
Two major hospitals
purchased many physician
practices (but not many
dermatologists or plastic
surgeons) during the
Fewer health insurance
companies in the state;
coverage is dominated by
Blue Cross Blue Shield.
Strategic Momentum: Validating the Strategic
A strategic plan is based in part on an external analysis. Initially this analysis
provides the basic beliefs or assumptions that management holds concerning various external trends, issues, and events. Once strategic management
Exhibit 211 (continued)
Chapter 2External Analysis 73
is adopted as the operating philosophy of managing, strategic thinking, strategic planning, and strategic momentum require frequent validation of the
strategic assumptions to determine whether external issues have changed and
to what extent. Continued strategic thinking is vital to maintaining strategic
The strategic thinking map presented in Exhibit 212 provides a series
of questions designed to detect signals of new perspectives regarding these
assumptions. The questions examine managements understanding of the
external situation and the effectiveness of the strategy. The board of directors,
strategic managers, or others may use these questions as a beginning point to
confirm 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 situation 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.
Exhibit 212 Strategic Thinking Questions for Validation of the
Strategic Assumptions
1. Has the organizations performance been adversely affected by unexpected or new general
environment trends or issues?
2. Has the organizations performance been adversely affected by unexpected or new trends
or issues in the health care system?
3. Has the organizations performance been adversely affected by unexpected or new trends
or issues in the service area?
4. Have new opportunities emerged as a result of new external trends, issues, or events?
5. Is the strategy acceptable to the major stakeholders?
6. Are there new technological developments that will affect the organization?
7. Have there been social or demographic changes that affect the market or strategy?
Changes in ethnic mix? Language barriers? Family structure?
8. Has the legislative/political environment changed?
9. Are there new local, state, or federal regulations or laws being introduced, debated, or
passed that will affect operations or performance?
10. Are there new economic issues?
11. Have new competitors outside the industry considered entering or actually entered into
health-related areas?
12. Is the strategy subject to government response?
13. Is the strategy in conformance with the societys moral and ethical codes of conduct?
74 strategic management of Health Care Organizations
Chapter Summary
Health care managers must be able to understand and analyze the general environment, the health care system, and their service area to be effectively positioned.
The goal of external analysis is to classify and organize 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 benefits of external analysis are clear, there are several limitations. External analysis cannot foretell the future; nor can managers hope to detect
every change. Moreover, the information needed may be impossible to obtain
or difficult to interpret, or the organization may not be able to respond quickly
enough. The most significant limitation may be managers preconceived beliefs.
The steps in external analysis include organizing the process, active scanning
to identify signals of change, monitoring and confirming identified issues, forecasting the future direction of issues, and assessing organizational implications.
External changes that may be important to health care organizations are generated
by organizations and individuals in the general environment (government institutions and agencies, business firms, educational institutions, research organizations
and foundations, individuals and consumers); organizations and individuals in
the health care system (organizations that regulate, primary providers, secondary
providers, organizations that represent providers; and individuals and patients);
and competitors and local organizations in the service area. Typically, such change
is classified as economic, social/demographic, legislative/political, technological,
or competitive. Such a classification system aids in aggregating information concerning the issues and in determining their impact.
People, organizations, databases, and publications both outside and inside
the organization serve as external information sources. There are a variety of
experts who are familiar with external issues; in addition, many organizations
collect patient and consumer information, and subscribe to and archive industry,
technical reports, and databases. Further, patients, physicians, nurses, suppliers,
third-party payers, pharmaceutical representatives, and managed care companies
as well as newspapers and journals, the internet, television, libraries, and public
and private databases may be important information sources.
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 confirm 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 significance of the issues.
There are several strategic thinking frameworks to conduct the scanning, monitoring, forecasting, and assessing processes. These methods include issue impact
and probability prioritization, solicitation of expert opinion, dialectic inquiry,
stakeholder analysis, and scenario writing. The information garnered from
Chapter 2External Analysis 75
external analysis may be documented in an issue map and serves as a foundation
for competitor analysis, internal analysis, the development of the vision and mission, and formulation of the strategy for the organization. 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.
Practical Lessons for Health Care Strategic Thinkers
1. External analysis is one of the most important steps in developing a strategic plan and provides an understanding of the context in which the organization has to be successful.
2. Strategic thinking awareness, anticipation, analysis, interpretation, synthesis, and reflection is key in external analysis. Awareness and anticipation help identify issues, trends, and events; analysis and interpretation
infuse meaning and consequences; and synthesis and reflection provide
conclusions that serve to build a strategic plan.
3. External analysis is an ongoing process and requires organization. Using a
systems perspective to focus strategic thinking can help in identifying and
tracking important external trends, issues, and events that will impact the
4. External analysis tools and techniques provide no answers in themselves;
but rather they are processes that help strategic managers identify and
think through issues and reach conclusions.
5. The issue map provides a foundation for the analysis of competitors in the
service area.
The Language of Strategic Management: Key Terms and Concepts
Delphi Method
Dialectic Inquiry
Expert Opinion
External Analysis
Focus Groups
General Environment
Gray Rhinos
Inevitable Surprise
Issue Impact and Probability
Issue Map
Nested Systems
Nominal Group Technique (NGT)
Predictable Surprise
Primary Providers
Secondary Providers
Service Area
Service Category
Stakeholder Analysis
Strategic Awareness
Strategic Issues
76 strategic management of Health Care Organizations
1. James M. Kouzes and Barry Z. Posner, The Leadership
Challenge: How to Keep Getting Extraordinary Things
Done in Organizations (San Francisco, CA: 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.
2. Govindarajan, Vijay, Planned Opportunism, Harvard
Business Review 94, no. 5 (2016), pp. 5461.
3. J. OConnell 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,
Conflict, and Trust on Decision Outcomes, Journal of
Management 33, no. 2 (2007), pp. 196222.
Questions for Class Discussion
1. What types of changes are likely to occur in the health care system in the next several
2. Describe the setting for health care management. Is the setting too complex or changing too rapidly to accurately predict future conditions?
3. Why is external analysis important for an organization?
4. What are the specific goals of external analysis?
5. What are the limitations of external analysis? Given these limitations, is external analysis worth the effort required? Why?
6. What processes are involved in external analysis? What are their subprocesses?
7. Why must the service categories be specified first in service area analysis for health care
8. Why is it important to clearly define the service area?
9. How does the scanning process create a window to the external systems? How does
the window concept help in understanding organizations and the types of information
they produce?
10. Why is the process of external analysis as important as the product?
11. Which of the external analysis strategic thinking frameworks are most useful? Why?
12. Using Exhibit 27 as 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.
13. Which of the scenarios in Exhibit 28 do you think is most likely? Why?
14. What is an issue map? How is it helpful for strategic thinking?
15. What are an organizations strategic assumptions? How may the strategic assumptions
be evaluated as part of managing strategic momentum?
Chapter 2External Analysis 77
4. Joel A. Barker, Future Edge: Discovering the New Paradigms
of Success (New York: William Morrow, 1992), p. 86.
5. 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.
6. Liam Fahey and V. K. Narayanan, Macroenvironmental
Analysis for Strategic Management (St. Paul, MN: West
Publishing, 1986).
7. Martin Reeves, Simon Levin, and Daichi Ueda, The
Biology of Corporate Survival, Harvard Business Review
94, no. 1/2 (2016), pp. 4655.
8. Ibid., p. 50.
9. Beaufort B. Longest Jr., Management Practices for the
Health Professional, 4th edn (Norwalk, CT: Appleton &
Lange, 1990), pp. 1228.
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. 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. Peter F. Drucker, Managing the Nonprofit Organization:
Principles and Practices (New York: HarperCollins
Publishers, 1990), p. 9.
14. Barker, Future Edge, p. 86.
15. Klaus Kleinfeld, Seeing is Treating, Harvard Business
Review 85, no. 2 (February 2007), p. 47.
16. 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.
17. Govindarajan, Planned Opportunism, p. 58.
18. Thomas and McDaniel, Interpreting Strategic Issues,
pp. 289290.
19. Paul J. H. Schoemaker and Philip E. Tetlock,
Superforecasting: How to Upgrade Your Companys
Judgment, Harvard Business Review 94, no. 5, (2016),
pp. 7278.
20. Kathleen M. Sutcliffe and Klaus Weber, The High Cost
of Accurate Knowledge, Harvard Business Review 81,
no. 5 (2003), p. 75.
21. 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.
22. Ibid. p. 95.
23. Schoemaker and Tetlock, Superforecasting: How to
Upgrade Your Companys Judgment, p. 74.
24. Fahey and Narayanan, Macroenvironmental Analysis,
p. 39.
25. 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.
26. James L. Webster, William E. Reif, and Jeffery S. Bracker,
The Managers 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.
27. S. C. Jain, Environmental Scanning in U.S.
Corporations, Long Range Planning 17 (1984), p. 125.
See also Dovev Lavie, Capability Reconfiguration:
An Analysis of Incumbent Responses to Technological
Change, Academy of Management Review 31, no. 1 (2006),
pp. 153174.
28. B. Thompson, D. MacAuley, O. McNally, and S.
ONeill, Defining Sports Medicine Specialist
in the United Kingdom: A Delphi Study,
British Journal of Sports Medicine 38, no. 2 (2004),
pp. 1418.
29. 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.
30. Fleisher and Bensoussan, Strategic and Competitive
Analysis, p. 257.
31. 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.
32. 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.
33. Webster, Reif, and Bracker, The Managers Guide,
p. 13.
34. Ibid.
78 strategic management of Health Care Organizations
35. 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.
36. Marco Iansiti and Roy Levien, Strategy as Ecology,
Harvard Business Review 82, no. 3 (2004), pp. 6878.
37. Fottler, Blair, Whitehead, Laus, and Savage, Assessing
Key Stakeholders, p. 532.
38. Stuart L. Hart and Sanjay Sharma, Engaging Fringe
Stakeholders for Competitive Imagination, The
Academy of Management Executive 18, no. 1 (2004),
pp. 718.
39. Ibid.
40. 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).
41. Peter Schwartz, The Art of the Long View: Planning for
the Future in An Uncertain World (New York: Currency
Doubleday Publishers, 1991).
Chapter 3
Service Area Competitor
Why Service Area Competitor Analysis Is Important
As Bruce Henderson concluded, not all organizations competing in the same
broad market are necessarily direct competitors; however, organizations with the
same or similar strengths serving a particular market will be rivals the more
similar they are, the greater the rivalry. Diverse competitors may all do well in
a single market by focusing on different market dimensions. Organizations that
compete in several different markets may find that their competitors in one market are completely different from those in another market.
The amount of competition varies from market to market as well. Service area
competitor analysis helps strategic managers structure their thinking to determine
on what market dimensions they desire to compete, the specific organizations
that are most like their own organization in a market segment, and what other
Your most dangerous competitors are those most like you.
Bruce D. Henderson, American entrepreneur and
founder of the Boston Consulting Group (BCG)
80 strategic management of Health Care Organizations
products or services may be seen as effective replacements or substitutes for a
given product or service. Identifying direct competitors and understanding the
nature of the market itself is essential.
In some markets, competition is quite genteel, whereas in others competition
is quite fierce. Understanding why competitive intensity in markets varies and
what makes a market attractive is profoundly important for strategic managers.
Organizational strategy is drawn to attractive markets.
Strategic thinking and structured processes for service area competitor analysis
work together to help strategic managers accurately assess their markets (service
areas) for their product or service, the nature of the competition, and the attractiveness of the market. Further, strategic thinking and its disciplined processes
can determine the specific organizations that compete with each other in a given
market. The strategy developed by most organizations rests on this analysis.
Use the concepts in this chapter to assess and understand competitors and
Learning Objectives
After completing the chapter you will be able to:
1. Describe the process of service area competitor analysis. Why is it important?
2. Examine the relationship between the general environment, the health care
system, and service area for identification of issues and competitors.
3. Explain the importance of a service area structure analysis for a health care
4. Develop critical factors for success for a product or service in a service area.
5. Identify strategic groups and map competitors strategies along important service and market dimensions.
6. Assess likely competitor strategic responses.
7. Synthesize a service area competitor analysis into some strategic conclusions.
8. Validate strategic assumptions to reinitiate strategic thinking concerning the
service area and competitors.
Strategic Management Competency
After completing this chapter you will be able to conduct a comprehensive service
area competitor analysis for a health care organization.
Further Focus within External Analysis
External analysis involves strategic thinking and strategic planning, focusing
on increasingly more specific issues. Chapter 2 provided the fundamental
approach and strategic thinking frameworks for organizing, scanning,
Chapter 3 Service Area Competitor Analysis 81
monitoring, forecasting, assessing, and mapping issues and trends in the
general environment, health care system, and service area. Once these trends
and issues have been identified and mapped, a more focused competitor
analysis is required. A service area competitor analysis is a more specific process
to understand the nature of competition, evaluate competitors, identify critical success factors, and anticipate competitors strategic moves in a defined
geographic area (neighborhood, city, state, United States, or in the world).
Along with the economic, social/demographic, legislative/political, technological, and competitive issues assessed in the general environment, health
care system and service area, the service area competitor analysis will provide an understanding of the competitive context in which the strategy of the
organization will have to be successful.
Clearly a new competitive marketplace is emerging in the health care system
and competition is expected to increase over the next decade. As reimbursement
incentives move to delivering value, outcomes data become more transparent,
and consumers are asked to pay a greater portion of their health care costs, health
care organizations will have to develop new, more competitive care-delivery models.1 Health care organizations that attempt to avoid competing or deny industry
changes currently underway will find their patients moving to other providers.
Therefore, 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 successfully position the organization in 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, filtering the raw information picked up by external and internal sources,
processing it for strategic significance, and efficiently communicating intelligence
to those who need it.2
A Process for Service Area Competitor Analysis
Service area competitor analysis is a process of understanding the market and
identifying and evaluating competitors within that market. Together with the
results of the general environment, health care system, and service area trends
and issues, service area competition will be analyzed and the results synthesized
into the strategic issues facing the organization. The synthesis is an explicit
input into the formulation of the organizations strategy. Not every potential
competitor in a service area is of concern because of targeting differences, positioning differences, quality differences, pricing differences, and so on. The process for service area competitor analysis is illustrated in the strategic thinking
map in Exhibit 31. The conclusions will provide crucial information for strategy
82 strategic management of Health Care Organizations
An Application of Service Area Competitor Analysis
By employing an actual service category (plastic surgery) and service area
(Charlotte, North Carolina), each step of the service area competitor analysis
process will be illustrated. First, the general required actions of each step of the
service area competitor analysis process will be examined and then the application of the actions for each of the steps will be demonstrated.
Step 1 Review External Analysis of the General
Environment, Health Care System, and Service Area
Step 2 Conduct Service Area Structure Analysis
Step 3 Conduct Competitor Analysis
Step 4 Analyze the Critical Success Factors
Step 5 Map Strategic Groups
Step 6 Assess Likely Competitor Actions or Responses
Step 7 Synthesize Analyses
EXHIBIT 31 Process for Service Area Competitor Analysis
Chapter 3 Service Area Competitor Analysis 83
As an overview of the service category and service area, 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 disfigurements, birth defects, ravages
of disease, and so on) is often covered by insurance; however, reimbursement
rates have been declining. Typically, a number of board-certified plastic surgeons
have offices in any given service area. These physicians compete not only among
themselves; but also against emergent niche providers who are often board certified in a specialty other than plastic surgery physicians in ophthalmology (eye),
dermatology (skin), EENT (eye, ear, nose, and throat), dental (teeth and jaw), and
OB/GYN (womens reproductive system). In addition, laser centers and medispas are competition, seeking to capture the lucrative and less invasive sectors
of the cosmetic plastic surgery market such as Botox, injectables, laser peels,
cool sculpting, and so on. For an overview of the plastic surgery service category
see Essentials for a Strategic Thinker 31, What Is the Plastic Surgery Service
Essentials for a Strategic Thinker 31
What Is the Plastic Surgery Service Category?
Plastic surgery is a medical specialty with two
major subspecialties: cosmetic plastic surgery
and reconstructive plastic surgery. A simple
definition of cosmetic plastic surgery is that it
involves procedures to modify a persons natural
appearance and is generally (medically) nonessential. Reconstructive plastic surgery may
be performed to lessen the physical signs of
an accident, disease, or congenital defect, and
may be necessary to sustain or improve health.
Although cosmetic procedures are not covered
by insurance, most reconstructive procedures
are. In many states, legislation requires insurance
companies to provide coverage for reconstructive plastic surgery for congenital (birth) defects
and breast reconstruction after mastectomies.
To become a plastic surgeon, one must earn
an MD (Medical Doctor) degree from an accredited medical school or college, of which there
are 126 in the United States. Most plastic surgeons have residency and fellowships before
board certification. Members of the American
Society of Plastic Surgeons (ASPS) are certified
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 specifically in plastic surgery;
is certified by the American Board of Plastic
Surgery; operates only in accredited medical
facilities; adheres to a strict code of ethics; fulfills
continuing education requirements, including
patient safety techniques; and works as a partner to achieve the patients goals.
The American Society for Aesthetic Plastic
Surgery (ASAPS) is the leading referral source
of board-certified plastic surgeons specializing
in cosmetic procedures of the face and body.
Active membership in the ASAPS is reserved for
American Board of Plastic Surgery certified physicians (or in Canada, physicians certified in plastic surgery by the Royal College of Physicians
84 strategic management of Health Care Organizations
and Surgeons of Canada), with wide experience
in cosmetic surgery and demonstrated commitment to aesthetic surgery continuing education.
Plastic surgeons often establish solo practices. Other arrangements include solo practices
that share facilities, small group practices (with
25 physicians), medium multispecialty group
practices (620 physicians), and large multispecialty group practices (more than 20 physicians).
In addition, plastic surgeons may work in military and academic facilities (with and without
private practice).
The majority of plastic surgeons do not
offer spa services (e.g. wraps, facials, massages) in conjunction with their medical practices. Further, most of these doctors do not
work in conjunction with medical spas where
non-surgical procedures, such as injections
and laser procedures, are performed. Plastic
surgeons generally consider medical spas to be
less professional and potentially dangerous if
someone other than the surgeon is performing
According to the American Society of Plastic
Surgeons, the top five reconstructive procedures
are tumor removal, laceration repair, maxillofacial surgery, scar revision, and hand surgery. The
top five cosmetic plastic surgical procedures are
breast augmentation, lipoplasty (liposuction),
rhinoplasty (nose reshaping), blepharoplasty
(cosmetic eyelid surgery), and rhytidectomy
(facelift). The top five cosmetic minimally invasive procedures are Botulinum Toxin Type A
(Botox), soft tissue fillers, chemical peels, laser
hair removal, and microdermabrasion.
Sources: ASPS and ASAPS websites; Association for American
Medical Colleges website. Accessed March 2017.
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 profitable 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 begin anew in establishing a reputation. Similarly, established competitors
should periodically re-evaluate the competition in their service area as a part of
maintaining an effective strategy. In addition, any new entrant to the service area
should trigger service area competitor analysis.
Plastic surgery can be defined as a service category as it is recognized as a
board-certified 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 or they may specialize on the face (such as congenital deformities and injuries due to trauma) or they may focus on cosmetic procedures for purely aesthetic
reasons. Eye, ear, nose, and throat physicians as well as oral surgeons perform
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 the less
invasive procedures such as Botox injections that may be administered by any
physician 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.
Chapter 3 Service Area Competitor Analysis 85
The general service area for the plastic surgery example is 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 IIIs wife, Sophia Charlotte, who was born in
Mecklenburg, Germany) has grown to be a major city with the fifth busiest airport
in North America by total aircraft movement and eighth busiest in North America
by total passengers in 2017. Charlottes population is younger, upwardly mobile,
educated, and relatively affluent and it is one of the fastest growing cities in the
United States. Little need exists to travel outside the city for medical or health
care services. The city is sufficiently large with 842,051 in population such that the
people in the seven-county, nearly 2.5 million surrounding metropolitan area are
pulled to Charlotte for medical and health care, including plastic surgery. In 2017,
the number of active, board-certified plastic surgeons practicing in the Charlotte
metropolitan area was 37 (an increase of nine compared to the 28 practicing five
years ago; two retirements and two surgeons leaving the area resulted in a net
gain of nine board-certified plastic surgeons).3
Step 1: Review of External Analysis
The results of the general environment, health care system, and services area
external analysis, as covered in Chapter 2, provide the foundation for the service
area competitor analysis. The issues, trends, and events identified in external
analysis represent the context in which the organization must operate to be successful. Results of the external analysis were then documented in an external issue
map (Exhibit 25). Review of the issue map is critical and will guide decisions
made in service area competitor analysis.
Step 1: Review of External Analysis Plastic Surgery in
Charlotte, NC
The example of a completed external analysis issue map conducted for the general
environment, health care system, and the Charlotte, North Carolina service area
was presented in Chapter 2, Exhibit 211 and provides the context for the service
area competitor analysis in this chapter. The health care system analysis indicates turmoil. The Patient Protection and Affordable Care Act (often referred to
as Obama Care) was enacted in 2010; however, most aspects of that law were
not effective until 2014 (or later as some parts were delayed). No doubt further
legislative changes will be forthcoming under President Trumps administration
as legislators weigh costs, coverage, access, as well as impacts on private and
government health insurance and health care providers.
Key points from the service area analysis affecting plastic surgery: (1) the
population of Charlotte is growing (from 730,000 in 2012 to over 840,000 in
2017) and the city is now the 17th largest in the United States; (2) unemployment
is down considerably from 2012 (9.6 percent) to a more normal-for-Charlotte
unemployment rate of 4.5 percent; (3) cost of living remains low at 96.2 percent
of the national average; (4) diversity has increased, especially from Hispanics;
(5) millennials moving to the city increased by 30 percent; and (6) the recession
began later in Charlotte and lasted longer (well into 2012) but in 2017 the city
had recovered.
86 strategic management of Health Care Organizations
Step 2: Conduct Service Area Structural Analysis
Harvards Michael E. Porter developed a Five Forces framework for external analysis through an examination of the competitive nature of the industry. Porters framework has been applied to a variety of industries; however, because of the nature of
competition in health care, it is more appropriate to apply the framework more narrowly to the service category/service area. The use of Porters Five Forces in health
care can be referred to as service area structural analysis. A service area structural
analysis assesses the attractiveness of an identified geographic region for a product/
service category. Service area structural analysis provides considerable insight into
the attractiveness of a service category in a service area and its competitive dynamics.
Porter suggested that the level of competitive intensity within an industry is
the most critical factor in an organizations environment. In Porters 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.4 The strength and impact of these five forces must be carefully monitored
and evaluated to determine the viability of the service category and may be used
to assess the changes likely to occur in the future. As illustrated in Exhibit 32,
Porters industry structural analysis can be adapted to service areas to understand
the competitive forces for health care organizations.
EXHIBIT 32 Service Area Structural Analysis: Forces Driving Service
Area Competition
of New
Service Area
Rivalry Among
Existing Firms
Threat of
or Services
Suppliers Buyers
of Suppliers
of Buyers
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 87
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 profits down. The threat of a new competitor entering into a market
depends on the industry or service area barriers. Barriers to entry are factors that
make entering a new market difficult or expensive for an organization therefore
limiting competition. If the barriers are substantial, the threat of entry is low.
Porter identified several barriers to entry that may protect organizations already
serving a market:
Existing organizations economies of scale cost advantages made possible
by increased volume.
Existing product or service differentiation.
Capital requirements needed to compete.
Switching costs the one-time economic, logistic, and emotional costs for
consumers in selecting and adopting an alternative product/service over
their present product/service.
Access to distribution channels.
Cost advantages (independent of scale) of established competitors.
Government and legal constraints.
These barriers should 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 (the level of control by physicians and
insurers) may make entry into a particular service area difficult because existing
organizations have built economies of scale and cost advantages making it difficult for a newcomer. In an effort to create cost efficiencies, managed care has had
the effect of limiting the ease of market entry. In areas where managed care penetration is high, market entry by new competitors will be more difficult because
switching costs for some populations are prohibitive. However, the difficulty of
adding new service categories for existing organizations in an established managed care market may be lessened; such service categories may be added to better
serve a captured (managed care) market.
Certificate of Need (CON) laws and regulations, for example, can present
significant barriers to entry for providers (see Essentials for a Strategic Thinker
32, What Is CON?). CON laws are the reason some specialty hospitals in cardiology and orthopedics were built in states in the southwestern United States and
the Midwest, where there were no CON barriers or the CON laws were much less
restrictive than other areas of the nation.
88 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 32
What Is CON?
Certificate of Need (CON) legislation
encompasses federal/state authorizations to
acquire, expand, or create facilities and is used
to regulate supply of services relative to demand
by eliminating overspending or limiting (protecting) access. As of 2017, 36 states retain some
type of certificate 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
first 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 effect
became the first CON legislation, although a
version was incorporated into the Hill-Burton
Act (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 CON regulations by requiring all 50 states to implement such regulations
to receive funds through the federal government; 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-profit, partnership, or public entity) was granted permission to
begin a project. These approvals are generally
known as Certificates of Need.
In 1986, Congress repealed the mandate
requiring states to have CON programs, along
with elimination of the federal funding for the
program. In 2017, California, Colorado, Idaho,
Indiana, Kansas, Michigan, New Hampshire,
New Mexico, North Dakota, Pennsylvania, South
Dakota, Texas, Utah, and Wyoming (14 states)
have no CON requirements; three other states
(Arizona, Minnesota, and Wisconsin) have CONlike state-developed requirements; and the
other states maintain CONs for various types
of facilities (building a new hospital or adding
beds to a nursing home) and dollar amounts for
technology (a physicians office request for a second MRI machine). Although the CON process
across states is similar, no two states are exactly
alike, and the scope of regulation varies a great
deal by state. Some states require providers to
document the community need for all regulated
services regardless of cost, whereas others do
not require CON approval for any project under
certain cost thresholds; however, the capital
expenditure thresholds range from hundreds
of thousands to millions of dollars. Recently,
Florida (2017) and Maine (2013) have attempted
repeal of CON laws. Maine was unsuccessful
and Florida had to remove nursing homes and
hospices, but has maintained its charge to avoid
CONs in hospitals for the state.
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 specified 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
Chapter 3 Service Area Competitor Analysis 89
frequently not included; however, in a few states an
organizations failure to meet its charity care commitment requires the organization to pay the difference to the state (a sort of tax on the organization
that does not provide enough charity care).
CONs have been plagued by providers
attempting to game the process, which represents 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 insufficient staffing and training and
an often overwhelming workload. An enduring
challenge for CON review boards is maintaining
meaningful competition while ensuring access
to care without allowing excess capacity.
CONs have been used as a way for organizations to claim territory. Such situations are typically
contentious and require a significant amount of
time to resolve and finalize. Applications can be
challenged at various stages, and decisions can be
overturned by hearing officers, courts, or sometimes state legislatures. CON boards generally
include appointed state officials, physicians, hospital representatives, and other stakeholders. The
substantial scrutiny, coupled with a lack of enforcement power to uphold decisions, has made the
role of CON boards increasingly challenging.
Clearly hospitals use the process to protect
existing market share either geographic or
by service line and block competitors. CON
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 impede new
entrants. Smaller community hospitals often
lack the financial resources to go through an
extended CON process. Large hospitals, which
often have ample financial 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 prevent
the founding of new physician-owned facilities.
Physicians interested in establishing for-profit
facilities (especially surgery centers) view CON
programs as overly restrictive and support repeal
of the regulations. Reflecting 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 offering the most
advanced equipment to patients and limiting
providers ability in some states to recruit top-tier
specialist physicians who want to work in facilities equipped with the newest technologies.
Suggested Reading
Karen Garloch, Piedmont Medical Center Wins
Right to Build Fort Mill Hospital, Charlotte
Observer, April 1, 2014, p. A-2.
David Grabowski, Nursing Home Certificate-OfNeed Laws Should Be Repealed. Health Affairs
blog, June 9, 2017.
Clark C. Havighurst, Monopoly Is Not the Answer,
Health Affairs (August 5, 2005), pp. 373375.
Joe Marusak and Karen Garloch, Piedmont
Medical Center Wins Appeal to Build Ft. Mills
First Hospital, Charlotte Observer, January 12,
2017, p. A-4. National Conference of State
Legislatures (January 2011; material added
March 2012). Website: Section: Certificate of Need State
Health Laws and Programs.
Lisa Schencker, State Certificate of Need Laws
Weather Persistent Attacks, Modern Healthcare
(January 23, 2016), pp. 1415.
90 strategic management of Health Care Organizations
Intensity of Rivalry among Existing Organizations Organizations
within an industry are mutually dependent because the strategy of one
organization affects all relevant competitors. Rivalry is the intensity of
competition for a product/service category in a service area. Rivalry occurs
because competitors attempt to improve their 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 fixed 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 Portland, Oregon market, consolidation
has resulted in three large integrated systems a large academic medical
center university hospital with a large childrens hospital ranked first in the
Portland market and two other systems Providence and Legacy all within
four miles of each other, resulting in extremely high strategic stakes. For some
markets, consolidation has resulted in competition between large for-profit
and not-for-profit 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 great. 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 various substitutes are available 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 higher the likelihood that 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
as well as the use of drugs that keep individuals out of hospitals. In addition,
alternative therapies such as chiropractic, massage therapy, acupuncture,
biofeedback, and so on are increasingly substituted for traditional health care
(see Essentials for a Strategic Thinker 33, What Are Complementary and
Alternative Medicine?).
Chapter 3 Service Area Competitor Analysis 91
Essentials for a Strategic Thinker 33
What Are Complementary and Alternative Medicine?
Complementary and alternative medicine (CAM)
is a group of diverse medical and health care
systems, practices, and products used for medical interventions, health promotion, or disease
prevention that are generally not considered
to be part of conventional medicine nor generally underwritten by health insurance plans.1
CAM includes acupuncture, herbal medicine,
homeopathy, massage, osteopathy, biofeedback, chiropractic, hypnotherapy, meditation,
aromatherapy, yoga, tai chi, guided imagery, and
naturopathy. CAM systems are characterized by
a holistic and highly individualized approach
to patient care with an emphasis on using the
bodys inherent healing ability and involving
patients as active participants in their own care.
Integrative medicine incorporates elements
of CAM with traditional western medicine and
over time some CAM therapies have become
mainstream. Integrative medicine provides a
new paradigm that incorporates core CAM values in contemporary medicine; however, the
extent to which integration occurs depends on
the attitudes of physicians.
A national survey of hospitals that offer complementary services found a number of significant
barriers for CAM 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 hospitals basic duty
is to ensure that those who treat patients within
its facilities are qualified and competent to do so.
Reasonable steps must be taken to control and
supervise practitioners by appropriate credentialing. In addition, the hospital has a duty to create a
safe environment for patients that includes going
to reasonable lengths to allow CAM at least
evidence-based therapies that current evidence
indicates could improve patients health or help
manage their symptoms.2
In 1998, Congress expanded the Office of
Alternative Medicine (renamed in 1992; previously known as the Office of Unconventional
Therapies) by creating the National Center
for Complementary and Alternative Medicine
(NCCAM). NCCAM was renamed the National
Center for Complementary and Integrative
Health (NCCIH) in 2015. NCCIHs mission
is: to define, through rigorous scientific
investigation, the usefulness and safety of
complementary and integrative health interventions and their roles in improving health
and health care.3
The NCCIHs strategic plan focuses primarily
on researching, advancing, and disseminating
information concerning CAM, and the Director,
Josephine P. Briggs M.D., stated concerning the
NCCIH 2016 strategic plan:
We remain committed to making investments in research areas that show scientific opportunity and promise, are
amenable to rigorous scientific inquiry,
foster discovery and innovation, and
have an impact on public health and
health care. The burden of a disease
or chronic condition on peoples lives
is another important consideration
when setting research priorities. Some
complementary and integrative health
approaches have shown promise for
managing some of these conditions
and their associated symptoms. Chronic
pain will remain an important emphasis.
92 strategic management of Health Care Organizations
Going forward, the Center will continue
to work to build the evidence base on
symptom management, including pain,
but also depression and anxiety. In addition, we will continue to build our disease prevention research portfolio and
focus more on pragmatic clinical trials
to test complementary and integrative
health interventions in real world settings. The evidence base is growing in
these areas, and I am eager to explore
these research opportunities as we map
the path forward.4
CAM is expected to increase substantially in
the future. More than 70 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 has issued guidelines that
threaten new, costly regulation of complementary and alternative medicine.
2. J. Gilmour, C. Harrison, L. Asadi, M. H. Cohen,
and S. Vohra, Hospitals and Complementary
and Alternative Medicine: Managing
Responsibilities, Risks, and Potential Liability,
Pediatrics 128, no. 4 (2011), pp. S193199.
Bargaining Power of Customers Buyers of products and services attempt to
obtain the lowest price possible while demanding impeccable quality and superior
service for health care. 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 profits (low profits force lower purchasing costs).
Poses a threat of backward integration (an organization taking on
ownership of its supply chain).
Has low quality requirements (the quality of the products purchased by the
buyer is unimportant to the final products quality).
Has enough information to gain bargaining leverage.
Perhaps the greatest change in the nature of the health care system in the past
decade has been the growing power of the buyers. Managed care organizations
(MCOs) purchase services in large volume and control provider choices. The
increasing power of those buyers has fueled system integration as well as blurring
of providers and insurers. Large employers as buyers have power because they
determine whether the MCO will be on the list that employees have to choose
from for their health care.
Chapter 3 Service Area Competitor Analysis 93
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 buyers business.
The buyers industry is not considered an important customer.
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 for hospital systems to purchase primary
care individual and group practices. Other suppliers, such as those who supply
general medical needs (e.g. bandages, suture materials, thermometers), 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) could have moderate to high supplier power, especially in the short run.
Step 2: Service Area Structural Analysis Plastic
Michael Porters Five Forces analysis is used to evaluate the viability of cosmetic
plastic surgery within the Charlotte service area. Competitive intensity and ultimately the profitability of the service category in the service area is determined by
a number of favorable factors. As described in Exhibit 33, the Five Forces model
suggests that it would be somewhat challenging to enter this market of 37 boardcertified plastic surgery practices when these existing competitors face increased
competitive pressure. The cosmetic plastic surgery segment will remain competitive because there are few barriers to entry for new competitors (one barrier to
entry is high: participants generally have some form of medical or dental degree).
However, 76 physicians list plastic surgery as their primary area or a secondary
area of practice but only 37 of the 76 physicians (49 percent) practicing plastic surgery in Charlotte are board-certified plastic surgeons. Many of the non-certified
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.
94 strategic management of Health Care Organizations
exhibit 33 Service Area Structural Analysis Plastic Surgery, Charlotte, NC
Five Forces Forces Driving Service Area Competition Conclusion
Intensity of
Approximately 41 practices with 23 having one
or more board-certified plastic surgeons (56
percent of practices board certified in 2017 vs.
45 practices with 24 having at least one boardcertified plastic surgeon for 53 percent in 2012)
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 different
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-certified surgeons.
Other competitors are in different 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 attempted board certification.
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 difficult to exit the market
(hard to find 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
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 confidently
interact with patients are important in maintaining
a successful cosmetic plastic surgery practice.
Board certification is a major hurdle; however,
many consumers do not understand that when
an MD states on his/her website that they are
board certified it does not necessarily mean that
it is in the plastic surgery specialty.
Capital requirements are not high. For example, the
cost of new equipment that may be used in the
office is less than $50,000; however, used equipment
is readily available to purchase or lease. Equipment
is generally upgraded before it becomes obsolete to
maintain cutting-edge technology.
Most single practices operate on a 3+1 office:
one doctor and three staff (operating room nurse,
office administrator, office nurse).
Threat of new entrants (new plastic
surgeons) into the Charlotte market is
medium, primarily because of growth in
the population and the economy; however,
the existing service area already has
numerous competitors.
To obtain board certification in plastic
surgery is a major hurdle to accomplish by
the physician; however, consumers lack of
awareness of the meaning of certification
in plastic surgery dilutes it as a hurdle. In
Charlotte, 23 practices (37 physicians) are
board certified; 18 practices identify plastic
surgery as their medical specialty using
non-board-certified plastic surgeons.
Chapter 3 Service Area Competitor Analysis 95
Five Forces Forces Driving Service Area Competition Conclusion
Threat of New
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 differentiation 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.
Financial barriers for setting up an office
are low.
Threat of
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-board-certified plastic surgeons.
New, strong chins by oral-maxillofacial surgeons.
For most patients, cosmetic plastic surgery is elective.
Cosmetic plastic surgery is expensive.
There are a number of low-cost, nonsurgical substitutes provided over-thecounter (OTC).
Less invasive procedures are considerably
less expensive, less painful, less time (to no
time) for recovery, and less intimidating.
Power of
The elective procedure of cosmetic plastic surgery
is rarely covered by insurance and is a cash
business, although some credit is offered using
MasterCard, VISA, or a medical procedure credit
card, CareCredit which is a subsidiary of GE
Capital (has a reputation for aggressive collections
and charges 29.5 percent to carry a balance).
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
Patients/consumers may prefer to travel away from
Charlotte to keep the procedures confidential;
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.
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.
Brazil has an international reputation for
excellent outcomes with plastic surgery,
offering a more affordable price (including
air fare and top-tier hotels for recovery),
plus greater confidentiality.
Power of
A significant 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 office or in surgery centers.
There are multiple major suppliers of
professional-grade equipment for cellulite
reduction and more than ten suppliers of
laser equipment.
96 strategic management of Health Care Organizations
Competitive rivalry is high as more board-certified 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 board-certified
and non-board-certified physicians with practices in this medical specialty are
considered). In addition, most of the board-certified physicians in the area have
practices that are long established (average: 19 years, 12 physicians have practiced in Charlotte for over 25 years, six physicians have been in the area for five
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 a number of manufacturers. Lumenis, Sharplight, SyneronCandela, Cynosure, Alma Lasers, Solta Medical, Hoya Combio, Sciton, and
Cutera were the top ten companies manufacturing laser medical devices for
plastic surgery. Cellulite reduction (liposuction) machine manufacturers include
(in alphabetical order): Alma Lasers, Ambicare, Bruker Corporation, Carl Zeiss
Meditec Inc, Cutera Inc, Cynosure/Deka, Ellex Medical, Ellipse A.S., Hamilton
Thorne, Invasix, NIKON, Olympus, Sciton, WellsJohnson, and Zeltiq Aesthetics.
The power of these suppliers has decreased somewhat because plastic surgeons
no longer purchase a line of products from the same company (such as the
market leader), rather, they purchase the best product for the processes desired
by consumers or the product that the surgeon is most comfortable with or has
used the most in training.
Thus, for cosmetic plastic surgery in the Charlotte service area, only one of
Porters Five Forces is favorable (power of suppliers) and four are unfavorable,
resulting in thin profit margins and intense competition. In the future, the Five
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, such as home cellulite reduction machines
that are widely available in 2017 (and prices have been falling). 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.
Step 3: Conduct Competitor Analysis
The next step in service area competitor analysis (refer to Exhibit 31) is to evaluate the strengths and weaknesses of competitors. In assessing the rivalry of the
service area, the competitors are identified. Next, the strengths and weaknesses of
each competitor should be specified and evaluated. Organizations have a unique
Chapter 3 Service Area Competitor Analysis 97
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.5 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 34.
exhibit 34 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
Achievement of economies of scale
Insulated from strong competitive
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 profitability
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 finance needed changes in strategy
Higher overall costs relative to key
Relevant information may be obtained through multiple sources such as
local newspapers, trade journals, websites, focus groups with customers and
stakeholders, consultants who specialize in the industry, securities analysts,
or outside health care professionals. Identification 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, facility expansions, strategic alliances, and new product or service introductions
that require more substantial commitments of resources and are more difficult
to reverse. Such competitive actions represent clear, offensive challenges that
invite competitor responses.6 See Essentials for a Strategic Thinker 34 What Is
Medical Tourism?
98 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 34
What Is Medical Tourism?
Medical tourism is the practice of travelling to a
country, other than ones own, for the purpose
of obtaining medical treatment. The most common procedures that people undergo on medical
tourism trips include cosmetic surgery, dentistry,
and heart surgery. The term medical tourism is
evolving based on increasing specialization and
heterogeneity in services, thereby leading to the
use of more specific terms such as reproductive
tourism, organ transplant tourism, and abortion
tourism. 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
In 2017, medical tourism accounted for 11
million people travelling annually (valued at $100
billion); approximately 4 percent of the worlds
population travelled internationally for medical
care. Along with the United States, the most popular destinations for medical tourism are Canada,
United Kingdom, Israel, Singapore, India, Germany,
France, South Korea, Italy, and Colombia.
Health care consumers today are motivated
to engage in medical tourism because of lower
overall costs, high copay insurance plans, high
deductible insurance plans, treatments and
medications not approved or available in their
home country, the availability of higher quality
care and services, increased comfort of returning to their home country, or the opportunity
for medical treatment combined with an attractive destination. The primary factors driving
the cost differential in many medical tourism
destinations are lower labor costs, the lack of
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.2
The main risk is quality of care although this
risk is being alleviated by the number of global
hospitals, centers, and clinics being accredited
by the Joint Commission International (JCI).
Even though hospitals may be accredited by the
JCI, other critical activities such as clinical analysis laboratories, radiology centers/departments,
medical imaging and interpretation, plus the
differences in malpractice laws and lack of postoperative follow-up care may cause problems.
With medical tourism expected to grow at
25 percent per year, there are implications for
defining service areas and identifying competitors. Clearly the service area boundaries for categories such as gall bladder surgery, orthopedic
surgery such as full hip replacement surgery
and numerous other procedures extend well
beyond the boundaries of the United States to
Thailand, India, Mexico, Hungary, and Singapore.
In addition, medical tourism presents a business
model in itself. With reasonably inexpensive
air travel costs, globalization of markets and
providers, the availability of information online,
frequency of international travel, potentially
long waits for local care, and more people taking
responsibility for their own health care, strategically positioning as a destination and utilizing
the medical tourism business model appears to
be viable for many institutions.
1. Naiade Anido Freire, The Emergent Medical
Tourism: Advantages and Disadvantages of
the Medical Treatments Abroad, International
Business Research 5, no. 2 (2012), pp. 4150.
Chapter 3 Service Area Competitor Analysis 99
Step 3: Conduct Competitor Analysis Plastic Surgery
The strengths and weaknesses may be assessed for providers of plastic surgery
procedures. For this analysis, a few representative plastic surgery providers
are profiled in Exhibit 35. Assessing strengths and weaknesses of competitors
is often difficult for outsiders and, as suggested in the Exhibit, weaknesses (in
particular those not manifest in the market) are often difficult 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, the understanding of competitors strengths and weaknesses can be
refined and improved as data gathering and analysis continue and new information is used to update the competitive analysis.
The Abner Center, run by the only black female plastic surgeon in Charlotte,
closed as did the (a franchised experiment that failed).
exhibit 35 Competitor Strengths and Weaknesses**
Competitor* Strengths Weaknesses
Aesthetic Surgery
of Charlotte
Board certification in plastic surgery +
Plastic and reconstructive surgery.
Contributes to science with journal articles.
Uses TouchMD for education, illustrating on a
photo of the patients own face/body part any
proposed/desired changes, and offers a patient
portal for post-op communication.
Each patient is authenticated along with the
photography of before/after.
Tech savvy.
Financing though Alphaeon or CareCredit.
Accepts Medicare.
Plastic surgery board certification 2013.
Quite new to Charlotte; practice
established in 2015.
Photo gallery is excellent but not all
procedure types have photos (supports
authenticity of photos, but also an
indication of a not-quite-two-year-old
Criswell & Criswell Husband/wife team allowing choice of male or
female surgeon.
15 percent off skin care products and
sunscreens during July.
Opened a new office in a very upscale area of
the city.
Website suggests artistry; they state talented,
passionate, artistic, and experienced
physicians. Both doctors have art backgrounds
(undergraduate major/minor).
Both speak Spanish.
Committed to both cosmetic and reconstructive
surgery. Many research papers and lectures on
reconstructive surgery.
Both are children of physician parents.
Consultation fee is applied to surgical
Use CareCredit, a subsidiary of GE Capital
which has a reputation for aggressive
collections; reconstructive plastic surgery
is typically paid for by private or public
100 strategic management of Health Care Organizations
Competitor* Strengths Weaknesses
Matthews Plastic
In practice for over 25 years.
Cosmetic and significant amount of
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 certified in cosmetic and reconstructive
plastic surgery.
Informative website.
Initial consultation fee will be credited
to patients bill if procedure is performed
within six months.
Cosmetic is cash basis; however, major
credit cards accepted, financing 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
Many videos about procedures.
Over 10,000 patients.
24/7 access to the doctor.
Promotions (price and additional services).
Wrote a book: Body by Ferrari.
Some international reconstructive work.
Incredible number of typos on the
Not easy to find information on the
website about financing: cost (or not) of
initial consultation nor any info about
financing for procedures.
Website is difficult to navigate: too many
clicks to find desired information.
Charlotte Plastic
Established 1951, five from Charlotte Plastic
Surgery among 15 Best Plastic Surgeons
selected by NC Business.
Photo gallery very realistic.
Complimentary consultations.
Financing through CareCredit and Prosper.
Member program (for a fee) to obtain specials
and reduced prices.
Staff is RitzCarlton trained.
AAAASF (American Association of Accredited
Ambulatory Surgical Facilities) certified.
BOB (Best of the Best) award winner, a Charlotte
regional award voted on by the area population.
Not all physicians are board certified.
Online store loads very slowly or not
at all.
Web design likely meant to be classic
but comes across as old-fashioned.
Voci Center Upscale spa services aromatherapy, soothing
organic candles, calming essential oils, fine lip
balms, facial moisturizers, and massage. Also
supply an assortment of herbal teas, juices, and
purified water.
Updated website with excellent photography
and realistic before and after photos;
informative on financing, procedures, etc.
Computerized imaging to determine what
would look best for an individual.
May be too pricey for many Charlotteans.
Consultation fee of $50 charged; however,
four or more open house events per year.
exhibit 35 (Continued)
Chapter 3 Service Area Competitor Analysis 101
Competitor* Strengths Weaknesses
Voci Center Focus on face, breast, and body.
Private office operating room suites, accredited
for general anesthesia by the AAAASF
(American Association of Accredited Ambulatory
Surgical Facilities) with a board-certified
Private overnight rooms for patients after
surgery are staffed all night by an RN with ACLS
More than 32 years of experience.
As of June 15, 2017 the open house
events listed were for November and
December 2016 (newspaper ads have
been current).
*All physicians are board-certified plastic surgeons. Board certifications are tracked by accessing the North Carolina
Board of Medicines database and the American Board of Plastic Surgery database, February 2017. **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 effective or ineffective business practices.
Step 4: Analyze Critical Success Factors
Critical success factor analysis is the identification 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 five or six areas in which the
organization must perform well (a critical success factor) and they are identifiable through careful external analysis. In addition, critical success factor analysis
may be used to examine new market opportunities by matching an organizations
strengths with critical success factors.
Typically, once the service category critical success factors have been identified,
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 external environment, the critical success
factors, the goals, and the strategy. In addition, it is important 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
identified several strategic dimensions that capture the possible differences
among an organizations strategic options in a given service area.
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.
The degree to which it seeks name recognition rather than competition based on
other variables.
102 strategic management of Health Care Organizations
Service/product quality
The level of emphasis on the quality of its offering to the marketplace.
Technological leadership
The degree to which it seeks superior technology in medical, health care, and
information systems advances in diagnostics or therapeutic software, equipment,
and procedures.
Vertical integration
The extent of value added as reflected in the level of forward and backward
Cost position
The extent to which it seeks the low-cost position through efficiency programs
and cost-minimizing facilities and equipment.
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 influence 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).7
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 the dimensions competitors have selected and
how well they are meeting the needs of customers.
Step 4: Analyze Critical Success Factors Plastic Surgery
From the service area competitor analysis conducted thus far, the critical success
factors may be inferred for plastic surgery in Charlotte:
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).
Extensive practice (high number of procedures performed with satisfactory
results such as performing intricate surgeries with minimal scarring).
Medical service pre-screening, pre-op, post-op.
Pleasing results for the consumer.
Chapter 3 Service Area Competitor Analysis 103
2. Competitive pricing (secondary to #1) for cosmetic plastic surgery
procedures. Free consultation is expected by consumers but this is time
consuming for the physician and often not productive. Some doctors
require an upfront consultation fee which is used to reduce the cost of the
procedure(s) if the consumer chooses his/her practice.
3. Managing and meeting consumers expectations, whether from surgery or
less invasive techniques:
Patients satisfaction with the new look.
No complications (such as infections or scarring that calls for further
4. Positive word-of-mouth; estimates are that a satisfied patient refers an
average of five others (a somewhat lower average than other medical
recommendations because some cosmetic plastic surgery patients want 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 profile development of desired specific target market
(whether female/male, young/older, single/multiple procedures,
cosmetic/reconstructive, etc.).
8. Office environment:
Aesthetically attractive physical space; appropriate look and feel for the
target market identified.
Adoption of new office technologies.
Three-person staff (minimum) for solo practitioner.
Step 5: Map Strategic Groups
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 several strategic groups often exist within
a service area. A strategic group is a number of organizations within a service area
that are similar and compete directly against each other on the same competitive dimensions and, therefore, make similar strategic decisions. Members of a
strategic group have similar recipes for success or core strategies.8 Therefore,
104 strategic management of Health Care Organizations
members of a strategic group primarily compete with each other and do not
compete with organizations outside their strategic group although there may
be other organizations outside offering similar products or services. These other
organizations are not considered competition because they focus on different customers, products/services, quality, price, and so on. For example, members of one
strategic group may base strategies on appealing to a specific group of customers;
organizations basing strategy on something else, such as low cost, may offer the
same services but will not be in the same strategic group.
External stakeholders have an image of the strategic group and develop an idea
of the groups reputation. The reputation of each strategic group differs because
the identity and strategy of each group differ.9 Organizations within a strategic
group use similar resources to serve similar markets. However, leadership in an
individual organization must find ways (sometimes subtle) to have its organization stand out from the group (differentiation) to develop competitive advantage
over other group members.10
Reputation has been defined as an organizations true character and the corresponding emotions 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 reputation of the
group.11 Thus, if several nursing home organizations in a service area are in the same
strategic group, the action of one influences 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 others primary or direct
3. Strategic group analysis can indicate alternative formulas for success for a
service category; such insight may broaden a managers view of important
market needs.
4. Strategic group analysis may surface important market dimensions or niches
that are not being capitalized on by competitors. Lack of attention to critical
success factors by other competitive organizations offering the same or similar
service may provide an opportunity for creation of competitive advantage.
Strategic group membership defines the essential characteristics of an organizations 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 differences among organizations in the service area.12
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 Porters structural analysis and provides additional
insights. As a means of creating a broad picture of the types of organizations
Chapter 3 Service Area Competitor Analysis 105
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.13 More specifically, strategic group analysis:
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 organizations experience affords.
Captures the intuitive notion that within-group rivalry and
between-group rivalry differ.14
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.15
For example, a pediatric group practice affiliated with a childrens 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.
Mapping competitors is the classifying of competitors within a service area that
most directly compete with each other (the strategic groups). Mapping competitors for any service category (broadly or narrowly defined) 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 according to whether it is high or low on
these dimensions. Competitors may then be plotted on the basis of these two
dimensions (see Exhibit 36). 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
Step 5: Map 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
106 strategic management of Health Care Organizations
word-of-mouth (WOM) referrals and reputation focusing on certain segments of
the service category (such as specialization in rhinoplasty). These practices may
offer other services to their primary patients but undertake little new patient promotion. In contrast, some practices within the service area offer specialty cosmetic
treatments, patient pampering, and luxurious surroundings in full-scale medical spas and focus on recruiting new patients. 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 certification)
identifies surgeons who have specific, additional training in the field. However,
many consumers are not aware of the meaning of board certification and will
allow eye, ear, nose, and throat (EENT) physicians, dermatologists, or dentists to
perform the desired plastic surgery. It may be the comfort level they have with a
specific 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-certified surgeon or they
simply may not be familiar with board certification.
There are 39 physicians in 18 practices in Charlotte who promote plastic surgery
as their area of specialization who are not board certified in plastic (cosmetic or
reconstructive) surgery. Some of them are board certified in other specialties such
as dermatology, general surgery, obstetrics/gynecology, or EENT, and some have
had residencies or fellowships in plastic surgery, but they are not board certified.
This analysis only considers the board-certified 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, and other provider information, the
strategic groups are:
Strategic Group 1 Single practitioners who focus on cosmetic plastic surgery
This strategic group comprises providers that only offer cosmetic procedures and
are paid out-of-pocket (they do not accept medical insurance). These practices
provide traditional cosmetic plastic surgery procedures. Many provide service
in their own offices as well as operating in hospitals or surgery centers. If they
advertise, it is primarily through the internet (all have websites), social media,
and WOM communication patients recommending a surgeon based on the great
experience and outcome they had. Most common (and most valuable) is WOM
which the physician can stimulate but cannot control. Some patients do not want
anyone to know they have had a plastic surgery procedure.
Strategic Group 2 Single practitioners who perform both reconstructive and
cosmetic plastic surgery
Members of this strategic group provide cosmetic procedures as well as reconstructive procedures. They are typically reimbursed from insurance for the
reconstructive portion of their practice and often accept Medicare and Medicaid
patients as a result. These practices often work on call and are provided emergency cases or patients referred by other physicians. Reimbursement rates have
declined significantly over the past few years for reconstructive plastic surgery.
Chapter 3 Service Area Competitor Analysis 107
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, the company website,
and WOM. The cosmetic portion of the practice is similar to Group 1; however,
these surgeons do not have to rely solely on a cash business.
Strategic Group 3 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. They provide ancillary services to support patient
convenience, charge high prices, and rely on WOM referral as well as sophisticated marketing campaigns that include advertising in newspapers and other
paid media as well as excellent websites. More attention is paid to the details
of product and procedure offerings, as well as office 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 discounts on specific services
(such as complementary fat grafting). 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 4 Multispecialty Practices
Only three practices have more than two plastic surgeons in the Charlotte area.
They offer full-service plastic surgery both reconstructive and cosmetic using a
variety of technologies. One of the practices is associated with a teaching hospital
and many patients are referrals from within the hospital system.
Although multispecialty group practices or even single-focus multiphysician
group practices are not common in plastic surgery, it was forecasted that developing larger practices would become more common over time because of the
pressures to have IT systems and electronic health care records (very expensive
for a solo practitioner). This new technology is costly and physicians may need to
share the expenses; however, before that could occur, the great recession caused
some changes in the Charlotte marketplace.
Exhibit 36 shows a map of the strategic groups with 24 practices in the
Charlotte plastic surgery market in 2012. The market has split into four distinctive groups that, for the most part, do not engage in between-group competition.
Strategic Groups 1 and 2 have some overlap, but the commitment to perform
reconstructive plastic surgery is such that a number of the physicians in Group 2
participate in medical missionary trips to Third World countries to perform surgery on cleft palates and other congenital deformities as well as disfigurement
caused by diseases such as cancer. They tackle some of the most challenging plastic surgery work and are proud of what they do to help others.
Outliers to this 2012 strategic map are one plastic surgeon who devoted his
practice to reconstructive surgery; two physicians who are board certified in both
otolaryngology and plastic surgery and work at Charlotte Eye, Ear, Nose, and
Throat; and one physician who is board certified in both ophthalmology and plastic surgery and advertises his lasik practice continuously.
108 strategic management of Health Care Organizations
The great recession caused challenging times for plastic surgeons in Charlotte
from 2009 until 2013. Other areas of the country felt the recession as early as 2007
or 2008, but Charlotte entered into the recession later and struggled with it longer
than other places in the United States. It was a major disruption to the status quo
of the plastic surgery strategic groups and caused some practices to make significant moves from one strategic group to another (see Exhibit 37 where these
moves are illustrated by the arrows to show the shifts from 2012 to 2017).
One solo practitioner who focused on reconstructive surgery joined with
two other non-board-certified plastic surgeons to form a larger practice, joining
Strategic Group 3 and one of the practices in Group 3 downsized, moving into
Group 2. The other change was that a solo practitioner in Group 2 combined with
two other board-certified plastic surgeons and hired in four others who are not
board certified and began competing with plastic surgeons in Group 3 who provide high-end medi-spa services engaging in many forms of advertising to attract
patients to the practice. Two more mature plastic surgeons gave up their surgical
practices and now focus on the more cosmetic procedures such as Botox injections and providing skin care.
Considerable within-group competition occurs in all the groups but particularly within Strategic Group 3 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.
Note that the practices without board-certified plastic surgeons are in different
categories (not shown on this map) and tend to engage in significantly more
Exhibit 36 Competitor Analysis Mapping Competitors 2012
Cosmetic Spa + Cosmetic
Range of Procedures/Services
Practice Size
CMC Cosmetic
& Plastic Surgery
Piedmont Plastic
Eye Center
& Criswell
Hunstad Diaz
Graper Kulbersh Voci
Lift Center

Bednar Liszke
Bullard Abner
Bickett Capizzi
Group 2 Group 1
Group 4
Group 3
Chapter 3 Service Area Competitor Analysis 109
Step 6: Assess Likely Competitor Actions or Responses
Strategy formulation is future oriented, requiring that management anticipate
the 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 difficult 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 by identifying
strengths and weaknesses, studying 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
Graper (2)
Riam (1)
Hennessy (1)
Appel (1)
Dropped out: Group 2: Abner (left the area) Bullard (retired)
Group 1: Callabretta (retired), Norwicky (left the area)
Both Plastic Spa/Cosmetic
Plastic Surgery
Number of Board Certied Plastic Surgeons
Health Care
System 5+
Surgery (3)
Criswell &
Criswell (2)
Surgery (2)
Diaz &
Gulater (2)
Ferrari (1)
Kulbersh (1)
Voci (1)
Evapar &
Harper (2)
Hunsted &
Kertesis (3)

Liszka (1)
Argenstein (1)
Bednar (1)
Ditesheim (1)
Freeman (1)
Gurein (1)
Bicket (1)
Shearer (1) Capizzi (1)
Gear (1)
Group 2 Group 1
Group 4
Group 3
Exhibit 37 Competitor Analysis Mapping Competitors 2017
110 strategic management of Health Care Organizations
strategic response. For example, HCAs analysis of the strategic response of
competitors for potential new markets that they are contemplating is an important
variable in HCAs own expansion strategy.
Step 6: Assess Likely Competitor Actions or Responses
Plastic Surgery
New or 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
Competition within Strategic Group 1 is likely to remain based on
cosmetic plastic surgery; however, when finances are tight more lowercost procedures (more spa-like products and services) are introduced
into the practice and non-medical treatments/products will be offered.
People may not be able to afford surgical procedures but will continue to
purchase products/services they feel they can afford to look their best.
This modification in the practice strategy places the surgeons into greater
competition with Strategic Group 3; however, in 2017 most of those practices
have reverted back to surgical procedures dominating their practices.
Competition within Strategic Group 3 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 1.
Members of Strategic Group 2 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 4 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 verifies a number of
larger, multispecialty practices for physicians (who specialize in specific
conditions or disease states and often make inter-group referrals). Because
most plastic surgeons deal with a cash business, they may be more prone
to go it alone, making their own decisions to control costs and attempt to
generate revenues to increase personal income.
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 maintain profitability, 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
Chapter 3 Service Area Competitor Analysis 111
Step 7: Synthesizing the Analyses
To be useful for strategy formulation, external 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 analysis should
be summarized into key issues and trends, including their likely impact, and then
service area competitor analysis summarized.
Step 7: Synthesizing the Analyses Plastic Surgery
Although once the domain of the rich and famous, plastic surgery today is more
accessible to the public. One website ( provides feedback from ordinary people (who personally feel they have benefited 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, financing by regular
credit cards (MasterCard, VISA, AmEx) or CareCredit (CareCredit works as a
health care credit card enabling patients to pay off the cost of plastic surgery over
time) or Alpheon credit has enabled many middle-class Charlotteans to find their
real self through cosmetic plastic surgery.
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 population. Given the Charlotte regions population, around 25 plastic surgeons are
needed; 37 board-certified plastic surgeons have offices in the area plus there are
another 39 practitioners who present themselves as plastic surgeons. Thus, significant competition exists for patients.
There are four distinct strategic groups, all of which achieved the hurdle of board
certification in plastic surgery to enter the market. There is high competitive rivalry
as well as high customer power, and there are myriad substitutes for the services
offered. 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 1 increasing its focus on a more upscale, well-appointed office; Strategic
Group 2 maintaining more traditional practices and office environments; and
Strategic Group 3 focusing on elite surroundings with an extremely upscale spa
environment that exudes personal attention. Strategic Group 4 represents more
traditional medical practices today with multiple physicians: office space is more
limited and a budget set by the group is followed.
Market share is dominated by Strategic Groups 1 and 3 that more aggressively
market their cosmetic surgery services. The basis for competition for Strategic
Groups 1 and 3 is cosmetic plastic surgery services whereas Strategic Groups
2 and 4 incorporate reconstructive surgery into their product mix. Members of
Strategic Group 4 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 office. If a hand and face specialist is needed,
the practice covers those subspecialties, as well.
112 strategic management of Health Care Organizations
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 in someone elses 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 surgeons first choice to set
up a practice. On the other hand, the Charlotte market is growing, its population
is younger than average, its citizens possess higher discretionary spending ability,
and a number of the solo practitioners are approaching retirement.
Obstacles to Effective Service Area Competitor
Monitoring the actions and understanding the intentions of competitors is often
difficult. 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 slow an organizations response to its competitors moves or cause the
selection of the wrong competitive approach. Flawed competitor analysis, resulting from these blind spots, weakens an organizations capacity to seize opportunities or interact effectively with its rivals, ultimately leading to erosion in the
organizations market position and profitability.16 Obstacles to effective competitor analysis include:
Misjudging industry and service area boundaries.
Poor identification of competitors.
Overemphasis on competitors visible competencies.
Overemphasis on where, rather than how, to compete.
Faulty assumptions about the competition.
Paralysis by analysis.17
A major contribution of competitor analysis is the development of a clear definition of the industry, industry segment, or service area. The service area is the
geographic area from which an organization draws the majority of its customer/
patients. 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 from
around the world, is now quite common (refer back to Essentials for a Strategic
Thinker 34, What Is Medical Tourism?). To avoid a focus that is too narrow,
the industry, industry segment, and service area must be defined in the broadest
Chapter 3 Service Area Competitor Analysis 113
terms that are useful. In addition, in todays health care environment, competition
may come from non-traditional competitors (outside the health care system). 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 system. For example, hospitals traditionally focused on acute care.
Management was not concerned with intermediate care, 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 quality of care and unnecessary readmissions, hospitals want to
control the flow of patients (integrated delivery systems) and assure the care is
appropriate (continuum of care) to increase revenues, provide seamless care, and
promote customer satisfaction with the quality of care received. 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 defined will lead to poor
competitor analysis.
Another possible flaw of competitor analysis is the improper or poor identification 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.18 Such myopia is especially true
when the perceived strengths of competitor organizations do not fit traditional
measures or there is an inflexible 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 AMCs as competitors; however, with lowered reimbursements and
increased numbers of charity care, AMCs are struggling to increase revenues
and have had to redesign their business model. For example, the Louisiana State
University (LSU) hospitals and its medical clinics are the states predominant
provider of health care for the poor and uninsured. Because of reduced financial
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 LSUs exploration of potential cooperative endeavor agreements, leases, or the
possible sale of some facilities.19
Another problem in performing competitor analysis is the tendency to be
concerned only with the visible activities of competitors. Less visible attributes
and capabilities such as organizational structure, culture, human resources,
service features, intellectual capital, management acumen, and strategy may
cause misinterpretation of a competitors strengths or strategic intent. Certainly
the Mayo Clinics 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 first 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.20
Competitor analysis requires predicting how competitors plan to position themselves. Although difficult, determining competitors strategic intent is at the heart
of competitor analysis. An effective competitor analysis should focus on what
114 strategic management of Health Care Organizations
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.21 See Essentials for a Strategic Thinker 35, What Is a
Black Swan Event?
Essentials for a Strategic Thinker 35
What Is a Black Swan Event?
Portraying different types of external change by
the nature of their predictability is an established
strategic management practice for example,
predictable and inevitable surprises and gray
rhinos (see Essentials for a Strategic Thinker 23).
Similarly, a Black Swan Event is a metaphor for
major impact events that are a complete surprise
and are often then rationalized as explainable
and predicable. Black swans have three important characteristics: (1) they are outliers meaning outside the realm of expectations; (2) they
have extreme impact; and (3) although they are
outliers, human nature causes us to generate
explanations that, after the fact, make the events
explainable and even predictable.1 The concept
of the black swan comes from the old story
that only white swans had been seen, therefore
people naturally assumed all swans were white.
Then, in Australia explorers saw a black swan.
That discovery highlighted the fragility of our
knowledge one single observation can invalidate a general statement derived from millennia
of confirmatory sightings of millions of white
swans. All you need is a single black bird.2
Consider a global pandemic influenza outbreak. Although outbreaks of influenza are not
unheard of, pandemics do not happen often
and are rightfully considered outliers; for generations they exist outside of normal expectations.
If a pandemic occurs, the impact is devastating.
For example, the 1918 influenza pandemic is
estimated to have killed 50 million or more
people world-wide. Should a pandemic happen,
scientists would be quick to remind us that such
events have occurred throughout human history and some might even say that we should
have expected an outbreak since pandemics
occurred with some regularity in the past.
Strategic thinkers must beware of black
swans and the kind of attitudes that lead to their
emergence. Nassim Nicholas Taleb, the author
of the book The Black Swan, calls these attitudes
the triplet of opacity3 that involves:
The illusion of understanding. Experienced
decision makers sometimes believe they
understand the situation better than is the
case in reality. Human beings tend to create
categories to simplify an external analysis to
make it more organized and logical.
Retrospective distortion. Decision makers
assess events after the fact and in doing
so are tempted to see the external
environment as more orderly and less
Overvaluation of factual information. The
more experienced and learned the decision
maker the more likely he or she is to
overvalue factual information. Experience
and education encourage us to rely on
information and data often to the exclusion
of more subjective feelings and intuition.
Chapter 3 Service Area Competitor Analysis 115
Black swans have important implications for
strategists. First, be careful not to assume that
the only situations that the organization faces are
those that have been seen before and are understood. Second, when unique events do occur,
resist the temptation to insist that this is nothing
new by forcing the events into pre-established
categories and classifications. Third, embrace outlier events as opportunities to innovate.
1. Nassim Nicholas Taleb, The Black Swan: The
Impact of the Highly Improbable (New York:
Random House, 2007).
2. Ibid., p. 1.
3. Ibid., p. 8.
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 external 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 in todays world with the internet, access to information becomes
easier. Under such conditions, information overload is possible and separating
the essential from the non-essential is often difficult. As a result, the intent of
competitor analysis should be emphasized. Over-analysis or endless analysis
should be avoided. Competitor information must be focused and contribute to
strategy formulation.
Strategic Momentum: Validating the Strategic
As with the general environment and health care system, 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 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 38 provides a series of questions designed to surface signals of new perspectives regarding the service area
116 strategic management of Health Care Organizations
exhibit 38 Strategic Thinking Questions Validating the Strategic
1. Is the strategy consistent 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 sufficient to be competitive and generate an acceptable profit?
The Use of External Analysis 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.
Chapter Summary
Service area competitor analysis focuses on the nature of competition and competitors within a defined service area and provides an understanding of the competitive context in which the strategy of the organization will have to be successful.
Specifically, service area competitor analysis is the process of evaluating competition
in the service area, identifying competitors, assessing the strengths and weaknesses
of rivals, determining the critical success factors for the product/service category
in the service area, determining the strategic groups, and anticipating competitors
strategic moves. The synthesis of the results of this process provides a foundation
for determining competitive advantage and subsequent strategy formulation.
Service area competitor analysis can be accomplished through a seven-step
process. Step 1 is the identification of the issues in the general environment, health
care system, and service area, which provides a foundation for the competitor
analysis. In Step 2, a service area structural analysis is used to evaluate the nature
and level of competition. Service area structural analysis may be accomplished
through a Porter Five 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. In Step 3, a comprehensive
competitor analysis is undertaken that includes an identification and evaluation
of competitor strengths and weaknesses. In Step 4, critical success factors are
Chapter 3 Service Area Competitor Analysis 117
identified and analyzed the limited number of activities that competitors in a
service category in a service area must perform well within a strategic group to
be successful (includes reputation, quality, low cost, or others). From the critical
success factors, strategic groups may be classified and mapped in Step 5. Strategic
groups are made up of competitors that most directly compete with each other. In
Step 6, competitors likely future strategies or strategic moves (and the organizations likely responses to strategic moves made by strategic competitors) must be
considered for strategy development. Finally, service area and competitor information should be synthesized and strategic conclusions drawn to enable better
recommendations to be made.
Health care organizations engage in service area competitor analysis to gather
information and to make important offensive and defensive decisions. However,
analysts must be careful not to misjudge the service area boundaries incorrectly
identifying strategic competitors, focus only on visible competence, overemphasize where rather than how to compete, create faulty assumptions, or be paralyzed by analysis.
Chapter 4 explores how an organization examines its own strengths and weaknesses to understand competitive advantages and disadvantages as a basis for
strategy formulation.
Practical Lessons for Health Care Strategic Thinkers
1. Specifying the service category frames the scope of service area competitor
analysis. The service category may be defined very broadly such as hospital
services or defined very narrowly such as pediatric hematologyoncology,
depending on the intent of the strategic planning process.
2. Generally, competitively relevant issues in the service area will impact the
organization more directly than issues in the general environment and
broader health care system except for game changing policy shifts or
major issues such as large shifts in the economy.
3. The service area structural analysis reveals the attractiveness of a service
category in a service area and provides insight into the desirability of
entering the market as well as how best to compete within the market.
4. The process of mapping competitors on important market dimensions
shows which competitors are most similar to the organization and therefore
the most dangerous. Use the critical factors for success for the product
category in the service area to map competitors. Those critical factors
determine the winners and losers.
The Language of Strategic Management: Key Terms and Concepts
Black Swan Event
Competitive Advantage
Critical Success Factor Analysis
Mapping Competitors
Service Area Competitor Analysis
Service Area Structural Analysis
Strategic Group
Strategic Response
118 strategic management of Health Care Organizations
1. Leemore S. Dafny and Thomas H. Lee, Health Care
Needs Real Competition, Harvard Business Review 94,
no. 12 (2016), pp. 7687.
2. Sumantra Ghoshal and D. Eleanor Westney, Organizing
Competitor Analysis Systems, Strategic Management
Journal 12, no. 1 (1991), pp. 1731.
3. Data was analyzed from the North Carolina Board of
Medicines list of practicing physicians in the Charlotte
NC, area with Plastic Surgery included by the physician as an area of practice (February 1, 2017) and the
American Board of Plastic Surgery (includes Plastic and
Reconstructive Surgeons who are Board-certified in Plastic
and Reconstructive Surgery) (accessed February 12, 2017).
4. 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).
5. Ming-Jer Chen, Competitor Analysis and Interfirm
Rivalry: Toward a Theoretical Integration, Academy of
Management Review 21, no. 1 (1996), p. 101.
6. Joel A. C. Baum and Helaine J. Korn, Competitive
Dynamics of Interfirm Rivalry, Academy of Management
Journal 39, no. 2 (1996), p. 257.
7. Adapted from Porter, Competitive Strategy, pp. 127128.
8. R. K. Reger and A. S. Huff, Strategic Groups: A
Cognitive Perspective, Strategic Management Journal 14,
no. 2 (1993), pp. 103123.
9. 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.
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-profit organizations
perform such a competitor analysis?
2. What is the relationship between external analysis and service area competitor
3. What competitor information categories are useful in competitor analysis? Are these
categories appropriate for health care organizations? How can these categories provide
focus for information gathering and strategic decision making?
4. Explain the steps and logic of service area competitor analysis.
5. How does the use of Porters Five Forces framework help to identify the major
competitive factors in the service area?
6. Why is an identification and evaluation of competitors strengths/weaknesses and
strategy essential in service area competitor analysis?
7. What are the benefits of strategic group analysis and strategic mapping?
8. How are the critical success factors for a strategic group determined?
9. Why should a health care organization attempt to determine competitors strategies
and likely strategic responses?
10. What is the purpose of the synthesis stage of service area competitor analysis?
11. What are some obstacles to effective competitor analysis? How may these obstacles be
Chapter 3 Service Area Competitor Analysis 119
10. 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.
11. C. J. Fombrun, Reputation (Boston, MA: Harvard
Business School Press, 1997).
12. Porter, Competitive Strategy, p. 129.
13. Robert M. Grant, Contemporary Strategy Analysis, 5th edn
(Malden, MA: Blackwell Publishing, 2005), pp. 124126.
14. Karel Cool and Ingemar Dierickx, Rivalry, Strategic
Groups and Firm Profitability, Strategic Management
Journal 14, no. 1 (1993), pp. 4759.
15. Chen, Competitor Analysis and Interfirm Rivalry, p. 102.
16. Baum and Korn, Competitive Dynamics of Interfirm
Rivalry, p. 256.
17. 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.
18. Zahra and Chaples, Ibid., p. 22.
19. Marsha Shuler, LSU Seeks Hospital Partners, The
Advocate (August 14, 2012), p. 1.
20. Mayo Clinic website:
21. Hubert Saint-Onge, Tacit Knowledge: The Key to the
Strategic Alignment of Intellectual Capital, Strategy &
Leadership 24, no. 2 (1996), pp. 1014.

Chapter 4
Internal Analysis and
Competitive Advantage
Why Internal Analysis and Competitive Advantage
Are Important
As defined by Professor Kotler, enhancing and leveraging competitive advantage
is central to strategy. Organizations are constantly trying to distance themselves
from competitors; responding to the demands of their situation in unique ways
enables them to be separated from their competitors. Competitive advantage is
created inside the organization through the development of a unique bundle of
resources, exclusive technology, access to the market, or new product/service
characteristics, that competitors cannot or will not match. Differentiation is
typically the basis for competitive advantage.
Competitive advantage is a companys ability to perform in one or more ways that
competitors cannot or will not match.
Philip Kotler, American marketing author
and distinguished professor
122 strategic management of Health Care Organizations
Competitive advantage is found in the strengths of the organization; however,
these strengths must be relevant to the markets served. Moreover, competitive advantage does not exist in a vacuum there is no one universal competitive
advantage. Competitive advantage occurs in context what is a competitive
advantage in one market may not be a competitive advantage in another market.
Finally, competitive advantage must differentiate the organization enough from
its competitors to make a meaningful difference in the mind of the buyer. If competitive advantages are easy to copy, they do not remain competitive advantages
for long.
An organizations self-examination is difficult strengths are sometimes over
estimated and weaknesses difficult to acknowledge. Therefore, methods to help
strategic managers objectively surface their organizational strengths and weaknesses as well as assessment guidelines for determining sustainable current
and potential competitive advantages are essential. An organizations external
analysis, service area analysis, and internal analysis are the basis for identifying
competitive advantage.
Use the concepts in this chapter to appraise internal strengths and weaknesses,
identify unique characteristics, and create competitive advantages for a health
care organization!
Learning Objectives
After completing the chapter you will be able to:
1. Explain how external analysis creates the context for internal analysis and the
development of competitive advantage.
2. Discuss the ways in which value can be created at various places in the
3. Articulate the rationale of using the organizational value chain to conduct internal analysis.
4. Use the value chain to identify organizational strengths and weaknesses.
5. Determine the competitive relevance of each organizational strength and
6. Describe how competitively relevant strengths and weaknesses can be used as
the basis for developing strategic plans.
7. Discuss the importance of identifying and developing competitive advantage for
a health care organization.
Strategic Management Competency
After completing this chapter you will be able to perform an internal analysis and
determine the competitive advantages and competitive disadvantages for a health
care organization.
Chapter 4 Internal Analysis and Competitive Advantage 123
The Process for Internal Analysis and the Search for
Competitive Advantage
Although an understanding of an organizations external environment is critical and provides the context for strategic planning, it is the organizations
strengths that provide the foundation for creating a competitive advantage.
Competitive advantage is derived from organizational strengths that are valuable to external stakeholders, relatively rare among competitors, difficult to
duplicate by competitors, and can be sustained by the organization. Typically,
these strengths are directed toward achieving a cost advantage or differentiating the organization from its competitors. Therefore, a detailed understanding
of the organizations internal strengths and weaknesses relative to the changes
taking place externally is a necessary element for developing a viable strategic
plan. The search for competitive advantage consists of five steps as shown in
Exhibit 41.
EXHIBIT 41 The Process for Internal Analysis
Step 1 Review Results of External Analysis and Service Area
Competitor Analysis
Step 2 Organize the Internal Analysis Process
Using the Value Chain
Step 3 Identify Organizational Strengths and Weaknesses
Step 4 Determine Competitive Advantages and Disadvantages
Step 5 Synthesize and Determine the Implications
of the Competitive Advantages and Disadvantages
124 strategic management of Health Care Organizations
Step 1: Review Results of External Analysis and Service
Area Competitor Analysis
To this point, situational analysis has concentrated on external factors in an
attempt to answer the first of three strategic questions What should the organization do? Before undertaking an internal analysis, it is important to understand
the external analysis the legislative/political forces, economic trends, social/
demographic changes, and technological issues affecting the organization, as well
as competitors abilities to be successful in the marketplace. Therefore, at a minimum, the issue map (Chapter 2, Exhibit 2-5) and the synthesis of the service area
competitor analysis (Chapter 3, Step 7) should be reviewed.
After external analysis, the emphasis of situational analysis shifts to the organization itself and the ways in which competitive advantage may be established the internal analysis. Successful organizations focus relentlessly on competitive advantage
[they] strive to widen the performance gap between themselves and competitors.
They are not satisfied with todays competitive advantage they want tomorrows.1
As Essentials for a Strategic Thinker 41, What Is the Red Queen Effect? illustrates,
obtaining and maintaining a competitive advantage is a difficult challenge.
Essentials for a Strategic Thinker 41
What Is the Red Queen Effect?
The Red Queen appeared in Lewis Carrolls
Through the Looking Glass with Alice running
hand-in-hand with the Red Queen who keeps
telling her to run faster and faster. To Alices
amazement, no matter how fast they run everything around them remains in the same place.
Alice says to the Red Queen, Well, in our country
youd generally get to somewhere else if you
ran very fast for a long time, as we have been
doing. The Queen responds, A slow sort of
country. Not here, you see, it takes all the running
you can do, to keep in the same place, if you want
to get somewhere else, you must run twice as
fast as that!
William Barnett in his book, Red Queen
among Organizations: How Competitiveness
Evolves, demonstrates what many health care
executives know intuitively you have to run
as fast as you can just to stay where you are in a
highly competitive environment.1 Consider the
case of a long-term care facility in a prosperous
retirement market that decides to seek a competitive advantage by providing a number of
ancillary services to its residents not offered in
the general market. The facility builds a state-ofthe-art wellness center, an on-site Olympic size
swimming pool, and provides on-demand transportation services to local health care offices
and shopping malls.
Initially the facility gains a competitive
advantage by offering these services. Retirees
move from other facilities and a larger percentage of prospective residents select the facility
because of the enhanced services. Rivals, recognizing they are operating at a disadvantage,
upgrade their facilities and add more amenities
such as an on-site chef, customized menus, and
a spa. This competitor becomes the recipient
of transfers from other facilities and acquires a
larger market share for a while.
Chapter 4 Internal Analysis and Competitive Advantage 125
The task of establishing competitive advantage is sometimes perplexing, and
not always successful. Developing a better product, establishing a cost advantage,
or delivering superior service does not necessarily guarantee success. Competitive
advantage requires an organization to develop a distinctiveness that is valued by
customers, not offered by competitors, and cannot easily be imitated. Identifying
this distinctiveness requires an introspective view that enables the organization to
answer the second strategically relevant question of situational analysis What
can the organization do? To answer this question, a method of internal analysis
must be adopted that will enable the strategist to effectively determine what customers value.
Step 2: Organize the Internal Analysis Process Using
the Value Chain
Internal analysis can be accomplished by evaluating the strengths and weaknesses of the functional areas such as clinical operations, information systems,
marketing, clinical support, human resources, financial administration, and so
on. With such an approach, each function or organizational subsystem is carefully analyzed. 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 stakeholders.
Value is defined as the degree of satisfaction received relative to the price and the
expected outcome or results.2 For example, a patient may go to a plastic surgeon
and pay an extremely high price to correct scarring from an automobile accident.
Despite the high price, the perception of social acceptance, increased self-esteem,
and improved self-confidence 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 The organizational
value chain is a useful tool for identifying and assessing how health care organizations create value through service delivery and organizational support activities.
Barnett notes that although it appears everyone is staying in the same relative place, it
is really an illusion to the insiders.2 The Red
Queen effect, viewed from the perspective of
the customer or patient, is that competition has
forced both organizations to learn and grow.
Organizations that rest on their past offerings
and insist on doing things the way we have
always done them fail to improve and eventually lose their competitive advantage. Constantly
running faster leads to innovation, learning,
and continuous improvement. Strategic leaders
must embrace competition and change the
pathways to improvement.
1. William P. Barnett, Red Queen among
Organizations: How Competitiveness Evolves
(Princeton, NJ: Princeton University Press, 2008).
2. Claudio Giachetti, Joseph Lampel, and Stefano
Li Pira, Red Queen Competitive Imitation in
the UK Mobile Phone Industry, Academy of
Management Journal, 60, no. 5 (2017),
pp. 18821914.
126 strategic management of Health Care Organizations
Organizational Value Chain Health care organizations have numerous
opportunities to create value for patients and other stakeholders.4 For example,
efficient appointment systems, courteous doctors and nurses, patient-friendly
billing systems, easy-to-navigate physical facilities, and the absence of bureaucratic red tape can greatly increase satisfaction.5 The organizational value chain is
an effective means of determining how and where value may be created.6
The value chain illustrated in Exhibit 42 has been adapted from the value
chain used in business organizations to more closely reflect the value-adding components for health care organizations. The value chain utilizes a systems perspective; value may be created in the service delivery subsystem (upper portion of the
value chain) and by effective use of the support activities (lower portion). Service
delivery is the primary way organizations create value for the customer/patient
through pre-service, point-of-service, and after-service activities. Service delivery activities are placed above the support activities, as they are the fundamental
value creation activities; however, they are buttressed (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 support
activities that may add value to service delivery by ensuring an inviting and supportive atmosphere, an effective organization, and sufficient use of resources such
EXHIBIT 42 The Value Chain
Market/Marketing Research
Target Market
Services Offered/Branding
Clinical Operations
Process Innovation
Patient Satisfaction
Shared Assumptions Shared Values Behavioral Norms
Function Division Matrix
Financial Human Information Technology
Add Value
Add Value
Support Activities
Service Delivery
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York:
Free Press, 1985), p. 37.
Chapter 4 Internal Analysis and Competitive Advantage 127
as finances, highly qualified 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 efficient organization. The value
chain as a strategic thinking map provides the health care strategist with a framework for internal analysis of the organization (see Exhibit 42 and Exhibit 43).
Exhibit 43 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 for health care services.
Service Delivery
These activities create value prior to the actual delivery of health
Identification of recognizable groups (segments) that make up
the market; information gathering to improve quality, how to
meet consumers needs.
Target Market Determination of the appropriate segment(s) to satisfy with
specific health care services.
Services Offered/
Dissemination of information to prospective patients and other
stakeholders regarding the prices, range of products, and location
of available services by an identified health care organization;
promotional information; brand-quality relationship.
Pricing Determination of the charge schedule (prices) for available
Distribution/Logistics Actions that aid patient/customer entry into the health care
delivery system, including appointments, registration, and parking.
Promotion Communication of information to customers concerning the
health care offering; includes advertising, events (health fairs,
10K sponsorships), social media, and so on.
Service Delivery
These activities create value at the point where health care is
actually delivered to the patient.
Clinical Operations Delivery of health care to patients.
Quality Improvements in the efficiency and effectiveness of health care
services as perceived by the patient.
Process Innovation Improvements in existing or new operational processes.
Marketing Determination of new products and prices; identification of new
customers; provision of information to customers; convenience of
Patient Satisfaction Enhancement of the patient/customer health care experience.
128 strategic management of Health Care Organizations
Value Chain
Component Description
Service Delivery
These activities create value after the patient/customer has
received the initial health care.
Follow-up Determination of additional services needed to supplement the
initial health care need.
Clinical Tracking of subsequent procedures and appointments.
Marketing Actions that provide information, assessment of patient/customer
satisfaction, and continuous improvement in quality of care.
Billing Implementation of clear, easy to understand billing procedures
and documents.
Follow-on Facilitation of patient/customer entry into another health care
Clinical Referrals to the proper clinical settings.
Marketing Provision of information concerning follow-on clinical settings for
further (extended) care, tracking of outcomes of care.
Support Activities The activities in the value chain that are designed to aid in the
efficient and effective delivery of health services.
Support Activity
Values, norms, artifact, and assumptions that serve as a guide for
Shared Assumptions The assumptions employees and others share in the organization
regarding all aspects of service delivery (e.g. needs of patients,
goals of the organization).
Shared Values The guiding principles of the organization and its employees.
The understandings people in the organization have regarding
excellence, risk taking, etc.
Behavioral Norms Understandings about behavior in the organization that can
create value for patients.
Support Activity
Those aspects of organization structure that are capable of
creating value for customers/patients.
Functional Structure based on processes or activities used by employees (e.g.
surgery, finance, human resources).
Divisional Major units operate relatively autonomously subject to
overarching policy guidelines (e.g. hospital division; outpatient
division; northwest division).
Matrix Two-dimensional structure where more than one authority
operates simultaneously (e.g. interdisciplinary team with
representatives from medicine, nursing, administration).
Exhibit 43 (Continued)
Chapter 4 Internal Analysis and Competitive Advantage 129
Value Chain
Component Description
Support Actiivty
Strategic Resources
Value-creating financial, human, information resources, and
technology necessary for the delivery of health services.
Financial Financial resources required to provide the facilities, equipment,
and specialized competencies demanded by the delivery of
health services.
Human Individuals with the specialized skills and commitment to deliver
health services.
Information Hardware, software, and information-processing systems needed
to support the delivery of health services.
Technology The facilities and equipment required to provide health services.
Service Delivery Activities Health care organizations can create value and
significant advantages over competitors in all three of the service delivery subsystems. For example, in late summer and early fall, public health officials begin
to remind citizens that it is time for immunization against influenza. Numerous
methods are available for a provider to create value even before the patients arrive
for their flu shot. Pre-service is a key area in the value chain where value can be created for the customer/patient before the service is actually delivered. A provider
that views administering flu shots as an effective way to build a caring, quality
image might do considerable research to determine which patients need flu shots
(or would benefit most from having flu shots); where those patients live or work
and where they might find it convenient to go for the immunization; how much
they might be willing to pay; and how they might best find out about the benefits,
convenience, and affordability (promotion). In this manner the clinic develops a
distinctive market orientation that is not common in public health or many private health care organizations.7
Once the patient arrives, point-of-service activities occur. Regarding the actual
delivery of health care, there are multiple ways to create value for the customer.
Point-of-service is the key area in the value chain where the service is actually delivered and value can be created through clinical operations and marketing. Point-ofservice value might be added if the physical surroundings are clean and attractive,
there is no waiting time, the nurse is courteous, and information is received
concerning the 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 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 Perhaps
the most important single area of the point-of service evaluation relates to patient
satisfaction. Essentials for a Strategic Thinker 42, What Is Patient Satisfaction?
illustrates one of the established survey methodologies for assessing patient
130 strategic management of Health Care Organizations
satisfaction, and a more recently developed effort to evaluate and make available
to the public the patient satisfaction scores for hospitals.
Essentials for a Strategic Thinker 42
What Is Patient Satisfaction?
Patient satisfaction is the individuals perception of the quality of his or her care experience,
including such factors as care outcomes, communication with and attitudes of nurses and
doctors, responsiveness of staff, facility cleanliness, communicating about medicines, discharge
information, overall rating of the facility, pain
management, and so on. Assessment of patient
satisfaction enables comparisons of care to be
made longitudinally for a single provider as well
as across a number of providers or facilities and,
thus, provides a basis for tracking the quality of
care and determining where improvements may
be made. Patient satisfaction measures may or
may not reflect the actual quality (technical expertise) of care as the patient may not be awake, may
not have any medical procedure experience, nor
be realistic in terms of pain management.
The most recognized name in health care
patient satisfaction is Press Ganey a company
that has provided consulting services for more
than 30 years to more than 26,000 health care
organizations.1 Many people who visit their doctors are familiar with the follow-up Press Ganey
surveys that appear a few days after the visit.
Patients are asked to assess the quality of care
from providers as well as the treatment afforded
by office personnel, laboratory technicians, and
health educators where appropriate.
The Cleveland Clinic became concerned
about its patient satisfaction scores when it
discovered its physician communication scores
were among the lowest when compared to 15
other top hospitals such as the Mayo Clinic, Johns
Hopkins Hospital, and Massachusetts General
Hospital. Through the collection of quantitative
and qualitative data, the Cleveland Clinic determined that patients top three concerns were:
respect, good communication among staff, and
happy employees during their stay.
When the Clinic implemented a pilot program
in its emergency department to improve patient
satisfaction, patient experience scores began to
rise when employees at all levels were encouraged to communicate with each patient during
their wait. For example, a receptionist might ask,
Is there anything I can get you? I know you have
been waiting a long time Doctors, nurses,
and all other employees were trained in communicating with patients. The Cleveland Clinics
doctor communication scores are now in the top
percentile of all reporting hospitals.2
In 2002 the Centers for Medicare & Medicaid
Services (CMS), working with the Agency for
Healthcare Research and Quality (AHRQ) and
the Department of Health and Human Services
(HHS), began developing a patient satisfaction
survey for hospitals.3 This survey is called the
Hospital Consumer Assessment of Healthcare
Providers and Systems (HCAHPS) survey. This
instrument has three major goals:
1. To produce data from a patient
perspective that will allow objective and
meaningful comparisons of hospitals.
2. To enable public reporting of data to
provide an incentive for hospitals to
improve patient care.
3. To improve health care accountability by
increasing transparency of the quality of
services provided by hospitals.
Chapter 4 Internal Analysis and Competitive Advantage 131
Finally, value can be created through effective after-service activities. Afterservice activities can add value through subsequent patient interactions. 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
consumer/patient satisfaction. Billing may provide assistance in filing the necessary insurance papers or assuring payment methods. Patient satisfaction surveys
at a later date can serve to remind the consumer of the outstanding care received
or can identify areas that need improvement. Follow-on activities may be as simple as setting up the post-hospital stay check-up with the physician or assistance
in determining a rehab facility for after surgery to repair a broken hip.
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 efficiently facilitating the service delivery.
The structure should have enough standardization to ensure consistent quality yet enough flexibility to allow for responding to special needs. Strategic
resources are important to the overall perception of value received at the health
care organization. Such resources will have a positive impact on a patients
satisfaction with the visit and can include 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. It is also
important to have modern and responsive administrative and financial management systems.11 Financial systems that produce bills that are too complex for
patients to understand or lost patient records may imply to some that the facility
provides poor quality care.
There are a number of opportunities for health care organizations to create
value even when patients come for a service as simple as immunizations. It is
important to recognize that opportunities for value creation may be missed within
each subsystem just as easily as they may be created.12 Therefore, the goals,
Utilizing this instrument, consumers/patients
are able to compare and assess participating
hospitals and gain valuable information about
the quality of services.
The HCAHPS survey includes 27 questions
addressed to discharged patients regarding
their hospital stay. The survey is administered to
patients within 48 hours to six weeks after they
are discharged. The survey is available in English,
Spanish, Chinese, Russian, and Vietnamese. CMS
publishes the participating hospital results on
its Hospital Compare website (https://www.
2. James Merlino, How to Improve Patient
Satisfaction Scores By Using Data,
3. Source of information on the HCAHPS
survey obtained from
132 strategic management of Health Care Organizations
values, and behaviors of all employees must be integrated toward the common
objective of patient satisfaction and service.
Step 3: Identify Organizational Strengths and
An organizational strength is an attribute or characteristic (resource, competency,
capability) that the organization believes it possesses and utilizes successfully. 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. A particular
location may be a visible strategic strength because it prohibits other organizations
from occupying that specific space and cannot be exactly replicated. Some strengths
that health care organizations possess are clear and easily recognizable; however,
organizational characteristics that appear to represent key strengths to strategists
may have little importance to patients or other key stakeholders. Further, it may be
a strength possessed by competitors. In todays health care market, strengths can
quickly become weaknesses as competitors challenge successful strategies.
Comparatively, a weakness is an attribute or characteristic (resource, competency,
capability) that the organization assesses that it needs to improve. Weaknesses
may be easy to recognize as well. To be competitively relevant, the weakness must
be of value to stakeholders, relatively rare among competitors, difficult for the
organization to fix, and sustainable by competitors. Dominant organizations may
become complacent, rest on their laurels, and refuse to consider that the factors
that made them a success may become a liability in the future.13
Strengths and weaknesses are subjective in that they represent the opinions of
evaluators. 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? Some strengths and weaknesses are relative they are not obvious and can only be determined in relationship to the strengths and weaknesses of primary competitors.14 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 surgeons 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. Finally, strengths or weaknesses may be objective in that
most everyone recognizes that the organization possesses the strength or weakness. A pharmaceutical company that wins a patent for an important new drug
has an objective or absolute strength (at least until the patent runs out or another
company wins a patent that is superior).
Competitive advantage of an organization may be based on having rare or
abundant resources, special competencies or skills, or superior management or
logistical capabilities. Similarly, competitive disadvantages may result from a lack
of resources, competencies, or capabilities. In most cases the search for competitive
advantages begins with an assessment of organizational strengths followed by an
assessment of organizational weaknesses. Essentials for a Strategic Thinker 43,
What Is the Resource-Based Theory of Competitive Advantage? illustrates one
view of competitive advantage, based on the tangible and intangible resources
possessed by the organization.
Chapter 4 Internal Analysis and Competitive Advantage 133
Essentials for a Strategic Thinker 43
What Is the Resource-Based Theory of Competitive
The resource-based theory argues that sustained competitive advantage is a function
of the organizations tangible and intangible
resources. Tangible resources include capital
facilities, human, informational, financial, and
similar types of observable resources. Resources
such as reputation, goodwill, and so on are intangible. Although not directly observable, they
are real none the less. How much goodwill does
St. Judes Research Hospital for Children possess?
What is the reputation of the Cleveland Clinic
worth? How can anyone put a true value on the
name Mayo Clinic?
Although the roots of resource-based theory can be traced to early economic thought,
researchers indicate that the most direct origins of the theory emerged in the early 1980s.1
Although resource-based theory might appear
logical, even self-evident, notable exceptions
to the argument are identifiable. In almost all
industries some examples of relatively weak
companies (resource wise) exist that effectively
compete against their richer industry neighbors. In 1968, how could Hospital Corporation
of America (HCA) expand by building new
hospitals, acquiring and upgrading existing
facilities, and building one of the first national
hospital companies in the midst of so many
well-established and successful hospitals and
health care organizations? Perhaps the best
explanation for this seemingly contradictory
evidence is that HCA was able to develop certain intangible resources such as leadership
and managerial capabilities that enabled it to
muster and combine its limited resources in
innovative ways.
An entrepreneurial spirit might be a unique
resource possessed by an organization with
less tangible resources that allows it to be
effective against larger and more resource
rich competitors. Titan Spine, which produces
only a small number of products used in back
surgeries, offers a five-year warranty on the
devices it manufactures shielding some of the
risk of product failure from its customers.2 In a
highly litigious society even the removal of a
small amount of risk might provide a competitive edge.
Sometimes an organization can convert a
resource weakness into an advantage. Younger,
smaller, and more creative organizations can
react to and take advantage of developing
opportunities faster than large, complex, and
bureaucratic competitors. Moreover, smaller
and more nimble organizations are often closer
to their customers/patients and increase the
value of their products and services by listening
more carefully to user preferences.
The resource-based theory provides an
important insight for strategic thinkers. To some
extent, the thinking prior to the emergence
of this theory was for organizations to adapt
similar strategies and do the same things better or at a lower cost/price than competitors.
The resource-based theory altered this view by
suggesting that a more productive approach is
to leverage unique resources and exploit the differences among competitors.3
134 strategic management of Health Care Organizations
Resources Resources include factors that are available for use in producing goods and services. Resources may be tangible, as in the case of land and
capital, or they may be intangible, as in the case of intellectual property, reputation, and goodwill.15 The importance of intangible resources should not be
underestimated. Robert Kaplan and David Norton, co-creators of the Balanced
Scorecard strategy performance tool, point out that unlike financial and physical resources, intangible resources are hard for competitors to imitate, making
them a powerful source of sustainable competitive advantage.16 Furthermore,
according to a Harris Interactive Health Care Poll, a good reputation and a
trusted physicians recommendation are two of the most important indicators of
the quality of medical care as perceived by patients. These factors ranked above
more tangible indicators of resources, including location, appearance, and condition of physical facility.17
The resource-based theory of strategy argues that valuable, expensive, or difficultto-copy resources provide a key to sustainable competitive advantage.18 Although
the resource-based viewpoint has been an integral part of strategic thinking for
more than two decades, it has consistently evolved and matured into a comprehensive theory in more recent years. 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 profits. Interestingly, some
researchers suggest that the deployment of unique resources does not necessarily
increase profits or explain the difference between the deploying firms profit and
that of competitors.19
Basing strategy on the resource differences between organizations should be
automatic rather than noteworthy; however, appropriate utilization of this basis
for strategy is far from evident, especially in light of the overwhelming attention
given to external analysis in strategy formulation.20 In addition, there are many
different types of resources. More recently the issue of resource orchestration has
emerged, calling for an increased focus on the amount of resources an organization possesses as well as the effectiveness of health care managers in structuring,
bundling, and leveraging resources.21
Competencies Competency includes intellectual and skills-based knowledge or know-how and may be a powerful source of sustained competitive
advantage. For a growing number of health care organizations, competitive
1. Jay Barney and Delwyn Clark, Resource-Based
Theory: Creating and Sustaining Competitive
Advantage (New York: Oxford University Press,
2. Larry Myler, What Does Entrepreneurship
Look Like in Healthcare? Forbes Entrepreneurs,
March 14, 2016.
3. Robert M. Grant, Contemporary Strategy
Analysis: Concepts, Techniques, Applications
(Malden, MA: Blackwell Publishers, 2002).
Chapter 4 Internal Analysis and Competitive Advantage 135
advantage lies in the ability to create an economy driven not by cost efficiencies
but by ideas.22 For example, some researchers have suggested that intellectual
capital is the single most important factor in the development of competitive
In many cases, competencies are socially complex and require large numbers
of people engaged in coordinated activities.24 Generally, to enter a particular
market or deliver specific services, the organization must possess threshold conditions the minimally required resources, competencies (knowledge and skills),
or capabilities necessary to compete in a particular area. For example, to offer
cardiac services, an acute care hospital must have a minimum number of clinical
personnel with specific knowledge and skill in cardiac care. Although all organizations offering cardiac services presumably possess threshold competencies,
only one or two will develop a particular type of knowledge or specific skill
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 competitive
Capabilities A health care organizations ability to muster, coordinate, and
deploy resources and competencies, usually in combination, to produce desired
services is known as its capability. The capability to purposefully coordinate
resources and competencies is another potential source of competitive advantage.
The ability to effectively and efficiently coordinate resources and competencies to
achieve integrative synergies through leadership and management is a strategic
capability. For example, some assets almost never create value by themselves, and
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 organizations supply chain.25 Individuals who are capable
of building and maintaining relationships with suppliers can develop significant
advantages over competitors.26
Capabilities fall into one of the two following categories dynamic capabilities
or disruptive capabilities:
1. The ability to make ongoing improvements to the organizations activities
through learning, renewal, and change over time is referred to as a dynamic
capability and relates to an organizations skill at adapting its resources, or
competencies, or both to external changes.27
2. The ability to develop strategic insights, recognizing and arranging or
rearranging resources and competencies to develop novel strategies before
or better than competitors is a disruptive capability.28
Capabilities, therefore, are integrating and coordinating abilities (bonding
mechanisms) of managers and leaders to bring together resources and competencies in ways superior to those of competitors.29
The stock of resources, knowledge, and integrative skills contained in a health
care organization may not be sufficient to ensure a competitive advantage over
time. It is likely that two or more organizations competing in the same health care
136 strategic management of Health Care Organizations
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.30
Health care organizations that do not have superior resources or unique competencies may still develop competitive advantages if they are extraordinarily competent at converting ordinary resources and skills into genuine strategic assets.31
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 organizations key
processes into services that consistently provide superior value to
3. Organizations create these capabilities by making strategic investments
in a support infrastructure that link together and transcend traditional
functions of 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
Step 3: Identify Organizational Strengths and
Weaknesses Hill-Rom
Using an actual organization, Hill-Rom, Inc., the steps in the process of determining competitive advantage will be illustrated. The first action of Step 3 is to
carefully assess the activities that Hill-Rom does well and the activities it does
not do as well within each component of the value chain (Exhibit 42). After the
organizations strengths and weaknesses have been identified, each is assessed
(Step 4) to determine whether it is or could become a competitive advantage
or competitive disadvantage.
Hill-Rom, headquartered in Chicago, is the dominant manufacturer of hospital beds in the United States some observers estimate the company controls
7090 percent of the hospital bed market. Hill-Rom, however, is much more. It
is a leading global technologies company with three major global businesses:
Patient Support Systems, Surgical Solutions, and Front Line Care. With more than
10,000 employees and partners in more than 100 countries world-wide, the company states that its focus is on improving clinical and economic outcomes in eight
core areas: advancing mobility, wound care and prevention, patient monitoring
and diagnostics, surgical safety and efficiency, respiratory health, patient support
systems, surgical solutions, and front line care.
Hill-Rom pioneered in making hospitals safer and more comfortable for
patients. The company has expanded its portfolio through acquisitions by purchasing Allen Medical, the worlds leading manufacturer of accessories for operating room tables; Liko, a Swedish firm specializing in products for the safe lifting
Chapter 4 Internal Analysis and Competitive Advantage 137
and transferring of patients in health care settings; Aspen, a British company that
makes surgical blades and scalpels (Aspens successful Bard-Parker scalpel sells
more than a 115 million units per year); Vlker, a German company that is a leader
in the production of long-term care beds; Trumpf Medical, a German company
specializing in the production of advanced operating room products and services
as well as innovative lighting technologies, cameras, and surgical assistance
systems; and its largest acquisition, Welch Allyn, the company that developed
the first direct illuminating hand held ophthalmoscope and manufactures other
instruments to assist physicians in examining patients. Today, Hill-Rom is a fully
integrated medical technologies company with revenues of $2.7 billion and has
virtually doubled its revenues since 2009.33
Service Delivery Activities Hill-Rom possesses both important value-creating
strengths and value-reducing weaknesses in service delivery for the medical device
industry. Incorporated into that is a large and diversified industry segment with
some exceptionally powerful competitors (see Essentials for a Strategic Thinker 44,
What Is the Medical Device Industry?). Yet, Hill-Rom, or its antecedents, has
existed for more than 90 years. Because of its market share in the hospital bed industry, it enjoys considerable name recognition, although it is a relatively small company
compared to the overall market leaders (Johnson & Johnson, GE, Medtronic, Baxter).
Hill-Rom has a diverse but remarkably interrelated portfolio ranging from hospital
beds to operating room beds, patient mobility equipment, physician exam equipment, and medical supplies.
Essentials for a Strategic Thinker 44
What Is the Medical Device Industry?
The World Health Organization defines a medical device as an article, instrument, apparatus
or machine used in the prevention, diagnosis or
treatment of illness or disease, or for detecting,
measuring, restoring, correcting or modifying
the structure or function of the body for some
health purpose. Typically, the purpose of a medical device is not achieved by pharmacological,
immunological or metabolic means.1 The primary customers for medical device firms are
physicians or hospitals (acting on behalf of physicians). These firms typically receive payments
directly from insurance companies.
The Food and Drug Administration (FDA)
divides the types of medical devices into
17 medical specialty panels. These include orthopedic instruments, surgical instruments, diagnostic apparatus, stents and catheters, syringes
and hypodermic needles, blood transfusion and
IV equipment, and others. The American medical device industry represents almost half of the
sales world-wide. The industry includes 7,000
companies, employs 400,000, and is expected to
grow 6 percent per year over the next five years.
The market is dominated by five mega
corporations, including Johnson & Johnson,
General Electric, Medtronic, Baxter International,
and Cardinal Health. These five companies alone
account for over $91 billion in revenues. Johnson
& Johnson has revenue of almost $30 billion;
138 strategic management of Health Care Organizations
Hill-Roms scale of operations makes it a formidable competitor in the specialized markets where it operates. Hill-Roms reputation for exceptional products
and services is backed up by an extensive service operation it has more than
160 service centers in North America and 45 more internationally, employing
more than 1,600 service personnel.
Although Hill-Rom was forced to eliminate a number of jobs in 2014 and closed
two manufacturing facilities because of the uncertainties associated with the hospital industry, 2016 was recognized as a record-setting year by the President and
CEO. Of particular importance were the integration of its $2 billion acquisition of
Welch Allyn and its development of the Enterprise Account Teams that resulted
in several major contracts. These teams work with the largest health systems in an
effort to identify customers needs across the entire Hill-Rom portfolio.
As with all organizations, Hill-Rom has some apparent service delivery weaknesses. The company competes in eight core areas and faces competition from
well-known firms. Some of its powerful competitors specifically in the hospital
bed component of the health care device industry include Stryker Corporation,
Invacare, Electromed, and Linet.
Whereas large-scale and global operations represent great strengths, HillRoms geographic footprint subjects the company to complex and diverse FDA
and international regulations. The diversity of the product and service portfolio
presents the usual challenges of managing diversified operations. In addition, the
company is obliged to deal with Group Purchasing Organizations (GPOs) that
frequently require discounts and strongly resist price increases.
although growing rapidly, Hill-Rom, has annual
revenues of $2.7 billion. Aside from the five
behemoths, 80 percent of the firms in the medical device industry are small to medium size
businesses with less than 50 employees.
Medical devices benefit from an aging population; thus the outlook for the industry is
favorable. As the population ages, more frequent injuries, required surgeries, and more
chronic diseases occur. One of the most interesting opportunities in new technology is the
introduction of 3D printers. The medical device
industry is finding multiple ways to use this
technology, including pre-surgery planning,
hearing aids, prosthetics, and dental implants.2
Threats include value-based reimbursement (versus volume-based reimbursement)
becoming more prevalent and the increase in
regulation. The degree of government regulation in this industry depends a great deal on the
nature of the device. The FDA does not require
a lot of premarket regulation if the device is
simple and does not pose a significant risk to
human beings; however, other devices such as
cardiac defibrillators, are high risk and highly
regulated. Congress imposed taxes on many
medical devices, effectively raising the price for
patients; however, because of industry pressure
and patient outrage, the tax was suspended
after one year and is expected to be repealed.
1. http// device/full_definition/
2. Market at
Chapter 4 Internal Analysis and Competitive Advantage 139
Hill-Rom faces potential quality control problems if raw material supplies do
not comply with quality standards. Furthermore, the dominant market share
relative to hospital beds suggests the danger of antitrust actions. One of the most
serious operational risks is the limited number of manufacturing locations; the
loss of any single location would present a major challenge to meet customer
needs. Some important financial issues include the companys pension plan being
underfunded by about $80 million and that Hill-Rom self-insures up to a stop-loss
level, representing considerable financial risk with regard to its products associated liabilities.
Support Activities Despite the fact that Hill-Rom was faced with a reduction
in force in 2014, the company appears to enjoy supportive human resources
it has not experienced a work stoppage in over 40 years despite 6 percent
of its manufacturing workforce being covered under collective bargaining
agreements; another 18 percent of employees are covered by various collective bargaining agreements or national agreements outside the United States.
In addition, Hill-Rom has gone on record with a strong statement of socially
responsible operations.
Virtually all of Hill-Roms executive team have experience in the health
care system as well as other areas, such as management consulting. As a
pioneer in the hospital bed industry, the company holds a number of patents
enabling it to continue its industry leadership; however, none of the patents are considered to materially affect the value of the business. In recent
years Hill-Rom has made significant investments in information technology,
although it faces a number of challenges trying to integrate the systems of its
various acquisitions.
As expected, there are some weaknesses in Hill-Roms support activities.
International operations present the challenge of managing individuals from such
a variety of cultures. With the companys diverse product portfolio, culture clash
among the existing and acquired firms is an ever-present potentiality.
Financially, it has to be noted that much of the growth in recent years has come
from acquisitions. Continuing to locate and acquire related firms at its present
rate is doubtful. Moreover, the acquisitions have had both positive and negative
effects. Acquisitions primarily accounted for the over 200 percent increase in total
assets since 2014, plus a 33 percent increase in total revenues and a 150 percent
increase in net income during the 2016 fiscal year. Although total long term obligations have been reduced over the past year, they remain significantly higher than
they were in 2014.
With the constantly evolving health care system, it is reasonable to assume that
Hill-Rom will be required to maintain and even accelerate its rate of innovation
with regard to its core areas. During 2016, the company spent about four percent
of its revenues on research and development which, although significant, is not
particularly impressive when compared with other companies in health care. In
addition, almost all of its research and development is internal.
Finally, the impressive record of acquisitions has associated problems of
increasing debt. For example, the Welch Allyn acquisition added substantial debt
to Hill-Roms balance sheet in 2015; however, operating profits showed a significant increase in 2016.
140 strategic management of Health Care Organizations
After carefully searching through the value chain of an organization and
reflecting on its resources, competencies, and capabilities to develop value, a
more detailed look must be undertaken to evaluate the competitive relevance of
each strength and weakness. Exhibit 44 categorizes value-creating strengths and
value-reducing weaknesses for Hill-Rom, Inc.
Exhibit 44 Value-Creating Strengths and Value-Reducing Weaknesses
for Hill-Rom, Inc.
Value Chain
Component Value-Creating Strength* Value-Reducing Weakness*
Service Delivery
1. 90-year history of delivering
quality products (reputation).
2. Strong market position;
dominant market share in
hospital beds.
3. Diverse but related product
4. Innovative sales approach
Enterprise Account Teams.
1. Undifferentiated products in
competitive markets.
2. Diverse product line presents
management challenges.
Service Delivery
5. Scale of operations 10,000
employees and over 100
global partners.
6. Integrated strategy focusing
on patient care solutions and
economic outcomes.
7. Executive team with
significant health care and
management consulting
3. Quality products offered
to Group Purchasing
Organizations (GPOs) that
seek discounts and resist price
4. Management of diversified
companies involves unique
5. No backup for limited
manufacturing facilities.
Service Delivery
8. Extensive service operation
with 160 service centers in
North American and 45 more
world-wide with 1,600 service
6. Litigation in areas of product
liability, environment, and
Support Activities
9. Favorable human resources;
no work stoppages in over 40
10. Published and circulated social
responsibility statement.
11. Aggressive growth strategy
based on acquisitions.
7. Culture clashes among
acquired companies.
8. Difficulties in coordinating
global operations.
Support Activities
None None
Chapter 4 Internal Analysis and Competitive Advantage 141
Value Chain
Component Value-Creating Strength* Value-Reducing Weakness*
Support Activities
12. Numerous patents and
registered trademarks.
13. Significant increase in total
14. Significant increase in
research and development
9. Significant reductions in net
revenue, net income, and
operating profit during the
2015 fiscal year. Although
substantial turnaround
occurred in 2016, significant
demands on operations.
10. Substantial long-term debt.
11. Self-insured and underfunded
pension plan.
12. Difficulty integrating
information systems of
acquired companies.
*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 effective or ineffective business practices.
Step 4: Determine Competitive Advantages and
Assessing an organizations current and potential competitively relevant strengths
and weaknesses is the goal of internal analysis. Competitively relevant strengths
are those that are valued by the external stakeholders, are relatively rare among
competitors, relatively difficult to duplicate by competitors, and can be sustained
by the organization. They are the pathways to sustained competitive advantage.34
In todays competitive and dynamic health care environment, the ability to
develop a sustained competitive advantage is increasingly difficult. 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 other stakeholders.35 Health care organizations must consider
how their resources, competencies, and capabilities strengths and weaknesses
relate to those of competitors.
Competitively Relevant Strengths Strengths must have value, be rare, be
difficult to imitate, and be sustainable to create competitive advantage. Strengths
that are merely present do not represent competitive advantages in themselves.
To be competitively relevant, the specialized resources and competencies must be
marshaled in a way that enables them to become genuine strategic assets, resulting in the accumulation of economic returns greater than could be achieved with
any alternative use.
Competitive relevance is determined by critically considering four important
1. Question of value. Is the resource, competency, or capability of value to
142 strategic management of Health Care Organizations
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 difficult to duplicate the resource,
competency, or capability?
4. Question of sustainability. Can the resource, competency, or capability be
maintained over time?36
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 when not rare (meaning they are
common) among competitors, do not create a competitive advantage.
Question 3 attempts to determine whether it would be difficult (D) or easy
(E) for competitors to obtain or imitate the strength. The rareness of a strength
becomes even more important if the strength is difficult 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 as
competitors will likely imitate it as soon as possible.
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. The difficulty or ease
with which competitors can imitate the strengths and the organizations ability
to sustain them determines the extent of its long-term or short-term advantage.
Exhibit 45 provides a strategic thinking map for possible combinations of the
four questions regarding strengths and the implications for strategic leaders.
Exhibit 45 Strategic Thinking Map of Competitive Advantages Relative to Strengths
Is the Value of
the Strength
High or Low?
Is the Strength
Rare? (Y/N)
Is the
Strength Easy
or Difficult to
Imitate? (E/D)
Can the
Strength be
(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 threshold
condition for success.
Chapter 4 Internal Analysis and Competitive Advantage 143
Is the Value of
the Strength
High or Low?
Is the Strength
Rare? (Y/N)
Is the
Strength Easy
or Difficult to
Imitate? (E/D)
Can the
Strength be
(Y/N) Implications
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 short-term
competitive disadvantage.
H N D Y No competitive advantage. Many
competitors possess the strength but it
is difficult 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 threshold condition for
H N D N No competitive advantage. Many
competitors possess the strength yet it
is difficult 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 short-term
advantage but should not base long-term
strategies on this type of strength. Over
time, this strength is likely to become a
threshold condition for success.
H Y E N Short-term advantage but not a source
of long-term 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 benefits for a
short-term advantage.
144 strategic management of Health Care Organizations
Is the Value of
the Strength
High or Low?
Is the Strength
Rare? (Y/N)
Is the
Strength Easy
or Difficult to
Imitate? (E/D)
Can the
Strength be
(Y/N) Implications
H Y D Y Long-term competitive advantage. This
strength is rare in the service area, difficult
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 difficult to
imitate, the strength cannot be sustained.
This strength should be exploited for as
long as possible.
Exhibit 45 (Continued)
Competitively Relevant 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 46 provides a strategic thinking map listing the suggested actions of strategic
leaders relative to possible combinations of weaknesses.
Exhibit 46 Strategic Thinking Map of Competitive Disadvantages Relative to
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain their
(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
it, competitors could achieve a short-term
competitive advantage. Over time, correction
of this weakness is likely to become a
threshold condition for the market.
Chapter 4 Internal Analysis and Competitive Advantage 145
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain their
(Y/N) Implications
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 it and therefore no organization
will be able to sustain an advantage; likely
to become a threshold condition for the
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 difficult to correct; however,
this situation is dangerous and should be
addressed to ensure that competitors do
not overcome this difficulty and correct it
first. 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 difficult 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.
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 threshold
condition for the market.
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.
146 strategic management of Health Care Organizations
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain their
(Y/N) Implications
H N D Y Serious competitive disadvantage. The
weakness is valuable, most competitors do
not have it, it is difficult 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
H N D N Short-term competitive disadvantage.
The weakness is valuable, most
competitors do not have it, it is difficult
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 is corrected
by the organization, it will continue to be a
serious disadvantage.
Step 4: Determine Competitive Advantages and
Disadvantages Hill-Rom
Identification of the strengths in the various components of the value chain in an
organization such as Hill-Rom inevitably results in a lengthy list of activities in
which the organization excels. As noted, not all of the strengths will necessarily
be sources of competitive advantage for the organization and only a few may be
competitively relevant. For example, executives often believe that our reputation
is our greatest asset. However, in the medical device industry, there are numerous firms with excellent reputations (e.g. Boston Scientific, General Electric, St.
Jude Medical), so it is unlikely that reputation alone would constitute a significant
competitive advantage. Similarly, an identified weakness may not necessarily be a
competitive disadvantage if it is not competitively relevant (others share the same
or similar weaknesses).
Competitively Relevant Strengths Hill-Rom To further illustrate how
this process may be used, the strengths of Hill-Rom, Inc. as listed in Exhibit 44,
are evaluated with regard to the four questions (found in Exhibit 45) to generate
Exhibit 47: Competitive Relevance of the Strengths of Hill-Rom, Inc. From the
initial assessment, Hill-Rom, Inc. has 14 potentially important strengths that have
high value in the marketplace. These strengths with high value are assessed using
Exhibit 46 (Continued)
Chapter 4 Internal Analysis and Competitive Advantage 147
the remaining three characteristics (rare, easy to imitate, and can be sustained) to
determine which strengths may become the basis for competitive advantage. The
last column in Exhibit 47 indicates the implications for Hill-Roms identified and
analyzed strengths.
Exhibit 47 Competitive Relevance of the Strengths of Hill-Rom, Inc.
Is the Value of
the Strength
High or Low?
Is the
Rare? (Y/N)
Is the
Strength Easy
or Difficult to
Imitate? (E/D)
Can the
Strength be
(Y/N) Implications
Service Delivery
1 90-year history
of delivering
quality products
H Y D Y Long-term competitive
2 Strong market
position; dominant
market share in
hospital beds.
H Y D Y Long-term competitive
3 Diverse but related
product portfolio
(one-stop shop
for many medical
H Y D Y Long-term competitive
advantage especially
for large-scale
4 Innovative sales
Enterprise Account
H N E Y Threshold condition.
Service Delivery
5 Scale of operations
10,000 employees
and over 100 global
H Y D Y Long-term competitive
6 Integrated strategy
focusing on patient
care solutions and
economic outcomes.
H N E Y Threshold condition.
7 Executive team
with significant
health care and
consulting expertise.
H N E Y Threshold condition.
148 strategic management of Health Care Organizations
Exhibit 47 (Continued)
Is the Value of
the Strength
High or Low?
Is the
Rare? (Y/N)
Is the
Strength Easy
or Difficult to
Imitate? (E/D)
Can the
Strength be
(Y/N) Implications
Service Delivery
8 Extensive service
operation with
160 service centers
in North America;
45 in other
countries; 1,600
service employees.
H Y D Y Long-term competitive
advantage; 160 centers
for fast service.
Support Activities
9 Favorable human
resources with no
work stoppages in
40 years.
H N D Y Threshold condition.
10 Published and
circulated social
H N E Y Threshold condition.
11 Aggressive growth
strategy based on
H N D N No competitive
advantage unless
Support Activities
None apply.
Support Activities
Strategic Resources
12 Numerous patents
and trademarks.
H N D Y Threshold condition.
13 Significant increase
in total assets.
H N D N No competitive
advantage unless
14 Significant
increase in
research and
H N E N No competitive
*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 effective or ineffective business practices.
Chapter 4 Internal Analysis and Competitive Advantage 149
Strengths that are valuable, but not rare, easy or difficult to imitate, and can be
sustained (HNEY or HNDY) should be maintained by Hill-Rom because they are
possessed by others and represent a threshold condition for success. They include:
No. 4 Innovative sales approach; No. 6 Integrated strategy patient care solutions
and economic outcomes; No. 7 Executive team experience; No. 9 Favorable HR
no work stoppages; No. 10 Published/circulated social responsibility statement;
and No. 12 Patents and trademarks. These strengths are necessary to be competitive in the market but are unlikely to become a competitive advantage.
Hill-Rom has one strength that, although valuable, is not rare, is easy to imitate,
and cannot be sustained (HNEN) No. 14 Increase in R and D; however, it offers
no competitive advantage as most competitors spend 4 percent of revenue on R
and D; thus it needs to be sustained or could become a competitive disadvantage.
Five strengths offer potential as competitive advantages (HYDY): No. 1
Established reputation; No. 2 Domination of hospital beds market; No. 3 Related
and diverse product portfolio; No. 5 Large scale operations; and No. 8 Extensive
service operation.
Competitively Relevant Weaknesses Hill-Rom An assessment of the
value chain for Hill-Rom revealed a number of weaknesses as first included in
Exhibit 44. Using the questions and implications found in Exhibit 46, Exhibit 48
Competitive Relevance of the Weaknesses of Hill-Rom, Inc. was developed to
list and assess Hill-Roms weaknesses.
Exhibit 48 Competitive Relevance of the Weaknesses of Hill-Rom, Inc.
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain Their
(Y/N) Implications
Value Chain
Service Delivery
1 Undifferentiated
products in
H Y D N No competitive
disadvantage; for
all competitors,
differentiation is
2 Diverse product
line presents
H N D Y Could be serious
150 strategic management of Health Care Organizations
Exhibit 48 (Continued)
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain Their
(Y/N) Implications
Service Delivery
3 Quality products
offered to Group
(GPOs) that seek
discounts and no
price increases.
H Y D N No competitive
industry problem.
4 Management
of diversified
companies involves
unique challenges.
H N D N Short-term
5 No backup
for limited
H N D Y Serious competitive
Service Delivery
6 Litigation in
areas of product
liability, the
environment, and
H Y D N No competitive
industry problems.
Support Activities
7 Culture clashes
among acquired
H N D Y Could be serious
disadvantage; major
8 Difficulties in
global operations.
H N D N Short-term
Chapter 4 Internal Analysis and Competitive Advantage 151
Three of Hill-Roms weaknesses (HYDN): No. 1 Undifferentiated products;
No. 3 Quality products offered to Group Purchasing Organizations (GPOs) that
seek deep discounts; and No. 6 Litigation in the areas of product liability, environment, and employment are serious issues but they are not unique to Hill-Rom.
Management must be aware of these challenges but they do not constitute a
competitive disadvantage.
Is the
Weakness of
High or Low
Value? (H/L)
Is the Weakness
Common (Not
Rare) Among
Is the
Easy or
Difficult to
Correct? (E/D)
Sustain Their
(Y/N) Implications
Support Activities
9 Significant
reductions in
net revenue,
net income,
and operating
profit during
the 2015 fiscal
year. Although
occurred in
2016, significant
demands on
H N D Y Could be serious
strains growth.
10 Substantial
long-term debt.
H N D Y Serious competitive
11 Self-insured and
pension plan.
H N D Y Serious competitive
12 Difficulty
systems of
H N D N Could be shortterm competitive
*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 effective or ineffective business practices.
152 strategic management of Health Care Organizations
The more serious weaknesses are primarily the result of Hill-Roms conscious strategy to diversify its product lines and grow through acquisitions.
These include six weaknesses in the form of (HNDY): No. 2 Diverse product
line challenges management; No. 5 No backup for limited manufacturing
facilities; No. 7 Culture clashes among acquired companies; No. 9 Significant
reductions in net revenues/income/profit in 2015 pressures operations; No. 10
Significant increase in long-term debt; and No. 11 Self-insured, underfunded
pension plan are serious disadvantages. It should be pointed out that these
competitive disadvantages occurred because management is betting in the
long run that these very same weaknesses will provide competitive advantages for the company.
Three additional short-term weaknesses are oriented around Him-Roms rapid
growth: No. 4 Management of diversified companies involves unique challenges;
No. 8 Difficulties in coordinating global operations; and No. 12 Difficulty integrating information systems of acquired companies. These weaknesses represent high
value areas, are not shared by all competitors, and are difficult to correct; however,
the advantages may not be sustainable by others in the industry (HNDN). They
are short-term competitive disadvantages but must be addressed based on HillRoms expansion strategy through acquisition.
Step 5: Synthesize and Determine the Implications of the
Competitive Advantages and Disadvantages
As illustrated in Exhibit 41, the final step in exploiting competitive advantage is to determine how each competitively relevant strength and weakness
is likely to affect an organizations ability to compete in the marketplace.
Competitively relevant strengths are those that are valued in the marketplace, are
rare, are difficult to imitate, and can be sustained (HYDY) providing the basis
for long-term competitive advantage and should be developed to the greatest
extent possible. Competitively relevant weaknesses relate to areas that are valued
in the marketplace, are not common weaknesses among competitors, are difficult for organizations to correct, and offer advantages that can be sustained
by others (HNDY), are serious competitive disadvantages and may threaten
the survival of the organization. Results of the determination of both long- and
short-term competitive advantages and disadvantages are a part of situational
analysis and provide one part of the basis for strategy formulation (what
an organization can do).
Step 5: Synthesize and Determine the Implications
of the Competitive Advantages and
Disadvantages Hill-Rom
Exhibit 49 lists each of Hill-Roms competitively relevant strengths and weaknesses that have been identified (those displaying the pattern HYDY for strengths
and HNDY for weaknesses from Exhibit 47 and Exhibit 48) and speculates as to
whether or not Hill-Rom has the potential to differentiate itself from competitors
or to provide a cost advantage over competitors.
Chapter 4 Internal Analysis and Competitive Advantage 153
EXHIBIT 49 Strategic Implications of Hill-Roms Competitively Relevant
Strengths and Weaknesses
Competitively Relevant Strengths*
(from Exhibit 47) Strategic Implications
1 90-year history of delivering quality
products; reputation.
Brand recognition and institutional history.
2 Strong market position; dominant market
share in hospital beds.
Leadership position in hospital beds provides
entre to selling many other products to
large hospital systems.
3 Diverse but related product portfolio. Name recognition and superior reputation in
health care system.
5 Scale of operations; 10,000 employees
and over 100 global partners.
Market domination in hospital beds and
economies of scale.
8 Extensive service operation with 160
service centers in North America and
45 more world-wide with 1600 service
Ability to provide prompt and continuing
after service.
Competitively Relevant Weaknesses*
(from Exhibit 48) Strategic Implications
2 Diverse product line presents
management challenges.
Although the diverse product portfolio is a
strength, coordination challenges occur for
5 No backup for limited manufacturing
Majority of manufacturing taking place in
only one location. Facility shutdown because
of severe weather, labor shut-down, or
terrorism could have catastrophic impact.
7 Culture clashes among acquired
Merging cultures is challenging, takes time,
and impacts the bottom line.
9 Significant reductions in net revenue, net
income, and operating profit during 2015;
substantial turnaround in 2016, however,
demands on financial resources remain.
Growth by acquisition is over without
infusion of capital to continue the strategy.
10 Substantial long-term debt. Current long-term debt obligation will limit
11 Self-insured and underfunded pension
May lose talented people to other
organizations that have a fully funded
pension program or disaster might cause a
plant shutdown.
*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 effective or ineffective business practices.
154 strategic management of Health Care Organizations
For Hill-Rom, the strengths have been collected into Exhibit 49 Strategic
Implications of Hill-Roms Competitively Relevant Strengths and Weaknesses
to determine competitive advantages. The company’s strengths, No. 1 90-year
reputation; No. 2 Strong market position, dominant market share in hospital
beds; No. 3 Diverse but related product lines; No. 5 Scale of operations; and No. 8
Extensive aftermarket service support organization in North America and around
the globe, represent potential long-term sustainable competitive advantages. Of
particular significance is the companys carefully selected range of associated
products ranging from hospital beds, patient mobility machines, operating room
supplies and equipment, and medical instrumentation. It will be very difficult for
any competitor to imitate this product portfolio.
Note that the assessment indicates that Hill-Roms strategic leadership has
the ability to differentiate the organization and its services through its long-term
market presence, dominance in the hospital bed industry, diversity of its present
product line, and the breadth of its service centers and personnel. Leaders must
be careful, however, because competitors have the potential for a substantial
advantage if the expansion through acquisitions strategy is not successful. HillRom is stretched to the limit financially and faces considerable risk in successfully
managing diverse, although related, companies.
A Final Challenge
Careful internal analysis 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.
The basic endowment of resources, competencies, and capabilities in a health
care organization and the way they are allocated are critical determinants of the
organizations ability to compete effectively. 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.37
Stretch is significantly moving the organization toward its strategic goals and is
accomplished through resource leveraging or systematically achieving the most
customer-satisfying 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 financial 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.38 Prioritizing goals and focusing on no
more than a 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
Chapter 4 Internal Analysis and Competitive Advantage 155
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.
Complementary resources, competencies, and capabilities can be combined
to create synergy where value and performance combined will be greater than
the sum of the separate individual parts. 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
The potential for effectively leveraging a particular resource, competency, or
capability becomes greater the more often they are used. 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 that competitors
greatest strength. Challenging a stronger competitor requires creativity and
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 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.
Essentials for a Strategic Thinker 41, What Is the Red Queen Effect?
illustrated the importance of not allowing a competitive advantage to lead to
complacency. Competitive advantage can be lost faster than it can be gained,
requiring vigilance on the part of strategic leaders. Resource leveraging is a
matter of attitude and willingness to take reasonable risks, to do things in new
and innovative ways, to learn from the experiences of others, and generally
pursue excellence in all aspects of organizational performance. Management
consultants 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.39 These factors
are relevant to all type of health care organizations including public health and
community health organizations. See Essentials for a Strategic Thinker 45,
What Are Federal Health Centers? for an understanding of this important
industry segment.
156 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 45
What Are Federal Health Centers?
The Health Resources and Services Administration
(HRSA) of the U.S. Department of Health and
Human Services (HHS) awards grants to four types
of Federal Health Centers (FHCs): (1) Community
Health Centers (CHCs); (2) health centers for the
homeless; (3) health centers for public housing
residents; and (4) health centers for migrants.
FHCs are governed by community boards with a
majority of members (at least 51 percent) being
patients. FHCs provide direct access to health
care services as part of the health safety net.
More specifically:
Health centers are community-based and
patient-directed organizations that deliver
comprehensive, culturally competent,
high-quality primary health care services.
In addition, health centers often integrate
access to pharmacy, mental health, substance abuse, and oral health services in
areas where economic, geographic, or cultural barriers limit access to affordable
health care services. Health centers deliver
care to the Nations most vulnerable individuals and families, including people
experiencing homelessness, agricultural
workers, residents of public housing, and
the Nations veterans.
Most FHCs are CHCs, i.e. public, not-for-profit
entities that provide primary, preventive, and
emergency services to the general population
of low-income individuals. CHCs also receive
grants from state and local sources, private
foundations, and other federal programs. CHCs
are required to provide health care to all individuals regardless of ability to pay and are
located in medically underserved areas. Most
CHC patients have incomes at or below the federal poverty level.
Although CHC Patients with incomes at or
below 100 percent of the federal poverty level
(FPL) pay only nominal fees, patients with incomes
greater than 200 percent FPL pay full charges.
CHCs are required to collect reimbursement from
third-party payers (e.g. private insurance plans,
Medicare, Medicaid, CHIP) for insured patients.
CHCs are also eligible for designation as Federally
Qualified Health Centers (FQHCs) and as such participate in the Medicare and Medicaid programs.
In addition to providing medical services (e.g.
diagnosis and treatment), CHCs provide preventive health services including immunizations,
free vaccines for children, family planning, prenatal care, and preventive dental care. Further,
CHCs provide behavioral health treatments and
services including mental health services, substance abuse treatment, and diabetes self-management training. CHCs are required to have
arrangements with outside providers for emergency medical services and after-hours care.
CHCs employ physicians and physician extenders to provide services for patients; its workforce
includes many primary care clinicians from the
National Health Services Corps that work in medically underserved areas in return for student debt
reduction. Physicians must be licensed and are
ordinarily required to have admitting privileges at
a local hospital. CHC physicians are not required
to carry medical malpractice insurance coverage
because under the Federal Tort Claims Act (FTCA)
they are immune from liability for care provided
within the scope of employment; however, the
Federal government may still be subject to liability
for patients injured by malpractice in these cases.2
Chapter 4 Internal Analysis and Competitive Advantage 157
Sustained competitive advantage does not necessarily lead to continuous value
creation; yet long-term success requires ongoing satisfaction of ever-increasing
expectations. Success builds the expectation of continued success. Ongoing value
creation requires an organization to have a theory or a consistent means of choosing among all the options with regard to activities, resources, etc. In other words,
it requires not just a strategy but a strategy for strategies.40 In the end, determination of competitive advantage requires an integration of what health care
strategists know about the external forces with a sophisticated understanding of
competitively relevant strengths and weaknesses.
Strategic Momentum
For sustained competitive advantage, strategic momentum must be maintained.
After the strategy has been initiated, internal analysis must be continuous to
stay informed and current regarding the organizations competitively relevant
strengths and weaknesses. Sustaining a competitive advantage is difficult in a
dynamic market, and what might be a competitive advantage today may not
be an advantage tomorrow. Carefully evaluating the strengths and weaknesses
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 internal analysis.
The questions presented in Exhibit 410 provide for such an ongoing evaluation of the effectiveness of the internal analysis. Ensuring appropriate strategic fit
requires that the internal as well as the external analysis be continuously evaluated.
EXHIBIT 410 Questions for Evaluating the Internal Strategic Assumptions
1. Have the strengths and weaknesses been correctly identified?
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. Are short- and long-term competitive advantages protected?
6. Has the competition made strategic moves that have weakened the organizations competitive advantages?
7. Is the organization creating new competitive advantages?
1. What is a Health Center?
2. Federal Health Centers: An Overview,
Congressional Research Service, Jan. 6, 2016.
Source: Leonard J. Nelson, III, Adjunct Professor at UAB School of
Public Health and Professor Emeritus at Samford University.
158 strategic management of Health Care Organizations
Chapter Summary
Competitive advantage resides within the organization, whether it is a hospital,
physicians office, or health maintenance organization. Understanding competitive advantage requires a careful internal analysis of the organization through
its value chain. The value chain provides a framework for analysis, identifying
and focusing on areas in a health care organization where value may be added
or created. 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 or 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 to achieve competitive
Although understanding competitive advantage is important to health care
strategists, more is required. Successful health care organizations must always
insist on stretching their resources, competencies, and capabilities while creatively looking for new opportunities. Sustaining competitive advantage requires
that leaders understand what the marketplace demands of successful health care
organizations, configuring competitively relevant strengths to the organizations
greatest advantage, eliminating or minimizing the adverse effects of competitively relevant weaknesses, and establishing demanding aspirations that require
strategic assets to be synergistically pursued while constantly searching for new
opportunities. Chapter 5 examines the development of directional strategies that
set strategic direction and create buy-in among stakeholders.
Practical Lessons for Health Care Strategic Thinkers
1. External analysis indicates what the organization should do; internal analysis indicates what the organization can do.
2. Finding strengths that are competitively relevant involves more than a listing of strengths. Each strength must be evaluated to ensure it is of value to
stakeholders, is something rare that the organization possesses, is difficult
for competitors to copy, and can be sustained.
3. Leaders must evaluate the organizations weaknesses to ensure they do not
constitute a competitive disadvantage. Competitive disadvantages, without
corrective action, place the organization in danger of extinction.
4. Competitive advantage is not an excuse for complacency; the things that
made an organization great in the past may be the very things that will
cause problems in the future.
Chapter 4 Internal Analysis and Competitive Advantage 159
The Language of Strategic Management: Key Terms and Concepts
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 for 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 analysis important?
5. Why is the concept of competitively relevant strengths and weaknesses so important to
internal 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 when using this approach?
8. Briefly define 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. 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.
Competitive Advantage
Competitively Relevant Strength
Competitively Relevant
Disruptive Capability
Dynamic Capability
Objective Strength or Weakness
Red Queen Effect
Relative Strength or Weakness
Resource-Based Theory
Service Delivery
Subjective Strength or
Support Activities
Sustained Competitive
Threshold Condition
Value Chain
160 strategic management of Health Care Organizations
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 Profits (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. Eric Almquist, John Senior, and Nicholas Bloch, The
Elements of Value: Measuring and Delivering What
Customers Really Want, Harvard Business Review 9,
no. 3 (2016), pp. 4753.
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.
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. Corinne M. Karuppan, Nancy E. Dunlap, and Michael R.
Waldrum, Operations Management in Health Care: Strategy
and Practice (New York: Springer Publishing, 2016), p. 156.
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. Nicholas Argyris and Romel Moatafa, Knowledge
Integration, Vertical Integration, and Entrant Survival in
the Early Automobile Industry, Academy of Management
Journal 59, no. 4 (2016), pp. 14741492.
14. Nag Rajiv and Dennis A. Gioia, From Common
to Uncommon Knowledge: Foundations of FirmSpecific Use of Knowledge as a Resource, Academy of
Management Journal 56, no. 2 (2012), pp. 421457.
15. Richard Hall, A Framework for Linking Intangible
Resources and Capabilities to Sustainable Competitive
Advantage, Strategic Management Journal 14, no. 6
(1993), pp. 607618.
16. Robert S. Kaplan and David P. Norton, Measuring
the Strategic Readiness of Intangible Assets, Harvard
Business Review 82, no. 2 (2004), pp. 5264.
17. Anonymous, Americans Rank Good Reputation,
Doctors Recommendation as Top Indicators of Quality
Care, Health Care Strategic Management 21, no. 11 (2003),
p. 8.
18. 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.
19. Luis Costa, Karel Cool, and Ingemar Dierickx, The
Competitive Implications of the Deployment of Unique
Resources, Strategic Management Journal 34, no. 4 (2013),
pp. 445454.
20. Glen R. Carroll, A Sociological View on Why Firms
Differ, Strategic Management Journal 14, no. 4 (1993), pp.
21. Jay Barney, The Future of Resource-Based Theory,
Journal of Management 37, no. 5 (2011), pp. 12991315.
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.
11. 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.
12. Why is resource leveraging an important concept in internal analysis?
Chapter 4 Internal Analysis and Competitive Advantage 161
22. Rob Goffee and Gareth Jones, Leading Clever People,
Harvard Business Review 85, no. 3 (March 2007), p. 72.
23. Nixon Kamukama, Intellectual Capital: Companys
Invisible Source of Competitive Advantage,
Competitiveness Review 23, no. 3 (2013), pp. 260283.
24. 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.
25. Hakan Aronsson, Mats Abrahamsson, and Karen Spens,
Developing LEAN and Agile Health Care Supply
Chains, Supply Chain Management 16, no. 3 (2011),
pp. 176185.
26. 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.
27. Oliver Schilke, On the Contingent Value of Dynamic
Capabilities for Competitive Advantage: The Nonlinear
Moderating Effect of Environmental Dynamism,
Strategic Management Journal 35, no. 2 (2014), pp. 179188.
28. Kaplan and Norton, Measuring the Strategic
Readiness, p. 54.
29. Manish K. Srivastava and Devi R. Gnyawli, When
Do Relational Resources Matter? Leveraging
Portfolio Technological Resources for Breakthrough
Innovations, Academy of Management Journal 54, no. 4
(2011), pp. 797810.
30. 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.
31. 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 Reconfiguration: An Analysis of
Incumbent Responses to Technological Change,
Academy of Management Review 31, no. 1 (2006),
pp. 153174.
32. Stalk, Evans, and Shulman, Competing on
Capabilities, p. 62.
33. The Hill-Rom overview used a variety of sources including Funding Universe for the historical information. See also Casket Maker
Evolves into Major Manufacturer, Cincinnati Reporter
(December 30, 2012) and Hillenbrand Industries to
Split into Two Independent Companies, http// Financial information
taken from Annual Reports Hill-Rom 2016 and 2015.
Note: the illustration of Hill-Rom is used for educational
purposes only and is not to be considered an assessment
of effective or ineffective management.
34. Manuel Espinoza, Turning Diversity into a Competitive
Advantage, Financial Executive 23, no. 3 (2007),
pp. 4346.
35. 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. 961972; 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.
36. 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 an organization not included in this
37. Gary Hamel and C. K. Prahalad, Strategy as Stretch
and Leverage, Harvard Business Review 71, no. 3 (1993),
pp. 7584.
38. 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.
39. Gary Hamel and C. K. Prahalad, Competing in the
New Economy: Managing Out of Bounds, Strategic
Management Journal 17, no. 1 (1996), pp. 237242.
40. Todd Zenger, Beyond Competitive Advantage: How to
Solve the Puzzle of Sustaining Growth while Creating Value
(Boston, MA: Harvard Business School Press, 2016), p. 12.

Chapter 5
Directional Strategies
Why Directional Strategies Are Important
As suggested by James Brian Quinn, strategic decisions set the overall direction for an organization and shape its goals as well as its products and services,
markets, and service delivery and support activities. The broadest strategic
decisions are the directional strategies vision, mission, values, and strategic
goals because they provide general limits for all subsequent organizational
decisions. The directional strategies essentially document strategic thinking
concerning who we are, what we want to be, how we are going to behave, and
what we want to achieve.
Strategic decisions are those that determine the overall direction of an enterprise
and its ultimate viability in light of the predictable, the unpredictable, and
the unknowable changes that may occur in its most important surrounding
environments. They ultimately shape the true goals of the enterprise.
James Brian Quinn, strategy author and Dartmouth professor
164 strategic management of Health Care Organizations
Directional strategies are profoundly important; they initially set all other
activities in motion. The directional strategies create the first signs of momentum
for the organization. They rest solidly on a close examination of the reasonably
predictable changes that the strategic thinking activities (awareness, anticipation,
analysis, and interpretation) have synthesized concerning the organizations
environment (external environmental analysis) and itself (internal analysis).
In addition, to a considerable extent, the directional strategies must be able to
weather the unpredictable and unknowable changes that will inevitably occur
to guide subsequent organizational decisions. Vision, mission, and values are
relatively enduring, whereas strategic goals may be short or long term, and will
naturally evolve as some are accomplished and others are modified in a changing
A change in the directional strategies is usually evolutionary rather than revolutionary. Therefore, directional strategies should be re-examined and modified
over time, allowing an organization to remain nimble enough to maneuver in
its changing environments. Transforming an organizations identity and what it
does is never an easy task. Re-invention can be traumatic for the organization, but
sometimes necessary for survival.
Because the directional strategies are relatively enduring, they must take an
organization through good times and bad, and are difficult to change en masse;
therefore, strategic managers must carefully create the organizations directional
Use concepts in this chapter to craft exciting and enduring directional strategies!
Learning Objectives
After completing the chapter you will be able to:
1. Discuss how external environmental analysis, service area analysis, and internal
analysis provide the context for developing the directional strategies.
2. Describe the roles of and relationships among mission, vision, values, and
strategic goals.
3. Develop a mission statement incorporating the important characteristics and
components of organizational missions.
4. Compose an organizational vision statement using the relevant characteristics
and components of organizational visions.
5. Develop a values statement based on established characteristics and components
of organizational values.
6. Use service category critical success factors to imbue strategic goals.
7. Develop a set of strategic goals that contribute to the mission, move the
organization toward the realization of its vision, and are consistent with the
organizations values.
8. Discuss the important issues in the governance of health care organizations and
the role of boards of directors in creating and maintaining policy-making direction.
Chapter 5 Directional Strategies 165
Strategic Management Competency
After completing this chapter you will be able to develop directional strategies for
a health care organization.
Directional Strategies
Mission, vision, values, and strategic goals are appropriately called directional
strategies because they guide strategists when they make key organizational
decisions. The mission captures the organizations distinctive purpose or reason
for being it is a broadly defined and enduring statement of purpose that distinguishes one organization from other organizations of its type and identifies the
scope of its operations in product, service, and market (competitive) terms. The
vision creates a mental image of what leaders want the organization to achieve. It
is an expression of hope for a desired future state a description of what leaders
want the organization to accomplish when it is fulfilling its mission. Values are the
fundamental or guiding principles that are held dear by members of the organization and shape the organizations culture. These are principles the managers
and employees will not compromise while they are in the process of achieving
the mission and pursuing the vision and strategic goals. Strategic goals are benchmarks or end results related to critical success factors; consequently, the goals
should provide more specific direction that accomplishes the mission and vision.
Unfortunately, there is rarely a clear distinction among the concepts and terms
actually used in these statements especially in the mission, vision, and value
statements. Studies of actual statements reveal that even when the statements are
clearly labeled there is a wide variety of terms used to express the ideas contained
in them.1 From an analysis of 100 firms in the Fortune 500, it was suggested that
many mission statements are written at an educational level above what would
be effective to communicate to all stakeholders.2
The Process for Establishing Directional Strategies
Exhibit 51 provides an overview of the process for establishing the directional
strategies. The exhibit demonstrates the sequence and the need to understand the
broadest external analysis to the more narrow internal analysis followed by the
narrower still service area competitor analysis. Only after a thorough understanding of the situation the organization faces are the directional strategies formulated.
Step 1: Review Results of Situational Analysis
In Chapter 2 guidelines for a situational analysis were developed and it was noted
that an understanding of the external environment is essential for organizations
to answer the question, What should we be doing? The rules of success are
written outside the organization and these rules must be clearly understood
before an effort is made to develop the mission, vision, values, and strategic goals
166 strategic management of Health Care Organizations
of the organization. A critical aspect of the external environment is the nature
of the competitors in the organizations market space (Chapter 3, Service Area
Competitor Analysis).
The more organizational leaders know about the strengths and weaknesses
of competitors, the more likely they will be able to position the organization to
establish or maintain its ability to compete effectively (its competitive advantage)
as covered in Chapter 4. A complete review of the organizations situation with
regard to external and internal factors is necessary before beginning the process
of formulating the directional strategies.
Step 2: Develop a Statement of Mission
Chester Barnard, in his seminal book, The Functions of the Executive, stated that
only three things are needed to have an organization: (1) communication, (2) a
willingness to serve, and (3) a common purpose. The inculcation of the belief in
the real existence of a common purpose is, according to Barnard, the essential
executive function.3 Purpose, among other things, helps managers make sense of
the environment. When the purpose of an organization is clearly understood, the
EXHIBIT 51 The Process for the Development of Directional Strategies
Step 1 Review Results of Situational Analysis External Analysis,
Service Area Competitor Analysis, and Internal Analysis
Step 2 Develop a Statement of Mission
Step 3 Develop a Statement of Vision
Step 4 Develop a Statement of Values as Guiding Principles
Step 5 Develop Strategic Goals
Chapter 5 Directional Strategies 167
Essentials for A Strategic Thinker 51
What Is the Long-Term Care Industry?
The long-term care industry is comprised of
organizations that provide rehabilitative, restorative, or ongoing skilled nursing care to patients
who require assistance with daily living. A variety
of facilities dedicated to the intensity of care
required have developed over time. The old
folks home may now be a memory care facility,
a skilled nursing facility, a rehab facility, and so
on. The following list represents the main types
(listed in ascending order by intensity of care).1
Independent living
Adult communities usually impose age restrictions, offer social activities, and provide increased
security. Generally, these facilities do not offer
medical services but may facilitate access to care
by providing convenient transportation, scheduled visits from contract providers, and so on.
Typically, residents are age 75 or younger.
Congregate care facilities (CCFs)
These facilities provide social activities, security,
and non-health related services such as meals,
housekeeping, and transportation for shopping
and health care appointments. The target age
population is 7582 years.
Assisted living facilities (ALFs)
Although there is no uniformly accepted definition of ALFs, the U.S. Department of Health
and Human Services defines ALFs as residences
that provide either routine general protective
oversight or assistance with activities necessary
for independent living to mentally or physically
limited persons. These facilities generally provide care for individuals between the ages of 70
to 90+ years.
Skilled nursing facilities (SNFs)
The statutory definition of a skilled nursing facility
as provided in the Social Security Act is an institution (or a distinct part of an institution) that is
engaged in providing skilled nursing care and
related services for residents who require medical
or nursing care, or rehab services (for the rehabilitation of injured, disabled, or sick persons), and is
complexity of the environment can be reduced; leaders are able to analyze their
situation in light of the goals the organization wishes to achieve. Thus the complex environment is no longer a mere mess of things. As a statement of purpose,
the mission plays an important role in focusing strategists attention on relevant
aspects of the environment.
For example, if the CEO of a long-term care facility attempts to consider all
the turbulence in the organizations environment, it will be overwhelming. Can
anyone effectively track all of the changes taking place in biotechnology, cultural
values, demographics, and politics? However, if the CEO focuses on only those
aspects of the environment that relate to the mission of the long-term care organization, the task becomes more manageable. Essentials for a Strategic Thinker 51,
What Is the Long-Term Care Industry? provides an overview of this expanding
168 strategic management of Health Care Organizations
The common purpose (mission) to which Barnard referred is the reason that
organizations exist. Some organizations exist to make money for the owners;
some are founded to provide health care to indigent patients; others are started to
deliver health services as conveniently as possible, or to provide care to 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
organizations distinctive character. Although a well-conceived mission is general, it is more concrete than vision. An organizational mission is an attempt
to capture the essence of the organizational purpose and commit it to writing.
Stryker Corporation, an international leader in the development of medical
technologies, has a mission statement that is simple and to the point Together
with our customers, we are driven to make healthcare better.4 Emphasis is
placed on the interactions with customers, physicians, researchers, and so on,
in the development of innovative products and services. This simple statement
is used to coordinate the actions of thousands of employees in more than 100
An organizational mission is a broadly defined and enduring statement of
purpose that distinguishes a health care organization from other organizations
of its type and identifies the scope of its operations in product, service, and market (competitive) terms.5 The mission statement of the University of Texas MD
Anderson Cancer Center in Exhibit 52, for example, distinguishes the center
from other health care organizations in the service area by its relationship with
the University of Texas; its emphasis on a specific disease (cancer); its 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.
not primarily for the care and treatment of mental
diseases. Nursing facilities offer the most intense
level of long-term care for individuals requiring
around the clock care; they generally have transfer
agreements with one or more hospitals.
Medicaid is the primary payer of long-term
care services. Over 60 percent of the patients
in nursing homes as well as almost 20 percent of residents in assisted living facilities,2
are Medicaid recipients. Medicare recipients,
by comparison, return to their home after a
relatively short stay of 36 days for purposes of
The future of the long-term care industry
appears very promising because of the aging
of the population and advances in medical
science that have prolonged human life. As the
population ages, the demand for rehabilitative
services, assisted living services, and treatment
of chronic conditions increases.
1. These definitions taken from: Long Term Care
Education. (
2. Payment for services information is from:
Chapter 5 Directional Strategies 169
MD Anderson developed an effective logo that states that MD Anderson
Cancer Center is dedicated to Making Cancer History with a bold red line
through the word cancer. With cancer wiped out, MD Anderson is definitely
making history. Since 1990 when U.S. News & World Report began a ranking of
hospitals, MD Anderson has been ranked first or second, and has received the top
ranking nine times in the past ten years.
Although mission statements are relatively enduring, they must be flexible in
light of changing conditions. The changes facing academic medicine will continue
to impose pressures on specialized centers of excellence such as MD Anderson
because of the substantial costs involved in integrating patient care with the teaching and research mission and the increasing reluctance of payers to reimburse for
educational costs. Essentials for a Strategic Thinker 52, What Are Academic
Medical Centers? highlights the nature and some challenges facing academic
medical centers. Despite the challenges, MD Anderson has retained its mission
statement for a number of years and has remained focused on its distinctiveness
in a rapidly changing environment.
EXHIBIT 52 Mission Statement of the University of Texas MD Anderson
Cancer Center
The mission of the University of Texas MD Anderson Cancer Center is to eliminate cancer in
Texas, the nation and the world through outstanding integrated programs in patient care,
research, education and prevention, and through education for undergraduate and graduate
students, trainees, professionals, employees, and the public.
Source: University of Texas MD Anderson Cancer Center.
Essentials for a Strategic Thinker 52
What Are Academic Medical Centers?
According to the Association of American
Medical Colleges (AAMC), an academic medical
center (AMC) is a university-based hospital or
health system that is organizationally or administratively integrated with a medical school.
Despite the Associations singular definition,
AMCs are diverse and complex no two are
alike. They differ in organizational, operational,
financial, and governance structures. At their
core, AMCs typically include a medical school, a
teaching hospital, and faculty who teach medical students and specialty trainees as well as
provide clinical care for patients. The current
trend is toward greater alignment among these
three components, yet no single corporate structure is considered ideal. Of the approximately
140 allopathic medical schools, only 25 percent
are fully integrated such as the University of
Michigan Health System where the medical
school, hospital, and faculty practice fall under
one corporate structure. On the other end of
the spectrum, fewer than 10 percent operate as
separate entities, similar to George Washington
University. In between are multiple examples of
corporate alignment between school and hospital (University of Virginia), school and faculty
170 strategic management of Health Care Organizations
(Columbia University Medical Center), and hospital and faculty (Vanderbilt University Medical
Center). Where an AMC falls along this alignment
continuum is a product of its institutional history,
culture, and financial interrelationships.
Not only do AMCs provide patients and their
communities with health care services ranging
from everyday needs to the most specialized
care, in addition, they:
Offer unique care and services not available
anywhere else in their market.
Teach the next generation of health care
professionals and train these professionals
in new care delivery models.
Develop technologies, forge new discoveries, and conduct research that improve the
health and well-being of the citizens they
According to a 2016 Advisory Board Outlook,
AMCs account for only 5 percent of hospitals in
the United States, but they deliver 25 percent of
all clinical care and represent 100 percent of the
hospitals featured on U.S. News & World Reports
20162017 Honor Roll. In addition, AMCs provide 41 percent of all hospital-based charity care
and 28 percent of all Medicaid services while
training over 100,000 residents annually.
Despite serving as a safety net for critical
services, AMCs are economic engines, responsible for nearly $34 billion in state tax revenue
and more than 3.5 million full-time jobs (1 out
of every 40 wage earners works either directly
or indirectly for an AMC). A 2011 AAMC study
estimated that the combined economic impact
of AAMC member medical schools and teaching
hospitals was over $587 billion.
Most AMCs have characteristics that can make
planning challenging, especially their tripartite
mission of clinical care, research, and education. Planning around a single mission is difficult
enough, but to embrace and acknowledge all
three can be insurmountable. Many times the
goals and objectives for one mission can be at
odds or in conflict with another. Plans to grow
and invest in a strategic clinical service may result
in less funding or resources to pursue research
initiatives. Conversely, using limited capital to
build more lab research space may require postponing the expansion of patient clinics.
In addition to having several missions, AMCs
have multiple stakeholders (i.e. chief executives, deans of medical schools, department
chairs, hospital or service line directors, etc.) and
multiple channels of engagement with varying
levels of oversight and scopes of responsibility.
The relationship among these various organizational components is often poorly defined but
highly co-dependent and leads to an extensive
consensus-driven decision-making process.
Source: David Randall, Senior Vice President, Strategy and Business
Development, University of Alabama at Birmingham Health
Mission statements are sometimes not the true living documents that are
capable of encouraging high performance. Studies of mission statements confirm
that the full potential of this directional strategy is rarely achieved.6 Often mission
statement creators seem to feel obligated to make reference to specific stakeholder
groups such as patients or communities because of institutional pressures and
refer to pressing social issues because of policy decisions within the organization.7
To be effective, mission statements must be carefully crafted to the organizations
unique purpose.8
One study of hospital mission statements found that almost 85 percent of
the respondents had mission statements; however, some of the executives who
Chapter 5 Directional Strategies 171
completed the survey did not perceive a high level of commitment to the statement by employees or that specific actions were influenced very much by the
mission.9 Another study of state-level departments of public health indicated
that more than 90 percent had formal, written mission statements. Despite the
frequency with which formal mission statements are encountered, a great deal
of confusion exists regarding their value and the influence that these statements
actually have on behavior within organizations.10
This confusion is unfortunate because the mission statement is a crucially
important part of strategic goal setting. It is the superordinate goal that stands
the test of time and assists top management in navigating through periods of
turbulence and change. It is, in other words, the stake in the ground that provides
the anchor for strategic planning. It must be emphasized, however, that mission
statements, even at their best, can never be substitutes for well-conceived and
carefully formulated strategies.11 A sense of mission is not a guarantee of success.
A positive relationship between mission statements and performance assumes a
commitment to the organizational purpose. This is especially true of health care
organizations.12 The organization has to adhere to the mission and regularly
review it to be sure that it remains relevant. When the mission is carefully crafted,
mission fulfillment influences a variety of key psychological states related to
employee motivation (e.g. employee engagement, organizational identification,
and so on).13 It has been suggested that mythopoetic leaders, who use the
mission of the organization to anchor behaviors, can be instrumental in building
robust cultures that can lead to a competitive advantage.14
Mission statements remind managers in health care organizations to ask
questions of themselves and their colleagues. It is important to ask individuals
throughout the organization the following questions as the answers radically
affect how the organization performs. These questions include:
Are we not doing some things now that we should be doing? A rehabilitative
medicine center, after analyzing the environment and studying its own
referral patterns, might determine that it should enter a joint venture with a
group of surgeons to provide outpatient surgery services. The rehabilitative
medicine center, located in a professional building adjacent to an acute care
hospital, had simply been referring patients requiring surgery to the hospital.
However, insurance company policies and patient preferences suggested that
the majority of surgeries could be performed on an outpatient basis.
Are we doing some things now that we should not be doing? The rehabilitative
medicine center, after extensive analysis, concluded that it should divest
its rehabilitative equipment business and contract with medical and sports
equipment suppliers for needed services.
Are we doing some things now that we should be doing, but in a different
way? Throughout its history the rehabilitative medicine center required
patients to come to the facility for services. For many patients, particularly
those with serious injuries, travel to the facility was difficult and often
impossible. As a strategic response, the center purchased a mobile trailer
with a fully equipped diagnostic and treatment facility that can transport
services to local high schools and industrial locations.15
172 strategic management of Health Care Organizations
An organization should carefully evaluate strategic decisions using its mission
statement when new opportunities are presented. The above three questions may
be used to determine whether or not the new opportunity is consistent with its
essential distinctiveness. Moreover, these questions are important guards against
mission drift, which is the tendency to move into businesses and programs not
in line with the stated mission.16 As an example, Cancer Treatment Centers of
Americas (CTCA) mission statement (see Exhibit 53) provides guidance for its
leaders and employees in its network of hospitals across the country in determining whether or not new opportunities should be pursued. CTCA has established a
reputation for treating the whole person. In pursuit of this central goal, the use
of state-of-the-art technologies is prioritized and treatment teams include medical oncologists, spiritual support personnel, rehabilitation therapists, dietitians,
radiation oncologists, naturopathic clinicians, and more. Adherence to the mission enables CTCA to evaluate any and all innovative and even sometimes less
conventional cancer care.
EXHIBIT 53 Mission Statement of Cancer Treatment Centers of America
Cancer Treatment Centers of America (CTCA) is the home of integrative and compassionate
cancer care. We never stop searching for and providing powerful and innovative therapies to
heal the whole person, improve quality of life, and restore hope.
Source: Cancer Treatment Centers of America.
Another important function of mission statements is to assist the strategic
leader in asking what should we not be doing? If leaders do not ask this question each time they face a new opportunity they open themselves to two dysfunctional possibilities. The first is mission drift and the second is mission creep.
Mission drift occurs when the mission is altered, often unintentionally, and the
organization fades into areas it should not pursue. Indeed, mission statements do
eliminate certain areas of operation (for example, a well formulated mission statement would discourage a health care organization from entering the construction
industry). When organizations devoted primarily to health care delivery engage
in businesses where they have little or no experience the results are unsuccessful
more often than not.
Another temptation for organizations is mission creep. In this case the health
care organization does not drift into an unfamiliar activity, it simply allows itself
to add on more and more related activities to the point where the diversity of
operations becomes unmanageable. Consider a local public health department
founded by a local government to ensure the health of the public. Initially, this
was interpreted as providing disease control services, vital records, and health
policy advocacy. Then the absence of primary care resources for the local medically indigent population required the health department to open primary care
clinics; because many in the local population did not have the transportation
required to receive the services of the primary care clinics, health officers decided
to devote some minimal resources to home health activities. Over time the
demand for home health grew and consumed more and more limited resources.
Chapter 5 Directional Strategies 173
Eventually, the local health department with essentially the same budget it had
when it was founded, was providing a portfolio of services that included disease
control, primary care, and home health and was considering additional services
in the area of environmental health. This example demonstrates how organizations can overwhelm their resources by allowing too many activities and services
to creep into their organizational missions, even while proceeding with the best
of intentions.
Characteristics of Mission Statements The mission statement of Shriners
Hospitals for Children (Exhibit 54) illustrates some of the important characteristics
of an effective mission statement. The product portfolio (specializing in services
to children with neuromusculoskeletal conditions, burn injuries, and other special
health care needs) is articulated in the mission statement so that interested parties
can immediately understand the uniqueness of Shriners Hospital for Children.
Clearly, this is not the typical childrens hospital. Moreover, insights are given into
the Shriners Hospital for Childrens concern for family, diversity, and so on. Using
the Shriners mission statement, four important characteristics of effective mission
statements can be illustrated:
1. Missions are broadly defined statements of purpose. Well-formulated
mission statements are written and communicated to those involved in
doing the work of the organization. They are broad but also, in a sense,
specific. The Shriners Hospital for Childrens mission statement specifies
the specific type of work it does. That is, mission statements should be
general enough to allow for innovation and expansion into new activities
when advisable (Shriners covers this with the phrase other special
healthcare needs) yet narrow enough to provide direction.17
2. Mission statements are enduring. The purpose, and consequently the mission,
of an organization should not change often and should be enduring. People
are committed to ideas and causes that remain relatively stable over time.
Shriners Hospital for Children has evolved from specializing in pediatric
orthopedic care in the 1920s, to burn units, to its present portfolio. The
consistent underlying theme has been its focus on children and their families.
3. Mission statements should underscore the uniqueness of the organization.
Shriners Hospital has a number of unique qualities including its focus
on children, its emphases on education and research, and its nondiscriminatory philosophy of providing care without regard to the patients
ability to pay.
4. Mission statements should identify the scope of operations in terms of
service and market. However, it is important for the mission statement
to specify what business the organization is in (health care) and who
it believes are the primary stakeholders.18 Note that Shriners Hospital
for Children clearly identifies the type of conditions it is committed
to treating.
174 strategic management of Health Care Organizations
These characteristics illustrate the essential properties of well-conceived and
communicated mission statements and outline worthy ideals that are always in
the process of being achieved by strategic leaders in health care institutions.19 The
mission provides direction. Mission statements are not easy to write, but fortunately there is general agreement on what they should include.
Components of Mission Statements There is no one best way to develop
and write mission statements. Research has shown, however, that in non-profit
organizations the content of mission statements is influenced by interorganizational peers or other non-profits in their own networks.20 Studies of Canadian
not-for-profit hospitals indicate that they emphasize a variety of factors in their
mission statements.21 To define the distinctiveness of an organization, mission
statements must highlight uniqueness. Some of the more important components
of a mission are discussed and illustrated with the use of mission statements from
a variety of health care institutions.
Mission statements target customers and markets. Frequently the mission
statement provides evidence of the kind of customers or patients the
organization seeks to serve and the markets where it intends to compete.
Exhibit 55 provides the mission statement of the Cleveland Clinic. This
mission statement clearly states who are considered the customers or
stakeholders of the Clinic the patients, researchers, and all employees.
Ultimately, the mission is to provide better care for the sick by investigating
the reasons for their illness, providing education to those who serve the
patients, and engaging in research.
The mission of The Cleveland Clinic is to provide better care of the sick, investigation into their
problems, and further education of those who serve.
Source: Cleveland Clinic.
EXHIBIT 55 Mission Statement of The Cleveland Clinic
Mission statements indicate the principal services delivered or products
provided by the organization. A specialized health care organization might
highlight the special services it provides in its mission statement. Amedisys
EXHIBIT 54 Mission Statement of Shriners Hospital for Children
Shriners Hospitals for Children has a mission to:
Provide the highest quality care for children with neuromusculoskeletal conditions, burn
injuries and other special healthcare needs within a compassionate, family-centered and
collaborative care environment.
Provide for the education of physicians and other healthcare professionals.
Conduct research to discover new knowledge that improves the quality of care and quality
of life of children and families.
This mission is carried out without regard to race, color, creed, sex or sect, disability, national
origin or ability of a patient or family to pay.
Source: Shriners Hospitals for Children.
Chapter 5 Directional Strategies 175
Mission statements specify the geographical area within which the
organization intends to concentrate. This element is most frequently
included when there is a local, state, or regional aspect to the organizations
service delivery. The California Department of Public Healths mission
statement provides an example of this component of mission statements
(see Exhibit 57).
EXHIBIT 56 Mission Statement of Amedisys, Inc.
To provide patient-centered care every day and be the leading healthcare at home team in
the communities we serve.
Source: Amedisys, Inc.
EXHIBIT 57 Mission Statement of California Department of Public Health
The California Department of Public Health is dedicated to optimizing the health and wellbeing of the people in California.
Source: California Department of Public Health.
EXHIBIT 58 Philosophy Statement of Amedisys, Inc.
Taking care of your loved ones as we would our own that is the philosophy Amedisys was
built on. This simple concept, coupled with our core beliefs, has guided Amedisys growth in
becoming one of the nations leading health care companies focused on bringing home the
continuum of care.
Source: Amedisys, Inc.
Mission statements identify the organizations philosophy. Frequently
the mission of an organization will include statements about specific and
distinguishing beliefs, values, aspirations, and priorities. Although not
specifically part of the mission statement, it is useful to see the statement
of philosophy that Amedisys provides in addition to its mission statement
(see Exhibit 58).
Mission statements confirm an organizations preferred self-image. How
a health care organization views itself may constitute a singularity that
should be included in the mission. The mission statement of Fresenius
Medical Care makes it clear that it views itself as the standard setter when
it comes to health care (see Exhibit 59).
is a home health and hospice care company dedicated to providing a
continuum of care in the home setting. Its mission statement reflects its
goal to deliver complete home health and hospice services to patients in
their homes (see Exhibit 56).
176 strategic management of Health Care Organizations
Mission statements specify the organizations desired public image. This
image customarily manifests itself in statements such as the organizations
desire to be a good citizen or a leader in the communities where its
operations are located or a similar concern. However, organizations may
have a particular approach or focus that they want to communicate to the
public. The mission statement of Promise Healthcare, a long-term acute
care hospital (LTACH) (see Exhibit 510), expresses its intent to be known
as a high-quality, professional, and compassionate organization.
EXHIBIT 510 Mission Statement of Promise Healthcare
Promise Healthcares mission is to deliver the highest quality of professional and compassionate care to our patients and their loved ones.
Source: Promise Healthcare
Not every one of the characteristics should necessarily be included in the
mission statement.22 Any particular statement will likely include one or several
of these components but seldom will include all. The organization must decide
which of these, or some other characteristics, really account for its distinctiveness
and emphasize them in the mission statement. Interestingly, studies have found
that higher-performing organizations generally have more comprehensive mission statements. Elements such as organizational philosophy, self-concept, and
desired public image were particularly associated with higher-performing organizations in the sample studied.23
Building a Mission Statement For a mission statement to be useful a
leader must begin the discussion concerning the need to examine or re-examine
the organizations mission to clearly state its purpose. This statement helps all
employees focus their efforts on the most important priorities. One process
that can be conducive to building mission statements is to convene a group of
interested employees (administrative and non-administrative) who understand
the issues facing the health care system as well as the strengths and weaknesses
of the organization. Each member of the group should understand the big
picture and be able to look at things from the perspective of the CEO, not just
from his or her personal viewpoint.
Prior to actually writing the mission statement, everyone should understand
why a mission statement is being written or rewritten and the desire for a wellunderstood and widely communicated statement of organizational distinctiveness. Without a common ambition shared among organizational members, the
usefulness of the mission statement and its ultimate purpose will not be realized.
EXHIBIT 59 Mission Statement of Fresenius Medical Care
To deliver superior care that improves the quality of life of every patient, every day, setting the
standard by which others in the health care system are judged.
Source: Fresenius Medical Care.
Chapter 5 Directional Strategies 177
Once commitment has been established, assessments should be made of what
makes the organization successful from the perspectives of employees and other
key stakeholders. Further, consideration should be given to what perceptions of
success will be in the future.
After the group has been given time to think about the organization, its distinctiveness in its environment, as well as the likely future it will face, the group
should meet in a planning retreat. Often it is useful to remove the participants
from the office, and encourage unplugging from social media to have the opportunity to truly focus on the organizations mission. To stimulate strategic thinking,
each person should be asked to reflect on the mission statement components listed
in Exhibit 511. 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 can be encouraged to generate the key
words through a series of fill-in-the-blank statements listed under each mission
statement component.
EXHIBIT 511 Strategic Thinking Map for Writing a Mission Statement
Component Key Words Reflecting Component
1. Target customers and clients:
The individuals and groups we attempt to serve
are Do not be limited to only the obvious.
2. Principal services delivered:
The specific services or range of services we will
provide to our customers are
3. Geographical domain of the services delivered:
The geographical boundaries within which we will
deliver services to our customers are
4. Specific values:
Specific values that constitute our distinctiveness
in the delivery of our services to customers are
5. Explicit philosophy:
The explicit philosophy that makes us distinctive
in our service area is
6. Other important aspects of distinctiveness:
Other factors that make us unique among
competitors are
178 strategic management of Health Care Organizations
After discussion and fine-tuning of the language, a draft of the mission statement can be developed. The draft should be refined by the group until there is
consensus on the wording and meaning of the mission statement. Once the group
is satisfied with the statement, it should be circulated among key individuals to
gain their input and support.
Top-Level Leadership: A Must for Mission Development For a mission
statement to be a living document, employees must develop a sense of ownership
and commitment to the mission of the organization. Involving employees is therefore essential in the development and communication of the mission. However,
top-level leadership must be committed. Management must stay engaged in the
mission development process but not dominate it. Board rooms and executive
suites can produce great ideas for mission development but everyone must commit to the mission for it to be achieved.24
Developing a mission statement is a challenging task. Frequently, attempts are
made to formulate blue sky statements of environmental and competitive 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 benefits comparable to those of other organizations in the area.
Realistically, the organization must be a good citizen and, if it wants employees,
its wages and benefits must be competitive.
The role of the chief executive officer in formulating the mission should not be
underestimated. Mission statement development is not a task that should be delegated to a planning staff. The CEO, the leadership team, and other key individuals who will be instrumental in accomplishing the mission should provide input.
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
final document is produced. The strategic thinking map (Exhibit 511) is useful
for identifying clients, services, and domain; however, the development and communication of a well-conceived mission statement requires use of the compass
(leadership) as well.
Step 3: Develop a Statement of Vision
The mission is developed considering the needs of stakeholders groups who
have a vested interest in the success and survival of the organization. Vision, on
the other hand, is an expression of hope. It is a description of the organization
when it is fulfilling its purpose.25 Vision involves creating compelling images of
the future and produces a picture of what could be and, more importantly, what
a leader wants the future to be.26
Effective visions possess four important attributes: idealism, uniqueness,
future orientation, and imagery.27 Visions are about ideals, standards, and desired
future states. The focus on ideals encourages everyone in the organization to
think about possibilities. It is dynamic and collaborative, a process of articulating
what the members of an organization want to create. Vision communicates what
the organization could be if everyone worked diligently to realize the potential.
Health care organizations need leaders who are forward looking. Effective visions
Chapter 5 Directional Strategies 179
are statements of destination that provide direction to where the organizations
leadership collectively wants to go. Finally, visions are built on images of the
future. When people are asked to describe a desirable place or thing, they almost
always do so in terms of images. Images motivate people to pursue the seemingly
impossible. One study of archival information in 151 hospitals and experiments
with 62 groups of full-time employees found that leaders who used specific
combinations of large amounts of vision imagery and smaller amounts of values
improved organizational performance by triggering a shared sense of organizational goals thereby improving coordination.28
Origins of Vision Health care leaders develop vision from an appreciation of
the history of the organization, a perception of the opportunities present in the
environment, and an understanding of the strategic capacity of the organization
to take advantage of these opportunities. All these factors work together to form
an organizations hope for the future.
History and Vision An organizations history is comprised of a variety of
events and activities including the founders philosophy. The story of St. Jude
Childrens Research Hospital began with Danny Thomas, a struggling entertainer, who prayed to St. Jude Thaddeus, the patron saint of hopeless causes
and said, Show me my way in life and I will build you a shrine. Thomas
fortunes changed and he became one of the best known stars in the entertainment industry.
In the 1950s, Thomas enlisted members of the business community in Memphis
to build a hospital for children. Supporters became convinced that rather than a
general hospital for children, a research hospital devoted to childhood cancers
would be a better option. Thomas and his wife devoted their time to funding the
hospital and eventually enlisted fellow Americans of Arabic-speaking descent to
assist. The American Lebanese Syrian Associated Charities (ALSAC) now raises
hundreds of millions of dollars annually to support St. Jude. Over 9 million
donors and more than one million volunteers contribute to make St. Judes the
nations largest health care charity.
Think of the inspirational impact of the relationship between the history and
vison of St. Jude to employees, donors, and all other stakeholders. Danny Thomas
dream was that no child should die in the dawn of life. In 1962 the survival rate
for childhood cancer, for example, was 20 percent. As of 2017, it is over 80 percent.
And, no child is turned away for an inability to pay.29
Vision and the Environment The vision must be relevant to the larger system and be sensitive to the changes taking place in the general and health care
environments. For example, Essentials for a Strategic Thinker 53, What Are
Health Care Sharing Ministries? demonstrates how some religious organizations
reacted to the passage of the Affordable Care Act in 2010 that offered an exception
to the individual insurance coverage mandate allowing individuals with similar ethical or religious beliefs to form organizations to share medical bills. This
resulted in the emergence of health care sharing ministries.
180 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 53
What Are Health Care Sharing Ministries?
Health Care Sharing Ministries (HCSM) are faithbased not-for-profit organizations that allow members who share the same religious beliefs and values
to share the risks of their health care expenses.
Customarily, these ministries are 501(c)(3) organizations that are considered legal alternatives to the
individual mandate under the Affordable Care Act.
The ACA allowed an exception for individuals with a
common set of ethical or religious beliefs to share
one anothers medical bills.1
Members join health sharing ministries for
a variety of reasons. Some join because they
can obtain less expensive coverage. The lower
cost is made possible by the fact that these
ministries are not required to include coverage
in areas such as mental health, preventive care,
and vision coverage for children. Others join
because required procedures in insurance plans
violate their personal religious beliefs.
It is estimated that half a million people rely on
HCSMs for their health coverage. Some of the largest HCSMs include Samaritan, Medi-Share, Christian
Healthcare Ministries, and Liberty HealthShare. It is
important to note that HCSMs are not insurance
companies in the conventional sense. Perhaps the
most important issue is that they are not regulated and represent potentially riskier alternatives
than traditional health care insurers. This risk was
highlighted by the actions of a Circuit Judge in
Kentucky who ruled that Medi-Share must cease
operations in the state unless it obtains regulatory
approval from the state Department of Insurance.2
Kentucky and other states, notably Washington
and Oklahoma, have been unsuccessful in their
efforts to close down HCSMs. It is estimated that 30
states exempt HCSMs from the same regulations
as insurance companies, although some fear this
leaves members without protection if their health
care costs are not covered.3
Monthly costs typically range from around
$64 for individual coverage to $450 per month for
family coverage. The larger plans do not have a
maximum limit on the coverage, although some
plans have maximum payout of $125,000 per
incident and $1,000,000 per diagnosis. Annual
personal responsibility amounts (similar to a
deductible) have a relatively large range depending on the actual HCSM involved. For example,
Medi-Share offers six programs and the annual
personal responsibility can range from $1,250
to $10,000 depending on the program selected.
Christian Healthcare Ministries Gold, Silver, and
Bronze options have annual personal responsibility of $500, $1,000, and $5,000 respectively.
Medi-Share members participate in a preferred provider organization and are charged
negotiated rates as long as they stay in the
network. Membership cannot be dropped for
developing a medical condition and some
HCSMs do not impose annual or lifetime limits.
1. Much of this discussion relies on Maya
Dollarhide, Health Care Sharing Ministries:
Obamacare Alternative,
2. Roger Alford, Judge Shuts Down
Christian Health Ministry Medi-Share in
Kentucky, Insurance Journal (October 4,
3. Kimberly Leonard, Christians Find their
Own Way to Replace Obamacare, U.S. News
(February 23, 2016). www.healthleadersmedia.
Chapter 5 Directional Strategies 181
Vision and Internal Capacity A leaders vision is related to the perceived
strengths and weaknesses of the organization. The challenge to reconcile vision
with internal capacity is illustrated by Senges integrative principle of creative
tension.30 Creative tension comes into play when leaders develop a view of where
they want to be in the future (vision) and tell the truth about where they are now.
The current reality is heavily determined by the organizations 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 fits 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.
Health Care Strategists as Pathfinders Building a vision for an organization is frequently referred to as pathfinding.31 When the leader of a health care
organization functions as a pathfinder, the focus is on the long run. The goal of
the pathfinder is to provide a vision, find the paths the organization should pursue, and provide a clearly marked trail for those who will follow. As Senge notes,
pathfinders have the opportunity to change reality by holding a picture of what
might be that is more important to people than what is.32
Strategic leaders are the key to establish a vision for an organization. The
vision-led approach is a philosophy where leaders are committed to strive for high
levels of performance that are inspiring although they cannot yet be achieved.33
A primary role of management using this approach is to clarify goals and
priorities and ensure that they are understood and accepted by employees.34
Individuals become engaged in the organization when they see connections
between vision, performance objectives, and personal contributions to the purpose of the organization.35
The role of the strategic leader, however, is more than pathfinding. Because
executives are responsible for inculcating the purpose into every employee, the
leader must also be the keeper of the vision a champion who communicates and
models the vision. This is often the CEO or another high-ranking executive.
Employees want to believe that what they are doing is important, and nothing
convinces employees of the importance of their jobs more than a leader who
reminds them of the shared inspirational vision (especially when things are not
going well).
Strategic leadership has traditionally focused on top management, particularly
the CEO. This individual is considered the person most responsible for scanning
and influencing the environment, developing adaptive strategies, and managing
key constituencies.36 Unfortunately, the exclusive focus on the CEOs 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;
182 strategic management of Health Care Organizations
however, certain strategic directions require middle-management to give input
and be actively involved. The increasing importance of quality as a strategic goal
and middle managements role in keeping this goal before all employees is a good
example.37 Quality is an important value to which employees at all levels are able
to be committed; middle managers are in the best position to encourage and reinforce this dedication.
Another critical area in which middle management should be involved is in
the redefinition of organizational vision. Grand strategies and futuristic visions
are necessary for health care organizations. If the vision is to inspire nurses,
pharmacists, medical laboratory technicians, and others, middle and first-line
managers must take the lead in helping to redefine the organizational vision in
terms that are meaningful to departments and work groups. Finally, with regard
to promoting commitment to service and quality, middle managers are in the best
position to appeal to the motives that matter most to their health care employees.
Unfortunately, most people either dont know their organizations vision, dont
understand it, or feel so disconnected from it that they cant explain how it relates
to their day job.38
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. For an
organizational vision to be successful it must be clear, coherent, consistent, communicative, and flexible.39 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.40
A vision is coherent when it fits with other directional strategies, including
the mission and values. It is consistent when it is reflected in decision-making
behavior throughout the organization.41 A vision communicates when it is
shared and people believe in the importance of cooperation in creating the future
that managers, employees, and other stakeholders desire. Finally, to be meaningful, a vision must be flexible. Because the future is uncertain, an effective vision
must remain open to change as the future and the strategic capabilities of the
organization evolve over time.
To effectively outline the future and facilitate the pursuit of organizational and
individual excellence, visions should possess certain characteristics:
Visions should be inspiring, not merely quantitative goals to be achieved
in the next performance evaluation period. In fact, visions should rarely
be stated in quantitative terms. They are, however, nothing less than
revolutionary in character and in their potential impact on behavior. The
vision of Shriners Hospital for Children speaks of the inspirational nature
of transforming childrens lives (Exhibit 512).
EXHIBIT 512 Vision of Shriners Hospital for Children
Become the best at transforming childrens lives by providing exceptional healthcare through
innovative research, in a patient and family centered environment.
Source: Shriners Hospital for Children.
Chapter 5 Directional Strategies 183
Visions should be clear, challenging, and about excellence. There must
be no doubt in the managers mind about the centrality of the vision. If
the keeper of the vision has doubts, those who follow will have even
more. The vision statement of MD Anderson Cancer Center provides a
straightforward statement of the hope for this flagship cancer institute
to make cancer history. Individuals working at MD Anderson should be
able to understand the leaderships sense of the future from this vision
statement (see Exhibit 513).
EXHIBIT 513 Vision Statement of MD Anderson Cancer Center
We shall be the premier cancer center in the world based on the excellence of our people, our
research-driven patient care and our science. We are Making Cancer History.
Source: MD Anderson Cancer Center.
EXHIBIT 514 Vision Statement of Fresenius Medical Care
To be the trusted provider and valued partner by building the premier integrated renal
disease network, expanding into a leading integrated chronic care network.
Source: Fresenius Medical Care.
EXHIBIT 515 Vision Statement of Cancer Treatment Centers of America
To be recognized and trusted by people with cancer as the premier center for healing and
Source: Cancer Treatment Centers of America.
Visions must make sense in the relevant community, be flexible, and stand
the test of time. If the vision is pragmatically irrelevant, it will not inspire
high performance.
Visions must be stable, but challenged and changed when necessary. The
vision statement of Fresenius makes it clear that it intends to be a trusted
provider and valued partner in the area of renal disease (see Exhibit 514);
however, the statement includes the possibility of moving to an expanded
integrated chronic care network. Such a move could be accomplished with
little or no change in the vision statement.
Visions are beacons and controls when everything else seems up for grabs.
A well-formulated vision statement guides decision making because it
provides inspiration for success in the future. The vision statement for
Cancer Treatment Centers of America is simple and to the point both for
decision makers and patients (see Exhibit 515).
184 strategic management of Health Care Organizations
Visions empower employees (the organizations own people) first and
then the clients, patients, or others to be served. Because visions should
be about inspiration and should drive excellence, it is critical to recognize
that employees are the ones who must be inspired first. Many health
care organizations make the mistake of devoting resources to pre-service
promotion programs designed to enhance potential patients image of the
organization only to disappoint them when they arrive and are greeted by
the same lack of service they experienced before the advertising campaign.
The Cleveland Clinic documents point out that this was the founders vision
when the first patients were accepted in 1921 (see Exhibit 516). The doctors
who founded this world class clinic believed in diverse specialists working
and thinking as a unit. That philosophy remains alive and well today.
EXHIBIT 517 Vision Statement of The Mayo Clinic
The Mayo Clinic will provide an unparalleled experience as the most trusted partner for health
Source: The Mayo Clinic.
EXHIBIT 516 Vision Statement of The Cleveland Clinic
Striving to be the worlds leader in patient experience, clinical outcomes, research and
Source: The Cleveland Clinic.
Visions prepare for events to come while honoring the past. Although
vision is the hope an organization has for the future, it is important to
always acknowledge and honor a history of distinction and service. The
Mayo Clinic, for example, points out that the values that guide the pursuit
of its vision are the expression of the vision of its founding physicians and
the Sisters of Saint Francis (see Exhibit 517). This association dates back
to a tornado that struck Rochester, Minnesota in 1883 when doctors in the
Mayo family teamed with the Sisters of St. Francis to provide relief to those
injured in the community. Six years later Saint Marys Hospital was opened
by the Sisters and the Mayo brothers began seeing patients.
Visions come alive in details, not broad generalities. The accomplishment
of the vision eventually has to lead to tangible results. Although visions
are futuristic and based on hope, they require strategic leaders who
can articulate the vision and translate it into terms that everyone in the
organization understands and supports.42
In the past decade more and more attention has been given to formal vision
statements. Vision statements are difficult to write because they require insights
into the future. However, there are some useful aids that can assist managers
in developing their vision and setting the direction they desire for the future.
Exhibit 518 provides a strategic thinking map to assist in developing a vision
Chapter 5 Directional Strategies 185
Exhibit 518 Strategic Thinking Map for Writing a Vision Statement
Component Key Words Reflecting Component
1. Clear hope for the future:
If everything went as we would like it to go, what
would our organization look like five years from now?
How would we be different/better than today?
2. Challenging and about excellence:
When stakeholders (patients, employees, owners)
describe our organization, what terms would we like for
them to use?
3. Inspirational and emotional:
When we think about the kind of organization we
could be if we all contributed our best, what terms
would describe our collective contributions?
4. Empower employees first:
How can we ensure that employees understand and
are committed to the vision? What needs to be done to
get everyones buy in?
5. Memorable and provides guidance:
What types of words should be included to ensure all
organizational stakeholders remember and behave in
accordance with the vision?
statement and a series of questions that are a useful aid when thinking about
vision statements. Planning retreats can be used as effective forums for gaining
insights into the thinking of organization stakeholders regarding their hopes for
the future.
A Cautionary Note: The Problem of Newness Strategic leaders are one of
the most important elements in the strategically managed organization. Visionary
leaders provide their greatest service by making the organization flexible and able
to enter new markets, disengage from old ones, and experiment with new ideas.
By entering into a new market first, organizations may achieve first-mover advantages that often accrue to those organizations who are the first into a new market.43
Pioneering organizations are those that seek first-mover advantages. A reputation
for pioneering can be generated and market position can be more easily 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 drawbacks. Referred to as the liability of newness,
44 disadvantages of early
entry into new markets are typically in the form of risk (uncertainty), the steep
(and sometimes long) learning curve, variable demand, and financial outlays for
technological investments. Innovators often experience pioneering costs. Pioneers
186 strategic management of Health Care Organizations
make mistakes that others learn from and eventually correct. First movers face
greater uncertainty because the demand for the service has not been proven.
Patient and client needs may change and, particularly when large technological
investments are required, the first mover may be left with expensive equipment
and little demand. Therefore, it is important that the demand for visionary management be tempered with realistic knowledge of the market, consumers, and
other factors that will affect the organization. The most substantial rewards often
go to the first mover, but the risks are greater.
Research confirms the dangers of being the first mover. Studies of companies
that were first in their markets exclude those firms that failed by focusing only on
those that survived, prospered, and eventually dominated their markets.45 Note
that market leadership has less to do with an organizations entry into the market
and more to do with will and vision. Enduring leaders have inspiring visions and
the will to realize the vision. These leaders are persistent in the pursuit of their
vision, innovative, committed financially, and know how to leverage their assets.
Step 4: Develop a Statement of Values as Guiding Principles
Values are the fundamental principles that organizations and people stand for
along with the mission and vision, they shape organizational culture. Most often,
discussions of organizational values relate to ethical behavior and socially responsible decision making. Ethical and social responsibility values are important, not
just to a single hospital, HMO, or long-term care facility, but to all organizations
and stakeholders. There are, however, other values that may be specific to an
organization and characterize its members behavior in the past or the behavior
to which members collectively aspire. For example, total quality management or
continuous improvement is a value, as are entrepreneurial spirit, teamwork, innovation, and so on.46 It is important that managers, employees, and key stakeholders understand the values that are expected in an organization. In addition, values
should be more than slick public relations statements. Talking the talk is insufficient; walking the walk is what matters when it comes to values. Essentials
for a Strategic Thinker 54, What Are Professional Ethics? demonstrates the
relationship among ethics, values, moral principles, and duties.
Essentials for a Strategic Thinker 54
What Are Professional Ethics?
Ethics are guidelines for action that are based
on values, moral principles, or moral rights and
duties. Examples include honesty, respect, and
compassion. Ethical guidelines may be reflected
in laws, whereas others are norms, customs, and
social expectations that develop and are 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 reflect the societal expectations for people
Chapter 5 Directional Strategies 187
who perform specific roles. We expect physicians
and nurses to help rather than harm patients. We
expect administrators and business officers to
accept fiduciary responsibility (act for the benefit
of the organization rather than themselves) and
to be accountable to stockholders or boards of
trustees for their decisions.
The norms guiding professional behavior
can change over time, as societys expectations
change. For example, over the past few decades,
physicians roles have evolved away from the
expectation that doctors will make decisions on
behalf of patients and their health to the expectation that they will provide all relevant information to patients and families and help them to
make their own decisions about their treatment.
As another example, the implementation of the
Health Insurance Portability and Accountability
Act (HIPAA) in April 2003 represented the legal
enforcement of a social expectation that healthrelated information on patients will be kept strictly
confidential; some widely accepted practices of
information sharing in health care organizations
had to be altered under the HIPAA guidelines
because they were not perceived to reflect the
priority that members of society placed on confidentiality of medical information.
Health care organizations involve the interaction of many sets of health professionals who,
by definition, are bound by differing 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 financially sound. Organizations
are best served when professionals are able to
represent their own guiding values and principles and 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 some basic level of health care is a universal right, or whether health care is a commodity that individuals can choose to purchase or not.
Professional ethics are neutral on this issue; one
may be an ethical physician or administrator and
make either applied ethics choice. Some social
choices have a broad consensus. In the United
States the responsibility of society to cover the
costs of health care for the elderly is generally
accepted. Other social choices are the subject
of considerable disagreement and conflict, even
when one set of values or expectations has been
codified into laws. The rights of individuals to
have abortions or to enforce their care preferences at the end of life are examples of ethical
conflict that impact health care organizations.
Organizations whose decision-making processes
are affected by ethical conflicts must consider
carefully the values and norms that guide their
stakeholders and the laws that represent the current societal consensus on the issue.
All actions have an ethical component, but the
underlying values for a decision may be so widely
shared that we do not recognize or consider the
implications of ethical choices. For example, we
do not question the principle that health care is
meant to benefit those who are sick. When faced
with a decision about whether to provide effective or harmful treatment to someone who is
sick, we automatically make the ethical decision
to help rather than to harm the person. On the
other hand, we sometimes face situations where
alternative courses of action reflect contrasting
values. For example, we value individuals 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.
188 strategic management of Health Care Organizations
EXHIBIT 520 Value Statement of The Mayo Clinic
These values, which guide Mayo Clinics mission to this day, are an expression of the vision
and intent of our founders, the original Mayo physicians and the Sisters of Saint Francis.
Primary Value
The needs of our patients.
Treat everyone in our diverse community, including patients, their families and colleagues
with dignity.
Provide the best care, treating patients and family members with sensitivity and empathy.
Adhere to the highest standards of professionalism, ethics, and personal responsibility, worthy
of the trust our patients place in us.
Core values, beliefs, and philosophy may be clear during the early stages of
an organizations development but become less so as the organization matures.47
Therefore, statements such as MD Andersons demonstrate how the organization
intends to treat patients, employees, and families (caring); deal with colleagues and
vendors (integrity); and encourage personal and professional development; providing an excellent example of how to keep core values at the forefront of organizational operations, even as the organization grows and ages (see Exhibit 519).
Exhibit 520 illustrates Mayo Clinics well-developed and articulated set of
organizational values. Their primary value is the patient comes first. Throughout
the values statement are references to ideals such as integrity, respect, compassion,
and excellence. Anyone reading this set of guiding principles can understand the
motivational force such a statement of values might have on employees and the
comfort it might provide patients.
EXHIBIT 519 Statement of Core Values, MD Anderson Cancer Center
Caring: By our words and actions, we create a caring environment for everyone.
We are sensitive to the concerns of our patients and our co-workers.
We are respectful and courteous to each other at all times.
We promote and reward teamwork and inclusiveness.
Integrity: We work together to merit the trust of our colleagues and those we serve.
We hold ourselves, and each other, accountable for practicing our values.
We communicate frequently, honestly and openly.
By our actions, we create an environment of trust.
Discovery: We embrace creativity and seek new knowledge.
We help each other to identify and solve problems.
We seek personal growth and enable others to do so.
We encourage learning, creativity and new ideas.
Source: MD Anderson Cancer Center.
Chapter 5 Directional Strategies 189
EXHIBIT 521 Value Statement of Stryker
Integrity. We do what is right.
Accountability. We do what we say.
People. We grow talent.
Performance. We deliver.
Source: Stryker.
Mission, vision, and value statements are tools for becoming better at what
we do. The usefulness of any of these statements comes from the ownership
taken by employees and the observed actions by stakeholders. Framed mission,
vision, values, and slogans are merely exercises and futile ones at that if they
are not made real by commitment and action.48 The point is to motivate and guide
all employees, managerial and non-managerial; provide high-quality care and
respond to external as well as internal customers; to distinguish the organization
from others in the perceptions of key stakeholders; and to let everyone know the
organization stands for something important. To be most effective, the value statement for an organization should capture the guiding principles by which the staff
is expected to function while achieving the organizations mission.49
Step 5: Develop Strategic Goals
Once strategic leaders are confident that the mission, vision, and values are well
formulated, understood, communicated, and expressed in writing, they are able to
focus on the activities that will make the most progress toward accomplishing the
mission and moving the organization toward a realization of its vision its strategic
goals. Well-written mission statements are the beginning point for strategic goal
setting. Goal setting should be focused on those areas that are critical to mission
Not all statements of values or guiding principles are as elaborate as that of the
Mayo Clinic or MD Anderson; however, they need to be as well conceived. Value
statements can be useful in clarifying to employees the specific behavioral norms
that are expected of them as members of the organization. This clarification is
effectively accomplished in the values of Stryker (see Exhibit 521).
Source: The Mayo Clinic.
Inspire hope and nurture the well-being of the whole person, respecting physical, emotional
and spiritual needs.
Value the contributions of all, blending the skills of individual staff members in unsurpassed
Deliver the best outcomes and highest quality service through the dedicated effort of every
team member.
190 strategic management of Health Care Organizations
accomplishment. Strategic thinking would entail asking this important question
when attempting to ensure that mission statements and strategic goals are consistent:
Does the mission provide for the formulation of a set of goals that are specific enough to give guidance to the organization yet broad enough to provide for the necessary flexibility?50
Critical success factors provide the targets for strategic goal setting. As discussed in Chapter 3 concerning service area competitive analysis, critical success
factors for the service category are similar for all members of a strategic group;
however, the factors may vary from one service category to another and one
strategic group to another.51 The strategic goals, in turn, become the anchors for
objectives and action plans.
Critical Success Factors for the Service Category Critical success factors
are the benchmarks that organizations must accomplish if they are to achieve high
performance.52 The critical factors for success in a medical practice are not the
same as the critical success factors in acute care hospitals.
As an example, Pacific Cataract and Laser Institute operates in the Pacific
Northwest with ten locations in the State of Washington.53 Cataract surgery (one service category) is most frequently performed on older adults, whereas refractive surgery (another service category) is performed to improve eyesight so that a person can
see without corrected vision (no need for eye glasses or contact lenses) in younger
adults. Cataract surgery is medically warranted and typically covered by insurance
(Medicare for many). The critical success factors for the service category of refractive
surgery in the Washington State service area are identified in Exhibit 522. These
critical success factors provide an important bridge between external and internal
environmental analysis.54 Strategic leaders must continually ask themselves whether
the mission, vision, and values of the organization are compatible with the critical
success factors. Once compatibility is ensured, leaders must prioritize a relatively
small number of activities that are absolutely essential to accomplish the mission and
build momentum to realize the vision. The application of the critical success factors
relative to Pacific is briefly noted in the second column. Strategic leaders need to
ensure that they address the factors that lead to success in the service category.
Strategic Goals Strategic goals should be used to coordinate critical success
factor activities, providing more specific direction to accomplish the mission and
vision. At the same time, strategic goals should be broad enough to allow considerable discretion for managers to formulate their objectives for individual units.55
The most appropriate strategic goals possess the following characteristics:
Strategic goals should relate specifically to activities that are critical to the
mission; goals that focus on activities that are not mission critical have the
potential to divert leadership attention and employee energy.
Strategic goals should be the link between critical success factors and
strategic momentum (carrying out unit objectives).
Strategic goals should be limited in number. When too many goals are pursued,
the trivial many rather than the critical few activities are accomplished.
Chapter 5 Directional Strategies 191
The Johns Hopkins Medical Centers strategic plan includes six strategic priorities which are essentially Johns Hopkins Medicine strategic goals. When describing the priorities, the plan states these are critical areas of focus for the success
and sustainability of the institution.
1. People attract, engage, develop, and retain the worlds best people.
2. Biomedical Research become the exemplary model for biomedical
research by advancing and integrating discovery, innovation, translation,
and dissemination.
3. Patient-and-Family-Centered Care Be the national leader in the safety,
science, teaching, and provision of patient- and family-centered care.
4. Education Lead the world in the education and training of physicians and
biomedical scientists.
5. Integration become the model for an academically-based integrated
health care delivery and financing system.
6. Performance create sustainable financial success and implement
continuous performance improvement.56
EXHIBIT 522 Critical Success Factors Related to a Service Category
(Refractive Surgery) in a Service Area (Washington State)
Critical Success Factors Related to Individual Organizations
Competitive price Multiple providers are in the service area around Seattle,
Washington. The procedure is rarely covered by insurance.
Prices have fallen over the past 30 years; however, purchasers
are price conscious and the procedure is offered just across
the border in Canada at a much lower price.
Latest technology available
but choices offered for lower
cost, safe options.
State-of-the-art technology is offered and it is faster, less
invasive (thus safer), but significantly more expensive. Some
individuals are willing to undergo the procedure using older,
slower, but safe technology to be able to afford the surgery.
Number of procedures
Greater numbers preferred, practice makes perfect is backed
by research.
Positive satisfaction ratings/
social media reviews
Todays potential customers for refractive surgery read recommendations online and investigate satisfaction scores. Pacific
Cataract and Laser has 97 percent of consumers saying they
would recommend the Institute to a friend.
Name recognition Many MDs who perform these surgeries advertise; however,
Pacific relies on referrals from family eye doctors (over 1,000
of them in the six states where they have offices) and does no
Strategic goals should be formulated by leaders but should be stated in
terms that can be easily understood and appreciated by everyone in the
192 strategic management of Health Care Organizations
Roles and Responsibilities of Boards of Directors
(or Trustees) in Strategic Management
The discussion of directional strategies has emphasized the importance of the
involvement and participation of as many people as practical. The governing
board (e.g. board of directors, board of trustees) is an important group that
should be involved in the development of the strategic direction of the health
care organization. The board members should be regularly informed about
the strategic goals and the progress being made toward their accomplishment.
Governing boards have taken on particular importance in the past several
years as ethical issues have escalated. Health care has not been exempt, as
evidenced by major corporate scandals involving companies such as Bausch
and Lombs ReNu MostureLoc contact lens solution and waiting time issues at
the Veterans Administration. Increasingly, the question of the role and responsibility of governing boards is discussed in health care management. Often
not only the individual involved in a scandalous act but the organization and
individual board members or the board collectively suffer damages to their
Four modes of governance have been applied to boards of directors. First
is the fiduciary responsibility mode or stewardship of assets; the second is the
strategic mode which involves collaborating with management to develop a
vision for the future; the third is the generative mode where the board engages
in shared creative thinking to make sense of data available to decision makers,
and the fourth is the idea of the progressive board that focuses on contributions
of individual members to a cohesive and comprehensive whole the board
is viewed as engaging in lively debate, discussion of important issues, and
learning from one another.58
In the strategic mode, boards of directors or boards of trustees are responsible
for making policies providing general guidelines under which the organization will operate. Therefore, boards are important in formulating the mission,
vision, and value statements of the organization and, depending on the nature
of the membership, boards can represent very complex issues in organizational
governance (see Essentials for a Strategic Thinker 55, What Are Interlocking
Directorates?). 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. In addition, boards are involved in
determining the compensation of key executives, executive succession planning,
and similar high-level decision making. With regard to mission, vision, and values
the board should be informed about the statements and involved in the strategic
thinking that results in their formulation; therefore, the selection of board members is a critical strategic decision.59
Chapter 5 Directional Strategies 193
Essentials for a Strategic Thinker 55
What Are Interlocking Directorates?
Interlocking directorates occur when members
of two or more boards of directors simultaneously serve on the boards of the same
organizations. The two or more organizations
involved are said to be interlocked. There is a
direct interlock of organizations when one or
more members serve on the boards of each
organization. Approximately one of every five
directors sits on more than a single board,
although service on multiple boards does not,
in itself, constitute an interlock. Technically, it is
a violation of the Clayton Act when an executive
or board member serves on the board of a direct
competitor. Although there are some exceptions,
interlocking boards among competitors are risky.
Many experts believe distinct advantages of
interlocking directorates result if the interlocked
organizations are not competitors. In a sense,
interlocking directorates can be viewed as a
social network. This view suggests that directors and executives connected in this manner
can communicate faster and more effectively.
Because boards are comprised of the more elite
corporate and health care leaders, interlocking
directorates make it easier for these executives
to discuss issues of common interest and it is
possible that best practices and innovations are
disseminated faster and more efficiently when
board members are interlocked. Imagining how
a member of one board might observe management practices in one organization that would
be beneficial to other organizations is easy to
envision. The repository of expert information
a person possesses is the primary reason why
individuals are asked to serve on boards; thus,
information sharing is a significant benefit of
interlocking directorates.
On the other hand, there must be some
potential dangers if interlocks among
competitors are outlawed by Section 8 of the
Clayton Act. Some fear that interlocking directorates create an excessively powerful group
of the most influential members of corporate
America, academics, the legal profession, and
other occupations. With the possible exception of not-for-profit boards, it is admittedly
true that corporate boards are comprised of
elite members of society. Because board members are most often business and health care
leaders, their concern may be inherently more
closely associated with the values of management rather than rank-and-file employees or,
more importantly, society as a whole. In the rare
cases where interlocks are among competitors,
collusion, price setting, and anti-trust liability
represent clear and present dangers and behaviors to be avoided.
Regardless of the pros and cons, interlocking
directorates are a reality of modern business
and health care life. Care must be taken when
formulating boards of directors to ensure that
the board is comprised of individuals who possess the most critical combination of expertise.
Further, a careful review of the associations
of board members should be undertaken to
ensure there are no conflicts of interest.
Christine Shropshire, The Role of the Interlocking
Director and Board Receptivity in the Diffusion
of Practices, Academy of Management Review
35, no. 2 (2010), pp. 246264.
Andrew V. Shipilov, Henrich R. Greve, and Timothy
J. Rowley, When Do Interlocks Matter?
Institutional Logics and the Diffusion of
Multiple Corporate Governance Practices,
Academy of Management Journal 53, no. 4
(2010), pp. 846863.
194 strategic management of Health Care Organizations
Health Care Performance and the Usual Suspects
Much of the discussion regarding governing boards has related to issues that
have been referred to as the usual suspects.60 Primary attention has been given
to questioning how these usual suspects influence the financial performance of
an organization. Some usual suspects are the number of outsiders on the board,
shareholdings of board members, board size, and CEO duality (CEO simultaneously functioning as the chief executive and board chair).61 An issue of particular
interest has been board size. A comparative study of board composition by the
executive search firm Spencer Stuart looked at the boards of the S&P 500. The
results, reported in the Harvard Business Review,
62 noted that boards of these leading corporations are smaller in size, comprised of older members, and are more
independent compared with a study conducted decades earlier. A 2014 study by
the Corporate Library indicated that the average size of a board was 9.2 members
but the size ranged from 3 to 31. The study noted that some experts believe seven
is an optimum size for a board; however, no universal agreement regarding board
size was promulgated.63
When compared with boards of directors of successful high-technology
firms, governing boards in a sample of multihospital health care systems were
almost twice as large (11 to 15 members).64 In fact, boards are frequently too
large to be effective aids in decision making, and where the goal is stakeholder
representation, board members often know so little about health care that
CEOs are forced to spend a great deal of their time informing and educating
lay members.
Board independence has been another topic that has received attention and
has been particularly influenced by the Public Company Accounting Reform
and Investor Protection Act of 2002 (Public Law 107240), also known as the
SarbanesOxley Act.65 Essentially the issue of board independence relates to the
number and nature of outside directors (those not employed by the organization).
Generally, boards are considered more independent if they have a majority of
outside members who are not significantly involved in doing business with the
focal organization.
Primarily because of corporate scandals of recent years and the passage of the
SarbanesOxley Act, board of director research has been reignited.66 This law,
which applies to publicly traded corporations, dramatically impacts the fiduciary responsibility of chief executive officers and boards of directors. Some states
have considered enacting similar legislation that would apply to not-for-profit
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).67 The results were that, in general,
governing boards of health care organizations were comprised of more members
from outside, rather than inside, the organization. Outside representatives were
primarily physicians, financial professionals, attorneys, and academics. The inclusion of physicians was found to be particularly significant in terms of bottom-line
performance. The presence of physicians on governing boards enhanced the
Chapter 5 Directional Strategies 195
support of the medical community, improving the organizations market share
and quality.
There are basically two different types of governing boards philanthropic
governing boards are service oriented, broadly represent diverse stakeholders, and are concerned primarily with fundraising. Corporate governing boards
are typically involved in oversight, strategic planning, and policy making.
Philanthropic boards are larger and more diverse to gain as much community
representation as possible. The inclusion of different types of stakeholders is
important and requires that board members be selected from among business
leaders, physicians, local politicians, consumers of health care services, and so
on. The corporate board is smaller and comprised of individuals who possess
expertise that will aid the organization in accomplishing its strategic goals.68
Membership diversity is important, but less so than the actual skills or expertise
possessed by the members.
The current trend in health care organizations is toward the corporate board. To
a great extent, the trend is the result of the increasingly competitive environment
facing health care organizations and the need for expertise in dealing with the
complexities of the economic environment. However, it should be noted that virtually no research confirms any positive relationship between the size and nature
of board membership and organizational financial performance.69
Research findings on boards of directors suggest that when profound or
radical organizational change confronts a health care organization, the 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.70 Boards of directors in health care
organizations undergoing corporate restructuring (defined as the segmentation
of the organizations assets and functions into separate corporations to reflect
specific profit, regulatory, or market objectives) tend to become less philanthropic and more corporate, not only in composition but also in the way they
The evidence is underwhelming with regard to the usual topics of board independence (percentage of outside members), board size, CEO duality, and so on.72
Although it is dangerous to generalize, some inferences can be drawn from the
research on governing boards in health care organizations. In not-for-profit health
care organizations, governing boards are more in line with the philanthropic
model. They are generally large (in fact, too large to be effective aids in strategic
decision making), do not compensate members, select members primarily as
stakeholder representatives, and do not hold the CEO formally accountable for
performance. In this case, the primary motivation for board membership is service
and recognition. When health care organizations are profit oriented, their boards
take on more corporate characteristics. They tend to be smaller, compensate members for service, select members for specific expertise, involve the CEO as a voting
member, make him or her formally accountable to the board, and require the participation of board members in strategic decision making. From the perspective of
the individual board member, the motivation to be on a board may be to provide
a valuable service to the community, but board membership may be a source of
income as well.
196 strategic management of Health Care 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
financial measures has encouraged researchers to look at different variables. Of
particular interest is the board process the means by which boards of directors
undertake their work.73
Interviews with experienced board members indicate that several behaviors
lead to more effective boards:
1. Engage in constructive conflicts (especially with the CEO). It is important that
board members debate diverse views among themselves and with the CEO.
An overabundance of insiders on a board may diminish the presence of
constructive conflict since debate with the CEO amounts to debate with the
2. Avoid destructive conflict. Personal friction and tension in the boardroom
should be minimized. There must be a clear distinction between
constructive debate and destructive conflict.
3. Work together as a team. The most important component of board process
is teamwork, and it is the primary characteristic of the progressive board.
The development of strong team norms, however, is difficult because
board members spend little time together. Given the members limited
availability, maximizing board member interaction is critical.
4. Know the appropriate level of strategic involvement. Board members should
limit their involvement to major strategic decisions. They should be very
careful not to become too involved in the day-to-day management of the
5. Address decisions comprehensively. Board members should consciously
attempt to address issues with sufficient depth to make sound decisions.
Too often, time demands and conflicting priorities tempt boards to deal
superficially with important issues. Effective boards find the time needed
for important strategic decisions.74
The work of boards of directors is crucial for health care organizations.
Boards are created to ensure that strategic leaders have additional expertise
available to them for making policy decisions that provide direction to the
organization. The effectiveness of the board is a key factor in the effectiveness
of the organization.
Strategic Momentum Evaluating Directional
As part of managing strategic momentum, managers assess the performance of
the organization and try to determine whether the mission, vision, values, and
goals are and continue to be appropriate. To illustrate, hospices today reap
billions of dollars annually in Medicare reimbursement. In just two decades since
hospices began receiving reimbursement for their services, end-of-life care has
emerged as an integral part of the health care system. The demand for palliative
Chapter 5 Directional Strategies 197
care (end-of-life and comfort care) has increased so rapidly that hospitals and
other providers have seized opportunities in this area. One example is a hospice
company which states that its mission is to provide care for dying patients
and their families in their homes. Another hospice, aware of the changes in the
environment and concerned with managing strategic momentum, has slightly
revised its mission to reflect the change in the competitive environment. Its new
mission is to provide end-of-life and palliative care services. If both organizations should decide to offer services to Alzheimers patients living in nursing
homes, only the second hospice would be acting in accordance with its mission; therefore, this juxtaposition demonstrates how mission flexibility must be
Decisions to change an organizations 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 523 provides guidance through several questions
that will aid managers in their strategic thinking concerning the appropriateness of the organizations 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 organizations goals
next to the questions in Exhibit 523 and ask the board of directors/trustees
and the strategic management team to freely discuss and reach a consensus
on each question. This process will either validate the existing mission, vision,
values, and goals or indicate that there should be changes to maintain strategic
momentum. This process invites clarification, understanding, and reinforcement of exactly what this organization is all about or what this organization
should be about.
EXHIBIT 523 Strategic Map for Evaluating Directional Strategies
1. Are we not doing some things now that we should be doing?
2. Are we doing some things now that we should not be doing?
3. Are we doing some things now that we should do but in a different way?
4. Are our organizations mission and vision unique in some way?
5. Is our mission relatively enduring?
6. Do our mission and vision allow for innovation?
7. Do our mission and vision allow for expansion?
8. Is our scope of operations clear (market, products/services, customers, geographic
9. Do our mission, vision, and values fit the needs of our stakeholders?
10. Do our fundamental values make sense?
11. Are our strategic goals moving us toward achievement of our mission?
12. Are our strategic goals moving us toward achievement of our vision?
13. Have we addressed the critical success factors?
14. Based on the mission, vision, and values, is the image of the organization what it
should be?
198 strategic management of Health Care Organizations
Chapter Summary
Directional strategies allow leaders to state what they believe the organization
should be doing and make explicit how they intend to conduct their business. Every
attempt should be made to develop and communicate well-conceived and written
statements of the organizations mission, vision, values, and strategic goals.
Directional strategies are the superordinate goals or outcomes that health care
organizations plan to accomplish. Leaders should recognize that strategic 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 organizations reason for existing. The vision provides hope for
the future and values tell everyone employees, stakeholders, patients, and so
on how the organization will operate. The strategic goals more specifically state
what the leaders believe is required to achieve the mission.
A mission alone is not enough. The mission, as a statement of purpose that
distinguishes the organization from all others of its type, such as the care given
to patients, physical location of the facility, the unusual commitment of physicians to research as well as to healing, or any other factor that is important in
the minds of those served, is only the first step. The mission may motivate a few
physicians and department managers, but real motivation comes from visionary
The vision is a hope that communicates what key stakeholders think the
organization should be when the mission is being achieved. Values, as guiding
principles, can be powerful motivating forces as well.
Even a well-developed and communicated mission is likely to leave the health
care strategist with far too many areas of responsibility, resulting in an impossible
task. For this reason, critical success factors for the service category must be identified and strategic goals must be set to accomplish the mission. Strategic goals
help to make the strategists job feasible and help focus strategists on those tasks
that really make a difference with respect to organizational success.
Management research shows that the existence of goals can be powerfully
motivating. Clearly stated and communicated strategic goals provide a sense
of direction they specify what leaders are expected to accomplish and remove
anxiety from those who want to succeed. Formulating mission, vision, values, and
strategic goals and identifying critical success factors are often messy and 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, board members should be regularly informed about the strategic
goals of the organization and the progress being made in their accomplishment.
Most importantly, the board should engage in a process that contributes to
organizational effectiveness. Research confirms that merely electing or selecting
a board of directors/trustees comprising an appropriate percentage of outsiders,
of individuals with the appropriate expertise, and small enough to be manageable, will not ensure its effectiveness. The board must also be willing to engage
Chapter 5 Directional Strategies 199
in constructive conflict, minimize destructive interpersonal tensions, avoid
micromanagement, and devote the time required to make important strategic
Chapter 6 builds on the directional strategies of mission, vision, values, and
strategic goals to address strategy formulation and the strategic alternatives available to health care organizations.
Practical Lessons for Health Care Strategic Thinkers
1. Organizations need a carefully constructed statement of purpose or
mission. Without such a deliberate statement the organization is likely to
experience mission creep or mission drift.
2. A vision statement is equally important to provide direction and hope for
the future.
3. Value statements provide tangible evidence of the behavioral norms that
are expected of everyone. Value statements are, in effect, guiding principles
as to how the mission and vision are to be accomplished.
4. Directional strategies are difficult to formulate so leaders are often tempted
to hire a public relations firm or consultant to draft these statements;
however, formulating statements of directional strategies represents an
opportunity to build understanding and communicate expectations to all
organizational members.
5. Top level executive buy-in is an absolute necessity for the formulation of
directional strategies.
6. Strategic leaders need to understand the factors that are required for
success in their industry. Once these critical success factors are identified
they can be used to anchor the formulation of strategic goals.
7. Boards of directors have a critical role in the formulation of directional
8. Health care organizations should carefully consider the expertise needed
to effectively set policies and appoint board members who possess and
expand the skills required for success.
The Language of Strategic Management: Key Terms And Concepts
Corporate Governing Board
Creative Tension
Critical Success Factor
First-Mover Advantage
Keeper of the Vision
Liability of Newness
Mission Creep
Mission Drift
Philanthropic Governing Board
Strategic Goals
Vision-Led Approach
200 strategic management of Health Care Organizations
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. 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 organizations guiding principles? In what sense do
values constitute a directional strategy for the organization?
8. How many strategic goals should a health care organization develop?
9. How can health care managers more effectively use directional strategies to stimulate
higher levels of performance among all personnel?
10. What are critical success factors for an organization? How are they determined? How
may they be used?
11. Why is the board of directors an important group to include in the formulation of
directional strategies? What is the boards proper role in formulating these strategies?
12. What is the best way to involve the board in the development of directional strategies?
Explain your answer.
13. List three reasons why boards of directors or trustees have become increasingly important factors in the effectiveness of health care organizations.
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. Setayesh Sattari, Leyland F. Pitt, and Albert Caruana,
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3. Chester I. Barnard, Functions of the Executive (Cambridge,
MA: Harvard University Press, 1938), p. 87.
4. Stryker Corporation website,
5. Perry Pascarella and Mark A. Frohman, The Purpose
Driven Organization (San Francisco, CA: Jossey-Bass
Publishers, 1989), p. 23.
Chapter 5 Directional Strategies 201
6. Forest R. David and Fred R. David, Its Time to Redraft
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7. S. Eric Anderson and Brad Jamison, Do the Top U.S.
Corporations Often Use the Same Words in their Vision,
Mission and Value Statements? Journal of Marketing &
Management 6, no. 1 (2015), pp. 115.
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Mission Statements and Stakeholder Management,
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9. C. Kendrick Gibson, David J. Newton, and Dennis S.
Cochran, An Empirical Investigation of the Nature of
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10. W. J. Duncan, P. M. Ginter, and W. K. Kreiel, A Sense
of Direction in Public Health: An Analysis of Mission
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11. Thomas T. Brown, Noble Purpose, Executive Excellence
21, no. 1 (January 2004), p. 7; Robert E. McDonald, An
Investigation of Innovation in Nonprofit Organizations:
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12. Bhavesh S. Patel, Lorne D. Booker, Hazel Melanie Ramos,
and Chris Bart, Mission Statements and Performance
in Non-Profit Organizations, Corporate Governance: The
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13. Teewon Suh, Mark B. Houston, Steven M. Barney, and
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on the Internal Audience: Psychological Job Outcomes
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14. Chip Jarnagin and John Slocum Jr., Creating
Corporate Cultures through Mythopoetic Leadership,
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15. David J. Forbes and Siju Seena, The Value of a Mission
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16. Roger Bennett and Sharmila Savani, Surviving
Mission Drift: How Charities Can Turn Dependence
on Government Contract Funding to Their Own
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17. James Rajasekar, A Comparative Analysis of
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of Management Policy and Practice 14, no. 6 (2013),
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19. Aimee Forehand, Mission and Organizational
Performance in the Healthcare Industry, Journal of
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See also Joseph Peyrefitte and Forest R. David, A
Content Analysis of the Mission Statements of United
States Firms in Four Industries, International Journal of
Management 23, no. 2 (2006), pp. 296301.
20. Bradley Koch, Joseph Galaskiewicz, and Alisha Pierson,
The Effect of Networks on Organizational Missions,
Nonprofit and Voluntary Sector Quarterly 44, no. 3 (2015),
pp. 510515.
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Canadian Not-for-Profit Health Care Sector, Health
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Christopher K. Bart and J. C. Tabone, Mission Statement
Rationales and Organizational Alignment in the Notfor-Profit Health Care Sector, Health Care Management
Review 23, no. 1 (1998), pp. 5470.
22. These components adapted from John A. Pearce II and
Fred David, Corporate Mission Statements and the
Bottom Line, Academy of Management Executive 1, no. 1
(1987), pp. 109116.
23. Ibid.
24. Mary Grayson, Whose Mission Is It Anyway? Hospital
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26. Deborah Ancona, Thomas W. Malone, Wanda J.
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27. James M. Kouzes and Barry Z. Posner, Envisioning
Your Future: Imagining Ideal Scenarios, Futurist
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Kirkpatrick, J. C. Wofford, and J. Robert Baum,
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pp. 139151.
28. Andrew M. Carton, Chad Murphy, and Jonathan R.
Clark, A (Blurry) Vision of the Future: How Leader
Rhetoric about Ultimate Goals Influences Performance,
Academy of Management Journal 57, no. 6 (2014),
pp. 15441570.
29. St. Jude Childrens Research Hospital Web Site. www.
30. Peter M. Senge, The Leaders New Work: Building
Learning Organizations, Sloan Management Review 31,
no. 1 (1990), pp. 1314.
31. G. B. Morris, The Executive: A Pathfinder,
Organizational Dynamics 16, no. 2 (1988), pp. 6277.
32. Senge, The Leaders New Work, p. 8.
33. James C. Collins and Jerry I. Porras, Organizational
Vision and Visionary Organizations, California
Management Review 34, no. 1 (1991), pp. 3052.
202 strategic management of Health Care Organizations
34. Timothy W. Coombs and Sherry J. Holladay, Speaking
of Visions and Visions Being Spoken, Management
Communication Quarterly 8, no. 2 (1994), pp. 165189;
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.
35. Clear Vision, Dialogue Help Align Employee Actions
to Business Goals, PR News 67, no. 25 (2011), p. 2.
36. Howard S. Zuckerman, Redefining the Role of the
CEO: Challenges and Conflicts, Hospital & Health
Services Administration 34, no. 1 (1989), pp. 2538. See
also Stephen C. Harper, The Challenges Facing CEOs:
Past, Present, and Future, Academy of Management
Executive 6, no. 3 (1992), pp. 725.
37. 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 Managements Strategic
Role, Academy of Management Executive 8, no. 4 (1994),
pp. 4757.
38. Shaun Spearmon, Your Company Vision: If Its
Complicated, It Shouldnt Be, October 14, 2013. http://
39. Ian Wilson, Realizing the Power of Strategic Vision,
Long Range Planning 25, no. 5 (1992), pp. 1828.
40. Les MacLeod, Mission, Vision, and Value Statements:
The Physician Leaders Role, Physician Leadership
Journal 3, no. 5 (2016), pp. 1825.
41. David Silvers, Vision Not Just for CEOs, Management
Quarterly 35, no. 2 (1994), pp. 1015.
42. Tom Peters, Thriving on Chaos (New York: Alfred A.
Knopf, 1988), pp. 401404.
43. Jeremy C. Short and Tyge Payne, First Movers and
Performance: Timing is Everything, Academy of
Management Review 33, no. 1 (2008), pp. 267269.
44. The term liability of newness was suggested by James
March. However, the most extensive treatment of firstmover advantages and disadvantages is presented in
Michael E. Porter, Competitive Advantage (New York:
Free Press, 1986), pp. 186191.
45. Gerald J. Tellis and Peter N. Golder, Will and Vision:
How Latecomers Grow to Dominate Markets (New York:
McGraw-Hill, 2002).
46. L. D. DeSimone, How Can Big Companies Keep the
Entrepreneurial Spirit Alive? Harvard Business Review
73, no. 5 (1995), pp. 183186; I. Morrison, Creating a
Vision from Our Values, Modern Healthcare 29, no. 39
(2000), p. 30.
47. Susan Taft, Katherine Hawn, Jane Barber, and Jamie
Bidwell, The Creation of a Value Driven Culture,
Health Care Management Review 24, no. 1 (1999), pp. 1732
and Fred Wenstp and Arild Myrmel, Structuring
Organizational Value Statements, Management Research
News 29, no. 1 (2006), pp. 673685.
48. 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. 8183.
49. William A. Nelson and Paul B. Bardent, Organizational
Values Statements, Healthcare Executive 26, no. 2 (2011),
pp. 5659. See also S. Eric Anderson and Brad Jemison,
Do Top Corporations Often Use the Same Words in
their Vision, Mission, and Value Statements? Journal of
Marketing and Management 6, no. 1 (2015), pp. 115.
50. Steven G. Hillestad and Eric N. Berkowitz, Health Care
Marketing Strategy: From Planning to Action (Boston, MA:
Jones & Bartlett Publishers, 2004) quoted in Mission
Statement Is Key to a Good Marketing Plan: Goals
Should Be Tied to Statement, Hospice Management
Advisor 8, no. 2 (2003), p. 17.
51. Graham Manville, Richard Greatbanks, Radica
Krishnasamy, and David W. Parker, Critical Success
Factors for LEAN Six Sigma Programmes: A View from
Middle Management, International Journal of Quality &
Reliability Management 29, no. 1 (2012), pp. 714.
52. M. E. Freisen and J. A. Johnson, The Success Paradigm:
Creating Organizational Effectiveness through Quality and
Strategy (Westport, CT: Quorum Books, 1995), p. 3. Also
see Vincent R. Kaval and Lawrence J. Voyten, Executive
Decision Making, Healthcare Executive 21, no. 6 (2006),
pp. 1621.
53. Pacific Cataract and Laser Institute website: www.pcli.
54. Jeffery K. Pinto and John E. Prescott, Variations in
Critical Success Factors over the Stages in the Product
Life Cycle, Journal of Management 14, no. 1 (1988), pp.
55. 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.
56. See Johns Hopkins Medicine Strategic Plan at www.
57. Michael K. Bednar, E. Geoffrey Love, and Matthew
Kraatz, Paying the Price? Controversial Governance
Practices on Managerial Reputation, Academy of
Management Journal 58, no. 6 (2012), pp. 17401760 and
Amanda P. Cowen and Jeremy J. Marcel, Damaged
Goods: Boards Decisions to Dismiss Reputationally
Compromised Directors, Academy of Management
Journal 54, no. 3 (2011), pp. 509527.
58. R. P. Chait, W. P. Ryan, and B. E. Taylor, Governance
as Leadership: Reframing the Work of Nonprofit Boards
(Hoboken, NJ: John Wiley & Sons, 2005); R. Charan,
Boards that Deliver: Advancing Corporate Governance from
Compliance to Competitive Advantage (San Francisco:
CA: Jossey-Bass, 2005); J. E. Orlikoff, Old Board/
New Board: Governance in an Era of Accountability,
Frontiers of Health Services Management 21, no. 3 (2005),
Chapter 5 Directional Strategies 203
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.
59. P. Michel Maher, Malcolm C. Munro, and Flora L.
Stromer, Building a Better Board: Six Keys to Enhancing
Corporate Director Performance, Strategy & Leadership
28, no. 5 (2000), pp. 3132.
60. Sydney Finkelstein and Ann C. Mooney, Not the Usual
Suspects: How to Use Board Process to Make Boards
Better, Academy of Management Executive 17, no. 2
(2003), pp. 101113.
61. Wayne F. Cascio, Board Governance: A Social Systems
Perspective, Academy of Management Executive 18, no. 1
(2004), pp. 97100.
62. Idea Watch, Corporate Boards: Now and Then,
Harvard Business Review 89, no. 11 (2011), pp. 3839.
63. Corporate Library study cited in Evaluating the Board
of Directors, Investopedia, September 14, 2014. www
64. A. L. Delbecq and S. L. Gill, Developing Strategic
Direction for Governing Boards, Hospital & Health
Services Administration 33, no. 1 (1988), pp. 2535.
65. J. A. Alexander, L. L. Morlock, and B. D. Gifford,
The Effects of Corporate Restructuring on Hospital
Policymaking, Health Services Research 23, no. 2 (1988),
pp. 311338; A. R. Kovner, Improving Hospital Board
Effectiveness: An Update, Frontiers in Health Services
Management 6, no. 2 (1990), pp. 327.
66. 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.
67. 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 Physicians 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.
68. S. M. Shortell, New Directions in Hospital Governance,
Hospital & Health Services Administration 34, no. 1 (1989),
pp. 723.
69. Catherine M. Daily, Dan R. Dalton, and Nandini
Rajagopalan, Governance through Ownership:
Centuries of Practice, Decades of Research, Academy of
Management Journal 46, no. 2 (2003), pp. 151158.
70. M. L. Fennell and J. A. Alexander, Governing Boards
and Profound Organizational Change, Medical Care
Review 46, no. 2 (1989), pp. 157187.
71. J. A. Alexander and L. L. Morlock, CEOBoard Relations
Under Hospital Corporate Restructuring, Hospital &
Health Services Administration 33, no. 3 (1988), p. 436.
72. Catherine M. Daily, Dan R. Dalton, and Albert A.
Cannella Jr., Corporate Governance: Decades of
Dialogue and Data, Academy of Management Review
28, no. 3 (2003), pp. 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.
73. 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.
74. Finkelstein and Mooney, Not the Usual Suspects,
pp. 103106.
75. Mission Statement is Key to a Good Marketing
Plan, Hospice Management Advisor, February 1 (2003),
pp. 1819.

Chapter 6
Identifying Strategic
Why Identifying Strategic Alternatives Is Important
As Peter Drucker observed, understanding and seriously considering alternatives
is the first step in making decisions. Careful evaluation of alternatives is even
more critical for organizations making strategic choices because of the long-term
consequences of such decisions.
Organizations typically have many strategic alternatives from which to
choose so many that selecting a strategy can become confusing at best and completely overwhelming at worst. Systematic classification of the strategic alternatives available, as well as a description of the intent and required conditions for
selecting each alternative within each classification, can aid strategic managers
in working though the clash and conflict of divergent opinions of the serious
consideration of competing alternatives. Despite one course of action appearing
The understanding that underlies the right decision grows out of the clash and
conflict of divergent opinions and out of the serious consideration of competing
alternatives Unless one has considered alternatives, one has a closed mind.
Peter F. Drucker, management author and philosopher
206 strategic management of Health Care Organizations
obvious, examining alternatives will provide new information; test long held
assumptions, biases, and opinions; and prevent tunnel vision.
Strategic decisions have a rational hierarchy. Decisions concerning the organizations mission, vision, values, and strategic goals are made first and provide
guidance for subsequent decisions. An understanding of the hierarchy of strategic
decisions a map that shows the classes of decisions and a logical order to follow
is important for strategic decision makers. In addition, strategic managers need
clear delineations of the available strategic alternatives and an understanding of the
implication of each. A logical map of strategic decision alternatives (the analytical
approach) lays the groundwork for the strategic planning process. As the strategy
unfolds, learning (the emergent approach) will guide alternative decision making.
A map of strategic alternatives for health care organizations helps begin the process of alternative analysis. Being able to envision the complete big picture of how
strategic decisions must progress provides perspective on the scope and hierarchy
of strategic decision making and illustrates the linkage of strategic alternatives in
organizations. Considering strategic alternatives opens ones mind to what can be.
Use the concepts in this chapter to identify and organize strategic alternatives.
Learning Objectives
After completing the chapter you will be able to:
1. Discuss the steps and logic of strategy development.
2. Identify the hierarchy of strategies and strategic decisions required in strategic
3. Explain the relationship among directional strategies, adaptive strategies, market entry/exit strategies, and competitive strategies.
4. Identify strategic alternatives available to health care organizations.
5. Provide the rationale as well as advantages and disadvantages for strategic
6. Demonstrate how strategies may be used in combination to accomplish the
organizations goals.
7. Map strategic decisions showing how they are linked.
Strategic Management Competency
After completing this chapter you will be able to use the hierarchy of strategic
decisions to identify strategic alternatives and begin the process of making
rational strategic decisions for a health care organization.
The Process for Identifying Strategy Alternatives
Strategic thinking involves an awareness of the environment; intellectual curiosity that
is always gathering, organizing, and analyzing information; and a willingness to be
open to creative ideas and solutions. Strategic planning concerns reaching conclusions
Chapter 6 Identifying Strategic Alternatives 207
based on information, setting a course of action, and documenting the plan. Therefore,
strategic planning is essentially decision making determining which strategy to pursue from among the many available options. In addition, a health care organization
may pursue several different types of strategies simultaneously or sequentially.
There is a logical order in making strategic decisions because as organizations
make strategic choices, these choices will have downstream consequences that
both limit and create opportunities. For instance, a merger or affiliation decision
is part of a series of decisions rather than a single decision or an end in itself;
there is a broader strategy that precipitated the merger or affiliation and there
will be subsequent strategic decisions that will have to be made to ensure success.
Strategy formulation is the process of developing strategic alternatives, evaluating
alternatives, and making strategic choices. This chapter introduces and classifies
the strategic alternatives for health care organizations and Chapter 7 discusses
strategic thinking methods for analyzing alternatives to make a strategic choice.
Exhibit 61 provides a six-step process for understanding the hierarchy of
strategic decisions and identifying the strategic choices available to health care
EXHIBIT 61 The Process for Strategy Development
Step 1 Understand the Decision Logic of Strategy Development
Step 2 Understand the Role of Directional Strategies
Step 3 Understand Adaptive Strategy Alternatives
Step 4 Understand Market Entry/Exit Strategy Alternatives
Step 5 Understand Competitive Strategy Alternatives
Step 6 Understand Combination Strategies
208 strategic management of Health Care Organizations
organizations. Beginning with a general understanding of the rationale or logic
of the process, the chapter works through the different types of strategy choices.
Understanding the decision logic is first, followed by directional strategies that
frame subsequent strategic choices. Next the adaptive strategic alternatives define
the scope of the organization. The market entry/exit alternatives carry out the
adaptive strategies whereas competitive alternatives define the nature of the
rivalry among similarly focused organizations. Because strategy development is a
creative (and iterative) process, some combinations of strategies may be required
to enable the organization to pursue its mission and achieve its vision.
Step 1: Understand the Decision Logic of Strategy
The decision logic of strategy formulation is illustrated in Exhibit 62. Decisions
concerning five categories of strategies directional, adaptive, market entry/exit,
EXHIBIT 62 The Decision Logic of Strategy Formulation
Directional Strategies
Adaptive Strategies
Market Entry/Exit Strategies
Competitive Strategies
Implementation Strategies
Expansion of Scope
Reduction of Scope
Maintenance of Scope
Market Exit
Strategic Posture
Service Delivery
Unit Action Plans
Corporate- and
Chapter 6 Identifying Strategic Alternatives 209
competitive, and implementation should generally be addressed sequentially
with each decision more specifically defining the activities of the organization.
Thus, the organization must first establish or reaffirm consensus on its mission,
vision, values, and strategic goals (directional strategies). Next, the adaptive strategies must be agreed on and developed to accomplish the goals set forth by the
directional strategies. Adaptive strategies are corporate-level decisions that specify
the organizations scope and focus on expanding, reducing, or maintaining operations. Then strategists should discuss market entry/exit strategies, as they are the
means to accomplish the adaptive strategies through purchase, cooperation, internal development, or market exit. Competitive strategies are generally independent of the adaptive and market entry/exit strategies as they are market- or
service area-specific. Competitive strategies determine the organizations strategic
posture and position vis–vis other organizations within the market. Finally,
implementation strategies are directed toward value-adding service delivery strategies, value-adding support strategies, and unit action plans and must be developed to carry out competitive and market entry/exit strategies. The scope and
role of the strategy formulation types are summarized in Exhibit 63.
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 organizations values and its strategic goals.
Adaptive Strategies These strategies are more specific than directional strategies and
provide the primary methods for achieving the vision (adapting
to the environment). These strategies determine the scope of the
organization and specify how the organization will expand, reduce, or
maintain scope.
Market Entry/Exit
These strategies provide the method of carrying out the adaptive
strategies of expansion of scope and maintenance of scope strategies
through purchase, cooperation, or internal development and
reduction of scope through market exit.
Competitive Strategies Two types of strategies: one determines an organizations strategic
posture and one positions the organization vis–vis other
organizations within the market. These strategies are market oriented
and best articulate competitive advantage. When changes are not
envisioned for adaptive or market entry/exit strategies, competitive
strategies still may require changing.
These strategies are the most specific and are directed toward
value-added service delivery and the value-added support areas. In
addition, individual organizational units develop objectives and action
plans that support the market entry/exit strategies, competitive
strategies, as well as the value-added service delivery and valueadded support strategies.
210 strategic management of Health Care Organizations
At each stage of the strategy formulation process, previous upstream
decisions and the implications for subsequent downstream decisions must
be considered. As leaders work through strategic choices, new insights and
perspectives may emerge (strategic thinking) that suggest reconsideration of
previous strategic decisions. Therefore, although the decision logic for strategic
decisions is generally sequential, in practice it is very much an iterative process.
Strategy includes a plurality of inputs, a multiplicity of options, and an ability
to accommodate more than one possible outcome. For example, where mission
and vision are ignored, or where no linkage occurs between vision and strategy,
strategy has no measurable end objective. In these situations, strategy suffers
from being a means without an end, an end in itself, or a means of achieving an
operational end, rather than being a design or plan for achieving the organizations mission and vision.1
Strategic decisions should be based on as much information and strategic
thinking as possible. Strategic thinking occurs in situational analysis and strategy formulation, as well as when managing strategic momentum. Before the
strategic plan is adopted, it is important to remember that organization-wide
consensus and commitment to the strategies must be established and actively
promoted if they are to be managed successfully (strategic momentum). The
choice of a strategic alternative creates additional direction for an organization and subsequently shapes its internal systems (technology, information
systems, culture, policies, skills, and so on). Strategic momentum is reinforced as managers understand, commit, and make decisions according to the
Exhibit 64 presents a comprehensive strategic thinking map of the strategic alternatives available to health care organizations. This map not only
identifies the alternatives but also the general sequential relationships among
them. Using this organizing framework or decision logic keeps strategy formulation from becoming overwhelming and focuses strategic thinking. As
strategic managers work through the strategic decisions, new understandings, 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 refine earlier decisions in the decision logic as they
make downstream decisions.
How-to formulas, techniques, or linear processes, of course, can never
replace strategic thinking. Many of the greatest achievements in science, law,
government, medicine, and other intellectual pursuits are dependent on the
development of rational, logical thinkers; however, linear thinking can limit
potential.2 Leadership is essential to foster creativity and innovation and allow
for the reinvention of the strategy formulation process. Strategy formulation
involves managing dilemmas, tolerating ambiguity, coping with contradictions,
and dealing with paradox.3 Often leaders must creatively resolve the tension
between competing information and alternatives to generate new options and
solutions.4 In addition, strategy development cannot ignore the entrepreneurial
Chapter 6 Identifying Strategic Alternatives 211
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.
Step 2: Understand the Role of Directional Strategies
Chapter 5 explored mission, vision, values, and strategic goals and indicated
that these elements are part of both situational analysis and strategy 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, as discussed in Chapter 5, they provide an operational context for the organization and an ethical and moral framework. In addition,
directional strategies are a part of strategy formulation because they set boundaries and indicate the broadest direction for the organization. The directional
strategies should provide a sensible and realistic planning framework for the
Exhibit 64 Strategic Thinking Map Hierarchy of Strategic Decisions and
Market Entry/ Exit
Expansion of Scope
Reduction of Scope
Maintenance of Scope
Status Quo
Venture Capital
Joint Venture
Internal Venture
Reconfigure the
Value Chain
Market Exit
Strategic Posture
Cost Leadership
Market Segment
Service Delivery
Unit Action Plans
212 strategic management of Health Care Organizations
Because formulation of the mission, vision, values, and strategic goals provides fundamental direction for the organization, directional strategic decisions
must be made first. Then the adaptive strategies mobilize organizational goals
by specifying the type and scope of product/market expansion, reduction, or
maintenance. The adaptive strategies form the core of strategy formulation and
are most visible to those outside the organization. After the adaptive strategies
have been selected, the directional strategies should be re-evaluated. Seeing the
directional strategies (ends) and the adaptive strategies (means) together may
suggest refinements to either or both. This broader perspective is essential in
strategic thinking.
Step 3: Understand Adaptive Strategy Alternatives
From a practical standpoint, whether the organization should expand, reduce, or
maintain scope is the first decision that must be made once the direction of the
organization has been set (or reaffirmed). As shown in Exhibit 65, several alternatives are available to expand, reduce, or maintain the scope of operations. These
alternatives represent major strategic choices for the organization.
Expansion of Scope Strategies
If expansion is selected as the best way to perform the mission and realize the
vision of the organization, several alternatives are available. The expansion of scope
strategies grow an organization and include:
Vertical integration.
Market development.
Product development.
Diversification Diversification is adding new related or unrelated products/
services (businesses) outside the organizations core business(es). Diversification
strategies, in many cases, are selected because markets have been identified outside the organizations core business that offer potential for substantial growth.
Many hospitals have added hospice care as the increasing number of baby
boomers are living longer and insurers (including Medicaid) began reimbursing
for this type of care. Often, an organization that selects a diversification strategy is not achieving its growth or revenue goals within its current market, and
these new markets provide an opportunity to achieve them. There are, of course,
other reasons why organizations decide to diversify. For instance, health care
organizations may identify opportunities for growth in less competitive or less
regulated markets (such as medical office buildings, long-term care facilities, or
outpatient care).
Diversification, at the level of the individual organization, is generally seen
as a risky alternative because the organization is entering relatively unfamiliar
markets or businesses. At the societal level it is sometimes thought of as a means
of increasing the concentration of power among fewer firms and, again, is viewed
Chapter 6 Identifying Strategic Alternatives 213
as possessing certain dangers or risk.5 Organizations have found that the risk
of diversification can be reduced if markets and products are selected that complement one another. Therefore, managers engaging in diversification seek synergy between corporate divisions or strategic business units (SBUs). Consider, for
example, the discussion of Hill-Rom in Chapter 4. The core business of Hill-Rom
is hospital beds and it dominates the market in this area. In recent years, however,
the company has acquired Allen Medical (operating room beds), Liko (specialized
products for safe lifting and transfer of patients), Aspen Medical (surgical blades
EXHIBIT 65 Strategic Thinking Map of Adaptive Strategic Alternatives
Expansion of Scope
Reduction of Scope
Maintenance of Scope
Adaptive Strategies
Product Enhancements
Product Line
Status Quo
Product Development
Market Development
Vertical Integration
214 strategic management of Health Care Organizations
and scalpels), Vlker (long-term care beds), Trumpf Medical (advanced operating
room products, lighting, surgical assistance systems), and Welch Allen (medical
instruments). Note that these acquisitions are concentric in that they revolve
around the core business of hospital beds. With these acquisitions Hill-Rom has
taken on a risky but a highly diverse portfolio of medical products.
There are two types of diversification: related (concentric) and unrelated (conglomerate). Exhibit 66 illustrates possible related and unrelated diversification
strategies for one type of primary health care organization.
Related diversification is adding new, similar products/services (businesses) that
are outside the organizations core business. This form of diversification is sometimes called concentric diversification because the organization develops a circle
of related businesses (products/services) and is illustrated by Hill-Roms venture
into a more diversified series of medical markets while focusing the diversification effort on a series of similar medical products (e.g. long-term care beds,
patient mobility equipment, operating room beds, and so on).
The general assumption underlying related diversification is that the organization will be able to obtain some level of synergy (a complementary relationship
EXHIBIT 66 Related and Unrelated Diversification by a Primary Provider
Diagnostic Lab
Long-Term Care
Home Health
Related Diversication
Unrelated Diversication
Health Care Environment
Medical Supplies
Managed Care
Medical Schools
General Environment
Health and Fitness
Parking Lots
Shopping Centers
Ofce Buildings
Within the Health
Care System
Outside the Health
Care System
Chapter 6 Identifying Strategic Alternatives 215
where the total effect is greater than the sum of its parts) between the production/
delivery, marketing, or technology of the core business and the new related product or service. This form of diversification has been characteristic of many firms in
the pharmaceutical industry.6 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.7 The movement of acute care hospitals into
skilled nursing care is an example of related diversification.
On the other hand, unrelated diversification is adding new unrelated products/
services (businesses) unlike the organizations core business. This action creates
a portfolio of separate products/services. Unrelated diversification, or conglomerate diversification, generally involves semi-autonomous divisions or strategic
service units. An example of unrelated diversification would be a hospital diversifying into the operation of a restaurant, parking lot, or medical office building. In
such a case, the new business is unrelated to the provision of health care although
it may be complementary (synergistic) to the provision of health services.
Research on diversification indicates that financial performance increases as
organizations shift from single-business strategies to related diversification, but
performance decreases as organizations change from related diversification to
unrelated diversification.8 Single-business organizations may suffer from limited
economies of scope whereas organizations using related diversification can convert underutilized assets and achieve economies of scope by sharing resources
and combining activities along the value chain. Unrelated diversification has
been found to increase strain on top management in the areas of decision making,
control, and governance. The stress increases in some cases because of the difficulties associated with integrating and managing diverse organizational cultures.9
In addition, unrelated diversification makes it difficult to share activities and
transfer competencies between units; it has been particularly difficult in hospital
Vertical Integration A vertical integration strategy is a decision to grow along
the channel of distribution or stages in the continuum of care of core operations.
Thus, a health care organization may grow toward suppliers or toward patients.
When an organization grows along the channel of distribution toward its suppliers or toward earlier stages on the continuum of care (upstream), it is called
backward vertical integration. When an organization grows along the channel of
distribution toward the consumer/patient or toward later stages in the continuum
of care (downstream), it is called forward vertical integration.
A vertically integrated health care system offers a range of patient care and support services operated in a functionally unified manner. The expansion of services
may be arranged around an acute care hospital and include pre-acute, acute, and
post-acute services or be organized around specialized services related solely to
long-term care, mental health care, or some other specialized area.11 The purpose
of vertical integration is to increase the comprehensiveness and continuity (or
continuum) of care, while simultaneously controlling the channel of demand for
health care services.12
One of the more familiar examples of vertical integration in health care has been
the strategy of hospitals acquiring physician practices in a move to more effectively
216 strategic management of Health Care Organizations
control the patient flow. This move, as with many others, has produced varying results. Some have argued that tightly integrated relations between physician
practices and hospitals have resulted in higher hospital prices and spending.13
Vertical integration can reduce costs and thus enhance an organizations
competitive position. Cost reductions may occur through lower supply costs
and better integration of the elements of production. With vertical integration,
management can better ensure that supplies are of the appropriate quality and
delivered at the right time. For instance, some hospitals have instituted technical
educational programs because many health professionals (the major element of
production in health care) are in critically short supply. However, in many cases it
seems that managerial incentives to build market share is the primary motivation
for vertical integration.14
Because a decision to vertically integrate further commits an organization to a
particular product or market, management must believe in the long-term viability
of the product/service and market. As a result, the opportunity costs of vertical
integration must be weighed against the benefits of other strategic alternatives
such as diversification or product development. Examples of vertical integration
would be a hospital chain acquiring one of its major medical products suppliers
(backward integration) or a drug manufacturer moving into drug distribution
(forward integration).
Whether a strategic alternative is viewed as vertical integration or related diversification may depend on the objective or intent of the alternative. For instance,
when the primary intent is to enter a new market to grow, the decision is to diversify. However, if the intent is to control the flow of patients to various units, the
decision is to vertically integrate. Thus, a decision by an acute care hospital to
acquire a skilled-nursing unit may be viewed as related diversification (entering a
new growth market) or vertical integration (controlling downstream patient flow).
Vertical integration is the fundamental adaptive strategy for developing integrated
systems of care and is central to many health care organizations strategies.
Numerous extensive health networks are the result of integration strategies
and some observers expected that the Patient Protection and Affordable Care
Act (ACA) would increase the movement to integrated health care systems.15
Although there is limited data to support or refute this suspicion, according to the
American Hospital Association well over half of American hospitals may be affiliated with a system or network.16 The major reason that hospitals join networks
and systems is to help secure needed resources (financial, human, information
systems, and technologies), increase capabilities (management and marketing),
and gain greater bargaining power with purchasers and health plans.17 However,
it appears that the pace of integration has slowed. In fact there has been some
degree of disintegration, with health care systems divesting health plans, physician groups, home health care companies, skilled care services, or facilities and
selling or closing hospitals.18 The reason for this divesting trend is related to
research that suggests that integrated health care networks have little or no significant effect on the improvement of overall organizational efficiencies and profits.19
To increase the supply of patients to various health care units, several patterns
of vertical integration may be identified.20 In Exhibit 67, an inpatient acute care
facility is the strategic service unit or core technology that decides to vertically
integrate. Example 1 represents a hospital (D) that is not vertically integrated.
Chapter 6 Identifying Strategic Alternatives 217
The hospital admits and discharges patients to and from other units outside the
organization. Example 2 illustrates a totally integrated system in which integration occurs both upstream and downstream. In this case, patients flow through
the system from one unit to the next, and upstream units are viewed as feeder
units to downstream units.
Example 3 represents a hospital that has vertically integrated upstream. In
addition, more than one unit is involved at several stages of the integration. For
instance, there are two wellness/health promotion units, three primary care units,
and three urgent care units. The dashed line represents the receipt of patients via
external or market transfers. Example 4 illustrates a multihospital system engaged
EXHIBIT 67 Patterns of Vertical Integration Among Health Care
Upstream Downstream
Business Unit
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
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.
218 strategic management of Health Care Organizations
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 benefits for patients (effectiveness) and cost savings (efficiency).
Finally, some health care systems are closed systems with fixed 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 closed system. This insurance function (letter i in the example) is shown as
an additional unit.
Market Development Market development is a divisional strategy used to enter
new markets with the organizations present products or services. Specifically,
market development is a strategy designed to achieve greater volume, through
geographic (service area) expansion or by targeting new market segments within
the present geographic area (market niche strategies). Typically, market 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, financial, 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 (current products and
services in a new market).
One type of market development is called horizontal integration. Horizontal
integration is a method of obtaining growth across markets (in essence buying
market share) by acquiring or affiliating with direct competitors rather than using
internal operational/functional strategies to take market share from them. Many
hospitals and medical practices engage in horizontal integration, creating 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 efficiencies, access to management expertise, increased personnel benefits, improved patient access, improvement in quality, and increased bargaining power with insurers and suppliers. However, many
of these benefits have not materialized and consolidation often raises prices with
no measurable impact on quality increasing scale without creating solutions.21
Another special type of market development is a market-driven or focused
factory strategy. A focused factory in health care is an organization that provides
comprehensive services across multiple markets (horizontal integration) for one
specific disease category such as cancer, diabetes, renal disease, asthma, or cardiac disease. The fundamental principle underlying a market-driven or focused
factory strategy is that an organization that focuses on only one function is likely
to perform better. Such focus allows an organization to achieve very high levels
of effectiveness and efficiency. The shift includes:
replacing giant providers and huge managed care networks, located in
hard-to-reach sites with what I call focused factories (a nomenclature borrowed from the manufacturing sector) that provide convenient, specialized
Chapter 6 Identifying Strategic Alternatives 219
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.22
Focused factories become so effective (high quality, convenient, and so
on) and efficient (less costly) that other providers are forced to use their
services. Thus, these other providers can obtain higher-quality services at
less cost by outsourcing to the focused factory. In turn, the focused factory
commands a place in the payment systems. Focused factory tools for providers of health care services are outlined in Essentials for a Strategic
Thinker 61 What Is a Health Services Focused Factory?
Essentials for a Strategic Thinker 61
What Is a Health Services Focused Factory?
The health care providers who flourish in this market-driven environment will give customers the
mastery and convenience as well as the focused,
cost-effective services they want by following the
rules of successful service entrepreneurs:
Pay Attention to the Customer
Dont call them patients, dont fight their assertiveness, dont give them hype, give them real
convenience and quality.
Focus, Focus, Focus
Throw out the general-purpose, everythingfor-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 wellchoreographed dance, where disparate elements
have been integrated into a harmonious whole.
Resist the Edifice Complex
Bricks and mortar are distractions; fixed costs
drag the enterprise down; many assets are really
liabilities (money pits that consume your time
and capital).
Lower Your Costs, Dont 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.
Dont Let the Dogma Grind You
Be open to new and different ways of thinking;
dont be a prisoner of your own thinking; obtain
advice from the widest possible range of sources
about what works and what doesnt.
Be Ethical
Dont seek competitive advantage in unethical
ways such as discriminating against sick or poor
people or by denying people the health care
services they need.
220 strategic management of Health Care Organizations
In health care, focused factories have not escaped criticism. The success of some
focused factories (cardiac surgery and treatment) led some states to propose 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.
Specifically identified were cardiac, orthopedic, surgical, and other hospitals
owned by physicians. These focused factories targeted profitable procedures from
insured patients, requiring local not-for-profits to care for less profitable diseases/
treatments without being able to offset the costs through the more profitable
procedures being captured by focused factories. Therefore, many politicians are
opposed to specialty hospitals and advocated for the federal legislation to become
Additionally, consternation has been expressed concerning 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 financial
interest in the hospital to increase their volume with elective procedures. As for
increasing quality, most experts agree that it is too early to judge. Some suggest that physicians referred easy cases to specialty hospitals and more complex
patients to general hospitals, but there is no data to support that claim. Further,
most experts agree that specialty hospitals initiated a medical arms race that
might eventually drive up health care costs. The fear is that as general hospitals
perceive the need to compete with the physician-owned specialty hospitals, they
will develop dedicated centers as hospitals-within-hospitals or as freestanding
facilities, forcing up overall costs.23
Product Development Product development is the introduction of new 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 diversification.
Breadth Beats Depth
Dont 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.
Dont Get Big for Bigness Sake
Dont 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; dont ignore
results you dont like and dont bury the results in
a file use them actively in continually recreating
your operations; dont believe your own press
you are at your most vulnerable when your
measurement results are at their most flattering.
Source: Regina E. Herzlinger, Market-Driven Health Care: Who
Wins, Who Loses in the Transformation of Americas Largest Service
Industry (Reading, MA: Addison-Wesley Publishing Company,
1997), pp. 283287.
Chapter 6 Identifying Strategic Alternatives 221
Related diversification introduces a new product category (though it may be
related to present operations), whereas product development may be viewed as
refinements, complements, or natural extensions of present products. Product
development strategies are common in large metropolitan areas where hospitals vie for increased market share within particular segments of the market,
such as cancer treatment and open-heart surgery, and specialized womens
health clinics.
Penetration An attempt to better serve current markets with current products
or services is referred to as a market penetration strategy. Similar to market and
product development, penetration strategies are used to increase volume and
market share. A market penetration strategy is typically implemented by marketing activities such as promotional, distribution, and pricing strategies, and often
includes increasing advertising, offering sales promotions, increasing publicity
efforts, or increasing the number of sales representatives.
Although still using their sales force to pursue expansion strategies, some
pharmaceutical companies have recently moved toward e-detailing (electronic
physician education concerning drugs) as a key component of their penetration strategies. The use of e-detailing by pharmaceutical companies is on
the rise because physicians increasingly prefer to replace sales calls with other
forms of communication and are accessing physician-only informational websites, and other interactive communication formats. For example, one study of
physicians and other medical professionals found that when e-detailing was
used in combination with occasional visits by professional service representatives the results were particularly effective. The argument was made that
e-detailing and periodic, in-person visits are complementary in nature, less
expensive, and that simultaneous use multiplied the effects of either approach
on its own.24
Reduction of Scope Strategies
Reduction of scope strategies decrease the size and reach of operations. Reduction
strategies include:
Divestiture Divestiture is a reduction of scope strategy in which an operating
strategic service unit (SSU) is sold off as a result of a decision to leave all or a
portion of the market despite its current viability. Generally, the business to be
divested has value and will continue to be operated by the purchasing organization.25 For example, in 2016 Community Health Systems, Inc. (CHS) announced
it was divesting its majority stake (80 percent) in its home health division to pay
down debt. The strategic plan was for Almost Family, Inc. to purchase a majority
interest and continue to operate the business.26
222 strategic management of Health Care Organizations
The strategy of unbundling (divesting by a hospital of one or more of its services) has become common. Hospitals are carving out non-core services previously
performed internally and divesting them. Typical services and products produced
in a hospital that are not necessarily part of the core bundle of activities include
laboratory, pharmacy, X-ray, physical therapy, occupational therapy, and dietary
services. In addition, hotel services (laundry, housekeeping, and so on) formerly
performed by hospitals are being contracted to outsiders. Even medical services in
such specialty areas as ophthalmology are increasingly being performed outside
the hospital in surgicenters and may be candidates for divestiture.
Divestiture decisions are made for a number of reasons. An organization may
need cash to fund more important operations for long-term growth or the division/SSU may not be achieving managements goals. In some cases health care
organizations are divesting services that are too far from their core business or
area of management expertise. For example, many multihospital systems have
divested their HMO (purchased only a few years earlier) to concentrate on care
delivery. A multihospital system purchasing a managed care organization actually
represents unrelated diversification. Although the strategy appears logical and
synergistic, managed care businesses are difficult to manage and there is little skill
transfer from managing provider organizations. Moreover, research has shown
that divestitures are more profitable when they are part of a carefully crafted strategy as compared to piecemeal sell-offs of various components of the business.27
Liquidation Liquidation is a reduction of scope strategy involving the
termination of a unit through the sale of its assets. The assumption underlying
a liquidation strategy is that the unit cannot be sold as a viable and ongoing
operation. However, the assets of the organization (facilities, equipment, and
so on) still have value and may be sold for other uses. Organizations may be
partially or completely liquidated. Common reasons for pursuing a liquidation
strategy include bankruptcy, the desire to dispose of non-productive assets, and
the emergence of a new technology that results in a rapid decline in the use of
the old technology.
One strategy of the MedCath Corporation illustrates an example of liquidation. On September 21, 2012 a Certificate of Dissolution was issued for MedCath
Corporation. MedCath consisted of a series of hospitals that specialized in cardiovascular care. Its strategy was to operate these specialty hospitals in partnership
with physician groups. Although the strategy was successful initially, the opposition
of acute care hospitals resulted in a moratorium on specialty hospital development,
which proved to be a mortal blow to the strategy and the company. MedCaths board
of directors approved a liquidating distribution of assets to stockholders, removed
its stock from trading on the NASDAQ stock exchange, and ceased operations.
On leaving a market, an aging hospital building may be sold for its property
value or an alternative use. In a declining market, a liquidation strategy may be a
long-term strategy to be carried out in an orderly manner over a period of years.
Recently, many hospitals have been liquidating their emergency helicopter 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.
Chapter 6 Identifying Strategic Alternatives 223
Harvesting A harvesting strategy is a reduction of scope strategy to continue to
operate a declining business and reap any remaining available profits while not
investing additional resources. A harvesting strategy is selected when the market
has entered long-term decline. The reason underlying such a strategy is that the
organization has a relatively strong market position but industry-wide revenues
are expected to decline over the next several years. Therefore, the organization
will ride the decline, allowing the business to generate as much cash as possible
without further investment.
When implementing a harvesting strategy, the organization attempts to
reap maximum short-term benefits before the product or service is eliminated.
Such a strategy allows the organization an orderly exit from a declining 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 difficulty in maintaining their commitment to health care in small
communities. The 20-bed hospitals frequently found in rural networks tend
to struggle financially because of a lack of support from specialists and primary care physicians, an aging population, and flight of the young to urban
areas. Twenty-bed rural hospitals are probably in a long-term decline with
little hope for survival. On the other hand, 50-bed hospitals have managed
to maintain or improve their financial position because of effective physician
recruitment, good community image, and the continued viability of the communities themselves. Therefore, regional hospitals with rural networks may
have to employ a harvesting strategy for the 20-bed hospitals while using
market development or maintenance of scope strategies for the 50-bed and
larger hospitals.
Retrenchment A retrenchment strategy reduces the scope of operations,
through redefining the target market, cutting geographic coverage, reducing the
segments served, or reducing the product/service line. Typically a retrenchment
strategy is a response to declining profitability, usually brought about by increasing costs. The market is still viewed as viable, and the organizations products/
services continue to have wide acceptance; however, costs are rising as a percentage of revenue, placing pressure on profitability. Retrenchment typically involves
a redefinition 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 find that they are overstaffed given the level
of demand. As a result, their costs are higher than those of competitors. When
market growth is anticipated, personnel are added to accommodate the growth,
but during periods of decline, positions are seldom eliminated. A reduction in the
staff members who have become superfluous or redundant is often central to a
retrenchment strategy.
Similarly, in an attempt to round out the product or service line, products
and services are added. Over time, these additional products/services may tend
to add more costs than revenues. In many organizations, less than 20 percent of
224 strategic management of Health Care Organizations
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
Maintenance of Scope Strategies
Often organizations pursue a maintenance of scope strategy when management
believes the past strategy has been appropriate and few changes are required in
the target markets or the organizations products/services. Maintenance of scope
does not necessarily mean that the organization will do nothing; it means that
management believes the organization is progressing appropriately. There are two
maintenance of scope strategies: enhancement and status quo.
Enhancement Enhancement seeks to improve operations within present
product or service categories in various ways, such as by implementing quality
programs, increasing flexibility, increasing efficiency, improving speed of delivery, and so on. 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 (continuous quality improvement or CQI, total quality management or TQM) directed toward improving organizational processes
or cost-reduction programs designed to render the organization more efficient.
In addition to quality and efficiency, enhancement strategies may be directed
toward innovative management processes, speeding up the delivery of the
products/services to the customer, and adding flexibility to the design of the
products or services (marketwide customization). As discussed in Essentials
for a Strategic Thinker 62, What Is Health Information Technology (IT)? the
adoption of information technology may be an enhancement strategy that creates competitive advantage.
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 a maintenance of scope strategy seeking to
maintain relative market share within a market and retain services at their current
level. A status quo strategy is often based on the assumption that the market has
Chapter 6 Identifying Strategic Alternatives 225
Essentials for a Strategic Thinker 62
What Is Health Information Technology (IT)?
Health IT is a broad term that refers to a wide
range of technologies and applications designed
to store, share, and/or analyze health information. Health IT includes electronic health records
(EHRs), health information exchanges (HIEs),
and many other technologies. Whereas EHRs
are computerized versions of patient records
that allow clinicians secured access to patient
information (e.g. prior history, test results, medication information) and algorithms designed to
assist clinicians to provide optimal care (e.g. dosing information, access to the newest medical
guidelines), HIEs are the infrastructure that allow
information from EHRs to be exchanged across
different providers, settings of care, and time.
Ideally, health IT assists clinicians, managers,
and public health officials to improve the quality
of care, reduce inefficiencies, and lower health
care costs. As such, federal policies have promoted the adoption and use of health IT by
physicians, hospitals, and other providers. For
example, the Health Information Technology for
Economic and Clinical Health (HITECH) Act of
2009 promoted the uptake of EHRs and HIEs by
paying providers bonus payments for successfully installing, upgrading, or using health IT that
met certain basic requirements.
Likewise, changes in reimbursement models
by Medicare, Medicaid, and private insurance
companies have also incentivized the use of
health IT. Historically, most insurance companies
reimbursed providers on a fee-for-service basis.
That is, for a given clinical service, insurance
companies would pay doctors and hospitals a
predetermined fee on behalf of patients. Under
this model, providers earned more if they provided a higher volume of services and quality
of care was not necessarily rewarded. As costs of
care increased and quality concerns grew, new
federal policies such as the Medicare Access
and CHIP Reauthorization Act (MACRA) of 2015,
introduced newer reimbursement models that
sought to financially reward physicians and hospitals that provide the best care for the lowest
costs. Collectively, these new reimbursement
models are known as value-based purchasing
arrangements. Value-based (as opposed to volume-based) models promote the use of health
IT because such technologies play a role in
improving quality and efficiency.
Despite much national attention to health IT
by insurance companies and providers, and despite substantial technological improvements to
EHRs and HIEs, the U.S. health care system has
not yet lived up to the full potential of health IT.
In retrospect, whereas the HITECH Act may have
spurred increased adoption of health IT, it may
not have fostered an environment where health
IT could be used innovatively. Moreover, many
organizations struggled with the implementation process of health IT because the challenges
with such wide-scale changes were underestimated. Lastly, despite improvements to commercially available health IT products, there is
still a perception that the products available do
not meet every organizations needs. As such,
one can expect that health IT will continue to be
tailored to individual organizational needs, and
researchers will continue to find ways for health
IT to be used more effectively to improve care,
support population health, enable new analytics, and generally be a necessary ingredient of
the modern U.S. health care system.
Source: Nir Menachemi, PhD Professor and Chair, Indiana
University Richard M. Fairbanks School of Public Health, Affiliate
Scientist, Regenstrief Institute, Inc.
226 strategic management of Health Care Organizations
matured and periods of high growth are over. In this situation, the organization
has secured an acceptable market share that managers believe can be defended
against competitors. In addition, a status quo strategy may be appropriate when
an organization is in a period of active waiting. Active waiting is a temporary
strategy for organizations operating in dramatically changing or volatile markets.
During periods of active waiting, leaders must remain alert to market anomalies
that signal potential threats and opportunities, build financial reserves, and prepare to make strategic changes.28
In a status quo strategy, the goal is to maintain market share and keep services
at their current level. Environmental influences affecting the products or services
should be carefully analyzed to determine when significant change is imminent.
Typically, organizations attempt a status quo strategy in some areas while engaging
in market development, product development, or penetration in other areas to 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 firms attempt to add
volume and reduce costs. Therefore, managers must be wary of the emergence
of a single dominant competitor that has achieved a significant cost differential.
A status quo strategy is appropriate when there are two or three dominant providers in a stable market segment because, in this situation, market development
or product development may be quite difficult and extremely expensive.
A brief definition of the adaptive strategies and their rationales for selection are
summarized in Exhibit 68.
Exhibit 68 Definition and Rationales of the Adaptive Strategies
Strategy Definition Rationale
Expansion of
Adding new related product or
service categories. Often requires the
establishment of a new division.
Pursuit of high-growth markets.
Entering less-regulated segments.
Not achieving current objectives.
Synergy is possible from new business.
Offset seasonal or cyclical influences.
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
Tax loss may be acquired.
Chapter 6 Identifying Strategic Alternatives 227
Strategy Definition Rationale
Adding new members along the
distribution channel (toward a later
stage) for present products and
services or controlling the flow of
patients from one institution to
Control the flow of patients through the system.
Scarcity of raw materials or essential inventory/supplies.
Deliveries are unreliable.
Lack of materials or supplies will shut down operations.
Price or quality of materials or supplies variable.
Industry/market seen as profitable for long term.
Adding new members along the
distribution channel (toward an
earlier stage) for present products
and services or controlling the flow
of patients from one institution to
Control the flow of patients through the system.
Faster delivery required.
High level of coordination required between one stage
and another secure needed resources.
Industry/market seen as profitable for long term.
Gain bargaining power.
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
New markets may be served efficiently.
Expected high revenues.
Organization has cost leadership advantage.
Organization has differentiation advantage.
Current market is growing.
Improving present products or
services or extending the present
product line.
Currently in strong market but product is weak or product
line incomplete.
Market tastes are changing.
Product technology is changing.
Maintenance or creation of differentiation advantage.
Penetration Seeking to increase market share for
present products or services in
present markets through marketing
efforts (promotion and price).
Present market is growing.
Product/service innovation will extend product life cycle (PLC).
Expected revenues are high.
Organization has cost leadership advantage.
Organization has differentiation advantage.
Reduction of
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.
228 strategic management of Health Care Organizations
Step 4: Understand Market Entry/Exit Strategy
The expansion of scope adaptive strategies require entering or gaining access to a
new market, while the maintenance of scope strategies may call for organizational
improvements; therefore, it is likely that both strategies will require new resources.
On the other hand, reduction of scope strategies may provide additional resources
or free up committed resources. Thus, the next important decision that must be
Strategy Definition Rationale
Liquidation Selling all or part of the organizations
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.
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 industrywide revenues are expected to decline.
These products or services will ultimately
be discontinued but may generate
revenue for some time. Few new
resources are allocated to these areas.
Late maturity/decline of the product life cycle.
Consider divestiture or downsizing.
Short-term cash needed.
Retrenchment Reducing the scope of operations,
redefining the target market, cutting
geographic coverage, reducing the
segments served, or reducing the
product line.
Market has become too diverse.
Market is too geographically spread out.
Personnel costs are too high.
Too many products or services.
Marginal or non-productive facilities.
of Scope
Enhancement Seeking to improve operations within
present product or service categories
through quality programs, increasing
flexibility, increasing efficiency, speed
of delivery, and so on.
Organization has operational inefficiencies.
Need to lower costs.
Need to improve quality.
Improve internal processes.
Status Quo Seeking to maintain relative market
share within a market.
Maintain market share position.
Maturity/late maturity stage of the product life cycle.
Product/market generating cash but has little potential
for future growth.
Extremely competitive market.
Exhibit 68 (Continued)
Chapter 6 Identifying Strategic Alternatives 229
made for these strategies concerns how the organization will enter and develop
a market or exit the market. Market entry strategies carry out the expansion
and maintenance adaptive strategies through purchase, cooperation, or internal
development. Reduction of scope strategies are carried out through market exit
There are three major methods to enter a market. As illustrated in Exhibit 64,
an organization can use its financial resources to purchase a stake in the new
market, team with other organizations and use cooperation to enter a market, or
use its own resources to develop its own products and services. It is important to
understand that market entry strategies are not ends in themselves but serve a
broader aim supporting the expansion and maintenance of scope adaptive strategies. Any of the expansion and maintenance of scope strategies may be carried
out using any of the market entry strategies but each one places different demands
on the organization.
If a reduction of scope strategy is selected, the organization may choose to
leave (exit) the market quickly or incrementally resulting in a partial withdrawal
or a complete abandonment of the market. Similar to the market entry strategies, market exit strategies support a broader vision and may continue to require
resources and careful management for a period of time before the strategy has
been completed.
Purchase Strategies
A purchase strategy uses financial resources to enter a market quickly. There are
three purchase market entry strategies: acquisition, licensing, and venture capital
Acquisition Acquisitions are entry strategies for expansion through the
purchase of an existing organization, a unit of an organization, or a product/
service. Thus, acquisition strategies may be used to carry out both corporate
and divisional strategies such as diversification, vertical integration, market
development, or product development. There are many reasons to purchase
another organization, such as to obtain real estate or other facilities, to acquire
brands, trademarks, or technology, and even to access employees. However,
the most common reason is to acquire customers.29 One form of acquisition is
inversion which has been used as a tax reduction strategy as well as a market
development strategy. See Essentials for a Strategic Thinker 63, What Is
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 benefits 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
230 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 63
What Is Inversion?
Inversion, also termed expatriation, results when
a U.S.-based multinational company restructures
and relocates the parent company to a low-tax
country.1 Inversions typically involve a U.S. companys acquisition of a smaller corporation in
a foreign country and the combined company
moves its headquarters from the United States
to the nation of the acquired firm. For example,
in 2014, Mylan, Inc. of Pittsburgh acquired
the European generic drug division of Abbott
Laboratories and incorporated the resulting enterprise in the Netherlands. Mylans new enterprise
will be managed by its executive team located in
Pittsburgh; however, the company will be located
in the Netherlands and will be a Dutch company.2
The term inversion references the upside-down
structure that results from the acquisition and
headquarters relocation the headquarters entity
is smaller than the U.S.-based main entity.3
The strategic rationale for inversion usually
focuses on reducing the corporate income tax
burden of multinational companies.4 The United
States uses a world-wide system of taxation
in which both domestic and foreign income
are combined for income tax reporting and,
thus, may result in double taxation first in
the country of income origin and second in the
United States.5 In the case of the MylanAbbott
transaction, Mylans tax rate was reduced from
35 percent to 21 percent.6 In selecting an acquisition target, U.S. companies are typically seeking
suitable business locations in countries that
use a regional taxation system where income
is taxed only in the country where it originates.
Ireland, the UK, and the Netherlands have
been prime locations for inverted multinationals
because of: (1) business tax rates that are lower
than U.S. rates, (2) flexibility in creating corporate
governance models (the Netherlands), (3) common law legal framework (Ireland and the UK),
(4) English-speaking (all three countries), and
(5) offering market development opportunities
in Europe (all three countries).7
The first inversion occurred in 1982 when
McDermott International Inc., a construction company previously domiciled (headquartered and located) in Louisiana, moved
its headquarters to Panama. In the health
care system, inversion has been used mostly
by pharmaceutical and medical device companies, such as Medtronics move to Ireland,
Convatec Healthcares move to Luxembourg,
Valeant Pharmaceuticals Internationals move to
Canada, Jazz Pharmaceuticals move to Ireland,
Activas move to Ireland, and Wright Medical
Groups move to the Netherlands.8
1. Hale E. Sheppard, Fight or Flight of US-Based
Multinational Businesses: Analyzing the Causes
for, Effects of, and Solutions to the Corporate
Inversion Trend, Northwestern Journal of
International Law and Business 23 (2002), p. 551.
2. Michelle F. Cortez, Mylan to Add Abbotts
Generic-Drug Unit, Cut Tax Rate,, (2014) (accessed
March 1, 2017).
3. U.S. Treasury, Corporate Inversion Transactions:
Tax Policy Implications, Office of Tax Policy,
Washington, DC (2002).
4. Kimberly A. Clausing, Multinational Firm Tax
Avoidance and Tax Policy, National Tax Journal
(2009), pp. 703725.
5. Joseph A. Tootle, The Regulation of Corporate
Inversions and Substantial Business Activities,
Virginia Tax Review 33 (2013), p. 353.
Chapter 6 Identifying Strategic Alternatives 231
expertise or capability and there is an organization that provides a good strategic
fit that does have such expertise then purchase may be warranted.30 However,
even a small acquired organization can be difficult to integrate into the existing
culture and operations. Often it takes several years to digest an acquisition or
to combine two organizational cultures.
Despite the difficulties of combining organizational cultures, the creation of
health systems with unified ownership has been an effective strategy. Health
systems have been better able than health networks (looser contractually- or
alliance-based strategies) to provide needed resources, competencies, and capabilities. Direct ownership of assets enables systems to achieve greater unity of purpose and develop more focused strategies, on average, than more decentralized
networks. In addition, hospitals in health systems that have unified ownership
generally have better financial performance than hospitals in contractually-based
health networks.31
Much of the growth of for-profit hospital chains has been via a market development acquisition strategy also called horizontal integration (or buying market
share). More specifically, horizontal integration is a type of market development
a method of obtaining growth across markets by acquiring or affiliating with
direct competitors rather than using internal operational or functional strategies
to gain/grow market share. Aggressive market development through acquisition of independent hospitals has been used to build the nations largest private
for-profit hospital chains. For example, in California the seven largest hospital
systems control more than one-third of the hospitals and licensed beds in the
state.32 Horizontal integration and vertical integration through acquisitions and
alliances have been key entry strategies for initiating rapid market growth by
health care organizations.
Licensing Licensing is an agreement for rights to a technology, product, trademark, franchise, or exclusive geographic area (territory) developed by one organization and used by another for a fee. The da Vinci laser knife was licensed to
surgeons. Acquiring a technology or product through licensing may be viewed
as an alternative to acquiring a complete company. Licensing agreements obviate
the need for costly and time-consuming product development and provide rapid
access to proven technologies, generally with reduced financial and marketing
risk to the organization. However, the licensee usually does not receive proprietary technology and is dependent on the licensor for support and upgrades.
In addition, the upfront dollar costs may be high.
6. Cortez, Mylan to Add Abbotts Generic-Drug
Unit, Cut Tax Rate.
7. Matthew Gilleard, Inversions: The Trend
Turning Transactional Tax Planning Upside
Down, International Tax Review 25 (2014), p. 8.
8. N. S. Rao, Corporate Inversions and Economic
Performance. NYU, Wagner Research Paper
No. 2566429, (September 6, 2015). Available at
SSRN: Retrieved from
Source: Andrew C. Rucks, PhD, Professor, School of Public Health,
University of Alabama at Birmingham.
232 strategic management of Health Care Organizations
Another common form of licensing is a franchise the granting of an exclusive
territorial license assuring the licensee all rights that the licensor has with respect
to a defined activity.33 This practice is most commonly found in the field of trademark licensing. Franchisees benefit from exploitation of the goodwill, uniform
format, and uniform quality standards symbolized by the franchisors trademark.
An example is the license agreement by and between Blue Cross and Blue Shield
Association and the various regional Blue Cross and Blue Shield Plans. Blue
Shield Plans are granted the right to use the Blue Cross and Blue Shield names
and trademarks in the trade and corporate name and the right to use the licensed
marks in the sale, marketing, and administration of health care plans and related
services within a geographic area. In such agreements no other health insurance
provider can encroach on the Plans license under the Blue Cross and Blue Shield
name within the stated territory.34
Venture Capital Investment A venture capital investment is a purchase strategy that provides capital to an organization with a developing technology, product, or market to participate (have a share) in its growth (profitability). Venture
capital investments offer an opportunity to enter or try out a market while 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.35
In addition, venture capital investments are a way for new health care organizations to grow. Venture capital investment in health care companies (including biotechnology, pharmaceuticals, medical devices, and health care delivery) in early
2012 fell to its lowest level since 2010; however, the number of deals remained
relatively high. Venture capital investment in health care technology firms was
strong throughout the decade of the 1990s but e-health (internet-related) 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 firms
located in California and Massachusetts. By far the most investments were in
mature companies rather than seed money for start-ups. Unlike the 1990s, 2010s
venture capital investments involved firms in genomic research (Warp Drive Bio),
non-invasive prenatal testing (Ariosa Diagnostics), radiation therapy (Mevion
Medical Systems), and endoscopic surgery (Apollo Endosurgery).36
Since 2012 venture capital investments in health care companies have reached
almost $150 billion and, for the first time in over a decade, accounted for a
larger percentage of total venture capital than information technology. Juno
Therapeutics, for example, did its initial public offering (IPO) less than a year after
receiving its initial venture capital funding.37 The Wall Street Journal reported that
venture capital funding in health care companies rose 34 percent between 2014
and 2015 primarily in new disease treatment and other medical technologies.38
Cooperation Strategies
Probably the most used and certainly the most talked about strategies of
the late 1990s and early 2000s were cooperation strategies. A cooperation strategy
Chapter 6 Identifying Strategic Alternatives 233
occurs when organizations agree to work together to achieve a common goal
through mergers, alliances, or joint ventures. Many organizations have carried
out adaptive strategies particularly diversification, vertical integration, product development, and market development strategies through cooperation
Mergers Mergers are similar to acquisitions. In a merger, 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 efficiency in the delivery of health care services, reduction
in duplication of services, improved geographic dispersion, increased service
scope, restraint in pricing increases, and improved financial performance.39
The expectation of increased merger activity has materialized, especially with
regard to hospitals. Since 2009, for example, the number of hospital mergers per
year has doubled from around 50 to over 100 per year.40 Another area that has
experienced a substantial amount of merger and acquisition activity is medical devices (pacemakers, surgical blades, catheters, and so on). According to
PricewaterhouseCoopers, in the fourth quarter of 2012 alone medical device
mergers and acquisitions amounted to $3.4 billion.41 The other primary use of
merger strategies (as well as acquisitions and alliances) in health care has been to
create integrated delivery systems (vertical integration). There are four motives
underlying such mergers:
1. Improve efficiency and effectiveness by combining available resources
and operations it is possible to exploit cost-reducing synergies and to take
fuller advantage of risk-spreading managed care opportunities.
2. Enhance access by providing a broader range of sophisticated programs
and services and offering services at a greater number of sites, quality of
patient care is improved.
3. Enhance financial position by gaining market share, the sole or one of
the dominant providers in the regions 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.42
Nevertheless, managing organizations that merge to create integrated systems
has been difficult. There are several reasons why integrated health systems
encounter significant obstacles in realizing the proposed benefits. The most frequently cited reasons relate to the difficulty of creating an effective strategic fit,
giving away too much money and power with respect to governance to the local
governing board, inability to achieve operating efficiencies, and experiencing
difficulties in realigning resources.43
As in acquisitions, a major difficulty in a merger is the integration of two
separate organizational cultures. Mergers offer a more difficult challenge than
acquisitions because a totally new organization must be forged. In an acquisition,
234 strategic management of Health Care Organizations
the dominant culture remains and subsumes the other. In a merger, a totally new
organizational culture (the way we do things) must be developed. Typically,
there are significant changes in the organizational structure, governance, senior
and middle management, service mix, product mix, and outside relationships.
Therefore, merging two distinctly different corporate cultures requires a great deal
of communication at all levels in the organization. Medical staff and employees
should engage in a reformulation of the mission, vision, and statement of the
shared values of the new organization. Work groups must be formed to address
how to effectively and efficiently meet the needs of patients. As well as communicating internally, external communications must be given top priority. Even with
such efforts, truly merging the two organizational cultures into one generally
takes years to complete.
Mergers and acquisitions and other forms of combination continue to be important market entry strategies for health care organizations. An environment conducive to large health care combinations, institutional coordination, demands for
efficiency, and the continuum of care (seamless care) has fostered many of these
mergers and acquisitions.
Alliances Alliances are loosely coupled agreements between two or more
organizations to achieve some long-term strategic purpose not possible by the
organizations separately. Alliances include configurations such as federations,
consortiums, networks, and systems.44 Strategic alliances are cooperative contractual agreements that go beyond normal company-to-company dealings but fall
short of merger or full partnership.45 Alliances have been used to create health
networks loosely coupled or organized delivery systems. They are an attempt
to strengthen the competitive position in a marketplace while maintaining the
independence of the organizations involved. With all of the mergers, acquisitions,
and alliances of hospitals, community blood centers are being affected as well.
A new, larger hospital system with a larger footprint wants to know that blood
will be available to meet all its needs. The result is aggressive merger or alliance
activity among blood centers; more than two-thirds of independent blood centers
in the United States are operating in the red in 2017 as is the American Red Cross.
Many are entering mergers or alliances to survive.
Some research suggests that organizations that develop these cooperative
relationships are likely to have similar status in the marketplace and have
complementary resources, competencies, and capabilities.46 Two organizations
may establish an alliance when each one possesses strength in a different stage
of the service category value chain for example, when one organization has
expertise in service delivery and another controls the distribution channel.
As an illustration, it has been found that community hospitals have successfully used alliances to provide specific advantages for patients.47 Further,
organizations may form coalitions to defray costs and share risk when they
undertake high-cost capital or development-intensive initiatives. Sometimes
the resources available from an alliance partner can facilitate an organizations effort to alter its strategic position.48 For instance, research indicates that
biotechnology start-up organizations, in particular, could enhance their initial
performance and strategic position by establishing upstream and downstream
Chapter 6 Identifying Strategic Alternatives 235
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 benefit 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 Vizient (includes the
former VHA, University Health Systems, Childrens Hospital Association, and
Novation), Premier, Intalere, and Health Trust. Note that purchasing alliances are
a different type from those based on an expansion/cooperation strategy.
Although they are not mergers, strategic alliances have many of the same
problems previously unrelated cultures have to learn to cooperate rather than
compete; numerous sessions are required to determine what will be shared
and what is proprietary, and how to balance the two; and efforts must be made
to maintain cooperation over time within such an informal cooperative effort.
On the other hand, strategic alliances offer several opportunities, including
shared learning, access to expertise not currently owned by the organization,
strengthened market position, and direction of competitive efforts toward 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 inflation.50 In some cases, an alliance can lead
to a merger. For example, Breech Medical Center in Lebanon, Missouri moved
its affiliation agreement with St. Johns Health System of Springfield, 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.51 Hospitals form alliances with physicians for several reasons. Alliances serve to contract with the growing number
of HMOs, to pose a countervailing bargaining force for providers in the face of
HMO consolidation, and to accompany hospital downsizing and restructuring
efforts.52 However, strategic alliances between physicians and hospitals should
be anchored in their common purpose improving patient care. The physicians
involved may not agree with the hospital in its management of facilities, staffing,
and so forth. In addition, conflict may emerge as hospitals diversify into areas
that compete more directly with the physicians own clinics, such as ambulatory
care centers, and diagnostic centers. Finally, although the hospital would prefer
to have many qualified physicians admitted to the staff (who could refer more
patients), allied physicians would prefer to limit credentialing of outside 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.53 A joint venture (JV) is a
contractual agreement between two or more organizations to work together and
combine resources to accomplish a designated task or project. A joint venture may
involve a pooling of assets or a combination of the specialized talents or skills of
236 strategic management of Health Care Organizations
each organization. The four most common organizational forms used in health
care joint ventures are:
1. Contractual agreements. Two or more organizations sign a contract agreeing to work together toward a specific objective.
2. Subsidiary corporations. A new corporation is formed (called an equity JV),
usually to operate non-hospital activities.
3. Partnerships. A formal or informal arrangement in which two or more parties engage in activities of mutual benefit.
4. Not-for-profit title-holding corporations. Tax legislation enacted in 1986
allowed not-for-profit organizations to form tax-exempt title-holding corporations (providing significant benefits to health care organizations engaged
in real estate ventures).54
Because of the dynamism in the health care environment, hospitals engage in
joint ventures to lower costs and to improve and expand services. Joint ventures
can be an innovative way to generate revenues, supplement operations, and
remain competitive.55 Through the first half of the 2000s, the most common joint
venture was between hospitals and physicians. Hospital/physician joint ventures
are popular because they allow the hospital to pre-empt physicians as competitors
and, at the same time, stabilize the hospitals referral base. Often joint ventures
with hospitals increase physicians profitability. Physicians enter joint ventures
with hospitals to protect their incomes and autonomy, whereas hospitals are
motivated to form joint ventures as a means of controlling medical care costs and
gaining influence over physician utilization of hospital services. Changes in thirdparty payments have created competition based on price joint ventures enable
hospitals to reduce costs and compete more effectively.56
Although there are benefits to creating joint ventures, they have their own
unique set of challenges. These challenges revolve around strategy, governance,
economic interdependencies, and organization. For example, the parent organizations may hold different strategic interests and maintaining strategic alignment across separate organizations with different goals, market pressures, and
stakeholders can be difficult. In addition, sharing governance can complicate
decision making, particularly with separate reporting systems and methods for
measuring success. Further, problems develop in providing services, staffing, and
other resources. Finally, building a cohesive, high-performing organization with a
unique culture has proven difficult for many joint ventures.57
Development Strategies
A development strategy is a decision to enter a new market using internal resources
through internal development, internal ventures, or reconfiguring the value chain.
Diversification and vertical integration through internal development or internal
venture usually take considerably longer to achieve than through acquisition
(although the costs may be lower). Reconfiguring the value chain finds new ways
to deliver value to customers and changes the business model.
Internal Development Internal development uses existing organizational
resources to create new products/services or enter new markets and may be most
appropriate for products or services that are closely related to existing products/
Chapter 6 Identifying Strategic Alternatives 237
services. Internal development is common for growing organizations, particularly
when they can exploit existing resources (especially financial), competencies, and
capabilities (leveraging existing resources and other assets).
Internal Ventures Internal ventures typically set up separate, relatively independent entities (businesses) within the organization to develop new products/services
or to enter new markets. Internal ventures may be most appropriate for products
or services that are unrelated to the current products or services.58 For instance,
internal ventures may be appropriate for developing vertically integrated systems.
Thus, initial efforts by a hospital to develop home health care may be accomplished
through an internal venture.
The number of health systems setting up their own venture funds has increased
in recent years. Cedars-Sinai Health System set up a fund to help start-ups and
had 500 applications for 11 open spots. Twenty percent of the most active investors over the past five years in the area of digital health have been corporate or
strategic funds. Inova Health System established a $100 million venture fund for
personalized medicine investment. Providence Venture Fund has made seven
internally financed investments since 2014.59
In 2015 venture groups invested $7.5 billion to fund start-ups, about 13 percent
of all venture capital dollars. Of this amount, health care venture funds accounted
for about 20 percent of the venture capital market and included some very familiar names such as Mayo Clinic Ventures, Partners Innovation Fund (Brigham and
Womens Hospital), and Flare Capital Partners (Cleveland Clinic). In total, more
than 40 health care provider systems have started their own venture funds.60
Reconfiguring the Value Chain The value chain represents the fundamental
way organizations create and deliver value to the customer. It represents the
business model. The features of the model define the customer value proposition,
cost/value formula, delivery mechanism, organization, processes, and so on.61
Dominant business models for product categories tend to emerge over time; however, an organization may reconfigure the value chain by changing the activities or
sequence of activities it performs and therefore change how value is delivered
to the customer change the basic business model. Value chain reconfiguration
requires rethinking the ways in which existing organizations serve customers. For
the most part, reconfiguration takes place in the service delivery components of
the value chain (pre-service, service delivery, after-service) and thus is marketing
and operations focused.
In many cases reconfiguring the value chain involves using new technology or
organizations to perform activities in ways that were not possible in the past.62
For example, pharmaceutical companies might create a whole new way to provide value to physicians by using podcasts for physician education. As discussed
in the Essentials for a Strategic Thinker 64, What Are Health Care Platform
Businesses? platform technology offers great potential for reconfiguring the
value chain in health care. Further, reconfigurations with the greatest potential for
the development of a completely new business model in health care appear to be:
New models applying a business model from another industry to health care.
New models that are better tailored than the dominant models to meet customers personal and immediate needs.
238 strategic management of Health Care Organizations
New models that reduce resource costs across partners.
New models that share costly assets where sharing happens by means of
two-sided online marketplaces (demand-side and supply-side) that unlock
value for both sides through platform organizations.
New models employing usage-based pricing.
New models that improve collaboration with partners.63
Market entry and penetration strategies coupled with reconfiguring the value
chain can be powerful combinations for creating new business models and effectively entering the market. For example, when an organization bypasses brickand-mortar outlets and sells its products through a website (penetration strategy
channel of distribution), it is reconfiguring the value chain.64
Essentials for a Strategic Thinker 64
What Are Health Care Platform Businesses?
One of the recent hallmarks of strategy for consumer-facing goods and services has been the
rapid rise in platform businesses with their ability
to dramatically outperform traditional producers.
A platform business brings together supply and
demand by providing a marketplace, or ecosystem, where producers and consumers can more
effectively and efficiently interact. The platform
does not control supply and demand, but does
control the rules of exchange as well as how
products or services are delivered or accessed
(e.g. through a mobile phone). In contrast, traditional pipeline businesses focus on turning raw
materials into products and tend to compete on
factors such as cost and quality. These businesses,
such as WalMart or a traditional hospital system,
implement the classic value-chain model to control resources, optimize internal processes to create strategic advantage, and focus primarily on
the end user as the recipient of the value created.
In a sense, platform businesses have existed
for a long time; for example, commercial malls
bringing together customers and retailers.
Recent advances in information technology
have created the ability to build a much more
efficient and scalable platform. Whether it is
the Apple iPhone and its app store, the sharing
economy in the form of Airbnb or Uber, or the
on demand economy with such platforms as
NetFlix, platform businesses introduce a fundamentally different way of delivering value than
traditional pipeline producers. As a result, they
have the potential to significantly disrupt traditional business. For example, Uber provides
a platform for ride-sharing where producers
(car owners) can find consumers (people wanting rides). Uber controls how the platform is
accessed (e.g. through mobile devices) as well as
the rules of how rides are delivered (e.g. pricing).
The speed with which Uber has changed the
face of global transportation demonstrates the
potential of modern platform businesses.
Health care has many features that make platform businesses an effective and efficient business model; however, it has some unique features
that make the entry of platforms difficult. Factors
complicating the entry of platform businesses in
health care are: (a) consumers of health care are
Chapter 6 Identifying Strategic Alternatives 239
Market Exit Strategies
The reduction of scope strategies of divestiture, liquidation, harvesting, and
retrenchment may be implemented quickly or incrementally over a period of time.
Additionally, these strategies may result in only a partial withdrawal from the
market or a complete exit. Generally divestiture may be achieved fairly rapidly (or
it may take some time if the price is too high or the organization does a poor job
of marketing the unit to be divested) and represents a decision by the organization
to go in a different direction. Similarly, liquidation can happen very quickly as
it involves the sale of assets that have value to others (again, the process may take
longer than expected if the value to others is not as great as the seller expects).
Retrenchment generally is carried out quickly as it is often a cost saving effort in
response to declining revenue or an over extension of organizational resources.
Harvesting, on the other hand, is a decision to slowly leave the market primarily
because the product category remains profitable, but is expected to decline or be
replaced over time.
Divestiture and liquidation are generally decisions to completely leave the
market. Harvesting and retrenchment are generally seen as decisions to partially
leave the market. Reduction of scope strategies are relatively enduring and once
they are implemented it is difficult to reverse the strategy or re-enter a market
once exit is complete. A retrenchment strategy, although a partial market exit,
may be the implementation of a redefinition of the target market(s) reducing the number of market segments served allowing for market development
in more attractive market segments or the narrowing of the product line to
focus on market development for key products or services. Both harvesting and
retrenchment continue operations, at least temporarily, and require an implementation plan.
not the sole purchaser of their care, and b) large
fixed-cost assets such as hospitals are necessary
for consumption of certain services such as MRIs.
Yet, there are many health care services where
platforms can better deliver services.
Companies such as Pack Health, a digital
coaching platform, are using these concepts
to connect individuals diagnosed with chronic
conditions with suppliers of appropriate services for these conditions in a scalable fashion. In
many cases, individuals with chronic conditions
are motivated to be members of the platform
because services are often difficult to obtain
and coordinate and the services are subsidized
by their employer, insurer, or a drug company.
For example, individuals diagnosed with Type 2
diabetes have to change many aspects of their
lives and consume unique goods and services
to manage their disease. These services may
include getting an annual eye and foot exam,
signing up for an exercise program, shopping
for healthy foods, and accessing medications. As
part of platform services, an advisor is assigned
to identify and coordinate appropriate services
for the platform members (patients) considering
their personal limitations and situations. On the
supply side, the platform allows for the inclusion
of a variety of service suppliers that pay to be
a part of the platform and provide discounted
services to platform members.
Source: Mazi Rasulnia, PhD, President, Pack Health.
240 strategic management of Health Care Organizations
Market Entry/Exit Strategy Linkage
The definition, major advantages, and disadvantages of the market entry/
exit strategies are summarized in Exhibit 69. The adaptive and market entry/exit
strategies work in tandem. They are the means for accomplishing the adaptive
strategies. This relationship is demonstrated as organizations struggle with cost
containment and their managed care strategies. Together the adaptive (scope of
the organization) and market entry/exit strategies (means to achieve that scope)
are shaping the health care landscape.
Exhibit 69 Definition, Advantages, and Disadvantages of Market Entry and Exit
Market Entry
Strategy Definition Major Advantages Major Disadvantages
Acquisition Strategy to grow
through the purchase
of an existing
organization, unit of
an organization, or a
Rapid market entry.
Image already established.
Performance known before
New business may be
unfamiliar to parent.
Takes a long time to assimilate
organizations culture.
New management team may
be required.
High initial cost.
Licensing Acquiring or providing
a valued asset
(product, technology,
market, equipment,
etc.) through contract.
Rapid access to proven
Reduced financial exposure.
Access to brand name.
Exclusive territory.
Not a substitute for internal
technical competence.
Not proprietary technology.
Dependent on licensor.
Rules and regulations.
Ongoing expense.
Venture Capital
Financial investment
in an organization
to participate in its
growth or receipt of
venture capital for
start-up or expansion.
Can provide window on new
technology or market.
Lowered risk.
Alone, unlikely to be a major
stimulus of growth.
Extended time to profitability.
Chapter 6 Identifying Strategic Alternatives 241
Market Entry
Strategy Definition Major Advantages Major Disadvantages
Merger Combining two (or
more) organizations
through mutual
agreement to
form a single new
Uses existing resources.
Retains existing markets and
Reduces competition.
Takes a long time to merge
Merger match often difficult
to find.
Big guppy eats the little
Alliance Formation of a formal
Fills in product line gaps.
Creates efficiencies (e.g.
bargaining power).
Reduces competition in weak
Stabilizes referral base.
Shared risk.
Potential for conflict between
Limits potential markets/
Difficult to align resources.
Governance issues.
Joint Venture Combination of the
resources of two or
more organizations
to accomplish a
designated task.
Technological/marketing joint
ventures can exploit small/large
organizational synergies.
Spreads risks.
Potential for conflict
between partners (shared vs.
Objectives of partners may
not be compatible.
Products or services
developed internally
using the organizations
own resources.
Uses (leverages) existing
Organization maintains a high
level of control.
Presents image of developing
(growth) organization.
Time lag to break even.
Unfamiliarity with new
Obtaining significant gains in
market share against strong
competitors may be difficult.
Internal Venture Establishment of an
independent entity
within an organization
to develop products or
Uses existing resources.
May enable organization to
retain a talented entrepreneur.
Isolates development from
organizations bureaucracy.
Mixed record of success.
Organizations internal climate
(culture) often unsuitable.
Reconfigure the
Value Chain
Changing the activities
or sequence of
activities in the value
chain thereby changing
how value is delivered
to the customer.
New approach may not be seen as
a threat by existing competitors.
Captures a special niche of the
May create a low-cost business
Not always possible.
Initially must focus on a niche
rather than the entire market.
Must be first to recognize the
new business model.
242 strategic management of Health Care Organizations
Step 5: Understand Competitive Strategy Alternatives
Competitive strategies are largely independent of the adaptive and market
entry/exit strategies as they concern the basis for competing in a market or service area. As shown in the decision logic in Exhibit 62, for many organizations,
where there is no significant change in scope suggested by the directional strategies, the development of competitive strategies follow and are driven by the
directional strategies. In all cases, managers must decide the strategic posture of
the organization and how the products and services will be positioned vis–vis
those of competitors. Therefore, the results of competitor analysis and internal
analysis play an important role in the selection of an organizations competitive
Strategic posture concerns the organizations fundamental behavior within the
market defending market position, prospecting for new products and markets,
or balancing market defense with careful entry into selected new product areas
and markets. In addition, an organization must consciously position its products
and services within a market through one of the marketwide or market segment
positioning strategies (generic strategies).
Market Exit
Strategy Definition Major Advantages Major Disadvantages
Fast A decision to leave all or
part of the market using
divesture, liquidation, or
The organization can move on
to more viable market/products.
Cash increase.
Buyers may be difficult to
May have to sell at a discount.
Slow A decision to leave the
market using harvesting.
The organization reaps any
remaining profitability from the
product category.
Some resources diverted to a
declining product/ market.
Deterioration of customer service
hastens the exit.
Partial Serve fewer customers;
reduce geographic areas
served, or reduce the
product line.
Reduce costs while remaining in
the product category accruing
some profit.
May allow for market development
in more attractive segments or
Reduces market prestige; may be
a problem if retrenching.
Complete No longer attempting
to satisfy any customers;
geographic areas served
and product lines
Allows management to refocus.
Resources may be used more
effectively for more profitable
No longer a player in a viable
Some disappointed loyal
Exhibit 69 (Continued)
Chapter 6 Identifying Strategic Alternatives 243
Strategic Posture
Organizations may be described by how they behave within their market
segments or industry their strategic posture. Research has shown that there
are at least four typical strategic postures for organizations defenders, 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 may behave
inconsistently; however, unless an organization exists in a protected environment, such as a monopolistic or highly regulated market segment, it may
not be able to continue to behave as a reactor indefinitely.65 Furthermore,
an organizations strategic posture should not be left to chance. Health care
organizations are able to change their strategic postures to match the demands
of their environmental context and improve their performance.66 Therefore,
strategic decision makers should examine the current market behavior, 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 protect its market segment through pricing or differentiation
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 efficiencies
of existing operations. Thus, cost efficiency is central to the defenders success. In
addition, defenders often engage in vertical integration to protect their market,
control patient flow, and create stability. Defenders grow through penetration
strategies and limited product development strategies.
Prospector Strategic Posture Organizations adopting a prospector strategic
posture frequently search for new market opportunities and regularly engage
in experimentation and innovation. A prospectors major capability is that of
finding and exploiting new products and market opportunities. As a result, the
prospectors domain is usually broad and in a continuous state of development.
Prospectors are typically in rapidly changing environments or service categories
such as health care technology and frequently engage not only in diversification
and product and market development expansion strategies but also divestment
and retrenchment strategies. One of the principal competitive advantages of a
prospector strategic posture is that of creating change within the service category/
service area. Many times these changes come about because of disruptive innovations as discussed in Essentials for a Strategic Thinker 65, What Are Disruptive
244 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 65
What Are Disruptive Innovations?
Disruptive innovations change both the way
firms operate and the underlying business
models they use to compete. Most industries have experienced a steady stream of
technological advances and process improvement activities that increase product quality or reduce cost. Such improvements are
sustaining innovations that are necessary
to meet customers ever-rising expectations,
but they are not disruptive to the underlying business model. Disruptive innovations
allow new competitors to enter the marketplace by undercutting incumbent firms
product prices, service delivery modes, or
both. In health care, there have been many
sustained innovations, but relatively few disruptive innovations that have significantly
changed the dominant organizational forms
business models (such as medical groups and
One example of a disruptive innovation
in health care delivery is the introduction
of freestanding ambulatory surgery centers
(ASCs) in the mid-1970s.2 The number and
variety of services delivered by ASCs grew
rapidly through 2005.3 The expansion was
fueled in part by physicians desire to have an
ownership stake in the facilities that delivered
care and be more than just a member of the
medical group. As with most disruptive innovations, ASCs were able to compete on price
but struggled to demonstrate that outcome
quality was comparable to traditional hospitals. Over time, ASCs were able to establish
legitimacy by being a more efficient delivery mode and competing on quality with
traditional hospitals. As often happens after
a disruptive innovation takes hold, incumbent firms modify their business models to
accommodate the new technology or process
to compete. In 2017, most health care systems
have established ASCs. Given the success of
ASCs in improving quality, controlling cost,
and increasing access to care, it begs the
question: Why are there not more disruptive
innovations in the health care sector?
There are three main reasons that the
health care sector is resistant to disruptive
innovations. First and foremost is the highly
regulated nature of the industry. The health
sector requires governmental permission to
introduce new products or processes (see for
example, Essentials for a Strategic Thinker 32:
What Is CON?). The approval process creates a significant barrier to new entrants and
reduces the probability of disruptive innovations. A second factor that impedes innovation is the lack of consumer empowerment.
Most disruptive innovations rely on consumers shopping for better prices on comparable goods. Such is not the case for most
health care services because of the third-party
payer system. Lastly, health care delivery is an
integrated activity with providers referring
patients to one another in a networked fashion. In effect, a new market entrant seeking
to disrupt existing competitors would need
consent from the competitors to gain access
to consumers. Taken together, these factors
impede the disruptive innovations needed to
repair a health sector with unsustainable cost,
quality, and access issues.
Chapter 6 Identifying Strategic Alternatives 245
Analyzer Strategic Posture The analyzer strategic posture is a combination of
the prospector and defender strategic postures. The analyzer tries to balance stability and change through maintaining stable operations typically in core businesses but also searches for new opportunities to engage in market innovation
in other areas. Characteristically they watch competitors and rapidly adopt those
strategic ideas that appear to have the greatest potential. Analyzers tend to use
penetration strategies in their stable core products and markets whereas related
diversification, product development, and market development are used to enter
new promising areas.
Reactor Strategic Posture The defender, prospector, and analyzer postures are all proactive strategies. Those who are reactors may lack a strategy
or plan or may be anticipating significant external changes or strategic moves
by competitors. The reactor strategic posture may be the de facto result of a
lack of strategy, leading to inconsistent and unstable responses to changes in
the general environment, health care system, or the market segment and its
competition. In such cases, reactors perceive opportunities and turbulence;
but are uncertain or not able to adapt effectively (severe limitation of financial
resources may be a factor). Reactors lack consistent approaches to strategy and
structure and make changes primarily in response to pressures in the environment, especially competitive pressures. On the other hand, a wait and see
strategy may sometimes be appropriate, as a short-term strategy, but seldom
works in todays rapidly changing world in the longer term. Reasons that
organizations become reactors include:
Top management may not have clearly articulated the organizations
Management does not fully shape the organizations structure and processes to fit a chosen strategy.
Management tends to maintain the organizations current strategy
structure relationship despite overwhelming changes in environmental
The organization has consciously adopted a follower strategy.
1. J. Hwang and C. M. Christensen, Disruptive
Innovation in Health Care Delivery: A
Framework for Business-Model Innovation,
Health Affairs 27, no. 5 (2008), pp. 13291335.
2. A. D. Hecht, Creating Greater Efficiency
in Ambulatory Surgery, Journal of Clinical
Anesthesia 7, no. 7 (1995), pp. 581584.
3. J. Bian and Michael A. Morrisey, HMO
Penetration, Hospital Competition, and Growth
of Ambulatory Surgery Centers, Health Care
Financing Review 27, no. 4 (2006), p. 111.
Source: Eric W. Ford, PhD, MPH, Professor, School of Public Health,
University of Alabama at Birmingham.
246 strategic management of Health Care Organizations
The organization anticipates a game changing external change or strategic move by competitors and is pausing to gather information prior to
attempting a more effective strategic posture.
If the internal analysis reveals that the organization has been reactive without
a clear strategy or that there is a mismatch between the strategy and 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.68
Understanding the organizations 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/exit, and positioning strategies. The
definition, major advantages, and disadvantages of the strategic posture strategies
are summarized in Exhibit 610.
Exhibit 610 Definition, Advantages, and Disadvantages of Strategic Postures
Posture Definition Major Advantages Major Disadvantages
Defender Focus on a narrow
market with limited
number of products
or services and
aggressively attempt
to keep others out
of this segment
through pricing or
Limited set of products and
Narrow market segment.
Stable environment.
Difficult for competitors to
enter this segment.
Reliance on the success of narrow
product line.
Must have long/sustaining product
life cycles.
Market segment must be stable
slow change.
May be unable to respond to major
market/industry shifts.
Difficult to enter new markets or
Prospector Continuously seek out
new products and new
Always involved in cuttingedge developments.
Organization shifts with
changing environment.
Allows for a rapid response
to a changing environment.
Organization is in a constant state of
New products and markets always
being developed.
Multiple technologies being
employed, seldom able to achieve
Tend to have lower profits because of
continuous change.
Tend to overextend resources.
Tend to underutilize financial, human,
and physical resources.
Chapter 6 Identifying Strategic Alternatives 247
Positioning Strategies: Marketwide or Focus
Michael Porter, a well-known strategic management writer, proposes that an
organization may serve the entire market using marketwide strategies or serve a
particular segment of the market using focus strategies. Porter called these generic
strategies because they were general strategies that any organization could use to
position itself in the marketplace.69 For both marketwide and market segment
focus there are two fundamental positioning strategies cost leadership and
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 as children or the
aged. As shown in Exhibit 611, marketwide positioning strategies can be based
on differentiation or cost leadership. Thus, the community hospital may try to
Posture Definition Major Advantages Major Disadvantages
Analyzer Balance defense in
some markets with
selectively entering a
limited number of new
markets or products.
Allows for the maintenance
of a core of stable traditional
products and services.
Allows for high-risk products
and services to be borne by
Lower investment in
research and development.
Difficult strategy to pursue.
Must respond quickly to follow lead
of key prospectors while maintaining
efficiency in core products/services.
Complex structure (matrix).
Management of both stable and
dynamic products and markets.
Communication is often difficult.
Lack of consistent approaches to
strategy and structure; make changes
primarily in response to environmental pressures.
Reactor React to the strategies
of competitors; expects
stability and does not
like or want change.
Little strategic planning
required (monopolistic or highly regulated
A follower or wait and
see strategy allows for
additional information
on changing external
Comfortable with things as
they are (until they are not).
Inconsistency in response to
environmental change.
Instability in organization.
Organization becomes both
ineffective and inefficient.
No effective guide for decision
Follower strategy may be ineffective,
especially with multiple products in
later stages of the PLC.
248 strategic management of Health Care Organizations
differentiate itself from other hospitals by emphasizing quality or convenience or
may compete as a low-cost provider.
Market segment strategies are directed toward the particular needs of a welldefined market segment, such as pediatric oncology or womens health, and often
are called focus strategies. Thus, a focus strategy identifies a specific, well-defined
niche in the total market that the organization will concentrate on or pursue.
Because of its attributes, the product or service, or the organization itself, may
appeal to a particular customer group (niche) within the market. Similar to 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 system, focus
strategies are quite common. Just as physicians have specialized, the institutions
within the field have tended to focus on specialized segments. Examples of focus
strategies are rehabilitation hospitals, psychiatric hospitals, ambulatory care centers, Alzheimers centers, and so on. These specialty organizations may be further
positioned based on cost leadership or differentiation. Each of the generic strategies
results from an organization making consistent choices for product/services, markets
(service areas), and distinctive competencies choices that reinforce each other.
Cost Leadership Cost leadership is a positioning strategy designed to gain an
advantage over competitors by producing a product or providing a service at a
lower cost. The product or service is often highly standardized to keep costs low.
Cost leadership allows for more flexibility in pricing and relatively greater profit
Cost leadership is based on economies of scale in operations, marketing,
administration, and the use of the latest technology. Cost leadership may be used
effectively as the generic strategy for any of the adaptive strategies and seems
EXHIBIT 611 Porters Matrix
Segment Only
Uniqueness Perceived
by the Customer
Differentiation Overall Cost Leadership
Low-Cost Position
Strategic Advantage
Strategic Target
Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors.
Copyright 1980 by the Free Press. All rights reserved. Reprinted with permission of the Free Press, a division of Simon & Schuster Adult Publishing Group.
Chapter 6 Identifying Strategic Alternatives 249
particularly applicable to the primary providers segment of the health care system. As Porter suggests:
Cost leadership requires aggressive construction of efficient-scale facilities,
vigorous pursuit of cost reduction from experience, tight cost and overhead
control, avoidance of marginal customer accounts, and cost minimization in
areas such as R&D, service, sales force, advertising, and so on.71
To use cost leadership effectively, an organization must be able to develop a significant cost advantage and have a reasonably large market share; however, low
cost is only an advantage if the organization in fact has the lowest cost and competitors know they cannot match it. Sustaining lowest cost is extremely difficult
to achieve without extraordinary scale, market share advantages, or unique factor
cost benefits.72 With an increase in value-based reimbursement, more availability
of health outcomes information, consumers bearing a higher proportion of health
care costs, and high deductible health plans opting for lower-cost narrowed networks that limit access to more expensive providers, low-cost/high-value strategies will continue to be viable.73 As a result, low-cost, low-price strategies within
the health care system are no longer perceived as necessarily meaning low quality.
A health care system segment where cost leadership is being used successfully
is in the area of long-term care. Long-term care facilities are a thin-margin business in which profit margins range from approximately 1.2 percent to 1.7 percent.
However, long-term care facilities that have been able to drive costs down while
maintaining quality have enjoyed higher margins. In addition, many of these
facilities have been upgraded to be more efficient and have instituted tight cost
controls. Advertising has been used to keep occupancy above 95 percent, which is
often required in the industry to be profitable.
Differentiation Differentiation is a strategy to make the product/service not
only different but also readily distinguishable from competitors products/
services. Thus, consumers see the service as unique among a group of similar
competing services. Differentiation is of no benefit unless that difference is both
valuable to buyers and capable of being sustained against competitors.74
The product or service may be differentiated by emphasizing quality, a high
level of service, ease of access, convenience, reputation, and so on. A number
of ways to differentiate a product or service exist, however, the attributes
that are to be viewed as different or unique must be valued by the consumer.
Therefore, organizations using differentiation strategies rely on brand loyalty
(reputation or image), distinctive products or services, and the lack of good
The most common forms of differentiation in the health care system have
been based on quality and image. Many acute care hospitals emphasize and promote quality care to differentiate themselves from other hospitals in their service
area. Note, however, that consumers expect to receive high-quality care at every
hospital, making quality a difficult differentiating factor. A high-tech image
is another basis for differentiation among health care organizations. Affiliation
with a medical school which performs the most sophisticated procedures or
uses the latest (often expensive) technology may promote the image of the
250 strategic management of Health Care Organizations
Step 6: Understand Combination Strategies
Combination strategies are a number of different strategies used simultaneously
to achieve goals/objectives for different products/services or service areas.
Combination strategies are often used, especially in larger complex organizations,
because no single strategy alone may be sufficient. In highly competitive markets,
profitable growth comes when a company pushes out the boundaries of its
core business into adjacent space.76 Several ways have been identified to grow
into an adjacent space expand along the external value chain (penetration),
grow new products and services (product development), enter new geographies
Exhibit 612 Definition, Advantages, and Disadvantages of Positioning Strategies
Strategy Definition Major Advantages Major Disadvantages
Cost Leadership Low-cost/price
strategy directed
toward entire market.
Provides clear competitive
Provides clear market position.
Provides opportunities to
spend more than competition.
Must obtain large volume.
Product/service must be
Product/service may be viewed
as low quality.
Relatively easy to copy in the
short run.
Differentiation Development of
unique product/
service features
directed toward entire
Product/service viewed as
Often viewed as high quality.
Greater control over pricing.
Difficult to copy.
Often difficult to adequately
differentiate product or service.
Product/service may be higher
Focus Cost
strategy directed
toward a particular
market segment.
Appeals to market segment
seeking low price.
May develop good relations
with market.
Low quality may be associated
with low price.
Expansion of market segment
may be difficult.
Development of
unique product/
service features
directed toward a
particular market
Product/service may be customized to the special needs of
the segment.
May develop close relationship
with market segment.
Market segment may remain
Price will probably be high.
best possible care. More recently, health care organizations are differentiating through providing consumers with more choices when selecting health
insurance products, choosing clinicians, and facilities where they receive care.75
Exhibit 612 presents the definition, advantages, and disadvantages of each of
the positioning strategies.
Chapter 6 Identifying Strategic Alternatives 251
(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 for hospitalbased 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).
In addition to an organization using several different strategies at once, a strategy may have several sequential phases. It may be necessary to string together
several strategic alternatives as phases to implement a broader strategic shift. In
a two-phase strategy, for example, an organization may employ a retrenchment
strategy in phase one and an enhancement strategy in phase two. As illustrated in
Exhibit 613, the strategic managers 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 modified or revised to meet the needs of the unique and changing situation.
Strategic management is a continuous process of assessment and decision making.
The decision logic for the formulation of the strategic plan was illustrated
in Exhibit 62. At this point, it would be useful to return to Exhibits 61 to
64 to review the complete strategy formulation process. After all the strategic
EXHIBIT 613 Vision of Combination Strategies
Boundary Set by
External Environment
Boundary Set by
V Development ertical Integration (forward) Market
Market Development Retrenchment (Product)
Today Year 1 5 Year 2 Year 3 Year 4 Year
External Environment
252 strategic management of Health Care Organizations
alternatives have been considered, creation of a strategy map showing the desired
directional, adaptive, market entry/exit, and competitive strategies together will
help to ensure their consistency and fit. However, it is not enough to know the
strategic logic and range of strategic alternatives. The strategic alternative (or set
of alternatives) should be selected that best meets the requirements of the external
environment, strengths and weaknesses of the organization, and the directional
strategies. Chapter 7 will discuss methods for evaluating the strategic alternatives
presented in this chapter and may lead to alterations or further refinements in
strategy choice.
Chapter Summary
To understand the decisions that have to be made in strategy formulation, a strategic thinking map depicting a hierarchy of strategic alternatives is useful. There
are several types of strategies, and several strategic alternatives within each type
are available to health care organizations. In addition, there is a general sequential decision logic in the strategy formulation process. First, directional strategies
must be articulated through the organizations mission, vision, values, and goals.
Second, adaptive strategies are identified, evaluated, and selected. The adaptive
strategies are central to strategy formulation and delineate how the organization
will expand, reduce, or maintain the scope of operations. Expansion strategies
include diversification, vertical integration, market development, product development, and penetration. Reduction strategies include divestiture, liquidation,
harvesting, and retrenchment. Finally, maintenance of scope strategies include
enhancement strategies and maintaining the status quo.
The third type of strategic decision concerns the market entry/exit strategies.
Expansion and maintenance of scope strategies call for entering or gaining access
to the desired market. Market entry strategies include acquisitions and mergers,
internal development, internal ventures, reconfiguring the value chain, alliances
and joint ventures, licensing, and venture capital investments. Any of the market
entry strategies may be used to carry out an expansion or maintenance of scope
adaptive strategy. Market exit may be quick or incremental or partial or complete
depending upon the strategy and goals of the organization.
The fourth category of strategy includes the competitive strategies which are
market-based strategies. Competitive strategies specify the strategic posture of
the organization and position the products and services vis–vis competitors. The
organizations strategic posture should be carefully considered by its leadership.
Strategic posture specifies the organization/market relationship and provides
decision and culture guidelines for management. Strategic postures that may be
adopted by an organization include defender, analyzer, prospector, or reactor
(although the latter usually indicates the lack of a strategy). In addition, positioning strategies (often called generic strategies) include cost leadership and
differentiation, both of which can be applied as marketwide strategies or focus
strategies (a market segment strategy). Each of the generic strategies places different demands on the organization and requires unique resources, competencies,
and capabilities.
Chapter 6 Identifying Strategic Alternatives 253
The strategy formulation decision logic provides a sequence for making the
strategic decisions. However, the selected strategic alternatives must be viewed
together to ensure their fit and consistency. In addition, it is unlikely that a single
strategy will suffice for an organization. Several strategic alternatives may have
to be adopted and used in combination. For instance, one service category may
require market development whereas a different service category may require
harvesting. One division may be a defender, positioned as a cost leader and
another may be a prospector, pursuing differentiation. Furthermore, several
strategic alternatives may be seen as phases or sequences in a broader strategic
shift. Chapter 7 presents several frameworks to help managers think about and
evaluate strategic alternatives that are most appropriate given the organizations
external environment, competitive advantages and disadvantages, and directional strategies.
Practical Lessons for Health Care Strategic Thinkers
1. There is a logical order to strategic decisions directional, adaptive, market
entry/exit, competitive, and implementation. These decisions range from
very broad to very narrow. Planning logic (an analytical approach) suggests
that making the broadest (directional strategies) first and working toward
the most specific (implementation strategies) is best; however, strategy is
rarely developed de novo for an organization. In reality strategic managers may begin by focusing on an alternative anywhere along the decision
continuum and work for decision consistency both backward and forward
along the continuum (an emergent approach). In the end, alternative decisions for each category must be made; strategic thinking helps one see the
big picture and the implications of the series of decisions.
2. Unanticipated strategic opportunities and threats will no doubt present
themselves. The hierarchy of strategic decisions can help determine the
implications of these issues. Knowing the alternatives, the underlying
rationale, and the implications provides insight into the next strategic
3. Organizations rarely have just one strategy; rather they have multiple strategies in various stages of implementation.
The Language of Strategic Management: Key Terms and Concepts
Adaptive Strategy
Analyzer Strategic Posture
Backward Vertical Integration
Business Model
Combination Strategy
Competitive Strategy
Concentric Diversification
Conglomerate Diversification
Cooperation Strategy
Cost Leadership
Defender Strategic Posture
254 strategic management of Health Care Organizations
Expansion of Scope Strategy
Focused Factory
Forward Vertical Integration
Generic Strategy
Horizontal Integration
Implementation Strategy
Internal Development
Internal Venture
Joint Venture
Maintenance of Scope Strategy
Market Development
Market Entry/Exit Strategy
Marketwide Strategy
Positioning Strategy
Product Development
Prospector Strategic Posture
Purchase Strategy
Reactor Strategic Posture
Reconfigure the Value Chain
Reduction of Scope Strategy
Related Diversification
Status Quo
Strategic Posture
Strategy Formulation
Unrelated Diversification
Venture Capital Investment
Vertical Integration
Questions for Class Discussion
1. What four types of strategies make up the strategy formulation process? Describe the
role each plays in developing a strategic plan.
2. Why are the directional strategies both a part of situational analysis and a part of 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. Explain how an understanding of an organizations strategic alternatives provides
structure for strategic thinking.
6. What is the difference between related diversification and product development?
Provide examples of each.
7. What is a market-driven or focused factory strategy? Identify some organizations that
have employed this type of market development strategy.
8. Many health care organizations have engaged in vertical and horizontal integration.
What is the rationale for these strategies?
9. Describe vertical integration in terms of patient flow.
10. Explain the difference between an enhancement strategy and a status quo strategy.
11. How is market development different from product development? Penetration?
Provide examples of each.
Chapter 6 Identifying Strategic Alternatives 255
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. G. Tyge Payne, John D. Blair, and Myron D. Fottler, The
Role of Paradox in Integrated Strategy and Structure
Configurations: Exploring Integrated Delivery in Health
Care, in John D. Blair, Myron D. Fottler, and Grant T.
Savage (eds), Advances in Health Care Management (New
York: Elsevier Science, 2000), pp. 109141.
4. Roger Martin, How Successful Leaders Think, Harvard
Business Review 85, no. 6 (June 2007), pp. 6067.
5. Bruce C. Vladeck, Viewpoint: Paradigm Lost: Provider
Concentration and the Failure of Market Theory, Health
Affairs 33, no. 6 (2014), pp. 10831087.
6. Liyohiro Oki, What Is the Ideal Diversification Strategy?
Reconsideration of Diversification Strategy Research of
Rumelt, Annals of Business and Administrative Science 12,
no. 4 (2013), pp. 199212.
7. Jay Greene, Diversification, Take Two, Modern
Healthcare 23, no. 28 (1993), pp. 2832. See also ShaoChi Chang and Chi-Feng Wang, The Effect of Product
Diversification Strategies on the Relationship between
International Diversification and Firm Performance,
Journal of World Business 42, no. 1 (2007), pp. 6179.
8. Leslie E. Palich, Laura B. Cardinal, and C. Chet Miller,
Curvilinearity in the DiversificationPerformance
Linkage: An Examination of over Three Decades
of Research, Strategic Management Journal 21, no. 2
(February 2000), pp. 155174.
9. Todd Creasy and Jerry Kinard, Health Care Mergers
and Acquisitions: Implications of Robbers Cave
Realistic Conflict Theory and Prisoners Dilemma Game
Theory, Health Care Manager 32, no. 1 (2013), pp. 5862.
10. Palich, Cardinal, and Miller, Curvilinearity, and
Michael S. Gary, Implementation Strategy and
Performance Outcomes in Related Diversification,
Strategic Management Journal 262 (2005), pp. 643664.
11. Myron D. Fottler, Grant T. Savage, and John D.
Blair, The Future of Integrated Delivery Systems:
A Consumer Perspective, in John D. Blair, Myron D.
Fottler, and Grant T. Savage (eds), Advances in Health
Care Management (New York: Elsevier Science, 2000),
pp. 1532.
12. Ibid.
13. Lawrence C. Baker, Vertical Integration: Hospital
Ownership of Physician Practices Is Associated with
Higher Prices and Spending, Health Affairs 33, no. 6
(2014), pp. 756763.
14. Miriam J. Laugeson and George France, Integration:
The Firm and the Health Care Sector, Health Economics,
Policy and Law 9, no. 3 (2014), pp. 295312.
15. Patrick D. Shay, Stephen S. Mick, and Craig Garner,
Post-Acute Care and Vertical Integration after the
Patient Protection and Affordable Care Act, Journal of
Healthcare Management 58, no. 1 (2013), pp. 2728.
16. Hospital Statistics, 2015 Edition (American Hospital
Association, Chicago, IL, 2015).
17. Gloria J. Bazzoli, Benjamin Chan, Stephen M. Shortell,
and Thomas DAunno, The Financial Performance of
Hospitals Belonging to Health Networks and Systems,
Inquiry 37, no. 3 (2000), pp. 234252.
18. VHA, Inc. and Deloitte & Touche LLP, Provider 2020:
Strategies for Differentiation in an Uncertain Environment
(Irving, TX and Detroit, MI: VHA, Inc. and Deloitte &
12. Compare and contrast a divestiture strategy with a liquidation strategy.
13. Which of the market entry strategies provides for the quickest entry into the market?
The slowest?
14. What is strategic posture? How does a decision concerning the strategic posture help
create decision guidelines for management and affect the organizations culture?
15. Explain Porters generic strategies. How do they position the organizations 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?
256 strategic management of Health Care Organizations
Touche, LLP, 2012), pp. 19. See also Fottler, Savage,
and Blair, The Future of Integrated Delivery Systems,
p. 18.
19. Carey Thaldorf and Aaron Liberman, Integration of
Health Care Organizations: Using the Power Strategies
of Horizontal and Vertical Integration in Public and
Private Health Systems, Health Care Manager 26, no. 2
(2007), pp. 116127.
20. Stephen S. Mick and Douglas A. Conrad, The Decision
to Integrate Vertically in Health Care Organizations,
Hospital & Health Services Administration 33, no. 3 (Fall
1988), p. 352. See also Frank T. Rothaermel, Michael A,
Hitt, and Lloyd A. Jobe, Balancing Vertical Integration
and Strategic Outsourcing: Effects on Product Portfolio,
Product Success, and Firm Performance, Strategic
Management Journal 27, no. 4 (2006), pp. 10331056.
21. Leemore S. Dafny and Thomas H. Lee, Health Care
Needs Real Competition, Harvard Business Review 94,
no. 12 (2016), p. 78.
22. Regina E. Herzlinger, Market-Driven Health Care: Who
Wins, Who Loses in the Transformation of Americas
Largest Service Industry (Reading, MA: Addison-Wesley
Publishing Company, 1997), p. xxi.
23. Do Specialty Hospitals Promote Price Competition?
Medical Benefits 23, no. 3 (2006), pp. 34.
24. Banerjee and Sampada Kumar Dash, Effectiveness of
E-Detailing As An Innovative Pharmaceutical Marketing
Tool in Emerging Economies: Views of Health Care
Professionals in India, Journal of Medical Marketing:
Device, Diagnostic, and Pharmaceutical Marketing 11, no. 3
(2011), pp. 204214.
25. Caterina Moschieri and Johanna Mair, Research
on Corporate Divestitures: A Synthesis, Journal
of Management and Organization 14, no. 4 (2008),
pp. 399422.
26. Why CHS Cashed Out of Home Health, Nashville
Business Journal (October 21, 2016), p. 8 and Struggling
CHS Sells System, Nashville Business Journal (November
25, 2016), p. 6.
27. Matthias Brauer and Markus Schimmer, Performance
Effects of Corporate Divestiture Programs, Journal of
Strategy Management 3, no. 2 (2010), pp. 84109.
28. Donald N. Sull, Strategy as Active Waiting, Harvard
Business Review 83, no. 9 (2005) p. 129; Don Moyer,
Active Waiting, Harvard Business Review 85, no. 7/8
(2007), p. 196.
29. Larry Selden and Geoffrey Colvin, M&A Neednt Be a
Losers Game, Harvard Business Review 81, no. 6 (2003),
p. 75.
30. Dennis Carey (Moderator), A CEO Roundtable on
Making Mergers Succeed, Harvard Business Review 78,
no. 3 (MayJune 2000), pp. 145154.
31. Bazzoli et al., The Financial Performance of Hospitals
Belonging to Health Networks and Systems,
pp. 234252.
32. California Health Care Foundation,
California Facts and Figures, 2012.
33. Jeffrey F. Allen, Franchise Issues Exclusivity of
Territory, Inquiry 39, no. 1 (2000), pp. 811.
34. Ibid.
35. Edward B. Roberts and Charles A. Berry, Entering
New Businesses: Selecting Strategies for Success, Sloan
Management Review 25 (Spring 1985), p. 7.
36. and www.medcitynews.
38. Venture Capital Dispatch: The Daily Startup: Health
Care Venture Investment Sets Records in 2015, Wall
Street Journal (January 25, 2016), p. 1.
39. Sharon Roggy and Ron Gority, Bridging the Visions of
Competing Catholic Health Care Systems, Health Care
Strategic Management 11, no. 7 (1993), pp. 1619.
40. Dafny and Lee, Health Care Needs Real Competition,
pp. 7687. Data quoted from American Hospital
Association and Irving Levin Associates.
41. Danielle Fugazy, Medical Devices Drive Health
Care M&A, Mergers and Acquisitions 48, no. 6 (2013),
pp. 2632.
42. Thomas P. Weil, Management of Integrated Delivery
Systems in the Next Decade, Health Care Management
Review 25, no. 3 (Summer 2000), pp. 923.
43. Ibid.
44. Howard S. Zuckerman and Arnold D. Kaluzny,
Strategic Alliances in Health Care: The Challenges of
Cooperation, Frontiers of Health Services Management 7,
no. 3 (1991), p. 4.
45. Michael E. Porter, The Competitive Advantage of Nations
(New York: Free Press, 1990), p. 65.
46. Seungwha (Andy) Chung, Harbir Singh, and
Kyungmook Lee, Complementarity, Status Similarity,
and Social Capital as Drivers of Alliance Formation,
Strategic Management Journal 21, no. 1 (January 2000),
pp. 122.
47. Mary Helen McSweeney-Feld, Suzanne Discenza, and
George DeFeis, Strategic Alliances and Customer
Impact: A Case Study of Community Hospitals, Journal
of Business and Economics Research 8, no. 9 (2010), pp. 1321.
48. Toby E. Stuart, Interorganizational Alliances and the
Performance of Firms: A Study of Growth and Innovation
Rates in a High-Technology Industry, Strategic
Management Journal 21, no. 8 (August 2000), pp. 791811.
49. Joel A. C. Baum, Tony Calabrese, and Brian S. Silverman,
Dont Go It Alone: Network Composition and Startups
Performance in Canadian Biotechnology, Strategic
Management Journal 21, no. 3 (March 2000), pp. 276294.
50. Leonard H. Friedman and James B. Goes, The
Timing of Medical Technology Acquisition: Strategic
Decision Making in Turbulent Environments, Journal
of Healthcare Management 45, no. 5 (SeptemberOctober
2000), pp. 317330.
51. Sandra Pelfrey and Barbara A. Theisen, Joint Ventures
in Health Care, Journal of Nursing Administration 19,
no. 4 (April 1989), p. 39.
Chapter 6 Identifying Strategic Alternatives 257
52. Lawton R. Burns, Gloria J. Bazzoli, Linda Dynan, and
Douglas R. Wholey, Impact of HMO Market Structure
on 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.
53. Roberts and Berry, Entering New Businesses, p. 6.
54. Pelfrey and Theisen, Joint Ventures in Health Care,
pp. 3941.
55. Ibid., p. 42.
56. Robert Pitts and David Lei, Strategic Management:
Building and Sustaining Competitive Advantage, 3rd edn
(Mason, OH: Thomson Southwestern, 2003), p. 346.
57. James Bamford, David Ernst, and David G. Fubini,
Launching a World-Class Joint Venture, Harvard
Business Review 82, no. 2 (2004), pp. 90100.
58. Marshall W. Van Alstyne, Geoffrey G. Parker, and
Sangeet Paul Choudary, Pipelines, Platforms, and the
New Rules of Strategy, Harvard Business Review 94, no.
4 (2016), p. 56.
59. Examples adapted from Beth Kutscher, Hospitals
Discover their Inner Venture Capitalist, Modern
Healthcare (April 9, 2016) at www.modernhealthcare.
60. Mary Jo Potter and Rick Wesslund, Provider Venture
Capital Funds Investing in Innovation, Healthcare
Financial Management 70, no. 5 (2016), pp. 5059. Data
reported in this article obtained from Thomson Reuters
published by PwC.
61. Van Alstyne et al., Pipelines, Platforms, and the New
Rules of Strategy, p. 56.
62. David J. Bryce and Jeffrey H. Dyer, Strategies to Crack
Well-guarded Markets, Harvard Business Review 85,
no. 5 (May 2007), p. 91.
63. Van Alstyne et al., Pipelines, Platforms, and the New
Rules of Strategy, p. 56.
64. Bryce and Dyer, Strategies to Crack Well-guarded
Markets, pp. 8788.
65. Raymond E. Miles, Charles C. Snow, Alan D. Meyer,
and Henry J. Coleman Jr., Organizational Strategy,
Structure, and Process, Academy of Management Review
3, no. 3 (1978), pp. 546562.
66. Monique Forte, James J. Hoffman, Bruce T. Lamont,
and Erich N. Brockmann, Organizational Form and
Environment: An Analysis of Between-Form and
Within-Form Responses to Environmental Change,
Strategic Management Journal 21, no. 7 (July 2000),
pp. 753773.
67. Miles et al., Organizational Strategy, Structure, and
Process, pp. 546562.
68. Forte et al., Organizational Form and Environment,
pp. 753773.
69. For a review of research on Porters 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.
70. Michael E. Porter, Competitive Strategy (New York: Free
Press, 1980), p. 35.
71. Ibid.
72. George Yip and Gerry Johnson, Transforming Strategy,
Business Strategy Review 18, no. 1 (Spring 2007), p. 12.
73. Dafny and Lee, Health Care Needs Real Competition,
pp. 7687.
74. Yip and Johnson, Transforming Strategy, p. 13.
75. Dafny and Lee, Health Care Needs Real Competition,
pp. 8283.
76. Chris Zook and James Allen, Growth Outside the
Core, Harvard Business Review 81, no. 12 (2003),
pp. 6673.

Chapter 7
Evaluation of Alternatives and
Strategic Choice
Why Evaluation of Alternatives and Strategic Choice
Are Important
The quote by Alvin Toffler is particularly relevant to those making strategic decisions. Quantitative as well as qualitative data help inform strategic decisions; however, the most important decisions made in organizations, the strategic choices, are
fundamentally judgments informed opinions about what the data actually means.
Toffler further suggests that although managers may collect and analyze all the
data they can to support the decision-making process, they still have to question
underlying assumptions, see the larger context, and use their best judgment. For
instance, one set of statistical data can often be used to make a case for either side of
an issue. Similarly, there really are no facts, just interpretations. The same set of facts
You can use all the quantitative data you can get but you still have to distrust it
and use your own intelligence and judgment.
Alvin Toffler, American author and futurist
260 strategic management of Health Care Organizations
may mean very different things depending on the interpretation interpretation that
is always colored by beliefs, values, and biases. Finally, by the time hard-data-driven
information reaches the strategic decision maker, it is likely a day late and has been
organized, summarized, sterilized, or otherwise manipulated by someone.
Many times a decision has to be made by the strategist despite a lack of data
indicating that one alternative is clearly superior to another alternative. In
these commonly occurring cases, no substitute exists that is better than using
ones intelligence, experience, and judgment. What will help strategic managers make improved judgments are innovative ways to organize the data so
that it better reveals its implications and, thus, better informs judgment and
opinion. Data organization may be accomplished by arranging information
into tables and strategic thinking maps. These constructs aid strategic managers by enabling them to see relationships, discern trends, derive meaning
from conflicting data, brainstorm alternatives, and so on. It is not so much the
data itself that guides decisions, rather the organization and presentation of
the data informs judgment.
Use concepts in this chapter to organize data and make judgments for better
strategic choices!
Strategic Management Competency
After completing this chapter you will be able to develop a comprehensive strategy for a health care organization.
A Process for the Evaluation of the Alternatives
Fundamental to strategic management is the need to change strategies over time.1
There are several analytical frameworks or maps that may be used to guide strategic thinking concerning the appropriate strategic alternatives for an organization.
Learning Objectives
After completing the chapter you will be able to:
1. Explain the rationale underlying the strategic thinking maps used to evaluate strategic alternatives.
2. Discuss the methods for the evaluation of adaptive strategic alternatives for a health
care organization.
3. Discuss the external conditions and internal resources, competencies, and capabilities most suited for the market entry/exit strategic alternatives.
4. Discuss the external conditions and internal resources, competencies, and capabilities appropriate for the strategic posture and generic positioning alternatives.
5. Articulate the role of the service delivery and support strategies.
Chapter 7Evaluation of Alternatives and Strategic Choice 261
These strategic thinking maps incorporate the results of external and internal
analyses, as well as the directional strategies. Contemplative strategic thinking to
understand the internal requirements and external conditions of strategic alternatives is essential to assure a coherent and integrated strategy. Exhibit 71 provides
an organized five-step process for using the analytical strategic thinking maps to
develop a complete strategy for a health care organization.
EXHIBIT 71 Process for Strategy Formulation
Step 1 Link Strategy with Situational Analysis
Step 2 Evaluate and Select Adaptive Strategies
Step 3 Evaluate and Select Market Entry/Exit Strategies
Step 4 Evaluate and Select Competitive Strategies
Step 5 Synthesize and Identify Implications of Strategy
Choices Strategy Map
Although the evaluation of strategic thinking maps introduced in the process
for strategy formulation fine-tunes the managers 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 analytical strategic thinking maps cannot
be used to obtain answers, but they enable strategists to gain perspective and
insight. Often no one right answer emerges. As management philosopher and
author Peter Drucker has pointed out, It is a choice between alternatives. It is
rarely a choice between right and wrong. It is at best a choice between almost
right and probably wrong but much more often a choice between two courses
of action neither of which is probably more nearly right than the other.2 Strategic
thinking maps help to structure the thought processes of decision makers. It
is important that managers think strategically and, almost as important, have
262 strategic management of Health Care Organizations
some imagination and employ sound judgment. To have the proper perspective,
strategic managers must be involved with customers, vendors, and employees in
the organization, talking to people to gain a real feel for the culture, competitive
advantage, and organizational opportunities and threats.
Step 1: Link Strategy with Situational Analysis
Situational analysis external, service area competitor, and internal analyses, as
well as the development of the directional strategies provides a critical foundation for the development of strategy. Conclusions of these analyses are critical inputs to the analysis processes and must drive the strategy alternatives
decisions. In fact, a final test of the strategic choices, as demonstrated by the
checklist in Exhibit 72, is that the strategies selected by an organization address
external issues, draw on competitive advantages or fix 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 its strategic goals. This checklist procedure is a significant part
of the strategic thinking process and helps to assure consistency of analysis and
action. Each selected strategy should be tested against these questions. Strategies
that do not have a yes in each column should be subject to additional scrutiny
and justification.
Exhibit 72 Checklist for Linking Strategic Alternatives with Situational
an External
Draws on a
or Fixes a
Fits with
Moves the
Toward the
One or More
Strategy 1 Yes Yes Yes Yes Yes
Strategy 2 Yes Yes Yes Yes Yes
Strategy 3 Yes Yes Yes Yes Yes
Step 2: Evaluate and Select Adaptive Strategies
As discussed throughout Chapter 6, once the directional strategies have been
developed, consideration is given to the adaptive strategies. The adaptive strategies are central to strategy formulation and are the broadest interpretation of the
directional strategies. This level of strategic decision making specifies whether the
organization wants to grow (expansion of scope), become smaller (reduction of
scope), or remain about the same (maintenance of scope). Once the decision has
been made to grow, reduce, or maintain scope, the methods to accomplish expansion, reduction, or maintenance of scope (diversification, divestiture, enhancement, and so on) must be formulated.
Chapter 7Evaluation of Alternatives and Strategic Choice 263
Re-evaluation of the adaptive strategies is an ongoing activity as new external
forces emerge and provide fresh opportunities or threaten the viability of the
current strategy. For example, Academic Health Centers (AHCs), although able
to maintain their unique research focus for decades, have increasingly felt the
pressures of change. AHCs, accustomed to having the most difficult cases referred
to them for treatment, have not been a major part of managed care but rather
dealt with these high-cost patients to further their unique mission. AHCs are
preparing to deal with an array of complicated issues as they look to the future.
Recently the Association of Academic Health Centers (AAHC) identified 10 disrupters its members must deal with in the future. These are: changing market
forces, consumer empowerment, disease patterns, entrepreneurism, globalization,
politics and policy, population demographics, science, societal needs and values,
and technology.3
Several constructs help strategic managers to think about adaptive strategic
decisions. As expressed previously, these constructs help to show relationships
of the organization to its markets and competitors; they do not make the decision. However, some methods are available to evaluate the adaptive strategies
SWOT Analysis Strengths, Weaknesses, Opportunities, and Threats.
External/Internal Strategy Matrix.
Product Life Cycle (PLC) Analysis.
Boston Consulting Group (BCG) Portfolio Analysis.
Extended Portfolio Matrix Analysis.
Strategic Position and ACtion Evaluation (SPACE).
Program Evaluation.
SWOT: Strengths, Weaknesses, Opportunities, Threats Analysis SWOT
(strengths, weaknesses, opportunities, and threats) analysis has been popular as
a way to display pertinent external issues and internal strengths and weaknesses.
SWOT analysis is a systematic investigation to consider an organizations internal
(strengths and weaknesses) and external (opportunities and threats) issues and
display them in a two-by-two matrix. SWOT is one of the most widely used strategic planning tools. One study noted that SWOT is a part of virtually every case
analysis used in the teaching of strategic management and business policy.4 A
SWOT analysis is typically displayed as illustrated in Exhibit 73 and developed
in brainstorming sessions of participants familiar with the organization and its
situation. SWOT analysis can provide an initial overview of an organizations
external and internal situation.
Methods for identifying an organizations opportunities and threats were discussed in Chapter 2, including trend identification and extrapolation, solicitation
of expert opinion, dialectic inquiry, stakeholder analysis, scenario writing, and
future studies. A method for determining organizational strengths and weaknesses was discussed in Chapter 4 and focused on identifying resources, competencies, and capabilities found in the organizations value chain.
264 strategic management of Health Care Organizations
A SWOT analysis is easy to develop; however, it does not provide much insight
into what strategy decisions might result from the list of strengths, weaknesses,
opportunities, and threats. It has even been suggested that in certain circumstances, such as moving from a deregulated to a highly regulated (or vice versa)
health system, where the future is uncertain, SWOT may be less applicable.5 As
discussed in Chapter 2, the designation of external issues as opportunities or
threats is often arbitrary, and opportunities are commonly presented as strategic
alternatives rather than independent external issues affecting the organization;
however, those strategists that are able to identify true external opportunities
(events/issues occurring in the external environment over which no one has
control) prior to or earlier than others, have the possibility of seizing an issue
and turning it into a competitive advantage. Additionally, it is important to note
that external issues may be both opportunities and threats. Furthermore, SWOT
analysis has no provision for prioritizing or evaluating the internal strengths or
weaknesses as being competitively relevant competitive advantages or competitive disadvantages. As a result, SWOT analysis should only be used as an initial
overview of the organizations situation or to provide a foundation for more indepth analysis.
External/Internal Strategy Matrix Rather than just listing strengths, weaknesses, opportunities, and threats, decision makers should match the external
issues identified in the general environment, health care system, and service
area as discussed in Chapters 2 and 3 with long-term and short-term competitive advantages and disadvantages (discussed in Chapter 4). An external/internal
strategy matrix juxtaposes external issues with internal competitive advantages
and disadvantages. Exhibit 74 shows such a strategic thinking map that is useful
EXHIBIT 73 SWOT Analysis
Chapter 7Evaluation of Alternatives and Strategic Choice 265
Exhibit 74 External/Internal Strategy Matrix
General Environmental
1. Population over 65
2. Economy continues to
3. Decreasing regulations
of business
Health Care System
1. Declining
2. Industry continues to
3. Lack of trained health
care workers
Service Area and
Competitive Issues
1. Increasing number of
2. CON required
3. Increasing number of
Internal Advantages
& Disadvantages
Long-Term Competitive
1. Brand Name
2. Dominate Market Share
3. Financial Strength
1. Product Development
serving over 65 years
of age market
2. Market Development
1. Enhancement
2. Enhancement
increase training
1. Penetration
increase advertising
2. Alliance with existing
3. Product Development
serving over 65 years
of age market
for matching external issues with internal competitive advantages and disadvantages. This approach, utilizing the complete results of a comprehensive external
and internal analysis, better fosters strategic thinking concerning adaptive strategy alternatives.6
In the external/internal strategy matrix, adaptive strategic alternatives are
suggested by the interactions of the seven sets of variables (long- and short-term
competitive advantages, long- and short-term competitive disadvantages, and
266 strategic management of Health Care Organizations
general, health care, and competitive issues). In this example, the primary focus
is the adaptive strategic alternatives, but this analysis could also be applied to the
development of any type of strategy. In practice, particularly in open discussion
sessions, some of the alternatives developed through the strategy matrix may be
adaptive, market entry/exit, competitive, or value-adding service delivery and
support strategies.
The strategies developed by matching the long-term competitive advantages
with the general environment, health care system, service area, and competitive
issues represent the primary adaptive strategies of an organization. The longterm competitive advantages are valuable, rare among competitors, difficult to
duplicate, and sustainable. The short-term competitive advantages may soon
be duplicated, particularly if the service areas and competitors are undergoing
change, but these advantages must be sustained for as long as possible. The longterm competitive disadvantages represent areas where internal fix-it strategies
will have to be addressed because other organizations provide a competitive
advantage that is valuable to stakeholders. The short-term competitive disadvantages are fixable but still represent a significant impediment to success. The
long-term competitive advantage row as well as some key factors in the general
environment, health care system and service area have been completed to illustrate the use of the external/internal strategy matrix (note that both the general
environment and service area factors suggest product development serving those
over 65 years of age).
Product Life Cycle Analysis Product life cycle (PLC) analysis is a method,
and typically a graphic representation, used to develop strategy alternatives
based on the principle that all products/services progress through distinct
stages of introduction, growth, maturity, and decline. These stages relate primarily to the changing nature of the marketplace, the product development
process, and the types of demands made on management. Moreover, the
nature of the product/service and industry may influence the life cycle stages.
For example, in the medical technology industry innovation is strongly influenced by product/service life cycle stages. In addition, individual curves can
be influenced by factors such as patent protection and barriers to entry.7 In
evaluating product life cycles, the evolution of service category sales and profits (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 75.
Products and services have an introductory stage during which sales are
increasing yet profits 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
profits are both increasing and, as a result, competing organizations enter the
market (analyzers) to participate in the growth. During this stage, prices are still
high but may begin to decline, promotion is directed toward specific brands, and
there is rapid growth in the number of outlets.
The maturity stage of the PLC marks the end of rapid growth and the beginning of consolidation. In addition, market segmentation (defining narrower and
Chapter 7Evaluation of Alternatives and Strategic Choice 267
narrower segments of the market) occurs. In this stage, prices have stabilized or
declined, price promotion becomes common, distribution is widespread, and
competitors are concerned with maintaining market share (defenders). In the
decline stage, total revenues and profits for the product or service are declining
and will likely continue to decline over the long term.
Tracking the enrollment of health maintenance organizations (HMOs) illustrates the PLC (see Essentials for a Strategic Thinker 71, What Is Managed
Care? for an overview of managed care). HMOs had an extended introductory
period. The first HMO prototype, the Ross-Loos Clinic in Los Angeles, became
operational in 1929. Forty years later, in 1970, there were only 33, generally notfor-profit, HMOs in the United States serving approximately 3 million enrollees.8
The boost that pushed HMOs from introduction to growth included the passage
of the Health Maintenance Organization and Resources Act of 1974. In addition to
the federal funding for development and growth, HMOs sought additional capital
in the early 1980s. One method to accomplish this was to convert from a not-forprofit to a for-profit HMO.
EXHIBIT 75 The Product Life Cycle
Source: Adapted from Philip Kotler and Kevin Lane Keller, Marketing Management, 15th edn (New York: Simon & Schuster, 2016),
p. 349. Reprinted by permission of Simon & Schuster.
Stage 1
Stage 2
Stage 3
Stage 4
0 Time
PLC Stage Characteristics
Introduction Growth Maturity Decline
Sales/Revenue Low Rapid growth Slow growth Declining
Prots Negative Peak levels High Low
Competitors Few Growing Many Declining
Cost/Customer High Average Low Low
Capital Access Venture Equity/debt Debt/internal Minimal
268 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 71
What Is Managed Care?
Managed care refers to health insurance plans
or organizations that contract with doctors,
hospitals, clinics, pharmacies, and other health
care providers to control and efficiently manage the costs and quality of the health care
of plan enrollees. The contracted providers
(hospitals, physicians, and so on) are called the
plans network.1 Managed care organizations
control cost and quality by negotiating reimbursement rates and standards of care with
network providers (often controlling where
plan members may receive care) and sharing some costs (deductibles, copay, etc.) with
Most Americans who have health insurance
are enrolled in one of several types of managed
care health insurance plans. The most common types are Preferred Provider Organizations
(PPOs), Health Maintenance Organizations
(HMOs), and Point-of-Service Plans (POS). Over
60 percent of those in managed care plans are
in PPOs and almost 36 percent are enrolled in
HMOs.2 Managed care plan enrollees are spread
across commercial plans, Medicaid managed
care plans, Medicare Advantage plans, and the
military. The largest major national health plans
are United Health Group, Anthem, Aetna, CIGNA
HealthCare, Health Care Services Corporation,
and Humana.3
Types of plans:
Although there are several types of HMOs, the
commonality among them is that HMOs are
insurance companies and therefore underwrite the claims. Thus, they are ultimately
responsible for the cost of covered medical
care expenses provided to an enrollee.4 HMOs
typically require a primary care physician (PCP)
to manage the care of individual enrollees,
including providing referrals to specialists
within the HMO network when necessary.
PCPs are typically internal medicine or family physicians operating practices as a part of
the HMO network. Medical costs incurred by
enrollees outside of the HMOs network are
typically not covered.
These organizations typically are not insurance
companies and, therefore, do not underwrite
the costs of care. Rather, PPOs are coordinating
organizations primarily for employer-based
health insurance. A PPO negotiates with providers to create a network of preferred providers that are willing to provide cost savings to
members of the plan.5 These plans most often do
not require a PCP to manage care and no referrals are required to see a specialist.
These plans have attributes of both HMOs
and PPOs and usually provide wider provider
choice options than HMOs (enrollees may
seek care out-of-the-network); however, such
plans frequently require more-out-of-pocket
costs to the consumer for out-of-network
services.6 Most often the plans require PCPs
to manage care within the network; however,
subscribers of the plan can choose to stay in
the network or receive care out of the network
with a PCP referral.
Chapter 7Evaluation of Alternatives and Strategic Choice 269
1. Michael Bihari, Whats the Difference
between HMO and PPO Health
3. Ibid.
4. Michael, A. Morrisey, Health Insurance (Chicago,
IL: Health Administration Press, 2008) pp. 1516.
5. Ibid.
6. Ibid.
Exhibit 76 shows the national HMO enrollment from 1987 through 2016. The
HMO enrollment growth stage extends through 1999 and then enters the mature
stage. By the late 1990s, many urban markets experienced high managed care
penetration, signifying local maturity. HMO consolidation in major markets 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
insufficient number of providers. In addition, few new players are entering the
market in these areas. Overall enrollment shows some growth. In fact by 2016 total
HMO enrollment in the United States, according to the Kaiser Family Foundation,
was just over 93.4 million indicating that the life cycle remains in the maturity
Millions National HMO Enrollment
EXHIBIT 76 National HMO Enrollment
Source: MCOL Research compiled from historical Managed Care Fact Sheet National Managed Care
Enrollment data for HMOs/.node/.blockUAT S 110300×250(t,l)Managed Care Executive/.
270 strategic management of Health Care Organizations
stage, but the overall picture may hide two separate HMO life cycles that are in
different stages urban maturity, perhaps toward decline, along with rural/nonurban late-stage growth. Efforts to control costs have resulted in health insurers,
particularly in the individual market, offering fewer preferred provider organization (PPO) plans and more HMO plans.
Despite its limitations, PLC analysis is a useful tool for strategic planning.
It provides a framework for assessing existing activities as well as new 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
When considering new product/service lines, a PLC analysis can help answer
questions not only about whether an activity is attractive for the organization,
but also what might be the best market entry/exit strategy. Historically, hospitals
have developed the businesses or services that they already offer. However, 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 sufficiently different such that an entirely new
life cycle is created.
There are two important questions for strategy formulation when using product life cycles: In what stage of the life cycle are the organizations products and
services? and How long are the stages (and the life cycle itself) likely to last? To
determine the stage of the PLC, management must use a great deal of judgment.
Total service category revenues and profits may be monitored as an initial indicator. In addition, information obtained in external 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.
The stage in the PLC for a product or service indicates a likely strategic response and the level of resources that might be committed. Exhibit 77 shows logical strategic alternatives for each stage.
Exhibit 77 Strategic Choices for Stages of the Product Life Cycle
Stage 1: Introduction Stage 2: Growth Stage 3: Maturity Stage 4: Decline
Market Development Market Development Market Development Divestiture
Product Development Product Development Product Development Liquidation
Penetration Penetration Harvesting
Vertical Integration Enhancement Unrelated Diversification
Related Diversification Status Quo
Unrelated Diversification
Chapter 7Evaluation of Alternatives and Strategic Choice 271
The relevance of the strategies shown in Exhibit 77 depends on managements
perception of the timing of the cycle. Products and services that management
determines have lengthy stages (or a long PLC) will require dramatically different
strategies from those that management concludes have short stages or a short PLC.
For instance, extensive vertical integration may be justified in the growth stage and
even in the mature stage of the PLC if the cycle is judged to be a long one. However,
the investment in and commitment to the product required in vertical integration
may not be justified when the PLC is viewed as being relatively short.
Portfolio Analysis Strategic thinkers often think in portfolio terms because it is
useful to have a framework for analyzing the mix of products and services.9 As a
result, portfolio analysis, popularized by the Boston Consulting Group (BCG), has
become a fundamental tool for strategic analysis. Portfolio analysis allows for the
assessment of the market position of the health care organization as a whole or its
separate programs. As illustrated in Exhibit 78, traditional BCG portfolio analysis
is a graphic depiction and evaluation of an organizations products and services
in terms of relative market share and market growth rate. The products and services may then be characterized as stars, cash cows, problem children, or dogs and
strategic alternatives generated.
EXHIBIT 78 BCG Portfolio Analysis
Products and services that fall in this quadrant (high market growth and high market share) represent the organizations best long-run opportunity for growth and
profitability. These products and services are likely good investments and should be
provided resources. Market development, product development, penetration, vertical
integration, and related diversification are appropriate strategies for this quadrant.
Cash Cows
Products and services in this quadrant have low market growth (probably in maturity
and decline stages of the PLC) but the organization has a high relative market share.
These products and services should be maintained but should consume few new
resources. For strong cash cows, appropriate strategies are status quo, enhancement,
penetration, and related diversification. For weak cash cows, strategies may include
retrenchment, harvesting, divestiture, and perhaps liquidation.
Problem Children
Problem children have a low relative market share position, yet compete in a highgrowth 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 category through harvesting, divestiture, or
liquidation. A case may also be made for retrenchment into specialty niches.
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 organizations 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.
272 strategic management of Health Care Organizations
Relative market share may be thought of as the market share held by the largest
rival organization compared with the market share held by others in the service
category. Growth rate can be measured by the changes in level of gross revenues
or by population or service utilization growth (such as admissions or inpatient
days). Classification as high, medium, or low may be determined through comparison with national or regional health care growth figures, return on alternative
investments, or the stage in the PLC.
The evaluation of products and services in portfolio analysis can be a dynamic
process and used for the long-run planning of service and product life cycles.
Therefore, portfolio management might be concerned with several time horizons.
Horizon 1 corresponds to managing the current fiscal reporting period, with shortterm considerations. Horizon 2 might be concerned with ramping up the next
generation of growth opportunities, and Horizon 3 with incubating new products
and services that will sustain the organization far into the future. This time-horizon
perspective is especially valuable for leaders trying to ensure that the organization
will grow over the long term.11 See Essentials for a Strategic Thinker 72, What
Are Red Ocean and Blue Ocean Strategies? that helps explain market positioning.
Essentials for a Strategic Thinker 72
What Are Red Ocean and Blue Ocean Strategies?
The only way to beat the competition is to stop
trying to beat the competition.1 Red oceans
are all the industries in existence today. The
market space is known, the industry boundaries are defined, and the competitive rules
are understood. Products become commodities
and cutthroat competition turns the red oceans
bloody.2 Blue oceans, on the other hand, are
defined by untapped market space and the
opportunity for high growth and profits.
Organizations in red oceans try to beat the
competition by building a defensible position
in an existing industry. Creators of blue oceans
engage in value innovation.3 These firms do not
try to beat the competition but focus on creating leaps in value, thereby opening up new and
uncontested market spaces.
There are three characteristics of a sound
blue ocean strategy focus, divergence, and a
compelling tagline. First, strategies have focus
and concentrate on a relatively few things that
are done very well. Curves, a womens fitness
company, entered the red ocean of fitness
companies by focusing on the most desirable
aspects of traditional health clubs and home
exercise programs. Next, competitors in red
oceans react to rivals and lose their uniqueness.
Curves differentiated its services by getting rid
of special machines, juice bars, and saunas and
arranged a limited number of simple-to-operate hydraulic machines in a circle to facilitate
interactions among members, making the exercise experience fun. In blue oceans, organizations differentiate themselves from the average
industry profile. Finally, a compelling and truthful tagline effectively communicates the value
innovation of blue ocean firms.4 Curves tagline
could be for the price of a cup of coffee a day
you can obtain the gift of health through proper
exercise with friends.
There is an interesting paradox in blue ocean
strategies. The more successful a firm is in value
Chapter 7Evaluation of Alternatives and Strategic Choice 273
An example of portfolio analysis for a health care institution is illustrated
in Exhibit 79. Cash cow services, such as plastic surgery and substance abuse
(lower left quadrant), have achieved high market share but the growth rate has
slowed. These services should generate excess cash that may be used to develop
stars and problem children services. Service lines in the upper left quadrant, such
as womens services, geriatrics, cardiology, and so on, have high market growth
and a relatively high market share (and most likely high profitability). 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. Nurturing
the services that will most likely move to the stars quadrant is important. Services
such as psychiatry, vascular surgery, and pediatrics have low growth rates as
well as a low relative market share (and most likely low profitability) and may be
targets for reduction of scope strategies. Note however, that in health care some
dog quadrant services may be slated for maintenance of scope or even expansion based on community needs.
innovation, the more likely other firms are to
imitate it.5 The easier it is to imitate the blue
ocean strategy, the less likely the strategy can
be sustained; thus the blue ocean turns red.
Blue ocean creators then become conventional
competitors in a bloody sea or must innovate
again. Consider for example, Pfizers success
with Viagra. Pfizer successfully reconstructed
the market boundaries by shifting the focus
from medical treatment to lifestyle enhancement. Pfizer was incredibly successful and today
a plethora of FDA-approved erectile dysfunction
products including Alprostadil, Caverject, CIALIS,
Endex, LEVITRA, Muse, Sildenafil, Tadalafil, and
Vardenafil are available.
Blue and red oceans have always coexisted
and successful organizations learn to navigate
both types of sea. The penchant to imitate,
however, makes it necessary for organizations
to understand competition in red oceans and
how to create and sustain blue oceans. Much is
known about how to navigate red oceans; much
is to be learned about blue oceans.6
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. Ibid.
3. 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.
4. Kyle Bruce, A Review of Blue Ocean Strategy:
How to Create Uncontested Market Space and
Make the Competition Irrelevant, Journal of
Management and Entrepreneurship 10, no. 3
(2005), pp. 106108.
5. John S. McClenahen, Sailing the Ocean Blue,
Industry Week 254, no. 3 (2005), pp. 2021.
6. W. Chan Kim and Rene Mauborgne, Value
Innovation: A Leap into the Blue Ocean,
Journal of Business Strategy 26, no. 4 (2005),
pp. 2229.
274 strategic management of Health Care Organizations
EXHIBIT 79 BCG Portfolio Analysis for a Health Care Institution
Source: Adapted from Doris C. Van Doren, Jane R. Durney, and Colleen M. Darby, Key Decisions in
Marketing Plan Formulation for Geriatric Services, Health Care Management Review 18, no. 3, pp. 720.
Copyright 1993, Aspen Publishers, Inc. Adapted by permission.
Womens Services
Cash Cows Dogs
Vascular Surgery
General Medicine
Problem Children
Emergency Services
Ambulatory Surgery, Adult
Ambulatory Surgery
High Medium Low
Relative Market Share Position
Plastic Surgery
Substance Abuse
Extended Portfolio Matrix Analysis Although the BCG matrix may be used
by health care organizations, portfolio analysis must be applied with care. For
example, health care organizations typically have interdependent programs, such
as orthopedics and pediatrics, which make a strategic service unit (SSU) difficult
to define. Additionally, underlying the BCG matrix is an assumption that high
market share means high profitability and that profits may be milked to benefit
other programs with growth potential. In health care organizations, however, it
is quite possible to have a high market share and no profit. For example, because
of reimbursement restrictions, a high number of Medicaid patients may cause a
physician practice to be unprofitable. Similarly, programs such as obstetrics, pediatrics, neonatal intensive care, and psychiatry may have high market share but be
unprofitable for a hospital.12
The profitability issues suggest that portfolio analysis for health care organizations might better utilize an extended portfolio matrix analysis an extension of the
BCG Portfolio Matrix to account for profitability in situations where high market
share does not necessarily mean high profitability. The profitability dimension is
measured by high or low profitability according to positive or negative cash flow or
return on invested capital. The expanded matrix is presented in Exhibit 710.
Shining stars have high market growth (typically in the early stages of the
PLC), a high market share, and high profitability. This quadrant represents the
best situation for a health care organization; however, it is likely that high profitability will attract competitors. Therefore, aggressive enhancement or product
development will be required, yet market development may be difficult because
Chapter 7Evaluation of Alternatives and Strategic Choice 275
of the already high market share. In addition, the organization will want to consider vertical integration and related diversification.
Cash cow products and services have low market growth but a high market
share and high profitability. In this situation, the organization has a dominant
position in the market (perhaps 100 percent not uncommon in a given health
care service area) and further growth is unlikely. Again, the high profitability
may attract competition, and the organization may have to defend its market
share. Thus, strategies should be directed toward maintaining market dominance
through enhancement. If the PLC is viewed as being long, the organization may
want to engage in vertical integration or related diversification.
Healthy children products and services have high market growth, a low market
share, and high profitability. This quadrant demonstrates that there are situations
in which it is possible to have a low share of the market and be profitable (at least
in the short term or through segmentation). This situation is potentially attractive
to the organization, which may be able to move the product or service into the
shining star and, ultimately, cash cow quadrant. These products and services will
require investment to nurture them and gain relative market share. Strategies may
include market development, product development, penetration, or vertical integration coupled with strong functional support.
For the faithful dog category, the products and services have low market
growth and a low market share, but have been profitable. For example, many
hospital services involve less-dominant units showing slow growth. However, if
they are profitable, such units make a positive contribution to the overall health
of the hospital and augment a full service line.13
EXHIBIT 710 Extended Product Portfolio Matrix
Source: Adapted from Gary McCain, Black Holes, Cash Pigs, and Other Hospital Portfolio Analysis Problems,
Journal of Health Care Marketing, 7, no. 2 (June, 1987), p. 58. Reprinted by permission of the publisher, the
American Marketing Association.
High Low
Market Share
Child High
High Low
276 strategic management of Health Care Organizations
For faithful dogs, managers must assess if increased market share will add to
profitability. For instance, if profitable segments can be identified, it may be more
advantageous to withdraw from broader markets, concentrate on a smaller segment, and maintain profitability. In such situations, a status quo or retrenchment
strategy may be appropriate. If profitability is likely to decline over time, a harvesting or divestiture strategy may be best.
Black hole products and services have high growth and a high market share
but low profitability. Not all high-growth, high-share programs are profitable in
health care. For instance, costly technological equipment may make an 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 profitability of other services.
Nevertheless, having a high share for a service with low or negative profitability 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 inflow, it becomes a black hole a collapsed star sucking in light (profit or
cash) rather than shining and generating cash or profits.14
If a black hole product or service cannot be made into a shining star, it is likely
to become a cash pig. Therefore, enhancement and retrenchment strategies may
be most appropriate. In addition, action plan strategies should be employed to
reduce costs and increase revenue.
Problem children are low-share, high-growth, and low-profitability products and
services that present both challenges and problems. Some of the products and services
represent future shining stars and cash cows, although others represent future black
holes and mangy dogs. Management must decide which products and services to
support and which to eliminate. For supported products, market development with
strong financial commitment is appropriate. For products that management does not
feel can become shining stars, divestiture and liquidation are most fitting.
Cash pig products and services have a high or dominant share, are experiencing low growth, and have low profitability. Health care cash pigs are likely to be
those well-established SSUs with dominant shares that once were considered to be
cash cows. Typically, they have well-entrenched advocates in the organizational
hierarchy who support their continuance.15
A possible solution to the cash pig problem is to cut costs and raise prices.
Therefore, aggressive retrenchment may be required. This strategy may allow the
organization to give up the market share to find smaller, more profitable segments
and thus create a smaller cash cow.
Products and services with low growth, a low share, and poor profit (mangy
dogs) have a debilitating effect on the organization and should be eliminated
as soon as possible. In this situation, other providers appear to better serve the
market. Probably the best strategy at this point is liquidation, as it will be difficult
to find a buyer for products and services in this quadrant.
Strategic Position and Action Evaluation Strategic position and action
evaluation (SPACE), an extension of two-dimensional portfolio analysis (BCG),
is used to determine the appropriate strategic profile of the organization. SPACE
analysis is a method that includes a graphic depiction to indicate the applicability
Chapter 7Evaluation of Alternatives and Strategic Choice 277
of strategic alternatives based on factors relating to the service category strength,
environmental stability, the organizations relative competitive advantage, and
the organizations financial strength. By using SPACE, the manager can incorporate a number of factors into the analysis and examine a particular strategic alternative from several perspectives.16
The SPACE chart and definitions of the four quadrants are shown in Exhibit 711.
Listed under each of the four dimensions are factors that individual numerical
values ranging from 0 to 6 can be assigned. The numbers are then added together
and divided by the number of factors to yield an average. The averages for 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 foursided polygon. Factor scales for each dimension are presented in Exhibit 712,
which has been filled in for a regional hospital. The resulting shape of the polygon
can be used to identify four strategic profiles aggressive, competitive, conservative, and defensive. The quadrant with the largest area is the most appropriate
general strategic position.
EXHIBIT 711 Strategic Position and Action Evaluation (SPACE) Matrix
Aggressive Profile
Typical in an attractive service category with little turbulence in its environment. The
organization enjoys a definite competitive advantage that can be protected with financial strength. The critical factor is the entry of new competitors. Organizations in this
situation should take full advantage of opportunities, look for acquisition candidates
in their own or related areas, increase market share, and concentrate resources on
products having a definite competitive edge.
Competitive Profile
Typical in an attractive service category. The organization enjoys a competitive advantage in a relatively unstable environment. The critical factor is financial strength.
Organizations in this situation should acquire financial 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 Profile
Typical in a stable market with low growth. Here, the organization focuses on financial
stability. The critical factor is product competitiveness. Organizations in this situation
should prune the product line, reduce costs, focus on improving cash flow, protect competitive products, develop new products, and gain entry into more attractive markets.
Defensive Profile
Typical of an unattractive service category in which the organization lacks a competitive
product and financial strength. The critical factor is competitiveness. Organizations in this
situation should prepare to retreat from the market, discontinue marginally profitable
products, aggressively reduce costs, cut capacity, and defer or minimize investments.
Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic
Management: A Methodological Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp.
145150. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.
278 strategic management of Health Care Organizations
EXHIBIT 712 Strategic Position and Action Evaluation Factors for a California-based
Regional Hospital
Factors Determining Environmental Stability
Technological changes Many 0 6 1 2 3 4 5 Few
Rate of ination High 0 6 1 2 3 4 5 Low
Demand variability Large 0 6 1 2 3 4 5 Small
Price range of competing products/services Wide 3 0 6 1 2 4 5 Narrow
Barriers to entry into market Few 0 6 1 2 3 4 5 Many
Competitive pressure High 0 6 1 2 3 4 5 Low
Price elasticity of demand Elastic 0 6 1 2 3 4 5 Inelastic
Other: ______ 0 6 1 2 3 4 5 ________
Average 6 = 3.7
Critical factors
Fairly turbulent environment; strong competition: many technological changes.
Necessary to maintain financial stability because of turbulence in the environment; demand in
market segments relatively stable; protect market niche against competition.
Factors Determining Service Category Strength
Growth potential Low 0 6 1 2 3 4 5 High
Prot potential Low 0 6 1 2 3 4 5 High
Financial stability Low 0 6 1 2 3 4 5 High
Technological know-how Simple 0 6 1 2 3 4 5 Complex
Resource utilization Inefcient 0 6 1 2 3 4 5 Efcient
Capital intensity High 0 6 1 2 3 4 5 Low
Ease of entry into market Easy 0 6 1 2 3 4 5 Difcult
Productivity, capacity utilization Low 0 6 1 2 3 4 5 High
Other: Flexibility, adaptability Low 0 6 1 2 3 4 5 High
Average = 3.7
Critical factors
Good growth and profit potential; strong competition.
Very attractive service category, but strong competition; degree of capital intensity increasing.
Chapter 7Evaluation of Alternatives and Strategic Choice 279
Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic Management: A Methodological
Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp. 148149. Reprinted by permission of Pearson Education
Inc., Upper Saddle River, NJ.
Factors Determining Competitive Advantage
Market share Small 0123 456 Large
Product quality Inferior 0123 456 Superior
Product life cycle Late 0123 456 Early
Product replacement cycle Variable 0123 456 Fixed
Customer/patient loyalty Low 0123 456 High
Competitions capacity utilization Low 0123 456 High
Technological know-how Low 0123 456 High
Vertical integration Low 0123 456 High
Other: ______ 0123 456 ______
Critical factors
Market share low; product/service quality very good.
The organization still enjoys slight competitive advantage because of quality and customer
loyalty; can be expected to diminish, howeven, because of improving performance of competitive
Factors Determining Financial Strength
Return on investment Low 0123 456 High
Leverage Imbalanced 0123 456 Balanced
Liquidity Imbalanced 0123 456 Balanced
Capital required/capital available High 0123 456 Low
Cash ow Low 0123 456 High
Ease of exit from market Difcult 0123 456 Easy
Risk involved in business Much 0123 456 Little
Other: Inventory turnover Slow 0123 456 Fast
Critical factors
Very little liquidity; too much debt.
Financial position very weak; cash inflow has to be increased in order to improve liguidity;
outside financing difficult because of high leverage.
Average 6 = 2.4
Average = 1.6
280 strategic management of Health Care Organizations
The factor scales shown in Exhibit 712 are for a California-based regional
hospital system specializing in health services for the elderly and chemically
dependent. This hospital system is operating in a fairly turbulent environment
with many competitive pressures and many technological changes (environmental stability axis).
Despite the turbulent environment, the hospitals 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 (as seen on the competitive advantage axis)
derived from early entry into the market and it has been able to retain customer
loyalty because of high-quality service. However, the hospitals financial position
(as seen on the financial strength axis) is weak because it financed new facilities
through a substantial amount of debt. Its liquidity position has eroded and cash
flow continues to be a problem.
Which of the adaptive strategic alternatives is most appropriate for this
regional system? The dimensions for this organization are plotted on the SPACE
matrix shown in Exhibit 713, 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 financial resources and the environment
is a bit unstable. Therefore, it should adopt a competitive profile.
6 5 4 3 2 1 2 6 3 4 5
Service Category
Conservative Aggressive
Defensive Competitive
Financial Strength
Environmental Stability
2.4 3.7
EXHIBIT 713 SPACE Profile for a California-based Regional Hospital System
Specializing in Elderly and Chemically Dependent Care
The SPACE chart is a summary display; each factor should be analyzed individually as well. In particular, factors with very high or very low scores should
receive special attention.17 Exhibit 714 examines various strategic profiles that
Chapter 7Evaluation of Alternatives and Strategic Choice 281
EXHIBIT 714 Space Strategy Profiles
Source: Adapted from Fred R. David, Strategic Management, 2nd edn (Columbus, OH: Merrill Publishing Co., 1989), p. 216.
A nancially strong organization that has achieved major
competitive advantages in a growing and stable service
An organization that has achieved nancial strength
in a stable service category that is not growing; the
organization has no major competitive advantages
An organization with major competitive advantages
but limited nancial strength in a high-growth service
An organization that has a very weak competitive
position in a negative-growth, stable but weak
service category
An organization whose nancial strength is a
dominating factor in the service category
An organization that suffers from major competitive
disadvantages in a service category that is
technologically stable but declining in revenue
An organization that is competing fairly
well in a service category where there is
substantial environmental uncertainty
A nancially troubled organization in a very
unstable and weak service category
Defensive Proles
Aggressive Proles
Conservative Proles
Competitive Proles
282 strategic management of Health Care Organizations
may be obtained in a SPACE analysis; Exhibit 715 shows the adaptive alternatives for each strategic profile. The SPACE plot for the regional hospital system
resulted in a competitive profile. 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 financial position because an
unstable environment may place unanticipated demands on the organization that
will require an additional infusion of capital. In light of its financial problems, the
hospital may have to pursue its goals (for example, market development) through
a cooperation market entry strategy. A cooperation strategy joining a network
may be important in a situation where health care systems, continuums, and referral networks are the key to market development and penetration. In the end, the
adaptive and market entry/exit strategic decisions are inextricably linked.
Status Quo
Unrelated Diversication
Related Diversication
Market Development
Product Development
Vertical Integration
Product Development
Market Development
Status Quo
EXHIBIT 715 Strategic Alternatives for SPACE Quadrants
Program Evaluation Program evaluation is an analysis method used particularly
by not-for-profit and public organizations for assessing their portfolio of programs
and developing strategic alternatives in situations where market share, service
category strength, and competitive advantage are not relevant. Program evaluation
is particularly useful for state- or federally-funded institutions, such as state and
county public health departments, state mental health departments, Medicaid agencies, community health centers, and public community hospitals. Despite the fact
that these organizations are public and not-for-profit, they should develop explicit
strategies and evaluate the adaptive strategic alternatives open to them. Although
the internal/external strategy matrix and a form of portfolio analysis may be used
Chapter 7Evaluation of Alternatives and Strategic Choice 283
to evaluate public health programs,18 evaluation methods that consider increasing
revenue and market share may be inappropriate or difficult to use.
Public and not-for-profit institutions typically maintain a number of 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 fill 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.
Within the context provided by an understanding of the external environment,
internal systems, and directional strategies, these not-for-profit institutions must
chart a future through a set of externally and internally funded programs. The set
of programs maintained and emphasized by the organization constitutes its adaptive strategy. The degree to which they are changed (expansion of scope, reduction
of scope, maintenance of scope) represents a modification of the adaptive strategy. The fundamental question is, Does our current set of programs effectively
and efficiently fulfill the mission and vision for the future? This question may
be addressed through a process of program evaluation. Two program evaluation
methods that have been used successfully are needs/capacity assessment and
program priority setting.
A needs/capacity assessment is an evaluation method for developing strategy
alternatives for not-for-profit and public organizations based on community
need and the organizations capacity to deliver programs that meet the need.
The set of programs in not-for-profit organizations are determined by the community, although some programs may be mandated by law, such as disease control, disease surveillance, and the maintenance of vital records (birth and death
records). However, the assumption is that the legislation is a result of an important
need and, typically, the mandate is supported by non-discretionary or categorical
funding (funding that may be used for only one specific purpose as required by
law). Therefore, in developing a strategy for a public health organization or notfor-profit organization serving the community, a needs/capacity assessment must
be undertaken community needs must be assessed vis–vis the organizations
ability (capacity) to address those needs.
Community need is one dimension for determining the strategy for a notfor-profit organizations programs based on (1) clear community requirements
(environmental, sanitation, disease control, and so on) and personal health care
(primary care) gaps; (2) the degree to which other institutions (private and public)
fill the identified health care gaps; and (3) public/community health objectives.
Many not-for-profit institutions enter the health care market to provide services
to those who otherwise would be left out of the system. Despite efforts to reform
health care, these gaps are likely to remain for some time. Health care gaps are
identified through community involvement, political pressure, and community
assessments such as those carried out by the Centers for Disease Control and
Prevention (CDC). These gaps exist because there are too few private or public
284 strategic management of Health Care Organizations
institutions positioned to fill the need. Where existing institutions are willing and
able to fill these gaps, public and not-for-profit organizations should probably
resist entering the market. In addition, public and community health objectives
must be considered when developing strategy. National, state, and community
objectives such as the Healthy People 2020 and Healthy People 2030 objectives
should be included as part of a community needs assessment.19
Organizational capacity is one dimension for determining the strategy for a
not-for-profit organizations programs based on its ability to initiate, maintain,
and enhance its programs. Organizational capacity is comprised of (1) funding to
support programs, (2) other organizational resources and skills, and (3) the programs fit with the mission and vision of the organization. Availability of funding
is an important part of organizational capacity. Many programs are supported
with categorical funding and accompanying mandates (program requirements
dictated by a higher authority, usually federal or state government). Often, 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-profit 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 programs fit with the organizations
mission and vision for the future. Programs outside the mission and vision should
be viewed as luxuries, superfluous, or wasteful. Similar needs assessment methodologies have been used extensively by public and not-for-profit organizations
(see Essentials for a Strategic Thinker 73, What Is Needs Assessment?).
Essentials for a Strategic Thinker 73
What Is Needs Assessment?
Needs assessment is a systematic process for
identifying gaps between two conditions: the
current state of what is (real) and the desired
state of what should be (ideal). Needs assessment is not intended to generate solutions; but
rather, to assess the discrepancy between these
two conditions. Conducting a needs assessment
allows an organization to identify and prioritize
needs; determine criteria for solutions; make
data-informed decisions regarding human,
financial, and other resources; and implement
actions to improve programs, services, or organizational structure and operations.1
For example, if administrators at a local
health clinic observe an increase in demand
for patient access based on the health-seeking behaviors of a specific target population,
the clinic may conduct a needs assessment
to determine the number of patients served
(actual) as compared to patient demand for
services (ideal). In doing so, these administrators may discover that the clinics current
capacity is 500 patients while patient demand
for services is 1,000.
This example demonstrates that there is gap
between what is and what should be. In other
words, a discrepancy exists. When discrepancies
are detected, organizational leaders may seek
to identify the root cause(s) of this gap to craft
effective and data-informed solutions. If there
Chapter 7Evaluation of Alternatives and Strategic Choice 285
Exhibit 716 presents the adaptive strategic alternatives indicated for public
organizations as they assess community needs and the organizations capacity
to fill them. Where the community need is assessed as high (significant health
care gaps, few or no other institutions addressing the need, and the program is
one of the communitys objectives) and the organizations capacity is assessed as
high (adequate funding, appropriate skills and resources, and fit with mission/
vision), then the organization should adopt one of the expansion of scope adaptive strategies (upper left quadrant). Appropriate strategies might include vertical
integration, related diversification, product development, market development,
and penetration. When the community need assessment is low (no real need, the
need has abated, the need is now being addressed by another institution, or the
need does not fit with community objectives) but organization capacity is high
(adequate funding, appropriate skills and resources, and fit with mission/vision),
there should be an orderly redistribution of resources, suggesting reduction and
maintenance of scope adaptive strategies (lower left quadrant). Reduction of
scope strategies should be given priority as the community need diminishes;
is little to no discrepancy, organizations may
choose to direct resources to other priorities.
The needs assessment process is typically
conducted in phases during which data are
collected, analyzed, summarized, and presented as a list of identified needs. Common
data collection tools for conducting a needs
assessment include surveys, focus groups, key
informant interviews, document analysis, and
observations. Irrespective of method, information is gathered from key stakeholders and
others who have knowledge or experience with
the issue. Decision-makers may then consider
each need in the organizations context to prioritize issues for planning interventions.
In addition to assessing expressed needs
based on supply and demand, as demonstrated
in the previous clinic example, needs assessments can be used to identify other discrepancies
between real and ideal states. For example, needs
assessment can be used to evaluate:
Prescribed or normative needs based on a
target as defined by an expert.
Relative needs between two groups in which
differences are compared to one another.
Perceived needs as defined by a specific
Extrapolated needs or formula-driven estimates based on a standard.2
Rather than adopting an ill-fitting solution
to a poorly defined problem, a rigorous needs
assessment empowers organizational leaders
to be thoughtful and strategic about how and
when to deploy specific resources to address
needs that are prioritized as the most important.
1. J. W. Altschuld and D. D. Kumar, Needs
Assessment: An Overview (Thousand Oaks, CA:
SAGE, 2010).
2. M. J. Harris, Evaluating Public and Community
Health Programs (San Francisco, CA: Jossey
Bass, 2010).
Source: Matthew Fifolt, PhD, Assistant Professor, Department
of Health Care Organization and Policy, School of Public Health,
University of Alabama at Birmingham and Julie Preskitt, PhD,
Associate Professor, Department of Health Care Organization
and Policy, School of Public Health, University of Alabama at
286 strategic management of Health Care Organizations
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 diversification,
retrenchment, harvesting, and status quo.
Where community needs have been assessed as low (no real need, the need has
abated, the need is now being addressed by another institution, or the need does
not fit with community objectives) and the organization has few financial or
other resources to commit to programs (low organization capacity), one of the
reduction of scope adaptive strategies should be adopted (lower right quadrant).
These strategies include liquidation, harvesting, divestiture, and retrenchment.
When community needs have been assessed as high but organizational capacity
is low, maintenance and reduction of scope strategies are appropriate (upper right
quadrant). Maintenance of scope strategies should be given priority because of
the high community need; however, if resources dwindle or funding is reduced,
reduction of scope may be required. Appropriate adaptive strategic alternatives
include enhancement or status quo (maintenance of scope) and retrenchment or
harvesting (reduction of scope). As resources become available, and organizational capacity increases, programs in this quadrant will move to the upper left
quadrant, enabling more aggressive (expansion) strategies to be selected.
The second method of developing adaptive strategies for not-for-profit or public programs involves ranking programs and setting priorities. Program priority
EXHIBIT 716 Public Health and Not-for-Profit Adaptive Strategic
Expansion of Scope
Vertical Integration
Related Diversication
Product Development
Market Development
of Scope
Status Quo
Reduction of Scope
of Scope
Related Diversication
Status Quo
High Low
Organizational Capacity
Chapter 7Evaluation of Alternatives and Strategic Choice 287
setting is another analysis method used by not-for-profit and public organizations for developing strategies that involves rank ordering programs when all
programs are considered important but resources are limited. As the demand
for health services has increased and the resources available for service delivery
has contracted, evidence-based priority setting methods that are transparent and
inclusive have been developed and improved. A study of five Primary Care Trusts
in England demonstrated the difficulty in achieving the dual goals of priority setting effectiveness and information accessibility, and consequently transparency,
among the decision makers.20 Other studies have demonstrated how different
issues fail to reach the actual decision makers in priority setting activities. The
result is often skepticism regarding the objectivity of program priority setting.21
Program priority setting is significant because community needs (both the
need itself and the severity of the need) are constantly changing and 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 first 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-profit 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. Then using different
colors or types of sticker, one for each of the adaptive strategies expand the
scope, reduce the scope, and maintain the scope each member of the management team is asked to sort the organizations 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 organizations 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 and can be used to prioritize a variety of
issues.22 Q-sort is a ranking procedure that forces choices along a continuum in
situations where the difference between the choices may be quite small. The program Q-sort evaluation is a forced-choice ranking procedure for differentiating and
reaching consensus on the importance of programs/issues and setting priorities.
It is particularly useful when experts differ on what makes one choice preferable
over another. By ranking the choices using a Q-sort procedure, participants see
where there is wide consensus (for whatever reasons used by the experts) and
have an opportunity to discuss the choices for which there is disagreement (and,
hopefully, reach greater consensus).
288 strategic management of Health Care Organizations
Q-sort is part of the Q-methodology, a set of philosophical, psychological,
statistical, and psychometric ideas oriented to research on the individual. Q-sort
evaluation helps overcome the problem of all programs being ranked as very
important by forcing a ranking based on some set of assumptions.23 Once Q-sort
has rank-ordered a series of objects (programs), numerals may be assigned to subsets of the objects for statistical purposes. Q-sort focuses on sorting decks of cards
(in this case each card representing a program) and displaying the correlations
among the responses of different individuals to the Q-sorts.
For ranking an organizations programs, only the first step in using the
Q-methodology is used the Q-sort. In the Q-sort procedure, each member of the
management team is asked to sort the organizations programs into categories
based on their perceived importance to the organizations mission and vision. To
facilitate the task, the programs are printed on small cards that may be arranged
(sorted) on a table. To force ranking of programs, managers are asked to arrange
the programs in piles from most important to least important. The best approach
is that the number of categories be limited to nine and the number of programs
to be assigned to each category be determined in such a manner as to ensure a
normal distribution.24 Therefore, if a public health department had 49 separate
programs that management wished to rank (culled from a larger list of programs),
they may be sorted as shown in Exhibit 717. Notice that to create a normal
Next Most
Next Most
Next Most
Next Most
Next Most
Next Most
Next Most
Next Most
Planning and
Control 7.0
Solid Waste
Public Health
Social Work
Indoor Air
Hearing Aid
Licensure and
School Health
Public Health
Home Health
5% 7.5% 12.5% 15% 20% 15% 12.5% 7.5% 5%
EXHIBIT 717 Department of Public Health Q-Sort Results*
*Program name and mean score in each box.
Chapter 7Evaluation of Alternatives and Strategic Choice 289
distribution (or quasi-normal), 5 percent of the programs are placed in the first
pile or group, 7.5 percent in the second group, 12.5 percent in the third, and so on.
In this case, there are two programs in the first group, four programs in the second
group, six in the third, and so on.
Depending on the group in which it is placed, each program is assigned a score
ranging from 1 to 9, where 1 is for the lowest- and 9 is for the highest-ranked
programs. The score indicates an individuals perception of that programs
importance to the mission and vision of the organization. A program profile is
developed by averaging individual members scores for each program.
Based on the results of the Q-sort, programs may be designated for expansion, reduction, or maintenance of scope. For the public health programs in
Exhibit 717, 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
The Q-sort procedure works well when incorporating several different sets
of strategic assumptions or scenarios. For example, the programs may be sorted
several times, each based on a different scenario. Then the group can determine
which of the scenarios is most likely and make decisions accordingly.
Priority setting is likely to increase in importance for health care organizations
as the demand for services continues to increase and resources become even
more scarce. Priority setting, by its nature, appears threatening especially to those
whose programs are judged to be of a lower priority. For this reason transparency
and communication from upper leadership are critical elements in any effective
priority setting process.25
Step 3: Evaluate and Select Market Entry/Exit Strategies
Once expansion of scope or maintenance of scope through enhancement adaptive
strategies are selected, one or more of the market entry strategies must be used to
break into or capture more of the market. All of the expansion adaptive strategies
require some activity to reach more consumers with the products and services.
Similarly, enhancement strategies indicate that the organization must improve
what it is already doing, which requires market entry analysis. Reduction of scope
and market exit strategies are directed toward offering fewer products and services and markets and may require identifying buyers, closing facilities, reducing
the product line, internal cost cutting issues, and managing declining demand.
The market entry strategies include acquisition, licensing, venture capital investment, merger, alliance, joint venture, internal development, internal venture, and
reconfiguring the value chain. Although any one (or several) of these strategies may
be used to enter the market, acquisitions, mergers, and alliances have received most
of the media attention over the past decade. Acquisition is the principal purchase
strategy and mergers and alliances are the principal cooperation strategies. Market
exit strategies are methods to either rapidly or slowly, partially or completely leave
markets and similar to market entry, divestiture (the other side of acquisition) has
most obviously shaped the health care landscape.
290 strategic management of Health Care Organizations
The specific market entry/exit strategy considered to be appropriate depends
on (1) the external conditions; (2) the pertinent internal strengths and weaknesses
based on the organizations resources, competencies, and capabilities; and (3)
the goals of the organization. Each of these three areas should be scrupulously
External Conditions The first consideration in the selection of the market
entry/exit strategy is the evaluation of the external situation. A review of the
external issues and supporting documentation (see Chapters 2 and 3) should provide information to determine which of the market entry/exit strategies is most
appropriate. Exhibit 718 provides a list of representative external conditions
appropriate for each of the market entry/exit strategies.
EXHIBIT 718 External Conditions Appropriate for Market Entry/Exit
Market Entry Strategy Appropriate External Conditions
Acquisition Growing market.
Early stage of the product life cycle or extended maturity
Attractive acquisition candidate.
High-volume economies of scale (horizontal integration).
Distribution economies of scale (vertical integration).
Licensing High capital investment to enter market.
High immediate demand for product/service.
Early stages of the product life cycle.
Venture Capital Investment Rapidly changing technology.
Product/service in the early development stage.
Merger Attractive merger candidate (synergistic effect).
High level of resources required to compete.
Alliance Alliance partner has complementary resources, 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/
Extended learning curve to ensure necessary expertise.
Internal Development High level of product control (quality) required.
Early stages of the product life cycle.
Chapter 7Evaluation of Alternatives and Strategic Choice 291
Market Entry Strategy Appropriate External Conditions
Internal Venture Product/service development stage.
Rapid development/market entry required.
New technical, marketing, production approach
Reconfiguring the Value Chain Competition dominated by a few traditional providers.
Specialized market niche identified.
New technology, marketing, production approach
Market Exit Strategy Appropriate External Conditions
Fast Declining market late stages of the product life cycle.
Available buyers for the business or assets.
High level of resource required to compete.
Liquidate before others recognize the change in the
Slow Late stages of the product life cycle.
Extended product life cycle, as others leave, greater share
Product category likely to remain profitable for near
Partial Specialized market segments provide opportunities to
redefine the market.
Extended product life cycle.
Complete End or decline stage of the product life cycle.
External change renders product category obsolete.
Resources, Competencies, and Capabilities As illustrated in Exhibit
719, each market entry/exit strategy requires somewhat different resources,
competencies, and capabilities. Before selecting the appropriate market entry
or exit strategy, a review of the internal competitively relevant strengths and
weaknesses should be undertaken (see Chapter 4). A market entry/exit 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 first
phase would be directed at correcting the weakness (competitive disadvantage)
that is prohibiting selection of the desired strategy, and the second phase
would be the initiation of the desired market entry/exit strategy. In some cases
a total redesign, or re-engineering, of a process may be required before a strategy can be implemented (see Essentials for a Strategic Thinker 74, What Is
292 strategic management of Health Care Organizations
EXHIBIT 719 Appropriate Internal Resources, Competencies, and
Capabilities for the Market Entry/Exit Strategies
Market Entry Strategy
Appropriate Resources, Competencies, and Capabilities
(Strengths or Weaknesses) Affecting Choice
Acquisition Financial resources.
Capability to manage new products and markets.
Capability to merge organizational cultures/structures.
Rightsizing capability for combined organization.
Licensing Financial resources (to pay licensing fees).
Support organization to carry out license.
Capability to integrate new product/market into the present
Venture Capital Investment Capital to invest in speculative projects.
Capability to evaluate and select opportunities with a high
degree of success.
Merger Management willing to relinquish or share control.
Rightsizing capacity.
Complementary service/product line.
Capability to merge organizational cultures/structures.
Alliance Lack of competitive skills/facilities/expertise.
Desire to create vertically integrated system.
Need to control patient flow.
Capability to coordinate boards.
Willing to relinquish some control.
Joint Venture Lack of a distinctive competency.
Additional resources/capabilities are required.
Not enough time to develop internal resources, competencies,
or capabilities.
Venture is far removed from core competency.
Lack required skills and expertise.
Internal Development Technical expertise.
Marketing competency.
Operational capacity.
Research and development capability.
Strong functional organization.
Product/service management expertise.
Financial resources.
Internal Venture Financial resources.
Entrepreneurial organization.
Capability to isolate venture from the rest of the organization.
Technical expertise.
Marketing competency.
Operational capacity.
Chapter 7Evaluation of Alternatives and Strategic Choice 293
Market Entry Strategy
Appropriate Resources, Competencies, and Capabilities
(Strengths or Weaknesses) Affecting Choice
Reconfiguring the Value
New technology available.
Entrepreneurial organization.
Capability to rearrange value chain.
Capability to adapt business model.
Market Exit Strategy
Appropriate Resources, Competencies, and Capabilities
(Strengths or Weaknesses)
Fast Significant drain on resources.
Decision to focus on other market segments.
Lack of management expertise in the product category.
Slow Product category remains profitable.
Decision to focus on other segments or to trim product line.
Capability to manage decline.
Partial Specialized market segments provide opportunities to redefine the market.
Prolong product life cycle.
Managing sales decline by ramping production as competitors leave the market; shutting down operations when too
many customers leave the market.
Complete No resources to support product category or market.
Lack of marketing expertise in the segment.
Giving up on success (profitability) with the product category.
Organizational Goals Along with the internal and external factors, organizational goals play an important role in evaluating the appropriate market entry/
exit strategies. As shown in Exhibit 720, internal development, internal ventures,
and reconfiguring the value chain offer the greatest degree of control over the
design, production, operations, marketing, and so on of the product or service.
On the other hand, licensing, acquisition, mergers, and venture capital investment
offer the quickest market entry but control over design, production, marketing,
and so on is low in the short term (in the longer term the organization may take
complete control). Alliances and joint ventures offer relatively quick entry with
some degree of control. The trade-off between speed of entering the market and
organizational control over the product or service must be assessed by management in light of organizational goals.
Similarly, speed of exiting the market can be an important strategic decision.
If financial resources are limited, selling all or part of the business or retrenchment may generate cash or substantially reduce costs and be the difference in
survival or failure. Harvesting, while a slow exit from the market, allows for the
generation of revenue without new investments and may continue for a number
of years.
294 strategic management of Health Care Organizations
EXHIBIT 720 Market Entry Strategies and Organizational Goals
Joint Venture
Venture Capital
Slow Market Entry
Rapid Market Entry
Initial Control
Over Design,
Initial Control
Over Design,
The Value Chain
Essentials for a Strategic Thinker 74
What Is Re-engineering?
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, define
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 definition
are radical and process.
Re-engineering goes beyond quality
improvement programs that seek marginal
improvements. It asks a team to start over and
completely and radically redesign a process.
It does not mean tinkering with what already
exists or making incremental changes that
leave basic structures intact. It ignores what is
and concentrates on what should be. The clean
sheet of paper, the breaking of assumptions,
the throw-it-all-out-and-start-again flavor of
Chapter 7Evaluation of Alternatives and Strategic Choice 295
re-engineering has captured and excited the
imagination of managers across all industries.
Radical redesign requires creativity and a willingness to try new things, questions the legitimacy of all tasks and procedures, challenges
all assumptions, breaks all the rules possible,
and draws upon customer desires and needs.
The process is an end-to-end set of activities
that together create value for a customer. Many
organizations have become so specialized that
few people understand the complete process. In
the past, organizations have focused on 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
of creating value 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
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.
Peoples roles change from controlled to
Job preparation changes from training to
The focus of performance measures and
compensation change from activity to
Advancement criteria change from performance to ability.
Attitudes change from protective to
Managers change from supervisors to
Organizational structure changes from
hierarchical to flat.
Executives change from scorekeepers to
Michael Hammer identified seven principles
for organizational re-engineering:
1. Organize around outcomes, not tasks. By
focusing on the desired outcome, people
consider new ways to accomplish the
2. People who use the output should perform
the process.
3. Include information processing in
the real work that produces useful
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.
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: Dont
Automate, Obliterate, Harvard Business Review
68, no. 4 (JulyAugust, 1990), pp. 104112.
296 strategic management of Health Care Organizations
Step 4: Evaluate and Select Competitive Strategies
After the market entry/exit strategies have been selected, the strategic posture
must be specified and the products/services positioned within the market using
the generic strategies of cost leadership, differentiation, or focus. All the adaptive
strategies (expansion, reduction, and maintenance of scope) require explicit 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.
Strategic postures include defender, prospector, analyzer, and reactor. Any of
these may be suitable, subject to: the external situation; the changing nature of the
market; competition; the resources, competencies, and capabilities (competitive
advantages) of the organization; and its vision and values. It is important to make
sure the strategic posture is linked to and fits the adaptive and market entry/exit
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 situations competitive rivalry is low and the barriers to entering the market are high. Indeed, the
cost-efficiency strategy of the defender tends to push entry barriers even higher.
Because defender organizations focus on a narrow product line, the strategy
works best when relatively extended PLCs are expected. In addition, long PLCs
enable the organization to commit to vertical integration, develop cost efficiency,
and create routine processes. Defender strategies are most effective in the mature
stage of the PLC. The risks associated with the defender posture are that the PLC
will be dramatically shortened by external change (new technology, for instance)
or that a competitor can somehow unexpectedly take away market share.
Prospectors operate well in rapidly changing, turbulent environments. In these
situations change is coming so rapidly that there are few rewards for efficiency.
Rather, the ability to incorporate the latest technology, feature, or design will reap
the greatest rewards. In addition, prospectors are successful by utilizing a technology across several markets (prospecting in new high-growth markets). Products
are usually in the introductory and early growth stages of the PLC and the cycle
tends to be relatively short. As a result, entry barriers may be low and the intensity
of rivalry typically is low (there is room for everybody). As products or services
mature, prospector organizations move on to new products and services, typically
in introductory stages of the PLC. Prospectors divest their maturing products and
services to successful defender organizations that are consolidating.
Analyzers operate well in conditions where there is moderate external change
with some product categories that are quite stable and some that are changing.
Competitive rivalry tends to be relatively high and these organizations cannot
afford to ignore new product developments, markets, or product categories. PLCs
for their stable products are moderately long but there are periodic innovations
and disruptions. Therefore, these organizations must enter new markets and
product areas. Analyzers typically do not enter the market in the introductory
stage of the PLC. Instead, they carefully watch product and market developments
(the prospectors) and enter the most promising ones in the early growth stage of
Chapter 7Evaluation of Alternatives and Strategic Choice 297
the product life cycle (using one of the market entry strategies). Analyzers attempt
to maintain balance with both mature- and growth-stage products or services
and markets.
Reactors tend to exit in protected or monopolistic markets or are legislatively
restricted from moving into new markets or offering new products. Like defenders, reactors often focus on efficiency rather than external changes. In addition,
for products and markets in the decline stage of the product life cycle, a reactor
strategy may be part of a harvesting strategy or a prelude to divestiture or
The external conditions appropriate for each of the strategic postures are summarized in Exhibit 721.
EXHIBIT 721 External Conditions Appropriate for Strategic Postures
Posture Strategy Appropriate External Conditions
Defender Stable external environments.
Predictable political/regulatory change.
Slow technological and competitive change.
Products or services in mature stage of PLC.
Relatively extended PLCs.
High barriers to entry.
Prospector Turbulent environment.
Rapid technological, political/regulatory, economic change.
Introduction and early growth stages of PLC.
Technology may be employed across markets.
Low intensity of competitive rivalry.
Numerous market and product opportunities.
Fairly low barriers to market entry.
Analyzer Moderately changing environment.
Technological, regulatory, economic, social, or competitive changes open
new opportunities.
Some competitive rivalry in old and new markets.
Some stable products and markets.
Some new market and product opportunities.
Growth and mature stage of PLC for existing products.
Growth stage of PLC for new products.
Reactor Monopolistic or highly regulated market.
Decline stage of PLC.
Legislative restrictions to growth.
New emerging technological change.
Political/legislative uncertainty.
Game changing moves by competitors.
298 strategic management of Health Care Organizations
As shown in Exhibit 722, there are certain strengths (or weaknesses) 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 efficient. Defender
organizations try to drive costs down through vertical integration, specialization of labor, a well-defined organization structure, centralized control and
Exhibit 722 Appropriate Internal Resources, Competencies, and Capabilities for
Strategic Postures
Posture Strategy
Appropriate Resources, Competencies, and Capabilities
(Strengths or Weaknesses)
Defender Capability to develop a single core technology.
Capability to be very cost efficient.
Capability to protect market from competitors.
Capacity to engage in vertical integration strategy.
Management emphasis on centralized control/stability.
Structure characterized by division of labor.
Well-defined hierarchical communications channels.
Cost control expertise.
Well-defined procedures and methods.
High degree of formalization, centralization (where a single central group/person,
typically top management, makes key decisions for the entire organization).
Prospector Capability to adjust organization to a variety of external forces.
Technological and administrative flexibility.
Capability and competency to develop and use new technologies.
Capability to deploy and coordinate resources among numerous decentralized units.
Decentralized planning and control (where key organizational decisions are
distributed throughout the organization closer to the customer).
Flexible structure.
Marketing plus research and development expertise.
Low degree of formalization (few well-defined procedures and methods).
Analyzer Capability to mix high levels of standardization and routinization of core
products/markets with flexibility and adaptation for new products/markets.
Capability to utilize structure to accommodate both stable and dynamic areas
of operation.
Capability to utilize many different management skills.
Effective lateral and vertical communication channels.
Effective strategy and planning team.
Reactor Lack of finances.
Lack of technical expertise.
Lack of management skill.
Lack of new product/service development and marketing skills.
Long-term strategy to leave the market.
Chapter 7Evaluation of Alternatives and Strategic Choice 299
standardization, and cost reduction while maintaining quality. Prospectors, on the
other hand, are continuously moving in and out of products and markets looking
for high growth. Therefore, they need organization structures, systems, and procedures that are flexible. Prospectors rely on decentralized control. These types of
organizations do not concentrate on developing efficiency but, rather, focus on the
development and early adoption of new products and services. Analyzers attempt
to balance defender strategies in stable markets with some prospecting in selected
developing markets. Managing these organizations is often difficult because they
must mix high levels of standardization and routinization with flexibility and
adaptability. Reactors tend to be reactors because of weaknesses or have adopted
a strategy to leave the market.
Positioning Strategies As discussed in Chapter 6, products/services may be
positioned marketwide or for a particular market segment. Cost leadership and
differentiation are used as marketwide strategies or they are used to focus on a
specific segment of the market.
Presence in a market requires that the products and services be positioned vis-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 externally in the service area. In other
words, how a product or service is positioned depends on the organizations competitive situation. Therefore, the positioning strategies must be selected on the basis of
resources, competencies, and capabilities (competitive relevant strengths), as well as
external risks. For example, it would be difficult for an urban public community 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.
Each of the generic positioning strategies has its own external risks that must be
evaluated by the organization (see Exhibit 723). 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 leaders product less desirable.
Exhibit 723 External Risks Associated with Positioning Strategies
Generic Strategy External Risks
Cost Leadership Technological change that nullifies past investments or
Low-cost learning by industry newcomers or followers,
through imitation or through their ability to invest in
state-of-the-art facilities.
Inability to see required product or market changes
because of the attention placed on cost.
Inflation in costs that narrow the organizations ability to
maintain sufficient price differential to offset competitors
brand images or other approaches to differentiation.
300 strategic management of Health Care Organizations
Generic Strategy External Risks
Differentiation The cost differential between low-cost competitors and
the differentiated firm is too great for differentiation to
hold brand loyalty; buyers sacrifice some of the features,
services, or image possessed by the differentiated organization for larger cost savings.
Buyers need for the differentiating factor diminishes,
which can occur as buyers become more
Imitation narrows perceived differentiation, a common
occurrence as the industry matures.
Focus Cost differential between broad-range competitors and
the focused organization widens to eliminate the cost
advantages of serving a narrow target or to offset the differentiation achieved by focus.
Differences in desired products or services between
the strategic target and the market as a whole
Competitors find submarkets within the strategic target
and out focus the focuser.
Focuser grows the market to a sufficient size that it
becomes attractive to competitors that previously
ignored it.
Source: Adapted from Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (1980), pp. 4041. Copyright 1980, 1998 by the Free Press. All rights reserved. Adapted by
permission of Simon & Schuster Adult Publishing Group.
The most significant risks for the organization that chooses a differentiation
strategy are that emphasis on differentiation pushes costs too high for the market
or that the market fails to see, understand, or appreciate the differentiation. In
addition, there are risks for the organization adopting a focus strategy. Often, the
focusing organization is dependent on a small segment that may diminish in size,
or purchasers may turn to the broader market for products or services. Movement
toward marketwide products and services will occur if the differences in cost or
differentiation become blurred.
Exhibit 724 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
state-of-the-art equipment and facilities and low-cost operations. This competitive
advantage must be maintained through tight controls and emphasis on economies
of scale.
Differentiation requires the ability to distinguish the product or service from
other competitors. Typically, this requires technical expertise, strong marketing,
Exhibit 723 (Continued)
Chapter 7Evaluation of Alternatives and Strategic Choice 301
a high level of skill, and an emphasis on product development. A focus strategy
is directed toward a particular segment of the market; however, either cost 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
tracked. Otherwise, changes in the market may negate the differentiation or cost
leadership. Often benchmarking (see Essentials for a Strategic Thinker 75, What
Is Benchmarking?) can be used to assess current internal strengths for successfully implementing strategies.
Exhibit 724 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
Low-cost delivery system.
Tight cost control.
Frequent, detailed control
Structured organization and
Incentives based on meeting
strict quantitative targets.
Differentiation Strong marketing abilities.
Product/service engineering.
Creative flair.
Capability and competency
in basic research.
Reputation for quality or
technological leadership.
Long tradition in the industry or unique combination
of skills.
Strong cooperation from
Strong coordination among
functions in R&D, product/
service development, and
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.
302 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 75
What Is Benchmarking?
Benchmarking is a management process of comparing an organization against a set of its peers
or top performers on critical metrics for success. Benchmarking is generally considered to be
part of an organizations learning or continuous
improvement efforts. In a sense, benchmarking is
similar to taking a picture of ones 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 identification of a set of peers. The peers
should be organizations that are similar, but not
necessarily identical, to the organization and
should operate on a scale that will not distort
the understandings. The peers should not be
direct competitors because of the collaborative nature of the process that will ensue. For
example, a large health care system might use a
telecommunications company as a benchmarking peer 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, financial 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, confidentiality, 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 first meeting and to determine whether such a person would be helpful in further meetings of the group. Each
participant should leave the first meeting
with the agenda for the second meeting and
a set of work assignments to be completed by
the next meeting. Work assignments might
include detailed descriptions of the handling
of customer complaints, how supplies are
inventoried, how customer billing is processed, or other activities identified as worthy
of discussion by the group. At each meeting,
detailed minutes (perhaps a transcript) should
be taken, produced, and distributed to the
participants in a timely manner. The purpose
of the minutes is to formalize the process and
to minimize misunderstandings that may arise
from failed memories.
Chapter 7Evaluation of Alternatives and Strategic Choice 303
Step 5: Synthesize and Identify Implications of Strategy
Choices Strategy Map
After all the strategy formulation decisions have been made, they should be evaluated in combination to ensure that they are logical and fit together. As suggested
at the beginning of this Chapter and illustrated in Exhibit 72, the strategies
selected must address an external issue, draw on an internal and competitively
relevant strength or fix a competitively relevant weakness, maintain the organizational mission, move the organization toward the vision, and make progress
toward achieving one or more of the organizations goals. Each strategy should
be checked to determine if it meets these criteria.
The strategies of the organization can be mapped and the interdependence of
strategies evaluated in concert for consistency and compatibility. Evaluating all
the strategic decisions together provides the big picture of where the organization is going and helps to determine whether the vision is truly being achieved.
In the process of evaluating the strategic map, adjustments may be made and
the strategies reconsidered. For example, a vertical integration adaptive strategy and a prospector strategic posture may not work together well. Similarly,
a product development or diversification adaptive strategy through an internal
development market entry strategy may be inconsistent with an analyzer strategic
posture. In addition, the map provides useful shorthand for communicating and
discussing the strategy of the organization.
Strategy Map: An Example
A strategy map for a long-term care organization is shown in Exhibit 725. This
long-term care organization has been a free-standing, independent institution providing assisted living services for some time. However, because of the growth of
integrated health systems in the area, the organizations 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
organizations traditional market (private pay and long-term care insurance),
but management is willing to enter new products and markets if the viability
The formal agenda for subsequent meetings
should include reports from each of the 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.
304 strategic management of Health Care Organizations
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 certification. Furthermore, product development has been selected and
management is planning to add an independent living facility on the organizations 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 organizations 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. Additionally, the
organization has committed to install a sophisticated information system including bedside terminals to further differentiate itself from its competition.
Such a strategy map provides a broad overview of the organizations direction
and a basis for the development of effective implementation strategies to carry out
the organizations 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 significant growth can occur, unpredictability reigns.
When business becomes complicated, strategy should be simple.26
Strategic Momentum: Adaptive, Market Entry/Exit,
and Competitive Strategies
Managing strategic momentum at this level is not a matter of keeping the
organization on track: rather, it entails deciding if a completely new track or
approach is warranted. Managers must decide if conditions require a change in
Market Entry/Exit
Expansion of Scope Cooperation Strategic Posture
Vertical Integration
Product Development
Market Development
Joint Venture
Internal Development
Maintenance of Scope Caring
Hospital Alliance
Information System

EXHIBIT 725 Map of Selected Strategies for a Long-Term Care Organization
Chapter 7Evaluation of Alternatives and Strategic Choice 305
the organizations fundamental strategies. Authors of Strategic Control, Lorange,
Morton, and Ghoshal have called this decision managing the strategic leap.
They suggest:
Here the challenge is to reset the trajectory of the strategy as well as to decide
on the relative levels of thrust and momentum for the new strategic direction. The critical underlying assumptions that underpin the strategy are no
longer viable, and the rules that govern the strategy must be redefined. This
situation involves a mental leap to define the new rules and to cope with any
emerging new environmental factors. Such a recalibrating of strategy
requires a personal liberation from traditional thinking, an ability to change
ones mindset and confront the challenge of creating advantage out of discontinuity. The question now is how to achieve a quantum leap in ones
strategy to capitalize on emerging environmental turbulence. One must proceed by redefining the rules rather than by clinging to the unrealistic hope
that the old rules are still valid.27
Changes in one organizations adaptive strategy create significant changes
for other organizations, especially those in the same strategic group. Such
dramatic change is relatively rare in stable environments but somewhat more
frequent in dynamic environments. Signals that the basic strategy for the
organization needs to be changed must be carefully monitored because the
change will have serious long-term consequences. The questions presented in
Exhibit 726 are helpful in surfacing such signals, and they provide a starting point for discussion of the appropriateness of the organizations adaptive
strategy. The assumption underlying Exhibit 726 is that the mission, vision,
values, and goals are still appropriate but that the organizations adaptive
strategy should be questioned.
EXHIBIT 726 Managing Strategic Momentum Adaptive Strategies
1. Are all the important assumptions on which the strategy is based realistic (external systems,
competitive service areas, internal systems)?
2. Has the strategy been tested with appropriate strategic thinking tools?
3. Have the major stakeholders both inside and outside the organization that will be most
influential in ensuring the success of the strategy been identified and evaluated?
4. If the adaptive strategy is to fill a currently unfilled niche in the market, has the organization investigated whether the niche will remain open long enough to return the capital
5. Has the adaptive strategy been tested with appropriate financial analysis, such as return on
investment and the organizations ability and willingness to bear the risks?
6. Is the payback period acceptable in light of potential external change?
7. Does the strategy take the organization too far from its current products and markets?
8. Is the adaptive strategy appropriate for the organizations present and prospective position
in the market?
306 strategic management of Health Care Organizations
Changes in market entry/exit strategies represent a new way of doing
business for an organization. For example, developing alliances as a means of
accomplishing market development is quite different from an internal development strategy and changes the entire orientation of the organization. Evaluation
of the effectiveness of the market entry/exit strategies provides insight into
how well the adaptive strategies are being carried out in the marketplace (see
Exhibit 727). Similarly, a change in an organizations 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/exit 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 728).
EXHIBIT 727 Managing Strategic Momentum Market Entry/Exit
1. Is the market entry/exit strategy the most appropriate way to achieve the mission, vision,
and goals of the organization?
2. Is the market entry/exit strategy consonant with the values of the organization?
3. Is the market entry/exit strategy the best way to accomplish the adaptive strategy?
4. Is the market entry/exit strategy compatible with the adaptive strategy?
5. Does management understand the unique requirements of the market entry/exit strategy
(purchase, cooperation, development, market exit)?
6. Does management understand the important market forces?
7. Have adequate financial resources been allocated to enter the market?
8. Does the selection of the market entry/exit strategy affect the ability of the organization to
effectively position its products/services in the market?
9. Does the market entry/exit strategy place unusual strains on any of the functional
10. Have new stakeholder relationships developed as a result of the market entry/exit strategy
(customers, vendors, channel institutions, and so on)?
11. Has the relationship between the desire and need for rapid market entry or exit been
properly analyzed?
12. Has the relationship between the desire and need for control over the products and
services been achieved?
13. Have the trade-offs between costs and control been properly analyzed?
Chapter 7Evaluation of Alternatives and Strategic Choice 307
Strategic Posture
1. Is the strategic posture sustainable?
2. Have there been external developments (technological, social, regulatory, economic, or
competitive) that have shortened product life cycles of important products/services?
3. Are there new market opportunities or challenges that suggest the organization should
move more toward a prospector posture? Analyzer posture? Defender posture?
4. Has the organization developed the right mix of centralization and decentralization of
decision making for the selected strategic posture?
5. Is the level of standardization and administrative flexibility appropriate for the strategic
6. Is the level and type of communication appropriate for the strategic posture?
7. Is the strategic posture appropriate given the barriers to market entry/exit?
8. Has the level of vertical integration been appropriate for the strategic posture?
9. Has the organization been caught by surprise too often?
10. Does the organization need to evolve its strategic posture?
11. Are the overall strategy, strategic posture, and value-adding strategies compatible?
1. Is the product/service positioning credible to the customer?
2. Can the organization use one of the other generic positioning strategies?
3. Is the positioning strategy appropriate considering the external opportunities and threats?
4. Will competitors allow the selected positioning?
5. Is the positioning strategy best suited to capitalize on the organizations strengths and
minimize its weaknesses?
6. Is the positioning of the organizations products/services unique in the marketplace?
7. Is the positioning strategy defensible against new players trying to position themselves in a
similar fashion?
8. Does the positioning strategy provide the appropriate image for the organization?
9. Is the positioning strategy sustainable?
10. Is the appropriate distribution channel being used?
11. Is the current promotional strategy appropriate?
12. Is the pricing strategy appropriate?
Chapter Summary
Several strategic alternatives are available to health care organizations. To initiate
strategic thinking and planning, it is important that the organization has a process
in place for understanding the internal systems, external conditions, and methods
for evaluating strategic alternatives. There are several methods for deciding which
of the adaptive strategic alternatives is most appropriate for an organization,
EXHIBIT 728 Managing Strategic Momentum Competitive Strategies
308 strategic management of Health Care Organizations
including SWOT analysis, external/internal strategy matrix, product life cycle
(PLC) analysis, portfolio analyses (BCG and extended), strategic position and
action evaluation (SPACE) analysis, and program evaluation. Using these methods, managers can classify internal and external factors to gain perspective concerning which adaptive strategic alternative or combination of alternatives is most
Once the most appropriate adaptive strategy (or combination of adaptive
strategies) has been determined, a market entry/exit strategy must be selected.
Expansion and maintenance of scope strategies are initiated through one
or more of the market entry strategies. Entry strategies include acquisition,
licensing, venture capital investment, merger, alliance, joint venture, internal
development, internal venture, and reconfiguration of the value chain. The
organizations internal resources, competencies, and capabilities (competitively
relevant strengths), the external conditions, and the organizations objectives
will determine which of these strategies is most appropriate. If market exit is
selected, it must be determined if the exit will occur fast or slowly and if the
market exit will be partial or complete. Divestiture, liquidation, and retrenchment can happen very quickly while harvesting usually occurs over a number
of years. Divestiture and liquidation are generally decisions to completely leave
the market. Harvesting and retrenchment are seen as decisions to partially exit
the market.
After the market entry/exit strategy has been selected, competitive strategies,
which include strategic posture and positioning strategies, should be 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 influence strategic posture and positioning strategies.
Therefore, the most appropriate strategic posture and positioning strategy may be
selected through an evaluation of the internal skills and resources of the organization and the external conditions.
Chapters 8 through 10 discuss implementation strategies. Chapter 8 will address
strategy implementation through value-adding service delivery strategies.
Practical Lessons for Health Care Strategic Thinkers
1. The strategy analysis methods are tools to help strategic managers generate strategic alternatives and evaluate the appropriateness of strategies
given the organizations external conditions and internal strengths and
2. Use several strategic thinking tools (analyses) to surface different perspectives and insights.
3. Remember there are no definitive answers to strategic decisions; only
informed judgment.
4. Evaluation of strategic alternatives requires organization and structured
Chapter 7Evaluation of Alternatives and Strategic Choice 309
The Language of Strategic Management: Key Terms and Concepts
Questions for Class Discussion
1. Why is the traditional SWOT Analysis a good place to begin? What are the problems
with using SWOT?
2. Explain the rationale underlying the external/internal strategy matrix.
3. Describe the product life cycle. How is it useful for thinking about the adaptive strategy of a health care organization?
4. Why is the length of the product life cycle important for strategy formulation?
5. What adaptive strategic alternatives are indicated for each stage of the product life
6. Is BCG portfolio analysis useful for developing adaptive strategic alternatives for
health care organizations?
7. Explain the rationale for expanding the traditional BCG portfolio matrix.
8. Identify appropriate adaptive strategic alternatives for each quadrant in the expanded
portfolio matrix.
9. Explain the strategic position and action evaluation (SPACE) matrix. How may adaptive strategic alternatives can be developed using SPACE?
10. Why should program evaluation be used for public health and not-for-profit institutions in the development of adaptive strategies?
11. What are the critical factors for determining the importance of programs within a notfor-profit organization?
12. Why should public health and not-for-profit organizations set priorities for programs?
13. Describe program Q-sort. Why would an organization use Q-sort?
14. How are market entry/exit strategies evaluated? What role do speed of market entry/
exit and control over the product or service play in the market entry/exit decision?
15. How are the strategic postures and the product life cycle related?
BCG Portfolio Analysis
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
SPACE Analysis
SWOT Analysis
310 strategic management of Health Care Organizations
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. Association of Academic Health Centers 2015 Annual
Report, 1400 Sixteenth Street NW, Suite 720, Washington,
DC 20036, See also T. Shoemaker
and M. D. Samuel, Preparing for Health Care Reform:
Ten Recommendations for Academic Health Centers,
Academic Medicine 86, no. 5 (2011), pp. 555558.
4. Marilyn M. Helms and Judy Nixon, Exploring SWOT
Analysis Where Are We Now? A Review of Academic
Research from the Last Decade, Journal of Strategy and
Management 3, no. 3 (2010), pp. 215251.
5. Jeroen D. H. van Wijngaarden, Gerald R. M. Scholten,
and Kess P. van Wijk, Strategic Analysis for Health Care
Organizations: The Suitability of SWOT, International
Journal of Health Planning and Management 27, no. 1
(2012), pp. 3449.
6. This approach is a modified TOWS matrix analysis
accounting for three levels of environmental analysis
and determination of competitive advantages and disadvantages. See Heinz Weihrich, The TOWS Matrix: A
Tool for Situational Analysis, Long Range Planning 15,
no. 2 (1982), pp. 5466.
7. Brian D. Smith, Rosanna Tarricone, and Vincenzo Vella,
The Role of Product Life Cycle in Medical Technology
Innovation, Journal of Medical Marketing 13, no. 1 (2013),
pp. 3743.
8. Susanna E. Krentz and Suzanne M. Pilskaln, Product
Life Cycle: Still a Valid Framework for Business
Planning, Topics in Health Care Financing 15, no. 1 (Fall
1988), pp. 4748.
9. Geoffrey A. Moore, To Succeed in the Long Term, Focus
on the Middle Term, Harvard Business Review 85, no.
7/8 (July/August, 2007), p. 84.
10. Gary McCain, Black Holes, Cash Pigs, and Other
Hospital Portfolio Analysis Problems, Journal of Health
Care Marketing 7, no. 2 (June 1987), pp. 5657.
11. Moore, To Succeed in the Long Term, p. 84.
12. Robin E. Scott MacStravic, Edward Mahn, and Deborah
C. Reedal, Portfolio Analysis for Hospitals, Health
Care Management Review 8, no. 4 (1983), p. 69. See also
Margaret Brunton, Emotion in Health Care: The Cost of
Caring, Journal of Health Organization and Management
19, no. 4/5 (2005), pp. 340352.
13. Gary McCain, Black Holes, Cash Pigs, p. 56.
14. Ibid., p. 61.
15. Ibid., p. 62.
16. Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and
Neil H. Snyder, Strategic Management: A Methodological
Approach, 4th edn (Reading, MA: Addison-Wesley,
1994), p. 148.
17. Ibid., p. 149.
18. Peter M. Ginter, W. Jack Duncan, Stuart A. Capper, and
Melinda G. Rowe, Evaluating Public Health Programs
Using Portfolio Analysis, Proceedings of the Southern
Management Association, Atlanta (November 1993),
pp. 492496.
19. U.S. Department of Health and Human Services, Healthy
People 2012 (Washington, DC: U.S. Government Printing
Office, 2010). This publication presents the national
health objectives. U.S. Department of Health and Human
Services, Tracking Healthy People 2020 (Washington, DC:
U.S. Government Printing Office, November, 2010). This
publication is a statistical compendium that provides
information on measuring 200 ten-year national objectives, technical notes, and operational definitions. Every
decade, the Healthy People initiative develops a new
set of science-based, 10-year objectives with the goal of
improving the health of all Americans.
20. Suzanne Robinson, Lestlyn Williams, Helen Dickinson,
Tim Freeman, and Benedict Rumbokl, Priority-Setting
and Rationing in Healthcare: Evidence from the English
Experience, Social Science and Medicine 75, no. 12 (2012),
pp. 23862393.
21. Jacqueline Margaret Cumming, Priority-Setting Meets
Multiple Streams: A Match to be Further Examined,
International Journal of Health Policy and Management 5,
no. 8 (2016), pp. 497499.
16. How may the positioning strategic alternatives be evaluated?
17. Do health care organizations change directional and adaptive strategies often?
18. How can doing the strategy (managing the strategic momentum) provide information about changing the strategy?
19. As managers learn by doing, what strategies are most likely to change: adaptive,
market entry/exit, or competitive?
Chapter 7Evaluation of Alternatives and Strategic Choice 311
22. See J. Preskitt, M. Fifolt, Peter M. Ginter, Andrew C.
Rucks, and M. S. Wingate, Identifying Continuous
Quality Improvement Priorities in Maternal, Infant
and Early Childhood Home Visiting, Journal of Public
Health Management & Practice 22, no. 2 (2016), pp. E12
E20 and M. Fifolt, J. Preskitt, Andrew C. Rucks, K.
Corvey, and E. C. Benton, Promoting Continuous
Quality Improvement in the Alabama Child Health
Improvement Alliance (ACHIA) through Q-sort
Methodology Quality Management in Health Care 26,
no. 1 (2017), pp. 3339.
23. Fred N. Kerlinger and Howard B. Lee, Foundations of
Behavioral Research, 4th edn (Fort Worth, TX: Harcourt
College Publishers, 2000), p. 722.
24. J. Block, The Q-Sort Method in Personality Assessment
and Psychiatric Research (Palo Alto, CA: Consulting
Psychologist Press, 1978), p. 137.
25. Neale Smith, Craig Mitton, Laura Dowling, MaryAnn Hiltz, Matthew Campbell, and Shashi Ashok
Gujar, Introducing New Priority Setting and Resource
Allocation Processes in A Canadian Healthcare
Organization: A Case Study Analysis Informed by
Multiple Streams Theory, International Journal of Health
Policy and Management 5, no. 1 (2016), pp. 2331.
26. 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, Richard S. Gallagher, and
Scott J. Leischow, Practical Challenges of Systems
Thinking and Modeling in Public Health, American
Journal of Public Health 96, no. 3 (2006), pp. 538546.
27. Peter Lorange, Michael F. Scott Morton, and Sumantra
Ghoshal, Strategic Control (St. Paul, MN: West Publishing,
1986), p. 11.

Why Value-Adding Service Delivery Strategies
Are Important
As concluded by Jack Welch, an organizations ability to learn and take action
quickly is a leadership and management capability that may, in itself, create
an advantage for organizations. The primary value for customers is created in
service delivery without an effective product or service strategy that satisfies
customers over time, there are no customers. Service delivery is the face of the
health care organization the point of intersection between the customer and the
Chapter 8
Value-Adding Service
Delivery Strategies
An organizations ability to learn, and translate that learning into action rapidly, is
the ultimate competitive advantage.
Jack Welch, American business executive and author
314 strategic management of Health Care Organizations
Three things must happen to have effective service delivery. First, service
delivery managers must translate the broader organization-wide strategies into
sound implementation plans. The service delivery function is largely responsible
for achieving the organizations strategy and, in doing so, providing a level of
value to customers. A poor alignment of the service delivery strategy to the overall strategy, or poor implementation of the service delivery strategy, will render
the organizations overall strategy ineffectual. The value-adding service delivery
strategies are the means to accomplish organizational ends.
Second, clear, unambiguous service delivery strategies must be developed
and managed, reflecting what the organization is able to do. An over-ambitious service delivery strategy that outstrips the organizations resources,
competencies, or capabilities is useless. Service delivery strategies draw on
the organizations strengths, although on occasion they may be attempting to
negate a weakness.
Third, it is the organizations ability to learn (or re-learn) that may make the
biggest difference. Strategies do not always work as planned and most of the time
managers learn by doing. Strategic managers must be willing to forego service
delivery strategies that are not working and learn from them. A strategy that
draws upon the organizations strengths, fixes weaknesses, and encourages learning along the way creates momentum for the organization.
Use the concepts in this chapter to develop effective value-adding service delivery strategies!
Learning Objectives
After completing the chapter you will be able to:
1. Explain how the service delivery portion of the value chain is key in the implementation of strategy.
2. Discuss the service delivery strategies.
3. Describe the decision logic for developing implementation strategies.
4. Link the results of internal analysis and the development of service delivery
implementation strategies.
5. Explain how the pre-service, point-of-service, and after-service strategies of an
organization are the means to achieve directional, adaptive, market entry/exit,
and competitive strategies.
6. Demonstrate how competitive advantage may be created inside the organization through implementation of the service delivery strategies.
7. Explain how the service delivery strategies may be used to strengthen competitive advantages and improve competitive disadvantages.
Strategic Management Competency
After completing this chapter you will be able to create effective service delivery
strategies for a health care organization.
Chapter 8 Value-Adding Service Delivery Strategies 315
Implementation Strategies
Once consensus has been reached regarding the directional, adaptive, market
entry/exit, and competitive strategies, planning for implementation strategies
commences. Further strategic thinking is required to determine how to achieve
the goals previously decided during 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 Without a
clear process for implementation, considerable overlap and confusion regarding
specific guidelines for translating strategies into management practice remain.
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 setting organizational unit objectives, developing plans,
assigning responsibilities, and agreeing on budgets that, in concert, translate the
organizations overall strategy into specific 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
Exhibit 81 The Value Chain
Market/Marketing Research
Target Market
Services Offered/Branding
Clinical Operations
Process Innovation
Patient Satisfaction
Function Division Matrix
Financial Human Information Technology
ul e
Del vi ery
Support Activities
Shared Assumptions Shared Values Behavioral Norms
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York:
Free Press, 1985), p. 37.
316 strategic management of Health Care Organizations
value chain focuses explicitly on the primary activities of the organization the
delivery of services. The lower portion of the value chain contains the valueadding support activities that include the organizations 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 organizations
culture, structure, and strategic resources are an inherent part of the pre-service,
point-of-service, and after-service activities. Thus, a change in the culture of the
organization human competencies is reflected in service delivery. Further,
an enhanced information system a resource can benefit all aspects of service
delivery as well as other strategic resources. Focusing on adding value and results
in health has been a theme for a number of years and the Essentials for a Strategic
Thinker 81, What Is Value-Based Reimbursement? examines reimbursement
models to encourage moving from volume to value. This chapter examines the
service delivery strategies and the process for developing service delivery implementation strategies. Chapter 9 discusses the support strategies and the associated process for developing support implementation strategies.
Essentials for a Strategic Thinker 81
What Is Value-Based Reimbursement?
Value-based reimbursement is a health insurance
system that pays providers based on the value of
care they deliver rather than on the number of
visits and tests they order thus paying for value
rather than volume. Value is typically determined
by the overall health of a defined population.
This payment system is designed to spur the
development of care systems oriented toward
outcomes rather than activity.
Under traditional fee for service (FFS) models, providers are reimbursed for activity
treatments, procedures, hospitalizations, visits,
encounters, consultations, and so on. Therefore,
total reimbursement rises as the number of
activities increases. At issue in FFS is whether the
economic incentives encourage overtreatment.
Capitation is a well-known alternative reimbursement method, itself controversial. Under
a capitated system, providers receive a set, periodic payment for each patient in a population. The sum of the payments received by the
providers to care for this population produces
a pool of revenue. All activity to render care
is a cost. At issue in capitation is whether it
encourages undertreatment, since the economic incentives are to perform less activity to
avoid expenses and increase income.
Both of these models rely on economic
incentives, assuming a direct correspondence
between ordering care and the economic benefit of doing so. Thus gaining more or less income
influences decision behavior (such as when
a surgeon prescribes surgery, or an internist
Chapter 8 Value-Adding Service Delivery Strategies 317
orders a follow-up exam) that enables them to
directly and personally gain from that order.
Equally true is that much economic activity
occurs within health care that is ordered without
prospect of personal economic gain. Examples
include: an emergency physician admitting a
patient to the hospital or ordering a follow-up
test; a primary care physician prescribing a drug;
an internist referring to a specialist or admitting
a patient to the hospital. All the same, each of
these actions becomes the basis for payment.
They increase the total cost of health care.
Payers insurers, government, and consumers
are paying for the volume of activity.
Some value-based reimbursement resembles capitation because it is population-based
rather than activity-based; however, this type
of reimbursement differs from capitation chiefly
because of incentives to attain specific population health measures. Such measures might
include A1C (a marker for diabetes), blood pressure, cholesterol, and body mass index (BMI,
a measure of obesity). If the population, as a
whole, reaches the performance targets additional payments are earned.
Other value-based models bundle an array
of related treatments and procedures into a
single, flat-rate payment. An example is joint
replacement that involves several providers and
suppliers; a bundled payment goes to one entity
that divides it among those who participated
in the care. By organizing the reimbursement
in this fashion, the goal is that the model of
care will follow in alignment and become more
efficient, standardized, evidence-based, and
Essential for the strategist is to: (1) have a
belief about whether and how economic flows
shape or do not shape behavior of people
and organizations; (2) recognize that in the
past, the rewards were for doing more under
FFS and less under capitation; (3) understand
that under value-based systems, the rewards
it is hoped are for doing those things that
add value, for example, reduce morbidity in
the population; (4) acknowledge that valuebased systems depart significantly from past
systems they are unprecedented and largely
unproven and arguably the largest change to
health care reimbursement ever attempted; and
(5) strategists must know the markets in which
they operate. Right now, all of these systems
fee for service, capitation, and value-based
operate in the market, making it enormously
Source: Christopher E. Press, MBA, FACHE, Assistant Professor
(adjunct), Rollins School of Public Health, Emory University and
Partner, Morgan Healthcare Consulting, LLC.
Decision Logic for the Value-Adding Service
Delivery Strategies
A planning logic for developing implementation strategies is illustrated in
Exhibit 82. Market entry/exit and competitive strategies provide the most direct
input into the development of the implementation strategies. The value-adding
service delivery strategies specify the pre-service activities, point-of-service configurations and processes, and after-service activities required by the strategies
developed during strategy formulation. These strategies must be coordinated
and consistent.
318 strategic management of Health Care Organizations
Exhibit 82 Decision Logic for Developing Value-Adding Service
Delivery Strategies
Directional Strategies
Adaptive Strategies
Expansion of Scope
Reduction of Scope
Maintenance of Scope
Market Entry/Exit Strategies
Market Exit
Competitive Strategies
Strategic Posture
Implementation Strategies
Support Strategies
Implementation Strategies
Unit Action Plans
Corporate- and
Implementation Strategies
Service Delivery Strategies
Chapter 8 Value-Adding Service Delivery Strategies 319
The value-adding support strategies create and shape the working environment
and behavioral norms, reporting relationships and structure, as well as information flows, financial 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, unit
action plans link the individual organizational units to the overall strategy. Units
are typically functional, such as operations (e.g. surgical units, Alzheimers units,
well-baby care), marketing, finance, human resources, and so on.
The value-adding service delivery strategies must be developed first, followed
by the support strategies and unit action plans. The value-adding service delivery
strategies are planned first because service delivery is the central activity of the
organization and is the principal way of delivering value to the customer. The
support strategies and action plans must facilitate the accomplishment of the service delivery strategies.
Process for Developing Service Delivery Strategies
A six-step process for developing service delivery strategies based on the decision
logic for the development of value-adding strategies is presented in Exhibit 83.
For each component of service delivery pre-service, point-of-service, and afterservice the demands of the selected strategies must be determined and matched
to the strengths and weaknesses (competitive advantages and disadvantages) of
the organization identified in internal analysis to determine whether the service
delivery needs to be changed to accomplish the selected strategies.
As shown in Exhibit 83, the final step in the process for the service delivery strategies is providing guidance to the organizational units. Although steps
15 are critically important, time-intensive, and demanding, the success of the
strategies hinges on the guidance delivered by leadership. The directions given
can bolster and motivate employees, or render them frustrated, confused, and
unenthusiastic regarding any proposed changes. For best results, leaders need to
carefully consider the content of their guidance, their plan for delivery, and how
to work through possible opposition.
Step 1: Identify the Service Delivery Requirements of
the Strategy and Service Delivery Value-Adding
Each of the strategic decisions (directional, adaptive, market entry/exit, 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/exit, and competitive strategies have been discussed in Chapters 5 through 7.
The general resource, competency, and capability requirements of the market
entry/exit strategies are presented in Exhibit 719, the requirements for the posture competitive strategies are outlined in Exhibit 722, and the requirements for
the positioning competitive strategies are shown in Exhibit 724; however, each
situation will be different and the demands on service delivery will be unique
320 strategic management of Health Care Organizations
Exhibit 83 Process for Developing Service Delivery Strategies
Step 1 Identify the Service Delivery Requirements of the Strategy
and Service Delivery Value-Adding Potential
Step 2 Compare the Strategy Requirements with the Results of the
Service Delivery Internal Analysis
Step 3 Decide to Maintain or Change Pre-Service
Step 4 Decide to Maintain or Change Point-of-Service
Step 5 Decide to Maintain or Change After-Service
Step 6 Provide Guidance to Organizational Units
to that situation. For example, strategic managers may assess that a merger will
initiate a new model of service delivery. Prospecting for new areas of growth may
require additional market research and a differentiation strategy may require an
emphasis on building point-of-service quality and reputation.
Strategic thinking awareness, anticipation, analysis, interpretation, synthesis,
and reflection will be required to customize service delivery to the demands
of the strategy. Strategic leaders may be required to reinvent service delivery
to align with strategy or incremental changes may be required to maintain
The Value-Adding Service Delivery Strategies Potential
Value-adding service delivery strategies are critical to the success of the organization because they are the principal methods for carrying out the strategy and
creating value. Therefore, explicit strategies must be developed for each type. The
Chapter 8 Value-Adding Service Delivery Strategies 321
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. A
review of the value-adding service delivery strategies demonstrates their potential for contribution to the organizations broader strategies and goals.
Pre-Service Delivery Strategies
Pre-service is a key area in the value chain where value can be created for the
customer/patient before the service is actually delivered. Pre-service activities
include marketing, target marketing, branding, pricing, distribution/logistics,
and promotion. A pre-service strategy 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 preservice strategies. Pre-service marketing involves market and marketing research
that enables the organization to determine the appropriate customer (target
market), design services that will satisfy that customer, build recognition for 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 data gathering about the
marketplace (potential customers) including demographics, geographics, psychographics, and benefits sought, that is combined with segmentation to identify the
organizations best customer. Market research aids in identifying the target market
(the market or market segment believed to be an organizations best customers
and around which all marketing activities focus) and must be done in conjunction
with identifying the services the organization will deliver. 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 certified 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 confidentiality in a remote but very comfortable
location. The target market has to want or need the services and the organization
must have or develop or purchase the appropriate resources, competencies, and
capabilities to provide the services.
Beyond information concerning potential customers, marketing research provides information concerning desired attributes for the product or service, appropriate price, the most convenient place desired by customers 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 organizations competitively relevant
strengths and weaknesses, the external analysis has identified the issues in the
marketplace, and the organization has identified the strategies it wants to pursue,
pre-service strategies attempt to identify the specific target market and define
the services to be offered. Marketing research may uncover a ready market of
potential customers for alternative types of services, for example, telehealth and
telemonitoring (see Essentials for a Strategic Thinker 82, What Are Telehealth
and Telemonitoring?).
322 strategic management of Health Care Organizations
Essentials for a Strategic Thinker 82
What Are Telehealth and Telemonitoring?
The Centers for Medicare and Medicaid Services
define telehealth as remote health care delivery via monitoring. Telehealth is specifically
defined 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 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 is able to stay in contact
with patients, 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 diseases will
encourage them to change unhealthy behaviors
and adopt more healthy lifestyles.
In many cases patients make poor decisions
about their personal health because of a lack
of information. The ability to accurately access
a patients 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 patient and provider.
Research has shown that the primary advantage of telemonitoring is the increased patient
compliance. Often, changes in a patients 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 depend on digital
proficiency on the part of both parties as well as
effective 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 effective go-betweens for clinicians and
patients. For example, telemonitoring of congestive heart failure patients has been shown to
be successful in reducing hospitalizations and
trips to the emergency department.
Telemonitoring enables patients to have
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
effective use of digital monitoring in home
health by reducing the frequency of nursing
visits, 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
improved and will continue to improve the
quality of life for a large numbers of patients
Research and Markets: Tele-Health Monitoring:
Market Shares, Strategies, and Forecasts
Worldwide, 20112017, Telemedicine Business
Week (June 29, 2011), pp. 8283.
Chapter 8 Value-Adding Service Delivery Strategies 323
Identifying the Health Care Customer Target Market Research has
shown that as customers participate more actively in the purchasing experience,
their positivity increases, and as positivity increases so does the perception of
service quality.3 In health care, however, two major issues are noteworthy. First,
many patients, as consumers, have been reluctant to participate in the purchasing
decision; they want to rely on their doctor to tell them what is wrong and what to
do to fix it. Second, and more challenging for health care marketers, is the sheer
number of very diverse customers to satisfy physicians, health care consumers
(patients) and their friends and families, other health care organizations, thirdparty payers, and more. In addition, there are multiple service categories that
consumers may utilize over their lifetime long-term care, emergency medicine,
oncology, dermatology, pediatrics, and so on that determine who potential
customers will be. Furthermore, within these specializations are consumers
with varying degrees of health and wellness resulting in differing needs, wants,
and desires.
Segmentation is the process of identifying groups within a market and determining the distinct characteristics of the various groups to select one or more
as the target market that segment of the population that the organization will
focus its efforts to satisfy. Several groups may be targeted, but each one requires
different marketing activities to achieve customer satisfaction. In addition, for
health care sometimes a choice does not exist, as when a person shows up at an
emergency room, the law requires that he or she be treated and the patient may be
unconscious and taken to the nearest ER (which might not be the preferred one).
Exhibit 84 illustrates the many customers for a hospital and the segments a physician (one of the hospitals customers) may consider. The process of segmentation
for a general medical practice service category would be more challenging than
Exhibit 84 Determining the Health Care Customer
Condition Athletes
Poor Elderly
Third-Party Payers
Third-Party Payers
Insurance Companies Employees
324 strategic management of Health Care Organizations
for an oncology (cancer) practice, which is more specialized; however, many segments can be identified among cancer patients those with leukemia, skin cancer,
lung cancer, and so on. Specialization of the hospital, nursing home, or physicians
practice could be a first step in the segmentation process, but other demographic,
psychographic, and geographic factors must be considered as well.
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 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 modified in much of health care
because the patient has a professional dependency on the doctor. Many patients
and their families have limited knowledge of medical terminology, or the complexity of medical diagnosis or care, nor can they accurately evaluate the medical
care provided. An excellent oncologist may provide outstanding care to a lung
cancer patient who smoked three packs of cigarettes a day. When the patient dies
many family members want to blame the physician or the hospital, not their loved
one. The same difficulty arises for obstetricians (physicians who deliver babies).
Excellent care may have been provided, but a mother who smoked heavily or
engaged in drug use may increase birth defects.
At one time, patients would never have questioned their doctors choice of hospital. Today, a patients choice is more frequently determined by health insurance.
In a study of pregnant women (who have enough time to actually plan for a hospital admission), 98 percent said a very important factor in choosing a hospital was
acceptance of her health insurance. A hospital that was recommended by my doctor had 64 percent agreement of being very important and a hospital that received
high ratings for its quality of maternity care received 59 percent agreement.4 A
2017 study found that 73.2 percent of pregnant women chose their obstetrician/
midwife first before their choice of hospital, and over half (55% percent) did not
believe their choice of hospital would affect their likelihood of having a cesarean
section. In addition, most respondents understood that quality of care varied
across hospitals; however, only about a third felt that specific quality measures
(maternal birth trauma rates, obstetrical infection rate, neonatal trauma rate, episiotomy, and hospital infection rate) were medium/high priority. At issue appears
to be that women view the quality of their prenatal care as more important, not
quality metrics reported at the hospital level; they do not believe that a hospitals
quality scores influence the care they will receive. Presentations of hospital quality data should more clearly convey how hospital-level characteristics can affect
womens experiences including the fact that their chosen obstetrician/midwife
may not deliver their baby.5
A plethora of quality scores have been generated for hospitals including The
Joint Commission that accredits in part on the basis of performance on measures of
quality; Centers for Medicare and Medicaid (CMS) that uses 123 different metrics
to produce Hospital Compare for the public to access; the National Committee
for Quality Assurance (NCQA) that offers HEDIS (Healthcare Effectiveness Data
Chapter 8 Value-Adding Service Delivery Strategies 325
and Information Set) scores; the National Quality Forum (NQF); the Agency for
Healthcare Research and Quality (AHRQ) that serves as a clearinghouse for quality measures; Utilization Review Accreditation Commission (URAC); plus several
not-for-profit and for-profit organizations including The Leapfrog Group (set up
by business organizations and consultants with the goal to save lives by reducing medical errors, injuries, accidents, and infections ranking hospitals on the
basis of safety); Truven Health Analytics Top 100 Hospitals (part of IBM Watson
Health) to rank health systems based on inpatient outcomes, process of care,
extended outcomes, efficiency, and patient experience; Healthgrades Top 100
hospitals claiming these hospitals have a 27 percent lower risk of patients dying
than patients in other hospitals not making the list (23 states did not place a single
hospital on its Top 100 Hospitals list in 2017); and US News & World Reports listing
of top hospitals by 16 specialties, such as cardiology, cancer, gynecology, geriatrics,
etc. while its Honor Roll recognizes the top 20 hospitals with the most rankings in
the various specialties (the Mayo Clinic was at the top, nationally ranked in 15 of
16 adult specialties and eight of ten pediatric specialties).
The University of Michigans Center for Healthcare Research & Transformation
developed a research brief that concluded: hospital rankings, ostensibly designed
to enlighten health care consumers, have morphed into a confusing array of metrics and methodologies that are now largely ignored outside of hospitals executive suites and doctors lounges. Nine prominent rankings were studied and
in 2012, 37 percent of hospitals were ranked on one of the nine hospital ranking
systems. In 2015, 53 percent of Michigan hospitals received a high rank on one of
nine hospital ranking systems, but only 22.5 percent received a high rank on at
least two ranking systems.6
Third-party payers (insurance companies and employers) are also customers.
These companies must be satisfied that the health care provider is efficiently treating patients or they will use their substantial financial influence 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-profit organization started by a number of large employers in 1991 with
a mission to improve health care quality everywhere. NCQA defines quality
health care as the extent to which patients get the care they need in a manner that
most effectively protects their health. Three different methods are used to assess
quality: (1) Voluntary accreditation (currently about 43 percent of the U.S. population is covered by accredited health plans); (2) Healthcare Effectiveness 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 specific plan. Because of
NCQAs success in the private sector it has expanded to the public sector as well
Medicaid and Medicare HEDIS are being used in various states, as well as dual
eligible consumers (those covered under both Medicare and Medicaid) in 2017.7
The rate of change in health care is rapid and, therefore, health care employees
must be ready to adopt new ways of doing things even if they feel threatened by
the change. Often changing conditions require that value and quality have to be
viewed in entirely new ways.
326 strategic management of Health Care Organizations
To Brand or Not to Brand Services A brand is a name created for a product, service, or idea. It provides identification and a guarantee of a certain consistent quality. A brand is intangible it is simply a set of promises. It implies
trust, consistency, and a defined set of expectations.8 A brand is a means to set
customers expectations (assurances of quality) and reduce their risks. A brand
name can be protected through legal registration; then no other organization in
the same industry can use it or something close to it (although how close is often
challenged in court). A brand has other dimensions that differentiate it in some
way from other products designed to satisfy the same need.9 Those dimensions
may include packaging, service, advertising, customer advice, financing, delivery
arrangements, warehousing, the customers feelings and perceptions about the
product attributes and how it performs, and the brand name (how it makes them
feel, what it stands for, and how they feel about the company that produces/sells
the brand).
The strongest brands have a unique position in the mind of buyers. Mayo
Clinic, MD Anderson, and Johns Hopkins are examples of brands that have
value for customers. Every person who has contact with a patient at these clinics
represents the brand. If housekeeping is poorly performed, it hurts the brand; if
admitting is repetitious and slow, it hurts the brand; if clinical care is done less
thoroughly than customers expect, 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 single employee.
To develop a good branding strategy, answers to three questions have to be
1. Why do consumers choose one brand over another?
2. How does our brand stack up against competition?
3. What possibilities exist for potential brand growth and expansion?
Customers evaluate every service experience by dividing perceived 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 brands image and positioning deteriorate rapidly.10
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 physicians and nurses who care for them in a hospital that they are familiar with and perhaps have 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.
A brand may be used to develop brand equity, a different construct than brand
familiarity (I know the brand), or brand loyalty (I buy only this brand), or commitment (I support this brand). Brand equity is a perceptual predisposition to
support a brand based on stored knowledge; it represents the biased behavior
a consumer has for a branded product versus an unbranded equivalent. A consumer may think highly of the Mayo Clinic, may speak about its quality, but may
never visit it; however, having heard and read about its philosophy, its great work
over its long history, and admiring it as an organization, that consumer has an
image in mind that leads to high brand equity.11
Chapter 8 Value-Adding Service Delivery Strategies 327
Marketers cannot simply create brand equity; it is earned through the marketing mix variables. Product, price, place, and promotion are the basic building
blocks of brand equity and are under a companys control, enabling marketers to
grow brand equity through marketing activities.
Brand image includes perceptions related to the object and brand attitude is
an evaluation of the object.12 Creating/managing positive brand attitude is one of
the brand associations that synergistically creates brand image. Brand associations should be conveyed consistently across all marketing and communication
efforts if the desired image is to be realized.13 Research has shown that different
brand images significantly affect the brand equity measures of purchase intentions and willingness to pay premium prices.14 In one study, perceived quality
was the major contributor to brand equity; however, brand quality alone will not
contribute substantially to brand equity without an appealing brand image.15
Using original, creative, and different advertising strategies, health care
organizations can develop greater brand awareness and positive perceptions
of their brands or can damage the brand. The CEO who approved his hospitals advertising agency recommended tagline of We Cheat Death! lost his
job. Individuals attitudes toward the advertisements play a key role in brand
awareness, influencing perceived quality, and brand associations.16
Monetary promotions (reduced prices, price discounts, coupons) have a negative influence on perceived quality as they appear to draw focus to internal reference prices and create a negative influence on perceived quality of the brand. On
the other hand, non-monetary promotions (gifts, premiums) help develop brand
To increase brand equity, the organization should build brand awareness as
a means to anchor various associations the consumer has about a brand. Brand
associations, acquired through the firms marketing mix activities or product use,
contribute to and ultimately define the brands image to the customer. Then, to
increase loyalty, managers should focus on associations. Associations that are
unique, strong, and favorable should create a positive brand image which when
processed by consumers will bias consumer brand behavior toward brand equity.18
Brand equity entails favorable predispositions that may or may not necessarily result in repeat buying behavior (or any buying behavior).19 A perfectly
healthy recreational athlete may not visit renowned orthopedic surgeon Dr. James
Andrews but be well aware of his reputation for repairing injuries for professional
athletes. Dr. Andrews has brand equity developed through the recreational athlete
and many others who would want Dr. Andrews to do their surgery if they needed
it. The athlete may review advertisements and absorb the content of articles written about the successful surgeries performed by Dr. Andrews on high-profile college and professional athletes. Brand equity is being built.
Another benefit of brand equity occurs when a health care organization has
service failure. The brand equity effect is identified as a prevailing advantage that
spans the entire failure and recovery sequence. Customers exposed to a failure
incident appear to be more satisfied and more willing to repurchase high-equity
brands than low-equity brands.20 This is an important finding because it indicates
that the advantages of high brand equity theoretically can apply to all failures, not
just those for which recovery is attempted. In health care, patients do not always
complain when they perceive a service failure and the organization does not
328 strategic management of Health Care Organizations
realize that it should be engaging in service failure recovery actions. Patients who
have high brand equity for the physician, nurse, clinic, or hospital may counterargue negative information about a favored brand believing that the failure is a
departure from the norm and unlikely to recur.
Although high-equity brands have an overall advantage throughout the failure
situation, customers view high-equity brand failures as particularly disappointing; thus satisfaction and behavioral intentions for high-equity brands decline at
a faster rate (immediately after the time of failure), but the disappointment can be
reversed with carefully planned recovery strategies. In health care that includes:
quick acknowledgment of the failure, a sincere apology, and restitution of some
sort. Although death is often viewed by the family as a service failure, better
education from a caring physician about a disease or condition and involvement
of the family in the care decisions may aid in understanding that all living things
die at some point.
Pre-Service Pricing Decisions Some say that health care in the United States
is delivered behind secure walls of a fortress where information on pricing is
kept out of public view.21 Pricing health care is extremely difficult 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
payment must be made regardless of outcomes; together, these factors make price
and quality comparisons difficult. Further, in many instances third-party payers
separate consumers from the actual costs of care. Finally, health care providers
have a great deal of difficulty determining their costs and then deciding on a
price given the variability of the human condition. Does each appendectomy cost
the same for the hospital or the surgeon? Given the numerous complications that
may occur, the answer is generally No, costs are not the same, yet how many
patients actually have complications?
The prospective payment system (PPS or fee-for-service) was easy for providers to implement; however it ballooned U.S. health care spending. The cost-plusbased system has proven to be no better. The value-based system is unknown.
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
providers long-term viability; many hospitals have closed. Government reductions in payments 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 care (because of the association
between cheap and poor quality). 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 benefits
(esthetically pleasing surroundings, attentive care, latest technology, and so on)
are worth the high price.
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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.
One way that prices have been lowered for patients, employers, and insurers,
is the site of care. Rather than high-acuity institutional settings, patients are moving from inpatient hospital departments to outpatient hospital departments, from
hospital-based to free-standing surgery centers, from free-standing centers to
physicians offices, and from the physicians office to the patients home.
A new component of health insurance design being used in California is reference pricing that motivates the patient to select low-price and low-acuity care settings.22 Reference pricing is an attempt to change the system by restructuring the
incentives (referred to as choice architecture). The combination of low consumer
price-sensitivity (resulting from generous insurance coverage) and high provider
power (resulting from market consolidation) has weakened the pricing clout of
managed care plans.23 As patients are being required to pay a greater portion of
their health care costs, reference pricing attempts to return some of the choice to
patients. Employers or insurers establish a maximum contribution toward payment for a service, product, or episode of care, selecting some midpoint in th